CIVILS

PREP
PREPARE PERFORM PREVAIL

Economics
For Civil Services Prelims and Mains
Examination

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Index
Chapter – 1 Fundamentals of Economics
Chapter – 2 Microeconomics
Chapter – 3 National Income Accounting
Chapter – 4 Socio – Economic Planning in
India
Chapter – 5 Money and Monetary Policy
Chapter – 6 Banking System in India
Chapter – 7 Financial Market
Chapter – 8 Fiscal Policy
Chapter – 9 Taxation
Chapter – 10 Inflation
Chapter – 11 Poverty, Inequality and Inclusive
Growth
Chapter – 12 Employment and Labor Reform
Chapter – 13 Land Reforms in India
Chapter – 14 Agriculture in India
Chapter – 15 Food Processing in India
Chapter – 16 Industry
Chapter – 17 Infrastructure and Investment
model
Chapter – 18 Public Sector Undertakings
Chapter – 19 Balance of Payment
Chapter – 20 Foreign Investment
Chapter – 21 Foreign Trade
Chapter – 22 International Economic
Organization
Chapter – 23 World Trade Organization

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goods or services. Human capital can also be improved

Chapter – 1 through training educating or re-skilling workers.

Fundamentals of Economics C. Capital

Capital also represents the investment in durable
1.1 Basics physical assets made by individuals and companies
which are used to produce goods or services These
Economics is a social science that studies how products
assets include buildings, production facilities,
and services are produced, distributed, and consumed.
equipment, vehicles etc. Capital represents the
In other words, discipline is concerned with how and w
monetary resources companies use to purchase natural
hy people choose certain options while making purchas
resources, land and other capital goods. Capital thus
es.
refers to man-made goods used in supply of other
Because we as humans have limitless demands that can
products.
not be satisfied by the limited resources in the world, sc
arcity is the fundamental economic dilemma.
Any commodity or service with a cost more than zero is
D. Entrepreneurship
regarded as rare. Economic resources can exist in an economy and still
You will be charged for using that good or service. not be transformed into consumer goods. Entrepreneurs
Without scarcity, individuals would consume all they co usually have an idea for creating a valuable good or
uld possibly consume without having to choose between service and assume the risk involved with transforming
different products and services or make trade-offs. economic resources into consumer products for which
Economics is therefore the study of how societies arran they earn profit.
ge limited resources to create valuable goods and distrib
ute them among various people. 1.3 Types of Goods
1.2 Factors of Production A. Final Goods
Factors of production refers to the inputs that are used Any good or service purchased by the consumer
in the production of goods or services in the attempt to (Individual or Enterprise) can be for final use or for use
make an economic profit. The factors of production in further production. An item that is meant for final use
include land, labour, capital and entrepreneurship. and will not pass through any more stages of production
or transformations is called a final good.
A. Land
Features:
Land is an economic resource encompassing natural
resources found within a nation's economy. This • It will not undergo any further transformation
resource includes timber, land, fisheries, farms and at the hands of any producer.
other similar natural resources. Land is usually a limited • Once it has been sold, it passes out of the
resource for many economies. Example: India has active economic flow.
17.7% of the global population but only 2.4% of the
• Apart from this, they undergo transformation
global land.
by the action of the ultimate purchaser, during
B. Labour their consumption. Example: The tea leaves
purchased by the consumer are not consumed
Labour represents the human capital available to in that form - they are used to make drinkable
transform raw material or national resources into tea which is consumed. Similarly, most of the.
consumer goods. Human capital includes able-bodied items that enter our kitchen are transformed
individuals capable of working in the nation's economy through the process of cooking. But cooking at
and willing to provide various services to other home is not an economic activity even though
individuals or businesses. This factor of production is a
the product involved undergoes
flexible resource as workers can be allocated to
transformation. Home cooked food is not sold.
different areas of the economy for producing consumer
to the market and hence is final good.

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B. Intermediate Goods their own and that governments must step in from time
to time and actively reallocates resources efficiently.
Of the total production-taking place in the economy, a
large number of products do not end up in final
consumption and are not capital goods either. Such
goods may be used by other producers as material
inputs. Examples are steel. sheets used for making
automobiles and copper used for making utensils. These
are intermediate goods, mostly used as raw material or
1.6 Types of Economy
inputs for production of other commodities. Continuing
the above example, if the same cooking or tea brewing 1.6.1 In Terms of Role of State
was done in a restaurant where the cooked product The most contentious issue that has affected civilized
would be sold to the customers, then the same items history of humankind is how the production process in
such as tea leaves would cease to be final goods and an economy should be organized. Whether the
would be counted as inputs to which economic addition production should be the sole responsibility of
takes place. Thus, it is not in the nature of the good but State/Government or should it be left altogether to the
in the economic nature of its use that a good becomes a private sector?
final good.
Every society has to answer three questions, which
1.4 Study of Economics determine the type of economic system:

The study of economics can be subcategorized into • What goods and services should be produced
Microeconomics and Macroeconomics. in the country?
• How should the goods and services be
Microeconomics is the study of economics of the produced? Should producers use more human
individual or business decision regarding allocation of labour or more capital (machines) for
resources given the scarcity and government producing things?
intervention.
• How should the goods and services be
Microeconomics includes concepts such as relationship distributed among people?
between supply and demand, price of goods and
services and relationship between wages, employment, Based on the answer of these three questions, the
inflation. Macroeconomics is the study of the economic systems are classified into 3 categories:
performance and structure of the whole economy rather
than specific individual markets.
A. Capitalist
The capitalistic form of economy has its origin in the
Macroeconomics includes concepts such as
famous work of Adam Smith - An Enquiry into the
inflation, international trade, unemployment, and
Nature and the Causes of the Wealth of Nations (1776).
national consumption and production, savings and
He stressed on 'laissez faire' state i.e., non-interference
general price levels.
by the government.

1.5 Schools of Economic • The decisions of what to produce, how much

to produce and at what price to sell, are taken
Thought There are also schools of economic thought. by the market, by the private enterprises in this
Two of the most common are Classical and Keynesian.
system with the state having no economic role.
The Classical view believes that free markets are the • In a capitalist economy, the market determines
best way to allocate resources and the government's role prices through the laws of supply and demand.
should be limited to that of a fair and strict referee For example, when demand for coffee
increases, a profit-seeking business will boost
In contrast, the Keynesian approach believes that prices in order to increase its profit. If, at the
markets do not work well at allocating resources on same time, society's appetite for tea

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diminishes, growers will face lower prices and means of production would be owned by
aggregate production will decline. community,
• If labour is cheaper than capital, more labour- • In Communism. All economic resources are
intensive methods of production will be used publicly owned and controlled by the
and vice-versa. government. Individuals hold no personal
• In a capitalist society, the goods produced are property or assets
distributed among people not on the basis of • In Socialism, Individuals can own personal
what people need but on the basis of what property but all industrial and production
people can afford and are willing to capacity is communally owned and managed
purchase.This means that a sick person will be by a democratically elected government.
able to use the required medicine only if he/she • In Communism, Class is abolished. The
can afford to buy it; if they cannot afford the chances of one worker earning more than the
medicine, they will not be able to use it even if other are nonexistent. In Socialism, Classes
they need it urgently. exist but the differences between them are
greatly reduced. It is possible for some people
B. Socialist to earn more than others.
The socialistic form of economy was rooted in the ideas
C. Mixed Economy
of historical change proposed by the German
philosopher Karl Marx (1818-83) More specifically, this It is an economic system that features characteristics of
kind of economic system first came up in the erstwhile both capitalism and socialism. A mixed economic
USSR after the Bolshevik Revolution (1917) and got its system allows a level of private economic freedom in
practical shape in the People's Republic of China the use of capital, but also allows for governments to
(1949). interfere in economic activities in MIXED ECONOMY
order to achieve social aims whenever required.
Under a true socialist system, it is the government's role
to determine output and pricing levels. The challenge is Mixed economic systems are not laissez-faire systems:
synchronising these decisions with the needs of the government is involved in planning the use of
consumers. A socialist society answers the above three resources and can exert control over businesses in the
questions in a totally different manner: private sector For example, Governments seeks to
redistribute wealth by taxing the private sector, and
• Distinction from Capitalist Economy: using funds from taxes to promote social objectives.
In principle, distribution under socialism is
supposed to be based on what people need and 1.6.2 Model Adopted by India
not on what they can afford to purchase.
Unlike capitalism, for example, a socialist The leaders of Independent India had to decide the type
nation provides free healthcare to the citizens of economic system most suitable for our nation, which
who need it Strictly, a socialist society has no would promote the welfare of all rather than a few.
private property since everything is owned by Among the different types of economic systems,
the state. socialism appealed to Jawaharlal Nehru the most.
• Socialistic economy emphasized the collective However, he was not in favour of the kind of socialism
ownership of the means of production established in the former Soviet Union where all the
(property and assets) and it also ascribed a means of production, i.e. all the factories and farms in
large role to the state in running the economy. the country, were owned by the government. There was
• Distinction between Communist and no private property. It was not possible in a democracy
like India for the government to change the ownership
Socialist Economy: Socialism and pattern of land and other properties of its citizens in the
Communism are often used in place of each way that it was done in the former Soviet Union, this
other despite being fundamentally different would have created upheaval among the industrial
from each other. Communist economy classes and stunted India's grown story.
advocates withering away of the state where

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The leaders found the answer in an economic system Middle Income Category with per capita GNI of $1900
which, in their view, combined the best features of as per World Bank.
socialism without its drawbacks. In this view, India
would be a socialist society with a strong public sector 1.7 Structural Composition
but also with private property and democracy; the
government would plan economy with the private sector The contribution made by the different sectors of the
being encourage to be part of the plan effort. This was economy, namely the agricultural sector, the industrial
done because modernisation projects had long gestation sector and the service sector in the GDP of the country.
period, large capital required and risk which the nascent makes up the structural composition of the economy.
private secto couldn't shoulder
A. Primary Sector
So, after Independence, India opted for the Mixe
Economy. In the process of organizing the economy The primary sector involves the extraction of raw
some basic and important infrastructural econom materials. from the natural resources. Therefore, this is
responsibilities were taken up by the State Government sometimes known as the Extraction Sector. This
(centre and state) and rest of the economic activities extraction results in raw materials and basic foods, such
was left to private enterprise i.e. the market. as coal, wood, iron and corn. Since most of the natural
product we get are from agriculture, dairy, forestry,
But once the country started the process of economic fishing, it is also called. agriculture and allied sector.
reforms in early 1990s, the prevailing state-market mix People engaged in primary activity are called red collar
was redefined and a new form of mixed economy began workers due to the outdoor nature of their work.
to be practised.

• The redefined mixed economy for India had a

B. Secondary Sector
declared favour for the market economy. The secondary sector involves the transformation of raw
• Many economic roles, which were under materials into finished or manufactured goods. This
complete government monopolies, were now sector is rightly called the manufacturing sector. Since
opened for participation by the private sector. the manufacturing is done by the industries this sector is
Examples are many A telecommunication, also called the industrial sector such as automobiles,
power, roads, oil and natural gas, etc. textiles, etc. People engaged in secondary activity are
• At the same time, social sector such as called blue collar workers.
education, healthcare, drinking water, etc. were Examples of manufacturing sector: Small workshops
given extra emphasis by the state so as to producing pots, artisan production Mills producing
create a balance between profit seeking interest textiles,nFactories producing steel, chemicals, plastic,
of private sector with the welfare obligation of car Food production such as brewing plants, and food
the state. processing Oil refinery.

The economic system of India was a mixed economy in C. Tertiary Sector

pre- 1991 years as it is in post-1991 years but the
composition of state-market mix has gone for a change The service sector helps in development of primary and
(For Detailed Reasons that why India adopted Mixed secondary sector is concerned with the intangible aspect
Economy, refer Socio-Economic Planning). of offering services to consumers and business. It
involves retail of the manufactured goods. It also
1.6.3 In Terms of Per Capita Income provides services, such as insurance and banking Its
provide value addition to transportation and production
The World Bank classifies economies based on their of goods created through secondary sector This sector
GNI (Gross National Income) per capita. Low-Income jobs are called white collar jobs.
and lower middle-income economies are usually
referred to as developing economies, and the Upper D. Quaternary Sector
Middle Income and the High Income are referred to as
Developed Countries. India is categorized in the Lower The quaternary sector is said to be the intellectual
aspect of the economy It includes education, training.

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the development of technology and research and • .The share of industry as a whole rose from
development. It is also called the knowledge sector It is about 20% in 1960 to around 28% in 2009,
the process, which enables entrepreneurs to innovate whereas the share of manufacturing alorie
better manufacturing processes and improve the quality disappointingly stayed at around 15% during
of services offered in the economy Without this growth the entire period, again a sign of sluggish
of technology and information, economic development structural transformation.
would be slow or non-existent.
• By 1990 the share of the service sector was
E. Quinary Sector 40.59 per cent, more than that of agriculture or
industry like what we find in developed
Quinary sector, which includes the highest levels of nations. This phenomenon of growing share of
decision making in a society or economy. This sector the service sector was accelerated in the post
includes top executives or officials in such fields as 1991 period.
government, science, universities, non-profit, • Presently, service sector has emerged as the
healthcare, culture and the media. It may also include largest and fastest growing sector of the
police and fire departments, which are public services economy with around more than fifty percent
as opposed to for-profit enterprises.
contribution to the GDP.
These include services that focus on the creation • The increasing contribution of service sector to
rearrangement and interpretation of ideas. Profession GDP growth is referred as Growing
under this category is called gold collar professional. Tertiarization of Indian Economy.
Economists sometimes also include domestic activities
(duties performed in the home by a family member or 1.8.2 Reasons for Asymmetric
dependent) in the quinary sector. These activities, such Structural
as childcare or housekeeping, are typically not
measured by monetary amounts but contribute to the Transformation of Indian Economy The reason for
economy by providing services for thee that would asymmetric structural transformation of Indian
otherwise be paid for. economy is on account of account of rapid increase in
tertiary sector and slow growth in secondary sector.
1.8 Structural Transformation of A. Reasons for Slow Growth in
Indian Economy Secondary Sector
Structural transformation in an economy is usually
1. Stringent Labour Laws: The labour laws in
associated with the changes in sectoral composition of
India are extremely complicated. e.g., Industrial
output, employment and changes in the rural-urban
Disputes Act- 1947 provides that if you are a
composition of output and employment.
manufacturing firm with 100 workers or more, you
As a country develops, it undergoes 'structural change. cannot dismiss any of them under any circumstances
The natural economic movement of a country goes from unless you get prior approval from the government
agrarian economy to an industrial economy to a service which is rarely given. The law is to be followed even if
economy But, India's growth story has been different the industry is going bankrupt. Thus, the investors are
and India has leapfrogged from an agrarian economy to not willing to enter into this sector.
a service economy.
2. Inadequate Skilled Workforce: The
1.8.1 Peculiar Structural Changes manufacturing sector, for it to grow, requires an
educated workforce with the necessary skills and
• The share of agriculture in Indian GDP fell training. India's skill ecosystem needs to be fixed.
from more than 40% in the early 1960s to
around 17% by the end of the 2000s. 3. Basic Infrastructure: Roads, connectivity and
transportation are slow and costly when compared to
• it is to be noted that the rate of decline in the
developed nations which is a huge deterrence to
agricultural share accelerated as the rate of
economic growth increased

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Industries. Uninterrupted power supply is another

challenge

4. Small Size: Small enterprises, because of their

smaller size, suffer from low productivity, preventing
them from achieving economies of scale.

5. Low Spending on R&D: Currently, India spends

about 0.7% of GDP on research and development, a
considerably small amount when compared with other
developed nations. This prevents the sector to evolve,
innovate and grow

B. Reasons for Rapid Increase in

Tertiary Sector
1. Advent of Information and the knowledge
economy which has enhanced the growth of the high
productivity segment of the services. It is also attributed
to well educated and fluent English speakers and human
resources. This has led to India's success is software and
ITeS significant service exports.

2. Public Services grow more rapidly where national

Government have significant role in planning and
production in the economy as a whole.

3. A large part of the service sector consists of soft

infrastructure such as banking, insurance, finance,
transport and communications, education, Health etc.
An urgent requirement of development is the proper
expansion of social and physical infrastructure as
provided by these services.

4. Increasing urbanization may be regarded as

another cause as it is closely associated with a rise in
demands for infrastructure services such as
communication, public utilities and distribution
services.

5. Tourism is becoming more and more international

as knowledge is being spread through television and
Internet thereby promoting various services like hotel
accommodations.

6. Also with increasing complexities of modern

industrial organization, manufacturing industries have
become service oriented. This has been reflected in the
increasing functions of accounting finance, legal
services, advertising, marketing, public relations etc.

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Chapter-2
Microeconomics and demand curves (graphic representations of the
relationship between product price and the quantity of
2.1 Basic Concepts the product demanded) for firms in factor markets.

Microeconomics is the study of economic trends, as wel All of these demand and supply curves express the
l as how individuals behave while making decisions or quantities demanded and supplied as a function of
when the components that go into production change. prices not because price alone determines economic
Buyers, sellers, and business owners are examples of mi behavior but because the purpose is to arrive at a theory
croeconomic subgroups that are frequently used to categ of price determination.
orise individual players.
The important point is that most demand curves are
negatively inclined/ sloping (this means an inverse
Theory of Choice relationship exists between consumer demand and price,
Theory of choice operate on both the level of demand and therefore consumers demand less as the price rises),
and supply. while most supply curves are positively inclined/
sloping (this means a direct relationship exists between
Supply Side: The supply side is expressed by the supply and price, and therefore suppliers are likely to
production function. A production function expresses produce more at higher prices). The participants in a
the fact that a firm's output depends on the quantity of market will be driven to the price at which the two
inputs it employs. If the firm wants to maximize profits curves intersect; this price is called the "equilibrium"
(defined as the difference between the sales value of its price or "market-clearing" price because it is the only
output and the cost of its inputs), it will select that price at which supply and demand are equal.
combination of inputs that minimizes its expenses,
maximises its revenue 2.2 Demand
Demand Side: The demand side is expressed by the 2.2.1 Demand Curve
utility function. Each household is endowed with
definite "tastes" that can be expressed in a series of The demand curve is a relation between the quantity of
"utility functions." A utility function (an equation the good chosen by a consumer and the price of the
similar to the production function) shows that the good. The independent variable (price) is measured
pleasure or satisfaction households derive from along the vertical axis (y-axis) and dependent variable
consumption will depend on the products they purchase (quantity) is measured along the horizontal axis (x-
and on how they consume these products. axis). The demand curve gives the quantity demanded
by the consumer at each price.
It is necessary to assume that households seek to
maximize satisfaction and that they will distribute their The demand curve will move downward from the left to
given incomes among available consumer goods in a the right, which expresses the law of demand.
way that derives the largest possible "utility" from
consumption. Their incomes, In theory, are assumed to
be fixed.
2.2.2 Law of Demand
In economic theory, the production function contributes
to the calculation of supply curves (graphic Law of Demand states that the other factors remaining
representations of the relationship between product constant, price and quantity demanded of any good and
price and quantity that a seller is willing and able to services are inversely related to each other. When the
supply) for firms in product markets price of a product increases, the demand for the product
will fall. In other words, higher price leads to a lower
quantity demanded and that a lower price leads to a
higher quantity demanded, assuming the other factors

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affecting demand remain constant. The given below quantity demanded of a good or service. The
diagram explains the law of demand clearly: relationship between income and quantity demanded is
a positive one, as income increases, so does the quantity
As the Price of commodity decreases from 5 to 2, the of goods and services demanded. For example, when an
quantity demanded of the commodity increases from individual's income increases, that person demands
100 units to 400 units. more goods and services, thus increasing consumption,
other things remaining same
2.2.3 Assumptions to the Law of
Demand 2.2.5 Exceptions to the Law of
1. Income of the Consumer remains constant:
Demand
If there is a change in the income of the consumer then A. Giffen Goods
the law of demand would have no effect. If the income
of consumer rises then even during price rise, the A Giffen good is a good for which demand increases as
demand of consumer would be unaffected. Vice versa if the price increases, and falls when the price decreases A
the income of the consumer falls then even during price Giffen good has an upward-sloping demand curve, as
fall, the consumer demand would be less. shown in the graph, which is contrary to the
fundamental law of demand.
2. Consumer Taste and Preferences do not
change: If the taste, preference, custom or habit of the A Giffen good is typically an inferior good that does not
have easily available substitutes, as a result of which the
consumer changes in respect to the product (either in
favour or against the product) then the Law of Demand income effect dominates the substitution effect. Staple
would be ineffective. foods are an example of Giffen Goods. They are
consumed by people living in poverty for the sole
3. Size and Composition of Population reason that they are unable to afford superior foodstuffs.
remains same: The size and composition of the total As the price of a superior food rises, consumers are
unable to supplement their diet with the more expensive
population should not change. As population increases,
foods, causing demand of giffen goods (staple food) to
so does the demand of the commodity. With a change in
increase as the price of other superior foods.
the demographics of the population, the needs and
demands of the population changes and so does the B. Veblen Goods
demand of the commodity.
A good for which demand increases as the price
increases because of its exclusive nature and appeal as a
status symbol. A Veblen good, like a Giffen good, has
an upward-sloping demand curve, which runs counter to
the typical downward-sloping curve. However, a Veblen
2.2.4 Income Effect and Substitution good is generally a high-quality, coveted product, in
Effect contrast to a Giffen good which is an inferior product
that does not have easily available substitutes. As well,
The substitution effect is the economic understanding the increase in demand for a Veblen good reflects
that as prices rise consumers will replace more consumer tastes and preferences, unlike a Giffen good.
expensive - items with less costly where higher demand is directly attributable to the price
alternatives/substitutes Conversely. as the wealth of increase.
individuals increases, the opposite tends to be true, as
lower-priced or inferior commodities are preferred over 2.2.6 Demand Elasticity (DE)
more expensive, higher-quality goods and services,
Demand elasticity refers to how sensitive the demand
known as the income effect. The substitution effect is
for a good is to changes in other economic variables,
generally has a negative impact within an economy. as it
such as the prices and consumer income. Demand
limits consumer and producer choice.
elasticity is calculated by taking the percent change in
The income effect represents the change in an quantity of a good demanded and dividing it by a
individual's or economy's income and its impact on the percent change in another economic variable. Higher

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demand elasticity for a particular economic variable of a particular good and a change in its price. The
means that consumers are more responsive to changes degree to which rising price translates into falling
in this variable, such as price or income. demand is called demand elasticity or price elasticity of
demand.
• Case 1: DE> 1, it is called elastic that is it
reacts proportionately higher to changes in Price Elasticity of Demand (PED) = % age change
other economic factors. A 1% change in price in quantity demanded /% age change in price
or income leads to more than 1% change in
If a small change in price is accompanied by a large
demand. change in quantity demanded, the product is said to be
• Case 2: DE < 1, it is called inelastic and the elastic (or responsive to price changes). Conversely, a
demand reacts proportionately lower to product is inelastic if a large change in price is
changes in another variable. A 1% change in accompanied by a small amount of change in quantity
price or income leads to less than 1% change demanded. Price elasticity of demand measures the
in demand. responsiveness of demand to changes in price for a
particular good.
2.2.7 Types of Demand Elasticity Case 1: If PED = 0, Demand is perfectly inelastic.
When the consumers do not respond to the increase or
A. Cross Elasticity
decrease in the price of a good, and the demand remains
The measure of responsiveness of the demand for a unchanged, it is said to be perfectly inelastic (ie.,
good towards the change in the price of a related good demand does not change when price changes). For
is called cross price elasticity of demand. It is always example: Insulin for a Diabetic patient etc. i.e.. items of
measured in percentage terms. necessity.

With the consumption behavior being related, the Case 2: If PED < 1, Demand is relatively inelastic
change in the price of a related good leads to a change (this occurs when the percent change in demand is less
in the demand of another good. Related goods are of than the percent change in price). For example: petrol,
two kinds, Le, substitutes and complementary goods. salt, goods produced by a monopoly etc.

1. Substitute Goods: The cross elasticity of demand Case 3: If PED = 1, Demand is unit elastic (the
for substitute goods is always positive because the percent change in demand is equal to the percent change
demand for one good increases if the price for the other in price). This can occur only with goods that have
good increases. In case the two goods are substitutes for close substitutes or alternatives, like clothing brands,
each other like tea and coffee, the cross price elasticity consumer goods etc.
will be positive, ie. iff the price of coffee increases, the
demand for tea increases. Case 4: If PED = ∞ (infinity), Demand is perfectly
elastic (demand is affected to a greater degree by
2. Complementary Goods: The cross elasticity of changes in price). For example: Luxury Goods,
demand for complementary goods is negative. As the anything with close and large number of substitutes.
price for one goods increases, an item closely associated
with that item and necessary for its consumption Case 5: If PED> 1, Demand is relatively elastic (the
decreases because the demand for the main good has percentage change in the quantity demanded of a
also dropped. product is greater than percentage change in price. For
example: fast moving consumer goods, Newspaper,
In case the goods are complementary in nature like pen consumer goods like tomato ketchup, chocolates etc.
and ink, then the cross elasticity will be negative, i.e.
demand for ink will decrease if prices of pen increase or C. Income Elasticity
vice-versa.
Income elasticity of demand refers to the sensitivity of
B. Price Elasticity of Demand the quantity demanded for a certain good to a change in
real income of consumers who buy this good, keeping
Price elasticity of demand is a measure of the all other things constant. Income elasticity of demand
relationship between a change in the quantity demanded

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means the ratio of the percentage change in the quantity decrease with the rise in income depending on the
demanded to the percentage change in income. nature of the good. For most goods, the quantity that a
consumer chooses increases as the consumer's income
Income Elasticity = %age change in quantity increases and decreases as the consumer's income
demanded/ %age change in income decreases. Such goods are called normal goods. Thus, a
consumer's demand for a normal good moves in the
same direction as the income of the consumer

Normal goods whose income elasticity of demand is

between zero and one are typically referred to as
necessity goods, which are products and services that
Types of Income Elasticity of consumers will buy regardless of changes in their
Demand income levels. Examples of necessity goods and
services include staple foods, water and electricity.
1. Positive Income Elasticity of Demand: If
there is direct relationship between income of the 2. Inferior Goods: Inferior goods have a negative
consumer and demand for the commodity, then income income elasticity of demand, as the income of the
elasticity will be positive. That is, if the quantity consumer increases, the demand for an inferior good
demanded for a commodity increases with the rise in falls, and as the income decreases, the demand for an
income of the consumer and vice versa, it is said to be inferior good rises. Examples of inferior goods include
positive income elasticity of demand. For example: as low quality food items like coarse cereals.
the income of consumer increases, they consume more
of superior (luxurious) goods. On the contrary, as the 2.3 Supply
income of consumer decreases, they consume less of
luxurious goods 2.3.1 Supply Curve
2. Negative Income Elasticity of Demand: If Supply curve is the graphic representation of the
there is inverse relationship between income of the relationship between product price and quantity of
consumer and demand for the commodity, then income product that a seller is willing and able to supply. In
elasticity will be negative. That is, if the quantity most cases, the supply curve is drawn as a slope rising
demanded for a commodity decreases with the rise in upward from left t right, since product pric and quantity
income of the consumer and vice versa, it is said to be supplied are directly related (ie., a the price of a
negative income elasticity of demand For example: As commodity increases in the market the amount supplied
the income of consumer increases, they either stop or increases). This relationship is dependent on certain
reduce consumption of inferior goods. other things remaining constant. Such things include the
number of sellers in the market, the state of technology,
3. Zero Income Elasticity of Demand: If the the level of production costs, the seller's price
quantity demanded for a commodity remains constant expectations, and the prices of related products.
with any rise or fall in income of the consumer, it is said
to be zero income elasticity of demand. For example: In A change in any of these conditions will cause a shift in
case of basic necessary goods such as salt, kerosene, the supply curve. A shifting of the curve to the left
electricity, etc., there is zero income elasticity of corresponds to a decrease in the quantity of product
demand supplied, whereas a shift to the right reflects an
increase.
Normal Goods and Inferior Goods: Depending
on the values of the income elasticity of demand, goods 2.3.2 Law of Supply
can be broadly categorized as inferior goods and normal
goods Law of supply states that other factors remaining
constant, price and quantity supplied of a good are
1. Normal Goods: Normal goods have positive directly related to each other. In other words, when the
income elasticity of demand, as incomes rise, more price paid by buyers for a good rises, then suppliers
goods are demanded at each price level. The quantity of increase the supply of that good in the market.
a good that the consumer demands can increase or

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When the price of a good rises, the supplier increases Cases of Elasticity Supply
the supply in order to earn a profit because of higher
prices. 1. Elastic Supply (E,> 1): Supply is said to be
elastic when a given percentage change in price leads to
2.3.3 Assumptions to the Law of a larger change in quantity supplied. Under this
Supply situation, the numerical value of E, will be greater than
one but less than infinity
1. Cost of Production Remain Constant: If the
cost of production increases with a rise in the price of 2. Inelastic Supply (E,< 1): Supply is said to be
the product, the seller or producer will not find it inelastic when a given percentage change in price
worthwhile to produce and supply more of the causes a smaller change in quantity supplied. Here the
commodity. Cost of Production includes the cost numerical value of elasticity of supply is greater than
incurred in paying wages, interest, rent etc. zero but less than one.. 3. Unit Elasticity of Supply (E,=
1): If price and quantity supplied change by the same
2. Technology Remain Constant: There should magnitude, then we have unit elasticity of supply Any
not be any change in the technique or technology used straight line supply Curve passing through the origin
in the production of the commodity. This is important
for the cost of production to remain same. If with an 2.4 Market Equilibrium
upgraded technology or an improvised technique, the
cost of production decreases then the producer or the In equilibrium, the aggregate quantity that all firms
seller will produce and supply more of the commodity wish to sell equals the quantity that all the consumers in
even at falling prices. the market wish to buy, in other words, market supply
equals market demand. The price at which equilibrium
3. Transport Cost Remain Constant: Any change is reached is called equilibrium price and the quantity
in transport cost will lead to a change in the total cost of bought and sold at this price is called equilibrium
production, a reduction in transport cost will encourage quantity
the producer or supplier to produce and supply the
commodity even at falling price. If at a price, market supply is greater than market
demand, we say that there is an excess supply in the
4.Related Goods (Substitute Goods and market at that price and if market demand exceeds
Related Complementary Goods): Any change in market supply at a price, it is said that excess demand
the price of the related goods will affect the supply of exists in the market at that price. Therefore, equilibrium
the commodity. If the producer is involved in in a perfectly competitive market can be defined
production of more than one commodity, he will be alternatively as zero excess demand- zero excess supply
inclined to produce the commodity which has a higher situation.
price. Under this circumstance, more of the product
may not be produced even though the price of the
commodity rises because it is more profitable to
produce the other good. 2.5 Market Structure
2.5.1 Perfect Competition
Perfect competition is a market structure in which the
2.3.4 Supply Elasticity number of buyers and sellers is large, all are engaged in
buying and selling homogeneous product without any
The price elasticity of supply of a good measures the restrictions or barriers and possessing perfect
responsiveness of quantity supplied to changes in the knowledge of the market at the time. Each buyer and
price of the good. More specifically, the price elasticity seller in the market is a price taker.
of supply, is defined as follow:
The price of commodity in the perfect competition is
Price Elasticity of Supply (Es) = % age change decided through the market forces of Demand and
in quantity supplied/ % age change in price

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Supply. Following are the characteristics of a Perfect Monopoly is a market situation in which the firm is
Competitive Market: independent of price changes in the product of each and
every other firm.
1. Large Number of Buyers and Sellers: In a
perfect competition the number of buyers and sellers are Following are the main features of the monopoly
so large that any one individual is not in a position to market structure:
influence the price and ultimately the output of the
market as a whole.
1. Single Seller: It is the main feature of monopoly.
Under monopoly market conditions, there is a single
2. Homogeneous Product: In a Perfect Competitive seller or producer of products. A full control of the
Market each firm offers a homogeneous product. Thus, seller on the supply of products in the market exists. In
no buyer has any preference for the product of any addition, under monopoly, the seller enjoys the power to
individual firm or seller. This creates a price uniformity decide the price of products.
in the market.
2. No Substitutes of the Product: Under
3. Free Entry and Exit: Firms are free to enter or monopoly, the seller deals in the product that is unique
exit the industry. This implies that if a firm suffers from in nature and does not have close substitutes. The
huge losses then it is free to leave and exit the industry. differentiation of products is absent in case of monopoly
There is no restriction on the entry of new firms in the market.
industry.
3. Barriers to Entry: Under monopoly, there are a
4. Perfect Knowledge of Price and number of entry barriers that restrict the entry of new
Technology: Buyers and sellers have complete organizations. These barriers include exclusive resource
ownership, copyrights, high initial investment and other
knowledge about the price of the product and the
technology used in production. This creates a restrictions by government.
uniformity of price in the market. 4. Restriction Information: Under monopoly on
5. Absence of Transport Cost: This is an essential information is restricted to the organization and people
working within the organization. This information is no
condition because the homogeneous products are sold at
same price across the market. If transportation cost is available to others and can be transferred only in the
added to the cost of production of the commodity then form of copyrights and patents.
the price of product in the market may vary which may
lead to arbitrage opportunities and distort price.
2.5.3 Monopolistic Competition
Perfect competition is sometimes referred to as "pure The term monopolistic competition represents the
competition. Perfect competition is a hypothetical combination of monopoly and perfect competition.
market structure. It is primarily used as a benchmark Monopolistic competition refers to a market situation in
against which other, real-life market structures are which there are a large number of buyers and sellers of
compared. products. However, the product of each seller is
different in one aspect or the other.
2.5.2 Monopoly It characterizes an industry in which many firms offer
A market structure characterized by a single seller, products or services that are similar, but not perfect
substitutes. All firms have the same, relatively low
selling a unique product in the market. In a monopoly
market the seller faces no competition, as he is the sole degree of market power; they are all price makers.
seller of goods with no close substitute. In the long run, demand is highly elastic, meaning that
it is sensitive to price changes. Some of the
A monopoly is a profit maximizer because it can change
the supply and price of a good or service to generate a characteristics of monopolistic competition are as
follows:
profit. It can find the level of output that maximizes its
profit by determining the point at which its marginal 1. Large Number of Sellers and Buyers: It refers
revenue equals its marginal cost. A monopoly firm is a
to one of the important characteristic of monopolistic
price maker.
competition. Similar to perfect competition, the size of

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sellers and buyers is also large in monopolistic 3. Barriers in Entry and Exit: The barriers of entry
competition. and exit distinguish the oligopoly market from
monopolistic competition
2. Differentiated Products: It constitutes the
characteristic feature of monopolistic competition. 4. Mutual Interdependence: Mutual
Under monopolistic competition, the products of sellers interdependence implies that organizations are
are different in many respects, such as difference in influenced by each other's decisions. These decisions
brand, shape, color, style, trademarks, durability, and include pricing and output decisions of organizations.
quality. Therefore, buyers can easily differentiate
among the available products in more than one way. 5. Lack of Uniformity: In oligopoly, organizations
However, under monopolistic competition, products are are not uniform in their sizes. Some organizations are
close substitutes of each other. very large in size while some of them are very small.

3. Free Entry and Exit: Under monopolistic 6. Existence of Price Rigidity: It implies that
competition there are no restrictions imposed on organizations do not prefer to change the prices of their
organizations for their entry and exit from the market. products in oligopoly In case, an organization reduces
This is the same condition as prevailing under perfect its price, its rivals also reduce prices, which adversely
competition. affect the profits of the organization. Thus, firms stick
to the implied prices to avoid price wars.
4. Price Policy: It affects the market prices of a
product. In monopolistic competition, if the prices of In monopoly and perfect competition, organizations do
products are higher, then the buyers would switch to not take into consideration the decisions and reactions
other sellers due to close substitutability of products. of other organizations, therefore, the decision of
Therefore, organizations do not enjoy complete control organizations in such types of market structures are
over price in monopolistic competition. independent. However, in oligopoly, an organization is
not able to take an independent decision and has to
The majority of small firms in the real world operate in factor in competition from other firms.
markets that could be said to be monopolistically
competitive. As an economic model of competition, In India, markets for telecom services, automobiles,
monopolistic competition is more realistic than perfect cement, steel, aluminium, etc, are the examples of
competition many familiar and commonplace markets oligopolistic market. In all these markets, there are few
have many of the characteristics of this model. firms for each particular product.

2.5.4 Oligopoly 2.5.5 Monopsony

Oligopoly is a market structure in which a small number In monopsany, sometimes referred to as a buyer's
of firms have the large majority of market share. An monopoly, is a market condition similar to a monopoly
oligopoly is similar to a monopoly, except that rather except that a large buyer, not a seller, controls a large
than one firm, two or more firms dominate the market. proportion of the market and drives prices down. A
There is no precise upper limit to the number of firms in monopsony occurs when a single firm has market
an oligopoly, but the number must be low enough that power in employing its factors of production
the actions of one firm significantly impact and
For example, the technology industry is a monopsony
influence the others. The main characteristics of
With only a few large tech companies in the market for
oligopoly are as follows:
engineers, major players like Cisco and Oracle have
1. Few Sellers and Many Buyers: Under been accused of colluding and choosing not to compete
oligopoly, few sellers dominate the entire industry with each other on the wages they offer technical
These sellers influence the prices of each other positions This, in turn, suppresses wages so that the
major tech companies realize lower operating costs and
2. Homogeneous or Differentiated Products: In higher profits. This example also highlights the fact that
oligopoly, organizations either produce homogenous a group of companies can act as a monopsony
products (similar to perfect competition) or
differentiated products (as in case of monopoly).

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Average Fixed costs (AFC) = Total fixed

costs/ Output
Average Variable Cost
2.6 Economics of Profit Average variable costs are found by dividing total
variable costs by output. The average variable cost
Determination (AVC) curve will at first slope down from left to right,
then reach a minimum point, and rise again.
Cost of Production
Average Variable Costs (AVC)- Total Variable
Production cost refers to the cost incurred by a business
costs/Output
when VC Variable Cost manufacturing a good (changes
with Y) FC Fixed Cost (a constant) or providing a Average Total Cost
service Production costs include a variety of expenses
including labor. raw materials, consumable Average total cost (ATC) is also called average cost unit
manufacturing supplies and general overhead. cost. Average total costs are a key cost in the theory of
Additionally, any taxes levied by the government or the firm because they indicate how efficiently scar
royalties owed by natural resource extracting companies resources are being used.
are also considered production costs.
Average Total Cost Average Fixed Cost +
Fixed and Variable Cost Average Variable Cost
Fixed costs are those that do not vary with output and The ATC curve is also 'U' shaped because it takes shape
typically include rents, insurance, depreciation, set-up from the AVC curve, with the upturn reflecting th onset
costs of diminishing returns to the variable factor.
Variable costs are costs that do vary with output, and Marginal Cost
they are also called direct costs. Examples of typical
variable costs include fuel, raw materials, and some Marginal cost is the cost of producing on AVC extra
labour costs. unit of output. I can be found by calculating the change
in total cost when output is increased by on unit. It is
Total Fixed Cost and Total Variable Cost important note that marginal cost is derived solely
Given that total fixed costs (TFC) are constant as output from variable costs, and not fixed costs. The marginal
increases, the curve is a horizontal line on the cost cost curve falls briefly at first, then rises Marginal costs
graph because total fixed cost remains constant are derived from variable costs and are subject to the
irrespective of amount of production and is not zero at principle of variable proportions. It is the leading cost
zero level of output. The total variable cost (TVC) curve curve, because changes in total and average costs are
slopes up at an accelerating rate, reflecting the law of derived from changes in marginal cost.
diminishing marginal returns.
Average Total Cost and Marginal Cost
Total Cost
A firm is most productively efficient at the lowest
The total cost (TC) curve is found by adding total fixed average total cost, which is also where Average Total
and total variable costs. Cost (ATC) = Marginal Cost (MC). This happens when
the firm has covered its fixed cost and cost of
Average Fixed Cost production on an average is equal to production of one
additional unit.
Average fixed costs are found by dividing total fixed
costs by output. As fixed cost is divided by an Opportunity Cost
increasing output. Average fixed costs will continue to
fall. The average fixed cost (AFC) curve will slope Opportunity cost refers to a benefit that a person could
down continuously, from left to right. have received, but gave up, to take another course of
action. Opportunity cost represents the cost of next best

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alternative. This cost is, therefore, most relevant for two

mutually exclusive events.

When assessing the potential profitability of various

investments, businesses look for the option that is likely
to yield the greatest return. Often, this can be
determined by looking at the expected rate of return for
a given investment vehicle. However, businesses must
also consider the opportunity cost of each option.
Assume that, given a set amount of money for
investment, a business must choose between investing
funds in securities or using it to purchase new
equipment. No matter which option is chosen, the
potential profit that is forfeited by not investing in the
other option is called the opportunity cost. This is often
expressed as the difference between the expected
returns of each option:

Opportunity Cost = Return of Most Lucrative

Option - Return of Chosen Option.
Total Revenue
Total revenue is the total receipts a seller can obtain
from selling goods or services to buyers. It can be
written as P x Q, which is the price of the goods
multiplied by the quantity of the sold goods. Profit for
the seller would be equal to the total revenue minus the
total cost. This profit will be maximised when marginal
revenue from producing an additional unit will be
greater than or equal to the marginal cost of producing
such unit. The firm in each market faces a different
shaped Revenue curve.

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Chapter-3
National Income Accounting
3.1 Introduction Therefore, national income data, in a way, is
manifestation of material results of human activity in an
A national government utilises national income (Ni) acc economy National income accounting demands an
ounting, a bookkeeping system, to gauge the volume of understanding of the structure of the macro economy
the nation's economic activity over a specific time perio which is exposed through a Circular Flow of Income
d. and Product.
Accounting records of this kind contain information on
the overall revenues generated by domestic firms, the w 3.3 Circular Flow of Income
ages paid to domestic and foreign employees, and the su
ms paid by corporations and individuals residing in the 3.3.1 Circular Flow of Income in a
nation in sales and income taxes. Simple Economy
DC. Colander asserts that "National Income accounting
The circular flow of income is a model of the economy
is a set of rules and definitions for measuring economic
in which major exchanges are represented as flows of
activity in the aggregate economy."
money, goods, services etc., between economic agents.
It attempts to summarise an economy's performance by
The flows of money and goods exchanged in a closed
examining annual national income aggregates.
circuit correspond in value but run in the opposite
Gross Domestic Product (GDP), Gross National Product
direction. The circular flow analysis is the basis of
(GNP), and Gross National Income (GNI) are a few of
national accounts and hence of macroeconomics. It
the metrics that can be determined using national incom
shows the unending flow of production of goods and
e accounting.
services, income and expenditure. It displays the
redistribution of income in a circular manner.
3.2 Uses of NI Accounting
Production, consumption and investment are important
• It indicates performance of the economy economic activities of an economy. In carrying out
signifying economy's strength and failures these economic activities, people make transactions
• It helps to find out structural changes in the between different sectors of the economy. Because of
economy. For instance, in India, proportional these transactions, income and expenditure move in
share of primary (agricultural) sector in circular form. This is called circular flow of income. It
national income is declining whereas those of is based on two principles.
secondary (industrial) sector and tertiary (i) The expenditure of the buyer because of the income
(services) sector are rising. of the sellers.
• It helps in assessing the current standard of
living or the income distribution within a (ii) Goods and services flow in one direction from
population. sellers to the buyers while money payment for these
goods, and services flow in opposite direction i.e. from
• It helps in making comparison among nations
buyers to sellers.
in respect of national Income and per capita
income which lead us to make suitable changes In this way, the flow of goods and services (real flow)
in plans and approaches to achieve rapid and flow of money payments (money flow) together
economic development. make a circular flow.

3.3.2 Circular Flow of Income with

Saving and Investment

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It reflects that how their savings will affect money • The study of circular flow also highlights the
flows in the economy if households save a part of their importance of monetary policy to bring about
income. the equality of saving and investment in the
economy
3.3.3 Circular Flow of Income with • It can be used to check and plug leakages.
Government as a Stakeholder
When households save, their expenditure on goods and 3.4 Basic Concepts
services will decline to that extent and as a result money
flow to the business firms will contract. But savings by 3.4.1 Gross Domestic Product (GDP)
households need not lead to reduced aggregate spending
Gross Domestic Product measures the aggregate
and income if they find their way back into flow of
production of final goods and services taking place
expenditure. In free market economies there exists a set
within the domestic economy during a year.
of institutions such as banks, insurance companies,
financial houses, stock markets where households Features of GDP:
deposit their savings. The government affects the
economy through taxes, subsidies and factor payments • GDP has certain features. They are:
including government purchases of goods. • GDP is expressed in monetary terms. It is the
money value of all the goods and services
3.3.4 Flows in the Four Sector Open produced domestically in a year.
Economy: Adding Foreign Sector • GDP takes into account all the values of final
goods and services produced annually
Foreigners interact with the domestic firms and
• GDP is a measure of value added, it's not about
households through exports and imports of goods and
output.
services as well as through borrowing and lending
operations through financial market. Goods and services • GDP takes into account those goods which are
produced within the domestic territory which are sold to brought to the market for sale. Thus, it
the foreigners are called exports. On the other hand, includes the goods having market values .
purchases of foreign- made goods and services by • GDP at market price never includes
domestic households are called imports. depreciation of capital goods in course of
production.
3.3.5 Importance of Circular Flow • Transfer payment like pension, maternity
benefits, unemployment allowance etc are not
The concept of the circular flow gives a clear-cut
picture of the economy We can know whether the included in GDP since, they have no
economy is working efficiently or whether there is any contribution for production of output.
disturbance in its smooth functioning. As such, the
circular flow is of immense significance for studying GDP at Market Price and Factor Cost: GDP at
the functioning of the economy and for helping the market price (MP) is the money value of all domestic
government in formulating policy measures. final gross output or product of a nation. The term
domestic output refers to the output exclusively
• It is with the help of circular flow that the produced within the domestic territory of a country.
problems of disequilibrium and the restoration
GDP estimated at market prices, includes indirect taxes
of equilibrium can be studied
but excludes subsidies GDP estimated at factor cost,
• The circular flow establishes a link between excludes indirect taxes but includes subsidies.
producers and consumers. It is through income
that producers buy the services of the factors of Factor cost = Market Prices - Taxes +
production from the consumers with which the Subsidies
latter, in turn, purchase goods from the
producers 3.4.2 Gross National Product (GNP)

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Gross national product (GNP) is an estimate of total defined basket of goods and services while the GNP
value of all the final products and services produced in deflator incorporates all of the final goods produced by
a given period by the means of production owned by a an economy. This allows the GNP to more accurately
country's citizens. capture the effects of inflation since it's not limited to a
smaller subset of goods.
GNP measures the total monetary value of the total
output produced by a country's citizens. Therefore, any 3.4.6 Difference between GDP and
output produced by foreign residents within the
country's borders must be excluded in calculations of GNP
GNP, while any output produced by the country's
Gross Domestic Product (GDP) and Gross National
citizens outside of its borders must be counted. GNP is
Product (GNP) both try to measure the market value of
not territory specific. GNP does not include
all goods and services produced for final sale in an
intermediary goods and services to avoid double-
economy. The difference is how each term interprets
counting since they are already incorporated in the
what constitutes the economy.
value of final products and services.
• Economy in terms of Territory v/s Economy in
3.4.3 Net Factor Income from Abroad terms of Citizens: GDP refers to and measures
the domestic levels of production, whereas
GNP can be calculated using the following formula:
GNP measures the levels of production by any
GNP= GDP+ Factor income earned by the person or corporation of that country,
domestic factors of production employed in the regardless of where in the world the actual
rest of the world - Factor income earned by the production process is taking place, and defines
factors of production of the rest of the world the economy in terms of the citizens.
employed in the domestic economy • GNP measures the compensation and
investment income received by nationals
GNP= GDP+ Net factor income from abroad working or investing abroad.

3.4.4 GDP Deflator Depending on circumstances, GNP can be either higher

or lower than GDP. This depends on the ratio of
The GDP price deflator is an economic measure of
domestic to foreign manufacturers in a given country.
inflation and is the ratio of nominal to real GDP.
For example, China's GDP is $300 billion greater than
GDP Deflator= Nominal GDP/Real GDP. its GNP, due to the large number of foreign companies
It is important because an economy's nominal GDP manufacturing in the country, whereas the GNP of the
differs from its real GDP in that nominal GDP includes U.S. is $250 billion greater than its GDP, because of the
inflation while real GDP does not. Nominal GDP is mass value of production that take place outside of the
economic outpu without the inflation adjustment. country's borders.
Nominal GDP is usually higher than real GDP in cases
where inflation is typically positive number. 3.4.7 Gross Value Added (GVA)
Gross value added (GVA) is defined as the value of
3.4.5 GNP Deflator output less the value of intermediate consumption.
It is an economic metric that accounts for the effects of Value added represents the contribution of labour and
inflation in the current year's gross national product by capital to the production process. When the value of
converting its output to a level relative to a base period. taxes on products (less subsidies on products) is added,
The GNP deflator is calculated with the following the sum of value added for all resident units gives the
formula: value of gross domestic product (GDP).

GNP Deflator= Nominal GNP/Real GNP. GDP at factor cost represents what the producers in the
economy make from industrial activity - wages, profits,
The GNP deflator provides an alternative to the rents and capital called 'factors of production'. Aside
Consumer Price Index (CPI). The CPI is based upon a from these costs, producers may also incur other

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expenses such as property tax, stamp duties and time. It is a measure of the economy's output produced
registration fees before sale. These are included in the within a country's borders irrespective of who owns the
GDP, but not the GVA. Essentially, GVA captures what means to production. It is characterized by the
accrues to the producer, before a product is sold. following formula.

Therefore, Gross value added is the difference between GDP=C+1+G+(X-M)

gross output and net output. Gross value added is
important because it is used in the calculation of gross Where,
domestic product (GDP), which is a key indicator of the
C is the level of consumption of goods and services.
state of a nation's total economy.
I is gross investment,
GVA is an important indicator of economic
performance, and it is being used by economists to G is government purchases, X is exports, and
study the economic transition that India is undergoing.
The RBI too considers only GVA to spell out its M is imports
economic projections in its policy reviews.
3.5.2 Income Approach
Depreciation: In accounting depreciation is the
allocation of the cost of an asset over its economic life. Under this method, national income is obtained by
Depreciation covers deterioration from use, age, and summing up of the incomes of all individuals of a
exposure to the elements. It also includes loss of country Individuals earn incomes by contributing their
usefulness arising from obsolescence on account of the own services and the services of their property such as
availability of newer and more efficient types of goods land and capital to the national production.
serving the same purpose. It does not cover losses from Therefore, national income is calculated by adding up
sudden and unexpected destruction resulting from fire, the rent of land, wages and salaries of employees,
accident or disaster. interest on capital, profits of entrepreneurs (including
Amortization: In finance amortization is the undistributed corporate profits) and incomes of self-
systematic repayment of a debt. In accounting, it is the employed people It can be expressed as GDP- National
systematic writing off of some account over a number Income (NY)+ Indirect Business Taxes (IBT)+ Capital
of years. Consumption Allowance and Depreciation (CCA)+ Net
Factor Payments to the rest of the world (NFP) National
Income Employee compensation + Corporate profits+
3.5 Methods of Estimating Proprietors' Income + Rental income + Net Interest
GDP/GNP Therefore, by adding all of the sources of income
GDP can be calculated by using 3 methods: Income together, a quick estimate can be made of the total
Method, Expenditure Method and Production Method productive value of economic activity over a period.
Adjustments must then be made for taxes depreciation,
The expenditure and the income methods calculate GDP and foreign factor payments.
by evaluating the final stage of sales (expenditure) or
income. However, the "output" or "production" method 3.5.3 Output Approach
calculates GDP by evaluating the value of all sales and
adjusting for the purchase of intermediate goods (to • The output approach is also called "net product
remove double counting) or "value added method. This method consists
of three stages. Estimating the gross value of
3.5.1 Expenditure Approach domestic output.
• Determining the intermediate consumption, ie,
The expenditure method is the most common way to
the cost of material, supplies and services used
estimate GDP, and it says - everything that the private
sector, including consumers and private firms, and to produce final goods or services,
government spend within the borders of a particular • Deducting intermediate consumption from
country must add up to the total value of all finished gross value to obtain the net value of domestic
goods and services produced over a certain period of output

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Gross value of output = Value of the total sales of goods removing the effect of indirect taxes
and services + Value of changes in the inventories or subsidies.
o Market prices mean the actual
Net value added = Gross value of output - Value of
expenditure incurred by consumers.
intermediate consumption
These will also include any subsidies
The sum of net value added in various economic that are provided to the consumer and
activities is known as GDP at factor cost GDP at factor any taxes levied on them.
cost plus indirect taxes less subsidies on products is • Until the recent revisions India used factor
GDP at producer price GDP at producer price costs for calculating GDP but now we have
theoretically should be equal to GDP calculated based shifted towards market prices. So GDP is
on the expenditure approach. However, discrepancies
being calculated by measuring the Gross Value
do arise because there are instances where the price that
Added (GVA) at market prices.
a consumer may pay for a good or service is not
completely reflected in the amount received by the • The shift from factor costs to market prices
producer and the tax and subsidy adjustments indicates that India is slowly conforming to
mentioned above may not adequately adjust for the international norms as most countries use
variation in payment and receipt market prices for calculating the GDP.
• Widening of Data Pool: In statistics, the
3.5.4 New GDP Series larger the sample, the more accurate the
extrapolations are, generally speaking.
Ministry of Statistics and Programme Implementation
Previous data was sampled from Annual
(MOSPI) has released the new series of national
accounts The earlier series was criticized for having an Survey of Industries (ASI), which comprised
old base year, and there was the need to update the base of about two lakh factories. The new database
year as per international practice. draws from the five lakh odd companies
registered with the Ministry of Corporate
These changes have led to a significant change in the Affairs (MCA21). While the earlier data gave
GDP figures. For example, India's GDP growth rate for only a factory-level picture, the new data looks
financial year 2013-14 was 4.7% as per the old
at the enterprise level.
methodology and it is estimated at 6.9% as per the new
methodology For the year 2014-15, it changed from
5.5% as per old methodology to 7.4%.
3.5.5 Critical Analysis of New GDP
Series
The changes that have been made to the methodology of
GDP calculation are: With the new series being adopted, there has been a
sudden spike in the GDP growth rate. Economists,
• Change in Base Year: Base year has been however, feel that it does not reflect the ground realities.
changed from 2004-05 to 2011-12. This means Some of the reasons for anomalies in the new GDP
that the 'real' GDP will be counted by keeping series are:
the prices of 2011-12 as the base prices instead
of referring to the prices of 2004-05. The • Different on Ground Situation: As per
change in base year is not an unusual the new GDP series, India is the fastest
phenomenon as base year is regularly updated. growing economy in the world, ahead of
• Factor Costs Replaced with Market China. But on the ground, the growth has been
rather slow in almost all sectors of the
Prices: There are two ways to calculate GDP
economy.
and those are calculating via factor costs or
• Structural Problems: In spite of problems
calculating via market prices.
o Factor costs mean the cost of like high Non-performing assets,
production that the producers or unemployment, issue of demographic
service providers have incurred after dividend, how can the GDP growth rate be so
high, this is being questioned by many experts.

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• Components of GDP Declining: Gross household work. But the value of the services
Domestic Capital Formation has shown a sharp of domestic helps are to be considered as
decline. This means investment in the national income.
economy is declining. Yet the GDP shows an • Unpaid services in nature of Pro-bono,
increase. Voluntary services are not reckoned as national
• Agrarian Distress: The agrarian distress income
continues to deepen, with the economy facing • Farm Products Kept for Self-
drought in the past years. Farmer stress can be Consumption: These are to be included as
seen in the increasing protest from farmers, national income and estimated by a guess and
and also the increasing number of farmer at the rate of market price of agricultural
suicides. products that have been marketed. However,
• The new series is being criticized because with output of food from domestic poultry keeping
indirect taxes added and subsidies deducted or vegetables grown in the home or terrace
under the new GDP calculations, there is more gardens etc are not included in national
incentive for the Government to raise indirect income, as no accurate estimate of their
taxes and reduce subsidies to inflate GDP production is available
calculation. This may have an impact on
sectors such as agriculture which receive a lot B. Statistical Difficulties
of subsidy.
• The lack of adequate statistical data due to
All these factors and reasons have led to several reasons flaws in extrapolation, ineffective training of
and arguments that the new GDP series is flawed and it illiterate statistical staff, makes the task of
doesn't reflect the ground reality. estimation of national income more acute and
difficult.
3.6 Difficulties in Estimating NI • Multiple counting is also an important
While estimating national income statisticians and problem while calculating national income. If
economists. usually encounter the following sets of the value of all goods and services is
difficulties: calculated, the total will overtake the national
output, because some goods that are currently
• Conceptual, and consumed, will be used in the making of
• Statistical or Practical others. The best way to avoid this error is to
calculate only the value of those goods and
services that enter into final consumption not
for intermediate production.
A. Conceptual Difficulties • India is a country with large regional
The conceptual problem relates to how and what is to diversities. Thus, different languages, customs,
be included and what is not in the measurement of etc., also create a problem in computing the
national income. Though, the concept of national estimates.
income implies that everything that is produced should
be reckoned, but by definition, we consider only those 3.7 GDP: Not a True Indicator
things which are exchanged for money or carry some
price. Therefore, certain guidelines have been laid down GDP is an indicator of economic activity, and it is used
about the process of national income estimates, and to measure economic growth. But GDP is not used to
about what components have to be included. measure welfare of the people because of the following
reasons:
• Services of Housewives: These are not to
be included in national income due to lack of • Does not Measure the Inequality Status
market for the services rendered for their own of a Nation: GDP does not describe whether

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or not the people are truly benefitting from activity within that country which directly attribute to
economic growth. people's standard of living Due to these shortcomings of
• Does not taking on Account of Non- GDP to measure the welfare and well-being of the
people, several other Indicators have been proposed and
Market Transactions: Examples of non- are being used Some of these indices are discussed
market transaction can be noted as volunteer below
work, where work is done by the goodwill of
people. A. Genuine Progress Indicator (GPI)
• Black Markets and Illegal Activities It is a metric which has been suggested to replace, or
create Distortion in Values: Non- supplement GDP as a measure of economic growth. It is
monetary and black markets fail to be designed to take fuller account of the well-being of a
identified as a part of the economic activity in nation, by incorporating environmental and social
a country that would attribute to GDP. factors which are not measured by GDP.
• Economics which are Highly Informal GPI is an attempt to measure whether the environmental
have Skewed GDP Data: Many impact and social costs of economic production and
undeveloped economies rely on non- monetary consumption in a country are negative or positive
economies, this means that trade is done factors in overall health and well-being By accounting
through swapping goods, rather than the for the costs borne by the society as a whole to repair or
employment of debt instruments and bank control pollution and poverty, GPI balances GDP
notes. This means that the economic activity spending against external costs.
and possible welfare of people in undeveloped
countries may be underestimated if based
around gross domestic product. B. Gross National Happiness (GNH)
• Does not take into Account the Loss to
Gross national happiness (GNH) attempts to measure
Environment: Another important issue is the sum total not only of economic output, but also of
that of sustainable economic growth. There are net environmental impacts, the spiritual and cultural
many historic examples where there was a growth of citizens, mental and physical health and the
boost in GDP due to the discovery of new strength of the corporate and political systems.
resources or the re-utilization of land or capital
The term was first attributed to Jigme Singye
However this growth would not be sustainable
Wangchuck the King of Bhutan in the early 1970s.
due to the scarcity of those resources.
Bhutan sough a measure of growth that reflected the
• Does not Measure the well being of a nation's deep commitment to maintaining cultural,
Nature: GDP counts "bads" as well as "goods spiritual and environmental-sustainability standards.
"When an earthquake hits and requires
rebuilding, GDP increases. When someone C. Gross Sustainable Development Product
gets sick and money is spent on their care, it's (GSDP)
counted as part of GDP But nobody would
• This measures the cost of growth and
argue that we're better off because of a
development.
destructive earthquake or people getting sick
• It is developed by the Global Community
• Does not Measure the Happiness Level Assessment. Centre and the Society for World
of a Nation:GDP makes no adjustment for Sustainable development.
leisure time • It measures economic impacts of environmenta
and health degradation or improvement;
The use of Gross Domestic Product (GDP) can be resource depletion, depreciation; impact of
useful to give a holistic view of a country's economy,
people activity on environment; quality of
however when looking at the welfare of an economy it
environment etc.
fails to be an effective indicator because it does not
involve factors such as happiness, and non-monetary

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He proposes an approach which focuses on human

3.8 Development flourishing as the entry point to the problem of poverty
Development (which is different from growth) is the and global inequality rather than economic growth.
process by which a nation improves its economic,
Economic development is a normative concept i.e., it
political and social well-being of its people. applies in the context of people's sense of morality
(right and wrong, good and bad). The definition of
3.8.1 Growth and Development: A economic development given by Michael Todaro is an
Comparison increase in living standards, improvement in self-esteem
needs and freedom from oppression as well as a greater
Growth and development are not the same thing. To choice.
grow is to increase in size or number. To develop is to
increase one's ability and desire to satisfy one's own The major factors which limit freedom as per Sen are
needs and legitimate desires and those of others.
• Poverty as well as tyranny.
Economic Growth is a narrower concept than economic • Poor economic opportunities as well as
development. It is an increase in a country's real level of systematic social deprivation,
national output which can be caused by an increase in • Neglect of public facilities,
the quality of resources (by education etc.), increase in
• Intolerance etc.
the quantity of resources and improvements in
technology or in another way an increase in the value of Sen focuses on crucial instrumental freedoms:
goods and services produced by every sector of the
economy. Economic Growth can be measured by an • Economic opportunities,
increase in a country's GDP (Gross Domestic Product). • Political freedoms,
Development alleviates people from low standards of • Social facilities,
living into proper employment with suitable shelter. • Transparency guarantees
Economic Growth does not take into account the • Protective security
depletion of natural resources which might lead to
pollution, Sen's theory has a huge influence on the new paradigm
in the early 2000s. During that time, development was
Economic growth is a necessary but not sufficient redefined in terms that include human rights as a
condition of economic development. Growth and constitutive part all worthwhile processes of social
development do not have to conflict; they can reinforce change are simultaneously rights-based and
each other. economically grounded.

3.8.2 Amartya Sen on Development Sen has focused on the well-being of those at the
bottom of society, not the efficiency of those at the top
Amartya Sen argues that human development is about
the expansion of capability of the citizens, hence it is 3.9 Models of Development
known as the capability approach.

Sen challenges the mainstream concept of measuring

3.9.1 Harrod-Domar Growth Model
development by economic growth. He argues that The model suggests that the economy's rate of growth
capabilities are substantial freedom to increase citizens depends on:
access and opportunities to the things they have reason.
to value, and hence must be enlarged. Sen does • The level of savings
acknowledge that increases in poor people's incomes do • The productivity of investment (capital output
contribute to the expansion of their freedoms. However, ratio).
he recognizes that increase of income alone has uneven
and detrimental impacts on the majority of a country's
As per the model:
population, and therefore radical redistributive
measures are necessary for the poor to benefit from • Economic growth depends on the amount of
growth. capital and labour

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• More physical capital generates economic to move from low productivity agriculture to
growth . high productivity industry, the circle continues.
• Net Investment leads to more capital
accumulation, which leads to generation of 3.9.3 Rostow's Model
higher output and income
According to Rostow, Development requires substantial
• Higher income allows higher level of savings.
investment in capital. For the economies of LDCs to
• For the least developed countries, lack of grow, right conditions for such investment would have
capital holds back their economic growth and to be created.
development.
The 5 stages of development are:
3.9.2 Lewis Structural Change (Dual- STAGE-1 Traditional Society: This is an
Sector) Model agricultural economy of mainly subsistence farming,
little of which is traded.
Many Least Developed Countries (LDCs) have dual
economies, which means: STAGE-2 Transitional Stage: Agriculture
becomes more mechanised and more output is traded.
• The traditional agricultural sector was assumed
Savings and investment grow although they are still a
to be of a subsistence nature characterised by
small percentage of national income (GDP).
low productivity, low incomes, low savings
and considerable underemployment. STAGE-3 Take off Stage: It is characterised by
• The industrial sector was assumed to be industrialisation, growing investment, regional growth
technologically advanced with high levels of and political change. If aid is given or foreign direct
investment operating in an urban environment. investment occurs at stage 3 the economy needs to have
reached stage 2. If the stage 2 has been reached then
Lewis suggested that the modern industrial sector would injections of investment may lead to rapid growth.
attract workers from the rural areas because:
STAGE-4 Drive to Maturity: It involves
• Industrial firms, whether private or publicly diversification, innovation, less reliance on imports and
owned could offer wages that would guarantee investment.
a higher quality of life than remaining in the
rural areas could provide. STAGE-5 High Mass Consumption: It is
• Furthermore, as the level of labour characterised by consumer orientation, durable goods
productivity was so low in traditional would flourish, service sector becomes dominant.
agricultural areas people leaving therural areas
would have virtually no impact on output. 3.10 Development in India
• Indeed, the amount of food available to the India adopted a mixed economy after independence,
remaining villagers would increase as the same and planning was done by the Planning Commission
amount of food could be shared amongst fewer through the five year plans.
people. This might generate a surplus which
could them be sold generating income
• Those people that moved away from the
villages to the towns would earn increased
incomes, and its impact would be:
• Higher incomes generate more savings. 3.11 Various Types of
• Increased savings meant more fund available
for investment. Increased investment meant Development Indices
more capital and increased productivity in the
industrial sector, higher wages, more incentive A. Human Development Index (HDI)

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Released by: HDI was developed by Indian capital that a child can expect to attain by age of 18 The
Economist Amartya Sen and Pakistani economist HCI, which is part of the World Development Report
Mahbub ul Haq and was published by the United 2019 Index
Nations Development Programme.
Measures: It conveys the productivity of the next
Measures: Whether people are able to "be" and "do generation of workers, compared to a benchmark of
desirable things in their life. complete standard education and full health. The HCI
measures the Index outcomes for each country as a
Components: The parameters used in HDI are: fraction of maximum value of 1.

• Health: Life expectancy at birth Components: The HCI has three components
• Education: Mean years of schooling and 1. Survival, as measured by under-5 mortality rates
Expected years of schooling
• Standard of Living: Gross national Income 2. Expected years of Quality-Adjusted School,
on per capita basis (PPP). which combines information on the quantity and quality
of education
B. Social Progress Index (SPI) • Quality is measured by harmonizing test scores
from major international student achievement
Released by: Social Progress Index (SPI), developed
testing programs
by the Social Progress Imperative, measures the extent
• Quantity from number of years of school that a
to which countries provide for the social and
environmental needs of their citizens. child can expect to obtain by age 18 given the
prevailing pattern of enrollment rates across
Measures: The Social Progress Index focuses grades in respective countries)
exclusively on indicators of social outcomes; rather than
measuring inputs. The primary goal of the Social 3. Health environment using two proxies of (a)
Progress Index is to provide a rigorous tool to adult survival rates and (b) the rate of stunting for
benchmark progress and stimulate progress within children under age 5 years.
countries. Social progress depends on the policy
choices, investments, and implementation capabilities The advanced economies in North America and Europe
of multiple stakeholders government, civil society, and mostly have HCI value of above 0.75, while South Asia
business. and Sub-Saharan Africa have the lowest HCI among the
regions. The HCI for India has been estimated at 0.49,
Components: This index is based on three India stands at rank 116 out of 174 countries.
dimensions, based on 4 components:
Major Findings-HCI 2020
• Basic Human Needs, comprising 4 indicators:
Nutrition and Basic Medical Care, Air Water The key observations regarding HCI for India in the
and Sanitation, Water, Personal Safety. Report are as under
• Foundations of Well-Being with Access to • A child born in India today will be only 44
Basic Knowledge, Access to Basic Information percent as productive when she grows up as
and Communication, Health and Wellness, she could be if she
Ecosystem Sustainability as its components. • enjoyed complete education and full health.
• Opportunity with Personal Rights, Access to • The HCI in India for females is marginally
Higher Education, Personal Freedom and better than that for males
Choice, Equity and Inclusion as indicators. • Further, there has been marked improvement
in the HCI components in India over the last
C. Human Capital Index (HCI) five years.
• The 2020 Human Capital Index update
Released by: The Human Capital Index, published by
includes health and education data for 174
World Bank, seeks to measure the amount of human

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countries covering 98 per cent of the world's substantial data gaps. The gap in data and
population-up to March 2020, methodology overlook the initiatives taken by
• It provides a pre-pandemic baseline on the a country and, in turn, portray an incomplete
health and education of children, with the and predetermined picture.
biggest strides made in low-income countries. • Assessment Lacks Global Character:
The use of PISA and TIMSS scores raises
Impact of the pandemic questions of possible conflict of interest as the
methodology for testing is largely controlled
• The analysis shows that pre-pandemic, most.
by non UN agencies and is that are used for
countries had made steady progress in building
health and survival indicators.
the human capital of children, with the biggest
strides made in low-income countries.
• The pandemic puts at risk the decade's
progress in building human capital, including • Ignored Realities of Developing
the improvements in health, survival rates, Nation: The differences in development
school enrollment, and reduced stunting. outcomes arising from governance issues,
• The economic impact of the pandemic has political systems, socio-cultural context, and
been particularly deep for women and for the legacy issues have been totally ignored The
most disadvantaged families, leaving many metric of HCI is too simplistic at one level and
vulnerable to food insecurity and poverty too ignorant of development realities at
• Due to the pandemic's impact, most children another.
more than 1 billion-have been out of school • Negligence of Important Initiatives:
and could lose out, on average, half a year of The HCI score for India does not reflect the
schooling, adjusted for learning, translating key initiatives that are being taken for
into considerable monetary losses developing human capital in the country.
• Data also shows significant disruptions to • The Samagra Shiksha Abhiyan has been
essential health services for women and launched to focus on access and quality of
children, with many children missing out on education by focusing on 2T's-Teacher and
crucial vaccinations. Technology.
• Through the Ayushman Bharat Programme,
India's performance India has now launched the world's largest
Health Insurance initiative providing 500
• India's score increased to 0 49 from 0.44 in
million citizens with adequate health coverage,
2018, as per the Human Capital Index report
and transforming 150,000 Health Centres into
released by the World Bank
Wellness Centres to provide comprehensive
• In 2018, India had raised "serious reservations
primary healthcare services.
over the Human Capital Index, wherein India
• Sanitation coverage has expanded from 38% in
was ranked 115 out of 157 countries.
2014 to 100% in 2019 under the Swachh
• In 2020, this year India finds itself at 116th
Bharat Mission. This has been made possible
from among 174 countries.
through the construction of over 95 million
toilets and simultaneous societal reforms
Stand for India's Ranking driven through strong political will.
This ranking does not reflect India's standing correctly • The Pradhan Mantri Ujjwala Yojana has
as there are serious reservations about the advisability reduced drudgery and improved the health of
and utility of this exercise of constructing HCI The about 70 million women by providing them
arguments against this ranking are as following: with LPG connection to replace firewood and
coke based cooking stoves.
• Concerns over Methodology: There are
major methodological weaknesses, besides

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• In pursuing with the agenda of financial While physical accounting determines the state of the
inclusion, the Pradhan Mantri Jan Dhan resources, types, and extent (qualitative and
Yojana has provided access to formal banking quantitative) in spatial and temporal terms, monetary
services to over 430 million persons The share valuation is done to determine its tangible and
of account ownership among rural adults has intangible components. Thereafter, the net change in
more than doubled from 33% in 2011 to 79% natural resources in monetary terms is integrated into
the Gross Domestic Product in order to reach the value
in 2017, significantly bridging the rural-urban
of Green GDP.
gap.
• Financial inclusion and the Aadhaar
identification system has enabled India to
make direct cash transfer of about US$ 500
billion to citizens, since the launch of the
scheme, thus improving governance and social Background
protection.
Among the various countries of the world China is the
India has a demographic dividend which needs to only nation that has majorly used the concept of Green
turned into productive workers of the future. The GDP to measure the viability of its economy. The then
government has initiated a number of schemes and Chinese Premier Wen Jiabao in 2004 said the green
programs to improve the human capital in the country. GDP concept would be soon replacing the traditional
GDP as a measure of financial condition of the country
3.12 Green GDP The continued use of green GDP concept impacted
growth data of the country which led the Chinese
The externalities of economic growth that are not government to stop the use of the green GDP in 2007
factored into the conventional GDP numbers have a and reverted back to using the normal GDP concept.
massive monetary value. A study by the World Bank
estimates that in 2013 India suffered a loss of over $550 Evolution of Concept of Green GDP in
billion, or 8.5 per cent of GDP, just as a result of air India
pollution.
• In 2009, the Government of India had
The economic cost of other impacts, such as water
pollution and land degradation, among several others, if announced its Intention to unveil "green GDP"
calculated could be much more. In wake of such figures
revelation of environmental impact of economic growth • Subsequently, the Ministry of Statistics and
the term. Green GDP has gained currency. Programme Implementation set up an expert
group in 2011 led by Partha Dasgupta to work
Meaning out a framework for green national accounts in
India.
Green GDP is a term used generally for expressing GDP
• Dasgupta-led expert group had submitted its
after adjusting for environmental damage. When
report in March 2013, recommending that
information on economy's use of the natural
environment is integrated into the system of national economic evaluation be made on the basis of a
accounts, which measures the economic activities in an comprehensive notion of wealth, including
economy during a period of time, it becomes green aspects such as infrastructure and capital
national accounts or environmental accounting. equipment, human capital and natural capital.
However, the government is yet to implement
Environmental accounting involves three steps viz the recommendations.
1. Physical accounting; • In July 2021, the Uttrakhand Government has
announced that it will initiate valuation of it
2. Monetary valuation;
natural resources in the form of Gross
3. Integration with National Income/Wealth Accounts. Environment Product.

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Significance of Green GDP

• Green GDP is an indicator of economic growth
with environmental factors taken into
consideration along with the standard GDP of
a country. It factors biodiversity losses and
costs attributed to climate change. \
• Green GDP is expected to account for the use
of natural resources as well as the costs
involved, which includes medical costs
generated from factors such as air and water
pollution, loss of livelihood due to
environmental crisis such as floods or
droughts, and other factors.
• Factoring in environmental costs could have a
significant impact on the country's perceived
"economic growth", resulting in a hasty
departure.
• It could bring the sustainability of various
business models and industries into question
by highlighting their direct impact on the
environment.
• Green GDP can help us measure a country's
preparedness for sustainable economic
development.
• The value of ecosystem services is about twice
as much as the global GDP. Therefore, green
GDP would help in the conservation of the
environment and also help save us from the
effects of climate change.

Issues
• Green GDP is also difficult to calculate, given
the various intangibles involved in the process.
• The purpose of introducing Green GDP is not
transparent. Is might be construed as an
attempt to claim a budget from the centre
against ecosystem services the state provides to
the rest of the country and/or a process of
providing benefits to its own residents, which
may hinder the spirit of cooperative federalism
in India
• For the concept to be successful it requires
concerted effort across the world to factor in
environmental and social costs, as none of the
countries want their growth figures to drop.

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industry contributed merely 7.5% to national income at

Chapter-4 the end of British rule, employing merely 2.3% of labor
force.
Socio-Economic Planning in There was a virtual absence of capital goods and
India machine industries with 90% of need for machine tools
being met by imports in 1950.
4.1 Introduction (c) Imbalance Regional Development: There was
lopsided industrial development with industries being
A plan is an orderly conception or proposal for concentrated in few cities and regions of the country
accomplishing an objective with given resources. The resulting in wide regional disparities in income.
First Five Year plan contains one of the clearest
definitions of planning According to it, planning (d) Poor human development indicators: Human
involves: development indicators such as literacy, life expectancy,
health showed dismal statistics Extreme poverty,
• Acceptance of a clearly defined set of disease, hunger, starvation was to be seen everywhere.
objectives in terms of which overall policies
are framed. Therefore, we may sum up India's economic profile at
• Formulation of a strategy for promoting the the time of independence as:
realization of the ends defined. (a) Stagnating per capita national income,
• Working out a rational solution to problems in
an attempt to coordinate means and ends. (b) Abysmal standard of living,

(c) Stunted industrial development,

4.2 Need for Planning
(d) Bulk of population dependent on stagnating, low
productivity semi-feudal agriculture.
1. Conditions at the Time of
Independence:
(a) State of agriculture: Indian economy at the time of
independence was predominantly rural and agrarian
with almost 70% of working population engaged in
agriculture. Irony of the situation was that despite such
2. Need for Direction with Limited
a high proportion of population being engaged in Resources
agriculture, the country was not self-sufficient in either
food or raw materials for Industry mainly because of With limited resources in the government purse, the
regressive agrarian structure (Zamindari and rack- question the government of independent India faced
renting), internal drain of capital and poor technology. was, how to make best use of it whether to invest in
agriculture or in industry? Many policy makers believed
(b) State of Industrial Progress and Private Enterprise: that the reason for underdeveloped status of the country
Modern and western entities dominated was the almost absence of heavy and capital goods
Industrialization of 19 century as well as British industry. So, it was decided to invest scarce resources in
commercial policy which imposed restrictions on India developing industries under regulated state control.
exporting to west but granted favors to British exporters
who flooded the Indian markets, contributed to decay of 3. International Influence:
traditional arts, crafts and small industries and didn't
create impetus for growth of indigenous machine and USSR had embarked on an era of centralized planning
heavy industries. in late 1920s and came out with its first five year plan
spanning 1928-32. Each five-year plan dealt with
Modern industries began to develop in the second half different aspects of development: capital goods,
of 19 century but their progress was exceedingly slow consumer goods, agriculture, transportation, health,
and stunted. By 1946, cotton and Jute textiles accounted communications, education, and welfare.
for 30% of all workers employed in factories. Modern

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Proof of Advantages of Planning: From 1929-35, when formulation of the First Five Year Plan, India embarked
the world over capitalist economies were reeling under on the programme of planned economic development of
the impact of Great Depression, Soviet Union was the the country.
only country among the world powers to not only
escape depression but also to successfully complete its 4.4 Objectives of Planning
first five-year plan and record positive growth rate. This
attracted many in Congress towards socialist tendencies Economic planning meant allocation of limited
including India's first Prime Minister, Pandit Jawaharlal resources among different users in such a way so to
Nehru, who got highly influenced by the Soviet model promote maximum welfare of the people. Given the low
of centralized planning. rate of savings and structural limitations in converting
savings to investment, it was felt that basic question of
Policy Makers realized that under prevailing conditions,
how much to save, where to invest, and in what forms
a complete centralized economy was not possible and
to invest could be best handled with the help of a plan.
so they came up with the concept of mixed economy
where both public and private sector can co-exist. Long term objectives of the Five Year Plans in India
were:
4.3 Constitutional Provisions
• High Growth rate to improve the living
Pandit Jawaharlal Nehru in his "Tryst with destiny" standard of the residents of India.
midnight address oriented the formal democratic • Economic stability for prosperity.
process towards more substantive aims; "To create • Self-reliant economy
social, economic and political institutions which will • Social justice and reducing the inequalities
ensure justice and fullness of life to every man and
• Modernization of the economy
woman".

The Indian constitution's preamble aimed "to secure to 4.5 Types of Planning
all its citizens JUSTICE-social, economic and political;
EQUALITY of status and opportunity and to promote 1. Planning by Direction: In planning by direction
among them all FRATERNITY assuring the dignity of targets of plans are pre-determined and executed with
the individual, and UNITY and INTEGRITY of the the help of the government in power In this form of
Nation". Thus, planning was chosen to be a mode which planning all the important position and decision are
aimed to achieve growth and justice. taken by the state. State directly controls financial
institutions, industrial sector, transport, and
The Directive Principles of State Policy defined the infrastructure
broad objectives of socio-economic policy.
2. Planning by Inducement: In planning by inducement
• Right of citizens to an adequate means of the government tries to achieve its objectives by.
livelihood influencing investment decisions of the entrepreneurs
• Regulation of ownership and control of by offering the necessary incentives.
ownership of material resources of the country
In practice, both these types of planning are
to subserve the common good.
complementary to each other under mixed economy
• Avoidance of concentration of wealth and
Government has full control over certain sectors like
means of production. atomic energy, defense while in certain other sectors
like agricultural small scale and cottage industries etc.
Thus, planning aimed for raising the standards of living
private sector are given many incentives.
of the people.
In fact planning by inducement is more relevant to
In pursuance of the above mandate, Planning
democratic countries. On the contrary, communist
Commission was set up in 1950 by an executive order
countries like Russia, China rely more on planning by
(not a constitutional body) to make an assessment of the
direction.
material, capital, human resources of the country and to
formulate a plan for the most effective and balanced 3. Democratic Planning: In Democratic planning, plans
utilization of the country's resources. With the are prepared according to the requirements and needs of

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the people. A democratic plan is prepared after 9. Rolling Plan: In a rolling plan, every year three plans
consultation with various stakeholders involved in the are made and acted upon. First, there is a plan for the
economy-government agencies, civil society or private current year which includes the annual budget and the
enterprises. Main goal of democratic planning is to foreign exchange budget. Second, there is a plan for a
eradicate inequalities of income and wealth through number of years, say three, four or five. Third, a
peaceful means by taxation and government spending perspective plan for 10, 15 or 20 or even more years is
on social welfare and social security schemes. presented every year in which the broader goals are
stated and the outlines of future development are
4. Planning Under Mixed Economy: Under this system forecast. The annual one-year plan is fitted into the
there is freedom of economic activities and government same year's new three, four or five year plan, and both
interferes for the social welfare. According to Prof. are framed in the light of the perspective plan.
Samuelson, "Mixed economy is that economy in which
both public and private sectors cooperate. The main
responsibility of the government in this system is to
4.6 History of FYPs
ensure rapid economic growth without allowing
concentration of economic power in the few hands.
Four Phases of Indian Plans A. Phase I:
India introduced planning under mixed economy. Nehruvian Legacy (1951-66)
5. Perspective Planning: Perspective planning refers to Features:
long-term planning in which long range targets are set
in advance for a period of say 15 or 20 years. The • Active role of State
broader objectives and targets are to be achieved within • Import substitution strategy.
the specified period of time by dividing the perspective • Heavy industrialization (Mahalanobis strategy)
plan into several short-period detailed plans of say
Three years or annual plans. 1. First Five Year Plan (1951-56):
6. Indicative Planning: This is a French system of Focused on public investment in the area of
planning which is based on the principle of
decentralization in the operation and execution of • Infrastructure,
national plans. This type of planning is not imperative • Agriculture (land reforms),
but flexible. In Indicative Planning the private sector is • Irrigation (3 important river valley projects
neither rigidly controlled nor directed fully to fulfill the undertaken- Bhakra Nangal, Damodar valley,
targets and priorities of the plan Even then, the private Hirakud),
sector is expected to fulfill the target for the success of • Power, transport and communication.
the plan.
Harrod Domar Model: Indian planning followed Harrod
7. Imperative Planning: Under Imperative Planning, all
Domar growth model. According to this model, the rate
economic activities and resources of the economy
of growth of GDP in dependent on the level of saving
operate under the direction of the state. There is
and capital output ratio: GDP growth rate = Saving
complete control over the factors of production by the
rate/capital-output ratio.
state. What and how much to produce - such decisions
are taken by the managers of firms and factories on the The capital accumulation place the dual role of
direction of the planning commission or a central increasing national income on the demand side and
planning authority. increasing productive capacity supply size.Increase in
saving rate contributes to increase in investment rate,
8. Totalitarian Planning: In totalitarian or authoritarian
which in turn leads to higher growth. Thus, focus in the
planning, all economic activities are in accordance with
first phase was more on increasing savings rate. Since
a single plan as per the central control and direction.
quality of investment matters, therefore focus was on
The consumption, production, exchange, and
lowering capital-output ratio.
distribution are all controlled by a state. Under the
Totalitarian Planning, the planning authority is the Targeted Growth Rate: 2.1%
supreme body. People have to accept and rigidly
Implement the plan. There is no opposition to the plans. Actual Growth Rate: 3.6%

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Result: Plan Success the country came under immense strain eventually
leading to BOP crisis.
2. Second Five Year Plan (1956-61):
Agriculture was neglected under the Mahalanobis plan,
To convert growing savings (in focus) into additional leading to food crisis in mid 1960s which was averted
real investment demanded that the productive capacity through food grain imports under PL-480 scheme
of the capital goods sector must rise at an accelerated
rate. The focus of this plan was rapid industrialization Targeted Growth Rate: 5.6%
with emphasis on heavy industry.
Actual Growth Rate: 2.5%
PC Mahalanobis was the author of the second FYP.
Result: Plan sheer failure
Second FYP envisaged developing indigenous heavy
industry base (comprising of metallurgy, chemical, Reasons for Fallure: Plan was a thorough failure in
machine building) with state playing a dominant role in reaching the targets due to unforeseen events Chinese
the development process. Fundamental insight of aggression (1962). Indo-Pak war (1965), severe drought
Mahalanobis model was that the greater the proportion (1965-66),
of investment devoted to increasing the capacity of
capital-goods sector, the rate of growth of output of Learnings from the Plan: Due to these conflicts, focus
capital goods will be greater and hence, the future rate was shifted from development to defense towards the
of growth of investment in the economy will be greater. end of this plan.

For this Industrial Policy Resolution, 1956 was B. Phase II (1966-90)

Introduced: It formed the basis for second FYP and it
tried to build the basis for the socialist pattern of society 1. Three Annual Plans (1966-69): Also called the period
with focus on regional equity. It laid down 3 categories of plan holiday. The sharp deterioration of the economic
of industries. situation and security environment highlighted two
main weaknesses of the development strategy relative
Classification of Industries-three categories: neglect of agriculture and critical dependence on
foreign aid.
1st: Industries which would be exclusively owned by
the state. So the focus was shifted to Agriculture and expenditure
on defence. A New Agriculture strategy was
2nd: Industries in which the private sector could
implemented. It involved distribution of high yielding
supplement the efforts of the state sector, with the state
varieties of seeds, extensive use of fertilisers and
taking the sole responsibility for starting new units.
pesticides, exploitation of irrigation potential. This was
3rd: The remaining industries which were to be in the better known as green revolution Government of India
private sector, was kept under state control through a also declared devaluation of rupes to increase the export
system of licenses IPR 1956 is also known as the of the country
Economic Constitution of India.
2. Fourth Five Year Plan (1969-74): Twin objectives -
Targeted Growth Rate: 4.5% Growth with stability and progressive achievement of
self-reliance
Actual Growth Rate: 4.3%
• Focus of the plan was growth in agriculture.
Result: Plan nearly successful • Also for the first time, omphasis was laid on
Social Justice as a formal goal. Implementation
of family planning was another highlight of the
plan.

3. Third Five Year Plan (1961-66): Targeted Growth Rate: 5.7%

Background of the plan: The heavy industrialization Actual Growth Rate: 3.3% Result: Plan not completely
strategy under Mahalanobis plan required import of successful
machineries but due to lack of exports, forex reserves of

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Effect: Run away inflation due to 1972 oil crises and • Seventh FYP represents culmination of shift to
huge influx of refuge from Bangladesh war in 1971. infrastructure and can be termed as the
infrastructure plan to raise productivity by
3. Fifth Five Year Plan (1974-79): Two main goals
increasing employment opportunity.
Garibi hatao (Removal of poverty) and attainment of
self reliance. • It was during this plan that reappraisal of the
import substitution strategy begins and a
To achieve the above stated goals "minimum needs gradual liberalization of the Indian economy is
programme and directed anti-poverty programme" were initiated. Thus, it can be said that Indian
introduced. economy adopted an outward oriented policy.
Focus was on stepping up of domestic rate of savings.
Targeted Growth Rate: 5.0%
Targeted Growth Rate: 4.4%
Actual Growth Rate: 5.8%
Actual Growth Rate: 4.8%
Result: Plan successful.
Result: Plan successful
C. Phase III (1990-2017)
Emergency was declared in 1975 and with that
emphasis shifted to Prime minister's 20-point Annual Plans due to fast changing political situation in
programme instead of the FYP When Janata party came India (1990-92)
to power in 1978, 20 point program was terminated and The severe Balance of Payments crisis in 1991 and the
a Rolling plan (1978-80) was Introduced and this was in subsequent IMF conditionalities brought about a sea of
continuation with fifth five year plan. Rolling plan was change in the Indian economy and demanded a full
introduced (1978-80) due to turbulence in political reappraisal of the planning methodology.
landscape of India. This was done to provide flexibility
and mend the targets as per changing conditions of 1. Eighth Five Year Plan (1992-97):
economy.
• Process of Fiscal Reforms and Dynamism:
4. Sixth Five Year Plan (1980-85): Eighth FYP represents the first effort at
planning for a market oriented economy.
• Sixth FYP, for the first time, recognized that
Eighth FYP stated in its preface: "The Plan is
the success of Mahalanobis heavy
indicative in nature" This meant that planning
industrialization strategy had created a
in the post reform era would be indicative with
situation where excess capacity was becoming
the State at best being a facilitator for private
evident in certain industries. There was,
enterprise which resulted in reduction of fiscal
therefore a shift away from Industrialization
deficit and unshackling of private sector. This
and towards infrastructure for both agriculture
plan was also called Rao-Manmohan model.
and industry. Emphasis was laid on greater
• This period saw rapid growth of 6.8% with
management efficiency and monitoring of
flourishing growth in agriculture and industrial
various scheme.
sector. Services were in an emergent phase.
• Focus on creating employment through
However, this period was a phase of jobless
National Rural Employment Programme and
growth because of increased activity in capital
Integrated Rural Development programmes.
intensive sector.
This also included involvement of people in
• Social spending was neglected.
formulating various scheme.
Targeted Growth Rate: 5.6%
Targeted Growth Rate: 5.2%
Actual Growth Rate: 6.8%
Actual Growth Rate: 5.7%
Result: Plan successful
Result: Plan successful.

5. Seventh Five Year Plan (1985-90):

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2. Ninth Five Year Plan (1997-2002): Focus on • Aimed towards faster and more inclusive
growth with social justice and equality. growth.
• Momentum of tenth FYP continued into the
• Aimed to depend predominantly on private
eleventh. However due to global financial
sector with state focusing on social sector viz
crisis of 2008-09, there was negative impact
education, health, infrastructure where private
seen on foreign capital and trade which led to
participation was likely to be bleak.
slower industrial growth. Despite short
• Emphasis was laid on seven basic minimum
recovery, there was a slowdown due to
services including water, health, sanitation,
Eurozone crisis in 2012 and tightening of
education, food security, woman
monetary policy by the RBI.
empowerment, etc. Priority accorded to
• Despite the slowdown in the world all over,
agriculture and rural development.
India clocked 8% growth rate due to
Decentralisation of planning also took place in
robustness of its service led growth.
this plan.
• Due to East Asian crisis and relatively high Targeted Growth Rate: 9.0 %
fiscal deficit due to 5th pay commission etc,
growth rate slumped to 5.4 % in this period. Actual Growth Rate: 7.9%

Result: Plan wasn't able to reach desired growth.

Targeted Growth Rate: 6.5%

Actual Growth Rate: 5.5%

5. Twelfth Five Year Plan (2012-17):

Result: Plan wasn't able to reach desired growth. • Main objective was faster, sustainable and
more Inclusive growth
3. Tenth Five Year Plan (2002-2007): • Monitorable targets for economic growth,
employment. literacy, health, Infrastructure
• This phase saw Service-led growth where
including rural infrastructure, environment and
services accounted for more than 50% of GDP.
sustainability
• Significant increase in Foreign Capital Inflow
• Focus was on service sector and energy
(FDI, FPI)
security
• Savings and investment peaked during this
• The challenge of urbanisation was identified as
period.
a key area.
• Exports increased significantly
• With the completion of the twelfth FYP,
• However, Agriculture was not accorded
planning era came to an end in 2017 Planning
primacy.
Commission now stands abolished and in its
• Tenth plan set monitorable targets for few place a new organization "NITI AAYOG" has
indicators such as reduction of gender gap in been created symbolizing transition from the
literacy and wage rates, reduction in infant and era of indicative planning to perspective
maternal mortality rates etc. planning.
MGNREGA was launched for giving employment
guarantees in rural areas. This was complemented with D. Phase IV-2017 Onwards
Bharat Nirman Project.
India is now on the road to becoming a full-fledged
Targeted Growth Rate: 8.0% market economy with the legacy of planning behind us.

Actual Growth Rate: 7.6% Replacing the Five Year Plane beyond 31 March 2017
NITI Aayog has prepared
Result: Plan nearly successful
• A 15-year Vision Document keeping in view
4. Eleventh Five Year Plan (2007-2012): the social goals set.

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• A 7-year Strategy Document spanning 2017-18 • Critical need to enhance the scale of
to 2023-24 to convert the longer-term vision production in each of the sectors-Agriculture,
Into implementable policy and action as a part Industry, Services.
of a "National Development Agenda • The document proposes the development of a
• A 3-year Action Agenda for 2017-18 to 2019- few Coastal Economic Zones (CEZS)
20 covering different sectors of the economy- operating under a liberal economic
agriculture, Industry and manufacturing and environment.
discussing policies necessary for urban and • The Agenda highlights priorities in the area of
rural transformation and a range of growth- digital network and offers solutions to bridge
enabling. Ingredients such as transport, digital the gaps in providing end-to-end e-services.
connectivity and entrepreneurship has been
prepared

Highlights of the Agenda-

The agenda describes the fundamental dilemma

concerning economic transformation of India. 4.8 Relevance of Planning in Era
• About 50% of India's workforce is employed of Liberalization
in agriculture, which contributes only 15% of
output Following liberalization, the role of the public sector in
• Two Implications: On the one hand, it suggests the Indian economy has considerably shrunk and is
shrinking further. Almost 75% of the investments in the
that workers should be moved away from this
economy are now flowing from the private sector.
relatively low-productivity activity. On the
Limitations on state in the form of financial constraints
other, it also requires that productivity in
emanating from the Fiscal Responsibility Budget
agricultura itself be improved to increase Management Act, 2003 provisions along with improved
yields and benefit those workers who remain in efficiency and professionalism by private sector has led
the sector. to the demand for the state to vacate areas hitherto
• The service sector and manufacturing jobs that regarded as the responsibility of the government like
await workers exiting the agricultural sector education, health. Public Private Partnership is
are not always high-productivity jobs Firms emerging as the preferred mode for initiatives in
with less than 20 workers. employ 72% of the development.
manufacturing workforce and produce merely
Given this background, should there be any role for
12% of the manufacturing output And nearly
planning?
40% of the services output is produced by
merely 2% of the service sector workers, Answer is Affirmative.
employed in the largest services firms.
Indicative: Planning can be helpful in a market
Thus, there is an urgent need for undertaking economy by providing "indication, coordination and
productivity. Enhancing reforms Agenda offers a prescription" as the experience borne out in market
number of proposals, oriented economies of Korea and France indicate.
Accordingly planning process underwent a
A few of which are as follows: transformation post 1991. The sectoral investment
targets for the economy were worked out based on the
• Use of high-yielding variety of seeds and output growth targets and incremental capital- output
improved irrigation techniques. ratio, but the targets for the government's sectoral
• Removal of tariff inversion (where the high investment were derived residually after estimating the
level of trade barriers on intermediate inputs likely pattern of private investment and assessing the
relative to final goods disincentivizes domestic likely investment by states. This is indicative planning.
production).

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Interdependent: There is close interdependence between longer dependent on other countries for the
markets and governance. Operation and successes of the supply of food- grains and a number of
market mechanism can be deeply influenced by the agricultural crops. This has been further
nature of governmental arrangements. enhanced by the Atmanirbhar Bharat initiative
Inclusive: The aim must be to stay with the objective of of the government.
inclusive growth but to take a more realistic view of • Social Justice: The objective of sustained
what the state can realistically deliver. Government growth with justice has been tried to be
through planning process must create an enabling ethos achieved over the planning period through
for the market so that the individual enterprise can several measures like land reforms, abolition
flourish and the nation goes on to achieve high level of of bonded labour, liquidation of rural
growth. indebtedness, fixation of minimum wages,
provision of basic minimum needs.
4.9 Achievements and Failures
4.9.2 Failures
4.9.1 Achievements
Although the planning has given a skeletal framework
• Increase in National Income and Per Capita to the Indian economy, yet some of the shortcomings of
Income: National income grew at the rate of the process of planning are as follows:
1.2% per annum between 1901-47. This has
• Lack of coordination between centre and state
increased to 11.6% in 2016-2017 due to plan
leading to states being subordinate to centre in
initiative.
a command economy.
• Development of Agriculture: Agricultural
• Rise in prices
productivity has marked an upward trend
during the plan period. The production of • No substantial improvement in the standard of
food-grains which was 510 lakh tones in 1950- living.
51 increased to 272 million tonnes in 2016. • Inefficient administration.
• Development of Industries: Plan period saw • Increase in unemployment.
remarkable strides being made in Industrial • High Incremental Capital output ratio.
development, especially in heavy industries • Inadequate development of infrastructure.
like Iron and steel, metallurgy etc. • Inequality in distribution of wealth and
• Development of Economic Infrastructure: In income.
the first two FYP, more than 25% of the outlay
was invested in the development of transport 4.10 NITI Aayog
and communication. Thus, FYP laid a robust
foundation for transport, communication, 4.10.1 Introduction
power generation etc.
The National Institution for Transforming India, also
• Development of Social Infrastructure: Services
called NITI Aayog, is an executive body which was
such as education, health have also made
formed via a resolution of the Union Cabinet on January
considerable success under the FYP process 1, 2015. NITI Aayog is the premier policy 'Think Tank
due to planned welfare obligation of the of the Government of India, providing both directional
government. and policy inputs.
• Increase in Rate of Capital Formation: Much
emphasis was laid on increasing the rate of 4.10.2 Reasons for Establishment
saving and investment and subsequently
savings rate risen to almost 35% during While designing strategic and long term policies and
programmes for the Government of India, NITI Aayog
eleventh FYP.
also provides relevant technical advice to the Centre
• Self-Reliance: During the last five decades,
and States.
considerable progress has been made towards
the achievement of self-reliance. India is no

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The Planning Commission also did this but in a heavily It also enables evidence-based policymaking and
centralised, big-brother way suited to a command enhancing productive efficiency with long-term vision.
economy. It was marred by bureaucratic processes and
was devoid of fresh thinking 1. "Three Year National Action Agenda" and the
"Strategy for New India@75" allows better alignment
NITI Aayog has been entrusted with the mandate of re- of the development strategy with the changed reality of
imagining the development agenda by dismantling old- India.
style central planning. As the Indian economy rapidly
integrated with the global economy contradictions arose 2. Reform of Central Public Sector Enterprises
between central planning and increasing private capital (CPSES).
flows. The NITI Aayog was mandated to foster 3. Balanced Regional Development
cooperative federalism by giving individual states much
more say in the planning and development process, (a) Development support to NE.
evolve a national consensus on developmental goals,
(b) NITI forum for NE.
redefine the reforms agenda, act as a platform for
resolution of cross-sectoral issues between Center and 4. Health & Nutrition Sector Reforms
State Governments, capacity building by replacing the
one way Centre-to-State flow of policy with (a) Launch of the POSHAN Abhiyan.
'cooperative federalism' and recommending policies,
(b) Evolving the National Nutrition Strategy. (c)
leaving implementation to the respective State
Pushing reforms for the pharma sector.
Governments.
5. In the energy sector
Thereby, NITI Aayog acts as a Knowledge and
Innovation hub. (a) NITI launched Report on "India's Renewable
Electricity Roadmap".
Unlike the Planning Commission, the NITI Aayog does
not have the power of allocating central funds to States. (b) Roadmap for revising the National Mineral Policy.
This will now be done by the Finance Ministry. 2018.

4.10.3 Actions Taken by NITI Aayog 6 Partnerships with National and International
Organisations and Promote Stakeholder Consultation in
Various Initiatives have been taken up by the NITI Policy Making
Aayog Including:
7 Promoting the adoption of frontier technology like
• Launching of various initiatives and Artificial Intelligence, blockchain, Methanol economy
programmes. etc.
• Measuring performance and ranking States on
8. Promote entrepreneurial and innovation ecosystem:
outcomes in critical sectors, Sustainable
(a) Atal Innovation Mission, which established Atal
Action for Transforming Human Capital Tinkering Labs in India, has already done commendable
(SATH). work in improving the Innovation ecosystem in India.
• Ek Bharat Shrestha Bharat.
• Public-Private Partnership in Health. (b) Global Entrepreneurship Summit 2017 – Women
First Prosperity for All
• Development Support Services to States
(DSSS) for Development of Infrastructure. (c) Women Entrepreneurship Platform
• Resolution of pending issues of States with
Central Draft Three Year Action Agenda
• Ministries. Aspirational District Programme In May 2016, the Prime Minister's Office advised the
(ADP); to realise the vision of "Sabka Saath, NITI Aayog, its premier, independent think tank, to
Sabka Vikas" and ensure that the growth prepare a Fifteen Year Vision, Seven Year Strategy and
process of India must be inclusive. Three Year Action Agenda The Fifteen Year Vision and
Seven Year Strategy document spanning 2017-18 to
2031-32 is in progress. The Action Agenda covers the

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period from 2017-18 to 2019-20. the last years of the • Model Land Leasing Law: Taking note of
Fourteenth Finance Commission. The draft 3 year increasing incidents of leasing in and out of
action agenda contains themes like revenue and land and suboptimal use of land with lesser
expenditure, economic transformation in major sectors number of cultivators, NITI Aayog has
regional development, growth enablers, social sectors, formulated a Model Agricultural Land Leasing
sustainability Act, 2016 to both recognize the nights of the
tenant and safeguard interest of landowners.
Based on the model act Madhya Pradesh has
Difference between Vision, Strategy, Action Agenda enacted separate land leasing law, while Uttar
Framework and Five Year Plan Pradesh and Uttarakhand have modified their
The 12 Five Year Plan was the last of the Five Year land leasing laws.
Plans With an increasingly open and liberalized • It has recommended Model APMC Act 2.0 on
economy and given the new realities of the global the basis of recommendations from the states.
economy, we needed to rethink the tools and approaches • NITI Aayog has developed the first ever
to conceptualizing the development process. The Agriculture Marketing and Farmer Friendly
Vision, Strategy and Action Agenda framework will Reforms Index to sensitize states about the
allow us to better align the development strategy with need to undertake reforms in the three key
the changed reality of India. areas of Agriculture Market Reforms, Land
Lease Reforms and Forestry on Private Land
4.10.4 Evaluation of NITI Aayog's (Felling and Transit of Trees).
Performance • Digital Payment Movement: An action plan on
advocacy, awareness and coordination of
A. Achievements
handholding efforts among general public,
• It has provided a platform to bring together micro enterprises and other stakeholders was
some of the best minds of the country and prepared by the Aayog. Appropriate literature
deliberate on issues that require expertise, in print and multimedia was prepared on the
Government has thus transformed. Into an subject for widespread dissemination Niti
enabler of the growth process rather than Aayog also launched two incentive schemes to
provider of the first resort. promote digital payments across all sections of
• It has quantified and delegated work to sub society - the Lucky Grahak Yojana and the
committees of CMs based on the priorities, eg. Digi Dhan Vyapar Yojana. Thus, the Aayog
Revamping of Centrally Sponsored Scheme has been ardently supporting government
(the sub-committee led to the rationalization of efforts at promoting financial literacy and
the existing CSSS into 28 umbrella schemes), inclusion.
skill development etc.NITI Aayog has been • Atal Innovation Mission: The Government has
entrusted with the role to co-ordinale set up Atal Innovation Mission (AIM) in NITI
Transforming our world: the 2030 Agenda for Aayog with a view to strengthen the country's
Sustainable Development (called as SDGs). innovation and entrepreneurship ecosystem by
• Reforming Medical Education: A committee creating institutions and programs that spur
chaired by Vice Chairman, NITI Aayog innovation in schools, colleges, and
recommended scrapping of the Medical entrepreneurs in general.
Council of India owing to rampant corruption • Indices Measuring State's' Performance in
and suggested a new body for regulating Health, Education and Water Management:
medical education. The draft legislation for the NITI Aayog has developed indices to measure
proposed National Medical Commission has incremental annual outcomes in critical social
been submitted. sectors like health, education and water with a
• Reforms in Agriculture: view to nudge the states into competing with
each other for better outcomes, while at the

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same time sharing best practices & innovations • Biases Towards Government: It often appears
to help each other - an example of competitive that the institution's agenda and priorities are
and cooperative federalism. being set by government rather than an
• Task Force on Elimination of Poverty in India organic, independent thought process. For
under Dr Arvind Panagariya: Task Force instance, while recognizing the importance of
primarily focused on issues of measurement of competition, it went with the government on
poverty and strategies to combat poverty. It promoting digital payments through select
recommended that an expert committee should entities, and kept quiet when government
be set up to arrive at an informed decision on policies distorted competition.
the level at which the poverty line should be • Only a recommendatory body: NITI Aayog is
set. With respect to strategies to combat yet to institutionalize a checks and balances
poverty. the Task Force has made mechanism to caution the government about
recommendations on faster poverty reduction the claims it makes, and apprise policymakers
through employment intensive sustained rapid of the ground realities. Therefore, it is only an
growth and effective implementation of anti- advisory body without the power to ensure
poverty programs. enforceability of ideas.
• Task Force on Agriculture Development under • Missed Opportunity for Transformative
Dr Arvind Panagariya: It has suggested Change: NITI Aayog's draft three year agenda
important policy measures to bring in reforms covers a wide range of issues including the
in agriculture for the welfare of the farmers as fiscal framework, agriculture, industry,
well as enhancing their income. services, transport, digital connectivity etc.
• Transforming India Lecture Series: As the Rather than a document infusing fresh
government's premier think-tank, NITI Aayog thinking, the action agenda appears more like a
views knowledge building & transfer as the document collating several policy-related
enabler of real transformation in States. To recommendations provided by experts and
build knowledge systems for States and the government-formulated committees over the
Centre, NITI Aayog launched the 'NITI years. It puts limited or negligible focus on
Lectures: Transforming India' series in 2016. implementation challenges, bureaucratic
The lecture series is aimed at addressing the reforms and government-citizen interaction of
top policy making team of the Government of Technical Cost
India, including members of the cabinet and • Lack Benefit Analysis: A comparison of the
several top layers of the bureaucracy. It's aims costs and benefits of different policy
is to bring cutting edge ideas in development alternatives should be made mandatory before
policy to Indian policy makers and public, so policy recommendations are made, which
as to promote the cause of transformation of currently is not the norm.
India into a prosperous modern economy.

Thus, we see that Aayog is working as multi-tasking

body promoting startup incubation, dwelling into the • Financial Constraint: NITI Aayog has no
problems being faced by the agriculture sector and powers in granting discretionary funds to
providing possible steps that can be taken to improve states, which renders it toothless to undertake a
the lot of farmers, augmenting government's effort at transformational intervention.
promoting financial inclusion and most importantly • Lack of Decentralization Power: One of the
building a culture of discussion, information envisaged goals of the NITI Aayog was to
dissemination through its Transforming India Lecture develop mechanisms to formulate credible
series. plans at the village level and aggregate these
progressively at the higher level
B. Shortcomings

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4.10.5 Suggestions to improve NITI

Aayog: REVAMPED NITI AAYOG
2.0
Few suggestions related to composition and functions of
the revamped Niti Aayog 2.0

• It will be responsible for allocating

development or transformational capital or
revenue grants to the states.
• In order to make the new Niti Aayog more
effective, it is essential to ensure that the
institution is at the 'High Table' of decision
making of the government. This means the
vice-chairman of the new Niti Aayog will need
to be a permanent invitee of the Cabinet
Committee on Economic Affairs (CCEA).
• It need not be involved with the approval of
the state's annual expenditure programmers It
should rather strive to be a think-tank with
'praxis' possessing considerable financial
muscle and devote its energies to outline
coherent medium and long term strategy and
corresponding investment resources for
transforming India.
• New NITI Aayog will annually need the
resources of around 1.5 to 2% of the GDP to
provide suitable grants to the states for
mitigating the development imbalances.

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Chapter-5 of money. Money provides a liquid store of

value because it is easy to spend and to store.
• Making Payments in Future: Money will
Money and Monetary Policy always be acceptable in a future date as it has
stored the value
5.1 Money
Money is defined as something which is generally
5.2 Types of Money
accepted by the society as a medium of exchange and
which can act as unit of account can store value and be A. Commodity Money
used for repayment of debt. Economic exchanges Commodity money is that type of money that possesses
without the mediation of money are referred to as barter intrinsic value of its own, independent of any governing
exchanges. Barter system involves exchange of one body. This means the money itself contains a worth.
kind of goods and services for another kind of goods
and services. Any type of commodity is able to fulfil the role of
commodity money as long as the money's value springs
However, when there are more than one economic agent from the material from which it is comprised.
who engage themselves in transactions through the Numerous commodities such as gold, silver, copper,
market, money becomes an important instrument for chocolate beans etc., have been effectively utilized as
facilitating these exchanges to avoid double coincidence this form of currency.
of wants.

Double coincidence of wants mean that if one wants to B. Metallic Money

exchange some good with another person then the latter Discovery of precious metals and the spread of
must also be willing to exchange his good with the first civilization and trade relations by land and sea, led
person. A person wants cloth and he has rice with him metallic money to take place of commodity money.
to offer in return. Then he can exchange rice for cloth Because of their scarcity. usefulness and attractiveness,
with another person who has cloth and who also wants gold and silver were regarded as natural money. They
rice. In practical life, such situation may or may not were chosen because of their convenience, storability,
arise. Another problem of barter system is that a person high value density and easy portability. But metallic
must store a large volume of his own good in order to money had some inherent defects like the ascertainment
exchange for his/her desired goods with others on day of the quality of metals and divisibility of metals for
to day basis. The good looses its original quality and smaller transactions were highly inconvenient.
value if it is stored for a long period.

Due to above problems, the barter system could not C. Paper Money
continue for long. As human civilization progressed
Paper money consists of currency notes issued by the
people realized that there has to be some common
government or the central bank of a country.
medium of exchange which can be easily carried,
stored, and used to express value of a good. So money D. Fiat Money
came into being.
Fiat money is the money which does not have any
Following are the main functions of money in a modern
intrinsic value, unlike commodity money. This is the
economy:
money that only contains any value because the
• Medium of Exchange: The primary and unique government decrees it and it has the full faith and credit
function of money is to serve as a medium of of the nation backing it.
exchange or as a means of payment. The value of the currency, notes and coins is derived
• Convenient Unit of Account: Money is the from the guarantee provided by the issuing authority of
common standard for measuring relative worth these items. In India, every currency note bears on its
of goods and service. face, a promise from the Governor of RBI that if
• Store of Value: Money also serves as a store of someone produces the note to RBI or any other
value People can hold their wealth in the form commercial bank, RBI will be responsible for giving the

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person purchasing power equal to the value printed on supply. (8) public, it refers to the households, firms,
the note. The same is also true for coins. Currency notes local authorities companies etc.). Thus, public money
and coins are therefore called fiat money. They do not does not include the money held by the government and
have intrinsic value like a gold or silver coin. the money held as CRR with RBI and SLR with
themselves by commercia banks. This money may be in
They are also called legal tenders as they cannot be the following forms:
refused by any citizen of the country for settlement of
any kind of the transaction. Cheques drawn on savings • Currency Notes and Coins (CU): In India,
or current accounts, however, can be refused by anyone Currency notes are issued by the Reserve Bank
as a mode of payment. Hence, demand deposits are not of India (RBI) which is the monetary authority
legal tenders. in India. However coins are issued by the
Government of India (Gol) and circulated by
E. Credit Money (Bank Money) the Reserve Bank of India (RBI) on behalf of
Credit Money or Bank money was used with to the the Gol.
development of banking institutions and their credit • Demand Deposits Such as Saving Banks
creation activities. The term 'credit money' refers to the Deposits (DD): These are those deposits that
demand deposits of the commercial banks. Demand can be withdraw on demand from banks.
deposits of bank are withdrawable through cheques. A • Other Deposits Such as Time Deposits/Term
cheque by itself is not money; it is only a credit Deposits/Fixed Deposits: These are those
instrument which is used and accepted as medium of deposits that can be withdrawn only after a
exchange. Therefore, credit money is regarded as 'near specific time.
money'. o Post Office Saving Accounts.
o Deposits of Banks in other Banks/RBI
F. Plastic Money (except CRR)
Plastic money is a term that is used predominantly in
reference to the hard plastic cards in place of actual 5.3.1 New Monetary Aggregates
bank notes. They can come in many different forms
The RBI has started publishing a set of new monetary
such as cash cards, credit cards, debit cards, pre-paid
aggregates following the recommendations of the
cash cards and store cards.
Working Group on Money Supply: Analytics and
G. Helicopter Money Methodology Compilation (Chairman: Dr. Y.V. Reddy)
which submitted its report in June 1998.
Helicopter money is a reference to an idea made
The Working Group recommended compilation of four
popular by the American economist Milton Friedman in
monetary aggregates on the basis of the balance sheet of
1969. The basic principle is that direct money transfers
the banking sector in conformity with the norms of
is one of the most effective tools by the central bank to
progressive liquidity
raise inflation and output in an economy that is running
substantially below potential/in recession. • NMO (monetary base)
Helicopter drop basically means higher government • NM1 (narrow money)
spending by increasing the monetary stock. The • NM2
government deficit is not financed by borrowings, as • NM3 (broad money)
normally happens but by printing new currency. The
newly created money can go directly to consumers or A. NMO (Monetary Base or Reserve
can be used to finance public work such as Money)
infrastructure projects. This idea ha again gained
relevant during the times of pandemic. NMO is the sum of Currency in Circulation, Bankers
Deposits with RBI, and 'Other' Deposits with RBI
5.3 Money Supply Components of NMO:
The total stock of money in circulation among the • Currency in Circulation Bankers
public at a particular point of time is called money

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• Deposits with RBI • Certificates of Deposits issued by Banks

• Other Deposits with RBI
In other words, NM2 NM1+ Time Liabilities Portion of
Note: Other deposits with RBI comprise mainly: Savings Deposits with the Banking System +
Certificates of Deposit issued by Banks + Term
• Deposits of quasi-government and other Deposits of residents with a contractual maturity of up
financial institutions including primary dealers, to and including one year with the Banking System.
• Balances in the accounts of foreign Central
banks and Governments, D. NM3 (Broad Money)
• Accounts of international agencies
NM3 is the sum of Currency with the Public. Current
International Monetary Fund, etc.such As the
Deposits with the Banking System, Savings Deposits
with the Banking System, Certificates of Deposits
B. NM1 (Narrow Money) issued by Banks, Term Deposits of residents with the
NM1 is the sum of Currency with the Public, Demand Banking System, Call/Term borrowings from Non-
Deposits with the Banking System, and 'Other' Deposits depository financial corporations by the Banking
with RBI. System, and Other Deposits with RBI.

Components of NM1: Components of NM3:

• Currency with the Public • Currency with the Public

• Current Deposits with the Banking System • Current Deposits with the Banking System
• Demand Liabilities Portion of Savings • Savings Deposits with the Banking System
Deposits with the Banking System • Certificates of Deposits issued by Banks Term
• 'Other' Deposits with RBI Deposits of residents with a contractual
maturity up to and including one year with the
In other words, NM1 = Currency with the Public + Banking System
Demand Deposits with the Banking System + 'Other' • Other' Deposits with RBI Term Deposits of
Deposits with RBI. residents with a contractual maturity of over
one year with the Banking System
Significance of NM1: NM1 includes currency with the
public and non-interest bearing deposits with the • Call/Term borrowings from Non-depository
banking sector including that of RBI. financial corporations by the Banking System.

C. NM2 NM3-NM2+ Term Deposits of residents with a

contractual maturity of over one year with the Banking
NM2 is the sum of Currency with the Public, Current System + Call/Term borrowings from Non-depository
Deposits with the Banking System, Savings Deposits financial corporations by the Banking System.
with the Banking System, Certificates of Deposits
issued by Banks, Term Deposits of residents with a Significance of NM3: NM3 captures the complete
contractual maturity up to and including one year with balance sheet of the banking sector.
the Banking System, and Other Deposits with RBI
5.3.2 Liquidity Aggregates - L1, L2,
Components of NM2:
and L3
• Currency with the Public
In addition to the monetary aggregates, the Working
• Current Deposits with the Banking System
Group had recommended compilation of three liquidity
• Demand Liabilities of Savings Deposits with aggregates namely, L1, L2 and L3, which include select
the items of financial liabilities of non-depository financial
• Banking System corporations such as development financial institutions
• Other Deposits with RBI and non-banking financial companies accepting
• Term Deposits of residents with a contractual deposits from the public, apart from post office savings
maturity up to and including one year with the banks.
Banking System

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L1-NM3+ All deposits with the post office savings and availability credit with a view to achieving the
banks (excluding National Savings Certificates). ultimate objective economic policy. The objectives of
the monetary policy are -
L2-L1+ Term deposits with term lending institutions
and refinancing institutions (FIs) + Term borrowing by
Fl’s + Certificates of deposit issued by Fl’s.
• Accelerating growth of economy.
L3 - L2+ Public deposits of non-banking financial • Generating employment.
companies. • Maintaining price stability.
• Stabilization of the exchange rate
5.3.3 Velocity of Money
The rate at which money is exchanged from one 5.4.1 Monetary Policy in India
transaction to another, and how much a unit of currency
is vested with the Reserve Bank of India (RBI)
is used in a given period of time. Velocity of money is
responsibility of forming the monetary policy of India.
usually measured as a ratio of GDP to a country's total
The responsibility is explicitly mandated under the
supply of money.
Reserve Bank of India Act, 1934. The primary objective
Velocity is important for measuring the rate at which of monetary policy is to maintain price stability while
money in circulation is used for purchasing goods and keeping in mine the objective of growth. Price stability
services. This helps investors gauge how robust the is a necessary pre condition to sustainable growth.
economy is, and is a key input in the determination of
In May 2016, the Reserve Bank of India (RBI) Act,
an economy's inflation calculation. Economies that
1934 was amended to provide a statutory basis for the
exhibit a higher velocity of money relative to others
implementation of the Flexible Inflation Targeting
tend to be further along in the business cycle and should
Framework
have a higher rate of inflation, all things held constant.

Velocity GDP/Total Money supply

A. Inflation Targeting

GDP Money Supply x Velocity of Money It is a central banking policy that revolves around
adjusting monetary policy to achieve a specified annual
As the equation illustrates, GDP cannot be controlled rate inflation. The principle of inflation targeting is
through money supply alone. based on the belief that long-term economic growth is
best achieved by maintaining price stability, and price
• If money supply is increased but velocity stability is achieve: by controlling inflation.
decreases GDP may stay the same or even
decline. B. Types
• If money supply is decreased but velocity
• Strict inflation targeting is adopted when the
increases, GDP could increase.
centra bank is only concerned about keeping
Therefore, an increase in money supply not necessarily inflation as close to a given inflation target as
leads to an increase in GDP or inflation without taking possible, and nothing else.
velocity of money into consideration. Higher money • Flexible inflation targeting is adopted when the
velocity can cause inflation and lower velocity will central bank is to some extent also concerned
result in decreasing inflation. about other things, for instance, the stability of
interest rates exchange rates, output and
It is a macro-economic policy tool used by the Central
employment.
Bank to influence money supply which in turn affects
interest rates to achieve certain macro-economic goals.
It involves management of money supply and interest
C. India's Flexible Inflation Target
rate and is the demand side economic policy. Framework Background:
Monetary policy refers to the use of monetary The central bank and the government agree in 2015 on a
instrument under the control of the central bank to policy framework that stipulated a primary objective of
regulate magnitude such as interest rates, money supply ensuring price stability while keeping in mind the

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objective of growth. The Flexible Inflation Target (FIT of the Cabinet Secretary, the Secretary of the
was adopted in 2016. This has put India on par with Department of Economic Affairs, the RBI
other nations in terms of flexible inflation targeting. The Governor and three experts in the field of
Reserve Bank of India Act, 1934 was amended to economics or banking as nominated by the
provide a statutory basis for a FTI framework. The Central Government.
amended Act provide for the inflation target to be set by • The quorum for meeting of the MPC is four
the Government, in consultation with the RBI, once
members.
every five years.
• The RBI Governor will have casting vote in
The FIT Framework: India adopted a flexible inflation case of a tie.
targeting mandate of 4 (+/-2) percent and headline • The search cum selection committee appointed
consumer price inflation was chosen as a key indicator. members shall hold office for a period of four
years and shall not be eligible for re-
Purpose: Inflation targeting is known to bring more
appointment.
stability, predictability, and transparency in deciding
monetary policy. This is because of the argument that With the introduction of the Monetary Policy
rising prices create uncertainties and adversely affect Committee, the RBI will follow a system similar to the
savings and investments. one followed by most global central banks. The US
Fixed Accountability: The framework made the RBI Federal Reserve sets its benchmark rate - the Fed funds
more accountable to explain to the government if it fails rate-through the Federal Open Market Committee
to meet the inflation targets. The flip side of this is such (FOMC). The Bank of England's monetary policy
targets will restrain the RBI from taking any tight or committee is made up of nine members.
accommodating monetary policy stance. for the inflation target to be set by the Government, in
consultation with the RBI, once every five years.
D. Process of Monetary Policy
The FIT Framework: India adopted a flexible inflation
In the past, the Governor was advised by a technical
targeting mandate of 4 (+/-2) percent and headline
committee but he could veto decisions and therefore,
consumer price inflation was chosen as a key indicator.
was singularly responsible for the monetary policy.
Purpose: Inflation targeting is known to bring more
The Finance Act 2016 amended the RBI Act for setting
stability, predictability, and transparency in deciding
up of a Monetary Policy Committee (MPC). The idea to
monetary policy. This is because of the argument that
set up a monetary policy committee was mooted by an
rising prices create uncertainties and adversely affect
RBI- appointed committee led by the then Deputy
savings and investments.
Governor Urjit Patel.
Fixed Accountability: The framework made the RBI
Section 45ZB of the amended RBI Act, 1934 provides
more accountable to explain to the government if it fails
for an empowered six-member monetary policy
to meet the inflation targets. The flip side of this is such
committee (MPC) to be constituted by the Central
targets will restrain the RBI from taking any tight or
Government by notification in the Official Gazette.
accommodating monetary policy stance.
Some of the provisions with reference to the MPC are:

• The Committee to meet at least 4 times in a D. Process of Monetary Policy

year. in the past, the Governor was advised by a technical
• The Committee will have six members: (a) committee but he could veto decisions and therefore,
RBI Governor (Chairperson), was singularly responsible for the monetary policy.
• (b) RBI Deputy Governor in charge of
The Finance Act 2016 amended the RBI Act for setting
monetary policy.
up of a Monetary Policy Committee (MPC). The idea to
• (c) One official nominated by the RBI Board, set up a monetary policy committee was mooted by an
• (d) Three members appointed by the Central RBI- appointed committee led by the then Deputy
Government based on the recommendations of Governor Urjit Patel.
a search cum selection committee, comprising

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Section 45ZB of the amended RBI Act, 1934 provides Reduce Unemployment: Increase in the money supply
for an empowered six-member monetary policy helps to stimulate the business sector, which also helps
committee (MPC) to be constituted by the Central to create more jobs
Government by notification in the Official Gazette
Some of the provisions with reference to the MPC are: Balance Currency Exchange Rates: Central banks have
the power to regulate exchange rates between foreign
• The Committee to meet at least 4 times in a and domestic currencies. For instance, if the central
year. bank opts to issue more currency to increase the money
• The Committee will have six members supply. domestic currencies become cheaper than
o RBI Governor (Chairperson). foreign currencies.
o RBI Deputy Governor in charge of Monetary policy shapes variables like Consumption.
monetary policy. Savings. Investment, and capital formation. It plays an
o One official nominated by the RBI important role in price stability and economic growth.
Board
o Three members appointed by the It deals with the demand side of economic policy and
Central Government based on the thus influencing demand-pull inflation.
recommendations of a search cum
selection committee, comprising of
5.4.2 Types of Monetary Policy
the Cabinet Secretary, the Secretary There are primarily two types of monetary policy. These
of the Department of Economic are:
Affairs, the RBI Governor and three
experts in the field of economics or A. Expansionary/Accommodative Monetary Policy:
banking as nominated by the Central The purpose of this type of monetary policy is to
Government. increase the money supply within the economy by
o The quorum for meeting of the MPC completing actions such as
is four members.
o The RBI Governor will have casting • Decreasing interest rates,
• Lowering reserve requirements for banks and
vote in case of a tie
• Purchasing government securities by central
o The search cum selection committee
appointed members shall hold office banks.
for a period of four years and shall not
This type of monetary policy helps to lower
be eligible for re-appointment. unemployment rates as well as stimulate business
activities and consumer spending.
With the introduction of the Monetary Policy
Committee. the RBI will follow a system similar to the The overall goal of this policy is to fuel economic
one followed by most global central banks. The US growth. Nevertheless, it can also have an adverse effect,
Federal Reserve sets its benchmark rate - the Fed funds occasionally leading to hyperinflation.
rate - through the Federal Open Market Committee
(FOMC).The Bank of England's monetary policy B. Contractionary Monetary Policy:
committee is made up of nine members.
• This type of policy is used to decrease the
E. Significance of Monetary Policy amount of money circulating throughout the
economy.
Manage Inflation: Most important objective of • It is most often achieved by actions such as
monetary policy. In general, low inflation is most o Selling government bonds,
conducive to a healthy, thriving economy. Therefore, I o Raising interest rates and
when inflation is on the rise, the Central bank may o Increasing the reserve requirements
adjust monetary policy to reduce inflation. for banks.
o This method is used when the
government wants to avoid inflation.

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5.4.3 Tools of Monetary Policy credit volume to the banks and hence declines the
supply of money. Increase in the bank rate is the
A. Quantitative Tools tightening of RBI monetary policy.

1. Reserve Requirements: The reserve requirement ( 5. Ready Forward Contracts (Repo and Reverse Repo
required reserve ratio) is a bank regulation that set the Rate Repurchase Options: In India, RBI lends on a short
minimum reserves each bank must hold as a par of the term basis to banks on the security of the government
deposits. These reserves are designed to satis various paper (repo). Banks undertake to repurchase the
needs like providing loans to the Government (SLR) security at a later date-over night or few days. RBI
and inflation management (CRR). They are the form of charges a repo rate for the money it lends.
RBI approved securities (SLR) kept wit themselves or
The higher the repo rate, the more costly funds are for
cash that is kept with the RBI (CRR). A the Scheduled banks and hence, higher will be the rate that banks pass
Commercial Banks (including Regional Rural Banks), on to customers. If the rate is high, it signals that access
Primary Urban Co-operative Bank (scheduled as well as to money is expensive for banks; lesser credit will flow
non-scheduled). Small Bank and Payment Banks are in the system and that helps bring down liquidity and
required to maintain stipulate: level of cash reserve ratio
lowers inflation.
(CRR) and statutory liquid ratio (SLR), though the CRR
and SLR obligation are different for different banks. Reverse repo is when RBI borrows from the market
(absorbing excess liquidity) with the sale of securities
and repurchases them the next day or after a few days.
2. Statutory Liquidity Ratio (SLR): The Statutory The rate at which it borrows is called reverse repo rate
Liquidity Ratio is a requirement on banks to hold a as it is the reverse of the repo operation.
certain share of their resources in liquid assets such as
The securities transacted here can be either government
cash, government bonds and gold. In principle the SLR securities or corporate securities or any other securities
can perform a prudential role because an unexpected which the Central bank permits for transaction. RBI
demand from depositors can be quick met by
uses Repo and Reverse repo as instruments for liquidity
liquidating these assets. SLR is aimed a ensuring that adjustment in the system.
the need for government funds is part but surely met by
the banks. RBI has the freedom to fix the SLR at any 6. Liquid Adjustment Facility (LAF): The introduction
rate depending on the macro economic conditions. of Liquidity adjustment facility in India was on the
basis of the recommendations of Narsimha committee
3. Cash Reserve Ratio (CRR): CRR is a monetary to to on banking sector reforms. Liquidity Adjustment
regulate money supply. It is the portion of the ban Facility (LAF) is a monetary policy tool which allows
deposits that a bank should keep with the RBI in case banks to borrow money through repurchase agreements.
form. CRR deposits earn no interest.
LAF is used to aid banks in adjusting the day to day
RBI has the freedom to fix the CRR at any rate mismatches in liquidity. LAF consists of repo and
depending on the macro economic conditions. CRR as a reverse repo operations. The collateral used for repo and
tool of monetary policy is used when there is a reverse repo operations are primarily Government of
tremendous need to reduce inflation and tighter credit as India securities. Liquidity of a more durable nature are
in 2008. Otherwise, normally, RBI relies on open managed with other instruments like, cash reserve ratio
market operations for liquidity management. (CRR) or Market Stabilization Scheme (MSS).

4. Bank Rate: It is the rate at which the Reserve Bank is All the Scheduled Commercial Banks are eligible to
ready to buy or rediscount bills of exchange or other participate in auctions 4. Further, the Primary Dealers
commercial papers. The bank rate, also known as the (PDs) having Current Account with Reserve Bank, are
discount rate, is the rate of interest charged by the RBI also eligible to participate in the Repo and Reverse
for providing funds or loans to the banking system. This Repo auctions.
banking system involves commercial and co-operative Through LAF, banks are permitted to borrow only a
banks, Industrial Development Bank of India, IFC, certain percentage of its Net Demand and Time
EXIM Bank, and other approved financial institutes.
Liabilities (NDTL). In case the Bank requires more
Increase in Bank Rate increases the cost of borrowing funds, beyond what is permissible under LAF, it can
by commercial banks which results into the reduction in

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access another window called Marginal Standing Initially, the MSS was launched to withdraw the excess
Facility (MSF) liquidity in the system that was generated as a resu of
the RBI's purchase of foreign currencies in the foreign
7. Marginal Standing Facility (MSF): Marginal exchange market. From 2002 onwards, there was huge
Standing Facility (MSF) refers to the penal rate at inflow of foreign capital into India. This led to
which banks can borrow money from the central bank appreciation of rupee. Since appreciation is not good for
over and above what is available to them through the exports, the RBI intervened in the foreign exchange
LAF window. market by buying dollars. RBI sells government bonds
MSF, being a penal rate, is always fixed above the repo on a general basis depending upon the volume of excess
rate. The MSF would be the last resort for banks once liquidity in the system. Here bonds go to financial
they exhaust all borrowing options including the institutions and money goes back to the RBI This
liquidity adjustment facility by pledging through withdrawal of excess liquidity is called sterilization
government securities, which has lower rate of interest The issued securities are government bonds and they
in comparison with the MSF. The scheme has been are called as Market Stabilization Bonds (MSBs). Thus
introduced by RBI with the main aim of reducing the bonds issued under MSS are called MSBs. These
volatility in the overnight lending rates in the inter-bank securities are owned by the government though they are
market and to enable smooth monetary transmission issued by the RBI. It is to be remembered that
Policy Rate Corridor: MSF represents the upper band of government is the owner of the securities. The money
the interest corridor and reverse repo as the lower band obtained under MSS is kept with the RBI. It should not
and the repo rate in the middle. Under the Marginal be transferred to the government. This is because, if it is
Standing Facility (MSF), currently banks (All the transferred, government will spend the money in the
scheduled commercial banks including regional rural economy thereby adding to liquidity.
banks) avail funds from the RBI on overnight basis At the same time, interest payments have to be given to
against their excess SLR holdings. the institutions who buys bond. Here, for the interest
8. Open Market Operations (OMO): This refers to payment, the government allocates money from its
buying and selling of government securities by RBI to budget to the RBI. This expenditure to service interest
regulate the short-term money supply. If RBI wants to payment for MSBS is called carrying cost.
induce liquidity or more funds in the system, it will buy
government securities and inject funds into the system,
and if it wants to curb the amount of money out there it 10. Term Repos: Since October 2013, the Reserve Bank
will sell these to the banks thereby reducing the amount has introduced term repos (of different tenors, such as,
of cash that banks have. 7/14/28 days), to inject liquidity over a period that is
longer than overnight. The aim of term repo is to help
Open market operations are RBI's most important and develop inter-bank money market, which in turn can set
flexible monetary policy tool. Open market operations market based benchmarks for pricing of loans and
do not change the total stock of government securities deposits, and through that improve transmission of
but change the proportion held by the RBI, commercial monetary policy.
banks and cooperative banks. This mechanism
influences: B. Qualitative Tools
• The reserve position of the banks, The qualitative measures do not regulate the total
• Yield on government securities amount of credit created by the commercial banks.
• Cost of bank credit. Open market operation These measures make distinction between good credit
makes bank rate policy effective and maintains and bad credit and regulate only such credit which
stability in government securities market. creates economic instability. Therefore, qualitative
measures are known as the selective measures of credit
9. Market Stabilization Scheme (MSS): Market control. These include:
Stabilization scheme (MSS) is a monetary policy
intervention by the RBI to withdraw excess liquidity by 1. Prescription of Margins Requirements: Generally,
selling government securities in the economy. The MSS commercial banks give loan against 'stocks or
was introduced in April 2004. 'securities'. While giving loans against stocks or

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securities they keep margin. Margin is the difference 5.5 Monetary Policy Transmission
between the market value of a security and its
maximum loan value. If central bank feels that prices of Monetary transmission refers to the process by which a
some goods are rising due to the speculative activities central bank's monetary policy decisions are passed on
of businessmen and traders of such go through financial markets (which includes banks too) 10
businesses and households.
consumer credit by (a) increasing down payment, and
(b) reducing the number of instalments of repayment of There are many monetary policy signals by the RBI, the
such credit. most powerful one is the repo rate. When repo rate is
changed, the interest rate on loans by banks also
On the other hand, if there is deficient demand certain
changes In an economy, both consumption and
specific commodities causing deflationary situation, investment are often financed by borrowings from
central bank can increase consumer credit by (a) banks Hence this encourages consumption and
reducing down payment and (b) increasing the number
investment activities of businesses and households As
of instalments of repayment of such credit the repo rate brings changes in market interest rate the
3. Moral Suasion: Moral Suasion means persuasion and repo rate channel is often referred as interest rate
request. To arrest inflationary situation, centra bank channel of monetary transmission
persuades and request the commercial bank to refrain
from giving loans for speculative and nor essential
purposes. On the other hand, to counteract deflation
central bank persuades the commercia banks to extend 5.5.1 Evolution of Monetary Policy
credit for different purposes. Transmission
4. Direct Action: This method is adopted when a Loans given on Base Rate: Loans taken between June
commercial bank does not co-operate with the central 2010 and April 2016 from banks were on base rate.
bank in achieving its desirable objectives. Direct action During the period, base rate was the minimum interest
may take any of the following forms: rate at which commercial banks could lend to
customers. Banks stopped lending on base rate from
• Central banks may charge a penal rate of
016 Base rate is calculated on three parameter 12/16 O
interest over and above the bank rate upon the
of fund, unallocated cost of resources and return on net
defaulting banks;
worth. Hence, the rate depended on individual banks
• Central bank may refuse to rediscount the bills
and they changed it whenever their cost of funds and
of those banks which are not following its other parameters changed.
directives.
Marginal Cost of Lending Rate: This system came into
Central bank may refuse to grant further effect in April 2016. It is a benchmark lending rate for
accommodation to those banks whose borrowings are in floating-rate loans. This is the minimum interest rate at
excess of their capital and reserves. which commercial banks can lend. This rate is based on
four components-the marginal cost of funds, negative
5. Credit Celling: With this instrument, RBI issues price
carry on account of cash reserve ratio, operating costs
information or direction that loans to the commercial and tenor premium. MCLR is linked to the actual
bank will be given up to a certain limit. In this case a deposit rates. Hence, when deposit rates rise, it indicates
commercial bank will be tight in advancing loans to the
the banks are likely to hike MCLR and lending rates are
public. They will allocate loans to limited sectors A few set to go up. The problem with MCLR-based system
examples of credit ceiling are agriculture sector
was that it led to:
advances and priority sector lending.
• Lack of required transmission of policy rates:
6. Priority Sector Lending: It is an important role given
When the RBI cuts repo rate there is no
by the (RBI) to the banks for providing a specified
guarantee a borrower will get the benefit of the
portion of the bank lending to few specific sectors like
rate cut or that it will be transmitted down to
agriculture and allied activities, micro and small
enterprises, poor people for housing, etc. him.

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• The MCLR system was opaque: MCLR is an to a rival bank that pays better interest rates.
internal benchmark that depends on the way a Otherwise, they would park more of their
bank does its business. savings in small saving instruments (public
provident fund, Sukanya Samriddhi Yojana,
External Benchmarking System: Under the new system, etc.) that pay much higher interest rates.
a bank is required to adopt a uniform external • Also, 65% of total deposits are "term" deposits
benchmark within a loan category RBI has given these (fixed for a certain duration) and take, on an
options of external benchmark rates to the banks
average, up to 2 years to get repriced at fresh
• RBI repo rate rates. So, banks cannot always reduce deposit
• The 91-day T-bill yield rates immediately as deposits take longer to get
• The 182-day T-bill yield repriced.
• Any other benchmark market interest rate • Moreover, if banks are under pressure to
produced by the Financial Benchmarks India reduce the interest rate they charge on new
Pvt. Ltd loans, they could possibly push up the interest
rates on old loans that allow for such
One of these benchmarks will be used to decide the flexibility.
lending rate in addition to the spread. Banks will be free
to decide their spread value but it will have to be fixed 5.5.3 Limitations of Monetary Policy
for the tenure of the loan. However, it can change if the
credit score of the borrower changes. The interest rates in India
under the new system will change every month RBI
There are several interest rates in our economy, and the
hopes to efficiently transmit monetary policy with
policy repo rate alone is insufficient to influence them
external benchmarking system.
all appropriately.
5.5.2 Reasons for Failure of • Unfavourable Banking Habits: An important
Monetary Policy Transmission limitation of the monetary policy is the
unfavourable banking habits of the Indian
• Repo rates have little impact on a bank's masses. People in India prefer to make use of
overall cost of funds. Reducing lending rates cash rather than cheque. This means that a
just because the repo rate has been cut is not major portion of the cash generally continues
feasible for banks. This is because, for banks to to circulate in the economy without returning
be viable, there must be a clear difference to the banks in the form of deposits. This
between the lending rate (charged on loans) reduces the credit creation capacity of the
and the deposit rate (given on deposits). The banks.
difference between the two has to be not only • Underdeveloped Money Market: The weak
positive but also big enough for the bank to money market limits the coverage, as also the
make profits. efficient working of the monetary policy. The
• Notably, to attract deposits, banks pay a high money market comprises of the parts, the
deposit rate. Such deposits make up almost organized money market and the unorganized
80% of all banks' funds from which they then money market. The money policy works only
lend to borrowers. On the other hand, banks in an organized money market. It fails achieve
borrow a minuscule fraction from the RBI the desired results in an unorganized money
under the repo. So even sharply reducing the market.
repo rate does not change the overall cost of • Existence of Black Money: The existence of
funds for the banks. black money in the economy limits the
• In effect, unless banks reduce their deposit working of the monetary policy. The black
rates, they will not be able to reduce their money is not recorded since the money
lending rates. However, if a bank were to borrowers and lenders keep their transactions
reduce its deposit rates, depositors would shift secure Consequently, the supply and demand

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of the also do not remain as desired by the It is a theory that states that, in the long-run, a central
monetary policy bank that hopes to conduct independent monetary
• Conflicting Objectives: To achieve the policy must choose between maintaining a fixed foreign
objective economic development the monetary exchange rate and allowing the free movement of
policy is to be expansionary. Contrary to it to capital. For instance, a central bank that chooses to
achieve the objective of price stability a curb increase the total money supply by adopting loose
on inflation can be realized by contracting the monetary policy cannot hope to maintain the foreign
exchange value of its currency unless it resorts to
money supply. The monetary policy generally
restricting the sale of domestic currency in the currency
fails to achieve proper coordination between
market.
these two objectives.
• Influence of Non-Monetary Factors: An
important limitation of monetary policy is its
5.6 Liquidity Trap
ignorance of nor- monetary factors. The A Liquidity trap emerges when interest charges are nil
monetary policy can never be the primary or during a downturn. People are afraid to spend money
factor in controlling inflation originating in They feel safe to just hold onto the cash. Due to such
real factors, deficit financing, and foreign circumstances, central banks consuming expansionary
exchange resources. The Reserve Bank has no monetary policy doesn't improve the economy.
control over deficit financing. It cannot Therefore. liquidity trap is a situation when
regulate deficit financing which affects the expansionary monetary policy does not increase the
money supply considerably. interest rate, income and hence does not stimulate
economic growth. Thus, the demand for money is
• Limitations of Monetary Instruments: An
perfectly elastic.
important limitation of monetary policy is
related to the inherent limitations in the various Liquidity Trap is the extreme effect of monetary policy.
instruments of credit control There are It is a situation in which the general public is prepared
limitations regarding frequent and sharp to hold on to whatever amount of money is supplied, at
changes in the bank rate, as these are supposed a given rate of interest. In such case, the monetary
to conflict with the development objectives. policy is powerless to affect the interest rate.
Most bank rates are virtually fixed and
Reasons for Occurrence of Liquidity Traps
mutually unrelated so that the scope for
adjustment is very limited. The margin • Expectations of Deflation: If there is deflation or
requirements have tended to be so high for people expect deflation (fall in prices) then real interest
most of the time due to prolonged inflation, rates can be quite high even if nominal interest rates are
that the scope for further increase in them is zero.
limited. The CRR and SLR have also been Unemployment: This phenomena has been seen during
fixed very high locking most of the funds in the times of the pandemic, where large scale job losses
low yielding assets. These limitations of have led to a decrease in disposable income in the hands
monetary instruments hamper the smooth of consumers. With a lower fund base, people tend to
working of monetary policy. save any excess funds for meeting any essential future
expenses, instead of spending them. Thus, a fall in
5.5.4 Monetary Policy Trilemma interest rates leads to yield no outcome concerning the
betterment of an economy.
The Impossible Trinity or Mundell-Fleming trilemma or
simply Trilemma states that it is impossible to have all Preference for Saving: Liquidity traps occur during
three of the following at the same time: periods of recessions and a gloomy economic outlook.
Consumers, firms and banks are pessimistic about the
• A stable foreign exchange rate future, so they look to increase their precautionary
• Free capital movement (Absence of Capital savings and it is difficult to get them to spend. This rise
controls) in the savings ratio means spending falls
• An independent monetary policy

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Credit Crunch: Banks lost significant sums of money in buy now rather than later. But there are risks associated
buying sub-prime debt which defaulted. Therefore, they with it.
are seeking to improve their balance sheets.
• First, a central bank can lose money on its
Unwillingness to Hold Bonds: If interest rates are zero, purchases money that will ultimately have to
investors will expect interest rates to rise sometime. If be underwritten by taxpayers either with higher
interest rates rise, the price of bonds falls. Therefore, future taxation or by the central bank creating
investors would rather keep cash savings than hold more money and risking higher future
bonds. inflation.
Way out from a Liquidity Trap: An enlarged • Second, go too far with creating and spending
government spending coupled with lower taxes would money and you will destroy the value of the
have a productive impact on the economy, as it raises currency. Inflation or even hyperinflation is the
production, which, in turn, increases employment levels result.
in a country. Subsequently, as people have greater • Third, if a descent into QE destroys confidence
disposable income at hand for spending, this leads to a in an economy rather than gives reassurance
rise in the aggregate demand as well as a rise in the that the authorities are on the case it can be
investment. This lead to excess production wherein counter-productive
supply exceeds demands, which brings down the prices
further. 5.6.2 Sterilization by RBI
5.6.1 Quantitative Easing (QE) It refers to the process by which the RBI takes away
money from the banking system to neutralise the fresh
Quantitative Easing is an unconventional form of
money that enters the system.
monetary policy where a Central Bank creates new
money electronically to buy financial assets, like Explanation: If RBI decides to buy US dollars from the
government bonds. This process aims to directly market, rupees so released by RBI will increase the
increase private sector spending in the economy and money supply in the banking system. Due to this
return inflation to target. increase inflation and bond yield will be impacted.
Higher supply of money will increase inflation. More
Only a central bank can do this because its money is
money in the banking system will lead to higher bond
accepted as payment by everybody.
prices and lower yield.
It can then use this new money to buy whatever assets it
The lower yield of bond will force RBI to cut interest
likes: government bonds, equities, houses, corporate
rates further. If RBI does not cut the rates, it will reduce
bonds or other assets from banks. With the central bank
the liquidity i.e. sterilise the liquidity that causes the
weighing in, the price of the assets it buys should rise
yields to fall. It will de so by selling the bonds it holds.
and the yield, or interest rate, on that asset will fall.
This means that sterilisation is possible only to the
Companies for example with a willing central bank
extent that RBI holds government bonds in its portfolio.
seeking to buy its bond, will be able to pay a lower
The process of selling bonds to reduce liquidity is part
interest rate when new bonds are issued or existing
of its Open Market Operations.
bonds come to the end of their life and need to be
replaced.

With cheaper borrowing the hope is that the central

bank will again encourage greater spending, putting
additional demand into the economy and pulling it out
of recession. As the money ends up in bank deposits,
banks should also find their funding position improved
and make them more willing to lend.

A side effect will be that this new money is expected to

raise consumer prices giving people another incentive to

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Chapter-6 maturity to compete with the presidency and

exchange banks.
• The period between 1906 and 1911 saw the
Banking System in India establishment of banks inspired by the
Swadeshi movement. The local businessmen
6.1 Introduction and political figures were inspired to open
banks of and for the Indian community. For
Though modern or commercial banking of the western e.g.. Catholic Syrian Bank, The South Indian
type is a recent development in India, banking as such
Bank, Bank of India, etc.
was not unknown to India. From very ancient times,
Indigenous banking and money lending existed in India
in the form of family or individual business.

6.1.1 Origin 6.2 Reserve Bank of India

The Reserve Bank of India was set up on the basis of
The genesis of western type commercial banking in
the recommendations of the Royal Commission on
India dates back to the 18th century.
Indian Currency and Finance also known as the Hilton
• Bank of Hindustan (1770): The first European Bank in Young Commission. The Reserve Bank of India Act,
India was started in Calcutta in 1770 by one of the 1934 provides the statutory basis of the functioning of
leading agency houses M/s Alexander & Company the Bank. The Bank commenced its operations on 1st
under the name "The Bank of Hindustan/Hindustan". April,1935.

• Three Presidency Banks: Banking in the modern sense Constitution of RBI: The constitution of RBI is as
came to be established in India with the setting up of 3 follows:
Presidency Banks by the Presidency Governments of
• Official Directors (central board of directors)
Bengal, Bombay and Madras.
• Full-time: Governor and not more than four
(a) The Bank of Bengal in 1806, Deputy Governors
(b) The Bank of Bombay in 1840 and • Non-Official Directors.
• Nominated by Government: ten Directors from
(c) The Bank of Madras in 1843 various fields and two government Official
• Others: four Directors one each from four local
6.1.2 Purpose of Banks During British Rule
boards (regional)
• The British rule saw the gradual coming into
existence of different types of banks like 6.2.1 Objectives
Presidency banks, exchange banks, joint stock
• Regulate the issue of bank notes
banks, swadeshi banks etc., which operated in
different segments of the economy. • Maintain reserves with a view to securing
monetary stability and
• The Presidency Banks were successors to
agency houses which combined banking with • To operate the credit and currency system of
their commercial and trading activities, and the country to its advantage. • To maintain
were floated by the East India Company to price stability while keeping in mind objective
facilitate the borrowings of the Government of growth.
and maintenance of credit.
6.2.2 Nationalization after Independence
• The exchange banks (mostly owned by
Europeans) concentrated on financing foreign After the partition of India, the Reserve Bank served as
trade. the central bank of Pakistan up to June 1948 when the
• Indian joint stock banks were generally State Bank of Pakistan commenced operations.
undercapitalized and lacked the experience and
The Bank, which was originally set up as a
shareholder's bank, was nationalised in 1949. After

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nationalisation in 1949, it emerged as the central Currency Management is one of the core functions of
banking body of India and it did not remain a 'bank' in RBI as laid down in the Reserve Bank of India Act, 199
the technical sense. which mandates it to regulate the issue of Bank not and
keeping of reserves with a view to secure monetary
6.2.3 Functions of RBI stability in India.
A. Monetary Authority Under Section 22 of the RBI Act, 1934 "Right to Issue
Bank notes", RBI has the sole right to issue bank. notes
The policy by which the desired level of money flow
various denominations except one rupee notes, which
and its demand is regulated is known as the monetary
issued by the Government of India.
policy. The central bank of the country has the primary
role in formulating the monetary policy. E. Regulatory Functions of RBI
There are many tools by which the RBI regulates the 1. Regulator and Supervisor of Financial System
desired Credit and Monetary Policy - CRR, SLR, Bank
Rate, Repo rate, Reverse Repo rate, and interest Regulation is aimed at : (a) Protecting depositors'
changes for the instruments of the Money Market, etc. interests,
An amendment to RBI Act, 1934, was made in May
(b) Orderly development and conduct of bank
2016, providing the statutory basis for the
operations and
implementation of the flexible inflation targeting
framework. Section 45ZB of the amended RBI Act, (c) Fostering of the overall health of the banking system
1934, also provides for an empowered six-member and financial stability.
Monetary Policy Committee (MPC) to be constituted by
the Central Government by notification in the Official The tools used for regulation by RBI a statutory,
Gazette. prudential regulation, other regulatory guidelines and
moral suasion through speech of Governor, Deputy
B. Maintaining Financial Stability Governors and period meetings, seminars, etc.

Financial stability is critical for economic growth as it Focal points for providing framework for regulation
ensures transfer or efficient allocation of resources from
lenders to borrowers. Financial stability is ensured (a) Issuance of 'licences' for opening of banks
through: (b) 'Authorisations' for opening of branches banks in
Maintaining Institutional and of interconnectedness India,
among various financial entity (c) Governing foreign banks entry and expansion and
Governance Structures: Conduct of macro prudential approval of Indian banks to opera overseas,
surveillance of financial system on an ongoing basis, Constitution of RBI: The constitution of RBI is as
establishment of inter sector coordination units like follows:
Financial Stability and Development Council Official Directors (central board of directors)
Measuring and Monitoring Systemic Risk: Analyse
systemic liquidity indicator, credit-GDP growth trend Full-time: Governor and not more than four Deputy
Implementing policies to mitigate identified system Governors
risks.
Non-Official Directors.
C. Conducting Foreign Exchange Operations:
Nominated by Government: ten Directors from various
With the objective of curbing volatility in the exchanger fields and two government Official Others: four
RBI conducts sale and purchases of foreign currency Directors - one each from four local boards (regional)
the forex market, to contain the excessive volatility a or
smoothen out bulky and lumpy outflows and inflation 6.2.1 Objectives
Such sales and purchases are not governed by a • Regulate the issue of bank notes
determined target or band around the exchange rate.
• Maintain reserves with a view to securing
D. Currency Management monetary stability and

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• To operate the credit and currency system of Implementing policies to mitigate identified system
the country to its advantage. risks.
• To maintain price stability while keeping in
C. Conducting Foreign Exchange Operations:
mind objective of growth.
With the objective of curbing volatility in the exchange
6.2.2 Nationalization after Independence rat RBI conducts sale and purchases of foreign currency
the forex market, to contain the excessive volatility are
After the partition of India, the Reserve Bank served as or smoothen out bulky and lumpy outflows and inflow
the central bank of Pakistan up to June 1948 when the Such sales and purchases are not governed by a p
State Bank of Pakistan commenced operations. determined target or band around the exchange rate.
The Bank, which was originally set up as a
D. Currency Management
shareholder's bank, was nationalised in 1949. After
nationalisation in 1949, it emerged as the central Currency Management is one of the core functions of
banking body of India and it did not remain a 'bank' in the RBI as laid down in the Reserve Bank of India Act,
the technical sense. 1934 which mandates it to regulate the issue of Bank
note and keeping of reserves with a view to secure
6.2.3 Functions of RBI monetary stability in India.
A. Monetary Authority Under Section 22 of the RBI Act, 1934 "Right to Issue
Bank notes", RBI has the sole right to issue bank. notes
The policy by which the desired level of money flow
various denominations except one rupee notes, which is
and its demand is regulated is known as the monetary
issued by the Government of India.
policy. The central bank of the country has the primary
role in formulating the monetary policy. E. Regulatory Functions of RBI
There are many tools by which the RBI regulates the 1. Regulator and Supervisor of Financial System
desired Credit and Monetary Policy - CRR, SLR, Bank
Rate, Repo rate, Reverse Repo rate, and interest Regulation is aimed at:
changes for the instruments of the Money Market, etc.
(a) Protecting depositors' interests,
An amendment to RBI Act, 1934, was made in May
2016, providing the statutory basis for the (b) Orderly development and conduct of banking
implementation of the flexible inflation targeting operations and
framework. Section 45ZB of the amended RBI Act,
1934, also provides for an empowered six-member (c) Fostering of the overall health of the banking system
Monetary Policy Committee (MPC) to be constituted by and financial stability.
the Central Government by notification in the Official
The tools used for regulation by RBI are statutory,
Gazette.
prudential regulation, other regulatory guidelines and
B. Maintaining Financial Stability moral suasion through speeches of Governor, Deputy
Governors and periodic meetings, seminars, etc.. Focal
Financial stability is critical for economic growth as it points for providing framework for regulation
ensures transfer or efficient allocation of resources from
lenders to borrowers. Financial stability is ensured (a) Issuance of 'licences' for opening of banks,
through: (b) 'Authorisations' for opening of branches by banks in
Maintaining Institutional and Governance Structures: India,
Conduct of macro prudential surveillance of financial (c) Governing foreign banks entry and expansion and
system on an ongoing basis. establishment of inter approval of Indian banks to operate overseas,
sector coordination units like Financial Stability and
Development Council (d) Policy formulation, review and implementation on
Prudential Norms, Basel-II and III frameworks,
Measuring and Monitoring Systemic Risk: Analyse of validation of quantitative models on Credit. Market and
interconnectedness among various financial entities Operational Risks. Stress testing.
systemic liquidity indicator, credit-GDP growth trend

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(e) International Financial Reporting Standards (IFRS). NBFCS are regulated and supervised by the Department
Securitisation, of Non-Banking Supervision of RBI.

(f) Resolution mechanism, etc... However, certain categories of NBFCs which are
regulated by other regulators are exempted from the
(g) Monitoring maintenance of SLR and CRR by requirement of registration with RBI. For e.g.. Venture
banks. Capital Fund/Merchant Banking companies/Stock
(h) Approving appointments of chief executive. officers broking companies registered with SEBI. Insurance
(private sector and foreign banks) and their Company holding a valid Certificate of Registration
compensation packages, issued by IRDAI etc.

(0) Overseeing the amalgamation, reconstruction and F. Banker to Banks

liquidation of banking companies,
RBI enables smooth seamless clearing and settlement of
(1) Policy issues relating to customer service, (k) Anti- inter-bank transactions thereby providing an efficient
Money Laundering and Combating means of fund transfer for banks.

Financing of Terrorism and issuing of instructions RBI also enables banks to maintain their accounts with
regarding KYC, the Reserve Bank for statutory cash reserve
requirements and maintenance of transaction balance
(1) Regulation of financial institutions. acting as the lender of last resort providing much
needed liquidity when no one else is willing to extend
2. Regulation of Commercial Banks. The Banking
credit to that bank.
Regulation Act, 1949, provides wide powers to RBI
towards the regulation of the commercial banks in G. Lender of Last Resort
India.
When commercial banks fail to meet their financial
RBI issues policies and guidelines for management and requirements from other sources in the market, then
methods of working, amalgamation, reconstruction and they approach the RBI (Central Bank). The Central
liquidation of the banks. Bank gives loans to commercial banks. This situation
3. Regulating Cooperative Banks: To improve the termed as a lender of the last resort. The central bank
financial soundness of the Cooperative banking sector, ensures that the banking system does not suffer any
through better coordination between the co-regulators, setback and money market remains stable.
the Reserve Bank of India entered into a Memoranda of The Reserve Bank extends this facility to protect the
Understanding (MoU) with all State Governments and interest of the depositors of the bank and to prevent
the Central Government wherein the Reserve Bank possible failure of the bank, which in turn may also
constituted a Task Force for Co-operative Urban Banks affect other institutions and can have an adverse impact
(TAFCUB). on financial stability of the economy.
TAFCUBS identify potentially viable and non-viable H. Banker to Government
UCBS in the states and suggest a revival path for the
viable and non-disruptive exit route for the non-viable Governments need a banker to carry out their financial
ones. transactions in an efficient and effective manner,
including the raising of resources from the public. The
The exit of non-viable banks could be through merger/ central bank also serves as an agent and adviser to the
amalgamation with stronger banks, conversion into Government.
societies or liquidation as the last option.
As such, it transacts all banking business of the
4. Regulation of Non-Banking Finance Institutions -As government, which involves the receipt and payment of
per the RBI Act, 1934, no Non-banking Financial money on behalf of the government and carrying out of
company can commence or carry on business of a non- its exchange, remittance and other banking operations.
banking financial institution without obtaining a
certificate of registration from RBI. As an agent of the Government, it is entrusted with the
task of managing the public debt and the issuing of new

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loans and Treasury Bills on behalf of the Government. The BO is a quasi-judicial authority for resolving
By acting financial adviser to the Government, it disputes between a bank and its customers. There are 15
advises the Government on important matters of Banking Ombudsman offices in the country at present.
economic policy such as deficit financing, devaluation
of currency, trade policy. foreign exchange policy, etc. The scheme covers grievances of the customers against
Commercial Banks, Scheduled Primary Cooperative
The conduct of Government business is also governed Banks and Regional Rural Banks.
by the Central Government Treasury Rules, Treasury
Rules of the State Governments and instructions issued Recent Initiatives: RBI has also launched the financial
from time to time by Controller General of Accounts literacy week.
and other Departments of Central and State K. Payment and Settlement Systems In India, the
Governments payment and settlement systems regulated by the
I. Financial Inclusion and Development Payment and Settlement Systems PSS Act). 2007 which
was legislated in December 2007 As per the PSS Act,
To push towards universal financial inclusion, the only Reserve Bank of India (RBI) or anyone authorised
Reserve Bank of India has taken several initiatives. by RBI can commence or operate a payment system in
These include advising banks on devising their India.
Financial Inclusion Plan, financial literacy programmes
in collaboration with commercial banks. Board for Regulation and Supervision of Payment and
settlement system (BPSS), a sub-committee of the
J. Consumer Education and Protection Central Board of the RBI is the highest policy making
body on payment systems in the country.
1. RBI initiatives includes the setting up of a Customer
Redressal Cell, creation of a Customer Service The BPSS is empowered for authorising, prescribing
Department in 2006 which has been recently policies and setting standards for regulating and
rechristened as Consumer Education and Protection supervising all the payment and settlement systems in
Department. the country.

Payment and Settlement Systems regulated by RBI:

RBI has identified and regulates the following entities
2. It is also engaged in sending out consumer protection related to payment and settlement infrastructure as
messages including 'know your liability' for Financial Market Infrastructure (FMI) are:
unauthorised electronic banking transaction and good
practices for a safe digital banking experience. Real Time Gross Settlement System (RTGS): It is a
system where the inter-bank payments settle on a 'real'
3. Among various messages, customers will be told time and on gross basis in the books of the RBI
through banners and posters that in case of unauthorised
digital transaction if bank is informed within 3 days, the Securities Settlement Systems (SSS): The Public Debt
liability of the account holder is zero. Office (PDO) of the RBI, Mumbai manages and
operates the Securities Settlement Systems for the
4. The RBI had also operationalised complaint Government securities, both for outright and repo
management system (CMS) portal as one stop solution transactions conducted in the secondary market.
for alternate dispute resolution of customer complaints
not resolved satisfactorily by the regulated entities. Clearing Corporation of India Ltd (CCIL) Systems:
CCIL is a Central Counterparty (CCP) which was set up
5. RBI also provides project specific financial in April 2001 to provide clearing and settlement for
assistance from the Depositors Education and transactions in Government securities, foreign exchange
Awareness (DEA) fund. and money markets in the country. CCIL acts as a
central counterparty in various segments of financial
Banking Ombudsman:
markets regulated by the RBI
In order to strengthen the institutional mechanism for
Retail Payment Systems: Retail payment systems. can
dispute resolution, the Reserve Bank of India in the year
be broadly classified based on the medium of
1995 introduced the Banking Ombudsman (BO)
transactions, i.e. Paper based systems, electronic
Scheme.

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systems, mobile based systems and card based systems merging several banking features, seamless fund routing
though the lines are blurring due to innovation. & merchant payments into one hood

Paper based systems like cheques, demand drafts and BHIM App: BHIM is a mobile app or payments
payment orders are largely cleared through the Cheque application that allows users to make instant bank
Truncation System (CTS) by NPCI. transfers.

Electronic & Mobile Payment Systems: The National Bharat Bill Pay: One-stop ecosystem for payment of all
Electronic Funds Transfer (NEFT) system run by RBI is bills
the most prominent. National Electronic Funds Transfer
is a nation-wide payment system facilitating one-to-one Immediate Payment Service: Real time interbank
funds transfer. Under this Scheme, individuals, firms payment system service that could be accessed on
and corporates can electronically transfer funds from multiple channels like Mobile, Internet, ATM, SMS,
any bank branch to any individual, firm or corporate Branch and USSD (*99#).
having an account with any other bank branch in the National Financial Switch: Network of ATMs in India.
country participating in the Scheme.
Bharat QR: A common QR code built for ease of
payments. The QR code or Quick Response code is a
two-dimensional machine-readable code, which is made
National Payments Corporation of India up of black and white squares and is used for storing
(NPCI) URLS or other information.
In 2008, National Payments Corporation of India Recently, RBI has floated the idea of an alternate
(NPCI). an umbrella organisation for operating retail mechanism to the existing National Payments
payments and settlement systems in India, was Corporation of India (NPCI). The private companies
established as an initiative of Reserve Bank of India have shown interest in setting up New Umbrella
(RBI) and Indian Banks Association (IBA) under the Entities (NUES) for payment systems.
provisions of the Payment and Settlement Systems Act,
2007, for creating a robust Payment & Settlement Interbank Settlement System: Interbank funds transfer
Infrastructure in India. systems are arrangements through which funds transfers
are made between banks for their own account or on
NPCI, has been incorporated as a "Not for Profit" behalf of their customers
Company under the provisions of Section 25 of
Companies Act 1956 (now Section 8 of Companies Act The processing of funds transfers involves two key
2013), with an intention to provide infrastructure to the elements.
entire Banking system in India for physical as well as The first of these is the transfer of information between
electronic payment and settlement systems. the payer and payee banks. A funds transfer is initiated
NPCI is focused on bringing innovations in the retail by the transmission of a payment order or message
payment systems through the use of technology for requesting the transfer of funds to the payee.
achieving greater efficiency in operations and widening The second key element is settlement - that is, the actual
the reach of payment systems. transfer of funds between the payer's bank and the
The following services have been established by NPCI: payee's bank. Settlement discharges the obligation of
• RuPay Contactless: Allows cardholders to wave their the payer bank to the payee bank in respect of the
card in front of contactless payment terminals without transfer. Settlement that is irrevocable and
the need to physically swipe or insert the card into a unconditional is described as final settlement. In
point-of-sale device. general, the settlement of interbank funds transfers can
be based on the transfer of balances on the books of a
Unified Payments Interface: Real-time interbank central bank (i.e. central bank money) or commercial
payment system for sending or receiving money. UPI is banks (i.e. commercial bank money).
a system that powers multiple bank accounts into a
single mobile application (of any participating bank), The place where the exchange of instruments occurs
and the claims are settled is known as the Clearing
House. The clearing system provides a convenient and

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well established institutional mechanism to take care of (g) Renewable Energy

the problem of physical delivery of instruments as well
as funds transfer between different banks. There are 860 (h) Others
Bankers clearing houses in India, of which 840 are M. Initiatives for Digital India
managed by State Bank of India and its Associates, 14
by Reserve Bank of India, and the rest 6 by nationalised 1. Regulatory Sandbox: The Reserve Bank of India
banks (RBI) has issued the final framework for regulatory
sandbox in order to enable innovations in financial
The Reserve Bank of India introduced the Electronic technology (fintech) space.
Clearing Service (Credit) Scheme during the 1990s to
handle bulk and repetitive payment requirements (like A regulatory sandbox usually refers to live testing of
salary, interest, dividend payments) of corporates and new products or services in a controlled/test regulatory
other institutions. ECS (Credit) facilitates customer environment for which regulators may permit certain
accounts to be credited on the specified value date and regulatory relaxations for the limited purpose of the
is presently available at all major cities in the country. testing.
This was the backbone of the interbank Settlement
system of RBI. The objective of the sandbox is to foster responsible
innovation in financial services, promote efficiency and
During September 2008, the Bank launched a new bring benefits to consumers.
service known as National Electronic Clearing Service
(NECS), at National Clearing Cell (NCC), Mumbai. The framework will likely be a positive step for
NECS (Credit) facilitates multiple credits to beneficiary financial technology startups and companies looking to
accounts with destination branches across the country innovate in the fast changing and highly regulated
against a single debit of the account of the sponsor sector.
bank. The system has a pan-India characteristic and Also, it will enable authorities to take a considered view
leverages on Core Banking Solutions (CBS) of member on the regulatory changes or new regulations that may
banks, facilitating all CBS bank branches to participate be needed to support useful innovation, while
in the system, irrespective of their location across the containing the attendant risks.
country.
2. Tokenisation: Tokenization refers to the replacement
L. Prescribes Priority Sector Lending Norms of actual card details with a unique alternate code called
Priority Sector Lending is an important role given by the 'token', which is unique for a combination of card,
the Reserve Bank of India (RBI) to the banks for token requestor (i.e. the entity which accepts request
providing a specified portion of the bank lending to few from the customer for tokenization of a card and passes
specific sectors like agriculture and allied activities, it on to the card network to issue a corresponding token)
micro and small enterprises, poor people for housing, and identified device.
students for education and other low income groups and The Reserve Bank had permitted 'tokenization' services,
weaker sections. under which a unique alternate code is generated for
This is essentially meant for an all-round development transaction purposes, on mobile phones and tablets of
of the economy as opposed to focusing only on the cardholders.
financial sector. RBI had issued guidelines on "Tokenization Card
Priority Sector includes the following categories: (a) transactions" in 2019, permitting authorised card
Agriculture networks to offer card tokenization services to any
token requestor, subject to conditions. Prior to the latest
(b) Micro, Small and Medium Enterprises circular, the facility was available only for mobile
phones and tablets of interested cardholders.
(c) Export Credit
A tokenized card transaction is considered safer as the
(d) Education actual card details are not shared with the merchant
(e) Housing during transaction processing.

(f) Social Infrastructure

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3. e-RUPI: It has been launched by National Payment A high-level inter-ministerial committee set up by the
Corporation of India (NPCI) in association with Finance Ministry had recommended Central Bank
Department of Financial Services (DFS). National Digital Currency (CBDC) with changes int the legal
Health Authority (NHA), Ministry of Health and Family framework including the RBI Act, which currently
Welfare (MOHFW) and partner banks. empowers the RBI to regulate issuance of bank notes.

It is a cashless and contactless method for digital Digital Currency is a payment method which exists only
payment. It is a Quick Response (QR) code or SMS in electronic form and is not tangible. It can be
string-based e-voucher, which is delivered to the mobile transferred between entities or users with the help of
of the users. technology like computers, smartphones and the
internet.
The users will be able to redeem the voucher without
needing a card, digital payments app, or internet The Subhash Chandra Garg Committee (2019) has
banking access, at the service provider. recommended a ban on private cryptocurrencies on
account of concerns such as volatility, instability.
It connects the sponsors of the services with the security risk and risk of funding illegal activities.
beneficiaries and service providers in a digital mode However, the committee has highlighted that an official
without any physical interface. digital currency can have number of advantages such
The mechanism also ensures that the payment to the as:
service provider is made only after the transaction is
• Promote cashless society.
completed. The system is pre-paid in nature and hence,
• Increase in Financial Inclusion.
assures timely payment to the service provider without
the involvement of any intermediary. • Foster development of Fintech sector.
• Provide a real time picture of economic
e-RUPI is still backed by the existing Indian rupee as activity and hence better GDP estimates and
the underlying asset and specificity of its purpose efficient monetary policy formulation.
makes it different to a virtual currency and puts it closer • Traceability of transactions would crack down
to a voucher-based payment system.
on corruption and money laundering.
Significance of e-RUPI: It can be used both by the • Counter the monopoly of private sector issued
government and private sector. It is expected to ensure a cryptocurrencies.
leak-proof delivery of welfare services and can also be
used for delivering services under schemes meant for 6.2.4 Publications of RBI
providing drugs and nutritional support under Mother
and Child welfare schemes, drugs & diagnostics under RBI also conducts various surveys and publishes
schemes like Ayushman Bharat Pradhan Mantri Jan various reports to gauge the pulse of the economy.
Arogya Yojana, fertiliser subsidies etc Even the private These include:
sector can leverage these digital vouchers as part of
Financial Stability Report (Half-Yearly): The FSR
their employee welfare and Corporate Social
reflects the collective assessment of the Sub-
Responsibility (CSR) programmes.
Committee of the Financial Stability and Development
The government is already working on developing a Council (FSDC headed by the Governor of RBI) risks
Central Bank Digital Currency and the launch of e- to financial stability and the resilience of financial
RUPI could potentially highlight the gaps in digital system. The Report also discusses issue relating to
payments infrastructure that will be necessary for the development and regulation of the finance sector.
success of the future digital currency.
Monetary Policy Report (Half-Yearly): The Monetary
Central Bank Digital Currency: The Reserve Bank of Policy Report is published by the Monetary Policy
India (RBI) is working on a phased implementation. Committee (MPC) of RBI. It also determines the police
strategy for its own digital currency and is in the rate required to achieve the inflation target.
process of launching it in wholesale and retail segments
Consumer Confidence Survey (CCS Quarterly The CCS
in the near future
is conducted by the Reserve Bank of India 13 Indian
cities quarterly. The survey seeks qualitative responses

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from households, regarding their sentiment on general Bank for International Settlement (BIS).From lending to
economic conditions, overall price situation banks for very short tenures
employment, income, spending, scenario Consume
confidence is a key driver of economic growth and is Management commission on handling the borrowings
widely considered a leading economic indicator of State Governments and the Central Government.
household spending on consumption. RBI buys these financial assets against its fixed
Inflation Expectations Survey of Households (IESH- liabilities such as currency held by the public and
Quarterly): The survey seeks qualitative response from deposits issued to commercial banks, on which it does
households on price changes (general price as well as not pay interest.
prices of specific product groups) in the next three B. RBI'S Expenditure
months as well as in the next one year and quantitative
responses on current, three-month ahead and one-year The RBI's expenditure is mainly on printing of currency
ahead inflation rates. The results of the survey will be notes, on staff, besides commission to banks for
used by the RBI as one of the important inputs for the undertaking transactions on behalf of the government
formulation of the monetary policy. and to primary dealers that include banks for
underwriting some of these borrowings.
Report on Foreign Exchange Reserves (Hall Yearly):
The Reserve Bank of India publishes hall yearly reports The central bank's total costs, which includes
on management of foreign exchange reserves as part of expenditure on printing and commissions forms, is only
its efforts towards enhanced transparency and levels of about 1/7th of its total net interest income (Hence, the
disclosure. These reports are prepared half yearly with surplus).
reference to the position as at end-March and end-
September each year. The report contains the 6.2.6 Issues between the Central
developments regarding movement of foreign exchange Bank and Government
reserves, information on the external liabilities vis-à-vis
the reserves, adequacy of reserves, objectives of reserve Time and again, tussle between the RBI and the
management, statutory provisions, risk management Government of India flares up, which reignites the
practices, information on transparency and disclosure debate on central bank autonomy in India. The major
practices etc. bone of contention between the RBI and the
government is as follows:
Digital Payments Index (DPI): The Reserve Bank of
India (RBI) has constructed a composite Digital A. Autonomy of RBI
Payments Index (DPI) to capture the extent of
digitisation of payments across the country. The RBI- The Central Government has employed three levers to
DPI comprises 5 broad parameters that enable control the RBI
measurement of deepening and penetration of digita
payments in the country over different time periods This 1. The Colonial-era RBI Act: Which provides sweeping
includes payment enablers, payment infrastructure powers to the government. For instance, Section 30 of
including both demand-side factors and supply side the RBI Act, allows the government to supersede the
factors, payment performance and consumer centricity RBI central board. Section 58 circumscribes the powers
of the central board to make regulations only with the
A. RBI'S Income previous sanction of the Central Government. Section 7
(1) says that the Union government can give directions
A significant part comes from RBI's Operations in to the central bank, after consultation with the governor
financial markets, when it intervenes, for instance of the bank in the public interest. Though, the above
provisions aren't invoked as a matter of routine, can be
To buy or sell foreign exchange. Open Market
used when needed.
operations (to prevent the rupee from appreciating). As
income from government securities, it holds. As returns 2. Choice of Governors and Deputy Governors to RBI:
from its foreign currency assets that are investments in According to a RBI report, seven out of every ten RBI
the bonds of foreign central banks or top-rated governors have been former finance ministry officials
securities. From deposits with other central banks or the (since independence)

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3. Composition and Staffing of RBI's Central Board:

The board is the RBI's highest decision-making body
and under the RBI Act is designed to consist of 21
members, of which 10 directors nominated by the
Union government and two government appointed
A. Advantages of Transfer of Surplus from RBI
officials. By not filling up board positions: The to Government
government can ensure that the ex-officio members Government on receipt of surplus can utilise funds for
hold sway over the board (as was the case during public spending, which could lead to a revival in
demonetisation). demand and boost economic activity and thus help
Controversy over the Political Background of the government deal with economic slowdown.
Appointees: In recent times, the board came to be It can also help the government cut back on planned
dominated largely by ex-officio members and also the borrowings, thereby providing space for private
share of women on the board has also steadily declined. companies to raise money from markets which would
No Regional Representatives on the Central Board: This obviate crowding out of private investments.
means board decisions may not have fully factored in It can also be utilised to provide capital to government-
their regional implications. As a result, the impact of owned banks in form of recapitalisation.
monetary policy and regulations can be vastly different
in different regions B. Disadvantages of Transfer of Surplus from
RBI to Government Cons
B. Easing Norms of Prompt Corrective
Action It reduces RBI's Buffer against externalities such as
potential threats from financial shocks, and the need to
The government frequently asks the RBI to give ensure financial stability and provide confidence to the
exemption to power companies under the PCA markets.
framework. The government wants RBI to ease lending
rules under PCA, as it could help reduce pressure on It is also crucial for the autonomy of RBI, so that it
MSME through credit availability RBI has said that doesn't depend on Government in times of financial
such move will jeopardize all efforts of dealing with stress.
country's Non-Performing Asset (NPA) Crisis.
Surplus transfers can also create inflationary pressures
C. RBI Surpluses if government spending is not done in a proper manner.

Every year RBI earns interests from the domestic and Way Forward
foreign bonds it holds. This income is used in running The tussle between RBI and government can impact the
the operation of RBI and rest is accrued as surplus. Out image of India as a stable market as investors require
of this surplus, RBI holds some amount to itself as long term policy consistency, such interference in the
equity capital to maintain its creditworthiness and pays working
the rest to the government.
6.3 Nationalisation of Banks in India
6.2.7 Transfer of Surplus
The Government of India, with the enactment of the
RBI transfers the surplus(excess of income over SBI Act. 1955 partially nationalised the three Imperial
expenditure) to the government, in accordance w the Banks (mainly operating in the three Presidencies of
Economic Capital Framework (ECF), retaining portion past with their 466 branches) and named them the State
of this surplus to meet its risks & contingencies Bank of India- the first public sector bank in India
Pay-out is called Transfers to government and no
6.3.1 Nationalisation
Dividend to the Government because the RBI is no a
commercial organisation like banks and other After successful experimentation in the partial
companies owned or controlled by the government pay nationalisations, the Government decided to go for
a dividend to the owner out of the profit generated complete nationalisation. With the help of the Banking

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Nationalisation Act. 1969, the Government nationalised take place; The planned development of the
a total number of 20 private banks in two phases: economy required a certain degree of
government control on the capital generated by
• 14 banks with deposits more than crore
the economy.
nationalized in July 1969, and
• 6 with deposits more than 200 crore banks Other reasons responsible for the nationalization of
nationalized in April 1980. banks were:

6.3.2 Need • Social welfare.

• Controlling private monopolies.
Once the Reserve Bank of India (RBI) was nationalised • Expansion of banking to rural areas.
in 1949 and a central banking was in place the Goerner
• Reducing regional imbalance to curb the
considered Nationalising of selected private banks in th
urban-rural divide.
country due to the following major reasons:

• After independence, the Government of India 6.3.3 Advantages

(GO adopted planned economic development
1. Removal of Barriers: There were no longer any
for the country. Nationalization was in
barriers, social, economic or political between the
accordance with t national policy of adopting bankers and customers. This enabled in a massive
the socialistic pattern society. Nationalization quantitative expansion in customer base and also helped
came at the end of a trouble decade. improve the services.
• India has suffered many economic as well as
political shocks. There were two wars (with 2. Enabled Banks to Widen their Reach: The banks
China in 1962 and Pakistan in 1965) that put began to expand into the rural areas. With this the
economy also expanded and employment opportunities
immense pressure on public finances.
were created. Even in the remote com of the country
• Two successive years of drought had not only
led to food shortages but also compromised 3. Expansion of Branch Network: During the last years
national security because of the dependence on of nationalization, the branches of the p sector banks
American food shipments (PL 480 program). rose 800 per cent from 7.219 to 570 with deposits and
• Subsequently, a three-year plan holiday advances taking a huge jump 11,000 per cent and 9,000
affected aggregate demand as public per cent.
investment was reduced. The decade of 1960- 4. Reorientation of Bank Lending: Accelerated process
70s was the lost decade for India as the of development, especially of the pr sectors of the
economic growth barely outpaced population economy, which had not previous received sufficient
growth and average incomes stagnated. attention from the commercial bar
• Industry's share in credit disbursed by
5. Increased Credibility of Indian Banking System Ease
commercial banks almost doubled between
of factor access and increased banking habits to
1951 and 1968, from 34% to 68% whereas
Increased credibility of Indian banking system
agriculture received less than 2% of total
credit. 6. Priority Sector Lending: In India, the argic sector and
• Agriculture needed a capital infusion, with the its allied activities were the large contributors to the
initiation of the Green Revolution in India that national income.
aimed to make the country self-sufficient in 7. Mobilization of Savings: Nationalisation aimed
food security. mobilizing the savings of the people to the lar possible
• As the banks were owned and managed by the extent and to utilize them for product purposes.
private sector the services of the banking were
having a narrow reach the masses had no
access to the banking service;
6.3.4 Problems
• The Government needed to direct the resources
in such a way that greater public benefit could

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1. Inadequate Banking Facilities: Even though be have The first Regional Rural Bank "Prathama Grameen
spread across the country; still many parts of country Bank" was set up on 2nd October, 1975. These aim to
are unbanked. This was due to low levels efficiency due fulfil the twin duties of:
to lack of competition.
Providing credit to the weaker sections of the society
2. Lowered Efficiency and Profits: After nationalization including small and marginal farmers, agricultural
banks were brought under the control of government labourers, artisans and small entrepreneurs in rural areas
which meant political pressures thereby hamper at concessional rate of interest who previously
professionalism. It resulted into lower efficiency poor depended on private money lending and sector banks,
profitability of banks. both classified as old (Karur Vysya B and new (HDFC
Bank Ltd).
3. Political and Administrative Interference: M public
sector banks badly suffered due to the polit interference Categories of Scheduled Banks:
and populist policies. It was seen arranging loan melas
which resulted in huge performing assets. Public Sector Banks: PSBS are those banks in which
majority of ownership is with the government.
4. Increased Expenditure: Huge expansion in a bank
network, large staff administrative expenditure trade Private Sector Banks: The banks in which major
union struggle, etc., lead to increased bank expenditure. shareholders are private entities are known as price
banks.
5. Complex Interest Rate Structure: Different rate
interest with different loans tenure resulting in hig Non- Foreign Banks: After 1991 economic reforms, Ind
Performing Assets (NPAS). opened the door for foreign banks. They are set up
either branches or subsidiaries of foreign banks.

Regional Rural Banks: RRBS are financial institution

which ensure adequate credit for agriculture and other
rural sectors.

To mobilise rural savings and channelize them

supporting productive activities in the rural are and
check the outflow of rural deposits to urban are and
6.4.1 Scheduled Commercial Banks reduce regional imbalances and increase t employment
generation.
Scheduled banks are those listed in the 2nd schedule of
RBI Act 1934. A bank to be included in this list has to The RRBS combine the characteristics of a cooperative
fulfil the following two conditions: in terms of the familiarity of the rural problems and
commercial bank in terms of its professionalism and
The paid up capital and collected funds of the bank ability to mobilise financial resources.
should not be less than 5 lakh. Any activity of the bank
will not adversely impact the interests of the depositors. The equity of a Regional Rural Bank is held by Central
Government, concerned State Government the Sponsor
The list includes the State Bank of India and its Bank in the proportion of 50:15:35. ad RRB operates
subsidiaries (like State Bank of Travancore). All within the local limits as notified by Government.
nationalised banks (Bank of Baroda, Bank of India etc),
Regional Rural Banks (RRBs). Foreign banks (HSBC The RRBs are required to provide 75% of their total
Holdings Plc, Citibank NA) and some co-operative credit as pessary sector lending.
banks. These also include private. Evolution of RRBs: Due to excessive leanings towards
social banking and catering to the highly economically
6.4.2 Regional Rural Banks
weaker sections, these banks started incurring huge
Regional Rural Banks were set up on the basis of the asses by early 1980s
recommendations of the Narasimhan Working Group
Following the suggestions of the Kelkar Committee..
(1975), and after the legislation of the Regional Rural
the government stopped opening new RRBs in 1987- by
Banks Act, 1976
that time their total number stood at 196

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For restructuring and strengthening of the banks, the Cooperative Banks are primarily categorised into: (1)
governments set up two committees the Bhandari Rural Cooperative Banks (RCBS), and (2) Urban
Committee (1994-95) and the Basu Committee (1995- Cooperative Banks (UCBS) Under the Banking
96) Regulation Act. 1949 only Urban Co-operative Banks
(UCBS), State Co- operative Banks (StCBs) and
The Khusrau Committee of 1989, noted that the Central Co-operative Banks (CCBS) are qualified to be
weaknesses of RRBs are endemic to the system and called as banks in the co- operative sector.
non-viability is built into it, and the only option was to
merge the RRBS with the sponsor banks. The objective B. Regulation
of serving the weaker sections effectively could be
achieved only by self-sustaining credit institutions. Cooperative banks are currently under the dual control
RRBS were finding themselves unable to sustain of Reserve Bank of India: It is responsible for
because of the mounting losses due to imprudent regulating banking functions under the Banking
commercial policy Regulation Act. 1949 and Banking Laws (Application
to Co-operative Societies) Act 1965 such as capital
The obligation of concessional loans abolished and the adequacy, risk control and lending norms
RRBS started charging commercial interest rates on its
lending. Registrar of Co-operative Societies (RCS) of respective
State or Central Government: They are responsible for
The paid up capital which was 25 Lakh at that time was regulation of management related functions such as
not able to absorb the loan losses of most of the RRBS incorporation, registration, management, audit,
supersession of board of directors and liquidation.
After the above-given policy changes, the RRBS started
coming out of the losses. The short term structure cooperative banks have a 3
tiered set up:
The Narsimham Committee in 1990s also reiterated that
the RRBS should be merged with the sponsor banks. It 1. Central Co-Operative Banks: This cooperative bank
also permitted the RRB's to engage in all types of operates at district level. Its operational area is limited
banking business and they should not be forced to to one district. There are two types of Central (or
restrict their operations to the target groups. The first District) Co-op Banks:
recommendation of letting the RRBS do all businesses
was accepted by the government. (a) Co-operative Banking Union

Regional Rural Banks are regulated RE and supervised (b) Mixed Central Co-operative Bank
by National Bank for Agriculture and Rural
The membership of Co-operative Banking Union is
Development (NABARD)
open only to co-operative societies.
6.4.3 Scheduled Cooperative Banks Priority sector Lending: Only Urban Cooperative
Banks(UCBS) are subjected to Priority Sector Lending
Cooperative banks are called as cooperative banks
nom (40% of Adjusted Net Bank Credit (ANBC), to be
because these have cooperation of stake holders as
increase to 75% by 2024, with a sub target of 7.5% for
motive This is a financial entity which belongs to its
Mic enterprises and 12% for weaker sections).
members who are both the owners and customers of the
bank Under the Rural Co-operative credit institutions, Short
the structures lend up to one year They lend for
Along with lending, cooperative banks accept deposits
cultivate activities and provide working capital to buy
They operate on the principle "one person one vote" in
seed fertilisers etc.
decision making and are managed on the basis of
cooperation and self help and no profit no loss. CRR and SLR requirement: It is at lower rate as
NABARD (National Bank for Agriculture and Rural compare to Commercial banks
Development) is the apex body of cooperative sector in
India. But the membership of Mixed Central Co- operative
Bank is open both to co-operative societies and
A. Types individuals.

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2. State Co-Operative Banks: Each state has its own rates of return, such as urban infrastructure, mining and
State Co-operative Bank It is the Apex body for heavy industry. and irrigation systems
cooperative banks in particular state.
Development banks are also known as term-lending
3. Primary Agricultural Societies: A Primary institutions or Development Finance Institutions (DFIs)
Agricultural Credit Society (PACS) a basic unit and
smallest co-operative cred institutions in India Sources of Funds for DFIs include Share capital of
owners, Issue of Debentures, provision of capital by
It works on the grassroots level (Gram Panchayat and RBI. NABARD, other banks, Centre & State govt.
village level). These cooperative banks operate at
village level. DFIs provide finance in form of term loans and
advances, Subscription to shares and debentures,
They provide short term loan to agriculture (1) year Underwriting of new issues, Guarantees for term loans
sometimes 3 years). PACS give loans to its members and deferred payments.
that are individuals.
As banks, they provide finance. But they are unlike
• Capital: Co-operative banks may raise equity ordinary commercial banks in following ways.
or unsecured debt capital from the public,
(a) First, they do not seek or accept deposits from the
subject to prior RBI-approval. Currently,
public as ordinary banks do.
access to capital for cooperative banks is
limited. (b) Second, they specialize in providing medium and
• Audit: Under the amendment act, audit of co- long-term finance, whereas commercial banks have
operative banks would be conducted on par specialized in the provision of short-term finance.
with scheduled commercial banks. (c) Third, they are not mere purveyors of long-term
finance like any ordinary term- lending institution.
Winding up: Certain provisions relating to winding up
and special provisions for speedy disposal of winding (d) Fourth, they often lend at low and stable rates of
up proceedings of banks will now be applicable to co- interest to promote long-term investments with
operative banks. considerable social benefits
The amendment act does not affect existing powers of (e) Fifth, they lend for similar maturities to avoid a
the State Registrars of Co-operative Societies under maturity mismatch a potential cause for a bank's
state cooperative laws. The amendments do not apply to liquidity and solvency.
Primary Agricultural Credit Societies (PACS) or co-
operative societies whose primary object and principal (1) Sixth, they also provide refinancing to commercial
business is long-term finance for agricultural banks.
development.
B. History of Development Banks
6.4.4 Development Banks Development banks formed the central piece of growth
strategy in India too. Soon after independence, the
A. Introduction institutional framework for development banking
These banks are specialised financial institutions which began- IFCI (1948), IDBI (1964), IIBI (1972),
perform the twin functions of providing medium and NABARD and EXIM Bank (1982), SIDBI (1990), etc.
long-term finance to private entrepreneurs and of IFCI, previously the Industrial Finance Corporation of
performing various promotional roles conducive to India, was set up in 1948. This was probably India's
economic development like provision of risk capital, first development bank for financing industrial
underwriting of new issues, arranging for foreign loans, investments.
preparation and evaluation of project reports, provision
of technical advice, market information about both In 1955, the World Bank prompted the Industrial Credit
domestic and export markets. and Investment Corporation of India (ICICI)-the parent
of the largest private commercial bank in India today,
They usually provide credit for capital-intensive ICICI Bank - as a collaborative effort between the
investments spread over a long period and yielding low government with majority equity holding and India's

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leading industrialists with nominal equity ownership to assessing investment projects for economic, technical
finance modern and relatively large private corporate and financial viability.
enterprises.
E. Case Study of Successful Development
In 1964, Industrial Development Bank of India (IDBI) Banks Indian Eco
was set up as an apex body of all development finance
institutions. Development Banks: the China's Agricultural
Development Bank of China, China Development
C. Importance of Development Banks Bank, and the Export-Import Bank of China have been
at the forefront of financing its industrial prowess.
Development Banks provide Long term loans for ticket
investments this in turn frees banks from asset liability After the global financial crisis, these institutions have
mismatch & NPA accumulation. underwritten China's risky technological investments,
helping it gain global dominance in IT hardware and
Development Banks help to boost domestic demand by
software companies.
providing credit to under-served sectors including rural
infrastructure, agriculture, tourism, housing MSME, Strong belief in development banking led China to
external trade etc. create the Asian Infrastructure Investment Bank and the
New Development Bank with its BRICS partners.
Development Banks help to perform a counter-cyclical
role to ensure investment flows even during economic Germany's Development Bank, KfW- Kreditanstalt für
downturns. They have also played an important role Wiederaufbau (Credit Institute for Reconstruction). has
many countries after 2008 Global Financial Crisis been spearheading long-term investment in green
development Banks are an essential source investment technologies and for sustainable development efforts
to crowd-in the private sector investments requiring long-term capital.
Development Banks also provide technical assistance In India, New Development Banks, in order to be
market information & capacity building. successful must focus on: Financial sustainability:
business models that ensure long-term financial
sustainability
D. Concerns with the Development banks Good governance: well-defined mandates, high
Framework in the past standards of corporate governance and transparency, no
political interference, outcome focus, assessment of
Economic Reforms after 1990s changed the role
social impact, effective monitoring & supervision etc.
Development Banks. The Washington Consensus that
guided reforms have put private markets in the
forefront.
6.4.5 Industrial Banks
Industrial banks collect cash by issuing shares and
The proportion of Development Banks loans accounts
debentures and providing long-term loans to industries.
for over two thirds of total disbursals between the ear
The main objective of these banks is to provide long-
1970s and late 1980s, but drastically declined to les
term loans for expansion and modernisation of
than 1.7 % within a decade.
industries In India such banks were established on a
After 1991, following the Narasimham Committee large scale after independence. For e.g. Industrial
reports on financial sector reforms, development Finance Corporation of India (IFCI), Industrial Credit
finance institutions were disbanded and got converted to and Investment Corporation of India (ICICI) and
commercial banks. Industrial Development Bank of India (IDBI).

ICICI in 2002 and IDBI in 2004 converted into 6.4.6 Differentiated Banks vs Universal
commercial banks. Banks
Development banks got discredited for mounting nor There are two kinds of banking licences that are granted
performing assets, allegedly caused by politically by the Reserve Bank of India Universal bank licence
motivated lending and inadequate professionalism in and Differentiated bank licence. Differentiated banks

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are distinct from Universal Banks (Eg: Commercial and marginal farmers; micro and small industries, and
Banks like SBI, HDFC, ICICI etc) as they are infused other unorganised sector entities
as niche segments. Niche banks typically target a
specific market and tailor the bank's operations to this Focus would be on deposit and loans Conditions:
target market's preferences. The differentiation could be (a) 25% branches in rural area,
on account of capital requirement, the scope of
activities or area of operations. As such, they offer a (b) 50% of the loans be given to MSME sector.
limited range of services/products or function under a
(c) Minimum networth shall be 100 crore from the date
different regulatory dispensation.
of commencement and has to be increased to minimum
6.4.7 Small Finance Banks 200 crore in five years.

Small Finance Banks are the financial institutions which (d) Small Finance Banks shall be required to maintain a
provide financial services to the unserved and unbanked minimum capital adequacy ratio of 15 percent of its
region of the country. risk-weighted assets (RWA) on a continuous basis

They are registered as a public limited company under 6.4.8 Payment Banks
the Companies Act 2013
Payment Banks are non-full service banks, whose main
A. Objectives objective is to accelerate financial inclusion. Payments
bank comes under a differentiated bank licence since it
Access to financial services: The main purpose behind cannot offer all the services that a commercial bank
having small finance banks is to expand access to offers. The objectives of setting up of a payments bank
financial services in rural and semi-urban areas. These is to further financial inclusion by providing small
banks can do almost everything that a normal
commercial bank can do but at a much smaller scale. savings accounts and payments/remittance services to
migrant labour workforce, low income households,
Basic banking services: It will offer basic banking small businesses, other unorganised sector entities and
services, accept deposits and lend to underserved other users. Government itself decided to establish
sections of customers, including small business units, Indian-post payment banks.
small and marginal farmers, micro and small industries.
and even entities in the unorganised sector. Features
Alternative institution: Small finance banks have the • They will not lend to customers and will have
potential to provide an alternative to some of the to deploy their funds in government papers and
existing institutions with their mandated focus on small bank deposits.
and medium businesses, the informal sector, small and • They can accept demand deposit, issue
marginal farmers and thus on increasing financial
ATM/debit cards but not credit cards.
inclusion and serving a variety of unserved clients in the
• Payments banks will mainly deal in remittance
hinterland and tier three and four cities and towns.
services and accept deposits of up to 1 lakh.
B. Features • They can't give loans. They can invest
depositor's money in Government securities
Can accept all types of deposits like a commercial bank (G-sec) only.
(CASA, FDRD etc.)
• The promoter's minimum initial contribution to
They can give out depositor's money as loans to other equity capital will have to be at least 40% for
customers, but small area of operation. It can also the first five years.
undertake non risk sharing financial activities, such as • Although they're allowed to sell mutual funds,
distribution of mutual fund units, insurance product insurance and pension products, accept utility
pension products, etc. bill payments etc., to keep branch operations
They'll be opened under "Companies Act 2013". • profitable.
Target customers would be small business units; small
Target customer: Poor, migrants, unorganized workers
wanting to send remittances home. Conditions:

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(c) Strict compliance of capital adequacy norms so that

taxpayer money not wasted in rescuing them during
(a) Maximum balance per customer 1 lakh, crisis.
(b) Minimum Leverage ratio 3% ie, liabilities should
Features of D-SIBS
not exceed 33 times of its net worth.
• SIBS are subjected to additional policy
(c) They are only allowed to invest the money received
measures to deal with the systemic risks and
from customers deposits into government securities
moral hazard issues posed by them.
(d) They cannot accept NRI deposits • Systemic risk can be defined as the risk
associated with the collapse or failure of a
(e) They need to maintain a Cash Reserve Ratio (CRR)
company, industry. financial institution or an
(f) Required to invest a minimum 75% of its "demand entire economy
deposit balances" in Statutory Liquidity Ratio (SLR) • Moral hazard is a situation in which one party
eligible Government securities/treasury bills with gets involved in a risky event knowing that it is
maturity up to one year. protected against the risk and the other party
(g) Need to hold maximum 25% in current and time/ will incur the cost.
fixed deposits with other scheduled commercial banks
for operational purposes and liquidity management. 6.5 Reforms in Banking Sector
6.4.9 Domestic Systemically 6.5.1 Evolution of Public Sector
Important Banks (D-SIBS) Banking
The Reserve Bank of India announced in 2015 the Public sector banks in India helped in regional
designation of State Bank of India and ICICI Bank Ltd diversification and regional rural banks enabled rural
as Domestic Systemically Important Banks (D-SIBs). penetration o banking. Schemes like "Lead Bank
Recently private sector lander HDFC Bank Ltd has Scheme" under which each bank adopted a district to
been also declared a domestic vertically important bank identify and support t growth potential lead to district
(D-SIBs) development. Prion, sector loans helped the
marginalised farmers and bars to finance infrastructure
SIBS are generally the big banks operating in the
supported social development programmes of the
country. Some banks, due to their size, cross-
government.
jurisdictional activities. complexity, lack of
substitutability and interconnectedness. become But the banking sector from 1969-1991 (since the time
systemically important. Since the national economy is y nationalisation to the introduction of economic
dependent upon these banks, they are perceived as Too reforms was plagued with the following issues:
Big To Fail (TBTF) because of the expectation of
government support for these banks at the time of • Interest rates with respect to lending,
distress. Due to this perception these banks enjoy borrowing deposits etc. were fixed by the
certain advantages in the funding markets. Reserve bank of India on the direction of the
government and did not give any flexibility to
Need for SIB Status the banks to their decision, in all there were
(a) To avoid reckless practices on part of these Banks more than 25 types of interest rates and more
like increased risk taking by the banks, reduction in its than 35 different types of deposit rates which
market discipline, creation of competitive distortions made even more complex.
etc. All this can increase the probability of distress in • Large presence of loan default was observed as
the future. there was no record of defaulters and the extent
of unpaid loans until 1991.
(b) Identification of SIBS so that they can be subjected
to additional policy measures to deal with the systemic • Rural penetration of branches was high but the
risks and moral hazard issues posed by them. customer base was very low due to the low-
income capacity of rural population and due to

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the lack of banking habits. This led to credit control, in place it should rely on open market
unprofitable branches operations (OMOs) increasingly.
• In addition, the indiscreet lending practices
4. Directed Credit Programme: It recommended to
unavailability of traceable collateral, and lack redefine Priority Sector Lending requirements to
of due diligence further embroiled the banking include only the weakest sections of the rural
sector in low repayments community.
• Very high cash reserve ratio (CRR), and
statutory liquidity ratio (15% and 38.5% at that 5. Structural Reorganisation of the Bank: The
time) resulted in restricting the banks capacity committee recommended substantial reduction in
number of PSBS through mergers and acquisitions. It
to give loans to the market.
recommended: Merger of PSBs and the financial
• Poor bankruptcy laws resulted in unresolved
institutions (AIFIs) Stronger banks and DFIs to be
loans for very long period due to which the merged Weaker and unviable banks to be closed. 3 tier
profitability of the banks suffered. banking structure suggested after merger:
• After the LPG reforms of 1991, there was an
emergent need to examine certain weaknesses 6. Autonomy to Public Sector Banks: The committee
that had developed in the banking sector so recommended more autonomy to banks in recruitment
that it could play a more enabling role in the procedures, training and remuneration policies to be
brought in line with the best market practices of
changed economic scenario.
professional bank management. The dual control of RBI
and the banking division of the Ministry of Finance was
6.5.2 Narasimhan Committee also to be curbed.
Reforms
7. Strengthening the Banking System: To improve the
Accordingly, a high level Committee on Financial inherent strength of the Indian banking system and their
System (CFS), aka Narasimhan I Committee was set up risk-taking ability, the committee recommended raising
on August 14, 1991 to examine all aspects relating to the capital adequacy ratio and having penal provisions
structure organisation, function and procedures of the for banks that fail to meet these requirements.
financial system based on its recommendations, a
8. Asset Quality: Banks were required to maintain
comprehensive reform of the banking system was
complete information about the non-performing assets
introduced in the fiscal year 1992-93
(NPAs). The committee also recommended creation of
In December 1997, the Government set up another asset reconstruction funds/companies to take over the
committee on the banking sector reform under the bad debts of the banks allowing them to have a clean
chairmanship of M. Narasimhan popularly known as the slate.
Narasimhan II Committee. The CFS recommendations
are as follows: Objectives of BASEL Norms:

1. Increased Competition: The committee recommended • Banks lend to different types of borrowers, and
more competition in the sector such that private banks each carries its own risk.
and later foreign banks were allowed to do business in • They lend the deposits of the public as well as
India (1991-1999). The government permitted opening money raised from the market ie, equity and
of new private sector banks was in 1993. debt.
2. De-regulation of Interest Rates: Interest rates were • This exposes the bank to a variety of risks of
deregulated in 1997, they were to be influenced by the default and as a result they fall at times:
market forces and banks could fix their own rates or Therefore. Banks have to keep aside a certain
both lending and deposits. In addition to simplification percentage of capital as security against the
of the structure of the interest rates, concessional rates risk of non-recovery.
of interests and subsidies on loans were to be phased • The Basel committee has produced norms
out called Basel Norms for Banking to tackle this
risk.
3. Directed Investment: The RBI was advised not to use
the CRR as a principal instrument of monetary and

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• Enhanced Minimum Capital & Liquidity be under capitalised, over leveraged and reliant short
Requirements term funding.

Basel I Norms Aim of these measures:

The first Basel Accord, known as Basel I, was issued in Improve the banking sector's ability to absorb shocks
1988 and focused on the capital adequacy of financial arising from financial and economy stress, whatever the
institutions and therefore on credit risk. source

It defined, capital adequacy risk (the risk a financial Improve risk management and governance
institution faces due to an unexpected loss). categorizes Strengthen banks' transparency and disclosures
the assets of financial institution into five risk
categories (0%, 10%, 20%, 50%, 100%). Banks that The guidelines aim to promote a more resilient banking
operate internationally are required to have a risk system by focusing on four vital banking parameters v
weight of 8% or less. capital, leverage, funding and liquidity.

Based on the Basel norms, the RBI issued similar 6.5.4 Understanding Capital
capital adequacy norms for the Indian banks. According
to these guidelines, the banks had to identify their Tier-1 Adequacy Ratio
and Tier-Il capital and assign risk weights to the assets. Principle: Banks should have adequate amount of its o
Basel II Norms capital to cover risks arising from Bad Assets (Bad
Loans Banks have two types of Capital:
In 2004 refined and reformed version of Basel I was
published. A. Tier-1 Capital
The second Basel Accord, known as Basel II focuses on Capital available for the immediate use by the ban
three main areas: supported by the promoters or depositors.

Minimum Capital Requirement which was set at 8% of It can absorb losses without a bank being required cease
Risk weighted assets. trading.

Supervisory Review by Central Bank to money bank's This is the core measure of a bank's financial strength
capital adequacy and internal assessme process. from a regulator's point of view (this is the most reliable
form of capital).
Market Discipline by effective disclosure encourage
safe and sound banking practices It consists of:

In India, RBI had set a standard of minimum 9% CRA • Equity Shares

in comparison to minimum 8% CRAR Similarly, BCBS • Cash Reserve Ratio and Excess Reserves with
had set minimum Tier 1 CRA requirement at 4.5% but RBI
RBI has given a target of 6% That means RBI has • Funds infused by the promoters (e.g.
always taken a more conservative view and set Capital Government infusing capital into the banks)
Adequacy standards higher the International
Requirements. Tier 1 is subdivided into Common Equity Tier-1 (CET-
1) and Additional Tier 1 (AT-1) capital Common Equity
Basel III Norms
Tier 1 capital includes equity instruments where returns
Basel III guidelines were released in December 20 The are linked to the banks' performance and therefore the
financial crisis of 2008 was the main reason behind the performance of the share price. They have no maturity.
introduction of these norms.
Additional Tier-1 capital are perpetual bonds which
Basel III is a comprehensive set of reform measure carry a fixed coupon payable annually from past or
aimed to strengthen the regulation, supervision and r present profits of the bank. They have no maturity, and
management of the banking sector, which was though to their dividends can be cancelled at any time.

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Together, CET and AT-1 are called Common Equity. 6.5.5 Terms Related to Capital
Under Basel III norms, minimum requirement for
Common Equity Capital has been defined. Adequacy Ratio
B. Tier-2 Capital A. Provisioning Coverage Ratio (PCR)
It can absorb losses in the event of a winding-up and so Under the RBI's provisioning norms, the banks are
provides a lesser degree of protection to depositors. required to set aside certain percentage of their profits
in order to cover risk arising from NPAs. It is referred to
Tier I capital is secondary bank capital (the second most as "Provisioning Coverage ratio (PCR)". It is defined in
reliable forms of capital). This is related to Tier 1 terms of percentage of loan amount and depends upon
Capital the asset quality. As the asset quality deteriorates, the
PCR increases. The PCR for different categories of
This capital is a measure of a bank's financial strength
assets is as shown below:
from a regulator's point of view.
• Standard Assets (No Default): 0.40%.
• Tier 2 capital is considered less reliable than Tier 1
capital because it is more difficult to accurately • Sub-standard Assets (90 days and less than 1
calculate and more difficult to liquidate. year): 15%.
• Doubtful Assets (greater than 1 year): 25%-
It is also called 'Capital on Call' 40%.
It consists of: reliable than Tier 1 capital because it is • Loss Assets (Identified by Bank or RBI):
more difficult to accurately calculate and more difficult 100%
to liquidate.
B. Liquidity Coverage Ratio (LCR)
Statutory Liquidity Reserve (SLR) Investment.
A failure to adequately monitor and control liquidity
•Secured Debentures of other institutions. risk led to the Great Financial Crisis in 2008. To
Loans extended to other banks with 100% collateral. improve the banks short-term resilience to liquidity
shocks, the Basel Committee on Banking Supervision
Cash in hand and bonds of other institutions (BCBS) introduced the LCR as part of the Basel III
(securitised). post-crisis reforms.

C. Tier-3 Capital The LCR is designed to ensure that banks hold a

sufficient reserve of High-Quality Liquid Assets
It is considered the tertiary capital of the banks which (HQLA) to allow them to survive a period of significant
are used to meet/support market risk, commodities risk liquidity stress lasting 30 calendar days.
and foreign currency risk. It includes a variety of debt
other than Tier 1 and Tier 2 capitals. HQLA are cash or assets that can be converted into cash
quickly through sales (or by being pledged as collateral)
Tier 3 capital debts may include a greater number of with no significant loss of value. The LCR requires
subordinated issues, undisclosed reserves and general banks to hold a stock of HQLA at least as large as
loss reserves compared to Tier 2 capital. expected total net cash outflows over the stress period
of 30 days.
To qualify as Tier 3 capital, assets must be limited to
250 per cent of a bank's Tier 1 capital, be unsecured,
subordinated and have a minimum maturity of two
years. Total net cash outflows are defined as the total expected
cash outflows minus the total expected cash inflows
Example: Considering the example below, the loan arising in the stress scenario.
amount given in each sector is to be multiplied with the
presumed risk percentage of specific sector. The product LCR = (Stock of High Quality Liquid Asset amount
gives the amount of risk weighted assets. In this case, (HQLA)/ Total net cash flow amount) 100%
the same is 760.
C. Leverage Ratio (LR)

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The Basel Committee on Banking Supervision (BCBS) default increases, prompting more people to withdraw
introduced Leverage ratio (LR) in the 2010 Basel III their deposits.
package of reforms.
F. Additional Tier-1 Bond and Yes Bank Crisis
The Formula for the Leverage Ratio is:
AT-1 bonds are a type of unsecured, perpetual bonds
LR= (Tier 1 Capital/ Total Consolidated Assets) x100 that banks issue to shore up their core capital base to
meet the Basel-Ill norms.
Where, Tier 1 capital represents a banks equity.
There are two routes through which these bonds can be
It is to be noted that the Tier 1 capital adequacy ratio
acquired:
(CAR) is the ratio of a bank's core tier 1 capital to its
total risk-weighted assets. On the other hand, leverage
ratio is a measure of the banks core capital to its total
assets. Initial private placement offers of AT-1 bonds by banks
seeking to raise money.
Thus, the Leverage ratio uses tier 1 capital to judge how
leveraged a bank is in relation to its consolidated assets Secondary market buys of already-traded AT-1 bonds.
whereas the tier 1 capital adequacy ratio measures the
AT-1 bonds are like any other bonds issued by banks
banks core capital against its risk-weighted assets.
and companies, but pay a slightly higher rate of interest
D. Countercyclical Capital Buffer (CCCB) compared to other bonds. These bonds are also listed
and traded on the exchanges.
Following Basel-Ill norms, central banks specify certain
capital adequacy norms for banks in a country. The Investors cannot return these bonds to the issuing bank
CCCB is a part of such norms and is calculated as a and get the money. However, the issuing banks have the
fixed percentage of a bank's risk-weighted loan book. option to recall AT-1 bonds issued by them Banks
issuing AT-1 bonds can skip interest pay-outs for a
The key respect in which the CCCB differs from other particular year or even reduce the bonds' face value. In
forms of capital adequacy is that it works to help a ba March 2020, RBI imposed moratorium of Yes Bank,
counteract the effect of a downturn or distressed forcing it to cancel AT-1 bonds due to its inability to
conditions. economy payback the investors.

With the CCCB, banks are required to set aside a high AT1 bonds are regulated by RBI If the RBI feels that a
portion of their capital during good times when loan are bank needs a rescue, it can simply ask the bank to write
growing rapidly, so that the capital can be release and off its outstanding AT-1 bonds without consulting
used during bad times, when there's distress in th sectors.
economy
RBI's Regulations Over Banks
Although the RBI had proposed the CCCB for India
banks in 2015 as part of its Basel-Ill requirements, it In a situation where a bank faces severe losses leading
hasm actually required the CCCB to be maintained, to erosion of regulatory capital, the RBI can decide it
keeping the ratio at zero percent ever since. the bank has reached a situation wherein it is no longer
viable.
This is based on the RBI's review of the credit-GDP ga
the growth in GNPA, the industry outlook assessment The RBI can then activate a Point of Non-Viability
index, interest coverage ratio and other indicators, as Trigger (PONV) and assume executive powers of the
par of the first monetary policy of every financial year. bank

By doing so, the PPL down to get the bank the existing
E. Bank Run
man additional capita.
It occurs when a large number of customers of a bark or
However, active down of the AT-
other financial institution withdraw their deposits
simultaneously over concerns of the bank's solvency As Then I think we need to do something about it through
more people withdraw their funds, the probability d the Banking Regulation Act, 1949.

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6.6 Challenges in Banking Sector controls. including its corporate governance

and accounting processes
6.6.1 Fraud Cases in Public Sector • They ensure compliance with laws and
regulations. help maintain accurate and timely
Banks financial reporting and data collection.
Public Sector Banks (PSBs) have been reviewing loant • Non-cooperation of borrowers during forensic
accounts and are expected to report more fraud cases in audits. Inconclusive audit reports.
accounts which have earlier been put under their Early • Lack of decision making in Joint Lenders'
Warning Signals (EWS) system. The Reserve Bank of meetings account.
India (RBI) developed the EWS framework as it noticed
a delay in the detection and reporting of banking frauds. Measures to Overcome such Frauds:
The objective of the EWS framework is to prevent and • The EWS (Early Warning System) mechanism
detect these offences, to provide timely reporting to is getting revamped alongside the
regulators and to initiate staff accountability strengthening of the concurrent audit function,
proceedings Thereby ensuring that the operations and with timely and conclusive forensic audits of
risk-taking ability of the banks is not impacted. borrower accounts under scrutiny.
The total cases of frauds (involving 1 lakh and above) • RBI is engaged in interlinking various
reported by banks and financial institutions shot up by databases and information systems to improve
28% by volume and 159% by value during 2019-20 fraud monitoring and detection.
despite the Reserve Bank of India (RBI) tightening the • Online reporting of frauds by the Non-Banking
supervision and vigilance. Financial Companies (NBFC) and the Central
Fraud Registry (CFR) portal of Scheduled
PSBS topped the fraud table with 4,413 cases involving
Commercial Banks (SCBs) augmented with
1,48,400 crores. Private banks reported 3,066 frauds
involving 34,211 crores. new features is operational. RBI has put in
place CFR, which is a searchable database to
Current Scenario: Banks are going through their help banks detect instances of fraud by
accounts which were put on alert earlier. They will borrowers early on.
report fraud wherever such instances are found in case
of large accounts and make 100% provision against 6.6.2 Rising NPAs
them. These are being reviewed thoroughly to ensure
that banks have adequately provisioned balance sheets. A. Introduction of NPA
The average lag between the date of occurrence of A nonperforming asset (NPA) is a loan or advance for
frauds and their detection by banks and financial which the principal or interest payment remained
institutions was 24 months during 2019-20 After overdue for a period of 90 days.
forensic audit and investigation into these accounts,
diversions and other issues were found. Special Mention Account (SMA): It is an account which
exhibiting signs of incipient stress resulting in the
RBI defines diversion of funds as utilisation of short- borrow defaulting in timely servicing of her debt
term working capital funds for long-term purposes not obligations, thoug the account has not yet been
in conformity with the terms of sanction: deploying classified as NPA as per t extant RBI guidelines. SMAS
borrowed funds for purposes/activities other than those show symptoms of bad as quality and have potential to
for which the loan was sanctioned; and transferring become an NPA/Stressed Asset the banks. The Net NPA
borrowed funds to subsidiaries/group companies or is calculated as Gross NPA min.
other corporates by whatever modalities.
C. Reasons for Increasing NPAs
Reasons for Bank Frauds:
• Over-optimism of Banking Sector: A larger
• Weak implementation of EWS by banks
number of bad loans originated in the period
• Non-detection of EWS during internal audits
2006-2008 when economic growth was strong,
Internal audits evaluate a company's internal

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and previous infrastructure projects such as • Wilful Defaulters: There has been increase in
power plants had been completed on time and the number of wilful defaulters, who have
within budget It is at such times that banks did failed to repay back the loans in spite of having
not follow diligence in extending fresh loans the capability to do so. This can be attributed
anticipating future economic growth. to lack of proper mechanism to deal with
• Slow-Growth: The financial crisis of 2008 led wilful defaulters.
to slower economic growth which in turn • Red-Tapism: Delays in government approvals
affected the profits of the companies and led to increase in the number of stalled
reduced their ability to pay back the loans on projects.
time • Lack of Policy foresight: Delay in formulation
• External Factors: To counter the aftermath of of Insolvency and bankruptcy code for faster
the financial crisis and declining growth, major resolution of NPAs
central banks globally adopted the easy money • Frauds: The system has been ineffective in
policy which also resulted in easy liquidity in bringing even a single high profile fraudster to
emerging markets such as India. This book. It was only after the NPA crisis, the RBI
phenomenon pushed up asset prices and led to set up a fraud monitoring cell to coordinate the
inflation. early reporting of fraud cases to the
• Regulatory and Policy Risks: The past few investigative agencies
years in India saw a volatile regulatory • Ineffective Recovery Tribunal: There has been
framework which built stress in certain undue delay in the resolution of cases before
industries. Some examples include Mining ban the debt recovery tribunals leading to higher
in certain southern Indian states, Decision to NPAs
cancel and re-auction the telecom airwaves etc. • Political Interference in working of PSBS: The
This caused significant financial and operating NPAs are mainly concentrated in the Public
stress in companies engaged in the mining, Sector Banks which could be linked to their
telecom and infrastructure sectors which had a poor governance and political interference.
cascading effect on overall investments in the • Priority Sector Lending: The lending by the
Indian economy. Banks to priority sectors such as Agriculture
• Industry Specific Risks: There are industry- and MSMES has also contributed to NPAs.
specific reasons that cause a rise in NPA levels • Credit Culture: The announcement of farm
in India. Sectors which are seeing increased loan waivers by the Central Government and
stress are aviation, textile and telecom among various State Governments has affected the
others. The higher NPAs in aviation sector credit culture in India.
could be attributed to high cost of aviation • Lack of Integrated database on Credit
turbine fuel which accounts for 45% of total Information: Presently, the credit related
operating costs, as compared to the global information is captured by multiple agencies
average of 30%. Similarly, Increasing without proper coordination. Further, the RBI's
competition and consequently irrational pricing proposal to create Public Credit Registry faces
behaviour among telecom players has led to legal challenges.
higher stress levels.
• Poor Credit Appraisal System: The Banks have D. Impact of NPAs
not developed sufficient capability to
undertake credit appraisal before giving loans. • Profitability: On an average, banks are
• Diversion of Loans: The poor end-use providing around 25% to 30% additional
monitoring system of the Banks has led to provision on incremental NPAS which has
diversion of funds by the companies for other direct bearing on the profitability of the banks
wasteful purposes. • Asset (Credit) contraction: The increased
NPAs put pressure on recycling of funds and
reduces the ability of banks for lending more

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and thus results in lesser interest income. It 1. Overleveraged Companies: Debt accumulation on
contracts the money stock which may lead to companies is very high and thus they are unable to pay
economic slowdown. interest payments on loans. 40% of corporate debt is
• Liability Management: In the light of high owed by companies who are not earning enough to pay
NPAs, Banks tend to lower the interest rates on back their interest payments. In technical terms, this
deposits on one hand and likely to levy higher means that they have an interest coverage ratio less than
1. This debt accumulation is often due to stalled projects
interest rates on advances. This may become
and poor demand (as in the case of Pandemic), this
hurdle in smooth financial intermediation
leads to inability of companies to pay off their debt.
process and hampers banks' business as well as
economic growth. 2. Bad-Loan-Encumbered Banks: Non Performing
• Capital Adequacy: As per Basel norms, banks Assets (NPA) of the banks is 9% for the total banking
are required to maintain adequate capital on system of India. It is as high as 12.1% for Public Sector
risk- weighted assets. Every increase in NPA Banks. As companies fail to pay back principal or
level adds to risk weighted assets which interest, banks are also in trouble. Rising NPAs leads to
requires the banks to shore up their capital base reduced incomes from assets (ROA) which necessitates
increased provisioning and declining profits making
further. In case of PSBS,it may put additional
banks risk averse and reluctant to lend.
burden on the Government f recapitalization of
PSBS. The Economic Survey 2015-16 has suggested a 4-D
• Shareholders' confidence: The increased NPA model for the banking sector to face competition in the
level is likely to have adverse impact on the changed environment.
bank business as well as profitability thereby
It has also suggested '4R approach to comprehensively
the shareholders do receive a market return on resolve the Twin Balance Sheet problem which means
their capital and sometime it may erode their Banks marred with NPAs and corporate houses hit by
value of investments. losses.
• Public confidence: Credibility of banking
system also affected greatly due to higher level 6.7 Four R Resolution Process
NPAs because it shakes the confidence of
general public in soundness of the banking 6.7.1 Recognition of Stressed Assets
system. Thus, the increase incidence of NPAs
not only affects the performance the banks but Loss Recognition: The RBI has mandated the banks to
also affect the economy as a whole. carry out Asset Quality Review (AQR) in order to know
the true status of their Balance Sheets and prevent them
• In a nutshell, the high incidence of NPA has
from ever greening of loans. Ever-greening of loans
cascading impact on all important financial
refer to the process of giving a loan to a debtor to repay
ratios of the banks viz., Ne Interest Margin,
earlier loan.
Return on Assets, Profitability. Divider Pay-
out, Provision coverage ratio, Credit Identification of Incipient Stress: The RBI has
contraction etc which may likely to erode the mandated the Banks to identify the incipient stress in
value of all stakeholder including their loans by classifying Special Mention Account
Shareholders, Depositors, Borrowers, (SMA) into 3 different categories so as to enable the
Employee and public at large. Banks to take corrective action before classifying them
as NPAs.
6.6.3 Twin Balance Sheet Problem Collection of Credit Information: The RBI has set up
Central Repository of Information on Large Credits
Twin Balance Sheet Problem (TBS) deals with two (CRILC) on all borrowers having an aggregate exposure
balance sheet problems. One with Indian companies and of 5 crore and above. It was created for early
the other with Indian Banks. recognition of financial distress, enabling prompt action
Thus, TBS is two-fold problem for Indian economy for resolution and fair recovery for lenders and as part
which deals with: of a framework for revitalising distressed assets in the
economy.

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A. Prompt Corrective Action (PCA) PCA can accelerate the loss of market share and cause
further decline of the position of the public sector banks
PCA is a framework under which banks with weak in the financial system in favour of private banks and
financial metrics are put under watch by the RBI. The foreign banks
RBI introduced the PCA framework in 2002 as a
structured early-intervention mechanism for banks that PCA is seen by government as hindering economic
become undercapitalised due to poor asset quality, or growth therefore is arguing for easier lending policies
vulnerable due to loss of profitability. by relaxing the PCA norms and aligning them to global
norms
PCA is intended to help alert the regulator as well as
investors and depositors if a bank is heading for trouble. The tussle between RBI and government can negatively
impact the image of India as an investment destination.
The idea is to head off problems before they attain
proportions. Essentially PCA helps RBI monitor key B. Supervisory Action Framework (SAF)
performance Crisis indicators of banks, and taking
corrective restore the financial health of a bank. The SAF is like the Prompt Corrective Action (PCA)
framework (which is imposed on commercial banks) for
The PCA framework deems banks as risky if they slip Urban Cooperative Banks (UCBs)
some trigger points-capital to risk weighted assets ratio
(CRAR net NPA, Return on Assets (ROA) and Tier 1 RBI has revised the Supervisory Action Framework
Leverage rat (SAF) for UCBS to ensure expeditious resolution of
financial stress faced by some of the UCBS.
The PCA framework is applicable only to commercia
banks and not to co-operative banks and non-bank. A UCB may be placed under supervisory action
financial companies (NBFCs). It may be noted that the framework when its Net NPAs exceed 6% of its net
21 state-run banks, 11 were placed under the PC advances
framework, out of which as on September 2021, only Net NPAs exceed 6% of its net advances.
thre public sector lenders- Indian Overseas Bank (IOB),
UC Bank and Central Bank of India are under the RBI's Capital adequacy ratio (CRAR) falls below 9%, When it
PC framework. incurs losses for two consecutive financial years or has
accumulated losses on its balance sheet
PCA Measures:
As soon as this threshold is breached, RBI may initiate
RBI can place restrictions on dividend distribution multiple actions, depending on severity of stress, such
branch expansion, and management compensation as
RBI may place restrictions on credit by PCA bank to Requiring UCB to submit a board-approved action plan
unrated borrowers or those with high risks, but doesn't for reducing its net NPAs below 6%
invoke a complete ban on their lending.
Putting restrictions on declaration or payment of
RBI may also impose restrictions on the bank for dividend without prior approval.
borrowings from interbank market. Banks may also not
be allowed to enter into new line: of business. Putting restriction on fresh loans and advances carrying
risk-weights more than 100%. Issuing show-cause
Only in an extreme situation, would a bank be a likely notice for cancellation of banking licence.
candidate for resolution through amalgamation
reconstruction or wind. 6.7.2 Recapitalisation of Banks
Challenges of Placing Banks under PCA: Bank recapitalisation means infusing more capital in
state- fun banks so that they meet the capital adequacy
PCA is an exceptional action and impacts the rating of norms.
the bank as well as consumer confidence This is
detrimental in the long run as it impacts the credit The government, using different instruments, infuses
history of the bank and raises questions about its capital into banks facing shortage of capital. As the
management. government is the biggest shareholder in public sector

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banks, the responsibility of bolstering banks capital state-run banks over four years while they will have to
reserves lies with the government. In the process, the raise a further 1.1 trillion from the markets to meet their
banks can write off the loans if required, taking a big capital requirement in line with global risk norms,
haircut if needed. known as Basel-III in line with the plan, public sector
banks were given 25,000 crore in 2015-16, and similar
Write Off: The NPA (outstanding loan) is removed from amount has been earmarked for the current fiscal.
bank's balance sheet and sold to some other institution Besides, 10.000 crore each would be infused in 2017-18
like Asset Reconstruction Company by taking a haircut. and 2018-19
The difference between waive off and write off is the
fact that in the waive off the loan will not be collected at Recapitalization with 2.11 trillion using recapitalisation
all in the future, whereas in the write off. it will be bonds, budgetary allocation and funds raised from the
collected through other means. market. This decision was taken after the Asset Quality
Review conducted by the Reserve Bank
Haircut Proportional loss incurred by the bank or
creditor due to the non-recovery of loans from the Using funds from the National Investment Fund: This
market. fund is constituted from the sale of the stake in public
sector enterprises i.e., disinvestment.
Need for Recapitalisation: Critical for the Economic
Recovery: Recapitalisation would Enhance loanable Concerns regarding Recapitalisation: The increased
funds available with the banks which will increase budgetary allocation will cause the government to
lending and boost economic growth. This would also breach its fiscal deficit targets. Such a move will hurt
Enable lower interest rates with reduced cost of economic growth and investor confidence in the Indian
borrowing and will give a further boost to productive economy.
capital.
There is a concern that recapitalisation only addresses
Increased Job Opportunities: Recapitalisation would the symptom and not the root of the problem of NPAs.
lead to investments in infrastructure & other projects Thus, without complementary measures (as suggested
which would increase job opportunities in the economy. under Indradhanush scheme) it becomes a political tool
like the farm loan waivers. Recapitalisation serves as a
Tackling Rising NPAs: Capital buffers will improve "temporary cushion" & not a "permanent solution" to
banks' ability to absorb potential large haircuts' taken the PA problem. Not necessarily result in the recovery
under IBC Recapitalisation also Provide a cushion of bad loans.
against an expected rise in provisioning for NPAs.
The ethical concern that poor decisions of the public
Ensuring Capital Adequacy: Recapitalisation enables sector banks will be backed by the money of
the banks to meet higher regulatory capital requirements hardworking taxpayers is a cause of worry for the
under Basel III, in the face of persistent weak earnings general public.
Government Responsibility: Government has the Recapitalisation promotes financial indiscipline, making
important responsibility of keeping the PSBS in healthy banks less accountable and financially irresponsible.
condition and avoid bank runs because it would create a
contagion effect on other sectors. Opportunity cost of public fund, as amount could be
used for other welfare or productive purposes is ignored
Support Inclusive Growth: PSBS are engines of driving when the banks are recapitalised.
inclusive growth through developmental lending in
priority sectors such as MSME, Exports, agriculture and There can be an increase in NPAs as companies will be
to vulnerable groups. more tempted to default due to writing off of loans by
banks. This leads to moral hazard.
Enhanced Equity Capital: Additional capital buffers will
enhance the banks' ability to raise equity capital from Recapitalisation does not directly address the qual of
the market. lending and the cycle of bad lending could go without
other adequate measures such as reforms the
Measures taken by the Government taken to management of banks
Recapitalise Banks: Indra Dhanush Scheme: the
Government had announced to infuse 70,000 crore in 6.7.3 Resolution of NPA's

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A. Insolvency and Bankruptcy Code Indra Dhanush Scheme: the Government had
announced to infuse 70,000 crore in state-run banks
It is a reform enacted in 2016 based on the over four years while they will have to raise a further
Vishwanathan Committee Report. It amalgamates 1.1 trillion from the markets to meet their capital
various laws relating to the insolvency resolution of requirement in line with global risk norms, known as
business firm It lays down clear-cut and faster Basel-III. In line with the plan, public sector banks were
insolvency proceeding to help creditors, such as banks, given 25.000 crore in 2015-16, and similar amount has
recover dues and prove bad loans, a key drag on the been earmarked for the current fiscal. Besides, 10,000
economy. It is also known a the exit law of India. crore each would be infused in 2017-18 and 2018-19
Insolvency: It is a situation where individuals or To set up an Insolvency and Bankruptcy Board of India.
companies are unable to repay their outstanding debt.
Maximization of the value of assets of corporate
Bankruptcy: It is a situation whereby a court of persons.
completer jurisdiction has declared a person or other
entity involve having passed appropriate orders to 1. Rationale for Introduction of IBC: Earlier, there were
resolve it and protect the rights of the creditors. It is a multiple overlapping laws and adjudicating forums
legal declaration of one inability to pay off debts. dealing with financial failure and insolvency of
companies and individuals in India.
The objectives of the Bankruptcy Act are:
This led to undue delays in the recovery of the NPAS by
• To consolidate and amend all existing the Banks. Hence, the IBC Code was introduced to
insolvency laws in India. To simplify and consolidate all the existing laws related to Insolvency
expedite the Insolvency and and Bankruptcy in India and to simplify the process of
• Bankruptcy Proceedings in India. insolvency resolution
• To protect the interest of creditors including Insolvency Professionals: A specialized cadre of
stakeholders in a company. licensed professionals would administer the resolution
• To revive the company in a time-bound process, manage the assets of the debtor, and provide
manner. information for creditors to assist them in decision
• To promote entrepreneurship. making.
• To get the necessary relief to the creditors and
Adjudicating Authorities: The proceedings of the
consequently increase the credit supply in the resolution process would be adjudicated by the National
economy. Companies Law Tribunal (NCLT), for companies; and
• To work out a new and timely recovery the Debt Recovery Tribunal (DRT), for individuals. The
procedure to be adopted by the banks, financial duties of the authorities will include approval to initiate
institutions o individuals. the resolution process, appoint the insolvency
• To set up an Insolvency and Bankruptcy Board professional, and approve the final decision of creditors.
of India.
Committee of Creditors (CoC): During the insolvency
• Maximization of the value of assets of resolution process, a committee consisting of lenders
corporate persons. would be constituted for taking decisions (by voting) on
the resolution process. The CoC may either decide to
1. Rationale for Introduction of IBC: Earlier, there were
restructure the debtor's debt by preparing a resolution
multiple overlapping laws and adjudicating forums
plan or liquidate the debtor's assets. However, such a
dealing with financial failure and insolvency of
decision has to be approved by at least 66% of the votes
companies and individuals in India.
in the committee of creditors. (Earlier, the voting
This led to undue delays in the recovery of the NPAS by threshold for the approval was 75%, but it was reduced
the Banks. Hence, the IBC Code was introduced to to 66% through the IBC Amendment Act, 2019).

Measures taken by the Government taken to Insolvency and Bankruptcy Board: Board would
Recapitalise Banks: regulate insolvency professionals, insolvency
professional agencies and information utilities set up
under the Code. The Board would consist of

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representatives of Reserve Bank of India, and the 1. Lack of operational NCLT benches: Though the
Ministries of Finance, Corporate Affairs and Law. government had, in July 2019, announced setting up of
25 additional single and division benches of NCLT at
1 Insolvency Resolution Process (IRP): When a default various places including Delhi, Jaipur, Kochi,
occurs, the resolution process may be initiated either by Chandigarh, and Amravati, most of these remain non-
the debtor or creditor before the adjudicating authority. operational or partly operational on account of lack of
The NCLT appoints an insolvency professional to proper infrastructure or adequate support staff.
administer the IRP. The Resolution Professional
identifies the financial creditors and constitutes a IBC also induces a Behavioural Change: The Fear
Committee of Creditors (CoC). The CoC would prepare losing control of the company forces the promoters
the resolution plan for the restructuring the loans of the operate at highest level of efficiency. This encourage the
defaulted borrower which may be in the form of borrowers to settle dues at the earliest.
extending the maturity period of the loan, reducing the
rate of interest on loans etc. However, such a resolution 2. Low approval rate of resolution plans: According to
plan has to be approved by at least 66% of the votes in the data from the Insolvency and Bankruptcy Board d
the committee of creditors. India (IBBI), only 60% of the cases have been closed
and the majority of the cases have been closed through
2. Priority of Claims: The Code significantly changes liquidation, only a few cases have been closed due to
the priority waterfall for distribution of liquidation resolution, High number of liquidations is a cause for
proceeds. Insolvency resolution process costs and the major worry as it violates IBC's principal objective d
liquidation costs to be paid in full. Claims of secured resolving bankruptcy.
creditors and workmen dues up to 24 months.
3. Delay in admission of Applications and Approval of
Employees' salaries upto 12 months Financial debt Resolution plans and slow judicial process in India
owed to unsecured creditors Government dues (2 years) allows the resolution processes to drag on, this was the
and unpaid dues to secured creditors. Any remaining same reason for slow recovery under SICA or RBBD.
debt and dues. Equity. .
4. Recovery rates have on an average been low, when
Achievements of the IBC large recovery cases such as Bhushan Steel, Essa Steel
etc. is excluded, the recovery rate of around 35 36% is
IBC is a vast improvement on the two earlier - laws observed.
legislated to recover bad loans the Sick Industrial
Companies (Special Provisions) Act, 1985 (SICA) and B. Insolvency and Bankruptcy (Amendment) Act, 2021
the Recovery of Debts Due to Banks and Financial
The Insolvency and Bankruptcy (Amendment) Act,
Institutions Act, 1993 (RDDB).
2021 introduced an alternate insolvency resolution
The IBC addresses the Chakravyuha challenge of Indian process for Micro, Small and Medium Enterprises
Economy 1991 LPG Reforms has enabled easier entry (MSMEs) with defaults up to 21 crore called the Pre-
of private sector but made the exit difficult. packaged Insolvency Resolution Process (PIRP).

Old Inefficient firms continue to operate with highly The Corporate Insolvency Resolution process involves
efficient firms leading to misallocation. of factors of the following process
production.
This is riddled with the following problems: Promoters
Speedier Resolution: Before IBC, resolution processes lose control of the company.
took an average of 4-6 years, after the enactment of
Large number of companies defaulted not due to poor
IBC, they came down to 317 days Higher Recoveries:
management but due to present economic situation.
Recoveries are also higher: 45% after the IBC, against
Unfair if we take away control of the promoters.
26% before it.
1. Delays in completion of Resolution due to
Ease of doing business: Due to the institution of IBC,
unnecessary litigations.
we have seen that many business entities are paying
2. Lower recovery rates for the creditors.
Challenges for IBC 3. Lack of trust between Creditors and Debtors.
4. The Prepacks work in the following way:

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5. Stressed MSMEs can prepare a plan for economic cycle created due to Twin Balance Sheet
settlement to secured creditors. (TBS) problem.
6. A resolution plan is prepared and submitted to
NCLT for approval An agreement is signed
Need in India:
between existing creditor and new investors. Economic Recovery: With the pandemic hitting the
7. Even after the resolution, existing owners banking sector, the RBI fears a spike in bad loans in the
retain the management. wake of a six-month moratorium it has announced to
8. Benefits of Pre-pack Solvency: Debtor-in- tackle the economic slowdown.
possession ensures minimal disruption to
Government Support: Professionally-run, funded by the
business and jobs. Reduced time and
private lenders and supported by the government, can
litigations.
be an effective mechanism to deal with Non-
9. Decrease in burden on Adjudicating
Performing Assets (NPA). The presence of the
authorities. government is seen as a means to speed up the clean- up
10. Higher value maximisation due to Swiss process.
Challenge method.
11. International Experience: Successful in Rising NPAs: The RBI noted in its recent Financial
countries such as UK, US etc. Stability Report (FSR) that the gross NPAs of the
banking sector are expected to shoot up to 13.5% of
Challenges of Pre-pack Solvency: advances by September 2021, from 7.5% in September
2020. K.V. Kamath Committee noted that corporate
Timeline of 120 days to complete resolution seems sector debt worth 15.52 lakh crore has come under
challenging. stress after Covid-19 hit India, while another 22.20 lakh
crore was already under stress before the pandemic. The
Debtor-in-possession model may militate against the
committee noted that companies in sectors such as retail
Swiss challenge method as the existing management
trade, wholesale trade, roads and textiles are facing
may create hurdles for an outside investor seeking
stress. Sectors that have been under stress pre-Covid
information to potentially invest in the company.
include Non-Banking Financial Company (NBFC),
C. Bad Banks power, steel, real estate and construction.

The Bad Bank is a specialised Asset Reconstruction International Precedents: Many other countries had set
Company that purchases NPAs from Banks and up institutional mechanisms to deal with a problem of
restructures them. The Economic Survey 2016-17 had stress in the financial system.
recommended setting up Centralised Public Sector Arguments in Favor of Bad Bank: Improvement in the
Asset Rehabilitation Agency (PARA) as Bad Bank to balance Sheet of the Banks due decrease in the NPAs.
address the growing problem of NPAs The budget 2021 Unlocking of the capital that was earlier locked
proposed an Asset Reconstruction Company (ARC)- provisioning requirements. This would lead to increas .
Asset Management Company (AMC) structure, wherein up in the credit creation.
the ARC will aggregate the debt, while the AMC will
act as a resolution manager. Enable the Bank to focus on their core areas accepting
deposits and lending loans. The function recovery of
The bad bank is not involved in lending and taking bad loans gets transferred to the special Bad Bank.
deposits. but helps commercial banks clean up their
balance sheets and resolve bad loans. The takeover of Address the problem of coordination and delays in th
bad loans is normally below the book value of the loan recovery of NPAs by multiple Banks. Setting up of Ba
and the bad bank tries to recover as much as possible Bank would enable the multiple Banks to transfer the
subsequently NPAs simultaneously to Bad Bank and improve the
balance sheets.
The Bad Bank has been often been touted as a magic
bullet for reducing NPAs, improving Banks' Balance Arguments against Bad Banks: However, it has to be
sheet, unlocking Bank's capital, increasing the Credit realised that Bad Bank cannot be considered as Panacea
creation and consequently a way out of the vicious to the present problems:

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Moral Hazard: Taxpayer's money would be used bail remaining 51% stake will be with private-sector
out inefficient Banks. Guaranteed takeover NPAs by lenders.
Bad Bank may prevent Banks from exercising due
caution before giving loans. The NARCL-IDRCL structure is the new bad bank
structure.
Pricing of NPAs: If the NPAs are sold at higher prices to
Bad Bank, the Bad Bank itself would fail. If NPAs are Need for NARCL-IDRCL Structure: Existing ARCS
sold at lower prices, the Banks would be required: take have been helpful in the resolution of stressed assets,
higher haircuts. especially for smaller value loans.

No Substantial Impact: Merely leads to transfer of Bad Various available resolution mechanisms, including
Assets from one entity to another. Insolvency and Bankruptcy Code (IBC), have proved to
be useful.
No long-term Impact: Does not address the core
underlying problems which led to increase in NPAs in
first place Without governance reforms, the Public However, considering the large stock of legacy NPAs,
sector banks (accounted for 86%, of the total NPAs may additional options/alternatives are needed and thus, the
go on doing business the way they have been doing in NARCL-IRDCL structure was announced in the Union
the past and may end up piling-up of bad debts again. Budget 2021.
International Experience: As seen in Sweden, Bad Bank Working of NARCL-IDRCL and Guarantee Offered:
works best in case of NPAs in small value housing The NARCL will first purchase bad loans from banks.
loans. However, in case of India, the NPAS are present
across multiple sectors. It will pay 15% of the agreed price in cash and the
remaining 85% will be in the form of "Security
Financing: Difficult to mobilise finances for setting up Receipts".
Bad Bank. Finding buyers for bad assets in a pandemic
hit economy will be a challenge, especially when When the assets are sold, with the help of IDRCL, the
governments are facing the issue of containing the fiscal commercial banks will be paid back the rest.
deficit. Thus, setting up of Bad Bank would only be a
If the bad bank is unable to sell the bad loan, or has to
superficial and band-aid solution to long- term
sell it at a loss, then the government guarantee will be
problems.
invoked.
Framework for Bad Banks in India: For resolution of
This guarantee is extended for a period of five years.
huge NPAs (Non-Performing Assets) in the Indian
Banking sector, the Government of India has set up two
new entities to acquire stressed assets from banks and
6.7.4 Reform
then sell them in the market Need for Reforms in the Public Sector Banks: PSBS
National Asset Reconstruction Company Limited account for 80% of the overall NPAs of the Banking
(NARCL): NARCL has been incorporated under the sector.
Companies Act and has applied to the Reserve Bank of PSB's also suffer from slower credit Growth of hardly
India for a license as an (ARC). NARCL will acquire around 4% in comparison to 15-30% registered by New
stressed assets worth about *2 lakh crore from various private Banks (NPBs). The PSB's also face higher
commercial banks in different phases. losses of around 66,000 crores. This is almost equal to
Public Sector Banks (PSBs) will maintain 51% the budgetary allocation for the Primary Education in
ownership in NARCL. India Debt Resolution Company India. PSB's account for 93% of total frauds.
Ltd (IDRCL) This in turn leads to loss of Taxpayers' money:
Another entity, India Debt Resolution Company Ltd According to the Economic Survey 2019-20, every
(IDRCL), will then try to sell the stressed assets in the rupee of the taxpayers' money which is invested in
market. PSBS and Public Financial Institutes (FIs) will PSBS fetches a market value of 71 paise. On the other
hold a maximum of 49% stake in IDRCL. The hand, every rupee invested in NPBS fetches a market
value of 23.70 ie, more than five times as much value as

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that of a rupee invested in PSBs. This further disproportionately under-developed given the size of its
perpetuates in form of lower efficiency in the form of economy.
lower Return on Assets, Return on equity and indicators
like capital adequacy ratio Government's Monopoly: The Government ownership
in the PSBS, which account for almost 70% of the
Challenges of PSBs: Banking assets has led to a kind of virtual monopoly
which is reducing the competition, breeds inefficiency
PSBS enjoy less strategic and operating freedom and thus hurts the overall growth of the Banking Sector.
because of majority government ownership.
Previous Experience: The Strategic disinvestment has
Government exercises significant control over all led to increase in overall efficiency gains which later
aspects of PSBS operations ranging from policies on translated into higher returns for the shareholders.
recruitment and pay to investments and financing and Possibility of Leveraging MFIs and NPBS for Social
bank governance including board and top management causes such as DBT, MGNREGA Wages, Pradhan
appointments. Mantri Jan Dhan Yojana etc.
Implicit promise of bailout of bank liabilities which is Reduce the burden on the Government by doing away
an implicit cost to the taxpayer. with the need for undertaking their recapitalisation to
comply with the higher BASEL III requirements.
PSB officers are subjected to extra scrutiny by the
Central Vigilance Commission and CAG. Officers are No benefit due to Nationalisation of Banks as shown.
wary of taking risks in lending or in renegotiating bad below:
debt, due to fears of harassment under the veil of
vigilance investigations. Arguments Against Privatisation of PSBS: The main
reason for the lower efficiency of the PSBS is actually
High operating costs. the Government's political intervention in the
functioning of the PSBS, which is in turn leading to
Recruitment processes of PSBS hinder them from
lack of autonomy and freedom to the PSBS and thus
campus hiring.
hurting their revenues. the solution to improve the
A. Reform efficiency of the PSBS is no privatisation, rather a
complete overhaul of the Governance framework.
1: Privatisation of Banks
Some of the external constraints faced by the PSBS
Privatization of banks simply means less active and which is leading to their poor efficiency include: Dual
direct participation of the Central Government in the regulation by the Finance Ministry and RBI
day-to-day activities of the banks. In effect, the majority
The Finance Ministry's directives could be bo explicit
stake held by the Central Government is the PSB will
(through the issue of guidelines) and through
be offloaded in favour of private investors. For banks, it
undocumented suasion. However, the Private sect banks
means more competition in the market and lesser to
are free from dual regulation.
negligible financial dependence on government funds.
Board Constitution: The appointment to the Boards the
Arguments in Favour for Privatisation of Existing
Banks is mainly based on Political considerations
Public Sector Banks (PSBS):
without giving due-emphasis on merit. Average tenure
Privatisation is envisaged to have the following of Chairmen and Executive Directors are short, all
benefits: which lead to the weak empowerment of boards.

Improve the Overall Efficiency of Banking Sector: External Vigilance enforcement through the CVC are
Even though, the PSBS and NPBS are operating in the CBI inhibits the PSBS from taking commercial risi
same domestic market, the PSBS are considered to be which are otherwise deemed acceptable. Further there is
less efficient and thus leading to loss of taxpayers' higher focus on adherence to procedures and rules
money. rather than outcomes leading to red-tapism and slow
decision making.
Increased Competition Leading to Development of
Large-sized Banks: India's banking sector is

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Privatisation may not Solve the Problems: It is to be capital requirements stipulated under the BASEL III
realised that even all the new private banks (NPBS) are Norms
no efficient. The balance sheets of the existing NPBS
are as poor as the PSBs. The case in the point is the Significant Cost Benefits from Synergies: Larger
recent Yes Bank Crisis. Similarly, number of Banking distribution network of the amalgamated bank will
frauds of much higher value have come to light even in reduce operating and distribution costs with benefits for
the NPBS as well So, it is not the ownership structure its customers and their subsidiaries. All merged banks in
that determines the efficiency levels of the Banks. a particular bucket share common Core Banking
Rather, it is the quality d Governance framework and Solutions (CBS) platform synergizing them
effective regulation which is a key to promote technologically
efficiency of the PSBs. Risks and Challenges of Bank Mergers: Systemic Risk:
B. Reform 2: Merger of Banks Recent Mergers of Bank: The 2008 crisis highlighted that presence of large
A total of 10 public sector banks have been merged into financial institutions pose systemic fisk to the economy
4 big banks making a total of 12 PSBs (from 27). and such institutions are "too big to fail. Further, in
event of any such crisis in future, the onus would lie on
SBI & its subsidiaries - State Bank of Bikaner and the government to bail out the institutions, thus posing a
Jaipur (SBBJ), State Bank of Hyderabad (SBH), State moral hazard.
Bank of Mysore (SBM), State Bank of Patiala (SBP)
and State Bank of Travancore (SBT) Human Resource Integration: Many employees would
fear job loss and disparities in the form of regional
Bank of Baroda Vijaya Bank and Dena Bank - (3rd allegiances, benefits. reduced promotional avenues, new
largest bank by loans). Anchor Bank Bank of Baroda culture, etc.
Need For Consolidation of PSBs:
Affect Financial Inclusion: Consolidation may lead to
Fragmented Banking Structure in India: Indian banking shutting down of overlapping branches of the entities
sector is highly fragmented especially in comparison being merged
with other key economies Additionally. most of the
PSBS in India are competing within themselves most of Technological Challenges: Various banks are currently
them have same business models and compete in the operating on different technology platforms Adverse
same segments as well as same geographies Thus, there Impact on Big banks: Forced mergers of the weaker
is a huge scope of consolidation in this sector Bank with stronger banks would adversely affect the
operations of the strong banks
Build Capacity to Meet Credit Demand: India needs to
have global sized banks that can support the investment Customer Retention: SBI's recent merger with its
needs of economy and sustain economic growth The associate banks saw customers of associate banks
Consolidation of Public Sector Banks into 4 or 5 banks opting to move their business to rival lenders
would create larger banks with capacity to fund larger Low Positive Correlation between Size and Efficiency:
size projects of economic importance The merger of PSBS is undertaken on an assumption
Need for Larger Capital Base to Manage NPAs: The that a large sized bank would be more efficient than a
Public Sector Banks (PSBS) which form approximately small sized bank In case of India some of the small
72% of the Indian banking system are among the most sized banks are considered to be much more efficient
affected by the high non-performing asset (NPA) than the large sized Public Sector Bank
problem. The consolidation of PSBS would lead to a
C. Reform
larger capital base to manage the NPAs. Merger of weak
Bank with the strong bank would prevent failure of 3: Technological Upgradation of Banks
weak Banks
Banks and Financial Institution need to make enough
Benefits for the Government: Reduce the financial investment in technology upgradation for survival in the
burden on the Government on undertaking frequent era of digital banking. The following initiatives have
recapitalization of the Public Sector Banks. It would been taken for making rapid strides in adoption of
also help the Government in meeting the stringent digital technology

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1. SWIFT -The Society for Worldwide Interbank Lack of design of risk mitigation mechanisms
Financial Telecommunication (SWIFT) provides a
network that enables financial institutions worldwide to 1. Bank Boards Bureau (BBB) Formation: The
send and receive information about financial government, in 2016, approved the constitution of the
transactions in a secure, standardized and reliable BBB as a body of eminent professionals and officials to
environment. make recommendations for appointment of whole-time
directors as well as non- executive chairpersons of
Established in 1973, SWIFT uses a standardized Public Sector Banks (PSBS) and state-owned financial
proprietary communications platform to facilitate the institutions.
transmission of information about financial
transactions. It is an autonomous recommendatory body. The
Ministry of Finance takes the final decision on the
SWIFT neither holds funds on its own nor manages appointments in consultation with the Prime Minister's
external client accounts SWIFT is headquartered in Office.
Belgium .Prior to SWIFT, the only reliable means of
message confirmation for international funds transfer Functions: Apart from recommending personnel for the
was Telex. It was discontinued due to a range of issues PSBS, the Bureau has also been assigned with the task
such as low speed, security concerns, and a free of recommending personnel for appointment as
message format. directors in government-owned insurance companies.

2. E-Kuber- e-Kuber is the Core Banking Solution of It engages with the board of directors of all the public
the Reserve Bank of India which was introduced in sector banks to formulate appropriate strategies for their
2012. growth and development.

Core Banking Solutions (CBS) can be defined as a It is tasked with improving corporate governance at
solution that enables banks to offer a multitude of public sector banks, building capacities, etc. The Banks
customer-centric services on a 24x7 basis from a single Board Bureau is a public authority as defined in the
location, supporting retail as well as corporate banking Right to Information Act, 2005.
activities. Arguments Against: As per the Nayak committee
The centralisation thus makes a "one-stop" shop for recommendations, all banks will run only with 'profit-
financial services a reality. Using CBS. customers can motive, no one will setup branches in villages and it
access their accounts from any branch, anywhere, would be detrimental to financial inclusion.
irrespective of where they have physically opened their Most of the banking crisis in recent times have been
accounts. because of banks and financial conglomerates outside
Almost all branches of commercial banks, including the Government control.
Regional Rural Banks (RRBs), are brought into the Arguments in Favour:
core-banking fold. The e-kuber system can be accessed
either through INFINET or Internet. More professionalism in decision making where bad
assets are on the rise and the need for capital is
D. Reform essential.
4: Governance Issues RBI committee on governance of Need for capital infusion in PSBS would be reduced.
bank boards highlight some major governance issues in
the PSBS: Enhanced quality of directors in the bank would
improve the governance and accountability of
Concentrate more on tactical issues rather that independent directors in decision making.
strategy/risk
2. EASE Reform Agenda: It is a common reform
Board deliberations are driven from the point of view of agenda for PSBS and is aimed at institutionalizing
compliance rather than business economics CLEAN and SMART banking Launched in January
2018. It was commissioned through Indian Banks'
General absence of a focussed approach towards
Association and authored by Boston Consulting Group.
resolution of problem of NPAS
It was launches in 4 stages, the latest one EASE 4.0

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EASE 4.0 commits PSBS to tech-enabled, simplified NBFC cannot accept demand deposits. NBFCs do not
and collaborative banking to further the agenda of form part of the payment and settlement system and
customer-centric digital transformation. The themes in cannot issue cheques drawn on itself.
EASE 4.0 include 24x7 Banking, Focus on North-East,
Leveraging Fintech Sector, Export Promotion, Digital Deposit insurance facility of Deposit Insurance and
Loans to Agricultural Sector etc. Credit Guarantee Corporation is not available to
depositors of NBFCs.
The EASE 1.0 report showed significant improvement
in PSB performance in resolution of Non-Performing B. Financial Fragility in the NBFC Sector
Assets (NPAs) transparently.
Shadow banking comprises a set of activities, mark
EASE 2.0 was built on the foundation of EASE 1.0 and contracts and institutions that operate partially outside
introduced new reform Action Points across six themes the traditional commercial banking sector are either
to including responsible Banking Customer lightly or not regulated at all Shadow bark sector has
Responsiveness, Credit Off-take, PSBs as UdyamiMitra grown significantly in India and accounts for significant
(SIDBI portal for credit management of MSMEs), proportion of financial intermediation especially in
Financial Inclusion & Digitalisation those segments where traditional banking sector unable
to penetrate. Three important segments of shas banking
EASE 3.0 seeks to enhance ease of banking in all system in India: or Non-Banking Housing Finance
customer experiences, using technology viz. Dial-a- Companies (HFCs) Retail Non-Banking Financial
loan and PSBloansin59minutes.com, Partnerships with Companies (Re NBFCs)
FinTechs and E-commerce companies, Credit@click.
Tech-enabled agriculture lending, EASE Banking Liquid Debt Mutual Funds (LDMFS)
Outlets etc.
The NBFC sector in India has been roiled by a series
defaults by the Infrastructure Leasing & Financial
Service (IL&FS) group of companies. The NBFC's
crisis has a been called as India's "Lehman Moment"
6.8 Non-Banking Finance since it co have had "contagion impact" on the entire
Indian Economy due to the exposure of IL&FS to
Companies various banks and finance Institutions.
A Non-Banking Financial Company (NBFC) is a
company registered under the Companies Act, 1956
C. Problems in the NBFC Sector
engaged in the business of loans and advances, A large number of NBFCS have defaulted in payment
acquisition of shares/stocks/bonds/debentures/securities obligations of bank loans, commercial paper and inter
issued by Government or local authority or other corporate deposits Consequent to defaults, credit rating
marketable securities of a like nature, leasing, hire- agencies have downgraded the ratings of the financial
purchase, insurance business, chit business but does not instruments issued by the NBFCs. A large number of
include any institution whose principal business is that banks and Mutual Fund companies have lent their
of agriculture activity, industrial activity, purchase or money to the NBFCs and hence the default on the
sale of any goods (other than securities) or providing repayment of loans would have adverse impact on the
any services and sale/ purchase/construction of entire financial sector leading to "Contagion impact
immovable property.
D. Reasons for the NBFC Crisis
A non-banking institution which is a company and has
principal business of receiving deposits under any 1. Asset-Liability Mismatch: The NBFCs such as
scheme or arrangement in one lump sum or in IL&FS depend on short term loans (through issuance of
instalments by way of contributions or in any other Commercial Paper) to lend money for infrastructure
manner, is also a non-banking financial company projects. The gestation period of such infrastructure
(Residuary non-banking company). projects is around 10-15 years. This leads to Asset -
Liability Mismatch.
A. Features of NBFCS
2. Roll over Risk: The ALM in NBFC sector leads to
redemption pressure on the mutual funds. Faced with

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redemption pressures, the LDMF sector is reluctant to Equity Market: Sell-off of the shares of the NBFCs
roll over loans to the NBFC sector (Rollover Risk). leading to rapid fall in the share prices of the NBFCS
causing a liquidity crunch in the NBFC sector. such as IL&FS, DHFL etc.

3. Increase in the Rates of Interest: The short-term Debt Market: Default by the NBFCs makes it difficult
interest rate of the commercial papers has increased for other companies from raising money from the debt
sharply in the recent times leading to increase in the market.
cost of borrowing for the NBFCs.
5. Mutual Fund Companies: Face redemption pressure
4. Complex Structure: Most of the NBFCs have and find it difficult pay back the investors' money. Due
complex business structure spanning multiple sectors to these crises, the credibility of credit rating agencies
which makes it extremely difficult to audit their takes a hit.
accounts and regulate them efficiently. For example,
IL&FS has 27 direct subsidiaries and 159 indirect F. Prevention of Such Crisis in Future
subsidiaries.
1. Integrated Monitoring of NBFCS: The present crisis
5. Delays and Cost Over Runs in Infrastructure Projects: would have not arisen had we put in place institutions
The Infrastructure projects in India face various that monitor and regulate systemic risks such as a
constraints such as delay in land acquisition, systemic-risk regulator. In this context, the Financial
environmental clearances, cost escalation etc. This is Sector Legislative Reform Commission (2012) had
has in turn adversely affected IL&FS as well. recommended to create Financial Data and
Management Centre to collect data across the sectors
6. Vicious Circle: The Banks have been reluctant to lend and monitor systemic risk.
loans to the NBFCs after the default by the bigger
NBFCs such as IL&FS. On similar lines, there has been 2. Strengthening Credit Ratings: The Credit rating.
drastic fall in the demand of the bonds and commercial agencies must take into account financial position of the
papers of the NBFCs among the financial entities. NBFCS before rating their financial instruments.
Earlier the NBFCs were able to roll-over their debt Further, they must also provide the rationale for their
(take loans to repay back previous loans). However, this credit ratings.
vicious cycle has made it difficult for the NBFCS to
3. Addressing Asset-Liability Mismatch (ALM):The
fulfil their debt obligations.
NBFCs need to maintain sufficient amount of liquidity
7. Lack of Integrated Regulation: Presently, the NBFC to avoid ALM. In this regard, the recent RBI's
Sector is regulated by multiple regulators such as RBI, guidelines on extending Liquidity Coverage Ratio
IRDA, SEBI etc due to which the it makes it difficult (LCR) to NBFCs is a step in the right direction.
for a single regulator (such as RBI) to have the
4. Reducing over-exposure to NBFCs: There is a need
complete picture of the finances of the NBFCS
to ensure that the Banks and Mutual Fund companies
Impact of the NBFC Crisis on the Economy are not over-exposed to the NBFCs in term of their loan
portfolios.
Banking Sector: The NPA crisis would lead to an
increase in NPAs, which would require higher 5. Early Warning Signals: Regulators can employ
provisioning, this would lead to an decrease in credit Health Score Methodology (something similar to
creation. This will eventually lead to economic Prompt Corrective Action used for Banks) to detect
slowdown early warning signals of impending rollover risk
problems in individual NBFCs. Downtrends in the
Infrastructure Financing: Further, NBFCs such as Health Score can be used to trigger greater monitoring
IL&FS have provided finance for major infrastructure of an NBFC
project such as Chenani-Nashri Tunnel. Thus, going
forward, the NBFC crisis would have adverse impact on When faced with a dire liquidity crunch situation,
infrastructure financing in India. regulators can use Health Score as a basis for optimally
directing capital infusions to deserving NBFCs to
-Loans to the MSMES: Affect the credit creation and ensure efficient allocation to scarce capital. Prudential
hence the associated investment expenditure and thresholds can be set on the extent of wholesale funding
employment creation.

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that can be permitted for firms in the shadow banking Hassle-free banking services Soothing user interface
system. Innovation-first attitude Advanced security level
Supporting Clients
Concentration of bad assets in a handful of sectors
increases the risk for the banking system as default in C. Pros of Neobanks
one sector can put significant pressure on the balance
sheet of several banks. Further, since the banking and Low costs: Fewer regulations and the absence credit
the financial system is highly interconnected, the failure risk allows neobanks to keep their costs low Products
of one bank, or some banks, is likely to affect the are typically inexpensive, with no month maintenance
stability of other banks. This interdependence is fees.
measured by the Banking Stability Index.
Convenience: These banks offer customers the majority
The Reserve Bank of India (RBI) defines Banking (if not all) of banking services through an app
Stability Index (BSI) as the expected number of banks
Speed: Neobanks allow customers to set up accounts
that could become distressed given that at least one
quickly and process requests speedily. Those the offer
bank has become distressed.
loans may skip the usual time-consume application
processes in favour of innovative strategy for evaluating
6.9 Contemporary Topics in your credit.
Banking D. Cons of Neobanks -Regulatory Hurdles: Since the
RBI doesn't yet recognise neobanks as such, officially
6.9.1 Neo Banks customers may not have any legal recourse or a defined
Neobanks are financial institutions that give customers process in case of an issue
cheaper alternative to traditional banks. They are dig Impersonal: Since neobanks don't have a physical
banks without any physical branches, that levera branch, customers don't have access to in-person
technology and artificial intelligence to offer personalist assistance. Limited Services: Neobanks generally offer
services to customers while minimising operating costs fewer services than traditional banks.
A. Current Scenario
In India, Reserve Bank of India (RBI) doesn't allow bar
to be 100% digital yet (though some foreign banks of 6.9.2 On Tap Licencing
digital-only products through their local units.)
On-tap licensing means that the window for getting a
There are 10 Neobanks in India currently, and a couple bank license from RBI is open throughout the year.
more are in the process of entering the market. ICICI B Earlier, RBI used to invite applications for giving bank
took the lead in the segment and partnered with th licenses, and prospective players submitted their
Neobanks: Free, Instant Pay, and Yelo. applications within a fixed time-frame as prescribed by
RBI. The Reserve Bank of India has received four
There are two types of Neobanks models in India. O is applications each for on-tap universal private bank
where the Neobank doesn't have a banking licence licences and small finance bank licences.
themselves and instead partner up with a traditional ber
to provide their products, According to the guidelines released by the central bank
in 2016, the following can apply for on tap licences:
While in the second scenario the neobanks obtain bank
licenses themselves to operate fully on their own. Eligible entities seeking universal bank licences must
be:
India's top Neobanks include: RazorpayX, Jupiter, Ne
Epifi, Open. Individuals/entities with at least 10 years of experience
in banking and finance at a senior level or private
B. Rationale for Neobanks companies or groups with at least 10 years of successful
track record.

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Groups or companies applying for such licences must Detriments of Allowing Corporates To Own Bank:
have assets of ₹5,000 crore or above and the non- There are many reasons for onerous restrictions on bank
financial businesses don't account for 40% or more of ownership by industry groups, which are as follows.
these assets.
Connected Lending & Moral Hazard: A bank with no
To be eligible to apply for a small finance bank licence: connections to business houses can effectively screen
loan applicants and thus ensure efficient allocation of
Individuals must have at least 10 years of experience in funds to accelerate the overall growth of the economy.
the banking and finance sector at senior levels. Industry-group-owned banks, on the other hand, will be
Groups, companies, existing payments banks, non- under constant pressure to favour group companies, at
banking finance companies, microfinance companies, the expense of more deserving ones, which can be
local area banks and cooperative banks applying for labelled as connected lending. Connected Lending can
these licenses must have at least successful track record. effectively transfer the project risks from the business
group to the banks, with the costs finally being borne by
6.9.3 Proposal of Corporates Owning the other shareholders of the bank or even by the
taxpayers in the case of a bank collapse. In economic
Banks terms, it may deter efficient fund use and affect
The Internal Working Group (IWG) to the Reserve profitability & solvency. In ethical terms, this will erode
Bank of India the recommended making necessary the bank's role as an effective financial and create a
amendments to the Banking Regulation Act, 1949 so as moral hazard or conflict of interest situation.
to allow industrial houses to enter into Indian Banking Circular Lending & Difficulty In Regulation: Another
System. risk associated with banks owned by industry groups is
This recommendation of opening up of the banking circular lending. Under circular lending, corporate bank
sector to the corporate sector is in consonance with the X funding projects of an industry group, which owns
policy for giving additional banking licences to more corporate bank Y, and corporate bank Y funding
aspirants, including non-banking financial companies. projects of an industry group owning bank Z, and
finally, corporate bank Z funding projects of industry
However, ownership of banks by business groups has group owning bank X. With available legal structures
always been a contentious idea. In the world, many and the proliferation of shell companies, makes it hard
countries have opted to build strong firewalls between to track such lending on a real-time basis.
banks and other businesses.
Inequality & Concentration of Wealth: Corporates
Thus, there is a need to weigh in the pros and cons of owing banks will add more muscle to big industry
allowing industrial houses to promote or own banks groups which already dominate many important sectors
Benefits of Allowing Corporates to Own Bank: of the economy, including telecom, organised retal
aviation software and e-commerce. Their tie-up with
Plugging Capital Gap: The biggest pro will be that banks which is the core of the financial sector, will not
India's banks need capital. Currently, the government only jeopardise the interests of smaller players but also
keeps picking money from the taxpayers pocket and help them leverage their strength into other new
funding the public sector banks. Hence, by allowing the markets This will further accelerate the concentration of
big corporates into the banking sector the capital wealth and increasing inequalities. This may lead to the
requirement can be fulfilled. emergence of new big power centres that would soon
Facilitating Financial Inclusion: As a lot of people do throttle the government's ability to steer the economy in
not have access to banking in the country, the entry of the right direction.
corporates into the banking sector would mean the Contradicting the Previous Ruling: The banking sector
opening of more branches and subsequently bringing in India has been in trouble for the last few years
more people into the banking net. keeping that in mind the RBI in 2016 had created new
Improving Competition: Privatization of banks has been guidelines on the limit of lending to a single company
a long-proposed reform in the Indian banking industry. The rationale behind this ruling was that if a bank lends
Allowing corporates into the banking sector will further too much to one company only then it risks losing that
pressurize Public sector banks to become competitive. money if the company sinks. Therefore, the

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recommendation of allowing the entry of industry framework .DEPA is an architecture that lets use
groups in the banking sector is in contraction with the securely access their data and share the same w third
above-said ruling in 2016 parties.

Conclusion Benefits of Account Aggregators: Better Decision

Making and Informed Consent
The pros and cons analysis of mixing industry and
finance indicates that the move may not be conducive to The new system makes it possible for banks, ta
authorities, insurers and other finance firms aggregate
growth, public finance and the future of the Indian
economy itself So rather than concentration of too much data of customers who have provided their consent to
get a better understanding about their potential
economic power in the hands of corporates, it will be
wise to carry out the long-pending banking reforms and customers, make informed decisions and ensure
strengthen the functional autonomy of RBI. smoother transactions.

Ease for Consumers: This will also enable customers to

easily access and share their financial data. allows
customers to avail various financial services from a host
of providers on a single portal based on a consent
method.

6.9.4 Account Aggregators (AA) Efficiency: It reduces the need for individuals to wait in
long bank queues, use Internet banking portals, share
An Account Aggregator is a non-banking financial their passwords, or seek out physical notarisation to
company engaged in the business of providing, under a access and share their financial documents.
contract, the service of retrieving or collecting financial
information pertaining to its customer. It is also engaged Economies of Scale: This will help banks reduce
in consolidating, organising and presenting such transaction costs, which will enable us to offer lower
information to the customer or any other financial ticket size loans and more tailored products and services
information user as may be specified by the bank. to our customers.

An AA is a framework that simply facilitates sharing of Reduce Frauds: AA reduces the fraud associated wit
financial information in a real-time and data-blind physical data by introducing secure digital signatures
manner (Data flow through AA are encrypted) between and end-to-end encryption for data sharing.
regulated entities (Banks and NBFCs)The RBI (Reserve
9. Prudential Norms and Disclosure Requirements
Bank of India) in 2016 approved AA as a new class of
(Provisioning Norms): The committee recommended
NBFC (Non Banking Financial Companies). whose
tightening the prudential norms for provisioning and
primary responsibility is to facilitate the transfer of
asset classification in a phased manner.
user's financial data with their explicit consent.
10. Reform in the Role of RBI: The committee
Architecture of Account Aggregators: AAs enable flow
recommended that RBI should withdraw from the 91-
of data between Financial Information Providers (FIPs)
day treasury bills market and that interbank call money
and Financial Information Users (FIUS)
and term money markets be restricted to banks and
Financial Information Provider (FIP): An Flp data primary dealers. Committee proposed a segregation of
fiduciary, which holds customers' data. It c be a bank, the roles of RBI as a regulator of banks and owner of
NBFC, mutual fund, insurance repository or pension bank.
fund repository. An FIU consumes the data from an FIP
to provide various services to the consumer. is the 6.5.3 Basel Accords
Financial Information User (FIU): An FIU is a lending • The Basel Accords (i.e., Basel I, II and now
bank that wants access to the borrower's data determine Basel III) are a set of agreements set by the
if the borrower qualifies for a loan. Basel Committee on Bank Supervision
(BCBS), which provides recommendations on
The architecture of AA is based on the Da
Empowerment and Protection Architecture (DEPA banking regulations in regards to capital risk,
market risk and operational risk.

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• The Basel norms is an effort to coordinate

banking regulations across the globe, with the
goal of strengthening the international banking
system.
• The Basel Committee on Banking Supervision
(BCBS) is the primary global standard setter
for the prudential regulation of banks and
provides a forum for regular cooperation on
banking supervisory matters for the central
banks of different countries.
• The purpose of the accords is to ensure that
financial institutions have enough capital on
account to meet obligations and absorb
unexpected losses.
• They are of paramount importance to the
banking world and are presently implemented
by over 100 countries across the world.

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7. Financial Market: Market dealing with the exchange

Chapter-7 of liquid assets (money) is called a financial market.

Financial Markets 7.3 Financial Systems

It is a complex and well-integrated set of sub system of
7.1 Market financial institutions, financial markets, and financial
Market can be defined as a setup where two or more intermediaries, services which facilitate transfer and
parties engage in exchange of goods, services and allocation of funds effectively and efficiently. It also
information. Ideally, two or more parties are involved in consists of regulations, laws and practices followed in
buying and selling. The two parties involved in a the system. The level of economic growth largely
transaction are called seller and buyer. depends on the financial system prevailing in the
economy
7.2 Types of Markets Financial systems deal with three inter-related and
interdependent variables, money, credit and finance.
1. Physical Markets: Physical market is a setup where
buyers can physically meet the sellers and purchase the
desired merchandise from them in exchange of money.
7.3.1 Financial Market
Shopping malls, department stores and retail stores are A financial market is a broad term describing any
examples of physical markets. Centre/ arrangement where buyers and sellers
participate in the trade of financial claims such as
2. Non Physical Markets/Virtual Markets: In such
equities, bonds. currencies and derivatives. Financial
markets, buyers purchase goods and services through
markets are typically characterised by having
internet. In such a market the buyers and sellers do not
transparent pricing. basic regulations on trading, costs
meet or interact physically, instead the transaction is
and fees, and market forces determining the prices of
carried out remotely with the help of technological
securities that trade.
tools. Examples: Amazon, flipkart etc.

3. Auction Market: In an auction market, the seller sells Classification of Financial Markets
his goods to one who is the highest bidder.
There are five ways that one can classify financial
4. Market for Intermediate Goods: Such markets sell markets:
raw materials and capital goods required for the final 1. Nature of the Claim: The claims traded in a financial
production of other goods.
market may be either for a fixed rupee amount or a
5. Black Market: A black market, underground residual amount and financial markets can be classified
economy, or shadow economy is a clandestine market according to the nature of the claim. The former
or transaction that has some aspect of illegality or is financial assets are referred to as debt instruments, and
characterized by some form of noncompliant behaviour the financial market in which such instruments are
with an institutional set of rules. traded is referred to as the debt market. The latter
financial assets are called equity instruments and the
6. Knowledge Market: Knowledge market is a setup financial market where such instruments are traded is
which deals in the exchange of information and referred to as the equity market or stock market.
knowledge based products.
2. Maturity of the Claims: A second way to classify
financial markets is by the maturity of the claims For
example, a financial market for short-term financial
assets is called the money market and the one for longer
maturity financial assets is called the capital market The
traditional cut off between short term and long term is
one year. That is a financial asset with a maturity of one
year or less is considered short term and therefore part
of the money market. A financial asset with a maturity
of more than one year is part of the capital market.

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Thus, the debt market can be divided into debt B. Key Points
instruments that are part of the money market, and those
that are part of the capital market, depending on the • Money market consists of negotiable
number of years to maturity instruments such as treasury bills, commercial
papers and certificates of deposit. It also deals
3. New vs Seasoned Claims: The market for newly with call money, notice money, repos, etc.
issued financial assets is called the primary market • It is used by many participants, including
After a certain period of time, the financial asset is
companies, to raise funds by selling
bought and sold (e exchanged or traded) among
commercial papers in the market. Money
investors. The market where this activity takes place is
market offers high liquidity of securities.
referred to as the secondary market
• It is a whole sale market volume of funds or
4 Cash vs Derivative Instruments: Some financial assets financial assets traded are very large.
are contracts that either obligate the investor to buy or • Money market has no geographical constraints
sell another financial asset or grant the investor the as that of a stock exchange. They are spread
choice to buy or sell another finance asset. Such over a wide area
contracts derive their value from the price of the
• It is not a single homogenous market, but
financial asset that may be bought or soc These
consists of call money market, commercial bill
contracts are called derivative instrument and the
markets in which they trade are referred to a derivative market, treasury bill market and commercial
markets. The array of derivative instrument includes paper market.
options contracts futures contracts forward contracts
C. Need of money market
swap agreements and cap and floor agreements.
1. Financing Trade: Money Market plays crucial role in
5. Organizational Structure of the Market: Although the
financing both internal as well as international trade.
existence of a financial market is not a necessary
Commercial finance is made available to the traders
condition for the creation and exchange of a finance
through bills of exchange, which are discounted by the
asset in most economies financial assets are created and
bill market. The acceptance houses and discount
subsequently traded in some type of organized financial
markets help in financing foreign trade
market structure A financial market can be classified by
its organizational structure. These organizational 2. Financing Industry: Money market contributes to the
structures can be classified as auction markets and over growth of industries in two ways
the counter markets
(a) Money market helps the industries in securing short-
6. Exchanges and Over-the-Counter Markets Exchange term loans to meet their working capital requirements
is the place where buyers and sellers meet in a central through the system of finance bills. commercial papers,
location Example Bombay Stock Exchange Over-the- etc
Counter (OTC) Market connect dealers at different
locations trade via computer and telephone networks (b) Industries generally need long-term loans, which are
Examples exchange of India (OTCEI)Over the counter provided in the capital market. However. capital market
depends upon the nature of and the conditions in the
7.3.2 Money Market money market. The short- term interest rates of the
money market influence the long-term interest rates of
A. Definition the capital market
Money market basically refers to a section of the 3. Profitable Investment: Money market enables the
financial market where financial instruments with high commercial banks to use their excess reserves in
liquidity and short-term maturities are traded. Money profitable investment.
market investments are also called cash investments
because of their short maturity period, Money market 4. Self-Sufficiency of Commercial Bank: Developed
has become a component of the financial market for money market helps the commercial banks to become
buying and selling of securities of short-term maturities, self-sufficient. In the situation of emergency, when the
of one year or less (up to 364 days) such as treasury commercial banks have scarcity of funds they need not
bills and commercial papers.

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approach the central bank and borrow at a higher Further, an active secondary market for dealings of
interest rate. money market instrument was created which positively
impacted the liquidity of these instruments.
5. Help to Central Bank: Money market helps the
central bank in two ways: For this purpose, the Discount and Finance House of
India Limited was formed as an autonomous financial
(a) The short-run interest rates of the money market intermediary in April 1988 to embellish the short ter
serve as an indicator of the monetary and banking liquidity imbalances and to develop an active secondar
conditions in the country and, in this way. guide the market for the trading of instruments in money market.
central bank to adopt an appropriate banking policy. 1 DFHI plays the role of a market maker in money
(b) The sensitive and integrated money market helps the market instruments The
central bank to secure quick and widespread influence E. Structure of Indian Money Market
on the sub-markets, and thus achieve effective
implementation of its policy. Broadly speaking, the money market in comprises two
sectors- (a) Organised sector, and (t Unorganised sector.
D. Growth of Money Market Ind
Post reforms period in India has witnessed tremendous The organised sector consists of the Reserve Bar of
growth of Indian Money markets. The organization and India, the State Bank of India with its sever associates,
structure of the money market has undergone a sea twenty nationalised commerce banks, other scheduled
change in the last decade in India. Upto 1987, the and non-schedule commercial banks, foreign banks, and
money market consisted of 6 facets: Regional Rural Banks. It is called organised because
part is systematically coordinated by the RBI

1. Call Money Market: The unorganised sector consists of indigenous banks

and money lenders. It is unorganised because activities
2. Inter Bank Term Deposit/Loan Market; of its parts are not systematically coordinated by the
RBI. The money lenders operate throughout the
3. Participation Certificate Market
country, but without an link among themselves.
4. Commercial Bills Market Treasury bills markets, and
Inter Corporate Market. 7.3.3 Similarities in Money Market
The market had 3 main deficiencies:
and Capital Market
In spite of the differences, the money market and the
1. It had a very narrow base with RBI, banks, LIC and
capital market have certain similarities and
UTI as the only participants lending funds while the
interrelations Complementary: The money market and
borrowers were large in number.
the capital market are complementary to each other and
2. There were only few money market instruments; are not competitive. The difference between the two is
only of degree rather than of kind. Any type of financial
3 The interest rates were not market determined but planning must integrate the short-term and long-term
were controlled either by RBI or by a voluntary programmes of economic development through a proper
agreement between the participants through the Indian coordination between short-term and long-term funds 1.
Banks Association (IBA).
2. Same Institutions: Certain institutions operate in
To set right these deficiencies, the recommendations of money as well as capital markets. Commercial banks,
Chakravarthy Committee and Vaghul Committee laid for example, which traditionally specialise in short-term
foundation for systematic development of Indian funds have started giving long-term loans in recent
Money Market. The implementation of the suggestions times. This is because of the growth of time deposits
of the respective committees has widened and deepened and higher rate of return on long-term loans.
the market considerably by increasing the number of
participants and instruments and introducing market 3. Interdependence: Money and capital markets are
determined rates as against the then existing inter-dependent. The activities and policies of one
administered or volunteered interest rates. market have their impact on those of the other. For

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example, the increased demand for funds in the capital business houses are met by the capital market. It helps
market also raises the demand and interest rates in the in research and development.
money market. Similarly, the monetary policy also
influences the activities of the capital market. 5. Optimal Allocation of Fund: Capital markets not only
helps in fund mobilization, but it also helps in optimal
allocation of these resources.

6. Service Provision: As an important financial set up.

capital market provides various types of services. It
includes long term and medium term liquidity to
7.4 Capital Market industry, underwriting services, consultancy services.
export finance, investor education by widening
The long-term financial market of an economy is ownership base.
known as the Capital Market'. This market makes it
7. Price and Goodwill Determination: Primary market
possible to raise long-term money (capital) i.e., for a
and the stock exchanges determine the issue price and
period of minimum 365 days and above. A capital
current value of scrips.
market is one in which individuals and institutions trade
financial securities and claims. Thus, this type of market 8. Barometer of Economic Health: Secondary market
is composed of both the primary and secondary and increase in Sensex indicate positive economic
markets. development.

7.4.1 Need for Capital Market 7.4.2 Evolution of Capital Market in

Any government or corporation requires capital to India
finance its operations and to engage in its own long-
The history of capital market in India dates back to
term investments. To do this, a company raises money
through the sale of securities - stocks and bonds in the almost 200 years. Indian stock markets are one of the
form of the company's stake. These are bought and sold oldest in Asia. The evolution can be divided into 4
Phases:
in the capital markets
1. Inception Phase (upto 1919): Until 1830's business
Some of the Functions/Benefits of Capital Market are:
1. Mobilization of Savings: Capital market is an on corporate stocks and shares in bank took place in
Mumbai (the then Bombay).
important source for mobilizing idle savings from the
economy. It mobilizes funds from people for further At the end of the American civil war, the brokers found
investments in the productive channels of an economy. the place in Bombay (1874) to carry their trade
activities.
2. Capital Formation: Capital formation is net addition
to the existing stock of capital in the economy. Through However, The place where the brokers assembled and
mobilization of ideal resources it generates savings; the transacted business regularly, is now known as Dalal
mobilized savings are made available to various Street and the building which is popularly reckoned as a
segments such as agriculture, industry, etc. This helps in premier stock exchange, is now known as Jijibhoy
boosting sectoral growth. Towers In 1887, these brokers formally established the
'Native Share and Stock Exchange Association
3. Provision of Investment Avenue: Capital market
raises resources for longer periods of time. Thus it In 1899, the stock exchange of Mumbai (now called as
provides an investment avenue for people who wish to BSE) came into existence. In 1890's, other stock
park their resources for a long period of time and earn exchange associations like Ahmedabad Share and Stock
reasonable return. Broker Association and Calcutta Stock Exchange
4. Speed up Economic Growth and Development: Association came into being for facilitating cotton and
jute business respectively
Capital market enhances production and productivity in
the national economy. As it makes funds available for 2. Umbrella Growth (1920-1946): Uptil the
long period of time, the financial requirements of independence various stock exchanges like: Madras
Stock Exchange, Lahore Stock Exchange and 'Delhi

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Stock and Share Broker's Association Limited' and the

'Delhi Stock and Share Exchange Limited.
With a market capitalisation of over USD 2.3 trilli
3. Post Independence Growth: Most of the stock currently, it is the world's 10th-largest stock exchange is
exchanges suffered almost a sharp fall during the post also the world's fastest exchange with a median tra
world war-Il period. speed of six microseconds. In the year 1986, it establish
the S&P BSE SENSEX Index (a.k.a BSE 30), which is
The first act to regulate and recognize the exchanges index of the 30 most well-established and monetary
came into force in 1956 i.e. Securities Contracts sound companies listed on the BSE.
(Regulation) Act, 1956. (SCRA, 1956)
It is considered the Indian domestic stock market's pulse
The established stock exchanges at Mumbai, In 1995, the BSE switched from open outcry trading to
Ahmedabad, Calcutta, Madras, Delhi, Hyderabad and electronic system of trading. The screen-based
Indore were recognized under the act. automated trading platform is called BOLT (an ac 12/25
In 1980's, many more stock exchanges were established. On-Line Trading). The exchange also offers depositor
Some of the stock exchanges which were formed in the services through one of its arms called the Centre
1980's-90's, were at Pune, Ludhiana, Guwahati, Depository Services Ltd.
Mangalore, Patna, Jaipur, Bhubaneshwar, Rajkot,
B. Over the Counter Exchange of India
Meerut, Vadodara and Coimbatore.
(OTCE)
4. Post Reform Phase (1991 Onwards):The final phase
starts from 1991 to the present date. After the adoption The OTCEI was a company incorporated under the
of Liberalization - Privatization - Globalization (LPG) Companies Act 1956, to provide access to small and
policy, there was a greater focus on Indian capital medium companies to capital market for raising funds t
market. provided an efficient and transparent avenue for capital
market investment. It provided a fully electronic, singe
There has been qualitative development in the Indian window and transparent system for securities exchange
market functioning. The uses of technology. variety of In the OTC exchange, a buyer/seller walked on its
products, investor protection are the areas which have counter tapped on the computer screen to find quotes
emerged during the last two decades. and atter to finalise a deal. Thus, there was no fixed
geographical area for its operations, providing a
The immediate post reform phase, though saw a
simplified process dealing in securities in an easy and
quantitative increase in the Indian capital market, yet,
economical way. The OTCEI has now been withdrawn.
there remained some inherent limitations like lack of
The OTCEI is no longer functional exchange as the
liquidity, imperfections in the information, lack of
same has been de-recognise by SEBI vide its order
transparency, long settlement periods etc.
dated 31 Mar 2015.
The last decade of the twentieth century saw the
.National Stock Exchange (NSE)
emergence of two important stock exchange v Over The
Counter Exchange of India (OTCEI) an the National The National Stock Exchange of India Limited (NSE) is
Stock Exchange (NSE). India's largest financial market. Incorporate: in 1992 on
the basis of the recommendations Pherwani Committee,
the NSE has developed into sophisticated, electronic
market, which ranked four in the world by equity
trading volume. NSE was the f exchange in India to
7.4.3 Stock Exchanges of India provide modern, fully automated electronic trading The
NSE is the largest private wide- area network in India
A. Bombay Stock Exchange
With the advent of liberalization of the economy it was
The Bombay Stock Exchange (BSE) is India's large and necessary to lift the trading system of Indian stock
earliest securities market. It is also Asia's first stop markets at par with the international standards The
exchange. It had its origins in the 1850s when of about establishment of NSE was one step forward in this
20 stockbrokers met under banyan trees in the streets of direction
Bombay. a group

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The National Stock Exchange is a pioneer exchange in Company Affairs and Department of Economic Affairs
introducing screen based trading mechanism. The use of of the Central Government
technology and broad based participation are the key
features of NSE 7.5 Types of the Capital Market
The NIFTY 50 is the flagship index on the National Capital market is the market for those financial
Stock Exchange of India Ltd. (NSE). The Index tracks instruments that are easily transferable by sale, it has
the behaviour of a portfolio of blue chip companies, the two inter- dependent and inseparable segments i e
largest and most liquid Indian securities. It includes 50 Primary Market and Secondary Market
of the approximately 1600 companies listed on the NSE
Primary market provides platform for mobilizing funds
D. Inter Connected Stock Exchange (ISE) by the Companies from General Public and Secondary
Market provides platform for selling and buying the
Inter-connected Stock Exchange Ltd. (ISE) is an Indian
national-level government owned stock exchange, issued securities from one investor to another via stock
market.
providing trading, clearing, settlement, risk
management and surveillance support to its trading
members. It is under the ownership of Ministry of
7.5.1 Primary Market
Finance, Government of India. It started its operation in The primary market provides the channel for sale of
1998. ISE was launched with an objective of converting new securities. The issuer of securities sells the
small, fragmented and liquid markets into large, liquid securities in the primary market to raise funds for
national-level markets. However, the ISE couldn't investment and/or to discharge. In other words, the
convince the bigger brokers of me participating market wherein resources are mobilised by companies
Regional Stock Exchanges to support any interest in through issue of new securities is called the primary
trading on ISE due to commercial considerations. As a market. The issue of securities by companies can take
result, it becomes virtually impossible for ISE to create place in any of the following methods
any worthwhile liquidity in its markets in competition
with the breadth and depth of NSE and BSE. SEBI Initial public offer (securities issued for the first time to
permitted ISE to exit bourse business as on 8 December the public by the company):
2014.
Further issue of capital.

Rights issue to the existing shareholder (on their

renunciation, the shares can be sold by the company to
7.4.4 Components of Capital Market others also):
. The various components of capital market are as Offer of securities under reservation/ firm allotment
follows:- basis to:
1. Securities: It include shares, bonds, debentures, Foreign partners and collaborators
futures, options, mutual funds units
Mutual funds
2. Intermediaries: It includes brokers, sub-brokers,
custodians, share transfer agents, merchant bankers, and Merchant bankers
depositories.
Banks and institutions
3. Issuers of Securities: It involves companies, body
Non resident Indians and overseas corporate bodies
corporate, banks, government, financial institutions,
Employees
mutual funds.
Offer to public,
4. Investors: It includes individuals, companies, mutual
funds, financial institutions, foreign institutional
investors.
Bonus Issue
5. Market Regulators: The regulators in the capital
markets are SEBI RBI (to some extent). Department of

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The primary market is of great significance to the the floor price. The offer price is determined after the
economy of a country. It is through the primary market bid closing date.
that funds flow for productive purposes from investors
to entrepreneurs. The strength of the economy of a Process of Book Building: The issuer of the initial
country is gauged by the activities of the Stock public offer (IPO) discloses a price band or floor price
exchanges. The primary market creates and offers the at least two working days before the opening of the
merchandise for the Secondary Market. IPO. The applicants bid for the shares quoting the price
and the quantity that they would like to bid at. After the
A. Public Issue bidding process is complete, the cut-off price is arrived
at based on the demand for securities. The basis of
Public Issues or Public Offering refers to the issue of allotment is then finalised and allotment or refund is
shares or convertible securities in the primary market by undertaken. The final prospectus with all the details
the promoters of a company to attract new investors for including the final issue price and the issue size is filed
a subscription. In this kind of issue, securities are with Registrar of Companies, thus completing the issue
offered to the new investors for becoming part of process.
shareholders family of the issuer. Public issue can be
further classified into two- 2. Follow on Public Offering (FPO): FPO (Follow on
Public Offer) is a process by which a company, which is
1. Initial Public Offerings (IPO's): IPO is the selling of already listed on an exchange, issues new share the
securities to the public in the primary market. Primary investors or the existing shareholders, promoters. FPO
market deals with new securities being issued for the is used by companies to diversify equity base. FPOs are
first time. It is also known as the new issues market. It popular methods for c to raise additional equity capital
is different from secondary market where existing in the capital mar. through a stock issue. usually
securities are bought and sold. It is also known as the company
stock market or stock exchange.

It is when an unlisted company makes either a fresh

issue of securities or an offer for sale of its existing B. Offer For Sale -Under this method, securities are not
securities or both for the first time to the public. issued directly to public but are offered for sale through
intermediaries issuing houses or stock brokers.
It is generally used by new and medium-sized firms that
are looking for funds to grow and expand their business. In this case, a company sells securities enbloc :: agreed
price to brokers who, in turn, resell them to investing
Public companies have to sell at least a portion of their public
shares to the public to be traded on a stock exchange.
This is why an IPO is also referred to as "going public." C. Bonus Issue
Company which offers its shares, known as an
When an issuer makes an issue of securities to existing
'issuer', does so with help of investment banks. After shareholders as on a record date, without: consideration
IPO, the company's shares are traded in an open market. from them, it is called a bonus issue shares are issued
Those shares can be further sold by investors through out of the Company's free reserve share premium
secondary market trading. account in a particular ratio to the number of securities
held on a record date.
Book Building: Book building is a process of price
discovery. It is a mechanism where, during the period D. Rights Issue
for which the IPO is open, bids are collected from
investors at various prices, which are above or equal to When a listed company which proposes to issue free
the floor price. The offer price is determined after the securities to its existing shareholders as on a partic. date
bid closing date. fixed by the issuer (i.e. record date), it is called rights
issue. The rights are offered in a particular ratio the
Book Building: Book building is a process of price number of securities held as on the record date T route
discovery. It is a mechanism where, during the period is best suited for companies who would like to ra capital
for which the IPO is open, bids are collected from without diluting stake of its existing shareholders
investors at various prices, which are above or equal to
E. Private Placement

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When an issuer makes an issue of securities to a se manager, consultant, adviser or rendering corporate
group of persons not exceeding 49, and which is neit a advisory service in relation to such issue management.
rights issue nor a public issue, it is called a private
placement. Private placement of shares or convent 2 Underwriting in Stock Market: Underwriting means
securities by listed issuer can be of two types: an agreement with or without conditions to subscribe to
the securities of a body corporate when the existing
Preferential Allotment: When a listed issuer issue shares shareholders of such body corporate or the public do not
or convertible securities, to a select group persons, it is subscribe to the securities offered to them.
called a preferential allotment. The issue is required to
comply with various provisions which inter alia include Underwriting is one of the most important functions. in
pricing, disclosures in the notion lock in etc., in addition the financial world wherein an individual or an
to the requirements specified in the Companies Act, institution undertakes the risk associated with a venture,
2013. an investment, or a loan in lieu of a premium.
Underwriters are found in banking, insurance, and stock
Qualified Institutions Placement: QIP is a process markets.
which was introduced by SEBI so as to enable t listed
companies to raise finance through the issue securities In the securities market, underwriting involves
to qualified institutional buyers (QIBS) QF are those determining the risk and price of a particular security.
institutional investors who are genera perceived to This ensures that the issuers of the security can raise the
possess expertise and the financial muscle to evaluate full amount of capital while earning the underwriters a
and invest in the capital markets, e.g. Insurance premium in return for the service.
companies, provident funds, pension funds
Investors benefit a lot from the underwriting process as
Need for QIPS the information provided by an underwriting agency can
help them take a more informed buying decision.
For the issuing company, QIPs are procedurally less
cumbersome than IPOS and FPOS. QIP is also a less The underwriters undertake a responsibility or give a
expensive mode of raising capital than an IPO, FPO or guarantee that the securities offered to the public or
rights issue. shareholders will be subscribed for.
Bonds If the shares are subscribed fully by the public, the
underwriters get a commission as a percentage of total
Bond is a debt security, in which the authorized issuer
amount of the shares issued. In case the issue is under
owes the holders a debt and, depending on the terms of
subscribed, then the underwriters have to buy the
the bond, is obliged to pay interest (the coupon) to use
unsubscribed portion of the issue or to the extent of his
and/or to repay the principal at a later date. termed
guarantee
maturity.
3. Prospectus: It is very important that an investor
A bond is a formal contract to repay borrowed money
before applying for any issue identifies future potential
with interest at fixed intervals (i.e., semi-annual/annual/
of a company. A part of the guidelines issued by SEBI
monthly)
(Securities and Exchange Board of India) is the
Bonds provide the borrower with external funds to disclosure of 23 information to the public. This
finance long-term investments, or, in the case of disclosure includes information like the reason for
government bonds, to finance current expenditure. raising the money, the way money is proposed to be
spent, the return expected on the money etc. This
G. Some Related Terminologies information is in the form of 'Prospectus' which also
includes information regarding the size of the issue. the
current status of the company, its equity capital, its
1. Merchant Bankers: A "merchant banker" means any current and past performance, the promoters, the
person who is engaged in the business of issue project, cost of the project, means of financing. product
management either by making arrangements regarding and capacity etc. It also contains lot of mandatory
selling, buying or subscribing to securities or acting as information regarding underwriting and statutory
compliances. This helps investors to evaluate short term
and long term prospects of the company.

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4. Red Herring Prospectus: To maintain the economy of a country. They measure and control the
transparency and to ensure investors security by making growth of a country.
them aware about most of the details regarding the
company which wants to release its shares in the Stock exchange apart from being hub of primary and
market, SEBI has made it mandatory to first file a Draft secondary market, also have a very important role to
prospectus for all. This draft prospectus is referred to as play in the economy of the country. Some of them are
Draft Red Herring Prospectus (DRHP). "Red Herring listed below.
Prospectus" is a prospectus, which does not have details Raising Capital for Businesses: Exchanges help
of either price or number of shares being offered, or the companies to capitalize by selling shares to the
amount of issue. investing public.

7.5.2 Secondary Market/Stock Provides Ready and Continuous Market: By providing a

place where listed securities can be bought and sold
Market
regularly and conveniently, a stock exchange ensures a
Secondary market refers to a market where securities ready and continuous market. This lends a high degree
are traded after being initially offered to the public in of liquidity to holdings in these securities as the investor
the primary market and/or listed on the stock exchange. can en cash their holdings as and when they want.
Majority of the trading is done in the secondary market.
Provides Information about Prices and Sales: A stock
Secondary market comprises of equity markets and the
exchange maintains complete record of all transactions
debt markets. The secondary market enables
taking place in different securities every day and
participants who hold securities to adjust their holdings
supplies regular information on their prices and sales
in response to changes in their assessment of risk and
volumes to press and other media. This enables the
return. They can also sell securities for cash to meet
investors in taking quick decisions on purchase and sale
their liquidity needs.
of securities in which they are interested. Not only that,
such information helps them in ascertaining the trend in
prices and the worth of their holdings.
The secondary market has further two components,
namely (i) The over-the-counter (OTC) market and (ii) Mobilizing Savings for Investment: They help public to
The exchange-traded market. mobilize their savings to invest in high yielding
economic sectors, which results in higher yield, both to
OTC markets are essentially informal markets where the individual and to the national economy. Facilitating
trades are negotiated Most of the trades in government Company Growth: They help companies to expand and
securities are in the OTC market All the spot trades grow by acquisition or merger.
where securities are traded for immediate delivery and
payment take place in the OTC market. The exchanges Profit Sharing: They help both casual and profession
do not provide facility for spot trades in a strict sense stock investors, to get their share in the wealth.
profitable businesses
A. Stock Exchange
Corporate Governance: Stock exchanges implement
Stock Exchange means any body or individuals whether stringent rules to get listed in them So, listed p
incorporated or not, constituted for the purpose of companies have better management records privately
assisting. regulating or controlling the business of held companies
buying, selling or dealing in securities. It is an
association of member. brokers for the purpose of self- Creating Investment Opportunities for Sm Investors:
regulation and protecting the interests of its members. Small investors can also participate in growth of large
companies, by buying a small num of shares.
It can operate only if it is recognized by the
Government under the Securities Contracts (Regulation) Government Capital Raising for Development Projects:
Act, 1956. They help government to raise funds developmental
activities through the issue of bon An investor who buys
B. Role of Stock Exchanges Role of Stock Exchanges them will be lending money the government, which is
are varied and highly important in the development of more secure, and sometime enjoys tax benefits also.

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operating in sectors such as health, environment and

transportation to raise risk capital.
Barometer of the Economy: They maintain the stock
indexes which are the indicators of the general tre in the Consequently, if a company lands into bankruptcy.
economy. They also regulate the stock pr fluctuations. preference shareholders are issued dividends first or
have the first right to the company's assets before
C. Types of Stock Exchanges common stock investors. For preference shareholders,
the dividend is fixed however, they don't hold voting
1. Commodity Exchange: A commodity exchange an
rights as opposed to common shareholders.
exchange where various commodities, derivative
products, agricultural products and other raw material
are traded. Most of the commodity markets across
7.5.3 Third and Fourth Markets
world trade in commodities such as wheat, barley sugar, We might also hear the terms "third" and "fourth"
maize, cotton, cocoa, coffee, milk product pork bellies, markets. These markets deal with transactions between
oil, metals, etc.. broker- dealers and large institutions through over-the-
counter electronic networks.
The commodity exchanges in India includes - Nation
Spot Exchange Limited (NSEL), Indian Commodity Third market in finance refers to the trading of
Exchange Limited (ICEX), Multi Commodity Exchange exchange- listed securities in the over-the-counter
(MCX), etc. (OTC) market.
From September 28, 2015, MCX is being regulated: the These trades allow institutional investors to trade blocks
Securities and Exchange Board of India (SEB Earlier of securities directly, rather than through an exchange,
MCX was regulated by the Forward Market providing liquidity and anonymity to buyers.
Commission (FMC), which got merged with the SEB
on September 28, 2015. Fourth market trading is direct institution-to-institution
trading without using the service of broker-dealers, thus
2. Derivative Exchange: The derivatives exchange avoiding both commissions, and the bid-ask spread.
refers to the financial exchange market for financial Trades are usually done in blocks. It is impossible to
instruments such as futures contracts or options the are estimate the volume of fourth market activity because
based on the values of their underlying assets trades are not subject to reporting requirements
Derivatives trading commenced in India in June 2000
after SEBI granted the final approval to this effect in
May 2001 on the recommendation of L. C. Gup
The main reason these third and fourth market
committee. Securities and Exchange Board of Ind
transactions occur is to avoid placing these orders
(SEBI) permitted the derivative segments of two stock
through the main exchange, which could greatly affect
exchanges, NSE and BSE, and their clearing house
the price of the security. Because access to the third and
corporation to commence trading and settlement
fourth markets is limited, their activities have little
approved derivatives contracts.
effect on the average investor.
3. Social Stock Exchange (SSE): The idea of the Social
Stock Exchange (SSE) as a platform for listing social 7.6 Instruments of Capital
enterprise, voluntary and welfare organisations so that
they can raise capital was mooted in the Union Budget
Market
2019-20 It works under the market regulator SEBI. There are various tools/instruments available under the
The aim of the initiative is to help social and voluntary norms of capital market using which one can raise funds
organisations which work for social causes to raise for longer periods. Various instruments for investment
capital as equity or debt or a unit of mutual fund. It can be classified under various headings namely.
provides new and cheaper sources of financing for • Equity
social welfare projects, while showcasing India's
• Debt
independence from foreign aid.
• Derivatives
SSE already exists in countries such as Singapore, UK, • Mutual funds
Canada among others. These countries allow firms • Exchange Traded Funds (ETFs)

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• Instruments of Foreign Investments 3. Dividends: A dividend is a distribution of a pon of a

company's earnings, decided by the board directors, to a
7.6.1 Equity class of its shareholders. Dividends be issued as cash
payments, as shares of stock other property.
Equity is stock or any other security representing an
4. Scrip Share: It is the share given to existing
ownership interest. On a company's balance sheet,
shareholder without any charge, also known as bonus
equity is the amount of the funds contributed by the
share
owners (the shareholders) plus the retained earnings (or
losses) It refers to the Net Worth of the company. It is 5. Sweat Equity Shares: Sweat equity shares refer
the source of permanent capital. It is the owner's funds equity shares given to the company's employees
which are divided into some shares. By investing in favourable terms, in recognition of their work one of the
equity, an investor gets a portion of ownership in the modes of making share based payment to employees of
company. the company. The issue of Swe equity allows the
company to retain the employees rewarding them for
A. Features
their services.
Equity comprises of ordinary shares, preference shares,
6. Market Capitalization: Market capitalization
and reserve and surplus.
the aggregate valuation of the company base on its
The dividend is to be paid to the equity holders acts as a
current share price and the total number: outstanding
return on their investment.
stocks. Market capitalization is one of t most important
Investment in equity shares is risky as in the event of characteristics that helps the invest to determine the
winding up of the company; they will be paid at the end returns and the risk in the share also helps the investors
after the debt of all the other stakeholders is discharged. choose the stock that ca meet their risk and
diversification criterion.
There are no committed payments in equity
shareholders i.e., the payment of dividend is voluntary. 7.6.2 Debt
Apart from that, equity shareholders will be paid off
only at the time of liquidation while the preference A debt instrument is a documented financial obligation
shares are redeemed after a specific period. that enables the issuer to raise funds by borrowing
money and repaying it in the future. It is basically a
B. Associated Information fixed income asset that allows the lender to earn a fixed
interest on it besides getting the principal back while the
1. Ordinary Shares: Ordinary shares or common shares,
issuer can use it to raise funds at a cost Debt acts as a
represent the basic voting shares of a corporation, they
legal obligation on the issuer (or taker) part to repay the
are sold to public through stock exchanges. Holders of
borrowed sum along with interest to the lender on a
ordinary shares are typically entitled to one vote per
timely basis. Bonds, debentures, leases, certificates,
share, and do not have any predetermined dividend
bills of exchange and promissory notes are examples of
amounts, unlike preference shares.
debt instruments.
Preference Shares: Preference shares allow investor to
own a stake at the issuing company w condition that A. Key Points
whenever the company decides to t dividends, the
holders of the preference shares will the first to be paid. These instruments give market participants the option to
transfer the ownership of debt obligation from one party
Consequently, if a company lands into bankrupt to another. The lender receives a fixed amount of
preference shareholders are issued dividends or have the interest during the lifetime of the instrument. Debt
first right to the company's assets be common stock instruments provide fixed returns.
investors. For preference shareholder the dividend is
fixed however, they don't hold vote rights as opposed to The duration of debt instruments can either be long-
common shareholders. term or short-term. Funds raised through short-term
debt instruments are to be repaid within a year.

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Credit card bills and treasury notes are examples of a return of 7% to 10%. The maturity can be anywhere
short-term debt whereas long-term loans and mortgages between 3 months to 30 years.
form part of long-term debt instruments.
2. Municipal Bonds: A municipal bond is a debt security
B. Types of Debt Instrument issued by a state, municipality or county to finance its
capital expenditures, including the construction of
1. Bonds: Bonds represent debt obligations and are a highways, bridges or schools.
form of borrowing. If a company issues a bond, the
money they receive in return is a loan, and must be Through municipal bonds, a municipal corporation
repaid over time. Just like the mortgage on a home or a raises money from individuals or institutions and
credit card payment, the repayment of the loan also promises to pay a specified amount of interest and
entails periodic interest to be paid to the lenders. returns the principal amount on a specific maturity date.

2. Debentures: It is another type of instrument available These are mostly exempt from federal taxes and from
under Debt Market. A debenture is a debt instrument most state and local taxes, making them especially
which is not backed by any specific security; instead the attractive to people in high income tax brackets.
credit worthiness of the company issuing the same is the
History of Municipal Bonds Issuance in India:
underlying security. Corporate treasury uses this as a
Municipal bonds were first issued in India in 1997. five
tool to raise medium to long-term funds. The funds
years after the 74th Constitutional Amendment
raised become part of the capital structure but not share
decentralized urban local bodies and gave them
capital of the company.
autonomy; made them accountable to citizens, and
There are certain options available to the investor reformed their finances enabling them to access capital
provided by the company (which is raising money markets and financial institutions.
through the Debt market), where he/she is provided
Between 1997 and 2010, the city corporations of
with an option that after a certain time period he/she can
Bengaluru, Ahmedabad and Nashik experimented with
get the Debt security converted into Equity Shares of
bond issues but barely managed to raise 1,400 crore.
that company. The investor of such debentures has a
right to convert the debt (either fully or partially) into The poor investor response was due to the fact that
equities of the issuing company at a price which is these bonds were not tradable and lacked regulatory
normally decided at the time of the issue. clarity.

7.6.3 Bond Securities and Exchange Board of India (SEBI)'s

detailed guidelines for the issue and listing of municipal
A. Definition
bonds in March 2015, clarified their regulatory status
A bond is a fixed-income instrument that represents a and rendered them safer for investors.
loan made by an investor to borrower (typically
In 2017, Pune Municipal Corporation had raised 200
corporate or governmental) Governments (at all levels)
crore through municipal bonds at an interest of 7.59%
and corporations commonly use bonds in order to
to finance its 24x7 water supply project.
borrow money as it need to fund roads, schools, dams
or other infrastructure. In 2020, Lucknow becomes ninth city to raise municipal
bonds (200crore worth Lucknow Municipal Bonds),
B. Types of Bonds incentivised by the Ministry of Housing and Urban
1. Government Bonds: Government bonds can be issued Affairs (MoHUA) under Mission AMRUT.
by national governments as well as lower levels of In 2021, Ghaziabad becomes tenth city in India. to raise
government. At the national level, these government Municipal Bonds of 150 crore for construction of
bonds are known as "sovereign" debt, and are backed by tertiary sewage plant. Significance of Municipal Bonds
the ability of a nation to repay through taxation of its Market:
citizens and to print currency. Since these are issued by
the government, they carry no risk of default and are
considered to be the safest investment option. They are
Municipal Bonds can help the Urban Local Bodies
also known as G-Sec. The bonds' return depends on the
(ULBS) to garner revenue to complete budgetary
prevailing interest rate. Usually, Government bonds pay

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projects as property tax is the only major source of to raise funds, systems accounting, and put up bankable
municipal revenue. projects. In order address this, the reforms enlisted in
the 15 Finance Commission (which makes it mandatory
Growth of the municipal bond market is critical for for urban lo bodies to submit audited accounts by
India's large cities and towns to upgrade their creaking linking them grant disbursement) must be implemented
infrastructure. Transparency within ULBS will increase their cres
The ability of municipal bodies to be self-sustaining is worthiness, thereby improving their prospects floating
also critical to the success of the Centre's pet projects Municipal bonds, enabling them to contribute towards
such as Smart Cities and AMRUT. building resilient infrastructure under Atmanirbhar
Bharat Abhiyan.
Benefits of Municipal Bonds for Investors:
3. Corporate Bonds: Corporate bonds are issue by
Transparency: Municipal bonds that are issued to the corporations to raise capital. Generally, short-term
public are rated by renowned agencies such as CRISIL, corporate bond has a maturity less than five years,
which allows investors transparency regarding the intermediate is five to years and long term is more than
credibility of the investment option. 12 years Corporate bonds are characterized by higher
yie because there is a higher risk of a company
Tax Benefits: In India, municipal bonds are exempted
defaulting than a government. They can also be the mos
from taxation if the investor conforms to certain
rewarding fixed-income investments because of the risk
stipulated rules. In addit' conformation, interest rates
the investor must take on. The company's credit quality
generate 20/25 investment tools are also exempt from
is very important- the higher the quality, the lower the
taxation policy.
interest rate the investor receives.
Minimal Risk: Municipal bonds are issued by municipal
The bondholders get a specified return every period
authorities, implying involvement of minimal risk with
These bonds can be of two types:
these securities.

Government bonds are usually viewed as low- risk

investments, because the likelihood of a government Convertible Bonds: They can be converted into a
defaulting on its loan payment tends to be low. predefined number of stocks as and whe required by the
investor. Issuing convertible bonds is one way for a
company to minimize negative investor interpretation of
its corporate action. From the investor's perspective.
convertible bond has a value-added component built
into it. It is essentially a bond with a stock option
Challenges
hidden inside.
Reduced Investor Trust and Confidence: Weak financial
Non-Convertible Bonds: Non-convertible bonds are
position and poor governance and management of city
bonds which cannot be converted into stocks
agencies have limited their ability to issue bonds, and
reduced investor to and confidence. Developing Corporate Bond Market In India: Corporate
bonds are debt securities issued by private and public
No Authentic Financial Data Investors have doubt over
corporations Companies issue corporate bonds to raise
local bodies no authentic financial data available
money for a variety of purposes, such as building a new
Other Issues: Low accountability and autonomy of city plant, purchasing equipment, or growing the business
agencies followed by lack of an enable environment.
Need for Developing Corporate Bond Market In India
Road Ahead: With the plight of the Covid-19, revert Meet Investment needs: The Economic Survey 2018-19
generation and state finances have come to a vina has highlighted that India needs to shift gears from
standstill, hampering the funding of ULBS Howe under consumption-driven economy to investment-led
the Atmanirbhar Bharat Abhiyan package, the are economy wherein the private sector investment has to
offered an increase in borrowing capacity, base on become the key driver of Indian Economy. The
potential reform of the urban property tax regime Still, development of corporate bond market can significantly
most urban local bodies do not have institutional agency

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enhance the investment rates and enable India to Narrow Investor Base: The demand for corporate bond
become $5 trillion economy by end of 2024-25. as an investment is mostly confined to institutional
investors with retail investors accounting for only 3 per
Reduce pressure on the Government and Banks: In most cent of the outstanding issuances. of Government
international markets such as USA, the corporate bond
market is well developed and this enables companies to
raise funds across different maturities including for
infrastructure projects with long gestation periods. In Securities: Dominance The Central and State
India, given the absence of a well- functioning Government securities constituted almost half of the
corporate bond market, the burden. of financing total investment in Bond Market.
infrastructure projects such as roads, ports, and airports Constraints on Foreign Investors: In recent years the
is more on banks and the government. investment limit for FPIs in the corporate bond has been
Asset-Liability Mismatch in Financial Sector: The enhanced along with a reduction in the withholding tax.
Banks use short term deposits (3-5 years maturity However, the FPIs are not fully utilizing the enhanced
period) to fund long term infrastructure projects with limits due to limited liquidity in the market.
long gestation period leading to asset-liability Higher Rated Companies Dominate Corporate Issuance:
mismatch. Thus, an active corporate bond market helps In Indian corporate bond markets almost 70% of the
in the diversification of risks in the financial system. bonds outstanding by value are rated AAA. This
Lower Cost of Capital: Corporate bond markets can indicates that the number of sub investment grade issues
help borrowers reduce their financing costs in two is minimal and the proportion below AAA is small
ways. First, they enable the corporates to borrow money Private Placement Issues: In India, over 95% of
directly from the investors and facilitate bank issuances are through private placements. Small and
disintermediation, thus removing the "middleman" and medium corporate issuers generally raise resources
related costs. Second, by issuing corporate bonds, firms through the private placement route given the cost
may tailor their asset and liability profiles to reduce the considerations, ease of issuance, greater institutional
risk of maturity and currency mismatch on their balance demand and less retail interest.
sheet, thus reducing the overall cost of capital.
Absence of Longer Maturity Bonds: The Corporate
Reduce Foreign Currency Exposures: The corporate Bond market is basically dominated by the bonds with
bond market enables the firms to borrow for longer average maturity period of 2-5 years. The Corporate
maturity periods in local currency to meet their bond market has not been able to cater to the needs of
investment needs and avoid foreign currency exposures. the long term investors such as pension and insurance
Provide Long-term Financial Assets: An active fund companies through the issuance of long term
corporate bond market could also provide institutional maturity bonds
investors such as insurance companies and provident Lack of Risk Management Market: One of the main
and pension funds with quality long term financial reasons for Indian corporate bond market to have failed
assets, helping them in matching their assets and to pick up is absence of interest rate/ credit derivatives
liabilities. which can efficiently transfer the risks arising out of
Present Status of Corporate Bond Market in India: interest rate movements and default probabilities.
Corporate debt to GDP ratio in India stood at around 17 Taxation Structure: Stamp duties on corporate bonds
per cent in 2017 as compared to 123 per cent in the US across various states have not been standardised.
and 19 per cent in the case of China. The proportion of
firms using banks as the primary source of working Road Ahead: There has been a number of reports by
capital is higher than most developing countries. expert Committees on development of corporate bond
Further, much of the corporate bond sales in India occur markets in India such as R. H. Patil Committee (2005),
through the private placement route, with the share of High Powered Expert Committee on Making Mumbai
such issues in the total standing at around 95 per cent in an International Financial Centre in 2007 (Percy Mistry
recent years. Committee), H. R. Khan Committee on Corporate Bond
Market.
Reasons for The Underdeveloped Bond Market In India

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Important Recommendations: Some of the examples of Impact Bonds include

USAID'S Turkish Bond, World Bank's Women’s
Enhancing Issuer Base: In order to incentivise Livelihood Bonds, etc. The Impact bonds have become
corporates to raise a part of their requirements through innovative method of financing social projects relate to
bonds, the time and cost for public issuance and the Education, Health etc. on account of following reasons:
disclosure and listing requirements should be reduced
and made simpler. Focus on Outcomes: Greater emphasis on the achieving
targets rather than on Inputs.
Enhancing Investor Base: The scope of investment by
provident/pension/gratuity funds and insurance Innovative Design: In case of failure, the on falls on the
companies in corporate bonds should be enhanced. private investors. Hence, it has in-built accountability
Retail investors should be encouraged to participate in mechanism which leads development of innovative
the market through stock exchanges. Such investors strategies.
should also be encouraged to participate in the
corporate bond market through mutual fund. Collaboration between Incentivise Government, Private
Sector and NGOs bring the strength of each of these
Investment in corporate bonds should be considered as entities onto single platform leading to synergistic
part of total bank credit while computing credit deposit efforts The Government expenditure of 7.5% of GDP on
ratio by banks. social sector can be optimally harnessed through impact
Bonds and hence there is a need to have legal and
Bonds Primary Primary Issuance Database: A administrative structure for their development
centralized database of all bonds issued by corporates;
made available free of cost to all the investors. 5. Green Bonds: The Green Bonds are similar to
Corporate Bonds However, the proceeds of such Bonds
Acceptance of Corporate Bonds Under LAF Repo of are exclusively used for financing green projects such
RBI: Encourage Banks to invest in Corporate Bonds as renewable energy projects, projects to mitigate the
and then use them to borrow loans from RBI through impact of climate change, reducing the emission of
Repos fossil fuels etc. The first Green Bond was issued in
2007 when European Investment Bank raised €600
million under the label "Climate Awareness Bond
Debt Market Index: Though equity indices such as Nifty dedicated for renewable energy projects and energy-
50 and the BSE Sensex serve as pop benchmarks for efficient projects.
equities, designing debt has posed challenges in India as
the market la breadth and depth. indict In January 2016, the Securities and Exchange Board of
India published its official green bonds requirements for
Credit enhancements of bonds by setting up Credit Indian issuers making India the second country (after
Guarantee Enhancement corporation. China) to provide national level guidelines. The Indian
Railway Finance Corporation Ltd. (IRFC) has
Strengthening of Credit Default Swaps (CDS A Credit
established a Green Bond Framework for fund raising
Default Swap (CDS) is a finance swap agreement that
the seller of the CDS compensate the buyer in the event Challenges and Concerns: In the last nearly seven years,
of a de default (by the debtor). green bonds worth $500 bn have been issued. Of this,
India's contribution is hardly around $8.6 billion (1.7
Municipal Bond Market: Municipal bonds me be given
percent).
some fiscal support in the form of b insurance or
providing credit enhancement that municipalities are Lack of Awareness: Due to the newness of the
encouraged to issue us bonds. instrument, the average domestic investor is wary of
investing in Green Bonds and perceives them as high
4. Impact Bonds: The Impact Bonds are a form
risk investments.
contractual agreement between Investors
implementation agency wherein the investors money to Lack of Sector Diversification: Presently, most of the
implementation agency only if it is ab to achieve the proceeds of the Green Bonds are used for development
pre-determined empirically verifiable social indicators. of renewable energy projects. The Green Bonds need to
be used for diversified purposes such as forestry and

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marine conservation to strengthen the Green. Bond value is derived from that of the underlying asset. This
Market is why they are called 'Derivatives'. Generally stocks,
bonds, currency, commodities and interest rates form
Smaller Projects: Most of the time, the Green Bonds are the underlying asset.
issued for smaller projects leading to smaller issue size
of such bonds. This is in turn hindering the full-fledged A. Advantages of Derivatives
development of the Green Bonds Market.
They help in transferring risks from risk adverse people
Definition of ESG Investment to risk oriented people.

The ESG strategy revolves around investing in They help in the discovery of future as well as current
companies that score high on three non-financial prices.
parameters i.e. environment friendliness, social
responsibility, and governance. The focus is on They catalyse entrepreneurial activity.
companies that adopt environment-friendly practices, They increase the volume traded in markets because of
produce products or services that influence society participation of risk averse people in greater numbers.
positively and conduct their business ethically They increase savings and investment in the long run.
Some of the aspects of ESG investment can include: B. Types of Derivative Instruments
Social Responsibility: Normally investors do not invest Derivative contracts are of several types. The most
in sectors that are deemed harmful such as Tobacco. common types are forwards, futures, options and swap.
liquor etc.
1. Forward Contracts: A forward contract is an
Environment Friendliness: The Investors make more agreement between two parties - a buyer and a seller to
investment in the companies which have reduced purchase or sell something at a later date at a price
carbon footprint, follow emission norms, waste agreed upon today. Any type of contractual agreement
recycling etc. Ethical Business: The investors avoid that calls for the future purchase of a good or service at
firms which have poor governance. a price agreed upon today and without the right of
Importance of ESG Investment cancellation is a forward contract.

Pressure from the investors force the corporate world to 2. Future Contracts: A future contract is an agreement
behave responsibly from a social, environmental and between two parties a buyer and a seller - to buy of sell
governance perspective. something at a future date. The contract trades o a
futures exchange and is subject to a daily settlement
Factors such as climate change and governance issues procedure Future contracts evolved out of forward
poses risks to corporate earnings. Companies that are contracts and possess the same characteristics. Unlike
aligned with ESG norms usually have lower risk of forward contracts, futures contracts trade on organized
losses due to these factors. exchanges, called future markets Future contracts also
differ from forward contracts in that they are subject to
Benefits the Investors through increase in the corporate a daily settlement procedure
earnings.
3. Options Contracts: Options are of two types. Calls
7.6.4 Derivatives and put

A derivative is a financial contract between two parties Call Option: Call option is a derivative contract
which derives its value/price from an underlying asset. between two parties where a buyer of the call option
The buyer agrees to purchase the asset on a specific earns a right (it is not an obligation) to exercise his
date at a specific price. Originally, underlying corpus is option to buy a particular asset from the call option
first created which can consist of one security or a seller for a stipulated period of time. Once the buyer
combination of different securities. The value of the exercises his option (before the expiration date), the
underlying asset is bound to change as the value of the seller has no other choice than to sell the asset at the
underlying assets keep changing continuously. These strike price (the price at which it was originally agreed).
financial instruments help one make profits by betting The buyer expects the price to increase and thus earns
on the future value of the underlying asset. So, their capital profits.

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(b) Put Option: Put option is a derivative contract Significance of the Agreement: Improves the
between two parties where a buyer of the put option confidence in the financial market. Enables the agreed
earns a right (it is not an obligation) to exercise his amount of capital being available to the country.
option to sell a particular asset to the put option seller
for a stipulated period of time. Once the buyer of put
exercises his option (before the expiration date), the Bring down the cost of capital for domestic entities
seller of put has no other choice than to purchase the while accessing the foreign capital market.
asset at the strike price at which it was originally
agreed. The buyer of put expects the value of asset to Aids in bringing greater stability to foreign. exchange
decrease so that he can purchase more quantity at lower and capital markets.
price.
5. Currency Derivatives: Currency derivatives are a
Features of Options: contract between the seller and buyer, whose value is to
be derived from the underlying asset, the currency
A fixed maturity date on which they expire (Expiry value. A derivative based on currency exchange rates is
date). The price at which the option is exercised is an agreement that two currencies may be exchanged at a
called the exercise price or strike price. future date at a stipulated rate. Underlying asset can be
The person who writes the option and is the seller is securities, stock market index, commodities, bullion,
denoted as the "option writer", and who holds the option currency or anything
and is the buyer, is called "option holder". else From Currency Derivatives market point of view.
The premium is the price paid for the option by the underlying asset would be the Currency Exchange rate
buyer to the seller. NSE was the first exchange to have received an in-
principle approval from SEBI for setting up currency
A clearing house is interposed between the seller and derivative segment
the buyer which guarantees performance of the contract.
7.6.5 Mutual Funds
4. Swaps: They are private agreements between two
parties to exchange cash flows or liabilities in the future A mutual fund collects money from investors and
according to a prearranged formula. They can be invests the money, on their behalf, in securities (debt,
regarded as portfolios of forward contracts. The two equity or both) A mutual fund is a mediator that brings
commonly used swaps are interest rate swaps and together a group of people and invests their money in
Currency swaps. stocks, bonds and other securities Each investor owns
shares, which represent a portion of the holdings of the
Interest Rate Swaps: These involve swapping only the fund. Thus, mutual fund offer investment options for the
interest related cash flows between the parties in the
common man to invest in a diversified, professionally
same currency. These interest related cashflows may be managed basket of securities at a relatively low cost
on account of fixed/ floating rate of interest.
A. Features of Mutual Fund
Currency Swaps: These entail swapping both principal
and interest between the parties, with the cash flows in It charges a small fee for managing the money.
one direction being in a different currency than those in
the opposite direction. Mutual funds make saving and investing simple and
affordable. Anybody with an investible surplus of as
Currency Swap Agreement: It is an arrangement little as a few hundred rupees can invest in mutual funds
between two friendly countries to involve in trading in
their own local currencies. Asset management is the process of taking investor
capital and putting it to work in different investments
As per the arrangements, both countries pay for import including stocks, bonds, real estate, master limited
and export trade at the pre-determined rates of partnerships, private equity etc. The company that puts
exchange, without bringing in third country currency. In together a mutual fund is called an AMC. An AMC may
such arrangements no third country currency is have several mutual fund schemes with similar or
involved, thereby eliminating the need to worry about varied investment objectives.
exchange variations.

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SEBI is the regulatory body to control and regulate the following are the three main types of mutual funds.
securities market and mutual funds industry in India. there
Infrastructure investment Trust (Invit) and Real estate
Investment Trust (RelTs) are examples of mutual funds. Equity Funds: Equity mutual funds invest primarily
stocks and equity-oriented instruments. These funds buy
B. Advantages of Mutual Funds the shares of companies that are publicly listed o stock
exchanges like BSE and NSE.
There are many advantages and benefits of investing
mutual funds such as Debt Funds: Debt mutual funds invest in fixed income
instruments like government securities, corporate
Expert Money Management: A mutual fund com bonds, treasury bills, money market instruments, etc.
employs professional managers to manage the mo Debt funds are also known as fixed income funds, but
invested in their funds they don't provide guaranteed returns. They generally
BENEFITS OF MUTUAL FUNDS deliver higher returns as compared to fixed income
investments like fixed deposits and recurring deposits.
Diversification
Hybrid Funds: These are mutual funds that invest in
Flexible more than one type of asset class. Hybrid funds are of
various types, which invest in equity as well as debt.
Mutual Funds
There are also other kinds of hybrid funds that invest
Higher Returns some portion in gold as well. The most popular type of
hybrid fund is the balanced fund. These funds invest at
Low Cost: Mutual Funds companies charge a nominal least 65% of their assets in equities and the rest in debt.
fee to manage the money. This fee is called the fun Balanced funds are equity-oriented hybrid funds. There
expense. are other types of hybrid funds as well that are debt-
oriented.
Convenience: It is easy to invest in a mutual fu Unlike
earlier, the process can be complete paperless and D. Issues Related to Mutual Fund Market
online.
Investments are Subject to Market Risk: The mutual
Diversification: An investment in mutual fund mears funds investment in companies even with weaker
investment in different stocks or papers for a small balance sheets do well during the period of higher
amount. growth rate with no undue pressure of liquidity.
However, when there is stress in the economy, such
Systematic Investments: A systematic investments plan
weaker balance sheets and high leverage are the first to
(SIP) is one of the biggest benefit of mutual funds An
default.
SIP allows investors to invest a fixed amount eve month
at a pre-decided date. Further, Indian Financial markets are volatile- nearly
30% of market value of India's stock exchange have
Flexibility: Apart from tax-saving mutual funds (as)
eroded in the last 4 months. This lowers the attraction
known as ELSS funds), no other mutual funds have a
towards mutual funds as a lucrative investment option
lock-in period. Investments in them are complete
and affects the overall economy. No Accountability of
flexible.
Credit Rating Agencies Fund Houses abdicate their
Liquidity: Mutual funds are completely liquid responsibility to credit rating agencies. Based on these
investments. You can redeem your invested money any ratings of assets (AAA rated assets being he most secure
time you want, without any questions being aske investment option) done by these agencies, investments
are made.
C. Types of Mutual Funds
However, sometimes even the most secure
Mutual funds can be broadly classified into three investment/companies that default or engage in corrupt
categories based on the asset classes they invest in. practices. Moreover, there is no accountability of these
Equity and dec are the primary asset classes that mutual agencies.
funds put accumulated funds in. On the basis of this, the

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Menace of Misinformation: The main objective of the A. Benefits of ETF's

fund houses is asset-gathering, and don't play the
fiduciary role as a trustee of other people's money. Following is the benefits of investing in ETFS

Moreover, Debt investment is the specialised domain of Tax Benefits: ETFS are a "tax friendly" investment as
a small group of finance professionals Many investors capital gains taxes are generally lower for ETFs than for
in mutual funds don't even understand that debt traditional mutual funds due to the structure of each
schemes are mislabelled as fixed-income schemes, trade.
which give investors the impression that they are Cost Effectiveness: Low expense ratio resulting in
similar to fixed deposits. lower cost.
E. Suggestion to Improve the Mutual Fund Sector Accountability: The company sponsor, designer, and
SEBI should revise rules to crack down on mis- creator of the ETF publishes the list of assets in the fund
labelling and mis-selling, and segregate debt funds run on a daily basis.
for institutional and retail investors. Immediate Dividends: With most ETFs. (open-ended
Regulatory reforms, such as a simplified KYC to make dividends are immediately reinvested back into the
onboarding hassle-free; making Aadhar interchangeable fund.
with PAN; and allowing investments on the basis of Simplicity: ETFS are simple in structure and should b
Bank KYC, should be taken. easy to understand, with exception of intricate funds
Technology will be the biggest enabler for growth as such as leveraged and inverse ETFs.
mutual funds are already noticing increasing traction Diversification: ETF based on broad market indices
from online channels like fintech platforms, mobile provides diversification to investments. Trading C ETF
apps and websites. on exchange provides flexibility and liquidity
There is a need to fix the accountability of credit-rating investments.
companies and fund companies There is a need to B. GOLD ETF
engage domestic investment in India's financial market.
This will reduce dependence on the foreign investment Gold ETF stands for gold exchange traded funds and
(hot money), which in turn, will curb volatility and are traded in stock exchange like usual stocks and
provide stability to Indian financial market generally one unit of gold ETF represents one gm of
gold A gold exchange traded fund is a commodity ETF
that consists of only one principal assets. gold The fund
itself consists of gold derivative contracts that are
backed by gold, one do not actually own any gold

Purpose of a Gold ETF: Gold ETF's are investment

products that combine flexibility of stock investment
and simplicity of gold investment
7.6.6 Exchange Traded Funds
(ETF'S) Advantages of Gold ETF: There are various advantages
associated with holding gold ETF instead of actual gold.
An ETF, or exchange-traded fund, is a basket of market
security that tracks an index, a commodity, bonds a Virtual: In case of gold ETF the gold is held virtually in
basket of assets like an index fund it is traded on a the demat account and one doesn't have to worry about
exchange just like a stock ETFS experience price it being stolen or lost.
change throughout the day as they are bought and sold Purity: There is no risk of getting cheated and being
its trad value is based on the Net Asset Value (NAV) of sold impure gold unlike the case with actual gold. Gold
Under stocks that it represents ETFs typically have ETF's back their assets by buying actual physical gold
higher da liquidity and lower fees than mutual fund of 99.5%
shares, market them an attractive alternative for
individual investors Liquidity: Gold ETF's are very liquid and can be sold in
the stock market at any time

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Selling at Market Price: Gold ETF when sold in the Utilities (20%)
stock market will fetch the current market price
Divisibility: It may not be possible or practical to buy 1 While selecting the constituent, government tried to
gm of gold but with the Gold ETF one can even buy the ensure that the Bharat 22 Index would be better
smallest one unit (1) Unit equivalent to 1 gm of gold) performing than the previous indices.

e-gold: e-gold is held electronically in the demat form The Bharat 22 ETF offers advantages like low expense
and can be freely converted into physical gold In India, ratio diversified investment, discount for retail investor
e-gold is offered by the National Spot Exchange and services of real time investment and monitoring.
Limited (NSEL), which gives investors the option to How ever it has been observed that Bharat 22 ETF has
invest in commodities such as gold, silver and platinum three private sector companies (ITC, L&T, Axis Bank)
online. Any investor can buy gold in small quantities on and 19 PSUs, but the weight of the private sector is a
the NSEL and sell it after making a profit. He also has substantial 44% thereby making the ETF highly
the option of taking physical delivery of the metal concentrated.

C. CPSE ETF E. CPSE ETF and BHARAT-22: A Comparison

Indian government has undertaken strategic stake sale The Bharat 22 portfolio has three clear points of
in profitable PSUs to help boost state revenue and difference with the earlier CPSE ETF.
bridge the fiscal deficit. Bharat-22 will have 22 constituents against CPSE
The CPSE ETF, which mirrors the performance of the ETF's 10.
CPSE index invests in 10 PSUs, namely, ONGC, Coal
India, Indian Oil Corp, Gail India, Oil India, Power Bharat-22 will be more diversified, and will capture the
Finance Corp. Bharat Electronics, Rural Electrification PSU universe better than the CPSE ETF. One of the
Corp. Engineers India and Container Corporation of drawbacks of the earlier CPSE ETF was its unduly
India. heavy exposure (over 62 per cent) to the public sector
energy giants, which made it quite a risky portfolio to
Government had first launched a CPSE ETF (Central own.
Public Sector Undertakings Exchange Traded Fund) in
March 2014, where it raised 3,000 crore through the Instead of packing the portfolio with cyclical businesses
initial public offering. as its predecessor did, Bharat 22 blends sectors with
secular growth prospects (FMCG and utilities), and
Following this, the government launched subsequent cyclical ones (energy, metals, industrials). This
follow-on public offers. smoothens out the return experience for the investors.
D. BHARAT-22 Bharat 22 consist of equity stakes held by the Specified
Bharat 22, a new exchange traded fund (ETF) Undertaking of Unit Trust of India (SUUTI) in private
comprises of 22 stocks including Central Public Sector sector blue-chips such as L&T, Axis Bank and ITC, this
Enterprises (CPSES), public sector banks (PSBS), and gives an attractive option to the investor, therefore it is
Specified sought that Bharat 22 will garner better response than
the CPSE ETF did.
Undertakings of the Unit Trust of India (SUUTI). The
earlier ETF, the CPSE ETF. had many energy F. Positives of ETF The ETF mechanism has proven to
companies but Bharat 22 is a well-diversified ETF be a smart, effect way for the government to help meet
spanning six sectors i.e its disinvestment targets, a key factor to keep fiscal
deficit under conte The ETF route provides a neat
Basic materials (4.4%). workaround by le the government pare small stakes (23
per cent) big basket Large Investors such as sovereign
Energy (17.5%). funds investing in ETFs as it is low cost and less risky a
Finance (20.3%). highly liquid assets.

FMCG (15.2%). G. Negatives of ETF

Industrials (22.6%).

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Seasoned investors in India are often wary of betting on company; Standard Chartered issued the first IDR in
PSUS owing to the Government's unwillingness allow India) or in general as GDR Global Depository Receipt.
them to operate on wholly commercial lines. State-
owned firms must repair its investor-unfriend image so A. American Depository Receipts (ADRs)
as to command valuations that match the private sector American Depository Receipts (ADRs) is a way of
peers, and befit their size and mare position. trading non-US stocks on the US exchange Say Indian
companies who are willing to raise funds from the US
can do so by issuing shares on American Stock
exchange

However, the issuance of ADR is governed by the rules

and regulations as laid down by the regulator Securities
and Exchange Commission (SEC) of USA The Indian
Companies will have to maintain accounts as per the
American Standards

B. Global Depository Receipts (GDRs)

7.6.7 Depository Receipts: As per the Companies Act, 2013, "Global Depository
Receipt" means any instrument in the form of a
ADR/GDR depository receipt created by a foreign depository
Meaning outside India and authorised by a company making an
issue of such depository receipts.
A Depository Receipt (DR) is a financial instrument
representing certain securities (e.g., shares, bonds etc While ADRS are denominated in dollars and traded on
issued by a company/entity in a foreign jurisdiction US national Stock Exchange, GDR's can be
Securities of a firm are deposited with a domestic denominated either in dollars or in Euros and are
custodian in the firm's domestic jurisdiction, and commonly listed on European Stock Exchanges.
corresponding "depository receipt" is issued abroad ADR is listed in American Stock Exchange i.e. New
which can be purchased by foreign investors. DR a York Stock Exchange (NYSE) or National Association
negotiable security (which means an instruments of Securities Dealers Automated Quotations
transferable by mere delivery or by endorsement and (NASDAQ). Conversely, GDR is listed in non-US stock
delivery) that can be traded on the stock exchange so exchanges like London Stock Exchange or Luxembourg
desired. Stock Exchange.
DRS constitute an important mechanism through which ADR can be negotiated in America only whereas GDR
issuers can raise funds outside their home jurisdiction can be negotiated all around the world.
DRs are issued for tapping foreign investors who
otherwise may not be able to participate directly in the 7.6.8 Foreign Currency Convertible
domestic market.
Bond (FCCB)
For investors, depository receipt is a way of
diversifying the risk, by getting exposure to a foreign A foreign currency convertible bond (FCCB) is a type
market, b without the exchange rate risk as they are of Convertible bond issued in a currency different than
foreign currency denominated. Further, they feel more the issuer's domestic currency. In other words, the
safe invest from their home location. money being raised by the issuing company is in the
form of a foreign currency. A convertible bond is a mix
Depending on the location in which these receipt are between a debt and equity instrument. It acts like a bond
issued they are called as ADRS or America Depository by making regular coupon and principal payments, but
Receipts (if they are issued in USA on the basis of the these bonds so give the bondholder the option to
shares/securities of the domestic (sa Indian company), convert the bond
IDR or Indian Depository Receipt (if they are issued in
India on the basis of the shares securities of the foreign The Indian companies cannot directly list their equity
shares on the international stock exchange. So in order

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to overcome this problem: the companies give shares to When converted into equity, FCCB bring down
American bank These American banks in return for earnings per share and dilute the ownership.
those shares provide receipts to the Indian companies.
The companies raise funds by providing those ADR Exchange rate risk due to conversion at a future date.
receipts in American share market
7.6.9 Participatory Notes (P-Notes)
The investors of foreign country can buy and sell
shares directly and the investor is free to convert the A. Meaning
ADR to receive the equivalent number of shares into Participatory notes also called P-Notes are offshore
stock. These types of bonds are attractive to both derivative instruments with Indian shares as underlying
investors and issuers. assets.
A. Features

A bond expressed in foreign currency. Participatory notes are issued by brokers and FIls
The principal and the interest is payable in foreign registered with SEBI. The investment is made on behalf
currency. of these foreign investors by the already registered
brokers in India. For example, Indian-based brokerages
The bonds are subscribed by a person residing outside buy India- based securities and then issue participatory
India notes to foreign investors.
The issuer of the bond is an Indian company. The brokers that issue these notes or trades in Indian
securities have to mandatorily report their PN issuance
The bonds are convertible into equity shares of another
status to SEBI for each quarter. These notes allow
company which is also called the offered company foreign high net worth individuals, hedge funds and
B. Benefits other investors to put money in Indian markets without
being registered with SEBI, thus making their
Issuers: participation easy and smooth. P-Notes also aid in
saving time and costs associated with direct
Coupon payment on bond is lower due to the option of
registrations.
conversion.
B. Use Investing through P-Notes is very simple and
Conversion premium is added to the capital reserves
hence very popular amongst Fils.
Fewer covenants as compared to a syndicated loan or a
Overseas investors who are not registered with SEBI
debenture.
have to go through a lot of scrutiny, such as know-your-
Investors: Assured returns in the form of fixed coupon customer(KYC) norms, before investing in Indian
rate payments shares. To avoid these hurdles, foreign investors take
this route.
Ability to take advantage of price appreciation in the
stock by the means of warrants attached to the bonds. Trading through participatory notes is easy because they
are like contract notes transferable by endorsement and
Lower tax liability as compared to pure debt delivery.
instruments due to lower coupon rate.
C. Concerns of Government and Regulators
C. Disadvantages of FCCB
The primary reason why P-Notes is a cause of concern
In a falling stock market, there is no demand for is because of the anonymous nature of the instrument as
FCCBs, because a fall in stock prices means investors these investors could be beyond the reach of Indian
will not convert their bonds into equity as shares of regulators.
most companies are trading well below the agreed
conversion price. The result is that the companies will Further, there is a view that it is being used in money
have to redeem the bonds by raising money at the laundering with wealthy Indians, like the promoters of
higher interest rates than prevalent in current times. companies, using it to bring back unaccounted f and to
manipulate their stock prices. fun

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Also, it is possible for the P-Note holder to furth sell The International Finance Corporation (IFC), the
Participatory note in his/her possession, t further investment arm of the World Bank, in November 2014,
making the task of a regulator more difficult as issued a 1.000 crore bond to fund infrastructure projects
anonymity has further increased because of m layers of in India. These bonds were listed on the London Stock
investors being formed. man Exchange (LSE)

Short-term speculative traders from overseas cause ΠΕ FC then named them Masala bonds to give a local
volatility in markets using this route flavour by calling to mind Indian culture and cuisine.

D. Regulating Participatory Notes B. Meaning

Steps taken by SEBI: SEBI has taken a number of step These are rupee-denominated borrowings by Indian
to tighten rules on P-Notes: In 2007, P-Notes were entities in overseas markets. Usually, while borrowing
banned for a short while due a surge in capital flows in overseas markets, the currency is a globally accepted
and excess liquidity. one ke dollar, euro or yen.

From January 2011, Falls have had to follow KYC C. Objectives

norms and submit details of transactions.
The Masala bonds were launched with three objectives:
The tightened KYC and disclosure requirements ODIS . One, to help Indian companies access low-risk
will provide the foreign investors an easier and borrowings from abroad,

cost-effective route to invest in Indian markets with Two, to help internationalise the rupee and take a step
directly registering as Foreign Portfolio Investor (FPIs) further on the road to full convertibility of the currency.

Under the new norms, all the users of ODIs would have Three, Fuel internal growth via borrowing and to fund
to follow Indian KYC and AML (Anti Money infrastructure project in India.
Laundering Regulations, irrespective of their
jurisdictions, when the ODI issuers will be required to
file suspicious transaction reports, if any, with the
Indian Financia Intelligence Unit, in relation to the
ODIs issued by them. D. Key Points

In 2014, it was made mandatory for those issuing P- The Masala Bonds are famous among the Indian
Notes to submit a monthly report disclosing their corporates as one of the best fund-raising options in
portfolios. This led to a decline in the number of entities debt segment to get a lower cost of borrowing which
issuing P-Notes. they always seek for.

SEBI mandated that, the anti-money laundering rules The bonds, offered to overseas investors, are set in
(AML) will be applicable to P-Note holders. rupee terms but are settled in foreign currency, usually
the US dollar. Thus, the currency risk is borne by the
investors. If the rupee weakens, the investors lose and if
SEBI issued norms on transferability of P-Note: the rupee gains, they benefit.
between two foreign investors. However, the Masala Bonds bear the risk of currency
SEBI in a consultative paper, proposed a fee $1,000 volatility in the global markets. Hence, hedging is
every three years, on ODI (Offshore Derivative always needed for these bonds.
Instrument) issuers and each investor, in order to If Masala bonds get a significant response in the
"discourage the ODI subscribers from taking the OD overseas market, then the Indian rupee may get a good
route" and push them instead to register as foreign boost, which may led to appreciation in the value of
portfolio investors. rupee.

7.6.10 Masala Bonds Despite the foreign currency risk, the masala bonds
should find takers because the interest rate on these
A. Background

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bonds is attractive compared with the low single-digit Markets and Listing Venues: Masala Bonds can only be
rates offered in many of the big global economies. resident of a country issued in a jurisdiction and can
only be subscribed by a which is a member of Financial
E. Features of Masala Bonds Action Task Force (FATF).
Issuers: Eligible issuers under the ECB Framework whose securities market regulator is a signatory to the
include all entities eligible to receive foreign direct International Organization of Securities Commission's
investment (IOSCO's) Multilateral Memorandum of Understanding
(FDI), port trusts units in special economic zones, (MOU):
specialised financial institutions such as Small should not be a country identified in the public
Industries Development Bank of India (SIDBI) and the statement of the FATF as a jurisdiction having anti-
Export Import Bank of India (EXIM Bank), and money laundering or terrorism financing deficiencies or
registered units engaged in micro-finance Indian entities a jurisdiction that has not made sufficient progress in
like HDFC, NTPC and India bulls Housing have raised addressing those deficiencies.
funds via Masala Bonds

Investors: Investors from outside of India who would

like to invest in Indian assets can invest in Masala
bonds.

Pricing: The maximum amount which can be borrowed

by an entity by issuance of Masala Bonds is USD750 F. Advantages
million (approximately INR50 billion). Any increase in
the issue size beyond USD750 million in a financial Security: Rupee Bonds can be secured with an asse!
year will require the prior approval of the RBI. backing as provided under Indian law Pricing: The
regulations do not provide for any limit on the rates or
Tax Treatment: Consistent with the tax treatment of
structure of return/interest
bonds issued by Indian issuers, a withholding tax of 5%
is applicable to interest income. Liquidity: Subject to the restrictions as provided, the
subscriber to these bonds will have greater flexibility to
Use of Proceeds: The proceeds of a Masala Bond issue
transfer/sell the Rupee Bonds to a third party (domestic
can be used by the issuer for all purposes except for
or offshore). Listing: These bonds can be listed on
Real estate activities (including acquisition of land) recognized stock exchange. With this the subscribers
except development of integrated townships or will have greater flexibility to sell these shares on
affordable housing projects. trading platform

Investment in capital markets (including domestic G. Disadvantages

Indian equity investments).
Listing Compliance: The issuer of the Masala Bonds, if
Activities otherwise prohibited under the existing listed on any recognized stock exchange. will be
foreign direct investment regulatory framework; and considered as a 'Listed Company under the Companies
Act, 2013 and will be required to adhere to all
On-lending to other entities for the purposes of any of applicable provisions for listed companies Exchange
the preceding restricted uses. Risk to the investors
Additionally, issuance proceeds from issuance of
H. RBI's Concern
Masaia Bonds cannot be utilised for working capital
purposes. general corporate purposes or repayment of Since Masala bonds are issued in rupee, the issuer is not
rupee loans unless the borrowing fulfils certain exposed to currency risks. However, some lower rated
minimum maturity requirements or if it is from offshore firms have issued these bonds, potentially raising
shareholders which again will be subject to minimum concerns.
maturity requirements.
Steps taken by RBI to Regulate Masala Bonds

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Recognising the potential advantages that Masala The Companies Act 2013 is an Act of the Parliament
Bonds may have in increasing the value of the Indian India which regulates incorporation of a company las
Rupees (INR) in a global trade and investment scenario, down responsibilities of a company, directors, dissolute
the Reserve Bank of India (RBI) issued its Notification of a company. The 2013 Act has replaced the Company
dated September 29, 2015 to facilitate the same Act, 1956. All the activities, right from the formation to
permitting Indian companies to issue such bonds within the liquidation of company and regulation and
the policy framework relating to external commercial governance including issue of capital, capital structure
borrowings (ECBS). of compare dividend distribution, inter corporate
investments allotment of shares, etc. are covered in the
In June 2017, The Reserve Bank of India (RBI) brought Companies Act. The Companies Act is administered by
in some restrictions on issuance of rupee-denominated Department of Company Affairs and the Company Law
bonds, or masala bonds, by harmonising the issuance Board of the Ministry of Law, Justice and Company
norms on a par with those for external commercial Affairs of the Centre Government.
borrowings (ECBs). As per RBI guidelines, masala
bonds must have a minimum maturity of three years for C. SEBI Act, 1992
issuances of up to $50 million. Sales above that amount
would need to have maturities of five years or above. As a part of the process of globalization, reforms we
inevitable in the Indian financial system as it was
7.7 Regulation of Capital vulnerable to external shocks after liberalization,
privatization, an globalization introduced in the system.
Market in India There was a nee felt to have an independent body as a
vigilant regulated authority. Certain powers under
A. Securities Contracts (Regulations) certain sections of Securities Contract (Regulation) Act
Act, 1956 and Companies Act have no been delegated to the
SEBI. The SEBI has its head office Mumbai and the
The SCRA, 1966 was passed based on the organization is under the overall control the Ministry of
recommendation of the Gorwala Committee. There was Finance, Central Government. SEBI Act was enacted to
a need to enact an act to regulate and control activities avoid the problem of multiple regulatory bodies Hence,
of the stock exchange. inception of SEBI gave way for a single, high visible
and independent organization, backed by a statute
A well regulated market. on which investors can s rely, Primary objective of SEBI Act is to protect the interest
would have encouraged transformation of saving n of the investor in securities and to promote the
investment in the country development and to regulate the securities market.
Markets
D. Depositories Act, 1996
It provides for direct and indirect control of aspects of
the advent of new technology and need for faster
securities trading and the running of exchanges and
Settlement there was a need to regulate matters in the
aims to prevent undesirable transaction in securities. It
capital market The Depositories Act, 1996 provides
gives Central Government regulator jurisdiction over
legal framework for establishment of depositor is to
(a) stock exchanges, through a process of recognition
ciliates holding of securities including shares in
and continued supervision, (b) contras in securities, and
physical/ materialised form and to effect the transfer of
(c) listing of securities on stock exchanges. virtually a
securities ought book entry only
store

As a condition of recognition, a stock exchange E . RBI Provisions for NBFC's

complex with conditions prescribed by Central the recent times, the NBFC sector has seen tremendous
Government Organised trading activity in securities growth For instance, in last five years alone, size of
takes plan on a specified recognised stock exchange. balance sheet of NBFCs has more than doubled from
The stop exchanges determine their own listing 20.72 lakh ore (2015) to 49.22 lakh crore (2020). As of
regulations, which have to conform to the minimum now, there ere close to 9.560 NBFCs in India.
listing criteria set our the Rules.

B. Companies Act, 2013

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The RBI has proposed a significant shift in its 1 member from the Reserve Bank of India,
regulatory approach towards India's non-banking
financial companies 5 other members of whom at least three shall be the
whole-time members
7.8 Securities and Exchange 7.8.4 Powers
Board of India (SEBI)
SEBI is a quasi-legislative and quasi-judicial body
which can draft regulations, conduct inquiries, pass
7.8.1 Introduction rulings and impose penalties.
Reforms were inevitable in the Indian financial system
It functions to fulfill the requirements of three
as was vulnerable to external shocks after liberalization,
categories:
privatization, and globalization. There was a need felt
have a an independent body as a vigilant regulatory A. Issuers
authority
By providing a marketplace in which the issuers can
The Securities Contract (Regulation) Act, 1956 increase their finance. In this respect, it Calling for
empowers e Central Government to regulate stock information, undertaking inspection. conducting
exchanges. n India The Government of India realised inquiries and audits of the stock exchanges, mutual
the need for an apex institution to regulate Stock funds, other persons associated with the securities
Exchanges and to promote an orderly growth of market, intermediaries and self- regulatory
securities market. SEBI is a statutory body established organizations in the securities market.
on April 12, 1992 in accordance with the provisions of
the Securities and Exchange Board of India Act, 1992. Regulating substantial acquisition of shares and
The basic functions of the Securities and Exchange takeover of companies.
Board of India is to protect the interests of investors in
Prohibiting insider trading in securities.
securities and to promote and regulate the securities
market. B. Investors
7.8.2 Evolution By ensuring safety and supply of precise and accurate
information. In this respect, it:
Before SEBI came into existence Controller of Capital
Issues was the regulatory authority it derived authority Promoting and regulating self-regulatory organisations;
from the Capital issues (Control) Act, 1947 Prohibiting fraudulent and unfair trade practices relating
to securities markets; Promoting investors' education
In April, 1988 the SEBI was constituted as the regulator and of intermediaries of securities markets
of capital markets in India under a resolution of the
Government of India .Initially SEBI was a non statutory C. Intermediaries
body without any statutory power It became
autonomous and given statutory powers by SEBI Act By enabling a competitive professional training for
1992 market intermediaries. In this respect, it Registering and
regulating the working of stock brokers, sub-brokers,
The headquarters of SEBI is situated in Mumbai The share transfer agents, bankers to an issue, trustees of
regional offices of SEBI are located in Ahmedabad trust deeds, registrars to an issue, merchant bankers,
Kolkata, Chennai and Delhi underwriters, portfolio managers, investment advisers
and such other intermediaries who may be associated
7.8.3 Structure with securities markets in any manner.
The SEBI Board Shall Consist of the Following Registering and regulating the working of venture.
Members. capital funds and collective investment schemes,
including mutual funds.
A Chairman, 2 members from Ministry of Central
Government dealing with finance & administration of
the Companies Act, 2013,
7.8.5 Functions

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• Establishing clearing corporations

• Nurturing the mutual fund industry and so on.
1. Market Regulation: SEBI acts as the watchdog for
the Indian Capital Market. SEBI prescribes the
conditions for issuer companies to raise capital from the 7.8.7 Issues with SEBI
public so as to protect the interest of the suppliers of
There is excessive focus on regulation of market
capital (investors). The extensive disclosures prescribed
for issuers facilitate informed investment decision conduct and lesser emphasis on prudential regulation
making by investors while simultaneously ensuring SEBI statutory enforcement powers are greater than
quality of the issuer. counterparts in the US and the UK as it is armed w far
greater power to inflict serious economic inju It can
2. Market Development: SEBI keeps initiating measures
impose serious restraints on economic activity this is
to widen and deepen the securities markets by bringing
done based on suspicion, leaving it to those affected to
changes in market micro and macro-structure. The
shoulder the burden of disproving the suspicion,
major market development measures undertaken by
somewhat like preventive detention.
SEBI include transparent screen based online trading
system, shifting to electronic mode (demat), robust risk Its legislative powers are near absolute as the SEBI A
management framework, etc. grants wide discretion to make subordinate legislation
3. Enforcement: SEBI ascertains compliance to its The component of prior consultation with the market
norms by carrying out inspections of registered and a system of review of regulations to see if they have
intermediaries, investigations and while processing of met the articulated purpose is substantially missing As a
documents filed with it, including investors complaints. result, the fear of the regulator is widespread
SEBI is vested with the power of civil court to call for Regulation, either rules or enforcement, is far from
information and records, to issue summons, to inspect perfect, particularly in areas like insider trading.
and to investigate entities associated with securities
markets. Apart from these civil proceedings, SEBI also The Securities offering documents are extraordinary
launches criminal proceedings against entities for bulky and have substantially been reduced to forma
breach of norms. compliance rather than resulting in substantive
disclosures of high quality.
4. Investor Protection: SEBI also has a comprehensive
mechanism to facilitate redressal of investor's 7.8.8 Suggestions
grievances. Further, in keeping with its belief that an
informed investor is a protected investor, SEBI There is need for an attitudinal change, indeed hundreds
promotes education and awareness of investors. of inputs about the market being fu of crooks
Moreover, mechanisms for dispute redressal (arbitration necessitating a crackdown and severe intervention
at stock exchanges) and to compensate investors have would be received.
also been provided.
SEBI needs deep review and research as to what ca be
done better. The size of funds that get raised ca never be
a barometer of success for how this segment of the
market regulation is performing. The foremost objective
of SEBI should be cleaning the policy space in this area
of the market.
7.8.6 SEBI's Achievements SEBI must give special attention to human resources
and matters within the organisation. SEBI must
It has ensured a well-functioning market and driven
encourage lateral entry to draw the best talent.
mark development:
Alignment and fitment of senior employees’ merger of
• Dematerialisation of shares the Forward Markets Commission into remains an open
• Shortening settlement cycles Initiating area of work.
nationwide electronic trading
• Introducing risk management systems

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Enforcement can be strengthened with continuous complaint and allotting a unique complaint number to
monitoring and improving market intelligence This the complainant for future reference and tracking.
requires a rich talent pool.
The complaint forwarded online to the entity concerned
India's financial markets are still segmented One for its redressal. The entity concerned uploads an Action
regulator can't be blamed for another's failure when the Take Report (ATR) on the complaint SEBI peruses the
remit over a financial product overlaps ATR and closes the complaint if it is satisfied that the
complaint has been redressed adequately.
In this context a unified financial regulator makes
eminent sense to remove both overlap and excluded General Grievances of Investors: Delay/default in
boundaries payment of interest and repayment of deposits

7.8.9 Initiatives Delay in listing of securities with Stock Exchanges.

Delay/Non receipt of refund orders, allotment letters
A. Investor Education and Protection Fund (IEPF) and share certificates/Debenture certificates/ bonds

EPF has been established under Section 125 of the Furnishing inadequate information or making
Companies Act, 2013 for promotion of investor's misrepresentation in prospectus, application form,
awareness and protection of the interests of investors. advertisements and rights offer documents

Activities Stipulated Under Rules: Education Delay/ Non receipt of Bonus Shares/ Rights Shares Non
programme through Media. receipt of Notices for meetings.

Organizing Seminars and Symposia. (Proposals for Non Receipt of Annual Reports.
registration of Voluntary Associations or other
organizations engaged in Investor Education and D. Investor Education and Financial Literacy
Protection activities. In the developing countries, the growing number of
investors, technically advanced financial markets.
Proposals for projects for IEP including research
activities and proposals for financing such projects. liberalized economy etc. necessitates imparting of
financial education for better operation of markets and
Coordinating with institutions engaged in Investor economy and in the interest of investor. Further
Education, awareness and protection activities. imparting of financial education is international concern
due to growth of international transactions, international
financial instruments like ADR, GDR etc., mobility of
B. Ombudsman individuals from one country to another etc.

Ombudsman, in is literal sense, is an independent Initiatives taken so far on financial literacy in India
person appointed to hear and act upon citizen's include Securities Market Awareness Campaign,
complaints about Government Services. In this regard, Financial Literacy -cum-Counselling Centre, etc.
SEBI has Issued SEBI (Ombudsman) Regulations,
2003. As per This Ombudsman means any person 7.9 Stock Market Scams in India
appointed under the aforesaid regulations and also
includes stipendiary ombudsman. 7.9.1 Introduction
C. SCORES Portal (SEBI Complaints Redress System) The Indian stock exchanges were mostly broker
dominated, and the concept of governance was not
SCORES is a web based centralized grievance redress given the due importance it deserves. This resulted in
System of SEBI (www.scores.gov.in). SCORES enables erosion of investors' wealth and ultimately their
investors to lodge and follow up their complaints and confidence in the stock market.
track the status of redressal of such complaints from
anywhere. SCORES is web enabled and provides online In 1992, Harshad Mehta scam occurred and In 1998, the
access 24 x 7; Complaints and reminders thereon can be market saw the Ketan Parekh scam of circular trading of
lodged online at anytime from anywhere; An e-mail is securities and controlling prices followed by the Satyam
generated instantly acknowledging the receipt of scam of 2009 involving falsification of books of

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accounts. and further to GDR/IPO related scam in 2010- All the lacuna that led to these scams has been address
11 of bogus investors and kick-backs to operators and via various policy and regulatory interventions
so on. In 2012, Sahara scam of manipulative investment including
scheme followed by Sharepro in 2016 which was a
registrar and transfer agent that manipulated the 1 KYC of investors.
physical holding of inactive folios. 2 Monitoring hot and bad money in the market a
regulating the same through circuit breakers 3
7.9.2 Measures Taken to Reform Suspending in-active companies, strict action
Indian Stock Market (ISM) falsification of books of accounts Circuit Breakers

A. Corporatisation of Stock Exchanges Sometimes the movement of stock prices can beat a
logic and move tremendously in any direction:
The corporatisation of stock exchanges took place for
streamlining the process of corporate governance Circuit breaker, simply put, is a set of rules formed and
Corporate governance is one of the most pivotal issues issued by SEBI in order to bring back normalcy in the
associated with demutualization of stock exchanges It stock markets in the event an index or stock enters a
would also allow the exchange to put in place a board of circuit. SEBI has different circuit breakers for indices
directors, to look after day to day operations In this and for stocks.
context, SEBI has taken a series of measures in a view SEBI rules require that the trading at the stock exchange
to reform Indian Stock Market be stopped for a certain period of time beginning from
half an hour to even an entire day.
B. Demutualization of Stock Exchanges in
India A price band specifies the span or price range for a
stock to move without any interference from regulatory
Demutualization is a process that changes a mutual or authorities. Only when the stock prices move beyond
cooperative association into a public company by the range, it is considered as entering into a circuit and
converting the interests of the members into circuit breakers are applied.
shareholdings. These holdings can then be traded like
the shares of a company The idea is to change the 4. Mandatory Push for Demat Trading: Settlement
structure of exchanges that were originally formed as system on Indian stock exchanges 13/16 settlement risk
trusts. Demutualization allows such associations to due to the time that elapsed before trades are settled.
conduct commercial business to make a profit just like a Trades were settled by physical movement of paper.
normal corporate entity. Theft, forgery, mutilation d certificates and other
irregularities were rampart and in addition the issuer
C. Reforms taken after Harshad Mehta Scam had the right to refuse the transfer of a security. All this
of 1992 added to costs, and delays in settlement, restricted
liquidity and made investor grievance redressal time
After the Harshad Mehta Scam of 1992, SEBI consuming and at times intractable. The Depositories
undertook a series of initiative: Regulation of listed and Act, 1996 was passed to provide for the establishment
unlisted companies, initial public offerings, fraudulent of depositories in securities with the objective of
trading activities, collective investment schemes. ensuring transferability of securities with speed,
accuracy and free security. Clearing corporations
Establishment of financial institutions promoted
emerged to assume counter party risk. Trade and
National Stock Exchange in 1993 that commenced
settlement guarantee funds were set up to guarantee
screen- based trading for equity and debt market
settlement of trades irrespective of default by brokers.
segment.
5. Reduction of Trading Cycle: The trading 13/16 from
All these initiatives were good but not good enough to
14 days for specified securities to such others and
deter fraudulent motives of the white-collar scammers.
settlement took another fortnight. Often the cycle was
D. Other Policy Measures not adhered to. Rolling settlement on T+5 basis was
introduced in phases and was reduced T+2 from April
2003.

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6 Insider Trading and Unfair Trade Practices: An act of The government has been going after companies it
counselling about procuring or communicating directly suspects of engaging in irregular transactions
or indirectly any non-public price-sensitive information demonetization of high-value currency bills in 2017,
to any person Insider trading refers to the practice of including transferring money abroad illegally, or black
purchasing or selling a publicly-traded company's money and evading taxes The government had set up a
securities while in possession of material information special task force to look in the matter The task force
that is not yet public information Price- sensitive had inter-alia recommended the use of certain red-flag
information means any information which relates indicators as alerts for the identification of shell
directly or indirectly, to a company and which published companies
is likely to materially affect the price of securities of the
company The Government launched the Operation Clean Money.
under which the Government had requested the Reserve
Accounting Reforms: It had also initiated measures to Bank of India (RBI) for freezing of accounts of the
curb falsification of books of accounts like disclosure of defaulting companies who have long exceeded the
quarterly results, strict punitive actions against auditors stipulated time limit, for filing of Financials Statements
(banning of PWC as an auditor). freezing all bank and and returns, under the Companies Act.
demat accounts of the accused, strengthening of
whistle-blower mechanism, informant mechanism Ministry of Corporate Affairs (MCA) and Central Board
among several others. of Direct Taxes (CBDT) had signed MoU for automatic
and regular exchange of tax information. The purpose
of the MoU was to curb the menace of shell companies.
7.10 Trading Restrictions on money laundering and black money in the country and
Shell Companies prevent misuse of corporate structure by shell
companies for various illegal purposes
7.10.1 Introduction Serious Fraud Investigation Office has been creating a
The Companies Act 2013 does not define a shell database of shell companies.
company. The government has undertaken a Special Drive for
A shell company is a firm that does not conduct any identification and striking off Shell Companies. During
operations in the economy, but it is formally registered, the period of 2018-21. 2.38,223 shell firms have been
incorporated, or legally organized in the economy. struck-off across the country

These are sometimes used illegitimately, such as to 7.10.3 Suggestions

disguise business ownership from law enforcement or
the public legitimate purposes for registering a shell The government can consider enacting a law that is
company include hiding particulars of ownership from specifically related to Shell companies. This law can
the law enforcement, laundering unaccounted money, provide a clear definition of shell companies based on
tax evasion and obscuring ownership etc. parameters such as revenues, assets, employee strength
apart from requirement of filing returns etc.
With the shell company as a front, all transactions are
Shown on paper as legitimate business transactions, The government must ensure that every company
thereby turning black-money into white. In this process, discloses the information to the tax department even if
the business person also avoids paying tax on the they have zero income.
laundered money
A permanent body under MCA can be created to
oversee all agencies so that a better coordination can be
7.10.2 Steps taken to Curb the achieved.
Menace of Shell Company
Signing of double tax avoidance agreements with tax
In 2017 SEBI issued a directive suspending 331 listed havens and imposing minimum operational expense
companies that were suspected to be shell entities after criteria on shell companies
they were put under the graded surveillances of the
government

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The government can simplify the corporate structure other investors about its merits. The concept of anchor
and mull/make efforts to use big data to track tax investors was introduce by Securities Exchange Board
evaders. of India (SEBI) with the intention to improve the price
discovery during Initial Public Offers (IPOs). The
7.11 Alternate Investment Funds process was aimed at improving the investment
opportunity for retail investors with the company. Since,
(AIFs) anchor investors belong to the Qualified Institutional
Buyers (QIBS) category they would be in a better
AIFS refer to any privately pooled investment fund,
position to gauge the fundamentals and the future
(whether from Indian or foreign sources), in the form of
prospects of the company. QIB category include mutual
a trust or a company or a body corporate or a Limited
funds, venture capital funds, foreign institutional
Liability Partnership (LLP). investors (Flls), domestic as well as international
provident and pension funds along with banks. The
AIF does not include funds covered under the SEBI minimum application size for each anchor investor
(Mutual Funds) Regulations, 1996, SEBI (Collective should be 10 crore.
Investment Schemes) Regulations, 1999 or any other
regulations of the Board to regulate fund management B. Angel Investor
activities. Hence, in India, AIFS are private funds which
are otherwise. not coming under the jurisdiction of any An angel investor is an affluent individual (not a
regulatory agency in India. company who provides capital for a business start-up.
usual in exchange for convertible debt or ownership
As per SEBI (AIF) Regulations, 2012, AIFS shall seek equity Angel investors are often experienced
registration in one of the three categories: entrepreneurs or executives, who may be interested in
angel investing for reasons that go beyond pure
1. Category 1: Mainly invests in start-ups, SME's or any
monetary return. These include wanting to keep abreast
other sector which Govt. considers economically and
of current developments in a particular business arena,
socially viable.
mentoring another generation of entrepreneurs, and
2. Category II: These include Alternative Investment making use of their experience and networks on a less
Funds such as private equity funds or debt funds for than full-time basis. Thus, in addition to funds, angel
which no specific incentives or concessions are given investors can often provide valuable management
by the government or any other Regulator advice and important contacts.

3. Category III: Alternative Investment Funds s as

hedge funds or funds which trade with a view make
short term returns or such other funds which open ended
and for which no specific incentives concessions are
given by the government or any other Regulator. C. Angel Tax

Example: In August 2021, the Ministry of Finance re Angel Tax was a 30% tax that is levied on the funding
launched 'Ubharte Sitaare Alternative Investment Fund received by startups from an external investor. However
facilitate debt and equity funding to export-oriented this 30% tax was levied when startups receive angel
MSME (Micro Small and Medium Enterprises) The funding at a valuation higher than its 'fair market value'.
fund wo identify Indian enterprises with potential It is counted as income to the company and is taxed.
advantages which are currently underperforming or The tax, under Section 56(2)(viib), was introduced by in
unable to tap th latent potential to grow. 2012 to fight money laundering. The stated rationale
was that bribes and commissions could be disguised as
7.12 Start-up Funding angel investments to escape taxes. But given the
possibility of this section being used to harass genuine
A. Anchor Investor
startups, it was rarely invoked
In common parlance, An anchor investor is an
Problematic: There is no definitive or objective way to
institutional investor, who acts as an anchor and
measure the 'fair market value' of a startup. Investors
commits a certain amount before the IPO date to assure
pay a premium for the idea and the business potential at

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the angel funding stage. However, tax officials seem to

be assessing the value of the startups based on their net
asset value at one point. This tax was ultimately
scrapped by the government in August 2019 to
encourage startup ecosystem in India.

D. Venture Capital Funds (VCFs)

VCF is an investment fund that manages money from
different investors seeking to provide capital in startup
and small- and medium-size enterprises that have strong
growth potential. According to SEBI, VCF is a fund
established in the form of a trust/company including a
body corporate and registered with SEBI. The VCF will
have dedicated pool of capital, raised in the specified
manner and invested by following regulations of SEBI.
The money provided by VCFs is termed as venture
capital. In India, the VCFs are regulated by the SEBI.
For the VCFs, they get money from a variety of sources,
including private and public pension funds, corporations
and wealthy individuals, both domestic and foreign etc.

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Chapter-8
Providing the necessary incentives to the
Fiscal Policy private sector for its healthy growth.
8.3 Tools of Fiscal Policy
8.1 Introduction Taxation: It includes income tax, capital gains from
Government policy refers to the goals, decision and investments, property tax, sales tax etc. Taxes provide
actions adopted by the executive authority for political the major revenue source that funds the government The
social economic management of macroeconomic downside of taxes is that whatever or whoever is taxed
variables of the country. has less income to spend on themselves That makes
taxes unpopular.
Fiscal Policy refers to government policy in respect of
public expenditure, taxation and public debt. It is the Government Spending: It includes subsidies, transfer
means by which the government adjusts its spending payments including welfare programs, public works
levels and tax rates to monitor and influence a nation's projects and government salaries. Subsidies increase
economy. demand and economic growth.

Fiscal policy is based on the theories of British 8.4 Types of Fiscal Policies
economist. John Maynard Keynes. This theory. Also
known as Keynesian economics, basically states that There are three types of Fiscal Policy
governments can influence macroeconomic productivity
levels by increasing or decreasing tax levels and public Cyclicality of the Fiscal Policy
spending. The cyclicality of the fiscal policy refers to a change in
direction of government expenditure and taxes based on
8.2 Objectives of Fiscal Policy economic conditions.
The following are the objectives of fiscal policy: These pertain to decisions by policymakers based on the
fluctuations in economic growth. There are two types of
• To maintain and achieve full employment. cyclical fiscal policies counter-cyclical and procyclical.
• To stabilize the price level.
• To maintain the growth rate of the economy. Counter-cyclical fiscal policy refers to the steps taken
• To maintain equilibrium in the balance of by the government that go against the direction of the
payments. economic or business cycle.
• To raise standard of living of the citizens of the Thus, in a recession or slowdown, the government
country. increases expenditure and reduces taxes to create a
demand that can drive an economic boom. The
An understanding of the fiscal policy is essential for government takes the route of expansionary fiscal
gaining proper perspectives on the different aspects of policy i.e. the government expenditure is increased and
budgeting. The budgetary fiscal policy can play a key taxes are reduced. This increases the consumption
role in the process of economic development by: potential of the economy and helps soften the recession.
• Mobilizing additional resources, Pro-cyclical fiscal policy is one where the government
• Maintaining economic stability, enforces the business cycle by being expansionary
• Allocating resources into socially necessary during good times and contractionary during recessions.
lines development,
Pursuing a pro-cyclical fiscal policy is generally
• Reducing extreme inequality in income and regarded as dangerous. It could raise macroeconomic
wealth and volatility, depress investment in real and human capital,
hamper growth and harm the poor. The government
takes the route of Expansionary Fiscal Policy i.e. the
government expenditure is decreased and taxes are
increased. This decreases the consumption potential of

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the economy and deepens the recession. The estimates show how the expenditure is likely to
government takes the route of contractionary Fiscal pan out. Actuals give the real number for how
Policy i.e. the government expenditure is increased and much was really extended.
taxes are decreased • Example: Suppose the Union government is
preparing the budget for 2022-23 during the
8.5 Budgeting in India time period of September 2021 to February
2022. In this case, the approval of Parliament
The Union Budget of India, referred to as the annual
Financial Statement in Article 112 of the Constitution of would be sought for the estimated
India, is the annual budget of the Republic of India. receipts/expenditures for 2022-23, which
presented each year by the Finance Minister of India in would be called Budget Estimates.
Parliament. The budget process in India comprises four • At the same time, the Union government, in its
distinct phases: budget for 2022-23, would also present revised
estimates for the ongoing financial year 2021-
1. Budget Formulation: The preparation of estimates of
22.
expenditure and receipts for the ensuing financial year:
• Finally, ministries would also be reporting
2. Budget Enactment: Approval of the proposed Budget their actual receipts and expenditures for the
by the Legislature through the enactment of Finance previous financial year 2020-21. Next, the
Bill and Appropriation Bill; revenue-earning ministries of the Union
government provide the estimates for their
3. Budget Execution: Enforcement of the provisions in
revenue receipts in the current fiscal year
the Finance Act and Appropriation Act by the
government collection of receipts and making (revised estimates) and next fiscal year (budget
disbursements for various services as approved by the estimates) to the finance ministry.
Legislature; and • Examination by Finance Minister: The finance
minister examines the budget proposals
4. Legislative Review of Budget Implementation: prepared by the ministry and makes changes in
Audits of government's financial operations on behalf of
them, if required. The finance minister consults
the Legislature
the prime minister and also briefs the Union
8.5.1 Budget Formulation Cabinet, about the budget at this stage.
• Consolidation: The budget division in the
• Budget division in the Department of finance ministry consolidates all figures to be
Economic Affairs under the Ministry of presented in the budget and prepares the final
Finance starts the process of formulation of the budget documents. The National Informatics
next financial year's Union budget in the Centre (NIC) helps the budget division in the
months of August-September every year. process of consolidation of the budget data,
• Annual Budget Calendar: To start the process, • Leave of President: At the end of this process,
the budget division issues an annual budget the Finance Minister takes the permission of
circular which contains detailed instructions the President of India for presenting the Union
for the Union government budget to Parliament.
ministries/departments relating to the form and • Halwa Ceremony: The tradition involves
content of the statement of budget estimates to preparing the 'halwa' sweet dish in a big
be prepared by them. 'kadhai' (large for pot) and serving it to the
• The ministries are required to provide three entire staff in the ministry." The ceremony
different kinds of figures relating to their marks the commencement of t printing process
expenditures and receipts during this process of the Central Government's budge After
of budget preparation. These are: Budget Halwa is served, the officials and support state
Estimates, Revised Estimates and Actual who are directly associated with the Budget
Estimates Budget estimates represent the making and printing process, are required to
government's wishes and ambitions. Revised stay in the Budget Press (situated inside North

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Block) and remain cut off from their families Cut Motions: When a Demand is taken up for
until the presentation of t Union Budget in the discussion, Member may seek reduction in the amount
Lok Sabha. of the Demand by moving any of the following types of
Cut any Motions:
The "lock-in" which follows the 'hal 5/25 is observed to
maintain the secrecy o wie preparation process. 1. Policy Cut by moving "that the amount of the
Demand be reduced to 1", thereby representing a
8.5.2 Budget Enactment disapproval of the policy underlying the demand;

Presentation: As per Rule 204 (1) of the Rules of 2. Economy Cut by moving "that the amount of the
demand be reduced by a specified amount, thereby
Procedure and Conduct of Business in the Lok Sabha,
the Budget presented to the Parliament on such date as representing the economy that can be effected,
is fixed by the President. 3. Token Cut by moving "that the amount of the demand
be reduced by 100", in order to ventilate a specific
A. Stage-1 grievance
General Discussion: The General Discussion on the
Budget is held on a day appointed by the Speaker
E. Stage-5
subsequent to the day of presentation of the Budget are Voting: At the end of the period allotted for discussion
for such period of time as the Speaker may decide. on the Demands for Grants, the Speaker puts all the
During the general discussions, the House is at liberty outstanding Demands for Grants to the vote of the
to discuss the budget as a whole or any question of House. Once the prescribed period for the discussion on
principle involved therein, but no motion can be moved demands for grants is over the speaker applies
nor can the budge be submitted to the vote of the 'Guillotine' which acts as a device for bringing the
House. The Finance Minister has a right to reply at the debate on financial proposals to an end, adding all the
end of the discussions. The scope of discussions at this outstanding demand, whether discussed or not are put to
stage is confined to genera examination of budget, vote at once.
policy of taxation as expressed in the Budget speech of
the Finance Minister and genes schemes and structures F. Stage-6
etc. Specific points or grievances can be discussed on
the floor of the House when it takes up relevant Appropriation Bill: The Appropriation Bill for
Demands for Grants or the Finance Bill. withdrawal from the Consolidated Fund of India is
introduced in the Lok Sabha with the prior approval of
B. Stage-2 the President. After Presidential assent, the
Appropriation Bill becomes the Appropriation Act and
Scrutiny by Standing Committee: The house is authorizes the payments from the Consolidated Fund of
adjourned for a few week which gives time to standing India.
committee to scrutinise the budget in depth.
The Finance Bill is introduced to give effect to the
C. Stage-3 financial proposals of the Government of India for the
following year. ts subjected to all the conditions
Demand for grants in Lok Sabha: After the conclusion applicable to a Money Bill Discussion on the clauses of
the scrutiny by the standing committees, the Demands Finance Bill is confined to tax proposal. Once
for Grants of individual Ministries/Departments are approved, the bill becomes, the finance act. The Finance
taken up in the Lok Sabha for discussion as per the time
Act legalises the income side of the budget and
table decided by the Business Advisory Committee of completes the process of the enactment of the budget.
the House and subjected to vote. In order to facilitate
proper examination of different Demands for Grants,
different departmental related Standing Committees of
8.6 Components of Government
the Parliament are constituted every year to consider the Budget
concerned Demands for Grants and make a report on
them to the House. The budget comprises of the (a) Revenue Budget and
the (b)Capital Budget
D. Stage-4

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8.6.1 Revenue Budget B. Revenue Expenditure

The Revenue Budget shows the current receipts of the Revenue Expenditure is expenditure incurred for
government and the expenditure that can be met from purposes other than the creation of physical or financial
assets of the Central Government. It relates to those
these receipts. expenses incurred for the day to day functioning of the
government departments and various services, interest
A. Revenue Receipts payments on debt incurred by the government and
Revenue receipts are receipts of the government which grants given to State Governments and other parties
are non-redeemable, that is, they cannot be reclaimed (even though some of the grants may be meant s
from the government. These receipts don't impact the creation of assets).
liabilities and assets of the government. They are
divided into tax and non-tax revenues. 8.6.2 Capital Budget
1.Tax Revenues consist of the proceeds of taxes and Capital essentially means the difference between asse
other duties levied by the Central Government Tax and liabilities. The Capital Budget is an account of the
revenues, comprise of (a) Direct Taxes are imposed assets as well as liabilities of the Central Government
directly on individuals (personal income tax) and firms which takes into consideration changes in capital
(corporation tax) consists of capital receipts and capital expenditure of
the government.
(b) Indirect Taxes like excise taxes (duties levied on
goods produced within the country), customs duties This shows the capital requirements (for creating long
(taxes imposed on goods imported into and exported out te durable infrastructure) of the government and the
of India) and service tax pattern of their financing.

(c) Other Direct Taxes like wealth tax, gift tax and A. Capital Receipts
estate duty (now abolished) have never been of much
All those receipts of the government which create liable
significance in terms of revenue yield and have thus
or reduce financial assets are termed as capital receipt
been referred to as 'paper taxes'.
The capital receipts in India include the following cap
Non-Tax Revenue of the Central Government mainly kind of accruals to the government:
consists of:
B. Capital Expenditure
(a) Interest receipts on account of loans by the Central
Government; Non Tax Revenue

(b) Dividends and profits on investments made by the All the areas which get capital from the government are
government, part of the capital expenditure. It includes so many
heads in India:
(c) Fees and other receipts for services rendered by the
government. Loan Disbursals: The loans forwarded by the
government might be internal (i.e., to the states, UTS
(d) Revenue from Spectrum Auctions has been one of PSUS, FIs, etc. for welfare services or asset creation or
the major sources of Non-Tax revenue for its external (i.e., to foreign countries, foreign banks
government. purchase of foreign bonds, loans to IMF and World
Bank, etc. for humanitarian aid or diplomatic purposes
(e) Cash, Grants-in-aid from foreign countries and
international organisations are also included. Loan Repayments: Again loan payments might be
internal as well as external. This consists of only the
The estimates of revenue receipts take into account the
capital part of the loan repayment as the element of
effects of tax proposals made in the Finance Bill. A
interest on loans is shown as a part of the revenue
Finance Bill, presented along with the Annual Financial
expenditure
Statement, provides details of the imposition, abolition,
remission, alteration or regulation of taxes proposed in Capital Expenditure on Defence: This consists of all
the Budget. kinds of capital expenses to maintain the defence forces,

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the equipment purchased for them as well as the Other Transfers (to States): This mainly includes
modernization expenditures. In the last decade (2011-12 additional central assistance for externally aided
to 2021-2022) the budget of Ministry of Defence has projects (given as grants or block loans) and special
grown at an annual rate of 8.4% which highlight the assistance to states
need for indigenisation of defence technology

Welfare Services: These also need huge capital

8.7 Deficit
expenditure by the government the Railways. Postal Balance budget is when the revenue of the government
Department, water supply, education, rural extension, is equal to its expenditure. Since the Indian economy is
etc one of welfare nature, the budget of the government is a
deficit budget. When a government spends more than it
Other Liabilities: Basically, this includes all the
repayment liabilities of the government on the items of collects by way of revenue, it incurs a budget deficit.
the Other Receipts. Budgetary deficit is the difference between all receipts
and expenses in both revenue and capital account of the
C. Central Government Expenditure
government. Prior to 1997-98, this difference is met by
The expenditures of the Central Government is the net addition of the treasury bills issued by the RBI
classified in the following six broad category: and drawing down of cash balances kept with the RBI.

Maintenance Expenditures: This category includes Budgetary Deficit = Total Expenditure - Total Receipts
salaries, medical expenses, wages, allowances, travel (Excluding sale of Treasury Bills)
expenses, office expenses, training, professional
services, rent paid, taxes, pensions, etc. This is 8.7.1 Types
expenditure that is incurred for maintaining the
administrative entity, as opposed to expenditure A. Revenue Deficit
incurred on programme and schemes. Central Sector Revenue deficit is the excess of government's revenue
Schemes: These are schemes for which the Central expenditure over its revenue receipts. It is related to
Government provides the entire budgetary support and only revenue expenditure and revenue receipts of the
most of them are implemented by the Central government.
Government.
When the government incurs a revenue deficit, it
implies that the government is dissaving and is using up
Transfers under Centrally Sponsored Schemes: For the savings of the other sectors of the economy to
these schemes, the Central Government shares the finance a part of its consumption expenditure. Revenue
budgetary support with State or Union Territory deficit results in borrowing to finance recurring and
government (based on a sharing pattern determined by non-asset creating expenditure.
the Central Government). These schemes are Revenue Deficit = Revenue Expenditure – Revenue
implemented by the State/UT governments. Receipts
Other Central Expenditure: This category includes A high revenue deficit warns the government either to
expenditure on CPSES and Autonomous Bodies. curtail its expenditure or increase its tax and non-tax
Finance Commission Transfers: These are grants given receipts, because it leads to unsustainable levels of debt
under Article 275(1) of the Constitution to urban and and inter-generational inequity.
rural local bodies, grant-in-aid to State Disaster B. Effective Revenue Deficit (ERD)
Response Funds (SDRF) and post-devolution revenue
deficit grant. Effective Revenue deficit was introduced in the Union
Budget 2012-13, on the suggestion of Rangarajan
Committee, Effective Revenue Deficit is the difference
The revenue deficit grant is meant to cover gap in between revenue deficit and grants for creation of
revenue expenditure after taking into account all the capital assets Grants for creation of capital assets are
Sources of revenue for states defined as "the grants-in-aid are given by the Central
Government to the State Governments, constitutional

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authorities or bodies. autonomous bodies and other Greater fiscal deficit implies greater borrowing by the
scheme implementing agencies for creation of capital government. The extent of fiscal deficit indicates the
assets". Effective revenue deficit is used to ascertain the amount of expenditure for which the government has to
actual revenue deficit after grants given for capital borrow money.
expenditure. Effective Revenue Deficit = Revenue
Deficit - Grants for Creation of Capital Assets 8.7.3 Borrowing from the Market
C. Fiscal Deficit The government may choose to borrow both from
domestic as well as foreign sources. It may borrow
This is widely used as a summary indicator of the directly from the market by issuing T-Bills and dated
macroeconomic impact of the budget in several
securities to the bank
industrialized countries.
Concerns with Market Borrowing
Fiscal deficit is defined as excess of total budget
expenditure (revenue and capital) over total budget High Debt: An increased borrowing programme means
receipts (revenue. and capital) excluding borrowings that the public debt will go up.
during a fiscal year. Fiscal deficit is a measure of how
much the government needs to borrow from the market Higher Borrowings Increase in Fiscal Deficit and Public
to meet its expenditure when its resources are Debt→ Inability of Government to repay the higher
inadequate. Debt

D. Primary Deficit Higher Interest Rates: Higher borrowing can push up

interest rates because markets are nervous about the
Primary deficit is defined as fiscal deficit of current government's ability to repay.
year minus interest payments on accumulated debt. It
shows how much government borrowing is going to Increase in Taxes: It may also necessitate an increase in
meet expenses other than Interest payments. Thus, zero taxes. This may burden the common people and also
primary deficits means that government has to resort to lead to less spending and savings by the public, leading
borrowing only to make interest payments. to a stalled market.

Measures to Reduce Fiscal Deficit: Some of t measures

highlighted to reduce fiscal deficit are- Crowding Out: When the government borrows from the
By Reducing Public Expenditure private sector by selling bonds, the private sector is left
with less money to spend and invest. Therefore,
(a) Rationalisation of subsidies although government spending increases, private sector
spending falls.
(b) Reduction in expenditure on bonus, LT leaves
encashment, etc. Higher Borrowings of Government from Banks →→
Less money available for private sector to borrow from
(c) Austerity steps to curtail non-plan expenditure Banks Increase in the interest rates → Crowding out
By Increasing Revenue Effect

(a) Tax base should be broadened concessions and 8.7.4 Monetisation of the Deficit
reduction in taxes shou be curtailed. an
A. Direct Monetisation of Deficit
(b) Tax evasion should be effectively checked
Monetising deficit means RBI purchases government
(c) More emphasis on direct taxes to increase revenue. bonds in the primary market and prints more money to
finance the debt.
(d) Restructuring and sale of shares in public sector
units. This is resorted to only when the government cannot
borrow from the market (Banks and other Financial
8.7.2 Financing Fiscal Deficit Institutions like LIC).

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The money printed by the RBI is called high powered A. Fiscal Responsibility and Budget Management
money or reserve money or monetary base. (FRBM) Act, 2003

B. Indirect Monetisation of Deficit Reasons for its Introduction

The Government may also borrow indirectly from the The FRBM Act was enacted in 2003 as rising
RBI through the Open market operations conducted by government borrowing and the resultant government
RBI, RBI also conducts indirect monetization of deficit debts had seriously eroded the financial health of the
through Open Market Operations (OMOS). government.

OMOS are market operations conducted by RBI by way With inadequate revenues, government resorted t high
of sale/purchase of government securities to/ from the level of borrowing. The borrowing again produced high
market with an objective to adjust the rupee liquidity interest payments. In this way, interest payments
conditions in the market on a durable basis. became the largest expenditure item of the government

Recently, RBI decided to infuse 10.000 crore liquidity To arrest this financial weakness in its budget, the
in the banking system by buying government securities government has taken some serious deficit cu targets by
through OMOS introducing a law in the form of the FRBM

Purchase of Government securities by the RBI helps in Objectives of FRBM Act

increasing the supply of the money in the market and
with banks. It helps to stabilize the market economy and The major objectives are:
generates credibility in the investors. Institutionalizing Fiscal Discipline, Reduction of Fiscal
It is different from monetization as it is controlled by Deficit;
RBI instead of the government as it is not as Creating transparent Fiscal management system;
inflationary as deficit monetization. Achieve Inter-generational equity in fiscal management
Advantages: Long-run macroeconomic stability, and
It has helped in the economic development of India in Better co-ordination between fiscal and monetary
its initial years as our domestic savings were less than policy.
9% of GDP and the capacity to raise loans was also
limited during the early 1950s, constraining the welfare Important Provisions
activities of the government.
Fiscal Deficit: The FRBM rule set a target reduction of
Disadvantages: fiscal deficit to 3% of the GDP by 2008-09. This was be
realized with an annual reduction target of 0.3% of GDP
Deficit financing is inflationary and is bad for the health per year by the Central Government.
of the central bank.
Revenue Deficit: Revenue deficit has to be reduced by
It may push up interest rates and thus make it even more 0.5% of the GDP per year with complete elimination by
difficult for the government to service the loan. 2008-09
It also poses threat to the financial stability of the Ways and Means Advances (WMAS): The Central
economy. Government shall not borrow from the Reserve Bank of
India except by Ways and Means Advances (WMAS) to
8.7.5 Fiscal Consolidation meet temporary excess of cash disbursements over cash
receipts.
Fiscal consolidation is a process where governments
fiscal health is improved indicated by reducing fiscal Escape Clause: The revenue deficit and fiscal deficit
deficit to levels which is manageable and bearable the may exceed the targets specified in the rules only on
economy. Improved tax revenue realization and be grounds of national security, calamity etc.
aligned expenditure are important components of fiscal
consolidation.

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Additional Documents: The Central Government to lay 70% among the worst among other comparable
before both Houses of Parliament three statements: (a) economies
Medium-term Fiscal Policy Statement,
Fiscal Deficit Target: Together and a fiscal deficit of
(b) The Fiscal Policy Strategy Statement, and 2.5% of GDP. both by financial year 2022-23. The
minimum annual reduction target was 0.3% of GDP The
(c) The Macroeconomic Framework Statement along latest provision of FRBM act required the government
with the Annual Financial Statement. to limit the fiscal deficit to 3% of the GDP by March
However, due to the 2008 international financial crisis, 31. 2021.
the deadlines were not met. Revenue Deficit-to-GDP: Revenue deficit-to-GDP ratio
should be reduce to 0.8% by March 31, 2023. The
minimum annual reduction target was 0.5% of GDP. •
Introduction of a Fiscal Council: The panel has
recommended the administration of the new fiscal rules
B. FRBM 2.0- Amendments in FRBM Act, 2003
be vested with a new body manned by experts:
Union Budget 2012-13 saw introduction of amendments
Fiscal Council under the Finance Ministry.
to the FRBM Act as part of Finance Bill, 2012. Concept
of Effective Revenue Deficit" and "Medium Term D. Implications of New Fiscal Rules
Expenditure Framework statement are two important
features of amendment to FRBM Act in the direction of Credit Rating Improvement: India's sovereign credit
expenditure reforms. rating is likely to improve by shifting the anchor to
Debt from Fiscal Deficit. This improved credit rating
Effective Revenue Deficit (ERD) and not Revenue will help in cheap borrowing from abroad.
Deficit should be reduced to 0% by 31 March, 2015.
Fiscal Council: The creation of fiscal council would
Fiscal Deficit should achieve the target of 3% by 31st have several advantages:
March 2017.
(a) A Fiscal Council, with technical expertise, would
Medium Term Expenditure Statement be placed before help generate better understanding of the consistency of
Parliament along with this budget. fiscal stance of each budget with the longer-term fiscal
trajectory envisaged under the FRBM Act.
C. N.K. Singh Committee A panel under former
Revenue Secretary, N.K. Singh was constituted by the (b) Improving the quality of Parliamentary oversight.
government in May 2016 for reviewing the Fiscal
Responsibility and Budget Management (FRBM) Act, (c) Contributing to a more informed public debate.
2003 and the Committee suggested using The panel was Congruence: Having institutions like Monetary Policy
also stated to consider the possibility of debt as the Committee and Fiscal Council, there could be perhaps
primary target for fiscal policy. greater congruence between monetary and fiscal policy.
Recommendations replacing absolute fiscal deficit Flexibility: The new fiscal rules have also considered
targets with a target range. Debt as New Anchor: It has the need for flexibility in fiscal targets. This is
recommended Debt (Combined Debt of the Centre and important because a fixed deficit target can pose
States) as the new anchor for fiscal policy and not the problems if there is a cyclical downturn in GDP.
Fiscal Deficit.
E. Instances of the FRBM Norms been Relaxed in the
Radical Changes to Act: The panel has recommended Past
enacting a new Debt and Fiscal Responsibility Act after
repealing the existing Fiscal Responsibility and Budget During the Budget 2020-21 presentation: The
reductions in corporate tax were cited as structural
Management (FRBM) Act Debt to GDP Ratio: It has reforms that triggered the escape clause. This implies
recommended a debt-to- GDP ratio of 60% (40% for the that this year the government has already made use of
Central Government, 20% for the State Governments) the escape clause. This enabled the government to
by 2024-25 At present the ratio of India's debt to gross adjust the fiscal deficit target for 2019-20 to 3.8%, from
domestic product (GDP) is estimated at a staggering

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the budgeted 3.3% It was also cited that the impact of physical terms closely Interwoven into one
the reforms would also necessitate a reset for 2020-21: comprehensive document. The main trust of
from the earlier deficit target of 3% to 3.5% performance budgeting is to provide output oriented
budget information within a long range perspective so
During the Global Financial Crisis in 2008-09: The that can be allocated more efficiently.
Centre resorted to a focused fiscal stimulus tax relief to
boost demand and increased expenditure on public C. Zero-Based Budgeting (ZBB)
projects to create employment and public assets, to
counter the fallout of the global slowdown. This led to A system of Zero-Base Budgeting (ZBB) was first
the fiscal deficit climbing to 6.2%, from a budgeted introduced in the United States Department of
goal of 2.7% Simultaneously, the deficit goals the States Agriculture in its 1964 fiscal year budget.
too were relaxed to 3.5% of Gross Sta Domestic
Product (GSDP) for 2008-09 and 4% GSDP for fiscal
2009-10 It was based on the concept that all programmes of the
Department were to be reviewed afresh from the base
8.8 Types of Government zero and not merely in terms of incremental changes
proposed for the budget year.
Budgeting
The Ministry of Finance formally introduced Zero-
Budgeting is the process of estimating the availability Base Budgeting in 1986 asking all the Ministries and
resources and then allocating them to various activities Departments of the Government to adopt Zero-Base
an organization according to a pre-determined porty Budgeting approach with effect from the budget for
1987-88.
A. Line-Item Budgeting
The basic tenet of Zero-Based Budgeting (ZBB) is that
In a line-item system, expenditures for the budgeted
program activities and services must be justified
period are listed according to objects of expenditure, or
annually During the budget development process. Thus,
"line-items." These line items include detailed ceilings
in zero case budget, no balances are carry forward, nor
on the amount a unit would spend on salaries, travelling
their are any pre-committed expenses.
allowances, office expenses, etc.

It facilitates centralized control and fixing of authority

Benefits of ZBB
and responsibility of the spending units. Its major The benefits of ZBB are substantial. These benefits are
disadvantage is that it does not provide enough set out below:
information to the top levels about the activities and
achievements of individua units. Since ZBB does not assume that last year's allocation of
resources is necessarily appropriate for the current year,
B. Performance Budgeting all of the activities of the organization are re-evaluated
The concept of Performance Budgeting is essentially a annually from a zero base. Most importantly therefore,
technique of presenting Government operations in terms inefficient and obsolete activities are removed and
of functions, programmes, activities and projects'. wasteful spending is curbed.
Performance Budgeting fixes responsibility on specified It challenges the status quo and encourages a
People The results are measured by completion of key questioning attitude among managers
results areas
It responds to changes in the business environment from
Under performance budgeting, the emphasis would get one year to the next.
shifted from the means of accomplishment to the
accomplishments themselves. The important thing The concept didn't prove to be as beneficial as
under ns technique was the precise definition of the explained above in India for the following reasons:
work to be one or services to be rendered and a correct
Due to lack of capability building Distinction being
estimate of what that work or service would cost. A
followed in India between Plan and Non-Plan
performance budget rus developed in terms of costs and
expenditure.
results facilitates management control by bringing out
the programmes and accomplishments in financial and D. Outcome Budgeting

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Outcome budgeting symbolizes a shift from traditional Step 2: An assessment of the extent to which the sector's
budgeting in the sense that it goes beyond budgeting by policy addresses the gender issues and gaps described in
inputs (how much can we spend) towards budgeting by the first step.
measurable outcomes (what can we achieve with what
we spend). Step 3: An assessment of the adequacy of budget
allocations to implement the gender-sensitive policies
The first step in developing an outcome budgeting and programmes identified in step 2.
system involves the process of defining the desired
outcomes (outcomes are essentially more long term and Step 4: Monitoring whether the money was spent as
typically are made up of more than one output) for the planned, what was delivered and to whom.
concerned ministry, department or function. This is Step 5: An assessment of the impact of the policy/
followed by the process of identifying the interventions programme/scheme and the extent to which the
required for achieving target outcomes. Finally, the situation described in step 1 has changed.
expenditure required for implementing the identified
interventions is estimated, which forms a line item in 2. Rationale Behind Gender Budgeting
the budget for that particular year. Thus, the Outcome
According to the 2011 census, women account for 48
Budget analysis the progress of each ministry
per cent of the total population of the country. Women
individually.
face disparities in access to and control over services
The first outcome budget was passed in the Parliament and resources.
on August 25, 2005. Budget 2017-18 for the first time
Bulk of the public expenditure and policy concerns are
laid down a consolidated Outcome budget covering all
in "gender neutral sectors". Gender responsive budgets
Ministries and Departments along with the other Budget
policies can contribute to achieving the objectives of
documents.
gender equality. human development and economic
E. Gender Budgeting efficiency.

The Budget year 2005-06 was very significant for 3. Gender Budgeting in India Gender Budget Statement
women in the country, as for the first time the 'Gender (GBS) was first introduced in the Indian Budget in
Responsive Budgeting (GRB) was adopted. The GRB is 2005-06. This GB Statement comprises two parts-
a method of planning, programming and budgeting that
Part A reflects Women Specific Schemes, is those which
helps advance gender equality and women's rights. It
have 100% allocation for women. Part B reflects Pro
serves as an indicator of the government's commitment
Women Schemes, i.e. those where at least 30% of the
towards the above mentioned objectives.
allocation is for women.

Gender budgeting efforts in India have encompasses

Gender Budgeting is a powerful tool for achieving four sequential phases:
gender mainstreaming so as to ensure that benefits of
Knowledge building and networking.
development reach women as much as men. GB entails
dissection of the Government budgets to establish its Institutionalizing the process,
gender differential impacts and to ensure that gender
commitments are translated in to budgetary Capacity building.
commitments.
Enhancing accountability.
The rationale for gender budgeting arises from
Gender budgeting in India is not confined to an
recognition of the fact that national budgets impact men
accounting exercise. The gender budgeting framework
and women differently through the pattern of resource
has helped the gender-neutral ministries to design new
allocation
programs for women.
1. The Five-Step Framework for Gender Budgeting
Gender Budgeting Cells (GBC) as an institutional
Step 1: An analysis of the situation for women and men mechanism have been mandated to be set up in a
and girls and boys (and the different sub- groups) in a Ministries/Departments.
given sector

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No Correlation between Expenditure and Actual

Implementation: The expenditure figures do not reflect
GBCS conduct gender based impact analysis actual expenditure made towards receipt of goods and
beneficiary needs assessment and beneficiary incidence services.
analysis to identify scope for re-prioritization of public
expenditure and improve implementation etc. Mis-Stating of Financial Position: Parking of funds by
implementing agencies, outside the government
4. Shortcomings accounts portrays an incorrect picture of the financial
Not only has the magnitude of the gender budget as a position of government. This also means that the
proportion of the total expenditure of the Union Budge Government's financial position is not known with
decreased, the budgetary allocations for promote gender reasonable accuracy at any given point of time
equality and women empowerment have also shown a Ad Hoc Project Announcements: Indiscriminate
decline. announcement of projects/schemes not included in the
There are only a few "big budget" women exclusive plan/budget is regularly made, often without proper
schemes of the Ministry of Women and Chic consideration and detailing.
Development (MWCD) like the Nirbhaya Fund and Biased Towards Output over Outcome: Emphasis on
Beti Bachao Beti Padhao campaign. Lack of dedicated compliance with procedures rather than on outcomes.
human resources to implement the interventions There is no proper mechanism to measure outcome (For
identified by the GBCs. Monitoring remains one of the example, in terms of improvement in socio- economic
weakest links in the GRB work with no designated indicators) of spending instead of outputs (in terms of
mechanism for monitoring at the national level. money spends)
5. Road Ahead
8.10 Off Budget Financing
The adoption of the GB should be accompanied
multifaceted and interrelated improvements to budge in The Off-Budget Financing refers to the expenditure
general and the gender sensitivity of budgets undertaken by the PSUS through the market borrowings
based upon guarantee of repayment of loans given by
There needs to be shift from mere "reporting" gender Government. For example, let's say the government
allocations to "purposive planning" with wide needs to invest in the Railways. It may ask the Indian
participation of women. Railway Finance Corporation (IRFC) to borrow money
from the market and finance railway projects. However,
8.9 Shortcomings in Budgetary the Government guarantees the repayment of principal
System and interest for the money borrowed by Indian Railway
Finance Corporation in case it fails to repay the
The 2 ARC in its 14th Report on "Strengthening borrowed money.
Financial Management Systems" has found the
following weaknesses: The amount Unrealistic Budget A. Concerns with Off-Budget Financing
Estimates: budgeted are often not realistic. Weakness in
According to various Estimates put forward by
preparing proper estimates leads to frequent revisions
Subhash Chandra Garg, the Off-budget Expenditure
and supplementary grants. On the other hand, there are
accounts for at least 1% of India's GDP, which appears
major unspent provisions at the end of the year.
to be quite huge. The same concern was raised even by
Delay in Implementation of Projects: Resources are Comptroller and Auditor General (CAG) in March
being spread thinly with only token provisions in some 2019.
cases, often leading to inordinate delays in execution of
Decrease in Government's Financial Accountability:
projects.
The Government's strategy to meet capital expenditure
Skewed Expenditure Pattern: The expenditure pattern is through off-budget financing provides flexibility in
skewed, with a major portion getting spent in the last meeting requirement of capital- intensive projects.
quarter of the financial year, especially in the last However, such financing remains outside budgetary
month. This has also been referred to as the "March control of the Parliament.
Rush".

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Decrease in Fiscal Discipline: The increase in the off This advancement of the date of Budget presentation
budget expenditure highlights that the Government has from the last day of February to 1" February would help
not been able to manage its finances efficiently and thus in following ways:
there is greater level of fiscal indiscipline.
The advancement of budget presentation by a month
Enhanced Financial Risk: The increase in off-budget and completion of Budget related legislative business
financing poses enhanced risk for the Government, before 31 March has paved the way for early
particularly when the Government agencies which completion of Budget cycle and enable Ministries and
borrow money from market based on government Departments to ensure better planning and execution of
guarantee fails to repay such loans. Under such schemes from the beginning of the financial year and
circumstances, the Government would be required to utilization of the full working seasons including the first
pitch in and fulfil its obligations. quarter.

Reduced Sanctity of Government's Finances: Ideally, This has also obviated the need for seeking
the Government guarantee on repayment of bonds appropriation through 'Vote on Account' and enable
should be accounted under Debt and Liabilities so as to implementation of the legislative changes in tax; laws
provide correct picture about its finances. However, for new taxation measures from the beginning of the
since it is not accounted, it would lead to understating financial year.
of Government's borrowings and do not present correct
picture related to fiscal indicators such as Fiscal Deficit C. Merger of Railway Budget and General Budget
and Revenue Deficit The merger of Railway Budget with the General Budge
B. Solution to the Problem of off Budget Financing based on the recommendations of Committee headed
Shri Bibek Debroy. This brought to end 92 year old trait
The office of CAG has given a number of of separating Railway Budget from General Budget
recommendations to tackle the problem of off-budget
financing. Some of these recommendations include: The Rail Budget was separated from the main Budge
following recommendation of a panel headed by Br
The Government of India must put in place policy railway economist William Acworth in 1920-21 Ever
framework for off-budget financing in order to provide year, the rail Budget was presented in Parliament a te
for enhanced disclosure to the Indian parliament. Such a days ahead of the general Budget. The Rail Budget ha a
policy framework must mandate the Government to separate existence from the General Budget since 1924
highlight the rationale and objective of undertaking off-
budget financing. The salient features of merger and the benefits from
same broadly given below:
The Government must come out with the quantum of
off-budget financing and the way it has been undertaken Ministry of Railways continued to function a
every year. departmentally run commercial undertaking
simultaneously allowing elbow room to finance
The Government must disclose all the details about the ministry for better resource allocation;
off-budget financing through the disclosure statements
in the Budget. A separate Statement of Budget Estimates and Demand
for Grant is created for Railways;
8.11 Budgetary Reforms A single Appropriation Bill, including the estimates
Railways, is prepared and presented by Ministry
A. Budget 2017-18 Contained 3 Major Reforms
Finance to Parliament and all legislative work
Advancement of the Budget Presentation. connected therewith will be handled by Ministry of
Merger of Railway Budget and General Budget. Finance;

Removal of Plan and Non-Plan Classification of Ministry of Finance provides Gross Budgetary Support
Expenditure. to Ministry of Railways towards meeting part of is
capital expenditure;

Functional autonomy of railways is maintained;

B. Advancement of Budget Presentation Railways continues to raise resources from market

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through Extra-Budgetary Resources as at present to performed by the Ministry of Finance, there was a need
finance its capital expenditure; for a revised framework of public expenditure
budgeting .
The combined budget facilitates multi modal planning
between railway, inland waterways and highways: The government control and micro management of the
plan model had led to excessive focus on so called 'plan
The presentation of a unified budget helps present a expenditure' with an equivalent neglect of items such as
holistic picture of the financial position of the maintenance which was classified as non- plan
Government;
The Plan/Non-Plan bifurcation of expenditure had
In times of coalition government, political heavy weight further contributed to a fragmented view of resource
had used the railway budget to hand out favourable allocation to various programmes/schemes With this
goods for own image building, this malpractice has fragmented distinction, it was difficult not only to
been done away with by the introduction of a combined ascertain cost of delivering a service but also to link
budget; outlays to outcomes, this also led to unnecessary
The merger reduces the procedural requirements and duplication of resources and efforts
instead bring into focus, the aspects of delivery and Plan and Non-Plan distinction in the budget was
good governance. therefore neither able to provide a satisfactory
o Removal of Plan and Non-Plan Classification classification of developmental and non-developmental
dimensions of Government expenditure nor an
Budge document earlier used to classify to Public S appropriate budgetary framework. The High Level
expenditure into plan and non-plan expenditure Screw Expert Committee under Shri Raghuram Rangarajan
Budget 2017-18, the distinction between Plan and Non recommended that Plan and Non- Plan distinction in the
Plan Expenditure has been done away budget should be removed
Plan Revenue Expenditure was related to central Plans
(the Five-Year Plans) and central assistance for State
8.12 Government Debt
and Union Territory plans
8.12.1 Classification of Government
Non-Plan Expenditure, the more important component Debt
of revenue expenditure, covered a vast range of general
economic and social services of the government. The The Union government broadly classifies its liabilities
main items of non-plan expenditure were interest into two broad categories. The debt contracted against
Payments: Défense services, the Consolidated Fund of India is defined as public debt
and includes all other funds received outside
Subsidies
Consolidated Fund of India under Article 266(2) of the
Grants to State and UTS (Including the grants for the Constitution, where the government merely acts as a
creation of capital assets); banker or custodian. The second type of liabilities is
called public account in general parlance, this is called
Salaries; and other liabilities.
Pensions. Public debt is further classified into internal and
external debt.
The decision to merge plan and Non-plan expenditures
in the budgetary classification needs to be seen in the A. Internal Debt
light of increased irrelevance of the Plan-Non-Plan
distinction or account of several factors including the Internal debt consists of marketable debt and non-
changed administrative structure where the early marketable debt Government dated securities and
Planning system was replaced with alternative treasury bills, issued through auctions, together
mechanisms. comprise marketable debt

Since the planning Commission has been replaced by Treasury Bills issued to State Governments and select
the National Institution for Transforming India (NITI) central banks, special securities issued to National
and the allocative functions relating to schemes is beng Small Savings Fund (NSSF), securities issued to

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international financial institutions, etc. are part of the Union government. The RBI handles all the money,
non marketable internal debt remittances, foreign exchange and banking transactions
on behalf of the Government. The Union government
Other Liabilities include liabilities on account of also deposits its cash balance with the RBI. However, of
Provident Funds, Reserve Funds and Deposits, Other late, there is a demand for creating a specialized agency
Accounts, etc. for managing public debt as exists in some advanced
B. External Debt economies. For instance, the Niti Aayog has advocated
the creation of a separate Public Debt Management
External Debt refers to money borrowed from a source Agency (PDMA).
outside the country including commercial banks,
governments or international financial institutions.
External debt has to be paid back in the currency in Public Debt Management Agency (PDMA) is a
which it is borrowed. specialized Independent agency that manages the
C. Trends of Central Government Debts internal and external liabilities of the Central
Government in a holistic manner and advises on such
Over the years, the Union government has followed a matters. In other words, PDMA is the Investment
considered strategy to reduce its dependence on foreign Banker or Merchant Banker to the Government.
loans in its overall loan mix.
PDMA manages the issue, reissue and trading of
This is because a debt crisis can occur if a country with Government securities, manages and advises the Central
a weak economy is not able to repay external debt due Government on its contingent liabilities and undertakes
to the inability to produce and sell goods to make a cash management for the Central Government including
profitable return issuing and redeeming of short-term securities and
advising on its cash management.
Internal debt constitutes more than 93% of the overall
public debt. PDMA was proposed to be established in India through
the Finance Bill 2015 As a corollary of the decision to
Internal loans that make up for the bulk of public debt
create a PDMA, the RBI or the Central Bank in India
are further divided into two broad categories marketable
was given the task of inflation targeting under a
and non-marketable debt.
monetary policy framework agreement
Dated government securities (G-Secs) and treasury bills
However, the creation of PDMA was put on hold due to
(T-bills) are issued through auctions and fall in the
the difference of opinion on the matter and the relevant
category of marketable debt
clauses were dropped from the Finance Bill, 2015 while
Intermediate treasury bills (with a maturity period of 14 the latter was passed
days) issued to State Governments and public sector
B. Aim of PDMA
banks, special securities issued to National Sama
Savings Fund (NSSF) are classified as non-marketable The aim of setting up the Public Debt Management
debt. Agency (PDMA) is to resolve issues relating to conflict
of interest as RBI decides on the key interest rates as
Also, note that external loans are not market loans They
well as undertakes buying and selling of government
have been raised from institutional creditors a
bonds
concessional rates. Most of these external loans are
fixed-rate loans, free from interest rate or currency PDMA is considered to be set up with the objective of
volatility. "minimising the cost of raising and servicing public
debt over the long-term within an acceptable level of
8.12.2 Public Debt Management risk at all times, under the general superintendence of
Agency (PDMA) the Central Government". This will guide all of its key
functions, which include managing the public debt. cash
A. Introduction and contingent liabilities of Central Government, and
related activities.
As cer Reserve Bank of India Act of 1934, the Reserve
Bank is both the banker and public debt manager for the C. Arguments for a PDMA

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Conflict of Interest: There is conflict of interest in RBI efficient government securities market and transparency
being the regulator of the securities market, being the in public debt management in India.
largest trader of government securities, operating the
market, and determining the interest rate, as well as Internationally Accepted Practice: Separation of public
being the monetary policy authority debt management from the activities of central bank is
also an internationally recognized practice for debt
Institutional Reforms: Several committees in the past management. It is prevalent in most of the advance
have advocated the need for an independent body economies and developing economies like Colombia,
overseeing public debt. The introduction of PDMA can South Africa and Brazil.
pave a way for an institutional reform for building an
efficient government securities market and transparency Omission of Certain Debt Management Functions: The
in public debt management in India. RBI being involved in several functions, ignored certain
incidental debt management functions like cash and
Internationally Accepted Practice: Separation of public investment management and there was no consolidation
debt management from the activities of central bank is of the information relating to the contingent and other
also an internationally recognized practice for debt liabilities.
management. It is prevalent in most of the advance
economies and developing economies like Colombia, Consolidation: Consolidating all the debt management
South Africa and Brazil. functions can result in a holistic and (PDMA) is to
resolve issues relating to conflict of interest as RBI
Omission of Certain Debt Management Functions: The decides on the key interest rates as well as undertakes
RBI being involved in several functions, ignored certain buying and selling of government bond
incidental debt management functions like cash and
investment management and there was no consolidation PDMA is considered to be set up with the objective of
of the information relating to the contingent and other "minimising the cost of raising and servicing public
liabilities. debt over the long-term within an acceptable level of
risk at all times, under the general superintendence of
Consolidation: Consolidating all the debt management the Central Government". This will guide all of its key
functions can result in a holistic and (PDMA) is to functions, which include managing the public debt. cash
resolve issues relating to conflict of interest as RBI and contingent liabilities of Central Government, and
decides on the key interest rates as well as undertakes related activities
buying and selling of government bonds
D. Arguments against a PDMA
PDMA is considered to be set up with the objective of
"minimising the cost of raising and servicing public Lack of Expertise: Only RBI has the necessary
debt over the long-term within an acceptable level of expertise, staff and tools to make macro-assessments
risk at all times, under the general superintendence of about the debt management (and its impact on money
the Central Government". This will guide all of its key supply, banking and finance sector, foreign exchange
functions, which include managing the public debt. cash rates etc).
and contingent liabilities of Central Government, and Threat for Centre State Public Debt Coordination: Only
related activities RBI can harmonise the Debt management of union and
C. Arguments for a PDMA State Governments- and their impact on the economy.
While the separate debt management office will only
Conflict of Interest: There is conflict of interest in RBI focus on union government but not on the State
being the regulator of the securities market, being the Governments. This lack of coordination will have
largest trader of government securities, operating the negative impact on the money supply.
market, and determining the interest rate as well as
being the monetary policy authority Conflict of Interest Remains: Even a separate debt
management office cannot stop conflict of interest
Institutional Reforms: Several committees in the past because government is the majority shareholder in
have advocated the need for an independent body public sector banks.
overseeing public debt The introduction of PDMA can
pave a way for an institutional reform for building an

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Other Factor: International studies have shown that

public debt lies at the junction of monetary and fiscal
policies and not independent of them.
8.13 Additional Concepts
Inefficiency: PDMA in Greece or other nations have not
prevented the huge debts of these countries. 8.13.1 Ways and Means Advances
(WMA)
E. Public Debt Management Cell The method of deficit financing or monetization of th
government deficits as practiced was discontinued an
Public Debt Management Cell is an interim effect from April 1, 1997. It was replaced by Ways
arrangement before setting up an independent and Means Advances scheme. This step was taken following
statutory debt management agency namely the Public the agreement reached between Central Government are
Debt Management Agency (PDMA). the Reserve Bank of India (RBI) on March 26. 1997.
PDMC has the following advisory functions to the In subsequent years, the entire requirement is being re
Government: through the 'Ways and Means' Advance (WMA) system
Plan borrowings of the Government, including market an market borrowing. The WMA is an overdraft facility
borrowings, other domestic borrowings, SGBS. from the RBI. The facility is available for 9 days. The
interest rate on WMA and overdraft are linked to the
Manage Central Government's liabilities including repo rate
NSSF, contingent liabilities.
A. Features
Monitor cash balances of the Government, improve
cash forecasting and promote efficient cash RBI provides facilities for temporary accommodation of
management practices the financial needs of the government up to a ceiling (or
limited amount) fixed in advance, to be decided
Advise other Divisions in DEA on matters related to mutually by RBI and Government. This help to tide
External Debt involving external borrowings through over temporary mismatches of cash flow on account of
MI, Bilateral Co-operation, other possible sources, in government receipts and expenditure.
terms of cost, tenure, currency, hedging requirements,
etc.. and monitor developments in foreign exchange Another feature of the scheme is the interest charge: on
markets. WMA and overdraft facility. Loans under WMA w be
charged and interest rate that is usually equal to the repo
Foster a liquid and efficient market for Government rate for 90 days. Beyond 90 days, a penalty rate of 2%
securities. is applicable over and above the repo rate This facility
of Ways and Means Advances is available to both the
Develop interfaces with various stakeholders/agencies
centre and State Governments.
in the regulatory/financial architecture etc. to carry out
assigned functions efficiently. This facility of Ways and Means Advances is available
to both the centre and State Governments.
Advice on matters related to investment and c cap
market operations Types of Ways and Means Advances
Undertake research work related to new product There are two types of Ways and Means Advances
development, market development, risk management normal and special.
debt sustainability assessment, other management
functions, etc. A Special WMA or Special Drawing Facility is
provided against the collateral of the government
Develop a database system for collecting maintaining securities held by the state.
comprehensive database of Government of India
liabilities on a near real time basis and shall responsible After the state has exhausted the limit of SDF, it gets
for publication of relevant information Carry out normal WMA.
Preparatory work for independent PDMA

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The interest rate for SDF is one percentage point less neutral with respect to the balance of the government's
than the repo rate budget.

The number of loans under normal WMA is based on a Fiscal neutrality creates a condition where demand
three-year average of actual revenue and capital neither stimulated nor diminished by taxation and
expenditure of the state government spending. A balanced budget is an example
fiscal neutrality, where government spending is covered
c. Significance Almost exactly by tax revenue.
The cash flow problems of States have been aggravated
by the impact of Covid-19, thus many States are in need 8.13.4 Crowding Out Effect
of immediate and large financial resources to deal with The crowding out effect is an economic theory
challenges, including medical testing, screening and
stipulating that rise in public sector spending drive
providing income and food security to the needy. down or even eliminate private sector spending.
WMA can be an alternative to raising longer-tenure A situation when increased interest rates lead to a
funds from the markets, issue of State Government
reduction in private investment spending such that it
securities (State development loans) or borrowing from dampens the initial increase of total investment
financial institutions for short-term funding. WMA spending is called crowding out effect
funding is much cheaper than borrowings from markets.
Sometimes, government adopts an expansionary fiscal
8.13.2 Fiscal Drag policy stance and increases its spending to boost the
economic activity. This leads to an increase in interest
Fiscal drag is an economic term whereby inflation or rates Increased interest rates affect private investment
income growth moves taxpayers into higher tax decisions. A high magnitude of the crowding out effect
brackets. Progressive taxation, whereby individuals are may even lead to lesser income in the economy.
roved into higher tax brackets because of inflation or
increased income, is a fiscal policy that results in fiscal
drag. This in effect increases government tax revenue
without actually increasing tax rates. The increase in With higher interest rates, the cost for funds to be
taxes reduces aggregate demand and consumer invested increases and affects their accessibility to debt
spending from taxpayers as a larger share of their financing mechanisms. This leads to lesser investment
income now goes to axes, which leads to deflationary ultimately and crowds out the impact of the initial rise
policies, or drag, on the economy. Fiscal drag can be in the total investment spending Usually the initial
seen as an automatic fiscal stabilizer as it controls a increase in government spending is funded using higher
rapidly expanding economy from overheating taxes or borrowing on part of the government.

WMA can be an alternative to raising longer-tenure

funds from the markets, issue of State Government
securities (State development loans) or borrowing from
financial institutions for short-term funding. WMA
funding is much cheaper than borrowings from markets. 8.13.5 Pump Priming
Pump priming is the action taken to stimulate an
economy usually during a recessionary period, through
8.13.3 Fiscal Neutrality government spending, and interest rate and tax
reductions.
Fiscal neutrality is when a government taxing,
spending, or borrowing decision has or is intended to Pump priming involves introducing relatively small
have no net effect on the economy. Any new spending amounts of government funds into a depressed economy
introduced by a policy Change that is fiscally neutral in in order to spur growth. This is accomplished through
this sense is expected to be entirely offset by additional the increase in purchasing power experienced by those
revenues generated; the net act of the policy change is affected by the injection of funds, with the goal of
prompting higher demand for goods and services. The

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increase in demand experienced through pump priming of the revenue foregone figures of the previous financial
can lead to increased profitability within the private year.
sector, which assists with overall economic recovery.
8.13.8 15th Finance Commission -
Pump priming relates to the Keynesian economic
theory, named after noted economist John Maynard Terms of Reference
Keynes, which states that government intervention
A. Vertical Devolution of Taxes
within the economy, aimed at increasing aggregate
demand, can result in a positive shift within the The share of states in the centre's taxes is recommended
economy. This is based on the cyclic nature of money to be decreased from 42% during the 2015-20 period to
within an economy, in which one person's spending 41% for 2020-21. The 1% decrease is to provide for the
directly relates to another person's earnings, and that newly formed union territories of Jammu and Kashmir,
increase in earnings leads to a subsequent increase in and Ladakh from the resources of the Central
spending. Government.

8.13.6 Economic Stimulus B. Horizontal Devolution of Taxes

An economic stimulus is the use of monetary or fiscal Earlier, the 15th Finance Commission has asked to
policy changes to kick start growth during a recession. explore the possibility of using the Population of 2011
Governments can accomplish this by using methods census instead of 1971 census for the devolution of
such as lowering interest rates, increasing government taxes. However, this was opposed by the Southern
spending and quantitative easing, to name a few. states. These states have taken substantial efforts to
reduce the Population growth rates by undertaking the
In the wake of COVID-19 Pandemic, the Government Family planning programmes since 1970s. So, naturally,
announced 3 tranches of economic stimulus under the if the criteria of 2011 census were to be used, this would
Atma Nirbhar Bharat Programme lead to loss in the share of their taxes. Here, the Finance
Commission has done a fine balancing between the
8.13.7 Tax Expenditure directions issued by the centre and concerns raised by
the Southern states. It has used the Population of 2011
Tax Expenditures, refers to the opportunity cost of census and done away with the Population of 1971
taxing at concessional rates, or the opportunity cost of census.
giving exemptions, deductions, rebates, deferrals credits
etc. to the tax payers. However, keeping in mind, the concerns raised p the
Southern states, it has introduced the new criteria of
Tax expenditures indicate how much more revenue Demographic performance indicator looks at the
could have been collected by the Government if not for Fertility rate in a state the fertility rate in a particular
such measures state is lower, it would me that such a state has taken
In other words, it shows the extent of indirect subsidy substantial efforts to reduce its population growth rate
enjoyed by the tax payers in the country. and accordingly it would get higher share. Since, the
fertility rate in the southern state is much lower, the
Tax expenditures or the revenue forgone are sanctioned introduction of such an indicator is like to reduce the
in the tax laws. A statement of the same, (as far as impact caused by using the criteria of 201 census
Federal/ Union/Central Government is concerned) is instead of 1971 census.
presented to the Parliament at the time of Union Budget
by way of a separate budget document titled "Statement For horizontal devolution, it has suggested 129
of Revenue Foregone weightage to demographic performance, 45% to income
15% each to population and area, 10% to forest are
It lists the revenue impact of tax incentives or tax ecology and 2.5% to tax and fiscal efforts
subsidies that are part of the tax system of the Central
Government. 8.13.9 Grants-In-Aid
This document also estimates the revenue to be A. Revenue Deficit Grants
foregone during the proposed financial year on the basis

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Revenue deficit grants emanate from the requirement to MCF amount is linked to the performance of these cities
meet the fiscal needs of the States on their revenue in improving their air quality and meeting the service
accounts that remain to be met, even after considering level benchmarks for urban drinking water supply,
their own tax and non-tax resources and tax devolution sanitation and solid waste management.
to them.
The total grants to local bodies for 2020-21 has been
Revenue Deficit is defined as the difference between fixed at 90,000 crore. This allocation is 4.31% of the
revenue or current expenditure and revenue receipts, divisible pool. This is an increase over the grants for
that includes tax and non-tax. local bodies in 2019-20, which amounted to 3.54% of
the divisible pool. The grants will be divided between
It has recommended post-devolution revenue deficit states based on population and area in the ratio 90:10.
grants amounting to about 3 trillion over the five-year The grants will be made available to all three tiers of
period ending FY26. Panchayat-village, block, and district.
Revenue Deficit Grants worth 274,000 crore have been E. Disaster Risk Management
awarded to 14 states. B. Performance Based Incentives
and Grants to States The Commission recommended setting up National and
State Disaster Management Funds (NDMF and SDMF)
These grants revolve around four main themes. The first for the promotion of local-level mitigation activities.
is the social sector, where it has focused on health and
education. F. Tax Capacity

Second is the rural economy, where it has focused on In 2018-19, the tax revenue of State Governments and
agriculture and the maintenance of rural roads. Central Government together stood at around 17.5% of
GDP. India's tax capacity has largely remained
Third, governance and administrative reforms under unchanged since the early 1990s. The Commission
which it has recommended grants for judiciary. statistics recommended: (i) broadening the tax base, (ii)
and aspirational districts and blocks. streamlining tax rates, (ii) and increasing capacity and
Fourth, it has developed a performance-based incentive expertise of tax administration in all tiers of the
system for the power sector, which is not linked to government.
grants but provides an important, additional borrowing G. Off-budget Borrowings
window for States.
The Commission observed that financing capital
C. Fiscal Space for Centre expenditure through off-budget borrowings detracts
Total 15th Finance Commission transfers (devolution + from compliance with the FRBM Act. It recommended
grants) constitutes about 34% of estimated Gross that both the Central and State Governments should
Revenue Receipts to the Union, leaving adequate fiscal make full disclosure of extrabudgetary borrowings
space to meet its resource requirements and spending H. Statutory Framework for Public Financial
obligations on national development priorities. Management
D. Grants to Local Governments The Commission recommended forming an expert
Along with grants for municipal services and local group to draft legislation to provide for a statutory
government bodies, it includes performance-based framework for sound public financial management
grants for incubation of new cities and health grants to system. It observed that an overarching legal fiscal
local governments. framework is required which will provide for
budgeting, accounting, and audit standards to be
In grants for Urban local bodies, basic grants are followed at all levels of government.
proposed only for cities/towns having a population of
less than a million. For Million-Plus cities, 100% of the 1. Criticisms of Grants-in-Aid
grants are performance-linked through the Million- Plus Performance based incentives disincentivizes
Cities Challenge Fund (MCF). independent decision-making. Any conditions on the
state's ability to borrow will have an adverse effect on

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the spending by the state, particularly on development Produce Independent forecasts related to var parameters
thus, undermines cooperative fiscal federalism. such as GDP, Tax collection, Deficits Advise the
Government on the formulation of Budget
It does not hold the Union government accountable for
its own fiscal prudence and dilutes the joint Monitor Government's fiscal performance to FR.
responsibility that the Union and States have.
Targets.
8.13.10 Fiscal Council in India Ensure greater accountability of the Government the
The Chairman of the 15th Finance Commission, NK Parliament.
Singh has recommended setting up of institutional Act as counterpart to the Monetary Policy Committee
mechanism like a 'Fiscal Council' to fill major Address the problem of Off Budget Financing
institutional gap in India's Fiscal System.
F. Proposed Role of Fiscal Council

Fiscal Data Coordinator: As a fiscal data coordinator the

A. Meaning Fiscal Council should have the responsibility of
A fiscal council is an independent and non-partisan compiling and collating centre, state, and local
agency which is set up to publicly assesses the government fiscal data and provide individual arc
consolidated fiscal accounts of the governments India
government's fiscal performance against its stated
objectives. on a timely basis and make such data accessible to
governments and public.
B. Functions
Fiscal Data Analyst: It should utilize the compel fiscal
Fiscal Councils can serve both ex-ante and ex-post data to provide valuable insights into the underlying
functions such as: fiscal trends and highlight their policy significance.

Producing independent forecasts related to GDP Fiscal Consolidation Path Monitor: The central as well
growth, tax buoyancy, inflation rate. as State Governments follow their respective fiscal
consolidation paths according to targets se under their
Review the government's forecasts and assumptions FRBM Acts. The Fiscal Council should monitor the
related to tax collections, Fiscal Deficit, GDP Growth compliance of these targets by the Central and State
etc. (an ex-ante function). Governments. It should highlight deviations in the
Monitoring governments' fiscal performance including targets by publishing quarterly and annual reports.
adherence to fiscal rules (an ex-post function). Fiscal Policy Advisor: Fiscal Council should provide
C. International Experience with Fiscal Count Fiscal guidance to the Central and State Governments of
councils can improve fiscal outcomes accuracy related appropriate fiscal policy interventions aimed improving
to government's forecasts related to parameters. growth and macro-stabilization outcomes
Example: United Kingdom (Office of Bu
Responsibility), USA (Congressional Budget Office) 8.13.11 Financial Stability and
Development Council (FSDC)
D. Committees related to Fiscal Council
A. Establishment
FRBM Review committee headed by N.K Singh and
Srivastava Committee on Fiscal Statistics have propose A non-statutory apex council under the Ministry of
to set up independent Fiscal Council in India. Finance constituted by the Executive Order in 2010.
The Raghuram Rajan committee (2008) on financial
E. Need of Fiscal Council in India
sector reforms first proposed the creation of FSDC
Promotes coordination among multiple agencies
B. Composition
involved in collection of the fiscal data.
It is chaired by the Finance Minister and its members
include the heads of all Financial Sector Regulators
(RBI, SEBI, PFRDA & IRDA), Finance Secretary,

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Secretary of Department of Economic Affairs (DEA). government is unable to balance the deficit, it has to
Secretary of Department of Financial Services (DFS), decrease spending, which affects development.
and Chief Economic Adviser.
Money Begets Money: People generally tend to keep
In 2018, the government reconstituted FSDC to include black money in the form of gold, immovable property
the Minister of State responsible for the Department of and other secret manners. Such money does not become
part of the main economy and therefore, remains
Economic Affairs (DEA), Secretary of Department of generally out of circulation. The black money keeps
Electronics and Information Technology, Chairperson of circulating among the wealthy and creates more
the Insolvency and Bankruptcy Board of India (IBBI) opportunities for them.
and the Revenue Secretary. FSDC sub-committee is
headed by the Governor of RBI. Higher Inflation and Inequality: The infusion of
unaccounted black money in the economy leads to
The Council can invite experts to its meeting if higher inflation, which obviously hits the poor the most.
required. It also increases the disparity between the rich and the
C. Functions poor.

To strengthen and institutionalize the mechanism for 8.14.2 Government's Initiatives

maintaining financial stability, enhancing inter-
regulatory coordination and promoting financial sector Legislative Action
development. 1. The Fugitive Economic Offenders Act, 2018: It seeks
To monitor macro-prudential supervision of the to confiscate properties of economic offenders who
economy. It assesses the functioning of the large have left the country to avoid facing criminal
financial conglomerates. prosecution or refuse to return to the country to face
prosecution.
8.14 Black Money 2. The Central Goods and Services Tax Act, 2017: The
act seeks to ensure ease of compliance and increase tax
There is no official definition of black money in
base by the chain of input tax credit to reduce tax
economic theory, with several different terms such as
evasion.
parallel economy, black money, black incomes,
unaccounted economy, illegal economy and irregular 3. The Benami Transactions (Prohibition) Amendment
economy all being used more or less synonymously. Act, 2016: The Act defines Benami transactions as
Transactions which are carried out in the name of a
The simplest definition of black money could possibly
third party (who owns property only on paper). It
be money that is hidden from tax authorities.
contains provisions regarding provisional confiscation
It can come from two broad categories: of property, special courts, appellate mechanisms,
imprisonment upto 7 years.
Illegal Activity: Money that is earned through illegal
activity is obviously not reported to the tax authorities, 4. The Black Money (Undisclosed Foreign Income and
and so is black. Assets) and Imposition of Tax Act, 2015: It penalises
the concealment of foreign income and provides for
Legal but Unreported Activity: The second category criminal liability for attempting to evade tax in relation
comprises income from legal activity that is not to foreign income. The Act gave a one-time opportunity
reported to the tax authorities to Indian residents to declare undisclosed foreign
income and assets.
8.14.1 Impacts
5. Prevention of Money Laundering Act, 2002: It forms
Loss of Revenue to the Exchequer: Black money eats the core of the legal framework put in place by India to
up a part of the tax and, thus, the government's deficit combat Money Laundering. The provisions of this act
increases. The government has to balance this deficit by are applicable to all financial institutions,
increasing taxes, decreasing subsidies and increasing banks(Including RBI). mutual funds, insurance
borrowings. Borrowing leads to a further increase in the companies, and their financial intermediaries.
government's debt due to interest burden. If the

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8.14.3 International Cooperation

A. Double Taxation Avoidance Agreements (DTAAs)

India is proactively engaging with foreign governments

with a view to facilitate and enhance the exchange of
information under Double Taxation Avoidance
Agreements (DTAAS)/Tax Information Exchange
Agreements (TIEAs)/ Multilateral Conventions.

B. Automatic Exchange of Information India has been a

leading force in the efforts to forge a multilateral regime
for proactive sharing of financial information known as
Automatic Exchange of Information which will greatly
assist the global efforts to combat tax evasion.

The Automatic Exchange of Information based on

Common Reporting Standard has commenced from
2017 enabling India to receive financial account
information of Indian residents in other countries.

8.14.4 Way Forward

Since black money menace is still untamed, therefor a
lot more needs to be done to tackle it. Some of the
strengthening steps that can be taken are:

Legislative Actions: Putting proper laws in place Public

Procurement, Prevention of Bribery of officials, citizens
grievance redressal, whistle-blower protection, UID
Aadhar. For e.g.

Improving Institutional Capacity of Agencies Dealing

with Black Money: Directorate of Criminal
Investigation Cell for Exchange of Information, Income
Tax Overseas Units- ITOUS at Mauritius and Singapore
have been very useful, Strengthening the Foreign TAX
Research and Investigation Division of the CBDT

Reducing the Misuse of Money in Elections are one of

the biggest channels to utilize the black money.
Appropriate reforms to reduce more power in elections.

Skill and Manpower Training: Both domestic and

international training pertaining to the concerned area
For instance, the Financial Intelligence Unit-India
makes proactive efforts to regularly upgrade the skills
of its employees by providing them opportunities for
training on anti-money laundering, terrorist financing
and related economic issues.

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the government. One of the bodies that overlook these

Chapter-9 direct taxes is the Central Board of Direct Taxes
(CBDT) which is a part of the Department of Revenue
Taxation (under the Ministry of Finance). The examples of Direct
Taxes are:
9.1 Introduction • Income Tax
Taxation refers to the practice of government collecting • Capital Gains Tax
money from its citizens to finance public services Taxes • Securities Transaction Tax
are generally an involuntary fee levied on individuals or • Corporate Tax
Corporations that is enforced by a government entity. • Wealth Tax
whether local, regional or national in order to finance
welfare activities A. Income Tax
The prime reason for levy of taxes is that they are the It is charged directly on the income of a person.
basic source of revenue to the government which can be
utilised by the government for its expenses on defence. The rate at which it is charged varies, depending on the
healthcare. education and different infrastructure level of income and exemptions applicable.
facilities like roads, dams highways etc
It's charged to individuals, co-operative societies,
The authority of the government to levy tax in India is firms, companies, Hindu Undivided Families (HUFS).
derived from the Constitution of India, which allocates trusts and any artificial judicial person.
the power to levy taxes to the Central and State
Income tax is charged on an income known as "taxable
Governments. All taxes levied within India need to be
income which is (applicable Taxa total income)
backed by an accompanying law passed by the
deductions and exemptions).
Parliament or the State Legislature
Its two basic types are:
9.2 Types of Taxes 1. Personal income tax, levied on incomes of
There are mainly two forms of taxes namely Direct and individuals, households, partnerships, and sole
Indirect taxes. These are differentiated on the basis of proprietorships and
Incidence of Ta These are defined according to the
2. Corporation income tax, levied on profits (net
ability of the end taxpayer to shift the burden of taxes to
earnings) of incorporated firms
someone else. Direct taxes allow the government to
collect taxes directly from The consumers while indirect
taxes allow the government to expect stable and assured
returns through the society, not necessarily from the
person on which it is levied.
B. Corporate Tax
Besides these two conventional taxes, there are also
other Taxes that have been brought into effect by the Corporate tax is the tax that is paid by companies on the
Central Government to serve a particular agenda. 'Other revenue they earn. It is generally levied on the profits
taxes' (in the form of Cess and Surcharge) are levied on earned. The companies and business organizations are
both direct and indirect taxes such as Swachh Bharat taxed on the income under the provisions of Income Tax
Cess, Krishi Kalyan Cess etc. rules.

It applies differently to both domestic and foreign

companies.
9.2.1 Direct Tax It applies to both public and private companies.
Direct Taxes, as the name suggests, are taxes that are The tax rate and surcharge depends on the turnover/
directly paid to the government by the taxpayer. It is a gross receipts. The new regime introduced w.e.f. AY
tax applied on individuals and organizations directly by

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2020-21 has provided a tax relief to new manufacturing Consumable stores or raw materials held for the
companies. purpose of business or profession.

Domestic Company: A domestic company in India Personal effects that are movable except jewellery.
refers to any enterprise that has its base location in India archaeological collections, drawings, paintings.
and is of Indian origin. sculptures or any artwork held for personal use.

Foreign Company: A foreign company means an Agricultural Land: The land must not be located within
enterprise that has operations and origin in any other 8 kms from a municipality, Municipal Corporation,
country except India. Such company has some part of notified area committee, town committee or a
control and management of affairs located outside India. cantonment board with a minimum population of
10,000.
Additional Health and Education cess at the rate of 4 %
will be added to the income tax liability in all cases. is 6.5 percent Gold Bonds, National Defence Gold Bonds
as below: and Special Bearer Bonds.

Surcharge applicable for companies Gold Deposit bonds under Gold Deposit Scheme.

1. 7% of Income tax where total income>1 crore Long-Term and Short-Term Capital Assets

2 12% of Income tax where total income > 10 crore Short-Term Capital Asset: An asset which is held for not
more than 36 months or less is a short-term capital
3. 10% of income tax where domestic company The asset. Long-Term Capital Asset: An asset that is held for
Income tax rate for Partnership firm or LLP as per old/ more than 36 months is a long-term capital asset.
opted for section 115BAA and 115BAB new regime.
Some assets are considered short-term capital assets
A partnership firm/ LLP is taxable at 30%. when these are held for 12 months or less Equity or
*12% Surcharge is levied on incomes above 1 crore. preference shares in a company listed on a recognized
stock exchange in India Securities (like debentures,
Health and Education cess at the rate of 4%. Note: bonds, Government securities etc) listed on a
There are no concessional rates introduced for recognized stock exchange in India.
firms/LLPs in next tax regime.
Units of UTI, whether quoted or not

Units of equity oriented mutual fund, whether t or not

C. Capital Gains Tax Zero coupon bonds, whether quoted or not.
Any profit from the sale of a capital asset is deemed as Tax on Equity and Debt Mutual Funds
'capital gains'. A capital asset is officially defined as any
kind of property held by an assesses, excluding goods Gans made on the sale of debt funds and equity funds
held as stock-in-trade, agricultural land and personal are treated differently. Any fund that invests heavily in e
effects. (more than 65% of the total portfolio) is called an
equity fund
Capital Gains Tax (CGT) is charged on the gains in the
financial year in which the capital asset is transferred, D. Securities Transaction Tax (STT)
but the tax is only payable in the financial year in which
the money from transfer/sale proceeds are actually STT is a type of direct tax payable on the value of
received by the assesses. Here are some examples of taxable securities transaction done through a recognized
capital assets: Land, building, house property, vehicles, stock exchange in the country.
patents. trademarks, leasehold rights, machinery, and
STT was introduced in the Budget of 2004 and
Jewellery.
implemented in October 2004. The objective behind the
The following are not capital assets: levy is to mitigate tax evasion as the same is taxed at
source. Stocks, futures, option, mutual funds and
Stock in trade. exchange traded funds come under the ambit of STT.
The rate of taxation for STT is set by the government

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and depends upon the type of security and type of however, is that any such tax adds to the burden of the
transaction, whether purchase or sale. SIT is not customer and may receive a backlash.
applicable to any off market transaction. Both purchases
and seller need to pay 0.1% of share value as STT G. 'GAFA' or 'Equalization Levy'

E. Wealth Tax An attempt was made by some European countries

including France and Britain to overhaul the global tax
Wealth tax was a charge levied on the total or market system for digital giants, under the auspices of
value of personal assets. Also known as capital tax or Organization or Economic Cooperation and
equity tax, wealth tax was imposed on the richer Development (OECD).
sections.
GAFA Tax is named after Google, Apple, Facebook and
Wealth tax included certain prescribed assets, such as Amazon the large technology and internet companies.
building or land (with certain exceptions), vehicles France became the first major economy to impose a tax
jewellery, bullion, yachts, boats and aircraft (other than on digital giants. France had passed a legislation that
those ones used for commercial purposes), urban land would envy a 3% tax on total annual revenues of the
and cash in hand exceeding a certain amount. largest tech firms providing services to French
consumers.
The application of the Wealth Tax Act was, however
discontinued on April 1, 2016, due to a low level In India, this kind of digital tax has been imposed in the
awareness and yield, besides an increased cost form of an Equalisation Levy. As per the union budget
collection and administrative burden. of 2016, Equalisation levy at 6% has been in force since
2016 on payment exceeding 1 lakh a year to a non-
The wealth tax was abolished in the Union Budge resident service provider for online advertisements.
(2016-2017) on February 28, 2016, and replaced with
an additional surcharge of 2 per cent on the super-rich It is now applicable for e-commerce companies that are
(those with annual taxable income exceeding 1 crore). sourcing revenue from Indian customers without having
Wealth tax mainly targeted super-rich people with hefty tangible presence here in the country.
assets either received through legacy or earned on their
own The amendments to the Finance Act, 2020 had
expanded the ambit of the equalisation levy for non-
F. Banking Cash Transaction Tax (BCTT) resident e-commerce operators involved in supply of
services, including online sale of goods and provision of
BCTT is a type of direct tax that was first introduced in services, with the levy at the rate of 2% effective April
2005 on cash transactions exceeding a specific amour 1, 2020.
rom the bank by a customer but after four years it was
held back on 1 April 2009. During this period it was The tax applies on e-commerce transactions on websites
0.1% such as Amazon.com. Google in particular as the tax
applies on advertising revenue earned Overseas if those
Recently, the Committee of Chief Ministers headed by ads target customers in India.
Andhra Pradesh Chief Minister Chandrababu Naidu on
Digital Payments has recommended the restoration of Need for Digital Taxation in India
Banking Cash Transaction Tax (BCTT)
The reason for creating a different system for taxing
tis a proposed method of taxation which would be internet service providers is as follows
charged on all forms of bank transactions credit and
debit. The tax would be charged on both - cheque The existing tax norms were framed keeping in view the
payments and electronic methods of transactions. The conventional brick and mortar business models and
tax would be collected by government and equally therefore, is not adequate to regulate the online services
distributed between Centre and the respective state that have sprung up quite recently
where transaction took place Digital economy is characterised by a unique system of
BCTT helped the government trace tax evasion and value creation resulting from multiple factors like sales
frauds. The same can be true for the incumbent functions, algorithms and personal information of users
government if it decides to levy this tax. The flip side,

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One important factor that distinguishes technology (residence) and developing (source) countries
companies from conventional businesses is user have furthered the delay in devising the global
participation in creating value, which, in turn, translates tax system for digital giants.
into revenue. Digital businesses' unique ability to
analyse big data gathered by constant user engagement Advantages of Direct Taxes
and data mining lies in their ability
1. Social and Economic Equity: This form of taxation
Value Attributable to the Users: The tech giants raise a indicates social justice as it is based on the ability to pay
sizeable revenue from what is known as "the value The progressive nature of direct taxation can help
attributable to the user in the source country". Ride-for- reduce income inequalities.
hire companies like Uber, for example, use user data as
inputs to improve their surge pricing algorithms This 2. Relatively Elastic: Increase in the income of
algorithm helps these companies to determine the individuals and companies, leads to increase in the yield
maximum fare a customer will be willing to pay in real from direct taxes also.
time, based on passenger demand and driver
3. Certainty of Tax to be Paid: The tax payer is certain
availability. In the absence of personal information (of
as to how much tax is to be paid, as the tax rates are
users in a source country) the difference in revenue
decided in advance. The same implies for the
created between what Uber would have ended up
government where it can estimate the tax revenue from
charging a user and what it ends up charging the user is
direct taxes.
the profit attributed to the user in the source country. At
present, entities in most jurisdictions are not taxed in 4 Low Cost of Collection: Collection of direct taxes is
the source country for the revenue generated with the generally economical. Like in the case of personal
help of this value produced. income tax, the tax can be deducted at source (TDS)
from the income or salaries of the individuals.
Countries in favour of Digital Tax: Major technology
firms in countries like France and Britain have come 5. Controls Inflation: Direct taxes can help control
under the scrutiny of lawmakers for potentially routing inflation. When the inflation is on the uptrend, the
income from activities in countries with relatively low government may increase the tax rate. With an increase
tax rates or other arrangements. in tax rate, the consumption demand may decline,
which in turn may help reduce inflation.
Challenges in Introducing a Digital Tax
Disadvantages of Direct Taxes
• The US pulled out of the negotiations as it
believes that the digital services tax unfairly 1. Tax Evasion: There is higher tax evasion in our
targets American companies. country due to high tax rates, poor documentation and
• A major challenge is that the assessment of corrupt tax administration. This helps in suppressing the
value of user contribution in the source country correct information about incomes easily and thereby
is subjective. Thus, the source country with manipulating accounts, evasion on tax is
government will often try to argue that the encouraged.
value of the consumer contribution that has 2. Impacts Capital Formation: Direct taxes can affect
converted into the revenue of the entity is savings and investments. Due to tax implications, the
much more than what the state in which the net income of individuals reduces, in turn reducing their
entity is formed will say. This might create savings Reduction in savings results in low investment,
friction and undermine the efficacy of double affecting the capital formation in the country
taxation agreements.
3. Arbitrary Rate of Taxation: The direct taxes are
• OECD acknowledges the need to tax value at arbitrary. There is no objective defined for determining
its source and identified how value is created the tax rates of direct taxes. Also, the exemption limits
Yet, it has not been able to devise a definite in personal income tax, wealth tax, etc., are also
method of assessing the value that users determined in an arbitrary manner. Therefore, direct
generate in a source country Lack of consensus taxes may not always fulfill the requirement of equity.
on quantifying user contribution and
differences in the interests of developed

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Imbalance in Sectoral Taxation: In India, there sectoral 2. Additional Duty (Countervailing Duty) (CVD)
imbalance as far as direct taxes are concern Certain Countervailing duty (CVD) is an additional import duty
sectors like the corporate sector is head taxed, whereas, imposed on imported products (by the import country)
the agriculture sector is 100% tax when such products enjoy benefits like expo subsidies
and tax concessions in the country of the gee where it is
9.2.2 Indirect Tax produced and exported) CVD is this an import tax by
the importing country on ported products CVD is
Indirect taxes are those taxes that are levied on goods generally country specific The decision to impose CVD
services. They differ from direct taxes because they a is taken by Ministry ance based on recommendation of
not levied on a person who pays directly to the Director General of Trade Remedies (DGTR)
government instead, they are levied on products and are
collected the person selling the product. The examples The WTO permits member countries to impose
of Ind taxes are: countervailing duty when the exporting country gives
export subsidy Export subsidy will help the exporters to
• Sales Tax sell the product at a lower price in the international
• Service Tax market. A parity between the price of imported products
• Value Added Tax (that enjoys export subsidy) and the domestic products
• Custom Duty and Octroi (that doesn't enjoy any subsidy) has to be ensured. For
• Excise Duty this, a Countervailing Duty is essential as it can raise
• Goods and Service Tax (GST): Refer to the the price of the imported product. Here. CVD is
imposed to countervail (overcome) export subsidy.
later sect as this tax has merged many of the
indirect taxes 3. Anti-Dumping Duty: Dumping is said to occur when
the goods are exported by a country to another country
A. Custom Duty at a price lower than its selling price in t origin. This is
an unfair trade practice which 7/25 "y na a distortive
Customs Duty refers to the tax that is imposed on
effect on international trade. Anti dumping is a measure
transportation of goods across international borders. It s
to rectify the situation arising out of the dumping of
kind of indirect tax that is levied by the government on
goods and its trade distortive effect. Thus, the purpose
the imports and exports of goods. Companies that are
of anti dumping duty is to rectify the trade distortive
into the export-import business need to abide by these
effect of dumping and re-establish fair trade.
regulators and pay the customs duty as required.
The use of anti dumping measure as an instrument of
The Customs Act was formulated in 1962 to prevent
fair competition is permitted by the WTO. In fact, anti
illega imports and exports of goods. Besides, all imports
dumping is an instrument for ensuring fair trade and is
a sought to be subject to a duty with a view to affording
not a measure of protection per se for the domestic
protection to indigenous industries as well as to keep
industry. It provides relief to the domestic industry
the imports to the minimum in the interests of securing
against the injury caused by dumping.
the exchange rate of Indian currency.
Restrictions: There are however certain restrictions on
Types of Customs Duty in India imposing dumping duties in case of countries which are
signatories to the GATT or on countries given "Most
Customs duties are levied on almost all goods that ar
Favoured Nation" (MFN) status under agreement.
imported into the country. On the other hand, export
duties are levied on a few items as mentioned in the 4. Export Duty: Such duty is levied on export of goods.
Second Schedule of the Customs Tariff Act, 1975. The main purpose of this duty is to restrict exports of
Customs duties are not levied on life-saving drugs, certain goods.
fertilizers, and foc grains. Customs duties are divided
into different taxes such as: 5. Social Welfare Surcharge (SWS): It is a tax imposed
on the value of goods including the BCD value. It is
1. Basic Duty: This duty is levied on imported goods generally 10% unless the good is exempted from this
under the Customs Act, 1962. tax. Social Welfare Surcharge was introduced in the
Budget 2018 is levied in place of education Cess.

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6 Integrated Goods and Service Tax (IGST) - Excise duty was levied on manufactured goods and
Introduced on 1 July 2017. GST subsumed most levied at the time of removal of goods, while GST is
indirect taxes such as excise duties and a special levied on the supply of goods and services.
additional customs duty that was applied previously. A
concept note on GST can be accessed at this Link on Alcohol does not come under the purview of GST as an
website of GST Council. IGST is imposed on the exclusion mandated by constitutional provision. States
imported goods to provide a level playing field for levy taxes on alcohol according to the same practice as
domestic manufacturers, who also pay an equivalent tax was prevalent before the rollout of GST.
(Central GST+State GST or IGST) on sale of goods. After GST was introduced, excise duty was replaced
IGST on imported goods can be set-off against any central GST because excise was levied by the Cer
other GST liability in India. There are five slabs of Government. The revenue generated from CGST the
IGST 0%, 5%, 12%, 18%, 28% Central Government. goes
Value of imported Goods + Basic Customs Duty +
C. Goods and Service Tax (GST)
Social Welfare Surcharge = Value on which IGST is
calculated Value x IGST Rate = IGST Payable The Goods and Services Tax (GST) is a value-added
levied on most goods and services sold for domes
7. Compensation Cess: This is an additional tax that is
consumption. The GST is paid by consumers, but
imposed along with GST on both imported items as
remitted to the government by the businesses selling
well as domestically manufactured items on products
goods and services.
that are classified as notified (mostly belonging to the
luxury and demerit category) E.g. Special Utility 1. Features of GST: Applicable on Supply Side: GST is
Vehicles, Cigarettes, Tobacco, Aerated Water, etc. applicant on 'supply of goods or services as against the
concept on the manufacture of goods or on provision of
8. Customs Handling Fee: The Indian government
services.
assesses a 1% customs handling fee on all imports in
addition to the applied customs duty. Tariff rates, excise Destination based Taxation: GST is based on the
duties, regulatory duties, and countervailing duties are principle of destination-based consumption taxation as
revised in each annual budget in February and are against the present principle of origin-base taxation.
published in various sources.

9. Health and Education Cess: Leviable @ 4% on the

aggregate of duties of customs. Dual GST: It is a dual GST with the Centre and the
States simultaneously levying tax on a common base
GST to be levied by the Centre is called Central GST
(CGST) and that to be levied by the States is scale:
B. Central Excise Duty State GST (SGST).
Excise duty is a form of tax imposed on goods for their Import of goods or services would be treaty: as inter-
production, licensing and sale. An indirect tax paid to state supplies and would be subject to Integrated Goods
the Government of India by producers of goods, excise & Services Tax (IGST) addition to the applicable
duty is the opposite of Customs duty in that it applies to customs duties.
goods manufactured domestically in the country, while
Customs is levied on those coming from outside of the GST Rates to be Mutually Decided: CGST, SGST IGST
country. are levied at rates to be mutually agreed upon by the
Centre and the States. The rates are notified on the
At the central level, excise duty earlier used to be levied recommendation of the GST Council.
as Central Excise Duty, Additional Excise Duty, etc.
However, the Goods and Services Tax (GST), Multiple Rates: Initially GST was levied at four rates
introduction in July 2017, subsumed many types of viz. 5%, 12%, 16% and 28%. The schedule or list items
excise duty. Today, excise duty applies only on that would fall under these multiple slabs are worked
petroleum and liquor. out by the GST council.

Taxes Subsumed: The GST replaced the following taxes

levied and collected by the Centre:

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(a) Central Excise Duty Union Finance Minister of India with ministers
nominated by the State Governments as its members.
(b) Duties of Excise (Medicinal Preparations)
The council is devised in such a way that the centre will
(c) Additional Duties of Excise (Goods of Specia have 1/3rd voting power and the states have 2/3rd
Importance)
The decisions are taken by 3/4th majority.
(d) Additional Duties of Excise (Textiles and Textile
Products) 4. Reforms Brought about by GST:

(e) Additional Duties of Customs (commonly know as Creation of Common National Market: By
CVD) amalgamating a large number of Central and State taxes
into a single tax.
(f) Special Additional Duty of Customs (SAD)
Mitigation of Cascading Effect: GST mitigated ill
(g) Service Tax effects of cascading or double taxation in a major way
(h) Central Surcharges and Cess, so far as they relate to and paved the way for a common national market.
supply of goods and services. State taxes subsumed Reduction in Tax Burden: From the consumers' point of
under the GST are: view, the biggest advantage would be in terms of
(a) State VAT reduction in the overall tax burden on goods

(b) Central Sales Tax Making Indian Products more Competitive:

Introduction of GST is making Indian products more
(c) Luxury Tax competitive in the domestic and international markets
owing to the full neutralization of input taxes across the
(d) Entry Tax (all forms)
value chain of production.
(e) Entertainment and Amusement Tax (except when
Easier to Administer: Because of the transparent and
levied by the local bodies) Taxes on advertisements
self-policing character of GST, it would be easier to
(g) Purchase Tax administer

(h) Taxes on lotteries, betting and gambling State 5. Exemptions under GST:
Surcharges and Cess, so far as they relate to supply of
Custom duty will be still collected along with the levy
goods and services.
of IGST on imported goods.
2 Legislative Basis of GST: In India, GST Bill was first
Petroleum and tobacco products are currently exempted.
introduced in 2014 as The Constitution (122nd
Excise duty on liquor, stamp duty and electricity taxes
Amendment) Bill. This got an approval in 2016 and was
are also exempted.
renumbered in the statute by Rajya Sabha as The
Constitution (101st Amendment) Act, 2016. Its 6. Benefits of GST:
provisions:
For Business and Industry
Central GST to cover Excise duty, Service tax etc, State
GST to cover VAT, luxury tax etc. Easy Compliance: A robust and comprehensive IT
system is the foundation of the GST regime in India.
Integrated GST to cover inter-state trade. IGST per se is
not a tax but a system to coordinate state and union Uniformity of Tax Rates and Structures: GST ensured
taxes. that indirect tax rates and structures become common
across the country, thereby increasing certainty and ease
Article 246A: States have power to tax goods and of doing business.
services.
Removal of Cascading: A system of seamless tax-
3. GST Council: credits throughout the value- chain, and across
boundaries of States. ensures that there is minimal
Article 279A: GST Council to be formed by the
President to administer & govern GST. It's Chairman is

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cascading of taxes. This reduces hidden costs of doing More Economical Empowerment: Power to tax
business. services, which was hitherto with the Central
Government only, will boost revenue and give States
Improved Competitiveness: Reduction in transaction access to the fastest growing sector of the economy.
costs of doing business eventually leads to an improved
competitiveness for the trade and industry. Enhancing Investments: GST being destination based
consumption tax will favour consuming States. Improve
Gain to Manufacturers and Exporters: The subsuming the overall investment climate in the country which will
of major Central and State taxes in GST, complete and naturally benefit the development
comprehensive set-off of input goods and services and
phasing out of Central Sales Tax (CST) reduced the cost States Increase Compliance: Largely uniform S and
of locally manufactured goods and services. This IGST rates will reduce the incentive evasion by
increases the competitiveness of Indian goods and eliminating rate arbitrage betwee neighbouring States
services in the international market and give boost to and that between t and inter-state sales
Indian exports.
7. Fiscal Federalism
For Central and State Governments:
Fiscal federalism deals with the division governmental
Simple and Easy to Administer: Multiple indirect taxes functions and financial relation among levels of
at the Central and State levels have been replaced by government.
GST Backed with a robust end-to-end IT system. GST
is simpler and easier to administer than all other indirect This includes taxation powers, borrowing power and
taxes of the Centre and State levied so far division of functions. When there s inherent cooperation
between the states an Centre, and also between different
Better Controls on Leakage: GST has resulted in better states, called cooperative fiscal federalism.
tax compliance due to a robust IT infrastructure. Due to
the seamless transfer of input tax credit from one stage GST is a fundamental reordering of federal fiscal
to another in the chain of value addition, there is an in- relations of India while states have had to give their
built mechanism in the design of GST that incentivizes taxation powers and cope with associate insecurities,
tax compliance by traders. This is done through the the Union government has ha to sacrifice its own share
input tax credit and its purview: revenues.

Higher Revenue Efficiency: GST decreases the cost of GST Council is made up of state finance ministers, with
collection of tax revenues of the Government, and the Union finance minister as chairperson. States
therefore, leads to higher revenue efficiency. together account for two thirds of the votes and the
Centre holds only: third. Therefore, a consensus based
For the Consumer Single and Transparent Tax: Due to decision making is preferred.
multiple indirect taxes being levied by the Centre and
State, with incomplete or no input tax credits available 8. Challenges of GST
at progressive stages of value addition, the cost of most
goods and services in the country were laden with many SCGT and CGST input credit cannot be cross utilized.
hidden taxes. Under GST, there is only one tax from the Manufacturing states lose revenue on a biggest scale.
manufacturer to the consumer, leading to transparency
of taxes paid to the final consumer. High rate to tax to compensate the revenue collected
now from multiple taxes i.e. Revenue Neutral Rate.
Relief in Overall Tax Burden: Because of efficiency
gains and prevention of leakages. the overall tax burden The reduction in the fiscal autonomy of the States
on most commodities has come down, which benefits Concerns raised by banks and insurance companies over
consumers. the need for multiple registration under GST.

For the States Expansion of the Tax Base: As states will The levy of additional cess.
be able to tax the entire supply chain from
manufacturing to retail. The capacity of State tax authorities, so far use to taxing
goods and not services, to deal with the latter is an
unknown quantity.

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The success of GST depends on politics consensus, Under progressive taxes, the lowest income gro
technology and the capacity of officials to adapt to the including ones below the poverty level would pay it to
new requirements nothing in taxes.

9.3 Basic Concepts Arguments for and Against

Progressive taxes are based on the logic of the ability to
A. Proportional Tax pay" principle.
It is a tax where the rate of taxation is fixed. It stays a
Higher income people should pay more since they
fixed irrespective of how high or low the income is capable of paying more.
For Example The fairness of progressive taxes are built on t fact that
A 10% proportional tax would mean that one making those who make more money should a contribute more
100 rupees pays 10% or 10 rupees in taxes, while to society in form of taxes
someone making 500.000 rupees pays 50,000 rupees in Those who make less, are less able to pay and should
taxes.
pay less
The rate of taxation does not change as income changes.
The counter argument to progressive taxes is that
Proportional taxes are also called flat tax. penalizes people who work harder and make me money.

Arguments for and Against In a sense, you are being punished for your success.
Those taxes are then used to fund social welfare
It is equal all across the income board and hence in programs that help raise the real income of the lower
theory is a fair system. Since there are no exceptions, income group
the rules are easy to understand and apply.
Critics of the progressive tax consider it to be
The tax administration and collection is also simple and discriminatory and reduces the incentive to work hard
straight forward. and excel in life
It is difficult to evade. C. Regressive Tax
Another argument for a proportional tax system is the It is a tax imposed in such a manner that the tax rate
motivation factor, since people who earn more are not decreases as the amount of taxable income increases
charged at a higher percentage rate.
In case of regressive taxes there is an inverse
The main argument against proportional taxes is that it relationship between the tax rate and the taxpayers
is regressive in application. ability to pay.
B. Progressive Tax This means that it hits lower-income individuals harder
GST on staple food, clothing and transportation c be
It is a tax in which the tax rate increases as the income
regressive, the inverted duty structure (where raw
increases.
material attracts more tax than finished good) can also
A progressive tax takes a larger percentage of income in be regressive.
taxes from the high-income group than it does from the
Since each person pays the same amount of money, is a
low-income group.
lower proportion for people with higher incomes.
Personal income taxes are progressive and so, people
Tobacco and gasoline taxes are highly regressive.
with higher income pay a higher percentage of their
income in taxes. For Example:
On the other hand, people with lower income, pay a If a person with 50 rupees income pays 5 rupees in
smaller % of their income in taxes. gasoline tax, it is 10% of his income in taxes. But the
person making 500 rupees, paying 5 rupees gasoline tax

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is only paying 1% of his income in this tax Hence it is J. Tax Incidence

regressive.
It shows the entity on which tax is imposed. For
D. Digressive Tax example, if government increases tax on petrol, oil
companies may absorb it if competition is intense or
Taxes which are mildly progressive, hence not very they may pass it on to private motorists. Tax incidence
steep, so that high income earners do not make a due here refers is on companies and the burden may be on
sacrifice on the basis of equity, are called digressive. the consumer.
taxation, thus, the tax payable increases only at a
diminishing rate. K. Tax Burden
E. Advaloerm versus Specific tax It means those who actually pay taxes-from whom it is
collected. Depending on the market forces involved, a
F. Advance Tax Collections tax can be absorbed by the seller or the buyer (in the
form of higher prices), or by a third party like seller,
Advance tax is paid by those who have tax liability of
employees in the form of lower wages.
$10,000 or more in a financial year. It is paid by both
salaried and businesses, thus including collections from L. Tax Base
Corporate tax and personal income tax.
The value of goods, services and incomes on which tax
Advance tax is paid as and when the money is earned in is imposed. When economists speak of the tax base
four installments rather than at the end of the fiscal year. being broadened, they mean a wider range of goods,
It is considered an indication of economic sentiment. services, income etc., has been made subject to a tax, In
The first installment or 15% of the annual tax is to be the case of income tax, and the tax base is taxable
paid by 15 June, the second by 15 September (30%), the income. Some kinds of income are excluded from the
third by 15 December (30%), and the rest by 15th definition of taxable income, such as agricultural
March. income.
G. Dividend Distribution Tax (DDT) M. Tax Shelter
Dividend refers to the distribution of profits to A tax shelter is a financial vehicle that an individual can
shareholders of a company. Thus, the dividend use to help them lower their tax obligation and, thus,
distribution tax is a type of tax that is payable on the keep more of their money. It is a legal way for
dividends offered to its shareholders by the corporation. individuals to "stash" their money and avoid getting it
In the Union Budget for 2020-2021 the DDT was taxed
withdrawn from the tax paid by the dividend payer. A tax shelter is entirely different from a tax haven
Instead, from April 2021 on, dividends would be taxed because the latter exists outside the country and its
in the hands of the recipients, i.e. shareholders of the legality can, at times, be questionable. A tax shelter, on
distributing company. The proposed rate is 10% for the other hand, is entirely legal and keeps all monies
dividends paid to shareholders resident in India and within an individual's home country.
20% if paid to foreign investors.
O. Tax Haven
H. Tax Deduction at Source
A country that offers foreign individuals and businesses
A person (deductor) who is liable to make payment of little or no tax liability in a politically and economically
specified nature to any other person (deducted) shall stable environment. Tax havens also provide little or no
deduct tax at source and remit the same into the account financial information to foreign tax authorities.
of the Central Government. Individuals and businesses that do not reside a tax
haven can take advantage of these countries' tax
I. Tax Collected at Source
regimes to avoid paying taxes in their home countries.
It is an additional amount collected as ta specified Tax havens do not require that an individual reside in or
goods from the buyer at the time 13/25 er above the sale a business operate out of that country in order to benefit
amount and is remitted to the government account. from its tax policies.

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Andorra, the Bahamas, Belize, Bermuda, the British Q. Negative Income Tax
Virgin Islands, the Cayman Islands, the Channel
Islands, the Cook Islands, Hong Kong, the Isle of Man, Subsidy is a negative income tax. It is a taxation system
Mauritius, Lichtenstein, Monaco, Panama, Switzerland where income subsidies are given to' persons or families
and St. Kitts and Nevis are all considered tax havens. that are below the poverty line.

N. Tax Avoidance and Tax Evasion

There are provisions in the law that allows one to sa and R. Pigouvian Taxes
invest in a manner that leads to reduction income. If
these provisions are used for the benefit, t called tax The Pigovian tax is imposed on bodies that have
avoidance. It is lawful to take all available t deductions. negative externality. For example, the seller and
in taxable consume of cigarettes together will harm the third
person with pollution. Carbon tax is one example in the
Tax evasion, on the other hand, is a punishable offence context of the need to discourage fossil fuels and
Tax evasion typically involves failing to report income encourage sources due to climate change threat.
improperly claiming deductions that are not authorized renewable

O. Tax Haven S. Tax Buoyancy

A country that offers foreign individuals and businesses Tax buoyancy explains relationship between the
little or no tax liability in a politically and economically changes in government's tax revenue growth and the
stable environment. Tax havens also provide little or no changes GDP. It refers to the responsiveness of tax
financial information to foreign tax authorities. revenue growt to changes in GDP. Tax buoyancy
Individuals and businesses that do not reside a tax estimates measure t percentage response of tax revenue
haven can take advantage of these countries' tax to a one per change in the tax base, usually proxied by
regimes to avoid paying taxes in their home countries. the gross comestic product. It is the total response of the
Tax havens do not require that an individual reside in or tax system ce to increase in the national income and the
a business operate out of that country in order to benefit tax policy ssions of the government is known as the tax
from its tax policies. buoyancy The buoyancy of a tax system measures the
total response tax revenue both to changes in national
Andorra, the Bahamas, Belize, Bermuda, the British
income and to scretionary changes in tax policies over
Virgin Islands, the Cayman Islands, the Channel time buoyancy depends mainly on Size of the tax base.
Islands, the Cook Islands, Hong Kong, the Isle of Man,
Mauritius, Lichtenstein, Monaco, Panama, Switzerland Tax administration regime
and St. Kitts and Nevis are all considered tax havens.
Reasonableness and simplicity of the tax rates
P. Hidden Taxes
Wealth creation
These are the taxes that are indirectly assessed upon
consumer goods without the consumer's knowledge. T. Tax Elasticity
Hidden taxes are levied upon the goods at some point The elasticity of tax revenue is defined as the
during the production process and therefore raise the underlying evenue response, holding constant all
cost of the goods sold. However, this tax is never parameters of tax 20icy Le measures the responsiveness
revealed directly to the consumer, who simply pays a of tax revenue to changes in national income keeping all
higher price for the good, not knowing that part of that other parameters reducing tax legislation) constant.
price is due to this tax.
When the elasticity of major revenue sources is low (for
Some ad valorem taxes are an example of a hidden ta as example, owing to the rigidity of the tax base or the
these are taxes that are imposed at the wholesale level. presence of tax evasion and/or avoidance), governments
Most consumers are aware that there is a tax o retail rase additional resources through discretionary
goods but this is by no means the only tax levied on measures. this case, the growth of tax revenue comes
consumer goods. Hidden taxes are almost invariably through high buoyancy rather than high elasticity
passed on to the consumer.

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U. Tax Stability • It has also been observed that aggressive tax

planning by private sector through legitimate
means no frequent changes and continuity of policy in a and illegitimate means like BEPS further
predictable and transparent manner. Although revenue
reduces the tax revenue of the government.
from different taxes varies from year to year, revenue
• The government also provides exemptions
stability is desirable because it makes it easier for a
government to build a credible spending and borrowing which amount to about 4-5% GDP.
plan for the year ahead. Taxes whose revenue is • One of the reasons for the low tax to GDP ratio
relatively stable contribute to overall revenue stability. of India is the poor legitimacy of government
including corruption, tax evasion, and presence
Tax-to-GDP ratio represents the size of a country's tax of black money.
kitty relative to its GDP. It is a representation of the size
• There is also a prevalence of cash transactions
of the government's tax revenue expressed as a
which enables avenues for parallel economy
percentage of the GDP Higher the tax to GDP ratio the
like Hawala transactions etc.
better financial position the country will be in. The ratio
represents that the government is able to finance its Steps to be taken to Improve the Tax to GDP Ratio of
expenditure. A higher tax to GDP ratio means that the
Indian Economy
government is able to cast its fiscal net wide. It reduces
a government's dependence on borrowings The most important measure for improving tax-to-GDP
ratio is ensuring the citizens pay their taxes The
Significance
introduction of Direct Tax Code can help in greater
A higher tax to GDP ratio means that an economy's tax compliance in this. regard Rationalisation of GST and
buoyancy is strong as the share of tax revenue rises in moving towards a two- rate structure can also help in
sync with the rise in the country's GDP. India, despite increasing compliance and putting an end to tax
seeing higher growth rates, has struggled to widen the evasion. While measures to improve tax compliance and
tax base. Lower tax-to-GDP ratio constrains the widen the tax base will yield higher tax revenue. the
government to spend on infrastructure and puts pressure importance of higher economic growth cannot be
on the government to meet its fiscal deficit targets. ignored. The following steps have to be taken:

India's Position with Respect to its Peers-Although India should focus on formalisation of economy, there is
India has improved its tax-to-GDP ratio in the last six a need for widening the tax base to at least 23% of voter
years, it is still far lower than the average OECD ratio base International cooperation is required to revise
which is 34 per cent. India's tax-to-GDP ratio at about DTAA and take steps to curb practices of base erosion
17%, is still lower than some of its peers in the and profit shifting by multinational enterprises The
developing world. Developed countries tend to have exemptions provided to the individuals and corporate
higher tax-to- GDP ratio. firms must be rationalised to make them revenue neutral
for the government.
Reasons for Low Tax to GDP ratio of India
There is a need to improve the legitimacy of the
• India has to deal with various structural issues, government by reducing corruption & increasing
70% of Indian economy is rural and monsoon transparency of tax administration improve tax
dependent, 85% of workforce is employed in administration to make tax compliance easier - Simplify
informal sector which effectively means that tax laws
major chunk of people are outside the tax
Increasing the Vigilance through data analytics with a
bracket, According to an estimate, only 1.5 360-degree profiling to match the database of people
crore Indians pay taxes filing taxes has to be undertaken.
• This is coupled with complex tax structure
including confusion, loopholes, litigations, The phenomena of Black Money/money laundering/
ineffective tax administration, and inadequate Tax evasion can be countered with legislative steps
data on potential tax payers, which eventually including Income tax disclosure sch Transaction Act,
etc. an
leads to low Tax compliance.

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Promoting cashless and digital transactions and creating • To bring horizontal equity among different
awareness among consumers and establishments classes: taxpayers in line with best
regarding tax discipline can further help to increase the international practices
tax to GDP ratio of the country. • To improve compliance further, tax laws need
to be simple, stable and robust.
W. Tobin Tax
• To phase out the multiplicity of tax exemptions
James Tobin an economist, proposed a worldwide tax an deductions in order to widen and deepen the
on all foreign exchange transactions when foreign tax base
capital enters a country and when it leaves. The aim is
to check speculative flows Long term investment - Expected Provisions of Direct Tax Code:
generally FDI. will not suffer as it does not invest for
speculative (short term) reasons like Flis Simplified Law: Expected to contain less than 400
sections (vis a vis 700 earlier), with easier compliance
9.4 Recent Concepts in Taxation mechanism.

Changes in Personal Tax Slabs: to benefit middle and

9.4.1 Robot Tax upper middle class Indians.
The rise in automation with increase in robots is likely Uniform Corporate Tax: across-the-board 25% tax rate
to shrink the government's tax revenue. This has raised for both local and foreign companies. Removal of
the need for assessing the implications and feasibility Surcharges and Cesses on persona and corporate taxes.
taxing robots. this tax was suggested by Microsoft
founded Bill Gates wherein robots should be taxed in 'Assessing Unit' to replace 'Assessing Officer: To check
the interest saving human jobs. According to him, the harassment by tax officials, individual 'assessment
tax would offer the social costs of automation and could officers' are likely to be placed with 'assessment units'.
be used to finance a universal basic income (UBI).
Removal of Dividend Distribution Tax: To dividends to
Taxing robots would make the employers opt for
be taxed only in the hands of shareholders allow
automation only when there i logical need in terms of
productivity enhancement would not hurt economic Repatriation Tax or "Branch Profit Tax": for foreign
growth, but would only rationale investments and thus companies on the earnings they repatriate to their
improve economic efficiency It would ensure a level overseas parent. This will be over and above the
playing field between automatic and labour use Tax corporate tax.

Mediation: The draft DTC might announce a new

concept of settling disputes through mediation between
9.4.2 Direct Tax Code the taxpayer and a Collegium of Commissioners, to help
avoid tax litigation.
Direct Tax Code is a major reform in the tax system we
the government aims at simplifying the tax laws Litigation Management Unit: to deal with tax litigation
regulations into a single legislation. process under the new income tax law.

The objectives of the Direct Tax Code are: A slew of incentives for start-ups.

• To simplify and consolidate all direct tax laws 9.4.3 General Anti Avoidance Rule
of Central Government (GAAR)
• To make the tax system more effective and
efficient General Anti Avoidance Rule is set of rules under the
• To bring the consolidated law relating to direct income Tax Act (under the proposed Direct Tax Code)
taxes that is, income-tax, dividend. which empowers the revenue authorities to deny tax
benefits on transactions or arrangements which do not
Distribution tax, fringe benefits tax and
have any commercial substance or consideration other
wealth-tax
than achieving the tax benefit.

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Reasons for Bringing GAAR MAT is a tax levied on profit-making entities that don't
pay corporate income tax because of exemptions and
Though legally tax avoidance is not a crime, it was incentives. Normally, a company is liable to pay tax on
causing huge revenue losses to the government due to the income computed in accordance with the provisions
aggressive tax planning by the business houses who of the Income Tax Act, but the profit and loss account of
often use the loopholes of the law to avoid taxes. Anti- the company is prepared as per provisions of the
avoidance rules have been brought in many countries to Companies Act.
check revenue posses to the government.
Although the companies show book profits and may
In India, the discussion of GAAR came after the even declare dividends to the shareholders, they do not
Vodafone tax dispute. Vodafone purchased the Hutch pay any income tax. These companies are popularly
India at 55000 crores. The parent company of Hutch, known as Zero Tax companies. In order to bring such
Hutchinson Hong Kong, was liable to pay capital gains companies under the income tax act net, MAT was
tax to the Indian government. introduced in 1996. They were required to pay MAT at
18.5%
Prospects with GAAR
Book profit is Profit which is notional made but not yet
• It will make the modus operandi of taxation realized through a transaction, such as a stock which
transparent, efficient and extremely simple. has risen in value but is still being held. It is also called
• It clarifies that in case of differential unrealized gain or unrealized profit or paper gain or
interpretations, the one which is more paper profit.
beneficial to taxpayers will hold.
• It introduces the internationally recognized 9.4.5 Presumptive Tax
concept of Place of Effective Management' for
Presumptive Tax is based on the Estimated Income
corporate. This will help India to be in sync Method of assessment for certain categories of
with international practices and create ease of businesses, as prevalent in several countries.
doing business. Presumptive taxation involves the use of indirect means
• It brings flexibility for tax payers which to ascertain tax liability. which differ from the usual
reduces the problem of frequent litigations. It rules based on the taxpayer's accounts. The term
makes India an attractive investment presumptive is used to indicate that there is a legal
destination by restoring investor's faith in the presumption that the tax payer's income is no less than
Indian economy. the amount resulting from application of the indirect
method.
Problems with GAAR
9.4.6 Inverted Duty Structure
• It increases the discretionary powers of tax
officials and thus increase scope of corruption An inverted duty structure comes up in a situation
and harassment to tax payers. where import duties on input goods are higher than on
finished goods. In other words, the GST rate paid on
• It may negatively impact the ease of doing
purchases more than the GST rate payable on sales.
business due to increased regulatory
This skewed du, structure makes domestic
requirements. This will also reduce investment manufacturers un-competitive
inflow
• There is lack of clarity and lack of safeguards Taxpayers who face an inverted duty structure will
for tax payers, generating arbitrariness always have Input Tax Credit (ITC) in their GST
• It is difficult to differentiate between different electronic cren ledger even after paying off the output
tax liability. Th creates working capital issues for the
types of avoidance practices
taxpayers, as crucial resources remain blocked in the
• Inadequate administrative machinery
form of ITC. While the GST law provides the option to
implementation may make the rules draconian. claim the unutilized i as a refund, there are other
complications. A complicate refund process under GST
9.4.4 Minimum Alternative Tax creates additional compliance requirements and finally

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leads to more cost of compliance This way, the inverted because it is the point at which the government collects
duty structure has caused refund related issues under the maximum amount tax revenue while people continue to
GST regime. work hard.

The Economic Survey (2010-11) said FTAs also lead to Base Erosion and Profit Shifting (BEPS)
a new type of inverted duty structure with duties for
final products being lower from FTA partners compared Base Erosion and Profit Shifting refers to tax avoidance
to duties for the previous-stage raw materials imported ratifies that exploit gaps and mismatches in tax rules to
from non-FTA countries. This acts as a disincentive to facially shift profits to low or no-tax locations.
local manufacturing which is not competitive against
Firms make profits in one jurisdiction and shift them
FTA imports because of the inverted duty structure
across borders by exploiting gaps and mismatches in tax
phenomenon.
rules, to take advantage of lower tax rates and, thus, not
paying taxes in the country where the profit is made.
The BEPS project is a joint initiative between G20
countries and the OECD, works towards the
development of a coherent global taxation system which
addresses BEPS concerns

BEPS practice is a major problem since nations have

9.4.7 Laffer Curve lost tax revenues to the tune of $ 100 billion to $ 240
billion annually, as per statistics put out by the
Organisation for Economic Cooperation and
Vented by Arthur Laffer, this curve shows the Development (OECD) The above revenue which is lost
relationship tax rates and tax revenue collected by is equivalent to 4 % to 10% of the total income tax
governments. The Laffer Curve describes how changes revenue at a global level
in between rates affect government revenues in two This undermines the fairness and integrity of tax
ways systems because businesses that operate across borders
One is immediate, which Laffer describes as can use BEPS to gain a competitive advantage over
"arithmetic" etc Every 1% in tax cuts translates directly enterprises that operate at a domestic level.
to 1% reduction of government revenue. When taxpayers see multinational corporations legally
The other effect is longer-term, which Laffer describes avoiding income tax, it undermines voluntary
as economic effect. It works in the opposite direction. compliance by all taxpayers.
Lower tax rates put money into the hands of taxpayers, The Organization for Economic Cooperation and
o then spend it. Development (OECD) states that BEPS is of major
creates more business activity to meet consumer significance for developing countries due to their heavy
demand. For this, companies hire more workers, who reliance on corporate income tax, particularly from
then spend their additional income. This boost to multinational enterprises.
economic growth generates a larger tax base. It BEPS Project - Launched by OECD
eventually replaces By revenue lost from the tax cut.
Organisation for Economic Cooperation and
The Laffer Curve suggests that, as taxes increase from Development launched the BEPS project to tackle the
w levels, tax revenue collected by the government also problem of tax avoidance, to bring in a transparent tax
creases. It also shows that tax rates increasing after a environment and bring in more synergy to the
certain point (T) would cause people not to work as international tax rules.
hard not at all, thereby reducing tax revenue.
There are 15 Action Plans that are being implemented
Eventually, if tax rates reached 100%, shown as the far by 135 countries.
right on his curve, all people would choose not to work
because everything they earned would go to the
government. Governments would like to be at point T*,

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Countries now have the tools to tax the company that is Act, 196 through Finance Act 2016, effective from 1
generating profits and value in that particular country. April 2016.
These tools also reduce disputes.
India is also a part of negotiations with respect to G7:
Recent Efforts by India to Curb BEPS Framework for a Global Minimum Tax.

India has signed the Multilateral Convention to 9.4.9 Double Taxation Avoidance
Implement Tax Treaty Related Measures to Prevent
Base Erosion and Profit Shifting ("Multilateral Agreement (DTAA)
Instrument" or "MLI") to swiftly implement a series of
A DTAA is a tax treaty signed between two or more
tax treaty measures to update international tax rules and
countries. Its key objective is that tax-payers in these
lessen the opportunity for tax avoidance by
countries can avoid being taxed twice for the same
multinational enterprises The MLI entered into force on
income. A DTAA applies in cases where a tax-payer
1st July 2018
resides in one country and earns income in another.
The convention will modify India's treaties to curb
DTAAS can either be comprehensive to cover all
revenue loss through treaty abuse and BEPS strategies
sources of income or be limited to certain areas such as
by ensuring that profits are taxed where substantive
taxing of income from shipping, air transport,
economic activities generating the profits are carried out
inheritance, India has DTAAS with more than eighty
India has also signed the Inter-Government Agreement countries, of which comprehensive agreements include
(IGA) on Foreign Account Tax Compliance Act those w Australia, Canada, Germany. Mauritius,
(FATCA) with United States. Singapore UAE, the UK and US.

India also has become a signatory of the Multilateral India has signed DTAA with the tax havens such a
Competent Authority Agreement on Automatic Mauritius, Singapore, Cayman Islands etc. These DTA
Exchange of Financial Account Information in 2015. have been misused by the MNCs in order to reduce
their tax liability in India. For example, If company
India and the US signed an agreement for exchange of (Shell Company is registered in tax haven and carries
country-by-country report to enable the two countries to out the operations through its subsidiary based in India.
automatically exchange the reports filed by the ultimate Under the provisions DTAA, the company would be
parent entities of the multinational enterprise in the liable to pay tax only in the tax haven country, even for
respective jurisdictions pertaining to the year the profits which it makes in oa This causes significant
commencing on or after January 1, 2016 revenue loss for India.
In Union Budget 2016 an equalisation levy' of 6 per OTAAS are intended to make a country an attractive
cent on payments exceeding over 1 lakh to online a investment destination by providing relief on dual
services from non-resident entities was introduces taxation Such relief is provided by exempting income
Prominent companies affected would be new economy earned abroad from tax in the resident country or
multinationals with Indian subsidiaries, like Facebook providing credit to the extent taxes have already been
and Google paid abroad. DTAAS also provide for concessional rates
of tax in some cases.
India is the first country to impose such a levy, post the
OECD action plans. Double Non-Taxation: The corporate taxes imposed on
multinational corporations (MNCs) are major sources of
A tax panel has recommended expanding the ambition
revenue for most economies. However, multinational
of this levy to cover a wide gamut of transaction
corporations have begun to sift their tax liabilities from
including online marketing, cloud computing, webs
a high tax jurisdiction to a low or no-tax jurisdiction,
designing, hosting and maintenance, platforms sale of
resulting in massive revenue losses for the fiscal
goods and services, and online use of download of
jurisdiction where the taxes should have been ideally
software and applications.
paid. This is a drastic shift from days of double taxation,
India introduced core elements of the Country-by when the MNCs had to pay taxes in more than one
Country reporting requirement in the Indian Income Tax jurisdictions, to an era of double non-taxation.

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9.4.10 Other Tax Evasion Techniques Consequently, the Organisation for Economic
Cooperation and Development (OECD) had announced
A. Treaty Shopping that a global deal to ensure big companies pay a Global
Minimum Tax (GMT) rate of 15% has been agreed by
Under Treaty Shopping, a foreign company routes its 136 countries (including India). The countries behind
investment into India through a tax haven country i.e. it the accord together accounted for over 90% of the
registers a company headquartered in tax haven and global economy.
Chen establishes its Indian subsidiaries to carry out the
operations. For example, Hutch's investment into India Global Minimum Tax is tailored to address the low
was routed through Cayman Islands. Since, the effective rates of tax shelled out by some of the world's
company s based in tax haven, it would be liable to pay biggest corporations, including Big Tech majors such as
tax to the Tax haven country. Apple. Alphabet and Facebook. These companies
typically rely on complex webs of subsidiaries to
B. Round Tripping hoover profits out of major markets into low-tax
countries or Tax Havens such as Ireland, the British
Round tripping refers to the practice where, capital Virgin Islands, the Bahamas, or Panama.
belonging to India goes out to tax haven country where
it is used to set up Shell Company. The money is then, Global Minimum Tax aimed at squeezing the
reinvested back in India in the form of FDI. opportunities for Multinational Enterprises (MNEs) to
indulge in profit shifting, ensuring they pay at least
The profit out of such investment cannot be taxed in some of their taxes where they do business.
India as the capital is coming from tax haven.
Proposed Two Pillar Solution: The global minimum tax
C. Transfer Mispricing rate would apply to overseas profits of multinational
firms with $868 million in sales globally.
Transfer price refers to the price at which the parent/
subsidiary company sells its goods and services to Pillar 1 (Minimum tax and subject to tax rules):
another subsidiary company. Governments could still set whatever local corporate tax
rate they want, but if companies pay lower rates in a
Under transfer mispricing, a subsidiary company "X"
particular country, their home governments could "top
located in low-tax jurisdiction deliberately sells its
up" their taxes to the 15% minimum, eliminating the
goods and services at higher prices to another
advantage of shifting profits.
subsidiary company "Y" located in India.
Pillar 2 (Reallocation of additional share of profit to the
This leads to higher operating costs of the subsidiary
market jurisdictions): Allows countries where revenues
company "y in India and consequently, lower profits
are earned to tax 25% of the largest multinationals' so-
Thus, the subsidiary company "Y" based in India ends
called excess profit - defined as profit in excess of 10%
up reducing its tax liability
of revenue.
On the other hand, the subsidiary company "X" based in
Timeline: The agreement calls for countries to bring it
low-tax jurisdiction shows higher profits on its balance
into law in 2022 so that it can take effect by 2023.
sheet. But since, the tax rates are either nil or quite low
Countries that have in recent years created national
in such countries, the Company "X" would also end up
digital services taxes (For example, equalization levy by
paying lower tax.
the Indian Government) will have to repeal them.

Impact: The minimum tax and other provisions aim to

put an end to decades of tax competition between
9.4.11 Global Minimum Tax governments to attract foreign investment. The
economists expect that the deal will encourage
The Finance Ministers of seven major economies across multinationals to repatriate capital to their country of
the globe, the Group of Seven (G7) countries, during headquarters, giving a boost to those economies.
the 47th G7 summit in 2020 reached the landmark
accord of setting up Global Minimum Corporate Tax Need for Global Minimum Tax
Rate (GMCTR) which would close cross-border tax
loopholes used by some multinational companies.

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Stopping Financial Diversion to Tax Havens: appeals will be randomly allotted any officer in the
Increasingly, income from intangible sources such as country and the identity of the officer deciding the
drug patents, software and royalties on intellectual appeal will remain unknown Also, All the decisions will
property has migrated to Tax Havens, allowing be team-based Although, there are certain exceptions as
companies to avoid paying higher taxes in their wel including: Appeals relating to serious frauds major
traditional home countries. tax evasion, sensitive and search matters international
tax, and Black Money Act.
Mobilising Financial Resources: With budgets strained
after the Covid-19 crisis, many governments I want Taxpayers Charter: It sets down the rights and
more than ever to discourage multinationals from responsibilities of both tax officers and taxpayers It is
shifting profits and tax revenues to low-tax countries likely to empower citizens by ensuring time services by
regardless of where their sales are made. The OECD has the IT Department, holding accountable while also
estimated that the minimum tax will generate $150 improving services for taxpayers. It also takes care of
billion in additional global tax revenues annually. maintaining the dignity and sensitivity of the taxpayer,
based on trust factor an that the assesses cannot be
Global Tax Reforms: Since the inception of the Base merely doubted without a basis.
Erosion and Profit Shifting (BEPS) programme, the
proposal for GMT is another positive step towards 2. The Government has increased ease of compliance
global taxation reforms. through prefilling of Income Tax Returns for individual
taxpayers.
Associated Challenges:
3. It has also curbed the discretionary powers of officers
Impending Sovereignty: It impinges on the right of the in deciding about raids on assesses CBDT recently
sovereign to decide a nation's tax policy. A global made it clear that only officers in the Directorates of
minimum rate would essentially take away a tool Investigation (Investigation Wing) and
countries use to push policies that suit them. Commissionerate of TDS (Tax Deducted at Source will
act as authorities for the survey.
Tight Timeline: Also, bringing in laws by next year that
it can take effect from 2023 is a tough task 4. Transparency in official communication has bee
brought about to safeguard taxpayers from phishing
Question of Effectiveness: The deal has also bee
emails and fake tax notices, the CBDT has made it
criticised for lacking teeth. Groups such as Oxford said
mandatory for the tax authorities to quote Document
the deal would not put an end to tax havens
Identification Number (DIN) in all the correspondence
issued by them.
9.5. India and Tax
Reducing the legal burden in the tax system through:
Administration Vivaad Se Vishwas Scheme: This has paved the way for
most of the cases to be settled out of court.
9.5.1 Initiatives Taken by the
Government for Better Tax Raised monetary thresholds: The limit of filing cases in
the High Court has been fixed at up to 1 crore rupees
Administration and up to 2 crores for filing in the Supreme Court.
The government has operationalised the Platform to Rationalising taxes: India has initiated the reduction in
"Transparent Taxation - Honouring the Honest This has corporate tax rates (from 30% to 22% ), MAT (to 15%).
been done through: India is one of the countries with the lowest corporate
tax in the world. Coupled with this, the abolition of
Faceless Assessments: This helps to eliminate the direct
Dividend distribution tax has been brought about.
interface between the Income ta department and the
taxpayer, to the extent that is technologically feasible. It Simplification of compliance norms for Startups: This
also Uses data analytics and Al for the selection of a includes simplification of assessment procedure,
taxpayer exemptions from Angel-tax, constitution of dedicated
startup cell etc.
Faceless Appeal: This obviates the need for the taxpayer
to visit the income tax office. In this scenario, the

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Tax Information Network (TIN): An initiative of Undo the decision of Supreme Court: In the Vodafone
Income Tax Dept. for the modernization of the current case, the SC had ruled that IT Act does not empower the
system for collection, processing, monitoring and tax authorities to demand tax from Vodafone and
accounting of direct taxes using Information technology accordingly ruled in the favour of Vodafone. The
retrospective amendment was brought to undo the
9 Sevottam Scheme has been launched for efficient decision of the Supreme Court.
grievance redressal through Aayakar Seva Kendra.
No International Agreements on Tax Avoidance: In
10 Encouraging digital transactions to avoid tax evasion absence of international agreements, Retrospective
and ensure transparency. amendment to taxation can be considered as one of the
11. Expansion of scope of TDS/TCS: new transactions fair means to collect revenue from MNCS
brought into the ambit of Tax Deduction at Source Prevent Tax avoidance by MNCs in future: The
(TDS) & Tax Collection at Source (TCS) like huge cash retrospective amendment can also discourage the MNCs
withdrawal, foreign remittance, purchase of luxury car, from carrying out transactions in BEPS and hence
e-commerce participants, sale of goods, acquisition of increase tax revenue for the government.
immovable property etc.
Problems with Retrospective Amendment
9.5.2Retrospective Amendment to
•
Taxation Hurt Foreign Investment: Introduction of
Retrospective amendment to taxation is well
Retrospective Taxation and Recent Amendment Bill within the powers of the Parliament. However,
such amendments lead to greater uncertainty in
The 2012 Finance Act had amended the IT Act to
taxation and hence discourage foreign
impose tax on the foreign companies on a retrospective
Investment.
basis. Under the act, if a company is registered outside
India, its shares will be deemed to be situated in India if • Increase in Litigations: Companies such as
they derive their value substantially from the assets Vodafone and Cairn have dragged the Indian
located in India. As a result, the persons who sold such Government before the international arbitration
shares of foreign companies before the enactment of the tribunals under the Bilateral Investment
Act (i.e., May 28, 2012) also became liable to pay tax treaties (BITS). The orders issued by these
on the income earned from such sale. arbitration tribunals have not only gone against
retrospective amendment, but they have also
Taxation Laws (Amendment) Bill 2021 Now, the
affected our global image as reliable
Government has decided to do away with the
investment destination.
retrospective amendment. Salient features: Demand for
the payment of the taxes on the transactions which were • Revenue Neutral: The intention behind the
done before May 28, 2012, would be withdrawn. Tax retrospective amendment was to enhance the
collected on a retrospective basis would be refunded revenue collection However, the revenue
back to the companies No further demand for taxes on collection under the amendments was zero, and
the transactions which were done before May 28, 2012 losses in terms of FDI and FPI was substantial
Above provisions would be applicable if the company Hence, retrospective amendment was
withdraws the case against the Government counterproductive.
• Economic Policy Uncertainty: Economic
Rationale for Retrospective Taxation Survey 2018 19 highlights the direct co-
Prevent Revenue loss: Foreign companies such as relation between higher economic policy
Vodafone have used loopholes in the tax laws to avoid uncertainty and lower GDP growth rates in
paying taxes. For example, in case of Vodafone, the India. To become $ 5 trillion economy. there is
transaction was deliberately carried out in Cayman a need for pro-business policies that foster
Islands (and not in India) simply to avoid payment of ethical wealth creation
capital gains tax which amounted to 14000 crores.
According to the State of Tax Justice report of 2020 Road Ahead
notes that India loses over $10 billion in tax revenue.

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Undoubtedly, the Government has sovereign nights the

companies in whichever way it would want to, but w
doing so, it must keep in mind the rights of the
company as well The companies should be given the
nights safe, secure, stable and predictable legal
environment Such an environment is not only necessary
to encourage foreign investment, but it is also crucial to
uphold re law. Hence, doing away with the retrospective
taxation a well-intended and pragmatic move which
would ensure to keep Indian economy more open,
transparent and rules based.

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Chapter – 10
term. Generally, it is not considered bad if the
Inflation wages also increases proportionally. Generally this
is less than 3 percent.

10.1 Introduction • Walking Inflation: It is also known as trotting

inflation. It is usually higher than the creeping
Inflation, in simple words, is a steady rise in the prices inflation and also gives a wakeup call to the
various goods and services. Given the level of the come
government that they should act fast to control
a household consumes a group of commodities a given
the inflation otherwise it may lead
price level. With inflation, the price level goes So with
unacceptable level of inflation. Generally the
the same level of income, this household can consume a
smaller amount of the commodities than it was range of this inflation is between 3 to 7 percent
consuming earlier Alternately, to maintain the earlier • Galloping Inflation: Steady and fairly high rate
level consumption this household now needs to have of increases in the general price level is known
more money. In other words, with inflation, purchasing as galloping inflation. The rate of inflation
power of money goes down. runs into two digits (20 per cent, 40 per cent
etc.) and sometimes even as high as three
Concept of Price and Price Level digits (ie., 200 per cent). Some Latin American
In a simplified terms price is defined as the rate at countries like Brazil and Argentina had
which goods and services are exchanged for money. It is experienced inflation rates of over 100 per cent
the amount of money received for selling or, paid for in the 1970s.
buying, one unit of a commodity (or services) in an • Hyperinflation: Hyperinflation is characterized
exchange economy. by astronomical increases in the annual rate of
inflation. In such situations, money ceases to
The term price level is an aggregate concept. It relates
be a store of value as well as a medium of
to he price of a basket of goods and services. The
exchange. In this type of inflation, the loss of
change in price level always corresponds to a group of
purchasing power is immense and also in a
commodities and to measure such changes an index
number is used. A price index is used for comparing very short duration. The most recent
changes in the general evel of prices of a group of phenomena of hyperinflation can be seen in
commodities. Generally, the index number refers to Venezuelan economy during current times.
changes in the prices obtained over time. It is expressed
by putting a particular period (called the base) equal to B. Based on Causes
100 and the price level for other periods are expressed
• Demand-Pull Inflation: Factors, which
relative to this base.
influence an increase in aggregate demand
10.2 Types of Inflation with no change in the level of aggregate
supply, can be said to cause demand-side
A Based on Rate inflation. These factors can be an increase in
government spending, a decrease in savings
• Creeping Inflation: This is also known as mild rate and a lower rate of taxation, which leave
inflation or moderate inflation. As the name greater amount of money or, increased
suggest this type of inflation creeps which disposable income with the public and increase
means it rises slowly but continuously, over a in money supply.
period of time. It can be gazed only if we view • Cost-push Inflation: Whenever inflation occurs
it in the long because of the increase in the cost of any factor
of production like, wages, raw material etc, it
is called 'cost-push inflation
• Supply-shock Inflation: Inflation can arise out
of either an unexpected or unforeseen sharp

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fall in the supply of commodities or a rise in economic growth of the country thus
the prices of commodities. Reasons for a increasing the demand and reducing the level
situation lie out of the control of either the of unemployment. This is done to recover
firms or the workers. It is known as supply- from deflation .
shock inflation. In 1973 and 1979, when oil • Disinflation: It refers to a situation where there
prices were unexpectedly raised by the OPEC decrease in the in the rate of inflation. One shot
all the economies world wide experienced a clearly understand that, the basic difference
massive rise in the general prices. between Deflation and Disinflation is that in
• Structural Inflation: This is also known as the Disinflation there of inflation never turns into
'Bottleneck inflation. This type of inflation negative zone. Deflation concerned with
basically arise from the mismanagement of falling prices whereas disinflation concerned
supply. So, if there are structural changes in with falling rate of inflation.
the oil market and in domestic agriculture, the • Core Inflation: Under this type of inflation,
inflationary process could also experience inflation is ensured as persistent increase in the
structure shifts. Here government has major general level case of goods and services
role in increasing or decreasing this type of excluding food and energy items This type of
inflation inflation is more suited those countries where
• Protein Inflation: This type of inflation is gene there is less volatility or actuation in the food
caused by the changing dietary habits of the and energy prices. Whenever core inflation
popu of a country which is related to the rises, Central Banks increase their key elates to
increase in inc As more and more people suck excess liquidity from the market and vice
includes protein rich such as milk, pulses, versa. It is, therefore, a preferred tool for
meat, fishes, etc., it increase demand of these ramming long-term policy.
items and hence increases the of these items. • Headline Inflation: In general, it reflects the
rate change in prices of all goods and services
Moreover, the prices of different goods and services in an economy over a period of time. In the
also be increased artificially if some people make ca RBI's newly adopted flexible inflation-
hoard a particular goods or start black-marketing goods
targeting (FIT) framework, the redline CPI
which is already in short supply. In India, this of
inflation measure is being used as the target
inflation is seen recently when there is short supp onion,
rate of inflation as it reflects the prices of
pulses etc.
essential consumption goods.
C. Other Types • Stagflation: The word 'Stagflation' is made up
of two words, ie. stagnation and inflation.
• Deflation: Deflation is a situation where prices Under this type of nation, though the economic
fall continuously or have a tendency to fall. growth stagnates but it still have the higher
This can arise when the aggregate demand is level of inflation and unemployment. It also
lower than the aggregate supply. Thus, falsifies the "Phillips curve".
deflation is characterized by a decrease in price
• Unanticipated Inflation: This is a type of
fall in output, increase in unemployment and
inflation which s neither expected nor
general slowing down of the economic
anticipated by the majority of population. This
activities. The Great Depression from 1929 to
is a kind of shock inflation. The rate of
1933 in the capitalist countries is an example
inflation is usually high. This occurs over a
of an acute deflation when the prices crashed,
quick period without any perceivable causes.
unemployment catapulted to astronomical
• Skew inflation: It refers to a situation where
heights and the income of these countries fell
there is increase in the prices of only few
sharply.
goods or a group of goods. In the case of India,
• Reflation: It refers to a situation where
it was true for food items. It s a new term
government consciously take monetary and
fiscal decisions which can stimulate the

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which was, for the first time mentioned in the As a result, the excess of 2.000 quintals will be called
Economic survey of India 2009-2010. an inflationary gap.

The inflationary gap is so named because the relative

Difference between Skew inflation and
increase in real GDP would cause an economy to
Inflation: increase its consumption, which would cause prices to
Inflation refers to a sustained, across-the-board price rise in the long run.
increase, whereas 'a relative price increase' s a reference Inflation Spiral: It refers to a situation of vicious circle
to an episodic price rise pertaining to one or a small where the increase in wage increase the price of goods
group of commodities. This leaves a third phenomenon, and service (due to increase in aggregate demand with
namely one in which there is a price rise of one or a aggregate supply remaining same) and the increase in
small group of commodities over a sustained period of the price again increases the wages. (due to higher
time, without a traditional designation. profits pocketed by entrepreneurs) It works like a spiral
Skewflation was last witnessed in India in 2009 and where one affects the other. This is also called the price
2010 when the food prices showed inflation and the wage spiral.
prices of the non-food items were majorly stable. Inflation Premium: It refers to the dividend which the
Another point to be noted here is, since onions borrowers enjoys as a result of the inflation. It will be
constitute a very important part of the food basket, difficult for a lender to lend in an economy which is in
thereby forming a significant of consumption constant zone of high rate of inflation. So, to negate the
expenditure of families, therefore the price rise and fall effect of inflation they charge the borrower on real
may in turn affect the major policy decisions and may interest rate which is adjusted for inflation not on
be used as a tool to turn the tide against government of nominal interest rate. Therefore, It is a method by which
the day as was witnessed in 1998 when despite the an investor calculates the normal rate of return on assets
frantic import, the skyrocketing prices of onions or investment during an inflation period.
throughout the country had caused extreme hardship to In simple words, it is a part of the prevailing interest
the poor and the middle classes and it led the rate which results from investors pushing the nominal
government to topple interest rates to a higher level to compensate for the
Inflationary Gap: It is also known as an expansionary expected inflation
gap. It is the difference between the current level of real The actual rate of interest is calculated by deducting the
GDP and the anticipated GDP that would be premium from nominal interest rates
experienced if an economy is at full-employment
Inflation Tax: Inflation erodes the purchasing power of
Alternatively it is the amount by which actual aggregate the money and hence its value. The people who holds
demand exceeds the level of aggregate demand required the currency is the real loser and government who has
to establish the full employment equilibrium Thus, the sole responsibility of printing money gains on the
inflationary gap is a measure of the amount of excess of cost of people's earning
aggregate demand over aggregate supply at full
employment This is a situation of sustaining government expenditure
at the cost of people's income. This looks as if inflation
In such a situation, an increase in demand means only is working as a tax. That is how the term inflation tax is
an increase in money expenditure without any also known as seinorage. It means inflation is always
corresponding increases in output and employment the level to which the government may go for deficit
because all the resources have already been fully financing-level of deficit financing is directly reflected
employed. by the rate of inflation. It could also be used by the
Let us suppose that an imaginary economy by governments in the form of prices and incomes policy
employing all its available resources can produce under which the companies pay inflation tax on the
10,000 quintals of rice. If aggregate demand for rice is, salary increases above the set level prescribed by the
say, 12,000 quintals, this demand will be called an government.
excess demand because aggregate supply at the level of
full employment of resources is only 10,000 quintals. 10.3 Effects of Inflation

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Inflation affects different stakeholders differently. For would like t deposit money in the banks to negate the
some stakeholder, it is profitable while for other, it is a effect the inflation
matter of concern.
Exchange Rate and Export
Lender and Borrower
The currency of a country gets depreciated against other
Inflation benefits the borrower as the value of the country's currency because of the inflation. But at the
money which they have borrowed reduces. The same time depreciation of currency makes the product
situation gets reversed in the case of lender as the value of a country attractive to the foreign country. So, the
of money which export increases

they lend gets reduced. For example: Mr. X borrows Import

from Mr. Y. Mr. X is the borrower here and Mr. Yis the
lend Now the rate of inflation is 10%, Assuming no On the account of depreciation of home currency, the
interest, 1 X repays 100 to Mr. Y after one year, the real foreg currency becomes dear. Hence, it discourages the
values which has decreased by 10% but Mr. Y has import
received same amount. Thus, Inflation hurts lenders and
lending institutions. And therefore, an Inflation
Premium is charge from the borrower which is factored
Employment
in the cost of debt
In short run, the employment increases on the account
Wages of inflation (Phillips curve) but long term it does no
The effect of inflation on wage depends whether got necessarily hold true.
increased on the account of inflation or not And
Trade Balance
increased, then to what extent. Normally, the nominal
va of wage increased but the real value remains the The effect on trade balance will depend on the
same composition goods and services which a country export
and import a country who is facing inflation, imports
Salaried Employees necessity odds like oil etc, then the trade balance is
This class of employees lose because of inflation unfavourable they have to import these item anyhow.
salaries are not adjusted every month against the
Overall Economy
inflation Though to compensate them, there is the
provision dearness allowance. All the above segments belong to an economy. There is
a range of inflation which is thought to be healthy for
Self-Employed every economy. Developed countries have the range of
They are usually not affected in the short term as they 1 to 3%, while for India 4-5% is seen as comfort zone.
ca adjust their income against inflation. But in long Inflation beyond range brings recessions and
term the obviously gets affected. depressions

Demand and Investment 10.4 Measures of Inflation

Increase in inflation indicates that, there is demand of To effectively monitor and control the level of inflation
good and services. So, the natural corollary to this is to in a economy, the policy maker needs some kind of
increase the investment. Also, during inflation a instrument through which it can exactly know what is
enterprise has the benefit of getting loan at lower the current level of inflation. In India, inflation is
interest. But one shou clearly understand that, this holds basically measured on two price indices i.e. the
true only in short run Wholesale Price Index (WPI) and the Consumer Price
Index (CPI).
Saving
A. Wholesale Price Index (WPI)
As the inflation reduces the value of money, holding
money is not a prudent economic decision. So, people

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WPI inflation measures the average change in the prices 2010 to 2012 with effect from the release of indices for
of commodities for bulk sale at the level of early stage the month of January, 2015
of transactions in domestic markets of India.
The Reserve Bank of India (RBI) has started using CPI-
WPI covers commodities falling under the three Major combined as the sole inflation measure for the purpose
Groups namely: of monetary policy on recommendation of Urjit Patel
Committee.
Primary Articles
Because of the different socioeconomic conditions of
Fuel and Power consumers, India has adopted following CPIs
Manufactured products. 1. CPI for Industrial workers - CPI (IW)
It is published by the Office of Economic Adviser, 2. CPI for Urban Non-Manual Employees CPI (UNME)
Ministry of Commerce and Industry. • The prices
tracked are ex-factory price for manufactured products, 3 CPI for Agricultural Labourers - CPI (AL)
mandi price for agricultural commodities and ex-mines
prices for minerals. 4. CPI for Rural Labourers - CPI (RL)

Weights given to each commodity covered in the WPI 5. CPI (Urban) and CPI (Rural)
basket is based on the value of production adjusted for CPI (UNME) has been discontinued w.e.f. December,
net imports. 2010, was meant for urban non-manual employees. The
WPI basket does not cover services. CPI (W) and CPI (AL& RL) compiled OCCU specific
and centre specific and are compiled by La Bureau CPI
The government has changed the base year for (Urban) and CPI (Rural) are new indices group of
calculating the WPI from 2004-05 to 2011-12 from Consumer price index and has a wider c of population.
April 2017. This index compiled by Central Stat Organisation tries
to encompass the entire popu and is likely to replace all
Key Changes in WPI with 2011-12 as Base Year the other indices present compiled.
The number of items has been increased from 676 to
C. Producer Price Index (PPI)
697, while 199 new items have been added, 146 old
items have been dropped. It measures the average change over time in the selling
prices received by domestic producers for their output t
New definition of WPI does not include taxes in order
measures price changes from the perspective of produce
to remove impact of fiscal policy
A committee was set up under the chairmanship of Prof
B. Consumer Price Index (CPI) Abhijit Sen to recommend whether PPI should replace
the WPI or not..
Consumer Price Indices (CPI) measure changes over
time in general level of prices of goods and services that Also, the recent changes in WPI such as prices used to
households acquire for the purpose of consumption. compilation do not include indirect taxes in order to
remove the impact of fiscal policy. This is in
CPI numbers are widely used as a macroeconomic consonance with best international practices and makes
indicator of inflation, as a tool by governments and the new WPI conceptually closer to 'Producer Price
central banks for inflation targeting and for monitoring Index'.
price stability, and as deflators in the national accounts.

CPI is considered as one of the most important

10.5 Business Cycle
economic indicators. "The business cycle is the periodic but irregular up-and-
The consumer price index number measures changes down movements in economic activity measured by
only in one of the factors-prices. fluctuations in real GDP and other macroeconomic
variables. A business cycle is not regular, predictable, or
The Central Statistics Office (CSO), Ministry of repeating phenomenon like the swing of the pendulum
Statistics and Programme Implementation has revised of a clock. Its timing is random and, to a large degree,
the Base Year of the Consumer Price Index (CPI) from unpredictable": -Parkin and Bade

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Business cycles are characterized by expansion in one increase in employment, upward movement in the rate
period and contraction in the subsequent period in the of inflation. All the above features was present when
economic activities of a country. These fluctuations in American and European countries was passing through
the economic activities are termed as phases of business this phase.
cycles. The fluctuations in the cumulative economic
magnitudes of a country show variations in different Types of Shape of Economic Recovery
economic activities in terms of production, investment,
Economic recovery can take many forms, which is
employment etc. Such changes represent different
depicted using alphabetic notations. For example, a Z-
phases of business cycles.
shaped recovery. V-shaped recovery. U-shaped
recovery. elongated U-shaped recovery, W-shaped
10.5.1 Phases of Business Cycle recovery and L-shaped recovery.
A Recession The alphabets generally denote the graph of growth
When the Indian economy faces a downfall for two rate, which resembles the shape of the letter. The
fundamental difference between the different kinds of
consecutive quarters and this results in the decreased
GDP of the country, it is said to be a state of Technical recovery is the time taken for economic activity to
Recession. normalize.

The time taken is often a factor of multiple things such

Recession is a slowdown or a massive contraction in
economic activities. A significant fall in spending as the depth of the economic crisis, eg deeper the
generally leads to a recession Such a slowdown in recession longer is the time to get back to normal.
economic activities may last for some quarters thereby The other aspect of economic recovery includes the
completely hampering the growth of an economy. In effect of pandemic on jobs and household incomes, and
such a situation, economic indicators such as GDP. the kind of policy response taken by the government
corporate profits, employments, etc., fall that determines how quickly economic growth will
The Reserve Bank of India releases the monthly RBI recover
Bulletin, wherein, it mentions the current statistics and Z-Shaped Recovery
state of the economy, based on which the growth or
downfall can be analysed. Z-shaped Recovery: the most- optimistic scenario in
which the economy quickly rises after an economic
B. Depression crash. It makes up more than for lost ground before
Depression is defined as a severe and prolonged settling back to the normal trend-line, thus forming a Z-
shaped chart. In this economic disruption lasts for a
recession. A recession is a situation of declining
economic small period wherein more than people's incomes, it is
their ability to spend is restricted.
activity. Declining economic activity is characterized by
falling output and employment levels. Generally, when

an economy continues to suffer recession for two or

more quarters, it is called depression. The Great
Depression of 1929 is considered to be the most classic V-Shaped Recovery
example of a depression in economic history.
V-shaped Recovery: It is the next-best scenario after Z-
shaped recovery in which the economy quickly recoups
lost ground and gets back to the normal growth trend-
C. Recovery line. In this, incomes and jobs are not permanently lost,
and the economic growth recovers sharply and returns
Government take various measures to boost demand to the path it was following before the disruption.
and production in the economy with the help of fiscal
and monetary policies which helps the economy to U-shaped Recovery: It is a scenario in which the
recover. This phase is characterized by new demand, economy, after falling, struggles around a low growth
new production, low interest rate, new investment, rate for some time, before rising gradually to usual

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levels. In this case several jobs are lost and people fall
upon their savings. If this process is more-long drawn
than it throws up the "elongated U" shape.

W-shaped
A W-shaped recovery is a dangerous creature. In this,
growth falls and rises, but falls again before recovering,
thus forming a W-like chart. The double-dip depicted by
a W-shaped recovery can be due to the second wave of
the pandemic L-shaped Recovery: In this, the economy
fails regain the level of GDP even after years go by. Tr
shape shows that there is a permanent loss to t
economy's ability to produce.

D. Boom
Recovery is the pre-condition for an economy to enter
in this stage of Business cycle. Under this phase a
economy enters into the zone of high growth rate which
is usual characterized by high level of demand, high
investment greater lending by the financial institution,
employment opportunity, increasing rate of inflation,
high national income, high standard of living etc.

During prosperity, existing capacity of plants is over

utilized. Unsustainable level of lending and investment
puts the pressure on both the financial institution and
the business firms. Labour and raw material shortage
starts to develop. Scarcity of resources leads to rising
cost Aggregate demand outstrips aggregate supply This
ultimately slows down the economic expansion and
paves the way for contraction.

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Chapter - 11
Poverty, Inequality and rather it is multidimensional. The MPI can help in better
Inclusive growth assessment of the poverty scenario and subsequently
can aid in the effective allocation of resources by
making possible the targeting of those factors having
11.1 Introduction greater correlation with poverty.

Poverty can be defined as a social phenomenon in It can help address some Sustainable Development
which a section of society is unable to fulfil even its Goals (SDGs) strategically and monitor impacts o
basic necessities of life. UNDP defines poverty as policy intervention.
denial of choices and opportunities for living a tolerable
life. Poverty entails more than the lack of income and The MPI can be adapted at the national level by any
productive resources to ensure sustainable livelihoods. nation using indicators and weights that make sense for
Its manifestations include hunger and malnutrition, any of it's region or the country as whole. It can also be
limited access to education and other basic services, adopted for national poverty eradication programs, and
social discrimination and exclusion as well as the lack can be used to study changes over time.
of participation in decision-making. High poverty levels
Multidimensional poverty index
are synonymous with poor quality of life, deprivation,
malnutrition, illiteracy and low human resource complements monetary measures of poverty with
development. information on overlapping deprivations experienced
simultaneously by individuals. It identifies deprivations
11.1.1 Multidimensional Poverty in the same three dimensions (having ten indicators) as
the Human Development Index.
Defining poverty in terms of monetary terms or
measuring poverty as just fulfilling the basic Education: Years of schooling and chi enrolment (1/6
requirement of food, cloth and home is a narrower view weightage each, total 2/6); 1/6
to define poverty.
Health: Child mortality and nutrition ( weightage each,
Multidimensional poverty is made up of several factors total 2/6):
that go beyond lack of income and constitute
deprivation such as poor health, lack of education, Standard of Living: Electricity, flooring, drinking water,
inadequate living standard, lack of income, poor quality sanitation, cooking fuel and assets (1/18 weightage
of work etc. A multidimensional measure can each, total 2/6).
incorporate a range of indicators to capture the A person is multidimensionally poor if she/he is
complexity of poverty. Different indicators can then be deprived in one third or more (means 33% or more) of
chosen appropriate to the society and situation. the weighted indicators (out of the ten indicators).
Those who are deprived in one half or more of the
11.1.2 Multidimensional Poverty weighted indicators are considered living in extreme
Index multidimensional poverty

The United Nations Development Programme (UNDP) MPI is significant as it recognizes poverty from
uses a Multidimensional Poverty Index to measure different dimensions compared to the conventional
multidimensional poverty. MPI is based on the idea that methodology that measures poverty only from the
poverty is not unidimensional (not just depends on income or monetary terms.
income and one individual may lack several basic needs
like education, health etc.), 11.2 Types of Poverty
There are two main classification of Poverty

A. Absolute Poverty

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In 1995, the United Nations defined Absolute poverty as the poor are from that poverty line. It enables poverty
a condition characterised by severe deprivation of basic comparisons. It also helps provide an overall
human needs, including food, safe drinking water, assessment of a region's progress in poverty alleviation
sanitation facilities, health, shelter, education and and the evaluation of specific public policies or private
information. initiatives.

It is a condition where household income is below a However, Poverty gap index ignores the effect
necessary level to maintain basic living standards (food, inequality between the poor. It does not capture
shelter, housing). This condition makes it possible to differences in the severity of poverty amongst poor.
compare between different countries and also over time.
4. Poverty Ratio: According to OECD, the poverty re is
It was first introduced in 1990, the "dollar a day" the ratio of the number of people (in a given a group)
poverty line measured absolute poverty by the standards whose income falls below the poverty line taken as half
of the world's poorest countries. In October 2015, the the median household income of the to population.
World Bank reset it to $1.90 a day.
It is available by broad age group:
Economist Amartya Sen has defined absolute poverty as
a failure to achieve certain minimum capabilities. Child poverty (0-17 years old). Working-age poverty.

Methodologies to Calculate Absolute Poverty Elderly poverty (66 year-olds or more). However, two
countries with the same poverty rate may differ in terms
Several methodologies are used to calculate the absolute of the relative income-level of poor.
poverty. Some of them are as follows:
In the absolute standard, minimum physical quantities
1. Poverty Line: Poverty line is the level of income to of cereals, pulses, milk, butter etc are determined for
meet the minimum living conditions. Poverty line subsistence level and then price is quoted in monetary
represents the amount of money needed for a person to terms of these physical quantities. This figure is know
meet his basic needs. Poverty line, its methodology and as per capita expenditure.
dimensions changes from one country to another.
The population whose level of income or expenditure is
2. Poverty Gap: Poverty gap is defined as the ratio of below this figure is considered to be below poverty line.
average per capita consumption of poor to poverty line.
Poverty gap measures the intensity of poverty. It shows B. Relative Poverty
the extent to which individuals on average fall below
Relative poverty defines poverty in relation to the
the poverty line.
economic status of other members of the society People
This measure reflects the depth of poverty (severity) as are poor if they fall below prevailing standards of living
well as its incidence (expanse). The indicator is often in a given societal context. Hence it is a measure of
described as measuring the per capita amount of income inequality.
resources needed to eliminate poverty. For example: In
Usually, relative poverty is measured as the percentage
2011-2012, the average per capita expenditure of the
of the population with income less than some fixe
poor was 708 per person per month and the poverty line
proportion of median income.
was 847.
Lorenz Curve and Gini Coefficient
With perfect targeting (that is, complete knowledge of
who is poor and by how much), a transfer of 139 per To measure relative poverty various methodology have
person per month (or 1,668 a year) would enable the been developed that uses different parameters to
target of zero percent (Tendulkar poverty) to be reached. calculate the relative poverty. One of such parameters is
'income inequality' which is measured by the concept of
In India, poverty gap is relatively greater in rural areas
Loren: curve and Gini coefficient.
than in urban areas. This would imply that measures for
alleviation of poverty should be so designed that the The distribution of income in an economy is
focus of their benefit is rural people. represented by a Lorenz Curve and the degree of
income inequality is measured through the Gini
3. Poverty Gap Index: Poverty Gap Index estimates the
Coefficient.
depth of poverty by considering how far, on an average,

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1. Lorenz Curve income and inequality, and is associated with Simon

Kuznets. It is now famously called as 'Kuznets Curve.
The Lorenz Curve, developed by Max Lorenz in 1906,
is a graphical distribution of wealth. Thus the kuznets curve can also be used to show the
relationship of the environmental degradation and per
It shows proportion of income earned by any given capita income. This is because the developmental
percentage of the population. process often has a consequence of environmental
The line at the 45° angle shows perfectly equal income degradation.
distribution, while the other line shows the actual
distribution of income. This means that the 45 degree 11.3 Poverty Estimation in India
line denotes that all people of the country earn equally
and the other line which deviates from this 45 degree 11.3.1 Pre-Independence
line shows the inequality in the earning of people.
One of the earliest estimations of poverty was done by
For example, if the actual income distribution coincides Dadabhai Naoroji in his book, 'Poverty and the Un-
with the perfect equality line, it will mean that 10% of British Rule in India' He formulated a poverty line
the people receive 10% of the total income. ranging from 16 to 35 per capita per year, based on
1867-68 prices. The poverty line proposed by him was
The deviation of line of actual distribution is directly based on the cost of a subsistence diet consisting of 'rice
linked to the inequality gap. In other words more the or flour, dal, mutton, vegetables, ghee, vegetable oil and
deviation from the perfect equality, more will be the salt.
inequality gap.
In 1938, the National Planning Committee (NPC)
For example, the Lorenz Curve in the given diagram, estimated a poverty line ranging from 15 to 20 per
which represents the actual distribution of income in a capita per month.
country, shows how the poorest 20% of the population
only earn 5% of the national income in this population. In 1944, the authors of the Bombay Plan' suggested a
While in a case of perfect equality, the poorest 20% of poverty line of 75 per capita per year.
the population would earn 20% of the income. The
more bowed out a Lorenz Curve, the greater is the 11.3.2 post-Independence
inequality of income in the country.
A. Planning Commission Expert Group
The Gini Coefficient is derived from the Lorenz Curve.
Gini coefficient is the ratio of area between the Lorenz In 1962, the Planning Commission constituted a
curve (Actual Distribution Line) and the line of absolute working group to estimate poverty nationally, and it
equality (Numerator) to the whole area under the line of formulated separate poverty lines for rural and urban
absolute equality (Denominator). areas of 20 and 25 per capita per year respectively.

The Gini Coefficient - measures the degree of income B. VM Dandekar and N Rath's Study
equality in a population.
They made the first systematic assessment of poverty in
The Gini Coefficient can vary from 0 (perfect equality) India in 1971, based on National Sample Survey (NSS)
to 1 (perfect inequality). data from 1960-61.
3. Kuznets Curve: The relationship between growth and They argued that the poverty line must be derived from
inequality of income has been of considerable concern. the expenditure that was adequate to provide 2250
in the development literature. As development process calories per day in both rural and urban areas.
proceeds, income inequality first rises and then falls
with development. A graphical representation of This generated debate on minimum calorie consumption
increase in per capita income on the X axis representing norms while estimating poverty and variations in these.
economic development and a measure of inequality on norms based on age and sex.
the 'Y' axis would show a curve in the shape of an
inverted 'U'. This has come to be called as inverted-U
C. Alagh Committee (1979)
hypothesis of the relationship between growth of

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In 1979, a task force constituted by the Planning dry fruits, sugar, salt and spices, other food, intoxicants,
Commission for the purpose of poverty estimation, fuel, clothing, footwear, education medical (non-
chaired by YK Alagh, constructed a poverty line for institutional and entertainment, personal and toilet
rural and urban areas on the basis of nutritional goods, other goods other services and durables.
requirements. institutional

Following table shows the nutritional requirements and 2. A Uniform Poverty Line Basket (PLB) across Rural
related consumption expenditure based on 1973-74 and Urban India: The Committee computed new
price levels recommended by the task force. Poverty poverty lines for rural and urban areas each state. To do
estimates for subsequent years were to be calculated by this, it used data on value and quantity consumed of the
adjusting the price level for inflation. items mentioned above by the population who were
classified as poor by the previous urban poverty line. It
D. Lakdawala Committee (1993) concluded that the a India poverty line was 446.68 per
capita per month in rural areas and 578.80 per capita per
In 1993, an expert group constituted to review method
month in urban areas in 2004-05.
for poverty estimation, chaired by DT Lakdawala,
3A Change in the Price Adjustment Procedure to
the following suggestions:
Correct Spatial and Temporal Issues with Price
Consumption expenditure should be calculated based on Adjustment: The Committee also recommended a new
calorie consumption as earlier, State specific poverty method of updating poverty lines, adjusting for changes
lines should be constructed these should be updated in prices and patterns of consumption, using the
using the CPI-IW in areas and CPI-AL in rural areas. consumption basket of people close to the poverty line.
Thus, the estimates released in 2009-10 and 2011-12
Discontinuation of scaling of poverty estimates by on use this method instead of using indices derived from
National Accounts Statistics. the CPI-AL for rural areas and CPI-IW for urban areas
as was done earlier.
E. Tendulkar Committee (2009)
4. Incorporation of Private Expenditure on health and
In 2005, another expert group to review methodology education while estimating poverty.
poverty estimation, chaired by Suresh Tendulkar,
constituted by the Planning Commission to address the 5. Mixed Reference Period: The Committee
following three shortcomings of the previous methods recommended using Mixed Reference Period (MRP)
based estimates, as opposed to Uniform Reference
Obsolete Consumption Patterns: Consumption patterns Period (URP) based estimates that were used in earlier
were linked to the 1973-74 poverty line baske (PLBS) methods for estimating poverty.
of goods and services, whereas there w significant
changes in the consumption patterns of t poor since that F. Rangarajan Committee
time, which were not reflected in t poverty estimates;
In 2012, the Planning Commission constituted a new
Inflation Adjustment: There were issues with expert panel on poverty estimation, chaired by C
adjustment of prices for inflation, both spatially (across Rangarajan to review the methodology for measurement
regions) and temporally (across time); and of poverty.
Health and Education Expenditure: Earlier poverty lines It made the following changes:
assumed that health and education would t provided by
the State and formulated poverty line accordingly. Methodology Used: Tendulkar committee had used the
all-India urban poverty line basket as the reference to
derive state-level rural and urban poverty. The
Rangarajan committee reverts to the practice of having
Recommendations
separate rural and urban poverty basket lines. The
1. A Shift away from Calorie Consumption Based Rangarajan committee estimation is based on an
Poverty Estimation: It based its calculations on the independent large survey of households by Centre for
consumption of the following items: cereal, pulses milk, Monitoring Indian Economy (CMIE). It has also used
edible oil, non-vegetarian items, vegetables fresh fruits,

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different methodology wherein a household is enunciated in his book 'Poverty and Unbritish Rule in
considered poor if it is unable to save. India' which explained the major causes of poverty in
India of that time. He was accompanied by many other
Normative and Behavioural Level: The poverty line nationalists like M.G. Ranade, R.C.Dutt, etc. However,
should be based on certain normative levels (Ideal and after independence the situation has changed but many
Desirable) of adequate nourishment, clothing, house of the factors remain prevalent like:
rent, conveyance and education, and a behaviourally
determined level of other non-food expenses. High Population Growth Rate: With limited resources
and high population, most people are left with lack of
Nutritional Requirement: It reversed the decision of the availability of resources leading to poverty.
Tendulkar Committee and anchored the poverty lines on
nutritional intake of calorie, protein and fat. Agrarian Form of Economy: Agriculture offers less
income which leads to poverty like situation
Calories: 2090 kcal in urban areas and 2155 Kcal in
rural areas. Primitive

Protein: For rural areas 48 gm and for urban areas 50 Agricultural

gm.
Practices: Elementary agricultural activities are neither
Fat: For urban areas 28 gm and for rural areas 26 gm. remunerative nor sustainable, as a result the condition
of deprivation exists due to low agricultural
The energy requirement as calculated by Rangarajan is productivity
2,155 kcal per person per day in rural areas and 2,090
kcal per person per day in urban areas. This is Illiteracy and Ignorance: Absence or lack of ability to
significantly lower than the 2,400 kcal in rural areas and read write and comprehend, reduces the ability of any
slightly less than 2,100 kcal in urban areas used by the person to prosper and uplift himself from poverty.
earlier Lakdawala panel. The reason given is that the
age profile and working conditions have changed with Unemployment and Underemployment: Unavailability
time. of avenues to earn creates a mutually reinforcing cycle
of poverty causing unemployment and unemployment
Poverty Threshold: Persons spending below 47 a day in causing poverty
cities and 32 in villages be considered poor. Based on
this methodology. Rangarajan committee estimated that Urban-Rural Divide: The availability of resources and
the number of poor were 19% higher in rural areas and means to possess those resources are more in urban
41% more in urban areas than what was estimated using areas than in rural areas, thus creating conditions of
Tendulkar committee formula. impoverishment in the rural areas.

Modified Mixed reference period: Instead of Mixed Social Inequality and Discrimination: Some of the
reference Period (MRP) it recommended Modified hindrances in this regard are the laws of inheritance,
Mixed Reference Period (MMRP) in which reference caste system, certain traditions, etc.
periods for different items were taken as: Inadequate Accessibility of Food: Food is a basic
365-days for clothing, footwear, education, institutional necessity of life. Inadequate accessibility to food leads
medical care, and durable goods ,7-days for edible oil, to hunger and penury.
egg. fish and meat, vegetables, fruits. spices. beverages, However, two major factors can be outlined which are
refreshments, processed food, pan, tobacco intoxicants the main causes of poverty:
30-days for the remaining food items, fuel light, 1. Inadequate Employment Opportunities:
miscellaneous goods and services include non- Unemployment implies absence of a source of income
institutional medical; rents and taxes and hence it becomes a major cause of poverty. Creation
of employment opportunities is, therefore, one of the
11.4 Causes of Poverty in India ways of reducing the incidence of poverty.
In India, the debate on poverty issue was launched by In a labour-surplus over-populated country like India
Dadabhai Naoroji, through his famous Drain Theory, any fight against poverty could be successful only if

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growth of the economy brings about new job The Eighth Five Year Plan (1992-97) identified human
opportunities. development as the ultimate goal. It aimed to create
jobs, contain population, eradicate illiteracy,
The rate of creation of new job opportunities has to be universalise elementary education, and provide safe
faster than the rate at which the labour force increases. drinking water and primary health care facilities to all.
Only then, it would not only be possible to provide jobs This objective was further carried forward in all future
to the already unemployed but also to the new entrants five year plans.
in the labour market. Provision of jobs thus becomes an
antidote to poverty.

2 Disparities in Income Distribution and Ownership of

Assets: Inequalities in the distribution of income could
be attributed by and large to the structure of asset
ownership in the economy. 11.5.2 Poverty Alleviation
In the rural areas, land is the asset par excellence. There
Programmes
are sharp inequalities in the distribution of land Poverty alleviation programmes have been designed
ownership. from time to time to enlarge the income-earning
Reinforcement of these causes of poverty leads trap. opportunities for the poor.

Various important anti-poverty schemes are listed

11.5 Poverty Alleviations in below.
India A. Integrated Rural Development Program
Since Independence Integrated Rural Development Programme (IRDP) was
The Government has adopted a three-pronged strategy introduced 1978-79. It provided assistance to the rural
poor in the form of subsidy and bank credit for
for reducing poverty comprising of:
productive employment opportunities.
1. Accelerated economic growth with a focus on sectors
which are employment intensive. In 1999, the IRDP and allied programmes, including
the Million Wells Scheme (MWS), were merged into a
2. Human and social development through provision of single programme known as Swarnajayanti Gram
basic minimum services. Swarozgar Yojana (SGSY).

3. Targeted anti-poverty programmes. It was a holistic programme of micro enterprise

development in rural areas with emphasis on organizing
While economic growth continues to be the prime the rural poor into self-help groups, capacity-building.
factor for reducing the poverty, targeted anti-poverty planning of activity clusters, infrastructure support.
programmes supplement the growth effort and protect technology, credit and marketing linkages.
the poor from destitution, sharp fluctuations in
employment and incomes, and social insecurity. It insisted that women must exclusively form 50 per
cent of the self-help groups and that 50 per cent of the
11.5.1 Background: Poverty and benefits should flow to SCs and STS.
Economic Planning While the IRDP concentrated on individual
beneficiaries, the SGSY laid greater emphasis on social
Every major policy and plan document has expressed a
mobilisation and group formation.
perspective and concern of poverty. The First Five Year
Plan (1951-56) stated that "the central objective of Analysis of IRDP
planning in India is to raise the standard of living of the
people and provide opportunities for a richer and more The program of IRDP had many areas of concern with
varied life. Successive Five-Year Plans continued to its implementation. For example the authority
emphasize poverty eradication, and the attainment of responsible for its administration did not have requisite
economic equality and social justice as key objectives. skills in social mobilisation. There were few linkages

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with the NGOs which could have facilitated this (RLEGP). A special wage employment programme in
process. the name of Employment Assurance Scheme (EAS) was
launched in 1993 for the drought prone, desert, tribal
and hill area blocks in the country. All this employment
schemes aimed at improving the quality of life and
eliminating poverty.

D. Jawahar Rozgar Yojana (JRY)

B. National Rural Livelihood Mission
It was launched during 2009-10 to facilitate effective The NREP and RLEGP were merged in April 1989
implementation of the restructured SGSY scheme in a under the Jawahar Rozgar Yojana (JRY).
mission mode. NRLM aims at reducing poverty in rural
areas through promotion of diversified and gainful self- The JRY was meant to generate meaningful
employment and wage employment opportunities. employment opportunities for the unemployed and
NRLM was strengthened in May, 2013. The key underemployed in rural areas through the creation of
features of restructured NRLM include: economic infrastructure and community and social
assets. The JRY was revamped from 1 April 1999 as the
• Mobilization of at least one woman member Jawahar Gram Samriddhi Yojana (JGSY).
from.es rural poor household in the country
It became a programme for the creation of rural
into SHG network in a phased manner;
economic infrastructure with employment generation as
• Special focus on the mobilization of women
a secondary objective.
from he Scheduled Castes (SCs) and the
Scheduled Tribe (STS), the Particularly E Employment Assurance Scheme (EAS)
Vulnerable Tribal Group (PVTGS), the
disabled and other vulnerable a marginalized The Employment Assurance Scheme (EAS) was
household; launched as Centrally Sponsored Scheme on October 2,
1993 covering drought-prone areas, desert, tribal, and
• Promotion of SHG federations at village and
hill area blocks. It was later extended to all the blocks in
clue levels-Village Level Self Help Group
1997-98.
Federations (VL at village level and Cluster
Federation (CF) at cluster (groups of villages) The EAS was designed to provide employment in the
level; form of manual work in the lean agricultural season
• Intensive support to link each SHG to bank The works taken up under the programme were
credit such that each SHG member would be expected to lead to the creation of durable economic
able to leverage cumulative bank credit of 1.00 and social infrastructure and address the felt-needs of
lakh over a period of 5 to 8 years. the people. The zila parishads and panchayat samitis
were the
C. Wage Employment Programmes
implementing agencies.
Wage Employment Programmes are an important
component of the anti-poverty strategy, with multiple It aimed at creating community assets which is
objectives. They not only provide employment important for rural development.
opportunities during lean agricultural seasons but as in
times of floods, droughts and other natural calamities
F. Food for Work Programme (FWP)
They create rural infrastructure which supports further The Food for Work programme was started in 2000-01
economic activity. as a component of the EAS in eight notified drought-
Wage employment programmes were first started during affected states of Chhattisgarh, Gujarat, Himachal
the Sixth and Seventh Plan in the form of National Pradesh, Madhya Pradesh, Orissa, Rajasthan,
Rural Employment Programme (NREP) and Rural Maharashtra and Uttaranchal. The programme aimed at
Landless Employment Guarantee Programmes augmenting food security through wage employment
Food grains were supplied to states free of cost.

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G. National Old Age Pension Scheme beneficiaries themselves thereby helping in reducing the
(NOAPS): rural poverty.

This pension is given by the Central Government. The Core Objectives of the MGNREGA are:
job of implementation of this scheme in states and (a) Providing not less than one hundred days of
union territories is given to panchayats and unskilled manual work as a guaranteed employment in a
municipalities. The states contribution may vary financial year to every household in rural areas as per
depending on the state. The amount of old age pension demand, resulting in creation of productive assets of
is 200 per month for applicants aged 60-79. For prescribed quality and durability;
applicants aged above 80 years, the amount has been
revised to 2500 a month according to the 2011-2012 (b) Strengthening the livelihood resource base of the
Budget. It is a successful venture. poor; (c) Proactively ensuring social inclusion and

H. Annapurna Scheme (d) Strengthening Panchayati Raj Institutions.

This scheme was started by the government in 1999- Plans and decisions regarding the nature and choice of
2000 to provide food to senior citizens who cannot take works to be undertaken, are made in open assemblies of
care of themselves and are not under the National Old the Gram Sabha (GS) and ratified by the GP. Social
Age Pension Scheme (NOAPS), and who have no one audit is a new feature, which creates accountability of
to take care of them in their village. This scheme would performance, especially towards immediate
provide 10 kg of free food grains a month for the stakeholders. Thus MGNREGA also marks a break
eligible senior citizens. They mostly target groups of from the relief programmes of the past towards an
poorest of the poor and 'indigent senior citizens' integrated natural resource perspective generation

Critical Analysis of MGNREGA:

I. Sampoorna Gramin Rozgar Yojana (SGRY)
• Job Creation: The Scheme has acted as a safety
This program was the result of merging of JRY. EAS
and Food for Work Programme in September 2001, all net to reduce migration of the rural poor by
of which aim at the creation of employment providing them with work and wages. Over 3.4
opportunities in rural areas. billions person-days have been generated in the
programme.
• Benefits to Weaker Section: According to the
The basic aim of the scheme continues to be generation Rural Development Ministry, out of all the
of wage employment, creation of durable economic workers benefited under the scheme, the
infrastructure in rural areas and provision of food and percentage of Scheduled Caste workers has
nutrition security to the poor. consistently been about 20% and of Scheduled
Tribe workers has been about 17%.
J. Mahatma Gandhi National Rural • Women in Workforce: Out of the total jobs
Employment Guarantee Act, 2005 created so far, the percentage of hours put in
(MGNREGA) by women has increased steadily, to 56%
much above the statutory minimum of 33%.
It was launched in 2006. The mandate of the
• Labour & Income: Ever since the launch of
MGNREGA is to provide at least 100 days of
this scheme in 2006, it has changed the nature
guaranteed wage employment in a financial year to
every rural household whose adult members volunteer of the rural labour market. It gave an
to do unskilled manual work. opportunity to rural households to earn
minimum income by getting job cards under
MGNREGA is bottom-up, people- centred, demand- this scheme. While the poor have used it to
driven, self-selecting and rights-based programme. climb out of poverty, the not-so-poor used it as
The Act for the first time brought the role of the state as a measure to supplement their income by
provider of livelihood within the reach of the working during lean agriculture periods.

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• Curbs Migration: The Act has broadened the allocation amounts to 0.47% of the GDP
occupational choices available to the continues to be much lower than the World
agricultural workers within their locality, Bank recommendations of 1.7% of GDP for
thereby impacting rural- urban migration. the optimal functioning of the programme. Due
• Sustainable Asset Creation: Sustainable assets to lack of funds, State Governments find it
have been created linked to conservation of difficult to meet the demand for employment
natural resources and has helped in overall under MGNREGA.
development of Gram Panchayats. • Delay in Payment of wages: Most states have
• Financial Inclusion: Payment of wages failed to disburse wages within 15 days as
through. bank accounts/ post office has led to mandated by MGNREGA. In addition,
large financial inclusion of the poor. workers are not compensated for a delay in
• Inadequate Financing: This year's allocation is payment of wages. This has turned the scheme
the highest allocation for MGNREGA in any into a supply-based programme and
year since the passage of the law. However, the subsequently, workers had begun. to lose
allocation amounts to 0.47% of the GDP interest in working under it.
continues to be much lower than the World • Ineffective Role of PRI: With very little gram
Bank recommendations of 1.7% of GDP for panchayats are not able to implement the in an
the optimal functioning of the programme. Due effective and efficient manner
to workers has consistently been about 20% • Large Number of Incomplete works: Thes been
and of Scheduled Tribe workers has been a delay in the completion of works com
about 17%. Women in Workforce: Out of the MGNREGA and inspection of projects has
total jobs created so far, the percentage of irregular. Also, there is an issue of quality and
hours put in by women has increased steadily, asset creation under MGNREGA
to 56% much above the statutory minimum of • Fabrication of Job cards: There are several
33%. related to the existence of fake job cards
• Labour & Income: Ever since the launch of inclusion of fictitious names, missing entries a
this scheme in 2006, it has changed the nature delays in making entries in job cards
of the rural labour market. It gave an
opportunity to rural households to earn K. MGNREGA 2.0
minimum income by getting job cards under
The MGNREGA 2.0 stand for second generation re in
this scheme. While the poor have used it to the implementation of MGNREGA act. It is based
climb out of poverty, the not-so-poor used it as recommendation of a task force under the chairman of
a measure to supplement their income by Mihir Shah which was assigned the task to lock o
working during lean agriculture periods. lacunas and redraft rules and guidelines for more
• Curbs Migration: The Act has broadened the effective and efficient management of the program.
occupational choices available to the
MGNREGA 2.0 is an attempt to overcome the
agricultural workers within their locality,
weaknesses of the earlier programme and infuse it with
thereby impacting rural- urban migration.
a truly live rooms generation character through a focus
• Sustainable Asset Creation: Sustainable assets on the creation durable assets and improvement in rural
have been created linked to conservation of productivity
natural resources and has helped in overall
development of Gram Panchayats. The reforms was a need of the hour because the
• Financial Inclusion: Payment of wages through demands for works were dipping and there was
bank accounts/ post office has led to large widespread corruption in the implementation.
financial inclusion of the poor. Under this new version 30 new works have been added
• Inadequate Financing: This year's allocation is which were earlier confined to 8 types of works. The
the highest allocation for MGNREGA in any programme now covers almost every source of rural
year since the passage of the law. However, the livelihood in every agro-ecological zone, from poultry

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fishery and from watershed development to sanitation awareness regarding government policies and
works. The reforms are expected to increase job measures in rural areas.
demand under the programme.
11.6 Strategy for Combating
Poverty
According to NITI Aayog, the strategy for combating
Way Forward poverty must rest on two legs: Sustained rapid growth
that is also employment intensive and making anti-
• Care needs to be taken on the issue that the
poverty programs effective.
funds allocated for the programme is reached
to the beneficiaries and that the leakage is
minimized to zero This could be achieved by
promoting digitization. 11.6.1 Employment-intensive
• More focus of the programme should be on the
development of quality of assets along with the
Sustained Rapid Growth
increase in quantity. In other words creation of
Sustained rapid growth works through two channels:
productive assets shall be a priority of the
First, by creating jobs that pay steadily rising real
scheme.
wages. It directly dents poverty.
• Some intelligent planning and desired
convergence o the programmed with other Second, it will lead to growth in government revenues
similar programme shall be done in order to which in turn allow the expansion of social
make it more effective. expenditures at faster pace.
• State Governments must ensure that public Development of Agriculture shall be the prime focus in
work gets started in every village. Workers rural areas as majority of the rural poor are dependent
turning up at he worksite should be provided on agriculture. These include measures like raising
work immediately. without much delay productivity in agriculture, giving good remuneration
• In the times of pandemic, Local bodies must prices to farmers, promoting second green revolution in
proactively reach out to returned and rainfed areas in general and Eastern India in particular,
quarantined migrant workers and help those in helping small and marginal farmers by reforming
need to get job cards. Adequate facilities such tenancy laws and bringing quick relief to farmers in
as soap, water, and masks for workers must be times of natural disasters.
provided free of cost, at the worksite. The growth in the industrial and service sectors can reap
• The pandemic has demonstrated the more benefit for the poor provided more employment is
importance of decentralised I governance. created in these sectors. For this India needs to
Gram panchayats need to be provided with accelerate growth in organised labour intensive sector
adequate resources, powers, and such as footwear, food processing. electronics and
responsibilities to sanction works, provide electrical appliances etc
work on demand, and authorise wage
Another focus area to eliminate poverty can be the
payments to ensure there are no delays in creation of new Coastal Economic Zones with business
payments. friendly ecosystems which can serve as magnets for the
• MGNREGA should be converged with other export oriented large scale firms involved in
schemes of the government. For example, employment-intensive activities. This can help generate
Green India initiative, Swachh Bharat Abhiyan more jobs for the poor living in the coastal zones.
etc.
• Social Auditing creates accountability of 11.6.2 Increasing Effectiveness of
performance, especially towards immediate Anti- Poverty Programs
stakeholders. Hence, there is a need to to create

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• Making anti-poverty programs such as the amenities like water, electricity, roads,
Public Distribution System (PDS). Midday sanitation, and housing , thereby resulting in
Meal Scheme, MGNREGA and Housing for lower incidences of poverty.
All more effective represents the second leg of
the strategy to eliminate abject poverty. For 11.7.2 Elements of Inclusive Growth
example, poor households must be offered the
option between cash and in-kind transfers A. Skill Development
under the PDS.
• Harnessing the demographic dividend will
• Schemes like MGNREGA can impart skills to depend upon the employability of the working
make it more effective which would in turn age population, their health, education,
also make it easier for the workers to exit the vocational training and skills. Skill
programs and earn better at other places with development plays a key role here.
the skills that he or she acquired through this
• India is facing a dual challenge in skill
program.
development: First, there is a paucity of highly
• The Trinity of Jan Dhan Yojana, Aadhar and trained workforce. Second, there is non-
Mobile (JAM) can play a vital role by employment of conventionally trained youths
widening the reach of government to the
vulnerable sections. Thus the digital mode and B. Financial Inclusion
the direct benefit link can revolutionize the
anti-poverty programmes by replacing the • Financial Inclusion is the process of ensuring
current cumbersome and leaky distribution of access to financial services to vulnerable
benefits under various schemes by the direct groups at affordable costs.
benefit transfer. • Financial inclusion is necessary for inclusive
• Inefficient and myriad Schemes should be growth as it leads to the culture of saving,
replaced by other efficient schemes. The which initiates a virtuous cycle of economic
identification of beneficiaries of those schemes development.
can be done by using the database created by
Aadhar linked accounts and by data available C. Technological Advancement
through SECC (socio-economic caste census)
The world is moving towards an era of Industrial
and other statistics. This will help in assessing Revolution 4.0. These technological advancements have
the total benefit accruing to each household. capabilities to both decrease or increase the inequality
depending on the way these are being used.
11.7 Inclusive Growth Several initiatives have been taken by the government,
It means economic growth that creates employment e.g. Digital India Mission, so that a digitally literate
opportunities and helps in reducing poverty. It includes population can leverage technology for endless
providing equality of opportunity and empowering possibilities.
people through education and skill development.
Technology can help to combat other challenges too,
e.g.:
11.7.1 Objective
• Agriculture: Modern technology can help in
• Inclusive Growth shall lead to significant
making an agro-value chain from farmer to
improvement in health outcomes, universal
consumer more efficient and competitive.
access for children to school, increased access
• Manufacturing: Technology can resolve the
to higher education and improved standards of
problems of finance, procuring raw materials,
education, including skill development
land, and linkages with the user market G was
• Inclusive growth shall provide better
made possible only with the help of sour
opportunities for both wage employment and
technology.
livelihood, and improving in provision of basic

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• Education: Innovative digital technologies car • Malnutrition and undernourishment has been
create new forms of adaptive and peer learning prevalent in society among marginalized
increasing access to trainers and mentor section especially among adolescent girls.
providing useful data in real-time. • Economic and Social inequalities exist at intra-
• Health: Technologies could transform the state level and inter-state level. Poor growth
delivery of public health services - extend care rates and poor public services in lagging states
through remote health services make sure that disparity increases. The data is
• Governance: Technology can cut down delays. reflected in the Human Development Index
corruption, and inefficiency in the delivery of a and Per Capita Income across different states.
public service. • Low agriculture growth, low quality
employment growth, low human development,
D. Economic Growth rural-urban divides, gender and social
inequalities, and regional disparities etc. are
• India is among the fastest-growing major
the problems for the nation Reducing poverty
economies in the world. However, currently
and inequality and increasing economic growth
Indian economy s facing slowdown due to both
are the main aim of the country through
cyclic and structural challenges.
inclusive growth.
• However, the target of becoming a $5 trillion
• Growth has been uneven across sectors and
economy by 2024-25 can allow India to reduce
locations. For instance, agriculture has been
inequality increase social expenditure and
lagging behind and in countries such as India
provide employment to all.
and China, some regions have advanced faster
than others. Policies are also relatively ignored
E. Social Development
the agriculture sector.
• It means the empowerment of all marginalised • Due to trade competitiveness, foreign direct
sections of the population like investment and new technologies has
SC/ST/OBC/Minorities, women and demanded skilled labour. In some cases, labour
transgenders. laws also often discriminate against formal
• Empowerment can be done by improving employment and encourage 'casualization' of
institutions of the social structure i.e. hospitals labour.
especially primary care in the rural areas, • Unsustainable economic growth
schools, universities, etc.
• Investment in social structures will not only
boost growth (by fiscal stimulus) but will also
create a healthy and capable generation to
handle future work
11.7.4 Challenges in achieving
inclusive growth
11.7.3 Need for Inclusive Growth In A. Poverty
India 373 million Indians continue to experience acute
deprivations. Additionally, 8.8% of the population lives
There is a severe lack of accessibility to core public
in severe multidimensional poverty and 19.3% of the
services.
population are vulnerable to multidimensional poverty.
• The public sending across core services stay at
B. Unemployment
a dismal percentage of GDP (1-2% ). Though
institutions have been established but the • The quality and quantity of employment in
quality is not up to the mark India are low due to illiteracy and due to over-
dependence on agriculture.

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• The quality of employment is a problem as • Some of the regional disparities problems are
more than 80% of people work in the informal as follow In terms of literacy rate, Kerala is the
sector without any social security. most literate state with 93.1% literacy, on the
• Low job growth is due to the following factors: other hand, literacy rate of Bihar is only
o Low investment. 63.82%.
o Low capital utilization in industry. • In terms of per capita income, Goa's per capita
o Low agriculture growth. income is 4,67,998 in 2018 while per capita
income of Bihar is just one-tenth of that i.e.
C. Agriculture Backwardness 43,822
Around 44% of people in India have agriculture-related
employment but its contribution to the Indian GDP is
11.7.5 Steps Taken by Government
only 16.5% which lead to widespread poverty The Government has launched several initiatives to
Issues in agriculture are as follows: ensure the inclusiveness by bringing excluded sections
of the society into the mainstream and enabling them to
• Declining per capita land availability. reap the benefits of faster economic growth.
• A slow reduction in the share of employment.
• One of the major steps in the direction of
• Low labour productivity.
bringing about financial inclusion is through
• Decline in agriculture yield due to climate
the Pradhan Mantri Jan Dhan Yojana
change. land degradation and unavailability of
(PMJDY)
water.
• Other schemes like MUDRA Bank (Micro
• Disparities in growth across regions and crops.
Units Development and Refinance Agency).
Self Employment and Talent Utilisation
(SETU), Skill India Mission are some of the
strong measures expected to create skilled
workforce and provide livelihood
D. Issues with Social Development opportunities.
• Schemes like Pradhan Mantri Jeevan Jyoti
Social development is one of the key concerns for
Bima Yojana, Pradhan Mantri Jeevan Suraksha
inclusive growth. But it is facing some problems such
as: Yojana and Atal Pension Yojana have been
introduced with the intention of creating
• Significant regional, social and gender sustainable security net in the country.
disparities. • The standard of living of the rural people has
• Low level and slow growth in public been raised by schemes like Mahatma Gandhi
expenditure particularly in health and National Rural Employment Guarantee Act
education. (MGNREGA).
• The poor quality delivery system. • The neglected agrarian community has also
• Social indicators are much lower for OBC, SC, been. included and benefitted from schemes
ST, and Muslims. like Pradhan Mantri Krishi Sinchayee Yojana
(PMKSY), Kisan Credit Card and National
E. Regional Disparities Agriculture Market (NAM).

• Regional disparities are a major concern for

India. Factors like the caste system, gap 11.8 Financial Inclusion
between rich and poor etc contribute to the
regional disparities which create a system
11.8.1 Meaning
where some specific groups hold more • Financial inclusion is the process of ensuring
privileges over others access to appropriate financial products and

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services needed by vulnerable groups such as • Financial inclusion broadens the resource base
weaker sections and low income groups at an of the financial system by developing a culture
affordable cost in a fair and transparent of savings among large segment of rural
manner. population.
• Financial Inclusion, broadly defined, refers to • Further, by bringing low income groups within
universal access to a wide range of financial the perimeter of formal banking sector;
services at a reasonable cost. financial inclusion protects their financial
• The objective of financial inclusion is to wealth and other resources in calamities.
ensure universal access to a wide range of • Financial inclusion also mitigates the
financial services like savings and payment exploitation of vulnerable sections by the
account, credit insurance and pensions. money lenders by facilitating easy access to
• Financial inclusion also aims to provide formal credit.
services for business opportunities, education,
savings for retirement and insurance against
risks including emergency loans.

11.8.2 Past Efforts

11.8.4 Challenges
• In 1904, the Cooperative Credit Societies Act
was passed. It provided a legal basis for • Fraud Due to Illiteracy: India is a country
cooperative credit societies. where large number of people are illiterate.
• Post Independence, steps like nationalization Thus it becomes easy to get their bank account
of banks in 1955 and 1980, establishment of details by fraudsters. It will lead to breaking
NABARD and introduction of priority sector down of trust on banks.
lending were some of the measures to usher • Non Operational Accounts: Another challenge
financial inclusion. is to make sure that the account so opened
• Other Measures for financial inclusion under schemes like Jan Dhan Yojana, are
included expanding banking service to provide operated periodically and that some balance is
a suite of services related to deposit, credit, maintained in the account.
micro insurance and remittances to the poor. • Number of Regulatory Authorities: At present,
• Banks were also advised to initiate Information there are a number of regulatory authorities
and Communication Technology based that have a role to play in financial inclusion -
Business Correspondent Model (BC Model) to Reserve Bank, National Bank for Agriculture
provide low cost banking services at doorstep and Rural Development
in remote villages, Roadmap to cover all the • (NABARD), Securities and Exchange Board
villages as early as possible, opening of at least of India, Small Industries and Development
25 per cent of new branches in unbanked rural Bank of India, and MUDRA bank. The
areas etc. responsibility of overseeing financial inclusion
should be dedicated to a single regulator.
11.8.3 Importance • Digital Divide: The most common barriers to
the adoption of digital technology which may
• Access to financial services opens doors for promote financial inclusion:
families, allowing them to smooth out o Non-availability of suitable financial
consumption and invest in their futures products.
through education and health. o Lack of skills among the stakeholders
• Access to credit enables businesses to expand, to use digital services
creating jobs and reducing inequality. o Infrastructural issues.
Financial inclusion is the bridge between
economic opportunity and outcome.

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o Low-income consumers who are not The fundamental objective of all these initiatives is to
able to afford the technology required reach the large sections of the hitherto financially
to access digital services. excluded Indian population
• Informal and Cash-Dominated Economy: India
is the heavily dominated cash economy, this
poses a challenge for digital payment adoption.
Also. according to the International Labour
Organization (ILO), about 81% of the
employed persons in India work in the
informal sector. The combination of a huge
11.8.6 Recent Financial Inclusion
informal sector along with a high dependence
on cash mode of transaction poses an initiative by RBI
impediment to digital financial inclusion.
• RBI has adopted a bank-led model for
• Gender Gap in Financial Inclusion: According achieving financial inclusion and removed all
to the Global Findex database, 83% of males regulatory bottle necks in achieving greater
above 15 years of age in India held accounts at financial inclusion in the country.
a financial institution compared to 77%
• New Banking Entities permitted in the
females. This is attributed to socio- economic
Financial Inclusion Space: RBI has granted in-
factors, including the availability of mobile
principle approval to some entities to set up
handset and internet data facility being higher
differentiated banks namely "Small Finance
among men than women.
Banks" (SFBS) and "Payments Banks" to
• Lack of Credit Penetration: One of the main further the cause of financial inclusion in the
constraints in providing credit to low-income country.
households and informal businesses is the lack
• Role of payment system in promoting financial
of information available with formal creditors
inclusion: Encouraging use of Mobile
to determine their credit worthiness. This
Banking, pre- paid instruments in the form of
results in a high cost of credit.
digital wallets and mobile wallets,
operationalization of the Aadhaar Bridge
11.8.5 Initiatives on Financial Payment System (ABPS) and Aadhaar-
Inclusion Enabled Payment system (AEPS) etc.
• Direct Benefit Transfer and Aadhaar Seeding
The Government of India and the Reserve Bank of India
of Accounts: An important driver for
have been making concerted efforts to promote
enhancing the demand side of financial
financial inclusion as one of the important national
objectives of the country. Some of the major efforts inclusion is Direct Benefit Transfer (DBT). It
made in the last five decades include: has the potential to be game changer. If
entitlements under various state sponsored
• Nationalization of banks, schemes starts directly flowing into the bank
• Building up of robust branch network of accounts of individuals under DBT mode, it
scheduled commercial banks, co-operatives can act as a catalyst to encourage saving habit
and regional rural banks, leading to build up of investment and seed
• Introduction of mandated priority sector capital for availing productive credit.
lending targets.
• Lead bank scheme, 11.8.7 Financial Inclusion Schemes
• Formation of self-help groups and Programmes
• Permitting BCs/BFs to be appointed by banks
to provide door step delivery of banking A. Pradhan Mantri Jan Dhan Yojana
services
• Zero balance BSBD accounts, etc.

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Pradhan Mantri Jan-Dhan Yojana (PMJDY) is National indication that more and more of these
Mission for Financial Inclusion to ensure access to accounts are being used by customers on a
financial services, namely, Banking/Savings & Deposit regular basis.
Accounts, Remittance, Credit, Insurance, Pension in an • RuPay Usage: Number of RuPay cards & their
affordable manner and by using technology for the usage has also increased over time.
benefit of excluded section.
• Jan Dhan Darshak App: This app is being used
Account can be opened in any bank branch or Busine for identifying villages which are not served by
Correspondent (Bank Mitr) outlet. Accounts opened banking touchpoints within 5 km. The efforts
unde PMJDY are being opened with Zero balance. have resulted in a significant decrease in the
number of such villages.
Six Pillars of the Scheme • Pradhan Mantri Garib Kalyan Package
Universal Access to Banking Services (Branch and (PMGKP) for PMJDY Women: Under
Banking Correspondents): Accounts opened are online PMGKP, a total of 30,945 crore have been
accounts in the core banking system of bank Focus has credited in accounts of women PMJDY
shifted from 'Every Household' to Ever Unbanked account holders during Covid lockdown.
Adult'. • Smooth DBT Transactions: About 5 crore
PMJDY account holders receive Direct Benefit
Basic Savings Bank Accounts with Overdraft ( Facility
Transfer (DBT) from the Government under
of 10,000/- to every household. (00)
various schemes.
Financial Literacy Program: Promoting savings, e of
ATMs, using basic mobile phones for banking, et Impact
Interoperability through RuPay debit card or Aadhar
enabled Payment System (AePS). • Increased Financial Inclusion: PMJDY has
been the foundation stone for people-centric
Creation of Credit Guarantee Fund: To provide banks economic initiatives Whether it is DBT,
some guarantee against defaults. Covid-19 financial assistance, PM KISAN,
Insurance: Free accidental insurance cover on RuPay increased wages under MGNREGA life and
cards increased from 1 lakh to 2 lakh for PMJD health insurance cover, the first step of all
accounts opened after August 2018. Pension Scheme for these initiatives is to provide every adult with a
the Unorganized sector. bank account, which PMJDY has nearly
completed.
Achievements • Formalisation of Financial System: It provides
• Accounts: The number of accounts rose to an avenue to the poor for bringing their
4304 crore in August 2021 from 17.9 crore in savings into the formal financial system, an
August 2015 Of this, 55.47% Jan Dhan avenue to remit money to their families in
account holders are women and 66.69% villages besides taking them out of the clutches
holders are in rural and semi-urban areas of the usurious money lenders.
Deposits: The deposits have shot up to 1.46 • Prevention of Leakage: DBTS via PM Jan
lakh crore from 22,901 crore during 2015- Dhan accounts have ensured every rupee
2021. reaches its intended beneficiary and prevents
• Operative Accounts: As per extant Reserve systemic leakage.
Bank of India guidelines, a PMJDY account is
treated as inoperative if there are no customer
induced transactions in the account for over a
period of two years. In August 2021, out of
total 43.04 crore PMJDY accounts, 36.86 crore
(85.6%) were operative. Continuous increase
in percentage of operative accounts is an

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Challenges a unique proposition of DAY-NRLM It

impacts the livelihoods through universal
• Connectivity: Lack of physical and digital social mobilization by inter alia organising
connectivity is posing a major hurdle in one-woman member from each rural poor
achieving financial inclusion for rural India. household into Self Help Groups (SHGS), their
• Technological Issue: The technological issues training and capacity building, facilitating their
affecting banks from poor connectivity, micro-livelihoods plans, and enabling them to
networking and bandwidth problems to implement their livelihoods plans through
managing costs of maintaining infrastructure accessing financial resources from their own
especially in rural areas. institutions and the banks, NRLM set out with
• Procedure not Clear: Most of the people are an agenda to cover 7 Crore rural poor
aware but still so many are not turned around households, across 600 districts, 6000 blocks,
as they are not understanding the proper 2.5 lakh Gram Panchayats and 6 lakh villages
procedure of opening an account and required in the country through self-managed Self Help
documents at a time. Groups (SHGS) and federated institutions and
support them for livelihoods collectives in a
Way Forward period of 8-10 years.
Success of the PMJDY scheme depends on the effective • Implementation: It is implemented in a
regulatory system as the stakeholders have to build a Mission mode by special purpose vehicles
sustainable ecosystem to keep the accounts active and (autonomous state societies) with dedicated
successful implementation of the programme. The implementation support units at the national.
challenge is the conversion of the non operative state, district and block levels, using
accounts with zero balance into operative and for this professional human resources in order to
it's important to focus on financial literacy programme. provide continuous and long-term handholding
Also, promotion of digital payments including RuPay support to each rural poor family.
debit card usage amongst PMJDY account holders • Support Provided: There were 63 lakh SHGs
through creation of acceptance infrastructure across comprising seven crore women members in the
India will expand the reach of PMJDY. country which had been granted 3 lakh crore in
B. Deendayal Antyodaya Yojana-National loans and the non-performing assets (NPA)
amounted to only 2.3%. In addition, the poor
Rural Livelihood Mission
would be facilitated to achieve increased
It is a Centrally Sponsored Programme, launched by the access to rights. entitlements and public
Ministry of Rural Development in June 2011. services, diversified risk and better social
indicators of empowerment. DAY- NRLM
Aided in part through investment support by the World
believes in harnessing the innate capabilities of
Bank, the Mission aims at creating efficient and
the poor and complements them with
effective institutional platforms of the rural poor,
enabling them to increase household income through capacities (information, knowledge, skills,
sustainable livelihood enhancements and improved tools, finance and collectivization) to
access to financial services. participate in the growing economy of the
country. The outstanding loans were to the
• Aim: To eliminate rural poverty through the tune of 1 lakh crore. The government plans to
promotion of multiple livelihoods and take the scheme to 10 crore women. DAY-
improved access to financial services for the NRLM also focuses on bank linkage of the
rural poor households across the country. To institutions and SHGS to mobilize their
reach out to all rural poor households and income.
impact their livelihoods. • Recent Developments: A new sub-scheme
• Functioning: It involves working with under DAY- NRLM named as "Aajeevika
community institutions through community Grameen Express Yojana (AGEY), has been
professionals in the spirit of self-help which is

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launched. The main objectives of AGEY are to • It provide easy credit and offer small loans to
provide an alternative source of livelihoods to customers, without any collateral.
members of Self Help Groups (SHGs) under • It makes more money available to the poor
DAY-NRLM by facilitating them to operate sections of the economy, leading to increased
public transport services in backward rural income and employment of poor households.
areas. This will provide safe, affordable and
community monitored rural transport services
like e-rickshaws, 3 and 4 wheeler motorised
• Families benefiting from microloans are more
transport vehicles to connect remote villages
likely to provide better and continued
with key services and amenities including
education for their children.
access to markets, education and health for the
• Non-Banking Financial Companies (NBFCs),
overall economic development of the area. In
Co-operative societies, Section-25 companies,
October 2020, the Union Cabinet has approved
Societies and Trusts, a such institutions
a special package worth 520 crore in the Union
operating in microfinance sector considered
Territories (UTS) of Jammu and Kashmir
MFIs and together they account for about 42
(J&K) and Ladakh for a period of five years
percent of the microfinance sector in terms of
under the Deendayal Antyodaya Yojana-
loan portfolio. The channel is dominated by
National Rural Livelihood Mission (DAY-
NBFCs which cover more than percent of the
NRLM).
total loan portfolio through the MFI channel

11.9 Microfinance B. Importance

Microfinance is the provision of financial services to • It promotes socio-economic development at
low- income clients or solidarity lending groups the grassroot level through community based
including consumers and the self-employed, who approach
traditionally lack access to banking and related services.
• It provides livelihood to the vulnerable and
Microfinance is not just about giving micro credit to the disadvantaged population.
poor rather it is an economic development tool whose • It promotes activities which have community
objective is to assist poor to work their way out of participation and sharing of responsibilities.
poverty. It covers a wide range of services like credit, • It helps in mainstreaming the disabled and
savings, insurance, remittance and also non-financial empowerment of women of backward areas.
services like training, counselling etc. • It develops and strengthens people's group like
The reason for existence of separate institutions i.e. self help group and facilitate sustainable
MFIs for offering microfinance are as follows: development through them.

• High Transaction Cost: Generally micro C. Major Business Models

credits fall below the break-even point of
providing loans by banks. • Joint Liability Group: This is usually an
• Absence of Collaterals: The poor usually are informal group that consists of 4-10
not in a state to offer collaterals to secure the individuals who seek loans against mutual
credit. guarantee. The loans are usually taken for
• Short Duration Loans: Loans are generally agricultural purposes or associated activities.
taken for very short duration periods. • Self Help Group: It is a group of individuals
with similar socio-economic backgrounds.
A. Microfinance Institutions These small entrepreneurs come together for a
short duration and create a common fund for
MFI is an organization that offers financial services to their business needs. These groups are
low income populations These services include classified as non-profit organisations National
microloans, micro savings and microinsurance.
Bank for Agriculture and Rural Development

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(NABARD) SHG linkage programme is Pricing: Non-transparent pricing by MFIs

noteworthy this regard, as several Self Help confines the bargaining power of the borrowers
Groups are able borrow money from banks if and their ability to compare different loan
they are able to present track record of diligent products, because they don't know the actual
repayments. price. In absence of the proper understanding
• Grameen Model Bank: It was the brainchild of of the pricing, clients end up borrowing more
Nobel Laureate Prof. Muhammad Yunus in than their ability to payback which results in
Bangladesh in the 1970s It has inspired the over-indebtedness of the borrowers.
creation of Regional Rural Banks (RRBs) in • Low Penetration of MFIS: Because of the
India. The primary motive of this system is the initial cost involved in serving a new location,
end-to-end development of the rural economy. MFIs are not willing to go to remote locations.
• Rural Cooperatives: They were established in This is the reason most of the MFIs have their
India at the time of Indian independence. branches in urban and semi-urban areas only
However, this system had complex monitoring resulting in a very low rural penetration of
structures and was beneficial only to the microfinance.
creditworthy borrowers in rural India Hence, • Multiple Lending and Over-Debtedness: In
this system did not find the success that it order to eat away each others' market share,
sought initially. MFIs are ending up giving multiple loans to
same borrowers which in some cases is leading
Challenges to over-indebtedness of the borrower. MFIs are
getting affected because borrowers are failing
• Legal Structure and Regulations: The presence
to make payments and hence their recovery
of institutions with a variety of legal forms
rates are falling, while over-indebtedness is
makes it difficult for the regulation of all such
making the borrower go to depression and in
institutions by a single regulatory body in the
some cases forcing them to commit suicide.
current Indian legal structure. Though NBFCs,
which cover the major part of the outstanding E. Way Forward
loan portfolio by the microfinance channel, are
regulated by Reserve Bank of India, other • The RBI has suggested that the non-corporate
MFIs like societies, trusts, Section-25 MFIS should be regulated by individual State
companies and cooperative societies fall Governments.
outside the purview of RBI's regulation. • Microfinance programmes and group
• Financial Illiteracy: One of the major formation should be handled by trained
hindrances in the growth of the microfinance personnel in a professional manner.
sector is the financial illiteracy of the people. • The microfinance programs should not be
This makes it difficult in creating awareness of restricted only for meeting the financial needs
microfinance and even more difficult to serve of women but also include entitlements and
them as microfinance clients. status of women.
• Inability to Generate Sufficient Funds: The • For control of interest rates of microcredit
problem of inadequate funds is bigger for institutions, regulatory framework should be
small and nascent MFIs as they find it very established, based on transparency and
difficult to get bank loans because of their avoiding hidden cost.
small portfolio size and so they have to look • In addition to proper regulation of the
for other costlier sources of fund. microfinance sector, field visits can be adopted
• Dropout and Migration of Members: Most as a medium for monitoring the conditions on
MFIs lend on the basis of the past record of the ground and initiating corrective action if
group. In absence of a decent past record, needed.
members are deprived of getting bigger loan • A common practice for charging interest
amounts and additional services. Transparent should be followed by all MFIs so that it

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makes the sector more competitive and the pandemic and consequent lockdown, many advocate
beneficiary gets the freedom to compare Universal Basic Income (UBI) programme to be a
different financial products before buying. solution.

UBI envisages an uncompromised social safety net that

11.10 Universal Basic Income seeks to assure a dignified life for everyone, a concept
that is expected to gain traction in a global economy
Meaning buffeted by uncertainties on account of globalization,
technological change, and automation.
A universal basic income (UBI) is unconditional and
universal. It requires that every person should have a
right to a basic income to cover their needs, just by
virtue of being citizens.
11.11 Low Skill Manufacturing
UBI has five components:
Meeting the challenge of jobs may require paying
• Universality: It is universal in nature. attention to labour-intensive sectors such as apparel and
• Periodic: Payments at periodic regular leather sectors. These provide opportunities for creating
intervals (not one-off grants). jobs (especially for women) and opportunities for
• Payments to individuals. exports and growth, as there is a worldwide demand for
• Payments in cash (not food vouchers or service these goods It will help India achieve the dual purpose
coupons). of job create and economic growth. Take off in
• Unconditionality: There are no preconditions economic growth in East Asia has been associated with
attached with the cash transferred to the rapid expansion in clothing and footwear exports.
Around 7-10% of GDP growth rate was associated with
beneficiary.
20-50% growth in apparel and 25% in footwear
The Economic Survey 2016-17 advocated the concept industry exports. Rising labour costs China affords
of Universal Basic Income (UBI) as an alternative to the India an opportunity to fill up the vacuum and provide a
various social welfare schemes in an effort to reduce better alternative to investors to shift the manufacturing
poverty. The Economic Survey estimated that providing basis away from China which is already ling under the
a modest basic income to all but the richest quartile scepticism or account of origin of demic and excessive
Indians could shrink national poverty from 22 perce concentration of global supply chain
(Tendulkar Committee) to 0.5 percent, while promoting
Challenges
social justice and empowering the poor.
• Low competitiveness: Bangladesh and
Way Ahead
Vietnam in case of apparels, and Vietnam and
Exploring the principles and prerequisites for successful Indonesia in case of leather and footwear, are
implementation of UBI, the Economic Survey 2016 fast taking over the space proceeded by China
pointed out that the two prerequisites for a successful • Qualitative and Quantitative trade barrier: To
UBI are: gain competitiveness in these sectors, India
requires easing restrictions on labor
(a) Functional JAM (Jan Dhan, Aadhar and Mobile)
system as it ensures that the cash transfer goes directly regulations, negotiating FTAs with major
into the account of a beneficiary. partners such as the EU and UK, and ensuring
that the GST rationalizes current tax policy
(b) Centre-State negotiations on cost sharing for the that can discriminate against dynamic sectors.
programme. • Scarce raw materials: Unavailability of
With almost 90% of India's workforce in the informal abundant cattle for slaughter hampers leather
sector without minimum wages or social security, industry.
micro-level circumstances in India are worse than • Problem of logistics: The costs and time
anywhere else. To deal with the economic inequality, involved in getting goods from factory to
unemployment and poverty created by the Covid-19 destination are greater than those for other

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countries. Logistics constitute 14% of India's

GDP in developed economies this number is
below 7%-8%.
• Lack of skilled personnel: Only 2% of work
force engaged in these sectors is formally
trained. Rigid Labor Laws: These increase
compliance burden for MSME's.

Steps Taken by Government

• Labor intensive sectors have been encouraged
to increase production through the production
linked incentive scheme.
• The government is focusing on improving and
formalizing employment through PM Rojgar
Yojana.
• Exporters have been provided relief to offset
the impact of taxes other than those subsumed
under GST, embedded in exports through
RODTEP scheme (Remission of Duties and
Taxes on Exported Products). This scheme
replaced the earlier Merchandise export from
India Scheme (MEIS) which was not
compliant with World Trade Organization.
• Skilling and entrepreneurial capital of the
workforce is ensured through skill India
Mission, Startup India. Standup India and
Mudra Yojana.
• During the pandemic, credit guarantees work
provided to banks so as to induced liquidity in
marginal and small labour intensive enterprises
as a part of Atmanirbhar Bharat Package.
• Thus, India's comparative advantage can be
utilized well to make inroads into these
sectors, and reclaim low skill manufacturing to
generate jobs and have wider, economy-wide
benefits.

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Chapter – 12
Employment, Skill
Development and Labour
Reforms
Labour Force: It includes all the people who are
presently employed or are searching for jobs.
Workforce: It includes all the people who are presently
12.1 Employment employed.

For Example, let us for simplicity assume that in an

12.1.1 Introduction
economy, 100 residents are present at a given point in
Employment is a relationship between two parties, time, out of which 70 fall in the working population
usually based on a contract where work is paid for, category (15-59), others being children and senior
where one party, which may be a corporation, for profit, citizens. Out of the above 70, 40 are actively employed,
not-for-profit organization, co-operative or other entity 20 are looking for employment, 10 are engaged in other
is the employer and the other is the employee. When a activities, i.e. studying and hence not looking for
person uses his own resources to earn income, this type employment. In the above example,
of employment is called self-employment. In self-
(40+ 20 = 60) is the Labour Force of the economy, 40 is
employment a person is himself employee and
the workforce
employer.
Unemployment rate = (60-40) ÷ 60 × 100 = 33% 60+70
12.1.2 Definition x 100 = 85.7% is the Labour Force Participation Rate
(LFPR)
Unemployment refers to a situation where the persons
who are able and willing to work but are unable or fails 40+70 x 100 =57.1% is the Employment-to-Population
to find one, which would have provided them income. Ratio (EPR)
Here, it is important to note that all the person who is
not working cannot be categorized as unemployed. 12.1.4 Types of Unemployment
Only those can be categorized as unemployed who is
actively seeking the work. Broadly speaking, there are two types of
unemployment, i.e., voluntary and involuntary. But
12.1.3 Key Terms Related to when we talk about unemployment in economy, we
consider only those people who are involuntarily
Employment unemployed.
National Sample Survey Organization (NSSO) defines The reason for excluding voluntary unemployed from
employment and unemployment on the following the point of view of economy is that these people are
activity statuses of an individual: not willing to work i.e. their unemployment is related to
Working (engaged in an economic activity) i.e. their own choices and not because of the economic
'Employed. situation prevailing in the market.

Seeking or available for work i.e. 'Unemployed. Neither A. Disguised Unemployment

seeking nor available for work.
It is a phenomena wherein more people are employed
than actually needed. This type of unemployment is the
peculiar feature of developing countries with high
population. Also this type of unemployment is more
true for agricultural sector in India. Under this, a person

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might seem to be working but his contribution to the Frictional unemployment is also called search
actual output is zero. unemployment because under this unemployment,
workers leave their jobs to find better ones. It is usually
For example, on a piece of land, five workers are a voluntary exit, but it can also occur from a layoff or
working where as the requirement is only for two. The termination with cause. The time, effort, and expense it
excess of three worker's work is disguised here. takes the worker to find a new job is called friction. For
example, a worker working in the private sector leaves
B. Seasonal Unemployment
his job to prepare for civil services examination. One of
This type of unemployment is co-terminus with the interesting facts about this kind of unemployment is
different seasons in different sectors of the economy. that it drops in the time of economic depression, as
For example, there will be demand for agricultural people do not want to quit their job because of the
labour in sowing and harvesting period but the same uncertainty about getting new job.
labour will get unemployed once these seasons get over.
F. Technological Unemployment
C. Structural Unemployment
It is caused when the individuals lose their jobs due to
It is a category of unemployment arising from the the technological advancement. Simply, the substitution
mismatch between jobs available in the market and the of manpower with technology results in technological
skills of the available workers in market. unemployment. In 2016, World Bank predicted that the
proportion of jobs threatened by automation in India is
From the point of view of policy maker, this is one of 69% Y-o-Y (Year on Year) basis.
major form of unemployment, which is difficult to
handle because this type of unemployment does not G. Chronic Unemployment
arise from the lack of demand.
Prolonged unemployment in the economy caused due to
Under this unemployment, people get unemployed the long-term unemployment persisting in the economy.
because of the change in pattern of demand leading to Often, the underdeveloped economies suffer from the
the change in structure of production in the economy. chronic unemployment because of Slower Economic
For example, the companies which uses the service of Growth, Rapid Population Growth, etc.
clerk for manual recording of accounts does not require
his service after the invention of computer until unless
he acquires the skills to operate computer.

D. Cyclical Unemployment
H. Casual Unemployment
This type of unemployment is associated with the
business cycle in the economy. In the time of 'Boom', When the worker is employed on a day-to-day basis for
i.e., when economy is on an upward trajectory with a contractual job and has to leave it once the contract
higher demand, higher output, higher profit and good terminates. Simply put, the inevitable time delay when a
financial position, then there is large-scale employment worker transits from one job to another due to the
and lower of unemployment. expiration of previous job contract is casual
unemployment,
However, the employment situation change with the
change of business cycle from Boom to Depression. I. Vulnerable Employment
Under the condition of 'Depression', the economy's
financial position weakens with the less demand, less This means, people working informally, without proper
job contracts and thus sans any legal protection. These
amount of profit and in some cases loss. The
unemployment in this case is called cyclical persons are deemed 'unemployed' since records of their
unemployment. This phenomena is mostly found in work are never maintained. It is one of the main types
of unemployment in India.
capitalist economies.

E. Frictional Unemployment J. Underemployment

Underemployment refers to a situation where a person
is employed, but the job and activity is not able to

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utilize his full skills and capacities because either it is Self-employed Category: Consists of employers, own
not a full time activity or the job is below his capacity account workers and unpaid family labour. Includes
and utilization. For example, a PHD scholar doing the those who work for themselves and do not sell their
job of a peon. labour power to anyone else in return for wage. Own
account workers work with one and more partners but
Recently, Niti Aayog Vice Chairman Arvind Panagariya have not engaged employees on a continuous basis, but
has said, "Jobs are being created but the problem we these employees I work with the said own account
have in India is that we suffer incredibly with workers only during the reference period. Own account
underemployment," which once again has raised the workers operate their own enterprises without hiring
debate whether we are in the economic phase of jobless labour while employers hire labourers. Own account
growth or we are dealing with the situation of workers are 36% of the total workers, employers make
underemployment. up 2% and unpaid family labour accounts for 14% of
the total workers
K. Unemployment Trap
Unemployment trap is a situation when unemployment 12.1.6 Important Observations
benefits discourage the unemployed to go to work.
Share of different categories: Self-employed (52%);
People find the opportunity cost of going to work too
Casual Workers (25%); Regular wage (23%)
high when one can simply enjoy the benefits by doing
nothing. Largest share: Own account workers account for the
largest share of workers (36%) followed by casual
While the purpose of social security and welfare
workers (25%) and Regular wage/Salaried workers
systems is to provide relief to the unemployed, they end
(23%)
up providing them with an incentive not to return to
work. An unemployment trap arises when opportunity
cost of going to work is higher than the income
12.1.7 Official Employment Statistics
received, discouraging people from returning to work Reports
and being productive.
Payroll Reporting: Published by National Statistical
12.1.5 Approaches to Measure Office (NSO) Measures employment related statistics in
the formal sector using information on the number of
Employment/ Unemployment Subscribers who have joined social security schemes:
Employees' Provident Fund (EPF) Scheme
In the labour force surveys, the activity status of a
person is determined on the basis of the activities Employees' State Insurance (ESI) Scheme National
pursued by the person during certain specified reference Pension Scheme (NPS).
period.
Quarterly Employment Survey Report: Published by
Usual Status Approach: Reference period is last 365 Labour Bureau, Ministry of Labour and Employment.
days (1 year). Person is categorized as Employed" if he/ Measures employment situation in selected non-farm
she is employed for a major part of the year. Industrial sectors. Covers 8 major sectors including
manufacturing, Construction, Trade, Transport,
Current Weekly Status: Reference period is last 7 days
Education etc.
(1 week). Person is categorized as Employed" if he/she
is employed for at least 1 hour on any day during the Periodic Labour Force Survey (PLFS) Report:
last week. Published by the National Statistical Office (NSO).
Replaced the earlier quinquennial (5-year)
12.1.6 Different Categories of Employment-Unemployment Surveys (EUS) surveys in
Workers India. It involves quarterly employment survey in
Urban areas and Annual Survey in the Rural Areas.
The NSO data classifies the workers on the basis of
employment status into three categories i.e.. workers; 12.1.8 Trends of Employment in
regular wage/salaried employees; and casual labourers.
self-employed
India

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• Jobless Growth: Stagnation in share of 12.2.1 Reasons for Jobless Growth in

Manufacturing Sector to India's GDP at 17%
since 1991 reforms, Dominance of small-sized
India
firms, Complexity in the labor laws and land In India, the phenomenon of jobless growth has arisen
acquisition, lack of skill sets etc. due to following reasons: Focus on Capital Intensive
• Nature of Jobs: The Jobs created in the Indian Industries
Economy have been concentrated in low-
Accidental Impact of Government Policies: Both at the
paying, low-productivity informal sectors such
Central and the State levels, there are fiscal and
as Construction, Small-sized enterprises. The
monetary incentives (e.g., capital investment subsidy,
Informal workers account for almost 90% of interest subsidy, export promotion capital goods
India's workforce. Hence, concerns have been scheme, credit-linked capital subsidy for technology
raised over not just over the number of Jobs upgrading of small scale industries, etc.) that provide
created, but also over the nature of Jobs. support for capital to various Industries. An indirect
• Growing Informalization of Workforce: The effect of such measures has been to decrease cost of
share of contractual workers increased from 12 capital and enhance cost of labour. This has incentivised
per cent of all registered manufacturing Industries to be more capital Intensive and less labour
workers in 1999 to over 25 per cent in 2010. Intensive.
The informal workers are paid almost 20 times
Nature of Demand: Since 1991 LPG reforms, the
less wages as compared to formal workers and demand for the manufactured commodities has
lack social security benefits. increased substantially. These manufactured
• Working Poor’s: The informal workers face commodities are more capital intensive and less labour
number of vulnerabilities such as poor wages, intensive. And that, in turn, has implications for
lack of access to social security benefits, poor technology choice and employment generation
skill sets, lack effective representation through
Growth of Service Sector: After the economic reform of
trade unions, lack of access to basic facilities
1991, the major force behind the economic growth of
such as housing, sanitation etc.
India has been the service sector. It is a less labour-
• Decline in Female LFPR: India exhibits a low intensive sector when compared to the manufacturing
and declining female labour force participation sector. This can be corroborated from the fact that today
rate. The female labour force participation rate service sector accounts for almost 67 percent of GDP
in India was 23.7 per cent in 2011-12 but employing only 28 percent of workforce.
compared to 61 per cent in China, 56 per cent
in the United States Laggard Manufacturing Sector: Industry in any
economy has the potential to provide a large number of
• Protection and Social Security: A large number
jobs. But in India the growth of industries is marred
of workers that are engaged in the unorganized
with issues like slow capital formation, lack of
sector are not covered by labour regulations
investment, labour law rigidities, skill mismatch
and social security. between what industry require and what workforce have
• Skills-Set: According to the India Skill Report etc.
2018, only 47 per cent of those coming out of
higher educational institutions are employable. Presence of Dwarf Firms in MSME Sector: The
Government provides a number of incentives so as to
nurture Infant MSMEs to grow into large sized giants
12.2 Jobless Growth or and ensure optimum utilization of factors of production,
Underemployment higher productivity and job creation. However, the
Government policies as shown below create perverse
Jobless growth, means that though an economy is incentives for firms to remain small rather than grow
growing at positive rate, the same can not be said of bigger.
employment situation, i.e., the economic growth has not
been able to create proportionate level of employment Poor Implementation of Labour Reforms.
of opportunities in a 4 country.

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Stagnation in the share of Manufacturing sector. Need Making investment subsidies conditional on realizing a
for high skill sets in Services sector such as IT and targeted level of employment per unit of investment.
BPM, Telecommunication etc.
Enhance female labour force participation by ensuring
Disguised unemployment in agriculture accompanied the implementation of and employers' adherence to the
by poor skill sets hindering job creation. recently passed Maternity Benefit (Amendment) Act,
2017, and the Sexual Harassment of Women at
Employment Data: We currently lack t periodic Workplace (Prevention, Prohibition and Redressal) Act
estimates of the work force. This lack of and data It is also important to ensure implementation of these
prevents us from rigorously monitoring the employment legislations in the informal sector.
situation and assessing the impact of various
interventions to create jobs
12.3 Female labour force
Negative Externalities: Infrastructure and MSME are
other sectors that absorbs a large number of workforce.
participation in India
However, due to large-scale NPAs problem the growth
rate in infrastructure sector is stagnant Whereas
12.3.1 Trends in Female Labour
MSMEs are marred with the problems of finance, Force Rate
obsolete technology, improper marketing and so on.
Important Observations
12.2.2 Strategies to Promote Job Labour Force Participation Rate in 2017-18: Total-
Creation 49.8%; Male- 75% ; Female - 25.3%. Female LPFR in
Rural Areas (26.6%) higher as compared to Urban
Focus on Labour Intensive Industries such as Textile Areas (22.3%). Decline in the total Female LPFR from
and Leather
45.2% in 1993- 94 to 25.3% in 2017-18.
Exploring Tourism Potential: Potential to create more Decline in Female LPFR sharper in Rural areas (from
than 40 million new jobs in the next 5 years. 52% in 1993-94 to 26.6% in 2017-18) as compared to
Smart Farming: Smart Farming should be explored Urban areas (from 25.1% in 1993-94 to 22.3% in 2017-
from inherent strengths in the agriculture sector to shift 18).
disguised unemployment from the traditional Women's education has increased over the last two
agriculture to the agro and food processing exports.
decades, and fertility rates have fallen both have
Focus on Assemble in India: By integrating "Assemble contributed to increasing participation of women in the
in India for the world" into Make in India. India would paid labour force in the world. However, this is not the
create about 4 crore well-paid jobs by 2025 and about 8 case in India.
crores by 2030 According to the Periodic Labour Force Survey, 2018-
Incentivizing 'Infant' MSME Firms rather than Dwarf 19, the female labour force participation rates (LFPR)
Firms: Provision of incentives to firms irrespective of among women aged above 15 years are as low as 26.4%
their age has led to dwarf firms. Hence, incentives in rural areas and 20.4% in urban areas in India.
should be limited to initial 5-7 years only.

Change in Orientation of SEZS: SEZS to be renamed as

3 E's-Employment and Economic Enclaves. Today,
SEZS are viewed as zones promoting only exporters
with special privileges; change in nomenclature will 12.3.2 Constraints In Female Labour
bring together all the categories of Investors that enable
economic activity and boost employment creation.
Force
Effective Implementation of Labour Reforms, including Participation
promotion of Fixed term Employment. Promotion of Stereotyping In Society: India's societal norms are such
secondary Agriculture in the rural areas to boost non- that women are expected to take the responsibility of
farm employment family care and childcare. This stereotype is a critical

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barrier to women's labour force participation. Due to Inadequate Social Security Protection: Even for women
this, women are in constant conflict over-allotment of who are in the workforce, the nature of their
time for work and life is a war of attrition for them. employment is such that most of them are out of the
purview of labour laws, including the recently passed
Societal Pressure: Generally, there is a fear of women Social Security Code.
being stigmatized by the community that might see their
work as a marker of low status, i.e., the inability of the 12.3.3 Initiatives by the Government
husband, the main breadwinner, to provide for the
family. Further, there is a rise in conservative attitudes to increase the Female labour Force
that believe a woman's place is inside the home and Participation Rate
kitchen, and that if the woman steps outside the socially
approved threshold, it would invite a backlash. Mahaila Shakti Kendra Scheme: Empowers rural
women through community participation.
Growing Informalization of Work: Over the last three
decades, there has been a massive decline in agricultural Female Entrepreneurship: To promote female
jobs, which has not necessarily been accompanied by an entrepreneurship, the Government has initiated schemes
increase in rural non-farm employment or livelihood like MUDRA, Stand Up India and Mahila e-Haat
opportunities. There has been movement out of Rashtriya Mahila Kosh: Provides micro-credit at
agriculture into informal and casual jobs, where the concessional terms to poor women for various
work is sporadic, and often less than 30 days at a livelihood and income generating activities.
stretch.
Minister's Employment
Women's Work not Being Counted as Work: There is
Prime Generation Programme (PMEGP): Under the
also the problem of much of women's work not being
scheme, women entrepreneurs are provided 25 per cent
counted as work. Data indicate that the decline in
and 35 per cent subsidies for the project set up in urban
LFPRS is driven by women moving from paid to unpaid
and rural areas respectively.
work and hence not getting counted as "workers". even
though they might continue to be involved in unpaid Deendayal Antyodaya Yojana National Rural -
economic work in family enterprises (farming. Livelihoods Mission (DAY-NRLM): Seeks to reach out
livestock, kirana shops, handmade products for sale and to 8-9 crore rural poor households and organize one
so on). woman member from each household into affinity
based women SHGS and federations at village and at
Digital Divide: In India in 2019, internet users were
higher levels.
67% male and 33% female, and this gap is even bigger
in rural areas. Improving the Safety of Women at Workplace through
enactment of the Prevention of Sexual Harassment
This divide can become a barrier for women to access
(POSH) at the Workplace Act, 2019: Once a complaint
critical education, health, and financial services, or to
is submitted to the portal, it will be directly sent to the
achieve success in activities or sectors that are
Internal Complaints Committee the concerned Ministry
becoming more digitized.
or department
Technological Disruption: Women hc 7/26 t
Sexual Harassment Electronic-Box (SHE-Box): The
administrative and data-processing roles at art artificial
Ministry of Women and Child Development (WCD) has
intelligence and other technologies threaten to usurp. As
launched an online platform to enable women
routine jobs become automated, the pressure on women
employees working in both the public and private
will intensify and they will experience higher
organisations to file complaints related to sexual
unemployment rates.
harassment at the workplace.
Lack of Gender-Related Data: Globally, major gaps in
Amendment of the Maternity Benefit Act, 2017. The
gendered data and the lack of trend data make it hard to
amendment provides for 26 weeks of paid maternity
monitor progress. In India, too, significant gaps in data
instead of 12 weeks. The Bill introduces a provision
on the girl child prevent a systematic longitudinal
wherein an employer may permit a woman to work
assessment of the lives of girls.
from home after the period of paid leave.

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Pickup and drop facilities for women working late will responsive to their take-home wages)- lower income
help create a strong infrastructure to create an enabling taxes for women can incentivize their participation.
environment for working women.
Recognizing Invisible Work: There is a need to invest
12.3.4 Suggestion for Increasing significantly in the care economy and social protection,
and redefine Gross Domestic Product to make work in
Women Labour Force Participation the home visible and counted.
Rate Encouraging Women Entrepreneurship: Creating job
As a report by McKinsey Global Institute suggests that opportunities is the need of the hour. However,
women participated in the Indian economy at the level encouraging more women to become entrepreneurs will
men do, annual GDP could be increased by 60% above provide a long-term solution. By creating jobs, fuelling
is projected GDP by 2025. Given this, governments at innovation, and furthering investment in health and
all evils, civil society, and citizenry should take education, entrepreneurship among women could
adequate measures to ensure gender equality. transform India's economy and society.

Bringing Women in Leadership Role: Subdued gender Imbibing Gender Equality: There is a need to remove
participation emanates from social-economic issues, barriers to women's full inclusion in the economy.
which can be treated by bringing behavioural change. including through access to the labour market. property
This can be changed if more women are given rights and targeted credit and investments. Women-
leadership positions. Thus, there is a need to ensure oriented government initiatives such as Beti Bachao
equal representation-from company boards to Beti Padhao, Knowledge Involvement in Research
Parliament, from higher education to public institutions Advancement through Nurturing (KIRAN) Scheme,
-through special measures and quotas. represent steps in the right direction.

Full-Time Child Care: The Integrated Child Prioritizing Gender Statistics: A UN Women Initiative
called "Making Every Woman and Girl Count' was
Development Scheme provides some support, but it is launched in 2016 to help prioritize gender data, ensure
not a full-time child care solution. However, the regular production of quality and comparable gender
"Sangini Centres of Self-Employed Women's statistics, and ensure that data are accessible and used to
Association (SEWA) provide full-day child care for 0-5- inform policy. There is a need to incorporate such an
year-olds, including nutrition, health, and child care. initiative in India as well.
Thus, similar centres should be significantly expanded.
Checking Violence Against Women: India should enact
Bridging Digital Divide: To address this, partnerships an emergency response plan to address violence against
between the public and private sectors will be most women and girls, and follow through with funding,
effective. Actions will need to address affordability of policies, and political will to end this Scourge.
phones and computers, female digital literacy and its
social context, and inadequate technical content Conclusion
dedicated to women and girls.
World Bank, noted that "no country can develop and
Flexible Working: The pandemic-induced remote achieve its full potential if half of its population is
working scenario has taught the corporate world that locked in non- remunerative, less productive and non-
seamless work-life integration is possible not only for economic activities."
women but for male professionals as well. Even as
Therefore, in a country where young women's education
Indian Industries adds more diversity and inclusion,
is now at par with men's, ignoring that half of the
initiatives such as increased maternity leave, mandatory
population isn't participating equally in the economy
paternity leave, the right to and choice of work for
means we are missing out on innovation,
women depends greatly on organizations continuing the
entrepreneurship, and productivity gains.
practice of flexible working.

Fiscal Incentives: Women have a higher elasticity of 12.4 Skill Development

labour supply than men (their labour supply is more
12.4.1 Introduction

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Skill Development can be defined as proficiency that is of the said 13% only about 11% received
acquired or developed through training or experience. It Informal Training and about 2%- Formal
strengthens the ability of individuals to adapt to Training. This is quite lower as compared to
changing market demands and help benefit from 68% in the UK, 75% in Germany and 96% in
innovation and entrepreneurial activities. South Korea.
Skill building could also be seen as an instrument to • Lower Employability: According to the India
empower the individual and improve his/her social Skills Report, 2021 Only 46 % of those
acceptance or value. At national level, the future coming out of higher educational institutions
prosperity of any country depends ultimately on the are employable.
number of persons in employment and how productive • Informalization of Workforce: It has been
they are at work Skilled human resource is essential for observed that it is difficult to upgrade the skills
inclusive growth. Hence, skill development can be of 90% of the workers who are employed as
connected to a broader growth, employment and informal workers.
development mandating government interventions. • Quantity and Quality of Training: India's
Presently, India faces a dual challenge of shortage of annual skilling capacity is significantly lower
trained workforce and non-employability of large than the workforce entering the market
number of educated youth, who possess little or no job annually. Further, the quality of skills imparted
skills. This is India's skilling paradox: Dwindling in the existing facilities is also poor.
opportunities in agriculture, much potential for jobs in • Sectoral Mobilization: Due to change in the
manufacturing and services, but not enough people with structure of economy, there is also change in
the right skills. the employment structure. Now more and more
According to the Periodic Labour Force Survey (PLFS) jobs are moving toward the manufacturing and
Report, only 13% of workforce received training, out of service sector, which require special set of
the said 13% only about 11% received Informal skills. However, according to the industry
Training and about 2% Formal Training. leaders, there is a huge mismatch between the
skill required by the industry and skills
12.4.2 Need possessed by the workers.
• Multiplier Effect: Government ambition of
• Demographic Dividend: India is in
India digital, solar capital of world,
demographic sweet spot with the youngest
manufacturing rub e-literate society etc.,
workforce in the world with an average age of
hinges on the fact that it will be able to provide
29 in comparison with other advanced
skill to the citizens of India making
countries. People in working age group (20 to
59 years) is expected to increase from 50% • Poor Linkages between Universities and
(2011) to 59% (2041). However, the biggest Industry The lack of connect between research
worrying factor is that, only 2% of workforce and academia leads to demand-supply
has employability skill. Therefore, for making mismatch in the skill
the young workforce employable, skill • Poor participation of Women: Women who
development is needed, as one should constitute 50% of population, yet their
remember, "demography provides potential contribution to the Labour Force Participation
and is not destiny". Rate is abysmally low, this figures is even
• Potential of Being Skill Capital of the World: more worrisome in the STEM (Science
India can be the universal skill bank of the technology, Engineering and Mathematics)
world. India can provide for the requirement of sector
skilled workers in those countries whose • Fragmentation of skill development initiatives
population is ageing, for example Japan. across ministries and State Governments leads
• Poor Penetration of Skills: According to the to duplication of efforts.
Periodic Labour Force Survey (PLFS)Report,
only 13% of workforce received training, Out

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• Low public perception on vocational training A. Dedicated Ministry for Skill Development
has reduced its attractiveness for longer term
benefits The Government of India has created full-fledged
ministry named "Ministry of Skill Development and
Entrepreneurship (MSDE)" fully dedicated for skilling
12.4.3 Challenges Indian workforce.
Huge Population: Almost a million people enter the job
market every month. Most of them do not have requisite
B. National Skill Development Mission
skills. Moreover, skilling and training such a The National Skill Development Mission launched by
humongous workforce is quite a task in itself. the Ministry of Skill Development and
Entrepreneurship on July 15, 2015, aims to create
Remote Areas: There is lack of vocational training
convergence across sectors and States in terms of skill
centre in rural area. This act as a double jeopardy for the
training activities.
rural workforce, which already lack proper education
It also aims to coordinate, implement and monitor
Technological Obsolescence: Rapid change of
skilling activities through various institutional structure.
technology almost every sector makes even the well-
trained worker redundant. C. National Skill Development Agency
Initiative: Lack of initiative from various industries of
National Skill Development Agency (NSDA) is an
companies in skilling the workforce is another factor
autonomous body under Ministry of Skill Development
which inhibits the proper skill development. There is
and Entrepreneurship that anchors the National Skill
lack of inter-governmental or international exchange for
Qualifications Framework and allied quality assurance
skill development programme, which would have
mechanisms for synergizing skill initiatives in the
otherwise provided workers an opportunity to acquire
country. NSDA is a quality assurance and policy
an international set of skills.
research body.
Mismatch between Training and Certification: Even
It is engaged in evaluating existing schemes to improve
after getting certification from the recognized skill
their efficacy and suggest improvements. It also ensures
development centre, the workers are unable to find the
skilling needs of marginalised sections are taken care of
suitable job because of the poor training.
etc.
Prejudices: Even though the chances of getting
employed after vocational studies is greater than after
D. National Skill Development Corporation
higher education in India but still there is stigma It is a public-private-partnership working under the
attached to it of a low level job. aegis of the Ministry of Skill Development &
Digital Divide: Low level of internet penetration also Entrepreneurship. NSDC aims to promote skill
inhibits the spread of Massive Open Online Courses development by catalysing the creation of large, quality
(MOOC), which have capacity to skill a large number and for-profit vocational institutions. It acts as a catalyst
of people. in skill development by providing funding to
enterprises, companies, and organizations that provide
Lack of Targeted Approach: Women workforce skill training. NSDC is the implementation agency for
participation in India is hovering around 25 percent. But skills training in the country.
still there are no specific skill development programmes
for them. It is also responsible for financing of schemes such as
Pradhan Mantri Kaushal Vikas Yojana (PMKVY),
Pradhan Mantri Kaushal Kendra (PMKK) etc.

E. National Skill Development Fund

This fund has been set up by the Government to receive
12.4.4 Measures taken by the contributions from Government and Non-Government
Government agencies for skilling. Money is ought to be spent by
NSDC for building skills.

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F. Pradhan Mantri Kaushal Vikas Yojana 25% of the PMKVY 2016-20 funds and corresponding
(PMKVY) physical targets have been allocated under CSSM.

Skill India Mission was launched by the Government in Outcome: More than 1.2 Crore youth have been
2015 under which the flagship scheme Pradhan Mantri trained/oriented through an improved standardized
Kaushal Vikas Yojana (PMKVY) is run. skilling ecosystem in the country under PMKVY 1.0
and PMKVY 2.0.
It aims to train over 40 crore people in India in different
skills by 2022. It aims at vocational training and 1. PMKVY 3.0
certification of Indian youth for a better livelihood and
The most recent version of the Pradhan Mantri Kaushal
respect in the society.
Vikas Yojana was launched in 717 districts, 28
G. PMKVY 1.0 States/eight UTS, PMKVY 3.0 is a step towards
'Atmnanirbhar Bharat'.
It was launched as India's largest Skill Certification
It will be implemented in a more decentralized
Scheme - Pradhan Mantri Kaushal Vikas Yojana
(PMKVY) on 15th July, 2015 (World Youth Skills Day). structure. with greater responsibilities and support from
States/UTS and Districts District Skill Committees
It aims to encourage and promote skill development in
the country by providing free short duration skill (DSCs), under the guidance of State Skill Development
Missions (SSDM), shall play a key role in addressing
training and incentivizing this by providing monetary
rewards to youth for skill certification. the skill gap and assessing demand at the district level.

PMKVY is implemented by the National Skills Features:

Development Corporation (NSDC) under the guidance It will be more trainee- and learner-centric. The focus is
of the Ministry of Skill Development and on bridging the demand-supply gap by promoting skill
Entrepreneurship (MSDE). development in areas of new-age and Industry 4.0 job
Key Components: Short Term Training, Special roles.
Projects, Recognition of Prior Learning, Kaushal & It will be a propagator of vocational education at an
Rozgar Mela, etc. early level for youth to capitalize on industry-linked
Outcome: In 2015-16, 19.85 lakh candidates were opportunities.
trained. The National Educational Policy 2020 also puts focus
on vocational training for a holistic growth and
increased employability.
H. PMKVY 2.0 By taking the bottom-up approach to training, it will
identify job roles that have demand at the local level
PMKVY 2016-20 (PMKVY 2.0) was launched by
scaling up both in terms of Sector and Geography and and skill the youth, linking them to these opportunities.
by greater alignment with other missions of the
Government of India like Make in India, Digital India, (Vocal for Local).
Swachh Bharat, etc.
It will encourage healthy competition between states by
Implementation Through Two Components: Centrally making available increased allocation to those states
Sponsored Centrally Managed (CSCM): This that perform better.
component was implemented by National Skill
Development Corporation. 75% of the PMKVY 2016- J. Pradhan Mantri Kaushal Kendra
20 funds and corresponding physical targets have been The Pradhan Mantri Kaushal Vikas Yojana seeks to
allocated under CSCM. establish state-of art Model District training centres in
Centrally Sponsored State Managed (CSSM): This every district of India. It seeks to provide soft loan up to
component was implemented by State Governments 70 lakhs to create training infrastructure.
through State Skill Development Missions (SSDMs).
K. Jan Shikshan Santhans (JSS)

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JSS is an institutional mechanism which aims to uplift N. Skill Strengthening for Industrial Value
the rural population economically by imparting Enhancement (STRIVE)
essential skills training, thereby enabling local trades to
grow and creating new opportunities for the natives of STRIVE is a World Bank assisted Central Sector
the region. It aspires to provide vocational training to Scheme which aims at improving the relevance and
non-literates, neo- literates as well as school drop-outs efficiency skills training provided through Industrial
in rural regions by identifying skills that have a relevant Training Institute (ITIS) and apprenticeships.
market in that region. It is implemented through NGOs
with 100% grants from the centre. The project aims at creating awareness through industry
clusters/geographical chambers that would address the
L. Skills Acquisition and Knowledge challenge of involvement of MSMEs. It is an outcome
Awareness for Livelihood Promotion focused schemes marking shift implementation strategy
in vocational education and training from inputs to
(SANKALP)
results. in government'
It is a World Bank loan assisted programme Centrally
It focusses on four result areas including:
Sponsored Scheme. It is an outcome oriented
programme launched to strengthen the district skill Improved and Broadened Apprenticeship Training
administration a the District Skill Committees (DSCs)
The scheme a to strengthen institutional mechanisms at Improved Teaching and Learning Increased Capacities
national, sta and district level and build a pool of quality of State Governments to support
trainers a assessors. It seeks to create convergence ITIS and Apprenticeship Training Improved
among skill training activities and provide access to performance.
skill train opportunities to the disadvantaged sections
the supplementing the Make in India initiative by Standard Training Assessment and Reward (STAR)
catering the skill requirements in different sectors. Scheme

The Scheme has also been designed to operational the Under this scheme, government will give monetary
sub-missions under the National Skill Development award to those trainees who have successfully
Mission. It envisages setting up of National Skill completed the course and have received certification
Certification Body. National Accreditation board and from National Skill Development Corporation (NSDC).
National S Research Division within National Skill
Development Agency (NSDA). P. Deen Dayal Upadhyaya Grameen Kaushal
Yojana
Development of Labour Market Information System
Kaushal Mart as a Skilling Resource Marketplace This is one of the most inclusive skill development
offering a credible platform for exchange of skill programmes launched by Ministry of Rural
resources of different kinds. Development for trainees belonging to SC/ST, Minority
and Women category.
Takshila as National Portal for trainers and assessor
Q. Skill Development in Higher Education
M. Mahatma Gandhi National Fellowship
Programme (MGNF) The major complain of industries regarding the
employability of Indian workforce is their skill
It is a two year academic programme which is a s mismatch. To bridge this gap NSDC has developed a
component of the SANKALP Programme, which has a unique model to integrate skill- based trainings into the
in-built component of on-ground practical experience academic cycle of the Universities. These are based on
the district administration to boost skill development the National Occupational Standards set by industry
district level. Upon completion of these components the through sector skill councils.
Fellows will be awarded a Certificate of Public Polic
and Management. Ministry of Skill Development an R. Skills Build Platform
Entrepreneurship (MSDE) has signed a contract w the
Indian Institute of Management (IIM) Bangalore This initiative is part of IBM's global commitment to
implementation of this programme. create a job-ready workforce and to build the next
generation of skills needed for new collar careers. It is a

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two-year advanced diploma in IT, networking and cloud Rural India: Given that in India around 70 percent of
computing, co-created and designed by IBM, will be population reside in rural setting, there is need to skill
offered at the Industrial Training Institutes (ITIS) & them in agriculture and related activities with
National Skill Training Institutes (NSTIs). The platform appropriate linkages with product, finance and labour
will be extended to train ITI & NSTI faculty on market. This would facilitate increase in women
building skills in Artificial Intelligence (Al). Skills participation and restrict distress migration from rural to
Build offers digital learning content from IBM and urban Areas.
partners such as Code Door, Corporately and Skillsoft.
National Rural Livelihoods Mission (NRLM) has to be
12.4.5 Suggestion to Improve the leveraged to provide necessary skill set to the people in
the rural areas.
Effectiveness of the Skill
Online learning system could be utilised to impart
Development in India skill/craft along with using fixed infrastructure. An open
Implement the labour codes at the earliest to enable platform for e-content on skill development should be
creation of formal sector jobs in the economy created where content can be crowd source.
Formalisation will increase firms' incentives to invest in
Skills on Wheel type initiatives could be used to address
upskilling their workers. Promote public and private
infrastructure and transport constraints. There are
investments in labour intensive sectors such as Textiles
shining examples of Skill Trucks operated in Brazil that
and Leather.
take skills training to the rural, remote parts of the
Mapping skill requirements for a demand driven skill country.
development ecosystem.
Creation of Mobility in Skill training
Collection of Relevant Data: Industry stakeholders must
Vertical Mobility: Creating a vertical mobility from
be incentivized to provide data on their skill
certificate to diploma to degree courses in the
requirements on regular basis. Regular labour market
vocational education. Providing options right from
studies should be conducted to capture changes in
school level up to PG level.
industry requirements to assess the skill sets required.
Regularly update the curriculum in Universities/ Lateral Mobility: Providing lateral mobility by giving
Colleges/Training Institutes to address demand- supply equivalence to vocational students especially at +2 level
mismatch of skill sets Capacities of teacher training so they can pursue graduate program
institutes need to be upgraded to ensure the availability
of qualified trainers. A single regulatory body with Role of Industry: Increasing role of industry in all
branches in all states should be set up to lay down aspects of vocational training providing latest
minimum standards for all players in the skilling machinery for training, governance, providing trainers
system. from industry and doing assessment to ensure quality at
each stage
Promote Vocational Education in secondary education.
Child Labour: To provide quality education and
Alternative financial sources such as Corporate Social counselling to children and parents about advantages of
Responsibility (CSR) funds, MPLAD Fund, education and training in accessing good jobs.
MGNREGA etc need to be explored. Overseas
Employment Promotion Agency should be set up to Recognition of Prior Learning: There is need to
train and certify Indian workers keen on overseas restructure the informal training so as to certify the
employment, in line with international standards. skills level of workers who have inherited those skills
from their ancestors. It will enable them to take up
Apprenticeship training has to be promoted through decent jobs, receive financial services and provide
National Apprenticeship Promotion Scheme (NAPS). livelihood security.
Job Opportunities: Skill development alone is not
sufficient to address the unemployment problem: there Targeted intervention in Difficult Areas: The targeted
is need for availability of job opportunities for those interventions such as UDAAN, HIMAYAT etc. need to
skills. be scaled up which would improve the outreach and

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access in LWE affected areas, hilly terrain and terrorist Apprenticeship can be an important mechanism for
affected areas. seamless transitioning from school to work and

bridging of skill-gap in the workforce.

12.5 Apprenticeship in India
Apprenticeship training refers to a course of training in 12.5.4 Salient Features
any industry or establishment. Apprentices get an
Legislative framework of Apprenticeship in India
opportunity of undergoing on the job' training and are
exposed to real working conditions. The Apprenticeship is regulated in India by Apprentices
Act, 1961. It provides that:
12.5.1 Apprenticeship Ecosystem in
All the establishments having work force (regular and
India contract employees) of 40 or more are mandated
According to the key findings of the Apprenticeship to engage apprentices undertake Apprentices
Outlook Report, only about 40-50% employers in India Programmes in a range from 2.5% -10% of the
have shown keen interest in hiring apprentices. Chennai workforce (including contractual employees) ever year.
has emerged as the most apprentice friendly city. The
manufacturing, automobiles and ancillaries, and retail For establishments having a workforce between 6 an 40,
are the leading sectors employing a large number of engagement of apprentices is optional
Interns. Overall the preference for women apprentices
Establishments having a workforce of 5 or less are n
has increased by 10% from the previous half year.
permitted to engage apprentices.
12.5.2 Status of Apprenticeship in Recent Changes in Apprenticeship Rules
India Minimum stipend amount that will be paid to trade
Currently India has only about 3 lakh apprentices as apprentices will be based on qualification. The amount
compared to the labour force of nearly 500 million can range anywhere between INR 5000 per month INR
people. 9000 per month from now onwards.

This proportion of less than 0.01% of the workforce Size-limit of an establishment with a mandatory
compares unfavourably with the countries such obligation to engage apprentices on an optional bass has
been lowered from 40 to 30.
Germany and Australia, which both have around 3.7 of
their workforces participating in apprenticeships India Reduced the size-limit of an establishment wanting
has set a target of skilling 500 million people with engage apprentices from 6 to 4. This will allow smaller
employable skills by 2022 Thus, apprenticeship will companies to hire more trainees and give more youths
play a crucial role in the task of up-skilling India an opportunity to get into the apprenticeship fold.
workforce and increasing employability
Establishments having four or more workers are eligible
to engage apprentices.

12.5.5 Reasons for Poor

12.5.3 Significance of Apprenticeship
Apprenticeship in India
India's working-age population is estimated continue to
increase through 2041 This will have major Lack of Enterprise Engagement in the System: Only
implications on the required rate of job creation in the around 24,000 enterprises. up apprenticeship in India
economy. have taken The low number of participating enterprises
is reported due to high regulatory compliance burden
Statistics show that approximately 3% of children upon employers.
dropout after grade 5th and 8th in the country owing
socio-economic challenges. Limited Occupational Coverage: The Indian formal
apprenticeship system has a limited list of designated
trades in which apprenticeships can be offered.

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Inadequate Stipend: The stipend that is required to be It is an initiative, introduced in 2013, taken jointly by
paid to apprentices is very low. AICTE and Government of India. It aims to offer
practical trainings to enhance employability of any
Limited Progression into Permanent Employment: person who is either pursuing graduation/diploma in
Normally, apprenticeships do not lead to permanent any technical or non- technical stream, or has
employment and hence there is low demand for discontinued studies of degree or diploma courses The
apprenticeship among the youth. NEEM is envisioned to place at least 10,000 students
Lack of Progression into Higher Qualifications: per year in registered companies of registered industries
Apprentices who pass their trade tests (All India Trades for the purpose of providing training.
Tests) obtain a National Apprenticeship Certificate.
C. Scheme for Higher Education Youth in
However, such certificates remain outside the formal
educational system and are therefore relatively Apprenticeship and Skills (SHREYAS)
unattractive to potential entrants.
The objective of scheme is to provide industry
Low Status of Apprentice Training: India has a very apprenticeship opportunities to the general graduates
long tradition of informal training and workplace exiting in April 2019 through the National
learning. This tradition is preserved today in the Apprenticeship Promotion Scheme (NAPS).
informal apprenticeship system' that exists alongside the It aims to enhance the employability of Indian youth by
formal system.
providing on the job work exposure and earning of
stipend. The scheme is for students in degree courses.
12.5.6 Government Initiatives to primarily non-technical, to introduce employable skills
Promote Apprenticeship in India into their learning, promote apprenticeship as integral to
education.
A. National Apprenticeship Promotion
Scheme 12.6 Entrepreneurship
The National Apprenticeship Scheme seeks to promote Development in India
apprenticeship training and incentivize employers who
wish to engage apprentices. It aims to increase the Entrepreneurs play an important role in the economic
engagement of apprenticeship from 2.3 Lakhs to 50 development of a country. Successful entrepreneurs
Lakhs Cumulatively by 2020. innovate, bring new products and concepts to the
market. improve market efficiency, build wealth, create
There are two Components to the Scheme: jobs, and enhance economic growth. De novo firms that
Reimbursement of 25% of prescribed stipend subject to unleash creative destruction shift surpluses from rent
a maximum of 1500/- per month per apprentice by the seeking large producers to consumers and broader
Government of India to all employers who engage society
apprentices.
12.6.1 Initiatives to Boost
Sharing of the cost of basic training in respect of fresher
apprentices (who come directly for apprenticeship Entrepreneurship
training without formal training) limited to 7500/- per
Micro Units Development and Refinance Agency
apprentice for a maximum duration of 500 hours in 3
(MUDRA) Scheme
months.
Self Employment and Talent Utilisation (SETU)
The scheme covers all categories of apprentices except
the Graduate, Technician and Technician (Vocational) Atal Innovation Mission
apprentices which are covered by the scheme
administered by Ministry of Education (erstwhile Startup India Scheme
Ministry of Human Resource Development) and is
A Scheme for Promotion of Innovation, Rural Industries
implemented by Director General of Training (DGT)
and Entrepreneurship (ASPIRE)
B. National Employability Enhancement Scheme India Aspiration fund under SIDBI to invest in
Mission (NEEM) various venture funds.

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12.6.2 Challenges To Catalyse a culture shift to encourage entrepreneurship.

Entrepreneurship In India 12.6.4 Way Forward

Lack of incentive structures for entrepreneurship. Introducing competitions to solve pressing economic
Lack of adequate business incubators to support early- and social challenges. For ex. Hackathons etc in which
stage ventures. new budding ideas for new companies will come out.

Inadequate access to capital and insufficient impact Harnessing corporate funds to Finance R&D
assessment. Gaps in education and work-readiness. Improving efficiency of incubators
Lack of ease of business as compared to advanced
entrepreneurial economies, issues of taxation (Angel Increasing amount of funding to business incubators
Tax etc.), intellectual property regime, complex labour
Creating virtual incubators.
laws and infrastructure deficit. A cultural affinity for
stability with emphasises job security over risk taking. Link funding with an institutionalised annual ranking
Exit nonperforming incubators.
Stigma over failure.
Strengthening links between incubators and corporate
Bias against hiring non-engineers and those from non-
sector:
elite universities.
Reforming education sector workers.
Loss of top talent to other countries.
Providing access to entrepreneurial courses
Trust deficit between government and private sector.
Strengthening Intellectual Property Rights
12.6.3 Government Initiatives to
Improving ease of doing business.
Promote
Aatmanirbhar Bharat provides a truly watershed
Entrepreneurship in India moment in our history to ignite the innovative
Pradhan Mantri Yuva Yojana (Yuva Udyamita Vikas entrepreneurial spirit of New India by focusing on
Abhiyan) strengthening the above pillars

The objective of the scheme is to create an enabling 12.7 Social Security Schemes For
ecosystem for entrepreneurship development through
Entrepreneurship education and training; advocacy and Employees
easy access to entrepreneurship support network and
promoting social enterprises for inclusive growth. A. Employees' Provident Fund (EPF)
The scheme aims to educate and equip potential and Employees Provident Fund is a social security scheme
early-stage entrepreneurs by developing and delivering aimed at salaried individuals run by EPFO which comes
entrepreneurship education to all citizens free of charge under the labour ministry.
through Massive Open Online Courses (MOOCs) and
Coverage: Organizations that employ 20 people or more
other online programmes.
need to offer EPF benefits to their employees.
It also seeks to:
It is compulsory only for those who earn up to 15,000 a
Support entrepreneurs through Entrepreneurship Hubs month have to contribute 12% of their basic salary plus
(E-Hubs) by establishing a National Entrepreneurship dearness allowance to EPF. The employer contributes
Resource and Coordination Hub to coordinate and an equal percentage (12%) to the corpus out of which
support entrepreneurship development programmes. 3.67% goes to the EPF and the rest 8.33% goes towards
employees' pension scheme (EPS). For those who ear
Connect entrepreneurs in enabling networks of peers, above the threshold of 15,000, contribution to EPF S
mentors, funds and business services through a web optional.
based online marketplace.

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B. Pradhan Mantri Rozgar Protsahan Yojana Scheme is primarily focussed on unorganised workers,
(PMRPY) but any Indian citizen in the age-group 18 to 40 years
can join through their Savings bank account or post
Under this scheme, the Government is paying 12 per office savings bank account. The Government
cent of employer contribution to EPFO in respect of the Contribution is 50% of total prescribed Contribution
new employees drawing salary up to 15,000 per month upto 1000 per annum.
for the first three years of their employment. The
scheme had ended on 31st March 2019. 12.8 Labour Reforms
C. Atmanirbhar Bharat Rojgar Yojana 12.8.1 Introduction
A new scheme to incentivize job creation during Labour is mentioned in concurrent list of Seventh
COVID-19 recovery has been launched. The scheme
Schedule of the Indian Constitution which means both
will be effective from October 1, 2020 and operational the Union and the State have the power to make laws
till 30th June 2021
regarding this subject. For any industry, labour is one of
The Central Government would provide subsidy for two the most essential constituent apart from capital. And if
wars in respect of new eligible employees engaged on industries have to grow to its true potential in India then
or after 1st October 2020 of upto 24% (Employee's labour reform is needed
contributions (12% of Wages) & Employer's Labour reforms essentially mean taking steps in
contributions (12% of wages)) for establishments increasing production, productivity, and employment
employing less than 000 employees. For establishments
opportunities in the economy in such a manner that the
employing more than employees Only Employee's EPF interests of the workers are not compromised. It means
contributions 02% of EPF wages) will be contributed by
skill development, retraining, redeployment, updating
the Centre. Employees' State Insurance (ESI) knowledge base of workers teachers, promotion of
The Employees State Insurance is an integrated social leadership qualities, etc. Labour reforms also include
security scheme tailored to provide socio-economic labour law reforms
protection to the workers in the organized sector and
Labour laws are concerned with the trade union rights
their pendants, in contingencies, such as Sickness, of the workers, industrial relations and job security and
Maternity and Death or Disablement due to an
policies relating to wages, bonus and other incentive
employment injury or occupational hazard. The wage schemes. Labour law reforms are of great important as
ceiling of the same is 121000/- per month. the laws enacted in the labour market aim at regulating
E Pradhan Mantri Shram Yogi Maan-Dhaan the market, protecting employment and ensuring social
security of workers.
PM Shram Yogi Maandhaan Yojana is a voluntary and
contributory pension scheme wherein the contribution E 12.8.2 Need for Labour Reforms in
made on a 50:50 basis by subscriber and Central India
Government. This scheme is applicable only for
organised workers earning less than 15,000 monthly Labour laws are under concurrent list. Currently, there
salary and in age group 18-40 years. are 44 labour laws under the purview of Central
Government and more than 100 under State
It seeks to provide a minimum assured pension of Governments, which deal with a host of labour issues:-
3000/- per month after attaining the age of 60 years and
a family pension on the death of subscriber. The Low Employment Elasticity: Even though, the Indian.
contribution by subscriber Depends upon age of entry. Economy has grown rapidly, it has failed to create
sufficient number of jobs leading to low employment
F. Atal Pension Yojana elasticity.
A Pension Yojana is a voluntary and contributory Archaic Labour Laws: Labour laws need to be
pension scheme which seeks to provide guaranteed reoriented to address the emerging needs of the service
pension of ₹1000 to 5000 (depending upon sector and the new technology intensive manufacturing
contribution) receivable at the age of 60 years. The sector.

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Multiplicity of Labour Laws: This not only leads to driving up aggregate demand and building and
significant increase in the compliance costs for the strengthening the middle class, and thus spur a phase of
firms and also gives scope for corruption and sustainable and inclusive growth.
harassment.
Minimum wages can promote social justice without any
Poor Coverage of Workers: Cover only around 10% of major negative implication for employment if wages are
the workforce employed as formal workers, remaining set at an adequate level.
90% informal workers face significant challenges in
terms of poor wages, working environment and lack of B. Types of Wages
social security benefits Minimum Wage: International Labour Organisation
Problem of Missing Middle: The labour law imposes defines it as "the minimum amount of remuneration that
compliance costs on the mid-sized and large firms and an employer is required to pay wage earners for the
incentives the small firms to stay smaller. This in turn work performed during a given period, which cannot be
adversely affects the job creation in the Indian economy reduced by collective agreement or an end contract".
The minimum wage includes the bare need of life like
Lack of Flexibility to the Firms: Labour laws fail to food, shelter, and clothing.
provide necessary flexibility to the firms. For example:
Industrial Disputes Act (IDA) requires firms employing Living Wage: It is the wage needed to pr minimum
more than 100 workers to seek permission from their income necessary to pay for basic needs based on the
respective State Governments to retrench or lay off cost of living in a specific coming In addition to bare
workers. needs, a living wage in education, health, insurance, etc.

Obstacle to Human Capital Formation: The industries Fair Wage: A fair wage' is a mean between living wage'
play crucial role in skill development. However, as and 'minimum wage".
stated before, labour laws discourage firms from Starvation Wage: It refers to the wages which a
employing a large number of permanent workers and insufficient to provide the ordinary necessities of life.
steer them towards employing more casual or contract
workers. The firms do not invest in upgrading the skills C. Features of Code on Wages 2019
of the informal workers leading to lack of human capital
formation. The new wage code removes the multiplicity of
definitions, which can significantly reduce litigation as
Reduce the Global Competitiveness: The Labour- well as compliance cost for employers. The new Act
intensive industries in India such as Textile and Leather links minimum wage across the country to the skills of
have remained mainly informal in nature due to labour the employee and the place of employment
policies.
It seeks to universalizes the provisions of min wages
12.9 New Labour Codes and timely payment of wages to all employee
irrespective of the sector and wage ceiling
The New Labour Codes were adopted on the
It seeks to ensure "Right to Sustenance" for every
recommendation of Second National Commission On
worker and intends to increase the legislative protection
Labour (2002), which the suggested consolidating 100
of minimum wage.
State laws and 40 Central laws across industries
Occupations and regions. A National Floor Level Minimum Wage will be set by
the Centre and will be revised every five years, while
12.9.1 Code on Wages 201 states will fix minimum wages for their regions, which
cannot be lower than the floor wage.
A. Need for the Code on Wages In India, labour market
preys on excess availability of workers, therefore It subsumes the following four labour laws.
workers are not able to demand fair minimum wages
and continue to live a precarious life. The Payment of Wages Act, 1936

An effective minimum wage policy that targets the The Minimum Wages Act, 1948
vulnerable bottom rung of wage earners can help in
The Payment of Bonus Act, 1965

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The Equal Renumeration Act, 1976 Delay in Implementation: Even after more than 2 years,
the Code on Wages along with the labour codes have
The code also reduces compliance burden since 4 laws not been notified by the Government. The Government
have been subsumed into a single code. It ensures Ease was expected to implement the labour reforms from
of Doing Business as it replaces inspector with April 1, 2021, but it has been delayed further.
inspector cum facilitators to handle inspections. The
Code also. provides for inspection which is web based Prompt Race to the Bottom: State Governments ca
and automatic, thereby eliminating any corrupt practices compete with each other to lower the minimum wage so
which were earlier carried by the Inspectors. as to attract private sector investment. This go against
the interests of the workers
D. Concerns With Code on Wages 2019
Poor Consolidation of Labour Laws: Earlier the number
Lack of Methodology for Fixing Minimum Wages: The of provisions were incorporated in the Ag itself, but
Code does not outline the methodology for fixing an now under the Code on Wages 2019 these provisions
adequate minimum wage. It completely ignores the have been converted into rule to be formulated by the
formula, which was unanimously recommended by the Government Hence if we combine the Code of wages
Indian Labour Conference (ILC) as well as the Supreme 2019 along with the rules formulated under it, it would
Court ruling in the Raptakos Brett case of 1992, be much bulkier and mor complex as compared to
wherein the Supreme Court advocated the concept and previous 4 laws
the right of living wage. According to this formula,
wages should be set by taking into account expenses on Discretionary Powers: Minimum wage will determined
food, clothing, fuel and lighting, education and according to the skill of the employee, difficulty of
healthcare as well as social costs such as marriages, work, geographical location This strengthens the
festivals etc. This methodology prioritised the needs of discretionary powers of administrators.
the workers, rather than viewing them merely as factors
Inspection Framework: The rules do not clarify the
of production.
governance and institutional structure for labour
Deduction of Wages Clause: The new law provides for inspection system". The rules propose an ad-hoc unclear
the arbitrary deduction of wages (upto 50% of monthly mechanism called "inspection scheme The scheme
wage) based on performance, damage or loss, advances provides for appointment of Inspector cum-Faciliatory
etc. The deduction clause will lead to reduced by notification by the appropriate government. This
bargaining power and right of association of workers. may lead to the revival of inspector raj system in the
The workers will not be able to demand even basic labour market.
work rights in fear of wage deduction. In India, the
Employer Friendly rather than Worker Friendly The
informal sector employers dominate the workers due to
penalties/fines imposed under the Code o Wages, 2019
caste and higher social status, therefore the above
are quite meagre and hence may not be sufficient to
provision may have the potential to become a handy
discourage the firms from violation d the law. Hence,
tool for exploitation of these workers.
the law can be considered to be mere paper tiger.
Lower National Level Minimum Floor Wages: Anoop
Grievance Redressal Mechanism: The Wage Code takes
Satpathy Committee (2019) recommended the
away the jurisdiction of courts in providing justice to
government to increase the national minimum wage to
workers who have faced violations with respect to their
375 per day. However, as of now, the minimum wages
wages. This means that workers can no longer access
is still lower at just 178 per day. It has been alleged that
courts, but can only approach the quasi-judicial body
the new wage code will push the starvation wages
and appellate authority set u under the provisions of the
further by increasing the income capacity and
Wage Code.
purchasing power of the informal workers. This has
been highlighted by Supreme Court in his judgement in E. Way Forward
U. Unichoyi and Others vs. The State of Kerala case, The Government should focus on "Need Based
where it remarked that in an underdeveloped country Minimum Wage" covering nutrition, healthcare
which faces the problem of unemployment on a very education, housing and provisions of old-ag Therefore,
large scale, it is likely that labour offers to work even on guaranteed minimum wage should treated as a
starvation wage.

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fundamental constitutional right for every citizen of Benefits the worker since the Code entitles fixed term
India. employees to the same benefits (such as medical
insurance and pension) and conditions of work as are
According to the new law, the revision of minimum available to permanent employees.
wages is to be done after every 5 year, which is quit a
long period considering the volatility in the mark Improve the conditions of temporary workers in
Therefore, minimum wages should be adjusted t comparison with contract workers who may not be
inflation so as to align the wages to market volatility be provided with such benefits.
The National Commission for Labours should formed to
streamline the issues and challenges of labour market 3. Reasons For Opposition
and fixing discrepancies in national level minimum Unequal bargaining powers between the worker and
wage computation. employer could affect the rights of workers.
Indian Economy Employer has the power to renew contracts and hence
For the minimum wage system to play a meaningful lead to Job Insecurity
role in aligning protection with the promotion of The Code does not restrict the type of work in which
Sustainable growth, it must be properly designed, its fixed term workers may be hired. Therefore, they may
goals clarified, and its enforcement made effective be hired for roles offered to permanent workmen.

4. In Spite of the above Provisions, Firms are

Continuing to Hire Contract Workers Instead of
12.9.2 Industrial Relations (IR) Code
Fixed Term Employees:
The Code provides for the recognition of trade unions,
Ideally, to encourage a shift away from contract workers
notice periods for strikes and lockouts, standing orders,
to fixed-term employees, the Government should have
and resolution of industrial disputes. It subsumes and
completely prohibited the use of contract labour in core
replaces three labour laws:
activities, that is, those activities for which the
The Industrial Disputes Act, 1947; establishment is set up and includes any activity which
is essential or necessary to the core activity. However,
The Trade Unions Act, 1926; the Industries have been allowed to hire contract
workers in core activities under certain conditions such
The Industrial Employment (Standing Orders) Act,
as a sudden increase of volume of work Such a
1946.
provision encourages the use of contract workers and
Major Changes brought by the Industrial Relations undermines the initiative of introducing fixed-term
Code are as following: employment

A. Provisions on Fixed Term Employment The cost of hiring contract workers continues to remain
lower than the cost of hiring fixed-term employees. This
1. Provision: The Code Introduces provisions on fixed is so because the fixed-term employees need to be
term employment. Fixed term employment refers to provided with benefits such as medical insurance,
workers employed for a fixed duration based on a pension, provident fund etc.
contract signed between the worker and the employer.
Reduced compliance cost for hiring contract workers
2. Benefits of Fixed Term Employment since it is the staffing companies that are required to
Allow employers the flexibility to hire workers for a incur monitoring and litigation costs. Rapid growth of
fixed duration and for work that may not be permanent staffing companies.
in nature: 5. Constraints: The Industrial Relations Code does not
Fixed term contracts are negotiated directly between the specify a minimum or maximum tenure for hiring fixed
employer and employee and reduce the role of a term employees. It does not specify the number of times
middleman such as an agency or contractor. the contract can be renewed. Also, it does not restrict
the type of work in which fixed term workers may be

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hired. The absence of such safeguards can, in fact, lead and should be avoided to the possible. After becoming a
to an erosion of permanent jobs. law, orders will not be dependent on whims and fancies
of executives of State Governments.
6. Addressing the Constraints Faced by Fixed Term
Employees: The Second National Commission on Without the need of a standing order in increased
Labour (2002) had recommended that no worker should industrial establishments due to the raised threshold the
be kept continuously as a casual or temporary worker process of hiring and firing workers will be more
against a permanent job for more than two years. The flexible and faster for employers which would result
International Labour Organisation (ILO) has increased employment.
highlighted that several countries restrict the use of
fixed term contracts by: 4. Problems with the Changes: This means that Small
Scale Industries employing less than 300 workers would
Limiting renewal of employment contracts (Example- no longer be required to lay down standing orders and
Vietnam, Brazil and China allow two successive fixed hence may lead to exploitation of workers
term contracts).
C. Closure And Lay-Off
Limiting the duration of contract (Example- Philippines
limits it up to a year). Limiting the proportion of fixed 1. Provision: Earlier, an establishment having at least
term workers in the overall workforce. 100 workers was required to seek prior permission of
the government before closure, lay-off, or retrenchment
These recommendations of the Second National The threshold has been increased to 300 workers
Commission on Labour and ILO need to be
incorporated. 2. Problems: Enable small scale Industries to hire and
fire workers at will.
B. Applicability of Standing Orders
D. Strikes and Lockouts
1. Provision: The 2020 IR Code provides that all
industrial establishment with 300 workers or more must 1. Provision: The code mandates prior notice of 14 days
prepare standing orders on the matters related to: before a strike or lockout. It also introduces new
conditions for carrying out a legal strike. The time
Classification of workers, period for arbitration proceedings has been included in
the conditions for workers before going on a legal strike
Method for termination of employment,
as against only the time for conciliation a present.
Grievance redressal mechanisms etc.
It mandates that no person employed in any industrial
2. Change from the Previous Regime: Industrial establishment shall go on strike without a 60-day notice
Employment (Standing Orders) Act, 1946 makes it and during the pendency of proceedings before a
obligatory for employers of an industrial establishment Tribunal or a National Industrial Tribunal and sixty days
where 100 or more workers are employed to say define after the conclusion of such proceedings
the conditions of employment and rus d conduct for
2. Problems with the Changes: The Code impacts the
workmen, by way of standing order services rules and
ability of the workers to carry out Strike or lock-out
to make them known to the women employed. The
which in turn decreases their bargaining power.
Industrial Relations Code: 202502 raised the threshold
for the requirement of a standing order to over 300 E. Power to Exempt Industries
workers which implies that strategy establishments with
up to 300 workers wit required to furnish a standing Provision: The Code provides the government with the
order power to exempt any new industrial establishment or
class of establishment from any or all of its provisions if
3. Advantages of the Changes: It was earlier suggested
it is in "Public Interest". At present, a person employed
by the Standing Committee on Labour which also in a public utility service cannot go on strike unless they
suggested that the threshold be increased accordingly in give notice for a strike within six weeks before going on
the Code itself and the words 'as may be notified by the strike or within fourteen days of giving such notice,
Appropriate Government' be removed because reform which the IR Code now proposes to apply for all the
of labour laws through the executive route undesirable
industrial establishments.

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2. Problems with the Changes: Factories Act, 1948 1952, the Maternity Benefit Act, 1961, and the
permitted exemptions from its provisions only in cases Unorganised Workers' Social Security Act, 2008.
of public emergency and limited such exemption to
three months. However, under the IR Code 2020 there is Provisions of the Social Security Bill, 2020
no limit on time duration for which Industries can be A. Social Security Entitlements 1. Provision: The 2020
exempted. Further, the term "Public Interest" could be Bill states that the Central Government through
interpreted broadly and hence government has wide notification provide that industries employing workers
discretion in providing exemptions. above a certain threshold level would be required to
Concerns with Industrial Relations Code, 2020 make contributions towards various social security
benefits such as Provident Fund, Insurance etc. The
It will water down the labour rights for workers in small Code also provides a uniformity in determining wages
establishments having less than 300 workers and would for the purpose of social security benefits.
enable companies to introduce arbitrary service
conditions for workers. 2. Advantages of the Changes: It has provided a wide
definition for wage. Specific exclusions with ceilings
It will give tremendous amounts of flexibility to the have been provided for discouraging inappropriate
employers in terms of hiring and firing, dismissal for structuring of salaries to minimise social security
alleged misconduct and retrenchment for economic benefits.
reasons will be completely possible for all the industrial
establishments employing less than 300 workers which 3. Reasons For Opposition: Presently, the threshold
is complete demolition of employment security. level for the contribution towards Social Security
Scheme has been provided under the law itself. For
The new conditions for carrying out a legal strike example, Employees Provident Fund (EPF) Act, 1952 is
elongate the legally permissible time frame before the applicable to all Industries employing more 20 people.
workers can go on a legal strike, making a legal strike The EPF is not compulsory for all employees. Only
near impossible. those who earn up to 15.000 a month have to contribute
12% of their basic salary plus dearness allowance to
It has expanded to cover all industrial establishments EPF. The employer contributes an equal percentage
for the required notice period and other conditions for a (12%) to the corpus out of which 3.67% goes to the
legal strike even though the Standing Committee on EPF and the rest 8.33% goes towards Employees'
Labour had recommended against it beyond the public Pension Scheme (EPS).
utility services like water, electricity, natural gas,
telephone and other essential services, as is the case at However, the 2020 Bill gives the discretionary power to
present. the Government to lay down the criteria for the
eligibility for the contribution to Social Security
It has also proposed to set up a re-skilling fund for Schemes. This has been criticised on account of
training of retrenched workers with contribution from following reasons:
the employer, of an amount equal to 15 days last drawn
by the worker. The mention of 'other sources' for Excessive Delegated Legislation.
funding the re-skilling fund is vague. The reskilling
fund is arbitrarily framed as the Code has no idea from Exclusion of Informal Workers in the Small-Scale
where the funds for the same will come apart from Industries from Social Security benefits.
employers' contributions. These ambiguities are left to Against the Idea of Universal Social Security put
the rule-making processes and the bureaucrats and, forward by National Commission on Labour B.
further, there are unclarities over who will reskill the Expanded Coverage of Workers
workers and how adequate the funding will be
1. Provision: The government can make provisions for
12.9.3 Code on Social Security 2020 registration of various categories of workers-
Unorganised, Gig Workers and Platform workers. It can
This Bill seeks to provide social security benefits such also notify schemes for their social security.
as Provident Fund, Insurance etc. to the workers. It
seeks to replaces nine laws related to social security. Gig workers refer to workers outside the traditional
These include the Employees' Provident Fund Act, employer employee relationship.

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Platform workers are those who access organisations or Stringent Penalties: Any failure to deposit employee
individuals through an online platform and provide contributions not only attracts a penalty of 21.06.000
services or solve specific problems. but also imprisonment of one to three years.

2. Advantages of the Changes: The Code has widened In case of repeat offence, the penalties and prosecution
coverage by including the unorganised sector, fixed is severe, and no compounding is permitted for repeated
term employees and gig workers, platform workers, offences.
inter-state migrant workers etc. This has led to enhanced
coverage of social security. Concerns with the Social Security Bill

3. Problems with the Changes: In spite of the effort of Online Registration Process: The onus lies on informal
the government to categorise the type of worker, there is workers registering as beneficiaries, further they do not
a lack of Clarity in the definition of Unorganised have digital literacy and connectivity. Also, there is a
Worker, Gig Worker or Platform Worker. For example, lack of awareness among informal workers regarding
Ola Cab Driver can be considered to be belonging to all socia security schemes.
the 3 different categories simultaneously.

C. Mandatory Linking with Aadhaar Lack of Inter-State Arrangement and Cooperation:

1. Provision: The code provides that employee or a Unorganised workers are spread across the length and
worker (including an unorganised worker) must provide breadth of India. Implications of this code would be too
his Aadhaar number to receive social security benefits. varied across States to be administered
The Code also mandates a National Database and Complicated Processes & Overlapping
Registration Portal.
Jurisdiction: Providing holistic social security cover for
2. Advantages of the Changes: With the aim of making the unorganised workforce in a simple and effective
a national database for unorganised sector workers, manner is lost in the Centre-State procedural
registration of all these workers would be done on an complications and jurisdictional or institutional overlap
online portal and this registration would be done on the
basis of self certification through a simple procedure. Maternity Benefit: Women engaged in the unorganised
All records and returns have to be maintained sector remain outside the purview of maternity benefit.
electronically. This will lead to ease of registration and
Employees Provident Fund: For informal sector
updation and will consequently give a push to digital
workers, access to employees' provident fund remains
India.
unfulfilled too in the new code.
3. Reasons for Opposition: This may violate the
Payment of Gratuity: Although payment of gratuity was
Supreme Court's judgement in Puttaswamy Case, 2017.
expanded in the new Code, it still remains inaccessible
In its judgement, the Court had ruled that the Aadhaar
for a vast majority of informal workers
card/number may only be made mandatory for
expenditure on a subsidy, benefit or service incurred Way Forward
from the Consolidated Fund of India.
The Social Security Code 2020 merges existing social
Other Provisions of the Social Security Code security laws and attempts to include informal workers
Consultative Approach: It has brought in a facilitating
approach by the authorities. Unlike the existing role of within the ambit of social security administration.
inspectors, the Code provides for an enhanced role However man examination of the Code reveals that
inspector-cum-facilitator whereby employers can look universalisation of social security remains an unfulfilled
for support and advice to enhance compliances aspiration.

Career Centre: To enable that demand for tuman The provision of social security could be used to
resources is met and to monitor employment formalise the workforce to a certain extent. Employers
information, career centres will be established should be made to own up to the responsibility of
providing social security to their workers.

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As the State has a responsibility but the primary 2. Reasons for Opposition: The Code seeks to put the
responsibility still lies with employers since they are cart before the horse, for the provisions of the code to
taking advantage of workers' productivity. materialise, there is a need to implement 'One- Nation
One Ration Card' faster, Need to have proper
coordination between Centre and States.

D. Other Provisions of Occupational Safety, Health and

Working Conditions Code Bill Mandatory Registration:
12.9.4 Occupational Safety, Health All establishments covered by the Code must be
registered with registering officers.
and Working Conditions Code Bill
Advisory Bodies: The Bill provides for the setting up of
The Code seeks to regulate health and safety conditions Occupational Safety and Health Advisory Boards
of workers. It subsumes and replaces 13 labour laws
relating to safety, health and working conditions. These by the Central and State Governments at the national
laws include: and state level. Annual Health Check-up: It has been
made mandatory in factories and its charge will be
Factories Act, 1948; Mines Act, 1952; borne by the employers.
Dock Workers Act, 1986; Duties of Employers: Appointment letters for all
workers (including those employed before this code).
Contract Labour Act, 1970; Inter-State Migrant Workers
underlying their rights to statutory benefits.
Act, 1979.
Policy on Working Hours: Overtime work must be paid
A Threshold for Coverage of Establishments 1.
twice the rate of daily wages. Female workers, with
Provision: The 2020 Bill defines a factory as any
their consent, may work past 7 p.m. and before 6 a.m.,
premises where manufacturing process is carried out
if approved by the Central or State Government.
and it employs more than: (i) 20 workers, if the process
is carried out using power, or (ii) 40 workers, if it is Leave policy: No employee may work for more than six
carried out without using power. days a week. Workers must receive paid annual leave
for at least one in 20 days of the period spent on duty.
2. Reasons for Opposition: Safety standards should be
applicable to all Industries irrespective of size. Working Conditions and Welfare Facilities: The
employer is required to provide a hygienic work
B. Power to Exempt Industries
environment with ventilation, comfortable temperature
1. Provision: The Code empowers the Government to and humidity, sufficient space, clean drinking water. and
exempt any new factory from the provisions of the latrine and urinal accommodations.
Code to create more economic activity and
employment.

2. Reasons for Opposition: Factories Act, 1948 provided

for exemption only in cases of public emergency and
for a limited time duration of 3 months. The new
provision has led to higher discretionary powers to
Government.

C. Benefits for Inter-State Migrants

1. Provision: The Code makes provision for the benefits

for Inter-State Migrant Workers in the form of:

Option to avail PDS either in Native State or state of

employment.

Insurance and Provident Fund Benefits. Create a

database of Inter-state Migrant Workers.

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Chapter – 13 13.2.1 Land Tenure Systems during

the British Rule in India
Land Reforms In India The British were formally granted revenue-collection
rights in these areas in 1765.
13.1 Introduction The Zamindari System (The Permanent Settlement):
Land Reforms is a planned and institutional This system created landlords that were entrusted with
reorganisation of the relation between man and land i.e. the responsibility of collecting rent from the cultivators.
changes introduced into system of land tenure and the The zamindars were used to act as intermediaries
farming structure. Therefore, it refers to efforts to
between the cultivators and the state. On any failure to
reform the ownership and regulation of land in India. discharge their obligations, the estates of the zamindars
Objectives of Land Reforms: were liable to be sold by the government for the
realization of their dues.
Restructuring of agrarian relations to achieve an
The Ryotwari System: The new system proceeded to
egalitarian structure
make a revenue settlement directly with the tenants or
Elimination of exploitation in land relations cultivators, not permanently, but temporarily without
any need of creating the zamindars.
Actualization of the goal of "land to the tiller"
Increasing agricultural production and productivity. The Mahalwari System: Under this system, the whole
village was treated as a unit and the village lands were
The measures adopted to achieve the above objectives held jointly by the village communities. "Primarily each
included abolition of intermediaries between the state man cultivates and pays for himself but ultimately, he is
and tenants, tenancy reforms, fixation of ceiling on responsible for his co-villagers and they for him, they
landholdings and consolidation of holdings. are ultimately bound together by a joint responsibility
"Land" falls under State list (as per Seventh Schedule of
the Constitution), hence state legislatures have to enact
13.2.2 Outcomes of Landowning
the land reforms related legislations. Therefore, there is Systems During the Colonial Era
no uniformity in land reforms across India (Different
states have different provisions). Extreme peasant indebtedness due to sky-high tax rates.

Creation of a class of rich few who mostly exploited the

13.2 Background of Land poor peasant.
Reform Peasants lived in constant fear of eviction.
The British Empire in India lasted for nearly two Poverty was entrenched into the farmer class.
hundred years. The British first arrived as traders; The
English East India Company received a permit in 1613 Thus in a nutshell, a rich-minority-landowning class
from the Mughal emperor, Jahangir, to build a factory at and poor- landless-peasant class became symbols of
Surat. Their empire building began with their victories Indian agrarian society. As the ownership of the land
in the battle of Plassey in 1757 and the battle of Buxar stayed with the rich Zamindar class, they became more
in 1764, as a result of which they obtained political powerful year after year. accumulating wealth. The
control of the modem states of Bengal and Bihar. peasants, who actually cultivated the land, were often in
poverty and remained landless.

13.3 Land Reforms Since

Independence
13.3.1 Zamindari Abolition

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Zamindari abolition Act aimed removing layer of 13.3.2 Tenancy Reforms

intermediaries who stood between cultivators and the
state. A. Background
Legislations were passed by the states to abolish such There were two types of tenants occupancy or
intermediaries. The first such legislation was enacted in permanent tenants (Superior Tenants who can not be
Madras in 1948. evicted against their will) and tenants at will (Inferior
Provisions of Zamindari Abolition Acts Ownership and Tenants who can be evicted easily).
land revenue related rights of the zamindars were Apart from above two types of tenants, Share croppers
abolished. Lands transferred to the (superior) tenants. and landless labourers are other types who work for the
State Governments gave compensation to Zamindars. owner and tenants (Superior or Inferior).
Transferred the ownership of common land/resources Tenants at will and share croppers experienced high
(previously held by Zamindars) to Village Panchayat. degree of exploitation (through frequent enhancement
Land which was cultivated by the zamindar himself was of rent, eviction at minor pretexts etc).
exempted from purview of these Acts. Zamindar was
permitted to keep this land. Farmer was made directly Tenancy legislations have taken three forms: (1)
liable for paying land revenue to the State Government Regulation of Rents: It is important so that fixed and
(Because Zamindars no longer the 'middleman' in land rational rate of rent could be paid by the tenants. The
revenue hierarchy). rent paid by the tenants was exorbitant, between 35% to
75% of the gross produce in India. To correct this, fair
8. Achievements of Zamindari Abolition rent was fixed at 20% to 25% of the gross produce level
in majority of the states.
1,700 lakh hectares of land was acquired from the
intermediaries (zamindars) and as a consequence, about (1) Security of Tenure: Importance of Security of
two crore tenants were brought into direct relationship Tenure: Insecurity of tenure led to lack of
with the government. initiative on the part of the cultivator (like soil
improvement, digging of well or tube-well and
Millions of cultivators who had previously been weak
tenants or tenants-at-will became superior tenants. construction of embankment etc) to improve
productivity of land. Three types of
The entire process occurred in a democratic framework legislations were framed by the states for
unlike the land reforms in China, Russia or Cuba. providing security of tenure:
This disarmed the Zamindars of economic exploitation
In the first type, tenants were given full security and
and dominance over others. Thus, transferred power
owners had no right of personal cultivation. E.g. in UP,
from Zamindars to peasants.
Bengal, Delhi etc.
Rise of middleclass.
In the second type, owners had the right to resume a
C. Limitations of Zamindari Abolition limited area for own cultivation but tenant should have
a minimum area. for cultivation. E.g. in Kerala, MP,
After the laws were passed, Zamindars went to the Gujarat. Maharashtra etc.
courts for stay on the law implementation which greatly
reduced the effectiveness of these legislations. In the third type, owners can resume cultivating certain
area but tenant was not entitled to retain a minimum
Personal cultivation-Many states permitted Zamindars area for cultivation. E.g. in J&K.
to keep a part of their land for personal cultivation but
the vagueness of the definition was misused to evict (i) Conferring rights of ownership for tenants
(Ownership Right): Many state laws permitted tenant to
tenant farmers and keep most of the land with
acquire the land if he/she pays 10/20/50 times the
themselves.
annual rent to the landowner.
The legislation only recognized zamindars as
However, in reality, legislation for conferment of
intermediaries, thus leaving out a class of other
ownership rights could not yield good results. because
intermediaries.

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many tenants are incapable of buying land from the (ii) After 1972, family was treated as the basis of land
landowners and many of them are unwilling to do so. holding. The ceiling limits were also lowered in the
second phase with differences varying as between
B. Limitations of Tenancy Reforms irrigated land with two crops, irrigated land with one
crop, and dry land.
Delays in Implementation: Due to the inordinate delays
in law making, landowners evicted potential B. Limitations
beneficiaries (tenants) before the law came into force.
The enforcement of the ceiling law was preceded by a
Oral Agreements and Underground tenancy: Most public debate spread over several years, and therefore
tenancy agreements were oral and informal, hence there was a long delay between introduction and
tenants could not prove anything in court to assert their passage of the Act. This enabled landowners to
rights. These laws pushed tenancy to underground i.e. in manipulate land records leading to fictitious (benami)
concealed form making tenants more vulnerable to and fraudulent partitions of lands among their relations,
exploitation. friends, fictitious trusts, etc.
Women, SC and ST did not get much of benefits from Law provided a number of exemptions for sugarcane
these reforms due to inherent patriarchal nature of the farms, orchards, grazing land etc. They exemptions
society and social hierarchy. were used for vested interests.
Tenancy laws framed in different states provided for Supreme Court ruled that compensation should be paid
"personal cultivation" under which land can be taken at market rate hence it led to a higher expenditure by the
back by the landowners. In this manner, zamindars were government.
able to hold large piece of land in their family where
cultivation was done by hired agriculture labour which The definition of family under the legislations made
brought back the phenomena of absentee land- lordism. possible to still amass huge land holdings like many
states provided extra-ceiling if family exceeded five
13.3.3 Land Ceiling Laws members.

Ceiling means fixing the maximum size of land holding During that era, more than 70% of the landholdings
that a family can own. were below 5 acres. Yet the ceilings were fixed too
high, example Andhra Pradesh had upto 312 acres of
A. Objective land ceiling (depending upon the quality) By 1992 only
2 million hectare land which is < 2% was declared as
To reduce the existing disparities in the pattern of land-
surplus and distributed among 4.76 million peasants.
ownership and make some land available for
distribution to landless agricultural workers, the Second
13.3.4 Consolidation of Landholdings
Five-Year Plan (1956-1961) recommended the
imposition of ceilings on agricultural holdings. Fragmented and subdivided landholdings as well as
small-sized holdings have made Indian agriculture un
It was envisaged that land above a certain limit, also
remunerative.
called surplus land, would be acquired by the State and
redistributed among the landless workers, small farmers So consolidation of these lands is necessary to boost
or handed over to the village panchayat to enable them efficiency and productivity of Indian agriculture.
to create economic holdings.
Consolidation of holdings means bringing together in
Legislation on land ceiling in India has been enacted in one compact block all plots of land farmer which are
two phases: scattered all over the village. Under the scheme all land
in the village is first pooled into one compact block and
(i) Upto 1972, landowner was treated as the unit of
it is divided into smaller blocks called chak and allotted
application. (Hence big farmers transferred their land to
to individual farmer.
sons, daughters, wives, relatives, and sometimes even
non-existent/dead family member to avoid crossing the Till 2001, nearly, only 1/3rd of the total cultivated area
ceiling). has been consolidated (mainly successful in the region

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of Green Revolution). Thus, the success story in this Attachment with Land: Farmers are unwilling to
regard is rather disappointing. surrender the rights of land in favour of the society
because they have too much attachment with it.
One of the reasons for the tardy progress of this aspect
of land reforms is the fear of small farmers that Lack of Cooperative Spirit: The spirit of cooperation
consolidation favours large farmers That is why the and love is lacking among farmers. They are divided in
threat of eviction of tenants from land out of various sections on basis like castes etc.
consolidation is the greatest.
Lack of Cooperative Spirit: The spirit of cooperation
A common complaint was that rich peasants were and love is lacking among farmers. They are divided in
getting the best land, while the small peasants get various sections on basis like castes etc.
marginal lands. So a major area rule was proposed. i.e.,
peasant would be given the holding where majority of Lack of Capital: The co-operative farming societies are
his land was situated. But it further led to eviction of also facing the capital shortage problem. Credit
tenants, as the landlord will find it more suited for facilities to these societies are also not sufficient.
personal cultivation Dishonesty: The management of cooperative often turns
out to be dishonest. The selfishness of the members
13.3.5 Co-Operative Farming makes the cooperative farming society ineffective.
Co-operative farming refers to an organisation that is Lack of Political Will: The apathy of the political class
voluntary in nature, where, the farmers pool their towards promotion of cooperative farming is also one of
resources in order to achieve common interests. In other the main reasons for their non-performance.
words, it is a co-operative among the farmers of limited
means. 13.4 Positive Effects of Land
A. Advantages of Cooperative Farming in Reforms
India:
Reduction of absentee ownership: There are enough
Economies of Scale: Indian agriculture is dominated by studies to indicate that the quantum of absentee
small land holdings due to which it is not economical to ownership in the 70s was much less serious than in the
go for mechanised farming. Cooperative farming 50s. Absentee ownership had reduced much more in un-
enables pooling of land and thereby, use of machines. irrigated areas, than in irrigated areas. The transfer of
land under the fore-warning impact of the tenancy and
As the size of farm increases, per hectare cost of using ceiling legislation to the resident cultivators was on a
high cost agricultural inputs (E.g. tractors, tube wells, much larger scale in dry areas.
threshers etc.) comes down.
The greed of the big landowners was kept in check.
Addresses the problem of fragmentation of holdings.
sub-division Collapse of the feudal structure.
Supply of Inputs: cooperative farming is in a better It led to an increase in the landless labour, as former
position to get adequate and timely supply of essential tenants were driven out.
agriculture inputs like fertilisers and seeds.
Rich peasants preferred to avoid wage related disputes
Fair Price of the Product: A co-operative farming with the new labour and thus preferred more
society can bargain in the market and sell the produce at mechanization.
a profitable price. The income of the individual farmer
will increase. 13.5 Poor Land Record
Guidance and Training: A co-operative society guides Management In India
the farmer to increase their efficiency and production.
Land titles are presumptive: The current system of land
B. Causes of Failure of Cooperative Farming: records was inherited from the pre-independence days
(zamindari system) and has not changed much since

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then. These land records provide information on who is adopting a conclusive system of titling will require
in possession of land, and not who the owner is. undertaking several measures. All existing land records
will have to be updated to ensure that they are free of
Registration of land refers to the registration of the any encumbrances. Information on land records, which
transaction, and not the land title. Such registration does is currently spread across multiple departments, will
not guarantee the title by the government. This implies have to be consolidated. Further, several changes in
that even bonafide property transactions may not always existing laws that govern registration and transfer of
guarantee ownership as an earlier transfer of the title. land, and institutional changes. in maintenance of land
could be challenged. records will also have to be.
Registration of property is not mandatory for all
transactions: Under the Registration Act, 1908, 13.6.2 National Land Record
registration of property is not mandatory for all Modernisation Programme
transactions. These include acquisition of land by the
government, court decrees, land orders, heirship
(NLRMP)
partitions, and property that is leased for less than one A. Background
year. Since heirship partitions do not require
registration, several property divisions are not recorded, The NLRMP was launched by the Government of India
and hence, do not correctly reflect who is in possession in August 2008 to:
f the property. This often leads to litigation. related to
rightful owner among heirs. Computerization of all records including mutations,

Poor maintenance of land records: Historically, land Modernize management of land records,
registration, and the maintenance of records has been Minimize scope of land/property disputes, Enhance
done manually. Documents are usually kept with the transparency in the land records maintenance system,
Revenue Department and are not easily accessible to the
public. This makes it difficult and cumbersome to Facilitate movement towards guaranteed conclusive
access land related data when trying to engage in a titles to immovable properties in the country,
property sale. An individual has to go back several
years of documents, including manual records, to find Digitise maps, upgrade survey and settlement of records
any ownership claims on a piece of property. thereby sustaining the same.

Multiple entities deal with land registration and records: B. Objectives of NLRMP
In the presence of multiple agencies responsible for
The main objective of the NLRMP has been to develop
registration and maintenance of records, it is difficult to
a modern, comprehensive and transparent land records
ensure that survey maps, textual data, and registration
management system. This aims to help in the
records match with each other and are updated. In
implementation of conclusive land-titling system with
addition, citizens have to approach several agencies to
title guarantee.
get complete information on land records.
C. Recent Developments
13.6 Reforms Undertaken to
In the Budget 2016, the digitisation of land records has
Improve the System of Land been re-launched under the National Land Records
Records Modernisation Programme (NLRMP). Benefits of
digitization:
13.6.1 Proposal of Conclusive Titling Modernisation of management of land records will
minimise the scope of land disputes, and enhance
In a conclusive titling system, the government provides
transparency in the land records maintenance system.
guaranteed titles, and compensation in case of any
ownership disputes. Achieving this will require shifting Status of a particular land would be available online
to a system of registered property titles (as opposed to Records pertaining to land under dispute before courts
sale deeds) as the primary evidence of ownership, and would also be available digitally Integration of land
having clear and updated land records. However, records with Aadhar which will help in monitoring the

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successful implementation of crop insurance scheme. A. Aims and Objectives of the Land
Every farmer's land would be linked to the Aadhar Acquisition Act, 2013
number after verification. Division of land could
happen accurately on digital maps leading to lesser To ensure a transparent process for acquiring land, in
land-related conflicts. Inheritance of land would be consultation with all the stakeholders and local
made easy resulting in reduction in property related governing bodies.
crimes.
To ensure minimum displacement of the existing
Online registration will remove any confusion about population, owning or staying on the land.
which land has been earmarked as government land The
government and revenue officials would have the exact To provide fair compensation to the families who are
details of land. affected or whose land has been acquired or livelihood
has been affected, because of the land acquisition.
Digitisation of land records will bring in transparency
which will make it difficult for people to evade price To provide adequate provision for rehabilitation and
tax. Land details availability could empower the resettlement of the families affected.
government to realise its industrialisation and smart
B. Key features of the LARR Act 2013
cities mission.
Compensation payment in rural areas up to 4 times the
Build up of local revenues through improved proceri tax
market value, whereas, for urban areas up to 2 times.
billing and collection will also be possible
Compensation will be provided to those who are
It would also reduce construction timeline and overall dependent on the land for their livelihood.
cost of development, benefits of which can be
To address the historical injustice, the Bill applies to
transferred by the developer to the consumer making
cases where no land acquisition award has been made.
property prices attractive.
Without the consent of the Gram Sabhas no land can be
acquired in the scheduled areas.
13.7 Land Management In India
One should not be dispossessed of the land till all the
13.7.1 Land Acquisition, payments are made and alternative sites have been
made available.
Rehabilitation and Resettlement Act
2013 In some cases, where PPP (public-private partnership)
projects are involved or private companies are taking
Land acquisition is a process by which the government acquisition, the Bill requires the consent of not less than
(state or union) can acquire private land for the purpose 70 per cent and 80 per cent, respectively (in both cases)
of infrastructure development, urbanisation or of those whose land is sought to be acquired.
industrialisation. In return, the government will pay a
suitable compensation to the land owner, as per the The Act requires that a Social Impact Assessment (SIA)
market value and would be responsible for the be conducted to identify affected families and calculate
rehabilitation and resettlement of the affected land the social impact when land is acquired.
owners. To safeguard food security and to prevent arbitrary
The Land Acquisition Act, also known as, the Right to acquisition, the Bill directs states to impose limits on
Fair Compensation and Transparency in Land the area under agricultural cultivation that can be
Acquisition, Rehabilitation and Resettlement Act, 2013, acquired.
regulates and governs the entire process of land If the land remains un-utilised after acquisition, the new
acquisition. The Act chalks out the provision for Bill empowers states to return the land either to the
providing fair remuneration to the land owners, owner or to the State Land Bank.
bringing transparency to the system and directs the
government to rehabilitate those who are most affected, No income tax shall be levied and no stamp duty shall
because of their land being taken away. be charged on any amount that accrues to an individual
as a result of the provisions of the new law.

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Where acquired land is sold to a third party for a higher Financing priority areas like water-shed development in
price within three years of acquisition, then 40 percent rainfed areas and wastelands development including
of the appreciated land value (or profit) will be shared afforestation.
with the original owners

In every project those losing land and belonging to the

SC or the ST, will be provided land equivalent to land C. Issues in Functioning of Land Development
acquired or two and a one half acres, whichever is lower Banks
(this is higher than in the case of non SC/ ST affected
families). Where the affected families belonging to the Loans given by them are predominantly for discharging
SC and the ST are relocated outside of the district, then of prior debts and not for purpose connected with land
they shall be paid an additional 25% rehabilitation and improvements. They are not able to raise sufficient
resettlement benefits to which they are entitled in funds although there debentures are guaranteed by the
monetary terms along with a onetime entitlement of State Governments
fifty thousand rupees.
There is no co-ordination between the activities of State
13.7.2 Land Development Banks in Co-operative Bank and Land Development Bank On
India account of red-tapism, there are the usual delays up to
more than a year in granting loans
A land development bank is a quasi-commercial type of
They give loans only up to 50 per cent of the value of
bank that provides services such as accepting deposits,
the land mortgaged. Thus, a very high margin is kept
making business loans, and offering basic investment
They adopt complicated procedures which ultimately
products. The main objective of the LDB is to promote
force the illiterate farmers to resort to moneylenders to
the development of land, agriculture and increase the
meet their financial requirements.
agricultural production. The LDB provides long-term
finance to members directly through its branches. D. Recommendations to Address these
A. Structure of the Land Development Banks Challenges

Primary Land Development Banks (PLDB): These Public Land Bank (PLB) at the Panchayat level is a
banks were originally organized to cover one or a few possible solution. This would regulate and rationalize
taluks in the district. At present they are eligible to land demand and supply. The PLB would take 'deposits
cover one development block. All landowners are of land from landowners wanting to lease out their land.
eligible to become members and borrow funds by The PLB would lease out the land under its command to
mortgaging their land. specially designated categories of disadvantaged
farmers such as marginal farmers, women, dalits, and
Central Land Development Bank (CLDB): These tribals, whether leasing as individuals or in groups.
members of the CLDBS are the PLDBS and a few
individual promoters. It grants long-term loans to
agriculturists through the PLDBSs and branches of
CLDBS.It raises funds through floating debentures,
which are guaranteed by the State Government.

B. Functions of Land Development Banks

Finance farm mechanization, horticulture and plantation
and land development and improvement.

Financing other non-land-based activities like dairy,

poultry, sheep and goat, fishery, bio-gas and bullock
carts since last few years.

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Employment: In India, this sector provides the

Chapter – 14 employment to around 45% of the workforce.

Agriculture in India Production: India achieved a record production of food

grains estimated at 276.37 million tonnes in 2019- 20.
Rice and wheat account for 75% of food grain
14.1 Introduction production.
India is a unique country from agricultural point of Agriculture in Federal Structure: Agriculture is part of
view. Its enormous expanse of level plains, rich soils, State List as per the Seventh Schedule of Indian
high percentage of culturable land, wide climatic Constitution
variety with adequate aggregate rainfall combined with
sufficient temperature, ample sunshine and long 14.2 Importance/Role of
growing season provide solid base to agriculture.
Agriculture
In a developing country like India, agriculture sector
and rural economy have a significant role in providing Agriculture is not crop production as popular belief
livelihoods, ensuring food security and providing holds - it's the production of food and fire from the
impetus to the growth of industries and service sectors. world's land and waters. Without agriculture it is not
possible to have a city, stock market, banks, university,
Basic Facts of Indian Agriculture church or army. Agriculture is the foundation of
civilization and any stable economy.
Area: India's total geographical area is 328 million
hectares. Out of this, 195 million hectare is gross Food and Nutritional Security: Agriculture provides
cropped area and 141 million hectare (45%) is net sown regular supply of food and nutrition to a huge size of
area. Gross Cropped Area (GCA) is the total area sown population of our country.
once as well as more than once in a particular year.
When the crop is sown on a piece of land twice, the area Poverty Elimination and Employment Generation:
Agricultural growth can reduce poverty directly, by
is counted twice in GCA. On the other hand, Net Sown
Area is the area sown with crops but is counted only raising farm incomes and providing employment, and
indirectly, through labour markets and by reducing food
once.
prices.
Irrigation: Net irrigated area is only 65.3 million
hectares. Rest of the agricultural land in India is Linkages with Other Sector: Higher incomes of farmers
maintained (>50%). increase the consumer demand for goods and services
produced by sectors other than agriculture. Such
GDP Contribution: The share of agriculture and allied linkages (or the 'multiplier effect') between growth in
sectors in Gross Value Added (GVA) was 18.4 per cent the agricultural sector and the wider economy has
in 2019-20. enabled developing countries to diversify to other
sectors where growth is higher and wages are better.
Components of Agriculture and Allied Example: Advanced agriculture creates demand for
Sector several industrial products like tractors, harvesters,
threshers, chemical fertilisers, pesticides, etc.
Agriculture and allied sector is not limited to crop
Source to Industries: Agriculture is the map source of
production only. In fact share of crops in this sector is
supply of raw materials to various important industries
only 60% This sector also includes livestock (Animal
of our country. Cotton and jute textiles sugar, plantation
Husbandry) Forestry and Logging, and Fishing and
industries (tea, coffee, rubber and agro-based cottage
Aquaculture
industries and their ran materials directly from
agriculture.

Boost to Exports of India: Agri-exports are the

important constituents of India's export basket earning
the important foreign currencies. The main agricultural

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commodities of export are tea, coffee cotton, tobacco, short period of maturing, resist pest damage, short
spices, fruits and vegetables. stems to easily carry fertilisers etc. Example: India
imported new dwarf variety of wheat seed from Mexico
Rural Development: Agricultural growth is the (developed by Dr. Norman Earnest Borlaug). Irrigation:
important pillar for developing the rural areas of our Availability of right quantity of water at right time was
country, thus reducing the distress migration from rural essential for the success of HYV seeds.
areas. Also, agriculture has the potential to reduce the
disparities between rural and urban areas. Hence, government focused on increasing irrigation
coverage to certain areas.
14.3 Evolution of Agriculture in Use of Fertilisers: Extensive usage of fertilisers was
India promoted in order to make HYV seeds Success.

Land reforms, farm mechanization, usage of pesticides

14.3.1 Independence to Pre-Green and rural electrification were other factors focused
Revolution Period during this phase.

Indian economy on the eve of independence was Achievements

fundamentally agrarian with more than 80% of the
population deriving livelihood from agriculture, directly Attainment of self-sufficiency in food grains due to
or indirectly. increased production and productivity. Green
Revolution resulted in a grain output of 131 million
In 1950-51, India produced around 50 million tonnes of tonnes in the year 1978-79 and established India as one
food grain, which was not enough to feed our 350 of the world's biggest agricultural producers. India
million people. Due to this, India had to import grains became self-sufficient in food-grains and had sufficient
to feed the citizens in this phase. food stock in the central pool, even, at times, India was in a
position to export food-grains.
This phase is characterized by:
Ability to create buffer stocks of food grains which
Stagnated Growth (around 0.4%)
could be used in the event of natural calamities such s
Low Productivity droughts and floods which resulted in fall in crop
production.
Inadequate investment towards the improvement of
agricultural productivity Green Revolution brought prosperity to farmers in the
regions it was implemented. The big farmers with more
Low Level of Technology Negligible Use of Chemical than 10 hectares of land were particularly benefited by
Fertilisers this revolution by investing large amounts of money in
Inadequate irrigational facilities Successive droughts various inputs like HYV seeds, fertilizers, machines.
and wars in early 1960s further aggravated the etc. It also promoted capitalist farming
agricultural crisis in India triggering pe green revolution Green Revolution tremendously increased the demand
in India. for various agricultural Inputs The Revolution brought
about large-scale farm mechanization which created
14.3.2 Green Revolution Phase demand for different types of machines like tractors,
Meaning of Green Revolution harvesters, threshers, combines, diesel engines, electric
motors, pumping sets, etc Several agricultural products
Gwen Revolution is the phrase used to describe the were also used as raw materials in various industries
spectacular increase in the production of food grains in known as agro based industries This encouraged
da starting from late 1960s. It started with the increase industrialisation and thus created a large number of
wheat production and later it was diffused to other crops employment opportunities. The Green Revolution
Hence cultivation was the result of several factors created plenty of jobs not only for agricultural workers
introduced during this phase but also industrial workers by creating related facilities
such as factories and hydroelectric power stations.
High Yielding Varieties (HYV) of Seeds: Characterised
by increased responsiveness to chemical fertilisers, Problems

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Green Revolution (GR) played a very significant role in beyond their consumption needs, women, in many
making India self-sufficient in food grains but at the families, are withdrawn from the labour force as there
same time, it led to various social, economic and isn't any need now for women to work as per the
environmental issues in the country: patriarchal norms. This led to, the preference for male
child becoming more prominent and people started
It led to increase in disparities in income among the taking technological aid for selective abortion. This is
farmers. Only the farmers with large farm holdings and one of the biggest reasons of adverse gender gap in case
a marketable surplus were able to reap the benefits of of Punjab and Haryana.
GR.
Tenant cultivators were adversely affected by a growing
Another negative outcome of the GR has been the tendency among large farmers to reclaim land
worsening of regional inequalities. The areas that previously leased out under 'tenancy agreement' for
underwent the technological transformation developed self-cultivation.
more than the other areas. It has so far affected only 40
percent of the total cropped area and 60 per cent is still Green Revolution also led to massive distress migration
untouched by it. The most affected areas are Punjab, of agricultural labour from eastern Uttar Pradesh and
Haryana and western Uttar Pradesh in the north and Bihar to Punjab and Haryana. These migrant labourers
Andhra Pradesh and Tamil Nadu in the south. It has were not skilled and so they had no way out but to work
hardly touched the Eastern region, including Assam, on the rich farmers' fields thereby leading to their
Bihar, West Bengal and Orissa and arid and semi-arid exploitation.
areas of Western and Southern India.
Except in Punjab, and to some extent in Haryana, farm
Since the nutrient requirements of high yielding mechanization under the Green Revolution created
varieties were very high, the soil became Fertiliser- widespread unemployment among agricultural
dependent. The Green Revolution resulted in a large- labourers in the rural areas. The worst affected were the
scale use of pesticides and synthetic nitrogen fertilisers poor and the landless labourers.
for improved irrigation projects and crop varieties.
However, little or no efforts were made to educate 14.3.3 Post-Liberalisation
farmers about the high risk associated with the Intensive
use of pesticides. Pesticides were sprayed on crops The post-reform period led to the gradual decline in the
usually by untrained farm labourers without following agriculture sector's contribution to the Indian economy.
instructions or precautions. This became a cause for India's traditional occupation, agriculture now
environment and soil pollution. As the high yielding contributes only about 18.4% to the GDP, down from 29
varieties of crops, which resulted in the Green percent in 1991. The services sector has taken the lead
Revolution, needed more water. In order to meet the role in propelling the economy at the global stage.
water requirements of such crops the existing natural Despite changes in the macroeconomic policy
sources of water were artificially altered. Canal systems framework and trade liberalization, the agricultural
were introduced, and irrigation pumps also sucked out sector in India did not experience any significant
the groundwater to supply the water-intensive crops, growth post economic reforms in 1991 nor did it derive
such as sugarcane and rice. thus depleting the the expected benefits from trade liberalisation.
groundwater levels Punjab is a major wheat and rice
cultivating area, and hence it is one of the highest water It was argued that economy liberalisation would a
depleted regions in India favourable shift in the terms of trade for ag Inda
nabbing producers to plough back sup cultivation to
Repeated crop cycle in order to ensure increased crop make long term improvements on and frame
production depleted the soll's nutrients To meet the agricultural productively and Contrary to expectations
needs of new kinds of seeds, farmers increased fertilizer there was no neo improvement in the terms of trade for
usage The pH level of the soil increased due to the argic during the reform period. Moreover, decline in cap
usage of these alkaline chemicals. Toxic chemicals in formation in agriculture, adequate expenditure nation
the soil destroyed beneficial pathogens, which further and extension services a dearth of cheap institutional
led to the decline in the yield. credit re slowdown of agricultural growth and he
Green Revolution had also negatively affected the livelihood insecurity for a substantial propose those
societal make up. When families income increased dependent on agriculture

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Leading Producer: India has the largest arable land

14.4 Trends in Indian Agriculture source in the world. It has about 20 agri-climatic
Subsistence Agriculture: Most parts of india fee regions with all the 15 major climates in the world sting
subsistence agriculture. The farmer owns a piece of in India. India has 46 of the 60 soil types in the world
land, grows crops with the help of his ta members and India is 2nd highest agriculture producer n the world
consumes almost the e produce with little surplus to sell (After China).It is the largest producer of spices, pulses
in the market (25%, highest for any one country). milk sea, cashew,
and jute. It is also the second largest producer of wheat,
High level of Monsoon Dependence: What 55% of rice (also largest exporter -30%), fruits and vegetables,
India's arable land dependant on money the uncertain, sugarcane, cotton (also the second highest exporter),
unreliable, regular amount for rain during the current and oilseeds
monsoon season could e economic activity in the
agriculture sector, in the large scale expansion of Lower Agricultural Yield: The agricultural yield
immigration facilitates a Independence, only one-third quantity of a crop produced per unit of land) is found to
of the cropped a provided by perennial irrigation and be lower in case of most of the crops, as compared
the remain two-third of the cropped area has to bear the toother top producing countries such as China, Brazil
brunt the vagaries of the monsoons and the United States

Variety of Crops: India is a vast country with v types of Fluctuations in Agricultural Growth: Agricultural
relief, climate and soil conditions There there is a large growth has been witnessing fluctuations ranging from
variety of crops grown in india Br the tropical and 5.8% in 2005-06 to 0.4% in 2009-10, -0.2% in 2014-15
temperate crops are such grown in India. Very few and 0.8% in 2015-16. However, it was the only sector to
countries in the world he variety of crops comparable to have clocked a positive growth of 3.4% in 2020-21
that produced in (during COVID pandemic)

Excessive Population Pressure on Land heavy 14.5 Determinants of

population pressure on land is caused by mated growth
of employment opportunist agricultural sector for rural Agricultural Growth-
people and rapid grow rural population. The increasing
population responsible for subdivision, fragmentation of
Agricultural Inputs
e holdings that results into low productivity of and Physical Factors: Terrain, topography, climate, and
underneath
Uneconomic Land Holdings: The average holding in
India is not only small in size but t into pieces and intuitional Factors: Land-tenure, land tenancy, sz id
scattered due to sub-dynamic fragmentation of land. holdings, size of fields and land reforms
The average land-holding past 115 hectares according to
the latest agric census in India. This has resulted into Infrastructural Factors: Irrigation, electricity, roads s to
the unc land holding making investments in p credit and marketing, storage facilities crop insurance
technology and inputs unviable and research.

Importance of Animals: Animal force has always Indian Technological Factors: High Yielding Varieties (new ,
E taggant role in agricultural operations such thing chemical fertilisers, insecticides, pesticides, and farm
gigaton threshing and transporting coal products machinery
Complete mechanisation of guess a distant goal and
animals will ue lo date the agricultural scene in India 14.6 Irrigation
for sever as to come
14.6.1 Meaning
Declining share of Agriculture in India's GDP: Over net
few decades, the manufacturing and services have Irrigation is the process of providing water to land
increasingly contributed to the growth of precocity, through artificial means for the purpose of agriculture
while the agriculture sector's contribution has decreased Migration constitutes 70% of total input cost Some facts
from more than 50% of GDP in the 0s to 16% in the related to water irrigation in India
current times.

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India's share of World's water resources is only 4% rainfed conditions during biennium 2011-12.Thus
withough it contributes 17% of world population irrigation can improve the productivity of the land
integration is man consumer of trash water and more
than 90% of groundwater in India Diverse Water Needs of the Crops: Different water
requirements for different crops can only be met
The water use efficiency in agriculture is very low only through irrigation facilities and can't be left to be
about 38% (whereas in developed countries its at 50 to dependent on rainfall.
60%)
Disaster Management: With the help of irrigation, flood
Agriculture, in india is mainly dependent on rainfall and drought can be effectively controlled.
which is concentrated during four months (75% of total
precipitation) in a year Food Security: Increase in agricultural production to
cater to the needs of the burgeoning population
Net irrigated area 65 mean (Net Sown Area in India is demands an increase in cultivable area. 19.44 million
141 mha) (About 45% of the agricultural area hectares was current fallow land while cultivable waste
cultivating food grains is covered by irrigation) The per land comprises another 13.83 million hectares Provision
capita water availability in the country as a whole is of irrigation facilities can make some portion of this
reducing progressively due to increase in population. land cultivable.
The per capita availability of water as per 1951 census
was 5177 cubic meters. This goes down to 1545 cubic Resilience: Global warming has increased the
meters as per 2011 census Climate change river frequency/intensity of droughts, floods, heat waves and
pollution and depleting ground water resources are other extreme events. In light of this, proper irrigation
other major problems related to water e india network can protect the farmers against such climate
induced variabilities.
The predominantly used conventional irrigation
methods, such as canal and flood irrigation, have Other reason: Other than the above reasons, irrigation
efficiency of 55%-65% while the less unsized improved has a variety of uses in crop production, including:
micro irrigation systems using drip and micro irrigation Frost protection for plants
technology have efficiency above 90% A huge amount
of water loss in canal and flood irrigation occurs due to Controlling the growth of weeds in grain fields
evaporation percolation and seepage (Closed pipe
Keeping the soil from settling. Dust suppression,
network reduces this loss significantly) India has low
sewage disposal, and mining are just a few of the
productivity per unit use of water india uses 2-4 times
applications.
more water to produce a unit of major food crop vis a
vis China & Brazil India a net water exporter
14.6.3 Types/Sources of Irrigation
14.6.2 Importance Depending on the topography, soil nature, rainfall and
different types of sources of water for irrigation are
Increase Cropping Intensity: The ranted areas are
used:
mostly single cropped with scanty rainfall, prone to
frequent droughts, soil erosion and characterized by
fragile pasture lands. With #rigation it is possible to
A. Tanks Irrigation
enhance the cropping intensity Presently, 76% of the A tank is developed by constructing a small bund of
agricultural land in the country remains unused for half earth or stones built across a stream. The water
of the productive period due to lack of access to meet impounded by the bund is used for irrigation and other
the crop water requirement purposes. Tank comprises an important source of
Diversification: Assured irrigation is important for irrigation in the Karnataka Plateau, MP. Maharashtra,
diversification to high value crops and doubling of farm Odisha, Kerala, Bundelkhand area of UP. Rajasthan and
income by 2022. Gujarat.

Increase Productivity: The per ha productivity of all Merits: Most of the tanks are natural and do not involve
crops taken together was 16 times higher under largely heavy cost for their construction and have longer span
irrigated conditions as compared to under largely In many tanks, fishing is also carried on, which
supplements both the food resources and income the

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farmer Demerits: Many tanks dry up during the dry Perennial Canals are those which are taken off from
season and fail to provide irrigation when it is required. perennial rivers by constructing a barrage across the
Letting of water from tanks and carrying it to the fields river. Most of the canals in India are perennial
is a strenuous and costly exercise.
Merits: Most of the canals provide perennial irrigation
B. Wells and Tube Wells Irrigation and supply water as and when needed. This saves the
crops from drought conditions and helps in increasing
There are various types of wells - shallow wells, deep the farm production.
wells, tube wells, artesian wells, etc From the shallow
wells water is not always available as the level of water Demerits: Many canals overflow during the rainy
season and flood the surrounding areas. Canal irrigation
goes down during the dry months. Deep wells are more
suitable for the purpose of irrigation as water from them is suitable in plain areas only.
is available throughout the year. These are more popular
in plains and coasts. The states where well irrigation
14.6.4 Micro-Irrigation
plays a significant role are - Gujarat (82%), Punjab Micro irrigation can be defined as the application of
(80%), Uttar Pradesh (74%), Rajasthan (71%). water ow volume and frequent interval under low
Maharashtra (65%). Madhya Pradesh (64%) and West pressure to dent oct zonie Drip and sprinkler irrigation
Bengal (60%). are the usual irrigation systems followed relation system
Merits: Well is simplest, cheapest and independent irrigates the root zone, not the whole face it releases
source of irrigation and can be used as and when the frequent, small quantities of water usually unlike
necessity arises. Several chemicals such as nitrate surface irrigation system. Ser irrigation, water is
chloride, sulphate, etc. found in well water add to the distributed through a system des is sprayed on the crops
fertility of soil. More reliable during periods of drought and falls as smaller water
when surface water dries up. Benefits of Micro-Irrigation
Demerits: Only limited area can be irrigated in the event Precision: Water in micro- irrigation is directed towards
of a drought, the ground water level falls and enough roots and stems. It has good scope for using the
water is not available. Tube wells can draw 3 lot of technique in closely spaced crops like rice, wheat,
groundwater from its neighbouring areas and make the onion, potato etc
ground dry and unfit for agriculture
Less Loss of Water: Water loss due to evaporation &
C. Canal Irrigation run off is avoided.

Canals can be an effective source of irrigation in areas Prevents Diseases/Weed: Diseases and weed outgrowth
of low level relief, deep fertile soils, perennial source of caused by contact with water is avoided
water and extensive command area. Therefore, the main
Prevents Overuse of Fertilizers: Fertigation allows for
concentration of canal irrigation is in the norther plain
better control of ground and surface water pollution and
of India, especially the areas comprising Uttar Pradesh,
lower Fertilizer Costs. Fertigation is a method of
Haryana and Punjab. The aging of canals in rocky and
fertilizer application in which fertilizer is incorporated
uneven areas is fact and uneconomic Thus, canals are
within the irrigation water by the drip system.
practically absent from the Peninsular plateau area.
However, the costal and the delta regions in South India Savings on Power: Micro Irrigation is power efficient
do have gone canals for migration and hence leads to lower electricity Costs.
Two types: Higher Farm Incomes: Micro irrigation leads to an
increase in crop productivity which leads to better
Inundation canals, which are taken out from the rivers
quality of produce leading to higher realization of sale
without any regulating system like weirs etc. at their
price resulting in increased income of farmer, and
head. Such canals provide irrigation mainly in the rainy
prosperity.
season when the river is in flood and there is excess
water. Higher Yield: Water deficient, cultivable waste land and
undulating land areas can easily be brought under

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cultivation due to ease of irrigation provided by micro- Attract greater private investments in irrigation
irrigation.
Promote extension activities relating to water
Potential and Challenges in Micro-irrigation India has harvesting, water management and crop alignment or
only about 8 mha out of the total 140 mha under farmers and grass root level field functionaries
cultivation through micro irrigation, while the potential
of drip and sprinkler irrigation stands at around 70 mha. Components of the Scheme
The challenges in adoption of micro irrigation includes 1. Accelerated Irrigation Benefit Program (AIBP): This
- high initial investment, lack of a stable scheme, poor is covered under the Ministry of Jai Shakti and focuses
and inefficient implementation of schemes, and absence on faster completion of ongoing Major and Medium
of a crop specific focus. Irrigation including National Projects Its main features
include Central Assistance (CA) and State share through
14.6.5 Government Initiatives NABARD under Long Term Irrigation Fund (LTIF)
Related to Irrigation 2. Har Khet ko Pani: It aims to increase the area of land
under irrigation and thus reach the ultimate irrigation
Pradhan Mantri Krishi Sinchayee Yojana (PMKSY) The potential through Creation of new water sources
Pradhan Mantri Krishi Sinchayee Yojana was launched
through Irrigation (both surface and ground water
on 1st July, 2015 with the motto of "Har Khet Ko Repair, restoration and renovation of water boss
Paani" It is being implemented to expand cultivated
strengthening carrying capacity of trad to water sources,
area with assured irrigation, reduce wastage of water construction rain water harvest structures (Jal Sanchay).
and improve water use efficiency PMKSY not only Ground water development in the areas whey is
focuses on creating sources for assured irrigation, but
abundant so that sink is created to store flood water
also creating protective irrigation by harnessing rain during peak rainy season
water at micro level through "Jal Sanchay" and "Jal
Sinchan" Micro irrigation is also incentivized through 3. Per Drop More Crop: It advocates improving w use
subsidy to ensure "Per drop-More crop" efficiency through adoption of micro irrigation
techniques such as drips, sprinklers, pivots rain guns etc
This Scheme Aims to: Ensure access to water to every
farm ("Har Khet Ko Pani") Improve water use 4. Watershed Development: Watershed development
efficiency ("Per Drop More Crop") it is aimed at refers to the conservation, regeneration and judicious
covering the remaining Rairited Area with irrigation. use of all the resources natural ( land, water plants
The Scheme integrates 3 ongoing schemes animals) and human-within the watershed area.

Accelerated Irrigation Benefit Programme (AIBP) - A. Long Term Irrigation Fund (LTIF)
Ministry of Jal Shakti
LTIF was created in 2016-17 for funding and t tracking
Integrated Watershed Management Program-Ministry of the implementation of incomplete major arc medium
Rural Development irrigation projects It has been formed in NABARD, for
funding ident ongoing projects under PMKSY (Pradhan
On Farm Water Management component of National
Mission on Sustainable Agriculture (NMSA)-Ministry Mantri Krish Sinchayee Yojana) The loans are extended
to State Governments at ES per annum and the
of Agriculture and Farmers Welfare
difference between the cost of fund by Government for
Objectives of the Scheme: NABARD and 6% is compensated of India through
Interest Subvention
Convergence of investments in irrigation at the field
level B. Micro Irrigation Fund (MIF)
Enhance recharge of aquifers and introduce sustainable A micro irrigation fund with a corpus of $5,000-crore
water conservation practices. been operationalised in NABARD

Explore the feasibility of reusing treated municipal It is under the Ministry of Agriculture and Farmers
waste water for peri-urban agriculture Welfare (MoA&FW) and aims to facilitate S
Governments efforts in mobilizing additional resource

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for expanding coverage under micro irrigation and Seed (Control) Order (1983). New Policy on Seed
incentivizing its adoption, beyond the provisions Development (1988)
PMKSY-Per Drop More Crop.
Plants, Fruits & Seeds (Regulation of Import into India)
MIF seeks to provide states financial assistance Order (1989). Protection of Plant Varieties and Farmers
concessional rate of interest to promote micro-irrigation Right Act (2001).

Essential Commodities Act 1955 including Seeds

(1955), National Seed Policy (2002), and Seed Bill
(2004).
14.7 Seeds
All of these legislations were passed to take care of
14.7.1 Introduction seeds right from the production level to marking,
labeling, and marketing levels so as to maintain the
Seed is a critical and basic input for attaining nig crop quality standards as prescribed by the Central Seed
yields and sustained growth in agriculture production. Committee (formed under the Seed Act. 1966)
Seed quality is estimated to account for 20-25% of the
agricultural productivity for such as fertilisers die barley These laws make quality seeds and planting material
indented by the Detection of same at send as critical an available to a common farmer and provide him a
e production of such seeds However due to less se and mechanism to approach concerned authority for justice.
militants prices of good-seeds, the same at access mort
of the farmers especially ne small and marginal farmers 14.7.3 Seed Related Initiatives
Out of total operational holding in India, only 54 A. High Yielding Variety Programme (HYVP)
percent used Certified seeds and only 98 percent Used
bride seeds (Economic Survey Data) High Yielding Variety Programme (HYVP) was
launched in 1966-67 as a major thrust plan to increase
India also has Low Seed Replacement Rates below 20% the production of food grains in the country.
in pulses and below 30% in paddy and wheat
Merits of HYV Seeds:
Organisations and Agencies involved in Seed
Production/Distribution: National Seeds Corporation High level of responsiveness to fertilisers
(Founded in 1963) Indian Council of Agricultural Short Life Cycle (thus enabling double cropping on
Research (ICAR), Agricultural Universities. Central same land)
Government Seed Farms and Seed Producers
Cooperatives Dwarf Stems which are resistant to wind damage and
tough enough to carry heavy load
Seed Replacement Rate (SSR) SSR is the percentage of
area sown out of the total area of crop planted in the Large leaf surface area facilitating photosynthesis
season by using certified/quality seeds other than the
farm saved seed. In simple terms it is a measure of B. National Seeds Policy 2002
cropped area covered with quality seed.
The main objective of the National Seeds policy, 2002
was the provision of an appropriate climate for the seed
14.7.2 Legislative Frameworks for industry to utilize available and prospective
Seeds in India opportunities, safeguarding of the interests of Indian
farmers, and the conservation of agro-biodiversity
Historically, the seed industry in India has been
governed by several legislative & policy frameworks
such as:
C. Sub-Mission for Seed and Planting Material
Seed Act (1966)
(SMSP)
Seed Rules (1968)
The Objective of the Sub-Mission for Seed and Planting
Material (SMSP) was to produce and supply quality

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seeds to farmers to enhance production and productivity E. Seeds Bill, 2019

through its various Components
The Seed Bill (2004) was proposed to replace the Se
Seed Village Programme Act (1966), however, owing to several shortcoming it
was not passed. The 2019 draft version tres overcome
Establishment of Seed Processing-cum-Seed Storage
the drawbacks of the 2004 Bill
Godowns at Gram Panchyat Level
The Bill aims to regulate the quality of seeds sold an
National Seed Reserve Boosting Seed Production in facilitate the production and supply of these seeds
Private Sector farmers. It aims to foster competition by amending Seed
Act, 1966 and Seed Rules, 1968
Strengthening Facilities of Quality
The Bill authorizes the Central Government reconstitute
Control Infrastructure a Central Seed that will be responsible the effective
implementation of its provisions
D. Seed Village Scheme
All varieties of seeds for sale have to be registered and a
A village, wherein trained group of farmers are involved
required to meet certain prescribed minimum standards
in production of seeds of various crops and cater to the
For instance, for transgenic varieties of seeds,
needs of themselves, fellow farmers of the village and
registration is to be obtained under the Environment
farmers of neighbouring villages in appropriate time
(Protection) Act, 1986. This can bring greater
and at affordable cost is called "a seed village".
accountability to seed companies
The seed village concept is to promote the quality seed
production of foundation and certified seed classes. The 14.7.4 Challenges in Indian
area which is suitable for raising a particular crop is
Seed Programme Major emphasis of seed programme
selected, and raised with single variety of a kind.
has been or development of better seeds for cereals
The objective was to upgrade the quality of farmer- (especially rice and wheat) and hence other crops like
saved seed, which is about 80-85% of the total seed pulses oilseeds and fibre received less attention
used for crop production programme by providing Inadequate inspection and inadequate infrastructure for
financial assistance for certification of seeds have led to flooding of non
certified seeds and spurious seeds in the market
Foundation/certified seed at 50% cost. impacting farmers negatively. Non availability of good
quality seeds has led to increasing tendency for farmers
Training to farmers on seed production &
to produce their own seeds, thus resulting into poor
Assistance for seed storage technology. yields.

The seed produced in these seed villages are preserved/ Poor irrigation coverage in our country is limiting the
stored till the next sowing season. In order to encourage success of HYV seeds as HYV seeds require high level
farmers to develop storage capacity of appropriate of irrigation to have proper yield.
quality. assistance is given to farmers for
making/procuring of Pusan Bin Mud bin/Bin made from 14.7.5 Genetically Modified (GM)
paper pulp for storing of seed produced by the farmers
Crops Meaning: A GM or transgenic crop is a plant that
on their farms.
has a novel combination of genetic material obtained
The implementing agencies of the scheme include State through the use of modern biotechnology. GM foods are
Departments of Agriculture, State Agriculture derived from plants whose genes are artificially
Universities, Krishi Vigyan Kendras. State Seeds modified, usually by inserting genetic material from
Corporation, another organism, in order to give it a new property,
such as increased yield tolerance to a herbicide,
National Seeds Corporation State Farms Corpora of resistance to disease or drought or to improve its
India (SFCI), State Seeds Certification Agencies, nutritional value, For example, a GM crop can contain a
Department of Seed Certification gene(s) that has been artificially inserted instead of the

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plant acquiring it through pollination. The resulting Pesticide Poisoning: In Maharashtra, 60 labourers and
plant is said to be "genetically modified farmers died due to inhalation of pesticides, which were
attributed to GM seeds. Indiscriminate usage of
Example Bt cotton produced by incorporating Bt gene glyphosate) can cause health hazards to humans and
rich encodes for BT toxin (insecticidal protein in cattle, apart from affecting the yield of cotton
Bacillus urgencies) in the cotton plant. The plant
becomes insect tant and this gene has been incorporated GM seeds contain terminator technology meaning they
in corn, , tomato, tobacco etc, making them insect have been genetically modified so that resulting crops
resistant po pesticides). do not produce viable seeds of their own. This leads to
tendencies of monopolising market. There is
Advantages of GM Crops desperation among farmers as introduction of Bt cotton
has slowly led to the non availability of traditional
Higher crop yields.
varieties of cotton leading to monoculture.
Increased nutrients, and stress tolerance.
Violation of natural organisms Intrinsic values and
Enhanced taste and quality. tampering with nature by mixing genes among species,
thus involving ethical dimensions as well.
Reduced maturation time.
Worldwide Practice:
Prevention of loss of species to endemic diseases
GM crops have been gaining acceptance. However,
Reduced usage of pesticides and herbicides
their use still remains highly skewed.
Improve economic condition of farmers with less labour
Today, GM crops are cultivated over 185 million
intensive and cost beneficial crops, improved resistance
hectares of land, by more than 18 million farmers across
to disease, pests, and herbicides leading to improved
26 countries, marking a 110-fold increase since GM
crop protection increased food security for growing
crops were first commercialized, according to data from
population.
the International Service for the Acquisition of Agri-
Increased farm profit and reduced import bill. biotech Applications. At least 30 other countries import
GM produce, which means about nearly 68% of the
Arguments Against GM Crops world's population is already consuming GM products
in one way or other.
Uncertainty within scientific community. There isn't
enough clarity about impact of GM crops on human Most of the GM crops are produced in the USA, Brazil,
Math and environment, due to lack of pacific study For Argentina, India and China.
example, by inserting genes from organisms Which
have never been eaten as food, new proteins trend 98% of GM cultivation falls under four main crops:
introduced into the human and animal food chains.
Soybean
There is concern that these could cause allergic
reactions or other health effects. Also, some GM crops Maize
adding to antimicrobial resistance. contain genes which
provide resistance to commonly used antibiotics, which Cotton
could be passed on to humans Canola
Introducing GM versions of various crops could be a p
India's Experience with GM Crops:
threat to the vast number of domestic and wild natives
of crops and therefore lead to reduction in biodiversity. Bt Cotton: Bt cotton is insect-resistant cotton variety
Strains of the bacterium Bacillus thuringiensis produce
There is also a potential for pests to evolve resistance to
different Bt toxins. Bt toxins are insecticidal to the
the toxins produced by GM crops and the risk of these
larvae of moths, bollworms, etc. but are harmless to
toxins affecting non target organisms Increasing
other forms of life. In 2002, a joint venture between
dependence on industrialized nations by developing
Monsanto and Mahyco introduced Bt cotton to India
countries for the seeds and this could result into
domination of world food production by a few
companies only

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India now has the world's fourth largest GM crop mostly consumed in areas with a shortage of dietary
acreage on the strength of Bt cotton yield more than vitamin A
doubled in the first decade since its introduction in
2002, but at the same time it was also marred by India too has been importing GM products- specifically
controversy regarding pricing and intellectual property GM soybean oil and GM canola oil (which is a sister
tights (IPR) and government price interventions and crop of mustard)-for nearly two decades now. These
litigation imports cost about 80.000 cm annually and are needed
to cover nearly half of Index edible oil demand
Advantages
There is a need for a cautious approach allows for
it increases yield of cotton due to effective control of scientific inquiry, scrutiny and regulation GM crops
three types of boil worms. should be tested with the same rigour as any new drug
to be used for chronic diseases which
It reduces the insecticide use in the cultivation of Bt
cotton in which bollworms are major pests. Enact a comprehensive law that covers all aspects GM
crops. Biotechnology Regulatory Authority of Ind Bill
Potential reduction in the cost of cultivation (depending which envisions creating a regulatory body to uses of
on seed cost versus insecticide costs) biotechnology products including genetically modified
organisms is pending in the parliament since 2008.
Problems with Bt Cotton
There should be a liability clause, that is, if something
High cost of Bt cotton seeds as compared to non Bt goes wrong the liability should be fixed statutable in
cotton seeds. case of US law, liability is huge in case the GM tec
Ineffective against sucking pests like whitefly. effects the regular varieties of crops. It will ensure that
case of non-accountability, in case of pink bollworm
Whitefly attack has become rampant in Punjab, pest attack on BT cotton, does not repeat itself in case
Haryana and elsewhere. of other GM crops.

The costs of Bt seed and insecticide increase the risk of With advances in biotechnology, there is an urgent need
farmer bankruptcy in low-yield rain-fed settings. for stringent regulation or scrutiny in the sector to
ensure cultivation and sale of environmentally safe agro
Bt Brinjal: Bt brinjal is created by inserting a crystal products. The FSSAI must identify all G products being
protein gene from the soil bacterium Bacillus sold in the market and prosecute companies and traders
thuringiensis. The Bt brinjal has been developed to give responsible
resistance to the Brinjal Fruit and Shoot Borer (FSB).
Following the study of biosafety data and field trials by
two expert committees, Bt brinjal was cleared for
14.8 Fertilisers
commercialization by India's top biotech regulator, the
Genetic Engineering Appraisal Committee, in 2009. But
14.8.1 Background
nothing came of it, with moratorium imposed by then Increase in the consumption of Fertilisers has been seen
government following opposition from civil society as measurement of agricultural prosperity. Fertiliser is a
groups and brinjal-growing states. Mahyco has crucial input for increasing the farm productivity and
developed the Bt brinjal variety. Mahyco's Bt. brinjal is achieving high cropping intensity (through multiple
commercially grown in Bangladesh. cropping).
GM Mustard (Dhara Mustard Hybrid-11): Genetic India is third largest producer of fertilisers after China
Engineering Appraisal Committee (GEAC), recently and USA, and second largest consumer after China in
(May 2017) cleared the genetically modified (GM) the world
Mustard (DMH-11) for commercial field use. There is
again huge opposition from civil society groups and 14.8.2 Macro and Micro Nutrients
hence final approval could be deferred
16 elements are considered essential for plant growth
Golden rice: Golden rice is a variety of rice (Oryza Carbon (C). Hydrogen (H) and Oxygen (0) are the most
sativa) produced to biosynthesize beta-carotene, a abundant elements in plants. The remaining 13 essential
precursor of Vitamin A, in the edible parts of rice. It is

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elements are classified as macronutrients and is met through imports. Prices of both phosphorus and
micronutrients potash are deregulated by the Government

14.8.5 Fertiliser Subsidy Policy

The subsidy on fertilisers is about 0 5% of GDP which
Macronutrients: is the second highest subsidy after food subsidy But,
according to a report by NITI Aayog only 35% of
Primary Nutrients: Nitrogen (N), Phosphorus (P) fertilizer subsidy reaches the intended beneficiaries
Potassium (K)- Most fertilizers that are common used in
agriculture contain these three basic plant nutrients Mechanism of Subsidies Farmers buy fertilisers at
(NPK). Maximum Retail Prices (MRP) below their normal
supply-and-demand-based market rates or what it costs
Secondary Nutrients: Sulphur (S) Calcium (Ca) and to produce import them
Magnesian (Ma) Micronutrients: iron (Fe), Zinc (Zn).
Manganese (Mn), CserCut Boron (B), Chlorine (Cl) and For example, the MRP of neem-coated urea is fixed by
Molybdenum the government at 5.900 per tonne, whereas its average
cost-plus price payable to domestic manufacturers and
Five additional elements: Sodium (Na), Cobalt (C) importers comes to around 17.000 and 23.000 per tonne
Vanadium (Va). Nickel (Ni) and Silicon (Si) have been respectively. The difference, which varies according to
established as essential micronutrients in some plants plant-wise production cost and import price is footed by
dan sols are generally deficient in nitrogen (N), the Centre as subsidy, which goes to the companies
phosphorus (P) and potassium (K) (also called NPK)
ese there is a need for using Fertilisers NO The MRPS of non-urea fertilisers are decontrolled or
foxed by the companies. However, the Centre pays a
14.8.3 Fertiliser Used in India flat per tonne subsidy on these nutrients to ensure
reasonable prices. The per-tonne subsidy ranges from
The Indian fertilizer industry can broadly be divided 10,231 to 24,000 for different types of fertilisers
into wo categories, depending on the nutrient
composition: Nitrogenous Fertilizers: Urea, calcium A. Urea Subsidy
ammonium nitrate, ammonium chloride and ammonium
Urea is sold at a Maximum Retail Price (MRP)
sulphate
statutorily fixed by the Government of India
Phosphatic and Potassic (P&K) Fertilizers: DAP (Di
The difference between the delivered cost of fertilizers
Ammonium Phosphate), Mono Ammonium Phosphate
at farm gate and net market realization by the urea units
MAP Trole Superphosphate (TSP), Murate of Potash
is given as subsidy to the urea manufacturer/importer by
14.8.4 Fertiliser Production the Government of India FICC (Fertilizer Industry
Coordination Committee), an attached office under the
Urea for Nitrogen) is the most produced (86%), the Department of Fertilizers, calculates the Concession
most consumed (74%) and the most imported (52%) rate for indigenous urea as per New Urea Policy for
Component of the fertilisers produces about 80 percent existing units and New Investment Policy (NIP) for new
of its Urea Fertiliser needs. The fertiliser industry has units
the capacity to magnemously meet 50 percent of the
Concerns with Urea Subsidy
country's phosphatic fertilisers. But India depends
heavily on ports for the potassium fertilisers Phosphatic Farmers tend to use urea excessively because of its low
fertilizers are the second majorly tortured fertilizer in prices, made possible by the subsidy
India. About 50% indigenous city has been developed in
respect of phosphatic fertilizers to meet domestic This is ruinous for soil health and agriculture in the
requirements. However, the raw materials and long-run.
intermediates for the same are largely imported For
Moreover, a bulk of subsidised urea is cornered by a
potash fertilisers (K), since there are no viable
handful of rich farmers.
sources/reserves in India, its entire requirement (100%)

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Farmers with large land holdings can show a high their production of urea, with the objective of
Agriculture urea demand promoting balanced use of Fertilisers, to increase
Nitrogen Use Efficiency and to prevent diversion of
This can become a route for both farmers and to sellers urea for the purpose other than agriculture. The
to exploit the black market for urea government has also allowed manufacturers to charge a
small 5 per cent premium on
B. Nutrient Based Subsidy (NBS)
Neem-coated urna its aim is to check the excess of urea
The Nutrient Based Subsidy (NBS) Policy for P&K
which is deteriorating the soil health and advent
fertilizers has been implemented since 2010 by the
impacting overall crop yield
Department of Fertilizers The MRPs of non-urea
fertilisers are decontrolled by Gol (ie fertilizer Advantages of Neem Coated Urea
companies are free to fix the rates) Under the NBS
Policy, the Government announces a fixed rate of (a) Reduce the subsidy outgo
subsidy (in per Kg basis). on each nutrient of subsidized
P&K fertilizers namely Nitrogen (N). Phosphate (P) (b) Prevent diversion of urea for industrial use (c)
Potash (K) and sulphur (S), on annual basis, taking into Underground water contamination due to leaching of
account all relevant factors including international urea also gets reduced with neem coming s nitrogen in
prices, exchange rate, inventory level and prevailing the neem coated urea gets released plants very slowly
Maximum Retail Prices of P&K fertilizers Neem coating slows down the of dissolution of urea in
the soil.
This leads to Improvement in soil health.
Direct Benefit Transfer in Fertiliser Sector
Reduction in usage of plant protection chemicals
From March 2018, a new direct benefit transfer (D)
Reduction in pest and disease attack. An increase in system was introduced, wherein subsidy payment the
yield of paddy, sugarcane, maize. soybean. Tur/Red companies would happen only after actual sales farmers
Gram by retailers. Each retailer now has a point-of- (POS)
machine linked to the Department of Fati e-Urvarak
Drawbacks DBT portal.
Urea is not covered under the scheme Delay in NBS Anyone buying subsidised fertilisers is required furnish
subsidy payments. Hence, Fertiliser companies focus his/her Aadhaar unique identity or Kisan Che Card
more on Urea than other fertilizers. number. Only upon the sale getting registered on the e-
Increase in prices of Phosphoric and Potash Fertilisers. Urvarak platform can a company claim subsidy with
these being processed on a weekly basis and payments
Farmers overuse Urea, hence, the ideal ratio of NPK is remitted electronically to its bank account
not maintained
The only loophole in the system is that the Cerbe
follows a "no denial" policy where anybody, non-
farmers included, can purchase any quantity of
14.8.6 Neem Coated Urea Policy, fertilisers through the POS machines. It allows for buik
buying by unintended beneficiaries. There is a limit of
2015 100 ragi that an individual can purchase at one time but
it does not stop anyone from buying any number of
Neem Coated Urea (NCU)
times Being super-subsidised, urea is always prone to
No Industrial use = No Diversion diversion for non-agricultural use. For example, it is
used as binder by plywood/particle board makers, cheap
The Department of Fertilizers estimates a reduction of prote source by animal feed manufacturers or adulterant
20 lakh tonnes by 2018-19 in. projected demand for by milk vendors, apart from being smuggled to Nepal
Urea because of lesser divergence and increased and Bangladesh. Discussions are going on to cap the 1
effectiveness number of subsidised fertiliser bags that any person can
Department of Fertilisers has made it mandatory for all buy during an entire Kharif or Rabi cropping season. A
the indigenous urea producers to neem coat 100% of

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reasonable cap for a total of 100 bags only once would Mechanisation of farm indicates the use of machines for
easily cover the seasonal requirement of a 20-0 farmer conducting agricultural operations replacing the
traditional methods which involve human and animal
14.8.7 Other Initiatives Related to abou is the process of using agricultural machinery
Fertilisers mechanise the work of agriculture. To boost up
mechanization in the agriculture sector, improved
A. Promotion of City Compost The Department of agricultural implements and machinery are essential
Fertilizers notified the scheme for promotion of City routs plays a vital role in optimizing the use of land
Compost in 2016. Under the scheme Market were energy resources, manpower and other inputs The
Development Assistance (MDA) in the form of fed pet seeds. fertilizers, pesticides etc to maximize the
MT of City Compost will be providers ang up productivity of the available cultivable area and make
construction and consumption of the product Soil agriculture a more profitable and attractive profession
Health Card Scheme where was launched in 2015 is a youth.
Centrally more nationwide scheme it is a printed report
It is one of the way dowers for me sustained
card to farmers indicating the nutrient status of the The
development of the agriculture sect There is urgent need
card cares crop-wise recommendations on pale dosage
to mechanise the agricultural operations so that and
of fertilisers and other soil amendments engrave so
efficient
heath and fertility variety: SHCs issued once in 2 years
so that nutrient decency can be regularly detected & Wastage of labour forces avoided productivity of a
improved 9 will contain the status of farmer's soil with labour in cases Farming operations are made convenient
respect 212 parameters namely N P K (Macro-nutrients and
S Secondary nutrient) Zn Fe, Cu, Mr. Bo
(Micronutrients) o Electrical Conductivity (EC) Organic Improvements in the quality and waste of the
Carbon (00) Pical parameters) agricultural produce

Improving utilization efficiency of over routs

Agricultural implements and machinery will facilitate
multiple cropping and thereby nursing production
14.8.8 Important Issues Related to Appropriate mechanization of farm operators can
Fertilisers increase farm productivity by 10-15% and cropping
intensity by 5-20%
Unbalanced Use of Fertilisers ideally, the ratios in
nitrogenous phosphatic and potassium (NPK) sears Level of Farm Mechanization
should be used is 421. However as a result of
autonomous policies in this sector, this ratio has become India stands at about 40-45% with states such as UP
highly relanced At national level, it is around 6.1 24: 1, Haryana and Punjab having very high mechanization
but some states like Haryana and Punjab, it has reached levels but north-eastern states having negligible
und 60:20:1. Hence farmers in India use Nitrogen mechanization This level of farm mechanization is slow
utiliser Urea) in very high proportion. This has as compared to countries such as the US (36%) Brazil
negatively impacted plant growth, productivity and soil (75%) and China 157%)
profile India has achieved some progress in farm
Disparities in Fertiliser Use Across States: Consumption mechanisation like in the field of power-operated
oftentimes at national level is around 150 kgs per migration bumps tractors tillers harvesters threshers etc
hectare. waver consumption varies across states a lot On However small fragmented and shrinking size of the
one de states like Haryana, Punjab. Andhra Pradesh and holdings and low purchasing power of small marginal
Tamil Nadu nave high consumption(>220 kgs/hectare), farmers are making individual ownership of agricultural
on other side States like Manipur Meghalaya and machinery progressively uneconomical
Nagaland have very low consumption (<40 kgs/hectare)
14.10 Agricultural Insurance
14.9 Farm Mechanisation Natura calamites such as food, drought or earthquake
cause gesso tamers in india resulting in poverty and

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farmer’s suicide Therefore insurance is one of the best The scheme was launched in 2016 and is being
ways to protect the farmers from such losses administered by the Ministry of Agriculture and Farmen
Welfare:
The nonevolved in taming are
It has replaced the National Agricultural Insurance
Production risk: Weather disease pests low yields Scheme (NAIS) and Modified National Agricultural
unpredictability of monsoon and changing climate Insurance Scheme (MNAIS) It aims to provide a
Market risk: Uncertainty about the prices producers comprehensive insurance cove against the failure of the
receive for commodities or the prices they must pay for crop thus helping in stabilise the income of the farmers
inputs Features of the Scheme include
Financial risk: interest rates, availability of credit can Scope: All food & oilseed crops and annual commercial
repayment etc. horticultural crops for which past yield data is available
Human resource risk: Death disability, Witness, labour Comprehensive risk insurance is provided to cover y
Crop insurance schemes are intended to mitigate crop losses due to non- preventable risks viz Drought Dry
losses due to natural or manmade causes is more spells. Flood, Inundation, Pests and Diseases. Landsides
effective way of helping farmers bide over unfavourable Natural Fire and Lightening. Storm, Hailstorm Cyclone
outcomes, besides reducing the financial burden on the Typhoon. Tempest, Hurricane and Tornado It provides
the insurance against localised calamites well, including
nde crop insurance was introduced in the year 1985 hailstorms, unseasonal rains, landside and inundation
where seven five year plan was announced Since then
mar developments have taken place in the crop me ale press for coverage of post-harvest premium: The
insurance sector and various government schemes have prescribed premium is 2% to be paid by all Kharif crops
been launches and 15% for all rabi crops In ace of annual commercial
and horticultural crops, the 5% Premium cost over and
Issues with Earlier Schemes above the farmer e was equally subsidized by States and
Gol. However, 3sured 0% of the premium subsidy for
Under the earlier yield-based and weather based on
North Eastern pes to promote the uptake in the region
insurance schemes only about 24% of the ame
households could be covered PRADHAN MANTRI FASAL BIMA YOJANA
ΑΚΡΟΚΕ
The risks were also only partially covered calamities
only) The coverage was capped in the earlier schemes, Cap on premium rate resulting in low claims One Crop
which means that farmers could rec only a fraction of One Rate 2% premium for Khant Crops, 15% for Rabs
their losses Crops 5% premium for annual commercial and
horticulture crops
The premium for commercial and horticulture was
calculated on actuarial basis which means premiums No upper limit on Government subsidy, even if balance
could be as high as 25% depending on the risk factor premia is 0% it will be brome by the Government
involved
FEATURES
Assessment of crop damage lacked transparency and
didn't use the latest technologies WHATS NEW

Compensation settlement took long periods Pradhan Cap removed now, farmers will get claim against ful
Mantri Fasal Bima Yojana sum insured without any reduction Technology to be
used intensively Smart phones to capture and upload
To address above issues. Government launched a new data of crop ang to reduce delays in claim payment to
crop insurance scheme in 2016 called Pradhan Man farmers
Fasal Bima Yojana (PMFBY). Remote sensing to reduce the number of crop cutting
About the Pradhan Mantri Fasal Bima Yojans (PMFBY) PLICATION ON WARMKRS

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Very Low Premiums Full insured amount against are selective basis, poor infrastructure of insurance
loss on account of companies for coverage of non-loanee farmers etc

Natural Caramba Claim Settlement Issues: The role and power of

Insurance companies is significant in many cases, it
Makes agriculture more remunerative didn't investigate losses due to a localised calamity and
Boost to agriculture and farmer's welfare therefore, did not pay the claims. The State
Governments failed to release funds on time leading to
Implementation: By empanelled general insurance delays in releasing insurance compensation. This
defeats the very purpose of the scheme which is to
companies. The selection of the Implementing Agency
provide timely financial assistance to the farming
A is done by the concerned State Government through
community
bidding
Lack of Awareness and Grievance Redressal: The
Use of technology: Smart phones will be used to
farmers are not aware of the crop insurance schemes.
capture and upload data of crop cutting to reduce the
There is a lack of a decent grievance redressal system
delays in cam settlement to farmers. Remote sensing.
and monitoring mechanism for speedy settlements of
GPS and Drones will be used to reduce the number of
farmer complaints at both the Centre and State
crop cutting experiments
Governments level.
Challenges in the PMFBY
Suggestions to make the scheme more
Sustainability: For insurance markets to work they need effective
Low insurance
Awareness Generation: Awareness generation will be
Yojana and low correlation in risk amongst those one of the major challenges in the smooth
buying Since the programme is aimed at covering risks implementation of the scheme The Government is also
of drought and floods, both assumptions are likely to be seeking active involvement of all stakeholders
especially States and implementing insurance
This is because when bad weather hits, all regional
companies for the conduct of publicity campaign/
farmers are affected (high correlation) and incidence of
awareness programmes in the rural areas to build farmer
bad weather is high (once in 5-7 years in loss
awareness about crop insurance schemes.
probability of 14%-20%) The PMFBY states the
premium rates to be 1.5-2% as the rest being subsidized Bringing Behavioural Change: A lot more needs to be
by the government. This in the long term is bad and also done in bringing about a behavioural change regarding
encourages risk-taking especially for crops with low the cost of insurance being a necessary input and not a
MSPs. money-back investment.
Inadequate Protection: The problems of tenant farmers Rationalising Waivers and Service Delivery: Loan
who bear the risk of crop failure but are not entitled for waiver schemes announced by State Governments along
compensation and insurance payments, have not been with mandatory Aadhar linkage should be rationalised
comprehensively addressed. No protection extended to to enable PMFBY of greater coverage.
share-croppers as payments are linked to land records
usually Identification Issues: Role of Technology: If the localized weather
forecasting, drought risk, disease risk, soil analysis data
Currently the PMFBY scheme doesn't distinguish which is now much easily available with technology
between large and small farmers and thus raises the can be made available to farmers they become pre-
issue of identification. Small farmers are the most emptive of the risk and can plan that much better, thus
vulnerable class reducing their losses. The data can also help settle local
level calamity disputes which can sometimes get tricky.
Disparities in the Scheme: Disparities among States in
The technology can enable insurance companies to be
coverage is attributable to the schemes being optional
better prepared and handle the premiums and
for States, notification by States of food and oilseeds
settlements much more efficiently. Technology can be
crops and annual commercial/horticultural crops on
integrated in form of crop insurance app, which
provides for easy enrolment of farmers and facilitates

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easier reporting of crop loss within 72 hours of RIDF With this the cumulative location has reached
occurrence of any event. Latest Technological Tools to 18,500 crores
assess crop losses, satellite imagery, remote-sensing
technology, drones, artificial intelligence and machine Long-Term Irrigation Fund (LTIF): The LTIF in
learning are used. Use of PMFBY Portal for integration NABARD was set up with an initial corpus of 20,000
of land records. core for funding 99 irrigation projects during 2016- 17
following announcement in the Union Budget.
14.11 Agricultural Credit RuPayKisan Cards (RKCs): NABARD has been at the
forefront of the technology revolution by helping rural
A. Importance financial institutions in providing RuPayKisan Cards
(RKCS) to all their farmer clients. Refinance: Short
Adequate and timely availability of finance is essential
Term Loans (Crop loans) are extended to farmers for
for agricultural sector. Further, due to the long gestation
crop production by financial institutions, which support
period between the investment made in growing crops
ensuring food security in the country
and the potential returns, credit availability assures
significant importance Commercial Banks (CBs): Subsequent to the
nationalization of 14 major Commercial Banks in 1969
In most of the Indian rural families savings are
(followed by another six banks in 1980). Commercial
inadequate to finance farming and other economic
Banks have been given a special responsibility to
activities. Indian farmers need credit both for working
provide rural credit by establishing their branches in the
capital and for capital investment.
rural areas. Scheduled commercial banks contributed
With onset of Green Revolution, Indian Agriculture has the major share (78-60%) in agricultural and allied
became input intensive (requiring lots of inputs ike credit. *
seeds, fertilisers and pesticides) which require capita
Regional Rural Banks (RRBs): RRBs are the
B. Sources specialised banks established under RRB Act. 1976 to
cater to the needs of the rural poor. RRBS are set-up as
Non-Institutional Sources: In 1951, non institution rural-oriented commercial banks with the low cost
sources accounted for 90% of total agricultural create profile of cooperatives but with the professional
The important sources of non-institutional credit discipline and modern outlook of commercial banks
include money lenders, traders, landlords etc. The
interest charged is usually very high. The land or other
assets are generally kept as collateral. Traditionally, The RRBS aim at providing credit and other faces to the
they have been major source of credit due to their easy small and marginal farmers. small agricultural labourers
accessibility to the farmers at local level. This number entrepreneurs in rural areas
has significantly reduced to 28% in the recent years.
As per Bharat Microfinance Report (2017) agriculture
al Sources: Refers to the formal institutions purpose as animal husbandry and trading are major sub-sectors
part of the policy on agricultural Government They where income generating loans are deployed
constitute 72% of total oval Sources involved in credit
are www Bank for Agriculture and Rural Development Small Finance Banks (SFBa): Small Finance Banks are
SAR) is an apex institution established in 1982 cheat the financial institutions that provide financial services
India It doesn't directly finance yes and cheer rural to the unserved and unbanked region of the country.
people it grants assistance to ne through the institutions They are registered as a public limited company under
described below the Companies Act. 2013. They are required to extend
75% of its Adjusted Net Bank Credit (ANBC) to the
Initiatives of NABARD sectors eligible for classification as priority sector
lending by the Reserve Bank of India
Rural Infrastructure Development Fund (RIDF): was set
up with NABARD in 1995-96 by the RBI at of the Rural Co-operative Credit Institutions Rural Credit
shortfall in lending to the priority sector by scheduled cooperatives are the oldest and most extensive form of
commercial banks for supporting rural structure rural institutional financing in India
projects. In 2020-21, 29.848 crores was allocated to

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The major thrust of these cooperatives in the area of Uneven Distribution of Institutional Credit: In 2019, the
agricultural credit is the prevention of exploitation of RBI's internal working group found that credit disbursal
the peasants by moneylenders It consists of three tier to the farm sector was higher than agriculture GDP in
system: 1) State Cooperative Banks 2) District Central some states, and the ratio of crop loans disbursed to
Cooperative Banks 3) Primary Agricultural Credit input requirements was highly unequally distributed
society (PACS) Kerala (326%), Andhra Pradesh (254%). Tamil Nadu
(245 %). Punjab (231% ), and Telangana are some
Micro Finance Institutions (MFI): A microfinance examples (210%)
institution is an organization that offers financial
services (key loans) to low income populations Procedural Delays: Agricultural credit is provided by
institutions which are subject to red tape. There is a
These institutions provide small loans to the poor at low problem of considerable delays in processing of loan
interest rates without collateral Microfinance has a applications and collaterals. Thus farmers shy away
significant role in bridging the gap between the formal from institutional financing and increase their
financial institutions and the rural poor. The Micro dependency upon non-institutional sources.
Finance institutions (MF)
Overemphasis of Monetary Credit: While the the is very
accesses financial resources from the Banks and other important factor but it should be complement with the
mainstream Financial Institutions and provide financial extension of services in form of guider expertise and
and support services to the poor MFIs make individual counselling on agricultural s farmers
microcredit loans directly to villagers,
microentrepreneurs, impoverished women and poor Multiplicity of Institutions: Numerous organise
families. Land Development Banks: It includes State Co providing similar kind of service with no coordination
operative Agriculture and Rural Development Banks in the system and the commercial viability is advert
(SCARDBS) and Primary Co-operative Agriculture and affected in this scenario
Rural Development Banks (PCARDBS). These provide
both medium and long-term Agri business loans against Lack of Motivation: In order to fill the gap the occurred
a collateral of land. due to the failure of rural cooper societies, Government
gave increasing role to t commercial banks. However,
C. Issues commercial banks as the desired skills and expertise in
the agro-credit
Financial Exclusion: Despite of a large network of the
institutional credit system, it has not been able to Poor Recoveries: Banks are shying away from financing
adequately penetrate the informal rural financial mainly because of poor recoveries which inflicting the
markets and the non-institutional sources continue to system. It is ironical that the recovery position is
play a dominant role in purveying the credit needs of adverse amongst rich farmers the amongst the small
the people residing in rural areas. In the last 10 years farmers. The political decisions waiving off loans are
agriculture credit increased by 500% but has not further putting pressures on the financial system.
reached even 20% of the 12.56 crore small and marginal
farmers. The RBI has also questioned agricultural
D. Measures
households with up to two hectares getting only about Financial Inclusion: Given the emergence of severe
15% of the subsidized outstanding loan from alternative financial models, viewing the problem
institutional sources (bank, co-operative society). This financial exclusion as a market failure with no market
shows that the bulk of subsidized agri- credit is grabbed oriented solutions is no longer accurate Finance
by big farmers and agri-business companies. exclusion must also be defined clearly, this is a exercise
High Interest Rates: The rate of interest charged by rural that will highlight what needs to change and provide
financial institutions (RFIs) from farmers continues to insights into appropriate solutions. It refers to the
be considerably higher than those charged by financial obstacles or constraints that keep people from using
institutions from urban consumers. 95% of tractors and financial services. It can range from not having a bank
other agri-implements sold in the country are being account to financial illiteracy.
financed by non-banking financial companies, or No-Frills Account: In order to expand the outreach of
NBFCs, at an 18% rate of interest. the banking services, banks made availability basic

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banking 'no-frills' account with minimum o nil balances. Promoting Agri-Entrepreneurs of the 21st Century:
The regional rural banks were as specifically advised to According to reports, farmers have been able to obtain
allow limited overdraft facilities in 'no-frills' accounts loans via mobile phone applications. These apps use
without any collateral or linkage to any purpose. satellite imagery reports to capture the extent of land
owned by farmers in states with digitized land records,
Micro Finance Innovations: Micro finance emerged as and they expand the crop to digitally extend Kisan
an alternative financial vehicle the provides micro credit Credit Card loans.
or small loans granted to poor without any collateral.
These loans are provide through micro finance Federalism in Cooperation: Reforming the land easing
institutions (MFIs) system and establishing a national-level agency to
create consensus among states and the federal
Direct Income Assistance (DIA): Giving small and government on agricultural credit reforms are also
marginal farmers direct income support on a pe hectare necessary to close the gap and meet the greatest umber
basis, rather than heavily subsidizing create is one way of small and marginal farmers.
to empower them.
Impact Investments: In India, impact investments have
Encouraging Farmer Producer Organisations Fod gained a lot of momentum and have a promising cure. It
(FPO): Streamlining the agri-credit system to S ΠΕ her has been earned in the form of debt investments in co-
crop loans to farmer producer organizations, or FPOS, operatives and food companies, Multi investments in
or small farmer FPOs, against commodity stocks can be retailers and ag-tech firms, and her forms of investment
a win-win model for agriculture development that aim to achieve optimum input factor and energy
use, effective resource management, and so on
Suggestions
Priority should be given to the ability to repay rather
Financial Discipline to Improve Recovery: A national
than the collateral: The size of landholdings and the
consensus among political parties should be evolved
level of income of agricultural households have a
two not politicizing the Rural Financial Institutions
significant impact on the variables of financial
(RFIs) and resist from announcement of loan or interest
inclusion, such as savings, investment, and even credit
waver schemes and giving calls for not repaying the
In order to double farmers incomes and rescue those in
institutional loans
debt, India must change this reality. particularly in
Revamping the Cooperative Credit Structure: The terms of credit. The reliance on income and
Cooperative Credit Structure should be strengthened landholdings for credit defeats the purpose of financial
make use of its wider reach. These have to be inclusion
recapitalised so as to provide funds for improving their
Philanthropy as a Source of Affordable Credit:
financial positions.
Charitable donations with no obligation to repay the
Financial Cum Consultancy Approach: RFIs needs to money allows for more flexibility in the design of credit
provide extension services like consultancy about seeds, instruments for India's small and marginal farmers A
availability and use of modern inputs, marketing revolving fund may be established to hold
strategies etc to the cultivators so that a holistic package contributions, repaid loans, and loan interest. Interest-
of assistance can be provided to them. free loans are not a safe idea because there have been
reports of arbitrage exploitation in the past Credit
Group Approach to Lending: The lending to instruments may also be sympathetic to farmers who are
homogenous farmer's groups needs to be organized to deeply in debt and forgive loans However, in order to
improve credit delivery. This would help to improve prevent wilful default motivated by the anticipation of
recovery because of peer pressure. loan waivers, such waivers must be issued on a case-by-
case basis.
Leveraging Technology: With cell phone penetration
among agricultural households in India at 89.1%,
ambitious efforts to increase institutional credit 14.12 Research and Extension
distribution through technology-driven solutions have Services
the potential to reduce the degree of agricultural
households' financial exclusion. A. Importance

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Agricultural Extension is an empowering system of E. Suggestion for Rejuvenation of Agricultura

sharing information knowledge technology, skills, risk Extension in the Country
& farm management practices across agricultural sub-
sectors. all along the agricultural value chain, to enable Co-opting and converging multiplicity of pubic private
the farmers to realise higher net income from their and not for profit extension services
enterprise on a sustainable basis. In other words,
Agricultural extension can be defined as the delivery of Agricultural extension activities to cover o and non-
information inputs to farmers to increase agricultural farm" income generating activities which at critical for
productivity and also it is the application of scientific doubling farmers' income
research and knowledge to agricultural practices Leveraging ICT to reach out to farmers will streaming
through farmer education information flow, reduce load on manpower and prove
for real time information, among other advantages
B. Objectives of Agriculture Extension
Services Revisiting Curriculum in Agriculture Universities
Public Private Partnership (PPP) mode through KVK
The main objective of Agriculture Extension Sy AES's Agribusiness oriented extension system Capacity
is to transmit latest technical know-how am Besides this building of extension functionaries
the Agriculture Extension Ser focuses on enhancing
farmers knowledge str techniques and helping them to F . Forms of Agriculture Extension Services Krishi
increase productive is done through training courses, Vigyan Kendra KVK places a special emphasis on the
farm visits or tented kisan melas, kisan club is, advisory training and education of farmers webpreneurs, farm
bulletins to women, rural youth, financial institutions extension
functionaries as well as voluntary organizations. The
C. Types of Agriculture Extension Services centre plays a First Line Extension roe A linkage
between research and the field in augmenting the socio-
Technology transfer Services: Transfer knowledge and
economic conditions of farmers. farm women, and
information
livestock owners' established across the country at the
Advisory Services: Advice to farmers in specific district level with a team of a multidisciplinary team of
problems faced by them experts, aim at technology assessment and refinement
and work as a knowledge and resource centre in the
Facilitation Services: Support farmers to out the own district.
problems and develop their own stop D. Limitations of
the Agricultural Extension Services M-Kisan SMS Portal: M-Kisan SMS Portal for farmers
enables all Central and State Government organizations
The technological solutions provided by the scient have in agriculture and allied sectors to give
not reached all the farmers, thus the res & development information/services/advisories to farmers by SMS in
outputs remain hollow if they reach the intended user. their language, preference of agricultural practices, and
location.
In India, Agricultural Extension has largely certain
focussing on production aspects whereas taken Kisan Call Centres: In order to harness the potential of
requirement today is more market related • Public ICT in Agriculture, the Ministry of Agriculture launched
extension provides advisory services when input supply Te scheme "Kisan Call Centres (KCCs)" on January 21,
is controlled by private sector this qua in delivery of 2004. Its main aim is to answer farmers' queries on a
services also creates confusion desire right advice by telephone call in their own dialect. Sandesh Pathak: The
public extension, farmers purchase wrong inputs Sandesh Pathak application will enable SMS messages
influenced by aggressive sale by input dealers. to be read out loud, for the benefit of farmers who may
have difficulty in reading. It uses the text-to-speech
To make the weather forecasting information system as
synthesis systems developed by the Indian Language
a part of extension services more effective information
TTS Consortium.
needs to be combined and provided with other
environmental information such as ground cover, soil Sanchar Shakti scheme: This is Mobile Value Added
type, soil organic matter, soil rada soil temperature, soil Services (VAS) provisioning that envisages the
moisture and long-term drought conditions. development of content/information customized to the

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requirements of women SHG members engaged in attacks, when to take the produce to the market and
diverse activities in rural areas across India where to sell, etc.

Agropedia-ICAR initiative: Content availability and its Access to the Latest Information on Best Practices:
intelligent organization continue to be a serious Information and communication technology can help
challenge in agriculture. This prevents the offer of bridge the knowledge gap and disseminate the latest
meaningful and efficient advisory and allied services to developments in the fields of agriculture to the farmers
farmers and other stakeholders. Agropedia is an attempt of remote regions of the country. This will help bridge
to infuse semantic and social networking technologies the gap in agricultural development between the
into agriculture information management to alleviate advanced and backward regions of the country and the
this problem world

Kisan Rath: The Ministry of Agriculture & Farmers Knowledge Assimilation: The ICT and other e-
Welfare has launched the Kisan Rath"mobile Technology solutions simplify the assimilation of
application (app) to facilitate transportation of food information related to the latest developments in the
grains and perishable during the lockdown. field of agriculture and best practices. This information
can then be easily accessed by farmers the world over to
Meghdoot: This app will help farmers by providing improve their productivity.
forecasts relating to temperature, humidity, rainfall,
wind speed and direction, and how to take care of the Increase the Reach of Farmers: ICT based solutions
crops and livestock like e-NAM, e-Commerce can help widen the reach of
the farmers both for purchasing the inputs and selling
Kisan Suvidha and Pusa Krishi Mobile App: The their produce.
application provides information related to market
prices, seeds, pesticides, fertilizers, weather and Real-time Fleet Tracking and Monitoring: Digital and
agricultural machinery, etc GPS technologies have been used to track which ular
movements and fuel consumption operation tracking to
IFFCO IMandi: IFFCO Mandi is a Social Commerce monitor yield and crop quality.
app launched in line with the Digital India initiative to
promote the rural digital revolution and aims to benefit Instant Access to Experts: ICT and smartphones
the farmers. It is specially built for large communities promote consultation with the experts in the field of
with commerce, content and communication enabled in agriculture. They enable the farmers to consult experts
a simple, seamless, and secure manner. for seeking their advice regarding their crops and
livestock from their place of stay itself. It widens the
14.13 Agri-Tech reach of the experts as well as reduces the physical
effort on the part of the farmers in reaching out to the
A. Importance experts

Agritech is the use of technology in agriculture, Precision Farming: The focus here is on optimal
horticulture, and aquaculture with the aim of improving utilization of the resources to improve both the quality
yield, efficiency. and profitability Agritech can be and quantity of the output while lowering the cost of
products, services or applications derived from production. It increases the efficacy of the fertilizers
agriculture that improve various input/output processes. and pesticides, thus preventing soil degradation and
Examples include Mobile applications, weather efficient usage of irrigation. This can be achieved
forecasts, drones, use of ICT in agriculture etc. through advanced technology like satellite monitoring.
usage of drones for applying pesticides, regulated
B. Benefits of Agri-Tech irrigation through sprinkler systems, etc.
Better Planning and Decision Making: Access to Easy Access to Credit and Insurance: Information and
necessary information can help the farmers plan better Communication technology solutions like mobile
and make better decisions including which crops are to applications can provide a channel for accessing credit
be raised based on the market conditions, time to sow from institutional lenders like commercial banks. The
crops based on the weather forecast, the amount of ICT solutions also promote farm insurance activities
fertilizer to be applied, safety against possible pest

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among the farmers by providing them multiple regional languages or it takes a long time t new
insurance packages through mobile applications technologies, they only believe and rely on the own
experience. them to being the adoption process and
Remote Monitoring and Drones: ICT solutions and loT scaling tus Old Behaviour: Old-age farmers do not
helps the agriculturalists in remote monitoring of their believe
crops and livestock. Through the use of Smartphones
and mobile applications, farmers can perform most of
the crop and livestock monitoring from anywhere and in
14.14 Food Management
real-time. Drones help farmers in applying the proper
amount of pesticides even from remote locations. It also
14.14.1 Minimum Support Price
helps the farmers in getting alerts to pest attacks or The MSP is the rate at which the government purchase
weed growth, enabling them to take up timely measures crops from farmers, and is based on a calculation of
to tackle them. least one-and-a-half times the cost of production
Livestock Management: ICT solutions help farmers incurred by the farmers
monitor the growth of livestock, helps them in feed MSP is a "minimum price" for any crop that the
management. It helps the farmers track the health of the government considers as remunerative for farmers and
livestock. It helps them in maintaining optimal living hence deserving of "support"
conditions for the livestock • Storage Management: e-
Technology solutions help the farmers and the traders 46 viewed as a form of market intervention (initiated
monitor the real-time parameters like temperature and 1966-67) by the Central Government to protect farmers
humidity in the go downs. It helps them in continuous anst any sharp fall in agricultural product prices in the
and real-time tracking of the condition of the products market Thus, it is a guarantee price for farmers to save
in the storage units, etc hem from distress sale MSPs are announced at the Ning
of sowing season of crops If the market price or the
Proper Land Record Management: The use of ICT and particular agricultural commodity falls below MSP nen
e-technologies like GPS helps in the proper the government will buy the entire quantity offered by e
management of land records This helps meer on the farmers at the announced MSP
effective distribution of benefits to the intern
A Objectives
C. Challenges of Agri-Tech
Assure remunerative and relatively environment for the
Lack of Infrastructure: inadequate connectivity and farmers stable price Food Security by inducing them to
internet penetration in the tur of the country is a major increase production and thereby augment the
roadblock in the adopt e-Technology in agriculture availability of food grains. improve economic access of
Illiteracy among the farmers: Lack of basic comp food for people through procurement and distribution.
knowledge and illiteracy hinders the rapid spread e-
B. Determination
Technology in agriculture Financial Constraints: Rich
farmers are adopting technology and utilizing their The Commission for Agricultural Costs & Prices
services but the and marginal farmers are unable to (CACP) recommends MSPs for 22 mandated crops and
afford the technologies and they remain left out fair and moderative price (FRP) for sugarcane. CACP is
an stached office of the Ministry of Agriculture and
Regional Disparities in Access to e- Farmers Welfare. The mandated crops include 14 crops
Technology of the tariff season, 6 rabi crops and 2 other commercial
crops.
There is a greater tendency to adopt the ICT solute in
the relatively developed regions of the when compared The list of crops for which MSP is declared Cereals (7):
to backward and underdeveloped regions, which further Paddy, wheat, barley, jowar, bajra, maize and ag
widens the already ex developmental gap.
Pulses (5): Gram, arhar/tur, moong, urad and lentil.
Adoption Issues: Despite the visible benefits of the new Dileeds (8): Groundnut, rapeseed/mustard, toria,
agricultural technologies, farmers either do no adopt soyabean sunflower seed, sesamum, safflower seed
them due to the lack of availability of informant in the niger seed, Raw cotton, Raw jute , Copra, De-husked

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coconut, and Sugarcane (Fair and remunerative price). Depletion of water resources, soil degradation and
addition, the MSPs of toria and de-husked coconut ire persistence of monocultures due to focus on input
fixed on the basis of the MSPs of rapeseed/mustard and intensive crops (wheat, rice & sugarcane) Distortion of
copra, respectively rational/sustainable farm practices as farmers tend to
grow more remunerative wheat and rice, irrespective of
Factors for Recommending the MSP their agro-climatic suitability
The CACP considers various factors while Lack of awareness among farmers: Even for paddy and
recommending MSP for a commodity, including cost of wheat, where active procurement occurs, less than 50%
cultivation. takes into account the supply and demand farmers have reported awareness of MSP
situation for the commodity, market price trends
(domestic and global) and tarty vis-à-vis other crops, Open Ended Procurement System: It means government
and implications for consumers (tation), environment can't decide quantity it wants to buy. So now
(soil and water use) and terms of Tade between government has huge stocks which are almost double
agriculture and non-agriculture sectors. the requirements for Buffer stock, PDS and other
government schemes such as Midday Meal Scheme.
Three Kinds of Production Cost The CACP projects
three kinds of production pop both at State and all-India Unequal Access: MSPs have unequal access as the
average levels. A2: Covers all paid-out costs directly benefits of this scheme do not reach all farmers. There
incurred by the farmer in cash and kind on seeds, are many regions of the country like the north-eastern
fertilisers, pesticides, hired labour leased-in land, fuel region where the implementation (due to lack of
irrigation. etc. A2+FL: Includes A2 plus an imputed procurement and storage infrastructure) is too weak.
value of unpaid family labour
Dependence on Middlemen: The MSP-base
C2: It is a more comprehensive cost that factors in procurement system is dependent on middlemen
rentals and interest forgone on owned land and fixed commission agents and APMC officials, which small
capital assets, on top of A2+FL farmers find difficult to get access to

CACP considers both A2+FL and C2 costs while Recent Developments

recommending MSP CACP reckons only A2+FL cost
for return However, C2 costs are used by CACP In a bid to encourage crop diversification, the Central
primarily as benchmark reference costs (opportunity Government has hiked the Minimum Support Price
costs) to see if the MSPs recommended by them at least (MSP) for Paddy Pulses and Oilseeds (for all mandated
cover these costs in some of the major producing States Kharif Crops)

The Cabinet Committee on Economic Affairs (CCEA) Significance of MSP Hike: The added focus on nutri-
of the Union government takes a final decision on the rich nutri-cereals is to incentivise its production in the
level of MSPs and other recommendations made by areas where rice-wheat cannot be grown without long
CACP term adverse implications for groundwater table.

C. Issues
Blas for Wheat and Rice: MSPs are announced for 20+ Concerted efforts have been made over the last few
commodities every year, but effectively this price years to realign the MSPs in favour of oilseeds, pulses
support operates primarily in wheat and rice only This and coarse cereals to encourage farmers shift to larger
creates highly skewed incentive structures in favour of areas under these crops and adopt best technologies and
wheat and rice. While country is short of pulses and farm practices, to correct demand-supply imbalance.
oilseeds (edible oils), their prices often go below MSP Issues with Hike:
without any effective price support This increase seems modest keeping in mind the
This has led to: Imbalanced cropping pattern at the cultivation costs-particularly on account of diesel used
expense of other crops such as pulses, oilseed & coarse for powering tractors, irrigation pumps and harvester
grains. combines have gone up. Some increases, especially for
maize, did not even keep pace with inflation. Further,
absence of assured procurement means farmers have no

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incentive to cultivate them. The announcement comes at Lift curbs on international trade which will help solve
a time when farm unions have been demanding problem of large fluctuations in agricultural product
legislation to guarantee MSP for all farmers for all prices.
crops, and a repeal of three contentious farm reform
laws. 14.14.2 Pradhan Mantri Annadata
Shortage in Open Market: Only 1/3rd of the total cereal Aay SanraksHan Abhiyan (PM-
production is left for open market after government AASHA)
procurement. This creates shortage in open market and
abundance in government go downs. The scheme aims to ensure a robust procurement
mechanism, in coordination with the State
As a result, a farmer who chooses the MSP route cannot Governments, such that an increase in MSP will be
take advantage of beneficial market prices and has to translated to higher farmer's income.
depend solely on the MSP. It prevents earning of profit
by producers The AASHA scheme has three components

MSP does not Cover Cost of Production: Even after so 1. Price Support Scheme (PSS) Under PSS, physical
many years of operation, the crop production is still procurement of pulses, oilseeds and copra will be done
increasingly unviable. The support prices that are being by Central Nodal Agencies like NAFED and Food
provided do not increase at par with increase in cost of Cooperation of India (FCI). the MSP declared by the
production. government Procurement under PSS is continued till
prices stabilize at or above the MSP.
Tussle with WTO Provisions: India's MSP scheme for
many crops has been challenged by many countries in Losses, if any, incurred in undertaking MSP operations
the WTO. For example, Australia has complained of the are reimbursed by the Central Government. Profit, if
MSP on wheat. These MSPs have been claimed to be any, earned in undertaking MSP operations credited to
trade-distorting by its method of calculation. If the the Central Government.
current process continues, the country will face
This scheme is implemented at the request of the
international criticism for breaching the 10 per norm for
concerned State Government which agrees to exempt
subsidy on farm production set by the WO •Distortion
the procured commodities from levy of mandi tax and
of Market: MSP regime has led to diston of the market.
ass central nodal agencies in logistic arrangements .
Farmers rely on political pressure remedy their
problems, instead of adapting to ma Price Deficiency Payment Scheme (PDPS) Under this,
the Centre proposes to cover all oilseeds and pay the
All this keeps private investment away from t sector
farmer directly into bank account the difference
Impact on Fiscal Marksmanship: Rapidly expanded between the MSP and his actual selling/modal price
food subsidy bill due to rising MSP. foodgrain storing Pre-registered farmers who sell their crops in
handling & carrying costs, thus, exerting pressure fiscal recognised mends within the notified period can benefit
deficit from it This scheme does not involve any physical
procurement d crops
Suggestions
3. Plot of Private Procurement & Stockist Scheme
The report of the National Commission on Farmers (PPSS): In the case of oilseeds, States will have the
headed by MS Swaminathan, called for distinguishing option to roll out PPSSS in select districts where a
between support prices and procurement prices. The private player can procure crops at MSP when market
distinction has been totally eroded thanks to the MS prices drop below MSP. The private player will then be
becoming the de facto procurement price under the compensated through service charge that will be up to a
"open-ended" grain procurement system. The S should, maximum of 15 per cent the MSP of the crop. It
in reality, be the bare minimum price that grower can involves physical procurement of the notified
call on to avert distress sales, while government commodity.
procurement should be at market-determined prose
Such a mechanism will spur farmers into responding The AASHA scheme will be complementing the
demand- and supply-driven price signals existing schemes of the Department of Food and Public
distribution for procurement of paddy, wheat and other

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cereals and pro coarse grains where procurement takes purchase from farmers/ farmers association at farm
place at MSP. gate/Mandi The PSF is utilized for granting interest free
advance of working capital to Central Agencies,
14.14.3 Market Intervention Scheme State/UT Governments/Agencies to undertake market
(MIS) intervention operations

The Market Intervention Scheme (MIS) is an ad-hoc 14.14.5 Post Harvest Handling
pro scheme under which horticultural commodities and
other agricultural commodities which are perishable in In agriculture, postharvest handling is the stage of crop
production immediately following harvest
nature and which are not covered under the Minimum
Support Price (MSP) scheme are included. The Activities included in Post-harvesting:
objective of this scheme is to protect the growers of
these horticultural/ Uren agricultural commodities from Technical processing activities: Handling storage and
making distress sale in the Sevent of bumper crop
Economic activities: Transportation, information and
during the peak arrival period when prices fall to very
communication, and marketing.
low level.

Implementation A. Objectives of Post Harvest Technology

Post-harvest technologies i.e. all treatments or processes
The Department of Agriculture & Cooperation is
that occur from the time of harvesting until produce
implementing the scheme. Government implements
reaches the customer are gaining importance to increase
MUS for a particular commodity on the request of a
agricultural productivity.
State Government concerned.
The main objectives of applying postharvest technology
Under the Scheme, in accordance with MIS guidelines.
are:
a pre-determined quantity at a fixed Market Intervention
Price (MIP) is procured by National Agricultural To add value to agricultural produce
Cooperative Marketing Federation of India Ltd
(NAFED) as the Central agency and the agencies To maintain quality (appearance, texture, flavour, and
designated by the State Government for a fixed period nutritive value)
or till the prices are stabilized above the MIP whichever
To protect food safety
is earlier.
To reduce losses between harvest and consumption
The Scheme is implemented when there is at least 10%
increase in production or 10% decrease in the ruling B. Need for Efficient Storage, Transport &
rates over the previous normal year. Losses Suffered are
Marketing of Agricultural Produce
shared on 50:50 basis between Central Government and
the State. India is one of the largest producers of food in the
world. But India is still facing the problem of hunger
14.14.4 Price Stabilization Fund and malnutrition. The agricultural sector's contribution
to GDP is very less and Indian farmers are still suffering
The Price Stabilization Fund (PSF) was set up in 2014-
from inadequate prices and a low standard of living.
15 under the Department of Agriculture. Cooperation &
Famers Welfare (DAC&FW) to help regulate the price The reasons for such a dire situation are:
volatility of important Agri-horticultural commodities
like onion, potatoes and pulses. The PSF scheme was Huge Post-harvest losses
transferred from DAC&FW to the Department of
Lack of better price realisation for farmers:
Consumer Affairs (DOCA) w.e.f 1st April, 2016
Bottlenecks in logistics Weak supply chains
The scheme provides for maintaining a strategic buffer
of aforementioned commodities for subsequent C. Loss of Agricultural Produce at Various
calibrated release to moderate price volatility and Stages
discourage hoarding and unscrupulous speculation. For
building such stock, the scheme promotes direct

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Probable Problems procure, store and discharge grains as per policy of the
government
Losses of agricultural produce are a major problem in
the post-harvest chain. They can be caused by a wide Food Corporation of India (FCI) has the prime
variety of factors, ranging from growing conditions to responsibility of procuring the food grains it is a Public
handling at the retail level. Not only are losses clearly a Sector Undertaking, under the Department of Food &
waste of food, but they also represent a similar waste of Public Distribution, Ministry of Consumer Affairs, Food
human effort, farm inputs. livelihoods, investments, and and Public Distribution It is a statutory body set up in
scarce resources such as water 1965 under the Food Corporations Act 1964. Its
objective is to ensure the ety of the nation by
Hence, there is a need for efficient storage, transport & maintaining a satisfactory teentational refer storks of
marketing of agricultural produce to reduce losses and food gras food grains are procured at MSP FCI also
improve the lives of farmers sells e open market to stabilize the prices esp. in case
D. Significance of Storage, Transport & Marketing of are Farmers prefer to sell to FCI because MSP is
Agricultural generally higher than market price and FC urges in bulk
Quality Control Division of FCI ensures payment of
Produce Perishable Food Industry: The perishable food food grains from procurement centres aptly in
industry is crucially dependent on storage, logistics, accordance with Govt of India's uniform quality
transportation, and distribution. specifications ACY has also been nominated as an
additional nodal Agency for procurement of Pulses and
Food Security: Increasing storage capacity and ensuring
Oilseeds
last-mile connectivity will help prevent post-harvest
losses and ensure food security. A. Procurement
Effect on the Price of Agricultural Produce: As most FC follows two models of procurement viz centralized
farmers cannot afford to take their produce to and decentralized procurement
government-regulated mandis due to high transportation
costs and storage issues, they are often Under Centralized Procurement System, the
procurement of foodgrains in Central Pool are
Lack of storage facilities Ineffective marketing undertaken either by Food Corporation of India (FCI)
Lack of Quality control mechanisms compelled to sell directly or State Government agencies procures the
to middlemen at a low price foodgrains and handover the stocks to FCI for storage
and subsequent issue against GO! allocations in the
Multiplier Effect: Procurement of farm produce by the same State or movement of surplus stocks to other
government may not prove fruitful in the absence of States. In Centralized Procurement, grain is first moved
good storage and transportation facilities to FCI go downs and then reallocated to the States. The
cost of the foodgrains procured by State agencies is
Creates Employment Opportunities: An investment in reimbursed by FCI as soon as the stocks are delivered to
creating robust post-harvest storage and transportation FCI. This results in extra expenditure on storage and
by investing 89,375 crore will also create over 3 million transportation.
jobs.
The Decentralized Procurement was introduced by the
Empowers Rural Economy: The majority of jobs wi be government in 1997-98 with a view to enhancing the
at the village level, thus empowering the local, rura efficiency of procurement and PDS and encouraging
economy local procurement to the maximum extent thereby
extending the benefits of MSP to local farmers as well
14.14.6 Procurement, Storage and as to save on transit costs. This also enables
Transport procurement of foodgrains more suited to the local
taste. Under this scheme, the State Government itself
Agricultural procurement and storage are the areas undertakes direct purchase of paddy and wheat on
which are heavily controlled by the government Food behalf of Government of India, and also stores and
Corporation of India (FCI) was formed in 1960s and distributes these foodgrains under TPDS and other
was a part of the larger plan directed toward food welfare schemes. The Central Government undertakes
security and self-sufficiency. FCI's responsibility is to

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to meet the entire expenditure incurred by the State mandi earmarked for procurement As of 2020, India has
Governments on the procurement operations as per the a total Agri warehousing capacity of around 91 million
approved costing. The Central Government also metric tonnes with the majority of the capacity being
monitors the quality of foodgrains procured under the owned by state agencies State agencies own around
scheme and reviews the arrangements made to ensure 40% of the capacity and the balance distributed among
that the procurement operations are carried smoothly. private entrepreneurs, cooperative societies, farmers,
etc.
B. Storage
Issues and constraints in storage:
Sage is an important marketing function, which
involves toding and preserving goods from the time The poor condition of storage facilities.
they are produced until they are needed for
Lack of enough storage space.
consumption. It is the phase of the post har mest system
during which the products are kept in such a way as to Low investments by the private sector in storage.
guarantee food security other than during periods of
agricultural production. Not using scientific storage methods.

The main objectives of storage can be summed up as Inefficient capacity utilization.

follows: Regional imbalances in storage capacity.
At the food level to permit deferred use of the Insufficient funding for bodies like FCI, CWC, etc.
agricultural products harvested
Steps were taken to improve storage facilities:
At the agricultural level to ensure availability of seeds
for the crop cycles to come Decentralized Procurement Scheme to procure and store
at the state level to avoid transit losses.
At the age industrial level, to guarantee regular and
continuous supplies of raw materials for processing Negotiable warehouse receipt system:
industries
Under this system, farmers can deposit their produce to
At the marketing level to balance the supply and the registered warehouses, and get a certain amount as
demand for agricultural products, thereby stabilizing advance from banks against their produce valued at
market prices MSP.

Importance of Storage: Ensures a continuous flow of They can sell later when they feel prices are good for
goods in the market them.

Protects the quality of perishable and seem perishable This will bring back the private sector, reduce massively
products from deterioration Helps to cope with the the costs of storage to the government, and be more
seasonal demand of goods key woollen garments compatible with a market economy.

Helps in the stabilization of prices by adjusting demand The Essential Commodities Act (ECA), 1955 has been
and supply amended to relax stocking limits and thus encourage
private and foreign investments in storage.
Storage is necessary for some period for the
performance of other marketing functions Agriculture Infrastructure Fund for investment in viable
projects for post-harvest management Infrastructure.
Storage provides employment and income through price
advantages Under Pradhan Mantri Kisan Sampada Yojana
(PMKSY) storage and cold chain facilities are created.
Storage Profile of India
"Village Storage Scheme' announced in Budget 2020: It
Around 70% of the total foodgrains production is will be run by women's SHG's.
retained and consumed at the farm level
The aim of the scheme is to provide holding capacity
The balance amount is supplied to the central pool and for farmers and through this, women in villages and the
delivered at the nominated warehouse or at the local rural part of the country will be able to retain their

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status as "Dhaanya Lakshmi" (one of the eight forms of Krishi Udan scheme to transport agricultural goods by
Hindu deity Lakshmi, the goddess of wealth) air.

Further measures to improve storage: Modernization This will immensely help improve value realisation
and up-gradation of Bulk Grain Handling Infrastructure. north (on agricultural products), especially in the east
and tribal districts.
The private sector should be encouraged to building
storage capacities in which they will store and marta Transport and Marketing Assistance (TMA) It aims to
foodgrains procured by the Government agencies provide assistance for the international component of
Adequate manpower and supervision are required freight and marketing of agricultural produce which is
scientific and safe storage. likely to mitigate the disadvantage of the higher cost of
transportation of export of specified agriculture
Timely and systematic evacuation planning can lea to products due to trans shipment and to promote brand
the utilization of vacant storage space recognition for indian agricultural products in the
The intervention of State Governments in identifying specified overseas markets
and handing over land for the construction of covered Pradhan Mantri Gram Sadak Yojana: It is a nationwide
storage spaces without undue delay in obtaining various plan in India to provide good all- weather road
clearances will speed up the addition storage capacity. connectivity to unconnected villages Kisan Rath mobile
FCI reforms should be an urgent measure to address the application (app) to facilitate: transportation of
issue of funding and scientific storage foodgrains and perishable during the lockdown

Integration of the entire storage business in Inda would The government has granted relaxation in the
go a long way in ensuring timely decisions are taken for nationwide cutdown for activities related to agriculture-
optimum utilization of the existing facilities farming and ailed activities with a view to addressing
problems being cede by the farming community
C. Transportation
Transport enables agriculture and emboldens the farmer
to invest more and increase production. An efficient Further measures to improve transportation
transport and marketing system can still ensure that unt Shift from road to rail network: About 1.9% of the
costs remain low and retain the agriculture value chain perishable fruits and vegetables are transported through
at a robust level market for agricultural produce, rail, while 97.4% of the produce is transported through
enhances interaction among geographical and economic roads. This ratio needs to shift in favour of the rai
regions. and opens up new areas to economic focus. network.
Issues and constraints in transportation Investments: Indian farmers incur 92,651 crore per year
Lack of modern road and rail infrastructure. Lack of full in post-harvest losses, the primary causes of which are
regional connectivity especially with Northeast India. poor storage and transportation facilities. Ironically,
Seasonally blocked routes in Himalayan and North- according to the high-level Dalwal committee report, an
eastern states. investment of 89,375 crore- a figure marginally lower
than the annual post-harvest losses is all it takes to
Steps were taken to Improve transportation improve the state of storage and transportation facilities
for food crops.
Kisan Rails are the first-ever multi-commodity trains
Dedicated Freight Corridor for agro-products.
These trains with refrigerated coaches will help in
bringing perishable agricultural products like D. Buffer Stocks
vegetables, fruits to the market in a short paranoid of
time. Butter stocks refer to a pool of certain commodities like
Rice Wheat, etc which are maintained to provide food
These will ensure that agro-products reach from one security and tackle unforeseen emergencies like
corner to another corner of the country. drought. famine, wars, etc. In India, the buffer stocks
are maintained by the public sector.

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The Buffer norms are the minimum food grains the High Cost of Logistics and administration: With a
Centre could have in the Central pool at the beginning majority of the funds allocated for buying the buffer
of each Quarter to meet requirement of public stocks, it becomes troublesome for the Agricultural
distribution system and other welfare measures. ministry and FCI to adjust the budget to make funds
available for the efficient establishment and working of
The objective of maintaining Buffer stocks: The public the storage units. This can be seen in the following
core food grain buffer stocks in India are maintained ways:
with The main objectives:
Wastage: Open, outdoor storage, the food grains are
Better returns for Farmers: The procurement of food often spoiled by rodents, frost, and rain. causing a huge
grains from the farmers at the Minimum Support financial loss for the government.
Price(MSP) helps the farmers get rid of the distress se
of their products and ensures them reasonable return for Warehousing Issues: Lack of sufficient storage space
their produce. and other storage infrastructure after the procurement.

Food Security: The buffer stocks of food grains are Diversion and Pilferage: The Buffer stocks are
maintained to achieve the goal of providing every sometimes diverted to black markets, liquor
Indian citizen with sufficient food for their sustenance manufacturing units, Ghost beneficiaries. This way
the maintaining food security instead of the targeted population, others benefit from
the buffer stocks of food grains, starving a great
Price Stability: Whenever there is a rise in the prices of percentage of the population.
food stocks the buffer stocks are released into the
market to bring down the prices to an acceptable level. Transportation Issues: The cost of transportation of the
This was the government tries to keep the food inflation grains to and from the FCI go downs is huge Spilling
at acceptable levels and spoilage at the time of transportation also increase
the losses
Source of Food Grains for Welfare Programs: The food
stock procurement helps the government- run its social Sometimes, buffer stocking is also used for political
welfare schemes like the Targeted Public Distribution considerations, For example: In the initial phase of
System (TPDS) and Other Welfare Schemes (OWS) like farmers' agitation on the borders of Delhi, several press
Mid-Day Meals Scheme for school-going children, releases were issued (between October and December
distribution of food grains to people displaced due to 2020) by the government taking credit for the higher
natural calamities, etc procurement of rice The idea possibly was to reassure
the farmers that despite the enactment of farm laws, the
Mechanism of Buffer Stocks open-ended procurement of rice has continued.
Food Stock available in the Central Government's pool As the table shows, India is carrying 3.5 times more
is the stock held by stocks than the buffer norms fixed in January 2015
State Government Agencies (SGAS) Trade Distortion Practice: Many developed countries of
States which are taking part in the Decentralised the West consider the government procurement of food
Procurement Scheme grains and maintenance of the buffer stocks as a trade
distortion practice. They drag India to the WTO
Food Corporation of India (FCI) As of now, the regarding the same.
stocking norms for buffer stock decided by the Gol
comprises of: Skewed Cropping pattern: Integration of the buffer
stocks with MSP for food grains like rice and wheat
Operational Stocks: The stock required to meet the leads to excessive production of these food grains.
monthly requirements under TDPS and OWS These are water-intensive crops and need the greater
application of fertilizers for greater productivity.
Strategic Reserves: The reserves to meet the
procurement shortfall. (Presently it is 5 MT) Open-Ended Procurement: In the absence of proper
estimation of the overall buffer stock estimation for
Challenges with maintaining buffer stocks running the PDS and emergencies, the open-ended
procurement of the food stocks further poses a

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challenge to proper storage and outtake of the buffer C. Various issues in Public Distribution
stocks. System (PDS)
14.14.7 Public Distribution System Identification of beneficiaries: Studies have shown that
(PDS) targeting mechanisms such as TPDS are prone to large
inclusion and exclusion errors. This implies that entitled
Public distribution system is a government-sponsored beneficiaries are not getting food grains whie those that
chain of shops entrusted with the work of distributing are ineligible are getting undue benefits
basic food and non-food commodities to the needy
Leakage of food grains: TPDS suffers from large
sections of society at very cheap prices. PDS is operated
under the joint responsibility of the Central and the leakages of food grains during transportation to and
State Governments. from ration shops into the open market. In an evaluation
of TPDS, the erstwhile Planning Commission found
The public distribution system (PDS) is supposed to 36% leakage of PDS rice and wheat at the all-indit
insulate the poor from the impact of rising prices of level.
essential commodities and maintain their minimum
Issue with procurement: Open-ended Procurement Le,
nutritional status.
all incoming grains accepted even if buffer stock is
The modern public distribution system for food grain filled, creates a shortage in the open market.
was set up in 1965, as part of an overall strategy of tw
Issues with storage: A performance audit by the CAG
management.
has revealed a serious shortfall in the government's
A. Objectives storage capacity. Given the increasing procurement and
incidents of rotting food grains, the lack of adequate
Price stability, covered storage is bound to be a cause for
Price support to farmers, and Minimum support price: The provision of minimum
support price (MSP) has encouraged farmers to divert
Making grain "affordable", through distribution from
land from production of coarse grains that are
surplus to deficit regions and to the poor
consumed by the poor, to rice and wheat and thus,
B. Evolution of PDS System In India accourages crop diversification

Early Public Distribution System: The initial POS was Environmental issues: The over-emphasis on attaining
a general entitlement for all the citizens. A fe amount of self-sufficiency and a surplus in food gains which are
food grains, sugar and edible oil were distributed water-intensive, has been found to be environmentally
through dedicated government outlets called Fair Price unsustainable Procuring states such as Punjab and
Shops (FPS), at a price lower than the market rate. Haryana: are under environmental stress, including
rapid groundwater depletion, deteriorating soil and
Revamped PDS: A more reformed version of the same water conditions from overuse of fertilisers
was launched in 1992 in 1775 blocks (mostly backward
and remote areas). This primarily focussed on PDS Increase in the Food Subsidy Bill.
towards economically backward families Targeted PDS: Central Issue Price (CIP) The Central Issue Price is the
Launched in 1997, under TPDS beneficiaries were price at which centre allocates food grains to the states.
divided into two categories, and two sets of PDS issue Wheat and rice are sold by the Central Government at
prices were announced for uniform central issues prices (CIP) to states and union
Households below the poverty line or BPL territories for distribution under Targeted PDS (TPDS).

Households above the poverty line or APL Central Issue Price under NFSA: Foodgrains under
National Food Security Act (NFSA) are made available
Antyodaya Anna Yojana (AAY): This scheme was at subsidized prices of 3/2/1 per kg for rice, wheat and
launched in December 2000 for the poorest among the coarse grains respectively.
BPL families. These families get 35 kg of food grains:
3/kg Rice and *2/kg wheat The CIF of wheat and rice for NFSA beneficiaries has
not been revised since the introduction of the Act in

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2013. But through these years, the MSP has been Higher procurement of food grains as against the
increasing. stocking norms (due to Open Ended procurement
Policy)
The difference between the MSP (higher than market
price) and the lower CIP has led to increasing food Increase in storage cost
subsidy per kg of food grain.
Problems with Central Issue Price (CIP)
Thus, the total food subsidy bill of the centre govt. is
increasing, estimated to be 1.1 lakh crore in 2020-21 The CIP for NFSA beneficiaries has not been revised
from 200/quintal in case of wheat and *300/quintal in
D. Food Subsidy Bill Food subsidy comprises case of rice.
of:
These rates were fixed under the Act initially for a
Subsidy provided to FCI for procurement and period of three years from the date of commencement of
distribution of wheat and rice under NFSA and other the Act and thereafter were to be fixed by the Central
welfare schemes and for maintaining the strategic Government from time to time, while not exceeding the
reserve of food grains minimum support price.

Subsidy provided to States for undertaking However, it has not been revised since 2013. This has
decentralized procurement. The Food subsidy bill is resulted in widening of the gap between the economic
calculated as the difference between Economic cost cost and CIP Uniform CIP for BPL and APL households
Food grains and Central Issue price (CIP).
E. Reforms
Food Subsidy Economic Cost Central Issue Price (CIP)
Computerization: End-to-End computerization of
Economic Cost = Actual Cost borne by FCI from Time
of TPDS to effectively monitor the TPDS programme and
to reduce errors and leakages.
Procurement till Distribution 1. Procurement Cost
(MSP) is increasing Digitized Ration Cards: This allows online entry and
verification of beneficiary data. It also enables online
2. Procurement Incidentals (Mandi Tax Storage tracking of monthly entitlements and off-take of food-
Transport) is increasing due to inefficient grains by beneficiaries.
procurement/Storage methods
Computerized Fair Price Shops: FPS automated by
3. Cost of Distribution is increasing due to inefficient installing 'Point of Sale' (POS) device to swap the ration
distribution card.

The food subsidy bill has increased from 12 lakh crores Issue of Smart Card in Place of Ration Cards: For
in 2014-15 to 3.8 lakh crores in 2020-21 In order to pay Securing electronic devices used to store beneficiary
the food subsidy bill, the Government has been data and preventing counterfeiting.
borrowing from National Small savings Fund (NSSF)
through the issuance of special G-Secs (However, this Role of Aadhar: Integrating Aadhar with TPDS will
practice of borrowing from NSSF has been discontinued help in better identification of beneficiaries and address
from this year as announced in the Union Budget 2021- the problem of inclusion and exclusion errors According
22) to a study by the Unique Identification Authority of
India, using Aadhaar with TPDS would help eliminate
Reasons for increase in Food Subsidy Bill: duplicate and ghost (fake) beneficiaries, and make
identification of beneficiaries more accurate
Increase in Economic Cost of Food grains Higher
coverage of beneficiaries under NFSA as compared to Technology-based reforms of TPDS implement by
erstwhile TPDS States: Wadhwa Committee, appointed by the Supreme
court, found that certain states had implemented
Increase in MSP (Increase of one unit in real MSP leads computerisation and other technology based reforms to
to 0.48 unit increase in real economic cost procurement) TPDS Technology-based refor helped plug leakages of
food grains during TPDS

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Use of GPS Technology: Use of Global Positioning giving deficit states for the option of cash or physical
System (GPS) technology to track the movement of grain distribution.
trucks carrying food-grains from state depots to FP
which can help in preventing diversion. Pulses and oilseeds deserve priority and Government of
India must provide better price support operations for
SMS-Based Monitoring: Allows monitoring by citizens them, and dovetail their MSP policy with trade policy
so they can register their mobile numbers and send so that their landed costs are not below their MSP
receive SMS alerts during dispatch and arrival of TPDS
commodities. B. PDS and NFSA Related Issues
Public Grievance Redressal Mechanisms: Effective Given that leakages in the PDS range from 40 to 50 per
Public Grievance Redressal mechanisms, such as a toll- cent, the Gol should defer implementation of the NFSA
free number or online complaint platform to register in states that have not done end to end computerization.
complaints or suggestions need to be created
Coverage of population should be brought down from
67% to around 40 percent.
14.14.8 Direct Benefit Transfer
BPL families and some even above that, be given 7 kg/
Under the Direct Benefit Transfer scheme, cash is
person. On central issue prices, while Antyodya
transferred to the beneficiaries' account in lieu of food-
households can be given grains at 73 or 2 or 1 per kg for
grains subsidy component. They will be free to buy
the time being, but pricing for priority households must
food grains from anywhere in the market. This aims to
be linked to MSP
Reduce the need for huge physical movement of
foodgrains Provide greater autonomy to beneficiaries to
C. Stocking and Movement Related Issues
choose their consumption basket The movement of grains should be gradually
Enhance dietary diversity containerised to reduce transit losses and have faster
turn around times
Reduce leakages
FCI should outsource its stocking operations to various
Facilitate better targeting Promote financial inclusion agencies such as Central Warehousing Corporation,
State Warehousing Corporation, Private Sector under
14.14.9 Shanta Kumar Committee
Private Entrepreneur Guarantee (PEG) scheme
The High Level Committee (HLC) (Set up in August
2014) for Restructuring of Food Corporation of India The committee calls for setting up of negotiable
warehouse receipt (NWR) system. In the new system,
(FCI) was chaired by Shri Shanta Kumar. Major
recommendations on different components are as farmers can deposit their produce in these registered
warehouses and get 80% of the advance from the bank
follows:
against their produce on the basis of MSP
A. Procurement Related Issues
D. Buffer Stocking Operations and
The FCI should hand over all procurement operations of Liquidation Policy
wheat, paddy, and rice to states that have gained
sufficient experience in this regard and have created A transparent liquidation policy is the need of hour,
reasonable infrastructure for procurement. In this which should automatically kick-in when FCI is faced
context the Central Government can incentivise states to with surplus stocks than buffer norms. FCI should be
follow Decentralised Procurement Scheme (DPS). It given greater flexibility in offloading surplus stock.
also recommended allowing private sectors to procure
and store grains.
E. Direct Subsidy to Farmers

Cash transfers in PDS should be gradually introduced, Farmers be given direct cash subsidy (of about 7000/ha)
starting with large cities with more than 1 million and Fertiliser sector can then be deregulated. This
population; extending it to grain surplus states; and then would help plug diversion of urea to non-agricultural
uses as well as to neighbouring countries, and help raise
the efficiency of Fertiliser use.

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F. End to End Computerization Farm subsidies act as a complementary income to

farmers, which can be invested back in agriculture
Total end-to-end computerization of the entire food
management system, starting from procurement from Farm subsidies in a way motivate farmers to continua
farmers, to stocking, movement, and finally distribution farming as an occupation
through the TPDS.
Insulate farmers from the issues posed by the cavid-19
G. On the New Face of the FCI pandemic

The new face of the FCI will be akin to an agency for Farm subsidies
innovations in the food management system with the Increase in productivity
primary focus of creating competition in every segment
of the food-grain supply chain, from procurement to Access to quality inputs
stocking to movement and finally distribution under the
Better income to farmers
TPDS, so that overall costs of the system are
substantially reduced and leakages plugged and it serves
a larger number of farmers and consumers.
14.15.2 Direct Farm Subsidies
Whenever a subsidy takes the form of a cash payment
H. Promotion of Self Help Groups and FPOS The
or grant to a recipient, it is characteristically considered
vibrant network of self-help groups formed under the
a direct subsidy.
National Rural Livelihoods Mission (NRLM) can be
tasked with the last-mile distribution of food aid other In the case of direct subsidies, the beneficiary purchases
than the PDS Farmer producer organisations (FPOs) the product at the same price and the beneficiary is
have been at the forefront of rebuilding the inefficient separately compensated for the purchase
supply chains. The FCI along with the National
Agricultural Cooperative Marketing Federation of India Examples of direct farm subsidies: PM Kisan Scheme
Ltd. (NAFED), is well placed to rope in expertise to PAHAL in LPG, etc.
manage the logistics to support supply chain
management.
Advantages of Direct Farm Subsidies:
Direct Subsidies help in increasing the purchasing
14.15 Direct and Indirect capacity of farmers and to raise the standard of living of
the people.
Subsidies
Direct cash transfers government empowering citizens
Agricultural subsidies are funding to farmers to support
and gives choice to beneficiaries to purchase as per
their operations, supplement their income and enhance
needs.
their productivity There are two major categories of
agriculture subsidies, first one is direct and another is It also helps to prevent the misuse of public funds as
indirect. money is reached beneficiaries directly.

14.15.1 Need for Farm Subsidies Direct subsidies also curb the inefficient use of
resources. E.g. As farmers will purchase fertilizer at full
Article 48 of the Indian Constitution, the responsibility rate will purchase what needed.
of the state to organize agriculture on modern lines.
The cash farmers receive can be used as capital in
As per FAO, 70% of Indian rural households primarily agriculture. Reduces government burden freeing
dependent on agriculture for their livelihood Subsidies transportation and storage costs.
are one of the tools for income distribution and to
reduce inequalities (According to the Oxfam report Issues of Direct Farm Subsidies: Lack of Financial
2020, the richest 10% of Indian households hold about Inclusion in rural areas poor accessibility of ATM and
72% of total wealth of the nation). banking service The chance that farmers can use the
money for non- farm unproductive needs
Poor income realization to farmers (farmers income is
less than 1/3rd income of non-farmers) More money in the hands of the public may lead to
inflation

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May have an impact on the food security of the country Pressure from the international community to reduce
subsidies as per WTO subsidies that distort the market
Main issues like market reforms and innovation in
agriculture remained unaddressed issues with the Vote bank politics, the government in power can come
identification of beneficiaries under the Amber box. provide subsidies for merely
political mileage

14.15.4 Issues with Farm Subsidies

As per Economic Survey 2018, rich farmers are
14.15.3 Indirect Farm Subsidies benefitted over small farmers from the farm subsidies
Any non-cash benefit that a recipient receives that helps Out of 1.70 lakh crore in budget 2018-19 as food
operate or compete is regarded as an indirect subsidy. subsidy only about 3000-4000 crore was the investment
indirect subsidies are those subsidies in which the cost in agriculture shows the wasteful expenditure rather
of the product is set at a lower price than the market than supporting agriculture. Subsidies lead to a huge
price india spends roughly 2% of GDP on indirect financial deficit and burden on the financial exchequer
subsidies. These subsidies include credit facilities,
reduction in irrigation electricity bill, fertiliser subsidy, A culture of subsidies may promote inefficiency and
MSP etc. dependence on the government and also reduce the
incentive to improve Policies of subsidies may also
Advantages of Indirect Subsidies: promote other countries to follow the same pursuit
which may then lead to trade wars and protectionist
These play a key role in promoting technological and
policies. Developing countries like India and China are
infrastructural advancements in agriculture. Ex:
not in an affordable position to breach the de minimum
Infrastructural subsidies.
levels of AMS(Aggregate Measures of Support) where
Subsidies on Seed and Fertilizer ensure farmers get developed countries like the USA provides subsidies
quality inputs which help to increase the productivity of >50% in some products like cotton, sugar.
the farm.
Subsidies in developed countries also act as barrier
Helps to change the behaviour and promote farmers entries to the goods of developing countries.
towards sustainable practices like crop diversification.
Subsidies granted to developed countries are way higher
Farmer training also come under Indirect subsidies than those provided in developing countries like India.
which make farmer equipped with knowledge
14.15.5 Probable Solutions
Ensures food security in the country.
Kelkar committee recommended the phased elimination
Help to contain the migration from the agriculture of subsidies and convert them to capital investments
sector to other sectors. Constructing cold chain facilities, warehouses near the
farm gate and holistically developing the agri-sector by
Challenges of indirect farm subsidies:
strengthening backwards and forward linkages could
Subsidies like MSP has led to cereal centric agriculture help in this direction.
with distorted cropping patterns.
Rationalizing subsidies through better targeting and
Providing subsidies in power, irrigation, and fertilizer including provisions for sunset clause can help in
subsidies have led to over usage of natural resources diverting funds to more productive uses and promote
resulting in desertification. Ex: Punjab's groundwater financial inclusion in rural areas.
resources note that groundwater extraction has
Impact of subsidy should be assessed periodically so
increased from 149% in 2013 to 165% in 2018
that subsidies should not distort resource allocation and
Indirect subsidies are marred with corruption and overuse of resources
Manages, due to intermediaries. Ex: PDS where the
Developed and developing countries have agreed to
presence of ghost beneficiaries, leakages are observed.
phase out export subsidies under the Nairobi package of

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WTO. Rather than the limit on entire agricultural value main objective of establishing a co-operative marketing
production the subsidies should be limit based on an are to encourage the intelligent and orderly marketing
individual product like cotton, wool, etc. of agricultural produce thereby eliminating speculation
and waste.
14.16 Marketing of Agricultural Contract Farming: Contract farming can be defined as
Produce agricultural production carried out according to an
agreement between a buyer and farmers, which
14.16.1 Need establishes conditions for the production and marketing
of a farm product or products. Typically, the farmer
Agricultural marketing system is an efficient way by agrees to provide agreed quantities of a specific
which the farmers can dispose their surplus produce at a agricultural product.
fair and reasonable price The term agricultural
marketing include all those activities which are mostly Commodity Market: Commodity Market is about
related to the procurement, grading, storing, trading of precious metals, energy, oil, spices & so on.
transporting and selling of the agricultural produce There are three commodity markets in India:
these operations are involved in movement of farm
National Commodity & Derivative Exchange.
produce from producer to the ultimate consumers. An
efficient agricultural marketing system is required in Multi Commodity Exchange (largest commodity future
India as the farmers are not so conversant with the exchange in India) urge in India
market forces and a support is required to enable them
to efficiently deal with the market. National Multi Commodity Exchange of India

Future Market: Derivatives are financial instruments w

14.16.2 Outcomes of Agriculture
a price that is dependent upon or derived from one more
Marketing underlying assets. In futures contract buyer has th
obligation to purchase a specific asset, and the seller to
Monetising the Produce
sell and deliver that asset at a specific future date Ag
Demand Signal Platform futures markets are considered to be one of the ways
ensure appropriate farm prices
Market growth

Capital formation and investment in technology

14.16.4 Agricultural Produce Market
Committee (APMC)
An Agricultural Produce Market Committee (APMC)
marketing board established by State Governments
India in order to provide a platform for farmers to sell
their produce

To protect and empower the farmers the State

14.16.3 Various Marketing Methods Governments, since 1950s, started enacting APMC
which
Rural Primary markets: Periodic markets or hats and
fairs (melas, jatras) are the major rural markets in India. runs on the following principles: (i) Ensure Farmers are
Rural Primary Markets include mainly the periodical not exploited.
markets known as haats, shandies, painths and fairs.
The producers sell their produce directly to the (ii) Ensure Farmers get good Money.
consumers or to small rural retailers. (iii) Needless intermediaries are eliminated.
Cooperative Marketing: The co-operative marketing is (iv) Improved market efficiency through a decrease
an alternative to private dealers with the main objective market charges.
of securing a large share of profits for the producer. The

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A State is geographically divided and markets (Mands Also, in several Indian States, regular elections of
are established at different places within the State where APMCs are not held and APMC boards are
farmers have to sell their products through auctions. administrated by bureaucrats.
There are 6946 regulated wholesale Mandis in India.
High commission, taxes, and levies: Farmers have to
APMC Acts provide that first sale in the notified pay commission, marketing fee, APMC cess which
agricultures commodities produced in the region such as pushes up costs. Apart from this many states impose
cereals pulses, edible oilseed, fruits and vegetables and Value Added Tax.
even chicken, goat, sheep, sugar, fish etc., can be
conducted only under the aegis of the APMC, through Conflict of Interest: APMC plays the dual role of
its licensed commission agents, and subject to payment regulator and market. Consequently, its role as regulator
of various taxes and fee. The producers of agricultural is undermined by vested interest in the lucrative trade.
products are thus forced to make their first sale in these They despite inefficiency won't let go of any control.
markets. Generally, members and chairman are
nominated/elected out of the agents operating in that
Issues with APMC Acts market.

Exclusionary: Under this regulation, no exporter of

processor could buy directly from farmers. Therefore,
discouraged processing and exporting of agricultural
products.

Monopolisation: Under the Act, the State Government I 14.16.5 Model APMC Act, 2003
could only set up markets, thus preventing private
2003, the Union government with a view to address the
players from setting up markets and investing marketing
shortcomings of the APMC Acts of states, drafted a new
infrastructure. Poor infrastructure facilities (cold
Model APMC Act, and asked the State Governments to
storage/ grading/sorting etc) at these mandis market
lead to lot of food wastages, especially f perishable Salient Features
items like fruits and vegetables.
Direct purchases: Farmer doesn't need to bring his
Fragmentation: The fragmentation of markets within the produce to APMC Mandi. He can directly sell it to
State hinders the free flow of agro-commodities somone whomever he wants. Farmers Processors, exporters,
market area to another and multiple handling of agri- graders, packers, etc., can buy agricultural produce
produce and multiple levels of mandi charges end up directly from farmers Destroy State monopoly of
escalating the prices for the consumers without Mandis and permit private market yards, Direct
commensurate benefit to the farmer Purchase Centres, farmers' market for doing trade in
Cartelisation: The licensee traders and commission agriculture produce
agents have formed informal cartels at these mandis Transparency in transactions: increase the
Many a times, no auction takes place. Even if auction is responsibilities of APMC committee like ensuring
held, collectively these traders keep low bidding so that complete transparency in pricing system and
farmer never benefits from such auctions. transactions taking place in market area, ensuring
Middleman: Middlemen have no facilities to do payment for agricultural produce sold by farmers on the
grading/sorting, all they do is pass the produce from same day
farmer to final consumer and charge truckload of New market channels: it allows Public Private
commission in between.
Partnership in the management and development of
Manipulation: To avoid tax/cess, the traders don't give agricultural markets in the country for post-harvest
sale receipts to farmers and later it is difficult for farmer handling, cold storage, pre-cooling facilities, pack
to prove his 'income' to get loans from banks. houses etc. Contract farming: It not only allows but
Bureaucratisation: Commission agent/middleman/ strongly advocates for contract farming It also provides
trader has to make heavy investment to start a business for dispute resolution mechanism
in APMCS and it leads to rent seeking behaviour later.

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Providing post harvest services: it mandates establish rather an instrument to create a national network of
State Agricultural Produce Marketing Standards Bureau physical mandis which can be accessed online.
for grading, standardization and quality certification. It
provides for abolishment of commission agent system. The e-NAM enables buyers situated even outside the
state to participate in trading at the local level.
Market led extension services: it mandates providing
market-led extension services to farmers including The NAM Portal provides a single window service for
ensuring that farmers are paid for the produce sold on all APMC related information and services like:
the same day. It also seeks to promote agricultural commodity arrivals & prices, buy and sell trade offers,
processing that will increase the value of the produce provision to respond to trade offers
Limitations A. Advantages of e-NAM
Reluctance of States to Reform: APMC model Act is a Choice: It provides more options for sale for farmers. It
sort of roadmap for states for their respective APMC would increase his access to markets through warehouse
Acts which shall be amended. States has adopted Model based sales and thus obviate the need to transport his
APMC in piecemeal manner as per vested interests of produce to the mandi.
various pressure groups. There is reluctance on part of
State Governments to reform the APMC legislation, as Extended Reach: NAM provides opportunity to the
it generates huge revenues. local trader to access a larger national market for
secondary trading.
High charges: The model APMC Act retains the
mandatory requirement of the buyers having to pay Lower cost: Bulk buyers, processors, exporters etc.
APMC charges even when the produce is sold directly benefit from being able to participate directly in trading
outside the APMC. at the local mandi thereby reducing their intermediation
costs.
14.16.6 Agricultural Produce and
Transparency: It removes information asymmetry
Livestock Marketing (Promotion and between buyers and sellers and promotes real time price
Facilitation) Act, 2017 discovery, based on actual demand and supply.
promotes transparency in auction process.
Government had drafted a model "The Agricultural
Produce and Livestock Marketing (Promotion and Best Practices: The NAM will also facilitate the
Facilitation) Act, 2017, which provided for progressive emergence of value chains in major agricultural
agricultural marketing reforms, including setting up commodities across the country and help to promote
markets in private sector, direct marketing, farmer- scientific storage and movement of agri goods.
consumer markets, de- regulation of fruits and One Nation One Market: The gradual integration of all
vegetables, e-trading, single point levy of market fee, the major mandis in the States into NAM will ensure
issue of unified single trading license in the State, common procedures for issue of licences, levy of fee
declaring warehouses/silos/cold storage as market sub- and movement of produce. Hence, a step towards one
yards and Market Yards of National Importance (MNI) nation one market (can be a solution to market
so that more markets were available for farmers to sell fragmentation in India).
their produce for better prices.
B. Challenges of e-NAM
14.16.7 Electronic-National
Infrastructural Deficit: There are no scientific sorting/
Agriculture grading facilities or quality testing machines in many
Market (e-NAM) National Agriculture Market (NAM) mandis Accurate quality testing and sorting of afferent
is a pan-India electronic trading portal which links the product are essential to establish trust among online
existing APMC mandis to create a unified national buyers Lack of internet connectivity is another issue
market for agricultural commodities. NAM is an online which is impeding progress in its development.
platform with a physical market or mandi at the
Interstate Barrier: Barriers hampering interstate transfer
backend. It is not a parallel marketing structure but
of agricultural commodities also have to be removed.

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For example, high taxes and levies imposed by states Most of the State Governments enacted the Agricultural
such as Punjab. Haryana and Andhra Pradesh on Produce Market Regulation Act (APMC Act) which
agricultural commodities trade have to be brought down authorizes the States to set up and regulate marketing
Apart from that, there are more than 22.000 Rural
Lack of Aggregation: With very few big buyers likely to Markets or Grameen Haats under the control of local
be interested in buying the small lots that farmers will bodies. panchayats, APMCs, etc
have to offer, aggregators will be needed and the trick
will lie in ensuring that it is not the same aggregators Problems with the APMC Regime:
who control the mandis that get to dominate NAM.
Restrictive Regime: Under the present APMC Act, farm
Speculation: It needs to be ensured that markets do not produce should be sold only at regulated markets
get cornered by speculators or cartels that drive prices through registered intermediaries. Further, the Essential
up or down. Considerable effort will also be needed for Commodities Act allows Central and State
the clearance mechanism to work. Governments to place restrictions on the storage and
movement of commodities deemed essential by
14.16.8 Agricultural Reforms and governments
Problems with APMC Regime Fragmented Agricultural Marketing: With about 2500
regulated APMCs, 5000 sub-market yards and
Essentially, the Indian agriculture can be considered as
thousands of Rural Markets or Grameen Haats, the
an enterprise with two distinct components- Production
agricultural marketing is fragmented in India. Hence,
and Post-Production activities. With respect to
due to this fragmented marketing the agricultural
agricultural production, India has not only become self-
commodities pass through multiple middlemen and
sufficient in ms of food production, but it has also
traders leading to escalation in prices and also prevents
emerged as a net exporter of agricultural products.
the farmers from getting remunerative prices.
However, the post- production activities of Indian
agriculture have not kept cace with the production Lack of Freedom to farmers to sell their produce to
related activities. The quantities marketable surplus whomsoever and wherever they want.
have multiplied by almost 10 times during the last 50
years. However, the agriculture marketing infrastructure Lack of Access to APMCS: An average APMC in India
continues to remain out-dated. serves an area of around 450 sq.km as against the
recommendation of 80 sq km given by M.S.
Government has converted the COVID-19 crisis into a Swaminathan Committee. On account of this the
form opportunity by undertaking long pending reforms farmers are forced to sell their produce at lower prices
agriculture marketing. Out of 11 measures, 3 measures outside the APMCs.
seek to liberalize agricultural marketing and hence
hailed 1991 moment for agriculture. The 3 farms acts Against Interests of Small and Marginal farmers who
are - A to promote Inter-state and Intra-State Trading, are forced to sell at lower prices due to their low
Act to promote Contract farming and Amendments to marketable surplus and poor bargaining power.
Essential Commodities Act. However, these 3 farm Acts
Poor Infrastructure of the APMCs leading to improper
have been opposed by various stakeholders- Farmers,
storage and consequently higher post-harvest losses: No
Traders and Stare Governments on account of various
electronic auction platform.
reasons
Imposition of Multiple Fees in APMCS which is
Discontinuation of MSP via open-ended procurement
estimated to be around 15% of the value of the
Gradual dismantling of the Public Distribution System
agricultural produce:
(POS).
Increased prices and affect food processing Industries.
Loss of price discovery mechanism established by the
APMC mandis Higher Post-harvest Losses in the range of 20-25% of
produce accounting for 92,000 crores loss.
Exploitation by the corporates.

Fear of a reduction in the scope and size of PDS 14.16.9 Recent Development Related
Problems with Agricultural Marketing in India
to APMC

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A. Farmers' Produce Trade and Commerce (Promotion Developing & upgrading existing 22.000 rural ha into
and Facilitation) Act, 2020 Gramin Agricultural Markets (GrAMs) GAM be
electronically linked to e-NAM and exempted hu
Mandate: Freedom to the farmers to sell their produce regulations of APMCs, thus, enabling farmers to make
whomsoever and wherever they want, Options to sell direct sale to consumers & bulk purchasers Setting up
produce outside APMCs. of Agriculture Funds to boost ma infrastructure:
Critical Analysis: Around 17 State Governments having Agriculture Infrastructure Fund of 1 lakh crore for
amended the APMC Act to make it more liberal and building post-harvest storage and processing facilities,
bring including development of warehouses cold storage,
pack houses and marketing facilities in the rural areas.
B. Probable Solution
Agri-Market Infrastructure Fund with a corpus of 2000
(NCAER) com years after the
crore for developing and upgrade agricultural marketing
Increase the Market Density in line recommendations of infrastructure in the GAM and APMCS.
M.S. Swaminathan Committee. With Link all the
NITI Aayog's Agriculture Marketing and Farmer
markets with the E-NAM
Friendly Reforms Index to sensitise states about the
Organize Small and Marginal Farmers into FPOS. need to undertake reforms in 3 key areas of Agriculture
Market Reforms, Land Lease Reforms and Forestry on
Improve Infrastructure in existing APMCs such as
Godowns. Cold chain infrastructure etc. Private Land

Central Sector Scheme titled "Formation and Promotion

14.16.10 Key Initiatives for Reforms
of Farmer Producer Organizations (FPOs) to form and
in Agriculture Marketing promote 10.000 new FPOs by 2023-24.
Launch of an e-marketing portal for Organic Products. •
Measures to popularise the pledge loan and e-NWR
14.17 Contract Farming
based marketing A. Meaning
State Governments have been advised to exempt fruits
Contract farming can be defined as agricultural
and vegetables from the purview of APMC Act.
production carried out according to an agreement
SAMPADA (Scheme for Agro-Marine Processing and between a buyer and farmers, which establishes
Development of Agro-Processing Clusters) - For conditions for the production and marketing of a farm
creation of modern infrastructure with efficient supply product.
chain management from farm gate to retail outlet,
Typically, the farmer agrees to provide agreed quantities
including setting up of new Mega Food Parks (MFP) it
of a specific agricultural product. These should meet the
on line with Model Agriculture produce and Livest
quality standards of the purchaser and be supplied at the
Marketing Act, 2017 For example, Kerala does not ha
time determined by the purchaser. In turn, the buyer
an APMC Act and Bihar repealed it in 2006 Other s
commits to purchase the product and, in some cases, to
such as Karnataka, Maharashtra etc deregulated and
support production through, the supply of farm inputs,
vegetables trade, allowed private markets, introduce a
land preparation and the provision of technical advice.
unified trading licence and have introduced a point levy
For example, PepsiCo Chips brands undergo for
of market fee.
agreement with potato farmers.
This Act was repealed in November 2021 by Govern of
B. Regulations
India
In India, contract farming is regulated under the Indian
Operation Greens: To address price fluctuations in
Contract Act, 1872
tomato, onion, & potato (TOP). "TOP to TOTAL
extends Operation Greens to all fruits & vegetable for a In addition, the Model APMC (Agricultural Produce
defined period, under Atmanirbhar Bha Package. Market Committee) Act, 2003 provides specific
provisions for contract farming, like compulsory

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registration of contract farming sponsors and dispute D. Issues

settlement.
Exclusionary nature: Companies prefer medium and
Since agriculture is a State list subject, therefore large farmers because of lower transaction costs
contract farming is not uniform.. However, in India, 85 per cent of the farmers are
marginal or small (operating less than two acres)
The NITI Aayog observed that market fees and other
levies are paid to the APMC for contract framing when Chances of rejection of contracted produce on quality
no services such as market facilities and infrastructure grounds: Corporates may resort to rejection when
are rendered by them. market prices dipped below contracted prices Similarly
farmers are engaged in side-selling in open markets
Thus, it has been recommended that contract farming
when market prices rose higher than contract prices.
should be out of the ambit of APMCs. Instead, an
independent regulatory authority must be brought in to Exploitation of Farmers: Low literacy rate of the
disengage contract farming stakeholders from the farmers have also led to lower bargaining power for
existing APMCs. them.
Therefore, the Ministry of Agriculture came out with a Adverse Impact on Environment: Promote Monoculture
draft Model Contract Farming Act, 2018. The draft farming: Promote harmful agricultural practices such as
Model Act seeks to create a regulatory and policy excessive water usage, fertilizer consumption;
framework for contract farming Based on this draft Destruction of forests and wildlife etc.
Model Act, legislatures of States can enact a law on
contract farming. E. Way Forward

C. Advantages Contract farming can work if there is a collectivisation

of small farmers. For e.g., if 10 to 15 farmers get
Access to Inputs: Provide the necessary capital and together, form a group, and sign a group contract. It
other inputs to farmers as small and marginal farmer in brings down the transaction costs, the farmers are better
India are generally capital starved and cannot make protected. and it is essentially a win-win situation for
major investment in land improvement and mode inputs both the farmer and the corporate.
Streamline Supply Chain: Assurance to the farmer to Government is keen on promoting contract farming in
get good price for their produce. This promotes higher India on large scale. Legalising Tenancy and insertion
investments of a provision in Farmers (Empowerment and
Protection) Agreement on Price Assurance and Farm
Intermediaries/Middlemen: This is major source of
Services Act, 2020 to state that the price paid to the
harassment of the farmers
farmer shall not be less than the MSP for such crops
Eradication of Minimise the Risks: From the viewpoint where MSP has been notified, could be a step in this
of corporate bodies, farming reduces the supply risk directions.
(risk of nor availability of raw material), while the
farmers enter into contractual arrangements with 14.18 Land Leasing
companies in order to minimize price risks.
A. Introduction
Enhancement of Incomes: Contract farming integrates
farmers with bulk purchasers such as exporters and food A land lease (also called a ground lease) is a
processing industries. commercial agreement that permits the tenant to use a
piece of land owned by the landlord in exchange for
Address Rural Indebtedness: Contract farming reduces rent.
dependence of the farmers on moneylenders for meeting
their credit needs. Land is a State Subject in Seventh Schedule of the
Constitution. So Centre can only suggest a model Act
Boost to Food Processing: Contract farming boosts food but its enactment has to be done by States themselves.
processing sector by providing access to good quality
raw materials and hence provide greater filip to the B. Need for Land Leasing
sector.

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The miniscule returns farmers get from fragmented mental disability, widows etc Some State Governments
landholdings prevents mechanization and investments also provide that a tenant of a big land owner above
agriculture and its profitability being is entitled to purchase his tenanted land on
continue possession for six years
The shrinking size of farms is a major factor responsible
for low incomes and farmers distress The viability of E. Negatives of Land Leasing Laws
marginal and small farmers is a major challenge for
Indian agriculture The average size of farm holdings Following are the negative repercussions on account off
declined from 2.3 hectares in 1970-71 to 1 15 hectares restrictive land leasing laws of States
in 2019 20 The share of small and marginal farmers Legal ban or restrictions on land leasing have led to
increased from 70% in 1980-81 to 86% in 2019-20 concealed tenancy in almost all parts of the country
Consolidation of land holdings to gain the benefits of Informal tenants are most insecure as they the have
size, can help in reducing agrarian distress In the fear of short duration oral leases or get rotated from por to plot
losing land and in the absence of long- term tenancy each year. This de-motivates them to invest in
laws the agriculture land lease are limited to one year. agricultural land improvement
The tenant is not sure of regaining tenancy next year. Due to legal restrictions, many land owners prefer keep
Therefore, there is no incentive for capital investment in their lands fallow due to the fear of losing land right if
agriculture. they lease out Keeping the land fallow results in
Changes in the occupational structure in rural areas and underutilization of land and loss of agricultural output.
increasing cases of fallow land. Due to lack of any legal framework for leasing the
Emergence of informal and underground land lease informal tenants of agricultural land have, in many parts
market and this creates a need for regulation. of the country, been deprived access to institutional
credit, disaster relief, and other support services.
The presence of informal tenancy puts tenants at the
risk of exploitation because of no legal security and F. Model Land Leasing Act, 2016
high rents.
NITI Aayog came out with a Model Agricultural Land
Lessing of Agricultural Land through Written Contract Leasing Act in 2016 for freeing up of farm land through
Lessor Farmers Areas and get Sam rent on the leasing. Salient Features of this Model Act are
biocultural land Reduce Defused
Legalise land leasing, which will promote agricultural
C. Benefits from Land Leasing efficiency, agriculture productivity and rapid rural
change.
Benefits in the form of enhanced investments.
economies of scale in use of capital, machines and other It would ensure security of land ownership right for
inputs land owners and security of tenure for tenants for the
agreed lease period.
Enhanced social mobility as non-farmland owning
groups or castes can benefit by taking land on lease can Removal of the clause of "adverse possession of land"
generate more income in the land laws of various states as it interferes with
free functioning of the land lease market
Those with small landholding can lease out their lands
and migrate to other occupations and therefore will Allow automatic resumption of land after the agreed
reduce the burden on agriculture land. Help corporate lease period without requiring any minimum area of
farming under which corporates can take large chunks land to be left with the tenant even after termination of
of land on lease and do cultivation tenancy.

D. Land Leasing Laws Facilitate all tenants including share croppers to access
institutional credit and insurance.
As of now, most State Governments have either legally
banned or imposed various restrictions on agricultural Incentivize tenants to make investment in land
land leasing allow leasing out only by certain category improvement and also entitle them to get back the
of land owners, such as those suffering from physical unused value of investment at the time of termination of

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tenancy Indian Eco law the terms and conditions of A per the Central Government data, despite a multi-
lease to be determined mutually by the land owner and pronged approach to improving income and social
the punt without any fear on the part of the landowner security of farmers in 2020, 5.098 of these agricultural
of ng land night or undue expectation on the part of re labourers died by suicide. Overall, 10.677 people
tenant of acquiring occupancy right for continuous engaged in the farm sector died by suicide in 2020.
possession of leased land for any fixed period They made up 7% of all suicides in the country Most of
these deaths were among those whose primary work
Concerns will prevent redistribution of land through and main source of income comes from labour activities
transfer ownership as people living outside the area will in agriculture or horticulture. Farmer suicides account
prefer easing instead of selling for approximately 7% of all suicides in India. Seven
Land leasing will promote absentee landlords. It may states account for 87.5% of total suicides in the farming
lead to a situation where individuals with big pockets sector in the country. The states are Maharashtra.
will control agriculture by taking large chunks of land Karnataka, Telangana, Madhya Pradesh, Chhattisgarh,
on lease. Andhra Pradesh and Tamil Nadu

may encourage the diversion of agriculture land from p Causes

cultivation to commercial use because it allows crop c The causes of farmers' suicides are both economic and
leasing of agricultural land for activities like plantation social. Some of the important causes are
crops, animal husbandry and dairy etc., in addition to
crop cultivation it the ceiling on land is not limited there A. Economic
is a danger of this land being transferred to corporate
houses, which can prove disastrous for the food security Cost of Input: Increasing cost of cultivation on account
of the country of rising prices of inputs like fertilisers and pesticides

H. Way Forward Declining average size of farm holdings: Increasing

demographic pressure, disguised employment in
Modernization and digitization of land records will agriculture and conversion of agricultural land for
reduce litigation related to the land leasing and land alternative uses, have drastically reduced the average
pooling land holding
rural area. Establishment of independent regulator for Dependence on rainfall and climate: Indian agriculture
the sector to resolve the disputes is heavily dependent on monsoon and ever- increasing
global temperature has made agriculture more prone to
The standardization of lease agreements and dispute
extreme weather events.
resolution mechanisms should be developed.
Fragmented supply chains:
Modernization of the agriculture marketing so that
informed decisions regarding leasing and pooling can Large gaps in storage.
be made Enhancing credit and insurance facilities for
agriculture. Cold chains

Transformation of agriculture as a business-cum- Limited connectivity

Livelihood activity so that investments are planned Absence of marketing infrastructure
based on long term strategies and hedged from market
and environmental risks. Lack of Mechanisation: introduction of latest
technology has been limited due to various reasons like
Proper awareness and education among the rural folk accessibility for credit and low awareness
about the benefits that land leasing can bring to their
household income and life. Deficiencies in Agricultural Produce Market
Committees (APMC) Act.
14.19 Agrarian Crisis: Farmers' Profiteering by middlemen.
Suicide Low and declining productivity on account of several
factors like soil degradation.

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Inadequate prices of agriculture produce: Farmers get Committee was set up to chalk out a strategy to achieve
little share of retail prices to consumers as much of this target of doubling farmers' incomes and set the goal
profit is appropriated by the middlemen. to be achieved over seven years with the base year of
2015-16 NITI Aayog also came out with a policy paper
Natural hazards caused by drought, floods and hail towards achieving the aim of doubling farmer's income
destroy their entire crop produce and absence of robust by 2022
insurance further aggravates their distress in such
calamities. A. Few Observations
Crop production is always at risk because of pests and The strategy adopted for development of the agriculture
diseases. sector in India in the past has focused primarily on
raising agricultural output and improving food security.
Absence of proper crop planning and government
The strategy did not explicitly recognise the need to
primarily focusing on raising agricultural output wether
raise farmers income and did not mention any direct
than recognising the need to raise farm income
measure to promote farmers welfare. The net result has
B. Social been that farmers income remained low. which is
evident from the incidence of poverty among farm
The drinking habit which gradually declines the households and large number of farmers suicides every
productivity of the farmer year
Extravagant expenditure on marriages Bad health and The low and highly fluctuating farm income is causing
illness and inability to meet the necessary expenditure detrimental effect on the interest in farming and farm
on medicine and health services investments, and is also forcing more and more
cultivators, particularly younger age group, to leave
The above factors have resulted in low income for
farming.
farmers which is evident from the incidence of poverty
among farm households Ang mat income of farmers till 2022-23 over the ne mar
of 2015 16 requires annual growth of 10 41 to farmers
The low and highly fluctuating farm income is causing
income According to an estimate mess income for
a detrimental effect on the interest in farming and farm
2015-16 by NABARD in 2016 the average monthly
investments and is also forcing more and more
income of farmers for 2015-16 was Therefore, strong
cultivators, particularly younger age group. to leave
measures will be needed harness all possible sources of
farming.
growth in farmers e within as well as outside agriculture
Farm income remained low in relation to income of sector
those working in non- farm sector. Farm income: per
Aibling farmers income by 2022 is quite challenging It
cultivator is around 30% of income of a non agricultural
is needed and is attainable Three pronged strategy
worker. This disparity is very large which require a
focused on (1) development initiatives, (ii) ology and
policy response to raise farmers' income at faster rate.
(m) policy reforms in agriculture is needed to double
This can cause an adverse effect on the future of food farmers' income
security and the state of agriculture in the country.
B. Development Reforms
The country also witnessed a sharp increase in the
number of farmers suicides in the last decades. As most of the development programmes and initiatives
for agriculture are implemented by the states, it is
Unsatisfactory agriculture credit (that too at h interest essential to mobilise States and UTs to own and achieve
rate) and accumulated burden of debt (de vicious cycle the goal of doubling farmers income if concerted and
of above factors) well-coordinated efforts are made by the Centre and all
the States and UTs, the country can achieve the goal of
14.20 Doubling Farmers' Income doubling farmers income by the year 2022

After two successive droughts in 2014-15 and 2015-16, Some of the development initiatives taken by the centre
the government set out an ambitious target to double are as follows
farmers incomes by 2022-23. The Ashok Dalwai

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Pradhan Mantri Krishi Sinchal Yojana Soil Health Card, In addition, schemes relating to tree plantation (Har
and Prampragat Krishi Vikas Yojana Aiming to raise Medh Par Ped), Bee Keeping, Dairy and Fisheries are
output and reduce cost also implemented.

Pradhan Mantri Fasal Bima Yojana: To provide D. Policy Initiatives

insurance against crop and income loss and to
encourage investment in farming Direct Income support: To support farmers by giving
them direct income irrespective of their land holding,
Interlinking of rivers: To raise output and farm incomes. the PM KISAN scheme was announced. Pradhan
Mantri Kisan Samman Nidhi (PM-KISAN)
Operation Greens: To address price volatility of
perishable commodities like Tomato, Onion and Potato To provide an assured income support to the small and
(TOP) marginal farmers, the Union Government has launched
a cash subsidy scheme called the Pradhan Mantri Kisan
PM Kisan Sampada Yojana: To promote food
Samman Nidhi (PM-KISAN).
processing in a holistic manner
Earlier, under this programme, vulnerable landholding
C. Technological Reforms farmer families, having cultivable land up to 2 hectares,
Initiating e-NAM: The National Agriculture Market will be provided direct income support at the rate of
(eNAM) is a pan-India electronic trading portal which 26,000 per year but now it has been revised to all
networks the existing Agricultural Produce Market farmers.
Committees (APMCs) mandis to create a unified This income support will be transferred directly into the
national market for agricultural commodities: bank accounts of beneficiary farmers, in three equal
Technology mission on cotton: It aims to increase the instalments of 2,000 each. It is fully funded by the
income of the cotton growers by reducing the cost of Union Government.
cultivation as well as by increasing the yield per hectare The scheme was inspired by the Rythu Bandhu Scheme
through proper transfer of technology to the growers. of the government of Telangana and the Kalia Scheme
Technology Mission on Oilseeds, Pulses and Maize of Odisha.
(TMOPM): Few schemes implemented under TMOPM Operational issues with the scheme:While PM-KISAN
are: Oilseeds Production Programme (OPP), National aims to cover small and marginal farmers (85% of
Pulses Development Project (NPDP), etc. farmer population), landless agricultural laborers and
Mission for Integrated Development of Horticulture tenant farmers are left in the lurch.
(MIDH): It is a scheme for the holistic growth of the Except a few states, others are still lagging in
horticulture sector covering fruits, vegetables, root & maintaining database for land records. There are
tuber crops, mushrooms, spices, flowers, aromatic concerns at operational level land record reconciliation,
plants, coconut, cashew, cocoa and bamboo. digitization of land records, costs incurred in
Sugar Technology Mission: Aimed at reducing the cost consolidation of land records.
of production of sugar and improving sugar quality The situation is slightly more complicated in the north-
through steps for improvements in productivity. energy eastern States, as land ownership rights in the region are
conservation and improvements in capital output ratio. community-based, making it difficult to identify
National Mission on Sustainable Agriculture: It aims at beneficiaries.
promoting sustainable agriculture through a series of The mammoth drive of implementing PM-KISAN can
adaptation measures focusing on ten key dimensions increase opportunity costs of critical (human) resources,
encompassing Indian agriculture namely, Improved crop operational risks and, eventually, shoot up operating
seeds, livestock and fish cultures'. Water Use expenses and strain the fiscal health of concerned states.
Efficiency'. 'Pest Management', 'Improved Farm 14.21 Farm Loan Waiver
Practices. Nutrient Management', 'Agricultural
insurance'. 'Credit support'. 'Markets', 'Access to
Information' and 'Livelihood diversification'.

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A. Introduction Loan waivers provide some relief to farmers in such

situations, but there are debates about the long-term
A farm loan waiver is a situation where the state or effectiveness of the measure.
Central Government take up the outstanding loans or
liabilities from the farmer and repay the banks on their Loan waivers offer immediate relief for farmers who
behalf. These waivers are often conditional and suffer from indebtedness and can offer a new ray of
selective hope. Studies prove that it is this agricultural
indebtedness that is the primary cause for the spate of
B. History of Farm Loan Waiver suicides across the country.

The first recorded instance of granting loans to peasants There is also a need to recognize that awareness and
in medieval India dates back to the regime of coverage of crop insurance are inadequate hence a
Muhammad-bin-Tughluq (1325-51) so as to ameliorate waiver is a kind of insurance that a farmer needs in
the distress suffered by villagers. cases where he has no fallback mechanism.

However, faced with rebellion and famine, these loans It improves creditworthiness of the farmer which many
were written off by Firoz Shah Tughlug, the subsequent banks or other institutional sources which lend consider
ruler. before giving a fresh loan. Thus the farmer would be
able to afford new critical inputs like fertilizer, seeds
There have only been two nationwide loan waiver etc.
programmes in India after Independence: in 1990 and
2008. There is a fundamental change happening in Indian
agriculture which many policymakers have not taken
The first nationwide farm-loan waiver in independent into account, there is a shift to highly remunerative
india was implemented in 1990 by the VF Singh-led
government It cost the exchequer 10,000 crore. but equally risky horticultural crops like fruits which
are neither adequately covered by insurance nor by
In 2008 the Agricultural Debt Waiver and Debt Relief Minimum Support Price mechanism of the Central
Scheme, implemented by the UPA government, Government hence do not have any support mechanism
involved an outgo of 71,680 crore. Since then, there has in case of crop failure Even supporting infrastructure
been a wave of such schemes by different State like cold storages were not made available which has
Governments. led to greater price volatility
C Rationale for Providing Loan Waivers D. Issues
Agriculture in India has been facing many issues - Moral Hazard: Farm Loan Waivers entail a moral
fragmented land holding, depleting water table levels, hazard even those who can afford to pay may not. in the
deteriorating soil quality, rising input costs, low expectation of a waiver
productivity More than 85% of small and marginal
farmers in India possess less than 1-2 hectares of Erodes Credit Discipline: Such measures can erode
holdings and lack basic inputs for farming. credit discipline and may make banks wary of lending
to farmers in the future.
In this context, the credit is a critical resource to
farming households for carrying out crop production Dent in the Government Finances: It also makes a sharp
and meeting consumption & daily-life expenses. dent in the finances of the government that finances the
write-off. But farmers can decide the fortunes of
Farmers are often forced to borrow to manage expenses. political parties, and politicians are wary of
Also, many small farmers not eligible for bank credit antagonising them.
borrow at exorbitant interest rates from private sources.
Free Rider Problem: Some farmers may take loans even
When the debt-ridden farmers are hit by nature in the if there is no need, in the hope of the next loan waiver
form of erratic monsoon and crop failures, they face scheme. This will impact the farmers who are genuinely
grim options. Indebtedness is a key reason for the many in need of loans.
farmer suicides in the country.

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Decline in Formal Access to Credit: After the Climate-Smart Agriculture (CSA) is an integrated
implementation of debt waiver schemes and subsequent approach to managing landscapes cropland, livestock,
losses to the banking industry banks will be reluctant to forests, and fisheries that address the interlinked
lend further to the farm sector. This leads to a rise in challenges of food security and climate change
farmer's dependence on informal sector lenders.
B. Impacts of Different Elements of Weather
Impact on Banking Sector: A report by the Indian on Agriculture
Council for Research on International Economic
Relations stated that the 2008 farm-loan waiver led to Rainfall drives water availability and determines
three-fold increase in non-performing assets of sowing time (rain-fed crops). Temperature drives crop
commercial banks between 2009-2010 and 2012- 2013. growth, duration; influences milk production in animals
This further affects credit-deposit ratio and risk- and spawning in fish.
weighted capital adequacy ratio, return on assets and
economic value of equity of banks. Temperature and relative humidity (RH) influences pest
and diseases incidence on crops, livestock and poultry
Against the Interests of Depositors: Banks receive Wet and dry spells cause significant impact on standing
money from the depositors and lend money to crops, physiology, loss of economic products (eg, fruit
borrowers under different contracts and agreements. drop).
Thus, the loss to the bank, due to loan waivers, is
directly or indirectly against the interests of the Extreme events (eg. high rainfall/floods/heat wave/ cold
depositors. wave/cyclone/hail/frost) cause enormous losses of
standing crops, livestock and fisheries.
E. Way Forward
C. Expected Outcomes of CSA
Hence farm loan waivers can be at best a temporary
solution. For long term solution, Government should CSA aims to simultaneously achieve three outcomes
focus on making agriculture sustainable by reducing Increased productivity: Produce more food to improve
inefficiencies, increasing income, reducing costs and food and nutrition security and boost the incomes of 75
providing protection through insurance schemes. percent of the world's poor who live in rural areas and
mainly rely on agriculture for their livelihoods:

Enhanced resilience: Reduce vulnerability to drought,

pests, disease, and other shocks; and improve capacity
to adapt and grow in the face of longer-term stresses
like shortened seasons and erratic weather patterns.

Reduced emissions: Pursue lower emissions for each

calorie or kilo of food produced, avoid deforestation
from agriculture and identify ways to suck carbon out of
14.22 Climate Smart Agriculture the atmosphere.

A. Introduction D. Indian Scenario

Climate change incidence on agriculture can be in the Though India is fortunate to have the monsoon t also
form of increased variability in temperature and rainfall uniquely vulnerable to rising temperatures with the
and intensity of extreme weather events like drought country ranked 7th on the Global Climate Risk Index
and flood ultimately creating disturbance to agro- 2021.
ecosystems. thereby impacting farmers and farming
community. Low irrigation coverage, small holdings, India has over 120 million hectares of land suffering
poor cropping mechanisms and low penetration of some form of degradation This has consequences
insurance further limit the adaptation and mitigation especially for marginal farmers
efforts for the majority of Indian farmers According to one estimate, they may face a 24-58
decline in household income and 12-33% rise
household poverty through exacerbated droughts . With

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rain-fed agriculture practiced in over 67% of our total

crop area, weather variability can lead to heavy costs,
14.23 Sustainable Agriculture
especially for coarse grains (which are mostly grown in The concept of sustainable agriculture has gained
rain-fed areas) prominence since the publication of the Brundtland
Report in 1987 Sustainable Agriculture involves the
processes that would enable to meet the current and
A predicted 70% decline in summer rains by 2050 long term societal needs for food, fibre and other
would devastate Indian agriculture. Within 80 years, our resources while maximizing benefits through the
Kharif season could face a significant rise in average conservation of natural resources and maintenance of
temperatures (0.7-33%) with rainfall concomitantly ecosystem functions.
impacted, and potentially leading to a 22% decline in
wheat yield in the rabi season, while rice yield could A. Principle of Sustainable Agriculture
decline by 15%
The three main principles of sustainable agriculture are:
E. Solutions Environmental sustainability: Protecting, recycling.
Promotion of conservation farming and dryland replacing and maintaining the natural resources base
such as land (soil), water and wildlife
agriculture, with each village provided with timely
rainfall forecasts, along with weather-based forewarning Economic sustainability: Improving soil management
regarding crop pests and epidemics in various seasons, and crop rotation which raise yields
is necessary.
Social sustainability: Upholding social justice and
Agricultural research programmes need to refocus on cultural cohesion
dryland research, with the adoption of drought- tolerant
breeds that could reduce production risks by up to 50%. B. Policy Ecosystem for Sustainable
A mandate to change planting dates, particularly for
Agriculture In India
wheat, should be considered, which could reduce Since 2014-15, India has had a National Mission for
climate change-induced damage by 60-75% by one Sustainable Agriculture (NMSA) to promote sustainable
estimate. agriculture.
There needs to be an increase in insurance coverage and It consists of several programmes focusing on
the supply of credit. Insurance coverage should be agroforestry. rainfed areas, water and soil health
expanded to cover all crops, while interest rates need to management, climate impacts, and adaptation
be subsidized, through government support and an
expanded Rural Insurance Development Fund The Beyond NMSA, the Pradhan Mantri Krishi Sinchai
recently announced basic income policy by the Yojana promotes the adoption of precision farming
government is a welcome step as well. techniques such as micro-irrigation, and the Integrated
Watershed Management Programme supports rainwater
A push for actual on-ground Implementation of harvesting.
compensatory afforestation is required. To check the
effects of climate change there is a r to preserve our Paramparagat Krishi Vikas Yojana is an elaborated
forest resources component of Soil Health Management (SHM) of major
project NMSA.
The Van Dhan Yojana, as adopted by the State
Government in Rajasthan, can be scaled up towards Under PKVY Organic farming is promoted through the
building a green mission to save our non- protected adoption of an organic village by cluster approach and
forests (outside the existing national parks and Participatory Guarantee System (PGS) certification.
sanctuaries).
With the help of PKVY, the government aims to support
Wildlife tourism must also be encouraged, particularly and promote:
through public-private partnerships, to help increase
1. Reduction in dependence on fertilizers and
conserved areas while making a difference to backward
agricultural chemicals.
districts.

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2. Organic farming. The principle of ecology: Organic Agriculture should be

based on living ecological systems and cycles, work
3. Improvement of soil health while increasing yields. with them, emulate them and help sustain them
4. Organic food, thus produced will be linked with The principle of fairness: Organic Agriculture should
modern marketing tools and local markets. build on relationships that ensure fairness with regard to
the common environment and life opportunities.
14.24 Conservation Agriculture
The principle of care: Organic Agriculture should be
Conservation agriculture is advocated as an alternative managed in a precautionary and responsible manner to
to the conventional production system. Soil disturbance protect the health and wellbeing of current and future
regulation, surface residue management and crop generations and the environment
rotation are the fundamentals (core pillars) of CA.
14.25.2 Opportunities for Organic
Impact of Conservation Agriculture
Farming
Economic benefits: Time saving and reduction in labour
requirement; Reduction of costs eg fuel, machinery High demand for organic farming food products which
operating costs and maintenance fetches higher prices for farmers Solution to resource
conservation needs Addresses. So it fatigue Higher
Agronomic benefits: Increase in organic matter content incomes for farmers
of soil, in-situ soil water conservation, improvement of
soil structure, and thus rooting zone. Under severe drought conditions organically managed
farms have frequently been shown to produce higher
Soil Fertility: Fertiliser use efficiency, water holding yields than their conventionally managed farms due to
capacity, soil aggregation, rooting environment and the higher water-holding capacity of organically farmed
nutrient retention. soils
Environment and social benefits: Reduced soil erosion, More energy efficient farming
improves water and air quality, increased biodiversity
and carbon sequestration. 14.25.3 Issues and Challenges of
Organic Farming
14.25 Organic Farming
Transition Period: When a farmer shifts to organic
According to FSSAI, organic farming' is a system of farming from conventional farming. yields have been
farm design and management to create an ecosystem of shown to have significant drop However yields tend to
agriculture production without the use of synthetic increase with the number of years under organic
external inputs such as chemical fertilisers, pesticides management as farmers gain experience and soil
and synthetic hormones or genetically modified improves
organisms.
Insufficient supply of nutrients such as nitrogen:
Organic farm produce means the produce obtained from phosphorus and several micronutrients issues related to
organic agriculture, while organic food means food Insect and disease management Weed Management is
products that have been produced in accordance with less so reach of certification of organic products through
specified standards for organic production. Participatory Guarantee Scheme, it needs to be
expanded
14.25.1 Principles of Organic
Farming 14.25.4 Scenario of Organic Farming
The principle of health: Organic Agriculture should
in India
sustain and enhance the health of soil, plant, animal, India ranks 1st in number of organic farmers and 9th in
human and planet as one and indivisible. terms of area under organic farming

Sikkim became the first State in the world to become

fully organic in 2016

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North East India has traditionally been organic and the responsible for regulating organic food in the domestic
consumption of chemicals is far less than the rest of the market and imports
country
Participatory Guarantee System (PGS): PGS is a
Similarly, the tribal and island territories have been process of certifying organic products, which ensures
traditionally practicing organic farming that their production takes place in accordance with laid
down quality standards PGS Green is given to chemical
The major organic exports from India have been tax free produce under transition to organic which takes 3
seeds. sesame, soybean, tea, medicinal plants, rice and years. It is mainly for domestic purpose National
pulses. There was an increase of nearly 50% in organic Program for Organic Production (NPOP)
exports in 2018-19, touching 5151 crore
NPOP grants organic farming certification through a
Commencement of exports from Assam, Mizoram, process of third party certification for export purposes
Manipur and Nagaland to UK, USA Eswatin and Italy. Soil Health Card Scheme has led to a decline of 8-10%
have proved the potential by increasing volume in the use of chemical fertilizers and also raised
expanding to new destinations as the demands health productivity by 5-6%
foods increases
D. Agri-export Policy 2018
14.25.5 Government Initiatives to It focuses on clusters and marketing and promotion
Promote "Produce of India" have positively impacted the
farming in India
Organic Farming A. Mission Organic Value Chain
Development for North East Region (MOVCD) One District-One Product (ODOP)

Mission Organic Value Chain Development for Nom Indian Econ grams of the 2015 even rough Chand on
East Region (MOVCD-NER) is a Central Sector India is also sures e wit gene POP ugh a For of
Scheme a sub-mission under National Mission for
he programme aims to encourage more visibility and we
Sustainable Agriculture (NMSA) it was launched by the of indigenous and specialized products/crafts of Pradesh
Ministry of Agriculture and Farmers Welfare in 2015 generating employment at the district level. presence of
for implementation in the states of Arunachal Pradesh
aggregators is imperative to bring about
Assam Manipu Meghalaya Mizoram Nagaland, Sikkim
and Tripura The scheme aims to develop certified Ames of scale for the small and marginal farmers FPM
organic production in a value chain mode to link Formalization of Micro Food Processing Enterprises
growers with consumers and to support the (PM FME)
development of the entire value chain
Te Ministry of Food Processing Industries (MOFPI)
B. Paramparagat Krishi Vikas Yojana (PKVY) launched the PM FME scheme as a part of 'Atmanirbhar
Bharat Abhiyan It aims to bring in new technology. at
Paramparagat Krishi Vikas Yojana, launched in 2015 is from affordable credit to help small entrepreneurs
an elaborated component of Soil Health Management penetrate new markets
(SHM) of major project National Mission of
Sustainable Agriculture (NMSA)

Under PKVY Organic farming is promoted through

adoption of organic villages by cluster approach and
Participatory Guarantee System (PGS) certification
14.25.6 Way Forward
Supply of sufficient nutrient through organic
C. Certification Schemes management, Promotion of Green manures, vermi-
composting.
Food Safety and Standards Authority of India (FSSAI)
is the food regulator in the country and is also

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Promotion of strategies such as Integrated Organic Other important pillars are- Intercropping. Rainwater
Farming Systems, Multiple Cropping and crop rotation, harvesting. Revival of the soils through earthworms etc.
Hedge row/alley cropping.
14.26.3 Government's Initiatives to
Biological pest management and biological weed
management strategies need to be promoted. Promote ZBNF
Making it easier for farmers to certify their food RKVY-RAFTAAR and Paramaparagat Krishi Vikas
products and market them. Yojana Under the RKVY-RAFTAAR and
Paramaparagat Krishi Vikas Yojana, States allowed to
14.26 Zero Budget Natural use their funds to promote the ZBNF.

Farming Benefits
Zero budget natural farming is a method of chemical- Reduce the input costs responsible for present agrarian
free agriculture drawing from traditional Indian distress
practices. The ZBNF, put forward by Subhash Palekar,
Reduce the dependence of the farmers on the credit
focusses on among without credit (Zero Budget) and
responsible for the debt trap. Enhancement in the soil
Farming with Nature without using Chemicals (Natural
fertility.
Farming).
Optimum utilization of water and reduce water
The Economic Survey 2018-19 focused on adoption of
consumption (85%).
Zero Budget Natural Farming' (ZBNF) in order to
double he farmers' income by the end of 2022. Promote diversification of the agriculture- towards
However, some of he critics have pointed out that the other crops and towards livestock rearing. This can also
Government's policy of collusion of ZBNF is unwise lead to reduction in the risks and enhance nonfarm
and imprudent. income.

14.26.1 Basic Premise of Zero Budget Enhance the farmers' income in the long term

Natural Farming Challenges and Concerns

Basic Premise: Soil has all the necessary nutrients A group of agricultural experts from the Natural
which could be made available through the Academy of agricultural sciences (NAAS) have
intermediation of microorganisms, Against chemical questioned ZBNF on multiple grounds.
fertilizers; low cost, low level of inputs and limited
reliance on externally purchased Lack of Independent and Scientific studies to validate
the claim that the yields through the ZBNF are much
14.26.2 Four Pillars of ZBNF higher. Based on Unscientific Premise since it
erroneously assumes that the soils have all the
Jivamrita/jeevamrutha: prepared using Fermented necessary ingredients
microbial urine to cow dung and Provides nutrients to
the soil, acts as a catalytic agent to promote the activity One-Size fits all Approach: In some regions of the
of microorganisms in the soil country, the soils are either acidic or saline and, in some
regions, the fertility of the soil has reduced due to heavy
Bijamrita/beejamrutha: Protection of the young roots metal pollution
from various diseases through cow dung and urine
Mulching: Conservation of the soil moisture by Flawed Nutrient Management: The ZBNF believes that
covering the top layer of the soil with dried biomass plants obtain 98 5% of the nutrients from the air and the
organic manure etc. Moisture: It challenges the basic remaining 1.5% from the Soil The nutrients cannot be
notion that plants need more amount of water and made available only through cow dung and urine
instead focuses on conservation of soil moisture and Incurs Costs: Not essentially "Zero Budget since some
promoting less irrigation. of the inputs need to be purchased. Agricultural inputs
which may have implicit cost such as the imputed value
of family labour not considered

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According to experts, replacing all farming with ZBNF India's Tax to GDP ratio is one of the lowest compared
could decrease crop production by 50% and thus to similar economies of the world.
severely affect both food security as well as income of
farmers. Hence, the Government must adopt evidence Tax Evasion: Curb tax evasion because income other
based approach and must not hastily promote ZBNF sources is usually shown as agricultural o resulting in
without multi-agroclimatic location studies, and leakage to the tune of crores in revert annually
scientific validation of long-term impact and viability of Increase in Revenue Base: It will increase revenues of
ZBNF the government, which can then be for expenditures on
social sector schemes especially related to agriculture.
14.27 Taxing Agricultural Equity: Vijay Kelkar Task Force on direct taxes
Income reported that not taxing agricultural income violates
horizontal and vertical equity. Taxing the rich farmer
A. Introduction equivalent to taxing a corporate, which is a progressive
step in achieving economic equity in the society
NITI Aayog in its three-year action agenda has
proposed the idea of taxation of agricultural income Targeted Schemes and Subsidies: Adequate for
documentation would help the Government to ident the
above a certain threshold. This issue was examined in
the past also: difference between small and big farmers and rollout
targeted subsidy schemes in future.
In post-Independent India, the K.N. Raj committee
Tax Shelter: The agriculture sector has long acted as a
(1972), examined the feasibility and implementation
issues tax shelter. While many experts, over the years, have
demanded closing of this loophole, no step has been
The Kelkar Task Force Report of 2002 estimated that taken by any government.
95% of the farmers were below the tax threshold.
Money Laundering: As the Tax Administration Retom
Commission report points out, agricultural income
being increasingly used as a conduit to launder money
B. Legal Position of Taxation of Agricultural Agriculture exemptions are used to route black money
Income In India by non-agricultural entities.

In the Seventh Schedule, Entry 82 in the Union List No Benefit to Small-Scale Farmers: It's true that
mentions taxes other than agricultural income, while agriculture is the main source of income for the
Entry 46 in the State List mentions taxes on agricultural majority of the rural Indian population. But the small
income scale farmers have been barely impacted by the tax
exemptions under the Indian Income Tax Act, wealthy
Therefore, it is in the State List. farmers have reaped the benefits by abusing them
Section 2 (1A) of the Income Tax Act defines D. Views Against
agricultural income as rent/revenue from land, income
derived from this land through agriculture and income Additional Burden in Time of Crisis: Performance of
derived from buildings on that land. the agriculture sector has not been encouraging and
consequently, the welfare of the population living in the
Section 10 (1) of the Income Tax Act excludes countryside has not visibly improved. Instead, the
agricultural income from a computation of total income. agrarian distress has been deepening, and large number
of farmer suicides have been happening in our country.
C. Views In Favour Taxing agricultural income will be a negative signal in
Expansion of Tax Base: It will bring more people under such situation.
the tax net and hence expand the tax base. Just by
Lack of Adequate Disposable Income: Education and
taxing the incomes of the top 4.1% of agricultural
health privatisation has increased the cost of rural
households, at an average of 30%, as much as $25,000
households and the burden of all this has adversely
crore could be collected as agricultural tax. Currently,
impacted agricultural households.

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Burden on Small Farmers: The average per month success of FPOS in turn lead to "Second Green
income of a farm household in India in 2012-13 as per Revolution" and bring out rural transformation. 1428.1
the National Sample Survey Office was just 6.491 Benefit of FPO's to Small and Marginal Farmers
Therefore taxation of such a small agriculture income .Fascinate land pooling and address sociated with
may impose negative externality on farmers ale Small fragmented landholdings.
Farmers: High illiteracy rate among s could make them
vulnerable to exploitation by calls and others Problems
Deses Attraction of Agriculture as a Profession: youth Reap economies of scale for buying of inputs and
are increasingly not inclined to continue the ang selling the agricultural produce
profession due to declining profitability Taxing coal
Enable sharing of services such as knowledge input.
income can further push such negative trend
production supervision, storage, transportation etc and
Variable Income Due to Monsoon Dependency: tural hence reduce the transaction costs
income is highly monsoon dependent and erce income
Create opportunities for farmers to get more involved in
from agriculture too is highly variable tang agricultural
value addition activities such as input supply, credit.
income may become a negative externality
processing, marketing and distribution
Political Will: Many states may have been reluctant to
Provide interface between the farmer and global market
agriculture incomes as they do not wish to lose vote ank
enabling them to export commodities
of farmers. Moreover, India's state legislatures vet
typically been populated by land owners who have been Provide access to capital for farmers and manage risk
blocking efforts to impose a tax on themselves. for farmers through diversification.
Cash Transactions: In India in particular, agriculture is Promote economic democracy at the grass root level.
harder to tax as it is based largely on cash transactions
which are hard to track and trace. Cash transactions not 14.28.2 Initiatives for the Promotion
routed through the banking system are difficult to verify
and be used for assessment of agricultural incomes
of FPOS
The Small Farmers Agribusiness Consortium (SFAC) is
E Conclusion the nodal agency at the national level for the creation of
Accurate data of farmers' income at individual level is FPOS. The SFAC operates a Credit Guarantee Fund to
the o come to any policy decision on this sensitive mitigate credit risks of financial institutions which lend
matter. the priority should be to collect comprehensive 2 to the FPCs without collateral.
at all levels (village/block/district/state etc) to have med SFAC also provides matching equity grant up to 10 lakh
debate to double the share capital of FPCs. NABARD also
provides financial support to the FPOS through two
14.28 Farmer Producer dedicated funds - "Producers Organization
Organisation Development Fund (PODF)" and PRODUCE Fund
(Producers' Organization Development and Upliftment
Producer Organisation (PO) is a legal entity formed Corpus) to promote new FPOs and support their initial
primary producers such as farmers, milk producers, financial requirements.
Wenyen, weavers, rural artisans, craftsmen etc. FPO is
type of PO where the members are farmers. The FPOS 14.28.3 Challenges and Issues in
be registered as Cooperatives (under Cooperative Sees Building Robust FPOS
Act of the respective State). Farmer Producer Company
(Under Companies Act, 2013) or Societies Inder In last 8-10 years, 5000 FPOs have been formed
Society Registration Act, 1860) through initiatives of SFAC (Nodal Agency),
NABARD, Government etc. without much success.
Recently, PM Modi has launched a campaign to set up Hence, to ensure success of new initiative, the
10000 FPOS across India in the next 5 years (till 2023- Government needs to acknowledge present weaknesses,
24). The FPOs can build social capital and promote
economic Democracy at the grassroots level. The

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analyse their reasons and then take outcome-oriented Census (2010-11) shows that out of an estimated 118.7
actions. million cultivators 30.3% were females.

Promote Collaborative farming: The FPOs need to be Steps taken by the Government
formed on basis of adjoining land holdings and
common produce to ensure higher economies of scale Earmarking at least 30 per cent of the budget allocation
and undertake value addition for women beneficiaries in all ongoing
schemes/programmes and development activities.
Finances: The reluctance of Banks to give loans has to
be countered through enhanced credit support from Initiating women centric activities to ensure benefits of
Government agencies. Further, Just like cooperatives. various beneficiary-oriented programs/schemes reach
the FPOs also must be given income tax exemption them.

Handholding: Need to provide regular training and Focusing on women self-help group (SHG) to connect
business level handholding them to micro-credit through capacity building
activities and to provide information and ensuring their
Professional Management: It can be improved by representation in different decision-making bodies.
enabling the Private sector to invest in FPOs. This will
need amendment of Companies Act which currently The Ministry of Agriculture and Farmers Welfare has
allows only farmers to be producer members declared 15th October of every year as Women Farmer's
Day. Therefore, an 'inclusive transformative agricultural
Market Linkages: Direct procurement by Government. policy' should aim at gender-specific interventions to
freight subsidy to wholesale buyers, connecting FPOS raise productivity of small farm holdings, integrate
to online platforms etc. women as active agents in rural transformation.
Village Producer Organisations (VPOs): The VPOs can
be developed as a joint venture of FPOS such that an
entire village region is developed for a predetermined
set of agricultural produce with post- production
activities. For example, a region having strength in
producing fibre crops can be developed as a VPO to
include small handloom weavers.

Way Forward
The promotion of FPOs should not to be seen as a one
exercise. Though there is sufficient focus on providing
financial assistance to FPOs, there is limited hams
holding subsequent to their formation in this regard, the
Government must provide for sustained and continuous
support until the time the FPOs become financially able
and independent.

14.29 Feminisation of
Agriculture
Growing feminization of Indian Agriculture: Wi
growing rural to urban migration by men, there a
feminization of agriculture sector, with increasing
number of women in multiple roles as Cultivators,
entrepreneurs and labourers. According to Oxfam India,
women are responsible for about 60-80% of food and
90% of dairy production. Further, the Agriculture

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Chapter – 15
Food Processing Industry
and Allied Sector
processed fruits and vegetables jam & jelly etc. and
holds around 38% share in the to processed food

15.1 Introduction By serving as a bridge between agriculture and

manufacturing sector and by dealing with a basic need
Food Processing includes process under which any raw of all Indian citizens - the assured supply of healthy and
product of agriculture, dairy, animal husbandry meat. affordable food at all locations in the country this sector
poultry or fishing is transformed through a process has the potential to be a major driver in India's growth-
(involving employees, power, machines or money) in the coming years. In fact the food processing sector has
such a way that its original physical properties undergo been growing faster than the agriculture sector
a change and the transformed product has commercial
India's food processing sector spans a wide range
value and is suitable for human and animal
products that includes:
consumption.
Fruits and Vegetables: Beverages Juices ,Concentrates,
The term food processing is mainly defined as a process
Pulps, Slices, Frozen & Dehydrated products, Wine
of value addition to the agricultural or horticultural
Potato Wafers/Chips, etc. Fisheries: Frozen and Canned
produce by various methods In other words, it is a
products mainly n fresh form.
technique of manufacturing and preserving food
substances in an effective manner with a view to Meat and Poultry: Frozen and packed mainly in fresh
enhance their shelf life. improve quality as well as make form, Egg Powder
them functionally more useful
Milk and Dairy: Whole Milk Powder, Skimmed milk
Food processing industry is one of the largest industry powder, Condensed milk, Ice cream, Butter and Ghee
in India and is ranked 5th in terms of production,
consumption and export Grain and Cereals: Flour, Bakeries, Biscuits Starch
Glucose, Corn Flakes, Malted Foods, Vermicelli, Pasta
Over the years, with emergence of new markets and Foods, Beer and Malt extracts, Grain based Alcohol
technologies, the sector has widened its scope. It has
started producing many new items like ready-to-eat Consumer Industry: Chocolates Confectionery, So
food, beverages, processed and frozen fruit and Aerated Beverages/Drinks.
vegetable products, marine and meat products, etc. It
Plantation: Tea, coffee, cashew, cocoa coconut .Of
also includes establishment of post-harvest
these, RTE (ready to eat) and RTH (ready to heat) los
infrastructure for processing of various food items like
have grabbed special attention.
cold storage facilities, food parks, packaging centres,
value added centres, irradiation facilities and
modernised abattoir.

The food processing sector comprises of two segments- 15.2 History

primary processed food and value added food. Primary
segment comprises of packaged fruit and vegetables Food processing dates back to the prehistoric ages when
milk, flour, rice, spices etc, and constitutes around 62% crude processing incorporated slaughtering, fermenting
in value terms of the processed foods The value added Sun drying, preserving with salt, and various types of
segment includes cooking (such as roasting, smoking, steaming, and oven
baking), Salt preservation was especially common for
foods that constituted warrior and sailors' diets.

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Reduce migration: Setting up of plant in rural periphery and wheat frequently processing technology in the 19th
will reduce rural to urban migration with huge and 20th y was largely developed to serve military
employment opportunity in nearby area it will also help needs Nicolas Apport invented a vacuum bottling that
in decreasing disguised unemployment Food processing would supply food for French troops, and booted to the
is a labour intrusive sector and helps in providing development of tinning and then by Peter Durand in
localised employment opportunities 1810 nation, discovered by Louis Pasteur in 1862, was a
advance in ensuring the microbiological safety win the
Reduction in Food Inflation: A good food processing late 20th century products such as dried sous
industry provide timely availability of food with low reconstituted fruits and juices, and self- ng meals were
wastage of food, eliminate middlemen, thus help in developed especially, has been a forerunner in giving
reduction of food inflation to great extent Processing diverse this art of food processing. Using salt and poke
increases the shelf life and keeps supply in tune with the surplus vegetables and sun-drying brined gables and
demand For example. Frozen Safal peas are available fruits to increase their shelf life, and e scarcity and
all round the year unfavourable conditions is nothing Indian households.
Employment Provider: Food processing industry
provides plenty of direct and indirect employment 15.3 Significance
opportunities. This sector provide employment to 35
Food Processing Industry (FPI) is of enormous cancel
lakh people directly and indirectly Being dominated by
unorganised sector, women and marginalised workers as it provides vital linkages and synergies natty
can also contribute their skills in this sector promotes between the two pillars of the economy.
agriculture and industry. Some of the significant roles
Crop Diversification: A good food processing industry eyed by Food Processing Industries are
with proper forward and backward linkages provide
better remuneration to farmers which incentivize Development of Both Pillars of Economy: Because of
the vital linkages and synergies that it promotes
farmers to grow crops other than rice, wheat and millet
and help in crop diversification. Food processing also between the two pillars of our economy-Industry and
required different types of inputs, this incentivize crop Agriculture, it helps in growth of both the sector
diversification. simultaneously. Fast growth in the food processing
sector and progressive improvement in the value
Increase in Export: Food processing industry adds value addition chain are also of great importance for
to the raw agricultural products and improves quality achieving favourable terms of trade for Indian
which fetch better prices in international markets. agriculture both in the domestic and international
Hence, food-processing industries contribute in markets.
increased Export earnings
Food Security and Reduction in Wastatge: According to
Multiplier Effect on the Local Economy: Since a large World Bank more than 40% amount of food goes waste
share of this industry is based in rural and semi-urban in India every year, the post-harvest losses are about 25
regions as these regions provide both raw material and to 30 per cent in our country. Even marginal reductions
labour for the industry, there is a significant multiplier in these losses are bound to give india great relief on the
effect on the local economies This boosts the local food security front as well as improve the income levels
economy through generation of income and its of the farmers.
cascading effect on the economy. The food processing
Nutritional Security: On the nutritional front India is
industry typically has an output multiplier of two to four
on GDP as well. aso going through a rough phase. India constitutes
largest population of world's malnourished population,
Reduce Subsidy and Provide Better Price to Farmers: In which is higher than some of the sub Saharan African
agriculture, subsidies are a pertinent malady in the Countries A robust food processing sector has the
macroeconomic health of the country. The Minimum potential to give a decisive blow to malnourishment and
Support Price (MSP) ensures remunerative price to the associated impoverishment. Also processed s when
farmers. The more practical solution is to increase the fortified with vitamins and minerals can educe the
marketable value of food to provide remunerative price nutritional gap in the population.
to the farmers and food processing sector can help to
achieve this. Government need not raise MSP on rice

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As per APEDA (Agricultural and Processed For Huge consumer base: favourable economic and cultural
Products Export Development Authority). India 13000 transformation, shift in attitudes and lifestyles.
to 15000 Crore every year on waste of fr and consumers are experimenting with different cuisines.
vegetables. The key reason for higher wastage of fruits tastes and new brands and increase in awareness and
and vegetables is non-availability of facies of concern for wellness and health, high protein, low fat.
temperature controlled storages. Only 2% of the whole grain and organic food
perishable produce has that facility.
Labour availability: Cost of skilled manpower is low in
The Indian food processing industry accounts for 32 per India.
cent of the country's total food market, one of the
largest industries in India and is ranked fifth in terms Strong economy: Apart from growing population and
production, consumption, export and expected growth burgeoning purchasing power, rising urbanization,
rising retail trade due to initiatives such as Digital India,
together with presence of global players of the industry
15.4 Statistics can be considered as the major growth drivers for the
The Food Processing Industry has emerged as one of industry. A vegetables Over the years agricultural
the important segment in terms of its contribution to production isa has consistently recorded higher output
Indian economy, as it contributes 8.98 % and 8.39% of India eks no 1 in the world in the production of Milk,
GDP in Manufacturing and Agriculture sector Ghee, Ginger Bananas, Guavas, Papayas and Mangoes
respectively. It also contributes to 10% of India's and ranks no 2 in the world in the production of Rice.
exports and 6% of industrial investment. The average Wheat and several other vegetables and fruits
annual growth rate (AAGR) of Food Processing Sector Port connectivity: Larger coastline of around 7000 km
for the period 2011-12 to 2014-15 has outnumbered as
with strategic location and proximity to food importing
that of agriculture, standing at 2.26% as compared to nation it gains from its locational advantage from the
1.69%
viewpoint of trade, as it has close connectivity with
Food Processing Industry stands as one of the major Europe, Middle East & Africa from the western coast.
employment intensive industry, constituting 11.6% of and Japan, Singapore. Thailand, Malaysia, Korea,
the total employment. The food processing industry Australia & New Zealand from the eastern coast
engages approximately 1.93 man people in around
39,748 registered units with fixed capital of $32.75 15.5 Potential for Food
billion and aggregate output of around $158.69 billion.
Processing Industry in India
The level of processing in perishable products in India
is estimated only at 2.1% in fruits and vegetables, 6% in 15.5.1 Facts about Food Processing
poultry, 21% in meat, 23% in marine and 35% in milk Industry in India
and milk products. Overall processing level of
perishable products India (approx 10%), USA (80%), India is world's largest producer of Spices, Milk and
Malaysia (80% ), France (70%), Thailand (30%), Pulses. It is the largest processor, producer and
Australia (25%). 100% FDI is permitted under the consumer of cashew nuts.
automatic route in food processing industries. 100%
FDI is allowed through the government approval route India is the world's second largest producer of gras and
for trading through e-commerce in respect of food fruits & vegetables after China but hardly 2% of the
product which are manufactured or produced in India. produce is processed.

India's livestock population is largest in the world with

50% of the world's buffaloes and 20% of cattle, but only
The food processing sector in India has received around about 1% of total meat production is converted to value
6414.67 crore rupees worth of FDI in 2019 to 2020. The added products. More than 75% of the industry is in
Confederation of Indian Industry (CII) estimates that unorganized sector
the food processing sectors have the potential to attract
as much as US$ 33 billion of investment over the next 15.5.2 Reasons for Bright Potential of
10 years and also generate employment of nine million Food
person-days.

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Processing in India 4. Primary Processing

Agri commodity hub: With around 127 agro climate 5. Secondary Processing
zone, different types of soil present in count contribute
6. Retailing
to cultivation of different type of crops, furs
Primary Processing relates to conversion of raw
Doubling of farmers' income: With the rise in demand
agricultural produce, milk, meat and fish into a
for agri-products there will be commensurate rise in the
commodity that is fit for human consumption. It
price paid to the farmer, thereby increasing the income.
involves steps such as cleaning. grading, sorting,
Boosts Trade and Earns Foreign exchange: It is an packing etc. While secondary and higher stage of
important source of foreign exchange. For e.g. Indian processing deal with processing, where new of higher
Basmati rice is in great demand in Middle Eastern value food products are manufactured.
countries.
Rice, sugar, edible oil and flour mills are examples of
Enhances the quality and taste of food thereby bringing primary processing. Secondary processing includes the
more choices in food basket processing of fruits and vegetables, dairy, bakery
chocolates and other items.
Enhances consumer choices: Today, food processing
allows food from other parts of the world to be Most processing in India can be classified as primary
transported to our local market and vice versa. processing, which has lower value-addition compared to
secondary processing. There is a need to move up the
15.6 Locational Factors for Food value chain in processed food products to boost farmer
incomes. For instance, horticulture products, such as
Processing Industry fruits and vegetables, carry the potential for higher
value addition when compared to cereal crops.
Physiography of a region: Soil, relief, slope, altitude,
latitude, longitude etc. At present, India's agricultural exports predominantly
consist of raw materials, which are then processed in
Customs, culture, tradition and taste of the people living other countries, again indicating the space to move up
in the area. the value chain.
Port facilities both for national and international
markets. 15.8 Upstream and Downstream
Socio economic infrastructure available: Cheap and Requirements
skilled labour and good power supply, Good transport
DOWNSTREAM linkages and, improved transport and
and cold storage facilities.
industry needs a robust UPSTREAM and king and
Conducive policy: Good and supportive government supply chain management to make the food processing
policy with good institutional factors like finance and industry both nationally and internationally competitive
land. Pro-active government policy with attractive fiscal
The upstream stage of the production process involves
incentive also drive up the growth in this sector.
Upstream wing for and extracting raw materials. The
upstream part of the production process does not do
15.7 Stages and Processes anything with the material itself, such as processing the
Involved material. This part of the process simply finds and
extracts the raw material. Thus, any industry that relies
There are different stages of processing of food as on the extraction of raw materials commonly has an
depicted below: upstream stage in its production process. The upstream
requirement include important pre- production supplies
1. Inputs of inputs to food processing industries such as:
2. Production 1. Raw material.
3. Procurement and Storage 2. Finance and capital.

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3. Information and training. 5. Organisation includes angles or group entrepreneurs

in both small scale and unorganised sector and cluster
4. Technology transfer. collection cum processing units such as mega loud
Credit Facilities 10 Marketing federations and o parks and larger/producers organisations flaw material
Marketing Federal very grant role in a business ho of of food processing industry means fruits, vegetables,
farmers producers organizations an series depend upon grains, milk or meat producing livestock an agricultural
these ingrates for of their produce and forest A the fielded The upstream requirement in raw material
seasonal and timely strong term credit facility necessary include
to support their day-to-day co Primary and Secondary Collection Centres:
Farmers are also assisted through the Neg Warehouse (a) For example, potato collection centres in the form of
Receipts (NWRs): documents issued by warehouses to rural haats are set up for walers and chips making
against commodities deposited in warehouse which industry
warehouse is ballet They are transferred by
endorsement and delivery e either original depose or (b) Similarly fruits collection centres like for apple.
holder in due course (transferee) car cam commodities plums, peaches, sea buckthorn, apricot mango otc are
from warehouse NWRs can be traded sold swapped and linked with squash, jams and pickles and other varied
used as collateral to support borrowing or loans from food processing units
banks These receipts were made negotiable under
Warehouse (Development and Regulation) Act, 2007 (c) For fish or marine industries fish, prawn, shrimp.
and are regulated by Warehousing Development and squids salting, drying and canning etc come under
Regulatory Authority (WDRA) upstream requirement Rural Godowns and Cold
Storages: Raw material need a place to be stored in
Fiscal Incentives in the form of refund/exemption of proper godowns and storage facility Recently
corporate/income tax have also been put in place: These Government launched e-National Agriculture Market
have been made available for business of processing, (NAM) (pan India electronic trading portal) for the
preservation and packaging of fruits or vegetables or procurement of raw material which will help the food
meat and meat products or poultry or marine or dairy processing industry in ensuring cheap and regular
products or from the integrated business of handling, supply of raw material
storage and transportation of food grans This also
applies for Setting up and operating a cold chain 2. Finance and Capital - Finance and capital is another
facility, and setting up and operating warehousing major requirement in Food Processing Industry
facility for storage of agricultural produce in addition to NABARD, SIDBI, Commercial banks, Cooperative
these, concessional custom duty is charged for al goods banks, and Primary Agricultural Credit Societies are
related to Food Processing, cold storage units catering to this sector.
refrigerated containers, sorting and grading lines and Credit disbursals by Public Sector Banks to FPI
ripening chambers, etc. MSME's: The RBI encourages the public sector banks
Availability of skilled manpower has been identified as to give out loans to MSME's engaged in Food
one of the major challenges of Indian Food Processing Processing sectors. Loans to agro based industries are
industry The Ministry of Food Processing Industries also provided as a part of Priority Sector Lending
(MoFPI) working in close collaboration with Food Requirements
Industry Capacity and Skill Initiative (FICSI), the Loans to Warehouses, Cold Storage and Cold Chain
Sector Skill Council (SSC) in food processing and Infrastructure: Loans will be provided for projects
regularly guiding and assisting it in achieving its through Warehouse Infrastructure Fund created in
mandate. NABARD for projects involving creation of storage
Under Pradhan Mantri Kisan SAMPADA Yojana infrastructure, upgradation of marketing infrastructure
(PMKSY) MoFPI has formulated a Scheme for facilities of Agricultural Produce Marketing Committee
assisting skiing infrastructure and Development of (APMC) etc. A special fund of 2000 cr has been set up
Course curriculum with a budget outlay of 27.50 Crore. in NABARD Under this loans are extended upto 95% of
The scheme has twe components: the project cost for setting up. modernisation and

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expansion of FPI and development of infrastructure in B. Downstream

designated food parks
The downstream stage in the production process
Energy saving in parboiling involves processing the materials collected during the
upstream stage into a finished product. The downstream
Improving milling techniques of cereal grains, pulses of
stage further includes the actual sale of that product to
seeds and millets
other businesses, governments or private individuals.
Food processing effluent treatment The downstream process has direct contact with
customers through the finished product.
Creating ready to use dry mix fermented batter for
ready to eat foods. Development of Course curriculum for training
modules and its translation in English Hindi and
Fortification of processed foods for making healthy regional languages Assistance for creation of
foods at affordable prices infrastructure facilities for Training Centers
Development of new equipment’s for puffing The FICS! is working on identification of job roles and
Reducing storage losses competencies required for each job role so as to develop
National Occupational Standards (NOS) for different
Economic utilization of biomass food industries by- sectors of food processing The scope of this is to
product and waste utilization determine what skills are required in different parts of
our country with respect to food processing activity
Besides, Food irradiation (ionizing radiation to food being undertaken near It shall include generic and
technology is also in use to improve the safety and domain specific skills To provide proper training.
extends the shelf life of foods by reducing or Ministry has set up National Institute of Food
eliminating microorganisms and insects. For example, Technology Entrepreneurship and
BARC offers AKRUTI technology package for rural
development which provides infrastructure and Management (NIFTEM) at KUNDLI in Haryana.
knowhow for radiation facilities NIFTEM and Indian institute of Food Processing
Technology (FPT) are also conducting regular
International Collaboration: In addition. Government programmes/courses on skill development and
over a period of time has also collaborated with entrepreneurship for the youth, farmers, self-help
different countries like food diplomacy with Japan for groups and industry.
inviting their companies to invest in India. Make in
India, invest India, FDI policy are some other measures 4. Technology Transfer
through which government is going to bring latest
technologies in India. Food Processing Technology includes a set of physical,
chemical, or microbiological methods and techniques.
Organisation- Agro Processing Clusters: This initiative used to transmute/transform raw ingredients into food
by the Ministry of Food Processing aims at and es transformation into other food processing firms.
development of modern infrastructure and common Food processing quality ensures food safety,
facilities to encourage group of entrepreneurs to set up personalized nutrition and health, preservation of
food processing units based on cluster approach by nutritional quality and fortification enrichment
linking groups of producers farmers to the processors
and markets through well- equipped supply chain with Since India has low technology development so it is
modern infrastructure Each agro processing clusters giving trust for R&D in food processing sector. The
under the scheme have two basic components ie Basic R&D efforts are aimed at following: Reduction of
Enabling Infrastructure (roads, water supply. power wastage. Development of technologies & preservation
supply, drainage. ETP etc.) of food products methods for

Core Infrastructure/ Common facilities (ware houses, Identification of new eco-friendly & better packaging
cold storages. IQF tetra pack, sorting, grading etc) The material.
units are set up simultaneous along with creation of
Development & standardization of packaging
common infrastructure
technologies for food products.

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Fortification of staple food items to improve nutritional B. Supply Chain Issue The various issues in
quality Change & diversification in food habits. supply chain are
Preferences and improvement in consumer perception Small and Dispersed Marketable Surplus: Fragmented
towards food safety holdings low farm productivity: high seasonality.
Designing/building of prototype equipment. The various perishability and intermediation affect proper supply of
technologies include: materials and which further result into improper supply
and poor quality and in turn, impede processing and
Application of soft x-rays for identifying internal exports.
blemishes in fruits and vegetables: Development of on-
farm pre-coolers and vegetable washers form, given Intermediation: In the long and fragmented supply
their high fibre and vitamin content and anti-oxidant chain, right from farm to mandi to processor to
properties. distributor to retailers, there are too many points of
intermediation & disconnect. Due to this there is a mis-
match between demand and supply It offers limited
choice to the consumers, unacceptable wastage and
High Packaging and Distribution Cost: Cost of
hygiene, unavoidable cost addition and opportunistic
packaging sometimes may exceed 20% of the end
profiteering
consumer price. Large proportion of processed food is
sold and bought in small packs which translate into Essential Commodities Act: The Essential Commodities
even higher costs of packaging as proportion of total Act (ECA) 1955 was put in place to control production,
costs and hence higher distribution cost. supply and distribution of essential agricultural
commodities and to ensure timely availability of food
High Taxation: Taxes on food in India are very high by
products in the current context of liberalizations,
international standards. Central and State taxes together
controlling the movement of products by licensing of
increase costs to consumer often by 20-30%. UK,
dealers, limits on stocks and control on movements only
Ireland, Malaysia for example have virtually zero tax on
hamper the growth of the agricultural sector and
processed food. Multiple and complicated tax regimes
promotion of food processing industries
have rendered the food industry uncompetitive
Agricultural Produce Market Committee (APMC) Act:
There are several challenges that need to be addressed
This Act discourages direct marketing arrangement
in order for the food processing industry to be able to
between farmer and processer. The processor is required
achieve the availability, affordability, awareness and
to obtain license from the respective state govt. as well
quality and safety goals.
as liable to pay market fees without even using mandi
A. Demand Side Factors infrastructure. Besides, APMC Acts of different states
have become a stumbling block for markets seeking to
Affordability: Domestically, affordability is the key scale up operations. In the whole process all qualities &
issue. Price differential between fresh and processed grades also get mixed up hence APMC Act is a major
food in India is very high relative to hygiene and health irritant in the supply chain integration
values of the processed food.
Low Value-Addition in Processing: There is major
Socio-Cultural Factors: Indians prefer freshly cooked fragmentation of food processing capacity, with a large
products as compared to packaged products. Various unorganized segment and widespread use of primitive
medical research also underlines the advantages of processing. This results in lower value-added at the
consumption of certain products such as fruit in raw processing stage, especially from a nutritional point of
view. Powerful ideas like fortification of flour with
The downstream requirements in the production process micronutrients that have been adopted globally. would
involve - Processing the materials collected during the be difficult to implement and monitor in India, given
upstream stage into a finished product and maintaining this large unorganized presence and difficulty in
adequate food processing standards. Proper advertising ensuring adoption of improved technology.
and actual sale of that product
Poor Economy of Scale: Indian food processing sector
is dominated by the small scale and unorganised sector

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which suffers from poor economies of scale. This Develop the agricultural facility with agricultural
results into low efficiency due to the lack of access to practice which ads the transition from staple fond o
credit, managerial knowledge, efficient tools/ diversification of crops Well defined roles of the
technology, marketing network, poor backward participants sharing mechanisms, fiscal incentives
partnership models for creation of for logistics, storage
Lack of Product Development, Innovation and and processing Encourage technology up-gradation of
Technology: Indian food processing industry is mainly existing facilities and investment development of
made up of small scale players and they lack the ancillary industries research and development,
capacity to invest money in R&D due to diseconomies packaging, fo processing equipment manufacturing
of scale Hence, this sector does not often use the best safety certifying agencies by extending face incentives
technology, machinery and management practices Wide to investors
network of R&D institutions under ICAR CSIR, ICMR
and Universities exist. But these are oriented towards Facilitate development controlled temperature
academic research and their linkage with users like distribution (from farm processing facility to retail
farmers and industry is undeveloped, resulting in lack of outlet) and setting up of pre-processing centres and pre-
R&D of commercial significance and technology flow. cooing facilities and quality measurement/control
infrastructure near farm gate and mends Slaughter
Paucity of Skilled Manpower: A severe shortage of animal rules should be framed na comprehensive policy
skilled manpower across the food value-chain is a major framework
challenge. Poor resource skills and knowledge with lack
of awareness of food regulations resulting in high Upgrade food processing clusters modernise agriculture
downstream rejection rates, especially with unorganized markets, warehouses and abattoirs and develop Food
suppliers inconsistent and parks to offer requisite infrastructure and services which
include technical, financial assistance along with access
Overlapping Regulatory Environment: More than a to regional, national and international markets.
dozen food laws under several ministries govern food
sector rather than a single comprehensive policy on Increase the availability of appropriate variety of raw
food processing. These laws are often inconsistent, materials at reasonable prices through increased
inflexible and non- responsive to science & innovation. productivity and efficient extension services, replicating
It creates confusion in the minds of consumers, successful models in the public and private sectors.
manufacturers and investors and increases costs of
business, affects quality, and discourages innovation. (b) Providing Impetus to Logistics and Supply Chain
For example: Presently a typical fruit processing unit is Sector:
visited by a host of inspectors viz. under PFA, FPO, Develop dedicated freight commodores (For example,
BIS, Boiler Act etc. KISAN Rail) in rail, supplemented by concretised dual
Logistics and Infrastructure Bottlenecks: Long and carriageways for the State and national highways,
fragmented supply chain, inadequate cold storage and which will directly reduce the cost of goods supplied
warehousing facilities, road, rail and port infrastructure, Support development of organised strategic logistics
lack of modern logistics infrastructure such as logistics hubs by helping in land acquisition and by providing tax
parks, integrated cold chain solutions etc., are major incentives/tax holidays Incentives for setting up
infrastructure bottlenecks. More than 30 per cent of the warehousing cold storage infrastructure and customized
produce from farm gate is lost due to such inadequate transportation network development.
cold chain infrastructure and inadequate logistics.
2. Streamlining the Regulatory Structure: . Bringing
15.9 Challenges multiple departments and law under single window
thereby providing clarity in roles of operational and
At present most of the industries are in unorganized service delivery.
sectors. So, number of problems are arising from
different sections of the industries. Some of the basic and forward linkages etc. For example Without proper
problems encountered by Indian food industries at backward linkages, instead of contract farming small
different levels are given below companies rely on multiple small suppliers which
provide raw materials with heterogeneous quality and
then these products are rejected in international market

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for not meeting Codex/HACCP standards All these New technology should be updated in the training
factors make small scale companies difficult to survive institutes and skill development should be given the top
intense competition from large scale players. most priority

Safety, Quality Standard and Lab Facility: The number Develop a three-tier food testing infrastructure: The
of laboratories in the country is insufficient and most of State/local laboratories will be involved in routine
the laboratories in country lack world- class facilities testing Regional labs will undertake testing requiring
Equipment, Testing manuals used are outdated having more sophisticated and skilled testing
very slow response time, sometimes extending to upto 5 procedure/techniques/equipment/manpower National
years. Most laboratories are not fully equipped to level laboratories will undertake only those tests which
handle testing of organic foods, residual radioactive cannot be undertaken by State and regional laboratories
matter, new toxins and allergens. textural analysis,
residues of veterinary drugs, enzymes and hormones etc 15.11 Government Schemes
These tests are necessary for complying with Codex,
HACCP etc standards before exporting to in US/EU It has been the endeavour of the Government to
markets promote food processing industry in the country to
reduce wastage of agricultural produce and minimize
Limited ability to control quality and safety: The sheer post- harvest losses.
number of players, especially in the targe unorganized
segment, involved in the food value- chain, makes According to "Assessment of Quantitative Harvest and
implementation of quality and safety norms difficult. Post-Harvest Losses of Major Crops and Commodities
This has led to practices such as milk adulteration and in India" by ICAR the percentage of post-harvest losses
use of carbide for fruit ripening becoming more as assessed by the study is as under
widespread
Crops Cumulative Wastage (%)
Low consumer awareness: Consumer awareness is a
Cereals 4.65-5.99
critical aspect of an improved nutritional situation in the
country. Consumers currently lack awareness of several Pulses 6.36-8.41
nutritional and food safety and quality aspects
Oil Seeds 3.08-9.96
15.10 Suggestions Fruits & Vegetables 4.58-15.88
There is need to adopt an integrated approach to address Milk 0.92
the above mentioned challenges with clear focus on
improving quality and value of output, reducing cost of Fisheries (Inland) 5.23
raw material, while improving farmer's income level.
Fisheries (Marine) 10.52
The following are few solutions that can be adopted:
Meat 2.71
1. Initiatives to Plug Supply Side and Infrastructure
Bottlenecks: (a) Overcoming long and fragmented Poultry 6.74
supply chain:
To counter the excessive wastage of food the Ministry
Development of backward linkages by evolving of Food Processing Industries brought the PM KISAN
conducive regulatory framework for contract and SAMPADA YOJANA
corporate farming and encouraging commodity clusters
and intensive livestock rearing to source appropriate A. Pradhan Mantri Kisan SAMPADA Yojana
quality. quantity and varieties of input by appropriate (PMKSY)
modifications to the APMC Act. For example, the
centre has released Model Contract Farming Act for the The scheme "Pradhan Mantri Kisan Sampada Yojana"
state to follow (Scheme for Agro-Marine Processing and Development
of Agro-Processing Clusters) is a comprehensive
Training of food inspectors should be made mandatory Central Sector Scheme with an objective to supplement
agriculture, modernize processing and decrease agri-
waste. It is an umbrella scheme (with an outlay of

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6000cr) which will integrate current and new schemes Training must also be focused on: Training of small and
of the Ministry of Food Processing Industries. medium enterprises in the unorganized sector.

Ensure uniform implementation of the APMC Act to Modern Processing Techniques: The Ministry has
encourage private sector investment in infrastructure introduced modern food processing techniques
development, harmonization of indirect taxes by GST improving the shelf-life of agricultural produce and
implementation to reduce vast price differences in ensuring stable revenue for the farmers
product.
Value of Food Processing Market in India: The food
Recent initiative like INVEST India has also created a processing market in India was valued at approximately
dedicated help desk for FPI sector exclusively to billion in FY 2018 and is expected to reach
facilitate single window clearance approximately *53 billion by FY 2024, expanding at a
CAGR of -12.00% during the FY 2020-2024 period
Need for Second Green Revolution in Agriculture: node
needs a second Green Revolution which takes nce and B. Mega Food Parks (MFP)
wheat cultivators beyond the grain production stage to
agro-food processing and value addition This would The Mega Food Park Scheme is based on "Cluster"
also solve the issue of constraints in raw material approach and envisages creation of state of art support
procurement. This high end initiative requires infrastructure in a well-defined agri/horticultural zone
commitment from all the stakeholders in the food value for setting up of modern food processing units along
chain Market Creation and Market Intelligence: with well-established supply chain. Mega food park
typically consist of supply chain infrastructure
Promotional campaign for consumers highlighting the including collection centres. Primary Processing
benefits of processed foods (healthy. convenient, Centres (PPC). Central Processing Centre (CPC) and
assured quality) . Develop a strong market intelligence cold chain and around 30-35 fully developed plots for
network to cater to the information needs of entrepreneurs to set up food processing units.
stakeholders.
The Scheme of Mega Food Park aims at providing a
The reach of such initiatives need to be increased. mechanism to link agricultural production to the market
by bringing together farmers processors and retailers so
Encouraging domestic startups and Industry in such
as to ensure maximizing value addition, minimizing
intelligence networks is required.
wastage increasing farmers income and creating
There should be a Centre of Excellence between Centre employment opportunities particularly in rural sector.
and State . Their should have more training institutes for
The following schemes will be implemented under PM
upcoming entrepreneurs and it should be in all states
Kisan SAMPADA Yojana:
Scholarship should be given to the upcoming
entrepreneurs. Mega Food Parks
Food Safety and Hygiene: Integrated Cold Chain and Value Addition Infrastructure
Develop and implement modern integrated food law Creation/Expansion of Food Processing & Preservation
with single apex regulator. Capacities
Phase-wise approach for harmonization of Indian food Infrastructure for Agro-processing Clusters
standards with Agmark, Codex, to the extent possible
Creation of Backward and Forward Linkages Food
Develop institutional set-up which can provide Safety and Quality Assurance Infrastructure
scientific advice on all matters related to food safety
Human Resources and Institutions
Skilling is required at 2 levels:
Impact
First at Farm gate in promoting agricultural best
practices The implementation of PMKSY will result in creation
of modern infrastructure with efficient supply chain
Second, food processing activities management from farm gate to retail outlet.

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It will provide a big boost to the growth of food The objective of the scheme is to provide effective and
processing sector in the country. seamless backward and forward integration for
processed food industry by plugging the gaps in supply
It will help in providing better prices to farmers and is a chain in terms of availability of raw material and
big step towards doubling of farmers' income. linkages with the market. Under the scheme, financial
It will create huge employment opportunities especially assistance is provided for setting up of primary
in the rural areas. processing centres/ collection centres at farm gate and
modern retail outlets at the front end along with
It will help in reducing wastage of agricultural produce, connectivity through insulated/ refrigerated transport.
increasing the processing level, availability of safe and
convenient processed foods at affordable price to
consumers and enhancing the export of the processed
foods.

Ministry of Food Processing Industries in February G. Scheme for Food Safety and Quality
2020 sanctioned 32 projects under PM Kisan Sampada Assurance Infrastructure
Yojana. The projects are stated to be spread across 17
states in India and are to leverage an investment worth Quality and food safety have gained a competitive edge
406 crores. Other details are: in the global market. Therefore, the installation of ISO
9000, ISO 22000 Quality Management Systems and
Employment Generation: The 32 projects under Hazard Analysis and Critical Control Points (HACCP)
PMKSY will create direct/indirect employment with a etc based food safety system is extremely desirable in
special focus on employment opportunities in rural view of the changing scenario of food market in the
areas. international trade.
of processing activities depending on the processing Ministry of Food Processing Industries is implementing
sectors which results in value addition and/or enhancing a Plan Scheme for Food Safety and Quality Assurance
shelf life of the processed products Infrastructure. The scheme has the following
components:
E. Scheme for Infrastructure of Agro-
Processing Clusters Setting Up/Up-Gradation of Quality Control/ Food

The scheme aims at development of modern Testing Laboratory: The objective of the scheme is to
infrastructure and common facilities to encourage group ensure safety and quality of food products with the
of entrepreneurs to set up food processing units based analysis of the samples received from food processing
on cluster approach industries and other stakeholders

Salient Features Objectives

The scheme will have two basic components e Basic To provide modern infrastructure for food processing
Enabling Infrastructure (roads water supply power units in the country.
supply drainage, ETP etc) Core Infrastructure/Common To ensure value addition of agricultural produce
facilities (ware houses cold storages, IQF, tetra pack. including dairy, fisheries etc.
sorting grading etc)
To establish a sustainable raw material supply chain for
Creation of common facilities in a cluster may vary each cluster.
depending upon requirements of food processing units
existing outside the cluster or to be set up in a cluster To facilitate induction of the latest technology.
The units are set up simultaneous along with creation of
To address the need of small and micro food processing
common infrastructure
enterprises by providing plug & play facilities.
F. Scheme for Creation of Backward and To provide an institutional mechanism for producers,
Forward Linkages processors, and retailers to work together to build the
supply chain.

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C. Integrated Cold Chain, Value Addition and J. National Mission on Food Processing
Preservation Infrastructure (NMFP)
The objective of the Scheme of Integrated Cold Chain, National Mission on Food Processing (NMFP) was
Value Addition and Preservation Infrastructure is to launched as a Centrally Sponsored Scheme by the
provide continuous and integrated cold chain and Ministry of Food Processing industries and had to be
preservation infrastructure facilities, from the farm gate implemented through State/UT Governments during 12"
to the consumer. Five Year Plan (2012-17) The scheme aimed at
decentralization of implementation of the programmes,
Under the Scheme the Ministry of Food Processing leading to substantial participation of State
Industries extends financial assistance to project Governments/UTS. The State/UT Governments were
proposals received from public/private organizations for given flexibility in implementing the schemes included
integrated cold chain infrastructure development. in the NMFP based on the needs of local area.
Pre-cooling facilities at production sites, refrigerator
K. Draft National Food Processing Policy
vans, and mobile cooling units has been covered under
the Integrated Cold Chain projects. 2017

D. Scheme for Creation/Expansion of Food The Government formulated Draft National Food
Processing Policy 2017, with the following objectives: •
Processing and Preservation Capacities To reduce wastages, increase value addition, ensure
The Scheme aims to create, expand and modernise better prices for farmers while ensuring availability of
processing and preservation capacities which will help affordable and quality produce to consumers:
in increasing the level of processing, value addition and To address the challenges of malnourishment and
thereby lead to a reduction of wastage malnutrition by ensuring availability of nutritionally
The setting up of new units and modernization/ balanced foods.
expansion of existing unit will be covered under the To make food processing more competitive and future
scheme. The processing units undertake a wide range ready through creation of adequate infrastructure
efficient technologies addition etc. facilities along the supply chain, use of modem
Promotional Activities: Various promotional activit technology and innovation, promoting traceability. food
seminars, workshops, fair, exhibitions are cared %% safety, encouraging optimum capacity utilization of
encourage investment in food processing and to cre assets and resources
awareness of the schemes being implemented by t To position India as the most preferred investment
Ministry destination for the agribusiness and food processing

To generate more opportunities for the development of

the agribusiness and Food Processing Industry, and
1. Modernization of Abattoirs
create employment
Hygienic and scientific slaughtering and m utilization of
Implementation of HACCPASO 22000/ISO 9000/
by-products are the most important issues the Indian
GHP/GMP: The objective of the scheme is to motivate
meat industry. The qualitative and quarte capacities of
the food processing industries for adoption of food
the abattoirs need to be upgraded and these are required
safety and quality assurance mechanisms such as TOM
to be linked with commercial processing of meat, both
including 150 9000, ISO 22000 HACCP GMP. GHP
for domestic consumption and exports besides
This will prepare them to face global competition,
discouraging unauthorized slaughtering
enable adherence to stringent quality and hygiene norms
Accordingly, a plan scheme for establishing new enhance product acceptance by overseas buyers and will
authors and modernization of the old abattoirs was keep indian industry technologically abreast of
started in 2009 The scheme envisages a financial grant international best practices
too.
Hazard Analysis Critical Control Point (HACCP)
Hazard Analysis and Critical Control Point (HACCP) is

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a process control system designed to identify and One Nation One Standard Mission was conceived in
prevent microbial and other hazards in food production. September 2019 by the Bureau of Indian Standards The
mission one nation one standard was envisioned on the
HACCP involves a system approach to identification of line of 'one nation, one ration card scheme in order to
hazard, assessment of chances of occurrence of hazards ensure quality products in the country There are
during each phase- raw material procurement. multiple standards in the country for a single product or
manufacturing, distribution, usage of food products, and service. The new mission is to converge such standards
in defining the measures for hazard control. with the BIS The idea is to develop one template of
standard for one given product instead of having
H. Scheme for Human Resources and
multiple agencies to set it The purpose of setting
Institutions standards and enforcing them is to ensure that quality
The scheme has following components: 1. Skill products are made available to consumers.
Development: The objectives of scheme are as follows The Mission aims to ensure that there is a synergy and
To provide sector specific skilled workforce ranging no overlap in the standardization work in the country,
from floor level workers, operators. packaging and thereby building a Brand India identity it also seeks to
assembly line workers to quality control supervisor etc provide dedicated domain-specific expertise available
in the various sectors of food processing industries To with various organizations in the country.
contribute towards achieving the projected skilled It also focusses on Lab testing, modern equipment and
human resources requirement as envisaged by National technologies to enable the convergence of all standard
Skill Development Corporation (NSDC) in food development activities in the country.
processing sector.
Way Forward
2. Scheme for Strengthening Institutions
Food processing has numerous advantages which are
This scheme focuses on putting in place new
specific to Indian context. It has capacity to lift millions
institutions and strengthening existing institutional
out of poverty and malnutrition. Government should
mechanisms for human resource development in the
develop industry in a way keeping in mind the interests
food processing sector. The following institutions have
of small scale industry along with attracting big ticket
been set up by the Ministry for development of food
domestic and foreign investments.
processing sector

National Institute of Food Technology Entrepreneurship

& Management (NIFTEM). Indian Institute of Crop The entire food value chain in India is controlled by
Processing Technology (CFT) multiple ministries, departments and laws. A
comprehensive policy will ensure that various
3. Research & Development: initiatives across the departments are aligned to the
Under the scheme, the Ministry of Food Processing overall goal of ensuring availability, awareness,
industries has been extending financial assistance to affordability, access, quality and safety of food.
undertake demand driven R&D work for the benefit The target of ensuring food security for more than a
food processing industry in terms of product and billion people requires a concerted effort by all
process development. stakeholders including the government and the food
The food segments identified includes ready to processing industry. In addition to private players and
eat/ready to cook marine products, processed fruits & Government. industry bodies and academia will also
vegetables, mozzarella cheese, and innovative/ organic have a crucial role in the success of these initiatives.
products of SMEs Other Government Initiatives to boost Food Processing
The scheme would also support the branding and Industry Food and agro-based processing unit and cold
marketing abroad chain structure have been classified under agriculture
Aces for Priority Sector Lending femting 100% FDI in
4. One Nation One Standard Mission retail trade including Commerce of food products
manufactured and/or produced in India

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Prime Minister-Formalisation of Micro Food Processing To ensure availability of safe and wholesome food for
Enterprises (PM-FME) It is a Centrally Sponsored human consumption and for matters connected
Scheme with a total outlay of 10,000 crores over the therewith.
period of 2020- 25 .Scheme is expected to benefit 2
lakh micro food processing units through credit linked The law is significant in ensuring quality food to the
subsidy .Scheme adopts One District One Product consumer. It protects consumer interest by prohibiting
(ODOP) approach to reap benefit of scale in terms of misleading advertisement and penalising adulteration In
procurement of inputs, availing common services and other words, the Act seeks to enhance quality of food
marketing of products. related information to consumers by setting standards

States need to identify one food product per district FSSAI has been mandated by the FSS Act for
keeping in view the existing clusters and availability of performing the following functions: Framing of
raw material. Regulations to lay down the Standards and guidelines in
relation to articles of food and specifying appropriate
Support for common infrastructure and branding & system of enforcing various standards so laid.
marketing would be for that product.
Laying down mechanisms and guidelines for
Scheme also places focus on waste to wealth products, accreditation of certification bodies engaged in
minor forest products and Aspirational Districts. certification of food safety management system for food
businesses.
1 Operation Greens
To provide scientific advice and technical support to
it is a Central Sector Scheme being implemented by Central Government and State Governments in the
Ministry of Food Processing Industries. matters of framing the policy and rules in areas which
have a direct or indirect bearing of food safety and
The scheme was originally meant for Tomato, Onion
nutrition.
and Potato value chain. In 2020 budget the scheme has
been increased to include 22 perishable crops. Collect and collate data regarding food consumption
incidence and prevalence of biological ski contaminants
This scheme is not meant for intervention in the market
in food, residues of various, contaminants in foods
during price rise.
products, identification of emerging risks and
Under the short term- price stabilization measures of the introduction of rapid alert system.
scheme, there is a provision for 50 per cent subsidy on
Contribute to the development of international technical
cost of transportation and storage for evacuation of
standards for food, sanitary and phyto-sanitary
surplus production from producing area to the
standards. Promote general awareness about food safety
consumption centre during the glut situation. Transport
and food standards.
subsidy has been allowed on any fruit & vegetable
through any rail service provided by Indian Railways.
Production-Linked Incentive (PLI) Scheme Food 15.12 Regulatory Authorities
processing sector is one of the sector which has been
included in incentive for PLI scheme Rules and 15.12.1 Ministry of Food Processing
Regulations 2011 under a single reg The Food Safety Industries
and Standards Authority of The Ministry of Health &
Family Welfare. Government India is the Administrative The Ministry of Food Processing Industries was set up
Ministry for the implement of FSSAI in July. 1988 to give an impetus to development of food
processing sector in the country. The Ministry is
FSSAI has been mandated by the Food Safety and concerned with formulation and implementation of the
Standards (FSS) Act, 2006 The Main Objective of the policies and plans for the food processing industries
Ac To consolidate the laws relating to food and within the overall national priorities and objectives. The
establish the Food Safety and Standards Author of India aim of the Ministry:
for laying down science based standard for articles of
food and to regulate their manufacture storage, Better utilization and value-addition of agricultural
distribution, sale and import produce.

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Minimising wastage at all stages in the food processing A The Bureau of Indian Standards (BIS) is the National
chain by development of infrastructure for storage. Standards Body of India working under the aegis of
transportation and processing of agro-produce. • Ministry of Consumer Affairs, Food and Public
Induction of modern technology into the food Distribution and Government of India
processing industries.
It is established by the Bureau of Indian Standards Act.
Create the critical infrastructure to fill the gaps in the 1986 The major functions of the Bureau is the
supply chain from farm to consumer. formulation. recognition and promotion of the Indian
Standards: BIS has adopted ISO 22000 which deals
with Food Safety Management

15.12.2 Agricultural and Processed BIS Initiatives

Food Products Export Development BIS-Care App: With this app, consumers can check the
authenticity of the ISI-marked and hallmarked products
Authority (APEDA) and lodge complaints.
It is an apex statutory export promotion organization
Covid-19 Standards: BIS developed Covid-19 standards
under the Ministry of Commerce and Industry for Cover-all and Ventilators and issued norms for grant
established under APEDA Act, 1985. APEDA is of licence for N95 Masks. surgical masks and eye
mandated with the responsibility of export promotion
protectors which has resulted in an increased production
and development of the products like fruits, vegetables, of ISI-marked Personal Protection Equipment (PPE)
meat products, poultry products, dairy products etc. Its
items.
main function are:
Quality Control Orders: BIS has been playing an
Improving of packaging of the products. important role in the formulation of Quality Control
Improving of marketing of the products outside India. Orders (QCO) to make the standards mandatory Portal
for Consumer Engagement: BIS is developing a portal
Development of industries relating to the scheduled on Consumer Engagement, which will facilitate the
products for export by way of providing financial online registration of Consumer Groups, submission of
assistance. proposals and approval thereof and complaint
management.
Fixing of standards and specifications for the products
for the purpose of exports.
15.13.2 Codex
15.12.3 Food Safety and Standard Codex is a collection of internationally recognized
Authority of India standards, codes of practice, guidelines, and other
recommendations relating to foods, food production,
The Food Safety and Standards Authority of India and food safety.
(FSSAI) has been established under Food Safety and
Standards Act, 2006 which consolidates various Acts Codex prescribes International Standards for safety and
and Orders that handled food related issues in various quality of food as well as codes of good manufacturing
Ministries and Departments. practices. guidelines to protect health of the customers.

The Act officially repeals the regulatory framework Its texts are developed and maintained by Codex
established by the previously existing eight food laws Alimentarius Commission which is an international
by consolidating them into the Food Safety and body constituted by Food and Agriculture Organisation
Standards (FAO) and World Health Organisation (WHO) of the
United Nations with an objective to protect health of
15.13 Food Standards consumers and to ensure fair practices in the food trade.

The Act puts in place a unified structure for all food

15.13.1 Bureau of Indian Standards safety related matters in the form of FSSAI at the
(BIS) Centre and Commissioners of Food Safety at the State
level

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The Act is applicable to anyone who handles, processes, 15.14.1 Present Status of Agri-
manufactures, sells, serves, stores, distributes,
transports or imports food Exports
Agri-exports touched $41.8 billion in FY 2020-21,
15.13.3 AGMARK amongst the various Agri-commodity exports, rice ranks
AGMARK is a certification mark सरकार employed on first with 17.7 million tonnes valued at $8.8 billion,
roughly 21 per cent of the total value of Agri-exports. It
agricultural products in India, assuring that they
is followed by marine products ($6 billion), spices ($4
conform to a set of standards approved by the
Directorate of Marketing and Inspection, agency an of billion), bovine (buffalo) meat ($3.2 billion) and sugar
($2.8 billion) current status of the Indian Agricultural
the Government of India. The word GOVERNMENT
Agmark is derived from Agricultural Marketing. OF Exports is
INDIA Lower Share of Global Exports: in spite of being one of
the largest producers of Food grains and Fruits and
The Agmark seal ensures about quality and purity of the
food products. The quality of the product is determined vegetables. India's share in global export of Agri
commodities stand at merely 2% (9th Rank)
with reference to the size, variety, weight, colour,
moisture, fat content and other factors are taken into Lack of Diversified Export basket: India's export basket
account. is basically dominated by Basmati Rice and Marine
It covers quality assurances of unprocessed, semi Products
processed and processed agricultural commodities. It Low Value Addition: Majority of its exports are low
lays down the specifications for various adulteration value, raw or semi-processed. The Agriculture Exports
prone commodities viz. butter, ghee, vegetable oils, Policy 2018 has emphasized on "Bake in India" ie.. a
ground spices, honey, wheat etc. renewed focus on value addition and on processed
Agmark also covers pulses, cereals, vegetable oils, agricultural products.
fruits and vegetables, roasted Bengal gram, vermicelli,
macaroni and spaghetti.
15.14.2 Agricultural Exports Policy
2018
15.13.4 Food Safety and Standards
The Agricultural Export Policy aims to:
Act 2006
Double agricultural exports from present -US$ 30+
Extensive use of Fertilisers, pesticides and other Billion to-US$ 60+ Billion by 2022 and reach US$ 100
chemicals has raised concerns about quality of food. Billion in the next few years.
Further, protection was needed from unfair and
hazardous practices such adulteration, Synthetic milk Diversify our export basket, destinations and boost high
and milk products etc. For this Food Safety and value and value-added agricultural exports including
Standards Act was enacted in 2006 prior to which there focus on perishables.
were plethora of laws under different ministries, which
Promote novel, indigenous, organic, ethnic, traditional
were overlapping and confusing.
and non-traditional Agri products exports.

Provide an institutional mechanism for pursuing market

access, tackling barriers and deal with sanitary and
phytosanitary issues.

Strive to double India's share in world Agri-exports by

integrating with global value chain at the earliest.

15.14 Agricultural Exports Constraints and Challenges

The Agricultural Exports Policy 2018 has sought to
double agricultural exports from present-US$ 30-
Billion to -US$ 60+ Billion by 2022 and reach US$ 100

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Billion in the next few years. However, it would face State-led Export Plan - Business plan for a crop value
number of challenges chain cluster. Plans should be collaboratively prepared
with private sector players and Commodity Boards.
Supply-side:
Product Wise Cluster Based Approach
Lack of stable and reliable export policy: More focus on
price stabilization and food security and not on exports. The concept of Agri Export Zone attempts to take a
Lack of Market Intelligence related to consumer comprehensive look at a particular produce/product
preference in export markets For example, higher located in a contiguous area for developing and the raw
sweetness in Indian mangoes is not necessarily in materials, their processing/packaging, leading to final
demand in many countries exports. sourcing

Identification Challenges: Absence of state level export Thus, the entire effort is centred on the cluster approach
data precludes us from identifying potential export of identifying the potential products, the geographical
clusters within a state to provide suitable incentives region in which these products are grown and adopting
.Lack of aggregation of low marketable surplus due to an end-to-end approach of integrating the entire process
significant variation in terms of varieties cultivated right from the stage of production until it reaches the
market.
Training and Skill Development: Unregulated
chemicals usage, Inadequate post-harvest management, Process
Lack of awareness leading to rejection of Indian
Products in overseas market This process would include identification of potential
export products by the State Governments through
Fragmented and restrictive APMC regime cluster approach and then forwarded to APEDA for
final guidelines and approval.
Poor Infrastructure and Logistics makes Indian products
uncompetitive. Various measures like financial assistance, fiscal
incentive are provided under this through Central and
Lack of coordination among multiple agencies involved State Government for training and extension, R&D,
in export of Agri-commodities such as Ministry of quality up gradation etc.
Agriculture, Commerce Ministry, FSSAI etc
The different agri export zone identified with their
Demand-side: potential export product is shown through the map
High import duties and Quota limits in export markets. below:

Indiscriminate application of sanitary and phytosanitary Focus on 22 crop value chains through a demand driven
measures by other countries against Indian products. approach

Surge in agricultural imports after signing of FTAS Private sector should play an anchor role in driving
outcomes and execution.
15.14.3 Recommendations of the Centre should be an enabler. Centre should enable state-
High- Level Expert Group (HLEG) led plans.
to Boost Exports Robust institutional mechanism to fund and support
implementation.
In August 2020, the High Level Group (HLEG) on
Agricultural Exports set up by the Fifteenth Finance Funding through convergence of existing schemes,
Commission submitted its report to the Commission. Finance Commission allocation and private sector
The HLEG was set up to recommend measurable investment.
performance incentives for states to encourage
agricultural exports and to promote crops to enable high 15.14.4 Agri Export Zone in India
import substitution.
Under Exim policy, 2000 a new concept of Agri Export
Zone (AEZ) has been evolved by Government of India

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to boost the export potential of product through cluster C. Government Initiatives to Boost this Sector
based approach.
1. Animal Husbandry Infrastructure Fund
Objectives (AHIDF):
The objective behind the AEZ was to focus on potential Development
products from the export perspective and address
critical issues in creation of exportable quantity and This is the first major fund launched by the government
quality and to synergize the use of all available that includes a diverse set of stakeholders such as
resources and logistics from Central and State sector Farmer Producer Organizations (FPO), private dairy
schemes in existence. players, individual entrepreneurs, and non- profits
within its ambit.
Nodal Agency
APEDA has been nominated as the Nodal Agency to
15.15.1 Animal Husbandry
coordinate the efforts between Central and State Animal husbandry refers to livestock raising and
Government. selective breeding. It is the management and care of
animals in which the genetic qualities and behaviour of
A. Importance of a livestock in rural economy animals are further developed for profit.
It has contributed significantly to the empowerment of A large number of farmers depend upon animal
women and has increased their income and role in
husbandry for their livelihood. It supports the livelihood
society. of almost 55% of the rural population.
It is a major risk mitigation approach for small and As per the Economic Survey-2021, the contribution of
marginal farmers, particularly across the rain-fed Livestock in total agriculture and allied sector Gross
regions of India.
Value Added (at Constant Prices) has increased from
24.32% (2014-15) to 28.63% (2018-19). Therefore,
Animal husbandry output constitutes about 30 percent
It is at the centre of poverty alleviation programs from of the country's agricultural output. Women constitute
equity and livelihood standpoints. 70 per cent of the labour force in livestock sector as
against 35 per cent in crop farming.
Livestock productivity has been identified as one of the
seven sources of income growth by the Inter- India is the highest livestock owner of the world: as per
the 20th Livestock Census, the total Livestock
Ministerial Committee under the government's target of
population is 535.78 million in the country showing an
doubling farmers' income by the year 2022.
increase of 4.6% over Livestock Census-2012. Animal
B. Constraints and Challenges rearing has multidimensional potential.

Shortage of Feed and fodder (only 4% of land Most of the livestock is concentrated in dry land areas
categorized as Pasture land): and with small and marginal farmers, development of
animal husbandry is considered to be more egalitarian
Frequent occurrence of deadly diseases such as Foot and inclusive.
and Mouth Diseases;
For instance, Operation Flood, launched in 1970, helped
Underdeveloped Livestock markets; dairy farmers direct their own development, increased
milk production ("a flood of milk"), augmented rural
Livestock extension grossly neglected; incomes and ensured reasonable prices for consumers.
Lack of International processing Standards hindering Strengthening Dairy Development Extension
export of meat; Programmes: The dairy development in Inda demands a
Poor coverage of livestock insurance; networking of venous extension activities as the milk
procurement is based on different milksh areas where,
Poor coverage of Artificial Insemination. the dairy stakeholders are the custodian of different
breeds of indigenous and crossbred cattle

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Organizing farmers into FPOs and focus on It was launched in June 2020 and has been set up with
diversification towards low-cholesterol ghee, low f an outlay of 15,000 crore it aims to support private
butter, flavoured milks, ice-creams etc investment in Dairy Processing value addition and cattle
feed infrastructure, wherein incentives will be given for
Promotion of Contract Farming: Contract farming establishing plants for export of niche products It will
Poultry sector and Dairy sector have been successtu in also support the establishment of animal feed plants of
some of the states such as Punjab. For example varying capacities including setting up of mineral
NESTLE's association with the farmers in the Punjab mixture plants, silage making units, and animal feed
for the procurement of milk has been responsible for testing laboratory.
socio-economic transformation. There is a need to adopt
such models across India 2. National Animal Disease Control Programme: This
programme has been launched for Foot and Mouth
Disease (FMD) and Brucellosis with a total outlay of
13,343 crore to ensure 100% vaccination of cattle.
buffalo, sheep, goat and pig population

15.15.2 Poultry Sector 3. Rashtriya Gokul Mission: This mission aimed to

develop and conserve indigenous breeds of bovine
Poultry farming is the practice of raising poultry, such population It aims to enhance milk production and to
as chickens, turkey, ducks, geese, as a subcategory of make it more remunerative to the farmers.
animal husbandry, for the purpose of farming meat or
4. National Livestock Mission: The National Livestock
eggs for food.
Mission was launched in the year 2014-15 to ensure
It requires small capital and provides small income and quantitative and qualitative improvement in livestock
job opportunity for large number of rural population an production systems and capacity building of all
the shortest possible time stakeholders.

Domestic birds (both layer and boiler) kept by human in 5. National Artificial Insemination Programme: The
a shed for eggs they produce, their meat, ther feathers. National Artificial Insemination programme was
According to the 20th Livestock Census, there are 8516 launched to suggest novel methods of bringing about
million poultry birds in India. impregnation in female breeds. It aimed to prevent the
spread of certain diseases which are genital in nature.
About 30% of this is backyard poultry or small and thereby enhancing the efficiency of the breed.
marginal farmers. Chickens, turkeys, ducks, geese, etc,
are reared in poultry farms for meat and eggs. Tamil D. Strategies needed for Improvement of Animal
Nadu Andhra Pradesh, Telangana, West Bengal. Husbandry Sector
Maharashtra. Karnataka, Assam and Kerala have the
highest poultry populations Prioritization of Breed: This involves selecting
economically important breeds in order to develop the
Constraints and Challenges dairies To sustain the improved productivity of
crossbreds and to minimize the decline in reproductive
Controlling virus outbreak in India is the important performance, there is a need to develop the sustainable
factor in ensuring sustainability of the Silver breeding strategy.
Revolution. For example, an outbreak of the H5N1
virus in India in 2006 seriously disrupted the Address Shortage of Male Germplasm/Breeding Bulls:
functioning of the poultry industry in India. Other This can be done by identifying more high genetic merit
challenges include: bulls

Poor infrastructure for export is hindering the export of Address the shortage of Feed and Fodder: The acute
poultry products. Shortage of feeds and fodders can be addressed by
effectively implementing National Livestock Mission
Competition from international players on opening up (NLM)
duty-free imports, lifting of trade barriers. Increasing
propaganda and demonstrations by organizations on Skilled Human Resource Development to enhance
promoting vegetarianism and Animal rights. extension service. The development of Dairy

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Entrepreneurs can be ensured by providing cheaper level cold storage needs to be established and cold chain
access to credit, and holding support etc. and their needs to be developed.
quality monitoring and in-house disease diagnostic
facilities Encourage brand development for certain indigenous
poultry like Kadaknath or other birds with some
2. Poultry Venture Capital Fund (PVCF): The specific attributes.
Department of Animal Husbandry and Dairying is
implementing it under "Entrepreneurship Development Recurrence of Salmonella and other diseases in poultry
and Employment Generation (EDEG) of the National meat Mary countries are dumping their poultry products
Livestock Mission. It is a bankable programme and the i.e. exporting eggs at prices lower than production cost
Central Government is providing subsidy through Many countries are protecting their poultry industry om
National Bank for Agricultural and Rural Development foreign competition by protective measures like
(NABARD) for those beneficiaries taking loan for restricting imports, keeping egg prices at lower level Si
PVCF. competition from Sri Lanka, Pakistan, Brazil and
France, all these countries provide subsidies, export
3. Strengthening of Breeding Infrastructure: It aims at incentives to exporters, and keep their price low.
strengthening existing state poultry farms so as to
enable the flow of suitable germplasm from the lab to High Maize & Soya price fluctuation leading to
the grassroots level along with technical services availability issues of poultry feed at reasonable prices.
Onetime revolving fund is also provided to the farm for Small farms, losing out on economies of scale and
smooth operations and maintenance to ensure long term biosecurity
sustainability. Lack or undefined standards leading to impending
4. Central Poultry Development Organisation (CPDO): cheaper imports.
It has been playing a pivotal role in the implementation Avian influenza and other emerging/re-emerging
of the policies of the Government with respect to diseases
poultry as a tool for alleviating nutritional hunger and
palliating the poverty of the resource-poor farmers, 15.15.3 Silver Revolution
especially the women. This organisation has
responsibility of producing excellent germplasm in the The practice of raising poultry, such as chickens,
form of day-old chicks and hatching eggs of the turkeys, Lois geese, as a subcategory of animal
varieties like Nirbheek, Hitkan. Vanaraja, Shyama, Cari, husbandry, for he purpose of farming eggs for food is
Chabro, etc. termed as silver auction in India. requires small capital
and provides additional income and job opportunities to
5. National Livestock Mission: Different programmes a large number of rural populations the shortest possible
under the National Livestock Mission under which time. The vast majority of poultry e termed using
financial assistance is provided to States/Union factory farming techniques.
Territories for implementation of Rural Backyard
Poultry Development (RBPD) and Innovative Poultry A Significance
Productivity Project (IPPP).
draw is the one of the world's largest producer of eggs
6. Assistance to States for Control of Animal Diseases and broiler meat. Approx. 75 percent of egg production
(ASCAD) Scheme: ASCAD under "Livestock Health contributed by commercial poultry farms, remaining
and Disease Control" (LH&DC) which covers the comes from household/backyard poultry. Total poultry
vaccination of economically important poultry diseases ed production of the country stands at 22 million
viz., Ranikhet Disease, Infectious Bursal Disease, Fowl tonnes. The Indian poultry sector is valued at INR 1
Pox etc., including control and containment of emergent lakh cr or USD 15.39 bn
and exotic diseases like Avian Influenza.
At present, more than three million people are directly
or indirectly employed in poultry farming. Landless
labourers derive more than 50 per cent of their income
C. Recommendations For The Poultry Sector
from livestock, especially poultry
Processing need to be encouraged as presently only 6%
of the poultry products is processed. Block/ District B. Government Initiatives

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1. Scheme for Assistance to State Poultry: A new cooperatives in 18 milk sheds in ten states, so as to link
Centrally-Sponsored Scheme called Assistance to State them with the four best metropolitan markets of
Poultry was implemented during the Tenth Plan where Mumbai, Delhi, Kolkata and Chennai. A separate
one time assistance is provided to suitably Strengthen agency called as the Indian Dairy Corporation (IDC)
the farms in terms of hatching, brooding, and rearing of was created to receive grants of food aid and use it in
birds with provision for feed milk the Operation Flood

The government has launched & scheme for the Phase-2: It covered the Sixth Plan period from 1961 to
modernization of abattoirs across the country in order to 1985. It was designed to build on the foundations of
address quality stardust contamination and deterioration Phase-I and by the end of Phase-2, there were 136 milk
of produce amount of meat wasted sheds, 34,500 village dairy cooperatives covering 36
lakh members intensity education and awareness about
15.15.5 White Revolution nutritve value of eggs and poultry through various
platforms like World Egg Day etc Intensify skill
White Revolution/Operation Flood was a comprehend development in the poultry sector and reduce the gap
program in India to increase the production of k It required.
occurred in 1970 when the National Dairy Development
Board (NDDB) was established to organize 24 day 15.15.4 Pink Revolution
development through the co-operative vacates Dr.
Verghese Kurien is called as the father of white Pink Revolution is a term used to denote the
revolution in India. technological revolutions in the meat and poultry
processing sector. India being a country of huge cattle
and poultry population, has high potential for growth if
The programme sought to link rural milk production to this sector is modernized. India is 8 in the world in
urban milk marketing through these cooperatives. The terms of meat production. With 58% of the world's
dairy development programme through co-operative brutal population, India is home to the world's largest
societies was first established in the state of Gujarat population of cattle and buffalo. The bovine meat
These co-operatives apart from financial help also industry plays a significant part in employment
provided consultancy to individual farmers generation in the agricultural sector

A. Objectives A. Potential

1. The procurement, transportation, storage of milk at The present meat consumption per capita of around 6
the chilling plants grams per day will improve to 50 grams a day in the
next decade or so. When such phenomenal increase in
2. Provide cattle feed meat consumption occurs, the sector will witness a
tremendous growth.
3. Production of wide varieties of milk products and
their marketing management Rising incomes in the developing world, an expanding
youth population, shifting food preferences towards a
4. Provide superior breeds of cattle (cows and
protein rich diet will increase the demand of meat in
buffaloes) health service, veterinary treatment and
future
artificial insemination facilities
B. Challenges
5. Provide extension service.
Challenges include creating standard policies for meat
B. Implementation production and export, standardizing the quality and
Operation Flood was implemented in three phases safety aspects of meat and poultry. Providing meat
testing facilities and creating infrastructure facilities for
Phase-I: It started in July 1970 with technical assistance modern slaughter houses, meat testing facilities and
from the United Nations Development Programme cold storages for the growth of the meat and poultry
(UNDP) and the Food and Agriculture Organisation processing sector.
(FAO), the programme was launched as Operation
Flood (OF). The objective was to set up dairy

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India needs more hygienic methods in meat and poultry Year Plan, from 1992-97, Intensive Marine Fisheries
processing and increased investment in the sector. Programme was launched.

C. Government Initiatives to Promote Meat The Blue Revolution has brought improvement in
and Poultry Sector aquaculture by adopting new techniques of fish
breeding. fish rearing, fish marketing, and fish export.
National Meat and Poultry Processing Board under
Ministry of Food Processing is nodal authority which The Nellore District of Andhra Pradesh is known as the
Shrimp Capital of India'. The fish catch in India are of
look after the sector.
two types namely marine fisheries and inland fisheries.
There is no Income tax or central excise in this sector.
There are no restrictions on the export of poultry and Among the States, Andhra Pradesh (27.4%) and West
Bengal (13.8%) together produce about 41% of the
poultry products, and the government provides some
transport subsidies. Restrictions on Foreign Direct country's total fish production
Investment (FDI) have also been lifted, meaning that Andhra Pradesh has recorded the highest production of
100 per cent FDI is now permitted to tap into available inland fish (36 01 lakh tones) where as Gujarat is the
opportunities across the sector provide sufficient quality leading state in Marine fish (7.01 Lakh tonnes) in the
of milk Also crossbreeding is poor in India and country. The higher fish production in the Arabian Sea
availability of quality breed is limited is due to the broader continental shelf. The important
6. Fodder unavailability: Grazing land is decreasing fish varieties include sardines, mackerel and prawn
because of real estate business and urbanization Higher 3 started in 1985 and its emphasis was on dang the
quality fodder is not available Majority of the farmers gains of the earlier phases by improving vity and
are poor and they are unable to provide good quality efficiency of the cooperative dairy sector its
fodder to their cattle institutional base for long term sustainability. This e
7. Logistical Issues: Lack of proper storage facility and came to an end in April 1996.
cold chain infrastructure, including inadequate Significance
marketing facilities are some other major issues
The White Revolution made a sound impact on rural
Downstream Issues 1. Adulteration of Milk: Price of masses and encouraged them to take up dairying as a
milk is drastically increasing because of increasing subsidiary occupation node has become the leading
urbanization and less availability of cow in urban areas producer of milk in the world Milk production, which
This leads to adulteration of milk. was around 17-22 million new in the 1960s, increased
2. Export Issue: Low productivity and quality of milk to 198.4 million tonnes during 2016-17 India ranks first
increase in domestic consumption, lack of experience in in milk production. accounting for 18.5 per cent of
marketing in foreign market causes less export 3. Tax world production.
on Inputs: Earlier there was a huge excise duty on dairy The per capita availability of milk in India has increased
vending machines, packaging machine and dairy from 124 grams per day in 1950-51 to 394 grams per
industry subject to octroi and sales tax which led to day by 2019-20.
increase in price.
The import of milk and milk production have been
15.15.6 Blue Revolution reduced substantially. Operation Flood has made the
country self-sufficient in milk and milk products
Blue Revolution means the adoption of a set of through modernization of our dairy industry.
programmes to increase the production of fish and
marine products. The Blue Revolution in India was The small and marginal farmers and the landless
started in 1985 during the seventh Five-Year Plan when labourers have been especially benefitted from the
the Central Government sponsored the Fish Farmers White Revolution.
Development Agency (FFDA). Subsequently, the
It helped in empowerment of farmers (especially
Brackish Water Fish Farms Development Agency were
women) and consumers.
set up to develop aquaculture. During the Eighth Five-

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To ensure the success of Operation Flood Programme, Now, the Board works under the Ministry of Forest
research centres have been set up at Anand, Mehsana, Animal Husbandry and Dairying It aims to achieve
and Palanpur (Banaskantha). economic prosperity of fishers and for farmers. The
same will be done by developing fisheries in a
India has proximity to milk deficit countries e.g. sustainable manner keeping in view biosecurity and
Bangladesh, Malaysia, South Korea etc so it became a environmental concerns
great source of foreign earning.
A. Objectives of Blue Revolution
D. Problems
The Program has certain objectives which includes •
Upstream Issues Low productivity: Despite largest
Fully tapping the total fish potential of the country both
population of cow in the world the productivity in India
in the inland and the marine sector and triple production
is one of the lowest in the world. Breeds of cattle are
by 2020
inferior.
Transforming the fisheries sector as a modern industry
2 Veterinary problem: Veterinary hospitals and
with special focus on new technologies and processes
dispensaries are inadequate in rural area. If they are
present then doctors are not available. Doubling the income of fishers and fish farmers with
special focus on increasing productivity and be post
1. Foot and Mouth Diseases: The disease is not reported
harvest marketing infrastructure including e-commerce
freely hence lead to death of the animal. In most of the
and other technologies and global best innovations.
villages the cattle are kept under unhygienic conditions
Inadequate availability of vaccine and prevalence of Ensuring inclusive participation of fishers and fish
diseases like FMD (food and mouth disease). farmers in the income enhancement
5. Climatic factor: Cattle have more productivity in Tripling export earnings by 2020 with focus on benefits
temperate regions while India has mainly tropical and flow to fishers and fish farmers.
subtropical climate, therefore imported breeds do not
Enhancing food and nutritional security of the country
To ensure food and the very
B. Significance
To generate employment and expand
Constituting about 6.30% of the global fish production
To ensure inclusive development a and aquaculture and about 5% of global trade, India has attained the
farmers
Objectives
15.15.7 Blue Revolution 2.0/Neel
The Program has certain objectives which includes:
Kranti Mission
To increase the overall fish production in a responsible
The focus of the Blue Revolution 20 is on dev and and sustainable manner for economic prosperity.
management of fisheries This covers and feh
aquaculture marine fisheries including deep se To modernize the fisheries with special focus on new
mariculture and all activities undertaken by the one technologies
Fisheries Development Board
C. Problems
The National Fisheries Development Board (NF) was
established in 2006 as an autonomous under the Upstream Issues
administrative control of the Defamer Fisheries,
1. Despite government ban, fisherman use fine-sized net
Ministry of Agriculture and Farmers Wets enhance fish
that catch even juvenile and larval fish which is not a
production and productivity The COUT and to
productive practice. Upto 40% of the total catch is
coordinate fishery development in a and holistic
discarded by fishermen in high seas because of juvenile
manner. The National Fisheries Devaney Board has
fish which don't fetch good prices in market.
been set up to realise the untapped patents of fishery
sector with the application of modern too g research and 2. During breeding season, fishing is banned in coastal
development including biotechnology waters. But the authorities don't enforce it strictly.

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3. The EEZ around Andaman-Nicobar and Contribution of nearly 5% of GDP from agri-allied
Lakshadweep confluences with international waters. sector. Contribution of nearly 1% within total GDP.
This makes these Island territories vulnerable to illegal
Fishing by foreign vessels. However, only 78% of marine and 58% of inland
fisheries potential has been harnessed.
4. National Fisheries Development Board and
Department of Animal Husbandry Dairying and 3. Comprehensive Marine Fishing Policy. 2004: This
Fisheries: these are the two major department regarding policy was developed to facilitate sustainable deep sea
fisheries sector in India fishing It has following objectives

Their jurisdictions/responsibilities are still not clearly To augment marine fish production of a country to the
defined. sustainable level

This result in overlapping of work area, wastage of time To boost export and socio-economic security the artisan
and energy, and lack of synergy. fisherman

5. Freshwater aquaculture contributed highest to the To ensure sustainable development of marra fisheries
'Blue Revolution' in the country in late 1970s. But now with due concern for ecological integrity and bio-
it is almost stagnating in terms of yield rates. 6. For diversity
proper processing, potable water is not available at 4. Initiative Taken under the MGNREGA: The 15
landing and cleaning sheds at the ports. government under the MGNREGA has started develop
the farm ponds, where pisciculture is taking place.
Downstream Issues
5. Mission Fingerling: Mission Fingerling, a
1. More than 1/3 of Indians eat fish but demand for
programme by Ministry of Agriculture to enable holistic
"processed fish" is limited because:
development and management of fisheries sector India.
Cost of processed fish product is nearly 20-25% higher The programme will facilitate the establishment of
than fresh fish due to higher taxes on processed food. Fingerling rearing ponds and hatcheries

Indian consumers prefer to buy fresh fish from local E. Strategies to be adopted to Boost Blue
markets and process it at home so Indian fish processing Revolution
segment is entirely export- oriented, due to lack of
local/domestic demand. The following strategies are envisaged to be adopted to
boost blue revolution:
2. Fish prices more than doubled during the Eleventh
Plan, a higher inflation than either crops or any other Horizontal expansion in untapped areas like Bracken
livestock segment. This is negatively affecting business aquaculture, Cold Water Fisheries, Pond aquaculture
and demand. Reservoirs, Canals, Ornamental fisheries. Recreational
fisheries.
3. There is inadequate awareness about nutritional
benefits of fish. Vertical expansion through diversification of culture AS
species; Integrated Farming System; Rice-Cum-Fish
4. Large number of retailers are unable to sell processed Culture System; Wastewater Aquaculture System
fish products because they don't have cooling storage
facilities and electricity problems also remain persistent Organic Aquaculture Restoration of natural productivity
and conservation of indigenous fisheries resources
5. India do not export ready to eat marine products in through ecosystem restoration to boost riverine
significant volumes, because of lack of information on Fisheries. Address stagnation in Marine fisheries
varied tastes and cuisines in different regions of the through deep sea fishing. Mariculture, open-sea cage
world second largest fish producing and second largest farming etc
aquaculture producing nation in the world. After
Independence, fish production has been increased from Upgradation of fishing fleet. Organize fishermen into
7.5 lakh tonnes in 1950-51 to 100.70 lakh tonnes during FPOS and fishing village communities into VPOs to
2014-15 reap economies of scale and promote value-addition.

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Address problems of seed, feed and health Revolution and raise it thereafter to about 20 million
tonnes by 2022-23.
Enhancing extension through Sagar Mitras Address
technical and managerial gap in shrimp farming through Therefore, Pradhan Mantri Matsya Sampada Yojana
FD! seeks to:

Development of fisheries post-harvest infrastructure Address critical gaps in fish production and
especially modern markets, cold storages, processing productivity, quality, technology, post-harvest
plants etc. through PPP. infrastructure and management, modernization

6. US/EU/foreign countries often reject our fish/shrimp Strengthening of value chain, traceability Establishing a
cargos for traces of antibiotics, heavy-metals, foul smell robust fisheries management framework Fishers'
welfare industries hastened the development of
Other Issues: beekeeping in 1980s.
1 Most of the fishermen are poor. They are not able to The production of honey in India increased significantly
purchase good equipment to improve the harvest of fish towards the late 1990s. 70% of honey production comes
2 The water bodies rivers, lakes, ponds and coastal from informal segments. As a major exporter of honey,
areas of the seas are increasingly polluted impacting India falls behind China, Argentina, Germany, Hungary,
fish stock Mexico, and Spain. West Bengal, Uttar Pradesh, Punjab,
and Bihar contribute about 61% of India's total honey
3 The area of paddy fields in which fisheries used to be production India has exported 61,333.88 MT of Natural
kept is also decreasing under the impact of fast growth Honey to the world for the worth of 732.16 Crore/ 105
of population, industrialisation and urbanisation 48 USD Millions during the year of 2018-19. USA,
United Arab Emts (UAE), Saudi Arab, Morocco, and
4 Lack of technological integration. For example, Qatar are the Major Export Destinations (2018-19)
Inadequate information about the environment of water
bodies, resource mapping through satellites. Increasing the number of bee colonies will not only
increase the production of bee-related products but will
5. Changing climate and Irregular Monsoons is also boost overall agricultural and horticultural productivity
adding to the misery of inland fish farmers.
C. Significance of Beekeeping
D. Government Initiative
Beekeeping has great potential for the small and
1. Pradhan Mantri Matsya Sampada Yojana: The marginal farmers, landless labourers etc. on account of
Scheme is aimed to turn India into a hotspot for fish and following reasons:
aquatic products through appropriate policy. marketing
and infrastructure support. Increases crop yields by 20-30% through cross
pollination.
With the Scheme, the government intends to bring all
fishermen under the ambit of farmer welfare Additional source of income for paid pollination service
programmes and social security schemes.
Less capital Intensive and hence can be practiced by
Through this scheme, the Department of Fisheries will poor farmers.
establish a robust fisheries management framework.
This will address a critical gap in the value chain Requires no land and can be practiced by landless
including infrastructure modernisation, traceability. labourers.
production, productivity, post harvest management and Other products such as bee pollen, bee-venom costlier
quality control. than honey.
2. Financial Allocation: The government has allocated Nutritional Security: more than a third of the global
804.75 crore rupees for the fisheries sector in the food basket is comprised of bee pollinated crops
current fiscal.
Growing demand for honey in overseas market and
It's aim is to augment fish production to achieve its hence scope for more export earnings
target of 15 million tonnes by 2020 under the Blue

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Hence, the Government has launched Honey Mission to production of bee-related products but will boost overall
harness potential of Sweet Revolution. Going forward, agricultural and horticultural productivity.
beekeeping should be considered as input of agriculture.
which could enhance efficacy of other inputs and As per the National Bee Board and Ministry of
accordingly training should be provided to farmers Agriculture & Farmers' Welfare India's honey exports
have jumped from 29.6 to 59.5 thousand metric tonnes
D. Beekeeping Development Committee between 2014-15 and 2017-18. The Indian apiculture
market size is expected to reach a value of 33,128
Bibek Debroy led the Beekeeping Development million by 2024, expanding at a CAGR of nearly 12%
Committee under the Economic Advisory Council to the by 2024. India is the sixth major natural honey
Prime Minister has made recommendations to enhance exporting country.
the contribution of the beekeeping sector for achieving
the target of doubling of farmer incomes by 2022 e- Evolution of Beekeeping in India
markets and e-trading of fish and fish products will be
The establishment of the Khadi and Village Industries
encouraged and promoted. Ecological certification of
Commission (KVIC) to revitalize the traditional village
fisheries to boost exports Fisheries sector has been
registering highest growth rates in production and Training and development of beekeepers should
providing livelihood and nutritional security in the provided by State Governments.
country. Hence, it needs to be treated on par with
agriculture and should be incentives/ concessions as in National and regional infrastructure should t developed
agriculture like financial assistance for technological for the storage, processing, and market of honey and
upgradation power supply, loan facility, insurance, other bee products.
marketing assistance etc.
Plantation of bee-friendly flora at appropriate place and
engaging women self-help groups in manage such
15.15.8 Beekeeping/Sweet Revolution plantations.
Apiculture is the science and culture of honeybees and
Recognition of apiculture as a subject for adverse
their management Beekeeping is the practice of
research under the aegis of Indian Council Agricultural
intentional maintenance of honey bee colonies,
Research.
commonly in hives, by humans. A beekeeper may keep
bees in order to collect honey and beeswax, or for the 15.15.9 Sericulture
purpose of pollinating crops, or to produce bees for sale
to other beekeeper. A location where bees are kept is Sericulture is cottage-based Industry which broad
called an apiary in India beekeeping has been mainly encompasses four Independent activities- Muben
forest based. Several natural plant species provide cultivation, silkworm rearing, silk reeling and weaving
nectar and pollen to honey bees printing and dying. It involves rearing of silkworms for
the production of raw silk, which is the yarn obtained
The scientific practice of Beekeeping (Apiculture) has
our cocoons spun by certain species of insects. The mag
the potential to promote eco-friendly and sustainable
activities of sericulture comprise of food-plant
agriculture along with higher yields leading to increase
cultivation feed the silkworms which spin silk cocoons
in income levels of farmers. Hence, just like White
and reeling t cocoons for unwinding the silk filament
Revolution, the Sweet Revolution can act as a major
for value-adder benefits such as processing and
tool to promote socio-economic development.
weaving.
A. Status of Beekeeping in India
A. Silk Production in India
As per the Food and Agricultural Organization database,
There are five major types of silk of commercial
Indian ranked eighth in the world in terms of honey
importance obtained from different species of
production while China stood first.
silkworms.
India has a potential of about 200 million bee colonies
The committee was set up to identify ways of advancing
as against 3.4 million bee colonies today. Increasing the
beekeeping in India that can help in improving:
number of bee colonies will not only increase the
Agricultural productivity.

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Enhancing employment generation. Practiced in all Agro-Climatic Conditions throughout

Rural autonomy through Development
Augmenting nutritional security.
Importance of Sericulture Eco-friendly and highly
Sustaining biodiversity. suitable for Small and Marginal Farmer
Key Recommendations of the Committee Higher participation of women in Sericultural activities
(55%)
Institutionalize the National Bee Board and rename it as
the Honey and Pollinators Board of India under the 8. Initiatives of the Government Establishment of
Ministry of Agriculture and Farmers' Welfare as it will Central Silk Board as a statutory body
help in advancing beekeeping through multiple
mechanisms such as: Setting up of new integrated bee Sik Samagra an integrated scheme for development sik
development centres and strengthening the existing industry with the following 4 components-R&D, Seeds,
ones. Creating a honey price stabilization fund. Market development, Quality Certification. Sericulture
included as agriculture allied activity under Rastriya
Collection of data on important aspects of apiculture. Krishi Vikas Yojana. This enables the Sericulturists to
avail the benefits of the scheme for the entire sericulture
Simplifying procedures and specify clear standards for
activities up to reeling Forest Conservation Act has
ease of exporting honey and other bee products.
been amended to treat mulberry sericulture as forest-
Beekeeping should not be restricted to honey and wax based activity enabling the farmers to undertake Vanya
only instead marketing of bee products such as pollen, silkworm rearing in the natural host plantation in the
propolis, royal jelly, and bee venom can contribute to forests.
the income of Indian farmers.
North East Region Textile Promotion (NERTPS): Under
Recognize honeybees as inputs to agriculture and this scheme, 38 Sericulture Scheme projects are being
consider landless beekeepers as farmers. implemented in all North Eastern States

These are Anti-dumping duty on Chinese raw silk

Mulberry Production of Bivoltine Silk: Bivoltine silk is the high

quality mulberry silk produced in India as an import
Oak Taser Tropical Taser substitute silk. R&D has been focused to evolve
productive bivoltine hybrids and package of practices
Muga
for production of high quality bivoltine silk in the
Except for mulberry, other non-mulberry varieties of country.
silks we wild silks, known as Vanya silks. India has the
MGNREGA guidelines to enable sericulture farmers to
unique function of producing all these commercial
avail assistance under the scheme
varieties stock South India is the leading silk producing
area of re country and is also known for its famous silk C. Challenges of Sericulture Industry
weaving enclaves like Kancheepuram, Dharmavaram,
Arni, etc. The Sericulture industry faces the following challenges
Auberry silk is the dominant one and contributes to Decline in area under Mulberry cultivation,
about 70 per cent of the country's raw silk production.
India is he second largest producer of silk in the world Irrigation facilities are available only for 50 per cent of
after China. China and India together account for about mulberry area. Lower yield of Cocoon,
98 per cent of he global raw silk production. Declining organic carbon level with adverse effects of
Bengal less capital intensive and more labour Intensive, excessive use of chemical fertilizers and pesticides on
Sericulture can boost rural economy as shown below: soil health.
come to farmers from amongst various non-farm Inadequate supply of quality eggs.
incomes, Income throughout year Enterprise:
Emergence of new pest and pathogens.

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Improper rearing conditions including mounting and Diversification reasonably controls the damage that can
post-harvest care, occur from the unfavourable weather condition This
process safeguards the farmers from the loss of crops in
Nonavailability of sufficient automatic reeling units such a situation.
Availability of low-cost synthetic textiles. Facilitating various Employment Alternatives:
Import of Cheap silk from China, Vietnam etc. Almost half of the employment of India revolves
around the agriculture sector. Diversification creates
D. Strategies Needed to counter the above
new job opportunities for rural people other than
challenges traditional farming.
Expansion of mulberry area to new districts of Thus, looking at these benefits, the Government has to
traditional and non-traditional sericulture states. now focus on Rainbow revolution in order to bring
Enhancing the egg production capacity: 95% Chinese about holistic development of all sectors-horticulture,
silk produced from highly productive bivoltine type in animal husbandry, poultry, fisheries, food grains etc.
comparison to 80% Indian silk produced from low This would have multiple benefits- nutritional and food
productive cross breed. security, income security for farmers and overall make
Enhancement of Automatic Reeling Capacity: Reeling agriculture more inclusive and sustainable
of Silk through traditional devices results in large
E. Challenges associated with Crop
variation in quality and uniformity making it unsuitable
for power looms. Diversification
Suitability for some crops: The majority of cropped area
in the country is completely dependent on rainfall
Diversification of silk into other material uses and new therefore some crops may not be able to survive
fabrics.
Overuse of Resources: Over-use land and water
R&D Into medicinal and other applications of resources, causing a negative impact on the
sericulture by-products. environment and sustainability of agriculture inadequate
infrastructure:
Anti-dumping measures need to be maintained
Enhancing Income levels of Farmers through Inadequate and skewed distribution of infrastructure
Diversification: According to Dalwai panel, expansion such as road, power market, pre- & post-harvest
in diversification by 1 ha could increase annual income handling, and irrigation are all major impediments for
of farmers by 1 lakh on account of following reasons diversification . Lack of Knowledge and Training:
Inadequately trained human resources together with
Higher Productivity: The cereal crops occupy 42% of
persistent and large scale illiteracy amongst farmers.
agricultural land but contribute only 20% of agricultural
GDP However, horticulture crops occupy only 14% of 15.15.10 Agricultural Diversification/
agricultural land out contribute 33% of agricultural
GDP Rainbow Revolution
Agricultural production would be more aligned with Agriculture Diversification refers to either a change in
demand and hence fetch higher prices cropping pattern or the farmers opting for other non-
farming options like poultry farming, animal husbandry,
Increase in the cropping Intensity due to shorten crop etc. This practice allows farmers to expand the
duration in comparison to Rice and wheat Reduction in production, which helps in generating a higher level of
risks and ensure constant flow o income. income. Changing a cropping pattern implies the
diversification between food and non-food crops,
Optimum utilization of land.
conventional crops and horticulture. high value and
Reducing the impact of Climate Change: low-value crops, etc.

A. Need for Diversification

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The phenomenal increase in production of Food grains The Government of India have taken several initiatives
after the Green Revolution has not translated into for agricultural development in general and crop
commensurate increase in food security. This is evident diversification particular These initiatives are as
in India's poor ranking on global indicators such as follows:
Global Hunger Index (GHI). This can be attributed to
lack of diversification in agriculture, which has also led Launching a Technology Mission for the Integrated
to stagnation in income levels of farmers. Development of Horticulture in the North-eastern
Region: The programme will establish effective
B. Types of Diversification linkages between research, production, extension, post-
harvest management, processing, marketing and exports
There are mainly two types of agricultural and bring about the rapid development of agriculture in
diversification prominent in India. They are Horizontal the region.
Diversification: This relates to multiple cropping or mix
of crops instead of cultivating a single crop. Horizontal Implementing National Agriculture Insurance Scheme:
Diversification is especially useful for small farmers The scheme will cover food crops, oilseeds, annual
who hold a small piece of land. This allows them to commercial and horticulture crops. Small and marginal
earn more by escalating cropping intensity. farmers are eligible for 50 per cent subsidy under the
Scheme.
Vertical Diversification: It refers to the incorporation of
industrialisation along with multiple cropping. In this Operationalizing Technology Mission on Cotton: The
kind of Diversification, farmers take a further step and Technology Mission will have separate Mini- Missions
invest in activities like horticulture, agro-forestry. on technology generation, product support and
livestock rearing, culture of aromatic plants, etc. extension.

Creation of Watershed Development Fund: At the

National level for the development of Rainfed lands.

Strengthening Agricultural Marketing: Greater attention

C. Major Features of Diversification to be paid to the development of a comprehensive,
efficient and responsive marketing system for domestic
Introduction of multiple or mixed cropping systems.
marketing as well as exports by ensuring proper quality
Shift from sole agricultural activities to other allied control and standardization.
enterprises like fishery, forest products, poultry and
other non-agriculture sectors G. Way Forward

D. Rationale for Diversification There is a need to identify crops and varieties that may
suit a range of environments and farmers' preferences
Nutritional security through Diversification: Presently,
There is a clear need for a shift in the perspective of
the production basket of agriculture is dominated by
skill development, with a focus on sustainable rural
Rice and Wheat However, there has been shift in
livelihoods
consumption pattern towards more protein based foods
such as Puises, Milk, Egg, Fish, Meat etc. leading to Research institutes should come with some other
demand-supply mismatch and thus nutritional technological breakthroughs for shifting production
insecurity. The diversification towards cultivation of frontiers and raising efficiency in the use of inputs.
other crops and livestock rearing would address the precision farming to raise production and income of
micronutrient deficiencies. Vitamin, iron deficiencies farmers substantially etc.
etc.
Adequate attention needs to be given to improve the
Seed Crop Insurance: A pilot scheme on Seed Crop welfare of farmers and raise agricultural income.
Insurance has been launched which will cover the risk
factor involved in the production of seeds. The government must promote crop diversification by
purchasing crops produced other than wheat and rice at
F. Government Policies and Strategies for a Minimum Support Price (MSP)
Crop Diversification

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15.15.11 Nutri-Cereals/Millets B. Challenges and Concerns

Millets such as Jowar, Bajra, ragi etc. are dual purpose. The subdued use of millets is because of:
nutrient dense, hardy and low input intensive crops that
Green Revolution: With the Green Revolution, the
have potential to address malnutrition and climate
focus was on food security and high-yielding varieties
change. while promoting sustainable agriculture In
of wheat and rice. An unintended consequence of this
India, millets are grown on about 17 million ha with
policy was the gradual decline in the production of
annual production of 18 million tonnes and contribute
millets. Further, the cost incentives provided via MSPS
10 percent to the country's food grain basket.
to wheat and rice, discouraged production of millets.
Initiatives taken by Government to address above
Increased Demand For Processed Food: In parallel.
problems include National Year of Millets (2018).
NFSM Coarse Cereals etc India saw a jump in consumer demand for ultra-
processed and ready-to-eat products, which are high in
On the proposal of Government of India, United Nation
sodium, sugar, trans-fats and even some carcinogens
has declared 2023 as International Year of Millets
With the intense marketing of processed foods, even the
A. Significance of Nutri Cereals and Millets rural population started perceiving mill-processed rice
and wheat as more aspirational
1. Nutritional Security .-Millets are actually three to
five times more nutritious than rice and wheat in terms Double Burden: This has led us to the double burden of
mothers and children suffering from micronutrient
of proteins. minerals and vitamins Millets are rich in B.
vitamins, calcium, iron, potassium, magnesium. zinc, deficiencies and the astounding prevalence of diabetes
apart from being gluten-free, and low in glycaemic and obesity
index (GI). These are more suitable for people with C. Steps Taken by the Government
gluten allergies or high blood sugar levels
Increase in MSP: The Government has hiked the MSP
Reduction in Cholesterol, Sugar. FAO has recognised
of Millets, which came as a big price incentive for
importance of Millets for meeting SDGS- 2, 3, 12 and
farmers. Further, to provide a steady market for the
13
produce, the government has included millets in the
2. Climate Resilience -Abiotic (drought, temperature public distribution system
and salinity) and Biotic (pest and disease) stress
Input Support: The Government has introduced
tolerant. Integral part of Conservation agriculture.
provision of seed kits and inputs to farmers, building
Climate change mitigation value chains through Farmer Producer Organisations
and supporting the marketability of millets
3. Sustainable Production System - 2.5 times lesser
water requirement than rice by carbon sequestration. Integration Approach: The Ministry of Women and
Child Development has been working at the intersection
Can be grown on dry, low-fertile, mountainous, tribal of agriculture and nutrition by setting up nutri-gardens,
and rain-fed areas. promoting research on the interlinkages between crop
diversity and dietary diversity and running a behaviour
Natural soil conditioner due to powerful root systems.
change campaign to generate consumer demand for
Multi-purpose: Food, Feed. Fodder, Biofuels and nutri-cereals.
Brewing.

Potential to enhance income in rainfed areas.

4. Economic Security: Low investment will be needed

for production of millets and thus can prove to be a D. Strategies to Promote Nutri-Cereals
sustainable income source for farmers.
Special Agribusiness Zones (SABZ) for millets: Focus
on development of particular millets which is popularly
cultivated in the local areas. Examples sorghum in

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Telangana, finger millet in Karnataka, pear millet in cent of probe production. Pulses are commonly grown
Gujarat, and small millets in Madhya Pradesh under rainfed condition all over India (87 per cent
Promoting Organic Millets to cater to increased demand rainfed) during two principal seasons of the year,
of the consumers. namely, kharif rainy season.

Explore Trade Opportunities: The export of Indian A. Production of Pulses

millets has not been up to the mark as compared to
other cereal grains due to poor quality, farmers need to Top Pulses: Top six pulses grown in India are chickpeas
be educated about quality concerns at all stages of (chana), pigeon pea (Arhar/tur dal), urad beans (urad
production and harvesting. dal), mung beans (moong), lentils (masoor) and peas.

Federating millets farmers as Farmer Producer Top States: Production of pulses has largely shifted
Organizations (FPOs). from northern India to central and southern part. More
than 90% of total pulses production is realized in 10
Expanding the coverage of small millets under MSP states namely, MP, Rajasthan, UP, Karnataka, AP,
Efficient implementation of PM-AASHA to undertake Gujarat, Jharkhand, CG and Telangana
higher procurement of Millets.
Net Importer: India accounts for 25% import of Pulses
Promotion of Contract farming for millets -Changing across the world
the Narrative to change the general perception around
consumption and trade point of view associated with Demand-Supply Mismatch: With the rising incomes and
millets and to re-brand coarse cereals/millets as nutri- fall in the poverty combined with greater health
cereals. consciousness, the demand for pulses has run ahead of
production.
Civil society can begin the Jan Andolan by taking small
steps towards choosing healthier foods, which are good B. Benefits of Pulses
for the environment and bring economic prosperity to
our farmers Pulses are rich in nutritional and protein values and are
an important part of a healthy diet.
Government can try on a pilot basis for providing MSP
to millets on the lines of Wheat and Rice (state Pulses, and legumes (lentils, peas, chickpeas, beans.
guarantee of procurement at MSP ) soybeans, and peanuts) play an equally important role in
health maintenance and overall improvement.
Mission Mode Initiative wherein The government can
encourage farmers to align their local cropping patterns Pulses also contribute majorly to achieving the goals of
to India's diverse 127 agro-climatic zones and promote the 2030 Agenda of Sustainable Development.
cultivation of millets with local topography and natural Pulses play a critical role in marking challenges of
resources. poverty, food chain security, degraded health, and
There is a requirement of a multi-ministerial policy climate change.
framework that is aimed towards building an Atma Pulses and legume crops help in improving the
Nibhar Bharat and resonates with the global call for feasibility of agricultural production systems
self-sufficiency and sustainable development.
Pulses contribute to environmental benefits. The
Thus, we need to focus on supply side factors (incentive nitrogen-fixing properties of pulses improve soil
to farmers, high yielding crops) and demand side factors fertility, which increases the productivity and fertility of
(value addition, labelling, awareness generation, the farmland.
inclusion under ICDS, MDM etc.) to ensure success of
Millet Revolution. Pulses are important for a healthy diet.

15.15.12 Pulses C. Government Initiatives

da is the world's largest producer of pulses with 23 National Food Security Mission (NFSM)-Pulses: Aims
million cess from an acreage of 30 million hectares. The to Increase Pulses production by 3 Million tonnes.
country accounts for 35 per cent global area and 27 per Increase in MSP.

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Price Support Scheme (PSS) under PM-AASHA Despite being the fifth largest oilseed crop producing
Creation of Buffer Stock of Pulses by NAFED Price country in the world. India is also one of the largest
Stabilisation Fund Scheme to check volatility in the importers of vegetable oils. The demand-supply gap in
prices. the edible oils has necessitated huge imports accounting
for 60 per cent of the country's requirement.
D. Strategies to Boost Pulses Production
Utilization of potential area of rice-fallow lands: About
30-40 per cent of the area currently left fallow after A. Important Facts Regarding Oilseeds
paddy harvest can be converted into productive
farmlands; additional 3 Mha of pulses and 1 Mha of Area under Oilseeds: 27 Mha (14% of agriculture area).
oilseeds can be brought under cultivation through It has remained almost stagnant (with slight variation)
"Targeting Rice Fallow areas" sub-scheme under both in terms of absolute area as well a percentage of
RKVY. area under agriculture.

Changing Cropping Pattern Diversification: Production of Oilseeds: 33 MT (2019-20). The overall

Replacement of less remunerative crops with pulses production has neither consistently increased nor
decreased in the last decade. It has been fluctuating and
Promotion of inter-cropping has remained around 30 MT in the last decade.

Increasing Productivity: Bridge the yield gap between Demand-Supply Mismatch of Edible Oils: Domestic
Pulses and other cereal crops to incentivise farmers to requirements is 25 MT, however, domestic production is
take up Pulses production only 10 MT from primary sources (Soybean Groundnut,
Sunflower etc) and Secondary sources (Palm oil,
Redesign of NFSM-Pulses: Two categories of districts coconut, rice bran, cotton seeds etc) The remaining 60
for coverage under NFSM for pulses NFSM Pulses for per cent of requirement is met through imports. Of
general districts and NFSM Pulses + for districts where imported edible oils, share of pair of about 60%
yield levels are lower than state/national averages. followed by soybean oil and sunflower India has
Strengthening storage and processing to reduce post- emerged as the largest importer of vegetable oils in the
harvest losses: Pulses are vulnerable to post harvest loss world followed by China & USA. Import bill: 275.000
which has been estimated to be the order of 20 to 30 per crore (2020-21). In the current year, the import bill
cent due to - Traditional dal mills resulting in low dal could go up to 31 lakh crores
recovery etc. Bringing down duration of pulse crops
B. Benefits of Increasing Palm oil Cultivation
through Technological interventions
in India
15.15.12 Yellow Revolution Atma-Nirbhartha in edible oils: Palm oil accounts for
in India, there was a concerted effort to increase oilseed 60% of import of edible oils. 99% of domestic pai oil
production that began with the creation of the requirements met through imports. If the palm o
Technology Mission on Oilseeds in 1986 which became production is increased in india, it will lead to huge
basis for yellow revolution. Therefore Yellow savings on account of the import bill of the India.
Revolution is defined as the dramatic increase in oilseed Higher yield of edible oils: One hectare of palm ol
production in India starting from 1986. The sudden cultivation gives about 4000 kg of oil as against 500kg
increase in production of edible oil is because of use of in case of sunflower. Lower land requirement: Palm oil
plantation of hybrid oilseed like mustard, sesame etc. cultivation gives higher yield of edible oils in
Aimed at accelerating self-reliance in oilseeds, the comparison to sunflower groundnut etc.
approach envisaged developing and taking modern Cost Efficiency: Low maintenance costs due to low pest
technological inputs to farmers, and thereby providing and disease resistance:
them incentive prices and storage and processing
facilities. Rapeseed, mustard, soyabean, ground nut are Increase in Employment: Increase in income levels of
some important edible oils in country. Sam Pitroda is the farmers by providing year-round returns
called as father of yellow revolution in India.

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Multiplier Effect: Boosts job creation addition by giving Special emphasis on the North-Eastern States and
push to Food processing Industries and value Andaman & Nicobar Islands. Funding: Centrally
Sponsored Scheme- to be financed by both Centre and
C. Challenges of Oilseed Production States.
Longer gestation period: The gestation period of a least E. Strategy to Promote Cultivation of Oilseed
4-5 years and hence this restricts income flow to the
(Ashok Dalwai Panel Recommendations)
farmers during initial years.
Increasing production through adoption of high yielding
Smaller land landholdings: Small holdings of farmers
varieties of seeds; soil and moisture conservation
with limited resources prohibits farmers from switching
techniques in rainfed areas; balanced Utilisation of
to oilseeds.
fertilisers; Intercropping of Oilseeds with other crops;
Fluctuation in prices in the international market Contract farming etc.

Erratic monsoon leading to shortage of water Encourage Cooperatives and FPOS and link them to oil
Competition with other economically viable crops such processing Industries.
as rubber, recant, sugarcane, banana coconut etc.
Reduce per capita consumption of edible oil and
Environmental damage: Diversion of forest land minimize import. Campaign for healthy oil
excessive water consumption, loss of biodiversity etc consumption.
International Experience: As claimed by in one of its
Promotion of Secondary Sources (rice bran, Coconut,
report, Oil palm expansion has led to deforestation,
cotton seed, oil palm and TBOs).
degradation of natural habitats
Enhancing capacity utilization of domestic processing
D. Initiatives to Boost Oilseeds Production industries.
National Food Security Mission (NFSM)
Promoting consumption of coconut as edible oil.
Oilseeds & Oil Palm: The scheme aims at Distribution
of quality seeds, improve technologies, Distribution of 15.15.13 Golden Revolution
micronutrients etc increase in the MSP on Oilseeds
A significant increase in overall horticulture and honey
Guaranteed procurement through PM-AASHA production is called Golden Revolution. Horticulture is
a branch of agriculture relating to the cultivation of
Targeting Rice Fallow Areas (TRFA) for cultivation of
fruits. vegetables and ornamental plants.
Pulses and Oilseeds. Once the Rice is harvested,
residual moisture left in the soil is sufficient to grow Horticulture is a capital and labour intensive
Pulses and Oilseeds. Introduction of Pulses and agriculture. India is bestowed with varied agro-climates,
Oilseeds in Rice fallows will not only increase which is highly favourable for growing large number of
production of Pulses and Oilseeds, but it will also lead horticultural crops such as fruits, vegetables, spices,
to doubling farmers income. root tuber, ornamental, aromatic plants, medicinal
species and plantation crops like coconut, arecanut,
Increase area and production: Increase area under Palm
cashew and cocoa
Oil cultivation from 3 lakh hectares to an additional 6.5
lakh hectares. Production of Crude Palm Oil (CPO) is The horticultural sector covers six categories, namely
expected to increase to 11.20 lakh tonnes by 2025-26. pomology (fruits), olericulture (vegetables), floriculture
(flowers), plantation crops, spices, aromatics and herbal
The scheme focusses on:
medicines.
Price assurance to the farmers to protect them from
volatility in the prices of Crude Palm oil A. Present Status of Horticulture

Assistance to the farmers for buying various inputs such India is the second largest producer of fruits and
as planting material vegetables globally; second largest producer and
exporter of Spices. Occupying only about 14 per cent of

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agricultural land, horticulture contributes more than 33 into high-value-plus crops like saffron, cardamom,
per cent to the agricultural GVA. turmeric, chillies, ginger and vanilla beans.

Other facts about horticulture Cashew and Cocoa

Area Cropped: 25 Mha; Cashew is grown in number of states such as Kerala

Karnataka, Goa, Maharashtra, Tamil Nadu, Andhra
Production: 300 MT; Pradesh etc. Cashew improves the farm income and
Contribution to Agricultural GDP: 33%; sustains employment for 1.5 million people in the
cashew farming. Cultivation of cocoa is gaining
Productivity: 12.5 tones/ha, compared to Food grains momentum and is grown in states such as Tamil Nadu
productivity- 2.25 tones/ha Fruits and Andhra Pradesh India imports around 60% of the
demand for Cocoa
Indian climate favours the development of a large range
of fruits. India's share in the total fruit production of the C. Importance of Horticulture
world is 10 per cent. Mango, banana, citrus, pineapple,
papaya, guava, sapota (chikoo), jackfruit, litchi, and High value crops due to higher demand from consumers
grapes are among the tropical and subtropical fruits; due to greater awareness of nutritional benefits
while apple, pear, peach, apricot, almond, walnut
Higher returns per unit of land as compared to cereal
among the temperate fruits are important fruits grown in
crops and hence beneficial for small and marginal
India.
farmers. Replacing 1 hectare of staple crops with
Vegetable horticultural crops increases annual income by 780,000
(Dalwai Panel).
More than 40 kinds of vegetables are grown in India.
Important vegetable crops grown in the country are Ensures nutritional security by overcoming vitamin and
potato, tomato, onion, chillies, carrot, radish, beans, micronutrient deficiencies.
ladyfinger, guard, brinjal, cabbage, cauliflower, spinach,
Being labour intensive, generates more employment
okra, and peas. India is next only to China in area and
opportunities.
production of vegetables and occupies the first position
in the production of cauliflower, second in onion, and Boosts secondary agriculture by developing cottage
third in cabbage in the world. based Industries.
B. Horticulture Plus D. Challenges In Horticulture Higher Capital
Horticulture is considered as high value agriculture. requirements
However, within the horticultural sector, there are Longer sowing to harvest cycle for some of the fruits
specific crops that can be considered as "Horticulture
such as Apple, Guava etc.
Plus". These include flowers, cashew, cocoa,
mushrooms, spices and aromatics, etc. Large scale prevalence of old and senile orchards
impacts productivity. Majority of the orchards also have
Floriculture
low planting density. Availability of quality seed and
Important agribusiness with immense potential for planting material impacts quality of produce
generating self-employment and entrepreneurship Poor tree canopy management
among small and marginal farmers in both urban and
rural area Though, India dominates in terms of area Rainfed cultivation, with majority of the horticultural
under cultivation yet India's yield per hectare is low. As cultivation having no access to irrigation.
a result, India's contribution to the global floricultural
export market is very minimal. Initial cost constraints in adoption of improved
technologies
Spices
Facilities for post-harvest management have not kept
India is the largest producer, consumer and exporter of pace with production growth. Unorganised supply chain
spices and spice products in the world. As the global
demand for the spices grow, farmers should diversify

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not suitably integrated for managing perishable linked activities and secondary agriculture" in February
produce. 2018

Lack of appropriately trained extension services for Secondary agriculture is understood to mean a cottage
horticulture. Industry that utilises agricultural products as raw
material, deploys locally available skills to produce
E. Strategy to Boost Horticultural Production goods and services. can be categorised appropriately as
MSME
Increasing the output through higher productivity.
Hybrid technology for high productivity and quality. The Ashok Dalwai committee has defined secondary
agriculture as a production activity at enterprise/farm
Hybrids of tomato, chilli, cucumber and muskmelon.
level and it devised a four-fold strategy
Quality planting material and seed production.
Sustainability of production; Monetisation of farmers'
Creation, modernisation and accreditation of nurseries. produce.

High density planting system-higher yield and net Strengthening of extension services: Recognising
economic returns per unit area, more efficient use of agriculture as an enterprise, and enabling it to operate as
inputs. such, by addressing various structure weaknesses.

Increasing the output through area expansion such as Three avenues have been identified that adequately help
Integrated Farming system approach, Urban & utilise capital, human resources, technology
Periurban Horticulture. organisational capabilities, and risk management for
secondary Agriculture
Resource use efficiency or savings in cost of production
through micro-irrigation, fertigation, adoption of Type A: Value-addition to primary agriculture
mechanisation to reduce labour costs. production systems: Type A can be achieved by
improving livelihood enhancement action plans that are
Increase in cropping intensity by enhancing Irrigation, implemented by farmer-based/community-based
Crop Rotation, Mixed Cropping etc. organisations. Linking farmers with the market through
aggregation and assaying grading of agricultural
Diversification towards high value crops within
produce can help them in value enhancement and
horticulture such as floriculture, cashew, Cocoa,
appropriation Collectivisations, cluster farming,
mushrooms, spice and medicinal plant cultivation.
financial literacy, marketing skills are important to build
Improvement in the market access and marketing this avenue.
System.
Type B: Alternative enterprises, but linked to rural off
Creation of near-farm occupations in post-harvest farm activities: Type B is based on utilisation of
handling facilities. alternative enterprises to primary agriculture, but is
associated with rural off-farm activities For example,
F. Government Schemes poultry, bee-keeping. suck farming and livestock
management are off-farm enterprises that can be
Mission for Integrated Development of Horticulture
promoted as part of integrated ing system Integrated
(MIDH): MIDH is a Centrally Sponsored Scheme for
farming can hedge farm risk in me period of crop
the holistic growth of the horticulture sector covering
failure or ease out the seasonality in the stream of cash
fruits, vegetables, root & tuber crops, mushrooms,
flows
spices, flowers, aromatic plants, coconut, cashew, cocoa
and bamboo. Type C: Enterprises that thrive on crop residues and
waste materials of primary agriculture: Type C are such
15.16 Secondary Agriculture enterprises that strive on crop residues, or by-products
of primary agriculture For example, after recovering
The essence of secondary agriculture was understood sugar om cane, if can be used as bagasse and molasses
when the Ashok Dalwai Committee submitted its report production Similarly, cotton stalk and seed (after
on "adding value to primary agriculture and building ginning) can be used for de-oiled cake preparation or
agricultural enterprises in rural India" through "farm- utilised in the secondary/tertiary sector.

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15.16.1 Philosophy Behind Secondary Funding Pattern: Under MIDH, Government of India
(Gol) contributes 60% of total outlay for developmental
Agriculture programmes in all the states except states in North East
and Himalayas, 40% share is contributed by State
Harnessing Structural Transformation In Rural Areas:
Governments in the case of North Eastern States and
The share of non-farm income in rural areas has
Himalayan States, Gol contributes 90%
increased rom 25% in 1970s to 70% in 2015, while the
share of employment in non-farm has increased from MIDH Sub-Schemes: National Horticulture Mission
23% to 35% (NHM): It is being implemented by State Horticulture
Missions (SHM) in selected districts of 18 States and 6
The rural areas account for 95% of agricultural output.
Union Territories.
50% of manufacturing and 25% of services sector
output. The share of rural areas in manufacturing output Horticulture Mission for North East & Himalayan
has doubled duty years, without an associated increase States (HMNEH): HMNEH is being implemented for
in share n the workforce. Thus, there is the need to overall development of Horticulture in North East and
strategically promote the right kind of development in Himalayan states
manufacturing and services sectors, that will generate
employment. Thus, Tree is the need to strategically National Horticulture Board (NHB): NHB is
promote labour-intensive homage-based manufacturing implementing various schemes under MIDH in all
and services sectors to support Indian Agriculture, boost States and UTS
employment creation nc transform rural areas.
Coconut Development Board (CDB): CDB is
implementing various schemes under MIDH in all
15.16.2 Benefits of Secondary Coconut growing States in the country.
Agriculture
Central Institute for Horticulture (CIH): CIH was
Holistic development of rural areas by transforming established at Medi Zip Hima, Nagaland in 2006-07 for
rural areas from consumers to producers of Goods. providing technical backstopping through capacity
building and training of farmers and field functionaries
Efficient utilisation of resources such as land and labour
in the North Eastern Region.
through various activities such as honeybee keeping,
mushroom cultivation, backyard poultry etc. Low-cost skilling and knowledge-based exposure,
Contributes to agriculture by providing inputs. ranking Specialised extension services for enterprises owned by
productivity and reducing post-harvest losses females.
Develop human and capital resources to replicate Starup Priority under rural electrification objectives.
india at village level
Fast track procedures to avail benefits under ongoing
15.16.3 Special Support Needed For Central Sector and Centrally Supported Schemes
Secondary Agriculture Geographical Indicator (GI) labels to products from
village scale secondary production. Secondary
following steps can be taken to support secondary agriculture would need to be promoted by providing
you’re in India ty sector status for institutional credit enterprise level support, which can be undertaken by
Nodal Ministry: The Ministry of Agriculture and initial setting up of a division on secondary Agriculture
& Enterprises in all three Departments of the Ministry
Farmers Welfare is implementing MIDH with effect
from 2014 15 MIDH implemented under Green of Agriculture and Farmers' Welfare and coordinate
their efforts through a structured platform
Revolution Krishonnali Yojana

Mission for Integrated Development of Horticulture 15.17 Evergreen Revolution

(MIDH) focusses on high density plantations, protected
cultivation, micro irrigation, quality planting material, The evergreen revolution involves the integration of
rejuvenation of senile orchards, and post harvest ecological principles in technologies development and
management and marketing dissemination in the agriculture sector it is called as
Second Generation Green Revolution. It can be defined

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as the increasing productivity in perpetuity without Due to mechanisation of agriculture, the likeliness for
ecological and social harm. sons instead of daughters led to skewed sex ratio in
Punjab, Haryana.
15.17.1 Features of Evergreen
Indian agriculture became cereal- centric and regionally
Revolution biased.
Nutrition Security: The concept involve need to move Water logging in fields and salinity increased due to
from food security to nutrition security excess irrigation.
Agriculture Clusters: This concept talk about creation of Farmers got burdened with debts from moneylenders.
agriculture clusters, wherein different areas could be banks.
identified with particular crops
The improvements brought out by the Green Revolution
Best practices: It involves the use of scientific and came at the cost of adverse environmental effects n
technological knowhow in the agriculture sector to areas subjected to intensive farming
increase productivity and overall holistic development
of agriculture sector Dr M.S. Swaminathan, father of Green Revolution in
India, had forewarned as early as in 1968 that "Intensive
Organic Farming: It comprises of organic farming cultivation of land without conservation of soil fertility
which involve cultivation without use of chemical and soil structure would lead ultimately to the springing
pesticides and green agriculture which involve deserts":
conservation of agriculture with the help of integrated
pest management, integrated nutrient supply and Under the Evergreen Revolution, it is envisaged that
integrated natural resource management productivity must increase, but in ways which a
economically viable and socially sustainable
Agroforestry: Simultaneously it also focuses on Agro
forestry system that involve fertiliser trees 15.17.3 Evergreen Revolution in
Sustainable Agriculture: Producing more from less. i.e.. India
less land, less pesticide and less water and it must be
sustainable agriculture The Green Revolution transformed the image of India
from being a 'begging bowl' to 'bread basket. However
Other Features: Information communication technology. to rectify flaws and loopholes of the Green Revolution
Efficient irrigation methods Stronger backward and we need to make it evergreen. Though India is now se
forward linkages Use of GM crops sufficient in many aspects of food production, it still
relies on imports for crops such as pulses and oilseeds,
15.17.2 Need for Evergreen where production has not kept pace with demand.
Revolution Introducing Indian farmers to innovative information
and communication technologies (ICT) can enhance
Need for Evergreen revolution arose due to failures of
farm productivity. ICT initiatives can tackle key
green revolution. Important demerits of green
challenges in the agricultural value-chain through
revolution are:
networking on weather alerts, the sowing period, the
More than five decades after India launched the Green prices of produce e-Krant one of the pillars of Digital
Revolution, it has not only failed to eliminate hunger India Campaign focuses on technology for farmers with
but also malnutrition is at its high. real-time price information online ordering of inputs,
and payment with mobile banking
Wheat and rice have largely displaced more nutritious
pulses and other cereals such as millets in consumption. According to the ICAR in the Dry Areas, drylands
produce half the country's cereals, 77 per cent of its
Soil has lost its fertility due to unscientific application oilseeds and 85 per cent of its pulses. Implementation of
of fertilisers. new and efficient irrigation methods, better watershed
management and maintenance of vegetation cover in
catchment areas and development of drought-tolerant
crop varieties is required to optimise water utilisation.

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More steps to promote 'lab to land agriculture to

increase farm productivity through developing good
forward and backward linkages is the need of the hour

GM food crops are also critical for enabling the success

of evergreen revolution. These crops have been proven
to significantly improve yield through high levels of
disease and pest resistance, improved weed
management abiotic stress tolerance and nutrient-use
efficient crops Eg Approval and promotion of Bt.
Mustard help us to reduce the edible oil imports and
improve Indian economy as well as provide nutrition

15.17.4 NITI Aayog's 3-year Road

Map for 'Evergreen Revolution'
NITI Aayog had unveiled a three-year roadmap (2017-
20) ended to take farm growth to new heights. The
roadmap er the next three years listed initiatives for the
growth of arm sector and for ensuring that farmers'
income doubles by 2022.

The new initiatives include use of cutting-edge

technology to increase farm productivity, promotion of
climate-resilient indigenous breeds of cows and
buffaloes, launch of a nationwide programme to harvest
the advantages of space technology in agriculture and
allied sectors, promotion of deep sea fishing, setting up
of seed production and processing units at 'panchayat'
level, increase of cropping intensity by 1 million
hectares per year through the utilization of rice fallow
areas for pulses and oil-seeds. and consolidation of
online trading and inter-market transactions, among
others.

It is time to stop importing readymade solutions as in

the case of green revolution and consolidate local
resources and skills to enhance food security for an
evergreen revolution. Achievement of food security
should involve a healthy mix of improving technical
competence coupled with stable food and agricultural
policies as well as good governance to ensure stronger
implementation. Reducing regional disparities, cross
learning and knowledge sharing can also go a long way
in improving food security.

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Chapter – 16
Industry (a) At the time of Independence, India did not have
much of industrial base. According to the census of
manufacturing industry, in 1946 about two-third of
value added and employment in the manufacturing
16.1 Introduction sector just came from two industries, viz., cotton textile
that was mainly based in Bombay and Ahmedabad and
Traditionally. Industry has been considered as the jute industry based in and around Calcutta. Industries
growth engine of most of the western countries. It also like iron and steel, engineering goods etc., constituted
holds rue for many Asian countries-China, Japan or only the miniscule fraction of manufacturing sector.
Southeast Asian countries Industrialization has the vital
(b) The private sector was regarded as capitalist
role in the economic development of the
exploiter of workers, anti-labour and anti-poor Also the
underdeveloped countries as it creates employment,
government at that time was apprehensive about the
increases the rate of urbanization, enhances living
ownership and concentration of wealth in few hands
standard, reduces the reliance on import us helping in
which goes against the Article 39(b) and Article 39(c) of
maintaining the Balance of Payments and so on.
the Constitution
Keeping in mind the importance of industries in the
(c) Private sector neither had necessary resource nor did
overall prosperity of a country. planners of Indian
it have interest to invest in public goods which was
economy launched the process of industrialization as
devoid of any major profit because of economic
conscious and deliberate policy of economic growth in
backwardness and poverty at the time of Independence.
early fifties when Soviet model of industrialization was
adopted, where the maximum roles were assigned to the (d) There was a consensus among the leaders and the
public sector. masses that for the high development of the country role
of the industries is inevitable and that too without
The role of private sector and foreign equity was limited
foreign economic domination.
only to few industries and also in those sphere they
were rigidly regulated through various instruments of The words of Jawaharlal Nehru summarize the above
licensing and control. sentiments "It is only when India has acquired the
ability to design, fabricate and established its own
Before studying about the various industrial policy and
plants without foreign assistance that it will have
resolution, we need to understand why this restricted
become a truly advanced and industrialized country."
model of industrialization was chosen. For this we need
Thus the stage was set for the various New Industrial
to understand the industrial conditions at the time of
Policy resolutions and statements which got modified
independence.
according to the time, situations and new challenges.
16.2 Evolution of Industries
At the Time of Independence ,In order to appreciate and
understand why the economic planners chosen the 16.3 Industrial Policy
public sector as an instrument for industrialization, it
would be important to look into the various Industrial policy refers to government action to
circumstances prevailing before and at the time of influence the ownership & structure of the industry and
independence. its performance It includes procedures, principles (ie,
the philosophy of a given economy), policies, rules and
regulations, in- centives and punishments, the tariff
policy, the labour policy, government's attitude towards
foreign capital, etc.

16.3.1 Objectives of Industrial Policy

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The main objectives of the Industrial Policy of the motor, tractor, electricity etc These industries continue
Government in India are: to remain under private sect however, the Central
Government, in consultation w the State Government,
To maintain a sustained growth in productivity: had general control over them
To enhance gainful employment: Other Industries (Private and Cooperative Sector All
To achieve optimal utilisation of human resources: other industries which were not included in above
mentioned three categories were left open for the
To attain international competitiveness; and private sector.
To transform India into a major partner and player in the Therefore, to meet this vision into reality a new
global arena. economic policy seemed necessary, which came in the
form of "Industrial Policy Resolution of 1956". The
16.3.2 Industrial Policy Resolution of Industrial Policy Resolution of 1956 called for a big
1948 expansion of the public sector. It is interesting to note
that the second Five-year plan for industrialization was
Within a year of Independence, the Government came based on the Industrial Policy Resolution of 1956.
up with the Industrial Policy, in April 1948. It defined
the broad contours of the policy delineating the role of The Industries (Development and Regulation) Act was
the State in industrial development both as an passed in 1951 to implement the industrial Policy
entrepreneur and authority. Resolution, 1948.

In this industrial policy, the role of government was 16.3.3 Industrial Policy Resolution of
limited to the management and development of only a 1956
selected industry, like railways, atomic energy, arms and
ammunition, civil aviation, etc. Industrial Policy Statement of 1956: Government
revised its first Industrial Policy (i.e. the policy of 1948)
India was envisioned as a mixed economy where many
through the Industrial Policy of 1956.It was regarded as
industries were open for the private sector investment
the "Economic Constitution of India" or "The Bible of
through the provision of compulsory licensing.
State Capitalism".
Therefore, both public sector and private sector was
considered important for accelerating the pace of The 1956 Policy emphasised the need to expand the
industrial development and thus helps in alleviating the public sector, to build up a large and growing
unemployment and poverty from the country. cooperative sector and to encourage the separation of
ownership and management in private industries and,
It classified industries into four broad areas:
above all, prevent e rise of private monopolies It
Strategic Industries (Public Sector): It included three provided the basic work for the government's policy in
industries in which Central Government had monopoly. regard to im stress fill June 1991
These included Arms and ammunition, Atomic energy
and Rail transport.
Features of Industrial Policy of 1956

Basic/Key Industries (Public-cum-Private Sector): 6 Classification of Industries: The Industrial Policy of

industries viz. coal, iron & steel, aircraft manufacturing, 1966 categorized industries in three categories
ship-building. manufacturing of telephone, telegraph & (a) Schedule A Industries: This category included 17
wireless apparatus, and mineral oil were designated as industries. The state had exclusive or complete
"Key Industries" or "Basic Industries". These industries monopoly over these industries. Some of the industries
were to be set- up by the Central Government. mentioned under it were - Arms and ammunition.
However, the existing private sector enterprises were Atomic energy, Iron and Steel, Heavy castings and
allowed to continue. forgings of iron and steel, etc.
Important Industries (Controlled Private Sector: It (b) Schedule B Industries: This category includes 12
included 18 industries including heavy chemicals sugar, industries Initially the government was to take initiative
cotton textile & woollen industry, cement paper, salt, to set up the new undertakings However, the private
machine tools, fertiliser, rubber, air and sea transport,

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sector was also supposed to complement and quality production and obsolete technology. All the
supplement the efforts of government. Some of the above- mentioned policy statement put forward some or
industries mentioned under it were: Antibiotics and the other restrictive laws, which impeded the growth of
other essential drugs, Fertilisers etc. indian economy

(c) Schedule C Industries: All the remaining industries, Under the policy statement of 1969. government passed
which were not mentioned in the Schedule A and the Monopolistic and Restrictive Trade Practices
Schedule B were included in this list. Their future (MRTP) Act. Though this Act was meant to regulate the
development was left to the initiatives of private sector. trading and commercial practices of the firms and to
check their monopoly and concentration of economic
2. Private Sector and the Industrial Licensing Policy: power in few hands but instead it created the nexus
Though the country was still envisioned to have mixed between bureaucracy and industrial powerhouse
economy, the provision of compulsory licensing which
was popularly known as 'License-Quota-Permit regime Under the policy statement of 1973. government passed
acted as a real deterrent for the participation of private the Foreign Exchange Regulation Act (FERA). This law
sector. was necessitated due to brewing problem of foreign
exchange. According to this Act, each one, whether
3. Stimulation to Small Scale Enterprises: The individual or company has to get the permission of RBI
government provided the stimulus to the small scale before conducting any transaction, which required the
industries by differential taxation or by giving them use of foreign exchange. This hampered the transactions
direct subsidy. Government helped these industries in and growth of industries. Companies like Coca-Cola
modernizing the method of production. withdrew their business from India. Though, the
4. Reducing the Regional Imbalance: The resolution intention was right but it hampered the growth and
emphasized the need of industries, especially in the modernization of Indian industries again.
backward region of the country, so that the country as a
Features of industrial Policy 1977
whole gets developed.
The main thrust of this policy was the effective
Consequences promotion of cottage and small industries widely
This economic resolution was based on the principles of dispersed in rural areas and small towns.
Economic Nationalism and Protectionism. The In this policy the small sector was classified into three
economic planners provided a greater role to the public groups cottage and household sector, tiny sector and
sector enterprises so that the overall development of the small-scale industries
country should take place in general and industrial
development in particular. The 1977 Industrial Policy prescribed different areas for
large scale industrial sector- Basic industries. Capital
The IPR was criticised as it reduced the scope of goods industries, High technology industries. and other
expansion for the private sector There has always beer industries outside the list of reserved items for the
incongruity between the intention expressed and the small-scale sector.
result achieved For example the real intention of
licensing was to regulate the private sector but this The 1977 Industrial Policy restricted the scope of large
actually hampered competitiveness, encouraged business houses so that no unit of the same business
inefficiency and retarded industrial development. But group acquired a dominant and monopolistic position in
still these policies more or less remain at the forefront the market
till the New Economic Reform of 1991
It put emphasis on reducing the occurrence of labour
16.3.4 Evolution of Industry between unrest The Government encouraged the worker's
participation in management from shop floor level to
1965 and 1980 board level
The decades between 1965 and 1980 was marked by the
stagnation of industrial production There was a general
belief that the industrial slowdown between mid-1960s The policy statement of 1977 was influenced by the
to late 1970s was due to low productivity high cost low Gandhian socialist ideology. The reason for the change

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of ideology was because of the new party at the Centre, Liberalisation

the Janta Party This policy focused mostly on the
decentralized industrialization, village and cottage Aim of New Industrial Policy (NIP) of 1991:
industries But this policy created a situation where there Unslacking the Indian Industrial Economy from the
was a virtual ban on foreign investment. cobwebs of unbureaucratic control, with a view to
integrate the Indian Economy with Removing
16.3.5 Industrial Policy Resolution of restriction on direct foreign investment as also to free
the
1980, 1985 and 1986
Introducing liberalization the World Economy domestic
The Industrial Policy of 1980, 1985 and 1986 endorsed entrepreneur from the restriction of MRTP Act, and
the 1956 Industrial Policy and but much more Shedding the load of Public Enterprises, which have
pragmatic than previous policies. These policy
shown a very low of return or were incurring losses
resolutions were similar in nature and had brought over the years
major changes in the terms of liberalization of licensing
policy in favour of large business houses, particularly in Objectives of the New Economic policy-1991
terms of making them free from the provision of MRTP
Act and FERA. The asset limit of MRTP companies The New Economic Policy of 1991 aimed to
was increased
Liberalise the regulations and license controls of the
Industrial Policy of 1980 sought to promote the concept industrial sector to improve economic growth rate
of economic federation, to raise the efficiency of the
Aimed to increase the support to Micro Small and
public. sector and to reverse the trend of industrial
Medium Enterprises (MSMEs) Reduce the losses of
production of the past three years and reaffirmed its
public sector enterprises and make them profitable.
faith in the Monopolies and Restrictive Trade Practices
(MRTP) Act and the Foreign Exchange Regulation Act Ensure rapid industrial development by increasing the
(FERA). competitiveness of industries and to ensure inclusive
economic development.
It also allowed the simplification and automatic
expansion of the large scale-sector to all industries Provide incentives backward areas for setting industries
specified in the First Schedule of the 1951 Industrial in the rural areas.
and Regulation Act. Similarly, the Policy Resolution of
1985 and 1986 further opened the Indian economy for Reduce the inflation rate and remove the imbalances in
foreign investment by allowing the MNCs to have payment.
equity of 49 percent in Indian companies Also, the
Build sufficient Foreign Exchange Reserves
number of industries for which the compulsory
licensing was necessary were reduced to 64. OBJECTIVES OF NEW INDUSTRIAL POLICY
16.3.6 First Generation Reform: New Attainment of international competitiveness
Industrial Policy Revival of weak units
One of the major reforms which happened post- Full utilization of plant capacities to generate
independence was known as First generation reform employment.
which took place in the form of New Industrial Policy,
1991 in the wake of severe Balance of Payments crisis Development of backward areas

Under the obligation of fulfilling the conditionality of Encouraging competition within Indian
IMF. Government issued this policy which sought to Efficient use of industry. productive resources.
liberate the industry from the shackles of licensing
system, reduce the role of public sector and encourage Permit the international flow of goods, services, capital
foreign participation India's industrial development. technology and human resources with fewer restrictions
Increase the share of private sector in the economy and
New Economic Policy - 1991 Announced by Narasimha hence the number of reserved industries were reduced.
Rao in July, 1991

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16.3.7 Initiative under the New devaluation of Indian rupees and also allowed the free
determination of value of Rupees through market
Industrial Policy (1991) demand and supply.
A Liberalization Liberalisation of Foreign Investment: This was the first
Industrial policy in which foreign companies were
The new policy, the Government has taken the was a allowed to have majority stake in India in 47 priority
government policy to liberalize the Indian Ay from the industries upto 51% FOI was allowed For export
clutches of excessive restriction and the companies to trading houses, FD up to 74% was allowed Today, there
enter into new industrial field Now government issued are numerous sectors in the serpent where government
liberal policy towards industrial ng export-import allows 100% FDI
policy, technology up gradation, scale policy and
foreign investment. Foreign Technology Agreement: Automatic approvals
for technology related agreements MRTP Act was
De-reservation of Public Sector: Sectors that were amended to remove the threshold limits of assets in
earlier exclusively reserved for public sector were respect of MRTP companies and dominant undertakings
reduced. However, pre-eminent place of public sec- tor MRTP Act was replaced by the Competition Act 2002
in 5 core areas like arms and ammunition, atomic
energy, mineral oils, rail transport and mining was B. Privatization
continued Presently, only two sectors- Atomic Energy
and Railway operations are reserved exclusively for the It means transferring the ownership or management of a
public sector. government owned enterprise to private sector which
has more managerial autonomy and expertise A
De-Licensing: List of industries in respect of which government can go for privatization in two ways
industrial licensing was compulsory was reduced to 18
only. Also provision of compulsory licensing would (a) By selling government shareholding to a point from
also not apply in respect of the small-scale units taking where the management of a company goes to the private
up the manufacture of item reserved for the exclusive sector. This is also called as disinvestment.
manufacture in small scale sector. Some of the example
(b) By selling all the equity of a company in the open
where industrial licensing was still required was,
market.
industrial explosive, hazardous chemicals, etc. There
are only 4 industries at present related to security, The major advantages of privatization is that the
strategic and environmental concerns, where an government can reduce its burden and focus more on
industrial license is currently required: governance issues. Also, public finances could be better
used. Some of the companies which got privatized in
Electronic aerospace and defence equipment,
India were Videsh Sanchar Nigam Limited (VSNL)
Specified hazardous chemicals, Hindustan Zinc Limited (HZL) etc

Industrial explosives, C. Globalization

Cigars and cigarettes of tobacco manufactured tobacco It refers to increasing global connectivity, integration
substitutes. and interdependence in the economic, social,
technological cultural, political, and ecological sphere
Financial Sector Reforms: The role of RBI was changed
from regulator to facilitator. Now, the financial sector Outsourcing: Outsourcing occurs when a company
institution were allowed to take their own decision on retains another business to perform some of its work
many matters without consulting the RBI. The reform activities. These companies are usually located in
policies led to the establishment of private sector banks, foreign countries with lower labour costs and a less
Indian as well as foreign. strict regulatory environment Companies hire regular
services from external sources mostly from other
Tax and Foreign Exchange Reforms: Both the direct and
countries. The services are mainly backend computers
indirect taxes were reduced as a part of New Economic related such as BPOs, KPOS
Policy as it was widely believed that the main reason
for tax evasion is higher taxes in India India allowed the

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It is one of the major outcome of globalization Now million dollars. During 2020-21, the FDI flows alone
company can get its non-core work done from any part are around 81.72 billion dollars.
of the world. The major factor, which influence the
decision to outsource, is the cost. As a part of the Foreign exchange reserves in 1990-91 came down to
process of globalization, India has been one of the top almost half a billion dollars and at present, they are
most beneficiary of the outsourcing activities. 640.4 billion dollars (as on 19" November 2021). GDP
Outsourcing has intensified in recent times because of growth rate prior to 1980 was known as the Hindu rate
the advent of Information and Communication of growth and was around 3%. But, after liberalization
Technologies (ITC) The low wage rates and availability it grew drastically as shown in the table below:
of English-speaking skilled manpower in India have But , Most of the GDP growth is mainly due to the
made it a destination for global outsourcing in the post- growth in the service sector.
reform period of India
Because of globalization, Indian companies made
New Market: Some of the sectors where India naturally footprints abroad like TATAS acquisition of Tete Corus,
enjoyed advantage with globalisation was textile and NatSteel as well as acquisitions b companies like
industry, leather industry, etc. Now, all these industries VSNL.
had the new market to sell Competition to the Domestic
Industry: The increasing level of globalization also 2. Disadvantages of Globalisation
brought new challenges to the domestic companies as
they lack in capital, technology, innovation etc., when Globalisation made disparity between rural and urban
compared to the foreign companies. This made the Indian joblessness, growth of slum capitals and threat of
Indian products non-competitive in both foreign market terrorist activities. Well-off sections in urban areas are
as well as in domestic market mostly benefitted.

1. Advantages of Globalisation Globalization increased competition in the India market

between foreign companies and domestic companies.
Globalisation has increased the competition in various Some small producers were decimated due to global
sectors of the economy which has resulted in increased competition. Several industries like the manufacturing
productivity of domestic industries (partially true in our of batteries plastic toys, tyres, MSMEs, etc were shut
country). down which led to joblessness.

Globalisation has improved quality and lowered the More employment is being created a flexible temporary
prices for various products. basis due to competition/uncertainty reform led growth
has not created sufficient employment and though
Globalisation has offered wider choices to consumers. growth is substant employment generation has not been
The standard of living has become higher in the era of commensuration with growth.
globalization due to an increase in income and Indian manufacturing sector as a whole suffered but the
opportunities for a larger section of people in the services sector benefitted Domestic industries also
society. suffered due to subsidies provided to local industries in
Globalisation attracts the entry of foreign capital along some countries.
with foreign updated technology which improves the Public investment in the agriculture sector man
quality of production. especially in infrastructure like irrigation, power roads,
Globalisation has led to the immense proliferation of IT market linkages, R&D was reduced in the reform period
industry. and this was the biggest drawback of economic reforms.
Small and marginal farmers have been affected
Globalisation has benefited local companies supplying adversely due to which there has been increasing
raw materials to big industries. It has resulted in the incidence of suicides of cotton farmers in the Deccan
growth of Indian industries from local to global, some part of country
of which have become big MNCS.
Industrial sector also suffered because products that
There is substantial improvement in FPI and FDI. In were manufactured in India were not world class and
1990-91 both FPI and FDI put together was just 100

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cheaper imports replaced the demand for domestic rich and poor Moreover, the government has evaded the
goods question of social security and hardship faced by the
workers Hence limitations of industrial Policies is as
Due to globalization only few sectors attracted follows
investment and infrastructure still remained inadequate
across the country Stagnation of Manufacturing Sector: Industrial policies
in India have failed to push manufacturing sector whose
Protectionist policies adopted by developed countries contribution to GDP is stagnated at about 16% since
have not resulted in level playing field and affected the 1991
export income of developing countries like India
Because of the reduction in tariff and because of the Distortions in Industrial Pattern Owing to Selective
pressure from multilateral lending institutions, overall
there is the negative impact on development and Inflow of Investments: in the current phase of
welfare expenditure investment following liberalisation, while substantial
investments have been flowing into a few industries
D. Outcomes of New Industrial Policies there is concern over the slow pace of investments in
many basic and strategic industries such as engineering
The 1991 policy made 'Licence, Permit and Quota Raj'a power machine tools, etc and
thing of the past. It attempted to liberalise the economy
by removing bureaucratic hurdles in industrial growth Displacement of Labour: Restructuring modernisation
of industries as a sequel to the New Industrial Policy led
Limited role of public sector reduced the burden of the to displacement of labour
Government
Absence of Incentives for Raising Efficiency: Focussing
The policy provided easier entry of multinational attention on internal liberalisation without adequate
companies, privatisation, removal of asset limit on emphasis on trade policy reforms resulted in
MRTP companies, liberal licensing All this resulted in 'consumption-led growth' rather than investment or
increased competition, that led to lower prices in many 'export-led growth"
goods such as electronics prices. This brought domestic
as well as foreign investment in almost every sector Vaguely Defined Industrial Location Policy: The New
opened to private sector. Industrial Policy, while emphasised the detrimental
effects of damage to the environment, failed to define a
The policy was followed by special efforts to increase proper industrial location policy, which could ensure a
exports Concepts like Export Oriented Units, Export pollution free development of industrial climate
Processing Zones. Agri-Export Zones. Special
Economic Zones and lately National Investment and 16.3.8 Second Generation Reforms
Manufacturing Zones emerged. All these have
benefitted the export sector of the country. The reform of 1991 has created a solid base from which
the next generation of reforms. e. second generation of
E. Conclusion reforms can be launched Starting from year 2001.
government launched various policies in the country.
The Industrial Policy 1991 has created the base for the
which has given stress on fiscal reforms, financial
further reforms known as second generation and third
reforms. structural reforms, labour law reforms etc.
generation reforms. This decision of government had
ended the license-permit raj, red tapism, and provided Major fiscal reforms have been undertaken for
for the expansion of private sector The structural broadening the income tax base and streamlining the
bottleneck for the economic growth has been removed excise and customs duty structures
to an extent. The indicator of well-being of Indian
economy like GDP growth rate, BOP position, foreign Commenting on philosophy of Second Generation
investment etc., has seen positive improvement. Reforms

One of the major criticisms of the Industrial Policy Mr. Yashwant Sinha observed, "Growth is not just an
1991 is that it is contrary to the principle of socialism end in itself. It is critical vehicle for increasing
This policy has increased the concentration of wealth employment and raising the living standards of our
and increased the income gap between the between the people, especially of the poorest. Sustained, broad

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based growth, combined with programmes for laws, reforms in the Indian Penal Code (IPC) and Code
accelerating rural development, building roads, of Criminal Procedure (CrPC). Labour Laws, Company
promoting housing boosting knowledge based industries Laws and enacting suitable legal provisions for new
and enhancing the quality of human resources. will areas like Cyber Law, etc.
impart strong impetus to employment expansion There
can be no better cure for poverty than this in our 9. Public Sector Reforms: Greater functional autonomy,
country" So, we can sum up the initiative taken under freer leverage to the capital market, international tie-
second generation of reforms in the following points ups and greenfield ventures, disinvestment etc.

1. Poverty Reduction: The reform emphasized on 10. Factor Market Reforms: The second-generation
reducing the poverty by providing people opportunities reforms aim at dismantling of the Administered Price
to earn by creating new jobs Mechanism (APM). There are many products in the
economy whose prices were fixed /regulated by the
2. Social Infrastructure: Added emphasis was given on government, viz. petroleum, sugar, fertilizers, drugs etc.
social sector like education, health, rural development. Though a major section of the products under the APM
nutrition, rural and urban housing etc were produced by the private sector, they were not sold
on market principles which hinders the profitability of
3. Attention to Agriculture and MSME: It is generally the manufacturers as well as the sellers and ultimately
believed that the first generation reform has not done the expansion of the concert industries leading to a
much for the agricultural sector and small scale sector demand supply gap Under market reforms these
As these are the major employment generating sector. products were to be brought the market fold in order to
the government has started to give focused attention on offer greater choice to the consumers
these sectors as part of 2 generation reform.

4. Financial Discipline: Fiscal prudence is one of the 16.3.9 Third Generation Reforms
key elements of this generation of reform. The The Third generation reforms are related to the acting
government has set the target to achieve the fiscal
competitive federalism, global competitiveness
deficit to 3 percent of GDP and zero-revenue deficit by infrastructure development and innovation
reducing the non-essential subsidies, increasing the tax
base, disinvesting in loss making PSUs etc. Though the first and second generation of reforms were
able to kick start the economy and has taken it on the
5. Labour Reform and Social Security Reforms: Major cam of higher growth but still the growth was not
financial reforms has taken place in the second equitable among the states. Moreover, the difference
generation reforms. For example, reforms in pension
between and poor has increased. Also, role of
sector, insurance sector etc. Also, reforms has been technology was limited in previous generation of
introduced in the labour market.
economic reforms But now technology is the essential
6. Reforms in Critical Areas: The second-generation feature of Third Generation Reforms.
reforms also commit to suitable reforms in the Following are the major highlights of Third Generation
infrastructure sector (i.e., power, roads, especially as the
Reforms:
telecom sector has been encouraging), agriculture,
agricultural extension, education and healthcare, etc. 1. Competitive and Cooperative Federalism: Now the
These areas have been called by the government as focus has moved towards the competitive federalism as
'critical areas". well as the co-operative federalism Government is
focusing more on decentralized governance where the
7. Government and Public Institutions Reforms: This states take the lead in reforming and introducing the
involves all those moves which really go to convert the
new reforms. One of the best example of co operative
role of the government from the 'controller' to the federalism is the GST Council where the representative
facilitator' or the administrative reform, as it may be
of both Centre and States sit together and take the
called. decisions collectively
8. Legal Sector Reforms: Though reforms in the legal 2. Education and Employability: Now, the focus
sector were started in the first generation itself, now it education is to increase the employability of a person
was to be deepened and newer areas were to be
included, such as, abolishing outdated and contradictory

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So, more and more attention is paid to the s Favourable Demography: Reaping the benefits of
development rather than just making a person literate demographic dividend, India has the highest number of
people in working age group.
3. Digital Governance: Each and every aspect of
governance whether in administration or in business is In spite of having world's second largest Population
linked to the digital governance. The digital governance India has failed to capitalize on Jeans and promote low
brings more transparency and hence more cost manufacturing India's industrial sector has evolved
accountability. through several phases from initial industrialisation and
licence raj to liberalisation and the current global
4. Democratic Decentralisation: Both first and second competitiveness In this context, the Indian
Generation of Reform has downsides thus, the third manufacturing sector exhibits many peculiarities.
generation of reform were announced around the
Launch of 10th Five Year Plan and they commit to the It contributes small and stagnant share to GDP (17%)
cause of a fully functional Panchayati Raj Institution Its composition is more skewed towards skill and
(PRIS), so that the benefits of economic reforms, can capital-intensive activities
reach to the grassroots; and has an objective to make the
reform process more inclusive. Only a small share of employment in manufacturing is
in organized manufacturing (the unorganized
5 Entrepreneurship: This Generation of Reform manufacturing sector accounted for almost 70 per cent
focusses on creating World Class Infrastructure and of total manufacturing employment).
creating encouraging and nurturing the spirit of
entrepreneurship Employment is heavily concentrated in small firms

6 Enhanced Public Investment: Third Generation 16.4.2 Reasons for India becoming an
reforms necessitate higher public investment for the Industrial Hub
delivery of public goods and services This, in tum
would crowd in private investment rather than crowding Large Domestic Demand: Third largest consumer
it out. Focused attention needs to be given to increasing market according to World Economic Forum (WEF)
efficiency and compliance in tax revenue collection so
that the Indian overall tax/GDP ratio rises to finance Focus on Skill Development: Through various schemes
enhanced public expenditure for apprenticeship encouragement and skill mobility.

Increased Investment in Research and Development:

16.4 Industrial Development Through government and private sector.

16.4.1 Introduction Challenges

Industry contributes around 33 percent to the economic Legislative and administrative environment
growth of India employing around 25% of workforce.
Transport and logistic infrastructure
Countries across the world have relied upon 3 modes of
Escape-Geography, Geology and Jeans (code for low- Corporate taxation
skilled manufacturing) to promote Economic growth
and development Countries such as Switzerland, Ease of doing business
Mauritius etc have focused on promotion of Tourism
Flexibility of labour law
(Geography) Countries such as Saudi Arabia, Australia,
Canada etc. have relied on their rich natural resources 16.4.3 Government Initiatives to
(Geology). Countries such as Singapore, Thailand,
South Korea, China etc have relied on low-cost Boost Manufacturing
manufacturing by making optimum utilization of their
Make in India Action Plan: The government aimed to
human resources (Jeans)
increase the manufacturing sector's contribution to 25
Incentive to Foreign Manufacturer: Through Ease of per cent of GDP by 2020 from the present 17% through
Doing Business in India reforms, creating SEZS in the make In India Programme.
various states, simplifying FDI compliances and single
window clearance, improving the infrastructure etc.

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National Manufacturing Policy 2011: The policy aimed The following are the reasons for failure of Make in
to create 100 million additional jobs by 2022 India campaign

Infrastructure: The government lays special emphasis Poor Condition of the Financial sector: The NPAS of
on the infrastructure, thereby creating a multiplier effect the Indian banks and liquidity crunch faced by the
through the programmes like National Investment and NBFCs has led to reduced credit creation within the
Manufacturing Zones (NIMZS Special Economic Zones Indian Economy Archaic Labour Laws: The archaic and
(SEZs Industrial Comdors Dedicated Freight Comidors labour laws have led to higher compliance the firms and
Sagarmala Bharatmala etc disincentivized the private se investing in the
manufacturing sector
Policy Initiatives Recent changes in definition of
MSMEs Consolidation of labour laws into 4 Labour Problem of Missing Middle: The mandatory sector is
Codes Reduction in Corporate tax rates increase in FD basically dominated by a large number small enterprises
limits on various sectors such as Defence Public and a relatively less number scale manufacturing
Procurement Policy etc enterprises There same absence of mid-sized firms Such
a piece v is referred to as "Problem of Missing Mode
Atma Nirbhar Bharat: The Atmanirbhar package The is basically attributed to the Government structure
announced by the government during the pandemic and policies
times aimed at Vocal for Local and protection to
domestic industries through tariffs Skilled Human Resources: As per census Z India has
almost 53% of the populator N working-age group
Schemes: Production Linked Incentive (PLI) Scheme However in order to optimal utilize the demographic
Startup India Stand-up India MUDRA Schemes for dividend, we need human resources The lack of
development of MSMEs etc- National Manufacturing availability of human resources is considered to be a
Competitiveness Program (NMCP) Zero Defect Zero constant for the manufacturing sector
Effect etc
Logistics Cost: The logistics cost account for amor 12-
16.4.4 Analysis of the "MAKE IN 14% of India's GDP as compared to 3%- other countries
INDIA" Campaign Impact of FTAs: The FTAs signed by India v the
developed economies such as Japan Sour Korea etc
The success of the "Make in India' campaign can be
have led to import of cheaper ore goods and hence
analysed from three important economic parameters-
adversely impacted the cones manufacturing
investment rates. Output Growth and employment
growth Investment rates: There has been decline in the High Taxation: The corporate tax rates with row was
overall capital investments in the manufacturing sector considered to be at least 50% nitre compared to other
in the last 5 years The investment rate within the Indian emerging economies. It was recently that the
Economy has reduced from 31.3% in 2013- 14 to 28.6% Government has decided to reduce the corporate tax
in 2017-18 rates and bring them on par with tax rates prevailing in
other countries
Output Growth: The output growth of the
manufacturing sector can be analysed by looking at Technology Adoption: The adoption of technologies
high frequency indicators such as Index of industrial like artificial intelligence data ana machine-to-machine
production The IIP has registered double-digit growth communications reconnect related technologies
rates only on two occasions between 2012 to 2019 The collectively called "industrial are a bigger challenge for
share of Manufacturing sector to GDP has also SMEs than for organs large-scale manufacturing
remained stagnant
Other important reasons that could be attributed failure
Employment Growth: The Unemployment within India of "Make in india' are cumbersome and acquire
has increased to 45-year high of 6.1% as highlighted by procedure, poor ease of doing business greater amount
PLFS Report of policy uncertainty poor infrastructure etc

16.4.5 Reasons For Failure of Make 16.4.6 New Manufacturing Policy

in India Campaign

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The National Manufacturing Policy aims to increase

share of the manufacturing sector to GDP from 165
25% by 2022 This is a holistic policy for the promotion
the manufacturing sector in the country

Contours of New Manufacturing Policy Sus on Coastal

Economic zones (CEZS): Por non vast racking
cementation 10 Sensing of Coastal SEZs China such
aced it to attract manufacturing Taiwan and Hongkong
16.5 Industrial Initiatives
Need to a me same to attract the companies from focus
on Sunrise Sectors based on new-age gets such as 16.5.1 Industrial Corridors
blockchain robotics: machine w by care etc to leverage An industrial corridors basically a corridor comprising
opportunities nausea Revolution 40 of sub-modal transport services that would pass through
3osting Innovation through Startups: Conducive A the states as main artery Freight cargo from industrial
nurturing and promoting startups ms to finance and National Investment and Manufacturing Zones
handholding tax vest Access to market extracting (NMZS) located up to a distance of 100-150 km or both
foreign Investment though Plug and Pay Model: Under sides of this main artery are brought to the industrial
the plug-and-play model the ness are provided with land corridor via a and road feeder inks that provides act
at affordable cost me necessary pre-clearances including mere connectivity
environments clearances it would provide in-built ce Industrial corridors offer effective integration between
spaces and al the basic facilities such as lemon water etc industry and infrastructure leading to overall economic
One of the biggest advantages models that it kickstarts and social development
the production assert as possible without any hurdles
Some of Stares such as Maharashtra Haryana etc have Industrial corridors constitute world-class infrastructure
procced accept such a model to boost foreign vestment such as
This model needs to be replicated by the re states as
well High-speed transportation network rail and road

Facilitate Investment: Reforms in Public Sector Banks Ports with state-of-the-art cargo handling equipment
entrance credit creation, Strengthen corporate Bone Modern airports Special economic regions/industrial
market improve financial position of NBFCs areas
Movements financial support to manufacturing clusters
and provide single window clearances to entrepreneurs Logistic parks/transhipment hubs • Knowledge parks
and investor Extend Product Linked Incentive (PLI) focused on catering to industrial needs Complementary
scheme to mere sectors infrastructure such as townships real estate

Focus on Quality standards to boost exports: Task 74 Other urban infrastructure along with enabling policy
Bureau of Indian Standards and Quality Council of framework
node with assessing the improvements in standards and
productivity required to achieve global standards Manufacturing is a key economic driver in each of these
projects. These projects are expected to play a critical
Renegotiate FTAs to India's advantage and address role in raising the share of contribution of the
vented duty structure manufacturing sector from approximately 16% to 25%
by 2025

Smart cities are being developed along these corridors

Skilling India: Greater connect between government These cities, with state-of-the-art infrastructure, will
rusty-academia is required to identify the changing house the new workforce that is required to power
requirements in manufacturing and prepare an manufacturing in turn leading to planned urbanization
removable workforce. In the context of employability
engineers, there is a need for thorough review of
standards of engineering education and its linkages 4m
industry

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A. Five Industrial Corridors It covers more than 800 km of Andhra Pradesh's

coastline and is aligned with the Golden Quadrilateral.
Five industrial corridor projects have been identified. It also plays a critical role in the "Act East Policy of
planned and launched by the Government of India India.
These corridors are spread across India, with strategic
focus on inclusive development to provide a boost to In September 2016, the Asian Development Bank
industrialization and planned urbanization (ADB) approved loans and grants worth US$ 631 mn
for the infrastructural development along the VCIC
Delhi-Mumbai Industrial Corridor (DMIC) covers Uttar
Pradesh, Haryana, Rajasthan Madhya Pradesh, Gujarat B. Significance of Industrial Corridors in India
and Maharashtra Economic Significance:

The corridor covers an overall length of 1483 km Avenues for Exports: The Industrial Corridors are likely
between the political capital, Delhi, and the business to lower the cost of logistics thereby increasing the
capital, Mumbai, of India. efficiency of industrial production structure. Such an
efficiency lowers the cost of production which makes
The US $100 billion project is being funded by the the Indian made products more competitive in
Government of India, Japanese loans, investments by international markets. The production of export surplus
Japanese firms and through Japan depository receipts would generate employment opportunities and range
issued by Indian companies DMIC Project aims to capita incomes
create futuristic Industrial Cities by leveraging the
"High Speed High Capacity connectivity backbone Job Opportunities: Development of Indu Corridors
provided by the would attract investments for development of Industries
which is likely to c more jobs in the market. Moreover,
Western Dedicated Freight Corridor (DFC) people wo find job opportunities close to their homes
Chennai-Bengaluru Industrial Corridor (CBIC) covers and would not have to migrate to far-off places (
Tamil Nadu, Andhra Pradesh and Karnataka. It is being prevent distress migration).
funded by the Japan International Cooperation Agency These corridors would provide necessary logistic
(JICA). infrastructure needed to reap economies of scale thus
Bengaluru-Mumbai Economic Corridor (BMEC) covers enabling firms to focus on their areas of competence.
Maharashtra and Karnataka it is being developed with Industrial corridor provides opportunities to private
the help of Britain (UK) sector investment in the provision various infrastructure
The Delhi Mumbai Industrial Corridor Development projects associated with the exploitation industrial
Corporation (DMICD) and the UK Trade and opportunity.
Investment (UKTI) have been determined as the nodal Apart from the development of infrastructure long-term
agencies on the Indian and UK sides respectively. advantages to business and industry along the corridor
Amritsar-Kolkata Industrial Corridor (AKIC) covers include benefits arising for smooth access to the
Punjab, Haryana, Uttarakhand, Uttar Pradesh, Bihar, industrial production units decreased transportation and
Jharkhand and West Bengal. communicators costs, improved delivery time and
reduction inventory cost.
The Project extends from Amritsar (Punjab) to Dankuni
(West Bengal) for a length of 1839 kms. The Eastern Environmental Significance: The establishment of
Dedicated Freight Corridor is the backbone of this Industrial Units in a scattered manner along the
economic corridor. industrial corridor across the length of the state with
prevent concentration of industries in one particular
East Coast Economic Corridor (ECEC) covers West location which exploited the environment bevor its
Bengal, Odisha, Andhra Pradesh and Tamil Nadu. Vizag carrying capacity and caused environmental
to Chennai segment of this Corridor has been taken as degradation.
phase-1

Vizag-Chennai Industrial Corridor (VCIC) is the first

coastal economic corridor in the country.

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Socio-Economic Significance: The cascading effect of 16.5.2 National Investment &

industrial corridors in socio-economic terms are many
such as setting up of industrial townships educational Manufacturing Zones
institutions, hospitals. These will further raise the
National Investment & Manufacturing Zones (NIMZS)
standards of human development
are one of the important instruments of National
Availability of jobs locally would help in preserving Manufacturing Policy, 2011. NIMZS are envisaged as
family as an institution. This will also increase social large areas of developed land with the requisite eco-
integration in the country. system for promoting world class manufacturing
activity.
C. Challenges Associated with Industrial Corridors
The main objective of Special Economic Zones is
Land Acquisition: Since the industrial corridor would promotion of exports, while NIMZS are based on the
cut across the length of the state, acquisition of land has principle of industrial growth in partnership with States
been slow because of legal hurdles and the amount of and focuses on manufacturing growth and employment
compensation generation. NIMZS are different from SEZS in terms of
size, level of infrastructure planning, governance
Technological Knowhow: Since India lacks
structures related to regulatory procedures, and exit
technological knowhow in certain sectors, it would be
policies.
prudent to raise FDI caps to allow foreign players to
bring in the required technological knowhow and So far the Government has granted in-principle'
encourage Indian investment in setting up ancillary and approval to the fourteen NIMZS (outside the DMIC
auxiliary industries in that sector. region). These are:
India's taxation regime needs to clearly define the lax Nagpur in Maharashtra
habitues of foreign firms operating in India as
permanent establishments and otherwise Prakasam in Andhra Pradesh

Macroeconomic Stability: It is necessary to have a Chittoor in Andhra Pradesh

stable exchange rate so that foreign players with Medak in Telangana
investments in India can avoid currency risks. India
needs to clearly lay down ground rules for cancellation Hyderabad Pharma NIMZ at Rangareddy and
of licenses in Bilateral Investment Treaties which could Mahbubnagar Districts in Telangana Tumkur in
later create confusion as in case of Antrix- Devas deal Karnataka.

The economic and financial feasibility of industrial Kolar in Karnataka

corridors should be ensured by attracting potential
investors to set up manufacturing units at NMIZ. Bidar in Karnataka
Massive investment in industrial corridor will pave the Gulbarga in Karnataka
way for large human displacement and destruction of
fertile agricultural land. Fear of widening Rural-urban Kalinganagar, Jajpur District in Odisha
gap in terms of Human Development, economic well-
Ramanathapuram District of Tamil Nadu Ponneri Taluk,
being and standards of living
Thiruvallur District, Tamil Nadu
D. Way Forward
Auraiya District in Uttar Pradesh
To make the corridors successful, India have to be part
Jhansi District in Uttar Pradesh
of the Industrial Revolution 4.0, which will be shaped
by a fresh wave of innovation in areas such as smart
16.5.3 Atama Nirbhar Bharat
robotics, materials that are lighter and tougher, and a
manufacturing process built around 3D printing and The Prime Minister had announced the 'Atmanirbhar
analytics: Industrial corridors will help India's efforts to Bharat Abhiyan (or Self-reliant India Mission) with an
lead the world in the fourth wave of industrial economic stimulus package worth 20 lakh crores aimed
revolution. Effective execution of this plan could make towards achieving the mission during the pandemic.
India take a major leap in the race of development. The announced economic package was 10% of India's

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Gross Domestic Product (GDP) in 2019-20. The Incentives: Extend an incentive of 4% to 7% on

package is expected to focus on land, labour, liquidity incremental sales (over base year of 2019-20) of goods
and law. manufactured in India for a period of 5 years

Self-Reliant India Mission Eligibility Incentives are provided under the scheme
only those companies which cross the threshold level
The Self-Reliant India Mission aims towards cutting terms of incremental sale of manufactured goods and
down import dependence by focussing on substitution incremental investment over the base year
while improving safety compliance and quality goods to
gain global market share The Self-Reliance neither Tenure of Scheme 5 years
signifies any exclusionary or isolationist strategies but
involves creation of a helping hand to the whole world The government had announced a production inward
incentive or PL scheme for medical devices mobile
The Mission focuses on the importance of promoting phones and specified active pharmaceutical ingredients
"local" products The Mission will be carried out in two with a proposed outlay of 251.311 crore The Production
phases: Linked Incentive (PLI) Scheme was then extended 10
more sectors for enhancing India's manufacturing
Phase 1: It will consider sectors like medical textiles, capabilities and exports (Atmanirbhar Bharat) The ten
electronics, plastics and toys where local manufacturing sectors include food processing, telecom, electronics
and exports can be promoted. textiles, specialty steel, automobiles and auto
Phase 2: It will consider products like gems and components solar photo-voltaic modules and white
jewellery, pharma and steel, etc. goods such as ar conditioners and LEDs

The Mission would be based on five pillars namely, The sectors had been identified on the basis of the
potential to create jobs and make India self-reliant The
Economy PLI scheme for these ten sectors will be operational for
five years with a total estimated outlay of 1.45 lakh
Infrastructure System
crore
Vibrant Demography Demand
B. Benefits of PLI Scheme
16.5.4 Production Linked Incentive The PLI scheme would help us achieve import
Scheme (PLI) substitution, export promotion, cost-competitive and
efficient manufacturing, economies of scale, increased
To become $ 5 trillion economy and realize the vision contribution in global value chains and higher market
of Aatma Nirbhar Bharat, there is a need to enhance share in the champion sectors
investment in the manufacturing sector. Hence, as part
of Aatma Nirbhar Bharat Package, the Government has Linking Incentives to Output: Unlike previous schemes
approved PLI schemes for almost 13 sectors such as which focusses on Inputs (such as increase in customs
Mobile Manufacturing. Pharmaceutical Industry. duty under the Phased Manufacturing Programme), the
Textile. Automobiles, Specialty steel, Solar PV Modules PLI scheme focusses on outputs as it encourages the
etc. companies to increase both investment and production
of goods
A. Details About PLI Scheme
Outcome-based and Result-oriented: This mears that
The scheme aims to give companies incentives on incentives will be disbursed only after production has
incremental sales from products manufactured in taken place in the country. The PLI scheme likely to
domestic units. The scheme invites foreign companies boost India's manufacturing output by 37 lakh crores
to set units in India however, it also aims to encourage crore (US$ 520 billion) in five years
local companies to set up or expand existing
manufacturing units Easy to Administer: The incentives are available based
upon fulfilment of objective criteria and hence easy to
Objective: Boost domestic manufacturing and attract implement
large investments in domestic manufacturing

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Creating Champions to Integrate into Global Value in comparison to domestic companies and thus domestic
Chains (GVCs): The scheme focuses on size and scale companies may get adversely affected
by selecting those players who can deliver on volumes.
This would enable nurturing of lead firms which can Limit on Incentives: The incentives given to a company
help set up Global Value chains (GVCs) is based on the incremental production. That greater the
production, the higher the incentives However, the
Technology Adoption: PLI Scheme focusses more incentives cannot be claimed beyond the financial
counting adoption of advanced technology For ample outlay proposed by the Government.
scheme for Automobile sector focusses manufacturing
of advanced Batteries and Electric enhances This would Hence, an over performing company may not be reap
encourage industries to give up caste technology, adopt the benefits under the scheme in absolute terms
cutting edge technology and become globally Limited Applicability: Applicable to only certain sectors
competitive Important labour intensive sectors such as Leather have
Linkages with MSMEs: PLI scheme will establish been left out Applicable to only selected few big
backward linkages with the MSME sector which in will companies For example, only 10 companies have been
lead to more inclusive growth and create huge chosen for mobile phone manufacturing
employment opportunities Promote Rent-seeking Tendencies among Private
Ensure Self-Reliance: Even today, India is critically Sector: Experience of the pre liberalization period
dependent on import of critical products such as shows that schemes such as these are prone to create
Telecom Active Pharmaceutical Ingredients (APIs). rent seeking tendencies among the private sectors For
Mco e phones, Electronic Goods. Advanced Batteries example foreign companies such as Samsung Wistron
etc By boosting production of these critical goods. ne and Foxconn have already approached the government
scheme not only ensures self-reliance, but also positions to delay the starting of the first-year conditions on
India to become major exporter additional sales and investments

Employment by Creation: Generate incentivizing of Inward Oriented and Protectionist Policies: To ensure
traditional labour-intensive processing and textiles success of PL scheme, the Government has increased
large-scale development sectors like the food customs duty on number of goods such as electronic
employment and electric goods, electric cars etc Protection to
selected industries both through subsidies and customs
Attract Foreign Companies Exiting China: Presently. duties would lead to the problem of protectionism and
very few foreign companies which are exiting from reduction in competition
China have established their base in India. These
companies are establishing their bases in other D. Way Forward
economies such as Vietnam. PLI Scheme would help us Subsidies and incentives can be a game-changer only
attract these foreign companies when we are able to address structural problems of the
C. Challenges manufacturing sector. PLI is a game-changer to
transform the manufacturing landscape of the country
Higher Manufacturing Cost: Manufacturing sector has However, its success hinges on supporting reforms that
remained stagnant due to poor access to factors of realise the full potential of the economy
production such as land, capital. poor labour
productivity, poor ease in doing business, higher
logistics cost etc. Because of these factors, the cost of
manufacturing is quite high in comparison our
competitors. So, despite PLI scheme, foreign companies
may prefer other investment destinations such as China,
Vietnam. Etc

May Go against Domestic Companies: Incentives are 16.6 Micro, Small and Medium
uniformly applicable to both domestic companies and
foreign companies incorporated in India. Deep Pocketed Enterprises (MSME)
foreign companies may be able to reap higher benefits

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16.6.1 Introduction 16.6.3 Importance of MSME Sector

The MSME sector employs around 111 million people Today, India is facing problem of job creation despite
and is the second largest employer after agriculture it having benefit of demographic dividend. In addition,
contributes 28% of India's GDP and 45% of our the lopsided development has created the regional
manufacturing output The share of export of specified imbalance in the country. Apart from that there is also
MSME related products to All India exports during large scale migration from rural to urban area. In light
2019-20 and 2020-21 was 49 8% and 49.5% of the above statements, MSME can provide solution to
respectively these problems.

16.6.2 New Definition of MSMES

The definition of MSMEs has been provided under Creation of Large Number of Jobs: MSMEs are labour
Micro, Small and Medium Enterprises Development intensive sector, i.e., the creation of more labour per
(MSMED) Act. 2006. Presently. MSMEs are defined in amount of capital in comparison to large scale industrial
terms of their investment in plant and machinery or enterprises. This peculiar feature fits well in the current
employment situation in country where a million youth
equipment as shown below. There are a number of
problems with the existing definition of the MSMEs are entering in the workforce every month. MSMe's is
the second largest employment generating sector after
Definitions based on investment limits in plant and agriculture
machinery/equipment were decided when the Act was
formulated in 2006 and does not reflect the current Capital Output Ratio: Capital is one of the most
increase in price index of plant and machinery/ important factors in economic development. With
scarce capital and the slow rate of capital formation in
equipment.
the country, MSMEs with lower capital output ratio,
MSMES due to their informal and small scale of i.e., more output from smaller capital, augurs well for
operations often do not maintain proper books of the country in the present scenario.
accounts and hence find it difficult to get classified as
MSMEs as per the current definition. Industrialization in Rural Areas, Inclusive and
Sustainable Development: A large number of MSMES
Presently, the MSMEs get number of benefits from the are situated in the rural area. This not only creates jobs
government such as collateral free loans, tax and provides income to the rural masses but also helps
concessions etc. Hence, if they lose the status of in reducing the migration from rural areas to urban area.
MSME, then they would no longer be able to avail these Thus it also helps in reducing the pressure on already
benefits. Hence, in order to avoid losing the status of crippling urban areas.
MSME, the industries deliberately keep their
Healthy Balance of Payment Export Competitiveness:
investment levels below the threshold mentioned in the
MSMED act MSMEs are already contributing around 49 percent to
the export from the country and hold further potential to
Hence, in a way, the existing definition has incentivised expand our export trade
the MSMEs to remain smaller rather than incentivising
them to grow bigger and create a greater number of High Growth Rate and Potential: With 36.1 million
jobs. units throughout the geographical expanse of the
country. MSME sector has maintained growth rate of
New Definition: As shown in the above table. 3 over 10 per cent MSME can play a key role in
important changes have been introduced in the new achieving the target of $ 5 trillion economy by 2025.
definition of MSMES:
MSMEs and Inclusive Growth: Inclusive growth means
The Investment limit has been increased that growth which has a positive effect on the living
standard of all the people, especially the weaker section
An additional criterion of annual turnover has been of the society.
introduced.
MSMEs has been able to help in achieving the purpose
The distinction in the definition of manufacturing and of inclusive growth. According to the, Eleventh Five
service sector enterprises has been done away with Year plan, the MSME sector is a microcosm of all

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vulnerabilities it touches upon the lives of women, talking about fourth industrial revolution, the MSMEs
children, minorities, SCs, and STS in the villages, in the sector is still stuck with the obsolete and backward
urban slums, and in the deprived pockets of flourishing production technology MSMES exist in the unorganised
towns and cities. For many families, it is the only sector, show lower adaptability of new technology and
source of livelihood. For others, it supplements the innovation.
family income. Thus, instead of taking a welfare
approach, this sector seeks to empower people to break Ease of Doing Business: The MSME's are not able to
the cycle of poverty and deprivation. It focuses on take the advantage of Ease of Doing Business due to
people's skills and agency. Promotes Innovation: cumbersome government procedures and rules for
MSME's provides opportunities for budding establishing new units The problem is further
entrepreneurs to build creative products boosting aggravated due to bureaucratic delays in getting
business competition and fuelling growth. clearances and poor litigation system in the country

Lack of Quality Control and Testing Facilities: Most of

16.6.4 Challenges the MSMEs in rural India lack quality control and
testing facilities This inhibits them from getting proper
The MSMES sector in India is neither clustered nor
homogenous Moreover, they are unorganized. This grading which would otherwise have helped them in
sector consists of production unit ranging from marketing their product in foreign market where these
traditional unt like handlooms, handicrafts, etc.. to requirements are essential for products to enter into
advanced high tech industries like food processing their market
industries. However, MSMES continue to face
challenges of formalization, access to technology,
access to timely and adequate range, improving
competitiveness, availability of skilled manpower,
16.6.5 Government Initiatives for
access to latest technology and marketing. Promoting MSMES
The MSME sector is yet to benefit from the advances in Recognizing the importance MSMEs, the Government
digitization, which can substantially reduce the cost and has come up with various measures and schemes to
time for this sector The sector was also affected in the promote this sector
recent past due to structural changes in the economy
such as implementation of GST and demonetisation Prime Minister Employment Generation Programme
(PMEGP): It is a Central Sector Scheme being
Following are the challenges faced by MSMES: administered by the Ministry of Micro, Small and
Medium Enterprises (MOMSME) which provides
Poor Access to Credit: One of the major problems for
financial Support for setting up of new MSMEs with a
the MSMEs is accessibility of finance from the
maximum Cost of project: 25 lakhs
financial institutions. 90% of MSME borrow from the
unorganized sources at very high rate, this further ZED Certification Scheme: The objective of the scheme
hampers their profitability and sustainability MSMES for promotion of Zero Defect and Zero Effect (ZED)
also suffer from lack of collateral and high working manufacturing amongst micro, small and medium
capital needs. enterprises (MSMEs) It provides financial support for
manufacturing products which have Zero Defect and
Lack of Marketing: Though products like handicrafts
Zero Effect on Environment. It promotes adaptation of
products made by tribes, etc., are quite popular but the
quality tools/systems and Energy Efficient
consumer base is very narrow because of lack of
manufacturing and encourages MSMEs to constantly
marketing by the MSME sector. MSMEs suffer from
upgrade their quality standards in products and
Low outreach and non-availability of new markets.
processes.
Lack of skilled manpower and ineffective marketing
strategy Difficulty in selling products to government Credit Guarantee Trust Fund for Micro & Small
agencies. Competition from MNCs and other big Enterprises (CGT SME): It was launched in 2000 by the
industries. Government of India (Gol) to make available collateral-
free credit to the micro and small enterprise sector up to
Lack of Appropriate Technology and Obsolete
Production Techniques: When the whole world today is

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a limit of 1 crore is available for individual MSE on suggested long- term solutions for the economic and
payment of guarantee fee to bank by the MSME financial sustainability of the micro, small and medium
enterprises.
A Scheme for promoting Innovation, Rural Industry &
Entrepreneurship (ASPIRE): The scheme was launched The following are the key recommendations of the
to set up a network of technology centres and to set up committee:
incubation centres to accelerate entrepreneurship and
also to promote startups for innovation in agro industry. Institutional Framework: In order to have convergence
It provides a one-time grant of 100% of the project cost of various MSME related policies. National Council for
or 1 crore (whichever is lower) for promotion of MSMEs should be set up at the apex level under the
innovation and entrepreneurship. Chairmanship of the Prime Minister. The States should
have a similar State Council for MSMEs, for better co-
Revamped Scheme of Fund for Regeneration of ordination of developmental initiatives.
Traditional Industries (SFURTI): The SFURT
programme organizes traditional industries and artisans Further, Ministry of MSME may consider setting up of
into clusters and make them competitive by enhancing a Non-Profit Special Purpose Vehicle (SPV) to support
their marketability & equipping them which improved crowd sourcing of investments by various agencies
skills particularly to pave the way for conducive business
ecosystem for MSMEs
Digital MSME Scheme: The Digital MSME Scheme
involves usage of Cloud Computing where MSMEs the Addressing delays in Payments to MSMEs by setting up
internet to access common as well as tailor made IT a monitoring authority under the office of Development
infrastructure Commissioner MSME Further, majority of the States
have only one MSE Facilitation Council (MSEFC)
National Manufacturing Competitiveness Programme which is not adequate to cater to delayed payment cases
(NMCP): The objective of NMCP is to develop global arising in the entire State. Hence, there is a need to
competitiveness among Indian MSMES through Credit increase the number of Facilitation Councils
Linked Capital Subsidy for Technology Upgradation particularly in larger States
(CLCSS). Lean Manufacturing Competitiveness for
MSMEs, Promotion of Information & Communication Expanding the Scope of GeM Portal: Government
Tools (ICT) in MSME sector, and Technology and should make it mandatory for PSUs/ Government
Quality Up gradation Support to MSMES, Department to procure from MSES up to the mandated
target of 25% through the GeM portal only. Further, the
MSME SAMADHAAN: MSME Samadhaan is an portal can be developed as a full-fledged market place
online portal where MSMEs can file their applications enabling MSE sellers to procure raw-material as well.
online regarding delayed payments.
Improving Ease of Doing Business: Presently. MSMEs
MSME-SAMBANDH: MSME SAMBANDH is a must do multiple registrations with various entities such
portal to monitor Public procurement policy as Udyog Aadhaar portal, GSTN, National State
Insurance Corporation (NSIC) etc. This leads to
Udyami Mitra Portal: The Udyami Mitra Portal is an replaced by making PAN as a Unique Enterprise
assistive portal launched by SIDBI to improve Identifier (UEI) and the same should be used for various
accessibility of credit and handholding services to purposes like procurement, availing government
MSMES. sponsored benefits, etc.
TREDS Platform: Discounting of invoices for MSMEs Capacity Building: Proposal to establish Enterprise
from corporate buyers through multiple financiers. Development Centres (EDCs) within District Industries
A. U.K. Sinha Committee Recommendations to Centres (DICS) has to be expedited; Provide
Improve the Functioning of MSME handholding support to the entrepreneurs in various
aspects such as technical know-how, managerial skill,
The Reserve Bank of India had set up an eight-member filling up of the knowledge gap, etc.
expert committee under the leadership of the former
chairman of SEBI, UK Sinha to review the current Focussing on MSME Clusters: MSME clusters should
framework for the MSME sector. The committee has collaborate with companies having innovation
infrastructure, R&D institutions and universities that

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specialize in a specific industry or knowledge area. The UK Sinha Committee recommended that the RBI
Distressed Asset Fund: Assist units in clusters where a should increase the limit for non-collateralised loans to
change in the external environment, e.g.a ban on 20 Lakh from the present limit of 10 Lakh. This limit of
plastics or 'dumping' has led to a large number of 20 lakh should also be applicable to the loans provided
MSMEs becoming NPA. under the MUDRA scheme

Loan Service Providers: RBI should create a new

category of Loan Service Providers (LSPs). The LSPs
B. Committee Recommendations for Initiatives for would act as agents of the borrowers (MSMEs) and
Provision of Finance to MSME'S: Pradhan Mantri offer individualised advice to them catering to all the
MUDRA Yojana (PMMY) Scheme: aspects of finance.
The PMMY Scheme was launched in April, 2015. The Development Service Providers: MSMEs lack expertise
scheme's objective is to refinance collateral- free loans in product development, technology adoption and
given by the lenders to small borrowers. The scheme, marketing strategy. The Government should build
which has a corpus of *20,000 crore allows banks and networks of development service providers that can
MFIs to refinance under the MUDRA Scheme after provide customized solutions to MSMEs in the area of
becoming member lending institutions of MUDRA technology, product development and marketing
MUDRA Loans are available for non-agricultural techniques; Need for strengthening of MSME Export
activities upto 10 lakh and activities allied to agriculture Promotion Council.
such as Dairy, Poultry Bee Keeping etc, are also Insurance: Government should take active efforts to
covered MUDRA's unique features include a Mudra provide insurance coverage to MSME employees on the
Card which permits access to Working Capital through lines of PMSBY and PMJJBY schemes.
ATMs and Card Machines
Fund-of-Funds: Government sponsored Fund of Funds
There are three types of loans under PMMY (FOF) to support VC/PE firms investing in the MSME
Shishu (up to 250,000) sector.

Kishore (from 250,001 to 25 lakh) C. Recommendations of Economic Survey 2018-

19 for MSMES
Tarun (from 2500,001 to 10,00,000)
The Government provides a number of incentives so as
PSBLoansin59Minutes portal as of now caters only to to nurture Infant MSMEs to grow into large sized giants
existing entrepreneurs having information required for and ensure optimum utilization of factors of production,
in-principle approval such as GSTIN, Income Tax higher productivity and job creation. However, the
returns, bank statement, etc. Portal should also cater to Government policies as shown below create perverse
new entrepreneurs, who may not necessarily have such incentives for firms to remain small rather than grow
information, including those applying under PMMY bigger.
loan and Stand-up India
The above-mentioned problem has led to dominance of
Priority Sector Lending (PSL) guidelines apply dwarf MSMEs firms which are more than 10 years old
uniformly to all the lenders and mandates specific but yet continue to employ less than 100 people. These
targets to banks to lend to priority sectors, e agriculture, firms account for more than half of all firms in
small and marginal farmers, micro enterprises. weaker manufacturing by number, but their contribution to
sections, etc. At present, the overall target for the employment is only around 14%. This clearly shows
universal bank is 40% and target for small finance bank that these firms are reluctant to grow bigger due to the
is 75%. The committee has recommended that for banks fear of losing out on the benefits enjoyed by MSMEs.
that wish to specialize in MSME lending, the
requirements to do agricultural lending under PSL can The dominance of dwarf firms has led to a number of
be waived provided they achieve 50% PSL lending problems:
target to MSMEs in the case of Universal Banks and
Stagnation in Share of Manufacturing Sector (17%),
80% in the case of Small Finance Banks
Problem of Missing Middle,

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Lower employment elasticity. Constraints and Challenges in Boosting Defence

Manufacturing Indian Eco
Informalization of jobs.
Lack of Independence and Autonomy of Ordnance
In this regard, the Economic Survey 2018-19 has given Factory Board (OFB): This has been addressed recently
the following recommendations: through the Aatma Nirbhar Bharat Package through the
Incentivizing 'infant' firms rather than 'small' firms: decision of Corporatisation of OFB Higher Preference
Provision of incentives to firms irrespective of their age to Defence PSUs: The Government tends to give higher
has led to dwarf firms. Hence, incentives should be preference to Defence PSUs which in turn constraints
limited to initial 5-7 years only. the growth of Private sector

Re-orientation of PSL: Under MSME's PSL targets. it is Delays in Procurement of Defence Goods: In the past
necessary to prioritize startups and infants. Focus on five years, the Indian government has approved over
High Employment elastic sectors such as Textiles, 200 defence acquisition proposals with the transfer of
leather etc. technology provision, valued around 4 lion, but most
are still in relatively early stages of processing
Deregulating labour law restrictions can create
significantly more jobs, as seen by the recent labour Lack of Critical Technologies: Poor design capability in
reforms introduced in states such as Rajasthan. critical technologies, inadequate investment in R&D
and inability to manufacture major subsystems and
MSMEs that grow not only create greater profits but components hamper the indigenous manufacturing. The
also contribute to job creation and productivity in the relationship between the R&D establishment,
economy. production agencies (public or private) and the end-
user are extremely weak.
Hence, the Government policies must, therefore,
enabling MSMEs to grow by unshackling them focus o Long Gestation Period: The creation of a manufacturing
base is capital and technology- intensive and has a long
16.7 Various Manufacturing gestation period. For a factory to reach optimum levels
of capacity utilisation, it could take anywhere between 5
Industries in India to 10 to even 15 years and by the time a unit
commences production, and when the production
16.7.1 Defence Manufacturing commences there could be changes in the threat
assessment/ strategy involving a complete change in
India is the world's second largest arms impose
priorities. For instance, buying a new advanced radar
accounting for about 12% of global arms imports Th
system may acquire a higher priority instead of adding
external dependence for Defence Goods not only p
more tanks or armoured vehicles. Also, newer
security risk, but it is also a challenge to Aatmatthe
technologies could make products outdated unable to
Bharat. Keeping in mind, the challenges faced by
match with what the enemy may have acquired.
Defence Manufacturing Sector, the Government had
unravels Defence Production & Export Promotion Failure in Defence Offset Policy wherein the CAG has
Policy (DPER 2020 in August 2020. recently highlighted that most of the time Foreign
vendors give commitment for offsets in order to win the
A. Objectives of Defence Production & Export
tender, but later on do not fulfil their commitments.
Promotion Policy (DPEPP) 2020 Achieve of 1,75,000
Crore (US$ 258 a turnover including export of 35,000 Lack of Investment in R&D which is around 0.7% of
Crore (US$ 5 Br) Aerospace and Defence goods and India's GDP, this is severely insufficient for
services by 2025 development of indigenous defence manufacturing
base.
To reduce dependence on imports and take forward
"Make in India" initiatives through domestic design and Failure to attract FDI in Defence manufacturing due to
development. and become over-dependence on Defence PSUs, Poor Ease of Doing
Business etc.
To promote export of defence products part of the
global defence value chains Lack of Coordination: Overlapping jurisdiction of the
Ministry of Defence and Ministry of Industrial

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Promotion impair India's capability of defence Public Procurement Order: Department of Defence
manufacturing Production has notified list of 24 items for which there
is local capacity and completion and procurement of
C. Steps Taken by the Government to these items shall be done from local suppliers only
Boost Indigenization of Defence irrespective of the purchase value.

Industry D. Strategies to Boost Defence Manufacturing

The size of the Defence Industry, including Aerospace The following steps can be taken to further enhance
and Naval Shipbuilding Industry, is currently estimated defence manufacturing
to be about 80.000 Cr in 2019-20. While the
contribution of Public Sector is estimated to be 763.000 Set up Project Management Unit (PMU) that should be
crores, the share of Private Sector has steadily grown to able to provide clear picture of future requirements of
17.000 crores over the years. The following steps have Armed Forces to Industries It should also support the
been taken by the government to boost indigenisation of acquisition process and facilitate management of the
defence Industry category of capital procurement Buy contracts List of Defence Goods whose import is
Indian- banned should be reviewed and updated regularly

Defence Procurement Procedure (DPP): A new IDDM Need to move away from licensed production to
(Indigenously Designed Developed and Manufactured) Design.
has been introduced in Defence Procurement Procedure Develop and Produce wherein the India should own the
(DPP) to promote indigenous design and development Design Rights and Intellectual property rights.
of defence equipment. Under this, highest priority
would be given to procurement of Defence Goods Procurement of indigenously developed products/
which are indigenously designed. developed and systems involves conducting a number of tests and trials
Manufactured within India and consumes a considerable amount of time as a result
of which placement of orders is delayed. This needs to
Defence Offset Policy: Persuade foreign vendors to be streamlined and expedited
outsource orders, transfer technologies to Indian
companies and invest in India. Set up Indigenisation portal to provide necessary
support to MSMES/ Startups for import substitution.
Import Bans: Under 'Aatmanirbhar Bharat, a list of 101
items has been prepared for which there would be an Need to have a distinct budget head for domestic capital
embargo on the import procurement Tap growing opportunities in Aerospace
Industry such as Aircraft MRO. Unmanned Aerial
Innovations for Defence Excellence (IDEX): DEX is Vehicles (UAVs) etc
aimed at creation of an ecosystem to foster innovation
and technology development in Defence and Aerospace Enhance Investment in R&D and convert the prototypes
by engaging Industries including MSMEs and Startups. into commercially useful products.

Strategic Partnership Model (2017): Indian companies Promote export of domestically manufactured defence
can seek technology transfers from MNCS to set up products through Govt to Govt agreements and Lines of
domestic manufacturing infrastructure and supply Credit/Funding.
chains.
16.7.2 Electronics Manufacturing
Policy for indigenisation of components and spares used
The Indian electronics sector is tremendously growing
in Defence Platforms (2019): To indigenize the
with the demand expected to cross USD 400 billion by
imported components and sub-assemblies for defence
2023-24.
equipment and platform manufactured in India.
Domestic production has grown from USD 29 billion in
Defence Corridors: In Feb 2018, Government decided
2014-15 to nearly USD 70 billion in 2019-20
to establish two defence industrial corridors (One in UP
(Compounded Annual Growth Rate of 25%).
and another in Tamil Nadu) to promote growth of
defence industrial base in India. Most of this production takes place in the final
assembly units (last-mile industries) located in India

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and focussing on them would help develop deep capital depreciation and often accounts for 50- 60% of
backward linkages, thus inducing industrialisation. the production cost. Domestic players have also shown
low interest due to their inability to compete with tech
The Economic Survey 2019-20 also promoted this idea giants in research and development (R&D) and
and suggested "assembly in India for the world". investment. Due to this, proposals to develop foundries
especially in "networked products", in a bid to create in Gujarat and Uttar Pradesh in recent years were
four crore well-paid jobs by 2025 and eight crore jobs abandoned.
by 2030. This is the strategy that helped China become
the economic superpower it is today National Security Considerations: Most of the chips as
well as components used in Indian communication and
The recently launched PLI Scheme plans to ache This critical systems, are imported. This could hamper
goal by granting an incentive of 4-6% for domestic national security and sovereignty as backdoors could be
production A. Present Status of Electronics Industry In programmed in chips during manufacturing, which
India could compromise networks and cyber-security.
Production of Electronic Goods: Cont 2.3% of India's Increasing Imports: It is expected that electronics
GDP. India's share in electronics manufacturing has imports will soon overtake crude oil as India's largest
growth from 1.3% (2012) to 3% (2018). Second largest import commodity which will result in assembly units
producer of Mobile phone after China ending up as little more than mere packaging units.
Higher Demand for Electronic Goods: Import 56bn,
C. Suggestions to Improve Electronic
China accounts for 70% share, Decis share of domestic
mobile companies (Microma Intex, Lava, Karbonn) Manufacturing in India
from 45% to 19% in last 2 years Increasing Investments: The total outlay of Scheme for
B. Challenges of Electronics Industry in India Promotion of Manufacturing of Electronic Components
and Semiconductors (SPECS) must be increased from
Missing Profits: the current 3300 crore, to attract the microchip giants.
Despite the impressive growth of electronic production The government launched SPECS to provide a 25%
in India, the net value added by production units is very incentive on capital expenditure for semiconductor
low The net value addition ranges between 5% and manufacturing among other core components.
15%, as most components are imported rather than Profiting from Anti-Chinese Sentiments: Due to the
locally sourced USA's allegations on China for worsening Covid-19 and
Limited Indigenous Capability in Upstream Industries: India-China conflict and recent developments as a result
In the era of global supply chains, the value addition at of it, numerous multinational companies (MNCs) are
the final stages of production is very low especially in shifting their production out of China. The USA and the
electronics because the more complicated processes, UK have blocked China's access to chip making tools
involving greater value addition, occu prior to assembly, and designated Chinese telecom giants as national
in 'upstream industries. These include the production of security threats.
processors, display panels memory chips, cameras, etc. Pushing Make in India: There is a need to promote
Currently, these imports nearly constitute 80% of these semiconductor manufacturing alongside assembly units
components, with approximately 67% of the imports in India. This will induce greater local production of
coming from China alone. components and also fuel the growth of the industry as
Absence of Foundries: In the absence of foundries a whole, making Make in India successful
(semiconductor fabrication plants where microchips are
produced), India has to rely on foreign contractors to
produce microchips.

Challenges in Setting-up of Domestic Foundries: It

requires massive capital expenditure to the tune of USD
D. Critical Analysis
2 billion and more. Foundries are also required to adopt
newer technologies and processes almost every 18
months to ensure competitiveness which means high

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Positives: 22 companies have filed application under the one of focus sectors of "Make in India Program". The
new schemes (Samsung Foxconn, Wistron, Pegatron Indian Medical Device Industry is highly fragmented.
etc) Currently, this sector is dominated by MNCs.

Concerns: Benefits available to companies lower in The Medical Devices industry in India is valued at U
comparison to benefits available in China and Vietnam 5.2 billion, contributing about 4-5% to the USD W
billion Indian healthcare Industry Medical devices
Focusses on increasing production and not value sector in India is very small in compared to the rest of
addition, Companies may resort to importing cheaper the manufacturing industry though India is one of the
components to enhance production and hence set back top twenty markets for medica devices in the world and
to "Assemble in India Incentives need to be provided on is the 4 largest market in A after Japan, China, and
both production and value-addition This will incentivise South Korea India currently imports 80-90% of medical
global MNCs such as Samsung. Apple etc. to move devices the USD15 billion market.
their entire assembly line to India
The US, Germany. China, Japan and Singso constitute
Lack of development of semiconductor manufacturing the five largest exporters of high technology medical
fab units in India. equipment to India
E. Way Forward B. Government Schemes to Promote Manufacturing of
Medical Devices
Today. India is one of the upcoming hubs for microchip
designing with hundreds of startups making substantial In order to achieve self-sufficiency and become
progress in this field. Even some IITs have developed aexporter of medical devices, the Union Cabinet as
indigenous microchip designs like Shakti and Ajit. approved the following schemes:
The schemes to promote electronics manufacturing Promotion of Medical Device Parks: The Scheme aims
combined with the Prime Minister's call for an to promote Medical Device Parks in the country in
"Atmanirbhar Bharat', have rejuvenated hopes of a rise partnership with the States. A maximum granting of 100
of the indigenous electronics industry, allowing India to crore per park will be provided to the States Production
be truly self-sufficient. Linked Incentive (PLI) Scheme for promoting domestic
manufacturing of medical devices: Under the Scheme,
It is only through such actions, India can hope to realise
incentive @ 5% of incremental sales over base year
the dream of being a truly indigenous electronic
2019-20 will te provided on the segments of medical
ecosystem encompassing all aspects of the electronics
devices identified under the Scheme.
industry.
Benefits of the Schemes
16.7.3 Manufacturing of Medical
Boost domestic manufacturing and attract large
Devices investments in the medical device sector Setting up of
The medical device industry is a unique blend of Common Infrastructure Facilities 4 Medical Device
engineering and medicine. It involves the creation of Parks is expected to reduce manufacturing cost of
machines that are used to support life within the human medical devices Generation of additional employment
body. of 34,000 jobs over a period of five years.

Medical devices include Surgical Equipment, Substantial reduction in import of medical devices C.
Diagnostic equipment like Cardiac imaging. CT scans, Factors Driving the Growth of Medical Devices Sector
X-ray. Molecular Imaging, MRI and Ultrasound- Market Factors: Growing population, ageing, income
imaging including hand-held devices; Life Support base and associated disposable income, increasing
equipment like ventilator, etc. as well as Implants and socio-economic inclusion of rural and deprived in
Disposables. mainstream economy, heightened manufacturing
innovation to create customized products to meet the
A. Medical Devices Sector in India needs of all income segments, changing disease
prevalence pattern (e.g. early onset of diabetes and heart
The medical device Industry was accorded the status of diseases) and growing awareness among the middle
independent Industry in 2014 when it was included as class to focus on early detection and disease prevention.

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wo-market Factors: Development of infrastructure ace cost of finance inadequate availability of quality Dower
regations FD inflow outsourcing of ang and R&D limited design capabilities and low focus on R&D and
activities to India government aves to improve skill development etc
healthcare access through e schemes such as Rashtriya
Swasthya Bima Aarogyash, etc Recent Developments

Issues Regarding Medical Devices Sector india In June 2021, the Quality Council of India (OCI) and
Underdeveloped: The industry is still at a nascent sape the Association of Indian Manufacturers of Medical
with sub-optimal penetration and usage of radical Devices (AiMeD) launched the Indian Certification of
devices This demands innovation and R&D the medica Medical Devices (ICMED) 13485 Plus scheme to
device industry in order to push for undertake verification of the quality, safety and efficacy
of medical devices
Regulatory Loopholes/deficit: The lack of regulatory
harmonized standards accreditation legal torments To boost domestic manufacturing of medical devices
proccer guidance on quality and best cices etc are and attract huge investments in India. the department of
affecting the medical devices busty adversely pharmaceuticals launched a PLI scheme for domestic
manufacturing of medical devices, with a total outlay of
Medical devices continue to be under the Drugs and funds worth 3,420 crore for the period FY21-FY28
Cosmetics Act 1940 and industry representatives are
pushing for a comprehensive equation that views The Ministry of Health and Family Welfare has notified
medical devices separatery through the entire life-cycle that medical equipment would qualify as 'drugs' under
of the product om design to tests on patients Section 3 of the Drugs and Cosmetics Act (D & CA).
incorporating actor feedback and surveillance of 1940 from 1 April, 2020
patients in anom the molants are used, etc. The four The Medical Devices Parks have been set up in Andhra
draft notifications issued by the health ministry recently Pradesh, Telangana, Tamil Nadu and Kerala In 2020,
nas notified all medical devices as medicines Under the Kerala established MedSpark, one of the first medical
Drugs Act from December 2019 device parks in the country. in Thiruvananthapuram.

E. Suggestions to Improve Medical Devices

However experts and device manufacturers are Manufacturing
Demanding to bring a separate law. Medical Devices
Formulate "Medical Device Regulatory Act": Medical
Act to regulate the medical devices rusty in India At
devices should be treated distinctly from drugs and a
present only 24 out of over 6.000 devices are regulated
separate chapter for medical devices should be made in
The Drugs Act itself needs reforms as it does Tot the existing Drugs & Cosmetics Act
uniform and equitably regulate quality from state-to-
Create Necessary Bodies to Drive the Policies: Set up
state in the absence of a national singular story authority
an independent body with a permanent office and
The Johnson and Johnson's duty hip implant device case
support staff to promote and facilitate the medical
is symptomatic The failure of regulatory mechanisms
device industry with representatives from all related
10 counter corporate forgery. lack of administrative
government departments as well as industry Department
accountability breach of business/medical ethics big
of Pharmaceuticals should be strengthened and
pharma and the lack of consumer/patient
rechristened as the Department of Pharmaceuticals and
Dependence Sectors: Unlike on Other Pharmaceuticals Medical Devices awareness
manufacturing of medical devices is dependent on a
Lack of Investment Ecosystem: investors shy away
mix of technologies such as engineering electronics
equator environment in the absence of norms
material science and T
predictable. incomplete and incorrect restic
Hence India has taled to emphasis on domestic manufacturing suffers as a surgeon S rors of trying an
manufacturing of medical devices unregulated device from a startup

Inadequate Infrastructure: Medical Device sector in Preferential treatment in government procurement:

india suffers or account of lack of adequate Preference may be given to medical devices that are
infrastructure domestic supply chain and logistics high being manufactured in India with an additional

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preference for medical devices manufactured under the Imports from China work out to be cheaper and cost
MSME sector. effective. (China is largest producer of APIs accounting
for 20% of world's production)
Medical device testing centers should be set up
preferably in the PPP model. Uncertainty of price fluctuations from other producers
such as US, Italy etc also leads to higher dependence on
China.
Designate "Centers of Excellence" (COE) for Lack of suitable policies and incentives to boost
supporting product development and validation. indigenous development and production of essential
Set up Skill development committee with a APIs within India, including time consuming
representatives from the Medical devices industry, environmental clearances and Red-tapism.
academia (NIPERS) and Healthcare Sector Skill
B. Major Constraints and Challenges in
Council (HSSC) under the National Skill Development
Council (NSDC). Production of APIs In India

Separate price control order for medical devices. Lack of Availability and cost effectiveness of inputs:
non-availability of raw materials, Chemicals and
16.7.4 Pharmaceutical Industry solvents needed for the manufacture of APIs. Currently,
if APIs are manufactured in India, the cost would be
India is the largest provider of generic drugs globally. It 20% higher as compared to China. This is aggravated
supplies over 50% of global demand for various by inadequate Financial support to Indian companies for
vaccines, 40% of generic demand in the US and 25% of manufacture of APIs, which eventually leads to lower
all medicine in the UK. profit margin in the manufacture of APIs
The Indian pharmaceutical market is estimated at USD Lack of Capabilities in Innovation Space: India is rich
40 billion and pharma companies export another USD in its manpower and talent but still lags in innovation
20 billion. However, this is a miniscule portion of the infrastructure. The government needs to invest in
USD 1.27-trillion global pharmaceutical market. research initiatives and talent to grow India's
motivation. The government should support the clinical
Globally, India ranks 3rd in terms of pharmaceutical
pals and subjectivity in certain regulatory decision-
production by volume and 14th by value.
Quality Compliance Inquiry: India has undergone
India has more than 30% share in the global genes
making me highest number of Food and Drug
market but less than 1% share in the new molecular
Administration (FDA) inspections since 2009,
entity space.
therefore, continuous vestment for upgrading quality
According to the Economic Survey 2021, the domestic standards will distract e capital away from other areas
market is expected to grow three times in the next of development and growth is reduced of Stable Pricing
decade. and Policy Environment: Lack The challenge created by
unexpected and frequent domestic pricing policy
India's domestic pharmaceutical market is estimated at changes in India. It has created a vague environment for
USD 42 billion in 2021 and likely to reach USD 65 investments and innovations
billion by 2024 and further expand to reach-USD 120
130 billion by 2030. C. Initiatives taken by Government to Promote
Manufacture of APIs
A. Reasons for Higher Import Dependence on
China For APIs Scheme for Promotion of Bulk Drugs: Grants-in-Aid to
States with a maximum limit of 1000 Crore per Bulk
Before 1991, Indian Pharma Industry imported only Drug Park.
0.3% of its API requirements from China. However,
presently almost two-thirds of APIs are imported. Production Linked Incentive Scheme: Financial
ncentive to eligible manufacturers of identified critical
bulk drugs on their incremental sales over the base year
(2019-20) for a period of 6 years.

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Steps to be taken to Boost Manufacturing of APIS with Academia-Industry collaboration to boost the
simplified processes, robust guidelines, production of chemicals for manufacture of APIs

Robust Regulation: An enabling regulatory structure Early Stage Government R&D Support in form of fiscal
predictability, increased capacity and strong incentives.
governance. India needs a 60% reduction in the
approval timeline to be competitive. Adoption of Good Manufacturing Practices (GMP) and
Good Laboratory Practices (GLP) by the MSMEs.
Robust Funding Support with government aid for
industry investment through policies/incentives, direct Revitalise Public sector Enterprises such as Hindustan
government investment, and significant private Antibiotics Ltd.
investment. India offers an attractive set of benefits -
weighted R&D deduction, additional patent box
16.7.5 Ship Breaking Industry in
benefits, and progressive policies to increase innovation India
funding which can attract more investment.
Due to its natural geographical advantage of a high
Industry-Academia Linkages: Strong linkages between inter- tidal gradient, favourable weather conditions and
academia and industry with high quality academic talent low labour costs, India has emerged as a leader in terms
and infrastructure, industry-oriented research, and of both volume and number of ships broken. Ship
strong governance. The US created the Bayh-Dole Act breaking yards are located in the states of Gujarat,
encouraging academics to set up independent Maharashtra and West Bengal. Most ship breaking
companies. India needs world-class centres of activity is concentrated in the Alang and Sosiya yards in
excellence to attract global talent and Support cutting- Gujarat. Alang alone accounts for more than 90 per cent
edge research. of the ships dismantled in India.
Coherent Policies Across Sector: A favourable policy A. Significance
landscape through coherent policies across research,
technology commercialisation and Intellectual Property Around 10% of the steel used in India is extracted from
(IP). the ships.

Innovation Hubs to Accelerate Collaboration: There is a Employment generation- more than 55,000 workers
need for several at-scale innovation hubs co-locating alone are employed in Alang.
academia, public R&D centres, industry. startups and
Generate Forex revenue.
incubators

Invest in Other Modern Sectors: India should look up to

B. Issues
and invest in biotechnology India's biotechnology Environmental problems: Ship breaking leads to release
industry, comprising biopharmaceuticals, bio-services. of large amounts of carcinogens and toxic substances
bio agriculture, bio-industry and bioinformatics is such as mercury, lead sulphuric acid No proper waste
expected to grow at an average rate of around 30% a management system Environmental damage on flora
year and reach USD 100 billion by 2025 and fauna
Ensuring Adequate Supply of Active pharmaceutical Health of the workers: According to ILO, Shipbreaking
Ingredients: Build a National Stockpile of APIs to is amongst the most dangerous of occupations, with
ensure uninterrupted supply. unacceptably high levels of fatalities, injuries and work-
related diseases.
Creation of mega drug manufacturing clusters with
common infrastructure facilities. Drugs manufactured C. Slowdown in Ship Breaking Industry
from indigenously manufactured APIs should be given
preference in Government procurements. The number of ships coming to India for recycling has
declined in the recent past. For example. India's global
Increase the customs duty on the imported APIs in a share of ship breaking Industry reduced from 31%
phased manner. Alternate markets such as Vietnam, (2016) to 26% (2018) One of the most important factors
Indonesia etc. needs to be explored till the time India has been the non-compliance of labour and
develops Indigenous capability. environmental rules Further, international agencies such

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as ILO have increasingly emphasised the effective services Tourism and Travel-related services Franc
implementation of international conventions such as services, Recreational, Cultural and Sporting service
Basel Convention on the Control of Transboundary Health-related and Social services
Movements of Hazardous Wastes and their Disposal.
Impact of Covid-19 on Services Sector: There was
D. Steps taken by India been included in the new significant impact on contact-intensive services sec
Recycling of Ships Act, 2019. First-half of FY 2020-21 saw services sector co by
almost 16% Air passenger traffic, rail freight t port
Recycling of Ships Act, 2019: The Indian Parliament traffic. foreign tourist arrivals and foreign exchange
has passed Recycling of Ships Act, 2019. Through this earnings all contracted sharply following announcement
Act, India has acceded to Hong Kong Convention lockdown:
(HKC) which is implemented by International Maritime
organization (IMO). The provisions of HKC have also Services Purchasing Managers' Index: This rou is also
Hong Kong International Convention: The Hong Kong known as IHS Markit India Services Bus Activity
Convention covers the design, construction, operation Index. It shows the performance of services sec in
and maintenance of ships to ensure they can be recycled Indian economy. The index was at 57.5 in February
safely and in an environment-friendly way at the end of 2020 contracted to lowest 5.4 in April 2020 The PM
their lives. Under the Hong Kong Convention, ships usually averages out to above 55 in normal years
sent for recycling are required to carry an inventory of
Service Sector Share at The State and UT Lave Services
all hazardous materials on board. Ship recycling
sector accounts for more than 50% of the Gre State
facilities are required to provide a "Ship Recycling
Value Added in 15 out of 33 States and UTS states,
Plan", specifying how each ship will be recycled, based
services sector accounts for more than 60% GSVA
on its characteristics and its inventory of hazardous
Contribution of services stands at more than 85%
materials.
Chandigarh and Delhi while for Sikkim the share of
service sector is lowest at 27.02%. Even states with
relatively lower share of services in GSVA have
witnessed strong service sector growth in recent years

FDI In Services Sector: India has improved its ranking

World Investment Report published by UNCTAD from
12 in 2018 to 5th in 2021. FDI into India recorded
almost 17% jump during April-September 2020 over
corresponding period last year, despite the COVID-19
lockdown Service sector is the largest recipient of FDI
in India Service Sector accounted for almost four/fifth
of FDI inflows India. Among the service sector,
Computer Software and Hardware accounted for most
of FDI
16.8 Service Sector Trade in Service Sector: WTO services trade activity
indicated a decline in global trade in commercial
16.8.1 Introduction to Service Sector services of 4.3 per cent in the first three months of
2020, reflecting partly the adverse effect from spread of
The services accounts for 54.3% (2020-21) of total size
COVID-19 has a significant presence in services sector
of the economy, about 38 per cent of total exports and
exports in remained among top 10 trading countries in
two- thirds of total FDI inflows into India.
commerce services in 2019 accounting for 3.5% of
Composition of Service Sector: Trade, Hotels and world services exports. India's services sector remained
Restaurants, Transport, Storage and Communication, relates resilient when compared to merchandise trade.
Financing, Insurance, Real Estate and Business The sect provided steady flow of current receipts even
Services, though exports from a few sub-sectors were adversely
affects Software sector accounted for most exports from
Community, Social and Personal services. Environment service sector.
services Sewage services, sanitation etc. Education

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16.8.2 Tourism Sector of sectors like agriculture, manufacturing, transport.

hospitality, education, health, banking, etc.
4 Importance of Tourism Sector in India Employment
Generation: Travel, tourism, and hospitality can C. Government Initiatives to Boost Tourism
exponentially create jobs, which is important for India's
Swadesh Darshan Scheme, Pilgrimage Rejuvenation
demographic dividend, as 72% of india's population 300
and Sortual, Heritage Augmentation Drive
of 29 is below 32 years with the average
(PRASHAD), Adopt a Heritage Project, Incredible
Travel and tourism account for approximately 81% of India 2.0 Campaign
the total employment opportunities.
D. Constraints in Tourism Sector
In 2019, it contributed 9.3% to India's Gross Domestic
Product (GDP) and received 5.9% of total investments. Entry/Exit of Tourists: Despite the introduction of an e-
visa facility, visitors find the process of applying for a
Multiplier Effect: An added aspect of the travel and visa still cumbersome. Further, awareness about the e-
tourism sector is that not only does the sector provide visa facility remains low.
high-quality jobs, it also enhances an investment India,
accelerates development, and showcases India's unique Infrastructure and Connectivity: Deficiencies in
treasures-acting as a tool for soft diplomacy. infrastructure and inadequate connectivity hamper
tourist visits to some heritage sites
Potential Areas of Tourism: India offers amazing
diversity in tourism, ranging from 40 UNESCO World Tourism Segments or Circuits: India has various tourist
Heritage sites to the different physiographic features to destinations but few circuits or segments such as the
medical and Wildlife Tourism. India is ranked third Golden Triangle (Delhi-Agra-Jaipur)
behind US and China) in the World Travel and Tourism Promotion and Marketing: Although it has been
Council (WTTC)'s Travel and Tourism Power Ranking, increasing, online marketing/branding remains limited
2019 and campaigns are not coordinated.
Top 10 countries from which tourists come in India: Skills: The number of adequately trained individuals for
Bangladesh, USA, UK, Australia, Canada, China. the tourism and hospitality sector is a key challenge to
Malaysia, Sri Lanka, Germany and Russia. giving visitors a world-class experience.
Top 5 states attracting domestic tourists: UP, Tamil E. Steps to be taken to Promote Tourism Industry in
Nadu, Andhra Pradesh, Karnataka and Maharashtra. India
(71% of total domestic tourists visits in 2019)
The Prime Minister of India emphasised the importance
Top 5 states attracting foreign tourists: Tamil Nadu. of making India a global hub for tourism, urging each
Maharashtra, UP, Delhi and West Bengal (69.4% of citizen to visit 15 tourist destinations in India by 2022.
total foreign tourists in 2019). In this pursuit.
B. Contribution of Tourism to Inclusive Growth - It Focusing Inward: A campaign focusing on domestic
ensure potential to grow at a high rate and consequential tourism that showcases what the nation offers to Indians
development of the infrastructure at the tourist could be the post-pandemic plan for the sector.
destinations.
Improving Transportation Infrastructure: The UDAN
Travel and tourism sector is estimated to create 78 jobs scheme has been a huge success, and now the
per million rupees of investment compared to 45 jobs in government can focus on the earlier plans of launching
the manufacturing sector for similar investment. 100 tourism-oriented trains.
Provides employment opportunities for both skilled and Also, the ease of access can be improved by the faster
unskilled workers. implementation of Bharatmala and Sagarmala projects.
Tourism provides employment. More benefits for Further, the Holistic Island Development plan which
women Potential to stimulate other economic factors focuses on the Andaman & Nicobar (A&N) and
through its forward and backward linkages with a host Lakshadweep Islands will automatically create jobs for

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the islanders and enhance connectivity through key

infrastructure projects.
A. Current Status of IT-BPM Industry in India
Preserving Heritage: Conservation and development of
all heritage sites should be undertaken and completed The Indian IT-BPM Industry has been the flag-bearer of
through either government funding or through NGOs/ India's exports over the last 20 years. While 1999 2000
Corporate Social Responsibility (CSR) activities. to 2009-10 was a decade of growth, the last decade has
been that of consolidation and the industry succeeded in
The Ministry of Tourism's Swadesh Darshan and decoupling revenue and employee growth.
National Mission on Pilgrimage Rejuvenation and
Spiritual Heritage Augmentation Drive (PRASAD) The global sourcing market in India continues to grow
schemes are already undertaking the development or at a higher pace compared to the IT-BPM industry India
maintenance of heritage sites. is the leading sourcing destination across the world,
accounting for approximately 55% market share of the
The number of projects sanctioned under this scheme US$ 200-250 billion global services sourcing business
should be increased and their implementation in 2019-20.
accelerated.
The IT industry accounted for 8% of India's GDP in
Skill Development: There is a need to connect local 2020. According to STPI (Software Technology Park of
communities to tourism by encouraging them to set up India), software exports by the IT companies connected
small enterprises to supply the tourism indu to it, stood at 1.20 lakh crore (US$ 16 29 billion) in the
(accommodation, food and material) Employment first quarter of FY22
opportunities can be expand by ensuring that investors
and operators in organized sector are encouraged to hate Der the last decade the industry grew by 102 per
se This will give a boost to Eco-tourism locally teaching USS 190.5 billion in revenues in 2019- 20 as
added: 8 million employees, up 70 per cent over the last
Leveraging Technology: Moving forward, technic can 10 years soficant part (about 84 per cent) of the IT-BPM
play a significant role in creating minimum physic industry (excluding hardware and e-commerce)
touch points in hotels, which is very much required safe continues to be export driven, with export revenues in
and hygienic tourism excess of USS 146 billion in 2019-20 is the largest
export market for India IT exports ploughed by UK
16.8.3 Information Technology and USA alone accounts for 62% of total 1-8PM exports
Business Process Management (IT- Factors that made India a Hotspot for BPOS
BPM)
Availability of Cheap Labour: Initially, India was
Industry Management or IT Information Techno chosen as an apt alternative to in-house processing
multinationals, and eve. of a third-party vendor to considering many favourable factors including large
manage certain aspects their work operations. the ser Eng sh-speaking workforce and availability of tech-
savvy manpower
Business Process Outsourcing (BPO): BPO business
practice in which an organization contract with an Cost Advantage: it is the operational cost reduction by
external service provider to perform a essential business outsourcing the business process services to node that
task. makes the country a suitable destination. Companies are
enjoying as much as 50-60 percent of cost reduction by
BPO offers several benefits, such as lower costs global outsourcing to India.
expansion, and higher efficiency, while some the
drawbacks include security issues, hidden costs and Competent Talent Pool: Despite the stiff competition
overdependence. from the Philippines, Vietnam and other Asian
countries. the Indian BPO industry still remains an
OSPS or Other Service Providers are companies or attractive destination because of the availability of vast
firms which provide secondary or tertiary services such skilled labour and their proficiency in understanding
as telemarketing, telebanking or telemedicine for progressive technology.
various companies, banks or hospital chains,
respectively

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Leveraging Cost-advantage From Tier II Cities: The sectors in terms of direct, indirect and induced effects in
existence of a large number of tier II cities in the all sectors of the economy
country is the biggest advantage for the Indian business
process outsourcing companies which find working in In India the real estate sector is the second-highest
such cities to be cost-effective Besides the mounting employment generator, after the agriculture sector. It is
cost of living in these cities has forced the companies to also expected that this sector will incur more non-
begin operations in the rural regions as it seemed to be resident Indian (NRI) investment, both in the short term
promising to significantly reduce the overhead costs in and the long term. Bengaluru is expected to be the most
the long run Human Resource Advantage: Though some favoured property investment destination for NRIs,
of the Asian countries are rising to be at par with India followed by Ahmedabad, Pune, Chennai, Goa, Delhi
in providing cost-effective BPO services these countries
A. Potential Drivers for Real Estate Sector in
lack sufficient human resources to cater to the global
market India, on the other hand, with ts large competent India
professionals is driving the BPO industry, thereby Robust Demand: According to Savills India, real estate
proving it to be an ideal destination for outsourcing demand for data centres is expected to increase by 15-
services 18 million sq. ft. by 2025.
C. Future of BPO's in India Increasing Investments: In the first-half of 2021, India
The rapidly growing industry requires growth registered investments worth US$ 2.4 billion into real
infrastructure as well. However, this is an area where estate assets, a growth of 52% YoY. FDI in the sector
India lacks and this issue need to be addressed to keep (including construction development & activities) stood
up with the competition at US$ 51.5 billion between April 2000 and June 2021

Even though India has been established itself as a world Policy Support: Under Union Budget 2021-22, tax
leader in the business of outsourcing in the near future, deduction up to 1.5 lakh (USS 206989) on interest on
there are chances of facing tougher challenges South- housing loan, and tax holiday for affordable housing
Asian countries like Malaysia Indonesia. Singapore, projects have been extended until the end of fiscal
Vietnam, Philippines Thailand and others are trying to 2021-22
improve their position so as to become alternative Attractive Opportunities: In July 2020, the Securities
offshore locations and Exchange Board of India lowered the minimum
Companies are branching out to Tier II cities where they application value for Real Estate Investment Trusts
would be able to take advantage of low labour costs. from 250,000 to 10,000-15,000 to make the market
Other South-Asian countries have been able to more accessible to small and retail investors.
challenge the competitiveness of India by offering
cheaper labour in business processing skills. India, on
the other hand is experiencing a rise in the labour costs B. Challenges in Real Estate Sector Land
along with high attrition which is of course of concern
Rates:
and thereby need to be addressed as soon as possible
High land prices in metro cities makes affordable
housing projects unviable

Goods and Service Tax (GST): For under-construction

projects, the GST rate has been reduced from 12% to
16.8.4 Real Estate Sector In India. 5%, but still it is quite high considering the quantum of
money to be paid
Real estate sector is one of the most globally recognized
sectors. It comprises of four sub sectors housing, retail. Drop in Property Prices: Post demonetization and
hospitality, and commercial. The growth of this sector is implementation of RERA Act 2016, there has been. a
well complemented by the growth in the corporate sharp decline in the property prices across the country.
environment and the demand for office space as well as RERA Act 2016 has increased transparency by
urban and semi-urban accommodations The preventing diversion of funds, curbing the infusion of
construction industry ranks third among the 14 major

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black money in the real estate sector, which contributed linked to the real estate sector. Therefore, crippling real
to the drop in the prices estate sector is also affecting other important segments
of the economy.
Implementation Issues: Implementation of existing
provisions in a fair and transparent manner is a issue in Job Crisis: The Periodic Labour Force Survey (PLFS)
the real estate sector. For example. There a provision of of the National Sample Survey Office (NSSO) showed
the Economic Weaker Section (EWS building in every that the overall unemployment rate in the country in the
housing project. But, generally these buildings do not financial year 2018 was at 6.1%. Since the real estate
go to EWS people and are occupies by working sector is the second-largest contributor to the labour
professionals and others force and employment, down-turn in this sector
aggravating the job crisis in the country. Steps taken by
High Rate of Insolvency: In 2020, About 421 estate Government
developers are under the corporate insolvency
resolution process. The root cause of the probe lies in Real Estate (Regulation and Development) Act, 2016
the liquidity crunch faced by the real estate developers: (RERA): RERA Act 2016 is a step towards reforming
the real estate sector in India, encouraging greater
Diversion of Funds: The problem begins with diversion transparency, citizen centricity, accountability and
of funds by developers to other projects. The developers financial discipline.
get the required funds from the buyers the time of
booking which they use as the collateral to secure a loan It had been made mandatory for each state and union
from the banks, which means the have the required territory, to form its own regulator and frame the rules
resources. The problem lies the deployment of funds. to govern the functioning of the regulator.
The developers build ne projects without bothering to
complete their prove ones. Over a period of time, they Real estate projects mandatorily need to be registered
got caught vicious cycle creating a shortage of adequate with the State Real Estate Regulatory Authority.
case Promoters cannot book or offer these projects for sale
Affordable Housing: Real estate sector is man without registering them.
concentrated in luxury housing while the need is Real Estate Agents dealing in these projects also need to
affordable housing. The target customer is man upper be registered with Real Estate Regulatory Authorities.
middle class which leaves a very small customer base
for developers and makes these project unaffordable for The Act makes it mandatory for a developer to deposit
other sections of the population The causes a huge stock 70% of the collected amount from buyers in an escrow
of unsold inventories bank account for construction of that project only.

Social Infrastructure: Housing projects being developed The Act also provides for fast-track dispute resolution
without proper linkage to so infrastructure i.e. schools, mechanism through the Real Estate
hospitals, market place adequate connectivity to metro
Regulatory Authority and Appellate Tribunals across the
rail, bus stand etc
country
Ghost Occupancy: On one hand there are huge stock
Fund: An Alternative Investment Fund (A/F) of 25.000
inventories (flats) and on the other side te sold
crores has been approved by cabinet to revive stalled
inventories face the problem of occupancy Investments
affordable and middle-income housing projects across
in real estate are being made with the expectation of
the country
good future returns which lead to the problem of
unoccupied houses (ghost occupancy) Special Window for Affordable & Mid-Income Housing
(SWAMIH): This is a government backed fund that was
C. Ripple Effect of Downturn in Real Estate set up as a Category-II AIF (Alternate Investment Fund)
Sector debt fund registered with SEBI, launched in 2019.
SWAMIH Investment Fund was formed to complete
Unstable Economy: Real estate is the second-largest
construction of stalled, RERA-registered affordable and
contributor to the GDP, therefore, the crisis in this
mid-income category housing projects which are stuck
sector will lead to destabilization of the economy
due to paucity of funds.
Demands in the steel and cement industry are closely

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Relaxation of Extra Commercial Borrowing (ECB) A. Present Status of Telecommunication

Guidelines: ECB guidelines will be relaxed to facilitate Sector
the financing of housing sector who are eligible under
Pradhan Mantri Awas Yojana (PMAY) in consultation Size and Contribution: Currently, India is the world's
with RBI. second-largest telecommunications market with a
subscriber base of 1.16 billion. It contributes almost
Housing Building Advance: To encourage government
8.2% of India's GDP
servants to buy new houses, the interest rates on House
Building Advance will be lowered and linked with 10- Tele density: 88% (Urban- 156%, Rural -56%) Higher
year government-security yields share of Private Sector: Since the 1991 LPG reforms,
the share of private sector has steadily increased to 88%
GST Rate Cut: The government has reduced GST rates
to a marginal 1% for the affordable housing project and Efficiency of Sector: India is now the global leader in
5% for under-construction houses. monthly data consumption, with average consumption
per subscriber per month increasing 146 times from 16
The lower tax burden on home buyers is expected to MB in 2014 to 9.06 GB in 2019.
push demand in the segment which, in turn, will keep
developers committed to build more affordable homes. B. Challenges affecting the
E. Way Forward Telecommunication Sector Higher Licensing
Fee
The government should focus on the hamea assess the
requirement of housing at local levels an then allowing Presently, the Telecom companies are required to pay
the requisite amount to be developed need based higher share of their revenue in form of various fees
planning at local level infrastructure status to housing such as Licensing Fee %) Spectrum Usage Charges
segment may lead flow of funds at cheaper rate and can (3%) and Universal Service Obligation Fund (5%). This
significant help in tackling liquidity crunch but in turn affects their profit margin and reduces their
government needs to be cautious that fund flows to ability to undertake higher investments
affordable housing sector only
Cut-throat Competition: The entry of new private
Generally, in manufacturing, we first produce the sell pavers such as Reliance Jio has undoubtedly benefitted
and earn profits but in real estate sector we tru sell and the consumers in terms of reduced call and data charges
earn profit and then produce which leads corruption and However, the stiff competition has ed to price wars
undelivered promises in this reges the government among telecom operators. This had an overall negative
could also try Singapoarian model where government impact on the telecommunication sector in the form of
created the housing stocks and then sold it off reduced revenues and higher debt (almost 8 lakh
crores).
The real estate sector has so much to contribute to the
people's life in terms of providing shelter, employment Higher NPAs of Telecom Companies: The poor
etc But the problem has come to a stage where we need financial position of Telecom companies has had a
15 crore housing units and at the same time, lakhs of contagion impact on Banking Sector. In a way, this has
housing units remain unsold. Majority of projects are created a vicious cycle wherein the Banks have been
still viable and can be handed over to buyers, therefore, reluctant to lend loans to these loss making Telecom
capital infuser to genuine developers who are willing to companies
complete the stalled project should be provided with the
Broadband Connectivity: Fixed broadband penetration
opportunity
in India is among the lowest in the world at only 6 per
It is high time to strike the root cause of the problem cent as compared with 55 per cent in China, 70 per cent
and convert the crisis into an opportunity to create good in Eurozone and 80 per cent in Japan.
solutions and boost the economy.
Limited Spectrum Availability: Presently, the
16.8.5 Telecom Sector government has proposed to auction spectrum in 3300-
3600 Mhz bands for the roll out of 5G services in India.
However, only about 175 units are available in the
3300-3600 Mhz band. The rest is under the control of

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ISRO and Ministry of Defence. 5G requires a minimum Bharat Net: Bharat Net seeks to provide high-speed
of 100 MHz block. Anything less, will not be attractive broadband to all the panchayats in the country. National
for Telecom operators. Information Infrastructure (NII): Ensure the integration
of the network and cloud Infrastructure to provide high-
Poor Connectivity: Lack of Telecom Infrastructure in speed connectivity to various government departments
Rural and Remote areas as evident in poor Tele density up to the panchayat level.
of 56% as compared to Urban Tele density of 156%
Public Internet Access Programme: The Programme
Decline in Revenue due to Growth of Over The Top aims to make 2,50,000 common service centres (CSCS)
(OTT) Providers: OTT providers are the entities that operational at the gram panchayat level to deliver
offer ICT services without owning or operating the government services online.
network. The best examples include Skype, WhatsApp,
Snapchat, Google Talk, Netflix etc. Some of these apps Universal Service Obligation Fund (USOF): The Fund
such as WhatsApp, Skype etc. provide options such as is raised through the imposition of Universal Access
Call, Messaging etc. which are similar to services Levy (UAL) of 5% of the revenue earned by the
offered by Telecom operators leading to decline in their operators under various licenses. This fund has been
revenue. given statutory status through the Indian Telegraph
(Amendment) Act, 2003 The proceeds of this fund are
Recent Judgement of Supreme Court: Recently, in 2019, used for enhancing tele density in the rural and remote
the SC ruled that the Adjusted Gross Revenue AGR) of areas.
the Telecom Operators would include both Core and
Non-Core revenue. This judgement of SC has led to Liberalization of FDI Norms: 100% Telecommunication
increase in the share of revenue which the Telecom (up to 49% Automatic. beyond 49% Government route)
operators are required to pay to the Government in form
of various fees. The total burden on all the telecom D. Reforms in the Telecom Sector
operators due to the SC judgement is as high as around
Rationalization of Adjusted Gross Revenue:
1 4 lakh crores.
Henceforth, AGR would include only the core revenue.
C. Government Initiatives Non-Core Revenue will be excluded from the
calculation of AGR. This is set to reduce the financial
National Digital Communications Policy 2018: The burden on the Telecom operators in future.
Policy aims to
Moratorium on the payment of existing dues for a
Provide Universal Broadband connectivity at 50 Mbps period of 4 years. This move is expected to ease
to all citizens Creating 4 million additional jobs in liquidity constraints of the Telecom Operators and
Digital would help them to undertake investment in new age
technologies such as SG spectrum would be increased
Communications sector Propelling India to Top 50 from 20 to 30 years
Nations in the ICT Development Index of ITU from 134
in 2017 Spectrum Tenure: In future Auctions, tenure of i
acquired in future spectrum auctions. No Spectrum
Attract investments of USD 100 Billion in the Digital Usage Charge (SUC) for spectrum
Communications Sector
Changes in FDI Norms for Telecom Sector: Presently,
Enhancing India's contribution to Global Value chains 49% FDI is allowed through the Automatic Route and
Ensuring Digital Sovereignty up to 100% through the Approval Route Now, the
Government has decided to allow 100% FDI through
National Broadband Mission: The mission seeks the automatic route
universal and equitable access to broadband services
across the country, especially in rural and remote areas 16.8.6 Insurance Sector
Digital India Scheme: Areas of focus of the scheme
include broadband highways. providing universal The insurance industry of India has 57 insurance
access to mobile connectivity, increasing electronics companies 24 are in the life insurance business, while
manufacturing etc. 34 are non-life insurers. Among the life insurers, Life
Insurance Corporation (LIC) is the sole public sector

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company. There are six public sector insurers in the population in India, and the presence of an insurance
non-life insurance segment. In addition to these, there is gap
a sole national re- insurer. namely General Insurance
Corporation of India (GIC Re). Other stakeholders in Public Sector Dominated: The insurance sector has
the Indian Insurance market include agents (individual transitioned from being an exclusive State monopoly to
and corporate), brokers, surveyors and third-party a competitive market, but public-sector insurers hold a
administrators servicing health insurance claims. greater share of the insurance market even though they
are fewer in number.
A. Evolution of Insurance Sector in India
Nascent Non-life Insurance: Life insurance dominates
The insurance industry in India was nationalised after the sector with a huge share of 74.7%, with non-if
independence. In 1956 Life Insurance Corporation of insurance accounting for the remaining 25 3% In the
India was formed after the nationalisation and merger of non-life insurance sector, motor, health and crop
245 insurance companies and other provident societies. insurance segments are driving growth
In 1972, the General Insurance Corporation and its four
India's non-life insurance penetration is below 1% In
subsidiaries were formed by nationalising 55 Indian
addition, insurance products catering to speciality risks
general insurance companies along with 52 general
such as catastrophes and cyber security are at a nascent
insurance operations of other companies. This was
stage of development in the country.
followed by constitution of the Insurance Regulatory
and Development Authority of India (IRDAI) in 1999. Rural-Urban Divide: Low insurance penetration and
density rates prevail in India. However, Rural
The Insurance sector was opened up of the sector to
participation of insurers remains deficient, and insurers,
both private and foreign players in 2000. It was coupled
especially private ones, gravitate towards the urban
with an increase in the foreign investment cap to 26%
population.
from 49% in 2015. The recent notification of 100%
foreign direct investment (FDI) for insurance Capital Starved Insurers: Insurers in India lack
intermediaries (announced in the Union Budget of sufficient capital, and their financial health, particularly
2019-20) has further liberalised the sector. The that of the public-sector insurers, is in a precarious state.
premiums in the Insurance sector have witnessed Further, investment in the insurance sector got dwindled
phenomenal growth. However, a large segment of the due to the crisis in banks and NBFCs (non- banking
population has not been provided insurance cover. The financial companies) sector.
insurance premium collection is 3 % of the GDP of
India.

B. Present Status of Infrastructure D. Government Initiatives

In India, the overall market size of the insurance sec The Government of India has taken number of
expected to US$ 280 billion in 2020. The life insurance initiatives to boost the insurance industry. Some of them
industry is expected to increase ta CAGR of 5.3% are as follows
between 2019 and 2023 India's ma penetration was
Export Insurance Cover: The Union Cabinet approved
pegged at 4.2% in FY21, with life insurance penetration
an investment of 26,000 crore into entities. export
at 3.2% and non life insurance penetration 1.0% In
insurance cover to facilitate additional puts worth 25 6
terms of insurance density, India's overall det stood at
lakh crore over the next five years Privatisation of
US$ 78 in FY21
Insurance Companies:
C. Challenges in India's Insurance sector In August, At the Parliament passed the General
Prevalence of Insurance Gap: The instance penetration Insurance Business (Nationalisation) Amendment Bill
(ratio of total premium to GDP (gross domestic The aims to allow privatisation of state-run general
product)) and density (ratio of total prem to population) insurance companies.
stood at 3 69% and US$ 73, respectively for FY18 FDI Relaxation: Union Budget 2021 increased FDI
(fiscal year 2017-18), which is low comparison with limit in insurance from 49% to 74% India's Insurance
global levels. These low penetration and density rates Regulatory and Development Authority (IRDAI) has
reveal the uninsured nature of large sections of

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announced the issuance, through Digi locker, of digital insurance products, bypassing intermediaries It should
insurance policies by insurance firms ensure that players do not overcharge or add hidden
costs.
IPO of Life Insurance Companies: Under the Union
Budget 2021, Finance Minister Nirmala Sitharaman 16.8.7 Space Sector
announced that the initial public offering (IPO) of LIC
will be implemented in FY22, as part of the India's space programme has grown exponentially in the
consolidation in the banking and insurance sector. past six decades, expanding from simple mapping
Though no formal market valuation has been services in the 1960s to many diversified uses.
undertaken, LIC's IPO has the potential to raise 1 lakh
crore. India spent about US$ 1.8 billion on space programmes
in 2019-20 However the country still lags behind the
Healthcare Worker Insurance: In June 2021, the major players in the space sector. such as USA, which
government extended a 50 lakh insurance coverage spent about 10 times more than India in the space sector
scheme for healthcare workers across India until the in 2019-20, and China, which spent about 6 times more
next one year. India has launched around 5-7 satellites per year in the
recent years. On the other hand, USA, Russia and China
Recapitalisation: In February 2021, the Finance
dominate the satellite launching services with 19, 25
Ministry announced to infuse 3,000 crore into state- and 34 satellites respectively in 2019.
owned general insurance companies to improve the
overall financial health of companies. As per Satellite Industry Association Report (2020). the
global space economy in 2019 was pegged at USS 366
Crop Insurance: Under Union Budget 2021, fund of billion, growing by about 1.7 per cent over 2018 The
*16.000 crore has been allocated for crop insurance commercial satellite industry is accounting for nearly 75
scheme. per cent of global space business.
E. Way Forward
Rural Centric Approach: Insurance companies in india Technology innovations and demand drives the need for
will have to show long-term commitment to the rural higher bandwidth capacity, throughput speeds.
sector as well, and will have to design products which improved optical, radar and thermal imaging.
are suitable for rural people. In this context, government
insurance schemes such as Pradhan Mantri Jan Arogya According to a report by the PwC, the Indian space
Yojana, Pradhan Mantri Fasal Bima Yojana, Pradhan economy is valued at US$ 7 billion, which is around 2
Mantri Suraksha Bima Yojana, and Pradhan Mantri per cent of the global space economy.
Jeevan Jyoti Bima Yojana are notable steps in right
The Agencies in the Space Sector of India include: New
direction.
Space India Limited (NSIL): It is a Central Public
Need For Awareness Program: There is a need for Sector Unit under Department of Space, created with
complementary thrust to spread awareness and improve the aim to to transfer the technologies emanating out of
financial literacy, particularly the concept of insurance, Indian space programme and enable Indian industry to
and its importance. scale up high-technology manufacturing base. Indian
National Space Promotion and Authorisation Centre
Technological Intervention: Another area that (IN-SPACE): It aims at promoting industries and
necessitates regulatory scrutiny is that of application of attracting investment in space sector. Further ISRO
technology in insurance. An example is the emergence would be sharing its infrastructure, transfer technology
of InsurTech, designed to make the claim process know how for production and spin-off
simpler and more comprehensible
Indian Space Association (ISPA): ISpA will act as a
Enhanced Role of Regulator: The regulator needs to single window and independent agency on matters
exercise vigilance on three other aspects It must ensure related to space technology. One of the main goals of
that insurance is not denied to lower-income people the organisation is to supplement the government's
who make up the bulk of the population and have the efforts towards making India a global leader in
most need for protection It should insist that insurers commercial space-based excursions
facilitate a simple online process for direct buying of

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Four Pillars of Space Reforms Allowing the private take up high technology space related activites and is
sector freedom of innovation. also responsible for promotion and commerce
exploitation of the products and services emanating
Government playing the enabler's role. from the Indian space programme
Preparing youngsters for the future: Recently, ATL ISRO is assisting new space startups and companies by
Space Challenge 2021 has been launched. This is to sharing its infrastructure, testing facilities and technical
ensure that students of classes 6 to 12 are given an open assistance, also funding through challenges and
platform where they can innovate and enable programs
themselves to solve digital age space technology
problems. B. Importance of Private Sector in Space
Treating the space sector as a resource for the progress Industry Private sector is needed for greater
of the common man: Development projects are being dissemination of space technologies, better utilisation of
monitored by satellite imaging. space technology is space resources, and increased requirement of space
being used in settlement of Fasal Bima Yojna claims based services.
and disaster management planning, and the NAVIC
system is helping fishermen. The private industry will also free up ISRO to
concentrate on science, research and development
Private Sector in Space Industry interplanetary exploration and strategic launches, as too
much of ISRO's resources is consumed by routine
Global space race started with the launch of Sputnik in
activities that delay its more strategic objectives
1957 by USSR. The space race is again starting but with
the entry of private sector. It is said that the space is The world over, an increasing number of private players
now democratizing because of the entry of the private are taking over this activity for commercial benefits.
sector besides the state actors.
Private Players will lead to creation of new job markets
This provides an opportunity for the Indian Private greater pool of resource sharing, risk sharing
sector to play a significant role in the space and at the
same time contributing to the Indian Economy. This would encourage the "Make in India" Programme
and give an edge to India's soft power and foreign
A. Present Ecosystem for Private Space Tech policy, which in the long run would also lead to a
in India reversal of Brain Drain.

There are about 120 active Space startups in India, 64% C. Technological Advancement as a facilitator
of which have emerged in the last six years.
Technological advancements and new space actors are
Government of India created a new organisation known cutting the cost of putting spacecraft into orbit and
as IN-SPACE (Indian National Space Promotion and expanding launch chances, paving the way for
Authorisation Centre) which is a "single window nodal innovation in the industry like launching of low-cost
agency" established to boost the commercialisation of nano satellites, mega-constellations of hundreds of
Indian space activities. satellites and small launchers.

IN-SPACE is supposed to be a facilitator, and also a Broadband and the Internet of Things from space.
regulator. It will act as an interface between ISRO and commercial human spaceflight, and other promising
private parties, and assess how best to utilise India's breakthroughs and new space technology systems are
space resources and increase space-based activities paving the way for commercialisation of the Space.

It is supplement to the Indian Space Research Some Indian Startups

Organisation (ISRO), the agency promotes the entry of
the Non-Government Private Entities (NGPES) in the Indian Digantara: it is an Indian private company
Indian space sector working to secure long-term space flight safety by
developing space debris tracking and monitoring
New Space India Limited NSIL is the commercial am of services
Indian Space Research Organisation (ISRO) w the
primary responsibility of enabling Indian industries to

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Bellatrix Aerospace: Headquartered in Bangalore, 4. Ecosystem

Indian private aerospace manufacturer and small
satellite company Lack of institutional support in way of intellectual
property, strategic partnerships, and hand-holding for
Tathya Earth: The company leverages deep learning the nascent industry
agonthms for satellite imagery and maritime data to
identify important real-time trends in the global There is a lack of level playing field between the ISRO
economy and new startups with monopoly of DRDO and ISRO
and slow speed of commercialisation
Space Tourism Technology transfer initiatives by ISRO
Asteroid Mining Potential of Indian Space Industry 5. Infrastructure

Increasing Digitisation Lack of access to expensive test facilities like rocket

and propulsion system test centres, rocket launchpads,
Increase in Aspirations of Small Countries tracking and telemetry centre

Internet Revolution Steps Taken Under Atmanirbhar Bharat to Harness

Potential of Indian Space Industry
Skilled Workforce In India
Level Playing Field-Use of ISRO infrastructure by
E. Challenges in the realisation of full Private players including satellites, launches and space
potential of Space Economy based services .Predictable Policy and Regulatory
Environment
1. Lack of an Open Policy
Liberal geospatial Data Policy to provide remote
A clear Space law that specifies what is allowed, and sensing data to tech entrepreneurs
what isn't, is missing. This means that companies
cannot get frequency allocations, launch permissions, Incubation support National Space Legislation
license to manufacture and operate Space assets.
Open Policy on future projects including planetary
No legal framework to allow Indian firms to operate Exploration and Space Travel
their own Space assets. There is no clarity on the
liability in the event of mishaps Most startups choose to F. Way Forward
set up their parent company outside India for the
Like other sectors such as Biotech, AR/VR, and
purpose of "ease of doing business" in the Space
healthcare, Space companies need more R&D contracts
technology sector. The Space Activities Bill, 2017 has
and grants from government initiatives
been in limbo.
There is also a need to ease criterion for startups to bid
2. Investments
in ISRO and DRDO (Defence Research and
Lack of funding has been a key concern holding up the Development Organisation) contracts, as current
Startups from achieving the desired goals. perimeters prior track record, profitability, security
deposit, and performance bank guarantee - make it
Even though the sector has attracted investors in the last impossible for these companies to independently apply
few years, considering the quantum of funding needed for such bids.
at the product development phase, there is still a
massive gap in terms of requirement and availability Learning from global best practices: the US has
Investors also do not have risk appetite due to high commissioned the Federal Communication Guidelines
initial investment and chances of failure and the European Space Agency has set up varied
business Incubation Centres
3. Market
Further, the industry is largely dependent on foreign
Lack of a domestic market beyond ISRO companies for most of the sub-systems, components
and material.
Startups have to sell only to ISRO and DRDO or go
abroad to get customers Clear laws to create an enabling ecosystem. The
regulatory framework should not lead to more Red Tape

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16.8.8 Innovation in India It will be a Techno-Financial, Incubation and

Facilitation Programme to support all aspects of startup
Innovation in India is being planned around the triangle businesses, and other self-employment activities,
of collaboration, facilitation and responsible regulation. particularly in technology-driven areas
It is advanced by cross-disciplinary collaboration. India
is the fastest growing country in terms of Internet usage, Various Innovation Challenges: Such as for Indar
with over 700 million users and the number projected to Railways, for Digital India Challenge 20 Grand
rise to 974 million by 2025 Innovation Challenge by NITI Aayog. Smart Inda
Hackathon etc.
A. Strengths of the Indian Innovation
The India Innovation Growth Programme (IGP) 2.0 is a
Large graduates in science and engineering: India has unique tripartite initiative of the Department of Science
the second highest number of STEM Graduates. and Technology (DST). Government of India, Lockheed
Martin and Tata Trusts which enables innovators and
High Gross capital formation. Ease of protecting entrepreneurs through the stages of ideation, innovation
minority investors through various legislations and and acceleration, to develop technology-based solutions
judgements. for tomorrow
India is the seventh largest patent filing office in the Innovate India is a unique platform to display promote
world. High ICT services exports. Large creative goods and recognize innovations happening across the nation.
exports. It has been launched in collaboration with AIM-NITI
Aayog and MyGov. Citizens from all parts of the
B. Challenges of Indian Innovation
country are eligible to share the innovation on the
India's R&D expenditures have remained stagnant at platform.
0.6-0.7% of GDP over the past two decades. Slowdown
The Confederation of Indian Industry (CII) has been
in business sentiment. Inadequate regulatory
orchestrating initiatives towards creating and fostering
environment.
innovation among the Indian industry and encouraging
Issues with education in terms of assessment in reading, entrepreneurial ventures India is also currently engaged
mathematics, and science. There is a disconnect in opening WIPO-
between the teaching and research enterprise with
supported Technology and Innovation Support Centres
research being concentrated in specialized research
(TISCS) in the country, which will help local innovators
institutes.
and creators research and market their products.
Lack of Firms offering formal training. Difficulty in
In collaboration with WIPO, the first India Innovation
getting credit for research and innovation.
Index, focusing on ranking Indian States was released in
C. Steps taken towards Innovation Ecosystem 2018.

Ramanujan Fellowship Scheme. The Innovation in D. Challenges faced by Innovation Ecosystem

Science Pursuit for Inspired Research (INSPIRE) Stagnation of Gross Expenditure in Research and
Development (GERD):
Faculty scheme and the Ramalinga swami Re-entry
Fellowship. In India, the GERD is a mere 0.7% of the GDP, the
same being 2.1% in China. 2.8% in USA and 4.3% in
Visiting Advanced Joint Research Faculty Scheme Israel. Out of this too the majority investment of 0.4%
(VAJRA) of GDP comes from the public sector while private
Knowledge Involvement in Research Advancement sector finances mere 0.3% of GDP.
through Nurturing (KIRAN) etc. Indian innovations are invariably incremental and not
ATAL Innovation Mission (AIM): To act as a platform disruptive: They are often first to India and not test to
to promote a network of world-class Innovation hubs the world They copy the 'current best practice but don't
and Grand Challenges for India Self-Employment and create the 'next practice Lack of Scalability to create
Talent Utilisation (SETU) competitive marketable products with speed, scale and
sustainability

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Quality of the STEM Talent Pool: The gross enrolment 16.8.9 E-Commerce
rabo at the tertiary education level in India is a low 26%
meaning a vast reserve of potential research talent in Electronic commerce or e-commerce is a business
model that lets firms and individuals buy and sell things
Comparison with other Countries: Even though India is over the Internet Propelled by nung smartphone
within touching distance of breaking into the top 50 penetration the launch of 4G networks and increasing
innovator countries in the world, it is still quite far from
consumer wealth the Indian e-commerce market is
a China, which filed, for instance, 53,345) patent expected to grow to US$ 350 billion by 2030.
applications with the WIPO in 2018 versus India's 2013
This leads to lower rank of India on indices like India is the 8 largest e-commerce market globally Only
Intellectual Property Index, WIPO's Global innovation 5% of India's retail market comprises of e-commerce $
Index, and World Economic Forum's Global 556 Billion was generated by the industry in 2021.10
Competitiveness Report million internet users are added monthly (majorly from
bier Il cities)
Skewed results: India is an odd juxtaposition of stellar
successes like the Chandrayaan and digital payments The Indian e-commerce industry has been on an upward
and a large number of unemployable engineering growth trajectory and is expected to surpass the US to
graduates and institutes that have virtually no autonomy become the second-largest e-commerce market in the
Moreover, while our top-rung universities and institutes world by 2034
(IITS Delhi & Mumbai, IISc) do well regionally, they
have consistently remained out of the global top-100 A. Advantages of e-Commerce

E. Way Forward The process of e-commerce enables sellers to come

closer to customers that lead to increased productivity
Movation is a key driver for sustenance and prosperity and perfect competition. The customer can also choose
of startups, conglomerates, governments by helping between different sellers and buy the most relevant
them improve their service delivery and performance. It products as per requirements, preferences, and budget.
also contributes to the long-term development of a Moreover, customers now have access to virtual stores
economy. 24/7

India needs to boost its innovation ecosystem by e-commerce also leads to significant transaction cost
intertwining among various stakeholders like the reduction for consumers. e-commerce has emerged as
government, industry. academia and society to one of the fast-growing trade channels available for the
transform India as an attractive rotation destination. cross-border trade of goods and services
There is a need to link National Labs to Universities to It provides a wider reach and reception across the global
improve the synergy between universities and research market, with minimum investments. It enables sellers to
institutes. It would fill the gaps of faculty support and sell to a global audience and also customers to make a
young talents and ensure deep commitment to global choice. Geographical boundaries and challenges
excellence. are eradicated/drastically reduced
Government can also partner with private sector to Through direct interaction with final customers, this e-
create ew R&D funding opportunities such as 50:50 commerce process cuts the product distribution chain to
partnerships with Science and Engineering Research a significant extent. A direct and transparent channel
Board (SERB) for industry relevant research under between the producer or service provider and the final
Ucchtar Avishkar Yojana UAY customer is made. This way products and services that
are created to cater to the individual preferences of the
Furthermore, academics who believe in not just Dublish target audience.
or perish, but 'patent, publish and prosper could form a
crucial cog in the machine of this ecosystem Scientists, Customers can easily locate products since e-commerce
who have the passion to become technopreneurs and can be one store set up for all the customers' business
passionate innovation leaders need to come up for the needs
scalability of these innovations
Ease of doing business: It makes starting, managing
business easy and simple.

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The growth in the e-commerce sector can boost It is reportedly planning to utilise the Open Network for
employment, increase revenues from export, increase Digital Commerce (ONDC) to set protocols for
tax collection by ex-chequers, and provide better cataloguing, vendor discovery and price discovery. The
products and services to customers in the long-term. department aims to provide equal opportunities to all
marketplace players to make optimum use of the e-
commerce ecosystem in the larger interest of the
country and its citizen.

process, digitisation of retail, focus on reforms and an

B. Disadvantages of e-Commerce open network for digital commerce offline retail and e-
commerce need to be administered in an integral
There is lesser accountability on part of e-commerce
manner. stating that
companies and the product quality may or may not meet
the expectations of the customers. The Consumer Protection (e-commerce) Rules 2020
notified by the Consumer Affairs Ministry in July
It depends strongly on network connectivity and
directed e-commerce companies to display the country
information technology. Mechanical failures can cause
of origin alongside the product listings In addition, the
unpredictable effects on total processes both
companies will also have to reveal parameters that go
domestically and Definite legislations internationally to
behind determining product listings on their platforms.
regulate e-commerce transactions are still to be framed
leading to lack of regulation of the sector. Paperless transactions on GeM: Government e-
Marketplace (GeM) signed a Memorandum of
At times, there is a loss of privacy, culture or economic
Understanding (MoU) with Union Bank of India to
identity of the customer. There is a chance of fraudulent
facilitate a cashless, paperless and transparent payment
financial transactions and loss of sensitive financial
system for an array of services in October 2019.
information.
Interoperability: The Reserve Bank of India (RBI) has
The Internet is borderless with minimum regulation and
decided to allow "interoperability among Prepaid
therefore protecting intellectual property rights (IPR) on
Payment Instruments (PPIs) such as digital wallets.
the Internet is a growing concern. There are currently
prepaid cash coupons and prepaid telephone top-up
several significant IPR issues including misuse of
cards. RBI has also instructed banks and companies to
trademark rights.
make all know-your-customer (KYC)-compliant
C. Government Initiatives prepaid payment instruments (PPIs), like mobile
wallets, interoperable amongst themselves via Unified
Since 2014, the Government of India has announced Payments Interface (UPI).
various initiatives, namely Digital India, Make in India.
Startup India, Skill India and Innovation Fund. The Digitisation: Under the Digital India movement,
timely and effective implementation of such programs Government launched various initiatives like Umang.
will likely support growth of e-commerce in the Startup India Portal, Bharat Interface for Money
country. Some of the major initiatives taken by the (BHIM) etc. to boost digitisation. Heavy investment
Government to promote e-commerce in India are as made by the Government in rolling out fibre network
follows: for 5G will help boost e-commerce in India.

Open Network for Digital Commerce (ONDC): In a bid FDI Limit Relaxation: In order to increase the
to systematic retailers on e-com for Promotion of I of participation of foreign players in e-commerce, Indian
adding process Department is reportedly planning to Government hiked the limit of FDI in e-commerce
utilise the Open Network for Digital Commerce marketplace model to up to 100% (in B2B models).
(ONDC) to set protocols for cataloguing, vendor
discovery and price discovery. The department aims to
provide equal opportunities to all marketplace players to D. Road Ahead
make optimum use of the e-commerce ecosystem in the
larger interest of the country and its citizen. The e-commerce industry has been directly impacting
micro, small & medium enterprises (MSME) in India by
providing means of financing, technology and training

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and has a favourable cascading effect on other in 55 diverse industrial sectors with 14% from IT
industries as well Indian e-commerce industry has been services, 9% healthcare and life sciences, 7% education,
on an upward growth trajectory and is expected to 5% professional and commercial services, 4% food &
surpass the US to become the second largest e- beverages and 4% agriculture.
commerce market in the world by 2034 Technology
enabled innovations like digital payments, hyper-local Indian Startup Ecosystem has seen exponential growth
logistics, analytics driven customer engagement and past few years (2015-2021): 9X increase in the number
digital advertisements will likely support the growth in of investors 7X increase in the total funding of startups.
the sector. The growth in e-commerce sector will also 7X increase in the number of incubators
boost employment, increase revenues from export. The Indian Unicorns are flourishing in the fast-paced a
increase tax collection by exchequers, and provide dynamic economy of today. These startups are not o
better products and services to customers in the long- developing innovative solutions and technologies bu are
term. Rise in smartphone usage is expected to rise 84% generating large-scale employment. Till FY 2016
to reach 859 million by 2022. approximately one unicorn was being added every y
Over the past four years (since FY 2017-18), this
16.8.10 Start Up Ecosystem in India number has been increasing exponentially, with a
The Department of Industrial Policy and Promotion whopping Year-on-Year growth in the number of
(DIPP), Ministry of Commerce and Industry has additional unicorn being added every year. India is
defined a startup as an entity that is incorporated as a home to 79 Unicom a total valuation of $ 260.5 bn. Out
of the total number: unicorns, 42 unicorns with a total
private limited company (as defined in the Companies
Act, 2013) or Registered as a partnership firm (under valuation of $ 821 were born in 2021.
the Partnership Act, 1932) or Registered as a limited B. Significance of Startups In India
liability partnership (under the Limited Liability
Partnership Act, 2008) in India. Boosts Employment: The startup ecosystem, target adds
to job creation in the nation. On an average" jobs
Furthermore, the department has stated that, an entity
created per startup totalling up to more than 3 Lakh
will be considered a startup:
jobs.
Up to a period of ten years from the date of
High Potential for Growth: It is estimated that number
incorporation/registration, Provided it has an annual
of unicorns in India will increase by times, to 95 in
turnover not exceeding 100 crore in any preceding
2025 with a cumulative valuation approximately $390
financial year, If it works towards innovation,
billion. Fulfilling Societal Needs: Startups hold the key
development or improvement of products or processes
address the critical needs of the country in areas
or services, or if it's a scalable business model with a
affordable healthcare, education, financial inclusion
high potential of employment generation or wealth
creation. Fostering a Culture of Innovation and Technology: ses
work in an environment of changing w and try to
maximize profits by innovation This also induces
backward and forward linkages which stimulate the
A. Current Status of Startup Ecosystem in process of economic development the country
India
Attracting Foreign Investment and Stimulating
India has emerged as the 2nd largest ecosystem for Domestic Investment: Indigenous startups have the
startups globally with over 59,000 DPIIT-recognized tential to grow into large multinational firms and
startups across 634 districts of the country as of 24th enterprises and thus can initiate an attractive and
November 2021. nourishing investment environment
India ranks 2nd in innovation quality with top positions Socio-Economic Impact Created by Startups: Startups
in the quality of scientific publications and the quality have showcased positive disruptive impact in me
of its universities among middle-income economies. economic sphere with encouraging employment.
accelerating adoption of technology and filling the
The innovation in India is not just limited to certain
prevalent economic gaps. Alongside the startups are
sectors. India has recognized startups solving problems

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also changing the demographic characteristics of today's completion of 5 years of Startup India, its contribution
business: to Startup ecosystem can be seen on following lines

44 per cent recognized startups have women directors Between 2016 and August 2020 Startup India
and number of women working in these start up is very programme has recognised over 34.800 startups Over
high $1 Mn worth benefits were given to 5.500 startups as
part of over 150 startup innovation programmes and
45 per cent startups are in tier 2 and tier 3 cities. challenges organised by Startup India. Also. Incubators
working as the brand ambassadors of the local products and accelerators have grown by 11% reaching close to a
Every state is supporting and incubating startups as per number of 5,000
local possibilities and 80 percent of districts of the Startup India enabled global market access and
country are now part of the Startup India mission knowledge for Indian startups through bilateral
Youth from all types of background are able to realize government collaborations with Russia. South Korea
their potential in this ecosystem resulting in a mindset Portugal. Japan Netherlands United Kingdom, Sweden,
change from aspiring for a job to being a job creator. Finland, Israel, and Singapore

C. Challenges Faced by Startups Raising Funds: A Also known as a Startup Bridge, these collaborations
recent report indicated that 85% of the new companies enable startups, investors. incubators, accelerators and
are underfunded in the Indian startup parlance. Primary aspiring entrepreneurs of both countries to connect with
reason for this can be cited as weak Venture Capitalist one another by providing them with resources to expand
and Angel investor framework alongside low-risk and become global entities
appetite of the Indian market More than 8.000 startups have been registered on
Revenue Generation: Startups generally require a Government e-Marketplace (GeM portal), with whom
certain amount of incubation time before they are able government has done business worth 2300 crore. The
to generate revenue. This support remains inconsistent base created by Startup India enabled growth of startups
and also, difficulty in finding orders further compounds even in COVID times. For instance, 11 startups entered
The revenue problem. the 'unicorn club' in 2020.

Inadequate Supporting Supporting infrastructure in the Initiatives for startups should be complemented with
form of technology Infrastructure: The parks, logistical structural changes such as creation of large scale
availability, business development centres still remain infrastructure, encouraging innovation in education,
sporadic Bureaucratic Hurdles: Hurdles like poor Ease strengthening industry-academia linkage and making
of Doing business in the form large number of entrepreneurship inclusive vis-à-vis region, gender,
regulatory compliances, angel tax complex labour laws caste or socio-economic status. Providing these linkages
etc and inconsistent stance on emerging technologies to the startup ecosystem will be essential in ensuring the
like cryptocurrency 5G among other further complicate idea of a 'Of the Youth, By the Youth, For the Youth'
the growth process startup ecosystem.

Lack of Mentorship and Support: Most of startups have India's distinctive competencies and competitive
brilliant ideas and/or products but have little of no advantage formed by the knowledge-based services
industry, business and market experience to get the makes it unique emerging market in the world. Backed
products to the market in this context, absence of this several government initiatives, the services sector in
institutional ecosystem could bring a potentially good Inde has the potential to unlock a multi-trillion dollar
idea to an end opponent which can create symbiotic growth for all
nations
D. Startup India Initiative
16.9 Tools to Measure Industrial
Launched in 2016, Startup India is a flagship initiative
of the Government of India, intended to catalyse startup Performance
culture and build a strong and inclusive ecosystem for
innovation and entrepreneurship in India. With the For measuring the performance of industries,
government uses the following indices:

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16.9.1 Index of Industrial Production

(IIP)
16.9.2 Index of Eight Core Industries
The Central Statistical Organization (CSO), under
Ministry of Statistics and Programme Implementation Eight Core Industries comprise nearly 40.27% of the
comples and publishes Index of Industrial Production eight of items included in the Index of Industrial
(IIP) even month which measures the short-term Production This is considered as the barometer of the
changes in re volume of production of a basket of monthly sthal performance. The index is released by the
industrial products during a given period with respect to Office The Economic Adviser, Department of Industrial
that in a chose base period. Policy & Promotion (DIPP), Ministry of Commerce and
Industry. The t core industries and their weights are:
CSO revised the base year of the all-India Index
Industrial Production (IIP) from 2004-05 to 2011-12, as • Refinery Products (28.04%)
was necessary to maintain representativeness of the • Electricity (19.85%)
items and producing entities and also to address issues • Steel (17.92%)
relating to continuous flow of production data. • Coal (10.33%)
• Crude Oil (8 98%)
Goods for IIP measurement can be divided on the basis
of use and broad based classification: • Natural Gas (6.88%)
• Cement (5.37%)
A. Use Based Classification • Fertilisers (2.63%)
Primary goods: Goods directly obtained from natural
sources and used for further processing and 16.9.3 Annual Survey of Industries
consumption. E.g., Ores and Minerals and Electricity (ASI)
Capital Goods: Plants, machinery and goods used or The Annual Survey of Industries (ASI) is the principal
further investments Eg. Boilers. Air & Gas Compressors source of Industrial Statistics in India. It covers all
Engines including Internal Combustion and Diesel factories employing 10 or more workers using power
Engine and those employing 20 or more workers without using
power it is published by Ministry of Statistics and
Infrastructure/Construction Goods: Finished goods
Programme Implementation. It provides data on various
which are primarily used in infrastructure industry or
vital aspects of the registered factories for use in the
construction industry as an input. E.g. paints, cement,
cables bricks. 1. Estimation of National Income
Intermediate Goods: Any good/product produced as 2. Studies of industrial structure
incomplete product or which goes as input in
production for further finishing or forming a part of a 3. Policy formulation
product Eg. Cotton yarn, Plywood etc. Some of the important indicators generated based on
Durables: Products directly used by Consumer ASI are number of factories, employment, wages,
consumers and having a longer durability (more than 23 invested capital, capital formation, input, output,
years). E.g.. Pressure Cooker, Air Conditioners, depreciation and value added on an annual basis.

Tyres etc Consumer Non-durables: Products that are

directly used by consumers and can't be preserved for
long periods E.g. Soyabean Oil, Full-cream/Toned/ 16.9.4 Purchasing Managers Index
Skimmed milk etc.
(PMI)
Highest Weightage: Primary Goods.
It is a survey-based measure complied by IHS Markit
Lowest Weightage: Capital Goods. India that asks the respondents about changes in their
perception about key business variables as compared
with the previous month.

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It is calculated separately for the manufacturing and

services sectors and then a composite index is
constructed

The PMI is a number from 0 to 100. PMI above 50

represents an expansion when compared to the previous
month; PMI under 50 represents a contraction, and a
reading at 50 indicates no change.

If PMI of the previous month is higher than the PMI of

the current, it represents that the economy is
contracting.

The PMI is usually released at the start of every month.

It is, therefore, considered a good leading indicator of
economic activity

Purpose: To provide information about current and

future business conditions to company decision-makers,
analysts, and investors. As the official data on industrial
output, manufacturing and GDP growth comes much
later, PMI helps to make informed decisions at an
earlier stage.

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Chapter – 17 17.2 Definition

While Infrastructure is recognized as a crucial input for
Infrastructure and economic development, there is no clear definition of
infrastructure according to the current usage of the term
Investment Models in India.

The National Statistical Commission headed by Dr. C

Rangarajan, attempted to identify infrastructure base on
some characteristics The Rangarajan Commissary
17.1 Introduction indicated six characteristics of infrastructure sectors
These characteristics are:
For any country, infrastructure is important for its
development as it offers basic facilities required for the (a) Natural Monopoly
smooth functioning of society. There is a close relation
between infrastructure development and economic (b) High Sunk Costs: A Cost that had already incurred
growth. While infrastructure development facilitates and thus cannot be recovered bee
economic growth, economic growth, in turn, increases
(c) Non-tradability of Output: Non tradable good
demand for more infrastructure, thereby leading to a
service is one which is produced and sold at the same
virtuous circle of prosperity and progress.
location
It can be said that infrastructure is the fundamental
(d) Non-rivalness (up to congestion limits) in
physical or organizational structure needed for the
Consumption: Non-rivalness implies that the cost of
operation of a civilisation or enterprises. For instance,
providing a good or service to an additional individua is
speedy growth needs to be maintained by an efficient,
zero
reliable and innocuous transport system. This is
particularly important for an economy concerned about (e) Possibility of Price Exclusion: Price exclusion
competitiveness. To fulfil these increasing demands, means that the enjoyment of benefits is contingent on
huge investments are needed in roads, railways, ports payment of user charges
and civil aviation sectors in order to increase their
capacities. (f) Bestowing externalities on society ,Based on these
features (except b. d and e), the Commission
Infrastructure refers to 'Economic and Social recommended inclusion of following infrastructure in
overheads'. These are the basic systems, structures, the first stage: Railway tracks, signalling system,
services which facilitate production, consumption, stations
distribution and exchange. These basic facilities
comprise of: Roads, bridges, runways and other airport facilities
T&D (Transmission and Distribution) of electricity
• Transportation
Telephone lines, telecommunications network Pipelines
• Electricity
for water, crude oil, slurry, waterways, port facilities
• Banking
• Insurance Canal networks for irrigation, sanitation or sewerage

As per harmonized Master List of infrastructure sub- The Commission further recommended that considering
sectors (issued by Cabinet Committee on characteristics (b). (d) and (e) also, the above list may
Infrastructure). it comprises of: be extended to include the following in the second stage

Hard infrastructure: Transport and Logistics, Energy, Rolling stock on railways Vehicles, aircrafts
Water and Sanitation, Communication, etc. • Social and Power generating plants Production of crude oil,
Commercial Infrastructure: Education, Sports purification of water
Infrastructure, Hospitals, Tourism infrastructure,
Affordable Housing etc. Ships and other vessels.

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infrastructure has a huge importance in supporting connectivity between ports and inland modes of
growth and also for the investment to come. Higher transport
level of growth enquires corresponding higher level of
infrastructure pending Poor Maintenance of Indian highways and roadways
etc.
17.3 Importance of Railways,
Infrastructure Development National Limited Capacity leading to congestion of
roads and railways
Infrastructure is the backbone of the economy which is
needed to sustain high economic growth. It is estimated Modal imbalances Roadways have become the
that the infrastructure spending of 1% of real GDP dominant mode of transport of goods at the cost of
likely to boost India's GDP by at least double that railways, despite the latter's economic and
amount Vision of $ 5 Trillion Economy: It is estimated environmental advantages over the former Similarly
that India would need to spend $4.5 trillion on inland waterways remain underutilized as a mode of
infrastructure by 2030 to sustain its growth rate. transport
Infrastructure Development works on the principle of Poor Transport safety leading to increase accidental
Multiplier effect", this boosts private investment, global deaths
competitiveness, exports, etc. in various sectors.
Higher dependence on fossil fuels affecting India's
Infrastructure is a labour-intensive sector. Its energy security
contribution to total employment includes 29% in urban
areas which is expected to increase to 41% in 2030. In Lack of access to long term financing options
the rural areas it contributes to 71% of total Delays in Land acquisition and environmental
employment currently. Infrastructure also holds the clearances
potential to absorb increasing work age population.
India's working-age population is expected to be 1
billion (which will be 68% of the total population) by
17.4 Investment Models
2030. Thus, Infrastructure can help India reap the Before going deep into investment Models, we should
demographic dividend. analyse another basic aspect. What is investment?
Infrastructure development will also support increasing Investment has slightly different meanings in economics
urbanization. It is expected that 42% of population and finance, but a combined definition can be
would live in urban areas in 2030 which is presently "Investment is the process of putting money in assets
31% for increasing production or financial gains" Yes,
investment is all about putting money in assets. Also,
Infrastructure also supports shift to services-based the investment models speak about how to put the
economy. money in assets

Climate Change and Disaster Resilience: Building 17.4.1 Understanding Investment in

climate resilient infrastructure is critical for people's
well-being, quality of life, and economic prospects Detail
Consequently, infrastructure development will meet the For a country to grow and generate employment
aspirations of people, and facilitate ease of living. opportunities to all, it should produce more Goods and
Services, and hence investments in business, agriculture
17.3.1 Challenges in Infrastructure or industry or supporting infrastructure is highly
appreciated.
Development
If government has sufficient funds to invest in these
The transport network is not planned holistically Lack areas. then it seems well and fine, but a nation like India
of interconnectedness and synergies in the transport with a large fiscal deficit cannot expect the Government
network, Poor Intermodal connectivity: Lack of to take care of all its investment needs. The investment
should come from private players too.

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17.4.2 Relation Between Investment In this type of partnership, investments are undertaken
by the private sector entity, for a specified period of
and GDP time.
GDP, the measure of national income is given by the These partnerships work well when private sector
formula: technology and innovation combine with public sector
incentives to complete work on time and within budget.
GDP = C+I+G+ NX, where C is the consumption
expenditure, G is government spending, and NX is net As PPP involves full retention of responsibility by the
exports, given by the difference between the exports government for providing the services, it doesn't
and imports, X-M. Thus investment. 'I' is everything amount to privatization.
that remains of total expenditure after consumption,
government spending, and net exports are subtracted There is a well defined allocation of risk between the
(ie., I= GDP - C-G-NX). There are three major private sector and the public entity.
investment models:
Private entity is chosen on the basis of open competitive
1. Public Investment Model: In this model Government bidding and receives performance linked payments.
requires revenue for investment that mainly comes
PPP route can be alternative in developing countries
through taxes
where governments face various constraints on
As the world is facing the prospect of an extended borrowing money for important projects.
period of weak economic growth, by enhancing public-
It can also give required expertise in planning or
sector investment large pools of savings can be
executing large projects.
channelized into productivity. Properly targeted public
investment can do much to boost economic
performance, generating aggregate demand quickly,
17.4.3 Public Private Partnership
fueling productivity growth by improving human It is a partnership between the public and private sector
capital, encouraging technological innovation, and with clear agreement on shared objectives for the
spurring private-sector investment by increasing delivery of public infrastructure and public services.
returns. Though public investment cannot fix a large Public-private partnerships involve collaboration
demand shortfall overnight, it can accelerate the between a government agency and a private-sector
recovery and establish more sustainable growth company that can be used to finance, build, and operate
patterns. projects, such as public transportation networks, parks,
and convention centres Financing a project through a
2. Private Investment Model: For a country to grow and
public-private partnership can allow a project to be
increase its production investment is required. Presently
completed sooner or make it a possibility in the first
tax revenue of India is not adequate to meet this
place.
demand so government requires private investment.
Private investment can be sourced from domestic or The partners in PPP, usually through legally binding
international market. From abroad private investment contract or some other mechanism, agree to share
comes in the form of FDI or FPI. responsibility related to implementation and/or
operation and management of related infrastructure
Private investment can generate more efficiency by
project.
creating more competition, realization of economies of
scale and greater flexibility than is available to the This partnership is built on the expertise of each partner
public sector. and meets clearly defined public needs through the
appropriate allocation of:
3. Public-Private Partnership Model: PPP is an
arrangement between government and private sector for Risk
the provision of public assets and/or public services.
Public-private partnerships allow large- scale Resources
government projects, such as roads, bridges, or
Responsibilities
hospitals, to be completed with private funding.
Rewards.

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A. Need for PPP in India Commonly adopted model of PPPs include Build-
Operate-Transfer (BOT).Build-Own-Operate (BOO),
Vision of $ 5 Trillion Economy: It is estimated that Build-Operate-Lease-Transfer (BOLT), Design-Build-
India would need to spend $4.5 trillion on infrastructure Operate-Transfer (DBFOT). Lease-Develop-Operate
by 2030 to sustain its growth rate. (LDO), Operate-Maintain-Transfer (OMT), etc.
Boost Demand and Employment Creation These models are different on level of investment,
ownership control, risk sharing, technical collaboration,
Equitable risk allocation and mitigation Plugging the
duration, financing etc.
deficiency in infrastructure to cater to
BOT: It is conventional PPP model in which private
Increased Urbanisation Complementary Roles and
partner is responsible to design, build operate (during
Drivers: The public sector is predominantly driven by
the contracted period) and transfer back the facility to
the 'public good". while the private sector by 'profit.
the public sector Private sector partner has to bring the
PPP projects allow both the sectors to cooperate and
finance for the project and take the responsibility to
enable both of them to meet their goals.
construct and maintain it Public sector will allow
private sector partner to collect revenue from the users.
The national highway projects contracted out by NHAI
B. Benefits under PPP mode is a major example for the BOT model

There are several reasons for growing collaboration BOO: In this model ownership of the newly built
with the Private sector in developing and providing facility will rest with the private party On mutually
infrastructure services, which include: agreed terms and conditions public sector partner agrees
to 'purchase the goods and services produced by the
Private entity is chosen on the basis of open competitive project
bidding and receives performance linked payments.
BOOT: In this variant of BOT after the negotiated
PPP route can be alternative in developing countries period of time, project is transferred to the government
where governments face various constraints on or to the private operator BOOT model is used for the
borrowing money for important projects. development of highways and ports
It can also give required expertise in planning or BOLT: In this approach, the government gives a
executing large projects. concession to a private entity to build a facility (and
possibly design it as well), own the facility lease the
Increased efficiency in project delivery and Operational
facility to the public sector and then at the end of the
management
lease period transfer the ownership of the facility to the
Availability of additional resources to meet the growing government
needs of investment in the sector, and Access to
DBFO: In this model, entire responsibility for the
advance technology (both software and hardware)
design construction, finance, and operation of the
PPP projects are well associated to create jobs in project for the period of concession lies with the private
construction, operation, and maintenance of carty
infrastructure areas Public Private Partnership has been
LDO: In this type of investment model either the
accepted as an important policy instrument for Central
government or the public sector entity retains ownership
and State Governments in the implementation of
of the newly created infrastructure facility and receives
commercially viable projects.
payments in terms of a lease agreement with the private
C. Models of PPP In India promoter. It is mostly followed in the development of
airport facilities
PPP arrangements are characterised by the identification
of risks and their allocation among the parties to the D. PPP Projects in India: Major Projects
arrangement. On the basis of the risk allocation, the
Delhi, Mumbai, Hyderabad and Bengaluru airports .
various PPP models are designed.
Ultra-mega power projects at Sasan (Madhya Pradesh
Mundra (Gujarat), Krishnapatnam Andhra Pradesh), and

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hilarys Charkharch thagar power transmission project in Finance Minister in the Une bouge k announced that the
Haryana Container terminals at Mumbai and Chennai PPF то 4 о development has to for revisited and re In
pursuance of this announcement t
E. Challenges Related to PPP
Revisiting & Revitalising the PP
Challenges across the PPP lifecycle can be broadly
classified into Development was set up which was shared by Vijay
Kelkar
Financing Issues: Financing issues, including
aggressive bidding, under pricing of projects, and Key recommendations of the committee
funding constraints (debt and equity) Project sponsors
1. Revisiting PPPS: PPP model requires the
in PPP projects depend hugely on commercial banks for
involvement ga partner to leverage financing and
financing the debt portion of the project
money operational efficiencies: Therefore state
The delay in infrastructure projects leads to increase in enterprises or public sector undertakings would not be
NPAs, which in turn leads to vicious cycle of tower allowed to bid for PPP projects PPPs should not be used
credit to PPP projects Project delays and aggressive by the government to evade its responsibility of service
bidding have resulted in poor recovery from the projects delivery citizens

Delays in execution of projects lead to equity getting This model should be adopted only the checking its
trapped in ongoing projects, thus not being available: viability for a project in terms costs and risks Further
for newer projects PPP structures south not be adopted for very small
projects since benefits are not commensurate with the
Capacity and procedural challenges: PPP projects have costs Currently, PPP contracts focus more on benefits.
been stuck in issues such as disputes in existing The focus should instead be on serv delivery for
contracts, non-availability of capital and regulatory citizens. Further, fiscal repos practices and performance
hurdles related to the acquisition of land. Lack of monitoring of should be improved. Ministry of Finance
efficient project preparation activities, delays in to allow banks and franca institutions to issue Zero
obtaining requisite approvals and clearances, and poor Coupon Bonds which also help to achieve soft landing
project monitoring activities further aggravate for user charges in infrastructure sector
problems.
2. Risk Allocation and Management: PPP contracts
In many sectors, PPP projects have turned into conduits should ensure optimal allocation across all stakeholders
of crony capitalism. Many PPP projects in infrastructure by ensue that it is allocated to the entity that is best us to
sector are run by "politically connected firms which manage the risk. A generic risk monitoring and evaluate
have used political connections to win contracts Policy, framework should be developed covering 4 aspects of a
regulatory and institutional gaps: Indian government project's lifecycle Improved fiscal reporting practices
has a poor record in regulating PPPs in practice and careful monitoring performance is also required
Absence of regulators or multiplicity of regulators Guidelines for risk allocation should be formulated
results in many of these issues and disputes being
unresolved, leading to litigations and cases Strengthening Policy and Governance: Some countries
have a legal framework for PPPS in the form of PPP
This in turn leads to delays or cancellation of projects Act/Law/Policy which clearly spells out the objectives,
and results in cost escalation, thereby making the scope and implementing principles of the PPP program.
projects unviable
Ministry of Finance may develop a national PPP policy
PPP firms use every opportunity for renegotiating document
contracts by citing reasons like lower revenue or rise in
costs which becomes a norm in India larger share of 3. Formulating a PPP law:
peak .These firms mal a mid hazard tight
Prevention of Corruption Act, 1988 should be amended
F. Suggestions to Improve PPP Models to distinguish between genuine errors in decision
making and acts of corruption by public servants
Vijay Kelkar Committee Report on Revisiting w
Revitalising PPP Model

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Umbrella guidelines may be developed for stressed The government had decided to introduce Hybrid
projects that provide an overall framework for Annuity Model (HAM) to revive PPP (Public Private
development and functioning of the sector specific Partnership) in highway construction. Till recently,
frameworks. three different models - PPP Annuity, PPP Toll and EPC
(Engineering, Procurement and Construction) were
followed by the government while adopting private
Unsolicited Proposals ("Swiss Challenge") to be sector participation.
discouraged to avoid information asymmetries and lack
Meaning
of transparency.
In financial terminology, hybrid annuity means that
4. Strengthening Institutional Capacity: The capacity of
payment is made in a fixed amount for a considerable
all stakeholders including regulators, authorities,
period and then in a variable amount in the remaining
consultants, financing agencies, etc. should be built up.
period.
A national level institution should be set up to support
institutional capacity building activities, and HAM has emerged as the dominant mode of
encouraging private investments with regard to PPPs. construction of national Highways due to its inherent
advantages.
An institutionalized mechanism like the National
Facilitation Committee (NFC) to ensure time bound Equitable Risk Sharing: Under BoT, the private sector
resolution of issues. faces considerable risk in the form of delays in
clearances, lower traffic, lower toll collection etc.
Set up an institute of excellence in PPP to inter alia
While, EPC leads to higher financial burden on the
guide the sector, provide policy input, timely advice and
Government
undertake sustainable capacity building.
Lower Financial Burden on Government: 60% of the
Encourage use of PPPs in sectors like Railways. Urban,
upfront project cost is provided by the private sector
etc. Railways to have an independent tariff regulator.
Government's financial support is in the form of
Infrastructure PPP Project Review Committee may be
Instalments.
set up to evaluate PPP projects.

An Infrastructure PPP Adjudication Tribunal ("IPAT)

chaired by a Judicial Member (former Judge SC/Chief Lower Burden on Banks: Private sector financing in
Justice HC) with a Technical and/or a Financial form of equity and debt and hence need for Bank loan
member, where benches will be constituted by the reduces Timely completion of project due to active
Chairperson as per needs of the matter in question involvement of Government.
Strengthening contracts: Since infrastructure projects Proper Maintenance of National Highways etc.
span over 20-30 years, a private developer may lose
bargaining power because of abrupt changes in the The HAM model has great potential in boosting private
economic or policy environment. sector Investment in other PPP projects such as metro
rail projects and hence need to be explored.
The Committee recommended that the private sector
must be protected against such loss of bargaining power The HAM combines features of BoT and EPC. The
EPC ensures completion of project on time. It is useful
This could be ensured by amending the terms of the for constructing role which have poor financial viability
PPP contracts to allow for renegotiations Prudent due to lower traffic and hence may not attract private
utilization of viability gap funds where user charges sector investment. EPC Model reduces the maintenance
cannot guarantee a robust revenue stream. risk for private sector. However, it also result in higher
financial burden and risk for the government.
Given the urgency of India's demographic transition,
and the experience India has already gathered in
managing PPPs, the government must move the PPP 17.5 Infrastructure Financing
model to the next level of maturity and sophistication.
Sources of financing have been - funds from the Central
Government budget, debt financing and equity
17.4.4 Hybrid Annuity Model

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financing Via Commercial Banks and NBFCs, External Funding Gap of Commercial Banks: After the budgetary
Commercial Borrowings (ECBS), Equity, FDI, and support, next in line is the banks Banks are unable to
insurance companies. provide long-term finance to infrastructure projects
Infrastructure financing is currently dominated by bank
17.5.1 Issues in Infrastructure lending, with outstanding credit to the infrastructure
Financing sector touching more than 15% until FY16. However,
due to rising non-performing assets in the banking
Impact of Domestic and Global Economic Slowdown: sector driven by declining asset quality in the
The slowdown in the economy has aggravated the infrastructure sector, the share has declined to 12% in
problem of funding gap in the infrastructure sector. In FY20
the context of Euro zone debt crisis, Global Financial
Asset/Liability Management Mismatch: In India most
Crises of 2008, and Covid pandemic accessing external
lenders borrow funds with maturity under 5 years. The
resources by way of ECBS has also become difficult
reason is primarily the absence of a deep bond market
and this has also accentuated the funding gap.
to borrow from As a result they lend to a project with a
Poor Capacity of Urban Local Bodies to Raise Funds: maturity of, say 20 years with funds of 2-year maturity.
For large scale financing of urban infrastructure which This leads to a mismatch in the maturities of assets and
is assuming critical importance in the context of rapid liabilities for the lender Asset/liability management is
urbanization, conventional fiscal transfer to the urban one of the main tools for evaluating financial risk and
local bodies or municipalities from governments is no for periodic testing and preparation of financial policies.
longer considered sufficient. There has been some
Lack of Vibrant Corporate Bond Market: An active
earnest experimentation by these bodies to tap
corporate bond market can facilitate long- term funding
unconventional methods of financing such as public
for the infrastructure sector. However. despite the
private partnership, utilizing urban assets productively.
various initiatives taken by the Reserve Bank, Securities
accessing carbon credits, etc., but these are not
and Exchange Board of India and Government of India,
sufficient to address the financing needs.
the corporate bond market is still a long way to go in
Lesser Funds with States: The Union government has providing adequate financing to the infrastructure sector
accepted the 15th Finance Commission report in India.
recommendation, according to which vertical share of
Legal and Procedural Issues: Infrastructure
tax devolution from the centre to states has been
development involves long term gestation periods, and
reduced 42% to 41%. Moreover, the Central
also many legal and procedural issues. The problems
Government increasingly resort to the imposition of
related to infrastructure development range from those
cesses which are almost permanent have reduced the
relating to land acquisition for the infrastructure project
shareable pool.
to environmental clearances for the project. Many a
Issues Associated with Burgeoning Fiscal Deficit: times there are legal issues involved in it and these
Infrastructure development in India will be funded by increase procedural delays.
fiscal stimulus. This can be reflected as the Centre has
indicated taking the fiscal deficit to 45% of GDP by 17.5.2 Measures taken by
2025-26 However the rising fiscal deficit can cause Government
macro-economic stability issues like high inflation
crowding out, a downgrade of international ratings: etc Government has taken several initiatives, especially to
standardize the document and process for structuring
Investment Obligation of Insurance and Pension Funds: and awarding PPP projects. This has improved
From the point of view of asset-liability mismatches, transparency in relation to the issues involved in setting
insurance and pension funds are one of the best suited up PPP projects
institutions to invest in the infrastructure sector. This is
because, in contrast to the commercial banking sector, Foreign Direct Investment: To facilitate infrastructure
these institutions leverage on long- term liabilities. financing 100 per cent FDI is allowed under the
However they are constrained by their obligation to automatic route or government route in some of the
invest a substantial portion of their funds in sectors such as power, civil aviation sector.
Government securities Construction and development projects, industrial

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parks, petroleum and natural gas sector,

telecommunications and special economic zones,
mining etc 17.5.3 National Infrastructure
Viability Gap Funding (VGF) Scheme: The scheme Investment Fund (NIIF)
aims at supporting infrastructure projects that are
economically justified but may not be financially viable NIIF is a Quasi-Sovereign Wealth Fund to provide
India Infrastructure Finance Company (IFC): financing to infrastructure projects NIF a government-
backed entity established to provide long-term capital to
Another major development was the setting up of IIFCL the country's infrastructure sector The Indian
by the Central Government for providing long- term government has a 49% stake i NIIF with the rest held by
loans to the infrastructure projects IIFCL is involved foreign and domestic investors:
both in direct lending to project companies and
refinancing of banks and other financial institution. With the Centre's significant stake, NIF considered
IIFCL is a dedicated institution for financing India's quasi-sovereign wealth fund It was set up in
infrastructure with focus on PPP projects December 2015 as a Category

Public Private Partnership Appraisal Committee: Alternate Investment Fund Across its three funds viz.
PPPAC has been set up by the Government to Master Fund, Fund of Funds, and Strategic
streamline the procedure for approval of PPP projects Opportunities Fund, it manages over USD 4.3 billion of
capital.
India Infrastructure Project Development Fund (IIPDF):
This fund has been set to provide funding to Central, 17.5.4 National Infrastructure
State and local bodies to carry out various activities
related to project development.
Pipeline
Infrastructure Debt Funds: Reserve Bank of India and The National Infrastructure Pipeline (NIP) is a group of
the Securities and Exchange Board of India (SEBI) social and economic infrastructure projects slated to be
notified detailed guidelines for setting up of IDFS established over a period of five years with an inta
which can either be mutual funds (trusts) (IDF- MF) or sanctioned amount of 102 lakh crore
an NBFC (companies) (IDF-NBFC). The NIP was first announced in 2019 during the
Infrastructure Bonds: To provide further impetus to Independence Day speech by Prime Minister Narendra
infrastructure financing. Government of India has Modi
permitted IFCI, IDFC, LIC and infrastructure finance NIP will enable a forward outlook on infrastructure
firms to issue long-term infrastructure bonds. By projects which will create jobs, improve ease of living
introduction of such instruments, the retails base can be and provide equitable access to infrastructure for al
tapped for rising for infrastructure projects. Similarly thereby making growth more inclusive. NIP includes
municipal bond market can be developed to address the economic and social infrastructure projects. During the
financing needs of urban local bodies. Rupee fiscals 2020 to 2025, sectors such as Energy (24% ).
Denominated Bonds or Masala Bonds: These are Roads (19%). Urban (16%), and Railways (13%)
launched to eliminate foreign exchange risk. amount to around 70% of the projected capital
Liberalization and Rationalization of ECB Policies: expenditure in infrastructure in India.
Corporate sector implementing infrastructure projects
are eligible to avail of External Commercial Borrowing It has outlined plans to invest more than 102 crore on
(ECB) up to USD 500 million infrastructure projects by 2024-25, with the Centre,
States and the private sector to share the capital
Setting up of Infrastructure Investment Trusts (InvITs): expenditure in a 39:39 22 formula..
InviTs are instruments that work like mulus funds They
are designed to pool small sums of money from a 17.5.5 National Monetisation Pipeline
number of investors to invest in assets that ge cash flow
over a period of time Part of this cash fos would be The Budget 2021-22 has laid out a three-pronged
distributed as dividend back to investors strategy for infrastructure financing in the country. This
includes:

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Creation of institutional structures in the form of government owned agencies for operation and
Development Bank (National Bank for Financing maintenance of assets.
Infrastructure and Development (NaBFID).
Raise Finances: The Covid-19 pandemic has led to
Increase in allocation of capital expenditure decrease in revenue collection, while at the same time,
it calls for enhanced public expenditure on capital assets
National Monetisation Pipeline NMP would enable the Government to raise finances by
The Government has recently launched the National monetising its existing assets to spend on creation of
Monetization pipeline (NMP) to raise around 6 lakh new infrastructure.
crores during the next 4 years -2022-25. This would Experience with Disinvestment: In the past,
help us meet our investment needs for the National disinvestment proceeds from the PSUs have not
Infrastructure pipeline. One of the critical factors for necessarily been invested in new infrastructure creation
ensuring the success of NMP is to attract more NMP enables the government to raise revenue without
investors-both domestic as well as institutional losing ownership of the assets.
A. Concept of National Monetization Risk Averse Private Sector: The Private sector has been
Pipeline (NMP) reluctant to undertake investment due to economic
slowdown. Under NMP, the Government would raise
Asset Monetisation is defined as transfer of core assets revenue to create new assets and then transfer such
owned by the Government to the private sector for a assets to the Private sector. This is less risky for the
limited period. The core infrastructure assets include private sector and hence attracts greater investment.
roads, ports, airports, telecom, railways, warehousing.
Lead Role for the Government: Presently, creation of
energy pipelines. power generation, power transmission, new infrastructure assets is saddled with multi- faceted
hospitality and sports stadiums NMP does not include challenges such as delays in land acquisition,
monetization of non-core assets (such as land, buildings environmental clearances etc. If the government takes
etc) lead in creation of infrastructure, the Government can
NMP is Not Privatisation: This is so since the easily address these challenges.
ownership of the assets would continue to remain with Better Operation and Maintenance of Assets: Th Private
the Government sector would be involved in operation and maintenance
The assets would be only transferred to the private of assets which is expected to mor the service delivery
sector for limited duration of time based upon the and efficiency in management public assets
contract Global Examples: Asset Recycling Initiative Better Targeted: Taxpayers money would not be utilised
(ARI) in Australia helped in raising over $17 billion for for the maintenance of the assets Rather those people
funding infrastructure Similarly, Indonesia's Limited who use such assets will be requires to pay user
Concession Scheme (LCS) was also hugely successful. charges.
Need for National Monetisation Pipeline (NMP): The
C. Challenges and Concerns
NMP would help us meet the financing for the National
Infrastructure Pipeline (NIP). As estimated by the Task Enhanced Role of the Government: Under P the
Force for NIP (2019), traditional sources of capital are Government would continue to build and o capital
expected to finance 85% of the capital expenditure assets. Presently, there are number problems in creation
under NIP Remaining 15% is expected to be met of infrastructure- time and co overruns, delays in land
through innovative mechanisms such as Asset acquisition, poor quality infrastructure etc. This needs
Monetisation and NaBFID. to be addressed ensure success of NMP.

B. Benefits Impact on the people: People may be required pay

higher user charges to private sector. Lack of
Unlock the Value: The NMP would help in unlocking Independent regulatory authority in some of the sectors
the value of existing public assets such as Roads, such as Roads, Railways etc. may discourage the
Railways, ports etc. It would reduce the burden on the private sector investment. An Independence regulatory
authority would:

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(a) Make rules and regulations for PPP agreements mandate to identify assets, method monetisation and
handhold in the transactions process
(b) Ensure that user charges are market determined
Designing PPP Agreement: Contracts must provide
(c) Adjudicate on disputes between Government and flexibility for addressing unforeseen developments such
private sector. as climate-related disasters, for example). Clear ality
This would create atmosphere of trust, confidence and benchmarks must be set for the assets that are handed
fairness and hence encourage private sector investment. over by the government. Limit arbitrary actions by the
Lack of Identifiable Revenue Streams in Various Government such as cancellation of projects

Assets: Further, less-than-encouraging bids in the Streamlining Investment Guidelines: Presently. The
recently launched PPP initiative in trains indicate that SEBI has laid down certain restrictions on the
attracting private investors' interest is not that easy insurance, Pension fund and mutual fund companies
with respect to how much money can be invested in
Ability to Realise Fair Value: Presently, economy is REITs and In VITS.
facing slowdown and the private sector is high averse to
taking risk. Hence, the Government may be able to
realise fair value from the assets due to poo For example, the insurance fund companies cannot vest
participation of the private entities more than 3% of the money raised by REITs/ InVITs
Financing Issues: Success of NMP depends upon Such lower limits would make it difficult for the
structured financing models such as REITS and INVIT REITS/INVITS from tapping long term finances from
Poor awareness among the investors may make difficult the institutional investors. Hence, there is a need to
for REITS/In VITS to raise money. Banks may be enhance the investment limit to mobilize more money
unwilling to lend money to the private sector to lease from the institutional investors.
assets. Under-developed corporate bond market may Tax benefits: To encourage the participation of the retal
make it difficult for the private sector to raise revenues investors, the Government should consider providing
Encourage Crony Capitalism: Only few large business income tax benefits for the investment in PEITS/VITS
houses can end up leasing the assets leading to
monopolisation pace of privatisation in government sow REITs/InVITs under IBC: The REITs/InVITs can issue
canes including Air India and BPCL also bound to bonds to raise money from the market However as of
encounter asset-specific challenges: This includes. now, the REITs/InVITS do not come under the
Insolvency and Bankruptcy code Hence in case of
Low Level of capacity utilisation in gas and petroleum default by the REIT/INVIT, the lenders cannot take
pipeline networks. recourse under IBC Such a restriction may discourage
The NMP is Regulated tariffs in power sector assets investments in REIT/INVITS Hence, to encourage
Low interest among investors in national highways investment, there is a need to bring REITs/
below four lanes InVITS under the IBC. Dispute Redressal Mechanism:
Suggestions to Overcome These Challenges Execution Further there is a need for an efficient dispute resolution
is the Key: While the government has tried address mechanism
many challenges, owing to infrastructure ceve comment User Charges by Private Sector: Develop mechanism to
in the NMP framework, execution of the can remains ensure that the private sector set user charges by
key to its success considering the investment and risks involved The user
Need for Standard Agreements: There is a need develop charges should not be too high as it would impact
model PPP concession frameworks for arouse common people
brownfield asset classes for quicker adoption. Creating Multi-Stakeholder Approach: The success of the
Institutional Structures: Institutional structures are infrastructure expansion plan would depend on other
required for fast tracking asset certification and stakeholders playing their due role and their public
monetisation transaction: Each Vanity should establish
suitably empowered working group with the sole These include State Governments sector enterprises and
the private sector. In this context, the Fifteenth Finance

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Commission has recommended the setting up of a High- Indian renewable energy sector is the fourth most
Powered Intergovernmental Group to re-examine the attractive renewable energy market in the world
fiscal responsibility legislation of the Centre and States
India was ranked fourth in wind power, fifth in solar
power and fourth in renewable power installed capacity,
as of 2020

17.6.2 Solar Energy

17.6 Sector-Wise Analysis Current Scenario Indian Economy endowed with vast
solar energy potential About 5000 trillion kWh per year
17.6.1 Energy energy is incident sets land area with most parts
receiving 4-7 per same per day.
The energy sector is fundamental to growth and
Receives peak solar radiation for 300 days using 2300-
development. Availability of electricity, petrol, diesel
3.000 hours of sunshine National Institute of Solar
and gas at competitive prices is essential for the
Energy has assessed the Country's sor potential of about
efficient functioning of energy user sectors. which
748 GW assuming 3% of the waste land area to be
include households, transportation, industry, agriculture
covered by Solar PV modules Recently, India achieved
and the government and comprises nearly the entire
5th global position in solar power deployment by
economy.
surpassing Italy. Presently solar tariff in India is very
A. Objectives competitive and as achieved grid parity

The government's on-going energy sector policies aim B. Need of Solar Energy
"to provide access to affordable, reliable, sustainable Solar Energy Ensures Energy Security: Energy demands
and modern energy a is largely fulfilled by non-renewable sources of energy
Make available 24x7 power to all by 2019. Achieve 175 Besides being polluting. The scarcity of these ss
GW of renewable energy generation capacity by 2022 resources stresses the need for renewable energy otes
Reduce imports of oil and gas by 10 per cent by 2022- Abundance of solar energy can fulfil India's clean
23 energy demands:

Continue to reduce emission intensity of GDP in a Solar Energy is Important for Economic Growth: India
manner that will help India achieve the intended being a developing economy needs proper electricity for
nationally determined contribution (INDC) target of industrial growth, service sector and agriculture. This
2030. would ensure cost effectiveness and Self-sufficiency in
power generation. Social Benefits: The problem of
B. Current Scenario power cuts and unavailability of electricity especially in
rural area, leads to degraded standards of living Mostly
India is world's 3rd largest consumer of electricity and energy demands are fulfilled by subsidised kerosene,
world's 3rd largest renewable energy producer with leading to loss for exchequer
38% (136 GW out of 373 GW) of total installed energy
capacity in 2020 from renewable sources. In 2016, Paris Environmental Concern can be Addressed with the Help
Agreement's Intended Nationally Determined of Solar Energy: India's large part of energy demand is
Contributions targets. India made commitment of fulfilled by thermal energy largely dependent on fossil
producing 50% of its total electricity from non-fossil fuels This causes environment pollution Solar energy is
fuel sources by 2030. clean form of energy resource, which can be a substitute

In 2018, India's Central Electricity Authority set a target C. Advantages

of producing 50% of the total electricity from non-fossil
fuels Sources by 2030. India has also set a target of Availability: Solar energy is available throughout the
producing 175 GW by 2022 and 500 GW by 2030 from day which is the peak load demand time during both
renewable energy winters and summers There is also an abundance of free
solar energy in almost all parts of country

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Cost effectiveness: Solar energy conversion equipment Government Initiatives Ministry of New and Renewable
have longer life when compared with thermal power Energy is the nodal
plants or windmills and need lesser maintenance and
hence provide higher energy infrastructure security Institutional Mechanisms: agency to tackle India's
Solar energy is also a cheaper form of energy because it renewable energy issues. National Solar Mission is a
requires low running costs & grid tie-up capital returns major initiative of the Government of India and State
Governments to promote ecologically sustainable
Clean Power: Unlike conventional thermal power growth while addressing India's energy security
generation from coal, they do not cause pollution and challenge .
generate clean power Convenience: Solar energy
obviates the need for overhead wires, this also saves on The Indian Renewable Energy Development Agency
account of transmission loss. (IREDA) is a Non-Banking Financial Institution under
the administrative control of this Ministry for providing
D. Challenges in Adoption Term loans for renewable energy and energy efficiency
projects
WTO Tussle: Although India has taken steps to mandate
domestic content requirements, yet its domestic content National institute of solar energy is created as
requirement clause is facing legal challenge at WTO. autonomous institution under MONRE is apex body
India is facing challenge to balance Prioritising forR&D
domestic goals and WTO commitments.
Infrastructural Mechanisms:
Dumping by China: The dumping of cheaper
Establishment of solar parks and ultra major solar
photovoltaic cells and other solar products from China
power project and enhancing grid connectivity
products is leading to profit erosion of local
Promotion of canal bank and canal tank solar
manufacturers. Indian domestic manufacturers aren't
infrastructure.
technically and economically strong to compete with
Chinese companies China's strong manufacturing base Sustainable Rooftop Implementation of Solar
is giving stiff challenge to domestic manufacturer Transfiguration of India (SRISTI) scheme to promote
rooftop solar power projects in India.
Population Troubles: Land availability in India for solar
plant is less due to high population density Solar Waste: PM KUSUM Scheme: The PM-KUSUM scheme was
India's solar waste is estimated to be around 1.8 million launched by the Ministry of New and Renewable
by 2050 also needs to be tackled Energy (MNRE) to support installation of off-grid solar
pumps in rural areas and reduce dependence on grid. in
E. Potential of Solar Energy Energy Security: The
grid-connected areas. This will enable farmers to set up
government initiative of power for all is changing the
solar power generation capacity on their barren lands
socio-economic structure of the country
and to sell it to the grid.
Employment Opportunities: The sector also has
Suryamitra programme to prepare qualified workforce.
immense potential to create new jobs GW of Solar
Renewable purchase obligation for large energy
manufacturing facility generates approximately 4000
consumer customers.National green energy programme
direct and indirect jobs in addition solar deployment
and green energy
operation and maintenance creates additional recurring
jobs in the sector G. International Initiatives
Storage Capacity Additions: Advancements are Nationally Determined Contributions: commitment as
underway for storage which has the potential to part of INDC at Paris climate deal to reduce the
revolutionise this sector globally, till then dependence emissions intensity of its GDP by 33 to 35% by 2000
on fossils can be reduced by gradually increasing the from 2005 level It has also pledged to achieve about 4
share of renewables India is expected to be 8% of per cent cumulative electric power installed capacity for
global solar capacity by 2035 With the future potential non-fossil fuel based energy resources by 2030 with t
capacity of 363 Gigawatts (GW), India can be a global help of transfer of technology and low cost international
leader in term of encashing energy sector advantages F. finance, including from Green Climate Fund

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International Solar Alliance: The international So Manufacturing: India has an annual cell manufacturing
Alliance (ISA) is a treaty based inter-government capacity of about 3 GW while the average annual
organization working to create a global market system demand is 20 GW Efforts taken by Government to
tap the benefits of solar power and promote clean energ Boost Solar Manufacturing
applications
100% foreign investment in solar power manufacturing
With 75 signatory countries in this global collective the under automatic approval.
ISA creates a multi-stakeholder ecosystem where
sovereign nations, multilateral organizations, industry Foreign investors encouraged to set up solar power
policymakers and innovators work in together to plants on build-own-operate basis.
promote the common and shared goal of meeting energy Safeguard duty of 25% on imports
demands of a secure & sustainable world
C. Problems in Solar Manufacturing in India
The Paris Declaration that established the ISA states
mat the countries share the collective ambition to Lack of human capabilities, technological capabilities
undertake innovative and concerted efforts to reduce the and capital in order to substitute cheaper imports from
cost of finance and technology for deployment of solar
D. Lessons to be Learnt from China's Experience
generation assets.
Char has emerged as a global player in Solar fracturing
The ISA aims to pave the way for future solar
mainly on account of 3 reasons:
generation storage and technologies for Member
countries' needs by mobilising over USD 1000 billion Human and Technical know-how.
by 2030 Achievement of ISA's objectives will also
strengthen the climate action in member countries, Proactive Government Policy such as subsidized land
helping them fulfil the commitments expressed in their acquisition access to raw materials, flexible labour was
Nationally Determined Contributors (NDCs) incentives for exports etc.

ISA's vision is to enable One World, One Sun, One Grid Access to Capital to gain competitive edge over the
industries located in other countries.
The ISA plays a four-fold role in establishing a global
sol market: it is an accelerator, an enabler, an incubator, 17.6.4 Wind Energy
and a facilitator.
des wind energy sector is led by indigenous wind power
17.6.3 Solar Manufacturing Strategy try and has shown consistent progress.

India has made rapid strides in the solar energy capacity The country currently has the fourth highest wind
addition in recent times. The solar generation capacity installed Capacity in the world with total installed
has increased by around 10 times from 2,650 MW in capacity of 39.25 Was on 31st March 2021) and has
2014 to 28 GW in 2019. The government had an initial generated around 149 Billion Units during 2020-21
target of 20 GW of solar capacity by 2022, which was gross wind power potential of 302 GW in the country
achieved four years ahead of schedule. However, in 100 meter and 695.50 GW at 120 meter above ground
spite of the rapid progress achieved, India has failed to Most of this potential exists in seven windy States
become the manufacturing hub of Solar panel cells and hoarding Gujarat, Rajasthan, Maharashtra, Tamil Nadu,
it continues to rely on the cheaper equipment from Madhya Pradesh, Karnataka, Andhra Pradesh
China
A. Offshore Wind Policy
A Need for Solar Manufacturing Strategy Huge
Potential to generate around 750 GW of solar y in India Offshore wind energy refers to the deployment of wind
by boosting manufacturing of solar farms inside the water bodies They utilise the sea winds
to generate electricity
Boost Make in India Reduce Import Dependency:
While around of the equipment used in wind power These wind farms either use fixed-foundation turbines
projects are 80% natured locally, in the case of solar or floating wind turbines
projects about 90% of the equipment are imported and
85% of which come from China Poor Domestic

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Offshore wind farms must be at least 200 nautical miles Wind flow: It's possible to build bigger and taler
from the shore and 50 feet deep in the ocean Offshore offshore windmills, resulting in increased energy
wind turbines produce electricity which is returned to harvest Furthermore, the wind flow is not restricted by
shore through cables buried in the ocean floor hills or buildings.

The coastal load centres distribute this electricity based C. Challenges of Offshore Wind Energy Lack of
on priority Trained Manpower: Local substructure manufacturers,
installations vessels and trained workers are lacking in
In India, where land is limited and the population is India
increasing, large wind farms positioned over water
bodies will be vital Higher Installation Costs: Offshore wind turbines
require stronger structures and foundations than onshore
India is blessed with a coastline of about 7600 km wind farms. This can cause higher installation costs
surrounded by water on three sides and has good Consequently, offshore wind tariffs in India are
prospects of harnessing offshore wind energy expected to range between 27-9 per unit, compared to
Considering this, the Government had notified the 28-29 per unit for onshore wind.
National Offshore Wind Energy Policy as per the
Gazette Notification dated 6th October 2015. As per the Damages to Turbine: The action of waves and even high
policy. Ministry of New and Renewable Energy will act winds, particularly during storms or hurricanes. can
as the nodal Ministry for development of Offshore Wind damage wind turbines. Eventually, offshore wind farms
Energy in India and work in close coordination with require maintenance that is more costly and difficult to
other government entities for Development and Use of perform.
Maritime Space within the Exclusive Economic Zone
(EEZ) of the country and shall be responsible for Cost overruns: Many Indian ministries and departments
overall monitoring of offshore wind energy are likely to grant clearances for offshore wind power
development in the country. projects. The process could be slowed by this factor,
resulting in delays as well as cost overruns.
Absence of any obstruction in the sea offers much better
quality of wind and its conversion to electrical energy D. Recommendations for Offshore Wind Energy
Offshore wind turbines are much larger in size (in range Development in India
of 5 to 10 MW per turbine) as against 2-3 MW of an A detailed set of recommendations detailing the
onshore wind turbine. While, the cost per MW for necessary elements for building a policy, regulatory,
offshore turbines are higher because of stronger grid integration, and funding framework are provided.
structures and foundations needed in marine
environment, the desirable tariffs can be achieved on Renewable specified obligated entities such as power
account of higher efficiencies of these turbines after distribution companies, open access consumers and
development of the eco system capital users can purchase clean energy as part of the
electricity consumption through a renewable purtr
B. Benefits of Offshore Wind Energy obligation Currently, there are two types of RPOS solar
and solar. MNRE can set specific wind RPO targets
Efficiency: It is proven that offshore wind turbines are
each state just like it does for solar
more efficient compared to onshore ones. Wind speed
over water bodies is high and is consistent in direction. Lower Taxes: In India, the GST Law en electricity and
As a result, offshore wind farms generate more power sales from GST in contrast power generation
electricity per installed capacity companies cannot clam ro credits when they pay GST
to purchase goods and services for setting up the
Daytime Generation As the offshore wind is stronger
project.
during the daytime, it ensures a more consistent and
efficient electricity generation when consumer demand Fiscal Benefits: The majority of wind farm component
is at its highest. In contrast, wind power on land need to be imported Turbines, transformers ne and
performs better at night when power consumption is evacuation infrastructures are expensive que the taxes
lower. paid for their acquisition. If excise duties and GST
could be waived, early project development be more
affordable

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Guarantees: A long-term contract and pre guarantee Har electricity is the conversion of the mechanical egy
reduces the inherent risk in renewace energy in flowing water into electricity. Hydro electricity is
production, encouraging investment arc development generated when the force of falling water from dams,
that would not otherwise take place Additionally, rivers waterfalls is used to turn turbines, which then
discoms can ensure priority payments for offshore wind drives generators that produce electricity.
projects
dio power projects are classified as large and small are
The underwater power evacuation and subsea projects based on their sizes Different countries have
substations could be developed by the Power Gr sterent size criteria to classify small hydro power
Corporation of India Ltd. This would reduce the refaced project capacity ranging from 10MW to 50 MW. In
by offshore wind farm developers India, hydro cower plants of 25MW or below capacity
are classified as Stall hydro, which have further been
17.6.5 National Wind-Solar Hybrid classified into micro 100kW or below), mini (101kW-
Policy 2MW) and small hydro (2- SMW) segments

Changes under the New Hydroelectricity Policy In

Solar and wind power being variable in nature pose
2019. The Government, under New Hydroelectricity
certain challenges on grid security and stability Studies
Policy, had approved 'renewable energy status' for large
revealed that in India solar and wind resources are
hydel projects. Earlier, only smaller projects of less than
complementary to each other and hybridization of these
25 Megawatt (MW) in capacity were categorised as
two technologies would help in minimizing the
renewable energy. Large hydro projects were treated as
variability.
a separate source of energy. This reclassification will
The Policy provides framework for promotion of large immediately help India achieve its target of 175 GW by
grid connected wind-solar PV hybrid system India has 2022. This will help large hydel projects avail cheaper
set an ambitious target of reaching 175 GW of installed credit and increase demand from distribution companies
capacity from renewable energy sources by the year for cleaner energy. State distribution companies will be
2022, which includes 100 GW of solar and 60 GW of obliged to purchase a certain percentage of hydropower-
wind power capacity. similar to renewable purchase obligations. This will
create a market for hydropower, making the sector
It has been announced by the Ministry of New & competitive. These projects will not only get the
Renewable Energy. budgetary support for infrastructure, but will also be
The main objectives of the Policy are to Provide a able to access "green finance
framework for promotion of large grid connected wind- A. Hydropower potential in India The hydropower
solar PV hybrid system for optimal and efficient potential of India is around 1,45,000 MW and at 60%
utilization of transmission infrastructure and land load factor, it can meet the demand of around 85,000
How the variability in renewable power pain and MW The estimated potential for power generation from
achieving better god stability Engage new technologies, small hydropower projects about 20000 MW.
methods and waits involving combined operation of B. Advantages of Hydropower
wind and solar PV plants the category of wind solar
hybrid power pants Wind Turbine Generators (WIG) Hydropower is a renewable source of energy because it
and Solar systems will be configured to operate at the uses and not consumes the water for generation of
same t of and connection electricity, and the hydropower leaves this vital resource
available for other uses
Recognition: A wind-solar plant will be recognized as
hybrid plant if the rated power capacity of one sce is at It is a renewable source of energy with no consumables
least 25% of the rated power capacity of At the state involved; there is very little recurring cost and hence no
level, Andhra Pradesh was the first to issue a draft solar high long term expenditure. It is cheaper as compared to
wind hybrid policy in 2016 electricity generated from coal and gas fired plants It
also reduces the financial losses due to frequency
17.6.6 Hydroelectricity fluctuations and it is more reliable as it is inflation free
due to not usage of fossil fuel.

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Hydropower stations are preferred solution for meeting decentralized manner for biodegradation of segregated
peak loads in grids due to its unique capabilities of organic wet wastes such as wastes from kitchens, etc
quick starting and closing
2. Incineration: Incineration technology is complete
The operational needs of hydro & thermal stations are combustion of waste (Municipal Solid Waste or Refuse
complimentary and the balanced mix helps in optimal derived fuel) with the recovery of heat to produce steam
utilization of the capacity Seasonal load curves of that in turn produces power through steam turbines
regional grids match with the pattern of hydro power
generation. 3. Gasification: Gasification is a process that uses high
temperatures (500-18000 C) in the presence of limited
During summer/monsoon season when the generation at amounts of oxygen to decompose materials to produce
hydro power plants is high, the load factor of the system synthetic gas (a mixture of carbon monoxide (CO) and
is high due to heavy agricultural load. During winter, hydrogen (H2)) Biomass, agro-residues, Segregated
the thermal stations operating at base load and hydro MSW and RDF pellets are used in the gasifier to
stations working as peak load stations will take care of produce Syngas. This gas further can be used for
weather beating loads. thermal or power generation purposes

C. Challenges related to Hydropower The hydropower 4 Pyrolysis: Pynyss unes heat to be canbushble
generation is highly capital-intensive mode of materials in the absence producing a mature of
electricity generation combustible gases ( the complex hydrocarbons tydig
carbon monoxide each and old resident products of
Due to the fact that hydropower projects are primarily pyrolysis process are to a gass aliquet (bio oltar), Did a
located in hilly areas, where forest cover is solid reside The gas generated by other of these proceed
comparatively better than plain areas, diversion of be used in boilers to provide heat or a cantechn up and
forest land is sometimes, unavoidable. Submergence of used in combustion tube greens purpose of pyrolysis of
land, thereby loss of flora and fauna and large scale waste is to menmus and to maximize the gain
displacement, due to the hydropower project 17.6.7
Waste to Energy B. Advantages

A waste-to-energy or energy-from-waste plant converts Curbs Air and Water Pollution: Mont win generated find
municipal and industrial solid waste into electricity their way into land and war t without proper treatment,
and/or heat for industrial processing causing severe water pollution

The energy plant works by burning waste at high Reduces dependence on Fossil Fuels: to energy
temperatures and using the heat to make steam. The generates clean, reliable energy fo renewable fuel
steam then drives a turbine that creates electricity. Apart source, thus reducing depended on fossil fuels, the
from producing electricity, burning waste also reduces combustion of which is a m contributor to Greenhouse
the amount of material that would probably be buried in Gas (GHG) emissions
landfills, Burning MSW reduces the volume of waste by
about 80% Thereby offering a number of social and Benchmark for the world: Waste Energ opportunities
economic benefits that cannot easily be quantified exist not just in India but all ove world. Thus, there
could be significant internati expansion possibilities for
Indian compan especially expansion into other Asian
courtes
A. Technologies Available
C. Challenges
Waste-to-Energy (WTE) technologies to recover the
energy from the waste in the form of Electricity and Lack of research and experimentation: to-Energy is still
Biogas/Syngas are given as below: a new concept in India Mat proven and commercial
technologies in spea urban wastes are required to be
1. Bio methanation: Bio methanation is anaerobic imported
digestion of organic materials which is converted into
biogas Bio methanation has dual benefits. It gives High Initial Costs: The costs of the projects areng as
biogas as well as manure as end product This critical equipment for a project is reque imported. This
technology can be conveniently employed in a

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is coupled with me lack of tec resources with Municipal Low energy density/yield: Some biofuels, like Ethanol,
Corporations/Ubat K Bodies is relatively inefficient as compared to gasoline. In fact,
it has to be fortified with fossil fuels to increase its
Lack of Legislative Enforcement: in vew of level of efficiency.
compliance of Solid Waste Mas Rules, 2016 by the
Municipal Corporatees U Local Bodies, segregated Food insecurity: Land is needed to produce biomass
municipal sold wa generally not available at the plant may be in demand for other purposes such as
she which to non-availability of waste-to-energy planes conservation or housing or agriculture use which may
Las conducive policy guidelines from State Govern in lead to a possible decrease in agricultural food
respect of allotment of land, supply of gadge power production. It may also lead to biodiversity loss.
purchase/evacuation facilities Pollution: Contrary to the
original goal, there been a continuous protest against the C. Bio-energy Role Meeting India's Energy Demands
Can plant in Delhi for polluting the environment High Potential in Biodiversity Rich India: Plants like
D. Road Ahead Jatropha, Neem and other wild plants are identified as

Urban local bodies (ULBS) should invest in preparing the potential sources for biodiesel production in India
an action plan on waste management in accordance with Energy Demand: Bioenergy can help to meet the
the Sold Waste Management (SWM) rules, 2016 within growing demand for energy within the country.
a time- pound approach and promote and adopt the key especially in rural areas. Nearly 25% of its primary
elements of waste hierarchy as refuse, reduce, reuse, energy comes from biomass resources and close to 70%
recycle and cover tis also important to focus on of rural population depend on biomass to meet their
segregation at source, spreading awareness, preparing daily energy needs.
an action plan for the cay for waste management by Income Generation: Adopting biofuels as an alternative
adopting decentralised echnologies source of energy can significantly improve farmers
income, generate employment opportunities etc.

Reduce Imports: India's energy demands met by imports

are about 46.13% of total primary energy consumption.
Bioenergy can help in reducing these imports and boost
17.6.8 Biomass Energy India's energy security and self-reliance.

Biomass is renewable organic material that comes from Climate Change Mitigation: Bioenergy provides
pants and animals. Biomass energy is energy generated important benefits compared to fossil fuels, regarding
or produced by living or once-living organisms. GHG emissions. Biomass recycles carbon from the air
and spares the use of fossil fuels, reducing the
Biomass continues to be an important fuel in many additional fossil carbon from the ground into the
countries, especially for cooking and heating in atmosphere.
developing countries. The use of biomass fuels for
transportation and electricity generation is increasing in Waste to Energy: Biofuels can augment waste to wealth
many developed countries as a means of avoiding creation. Being a derivative of renewable biomass
carbon dioxide emissions from fossil fuel use. resources such as plastic, municipal solid waste,
forestry residues, agricultural wastes, surplus food
A. Advantages of Biomass Energy It is a renewable grains etc. It has huge potential to help the country
source of energy. achieve the renewable energy goal of 175 GW
Biomass energy is a versatile source of energy which D. Various Government Efforts in Utilising Bioenergy
can be used for cooking food as well as generation of
power. National Policy on Biofuels: The policy is aimed at
taking forward the indicative target of achieving 20%
The emission of CO2 are lower from Biomass energy blending of biofuels with fossil-based fuels by 2025
than other conventional sources of energies.
10 GW National Target Ministry of New and MNRE
B. Disadvantages of Biomass Energy has set the national target

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10 GW of stalled biomass power by Generated from renewable energy (like Solar Wind)

Policy for Biomass and Bagasse Cogeneration: there Electricity splits water into hydrogen and oxygen
developed a policy for biomass and 2neration that will
help in meeting India's demanded it includes financial By Products Water Water Vapor
incentives and both for biomass projects and sugar mills India has a huge edge in green hydrogen production
technology. owing to its favourable geographic conditions and
Fiscal Incentives: Government gives 10 years Income presence of abundant natural elements
das Concessional customs and more duty won for The government has given impetus in scaling up the gas
machinery and components for initial dup of Biomass pipeline infrastructure across the length and breadth of
power projects General sales non is available in certain the country, and has introduced reforms for the power
States National Biomass Repository: MNRE also plans grid, including the introduction of smart grids Such
ceting a National Biomass Repository through cewide steps are being taken to effectively integrate renewable
appraisal program which will help are availability of energy in the present energy mix
biofuels produced from domestic
In rural India, where there is no access to the grid, the
17.6.9 Hydrogen Economy use of hydrogen can provide energy services. In
October 2020, Delhi became the first Indian city to
hydrogen economy refers to the vision of using as a operate Hydrogen-enriched CNG (H-CNG) buses in a
low-carbon energy source-replacing, for source gasoline six-month pilot project
as a transport fuel or natural gas as a get Hydrogen is
attractive because whether it is nest produce heat or The Government of India is planning to focus on five
reacted with air in a fuel cell to use electricity, the only key areas:
by-product is water
(a) Research and Development
Electricity Grid
(b) Demand creation
Hydrogen fuel is a zero-emission fuel burned with
(c) Use of the same
Seven it can be used in fuel cells or internal contusion
engines It is also used as a fuel for pace craft propulsion (d) Creation of an eco-system
can be produced from renewable sources of energy
Cassola and wind At present, there are a number ways (e) Aligning with international partnerships
to produce hydrogen, but the most common method is
B. Policy Challenges:
natural gas reforming and electrolysis
Infrastructure and Economic Feasibility: One of the
At present the current global demand for hydrogen is 70
biggest challenges faced by the industry for using
million metric tons most of which is being produced
hydrogen commercially is the economic sustainability
from fossil fuels 76% from natural gas and 23% from
of extracting green or blue hydrogen
coal and remaining from the electrolyses water
consumes 6% of the global natural gas and 2% of the Capture and Storage Technologies: The technology used
global coal This results in CO2 emissions of around in production and use of hydrogen like Carbon Capture
830Mt/year out of which only 130MUyears being and Storage (CCS)and hydrogen fuel cell technology
captured and used in the fertilizer industry are at nascent stage and are expensive which in turn
increases the cost of production of hydrogen Heavy
A. Types of Hydrogen
Investment: The commercial usage of hydrogen as a
Grey Hydrogen: Constitutes India's bulk Production fuel and in industries requires mammoth investment in
Extracted from hydrocarbons (fossil fuels, natural gas) R&D of such technology and infrastructure for
production, storage, transportation and demand creation
By product CO2 for hydrogen
Blue Hydrogen: Sourced from fossil fuels By product C. Measures Needed:
CO.By products are Captured and Stored, so better than
grey hydrogen Green Hydrogen:

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Tap Into Domestic Demand with Investment: At this India's power sector is one of the most diversities the
juncture, with a calibrated approach, India. can uniquely world Sources of power generation range conventional
position itself to take advantage with increasing sources such as coal signide oil, hydro and nuclear
investment in R&D capacity building. compatible power to viable non-convenons sources such as wind,
legislation, and the opportunity for creation of demand solar, and agricultural and some waste Electricity
among its vast population. Such initiatives can propel demand in the country has no rapidly and is expected to
India to become the most favoured nation by exporting rise further in the years cone In order to meet the
hydrogen to its neighbours and beyond increasing demand for electrot the country, massive
addition to the installed generating capacity is required
Collaboration: Proactive industry collaboration with the india ranked fourth in the Asia Pacific region out of t
government is key to creating a hydrogen economy in nations on an index that measured their overall power
India. This will help bring best-in-class- hydrogen India was ranked fourth in wind power, it in soar power
technology, equipment, and know-how to create a and fifth in renewable power installed capacity India
hydrogen supply chain in India in many cases, these ranked sixth in the list of countries to make significant
could be "Made in India". investments in clean energy at US$ 50 billion India a te
Institutional and Policy Changes: A robust policy only country among the G20 nations that is on track
framework akin to the one that guided the country's achieve the targets under the Paris Agreement
solar revolution could lead to an increase in production A. Status of Power Sector in India
and demand of this green fuel. The Government of India
should consider setting up a multi-agency mission to Commendable progress has been made in the generator
bring multiple ministries, private industry and academia and transmission of electricity in India. The total
together in a partnership to scale up the deployment of capacity has increased from 3.56,100 MW in March-20
hydrogen across sectors and industries to 3.70.106 MW in March 2020

Fiscal Incentives: Tax benefits that solar and wind Decline in energy deficit may be partially attribute
receive should be extended to all players in the green enhanced energy efficiency and improved energy test in
hydrogen ecosystem. Low solar prices coupled with India Energy intensity is defined as the quantity of
pragmatic policies can help India take a leadership energy required to produce a unit of output. Therefore
position in driving the global hydrogen economy. lower the energy intensity better it is The energy
Technology Transfers: India should ramp up immensity of india (at 2011-12 prices) decreased from
international collaborations for more effortless transfer 656 toes per put rupees in FY12 to 55 43 toe per crore
of technology and resources related to hydrogen rupees FY1 the same time, the per capita consumption
increased from 047 toe in FY12 to 0.58 toe in FY19
D. Conclusion integrated Power Development Scheme (IPDS) aims to
Green hydrogen is one of the most promise the efforts facilitate state utilities to ensure quality and reliable
to reduce carbon emissions Green hydrogen energy is 24*7 power supply in urban areas.
vital today Nationally Determined Contributions and India has accomplished two major landmarks in rural
regional and national energy security com availability electrification arena:
Hydrogen can act as an ene option, which would be
essential tomtence (of renewable energy) in the future 100 per cent village electrification under Deen Dayal
Upadhyaya Gram Joyti Yojana,

Universal household electrification under 'Pradhan

Mantri Sahaj Bijli Har Ghar Yojana' (Saubhagya).

T&D losses have been declining since 2001-02 but are

17.6.10 Power still substantial.
Power is among the most essential component B. Systemic Issues Faced by Power Sector in India
infrastructure, crucial for the economic growth and of
nations. The existence and development of ado 1. Power Generation Issues
infrastructure is essential for sustained growth of me
now economy

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Fossil Fuel Derived Energy Generation: Thermal power Eliminate Cross Subsidization: High industrial
based on fossil fuel such as coal, natural gas and diesel commercial tariff and the cross-subsidy regime have
accounts for 80% of the country's generation. Moreover, affected the competitiveness of the industrial and
the majority of plants in India are old and inefficient. commercial sectors. Thus, there is a need to ensure
effective enforcement of rationalization of cross-
Higher Cost of Fuel Cost extraction from the run Coal subsidy
Inda is near monopoly), has stagnated due to delayed
environmental clearances and acquisition troubles and Covering up ATAC Losses: To manage the de for
inte investment in advanced technologies Many power power, its necessary to reduce 100% m net metering
companies have to lock for coal mines overseas and smart mene supplied to ague Thones who woduce
source more expensive mports (despite having abundant performance-based structure
coal reserves)
Subsidy Reforms: For agriculture the dres per acre of
2. Transmission and Distribution Issues: Tarthy haven't land through Direct Benet Trade may be considered
en enough for years to cover costs for subsidies in the instead of providing w subsides for fetizers electiofy
agriculture sector Also high aggregate technical and one s
commercial (AT&C) losses, has forced electricity
distributors (discoms) into losses as high as 40% in Greening the Grid The KUSUM scheme a suitable
some states, while the country-wide average is 27% ahorative to the power subs agriculture The scheme
intends to promote the of solar pumps for agriculture
3. Associated Issues and mae prvi that local discoms should buy surplus
power hor farmer
Magnifying Effect: Paradoxically, the governments tush
for ensuring electrification of all has contributed to Cross Border Electricity Trade: The go needs to actively
greater inefficiency. As household connections are promote cross-corder O trade to utilize existing
ramped up, to support higher levels of electrification upcoming generation
cost structures need to be reworked and the distribution
network transformers, wires, etc) would need to be The SAARC electricity grid is a step direction
augmented. In the absence of all this, losses are bound D. Major Initiatives Taken by the Government India to
to se Improve the Indian Power Sector
Economic Fallout of the Pandemic: Amid pandemic, 1. Ujjwal Discom Assurance Yojana (UDAY) The
with demand from industrial and commercial users Upwat Discom Assurance Yojana (UDAY) was by the
falling, revenue from this stream, which is used to Ministry of Power in November 2015 to around the
cross-subsidise other consumers, has declined, poor financial situation of state diacons
exacerbating the stress on discom finances Low
Investment: Owing to the poor financial heath of the Critical Components
dicoms, there are less new investments in the electricity
Takeover of 75% of discom deteta Governments.
sector (particularly by the private sector) Interstate
Disputes: india is a federal democracy, and because Reduction in AT&C losses Timely tariff revisions and
rivers cross state boundaries, constructing efficient and elimination of between the Average Cost of Supply C
equitable mechanisms for allocating river flows has Average Revenue Realised (ARR) by trace year 2019
long been an important legal and constitutional issue.
Due to the there is not availability of water all the times It also envisages development fe energy sector and
to operate hydro plants, Interstate disputes also restrict availability of 247 Pow All at an affordable price There
the excess power exchange between the states are several other operation targets under UDAY, such as
feeder m smart metering and feeder segregation
Policy Paralysis: The micro level policies governing the
fuel cost pass-through, mega power policy, compete Evaluation of the Scheme Hits: Out of the 25 states that
bidding guidelines are not in consonance with the implemented LDer states have shown either reduced
macro framework like The Electricity Act 2003 and the losses or pro 2019 instead of just focusing on
National Electricity Policy C. Suggestions to Improve distribution, D focused on interventions in coat,
the Health of Power Sector in India generation a transmission sectors as well

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Misses: However, the indications are that the around as sector and subsequently, socio- economic growth of
envisaged by UDAY hasn't materialised, with several India will suffer 2. SAUBHAGYA Scheme: It was
targets being missed launched in 2017 to ensure electrification of all
households in the country in rural as well as urban
Burgeoning AT&C Losses: At the aggregate level the areas. It sought to achieve universal household
AT&C losses for major states stood at 1905% as against electrification in the country. through last mile
the target of reducing them to 15% by the end of 2019. connectivity It aimed to provide access to electricity to
The Discom losses, which had progressively reduced in all un-electrified households in rural areas and poor
the first couple of years (since the inception of UDAY). households in urban areas
have rebounded in 2019 to nearly double the losses
recorded the previous year In the case of some states, Expected Outcomes: Environmental upgradation by
especially in the northern and central parts of the Kerosene for lighting purposes
country, the losses are of a much higher magnitude,
suggesting that pilferage continues to be rampant Improvement in education services substitution of

High ACS-ARR Gap: While the ACS-ARR gap was Better health services.
supposed to be eliminated by 2019, it remains as high as Enhanced connectivity through radio, television
70 25 per unit. In many states, the gap is even higher. mobiles, etc
This can be traced to inadequate tariff hikes.
Increased economic activities and jobs
Mixed Progress: Operational efficiency targets under
UDAY, such as the installation of feeder metering, Improved quality of life especially for women
smart metering and feeder segregation, are still not Evaluation of The Scheme: The Pradhan Mantri Sahaj
completely met. For instance, not much progress has Bijli Har Ghar Yojana (PM Saubhagya) lapsed on
been made in the case of smart metering above 200 and March 31, 2019, but its target of 100% electrification
up to 500 kwh and above 500 kwh, nationwide is yet to be achieved. The scheme was
launched in September 2017 with a target to electrify all
Inadequate Power Subsidy: Also, the power subsidy households by December 2018. This target was moved
released by State Governments to discoms appears to be forward to March 31, 2019, and eventually the Centre
inadequate. As a result, discoms have reported financial declared that all 'willing' homes have been provided
losses to the tune of $21.658 crore at the end of 2019, with electricity connections.
reversing the declining trend since the launch of UDAY.
Since the Saubhagya Scheme has no allocation in the
Economic Roadblock: Further, UDAY bonds were latest Budget, these connections will be funded through
issued at a premium, due to this, the cost of debt the Integrated Power Development Scheme (IPDS) and
servicing has gone up for the UDAY states. The impact Deen Dayal Upadhyaya Gram Jyoti Yojana (DDUGJY).
on state finances is likely to continue due to interest
payment on UDAY bonds and redemption of these The Rajasthan government has informed that around
bonds. 1.56 lakh households are un-electrified and are willing
to take electric connections.
Way Forward
Owing to regions hit by Left-wing extremism, even in
Government's announcement of the launch of UDAY Chhattisgarh number of villages are yet to be provided
2.0 which seeks installation of smart prepaid metres, with electricity connections.
prompt payment by discoms, making coal available for
short term and reviving gas-based plants is a step in the The Uttar Pradesh government has decided to request
right direction. the Centre to reopen the Saubhagya Scheme, in the state
to give another chance to the poor to get free electricity
There is an urgent need to address the issues of connection in case they did not get one earlier.
burgeoning outstanding dues of discoms towards power
generators and stressed projects that are being dragged 3. PM Ujjwala Yojana: It aims to provide deposit tree
under insolvency proceedings LPG connections to poor households. Under the
scheme, an adult woman member of a below poverty
Formulation of pragmatic power tariff policy is the need line family identified through the Socio-Economic
of the hour because without a financially viable power

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Caste Census (SECC) is given a deposit-free LPG a need to adopt this model even in PM Ujjwala Yojana
connection with financial assistance of 1,600 per as well wherein the Antyodaya households could be
connection by the Centre Eligible households are provided the LPG cylinders free of cost.
identified in consultation with State Governments and
Union territories. The scheme is being implemented by Integrating Ujjwala Yojana: Adopt nudge theory to
the Ministry of Petroleum and Natural Gas encourage regular and continuous usage of the LPG
cylinders: The Government must launch a campaign
communicating that solid fuels harm respiratory health
Similarly, advertisements that food cooked on gas can
Achievements: be as tasty and healthy as food cooked on a chulha
Target Achieved: Target of providing 8 crore would be helpful

LPG connections achieved 7 months ahead of schedule 4. Other Initiatives

(March 2020). Increase in LPG coverage from 62% '4 Es' in the Revised Tariff Policy: The 4Es
(2016) to 99.5% (2021).
include Electricity for all. Efficiency to ensure
Addressed Energy Poverty: India accounts for 18% of affordable tariffs, Environment for a sustainable future.
world's population but uses only 6% of world's energy. Ease of doing business to attract investments and ensure
Facilitated human development as there is direct financial viability
correlation between access to energy and human GARV (Grameen Vidyutikaran) App: To monitor
development. Women empowerment as time saved on transparency in implementation of the electrification
collecting firewood can be better spent on more schemes. Grameen Vidyut Abhiyantas (GVA) have been
productive activities. Better health outcomes as indoor appointed by the government to repor progress through
pollution gets reduced. GARV app
Expansion in constitutional rights as it strengthens Deendayal Upadhyaya Gram Jyoti Yojana (DDUGJY)
Right to Life (Art 21). for Rural Areas: The scheme provides for (a) separation
Progress towards SDG 7: Access to affordable,reliable of agriculture and non-agriculture feeders: (b)
and sustainable energy for all. strengthening and augmentation of sub-transmission
and distribution infrastructure in rural areas including
Challenges metering at distribution transformers, feeders and
consumers end; and (c) rural electrification.
Higher Refilling Cost: On an average, the families with
Ujjwala connections are opting for four subsidised Integrated Power Development Scheme (IPDS) for
cylinders in a year, this is lower than the seven Urban Areas: The scheme provides for (a) strengthening
subsidised cylinders that non- Ujjwala connections go of sub-transmission and distribution networks in urban
for in the same time period. The lower usage can be areas; (b) metering of distribution transformers/feeders
attributed to higher refilling cost which is forcing them consumers in urban areas; and (c) IT enablement of
to use the LPG cylinders sparingly. distribution sector and strengthening of distribution
network.
Flawed Mind Set of the People: Most people believe
that food cooked on a Chula is healthier and tastier. In 17.6.11 Coal Sector
contrast, rotis cooked on gas cause indigestion. They
also believe cooking with solid fuels is healthy for the A. Present Status of Coal Sector
women too as the fumes causes tears and purifies the
eyes. India has the world's third largest coal reserves. India is
also the second largest coal producer in the world
Way Forward However, due to the growing needs of the rapidly
expanding economy, the annual demand for coal has
Higher Subsidy Amount to Poor Households:
increased to around 900 MT. Hence, the shortage of
Under the National Food Security Act (NFSA). the coal in India is met through imports.
Antyodaya households are provided higher amount of
food grains as compared to priority households. There is

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Coal Consumption: Commercial primary energy Lignite: Lignite carries 40 to 55% carbon content and is
consumption in India has grown by about 700% in the often brown in colour with high moisture content thus,
last four decades. The current per capita commercial gives smoke when burnt Rajasthan. Lakhimpur (Assam)
primary energy consumption in India is about 350 and Tamil Nadu has deposits of Lignite Peat: Peat is the
kgoe/year which is well below that of developed first stage of transformation from wood to coal with low
countries. Coal accounts for almost 55% of our energy calorific value and less than 40% carbon content
needs. Hence, the shortage
C. Evolution of Coal Mining In India Nationalisation of
own out domestic economy is forcing the thermal ments coal mining in 1973 -Coal mining was monopolized by
to operate their threshold capacity. This has wwer profit Coal India Limited -Captive Coal Mine Blocks allowed
margins of the thermal power plants and wd the ability with end-use restrictions
to repay back the loans to the banks Thes the shortage
of coal within India has not only led to ave nancial February 2018 -Indian Private sector entities allowed to
position of power plants but it has also led to ease in the mine coal.
Non-performing assets (NPAs) of the Indian October 2018 - Easing of End use Restrictions on
Coal Production: Through sustained programme of Captive coal Mine operations
vestment and greater thrust on application of modern Allowed to sell 25% of extracted coal in open Market.
chnologies, it has been possible to raise the All India
production of coal at 730 354 million tonnes in 2018-19 August 2019 - 100% FDI allowed in Coal Mining and
Provisional) with a positive growth of 7.9% Coal Infrastructure such as Coal Washeries.

Import of Coal: As per the present import policy, coal February 2020 -End of captive coal mining.
cane freely imported (under Open General Licence) by
Composite Mining Licence (Prospective-cum-mining)
the consumers themselves. Coking Coal is being
imported by Steel Authority of India Limited (SAIL) D. Reasons for Abysmal Condition of Coal Sector in
and other Steel manufacturing units. Coal based power India
plants, cement plants, captive power plants, sponge iron
plants, industrial consumers and coal traders are Following reasons can be listed for Coal sector abysmal
importing non-coking coal condition:

Coal Reserves: A cumulative total of 319.02 Billion Delayed Environment and Forest Clearances:
ones of Geological Resources of Coal have so far been Environment ministry in past has classified ecological
estimated in the country. Hard coal deposit spread over sensitive areas in 'Go and No Go areas' and there was
27 major coalfields, are mainly confined to eastern and total prohibition on mining in no go areas Further there
south central parts of the country. Top 5 States in terms are other clearances required from State and Central
of total coal reserves in India are: Jharkhand > Odisha > Governments.
Chhattisgarh West Bengal > Madhya Pradesh.
Land Acquisition problems
B. Classification of Coal
Lack of adequate technology
Classification of Coal can be done on the basis of
Monopoly in extraction of coal by Coal India
carbon content and time period
Limited: Till now, the PSU, Coal India was the only
Anthracite: It is the best quality of coal with highest
commercial miner in the country for more than four
calorific value and carries 80 to 95% carbon content It
decades which has shown monopolistic tendencies in
ignites slowly with a blue flame and found in small
the sector Monopoly in mining sector was incapable of
quantities in Jammu and Kashmir
meeting domestic demands
Bituminous: It has a low level of moisture content with
Demand-supply mismatch in coal leading to imports
60 to 80% of carbon content and has a high calorific
(25% of domestic requirements);
value. Jharkhand, West Bengal, Odisha, Chhattisgarh
and Madhya Pradesh have deposits of Bituminous Most of the thermal power plants are operating below
their capacity Plant Load Factor (PLF) is hardly around

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56% in 2019-20 Low productivity of Coal India is still a Indian road network can be broadly categorised national
concern highways, state highways, major district roads and rural
roads. A number of initiatives have been taken by the
Tendency to expand open cast mining and discourage Government in the last few years to improve the quality
underground operation even for better quality coal of the road network. The result of the initiatives now
reserves: visible and has dramatically enhanced the quality of
Coal plants have higher operation and maintenance road travel and transport in India.
costs because of strict regulatory issues India's power Highway construction in India increased at 17.00%
regulators are not regularly updating. CAGR between FY16-FY21. Despite pandemic and
prices to accommodate increases in operational costs lockdown India has constructed 13,298 km of highways
due to regulation. State Pollution Control Boards are in FY21
ineffective at monitoring or enforcing compliance In FY21, 13,298 kms of highway was constructed
Expansion in power generation in India has been largely across India. In June 2021, the Ministry of Road
based on state financing i.e many coal power plants in Transport and Highways constructed 2,284 kms of
India are constructed through massive debt financing national highways compared with 1.681 kms in June
from state-owned banks. 2020

E. Significance of Government's Initiatives Boost Coal The Categorisation of Roads in India Expressways:
Mining: Domestic production by Coal India Ltd (CIL) These are the highest class of roads me Indian road
has been unable to keep up with the demand for coal network that consists of 6 or 8 larie ontrond access
highways. The entrance and exit of se expressways are
Meet the Coal Needs of Power Plants: Power plants in controlled by the use of ship ads The Ahmedabad
India have been operating below their installed capacity, Vadodara Expressway-the National Expressway 1, is
necessitating imports to meet demand. Reduce Current India's first Expressway I
Account Deficit: 25% of our coal requirements are met
through imports 2 National highways: National Highways are the
primary roads of the country connecting the major
Technological Advancement in Coal FDI would lead to Industrial centres and large cities of India. The national
newer and efficient expla technologies and methods for highways are designated as NH followed by a highway
mining coal, especially high-end technology for number. As of December 2018, 1,31,326 am national
underground mining user global miners, which would highways are operational in India and the government
help in lowering costs plans to increase this 2,00,000 km.
Promote Competition: New policy would also enab the State highways: State Highways are the roads that link
opening up of the industry to competition which until the important centres of industry, trade and commerce
now had been the monopoly of Goal india Lim and state capitals with the district headquarters of the
state highways are often also linked to the national
17.6.12 Road Sector highways and are constructed and maintained by the
State Governments. Most of the state Highways are
India has the second largest road network across the w constructed and maintained by the State Public Works
at 5.9 million km. This road network transports more Department. These provide linkage to national
the 60 per cent of all goods in the country and 85 per highways, district headquarters, tourist centres, minor
cent India's total passenger traffic. However, a majority ports and the highways of neighbouring states.
of the are of poor quality. Half the network is not Maharashtra has the largest share of state highways
cemented and the National Highways account for only (22.14%)
2.2 per cent of the total length, but carry 40% of India's
total road traffic 4 District Roads: District roads are the roads that
connect the different parts of the district, important
This road network transports 64.5% of all goods in the industrial centres, areas of production with markets and
country, and 90% of India's passenger traffic uses mas link them with the state highways and national
network to commute. highways. District highways also link the Taluka
headquarters of rural areas with the district

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headquarters. The responsibility to maintain the district To generate a large number of direct and indirect
roads is on the Zilla Parishad. employment opportunities in the construction and
infrastructure sector and also as part of the enhanced
5. Village roads: Around 66% of rural roads or economic activity resulting from better road
unsurfaced which are in poor shape affecting the quality connectivity across the country.
of life of the rural population and negatively affect
farmers ability to transfer the produce to the market. To connect 550 districts in the country through national
Rural roads due to their poor quality are unable to highway linkages
withstand loads of heavy farm equipment.

6. Border Roads: Border roads are the road networks

constructed in the border areas of India and in the
trendly neighbouring countries. The Border Road Features
Organisation has the responsibility to construct and
maintain the border roads. Green Expre Improvement in the efficiency of existing
corridors through the development of Multimodal
Logistics Parks and elimination of chokepoint.

Enhance focus on improving connectivity in North East

B. Major Initiatives by the Government Bharatmala and leveraging synergies with Inland

1.umbrella Pariyojana: BharatMala Pariyojana is an by Waterways Emphasis on the use of scientific and
the Ministry of Road Transport and Highways. program technological planning for Project Preparation and
for the highways sector envisaged Asset Monitoring

Under Phase-l of BharatMala Pariyojana. Satellite mapping of corridors to identify up-gradation

implementation of 34.800 km of national highways in 5 requirements
years (from 2017 to 2022) has been approved at an Delegation of powers to expedite project delivery for
estimated outlay of 25 35.000 crore Phase-II envisages successful completion of Phase I by 2022
around 48.000 km of road network across India by 2024
2. Dedicated Freight Corridors (DFC): It is a high speed
Objectives of BharatMala Pariyojana: To optimise the and high capacity railway corridor that is exclusively
efficiency of freight and passenger movement across the meant for the transportation of freight, or in other words
country by bridging critical infrastructure gaps through goods and commodities DFC involves the seamless
effective interventions The effective interventions integration of better infrastructure and state of the art
include the development of economic corridors, inter technology DFC consists of two arms:
corridors and feeder routes, national corridor efficiency
improvement. border and international connectivity Eastern Dedicated Freight Corridor (EDFC): It starts at
roads, coastal and port connectivity roads and Sahnewal (Ludhiana) in Punjab and ends at Dankuni in
greenfield expressways. West Bengal. The EDFC route has coal mines, thermal
power plants and industrial cities. Feeder routes are also
Economic Corridors: These are integrated networks of being made for these
infrastructure within a geographical area designed to
stimulate economic development The EDFC route covers Punjab, Haryana, Uttar Pradesh
Bihar, Jharkhand and West Bengal
Greenfield Projects: They lack constraints imposed by
prior work on the site. Typically, it entails development The World Bank is funding a majority of the EDFC.
on a completely vacant site and architects start Western Dedicated Freight Corridor (WDFC):
completely from scratch
The other arm is the around 1,500-km WDFC from
Brownfield Projects: They carry constraints related to Dadri in Uttar Pradesh to Jawaharlal Nehru Port Trust in
the current state of the site and might be contaminated Mumbai, touching all major ports along the way
or have existing structures that architects have to tear
The WDFC covers Haryana. Rajasthan, Gujarat
down or modify in some way before the project can
,Maharashtra and Uttar Pradesh. It is being funded by
move forward

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the Japan International Cooperation Agency Connecting Frase of PMGSY 1,35,436 habitations were ted
Link for Eastern and Western Arm: It is under providing road connectivity and 368 Ohm for
construction between Dadri and Khurja upgradation of existing rural roads in der ensure full
farm to market connectivity. The Government of India
The industrial corridor of Delhi-Mumbai and Amritsar- subsequently launched PMGSY-II 2013 for upgradation
Kolkata are also being developed around both these of 50.000 Kms of existing rural outwork to improve its
DFCS overall efficiency Phase was approved by the Cabinet
Significance Increased Capacity: The DFC shall reform during July 2019 vesprites to facilities like Gramin
the transportation sector and will create more capacity Agricultural Marsets (GrAMs) Higher Secondary
on trunk routes of Indian Railways as goods trains shall Schools and hospitals der the PMGSY-III Scheme it is
be able to run freely on DFC without any restrictions proposed to so date 1.25.000 km road length in the
imposed by movement of passenger trains. States. The ration of the scheme is 2019-20 to 2024-25
mouth the scheme faces challenges like lack of
Decongestion: Around 70% of the freight trains sedicated funds, limited involvement of the Panchayati
currently running on the Indian Railway network are ra institutions, inadequate execution and contracting
slated to shift to the freight corridors, leaving the paths capacity and scarcity of the construction materials. vet it
open for more passenger trains. helps in generating increased agricultural incomes and
productive employment opportunities in India by
Business Generation: Tracks on DFC are designed to
ensuring rural road connectivity
carry heavier loads than most of Indian Railways DFC
will get track access charge from the parent Indian Green Highways Policy: The Ministry of Road
Railways, and also generate its own freight business Transport and Highways has promulgated green
highways (plantation, transplantation, beautification and
Punctuality: The new section means on the Indian
maintenance) policy 2015, for developing the green
Railway main line, more passenger trains can be
corridors along the national highways for nclusive
pumped in and those trains can, in true achieve better
growth and sustainable environment..
punctuality
This policy envisions development of eco-friendly
Benefits:
National Highways with the participation of the
Logistics costs will be reduced communities, farmers, NGOs, the private sector.
institutions, government agencies and the forest
Higher energy efficiency Faster movement of goods departments for economic growth and development in a
sustainable manner.
It is environmentally friendly
Char Dham Highways: Char Dham Expressway
It will provide ease of doing business
National Highway is proposed two-lane Express
Helps in generating more employment National Highway with a minimum width of 10 meters
to be implemented in the state of Uttarakhand The
3. Setu Bharatam: This Scheme was undertaken by scheme will connect the four holy places in Uttarakhand
Ministry of Road, Transport and Highway. Its objective that includes Badrinath, Kedarnath, Gangotri and
included development of bridges for safe and seamless Yamunotri The scheme complements the Char Dham
travel on National Highways. It aimed to make a Railway project of the government by constructing 900
National Highways free of railway level crossings by km of national highways in Uttarakhand. This scheme
2019, This was being done to prevent the frequent will include several long bridges and tunnels for
accidents and loss of lives at level crossings. It aimed to eliminating accidents and landslides. Other Initiatives
carry out conditions survey and inventorization of all by the Ministry of Road Transport and Highways.
bridges on National Highways in India by using Mobile
Others Famous Highway Projects in India Golden
Inspection Units. 4. Pradhan Mantri Gram Sadak Yojana Quadrilateral: It is a national highwaynetwork that
(PMGSY): Launched in 2000, the scheme aims to connects the four major metro cities of India namely
provide connectivity, by way of an all-weather road to Delhi, Mumbai, Chennai and Kolkata it is the largest
unconnected habitations Highway project in India and consists of four and six-
lane highways built at a cost of 7600 billion. The

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scheme was launched in 2001 which got completed in According to the KPMG report, India's road network
2012 logistics and the bottlenecks in transportation negatively
impacts the GDP growth rate by one to two percent
North-South Corridor: It connects Srinagar with
Kanyakumari with 4000 km highway network East- D. Solutions to Improve Road Connectivity
West Corridor: It connects Silchar (Assam) with
Porbandar (Gujarat) 1. Increase Connectivity: Especially in Rural India and
with Ports by expanding the road network, this can be
C Constraints/Challenges done through use of schemes like Gram Sadak Yojana

1. Capacity of Existing National Highways: The 2. Improve Road Maintenance and Safety: Earmark
National Highways account for only 22 per cent of the funds from the Central Road and Infrastructure Fund
country's total road network but carry 40 per cent of (CRIF)
India's total road traffic Indian roads face huge pressure
due to the increased requirements of the Indian 3. Urban Mobility: Dedicated cells for integrated
economy due to which there is a great need of planning, coordination and delivery of transport
modernization of roads services in smaller cities; dedicated Metropolitan Urban
Transport Authority in larger metropolitan authorities
2. Maintenance of Existing Infrastructure: The annual can improve urban mobility exponentially.
outlay earmarked for maintenance is only about 40 per
cent of the funds required The road maintenance in 4. Streamline land acquisition.
India is underfunded and still thousands of villages in 5. Increase emphasis on research and development.
India lack access to all-weather roads
6. Use of new technology and initiatives like Bhoomi
3. Low Private Sector Participation in National Rashi Portal, for digital and paper-less processing of
Highways: The private sector contribution in the road land acquisition related notifications can increase ease
contribution is a mere 15% which increases the burden of living and doing business.
on the government exchequer
7. Expand the reach of the Electronic Toll Collection
4. Poor Connectivity of Remote Areas with Trunk (ETC) system to all the toll plazas, this will help
Routes and Metros: The Intra-city vehicle speed in India removing bottlenecks, ensuring seamless movement of
is one of the lowest in the world. This is due to high traffic and collection of user fee.
traffic and unavailability of feeder roads

5. Problems with Tolls: The toll collection often

witnesses problems like revenue leakages, congestion at 17.6.12 Road Safety
toll plazas: Flat rate toll irrespective of actual distance
travelled. Road transport is the dominant mode of transport in
India, in terms of traffic share and in terms of
6. Cost Escalation for Roads: Delays in acquiring land contribution to the national economy.
can affect project costs and thereby affects the profit
incentives for contractors 7. Low Average Speed: In To meet the demand for road transport, the number of
India, the average road speed is about 30-40 km per vehicles and the length of road network have increased
hour whereas the average road speed worldwide is over the years. A negative externality of expansion in
between 60 to 80 km per hour in India, the average road road network, motorization and urbanization in the
speed is about 30-40 km per hour whereas, the average country is the increase in road accidents and road crash
road speed worldwide is between 60 to 80 km per hour. fatalities.

8. Limited Use of Advanced Technology in Safety and Road traffic injuries are one of the leading causes of
Security: In India, the average road speed is about 30- death, disabilities and hospitalization in the country
40 km per hour whereas, the average road speed imposing huge socio-economic costs India loses 3% of
worldwide is between 60 to 80 km per hour Problems its GDP due to road accidents, most of which are
are encountered in traffic management, surveillance preventable.
automated fare collection system, etc
A. Causes of Road Accident

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Many road accidents are the result of faulty road- addition, new cars are required to have airbag fitted as
design especially a single-lane one with a sharp curve. standard and to have a speed warning devic above 80
km/h.
Infrastructural Deficits: Pathetic conditions of roads and
vehicles, poor visibility and poor road design and signed the Brasilia declaration and committed to
engineering- including quality of material and redchon in fatalities 3pme Court had set up the three
construction. member KS Radhakrishnan panel on road safety in
April 2014 The man Hicommendation of the committee
Negligence and Risks: Over speeding, driving under the was Ban on the sale of alcohol on highways (both at and
influence of alcohol or drugs, tiredness or r without a national) to restrain drunk driving. The states were
helmet driving without seatbelts Distraction while directed to implement laws on wearing helmets
driving like talking over mobile phones while driving
has become a ma road accidents Overloading to save Audit of road safety to be implemented by states to
cost of transportation Weak Vehicle Safety Standards in ensure the safety standards in the design. construction
India: in 201 crash tests carried out by the Global New and maintenance of roads
D
The committee stressed the importance of creating
Assessment Programme (NCAP) revealed that some of awareness among people on road safety rules
India's top-selling car models have failed the U frontal
impact crash test. Lack of awareness among people 3 Year Action Agenda NITI Aayog also highlighted reed
regarding importance of safety features like airbags Ar for Road Safety and set the following agenda Srengthen
Braking system etc. Moreover, Vehicle manufacturers rules governing road safety by passing the Motor
do not provide them as standard fitment but only higher Vehicles (Amendment) Bill, 2016.
class of vehicles reducing their reach Create Road Safety Boards to reduce accidents
Brasilia Declaration on Road Safety Use data to monitor accidents. We can do this by use of
Through the Brasilia Declaration Countries plan to data to monitor accidents in real time and use this input
achieve the Sustainable Development Goal 3.6. By to direct efforts towards correction on specific points
2022 halve the number of global deaths and injuries Standardize reporting of accidents and enhance
from road traffic accidents. preparedness through better logistics. Motor Vehicles
The main points of the Brasilia Declaration are (Amendment) Act 2019: Contains Provisions for
Countries should form transport policies in order to electronic monitoring of roads and highways to improve
favor more sustainable modes of transport such as safety and improving the road design through
walking, cycling and using public transport. engineering design corrections •Driving License: Tests
for driving licenses will be automated, and learner's
It highlights strategies to ensure the safety of all roat licenses will be issued online. A driving license issued
users, by improving laws and enforcement. making to a person under the 390 of 30 is valid till the person
roads safer through infrastructural modifications; turns 40. For those who receive licenses between the
ensuring that vehicles are equipped with saving ages of 30 and 50, the license will remain valid for 10
technologies; and enhancing emergency trauma car years.
systems.
Higher Fines: The existing fines for violating traffic
B. Government Action rules have been increased in this bill eg. Drunk ving
from 2,000 to 10.000, rash driving from 1,000 to
In 2015 the Indian government announced application $5,000, driving without a license - from 2500 105,000
of new regulations consistent with the UN standards for
front and side impact and as pedestrian protection Traffic Violations by Juveniles: The guardians or owner
of the vehicle would be held responsible. It proposes
For new car models, the use of front and side crash tests three-year jail for parents of minors drivers using fatal
came into force from October 2017 and will apply to all accidents Third-party Insurance: The 2016 version of
new cars from October 2019. The pedestrian protection the Bill had capped the payments to be made under
regulation for new modes came into force from October third-
2018 and will apply all new cars from October 2020. In

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Dany insurance. The 2017 Bill has removed that cap. Motor Vehicle Accident Fund: It is proposed to be
created. It will provide compulsory insurance cover to
Vehicle Recall: The new Bill provides for the recal of all road users in India for certain types of accidents
vehicles if the defective vehicle is a danger to the
environment, the driver or other road users. The
manufacturer will then have to reimburse all buyers
with the full cost of the vehicle, replace the defective
vehicle

Solatium Fund: The act provided Solatium Fund for 17.6.14 Electric Mobility
victims of hit-and-run accidents
A. Need for Electric Mobility
Good Samaritans: People coming forward to hep
accident victims will be protected from civil or criminal Climatic Change: India has committed to cutting its
liability GHG emissions intensity by 33% to 35% below 2005
levels by 2030
Accountability: Contractors consultants and civic
agencies will be accountable for faulty design Advances in Renewable Energy and Battery
construction or poor maintenance of roads leading to Technology: Lower cost of clean, low-carbon energy
accidents with higher energy densities, faster charging and long-
lasting batteries
C. Way Forward
Rapid Urbanization: According to a recent study by
Behavioural Changes: Increasing motorcycle helmet WHO, India is home to 14 out of 20 most polluted cities
use, increasing seat-belt uses and increasing child in the world. Electric vehicles (EVs) can improve that
restraint use. Awareness regarding influence of scenario by reducing local concentrations of pollutants
in cities
alcohol on driving. Post Crash Response and Effective
Trauma Care: Simple and affordable post-crash care Data Capture and Analysis: Mobility has undergone a
interventions can save lives Effective care for the digital revolution. This has created possibility of a
injured requires timely care at the scene, prompt greater utilization of existing transportation assets to
transport to appropriate emergency and surgical care at move towards electric mobility.
the hospital, and early access to rehabilitation services
Opportunities Through Improved Battery Technology:
Role of Bystanders: Bystanders play a major role in Advances in battery technology have led to higher
post-crash care. They contribute by activating the energy densities, faster charging and reduced battery
emergency care system and taking simple, potentially degradation from charging
life-saving actions until professional help is available
Energy Security: EV's will facilitate lower reliance on
Safe Roads: Safety consideration during the planning. fossil fuel imports and at the same time reduce India's
design, and operation of roads, can contribute to Current account Deficit (CAD).
reducing road traffic deaths and injuries
Lower Maintenance of Electric Vehicles due to less
Vehicular Safety Standards: Vehicle safety features such number of moving parts. NITI Aayog in its recent report
as electronic stability control, effective Car Crash has highlighted that making India's passenger mobility
Standards and advanced braking should be made shared, electric and connected can cut its energy
mandatory. demand by 64% and carbon emissions by 37% This
roughly translates into savings of 23.9 lakh crores by
Awareness and Publicity: Mass media and social media
2030.
should be used effectively for spreading awareness
about road safety B. Initiatives taken for Electric Mobility
Training and Capacity Building: Training courses and National
training workshops have been organized for building
Electric Mobility Mission Plan 2020: Aims to have 6-7
capacity in road safety audits and road safety
Million Electric Vehicles by the end of 2020.
engineering

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Implemented by Ministry of Heavy Industries and Ensuring availability of critical and strategic minerals
Public Enterprises such as Lithium, Cobalt etc. by acquiring mines
overseas. The setting up of Khanij Bidesh India Ltd.
National Council for Electric Mobility: Inter- (KABIL) to ensure mineral security is a step in right
Ministerial team headed by Minister of Heavy direction
Industries to approve Electric Mobility PlansNational
Board for Electric Mobility: Inter-Secretarial team Providing charging infrastructure. Import Duty and
headed by Secretary, Department of Heavy Industries to Make in India: Components such as batteries,
recommend Policies for adoption of Electric Vehicles drivetrains etc. should have lower customs duty as
compared to finished Electric cars.
FAME Scheme (Phase II): Demand Incentive and
Charging Infrastructure GST rates: The GST rates should favour commercial
vehicles in comparison to private vehicles.
C. Challenges in the Adoption of Electric Vehicles
Invest in Research and Development in new approaches
In spite of these initiatives, the share of Electric and technologies such as hydrogen fuel- cells, new
vehicles in India has remained below 1%. This is quite battery-chemistries (with higher specific energy and
low as compared to countries such as Norway where the energy densities) etc. Appropriate guidelines have to be
share of electric vehicles is as high as 40%. Similarly, laid down for providing tax exemption and utilisation of
last year. China alone accounted for more than half of CSR Funds
the global sale of Electric Vehicles. Some of the
constraints and challenges are: Added thrust on Renewable energy projects such as
Solar, Wind etc. for charging of Electric Vehicles and to
Higher Dependence on Raw Materials: India does not ensure energy security.
have enough reserves of rare earth minerals such as
Lithium, Cobalt etc. which are required for Explore to promote Electric Vehicles such as Doing
manufacturing batteries. Most of these minerals are away with Road Tax and Registration charges. free toll,
imported from countries such as China. free parking, dedicated parking spaces in offices and
residential buildings etc
Poor Charging Infrastructure: Once fully charged. the
Electric Vehicles can run for an average maximum 17.6.15 Railways
distance of around 250 km. Hence, unless the charging
infrastructure improves, the demand for electric India has the fourth largest railway network in the world
vehicles would remain lower. it has come a long way since 1950-51 in terms of
number of trains and quantum of traffic carried. Indian
Capital Costs of Electric Indian Eco Higher comparison Railways route length network is spread over 1,23,236
to conventional vehicles in Lower efficiency of Electric
km, with 13.452 passenger trains and 9,141 freight
vehicles in terms average speed and distance travelled. trains plying 23 million travellers and 3 million tonnes
Energy Insecurity: The Fossil fuels account for almost (MT) of freight daily from 7,349 stations. Indian
65% of electricity needs in India. Hence, the higher Railway is the main artery of the country, it is also
demand for electricity to charge electric vehicles could called as lifeline of India which provides both freight
lead to increased demand for fossil fuels. and passenger mode of transportation. It contributes in
the national growth and economic integration of the
Lack of skilled manpower for the manufacture of country.
Electric and hybrid vehicles:
The Government of India has focused on investing on
D. Recommendation to Promote Adoption of Electric railway infrastructure by making investor-friendly
Vehicles policies. It has moved quickly to enable Foreign Direct
Investment (FDI) in railways to improve infrastructure
Revisiting FAME Scheme: Provide higher incentive for
for freight and high-speed trains.
two-wheelers instead of four wheelers. Promote battery
swapping. A. Significance of Railways
Retrofitting Existing Vehicle Fleet by enabling them to
act as Hybrid Vehicles (both Petrol/Diesel and Electric).

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Railways provide the cheapest and most convenient Internal Generation of Resources: Lower share of the
mode of passenger transport both for long-distance and railways in freight traffic, Low and static prices for the
suburban traffic passenger segment has lead to safety and poor quality of
service delivery .
Railways have played a significant role in the
development and growth of industries. Railways help in Higher Operating Cost of 98.4%: This means that to
supplying raw materials and other facilities to the earn a revenue of 100, the railways has to spend 798.4.
factory sites and finished goods to the market.
Commercialization of agriculture has been possible Inadequate Investment: The expenditure on the railways
only by the contribution of the railway Railway helps in as a percentage of transport expenditure declined from
quick transport of perishable goods agricultural 56 per cent in 1985-90 to 30 per cent in 2007-12
implements etc to a larger distance. Competition with Road Transport: The competition with
Railways are also helpful in removing isolation between road transport is growing in intensity, both in passenger
cities and countryside (rural areas) and have played a and in goods transport. The lack of coordination
significant role in disseminating innovations and new between railways and road transport has lowered the
ideas earning capacity of the railways This has further caused
delay in traffic movement and inconvenience to
The railway is connected with major ports which are passengers.
helpful in promoting international trade.
Decline in Share of Freight Traffic: It is on account of
Railway helps in the defence and internal security of the shortfall in carrying capacity and lack of price
country by ensuring the quick movement of troops, competitiveness. The Indian Railways has kept the
defence equipment, etc to remote places. Railways play passenger fares at lower value while it has increased the
a vital role in mitigating the sufferings of the people in freight charges to compensate for this loss. Hence the
the event of natural calamities like droughts, floods, cross-subsidization of low passenger fares by artificially
famines, earthquakes, etc. This is done by carrying high freight rates has led to shift in favor of road
relief and rescue teams andessential items to the transport, for both freight as well as short distance
affected areas and save people from suffering and passenger traffic.
starvation.
C. Probable Solutions
B. Problems in Railway Infrastructure
The Bibek Debroy committee on Railway
Old Track and Poor State of Rolling Stock: The major Modernisation and Anil Kakodkar Committee on
problem faced by Indian railways is that the tracks are improving railway safety have given a number of
old and outdated. These old tracks cause many serious recommendations to improve the performance and
railway accidents. This has also resulted in speed safety of Indian railways.
restrictions.
Rationalize Fare Structures and Subsidies: By ending
Railway Accidents: The incidence of railway accidents the cross-subsidisation model presently followed by
in our country is greater as compared to other countries railways. Freight tariffs should be competitive with the
of the world. Accidents have also occurred due to the cost of road transportation so that there is increase in
errors and negligence of the employees. Problem of the modal share of Railways
Replacement: The problem of replacement of old and
obsolete railways engines, wagons and other equipment Independent Regulator for Railways: To determine the
has created a serious problem in India. tariff and monitor whether the tariff is marke
determined and competitive. Focus on Core Activities:
Problem of Laying Double Lines: Most of the railway Running trains and give up non-core activities such as
lines are single lines which create great inconvenience running schools, hospitals and a police force.
to the railway organization and passengers.
Accounting reforms: The current accounting system
Organizational Structure: Delays in decision making, does not provide details of the cost of various activities
inadequate market orientation lead to slow turnover and services, such as introduction of new trains and
times and delays in the implementation of railways scheduling of stops. It neither tracks assets nor assesses
projects. liabilities. Consequently, it becomes difficult to

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compute the costs and benefits of any project of activity. specific routes. Here, the Private sector entities are
Hence, in this regard, there is a need to adopt expected to be given complete autonomy with respect to
accounting reforms to track these details. fixing the tares and provision of various other services
such as catering, housekeeping etc.
Financing of Projects: Railways can lease huge aunt of
land that it holds to the private sector for station of time Payment Mechanism: The Private sector is required to
and car revenue Similarly, ays can enter into PPP pay haulage charge to the Railways for the use of its
agreements for the development of stations physical infrastructure such as Railway tracks signaling.
Railway stations etc. Apart from that the private sector
Safety of Railways: The Kakodkar committee had operator needs to share the revenue with the Indian
mended for an investment of 1 lakh crores a period of 5 Railways
years to improve the safety of Indian
C. Concerns with PPP Model of Private Trains
17.6.16 PPP Model in Indian
Higher Entry Barriers: Private entities required to buy
Railways their own Fully Air-conditioned modem coaches which
are higher costly
2020 the Ministry of Railways invited private sector for
operation of passenger trains in PPP mode on 109 es Higher Charges: Private entities are required to pay
across India Against this background, Government multiple charges to the Indian Railways in the form of
recently invited tenders from the private sector for the Haulage charges. Station usage charges etc Plus they are
tion of trains along certain identified routes. However, also required to share a certain percentage of their
response of the private sector was poor due to which revenue with IR: Private entities argue that the higher
Government had to cancel the entire auction process. charges reduce their profit margin.
Need for PPP in Indian Railways (IR) Demand Exceeds Lack of Level Playing Field: Trains run by indian
Capacity: Around 5 crore (15% ) passengers could not Railways (IR) and private sector would operate on same
be given confirmed tickets in 2019-20 On certain routes Presently, there is lack of clarity with respect to
routes, the demand exceeds the tram capacity by 30% whether there would be level playing field between IR
and Private sector. For example, IR trains may get
Availability of Track Capacity: The two Dedicated
priority in terms of allotment of platforms. preferential
Freight Corridors (DFCs) are set to be commissioned in
departure, and arrival timings etc
2021 This will generate additional capacity on routes
adjacent to the DFCs, where more passenger trains can Unfair Competition: Indian Railways maintains lower
be run. passenger fares through cross-subsidization Similarly.
the subsidy provided on certain air routes under the
Higher Investment Needs: PPP enables IR to raise
UDAN scheme has led to decline in airfare prices. On
revenue to meet its investment needs of around 50 lakh
the other hand, the Private sector operating the
crores between 2018 and 2030.
passenger trains needs to fix higher fares to recover its
Higher Multiplier Ratio: IR has strong forward- investment. The higher fares on such private trains vis-
backward linkages due to which it has large multiplier a-vis IR/air travel acts as major obstacle
effect of 5. Investment of Rupee 1 increases the output
D. Unreasonable Terms in PPP Agreement
by 25 (Eco Survey 2014-15).
Lack of flexibility for the private entities in changing
Benefits to the Passenger: Higher service quality and
departure/arrival timings, introduction of new halts
reduced journey times through the introduction of next
generation coaches. along the routes, deciding on length of train etc PPP
Agreement provides for key performance indicators
Mechanism of PPP model of Private Trains such as punctuality, reliability, maintenance of trains
etc. to be met by private entities Inability to meet these
Sharing of Resources: Under this model, the physical
indicators attracts penalty. For example, if the private
infrastructure such as Railway tracks, signaling.
trains do not arrive/depart on time, they would be
Railway stations etc. would remain under the control of
required to pay fine. However, the private entities argue
Indian railways. The private sector entities would be
that ability to arrive/depart on time (punctuality)
required to bring in their modern coaches to operate on

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depends on the signaling provided by Indian Railways (6 per cent) despite it being the most cost effective and
So, it would be unfair to force the private entities to pay efficient mode.
fines in such cases
Draught Levels: Most Indian container handling ports
E. Way Forward lack the capability to handle large container vessels due
to inadequate depth, a minimum draft depth of 18
The Bibek Debroy Committee on Railway metres is needed to enable mother vessels to dock at
Modernisation had strongly advocated setting up of ports
Railway Regulatory Authority of India (RRAI) to
ensure success of PPP in Indian Railways. Connectivity to Ports: Weak hinterland connectivity
between production centres and gateway ports.
Rationale: Presently, policy making, and the regulatory
function are both vested with the Ministry of Railways Transhipment Port: A large percentage of containers in
There is a clear conflict of interest as the regulator India are currently transhipped through other ports,
(Ministry of Railways) is also the competitor for the
private entities Because of this, private entities would such as Colombo (just south of India). Sign (East) due
always have an apprehension that policies would be to the absence of a transhipment country. This has led to
tited in the favour of Indian Railways. An atmosphere additional costs and due to the feeder voyage from india
of trust and confidence must be built through setting up to the h Capital for Inland Vessels: At present of capital
of an independent and autonomous regulator in form of is very high and makes TNT tr uncompetitive
RRAI Technical Issues in Inland Waterways: The and limited
Role: Determine whether the tariffs fixed by IR are depths due to the meandering w braiding of alluvial
market determined and competitive Create level playing rivers and the erosion of the causing excessive siltation,
field between Indian Railways (IR) and private entities lack of cargo a for IWT, non-mechanized navigation
Ensure that the private entities are treated on par with lock system insufficient unloading facility at terminals
IR on all aspects, including access to railway her use of IWT by shippers
infrastructure. Adjudicate on disputes which may arise
B. Way Forward
between IR and private entities Unlike other
infrastructure sectors such as Roads, Ports, Airports etc, Open up India's Dredging Market: At present Dredging
IR has so far failed to attract private sector investment. Corporation of India (DCI) and a im of private vendors
Hence, going forward, IR must address various serve the Indian dredging make limiting competition
bottlenecks and challenges which are hindering the
private sector investment. Enhance Last Mile Connectivity to inland Waterways:
IWT should be integrated to mutmo intermodal
17.6.17 Ports, Shipping and Inland connectivity Inland terminals with proper road and/or
rail connectivity and seamless transfer goods from one
Waterways mode to the other are important for a efficient logistics
India has a coastline spanning about 7,500 km, forming supply chain.
one of the biggest peninsulas in the world. Around 90 Facilitate Access to Capital For Inland Vesses Financing
per cent of India's external trade by volume and 70 per for inland vessels could be made par priority sector
cent by value are handled by 12 major ports and 205 lending by banks: Categorizing inand vessels as
non-major ports operate on India's coast. Yet, roads and infrastructure equipment will further ease access to
railways continue to be the dominant mode for cargo capital issues for a sector where capta investments and
movement. Despite being the most cost-effective and operational costs are high
efficient mode, water transport accounted for mere 6 per
cent of freight transport in India in 2016-17 Address Technical and Regulatory Constraints In Inland
Waterways: To ease movement of in vessels-Detention
A. Constraints before Inland Water Ways . Modal Mix: of a vessel without a valid reason should not be
Roads (54 per cent) continue to be the dominant mode allowed; A clear directive needs be issued for security
of transporting cargo, followed by rail (33 per cent). of inland vessels, crew and cargo, Strengthen existing
Transportation of cargo through waterways-shipping Inland Water Transpor Directorates or Maritime Boards
and inland water-accounts for a minuscule modal share or set them up in states where they do not exist to ease

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the IWT business and to ensure efficient regulation and 2025 and create an estimated 10 million new jobs (four
facilitation of IWT for cargo movement. million in direct employment)

Streamline the Governance of Inland Waterways Recently, the Ministry of Port, Shipping and Waterways
Currently, inland waterways are governed by mutp has started a Sagarmala Seaplane Service. A seaplane is
authorities including the Central Inland Water a fixed-wing aeroplane designed for taking off and
Corporation Limited (CIWTC Ltd), port authorities and landing on water. The seaplanes services will be a
State Governments. Streamlining the regulatory game-changer providing a supplementary means of
structure and bringing an overarching body to overse faster and comfortable transportation across the nation.
Inland Water Transport such as the IWAI will bring Apart from providing air connectivity to various remote
more consistency in the rules and strategy of the sector. religious/tourist places, it will boost tourism for
domestic and international holiday makers. It will save
Develop Measures for Year-round Navigation: Cntly travel time and stimulate localized short distance
due to weather conditions several inland trays are only traveling especially in the hilly regions or across the
serviceable during a part of the The seasonality of this rivers/lakes etc
mode of transport reduces option Efforts should be
made to develop deeper hes of the river, re at least 25 m
to 3 m

Expedite the implementation of Sagarmala to demise

ports
17.6.18 Civil Aviation Sector in India
C. Sagarmala Programme The Sagarmala Programme
was approved by the Union Cabinet in 2015 which aims India is currently considered the third largest domestic
at holistic port trastructure development along the 7.516 Civil aviation market in the world
km long coastine through modernisation, mechanisation
and computerisation. The Sagarmala project seeks to A. Significance of Air Transport
develop a string of ports around India's coast it aims to High Speed: It is the fastest means of transport which
develop access to new development regions with can transport passengers and goods within minimum
intermodal solutions and promotion of the cptimum time viz other transport
modal split, enhanced connectivity with main economic
centres and beyond through expansion of ral inland Strategic Importance: it has great strategic relevance
water, coastal and road services. which can be harnessed for internal and external
security
Under this port-led development framework, the
government hopes to increase its cargo traffic three-fold Easy Transport of Costly and Light Goods: it
convenient to send costly, light and perishable goods
It also includes the establishment of rail/road linkages through air transport which can't be transported via road
with the port terminals, thus providing last-mile or rail
connectivity to ports: development of linkages with new
regions, enhanced multi-modal connectivity including Free from Physical Barriers: Air transport is free from
rail, inland water, coastal and road services. physical barriers like rivers, mountains and valleys etc
thereby ensuring seamless travel across the globe •
0. Importance of Sagarmala Project Useful in Natural Calamities: During earthquake. flood,
India is located along key international trade routes in accidents and famine air transport is used extensively as
the Indian Ocean and has a long coastline of over 7.500 rail and road are not very effective for rescue operations
km. Yet, capacity constraints and lack of modern B. Government's Policy Support National Civil Aviation
facilities at Indian ports tremendously elongates the Policy 2016: Aims to take flying to the masses by
time taken to ship goods in and out of the country and making it affordable and convenient covers 22 areas of
has held back India's share in world trade. the Civil Aviation sector
Developing rivers as inland waterways can also help UDAN ("Ude Desh Ka Aam Naagrik") Scheme: Put
save domestic logistics costs too. Sagarmala could smaller cities and remote regions on the aviation map
boost India's merchandise exports to $110 billion by

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Nabh Nirman Scheme: Expand airport capacity more A. Present Status of Logistics Sector in India
than five times to handle a billion trips a year
Logistics is the overall process of managing how
C. Challenges before the Aviation Industry resources are acquired, stored and transported. It
includes industrial parks, warehouses, cold storages and
Government Intervention: The flying rights over transportation.
another country's territory do not lie in the hands of the
airline company, rather it depends on the political Employs around 22 million people (2016) Growth rate
relation and bilateral treaty between two or more in the last decade is around 7.8%
countries
Higher Logistics costs in India around 14% of GDP
Rising Fuel Prices: The industry's operational cost (US-9% Japan- 12 %)
component is dominated by the cost of the Aviation
Turbine Fuel (ATF) accounting for almost 45% of the Poor Ranking on Logistic performance Index
operational expenses A 10 per cent decrease in indirect logistics cost has the
Congestion: Capacity limitations at many airports like potential to increase exports by 5-8 per cent.
Delhi and Mumbai; Inadequate hangar space and B. Constraints in the Logistics Sector Cost of Logistics:
unavailability of land to expand airports at their current The cost of logistics remains high due to challenges in
sites. accessing finance underdeveloped infrastructure. poor
High Airport (Aeronautical) Charges: The airport connectivity and an unfavourable modal mix (India's
charges payable at the International airports are higher modal mix)
than those payable at the airports nominated as Coordination Due to Multiple Stakeholder Involvement:
Domestic airports or domestic flights leading to higher Logistics has four key compare transport warehousing
operational costs of aviation companies freight forwarding value added logistics Each of these
Shortage and Gaps in Availability of Industry- fails different segments of regulatory oversight w adds
complexity to the system. The presence multiple
Recognised Skills: From airline pilots and crew to agencies often leads to duplicate pro Non- uniform
maintenance and ground handling personnel D. documentation across states a transaction costs
Solutions to the Above Challenges
Warehousing Capacity and Fragmented Structure India's
Enhance Aviation Infrastructure: Complete the planned current reported warehousing capacity 108 75 million
airports under the UDAN initiative in a time- bound metric tonnes (MMT) of which the v sector makes up
manner. Revival of 50 un-served and under- served less than 20 per cent There value addition in the
airports/airstrips should be completed warehouse sector Handing warehousing facilities are
still largely un-mech with manual loading, unloading
Increase Investment in the Sector through Financial and and handing case of many commodities.
Infrastructure Support: Reduce taxes on MRO
Seamless Movement of Goods Across Mo and High
services and consider granting infrastructure status for Dwell Time: The movement of g across modes suffers
MRO, Increase aircraft parking infrastructure and from the absence of last e connectivity and
facilities at metro airports Bring Aviation Turbine Fuel infrastructure.
(ATF) under GST.
Interoperable Technology Across Modes: The of
Address Shortage of Skilled Manpower: Expedite interoperability of software systems used by authorities
commencement of courses by the National Aviation governing different modes of transfer leads to
University: Facilitate greater involvement of the private inefficiencies as it increases transit t and the need for
sector in sponsoring aviation institutions Ease the manual intervention when switching modes
Regulatory Burden: Deregulate further and open up the
aviation market: Strengthen regulatory capacity with Higher Border compliance and document process time.
respect to public private partnerships etc.

17.6.19 Logistics Sector C. Measures taken by Government

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Draft National Logistics Policy: The integrate Logistics Logistics Park: Ministry of Road Transport and
Policy could go a long way in streamlining an Highways (MORTH) is developing multi-modal
consolidating multidepartment requirements, base logistics parks at selected locations in the country under
facilitating corrective action, effective monitoring its Logistics Efficiency Enhancement Program (LEEP).
prompt grievance redressal Relaxed FDI Norms: It will encourage market
accountability through regulation and will attract
Infrastructure Status to Logistics: Infrastructure status investments from debt and pension funds into
will benefit the industry by way of car borrowing rates, recognized projects.
increased flow of foreign and priest capital, etc. The
benefits include: GST has Eased Cross Border Movement of Goods: The
GST regime is certain to expedite faster conversion of
Infrastructure lending at easier terms enhanced limits informal logistics setups to formal ones and speed up
Access to larger amounts of funds as Exe Commercial freight movement at interstate borders due to
Borrowings (ECB). dismantling of check posts

Access to longer tenor funds from insurance companies D. Way Forward

and pension funds
Driving logistics cost as a percentage of GDP down
Eligibility to borrow from India Infrastructure from estimated current levels of 13-14% to 10% in line
Financing Company Limited (IIFCL) Subsector: The with best-in-class global standards and incentivize the
logistics sector now finds a place List of Infrastructure sector to become more efficient by promoting
Integrated development of logistics. Optimizing the
Harmonized Master in the Harmonized Master List of current modal mix in line with international
infrastructure Subsector. This inclusion is set to benefit benchmarks.
the logistics industry as it will now have an access to
cheaper and na ferim credit National Trade Facilitation Enhancing efficiency across the logistics value chain
Action Plan: The National Facilitation action plan is the through increased digitization and technology adoption
reflection of the such as Blockchain. Bigdata, and Al etc • Ensuring
standardization in logistics (warehousing packaging,
Government's commitment to implement the Trade 3PL players, freight forwarders) Creating a National
Facilitation Agreement (TFA) Logistics e-marketplace as a one stop marketplace. It
New Logistics Division in the Ministry of Commerce will involve simplification of documentation for
and Industry (Bibek Debroy committee exports/imports and drive transparency through
recommendation): A new Logistics Division in the digitization of processes involving Customs. PGAs etc
Department of Commerce has been established to in regulatory, certification and compliance services
coordinate integrated development of the sector by way
of policy changes, improvement in existing procedures,
identification of bottlenecks and gaps. and introduction Improve India's ranking in the Logistics Performance
of technology-based interventions. e-way bill: The use Index to between 25 to 30 Strengthening the
of e-way bills has reduced truck turnaround time by warehousing sector in India by improving the quality of
20% storage infrastructure including specialized warehouses
across the country Set Multi-Modal Logistics Park
India has signed International Conventions: UN TIR Authority (MMLPA)
Convention (Customs Convention on International
Transport of Goods). TFA of WTO has been ratified - 17.6.20 Digital Infrastructure
which aims to simplify custom procedure. LEADS
Index: By Ministry of Commerce & Industry, a new Individuals can transfer payments digitally use e-
Logistics Ease Across Different States Index to rank governance portals to connect with the government.
states for the support they provide to improve logistics access information or make online purchases. This has
infrastructure within their respective jurisdictions. been made possible due to digital connectivity and
communication infrastructure. The Digital India
Infrastructure Creation: Bharat Mala, Sagar Mala, Programme has made significant progress in its nine
BBIN (framework MVA). growth areas The areas of focus include:

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Building broadband highways. is also attributed to the increase in disposable income,

especially, among the millennials who are changing
Providing universal access to mobile connectivity. decades of traditional travel trends Thus, Digital India
A public internet access program. will be needed for being transformative that is to realize
IT (Indian Talent) + IT (Information Technology) IT
E-governance, (India Tomorrow)
Electronic B. Government Initiatives
Service delivery. National Digital Communication Policy Broadband for
Access to information. all Creating 4 million additional jobs in Digital
Communications sector. Enhancing contribution of the
Increasing electronics manufacturing. digital communication sector to 8% of India's GDP
from 6% in 2017
Providing information technology skills for jobs and
early harvest programs Propelling India to Top 50 Nations in the ICT
Development Index of ITU from 134 in 2017.
A. Importance of Digital Infrastructure Enhancing India's contribution to Global Value Chains
Digital infrastructure is critical for delivery of services Ensuring Digital Sovereignty
to remote areas. In urban and regional cities, new
technologies are being used to improve the efficiency. National Broadband Mission: Universal and equitable
sustainability and services of infrastructure networks access to broadband services across the country,
from transport to energy services. especially in rural and remote areas.

Digital Infrastructure is needed for preparing India for a Digital India Scheme: Areas of focus include broadband
knowledge future, by providing quality and local highways, providing universal access to mobile
language content and making technology central to connectivity, a public internet access program, e-
enabling change. Digital infrastructure also helps in governance, electronic service delivery, access to
Inculcation of scientific temper, where perception information increasing electronics manufacturing
doesn't drive policy. providing information technology skills for jobs early
harvest programs to all
Digital Infrastructure will help to drive growth in
various .Infrastructure and line with sectors including Bharat Net: Providing high-speed broadband
Panchayats in the country
Fintech Sector: The Fintech sector in a recent couple of
years has seen a huge sump in growth Digital currency National Information Infrastructure (NII): Ensure
and online payments platforms have played a major role integration of the networks and cloud infrastructure to
in financial inclusion and efficient provide high-speed connectivity to various government
departments up to the Panchayat level Public Internet
Public Services Sector: Steady digital transformation Access Programme: Make 25000 common service
across areas like e-governance and this has also centres (CSCs) operational at Gram Panchayat level to
considerably brought down leakages and corruption. In deliver government services online
recent years india performed well in transparency index.
Universal Service Obligation Fund (USOF): Fund
Health Care Sector: it is catching up to meet the raised through the imposition of Universal Access Levy
demands of its tech-savvy population Demand is (UAL), which is a percentage of the revenue arrest by
shifting now to quality and affordable healthcare. much the operators under various licenses. This tend was
of it being fulfilled by a public-private partnership e- established with the object of improving telecom
commerce and Consumer Internet Sector: services in the remote and rural areas of Inda
India's e-commerce market is set to grow three times to C. Constraints and Challenges Broadband Connectivity:
surpass USD 100 billion by 2022. Travel and Internet access is plaque by issues related to quality and
Hospitality Sector: This sector has enjoyed rapid online reliability, outages call drops and weak signals. The
growth since the beginning of this century. The growth current definition of broadband of 512 kbps speed is

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inadequate and not in line with the expected rise in technologies which would resolve some of the
demand the future. Existing networks have been bandwidth challenges.
strained by limited spectrum availability and usage,
affecting provision of quality services Access and Digital Literacy: The National Digital
Literacy Mission should focus on introducing digital
Digital Access and Literacy: A significant portion of our terrace at the primary school level in all government
population does not have access to devices such as schools for basic content and in higher classes and
laptops, computers, smartphones etc. Digra literacy in colleges for advanced content. Multiplier effects of this
India is estimated to be less than 10 pierce of the mission will be realised when these students in tur
population. educate their family members.

Content in Indian Languages: Currently most dig Content in Indian Languages: Centre. States and
content is in English. However, "9 out of every 10 new researchers need focused collaboration to promote
internet users in India over the next 5 years are likely to Natural Language Processing for making all
be Indian language users" Availability of e-Services: A government's online services available in all 22 official
large number of e-services are not available on the languages Focus could be laid on the automatic
digital platform Wide variation across states in the translation of content into regional languages from
availability of citizen e-services. Currently, citizens Hindi or English. Case studies like those of the
have to physically vis government offices to access European Union, which had similar problems in making
most government- citizen (G2C) services, as content available in the languages of member countries,
municipalities and other government bodies have been should be explored to identify models that can
slow to digitize there processes. potentially be adopted

Cyber Security: The regulatory framework for cyber Availability of e-services: Individual ministries and
security is inadequate. Hacking and denial-of-service states have to play a pivotal role in ensuring that all
attacks have led to disruption of services, both in the their services are available and easily accessible by
government and the private sector banks and citizens over digital platforms Boosting domestic
governments increasingly face security breaches manufacturing of Electronics and other Digital
Components.
Strategies Needed to Improve Digital Infrastructure
Boost Electronics Manufacturing: To reduce the import
Improving Access of electronic goods and ensure digital sovereignty.
Universal broadband connectivity Provide 50 Mbps to Cyber Security: Need to evolve a comprehensive cyber
every citizen at Provide 1 Gbps connectivity to all Gram security framework for data security, safe digital
Panchayats of India by 2020 and 10 Gbps by 2022 transactions and complaint redressal Promotion of Data
Enable deployment of public Wi-Fi Hotspots; to reach 5 Localisation and a comprehensive data protection
million by 2020 and 10 million by 2022. . Ensure regime based on recommendations of B.N. Srikrishna
connectivity to all uncovered areas. Committee should be implemented Principles of Net
neutrality should be upheld and aligned with service
Innovation in Digital Sector requirements Security standards and testing for devices
and networks should be mandated and periodically
Attracting investments of $100 billion in the Digital
updated
Communications Sector.

Creation of Innovation led Start-ups in Digital

E. Road Ahead
Communications Sector. 4.0. Digital Infrastructure is the bedrock on which the vision
Accelerate transition to Industry of digitally empowered Digital India can be realised.
This needs to be given focussed attention for a
Quality of Service: Adequate availability of spectrum is transparent, empowered and secure India of 21st
critical to ensure service quality. Efficient spectrum Century
allocation in large continuous blocks should be
explored. We should explore migration to new

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Chapter – 18 18.2 Need for Public Sector

Undertakings (PSUs)
Public Sector Undertakings
Following are some of the factors that pressed need
PSUS:

1. After independence, industrialization required huge

18.1 Introduction financial support, technology and manpower which
A state-owned enterprise in India is called a Public were not available with the private sector.
Sector Undertakings (PSUs) or a Public Sector 2. Capital goods industries had long gestation periods
Enterprise. These companies are owned by the union (time between investment and commercial productor
Government of India. or one of the many state or and high break-even point (period before profit which
territorial governments, or both it is owned and acted as natural disincentives for private sector
managed by the government with a view to maximise
social welfare and uphold the public interest. it is 3. Lack of requisite private sector organization to lea the
offering from private sector in terms of management. industrial growth required by the country.
financial stake profit mechanism and objective.
4. Employment generation, inclusive growth, balanced
India has adopted mixed economic system where both regional development, etc. were some of additional
public and private sectors are parties in various factors which required setting up of PSUs
economic activities. There are nearly 348 PSUs in total
PSUs may be classified as Central Public Sector 18.3 Objectives of PSUs
Enterprises (CPSES) or State Level Public Enterprises
(SLPES). CPSES are companies in which the direct Public Sector Undertakings have been set up with the
holding of the Central Government or other CPSES is following objectives:
51% or more. The Central Public Sector Enterprises
1. To achieve self-reliance in core areas.
(CPSES) are also classified into strategic and non-
strategic Except the following areas all other CPSES are 2. To create capacity to produce basic and capital goods.
considered as non-strategic.
3. To become a driver of industrial growth
Areas of strategic CPSEs are:
4. To create employment opportunities.
Arms & Ammunition and the allied items of defence
equipment, defence air-crafts and warships 5. To promote exports and reduce imports

Atomic Energy (except in the areas related to the 6. To develop small scale industries
operation of nuclear power and applications of radiation
7. To give government the authority to regulate prices of
and radio-isotopes to agriculture, medicine and non-
basic goods.
strategic industries) Railways transport .
8. To promote balance regional growth.
The public sector can be classified into: . Departmental
Undertaking: Directly managed by concerned ministry 9. To provide industrial base for the development of
or department (e.g. Railways, Posts, etc) private sector.
Non-Departmental Undertaking: PSU (e.g. 10. To promote inclusive growth by reducing income
HPCL.IOCL, etc.) inequalities and accelerating economic growth.
Financial Institution: Statutory Corporations SBI UTI, 11. To promote redistribution of income and wealth.
LIC, etc.)

Companies registered under Companies Act, 1956 and

18.4 Evolution of Public Sector
2013 Undertakings
Boards and cooperatives

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Prior to Independence, there were few Public Sector Although a strong public sector has made India self
Enterprises in the country. These included the Railways, reliant in basic and heavy industry, has enhanced the
the Posts and Telegraphs, the Port Trusts, the Ordinance GDP of India which has had an spill over effect on the
Factories, All India Radio etc. Overall economy, led to creation of solid infrastructure
and defence architecture. Yet dominance of public
India, at the eve of independence, was predominantly an sector at the cost of private sector has given rise to
agrarian economy with a weak industrial base, low level crony capitalism and inefficiencies. The Indian PSUS
savings, inadequate investments and infrastructure faced the following problems which necessitated
facilities. In view of this type of socio-economic set up, reforms:
our visionary leaders drew up a road map for the
development of Public Sector as an instrument for self- Political Interference and Lack of Autonomy kill the
reliant economic growth. spirit of professionalism and discipline.

This led to the passage of Industrial Policy Resolution Inappropriate investment decisions leading to high
of 1948 and followed by Industrial Policy Resolution of operating ratios and low profitability
1956 The 1948 Resolution envisaged development of
core sectors through the public enterprises. Improper and Inconsistent Pricing Policy and excessive
overhead cost
It laid emphasis on the expansion of production, both
agricultural and industrial, and in particular on the Outdated Labour and other laws that choke innovation
production of capital equipment and goods satisfying and radical reforms
the basic needs of the people, and of commodities the Overstaffing and huge payroll costs
export of which would increase earnings of foreign
exchange. Multiple regulatory bodies create complexity in
working
In early years of independence, capital was scarce, and
the base of entrepreneurship was not strong enough Trade Unionism and disruptive activities
Hence, the 1956 Industrial Policy Resolution gave
Presence of Idle Capacity and Diseconomies of Scale
primacy to the role of the State which was directly
responsible for industrial development. Corruption and Crony capitalism
Consequently, the planning process (5 year Plans) was Inefficient management
initiated taking into account the needs of the country
The year 1991 can be termed as the watershed year Lack of efficient and trained staff.
heralding liberalization of the Indian economy
Cumbersome Exit Policy.

Public Sector Reforms have an impact in following

In 1991, India met with an economic crisis relating to sectors
its external debt. India approached the World Bank and
Research: There has been increased in research and
the International Monetary Fund (IMF), and received
development activities after Public Sector Reforms to
loans to manage the crisis. For availing the loan, these
make Indian PSUs globally competitive.
international agencies expected India to liberalize and
open up the economy by removing restrictions on the High-level networks: The schemes like Digital India.
private sector reducing the role of the government in optical fibre network, etc. have contributed to an
many areas and removing trade restrictions. India increase in communication networks and efficiency.
agreed to the conditions of World Bank and IMF and
announced the New Economic Policy (NEP) which is Consultancy: Consultancy services have been
characterized by liberalization and privatization of mushrooming in the country which is the result of
PSUs Public Sector Reforms.

Training: There has been a focus on skill development

18.5 Challenges of PSUs to cater to the needs of the Public Sector in order to
make it more competitive

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NTPC Limited
18.6 Classification of PSUs
Oil & Natural Gas Corporation Limited Steel Authority
After the advent of policy related to PSUs, lot of of India Limit
reforms took place ranging from provision of autonomy
to disinvestment policy of contemporary. After B. Navratna
economic reforms, various PSUs have been awarded
additional financial autonomy by the Government. The CPSEs fulfilling the following criteria are eligible
tr grant of this status:
These corporations are public sector companies that
have comparative advantages, which means that the 1. Having Schedule "A" and Miniratna category-1
Government has given them greater autonomy in their status.
functioning to compete in the global market in order to
2 Having atleast Three Memorandum of Understanding
support these enterprises in becoming global giants
(MoU) ratings during "excellent" or "very good" the last
(players)
5 years
Currently, this level of financial autonomy is divided
3 Composite Score of 60 or above in the six selected
into three categories: Maharatna, Navratna and
performance parameters Net Profit to Net Worth
Miniratna. The Maharatna category has been the most
(Maximum: 25)
recent one since 2009, other two have been in function
since 1997. There are around 10 Maharatna, 14 Manpower cost to cost of production or services
Navratna and 74 Miniratna CPSES. (Maximum 15) Gross margin as capital employed
(Maximum 15)
A. Maharatna
Gross profit as Turnover (Maximum: 15)
An entity is qualified for Maharatna status
Earnings per Share (Maximum: 10) Inter-Sectoral
1. Where the average annual turnover is ₹25.000 crore comparison based on Net profit to net worth
during the last 3 years. (Maximum: 20)
2. Average annual net worth of the company is 15,000 It empowers PSEs to make investment decisions up to
crore. 1000 crore or 15% of Net worth in a single project
3. Average annual net profit after tax of more than without government approval. They enjoy freedom to
*5,000 crore, during the last 3 years enter in joint ventures, form alliances and float
subsidiaries abroad Examples of Navratna include:
4. Should have significant global presence/international
operations. Bharat Electronics Limited (BEL)

5. Having Navratna Status. Container Corporation of India Limited

6. Listed on Indian stock exchange with minimum Engineers India Limited

prescribed public shareholding under SEBI regulations Hindustan Aeronautics Limited
The Maharatna status empowers mega CPSES to Hindustan Petroleum Corporation Limited
expand their operations in the global market. The board
of firms can take investment decisions upto 5000 crore Mahanagar Telephone Nigam Limited
without seeking government approval and are free to
decide on investments up to 15% of their net worth in a National Aluminium Company Limited
project Examples of Maharatna PSUs include: National Buildings Construction Corporation Limited
Bharat Heavy Electricals Limited NMDC Limited
Coal India Limited Nayeli Lignite Corporation Limited
GAIL (India) Limited Oil India Limited
Indian Oil Corporation Limited

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Power Finance Corporation Limited private company is privatization Government

companies can be converted into private companies in
Shipping Corporation of India Limited two ways:
C. Miniratna By withdrawal of government from ownership and
management of public sector companies and/or By
The CPSES that have shown profits in the last
outright sale of public sector companies
continuous three years and have positive net worth can
be considered eligible for grant of Miniratna status.
Presently, there are 74 Miniratnas in total. The
18.7.2 Objectives Sought from
Miniratnas are divided into two categories (I and II). Disinvestment
Category One: The PSUs that have made profits in the To reduce the financial burden on the government
previous three years or have generated a profit *30
crore or more in one of the preceding three years. To improve public finances of the exchequer
Example: Airports Authority of India, Antrix To introduce, competition and market discipline
Corporation Limited
To depoliticize non-essential services, granting them
Category Miniratnas have autonomy to decide on autonomy
investments without government approval up to 500
crore or equal to their net worth whichever is lower To encourage a wider share of ownership and make
public enterprises accessible.
Category Two: The PSUs that have made profits in the
preceding three years and have a positive net worth in 18.7.3 Types of Disinvestment
all three preceding years Example Artificial Limbs
manufacturing Corporation of India Bharat pumps and Disinvestment through minority stake sale in listed
compressors Limited, etc PSE: In this type of disinvestment. Government retains
majority shareholding ie. 51% of the shareholding and
Category Miniratnas have autonomy to decide on management control of PSE The sale of government
investments without government approval up to 300 shares is to retail public, employees. Foreign
crore or up to 50% of their net worth whichever is lower Institutional Investors (FI) etc.
Criteria: The CPSES which have made profits in the last
three years continuously and have positive net worth are Modes for Disinvestment through minority state in
eligible to be considered for grant of Miniratna status listed PSE include IPO, FPO, Offer for Sale (OFS),
Exchange Traded Funds (ETFs), Institutional Placement
Miniratnas can enter into joint ventures set subsidiary etc. Strategic Disinvestment: In this type of
companies and overseas offices but with certain disinvestment sale of substantial portion of Government
conditions shareholding in identified PSES upto 50% or more. This
entails sale of bulk equity to single buyer or entity. This
18.7 Disinvestment consists of two types:

18.7.1 Introduction 1. Majority Disinvestment: This happens when

government retains minority shareholding (26%).
Disinvestment can also be defined as the action of the Historically majority disinvestments have been typically
government selling or liquidating an asset or subsidiary. made to strategic partners. These partners could be
It is also referred to as divestment or 'divestiture other CPSES themselves, a few examples being BRPL
to IOC, and KRL to BPCL. Also, same as in the case of
Disinvestment refers to the sale from the government. minority disinvestment, in majority disinvestment cases
partly or fully of a government-owned enterprise the stake can also be offloaded by way of an Offer for
A government organization will disinvest an asset either Sale, separately or in conjunction with a sale to a
as a strategic move for the company or for raising strategic partner.
resources to meet general/specific needs 2. Privatisation: This is a form of Majority
Privatization: Changing of the ownership or disinvestment, along with 100% transfer of
management of a government owned enterprise to a management control. Disinvestment and privatization

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are often loosely used interchangeably. There is, 7. Employee Benefits: Employees of a firm are by
however, a vital difference between the two. disinvestment through: benefited ,Pay rises, which has
Disinvestment may or may not result in privatization. been done in disinvestments. Greater opportunities and
When the government retains 26% of the shares avenues for career growth and further employment
carrying voting powers while selling the remaining to a generation through capacity expansion.
strategic buyer, it would have disinvested, but would
not have 'privatized, because, with 26%, it can still stall 8. Core Competency: It helps the government to focus
vital decisions for which generally a special resolution more on core governance issues of our country rather
(three-fourths majority) is required. than on producing industrial goods.

18.7.4 Benefits of Disinvestment 18.7.5 Disadvantages of

Disinvestment
1. Improving Productivity: Privatization in developing
greater capabilities, improving productivity, efficiency, 1. Loss of Regular Income: Selling of profit-making and
with focus on profitability. dividend-paying PSU would result in loss of a regular
source of income to the government
2. Deepening of capital market: The process of listing of
CPSES on stock exchanges facilitates development and 2. Asset Stripping: There would be chances of 'asset
deepening of capital market and help in spread of equity stripping' by the strategic partner. Most of the PSUS
culture. have valuable assets in the shape of plants and
machinery, land and buildings, etc. The government's
3. Improves corporate governance: It would result in policy or disinvestment includes the disposal of both
introduction of corporate governance in the privatized profit-making, as well potentially viable PSUs.
companies by freeing the PSES from the Government
control and give more scope to innovation. Enhanced 3. Strategic and National Security Concerns: Strategic
corporate and with the introduction of independent Disinvestment of Oil PSUs is seen by some experts as a
Directors. threat to National Security since Oil is a strategic
natural resource and possible ownership in the foreign
4. Increase in public finance: It helps raise budgetary hand is not consistent with our strategic goals.
resources for the Government. Disinvestment funds can
be utilised for long-terms goals such as 4. Short Term Fix: Raising funds from disinvestment to
bridge the fiscal deficit is an unhealthy and short- term
Financing large-scale infrastructure development practice. It is said that it is the equivalent of selling
Investing in the economy to encourage spending family silver to meet short-term monetary requirements.

Expansion and Diversification of the firm. 5. Creation of Monopolies: Private sector monopoly
may lead to exploitation of workers.
Repayment of Government Debts: Almost 40 45% of
the Centre's revenue receipts go towards repaying 6. Exploitation of Employees: Privatization may lead to
public debt/interest. Investing in social programs like large lay off of workers increasing the unemployment
health and education. level.

5. Creates fiscal space for relocation of resources locked 7. Misappropriation of Disinvestment Proceeds: Funds
with CPSES: Disinvestment also assumes significance received through privatization and disinvestment are
due to the prevalence of an increasingly competitive mostly being used to balance budgetary deficit. High
environment, which makes it difficult for many PSUs to level of fiscal deficit cannot be reduced by proceeds of
operate profitably. This leads to a rapid erosion of the disinvestment and privatization only.
value of the public assets making t critical to disinvest
early to realize a high value. 18.7.6 Process of Disinvestment
6. Unlocking of shareholder value: It is done with the NITI Aayog will make recommendations with regard to
help of issuing IPO. Every company needs money for CPSUS under Strategic sectors (under Govt control) &
expansion, to improve their business, to better the Non strategic sectors (to be privatised or closed).
infrastructure, to repay loans, etc.

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Its recommendations will be approved by Core Group Commission. It was also simultaneously decided that
of Secretaries on Disinvestment (CGD). the NIF would be utilized for the following purposes:

Alternative Mechanism (AM) for DIPAM will secure 'in Subscribing to the shares being issued by CPSE
principle' approval from CCEA for strategic including PSBS and Public Sector Insurance Companies
disinvestment of PSE from time to time strategic on Rights basis to ensure 51% ownership of the
disinvestment has been empowered by the CCEA government in those CPSES/PSBs/Insurance
(Cabinet Committee on Economic Affairs) to decide on Companies
CGD's recommendations (where CCEA has given in
principle approval for strategic disinvestment) AM Recapitalization of Public Sector banks and Public
comprises Finance Minister, Minister of Road Transport Sector Insurance companies.
& Highways and minister representing respective Investment by government in
administrative department RRBs/IIFCL/NABARD/Exim bank.
The sale of the Centre's assets falls within the mandate Equity infusion in various metro projects.
of the Department of Investment and Public Asset
Management (DIPAM) under the Ministry of Finance It Investment in Bhartiya Nabhikiya Vidyut Nigam
is tasked with managing the Centre's investments in the Limited and Uranium Corporation of India Ltd.
PSUS
Investment in Indian Railways towards capital
Each year, the Finance Minister sets a "disinvestment expenditure.
target" Accordingly, bids are invited, or as in the case of
LIC. public offerings are made, and the PSU is 18.7.8 Reasons for the Government not
disinvested partially or fully Meeting its Disinvestment Target
All disinvestment proceeds to be channelized into The government has met its disinvestment target only
National Investment Fund (NIF) twice in last 10 years. The reasons for the same are
18.7.7 National Investment Fund Unpredictable Market conditions: The prevailing
(NIF) COVID driven slowdown & turmoil in the global
economy has impacted the valuations of privatised.
National Investment Fund (NIF) was constituted in
Low risk appetite: Many have the appetite for bidding.
November, 2005 into which the proceeds from
disinvestment of Central Public Sector Enterprises were Unwillingness of Private sector: To buy loss making
to be channelized. The corpus of NIF is of a permanent debt heavy PSUs, for example: Air India.
nature and was to be professionally managed to provide
sustainable returns to the Government, without Political ramifications: Suspicion of cronyism The
depleting the corpus. As per this scheme, 75% of the accusation of selling the family silver to western
annual income of the NIF is to be used for financing corporations has made those in power hesitant of
selected social sector schemes which promote disinvestment. The fair value of the asset may be a
education, health and employment. The residual 25% of controversial, subjective process, and can be easily
the annual income of NIF is to be used to meet the challenged in courts, and vulnerable to charges of
capital investment requirements of profitable and corruption.
revivable PSUs.
Workers' opposition: Trade Unions and workers often
In view of the difficult economic situation caused by the fear layoffs and adverse working conditions
global slowdown of 2008-09 and a severe drought in
2009-10, Government approved a change in the policy Way Forward
for utilization of disinvestment proceeds by granting a Given the importance of PSUs and the attached social
one-time exemption to utilize the disinvestment impact, a systemic and infrastructural overhaul of PSUs
proceeds directly for selected Social Sector Schemes is the need of the hour. These include timely
allocated by Department of Expenditure/ Planning disinvestment and privatisation of sick units, engaging
experts in the top level, providing more autonomy, etc.

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amount of the surplus, and a current account deficit

Chapter – 19 decreases it by that amount .

Balance Of Payment Generally, Balance of Trade component is the biggest

factor in making Current Account Deficit or Surplus

For example, if a country is importing more than it

exports, its trade balance will be in deficit, but the
19.1 Introduction shortfall will have to be counterbalanced in other ways
such as by funds earned from its for e.g. investments, by
The Balance of Payments (BOP) also known as balance
running down current reserves or by receiving loans
of international payments encompasses all economic
from one countries
transactions between a country's residents and its non-
residents in a particular period (generally over a year)
involving goods services income transfers such as gifts
19.2.2 Capital Account
foreign investments and loans etc. These transactions The capital account records international purchases and
are made by individuals, firms and government bodies sales of assets such as money, stocks, bonds etc
Purposes of Calculation of BOP: The capital account includes Foreign Direct Investment
(FDI), portfolio and other investments, and net external
Reveals the financial and economic status of a country
borrowings/Loans/Assistance
Can be used as an indicator to determine whether the
A capital account deficit shows that more money is
country's currency value is appreciating or depreciating
flowing out of the economy along with increase in its
Helps the Government to decide on fiscal and trade
ownership of foreign assets and vice-versa in case of a
policies Provides important information to analyse and
surplus.
understand the economic dealings of a country with
other countries
19.2.3 Errors and Omissions
19.2 Components of BOPs Sometimes the balance of payment does not balance.
This imbalance is shown in the BOP as errors and
19.2.1 Current Account omissions.

The current account measures the flow of goods service It reflects the country's inability to record all
and investments into and out of the country it represents international transactions accurately.
country's foreign transactions and, like the capital
account is a component of a country's Balance of 19.2.4 Changes in Foreign Exchange
Payments (80 The current account consists of the Reserves
balance of t (exports minus imports of goods).net
services minus import), net primary income or factor Movements in the reserves comprises changes in the
income (earnings on foreign investments minus foreign currency assets held by the Reserve Bank of
payments made foreign investors) and net cash India (RBI) and also in Special Drawing Rights (SDR)
transfers, that have e place over a given period of time balances.
Current Account = Trade gap + Net current transfers. A. Autonomous Items
Net income abroad
Autonomous Items also known as 'above the line items'
Trade gap= Exports-Imports - are those international transactions which happen due
A positive current account balance indicates that re to profit earning motive. All profit oriented international
transactions like export and import are autonomous
nation is a net lender to the rest of the world, while
negative current account balance indicates that s a net transactions. Autonomous transactions are called
borrower from the rest of the world. A current account autonomous' because they happen on their own accord
and not because of a country's BOP scenario.'
surplus increases a nation's net foreign asses by the

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Autonomous transactions will include imports and exceeds its supply) or vice-versa. This deficit or surplus
exports (current account transactions) and also lending needs to be counterbalanced from the Foreign Reserve
or borrowing of loans (cross border) or payment or of the country in order to make net BOP Zero. Hence, a
receipt of interests thereon. These transactions will BOP (excluding forex) surplus (or deficit) is
happen as when the originator of the transaction - ie. accompanied by an accumulation (or de-accumulation)
importer/ exporter/ borrower/ lender/ etc. wants to of foreign exchange reserves maintained by the central
transact. These transactions are not meant to establish bank
BOP identity.
19.3.2 Types of Disequilibrium
B. Accommodating items
Disequilibrium in balance of payments can be classified
Accommodating Items or 'below the line items are those as follows:
which originate to accommodate the BOP scenario. If
there is BOP surplus or deficit then accommodating Temporary Disequilibrium: Temporary disequilibrium
transactions are carried out in a deliberate manner to in the form of deficits or surpluses tend to last for a
balance out the surplus/ deficit BOP. Accommodating short period of time. They are the result of temporary
transactions compensate the surplus or deficit brought changes in the economy like crop failure, seasonal
about by autonomous transactions. It seeks to bring fluctuations, effect of weather on agricultural
equality between the payments and receipts of foreign production, etc. Such a disequilibrium may occur once a
exchange. Usually we have BOP deficit and that is while and gets automatically corrected. It does not pose
accommodated by bringing in flow of foreign exchange a serious problem for a country.
in the form of FDI/ loan from IMF etc. to balance out
Fundamental Disequilibrium: There is no precise
the deficit or to lower the deficit. Example: Drawings
definition of the term fundamental disequilibrium
from SDR, borrowings from IMF or central banks of
Economists generally define fundamental equilibrium
other countries etc. which have to be made to correct
as a deep rooted persistent deficit or s in the BOP of a
the disequilibrium in the autonomous items of balance
country" It is a chronic BOP according to IMF It is of
of payments.
long term nature and a matter of serious concern for the
Overall the BOP account can be a surplus or a deficit. If country
there is a deficit then it can be bridged by taking money
Cyclical Disequilibrium: Cyclical fluctuations in the
from the Foreign Exchange (Forex) Account.
business activity also lead to BOP disequilibrium
If the reserves in the forex account are falling short then cyclical disequilibrium occurs because (1) Trade cycles
this scenario is referred to as BoP crisis. follow different paths and patterns in different countries
() Different countries follow different stabilization
programmes, (iii) Differences in price and income
elasticities of demand for imports
19.3 Balance of Payments and
Structural Disequilibrium: Structural disequilibrium
Foreign Reserve (Forex) occurs due to structural changes in the economy Some
of the structural changes would include changes n
For the purpose of accounting, at broader level, Central technology, changes in tastes and preferences. changes
Bank's reserve account (forex) is also included into in long term capital movements, etc.
Capital Account of BOP. As when all components of the
BOP accounts are included they must sum to zero with 19.3.3 Measures to Overcome
no overall surplus or deficit (Hence the term 'Balance' is
used in Balance of Payment). Disequilibrium/ Imbalances in BoP
19.3.1 Disequilibrium of BOP A. Automatic Correction

If we add the current account and the capital account Miscellaneous

excluding the central bank's reserve account imbalances Under automatic correction, the BOP adjustment comes
(Disequilibrium) is possible, for example, more imports about automatically, and it is not brought about
than exports(and hence demand of foreign currency deliberately by government policy or intervention. The

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burden of adjustment is on the economy and market Import Control: Import Control can be done by
forces and not on the government. Assuming fixed or enhancing import duties, restricting imports through
flexible exchange rates, the automatic adjustment in import quotas, licensing and even prohibiting altogether
BOP takes place through changes in prices, interest the import of certain inessential items.
rates, income and capital flows.
3. Miscellaneous Measures: Some miscellaneous
B. Deliberate Measures measures like foreign loans, Incentives to promote
foreign investments and remittances, development of
1. Monetary Measures tourism can be used to control BoP imbalances
Monetary Contraction: The level of aggregate domestic Foreign Loans: Deficit BOP can be corrected by
demand, domestic price level and the demand for government borrowing from foreign banks etc since
imports and exports may be influenced by contraction repayment of these loans is spread over a long period,
or expansion of money supply so that balance of this helps the government to remove the deficit in the
payments disequilibrium may be corrected. balance of payments by utilizing the time gap.
Contraction of money supply is likely to reduce the Foreign Investments: By attracting foreigners in the
purchasing power and, thereby, the aggregate demand it country by offering them various incentives and
is also likely to reduce domestic prices. The fall in the concessions so that there is more capital inflow in the
domestic aggregate demand and domestic prices economy that helps government
reduces the demand for imports. The fall in domestic
prices is likely to increase exports Thus, the fall in Tourism Development: Increasing tourist by reduce
imports and rise in exports would help correct the deficit in BOP account offering them various facilities
disequilibrium like good hotels. transportation facility, concessional
travel etc. this would increase the foreign exchange
Devaluation: it means reduction of the official rate at earnings of the country
which the domestic currency is exchanged for another
currency

A country with fundamental disequilibrium in the Foreign Remittances: Government gives incentives to
balance of payments may devalue its currency in order people working abroad. This helps in inflow of foreign
to stimulate its exports and discourage imports to exchange.
correct the disequilibrium. Devaluation makes export of
Import Substitution: Producing substitutes of imported
goods cheaper and imports dearer
goods by providing various incentives and concessions
Exchange Control: It is a popular method employed to to the domestic industries. This replaces foreign
influence the balance of payments positions of a exchange outflow.
country Under exchange control the government or
central bank assumes complete control over the foreign 19.4 Balance of Payments Crisis
exchange reserves and earnings of the country.
A BOP crisis, also called a currency crisis, occurs when
The recipients of foreign exchange like exporters are a nation is unable to pay for essential imports or service
required to surrender foreign exchange to the its debt repayments Typically, this is accompanied by a
government central bank in exchange for domestic rapid decline in the value of the affected nation's
currency. By virtue of its control over the use of foreign currency Crises are generally preceded by large capital
exchange, the government can control imports. inflows, which are associated at first with rapid
economic growth. However a point is reached where
2. Trade Measures overseas investors become concerned about the level of
debt their inbound capital is generating, and decide to
Export Promotion: Export promotion includes the
pull out their funds.
reduction and abolition of the export duties providing
export subsidy, encouraging export production and The resulting outbound capital flows are associated with
export marketing by giving monetary, fiscal, physical a rapid drop in the value of the affected nation's
and institutional incentives and facilities. currency. This causes issues for firms of the affected
nation who have received the inbound investments and

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loans, as the revenue of those firms is typically mostly Convertibility of a currency means that currency of a
derived domestically but their debts are often country can be freely converted into foreign currency
denominated in a reserve currency. Once the nation's market determined rate of exchange that is, exchange
government has exhausted its foreign reserves trying to rate as determined by demand for and supply of a
support the value of the domestic currency, its policy currency
options are very limited. It can raise its interest rates to
try to prevent further declines in the value of its For example, convertibility of Rupee means that those
currency, but while this can help those with debts who have foreign currency (e.g. US dollars, Pound
denominated in foreign currencies, it generally further Sterling etc can get them converted into rupees and
depresses the local economy. vice-versa at the market determined rate of exchange.
Under convertibility of a currency there are authorised
Role of Global Institutions in Bop Crisis 1. Role of dealers of foreign exchange which constitute foreign
IMF: The International Monetary Fund is a global exchange market
organization which aims to help countries stabilize
exchange rates and provide loans to countries in need. The exporters and others who receive US dollars. Pound
Sterling etc. can go to these dealers which are generally
IMF lending, aims to give countries breathing room to banks and get their dollars exchanged for Rupees at the
implement adjustment policies and reforms that will market determined rates of exchange. Similarly, under
restore conditions for strong and sustainable growth, currency convertibility, importers and other who require
employment, and social investment. These policies will foreign currency can go to these banks dealing in
vary depending upon the country's circumstances, foreign exchange and get rupees converted into foreign
including the causes of the problems. currency

When a country suffers from a deficit in its balance of A. Convertibility on Current Account
payments on current account, it can obtain from the
IMF in exchange for its own currency, the currency Current account convertibility refers to the freedom to
which it needs to pay off its deficit. There is, however a convert your rupees into other internationally accepted
limit to the amount which it can thus obtain currencies and vice versa without any restrictions
whenever payments are made. Accordingly, several
2. Contingent Reserve Arrangement (CRA) by BRICS: provisions like remittances for service, education, basic
The BRICS CRA proposes to provide short-term travel, gift remittances, donation, and provisions of the
liquidity support to the members through currency Exchange Earners' Foreign Currency Account (EEFCA)
swaps to help mitigating BoP crisis, in case such a were relaxed .Current account is today fully convertible
situation arises. The BRICS CRA will help Ind and (operationalized August 19, 1994) It means that the full
other signatory countries to forestall short-term liquidity amount of e foreign exchange required by someone for
pressures, provide mutual support and further current see will be made available to him at the official
strengthen financial stability. It would also contribute to exchange rate and there could be an unprohibited
strengthening the global financial safety net arc outflow foreign exchange (earlier it was partially
complement existing international arrangements (from convertible) a was obliged to do so as per Article VIII
IMF) as an additional line of defence BRICS CRA will of the IMF which prohibits any exchange restrictions on
ensure equity and inclusiveness by providing a backup current international transactions (keep in mind that
safety net arrangement in place that will allow the India was under pre-conditions of the IMF since 1991).
Government of India to go ahead with its necessary and
bold policy decisions without being concerned about the Notwithstanding the above, the government still retains
international economic development that may lead to any controls on current account. Among these, the
domestic imbalances arc worsen BoP position. following may be specifically mentioned Repatriation
of export proceeds within six months;

Caps on the amounts spent on the purchase of services

abroad: Restrictions on the repatriation of interest on
rupee debt:

Dividend-balancing for FDI in some consumer goods

19.5 Convertibility of Currency industries:

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Restrictions on the repatriation of interest on NRI Indian corporate is allowed to prepay their external
deposits: The rupee is not allowed to be officially used commercial borrowings (ECBS) via automatic route if
as International means of payment. Indian banks are not the loan is above $ 500 million
permitted to offer two-way quotes to NRIs or-non-
resident banks. Individuals are allowed to invest in foreign assets
shares, etc., up to the level of $ 2.50.000 per annum •
With the help of these controls, the governments can Unlimited amount of gold is allowed to be imported
significantly alter the flow of foreign exchange and the (this is equal to allowing full convertibility in the capita
exchange rate of rupee. Additionally, the RBI can account via current account route, but not feasible for
influence the exchange rate through direct purchase and everybody) which is not allowed now
sale of foreign exchange in the market.
The priority has been to liberalise inflows relative to
B. Convertibility on Capital Account outflows, but all outflows associated with inflows have
been totally freed. Among the type of inflows. FDI is
Capital account convertibility (CAC) means the preferred for its stability, while short-term external debt
freedom to convert local financial assets into foreign is avoided A differentiation is made between corporates
financial assets and vice versa at market determined individuals and banks
rates of exchange. This means that capital account
convertibility allows anyone to freely move from local Advantages of Capital Account Convertibility
currency into foreign currency and back.
Availability of large funds by improved access to
Convertibility on the capital account is usually international financial markets
introduced her a certain period of introducing the
Current account convertibility. The most important Reduction in cost of capital
effect of introducing e capital account convertibility is The incentive for Indians to acquire and hold
that it encourages e inflow of the foreign capital, international securities and assets
because under certain Conditions, the foreign investors
are enabled to repatriate their investments, wherever Greater financial competitiveness
they want. But the risk is that it ay accelerate the flight
Will help Indian corporate to use External commercial
of the capital from the country if are unfavourable.
borrowing route without RBI or Govt approval
For example, an Indian can sell property here and take e
Indian residents can hold and transact foreign currency
Capital outside. India, at present has partial capital
denominated deposits with Indian banks.
account convertibility.
A Certain class of financial institutions and later NBFCs
After the recommendations of the SS Tarapore
can access global financial market.
Committee (1997) on Capital Account Convertibility.
India has been moving in the direction of allowing full Banks and financial institutions can trade in Gold
convertibility in this account, but with required globally and issue loans
precautions India is still a country of partial
convertibility (4060) in the capital account but inside Disadvantages of Capital Account
this overall policy enough reforms have been made, and Convertibility
to certain levels of foreign exchange requirements, it is
an economy allowing full capital account convertibility. Market determined exchange rates being higher than
Following steps have been taken in the direction of officially fixed exchange rates can raise import prices
capital account convertibility and cause Cost-push inflation.

Indian corporate is allowed full convertibility in the Improper management of CAC can lead to currency
automatic route up to $ 500 million overseas ventures depreciation and affect trade and capital flows.
(investment by Ltd companies in foreign countries
The advantages have been found to be short lived as per
allowed)
studies, and also International financial institutions are
sceptical about CAC post-2008 crisis.

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Speculative activity can lead to capital flight from the ed to contraction in capital inflows.As a result rupee
country as in case of some South East Asian economies was devalued in June 1966 by 36.5%
during 1997-98.
B. 1979 Energy Crisis/Oil Shock
Imposing control would become difficult in a globalized
environment once CAC is introduced. Price of Crude Oil almost doubled due to the crisis (in
wake of Iranian Revolution) which led to increase in
On the other hand, Capital Account Convertibility is cost of petroleum, oil and lubricant (POL) imports
widely regarded as the hallmark of developed countries. Between 1978-79 and 1981-82 imports almost doubled
It is also seen as the major comfort factor for foreign Also, the exports performance was depressed by severe
investors since it allows them to reconvert local International recession. There was a sharp widening in
currency back into their own currency and move out merchandise trade deficit which resulted in a turnaround
from India. CAD from a surplus in 1977-78 to deficit in 1981-82
To attract foreign investment, many developing C. External Payments Crisis of 1991
countries went in for CAC in the 1980s, not realising
that free mobility of capital leaves countries open to 1. Responsible Factors for Crisis
both sudden and huge inflows and outflows, both of
which can be potentially destabilising. More important, Political Uncertainty and Instability: The period from
unless there are required institutions, particularly November 1989 to May 1991 was marked with political
financial institutions capable of dealing with such huge uncertainty and instability in India In fact, within a span
flows, countries may not be able of one and half years there were three coalition
governments and three Prime Ministers. This led to
delay in tackling the ongoing Balance of Payments
crisis, and also led to a loss of confidence of foreign
C. Difference between Capital and Current investors.
Account Convertibility
Excess Domestic Expenditure i.e. Large Fiscal Deficit:
Current Account Convertibility allows free inflows and The gross fiscal deficit of the Government (Centre and
outflows of foreign currency for all purpose including States) rose from 9.0 percent of GDP in 1980-81 to 10.4
resident Indians buying foreign goods and services percent in 1985-86 and to 12.7 percent in 1990-91.
(imports). Indians selling foreign goods and services
(exports), Indians receiving and sending remittances
accessing foreign currency for travel, study abroad. Iraq-Kuwait War or Gulf War: The Gulf crisis began
medical tourism purpose etc. to cope as was with the invasion of Kuwait by Iraq at the beginning of
demonstrated by the East Asian crisis of the late 90s. August 1990. Crude oil prices rose rapidly thereafter-
from USD 15 per barrel in July 1990 to USD 35 per
19.6 India and BoP barrel in October 1990. Iraq and Kuwait were the major
sources of India's oil imports and the war made it
Historically Important Events necessary to buy costly oil from the spot market. Break-
Up of the Soviet Bloc: Rupee trade (payment for trade
A. Turbulent Period of 1960s was made in rupees) with the Soviet Bloc was an
Following chain of events led to low level of foreign important element of India's total trade up to the 1980s.
exchange reserves Extent of Crisis
Strains of Indo-China conflict (1962) Inflow of foreign borrowing had increased at rapid rate.
Indo-Pakistan war (1965) Total public debt as proportion of GNP (Gross National
Product) doubled, reaching the level of 60%
Severe drought (1965-66)
Foreign currency reserves depleted rapidly: the situation
Large food imports from the US under PL-480 became so serious that the Indian foreign exchange
Withdrawal of foreign aid by countries like USA further reserves could barely finance three weeks' worth of
imports.

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India was on the verge of defaulting on its international After the global financial crises in 2008, most of the
commitments and was denied access to external emerging economies like India faced shocks form the
commercial credit markets A net outflow of NRI policies of the advanced countries. Due to global
deposits commenced in October 1990 and continued economic slowdown, there was the low external
during 1991 demand (Impacting Indian Exports). Also, due to large
scale dependence on oil imports, India's imports have
The only way left for India was to borrow against the increased continuously. This hay led to the widening of
security of its gold reserves. CAD reaching a record low of -31857 18 USD Million
3. Steps Taken by India IMF Loan and Gold Airlift: To in the fourth quarter of 2012
solve the crisis of 1991, the Government of India was However, India's BoP situation remained comfortable
forced to approach the International Monetary Fund and during 2013-14 to 2015-16, which further improved in
World Bank for assistance Government of India's 2016-17 due to many reasons:
immediate response was to secure an emergency loan of
USD 22 billion from the International Monetary Fund The fall in international crude oil prices, which resulted
by pledging 67 tons of India's gold reserves as in a decline in oil import bill Sharp decline in gold
collateral. The Reserve Bank of India had to airlift 47 imports India's services exports continue to remain
tons of gold to the Bank of England and 20 tons of gold buoyant .Increase in Foreign Investments (India is
to the Union Bank of Switzerland. This move had among the top destination countries for FDIs)
outraged the National sentiments as well

IMF Loan with Conditions: These international

financial institutions were at that time criticized for
their structural adjustment programs, which featured
standard conditions such as a reduction in the current
and fiscal deficit monetary tightening and devaluation
of the currency

Devaluation: At that time, devaluation of the rupee was

imperative hence, the Government along with RBI
undertook a two-step devaluation of the rupee, which
was first devalued against major currencies by around 9
percent on 1st July, 1991. followed by another
devaluation of 11 percent two days later. This was done
to counter the massive draw down in foreign exchange
reserve and making Indian exports more competitive

Structural Reforms: 1991 Crisis led to big economic

reforms famously termed as Liberalisation, Privatisation
and Globalisation (LPG reforms). This led to reduction
in tariffs in the import, deregulation of markets.
reduction of taxes, increase in foreign investment due to
opening up of different sectors to FDIs etc

These moves helped India tide over the Balance of

Payments crisis. The foreign reserves started picking up
with the onset of the liberalisation policies. In 2009,
India bought 200 Metric tons of gold from International
Monetary Fund, which was nearly three times the
amount which India pawned to IMF in 1991.

D. Present Scenario

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currency fixed in terms of some External Standard This

Chapter – 20 external standard can be gold, silver, other precious
metal. another country's currency or even some
Foreign Investment internationally agreed unit of account

The basic purpose of adopting this system is to ensure

stability in foreign trade and capital movements To
achieve stability, government undertakes buy foreign
20.1 Exchange Rate currency when the exchange rate becomes weaker and
sell foreign currency when the rate of exchange gets
Exchange rate is the price of a nation's currency in stronger. For this, government has to maintain large
terms of another currency i.e., an exchange rate is the reserves of foreign currencies to maintain the exchange
rate at which one currency will be exchanged for rate at the level fixed by it.
another. An exchange rate thus has two components, the
domestic currency and a foreign currency, and can be When value of domestic currency is tied to the value of
quoted either directly or indirectly. In a direct quotation, another currency or in terms of gold, it is known as
the price of a unit of foreign currency is expressed in Pegging
terms of the domestic currency. In an indirect quotation,
the price of a unit of domestic currency is expressed in Arguments in Favour of Fixed Exchange Rate
terms of the foreign currency. It provides stability in the markets, certainty about the
A currency's exchange rate vis-a-vis another currency future course of actions in the Foreign Exchange
reflects the relative demand among the holders of the Market, and it eliminates the risk caused by the
two currencies uncertainty.

For e.g. If the US dollar is stronger than the rupee It creates a system for a smooth flow of foreign capital
implying value of dollar is higher with respect to between the nations, as it gives assurance of fixed
rupee). then it shows that the demand for dollars (by return on investment.
those holding rupee) is more than the demand for rupees It removes the possibility of speculative transactions in
(by those holding dollars). foreign exchange markets.
This demand in turn depends on the relative demand for It reduces the possibility of competitive exchange
the goods and services of the two countries. depreciation or devaluation of currencies.

20.1.1 Types of Exchange Rate B. Flexible Exchange Rate System

System Flexible exchange rate system refers to a system in
Some of the major types of foreign exchange rates are which exchange rate is determined by forces of demand
as follows: and supply of different currencies in the foreign
exchange market i.e. by the market through interactions
A. Fixed Exchange Rate System (or Pegged Exchange of thousands of banks, firms and other institutions
Rate System). seeking to buy and sell currency for purposes of making
transactions in foreign exchange.
B. Flexible Exchange Rate System (or Floating
Exchange Rate System). The value of currency is allowed to fluctuate freely
according to changes in demand and supply of foreign
C. Managed Floating Rate System
exchange. There is no official (Government)
intervention in the foreign exchange market.

Flexible exchange rate is also known as 'Floating

A. Fixed Exchange Rate System Exchange Rate'
Fixed exchange rate system refers to a system in which
Arguments in Favour of Flexible Exchange Rate
exchange rate for a currency is fixed by the government
Under this system, each country keeps value of its

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Flexible exchange rate provides a good deal of foreign exchange reserves of that country gets
autonomy in respect of domestic policies as it does not exhausted. After this, the central bank goes t the
require any obligatory constraints. This advantage is of devaluation of the domestic currency to move another
great significance in the formulation of domestic equilibrium of the exchange rate
economic policies.
Crawling Peg System: Under this, the central bank
Flexible exchange rate is self-adjusting and therefore it keeps on adjusting exchange rate based on the near
does not devolve on the government to maintain an demand and supply conditions of the exchange rate
institutions seeking to buy and sell currency for market. It follows a system of regular checks and
purposes of making transactions in foreign exchange balances and the central bank undertakes small
devaluations based on the market conditions
The value of currency is allowed to fluctuate freely
according to changes in demand and supply of foreign Clean Floating System: Under this, the exchange rate of
exchange. There is no official (Government) domestic currency is based on the market forces of
intervention in the foreign exchange market. demand and supply without the government
intervention This system is identical to the floating
Flexible exchange rate is also known as 'Floating exchange rate .
Exchange Rate'
Dirty Floating System: Under this, the exchange rate is
Since flexible exchange rate is based on a theory it has a mainly determined by the market forces of demand and
great advantage of predictability and has the merit of supply but the central banks occasionally intervened to
automatic adjustment. Flexible exchange rate serves as remove excessive fluctuations from the foreign
a barometer o actual purchasing power of a currency in exchange markets
the foreign exchange market.

Some economists argue that the most serious charge

against the flexible exchange rate, that is, uncertainty is
not tenable because speculative tendency under this 20.1.2 Devaluation and Revaluation
system itself creates conditions for certainty and
Devaluation refers to reduction in the value of domestic
stability.
currency by the government On the other hand,
They argue that the degree of uncertainty under flexible Revaluation refers to increase in the value of domestic
exchange rate system, if any, is not greater than one currency by the government India devalued Rupee for
under the fixed exchange rate the first time in 1966.

Revaluation is a term which is used when there is a rise

in currency value in relation with a foreign currency in
C. Managed Floating Rate System a fixed exchange rate In the floating exchange rate
regime, the correct term would be appreciation
It is a hybrid of a fixed exchange rate and a flexible
exchange rate system. It refers to a system in which Altering the face value of a currency without changing
foreign exchange rate is determined by market forces its foreign exchange rate is a redenomination not a
and Central Bank intervenes in the foreign exchange revaluation
market to restrict the fluctuations in the exchange rate
within certain limits. 20.1.3 Controversy Regarding India
The aim is to keep exchange rate close to desired target
Being a Currency Manipulator
values. For this, central bank maintains reserves of A. Currency Manipulation
foreign exchange to ensure that the exchange rate stays
within the targeted value. It is also known as 'Dirty This refers to practice of engaging in "unfair currency
Floating'. practices by deliberately devaluing their currency
against the dollar. The practice would mean that the
Types of Pegged Systems country in question is artificially lowering the value of
Adjusted Peg System: Under this, the central bank tries its currency to gain an unfair advantage over others.
to hold the exchange rate of domestic currency until the This is because the devaluation would reduce the cost of

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exports from that country and artificially show a and seller for forward sale and purchase of currency is
reduction in trade deficits as a result. called forward exchange rate

B. Currency Manipulators 20.1.5 Factors Affecting Exchange

The US Department of Treasury releases the semi- Rates
annual report where it has to track developments in
Intervention of the Reserve Bank of India: During high
international economies and inspect foreign exchange
rates. It reviews Currency practices of the US' 20 volatility in the exchange rate. RBI intervenes to
prevent the exchange rate going out of control For
biggest trading partners. An economy meeting two of
the three criteria in the Trade Facilitation and Trade example, the RBI sells dollars when Indian rupee
Enforcement Act of 2015 is placed On the Watch List depreciates too much, while it purchases dollars when
the Indian rupee appreciates beyond a certain level
This includes
Inflation Rate: The increase in inflation rate can
A significant bilateral trade surplus with the US-one
that is at least USD 20 billion over a 12-month period.A increase the demand for foreign currency which can
negatively impact the exchange rate of the national
material current account surplus equivalent to at least
2% of Gross Domestic Product (GDP) over a 12-month currency For example, an increase in the inflation level
period. of petroleum oil can increase the demand for foreign
currency leading to the depreciation of Indian rupee
"Persistent one-sided intervention when net purchases
of foreign currency totalling at least 2% of the country's Interest Rate: Interest rates on government securities
GDP over a 12 month period are conducted repeatedly, and bonds, corporate securities etc affect the outflow
and inflow of foreign currency. If the interest rates on
in at least six out of 12 months Countries that meet all
three of the criteria are labelled as currency government bonds are higher compared to other country
forex markets, it can increase the inflow of foreign
manipulators by the Treasury.
currency, while lower interest rates can lead to the
India's Status: India met two of the three criteria that is outflow of foreign currency. This affects the exchange
the trade surplus criterion and the "persistent one-sided rate of Indian rupee.
intervention" criterion.
Exports and Imports: Exports and imports affect
Consequence: Inclusion in the list does not subject to exchange rate as exports earn of foreign currency while
any kind of penalty and sanctions but it deteriorates the imports require payments in foreign currency. Thus, if
global financial image of the country in the financial the overall exports increases, the national currency
markets in terms of foreign exchange policies including appreciates, while increases in imports leads to the
undervaluation of currencies to gain export advantages. depreciation of the national currency

20.1.4 Types of Exchange Rate Apart from above, the Indian foreign exchange market
is also affected by factors such as the receipts in the
Markets accounts of exports in invisibles in the current account,
inflow in the capital account such as FDI. external
Spot Market: It refers to a market in which the sale and
commercial borrowings, foreign institutional
purchase of foreign currency are settled within two days
investments, NRI deposits, tourism activities etc.
of the deal. The spot sale and purchase of foreign
exchange make the spot market The rate at which the
foreign currency is bought and sold is called spot
20.1.6 Exchange Rate System in India
exchange rate For all practical purposes, spot rate is Historical Background
treated as the current exchange rate
India was the founding member of International
Forward Market: it refers to that market which deals in Monetary Fund (IMF), and hence, India was obliged to
the sale and purchase of foreign currency at some future
adopt the IMF system of exchange rate determination...
date at a pre-settled exchange rate When buyers and
sellers enter an agreement to buy and sell a foreign This system is known as the par value system pegged
currency after 90 days of the deal it is called forward exchange rate system Under this system each member
transaction The exchange rate settled between buyer country of the IMF was required to define the value of

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its currency in terms of gold or the US dollar and the main objectives of India's exchange rate policy to
maintain (or peg) the market value of its currency ensure that the economic fundamentals are truly elected
within 1 per cent of the defined (par) value in the external value of the rupee Subject to this
predominant objective, the conduct of exchange policy
The Bretton Woods system collapsed in 195 (with the is idled by the following
suspension of convertibility of the dollar by the USA)
Consequently, the rupee was begged to pound sterling Reduce volatility in exchange rates, ensuring that the
for four years However in order to overcome the market correction of exchange rates is effected in an
weaknesses associated with a single currency peg and to orderly and calibrated manner
ensure stability of the exchange rate, the rupee, with
effect from September 1975 was pegged to a basket of Hep maintain an adequate level of foreign exchange
currencies till the early 1990s (initially linked to the reserves
basket of 14 currencies but later reduced to 5 currencies Prevent the emergence of destabilisation by speculative
of India's major trading partners) activities and
This System continued through the 1980s: though the Help eliminate market constraints so as to assist the
exchange rate was allowed to fluctuate in a wider development of a healthy foreign exchange market
margin and to depreciate modestly with a view to
maintaining competitiveness However, the need for 20.1.8 Nominal Effective Exchange
adjusting exchange rate became precipitous in the face
of external payments crisis of 1991 Rate (NEER)
The Liberalised Exchange Rate Management System Nominal Effective Exchange Rate is the weighted
(LERMS) was put in place in March 1992 involving the average lateral nominal exchange rates of the home
dual exchange rate system in the interim period. Under currency in ms of foreign currencies. It is the exchange
a dual exchange rate system 40 percent of export rate of one currency against a basket of currencies,
earnings were to be converted at the official exchange weighted according to trade with each country (not
rate prescribed by the Reserve Bank of India and the adjusted for inflation).
remaining 60 percent were to be converted at market
determined rates 20.1.9 Real Effective Exchange Rate
The dual exchange rate system was replaced by a
(REER)
Unified Exchange Rate System (UERS) in March 1993. The real effective exchange rate (REER) is the weighted
With that. India entered into a new phase of exchange average of a country's currency relative to an index or
rate management le Managed Floating Rate System. casket of other major currencies, adjusted for the effects
of inflation. The weights are determined by comparing
The experience with a Market Determined Exchange
the relative trade balance of a country's currency against
Rate System in India since 1993 is generally described
ach country within the index. This exchange rate is used
as 'satisfactory as orderliness prevailed in the Indian
to determine an individual country's currency value
market during most of the period Episodes of volatility
relative the other major currencies in the index, such as
were effectively managed either through direct market
the US. dollar Japanese yen and the euro.
intervention (purchases and sales in international
currency (i.e... US dollars and euro) both on the spot NEER-Domestic currency exchange rate in terms of
and also in forward markets) or indirect interventions SDR/Foreign currency exchange rate in terms of SDR.
(the use of reserve requirements and interest rate
flexibility to smoothen temporary mismatches between REER NEER x (Domestic Price Index/Foreign Index).
demand and supply of foreign currency)
20.2 Forex Reserve of India
In 1947 the exchange rate was 1 USD = 1 INR but as of
September 30, 2021 it is around 1 USD 75 INR Price

20.1.7 Objectives of Exchange Rate Exchange reserves are the foreign currencies held by a
country's central bank They are also called foreign
Management in India currency reserves or foreign reserves One of the most

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important reasons for holding serves is to manage the IMF. but can designate for its own use. The reserve
currency's value. tranche portion of the quota can be accessed by the
member nation at any time, whereas the rest of the
Foreign Exchange reserves consist of: member's quota is typically inaccessible.
Foreign Currency Assets If any money was lent over and above the quota to the
Gold IMF's General Resource Account. it becomes part of
Reserve Tranche.
Special Drawing Rights (SDR) holdings
India's Foreign Exchange Reserves have risen from a
Reserve Tranche modest level of US dollar 5 billion during 1001 to reach
around 600 billion US dollar as of June 2001
A. Foreign Currency Assets (FCAs) Significance of Foreign Exchange Reserves
The currencies of various countries held in foreign The importance of foreign exchange reserves les in the
exchange reserve are called foreign currency assets For following aspects :
example reserves held in US Dollars, Euro, Japanese
Yen ett Apart from currencies, it includes foreign bank 1 As economies pursue open policies with large cross
deposits foreign treasury bills and short term and long border inflows and outflows, it provides a buffer against
term foreign government securities. The deposit global fallout and prevent currency crisis like situation.
agreements with IMF trust is also a part of FCAs and
2 It helps economies to provide import cover, ensuring
are readily available to meet a BOP financing need
smooth import in terms of domestic requirements
B. Gold 3. It gives the freedom to run higher current account
The RBI uses its gold stock as a back up to issue deficits which could otherwise become a limiting factor
currency and meet the unexpected Balance of Payment for Open Economy It is helpful for economies to service
problems. their high cost.

4 foreign currency debt or in meeting short term foreign

C. Special Drawing Rights (SDRs)
Currency debt
The SDR is an international reserve asset. created by
5 It strengthens the confidence of the government for
the IMF in 1969 to supplement its member countries
Greater openness of economies and bolder reforms
official reserves, and help countries meet Balance of
Payment problem. The member countries contribute to 6 It increases international credibility and stature.
this account to avail this benefit. The contribution is in
proportion of their IMF quota (membership fee). SDRs 7 Provides the capacity to intervene in support of the
can be exchanged for freely usable currencies. The national or union currency
value of the SDR is based on a basket of five major 8 Limits external vulnerability by maintaining foreign
currencies- the US dollar, the euro, the Chinese currency liquidity to absorb shocks during times of
renminbi (RMB), the Japanese yen, and the British
crisis or when access to borrowing is curtailed
pound sterling. The SDR is neither a currency, nor a
claim on the IMF. Rather, it is a potential claim on the Significance of Rising Forex Reserves during Pandemic
freely usable currencies of IMF members Holders of Times Comfortable Position for the Government: The
SDRS can obtain these currencies in exchange for their rising forex reserves give comfort to the government
SDRS in two waysThrough the arrangement of and the RBI in managing India's external and internal
voluntary exchanges between members. By the IMF, financial issues
designating members with strong external positions, to
purchase SDRS from members with weak external Managing Crisis: It serves as a cushion in the event of a
positions. Balance of Payment (BOP) crisis on the economic front.

Rupee Appreciation: The rising reserves have also

D. Reserve Tranche
helped the rupee to strengthen against the dollar
It is the proportion of the required quota of currency
that each IMF member country must provide to the

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Confidence in Market: Reserves will provide a level of to buy $1 worth of goods in India as opposed to in the
confidence to markets and investors that a country can US.
meet its external obligations 20.3 Purchasing Power
Parity The following micro-example can illustrate that point.
Suppose it costs $10 to boy a shirt in the US It costs 500
20.3.1 Introduction rupee to buy the same shirt in India. To make an apples-
to apples comparison, the 500 rupee in India needs to be
Purchasing Power Panty (PPP) is an economic theory converted into US dollars
that compares different countries' currencies through a
market "basket of goods" approach. According to this If the exchange rate was such that, the India costs 500,
the PPP would be 500/10, or 50 For every $1.00 spent
concept, two currencies are m equilibrium or at par
when a market basket of goods taking into account the on the shirt in the US. it takes Rupee 50 to obtain the
exchange rate) is priced the same in both countries same shirt in India

The five nations with the highest GDP in market

Using PP's is the alternative to using market exchange
rates The actual purchasing power of any currency is exchange terms are the U.S., China, India, Japan, and
the quantity of that currency needed to buy a specified Germany. The economy of the United States is the
largest in the world, at $22 trillion, according to the
of a good or a basket of common goods and services 1
ppp is determined in each country based on its revenue latest World Bank figures. China follows, with $14
trillion, Japan is in third place with an economy of $5
cost of living and inflation rates. Purchasing power
panty ultimately means equalizing the purchasing trillion. India is in fifth place with $2.87 trillion.
power two differing currencies by accounting for This comparison changes when PPP is used. According
differences inflation rates and cost of living to 2017 data from the International Monetary Fund
For example, a smartphone that costs around 1.000 (IMF). China has overtaken the U.S. as the world's
India would cost around $40 in the USA the exchange largest economy based on purchasing power with GDP
of $2.5 trillion. The U.S. comes in second with $21.43
rate is considered as 75 for $1 The purchasing power
parity is one of the most important macroeconomic trillion. India is third with GDP of $9.56 trillion.
metrics that are used by economy in determining the
economic productivity and large standards of a country. 20.4 Foreign Investments: FDI
PPP is based on the law of one price, which states the and FII/FPI
identical goods will have the same price The purchasing
INDIA FDI INFLOW RISES BUT FAILS TO AID
power parity formula can be express as follows
CAPITAL FORMATION FDI inflow and contribution
S-P1/P2 Where. of capital inflows to capital formation in India (in
billion US dollars)
S-Exchange rate of currency 1 to currency 2 P1 Cost of
a good in currency 1 P2-Cost of the same good in 1 Foreign direct investment into India Net inflow
currency 2 contributing to gross capital formation Net inflow as
share of gross capital formation (in)
20.3.2 GDP (Nominal) and GDP
20.4.1 Foreign Direct Investment
(PPP)
(FDI)
IN contemporary macroeconomics, GDP refers to the a
monetary value of the goods and services produced thin FDI is the process whereby residents of one country
one country. It is one of the primary indicators used (the home country) acquire ownership of assets for the
evaluate a country's economy and can be calculated in purpose of controlling the production, distribution and
One way to think of what GDP with PPP represents is to other activities of a firm in another country (the host
signed the total collective purchasing power of India did country)
were used to make the same purchases in US markets.
This only works after at Rupee are exchanged for
A. Three Components
dollars otherwise, the comparison does not make sense.
The net effect is to describe how many dollars it takes

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Equity capital is the foreign direct investor's purchase of D. Example of FDI

shares of an enterprise in a country other than its own
Reinvested earnings comprise the direct investors share various software companies like IBM India which is
of earnings not distributed as dividends by affiliates, or initially based in United States but has opened its
earnings not remitted to the direct investor Such subsidiaries in different part of India Maruti Suzuki is
retained profits by affiliates are reinvested yet another example in which Suzuki of Japan had joint
ventured with Maruti Udyog Ltd. SBI life insurance is a
Intra-company loans or intra-company debt transactions joint venture life assurance company between State
refer to short or long-term borrowing and lending of Bank of India (SBI) and BNP Paribas Assurance of
funds between direct investors (o enterprises) and France
affiliate enterprises
20.4.2 Foreign Portfolio Investment
B. Categories of FDI
(FPI)
Horizontal: A horizontal direct investment happens
when an investor sets up the same type of business FP is an investment in financial assets, such as stocks of
operation in a foreign country as it operates in its home bonds in a foreign country. Unlike FDI, FPI doesn't
country. offer control over the business entity in which the
investment made FPI typically has a shorter time frame
Vertical: A vertical investment is one in which different. for statement return than FDI. As with any equity
but related business activities from the investor's main investment. FP investors usually expect to quickly
business is established or acquired in a foreign country realize a profit on their investments That is why it also
known as Hot Money Because securities are easily
For instance, when a manufacturing company acquires
traded, the liquidity of FPIs makes them much easier to
an interest in a foreign company that supplies parts or
sell than FDIS FPIs are more accessible for the average
raw materials required for the manufacturing its
investor than FDIs since they require much less
finished goods, it is called vertical investment.
investment capital.
Conglomerate: A conglomerate type of FDI is the one
Example of FPI: Any foreign company invests in the
where a company or an individual makes foreign
shares of Infosys (based in India)
investment in a business that is unrelated to its existing
business in its home country. Since this type of
vestment involves entering a new industry where the
20.4.3 Foreign Institutional Investor
investor has no experience it often takes the form of a (FII)
joint venture with a foreign company already operating
in the country FII is an investor of group of investors who bring FPIs
Institutional investors include hedge funds, insurance
C. Methods of FDI companies. pension funds and mutual funds They
participate in the secondary market of economy To
Greenfield Investment: When companies are interested participate in the market of India Fills must register
in FD, they build up their own factory in a different themselves with Securities and Exchange Board of
country and train people to work in their factor India (SEBI)
organization For instance, McDonald and Starbucks
started everything from scratch and trained their FPI and FDI are both important sources of funding for
employees themselves. This method is called greenhead most economies. Foreign capital can be used to develop
investments infrastructure, set up manufacturing facilities and
service hubs, and invest in other productive assets such
Brownfield investment: In this method, the foreign as machinery and equipment, which contributes to
companies do not build something from scratch in economic growth and stimulates employment
another country These companies expand their business
by either going for cross-border mergers and Out of FDI and FPI, FDI is most important for any
acquisitions (M&As). This allows the companies to economy because it is a type of permanent investment
immediately start their operations without necessary in the economy. Like IBM India has its branches in
preparations. India it cannot easily shut its business from India
because it has set up a whole infrastructure in India.

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IBM will itself go into great losses. While in FPI, the Government Route: In this, the foreign entity has take
investors can exit a nation easily whenever they want. the approval of the government The Fog Investment
Thus FDI increases job opportunities, infrastructural Facilitation Portal (FIFP) facilities single window
development in the investee country and thus leads to clearance of applications who through approval route. It
economic growth which is not in the case of FII. Also, is administered by b Department for Promotion of
in the case of FDI. there is the transfer of funds. Industry and Trade (DPIIT), Ministry of Commerce
resources, technology strategies, know-how etc and industries
Conversely. Fll involves the transfer of funds only.
In India, FDI is categorized into four categories:
20.4.4 Foreign Direct Investment Category 1: Sectors in which FDI is permitted - 100%
(FDI) in India under automatic route.

Significant contribution growth of the economy in the Category 2: Sectors in which FDI is permitted u 100%
Foreign Direct Investment (FDI) is critical catalyst of under Government route.
economic growth, apart from being a chief source of
Category 3: Sectors in which FDI is permitted per
non- debt financial resource for the economic
certain limit with Government.
development of India Foreign companies invest in India
to take advantage of relatively lower wages, special Category 4: Sectors wherein FDI is permitted certain
investment privileges such as tax exemptions, etc. India limit under both Government and Auto routes subject to
in return benefit from foreign investments by getting applicable laws/regulations sec and other
technical know-how. technology transfer, best conditionalities:
management practices and by receiving foreign
Currencies. 20.4.5 Prohibited Sectors for FDI
The Department of Industrial Policy and Promotion Lottery Business including Government/private lottery,
(DIPP) which has now been renamed as Department for online lotteries, etc.
Promotion of Industry and Internal Trade (DPIIT) is the
nodal Department for formulation of the policy on Gambling and Betting including casinos etc.
Foreign Direct Investment (FDI). It also maintains and
Chit funds
manages data on inward FDI into India, based upon the
remittances reported by the Reserve Bank of India. Nidhi Company
The FDI policy is reviewed regularly to making it more Trading in Transferable Development Rights (TDRS)
and more investor-friendly to attract more FDI. The
Government is liberalising FDI policy by permitting up Real Estate Business or Construction of Farm Houses
to 100% FDI, under the automatic route, in most (Real estate business does not include development of
sectors/activities Significant changes have been made in townships, construction of residential/commercial
the FDI policy regime in recent years, to ensure that premises, roads or bridges)
India remains an increasingly attractive investment
Manufacturing of cigars, cheroots, cigarillos and
destination, DIPP plays an active role in the
cigarettes, of tobacco or of tobacco substitutes
liberalization and rationalization of the FDI policy. For
that, DPIIT constructively engages in extensive Activities/sectors not open to private sector investment
stakeholder consultations on various aspects of the FDI e.g., Atomic Energy and Railway operation than
policy. permitted activities)
The government has recently made significant charge to Foreign collaboration any form censing for franchise
the Foreign Direct Investment (FDI) policy regime trademark brand name management contracts prohibited
enhancing FDI limits in various sectors like Defence C fee Lottery Business Gambling and Betting.
Aviation etc. The FDI limit is not uniform for all se
activities Routes through which India gets FDI: 20.4.6 Factors on which FDI Depends
Automatic Route: In this, the foreign entity does require Wage rates: One of the monetises a company to invent
the prior approval of the government or the RBI abroad is to outsource labour intensive production et

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countries with lower wages Countries in the Indian instance, UK post-Brexit is likely to be less attractive to
subcontract are one of the man hubs for labour FDI due to its restriction on the movement of people
outsourcing However, the age alone does not determine and goods
FD should also be accompanied by other aspects such
as infrastructure and transport in this context counties Other Factors: Numerous other factors determine FDI
that have low transportation costs and have access to inflow and it is hard to isolate individual factors as there
sea hold a significant advantage For instance, a firm are many different variables. Some of them include the
may be reluctant to invest in Sub-Saharan Africa type of industry, macroeconomic stability political
because the advantage of the low wage labour force is openness, etc.
outweighed by the other drawbacks like high
transportation costs
20.4.7 Importance of FDI
and lack of necessary infrastructure Skilled labour Increase in production: Allowing FDI inflow ensures an
force: Some industries require skilled labour force for increase in investment in key areas such as
operation Example pharmaceuticals and electronics For infrastructure development, which may lead to an
instance, India has attracted significant investment in upsurge in capital goods production For instance
call centres as it has a high percentage of English- investment in power generation can generate more
speaking population but wages are low. This makes it an electric power, which would enable the growth of more
attractive place for outsourcing and therefore attracts industries.
investment Tax rates: Large Multinational Companies Increase in capital inflow: FDI promotes more capital
like Apple, Google and Microsoft have sought to invest inflow into the countries, especially in key sectors It can
in countries that have lower corporate tax rates. For address the shortage of money and materials. which can
instance Ireland has been able to attract high rapidly enhance the growth of the country
investments from Google and Microsoft due to its low
corporate tax rate Economic growth potential: FDI is Increase in employment opportunities: FDI in
often targeted to sell goods directly to the country developing countries have enhanced the service sectors.
involved in the investment. Therefore, the size of the This increased the employment opportunities within
population and the economic growth potential plays an these countries, leading to an increase in economic
important role in attracting investment For instance, a growth. Educated unemployment has also been reduced
large country with a huge population that is willing to by the FDIs as they can absorb some of the workforces
spend has a large market that allows investors to
increase their sales Small countries in this context, Strengthening of financial services: FDIs can enhance
maybe at a considerable disadvantage as it is not worth the financial services of a country by not only entering
investing in a small population its banking industry but also by extending other
activities like merchant banking portfolio investment,
Political stability: FDI is a risky venture. Countries with etc. This, in turn, can result in the promotion of more
an uncertain political situation will be a major companies. It has also helped the capital market within
disincentive Furthermore, an economic crisis can the country.
discourage investment in that country. This is one of the
reasons behind many former communist countries from Exchange rate stability: RBI has been maintaining the
Eastern Europe joined the European Union EU was exchange rate in the country through its exchange
seen as a signal of political and economic stability, control measures. However, the constant and continuous
which encourages foreign investment. Corruption and supply of foreign exchange is vital for the continuation
trust in institutions like judiciary, law, and order also of exchange rate stability. FDI inflow plays a crucial
play a crucial role in influencing FDI inflow role in this aspect by helping RBI to have a comfortable
foreign exchange reserve position of more than 1 billion
Exchange Rates: A weak exchange rate in the host dollars.
country can attract more FDI as it will be cheaper for
companies to purchase assets. However, exchange rate Economic development: FDIs, in the past, have played
volatility could discourage investment in the country a crucial role in developing backward areas by starting
industries. This resulted in many of these Ning
Free trade: Free trade area, along with low non-tart industrial centres, with improvement the standard of
barriers attracts huge investments into the country For living of the people in these areas

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Efficient use of natural resources: The natural sees the inflows into the country. Some of the important steps
country are put to better use by the which may taken in this direction in recent years are
otherwise have been unutilized
Abolition of the Foreign Investment Promotion Board
Improved knowledge and technology: One of De (FIPB): The Government of India has scrapped the
benefits received by the host countries ugh the FDls is Foreign Investment Promotion Board (FIPB) which
access to new technologies and expertise from foreign would enable the foreign investment proposals
companies: This can result in enhancement of the requiring government approval to be cleared by the
country's growth potential ministries concerned, improving the ease of doing
business in the country and the introduction of the
Maintenance of Balance of Payments: FDI growth can 'Foreign Investment Facilitation Portal (FIFP). an
help maintain the Balance of Payments. It can also tain administrative body to facilitate FDI applicants Foreign
the value of countries currencies Investment Facilitation Portal (FIFP) is the online single
point interface of the Government of India with
investors to facilitate FDI It is administered by the
Department for Promotion of Industry and Internal
20.4.8 Criticism of FDI Trade, Ministry of Commerce and Industry
org ownership of strategically important sectors may Government schemes like production-linked Incentive
not favour the countries Foreign investors might strip (PLI) scheme in 2020 for manufacturing, have been
the business of its value. They could sell giftable notified to attract foreign electronics investments In
portions of the company to the local, less sophisticated 2019, the amendment of FDI Policy 2017 by the
investors government to permit 100% FDI under automatic route
They can use the company's collaterals to get low cost in coal mining activities enhanced FDI inflow FDI in
local loans. Instead of reinvesting it, they lend me funds manufacturing was already under the 100% automatic
back to the parent company The MNCs, through FDIs, route, however, in 2019, the government clarified that
can get controlling rights within the foreign countries investments in Indian entities engaged in contract
manufacturing is also permitted under the 100%
FDI can also be a convenient way to bypass local automatic route provided it is undertaken through a
environmental laws Also, developing countries are legitimate contract
tempted to reduce environmental regulations to attract
FDI inflows Further, the government permitted 26% FDI in digital
sectors The sector has particularly high return
FDI does not always benefit host countries as it enables capabilities in India as favourable demographics
foreign multinationals to gain from ownership of raw substantial mobile and internet penetration, massive
materials and even exploit labour force by not consumption along technology uptake provides great
distributing its wealth to the backward society market opportunity for a foreign investor

MNCs are often criticized for their poor working FDI in Insurance sector: Parliament had passed the
conditions in foreign countries Insurance Amendment Bill 2021 to increase the FDI
limit in the insurance sector to 74% from 49% The
The entry of large firms can often displace local Ministry of Finance has notified Indian Insurance
businesses and may drive them out, as these small Companies (Foreign Investment) Amendment Rules
companies cannot compete 2021. The increase in foreign ownership to 74% can
result in inclusion of global best practices in terms of
20.4.9 Recent Government Initiatives insurance products going forward It will also help in
to Further Liberalise FDI Policy bringing down the cost of insurance products in India It
is good for Indian Promoters, it will let them keep
It has been the endeavour of the Government to put in control of management and board, the additional capital
place an enabling and investor friendly FDI policy. The inflow will help them with funds to push for growth. It
intent all this while has been to make the FDI policy will benefit small insurance players or the ones where
more investor friendly and remove the policy the sponsors don't have the ability to put in more capital
bottlenecks that have been hindering the investment and hence it will benefit in strengthening them and

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increasing competition across the industry It is likely to 3 Failure to attract FDI in the greenfield projects raises
help local private insurers grow fast and expand their questions about their role in job creation and foreign
presence across India, which has one of the lowest exchange earnings. 4 Majority of FDI in the startups are
insurance penetration levels globally. coming only in the metro cities, with a small portion left
for rural India. This may increase the already prevailing
FDI in Retail: The Indian retail market is said to be rural-urban gap.
worth USD 600 billion. It comes in the top-five retail
markets worldwide by economic value. In terms of Though efforts of the government to attract more and
economy, retail is one of the pillars of the Indian more FDI is admirable, the nature and distribution of
economy with the sector contributing to about 10% of FDI inflows across sectors need a closer observation.
the Gross Domestic Product (GDP). In this sector, the Also, a liberal FDI regime through the automatic route
organized sector is merely 9% and the unorganized may fail to achieve the larger socio-economic objectives
sector dominates. The Central Government has of job creation and May actually quite opposite widen
approved 100% FDI in single-brand retail and 51% FDI the spatial income equality. The conditions attached
in multi-brand retail. FDI inflow is further expected to with FDI therefore need be tailor-made aiming creation
increase: As foreign investors have shown interest in the of jobs, and preferably with stiffer domestic sourcing
government's moves to allow private train operations requirement clause
and bid out airports. Valuable sectors such as defence
manufacturing where the government enhanced the 20.5 External Commercial
FDI limit under the automatic route from 49% to 74% Borrowings (ECB)
in May 2020 is also expected to attract large
investments going forward External commercial borrowing (ECBs) are loans
availed by an Indian entity from non-resident lenders
In 2020, factors such as a swift response in combating with at minimum average maturity. ECBs include
the Covid crisis, favourable demographics, impressive commercial bank loans, buyers' credit, suppliers' credit,
mobile and internet penetration, massive consumption securitised instruments such as floating rate notes and
and technology uptake, played an important role in fixed rate bonds etc., credit from official export credit
attracting the investments agencies and commercial borrowings from the private
sector window of multilateral financial Institutions such
Launch of Schemes attracting investments, such as
as International Finance Corporation, ADB, AFIC,
National Technical Textile Mission, Production Linked
CDC, etc.
Incentive Scheme, Pradhan Mantri Kisan SAMPADA
Yojana, etc. The government has elaborated upon the A. Restrictions on External Commercial
initiatives under the Atmanirbhar Bharat to encourage Borrowings
investments in different sectors
ECBS cannot be used for investment in stock market or
As a part of its Make in India initiative to promote speculation in real estate. The minimum average
domestic manufacturing, India deregulated FDI rules maturity of such loans is 3 years.
for several sectors over the last few years.
They are used widely in India to facilitate access to
FDI inflow into the Indian startups is good too as it foreign money by Indian corporations and PSUs (public
supports their growth and expansion and eases financial
sector undertakings).
and technical constraints. But there are a few
downsides. ECB can be raised in Indian Rupees (INR) and/or any
convertible currency India's ECB policy seeks to keep
1 There is asymmetry in inflow of FDI into the startups.
an annual cap or ceiling on access to ECB (individual
Investments have poured into select few successful/ limits as well as overall limit), consistent with prudent
promising startups leaving many others with limited
debt management.
financial backup.
B. Objectives of External Commercial Borrowings
2 This could lead to market distortions in the startups
through a wave of consolidation and acquisition.

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Government permits the ECBS as an additional source Companies may have to incur hedging costs or assume
of financing for expanding the existing capacity as well exchange rate risk which if goes against may end up
as for fresh investments. negative for the borrowers.

The ECB policy of the Government seeks to emphasize Also increase in ECB is accompanied with increase In
the priority of investing in the infrastructure and core currency risk as there will be depreciation in rupee,
sectors such as Power, Telecom, Railways, Roads, which will lead to increased burden on the borrower as
Urban infrastructure etc. External Commercial the value of the rupee depreciates. Thus, increased
Borrowing in India can be accessed via two routes viz. dependence on ECB is less favourable for borrowing
Automatic Route and Approval Route. country's view. If ECBS are not controlled, there can be
huge debt causing problems for economy.
The DEA (Department of Economic Affairs), Ministry
of Finance, Government of India along with Reserve C. Evolution of External Commercial Borrowings
Bank of India, monitors and regulates ECB guidelines
and policies The Sahoo Committee was set up in 2013. to develop a
framework for access to domestic and overseas capital
Benefits of ECB markets. The Committee made an assessment of the
currency risk by Indian firms undertaking ECB. The
Interest rates are lower compared to domestic funds Committee noted that the possibility of market failure
hence provide cheaper source of funding ECBS are in can be ameliorated, by requiring firms that borrow in
the form of foreign currencies. Hence, they enable the foreign currency to hedge their exchange risk exposure.
corporate to have foreign currency to meet the import of
machineries and paying to suppliers in other countries The present complex array of controls on foreign
etc.. currency borrowing should be done away with. The
Indian domestic rupee debt market is a viable
ECBS provide opportunity to borrow large volume of alternative to foreign borrowing for financing Indian
funds (like funds for infrastructure projects) and these firms and does not entail any market failure. The policy
funds are available for relatively long term should aim at removal of all impediments to the
development of the domestic rupee debt market.
Corporate can raise ECBS from internationally
recognized sources such as banks, export credit
agencies, international capital markets etc.

Concerns

The External commercial borrowings increase the

external debt of the country. That is why it has to be
matched with growth of foreign exchange reserves in
the country so as to maintain solvency.

The growing importance of ECBS in the composition of

external debt is a cause of concern for the Indian
economy. Availability of funds at a cheaper rate may
bring in lax attitude on the company's side resulting in
excessive borrowing.

This eventually results in higher debt on the balance

sheet which may affect many financial ratios adversely.

Higher debt on the company's balance sheet is usually

viewed negatively by the rating agencies.

This may result in a possible downgrade by rating

agencies which eventually might increase the cost of
debt

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imported. Thus robust foreign trade system is vital for

Chapter-21 energy security of the country

Foreign Trade Foreign trade is also crucial for maintaining the foreign
Currency reserves and stabilization of the Balance of
Payments of Country

21.1 Introduction 21.2 India's Place in World

Simply put together trade can be defined as buying and
Trade
selling of goods and services among different countries After the opening of economy since 1991 reforms in has
of the world The foreign trade is beneficial for the emerged as key trading country at the globe we we
countries on account of consider the merchandise trade, India’s share in world
1. Specialized Production: it allows them to specialize exports is about 1.7% while that of imports a 285 On
in production of those goods and services, which are the other hand, the share of services exports world is
best suitable to their physical and socio-economic 3.5% and that of imports is 3.2% shows the relative
environment. For example. Mediterranean countries percentages of Indian exports in the total world trade
specialize in vine and citrus fruits production This
specialization result in higher efficiency and 21.3 Foreign Trade Policy in
productivity
India
2. Price Equality and Standardization: The price of a
The Foreign Trade Policy of India, also known as,
commodity depends upon the forces of demand and
EXIM Policy of the Indian Government is regulated by
supply in the market. With foreign trade, it is hard to
the Foreign Trade Development and Regulation Act,
have monopoly as there are several suppliers of similar
1992.
goods and services This results in the establishment of
party and standardization in the prices of goods and The Foreign Trade Policy (FTP) outlines government
services. strategies and steps to promote domestic production and
exports to drive economic growth. It is essentially a set
3. Generation of Employment: The ever increasing
of guidelines for the import and export of goods and
volumes of trade and high labour and resource mobility,
services.
results in higher requirement of employees in import
and export sector of a country in some countries Indian Foreign Trade Policy contains various policy
external sector is the largest contributor to their related decisions taken by the government in the sphere
economies of Foreign Trade, i.e., with respect to imports and
exports from the country and more especially export
4. Economic Growth and Economic Development: The
promotion measures, policies and procedures.
economy of a country is highly influenced by the
external sector Import provides the essential Trade Policy is prepared and announced by the Central
requirements, as well as the technology and cap Government (Ministry of Commerce through DGFT-
equipment for increasing the productivity of use in a Directorate General of Foreign Trade).
country. On the other hand, exports provide foreign
currency assets and help in the economy growth Main Objectives of the Foreign Trade Policy
Importance of Foreign Trade for India The growth of To accelerate the economy from low level of economic
services sector in India is primarily due to the exports to activities to high level of economic activities by making
the western markets. it a globally oriented vibrant economy and to derive
maximum benefits from expanding global market
Agricultural products are key components of Indian opportunities.
Exports and thus support farmer's income and
livelihood India is highly dependent on imports of To stimulate sustained economic growth by providing
petroleum product as almost 80% of the crude oil is access to essential raw materials, intermediates,

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components, consumables and capital goods required industrialized nation in the economic sphere. Therefore,
for augmenting production. Neo-imperialistic policy were feared

To enhance the techno local strength and efficiency of 3. Balance of Payments Issue: This Import Substitution
Indian agriculture, industry and services, thereby. Phase had its own benefits and costs.
improving their competitiveness.
Advantages
To generate new employment.
Development of domestic heavy industries such as Iron
Opportunities and encourage the attainment of & Steel (SAIL, TISCO), Automobiles etc.
internationally accepted standards of quality.
India was not dragged into the cold war conflicts due to
To provide quality consumer products at reasonable its comparatively lesser economic dependency with
prices. either of the blocs.
Foreign Trade Policy of India can be broadly divided Resulted in regional development by setting industries
into the following phases:(1950's to 1970s) and higher generation of domestic employment.
Phase I: Import Restriction and Import Substitution 21.3.2 Export Promotion & Import
Phase II: Export Promotion & Import Liberalisation
(From 1970s to 1990s). Liberalisation

Phase III: Outward Orientation (From 1990 onwards) By the end of 1970s, it was being recognized that Indian
industry was experiencing a slowdown in growth due to
21.3.1 Import Restriction and Import factors like low productivity, high costs, low quality of
production and obsolete technology. The general
Substitution consensus was that due to lack of effective foreign
Import substitution can be defined as the measures trade, the Indian industries lack in efficiency.
taken to protect the domestic industrial sector from Against this backdrop, P.C. Alexander Committee was
international competition by restricting imports through set up in 1977 to review and recommend on Import-
imposition of tariffs, quotas and undervaluing currency Export Policies and Procedures. Some of its
It is done to protect domestic industry which will recommendations are:
generate income and employment for the residents and
the country will have less dependency on imports (a) The Scheme of Import Licensing should be
liberalized gradually.
Rationale for Import Substitution in India
(b) The scope of Open General Licenses (OGL) granted
India followed the policy of Import substitution from for the import and sale of the commodities should be
late 1950s to 1970s. The economists often term this further widened.
phenomena as "Infant Industry Argument as economic
rationale for trade protectionism. The principle states A. Export Processing Zones (EPZ)
that, nascent industries do not exhibit the economies of
scale that their competitors from other countries may Export Processing Zone( EPZ) is industrial estates that
have, and therefore there is need to protect them until are enclaved from Domestic Tariff Areas(DTA) such as
similar economies of scale can be attained: tariff or quota. These are generally usually situated near
to port and airport to get easy accessibility of the
1. Socialist Mindset: The founding fathers of International market. The intention of making EPZ was
independent nation of India were greatly influenced by to provide a duty-free
the socialist political ideologies of USSR and wanted to
replicate the domestic industrial growth model in the environment for export purposes and making
country. competition prices and quality

2. Foreign Threat of Neo-Capitalism: it was felt that for India was one of the first in Asia to recognize the
a newly independent country, being dependent on effectiveness of the Export Processing Zone (EPZ)
western economies will result in proxy control of the more in promoting exports, with Asia's first EPZ set up

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in Kandla in 1965 These zones receive fiscal incentives The facility for financing of export and import of goods
such as tar benefits from the government. Also, both from India and abroad
government supported EPZS to develop world class
infrastructure for purpose exports promotion Kandla The bank also provides administrative and technical
EPZ (Gujarat) was followed by the Santacruz exponent assistance to the parties engaged in export and import
processing zone (Maharashtra) which came into business buyers' credit and lines of credit to the foreign
operator in 1973. The government set up five more banks and governments
zones during the late 1980s. However, the outputs from 4 It also undertakes merchant banking exercise for the
EPZs were far be from the desired level. Some of the companies engaged in foreign trade
factors responsible for this are
5 It also provides marketing advisory services which
1. Bureaucratic Hurdles which resulted in delays help Indian exporters in their globalization ventures by
clearances and lack of a well-structured policy assisting in locating overseas distributors/partners,
2 Roadblocks like stringent labour laws which affected 6 It is engaged in research and analysis research in the
productivity and poor infrastructure facilities in these field of international economics, trade and investment,
zones. country profiles to identify risks, etc.
3. The dominant mindset of the policy makers were 7. It also provide export advisory services to reduce
protectionist in nature and hence lack of focus on tree international risks D. Export Promotion Capital Goods
trade. (EPCG) Scheme Export Promotion Capital Goods
(EPCG) is a scheme that allows for import of capital
B. Export Oriented Units (1981)
goods for pre-production, and post production activities
EOU's are units undertaking to export their entire at zero duty subjected to an export obligation of 6 times
production of goods. The main objectives of the EOU of duty saved on capital goods. The export should be
scheme are to increase exports, earn foreign exchange materialized in years from the date of import This
to the country transfer of latest technologies stimulate scheme was one of the several initiatives launched for
direct foreign investment and to generate additional the promotion of exports in the early '90s. The objective
employment The EOU Scheme was introduced in 1981 of the scheme was to allow exporters to import
and was designed to be complementary to the EPZ machinery and equipment at affordable prices so that
scheme Although, it adopts the similar production quality products can be produced for the export market.
regime but also offers much wider choice in location
according the factors like location of raw materials, 21.3.3 Outward Orientation
ports ancillary facilities, availability of technological
Due to introduction of the Rao Manmohan model which
skills, presence of an industrial base, and land
led to greater liberalisation and globalisation of Indian
availability for the project
economy. an outward orientation with increased
Hence, EOUS can be set up in any location in the interdependence was adopted by India.
country and may engage in any of the export oriented
sectors manufacturing, textiles, chemicals, software etc A. Special Economic Zone (SEZ)

C. EXIM Bank (1982) A Special Economic Zone ("SEZ") is a specified.

delineated and duty-free geographical region that has
Export and Import Bank (EXIM) bank was incorporated different economic laws from those of the country in
in 1982 under the provisions of Export-Import Bank of which is situated. In some countries, such a region is
India Act. 1981. Its primary objective was to provide even treated as a deemed foreign territory. SEZ is an
financial assistance to एक्ज़िम बैंक EXIM BANK instrument of capacity development with the goal to
exporters and importers भारतीय नियाा त-आयात so as to promote rapid Economic growth by using fiscal and
promote India's EXPORT-IMPORT BANK OF INDIA business incentives to magnetize foreign as well as
foreign trade domestic investments and technology

The Special Economic Zones (SEZs) Policy was

Functions
announced in April 2000, with a view to overcome the
shortcomings experienced on account of the multiplicity

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of controls and clearances, absence of world-class the date of receipt of such proposal to the Board of
infrastructure and an unstable fiscal regime, with a view Approval
to attract larger foreign investments in India
Once an SEZ has been approved by the Board of
This policy intended to make SEZS an engine for Approval and Central Government has notified the area
economic growth supported by quality infrastructure of the SEZ. units are allowed to be set up in the SEZ.
complemented by an attractive fiscal package, both at
the Centre and the State level, with the minimum B. Performance of SEZ
possible regulations.
Exports: Exports of 22.840 Crore (2005-06) has
To instil confidence in investors and signal the increased to 7.59.524 Crore (2020-21)
Government's commitment to a stable SEZ policy
Investment: Investment of 74,035.51 Crore (2005-06)
regime and with a view to impart stability to the SEZ
has increased to 26,17,499 Crore (2020-21).
regime thereby generating greater economic activity
and employment through the establishment of SEZS. a Employment: Employment from 1,34,704 persons
comprehensive Special Economic Zones Act, 2005 was (2005- 06) has increased to 23.58.136 persons (2020-
passed by Parliament. 21).
After extensive consultations, the SEZ Act, 2005. C. Issues with SEZ
supported by SEZ Rules, came into effect on 10th
February, 2006, providing for drastic simplification of The reasons for limited success of SEZS in India are:
procedures and for single window clearance on matters
relating to Central as well as State Governments Misuse of Exemptions: As much as 75 per cent of the
SEZ area can be used for non-core activities, including
The Main Objectives of the SEZ Act are: development of residential or commercial properties,
shopping malls and hospitals. Developers misuse this
Generation of additional economic activity. provision to make money via the real estate route rather
Promotion of exports of goods and services through export promotion. For example, Noida SEZ
was envisaged on the model of industrial growth. but
Promotion of investment from domestic and foreign real estate got the better of it.
sources.
No Balanced Regional Growth: Concentration of SEZS
Creation of employment opportunities. in the districts that are relatively more industrialized or
situated in sea connected States, creates regional
Development of infrastructure facilities.
imbalances and income inequality and thus undermine
Incentives Offered to SEZS: the objective of promotion of balanced regional
development in the country.
Duty free import/domestic procurement of goods for
development, operation and maintenance of SEZ units. Technical Logistical Challenges: Land and acquisition
issues as there is an opposition from public during
Exemption from various taxes like Income Tax, acquisition of farmland for establishing SEZS in the
minimum alternate tax, etc. country. Lack of infrastructure or absence of external
infrastructure support. Lack of Skilled human resources
External commercial borrowing by SEZ units up to US
$ 500 million in a year without any maturity restriction Existence of Multiple Models: There are multiple
through recognized banking channels. Single window models of economic zones such as SEZ. Coastal
clearance for Central and State level approvals economic zone, Delhi-Mumbai Industrial Corridor,
National Investment and Manufacturing Zone, food
Approval Mechanism: The developer submits the
park and textile park which pose challenges in
proposal for establishment of SEZ to the concerned
integrating the various models.
State
Competition from ASEAN Countries: in the past few
Government The State Government has to forward the
years, many of the ASEAN countries have tweaked
proposal with its recommendation within 45 days from
their policies to attract global players to invest into their
SEZS and have also worked on a developmental set of

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their skilling initiatives Consequently, Indian SEZS the framework development to bring linkages between
have lost some of their competitive advantages globally all initiatives.
and hence need to have fresher policies
Extension of Sunset Clause and retaining tax or duty
D. Modelling SEZ's to Benefit India benefits

Increasing scale: Large sized zone can generate Extension of benefit under services Export incentives
economic activity on some reasonable scale. In a small scheme
zone, the requisite infrastructure and services cannot be
provided nor can multiple economic activities be Allowing alternate sectors to invest in sector-specific
promoted. Hence, to be economically viable SEZ SEZs/3ES
should be approved over a particular land area (greater Specified domestic supplies supporting 'Make in India'
than 1000 acres) for rapid economic growth in the area to be considered in NFE computation.
and for it to be profitable and self-sustainable. The tax
and other incentive package can be extended to the Export duty should not be levied on goods supplied to
infrastructure sector to zone developers and the units as developers and used in the manufacture of goods
well. exported.

Infrastructure norms: Provide internationally Infrastructure status to improve access to finance and
competitive infrastructure, relaxed tax norms, labour enable long term borrowing.
laws and DTA regulations in order to attract foreign
Promote MSME participation in 3Es and enable
direct investment
manufacturing enabling service players to locate in 3E
E. Baba Kalyani Committee on SEZ Dispute resolution through arbitration and commercial
The Baba Kalyani led committee was constituted by the courts.
Ministry of Commerce and Industry to study the
F. Gujarat International Finance Tec-City
existing SEZ policy of India and had submitted its
recommendations in November 2018. (GIFT City)
It was set up with a broad objective to evaluate the SEZ It is a Central Business District being built between
policy towards making it WTO (World Trade Ahmedabad and Gandhinagar in Gujarat GIFT is India's
Organisation -compatible and to bring in global best first multi-service SEZ with International Financial
practices to maximise capacity utilisation and to Service
maximise potential output of the SEZS.
Centre (IFSC) status which will cater to the domestic as
Baba Kalyani committee recommendations: Framework well as global financial services market by offering
shift from export growth to broad-based Employment global firms world-class infrastructure and facilities An
and Economic Growth (Employment and Economic IFSC caters to customers outside the jurisdiction of the
Enclaves-3Es). domestic economy. Such centres deal with flows of
finance, financial products and services across borders
Formulation of separate rules and procedures for
manufacturing and service SEZS GIFT City is India's first global financial hub and is
emerging as the new financial capital of the world's
Enabling framework for Ease of Doing Business financial capitals Providing financial incentives,
(EODB) in 3Es in sync with State EoDB initiatives. regulatory freedom,
One integrated online portal for new investments,
operational requirements, and exits related matters. Features:
Enhance competitiveness by enabling ecosystem World-class infrastructure and unparalleled connectivity
development by funding high-speed multi-modal and transportation access.
connectivity, business services, and utility infrastructure
Promote integrated industrial and urban development It will function as a national and international hub of IT
walk to work zones, States and centres to coordinate on and ITeS companies, finance companies, commodity

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exchange, global trading, insurance, offshore banking Another significant item of import is gold, which is
and data centres among others. often seen as a key factor of the widening of the current
account deficit. In recent years, government has
It will have a SEZ, international education zone, undertaken several measures for restricting gold import.
integrated townships, an entertainment zone, hotels, a These include high import duties as well schemes like
convention centre, and international techno park, Sovereign gold bonds and Gold Monetization.
Software Technology Parks of India (STPI) units,
shopping malls etc. 21.4.2 Export Basket Indian
Termed as India's first 'Operational Greenfield Smart Economy
City GIFT City encompasses world-class infrastructure
facilities many of which are being introduced in India There have been substantial changes in the composition
for the first time. esports since liberalization in 1901 A structural shift can
teased in India's exports from primary, agricultural and
It is estimated that GIFT City will create 500,000 direct traditional exports like textiles towards more value at
jobs and an equal number of indirect jobs. Strict manufactured and technology-based items such as
adherence to environmental norms, with built-in engineering goods, refinery products, pharmaceuticals.
technologies for a sustainable ecosystem.
Currently, India's export basket is now diversified with
Gujarat International Finance Tec-City Company non traditional items and differential products are also
Limited (GIFTCL) is responsible for developing and gaining importance
implementing the project. GIFTCL is a joint venture of
Gujarat Urban Development Company Limited Analysis of Indian Exports: Even though India started
from a very low base, but in the last 15-16 years, India
(GUDCOL) and Infrastructure Leasing & Financial has had the second-fastest average export growth
Services (IL&FS) among the major emerging markets. Pharmaceuticals
have been identified as an emerging area of exports
where India has been taking significant strides, and it is
around 5% of total exports India's young pool of
scientists and its low cost developing of generic
medicines can give it a significant advantage
21.4 Composition of Indian The services sector is one of the largest contributors to
Foreign Trade the Indian exports. India's share in global services
exports s around 3.5% which is double that of its
merchandise exports which stood around at 1.7 per cent.
21.4.1 Import Items India is in the eighth place amongst the top ten
Petroleum and crude oil commands the lion share in the exporters of service in the world
imports basket of India. The other significant import
items are Engineering and Electrical goods, gold etc 21.4.3 Trade Balance with Trading
Analysis of India's Imports: Over-arching dependence
Partners
on import of crude oil increases the vulnerability of the Among India's trading partners, the top five countries
energy security of India. Thus, India has started to with which India has negative bilateral trade balance are
invest in the off-shore ventures for securing its energy China Switzerland, Saudi Arabia, Iraq and South Korea
needs Significant progress have achieved in building while the top five countries with which it has surplus
strategic of reserves in India (Vishakhapatnam, trade balance are USA, UAE, Bangladesh, Nepal and
Mangaluru, Padur and Chandikhol). UK
The high proportion of engineering goods in Import India's major items of imports from China are telephone
basket signifies the lack of technology and capital in the sets including mobiles, automatic data processing
Manufacturing sector of country. machines, diodes & other semi-conductor devices.
electronic devices, chemical fertilisers, etc. India's
Apart from loss of foreign exchange, it also hampers the
major items of exports to China are cotton yarn, copper,
creation of jobs in the secondary sector of the economy

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refined and copper alloys unwrought, granite, 1. Implementation of various policies regarding
aluminium ores. other fixed vegetable fats & oils, cyclic international trade such as Foreign Trade Policy (FTP),
hydrocarbons. cotton, polymers and iron ore
2 It is the licensing authority for exporters, importers,
In the case of Switzerland, the trade deficit is mainly and export and import business.
due to import of gold. This deficit has fallen in the last
two years. Moreover, a part of it is used in exports. In 3. It grants 10-digit Importer Exporter Code (IEC),
the case of Saudi Arabia and Iraq, the deficit is due to which is a primary requirement to Import Export.
crude oil imports, while for South Korea it is due to 4. It can prohibit, restrict and regulate exports and
import of electrical machinery and equipment and iron imports.
and steel.
C. Directorate General of Trade Remedies
(DGTR)

21.5 Indian Foreign Trade: Established in 1998 as the Directorate General of Anti-
Dumping & Allied Duties, it was renamed in 2018 as
Agencies the Directorate General of Trade Remedies (DGTR).
DGTR works alongside the Department of Commerce
A. Ministry of Commerce and Industry under the Ministry of Commerce and Industry.
The Commerce and Industry ministry is responsible for The Directorate General of Anti-dumping and Allied
the regulation, development and promotion of India's Duties (DGAD), Directorate General of Safeguards
international trade and commerce by formulating (DGS), and DGFT dealing with quantitative restriction
appropriate international trade and commercial policies (QR) safeguards; these functions of DGFT were merged
and the implementation of various programs. It provides into one single entity, DGTR, making it an integrated
an enabling environment and infrastructure for single umbrella National Authority
accelerated growth of foreign trade
Functions:
The ministry formulates, implements and monitors the
Foreign Trade Policy (FTP) which is the basic 1. It is an apex national authority responsible for
framework of policy and strategy to be followed for administering all the trade remedial measures which
promotion of exports and international trad include:

The ministry is also given responsibilities relating to Anti-Dumping Duties, Countervailing Duties and Other
multilateral and bilateral commercial relations, creation Safeguard Measures
and management of Special Economic Zones, state
2. To gain an integrated single-window agency that will
trading, export promotion, trade facilitation, and
provide a comprehensive and swift trade defence
development and regulation of certain export oriented
mechanism in the country, DGTR was established
industries and commodities.
3. The Department of Revenue considers the
B. Directorate General of Foreign Trade recommendations of DGTR for imposing Anti-
(DGFT) Dumping, Countervailing, and Safeguard Duties

DFGT is an attached office of the Ministry of 4. The merging of DGAD and DGS will result in
Commerce and Industry. It was earlier known as Chief savings of about 49 posts in the government in
Controller of Imports and Exports (CCI&E) till 1991. alignment with the Government's goal of "Minimum
The organization has primarily been involved in the Government and Maximum Governance"
regulation of foreign trade. After the liberalization and
globalization in 1991 DGFT has since been assigned the 5. It will also bring in a substantial reduction of the time
role of "facilitator" taken to provide relief to the domestic industry

Functions: 6. DGTR draws from the skill set of various officers of

various ministries in fields such as Law Costing
Economics, Finance, Customs, Revenue, and

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International Trade, hence serving as a multi-service 4 Promotion of deep-sea fishing projects and
organization. undertaking initiatives for higher efficiency in fishing.

7. Trade defence support would be provided by the F. Indian Institute of Foreign Trade (IIFT)
DGTR to our domestic industries and the exporters in
dealing with the trade remedy investigations instituted The Institute was set up in 1963 by the Government of
by other countries against them. India as an autonomous organisation to bring
professional outlook in the country's foreign trade
D. Agricultural and Processed Food Products management and developing quality human resources,
Export Authority (APEDA) by analysing and disseminating data and conducting
research.
It was established under the Agricultural and Processed
Food Products Export Development Authority Act Features:
passed by एपीड the Parliament in December,
To act as a catalyst for generation of new ideas,
1985.APEDA concepts and skills required for the internationalization
Functions: of the Indian economy.

1. Development of industries for export by way of 2 It acts as the provider of training and research-based
providing financial assistance and for undertaking consultancy in the field of international business, both
surveys and feasibility studies. It also engages in for the corporate sector as well as for Government and
participation in enquiry capital through joint ventures the student community.
and other reliefs and subsidy schemes. 3 The institute is entrusted with the role of servicing the
2. It is involved in fixing of standards and specifications requirements of the Government and industry through
of the scheduled products for the purpose of exports research and consultancy assignments

3. Training in various aspects of the industries G. Export Credit Guarantee Corporation

connected with the scheduled products. (ECGC)
4. Improvement in packaging and marketing of Export Credit Guarantee Corporation of India is a
scheduled products outside India. company wholly owned by the Government of India. Its
primary aim is to provide export credit insurance
E. Marine Products Export Development support to ECGC Indian exporters.
Authority (MPEDA)
ECGC was established to promote exports by providing
The Marine Products Export Development Authority credit insurance services to exporters against non-
(MPEDA) was set up by an Act of Parliament during payment risks by the overseas buyers due to
1972 It is the nodal agency for the holistic development commercial and political reasons.
of seafood industry in India. Based on its
recommendations, Government notifies new standards 21.6 Foreign Trade Policy (2015-
for shing vessels, storage premises, processing plants
and conveyances 20)
Functions: Foreign Trade Policy seeks to make India a bigger
player in global nide by doubling the overseas sales to
It does registration of infrastructural facilities of the 1900 billion by 2019-20, while integrating the foreign
units for seafood export trade trade with "Make in India" and "Digital India
Programme
2 Promotion of aquaculture through diversification of
species, new hatchery development etc. Salient Features:
3 Carrying out inspection of marine products, its raw FTP 2015-20 introduces two new schemes, namely
material, fixing standards and specifications Merchandise Exports from India Scherme (MEIS) for
export of specified goods to specified markets and

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Services Exports from India Scheme (SES) for with varying conditions (sector specific or actual user
increasing exports of notified services only) attached to their use. These were

Measures have been adopted to nudge procurement of 1. Focus Product Scheme

capital goods from indigenous manufacturers under the
EPCG scheme by reducing specific export obligation to 2 Market Linked Focus Product Scheme
75% of the normal export obligation 3. Focus Market Scheme
Self-Certification: Manufacturers will now be enabled 4 Agriculture Infrastructure Incentive Scrip
to self-certify their manufactured goods as originating
from India with a view to qualifying for preferential 5 VKGUY (Vishesh Krishi and Gram Udyog Yojana).
treatment under various forms of bilateral and regional
Under the new FTP all these schemes were merged into
trade agreements, MSME Clusters: Considering the
a single scheme, namely Merchandise Export from
strategic significance of small and medium scale
India Scheme (MEIS) and there will be no
enterprise in the manufacturing sector and in
conditionality attached to the scrips issued under the
employment generation, MSME Clusters have been
scheme
identified for focused interventions to boost exports

Niryat Bandhu Scheme: It has been galvanized and B. Service Export from India Scheme (SEIS)
repositioned to achieve the objectives of Skill India
Service Exports from India Scheme (SEIS) has replaced
Outreach activities will be organized in a structured way
the old Served from India Scheme (SFIS). Thus, SEIS
at these clusters with the help of EPCs and other willing
provides for rewards to all Service providers of notified
'Industry Partners' and 'Knowledge Partners
services, who are providing services from India,
Duty-Free Import Authorisation (DFIA): It is a scheme regardless of the constitution or profile of the service
under which duty-free import of inputs, fuel, oil, energy provider.
sources, a catalyst which is required for the production
USD in 2017. India subsequently lost the case at WTO
of export goods is allowed.
and had to come up with a new WTO compliant scheme
Electronic Import Exporter Code (IEC): Import exporter to help Indian exporters For garment exporters, the
code is an export permit is mandatory for carrying out Rebate of State and Central Levies and Taxes
exports and imports from/to another country. DGFT has (ROSCTL) Scheme has been notified separately
facilitated the online filing of the IEC application.
Rates: The tax refund rates range from 0.5% to 4.3%
Round-the-Clock Customs Clearance: 24*7 customs various sectors. The rebate will have to be claimed as a
clearance has been made available at 19 seaports and 17 percentage of the Freight On Board value of exports
air cargo complexes. Issuance: Rebates will be issued in the form of
transferable duty credit/electronic scrip (e-scrip) which
Single Window Interface: Single Window Interface for will be maintained in an electronic ledger by the Central
Facilitating Trade (SWIFT) has been launched to Board of Indirect Taxes and Customs (CBIC)
facilitate the easier perusal of business. The system
enables the importers to electronically lodge Integrated Significance
Declaration at a single point only with Customs. The
Enhance India's Competitiveness: The reimbursement
necessary permissions are obtained from other
of taxes such as duty on power charges, Value-Added
regulatory agencies without physically approaching
Tax on fuel in transportation Farm Sector etc. will make
them.
Indian products competitive in global markets. It is
expected to significantly impact India's
21.7 Export Promotion Schemes competitiveness: trade flows and export numbers over
the next 5-10 years Par with International Standards:
A. Merchandise Export of India Scheme
Indian exporters ill be able to meet the international
(MEIS) standards for exports as affordable testing and
certification wit be made available to exporters within
Earlier there were 5 different schemes for rewarding
the country instead of relying on international
merchandise exports with different kinds of duty scrip

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organizations. This would increase the economy for the Export Promotion Capital Goods (EPCG) Scheme:
country and working capital for the enterprise EPCG Scheme permits import of capital goods at 0%
customs duty with an obligation to export 6 times of the
Automated Tax Assessment: Also under it ta assessment duty saved amount in 6 years. The aim of EPCG
is set to become fully automatic for exporters. scheme is to facilitate import of capital goods for
Businesses will get access to their refunds for GST producing quality goods and services to enhance India's
(Goods and Services Tax) via an automat refund-route. export competitiveness
Concerns E. Export Market Based Schemes Market Access
Lower Rates: The scheme disappointed many exporters Initiative (MAI) Scheme: The scheme provides
as the rates are much lower than MES rates with lesser assistance to Export Promotion Organizations/Trade
budget allocation. The rates have not taken into account Promotion Organizations/National Level
the taxes embedded in their raw material like steel in Institutions/Research Institutions/Universities/
the engineering products in a large number of cases. Laboratories. Exporters etc. for enhancement of exports
through accessing new markets or through increasing
Deprive Large Sectors: The benefit appears not to be the share in the existing markets
available to major exports such as steel, pharma etc and
exports made under Advance Authorisation EOU Market Development Assistance (MDA) Scheme: It is
(Export oriented unit), SEZ (Special Economic Zone), under operation through the Department of Commerce
etc. It will have an adverse impact on competitiveness to assist exporters for export promotion activities
of Indian exports and will send negative sentiment abroad, assist Export Promotion Councils (EPCS) to
amongst the exporters undertake export promotion activities for their
product(s) and commodities and assist approved
Advance Authorization Scheme: Advance Duty organizations/trade bodies in undertaking exclusive
Exemption Scheme Authorisation is issued to allow non-recurring innovative activities connected with
duty free import of input, which is physically export promotion efforts for their members
incorporated in export product. This includes fuel, oil
catalyst which is consumed or utilised in the process of Status Holder Scheme: Business houses or leaders who
production of export product Imports under Advance have excelled in international trade and have
Authorisation are exempted from payment of Basic successfully contributed to country's foreign trade are
Customs Duty. Additional Customs Duty Education recognized as Status Holders and given special
Cess Anti-dumping Duty Safeguard Duty and Transition treatment and privileges to facilitate the trade
Product Specific Safeguard Duty wherever applicable transactions in order to reduce their transaction costs
and time
According to recently enacted GST Law, an importer
availing benefits under Advance authorization scheme Manufacturers who are also Status Holders have the
needs not pay basic customs duty on imports However, facility to self-certify their manufactured goods as
the importer is liable to pay IGST (Inter-State GST) on originating from India with a view to quality for
reports under Advance Authorization scheme which can preferential treatment under different Preferential
be availed back as input Tax credit on account of Trading Agreements (PTAs). Free Trade Agreements
statement of export commitment. (FTAs) Comprehensive Economic Cooperation
Agreements (CECAs) and Comprehensive Economic
D. Duty Remission Scheme Partnerships Agreements (CEPAS) which are in
operation
Duty Free Import Authorization: Duty Free Import
Authorisation is issued to allow duty free import of 21.8 International Collaboration
inputs In addition, import of oil and catalyst which is
consumed or utilised in the process of production of 21.8.1 Economic Integration
export product may also be allowed
Economic integration refers to trade unification
Duty Drawback Scheme: Under Duty Drawback
between different states by the partial or full abolishing
Scheme (DBK) the Customs and Central Excise Duties
of customs tariffs on trade taking place within the
paid on the inputs/components used in the manufacture
borders of each state.
of goods exported is repaid to Exporters

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The objective of this integration is to increase the When the countries go beyond FTA and agree for a
combined economic productivity of the countries - greater degree of economic integration which includes
easier access of goods and services improving the attractiveness to capital and human
resources, and to expand trade and investment, it would
Other by-product of integration is competitiveness it 4-5 result in CECA or CEPA
countries come together to form a closely knit family
(of sorts), they would create barriers to entry of an CEPA Comprehensive Economic partnership
external (possibly much larger player) to disrupt the Agreement CECA Comprehensive Economic
region with cheaper goods. Cooperation Agreement

A trade agreement is a contract/agreement/pact between C. Customs Union

two or more nations that outlines how they will work
together to ensure mutual benefit in the field of trade An agreement among countries to have free trade
and investment among themselves and to adopt common external
barriers against any other country interested in
21.8.2 Levels of Economic Integration exporting to these countries

A. PTA Preferential Trade Agreement Some examples:

A preferential trade agreement, is a trading bloc that Southern Common Market: Mercosur (Argentina,
gives preferential access to certain products from the Bolivia, Brazil, Paraguay, Uruguay, and Venezuela)
participating countries Gulf Cooperation Council (GCC): Its member states are
This is done by reducing tariffs but not by abolishing Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the
them completely. A PTA can be established through a United Arab Emirates East African Community (EAC):
trade pact. It is the first stage of economic integration. composed of 5 countries in the African Great Lakes
region in eastern Africa Burundi, Kenya, Rwanda,
Some examples: Tanzania, and Uganda.

Asia-Pacific Trade Agreement (APTA): Formerly D. Common Market

known as the Bangkok Agreement was signed on 31st
of July 1975 as an initiative of the United Nations A type of custom union where there are common
policies on product regulation, and free movement of
Economic and Social Commission for Asia and the goods and services, capital and labour.
Pacific (ESCAP) ESCAP is the regional development
arm of the United Nations for the Asia Pacific region E. Economic Union
India-MERCOSUR Preferential Trade Agreement An economic union is a type of trade bloc which is
(PTA): MERCOSUR is a sub-regional blogs with its composed of a common market with a customs union
member countries full members are Argentina. Brazil, The participant countries have both common policies on
Paraguay, Uruguay and Venezuela product regulation, freedom of movement of goods.
services and the factors of production (capital and
B. FTA Free Trade Agreement labour) and a common external trade policy
A free trade area is a trade bloc whose member
countries have signed a free-trade agreement (FTA),
which eliminates tariffs, import quotas, and preferences
on most (if not all) goods and services traded between
them. Some of the examples include.

Evolution of SAPTA to SAFTA (South Asian PTA to F. Economic and Monetary Union
FTA)
When an economic union involves unifying currency it
ASEAN FTA (Trade agreement within the Southeast becomes a economic and monetary union. E.g.
Asian nations). Eurozone

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21.8.3 Export-Led Model of faster than exports, which could potentially lead to a
widening deficit
Development
Conducive environment in terms of decline in exports
India's vision of becoming a $ 5 trillion economy by from China on account of US-China Trade war, rising
2024 s intricately linked with an export-oriented Labour costs, growing anti-China sentiment etc.
approach. Greater integration with global value chains
(GVCS) will enable India to attract investment, create Boost Make in India and Assemble in India: By
Jobs, Boost Exports and hence sustain virtuous integrating "Assemble in India for the world" into Make
economic cycle. In line with such a strategy, NITI in India, India can raise its export market share to about
Aayog has taken a significant step by developing the 3.5 percent by 2025 and 6 per cent by 2030 India would
first-ever Export Preparedness Index for Indian states. create about 4 crore well-paid jobs by 2025 and about 8
crore by 2030.
A. Important Aspects of India's Trade
Innovation and Efficiency: Exporters would be required
India's share in the world's exports has remained to innovate and adopt new technologies to boost exports
stagnant at 1.6% in the last decade. India is still focus on domestic demand might strengthen imports
critically dependent on import of critical goods such as faster than exports, which could potentially lead to a
Pulses, Oilseeds, Electronic Goods, Active widening deficit
Pharmaceutical Ingredients (APIs) etc. which shows
lack of self-sufficiency of Indian Economy. C. Challenges In Boosting Exports
Imports into India is much higher than exports. This 1. Supply-side: Dominance of Dwarf Firms in MSME
usually leads to Current Account deficit. Sector: MSMES account for around 40% of the exports
and 45% of manufacturing output. However, these
India's export basket is dominated by Capital intensive MSMEs face problems with respect to factors of
goods such as Petroleum products, Gems, Jewellery etc. production such as Land, labour and capital Plus, most
(rather than Labour intensive goods such as Textiles, of the MSMEs use obsolete technology which leads to
Leather etc.). poor efficiency and competitiveness.
Undoubtedly, the forex reserves have increased to all Higher Logistics Cost: India's logistics cost as a share of
time high. However, it is mainly on account of increase GDP is 14 percent, which is high when compared to
in volatile FPI inflows rather than on account of export developed nations, where it ranges between eight and
surplus. ten percent Higher logistics cost in turn reduces the
Unlike China, India has failed to get integrated into overall competitiveness of Indian economy
Global value chains (GVCS). Trade Facilitation: Involves reducing the number of
B. Need for Export-Led Model Empirical Evidence: documents needed for trade Trade facilitation reduces
Countries such as Japan, South Korea, Singapore etc. the time to export and cost of exports In India Trade
have been able to Sustain higher economic growth by facilitation, as measured by "Trading Across Borders" is
following export- led strategy. In the recent times, such quite poor. "Trading Across Borders is one of the
an export- led strategy has benefitted both bigger parameters for measuring World Bank's Ease of Doing
economies such as China as well as smaller economies Business
such as Vietnam. Poor Innovation: India spends hardly around 0.7% of its
Shift from Consumption-led to Investment and Export GDP on R&D, which is quite lower in comparison to
driven Model: India's growth drivers highlight that its USA (2.1% ), China (2.8% ). Israel (4.3%) etc.
economic growth has been primarily propelled by Improvement in innovation ecosystem would help us
domestic demand which accounts for 60% of India's improve manufacturing competitiveness and help us
GDP. However, exports account for only 12% GDP. It manufacture high quality goods for the global market.
should also be recognised that an economy with only Lack of Market Intelligence related to consumer
$2.000 per capita income will not be able to expand preference in export markets. For example, higher
simply based on domestic demand Moreover, too much sweetness in Indian mangoes is not necessarily in
focus on domestic demand might strengthen imports demand in many countries.

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Identification Challenges: Each district of a country has Better Inter-Ministerial Coordination: The min of
a potential equivalent to that of a small country in Commerce and Industry must hold regular in ministerial
boosting exports. However, there is lack of focus on meetings. Further, regular Interactions w the State
identifying potential export clusters within a state Governments is also crucial so that trade facilitation
takes place under cooperative federalism
Lack of coordination among multiple government
ministries and departments involved in boosting exports Handholding Support to MSMES: The MSMEs need to
be provided handholding support to have access to
Adverse Impact of FTAS: Some of the FTAS with factors of factors and use appropriate technology to
countries such as Japan, South Korea etc. has led to boost exports.
inverted duty structure which has in turn encouraged
import of finished goods and discouraged domestic Increase Access to Formal Finance: Less than 4 per cent
manufacturing of small firms in India have access to forma finance.
The figure for the US, China, Vietnam and S Lanka is
Policy Instability: Delay in announcement of incentives 21 per cent.
under RoDTEP scheme Even though. this scheme was
announced on 1st January 2021. The Government has Reorient SEZS (Baba Kalyani Committee): The SEZS
notified the guidelines in August 2021. Whenever there should be renamed as 3 E's- Employment and Economic
is increase in prices of agricultural commodities such as Enclaves: Focus should not only be on boosting exports,
Onions, Potato etc., the Government imposes ad-hoc but also on employment creation and GDP growth rate.
ban on export of such commodities. This affects India's Incentives given to companies in SEZs should depend
image as a reliable supplier of agricultural commodities upon factors such as Value addition Technology
adoption etc. This would encourage the companies to
2. Demand-side: Rising Protectionist Policies in innovate and compete at the global level
importing countries: High import duties and Quota mis
export markets Integration into Global value chains (GVCs): Integrate
large anchor firms in critical products to set up
Easier market access to India's competitors: Goods from operations in India Government initiatives like
countries such as Bangladesh Vietnam etc enter into simplified labour laws PLI incentives, low corporate tax
export markets as EU, USA etc at almost zero customs on new manufacturing operations and scrapping of
day However, Indian goods enter such markets w retrospective tax would encourage many firms
comparatively higher customs duty and thus goods searching for China plus-one location to shift base to
become uncompetitive. India's ExCom of Textiles and India
Leather to USA and EU has bee declining on account of
this 21.8.4 Global Value Chains
WTO Norms: Indiscriminate application y sanitary and Integration into GVCS has the potential to bring about
phytosanitary measures by other countries against
structural shift in our economy- From Agriculture to
Indian products For example basmati and non-basmati Manufacturing, From Low-end Manufacturing to high-
rice exports to the us have been rejected multiple times
end Manufacturing. From Self-Employed and Casual
on the grounds of low hygiene standards. Similarly, the Workers Salaried Workers, from lower Productivity to
issue of pesticides residues is frequently raised by the higher productivity and overall a change in our
Eu and Japan
orientation from being inward to outward
D. Road Ahead in the Budget 2020-21, the Finance Minister had
Improve Trade Competitiveness by improving access to highlighted Te need for "Assemble in India" on the lines
factors of production (Land, Labour) Capital), Reduce of "Make in India". In a way, this was a call for greater
Logistics costs (14% of GDP) global benchmarks (8% Integration of Indian Economy with the Global Value
of GDP), improving Ease Doing Business etc. Chains (GVCS) to reap multiple benefits

Protect the domestic Market from the import check A. Meaning of Global Value Chains (GVC) GVCS refer
foreign goods through (a) strong and effective technical to the full range of activities (design. production,
regulations (b) trade safeguards such a Anti-dumping marketing, distribution and support to the final
duties and safeguard duties consumer, etc) that are divided among multiple firms

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and workers in multiple countries to bring a product female employees because of the high levels of
from conception to its end use and beyond. The Global dexterity required
value Chains (GVCs) have been developed for number
of products such as Automobiles, Pharmaceuticals, 4. Benefits for Agriculture Sectors: Even though, India
Textiles, Electronics, Chemicals. Gold and Jewellery is one of the largest producers of Agri-commodities its
etc. share in global exports stands at merely 2.2% (9th
Rank). This clearly highlights India's poor Integration
8. Reasons for Integration of India into GVCS 1. into Global agricultural supply chains. Hence greater
Economic Reasons: According to World Bank, 1 integration would translate into expanded market access
percent increase in the level of GVC participation and higher prices for the farmers leading to doubling of
increases average productivity by 1.6 percent and per- their income levels
capita Income by more than 1% in long-run. This is on
account of following reasons 5. Higher Resilience and Stability: According to
OECD.. Integration of economies into GVCs lead to
Provides fast track route to Industrialisation since there resilience stability and flexibility in their production
is no need to build entire supply chain night from network and hence capable of responding to domestic
scratch. shocks On the other hand, economies which are less
integrated into GVCs are more vulnerable to shocks and
Better access to a greater variety of higher- quality or hence may see decline in economic activity and fall in
less costly intermediate inputs. No need for firms to National incomes in response to domestic shocks
focus on entire supply chain and instead focus on
specialised tasks leading to Hyper-specialisation. C. Reasons for India's Poor Integration into GVCS
According to OECD-WTO'S TIVA (Trade in Value
Transfer of technology and now now from the foreign Added) database. India's GVC participation index
partners stands at 43, as compared to 52 for Vietnam and 60 for
Promotes collaboration rather than competition between Malaysia The GVC participation index displays a
Domestic and Foreign Firms wherein each of them country's integration into the GVC and is the sum of
focusses on specialised task in the production cycle. forward and backward linkages divided by total exports
Both Domestic and Foreign firms collaborate with each The foreign value added of India's Gross Exports
other in order to minimise the costs and maximise the (Forward Linkages) has reduced from 25% (2012) to
profits 16% (2016) Some of the reasons for India's poor
Integration into
Knowledge Intensive firms in other countries would
share product innovations with indian Firms and thus GVCs are as given below Inward-looking Industrial
provide scope for the Indian hems to move higher up policies with focus on State- led Industrialisation,
the value chain Import substitution, Licence-raj System etc

2. Employment Creation: GVCS have a potential to The lead firms are the firms that establish supply chains
provide fillip to Manufacturing sector leading to across the world and hence major drivers of GVCS For
structural change in Indian Economy It offers the example in India. Tata Motors (Automobile) and
following other opportunities Ranbaxy (Pharmaceuticals) have emerged as lead firms
by attracting foreign investment, transferring
Shift in the Workers from agriculture to Manufacturing technology, establishing supply chains etc. However,
there is a need to have such lead firms in almost all
Higher Paying Jobs accompanied by Social Security
sectors
benefits. Induces shift in type of employments from
Self- employed and Casual workers towards Salaried Indian Firms have traditionally focussed on Indian
Workers Domestic Market since it is quite large. However, they
have failed to realise that integration into GVCs would
3. Social Reasons: GVCS support employment of not
give them much wider market.
just men, but also women. Notably in the apparel and
electronics sectors, where assembly of many small parts Countries such as China and Vietnam have been
must be done manually, firms report preferences for inviting MNCs with GVC linkages to their countries

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leading to their Integration. However, India has so far agreements, therefore, came across as more favourable
not given due emphasis on this aspect of FDI policy. policy choice.

Lack of Focus on R&D leading to limited knowledge

transfer.
A. Need for FTA's
Lack of access to Finance- Higher Dependence of
Banks, Under-developed Bond Market etc Inability of Access to high quality Raw Materials to support the
the Government to bring about long- pending Labour domestic Industries and promote "Make in India" and
Reforms "Assemble in India". Access to the global markets and
enable export-e model of Development.
Lack of availability of skilled manpower in crucial
sectors Electronics Higher Logistics Cost (14%) as Integration into Global Value Chains leading to
compared to USA (9%) and Japan (11%) - leading to employment creation, enhanced efficiency, higher GDP
Uncompetitive Indian exports. growth rates.
Poor Focus on Quality due to higher share of small Trade Liberalisation with Flexibility: The FTAS help
scale enterprises. reduce tariffs with a chosen trade partner in a calibrated
manner with tariff reductions spread over time. Further,
Inverted Duty structure making import of Finished the partner country would also be required to
Goods cheaper. reciprocate by reducing the tariffs
D. Way Forward B. India's Experience With FTAS Positive Impacts:
India's Trade with FTA partners: India's total trade has
The Government should address the various constraints
increased with each FTA partner in post FTA phase
highlighted above in order to successfully integrate
Indian Economy into GVCS India should target the Structure of Imports and Exports: FTA partners have
entire production cycle in the Smile Curve of the Global been able to provide for high quality raw materials.
Value Chains (GVCS) In some of the selected products Further, India's exports are primarily accounted for by
such as Automobile. Pharmaceuticals etc, India needs to non raw materials with respect to each FTA partner
focus on high-end activities such as Conceptualisation
and Design in order to reap its expertise in R&D, Trade in Services: India's trade in services has increased
technology with some of the FTA partners such as Japan, South
Korea, Malaysia etc Some of the sectors that have been
India must also focus on lower end of the curs benefitted include technology (Computer Software).
(Production and Assembly) to give fillip to "Make in telecommunication, finance, tourism etc.
Ind and "Assemble in India"
FDI in FTA Partners: Indian companies have been
21.8.5 Free Trade Agreements of established in most of the major FTA partner countries
of India leading to greater exports from India
India
2 Adverse impacts:
Free Trade Areas (FTA) are conceptualized to reduce
the barriers to trade between two or more countries, Structure of Trade: FTAs have led to increased imports
which generally are put in place to help protect local and exports. However, imports are much higher than
market and industries Lowering of the trade barriers exports. Further, India's exports to FTA countries has
results increased access of new markets for industries, not outperformed overall exports to rest of the world.
boosting their reach and the number of people they can
sell the products to One of the main reasons why India Widening Trade Deficit: India's trade deficit with
started forging FTA was the decreasing relevance of the ASEAN, Korea and Japan has widened post- FTAS
Doha round of trace talks under the World Trade Sector-Wise Impact of FTAS: Apart from the widening
Organisation (WTO), In this round, the developing trade deficit, the quality of trade has also deteriorated
countries were not able to secure a favourable deal with after signing of FTAs. Out of 21 important sectors, 13
the developed countries. The region and bilateral sectors have been adversely affected by higher imports
as compared to exports. Some of these affected sectors

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are minerals, leather, textiles, gems and jewellery, C. Way Forward

metals, vehicles etc.
There is a need for Indian industries to become more
Under-Utilised FTAs: Utilisation rate of FTAS by aggressive and look for the opportunities that the FTAS
exporters in India is very low (between 5 and 25%) 3. provide rather than only being dependent on Indian
Recommendation for Utilisation of FTAs: The domestic market. Also, India need to negotiate hard for
getting market access in services as it is the core
Surjit Bhalla Committee has given the following
strength of Indian economy
recommendations for effective utilization of FTAS:

*Review of Existing FTAS: India must undertake a 21.8.5 Model Bilateral Investment
comprehensive review of the existing FTAS in terms of Treaty
benefits to various stakeholders like industry and
consumers. If necessary, these FTAS have to be Bilateral investment Treaties (BITs) are agreements
renegotiated to ensure that India's interests and concerns between two Countries for the reciprocal promotion and
are adequately addressed. protection of investments in each other's territories by

Improve Trade Competitiveness: Exports in India are individuals and companies situated in either State BITS
constrained by improper access to factors of production, encourage foreign investors to invest in a State and
namely, land, labour and capital in India and high cost there by contributing towards overall developments and
of these factors of production advancements of the economy

Protect the domestic market by laying down strong and A. Features of BIT
effective technical regulations to avoid importing cheap
quality goods. At the same time. we must use the trade Some of the important features of the BITs are Fair and
safeguards such as Anti- dumping duties and safeguard Equitable Treatment (FET): Mandates States to have a
duties to protect our domestic Industry stable and predictable legal framework regulating
investments which meets the reasonable expectations of
Approach towards Services: With respect to FTA in the investors.
Services, India has so far excessively focussed on the
movement of Natural persons which would enable Full Protection and Security (FPS): Mandates States to
Indian professionals (such as IT. Educators, doctors etc) provide full protection and safety to foreign investments
to render their services in the FTA partner countries.
National Treatment: The foreign investors should be
However. going forward, we need to go beyond and
treated at par with the domestic investors
negotiate with the FTA partners to allow Indian service-
based companies to set up their bases in their country. Most Favourable Nation Treatment (MFN): Concession
extended to foreign investor of a particular country
Better Inter-Ministerial Coordination: The ministry of
would be extended to foreign investors of other
Commerce and Industry must hold regular Inter-
countries. Expropriation (Taking over property): Bars
ministerial meetings to improve the coordination
the state from expropriating the foreign investments
between various ministries
except under exceptional circumstances
Facilitation for MSMES: Launch nation-wide
Repatriation of Investment and Returns: Mandates the
sensitisation scheme whereby the MSMEs can be
states to provide unrestricted power to the foreign
explained about the potential of FTAS Launch FTA
investors to repatriate their investments and returns
Utilisation Mission: The MSMEs are often unable to
take advantage of the FTAs due to lack of Information Investor State Dispute Resolution (ISDS): Foreign
about the FTAs Hence, there is a need to launch nation- investors can directly initiate arbitration proceeding
wide sensitisation scheme whereby the MSMEs can be against a State without approaching its own
explained about the potential of FTAs government. To handle such a dispute, an ad- hoc
tribunal may be set up in accordance with the
Integrate Government initiatives such as One- District
Arbitration rules of the United Nations Commission on
One Product. RODTEP Scheme etc. into FTAS to push
International Trade Law.
for export
B. Reason for Termination of BITS

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The BITS signed by India gave extensive protection to and the US (11.7%). The EU is the second-largest
the foreign investment with scant regard for state's destination for Indian exports (14% of the total) ahead
interests based on the neoliberal model. For example, a the USA.
number of foreign corporations slapped ISDS notices
against India challenging a wide array of regulatory India is the EU's 10th largest trading partner accounting
measures such as the imposition of retrospective taxes for 1.8% of EU total trade in goods in 2020 well behind
(Vodafone case),cancellation of spectrum licences and China (16.1% ), the USA (15.2%), and the UK (12.2%)
revocation of telecom licenses. These ISDS cases India and EU had launched talks for having a wide-
against India led to a fundamental rethink and review of ranging Free Trade Agreement (FTA), officially called
BITs in India leading to the adoption of Model BIT in broad-based BTIA, long ago in 2007. The BTIA was
2016. proposed to encompass trade in goods services and
investments.
21.8.6 Important Provisions of Model
However, the talks stalled in 2013 over differences on
BIT
market access and movement of professionals
Enterprise based Definition of Investment: The asset-
With the signing of the BTIA, India and the EU expect
based definition of the investment under the earlier
to promote bilateral trade by removing barriers to trade
BITS has been replaced by Enterprise based definition
in goods and services and investment across all sectors
under the model BIT Asset based defin considers every
of the economy.
kind of asset both movable immovable including the
IPRS as investment and gives protection under treaties
Moving away from an asset-based approach to an
enterprise-base approach aims at narrowing the scope of
investmen to be protected and thus seeks to reduce the
number of BIT claims that can be brought against Inda B. Broad-based Trade and Investment
Exclusion of MFN Treatment: In recent years so foreign
Agreement (BTIA)
investors have sued India arguing that they have to get The Broad based Trade and Investment Agreement
the same beneficial treatment gen to companies from (BTIA) s an intended trade agreement in negotiation
other countries. Accordingly in has dropped MFN between india & European Union it has not progressed
Clause from the Model BIT due to share differences between both negotiating
parties
Conditions for Initiating Arbitrations at International
Arbitrations: The Model BIT puas that the aggrieved Differences on BTIA
investor should use all 4 remedies as well as
negotiations and consultations before initiating Protection of Foreign Investments: There is a
arbitrations against the host Sa Investor can use outside disagreement between India and EU on whether the
remedies only five years after resorting to all domestic protection of foreign investments will be part of the
arrangements BTIA or will be dealt with in a separate agreement
Application of Indian Judicial Remedies: The provision
Corporate Social Responsibility: The Model B under BTIA makes it mandatory for foreign investors to
mandates foreign investors to voluntarily adore initially pursue Indian judicial and administrative
internationally recognized standards of corporate social remedies for at least a period of five years before
responsibility pursuing a claim under international law. This provision
is being opposed by the European Union
21.8.7 India-UK Broad-Based Trade
and Investment Agreement Immigration Policies: India wants a greater ease of
movement of temporary skilled workers to provide
A. India-UK Trade Relations services in the EU European nations have been pursuing
a policy of protectionism after successive financial
The EU is India's third largest trading partner crisis caused a rise in unemployment. Moreover,
accounting for €62.8 billion worth of trade in goods liberalization in immigration policies including for
2020 or 11.1% of total Indian trade, after China (12%) migrant workers is subject to decisions of individual

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countries, thereby limiting the mandate of EU to The agreement covers goods, services investment
negotiate with India. competition, intellectual property, economic and
technical cooperation, e-commerce and law, and is
Market Access for Wines: The EU wants greater market intended to be a Free Trade Agreement. It is meant to
access for its wines and spirits, and that India should build upon the existing ASEAN+1 FTA wherein
lower its tariffs for their imports. Wines and spirits are ASEAN has existing FTA agreements with the other six
considered luxury items in India and therefore there is members
no reasonable cause for such a tariff reduction.
The RCEP countries account for almost half of the
Data Security: EU is not granting data secure world's population, contribute 25% of the world exports
certification to India, which would facilitate the cross- and make up around 30% of global GDP and hence
border transfer of personal data that is required by RCEP is considered to be one of the largest regional
Indian companies especially in the IT industry. trade agreement
Data Localisation: EU is varied of the data localization India has decided to remain outside the proposed RCEP
rules within India. This has led to disagreement on the trade agreement which was negotiated between ASEAN
operating guidelines for e-commerce companies. and its six Free trade partners India has officially stated
Agro Products: Agricultural products have been that the present form of the RCEP Agreement does not
excluded from the negotiations. European countries fully reflect the basic spirit and the agreed guiding
give huge subsidy to their agro products, due to which principles of RCEP.
Indian agricultural products are not able to compete. A. Benefits of India Joining RCEP
EU has also asked India for change in government Effective Utilisation of FTAs: India has signed Free
procurement policies, India has denied these Trade Agreements (FTAs) with some of the RCEP
prospective changes as agricultural procurement is member countries such as Japan, South Korea.
followed on basis of developmental motive rather than Singapore, Malaysia etc. However. India has failed to
profiteering motive. Pursuit of self-reliance has been effectively utilize the benefits of such FTAs In this
accelerated by the Covid-19 crisis under the regard. the RCEP provides an avenue for India to
Atmanirbhar Bharat Mission. This is perceived by the complement India's existing free trade agreements with
European Union as India's "protectionist stance". the ASEAN and some of its member countries. It would
Labour and Environmental Standards: India may find it help India streamline the rules and regulations of
difficult to meet the sustainable standards on labour and regional trade and help India in effective utilization of
environment on which the ELI now lays greater FTA
emphasis Greater Regional Integration: Enable India to strengthen
Therefore for closer convergence between India and the its Act East Policy. Quite important because India is not
EU both should engage in finalisation of the trade deal a party to two important regional economic blocs Asia
as soon as possible Pacific Economic Cooperation and the Comprehensive
and Progressive Agreement for Trans- Pacific
21.9 Regional Agreements Partnership (CPTPP)

Harness Comparative Advantage in areas such as ICT

21.9.1 Regional Comprehensive Education and Healthcare Hence joining RCEP would
Economic Partnership (RCEP) give greater tile to such crucial sectors of the Indian
Economy leading to higher employment creation and
RCEP is a Free Trade agreement between ASEAN 5 higher GDP growth Attract Investment from RCEP
which includes the 10 ASEAN countries and Australia member countries:
China, Japan, New Zealand and South Korea The RCEP
negotiations was also envisioned as being led by The RCEP countries account for almost 25% of the
ASEAN and would be based upon vision of ASEAN global FDI flows Hence, by joining RCEP India will be
Centrality able to attract more amount of FDI. giving a much
needed boost to 'Make in India campaign

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B. Reasons for India's Reluctance to Join RCEP lower reduction in the customs duties and offered
Reluctance to Open: India has negotiated for protection to the indian domestic Industry
liberalization of the Services sector in which it has an
advantage however, countries such as Australia and Ratchet Clause: Ratchet means a screw which turns
New Zealand are reluctant towards opening their only in one direction, up or down and not both ways.
services market to other countries such as India that This concept is proposed to be applied in RCEP which
would provide cheaper competitive edge to their will disallow the member country to increase the import
domestic players India has been reluctant for duties, once reduced The Indian Government wanted
liberalisation in the manufacturing sector in which the RCEP member countries to adopt safeguard
China and other member nations have an advantage mechanism which should enable the countries to
which would hamper India's domestic players in price increase the tariffs on certain products when there is a
competitive sectors such as in electronics, in which surge in imports. However, the RCEP member countries
China, South Korea and other have an edge wanted that once the tariffs on products is raised, it
should not be allowed to reduced Adoption of
Adverse Trade Deficit: India has around $104 billion liberalized Rules of Origin would have affected India's
trade deficit with the RCEP member countries which is interests
65% of India's total trade deficit. The RCEP agreement
forced India to eliminate tariffs on almost 90% of the Investments under RCEP: Presently, the India
imported goods over the next 15 years. Hence, India Government emphasizes that foreign companies
was apprehensive that RCEP agreement would lead to investing in India should transfer technology or
increase in its trade deficit, particularly with countries knowhows to their domestic counterparts Further the
such as China government and Reserve Bank of India also currently
impose a cap on the royalties a domestic company can
Adverse impact of previous FTAs: The FTAs with pay to its foreign parent or partner The Investment
Japan and South Korea have led to substantial increase related aspects of the RCEP has been finalized recently
in import of goods into the domestic market leading to and it has done away with requirement of technology
adverse impact on domestic manufacturing India is transfer and cap on royalties paid by the domestic
apprehensive that RCEP would enable China to dump companies to foreign companies. This goes against the
its goods in Indian domestic market. The steel and interests of India
textile industries have been demanding for enhanced
protection in the RCEP negotiations Application of Investors to State Dispute Settlement
(ISDS) Mechanism: Under multilateral trade and
Impact on Dairy Industry: Many participating countries investment agreements such as RCEP a third party
like New Zealand and Australia have been urging India forum is normally provided for to resolve such disputes.
to open up the dairy sector through reduction of import This means that the relevant laws and judiciary in India
duties. India is the largest milk producer with a will no longer be able to intervene in such disputes
production of 176 million metric tonnes in 2018-19.
India's dairy sector is estimated to have a value of $100 Provisions against Data Localization in the e-commerce
billion and constitutes 20% of the total global milk chapter in the RCEP goes against India's interests
production, RCEP negotiations are crucial to the Electronic Commerce: The present e-commerce chapter
survival of India's dairy sector as milk production in contains clauses that prevent the member countries from
India is smallholder-centric, India needs to learn from specifying the data localisation rules for the foreign
its past mistakes. For instance, in the companies. It is to be noted that the RBI has already
case of edible oil, the entire industry has moved from come out with the data localisation norms for the
self-sufficiency to import dependency post the WTO payment system operators such as Visa, MasterCard etc.
implementation in 1996-97 Further, Srikrishna Committee has also highlighted the
need for data localisation to improve the law
Base Year for Eliminating Tariffs: The RCEP member enforcement in India. Hence. e-commerce chapter in the
countries demanded that the base year should be 2013 RCEP does against India's interests
while India demanded that the base year should be 2019
It is to be noted that India has increased import duties C. Way Forward
on several products between 2014 and 2019 and hence
adoption of 2019 as the base year would have led to

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Firstly, India has already signed FTAs with almost 12 The CPTPP covers a broad range of goods and services.
countries which are part of RCEP. This includes 10 These include financial services, telecommunications,
ASEAN Countries, Japan, and South Korea. Hence, in and food safety standards.
the short-run, India can afford to remain outside RCEP
until its core interests and concerns are addressed. India CPTPP is essentially a Free Trade Area that among
must first thus try to strengthen its own position and other things, seeks to:
market before it decides on joining any such large scale Lower trade barriers such as tariffs. The CPTPP
trade partnership by undertaking deeper Economic removes 95% of tariffs on goodwill services.
Reforms: India needs second generation reforms in
order to make its trade more competitive. Establish a common framework for intellectual property
Enforce standards for labour law and environmental
Secondly, in the medium and long run, India must focus law, and establish investor-state dispute an settlement
on enhancing its export competitiveness by addressing mechanism
the infrastructural bottlenecks, build manufacturing
capabilities, improving logistics supply chain, focus on All countries agreed to cut down on wildlife trafficking.
R &D etc. For this, creation of dedicated agencies and That helps elephants, rhinoceroses, and marine species
establish offices overseas equipped with professional the most. It prevents environmental abuses, such as
marketing expertise that will undertake export unsustainable logging and fishing. Countries that don't
promotion and to link buyers with Indian exporters in comply will face trade penalties.
major markets across the world is required. The
marketing of Indian products to existing favourable A. India's Stand
markets, as well as other countries where India has a India did not join CPTPP as it seeks to place greater
low export presence will also augur Indian labour and environmental standards on its other partners
competitiveness. and CPTPP draft includes narrowly detailed
Thirdly, to realize vision of $5 trillion economy. India qualifications on standards for investment protection,
needs to get integrated into regional trading agreements provisions to protect the host state's right to regulate,
(including RCEP). Hence, it should keep engaging with and the imposition of detailed transparency
the RCEP countries to ensure that its demands are taken requirements
into consideration.
B. Need for India to Reassess CPTPP
21.9.2 Trans-Pacific Partnership To Boost its Manufacturing Sector: The CPTPP bloc
(TPP) represent a major portion of the world economy. which
may present India the possibility of being a
Trans-Pacific partnership was one of the biggest global manufacturing hub and export platform for the Pacific
trade deal encompassing 40% of the global economy region with access to duty-free, quota free trade.
and 26% of world trade. The deal include 11 pacific rim
countries Australia, Brunei, Canada, Chile, Japan, To Strengthen Individual Relations: India already has
Malaysia, Mexico, New Zealand, Peru, Singapore, steady trade relations or is negotiating new agreements
Vietnam and US (withdrawn) and was signed in with various CPTPP countries such as Canada, Mexico,
February, 2016. After the United States withdrew its and Chile.
signature, the agreement could not enter into force. The To be a Major Player in Regional Development: India
remaining nations negotiated a new trade agreement has a crucial role to play in helping the region build an
called Comprehensive and Progressive Agreement for inclusive architecture at a time of increasing global
Trans-Pacific Partnership (also known as TPP11), instability. Besides, rising US-China tensions are
which incorporates most of the provisions of the TPP. "deeply worrying" for the region with the pandemic
This was signed in March 2018 and came into force in resulting in "heightened tension".
December 2018.
To Provide Indian Companies Better Platforms: Such
The TPP was followed by negotiations on a broader trade pacts will also give Indian companies a platform
range of topics which culminated into the to showcase their strengths across even larger markets.
Comprehensive and Progressive Agreement for Trans-
Pacific Partnership (CPTPP). C. Way Forward

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Acknowledging India's economic heft and value as a

market, the CPTPP members have left the door open for
India. Given the global economic scenario in present
times and the near future, it would be in India's interest
to dispassionately review its position on CPTPP and
carry ou structural reforms that will help India to
mitigate some of the repercussions arising from the
CPTPP

21.9.3 Trans-Atlantic Trade and Investment

Partnership (TTIP)
Trans-Atlantic Trade and Investment Partnership (TTP)
is a proposed trade agreement between the United
States and the European Union. Till now more than to
round of negotiations have taken place between the two
blocs. The agreement is conceptualized with the aim of
promoting trade and multilateral economic growth TTP
is considered as complimentary agreement to the Trans-
Pacific Partnership (TPP).

U.S. and the EU account for around 30% of India's

exports therefore, significant trade diversion effect of
the TTIP s evident. Therefore, if TTIP trade deal is
finally clinched than India will suffer from a decrease in
both exports and imports, and consequently a dip in
GDP growth. The economic challenge can be addressed
by undertaking reforms aimed at matching the trade
cost cut under the TTIP, and also a proactive policy for
engagement with the trade regime that is likely to
emerge out from TTIP talks.

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The IMF's fundamental mission is to ensure the stability

Chapter – 22 of the international monetary system. It performs the
following functions:
International Economic Surveillance: The IMF oversees the international
Organization monetary system and monitors the economic and
financial policies of its 189 member countries. As pa of
this process, which takes place both at the global level
and in individual countries, the IMF highlights possible
22.1 Bretton Woods Institutions risks to stability and advises on needed policy
adjustments
The Bretton Woods institutions were created in Bretton
Woods, New Hampshire in 1944 during the United Lending: A core responsibility of the IMF is to provide
Nations Monetary and Financial Conference After the loans to member countries experiencing actual or
Second World War. delegates from 43 countries met to potential balance of payments problems Unlike
help rebuild the shattered post war economy and development banks, the IMF does not lend for specific
promote international economic cooperation, create a projects. The IMF lends money to replenish
new international monetary system to ensure a foreign International reserves, stabilise currencies ar strengthen
exchange rate system, prevent competitive devaluations conditions for economic growth
and promote economic growth Capacity Development: IMF capacity development-
One of the major outcomes of the Bretton Woods technical assistance and training-helps member
Agreement was the creation of the institutions like countries design and implement economic polices that
International Monetary Fund and World Bank (with its foster stability and growth by strengthening the
first group institution (BRD). These institutions together institutional capacity and skills.
are popularly called as Bretton Woods Twins. John Promote exchange rate stability and orderly exchange
Maynard Keynes was one of the founding father of the arrangement.
two institutes.
Assist in the establishment of a multilateral system of
22.2 International Monetary payments and the elimination of foreign exchange
restrictions.
Fund (IMF)
The International Monetary Fund (IMF) is an
22.2.3 Governance Structure
international organization of 189 countries, working to The IMF is governed by and accountable to 189
foster global monetary cooperation, secure financial member countries.
stability, facilitate international trade. promote high
employment and Sustainable economic growth, and A. Board of Governors
reduce poverty around the world. The IMF formally
came into existence on 27 December 1945. The Board of Governors is the highest decision- making
body of the IMF. It consists of one governor and one
22.2.1 Objectives of IMF alternate governor from each member country The
governor is appointed by the member country and is
Foster global monetary cooperation, usually the Minister of Finance or the Governor of the
central bank. The Union Finance Minister is the ex-
Secure financial stability. office Governor of India in the IMF and the RBI
Facilitate international trade, Governor is the alternative governor

Promote high employment and sustainable economic All powers of the IMF are vested in the Board of
growth, and Reduce poverty around the world. Governors They exercise the following functions:

Approval of quota increases;

22.2.2 Functions

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Special drawing right allocations; The admittance of The IMF's quota system was created to raise funds for
new member. loans Each IMF member country is assigned a quota
contribution, that reflects the country's relative size in
Compulsory withdrawal of members etc Amendments the global economy. Higher IMF quota is directly
to the agreements a bye laws of the MOUS signed related to high voting rights and greater borrowing
among nations permissions under IMF
The Board of Governors normally meets once a year Quota defines the amount of assistance a country will
Unlike the General Assembly of the United Nations, get out of contingency fund of IMF as well as the power
where each country has one vote, decision making at of a country to influence the lending decisions and sap
the IMF was designed to reflect the relative positions of into the funds themselves
its member in the global economy. countries Quotas are denominated in Special Drawing Rights
(SDRs), the IMF's unit of account Special Drawing
B. Ministerial Committees
Rights (SDR)
The Board of Governors is advised by two ministerial
Special Drawing Rights is an international reserve asset,
committees International Monetary and Financial
created by the IMF in 1969 to supplement its member
Committee (IMFC): MFC has 24 members, drawn from
countries official foreign reserves. SDRS can be
the pool of 190 governors, and represents all member
exchanged for freely usable currencies
countries
SDRs are allocated to countries by the IMF. A country's
It discusses the management of the international
IMF quota, the maximum amount of financial resources
monetary and financial system.
that it is obligated to contribute to the fund, determines
It also discusses proposals by the Executive Board to its allotment of SDRS. Any new allocations must be
amend the Articles of Agreement. And any other matters voted on in the SDR Department of the IMF and pass
of common concern affecting the global economy. with an 85% majority. The SDR is also the unit of
Development Committee: account for the IMF

It is a joint committee(25 members from Board of The value of the SDR was initially defined equivalent to
Governors of IMF & World Bank). tasked with advising one US dollar. But later it consisted of various
the Boards of Governors of the IMF and The World currencies and with Effect from October 1, 2016 the
Bank on issues related to economic development in SDR basket consists of the US Dollar, Euro, the
emerging market and developing countries. It serves as Chinese Renminbi, Japanese Yen, and British Pound
a forum for building intergovernmental consensus on Sterling
critical development issues.
Pay a Quota Subscription: On joining the IMF each
C. Executive Board member country contributes a certain sum of money
called a quota subscription, which is based on the
24 Executive Directors make up Executive Board. The country's wealth and economic performance (Quota
Executive Directors represent all 189 member countries Formula)
in a geographically based roster
It is a weighted average of
D. Managing Director
GDP (weight of 50 percent).
The IMF has a Managing Director, who is head of the
Openness (30 percent).
staff and Chairperson of the Executive Board. The
Managing Director is appointed by the Executive Board Economic variability (15 percent)
for a renewable term of five years. The IMF's
employees come from all over the world. They are International reserves (5 percent)
responsible to the IMF and not to the authorities of the GDP of member country is measured through a blend of
countries of which they are GDP-based on market exchange rates (weight of 60
percent) and on PPP exchange rates (40 percent)
22.2.4 IMF Quota System

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Quotas play several key roles in the IMF: A members 22.2.6 India and IMF
quota determines country's financial and organizational
relationship with the IMF, including: India has been one of the largest recipient of funds from
IMF The Indian constituency include Bhutan
Subscriptions: A member's quota subscription Bangladesh and Sri Lanka India's voting nights
determines the maximum amount of financial resources increased to 2.63 per cent from the current 2.3 per cent
the member is obliged to provide to the IMF. A member
in 2016 the recent reforms bring India and Brazil into
must pay its subscription in full upon joining the IMF the list of the top 10 members of IMF Though India has
up to 25 percent must be paid in SDRS or foreign
not been a frequent user of IMF funds. IMF credit has
currencies acceptable to the IMF (such as the US dollar, been instruments helping India in relevance to the
the euro the Japanese yen, or the British pound sterling), Balance of Payments Crisis at the following occasions
while the rest is paid in the member's own currency
Post Partition:
Voting Power: Each IMF member's votes are comprised
of basic votes plus one additional vote for each SDB 1. Post-partition period. India had serious balance of
100.000 of quota payments deficits, particularly with the dollar and other
hard currency countries, It was the IMF that came to her
Access to Financing: The amount of financing a
rescue. The Fund granted India loans to meet the
member can obtain from the IME (its access limit) is financial difficulties arising out of the Indo-Pak conflict
based on its quota For example under Stand-By and
of 1965 and 1971.
Extended Arrangements a member can borrow up to
145 percent of its quota annually and 435 percent 2. In 1981-82, after the second oil shock India borrowed
cumulatively SDR 3.9 billion under an Extended Fund Facility the
largest arrangement in IMF History at that time

3. India wanted large foreign capital for her various

22.2.5 IMF Publications river projects, land reclamation schemes and for the
development of communications Since private foreign
World Economic Outlook: The IMF publishes World capital was not forthcoming. the only practicable
Economic Outlook Report twice a year which contains method of obtaining the necessary capital was to
analysis of global economic developments during the borrow from the International Bank for Reconstruction
near and medium term. WEO forecasts include key and Development (i.e.: World Bank)
macroeconomic indicators, such as GDP, inflation,
current account and fiscal balance of more than 180 4. In 1991-93, India borrowed SDR 2.2 billion under
countries around the globe. It also publishes the report two stand by arrangement and in 1991 it borrowed SDR
on annual International Capital Markets 1.4 billion under the Compensatory Financing facility
The foreign reserves started picking up with the onset of
Global Financial Stability Report: It provides an the liberalisation policies
assessment of the global financial system and markets,
and addresses emerging market financing in a global All the loans taken from IMF had been repaid. Instead.
India is now active contributor to the IMF. IMF had
context
provided India technical assistance in various areas
Fiscal Monitor: Fiscal Monitor was launched in 2009 to which include development of Government Securities
survey and analyse the latest public finance market, Foreign Exchange Market reform, Public
developments, update fiscal implications of the crisis Expenditure management. Tax and Custom
and medium-term fiscal projections, and assess policies Administration, and strengthening statistical systems in
to put public finances on a sustainable footing It is connection with the Special Data Dissemination
prepared twice a year by the IMF's Fiscal Affairs Standards

Department. It focuses on current market conditions India has occupied a special place in the Board of
highlighting systemic issues that could pose a nek to Directors of the Fund Thus, India had played a
financial stability and sustained market access by creditable role in determining the policies of the Fund.
emerging market borrowers This has increased the India's prestige in the
international circles India availed of the services of

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specialists of the IMF for The purpose of assessing the More resources to IMF since the magnitude of
state of the Indian economy -way India has had the international trade has increased and the number of
benefit of independent thy and advice countries that will approach to IMF

Present India holds 2.75% of SDR quota and 2.63% of The management system in the IMF should be modified
the IMF in the IMF and World Bank group there is an informal
arrangement that the head of the IMF should be a
22.2.7 Need for Reforms in IMF European and the head of the World Bank should be an
American. The time has come to reconsider this and the
Organisational Structure and Quota System: The MF IMF probably should really rethink it
remains dominated by the rich, developed and powerful
nations Big Countries like India & Russia have only The IMF should focus on lower income countries and
around 2.6% quota where G7 group owns more than support other developing countries market funds raising
40% quota in IMF The decisions of IMF are hence activities, as its Article IV consultation reports are
guided by the wishes of developed nations Higher MF utilised by credit rating agencies impacting the fund
quota is directly related to high voting rights. power of a raising capacity of countries like India
country to influence the lending decisions and greater
Long term Crisis management rather than just short-
borrowing permissions under IMF
term solutions advocated by the IMF
Conditionality: On giving loans to countries, the IMF
makes the loan conditional on the implementation of 22.2.9 Reforms Taken by IMF in 2016
certain economic policies Though these conditionalities
may help the countries economically (n certain cases In 2010, the IMF's Quota Governance reforms were
like India) get it is seen as an infringement on the right drafted which finally became effective in 2016 This
of political autonomy of the recipient country Examples reforms boosted the quotas for all 188 members
of such conditions are doubling the overall quota resources for the IMF
Emerging and developing nation gained more
Reducing government borrowing - Higher taxes and influencing power in the governance planning of the
lower spending Structural adjustment-Privatisation, International Monetary Fund (IMF). More than six per
deregulation reducing corruption and bureaucracy. cent of the quota shares were transfer from the US and
European countries to developing and emerging nations
Higher interest rates to stabilise the currency. The reform gives emerging economies such as Brazil
Veto Authority of USA: For major reforms and and China larger quota shares at the institution
decisions. 85% of the IMF voting power is required India's voting rights increased to 2.6% from the current
However, the USA hold more than 16% of voting power 2.3% and China's voting rights increased to 6% from
and hence can virtually block any unfavourable reform 3.8% China has the 3rd largest IMF quota and voting
or decision of IMF towards USA or its allies share after the US and Japan. While, India. Russia and
Brazil are among the top 10 members of the IMF
22.2.8 Reforms Demanded
About 6 percent of quota shares will shift to emerging
Restructuring the voting rights/powers in the IMF market countries As a result quota shares of
reflecting the current global economic scenario which traditionally strong economies such as the United
means increasing the role of emerging nations like India States. Saudi Arabia and European countries will be
and China while reducing the role for developed diminished. The quota shares of the poorest member
European states and USA. countries will largely remain the same
Comprehensive review of the different conditionality The permanent capital resource of IMF have been
associated with the IMF loans. IMF loan conditions doubled to SDR 477 billion (about US$659 billion)
should be paired with other reforms-e.g. trade reform in Executive Directors will now be appointed by elections
developed nations, debt cancellation, and increased unlike earlier
financial assistance for investments in basic
infrastructure. IMF loan conditions cannot stand alone IMF's Executive body now consists of entirely elected
and produce change. They need to be partnered with Executive Directors thus bringing an end to the
other reforms or other conditions as applicable

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category of appointed Executive Directors which is Each institution in the World Bank Group is owned by
appointed by the five largest quota-holders its member governments, which subscribe to its basic
share capital, with votes proportional to shareholding
The reforms approved by the IMF's Executive Board Membership gives certain voting rights that are the
seek to ensure that the Fund can flexibly support Low same for all countries but there are also additional votes
Income Countries (ICs) financing needs during the which depend on financial contributions to the
pandemic and the recovery while continuing to provide organization.
concessional loans at zero interest rates
The IBRD has 189 member governments, and the other
The centrepiece of the approved policy reforms is a 45 institutions have between 153 and 184 members. The
percent increase in the normal limits on access to institutions of the World Bank Group are all run by a
concessional financing, coupled with the elimination of Board of Governors meeting once a year Each member
hard limits on access for the poorest countries. These country appoints a governor. generally its Minister of
higher access limits will facilitate the provision of more Finance On a daily basis the World Bank Group is run
concessional support to LICS with strong policies and by a Board of 25 Executive Directors to whom the
large balance of payments needs governors have delegated certain powers

22.3 World Bank Group A. International Bank for Reconstruction and

Development (IBRD) The International Bank for
The World Bank is another product of Bretton woods Reconstruction and Development (IBRD) is the oldest
Agreement, which came into formal existence on: 27 of the World Bank Institutions (established in 1945). It
December 1945. The World Bank is a vital source of supports the World Bank Group's mission by providing
financial and technical assistance to developing loans, guarantees, risk management products and
countries around the world The World Bank is advisory services to middle-income and creditworthy
headquartered in Washington DC. The World Bank low-income countries, as well as by coordinating
Group has set two goals for the world to achieve by responses to regional and global challenges.
2030
IBRD finances investments across all sectors and
End extreme poverty by decreasing the percentage of provides technical support and expertise at each stage of
people living on less than $1.90 a day to no more than a project The IBRD provides commercial-grade or
3%. Promote shared prosperity by fostering the income concessional financing to sovereign states to fund
growth of the bottom 40% for every country. projects that seek to improve transportation and
infrastructure, education domestic policy, environmental
The World Bank Group consists of five distinct yet
consciousness, energy investments, healthcare, access to
complementary organizations:
food and potable water, and access to improved
A International Bank for Reconstruction and sanitation.
Development (IBRD)
It supports government efforts to strengthen public
B International Development Association (IDA) financial management as well as to improve the
investment climate address service delivery bottlenecks,
C. International Finance Corporation (IFC) and strengthen policies and institutions.
D. Multilateral Investment Guarantee Agency (MIGA) B. International Development Association (IDA)
E International Centre for Settlement of Investment The International Development Association, also known
Disputes (ICSID) as the soft loan window of the World Bank, was set up
1960 and is headquartered in Washington, DC It offers
The term "World Bank generally refers to just the IBRD
concessional loans and grants to the world's poorest
and IDA as they share the same leadership and staff,
developing countries.
whereas the term World Bank Group or WBG is used to
refer to all five institutions collectively It was established in 1960 to complement the existing
IBRD by lending to developing countries which suffer
22.3.1 Organisation Structure from the lowest gross national income or from troubled
creditworthiness. The IDA's stated aim is to assist the

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poorest nations in growing more quickly, equitably and 22.3.2 Important Reports Published
sustainably to reduce poverty.
by the World Bank
IDA credits have a zero or very low interest charge and
repayments are stretched over 25 to 40 years, including World Development Report: The World Development
a 5-to-10-year grace period C. International Finance Report is an annual report published since 1978 by the
Corporation (IFC) International Bank for Reconstruction and Development
or World Bank. Each WDR provides in-depth analysis
The International Finance Corporation (IFC) is the of a specific aspect of economic development
private-sector arm of World Bank focused exclusively
on the private sector. It lends money to private sector Ease of Doing Business: The report was introduced in
companies of its member nation. It was set up in 1956 2003 to provide an assessment of objective measures of
and is headquartered in Washington, DC The President business regulations and their enforcement across 190
of the World Bank Group is also President of IFC. economies on ten parameters affecting a business
through its life cycle 10 different parameters namely,
the IFC's stated aim is to create opportunities for people Starting a Business, Dealing with Construction permits.
escape poverty and achieve better living standards 2 Electricity availability, Property registration, Credit
mobilizing financial resources for private enterprise availability Protecting minority Investors Paying Taxes
meting accessible and competitive markets, supporting Trading across borders Contracts enforcement, and
businesses and other private-sector entities, and creating Resolving Insolvency
and delivering necessary services to those who are very
stricken or otherwise vulnerable rases capital through 22.3.3 India and World Bank
bond issuances in International Markets to fund loans
to clients and maintain their financial strength India was one of the forty four original signatories to
the agreements reached at Bretton Woods that
established the international Bank for Reconstruction
and Development (BRD) and the International
Monetary Fund (IME)
D. Multilateral Investment Guarantee Agency (MIGA)
It was also one of the founding members of the IFC in
The Multilateral Investment Guarantee Agency (MIGA) 1956 and the IDA in 1960 India later became a member
is international financial institution which offers of the MIGA in January 1994 India is not a member of
political insurance (guarantees) to investors and lenders ICSID India claimed ICSID
against the loss caused by non-commercial (Political)
Convention is not fair, convention's rules for arbitration
risks, such as currency transfer, expropriation, war and
leaned towards the developed countries in ICSID the
civil subrace. Thus, it promotes foreign direct
Chairman of the Centre is the Chairman of the World
investment by protecting such investments) into
Bank. If the arbitration award is not satisfactory then
developing countries support economic growth, reduce
the aggrieved party would appeal to a panel which will
poverty, and improve people's lives. It was set up in
also be constituted by the ICSID There is no scope for a
1988 and is headquartered Washington, D.C
review of the award by an Indian court even if the
E. International Centre for Settlement of Investment award is against public interest
Disputes (ICSID)
IBRD lending to India commenced in 1949 with a loan
CSD is an international arbitration institution, set up in to the Indian railways. During the 1950s the BRD was
1966 to settle the international investment dispute. Its India's sole source of World Bank borrowings
Decision are binding on the parties. It helps in
By the end of the decade India's mounting debt
promoting international investment by providing
problems became an important factor in the launch of
confidence in the route resolution process However,
the IDA, the soft loan affiliate of the World Bank (WB)
settlement through this institute is voluntary i.e..
group
approaching this institute for settlement is upon the
parties. But price parties agree to settle the dispute By the end of the 1960s, the United States until then
through this state they cannot withdraw their consent India's largest source of external resources sharply I cut
unilaterally.

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its bilateral aid program Since then the WB emerged as pollution. This may interfere with the autonomy of the
the most important source of official long- term finance country.

During the 1960s and 1970s the IDA accounted for Catering to the Agenda of World Capitalism: Some
nearly three-fourths of all WB lending to India: In critics have pointed out that the World Bank really
1980's India's better performance saw a sharp decline in caters to the agenda of World Capitalism in the garb of
India's share in IDA The share of IBRD lending in India its Structural Adjustment Programme (SAP) and
grew sharply in the 1980s, buoyed by its improving continues to be dominated by rich countries. SAP is a
credit-worthiness set of "free market" economic policy reforms imposed
on developing countries by the World Bank as a
The lending portfolio changed sharply after the 1991 condition for receipt of loans. It is argued SAP policies
macroeconomic crisis in the immediate aftermath. India have increased the gap between rich and poor in both
became one of the last important WB borrowers to local and global terms.
partake of structural adjustment lending. which
supported policy reforms in finance, taxation, and the One Size Fits All Approach: The World Bank, has been
investment and trade regime. accused of treating different nations and regions as
indistinguishable, and it assumes the "uniform remedy
India is currently classified as a "blend country defined of development" The danger of this assumption is that
as one in transition from lower middle-income to to attain even small portions of success, western
middle-income and is creditworthy for lending from approaches are adopted and traditional economic
both IDA and IBRD. structures and values of developing countries are
India is the largest IBRD client of the World Bank abandoned
Between 2015 and 2018, the World Bank lent around
$10.2 billion to India 22.3.5 Reforms Demanded
The World Bank Group (WBG) has approved a $25- 30 Governance Reforms: The very first reform demanded
billion commitment plan for India for the period 2019- by the nation is change in the governance structures of
22 the World Bank. It should shift its focus from the need
of US and European nation to those of underdeveloped
22.3.4 Need for Reforms in World or developing nation by reforming the voting system
Bank The emerging new economic powers, particularly Inda
and China, and some other Asian and Latin American
Governance Structure: The World Bank's organizational countries of the world should be given due place and
structure and voting rights are dominated by developed role. It will serve the real purpose of its creation and
countries, the USA and the Western European countries increase the legitimacy of this institution.
in particular. Hence, decisions are guided by the whims,
interests and policies of the developed countries instead Leadership Reform: The leadership succession debate
of developing countries. should be used to create space for reflection on the
purpose of the multilateral body, the substantive role it
US Monopoly: Traditionally, the World Bank President should play in the future, the need to strengthen
has always been a US citizen nominated by the inclusive multilateralism, and the actions needed to
President of the United States, which is also the largest bolster the position of emerging economies and
shareholder in the bank. The voice of developing developing countries. Developing nation should get
countries remains unheard at this forum. greater representation in Executive board that is
Conditional Lending: Loans or grants for specific generally dominated by developed nation
projects are often linked to wider policy changes in the Voting Reform: Decision-making reform through the
sector or the country's economy as a whole. For introduction of double majority voting system, where
example, a loan to improve coastal environmental agreement requires both shareholder and member state
management may be linked to development of new majorities, thus giving developing countries a larger
environmental institutions at national and local levels part in decision-making.
and the implementation of new regulations to limit

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Adapting to the Changing World Order: Failure of of hydroelectric dams in various countries has resulted
World Bank to adapt to the changing world order may in the displacement of indigenous peoples of the area.
see rising economies going their own way Eg
establishment of the Asia Infrastructure Investment Private Sector Bias: Third concern is with respect to
Bank (AllB) by China. Such a development would working of World Bank in partnership with private
signify the emergence of multi-polarity without sector It may undermine the role of the state as the
multilateralism and create a climate of conflicting primary provider of essential goods and services. such
interests and values among a diverse group of countries. as healthcare and education, resulting in the shortfall of
such services in countries badly in need of them
22.4 IMF and World Bank: A Rigid Policy Prescriptions: Fourth concern is about the
Critical Analysis role of the Bretton Woods institutions in shaping the
development discourse through their research, training
MF and World Bank are among the few institutions and publishing activities. As the World Bank and the
which have played a very important role in shaping the IMF are regarded as experts in the field of financial
present World Economic Order. These Bretton Woods regulation and economic development, their views and
Institutes, at several occasions, have been a boon for prescriptions may undermine or eliminate alternative
many countries them during their BoP crisis, and perspectives on development
developmental growth trajectory, providing assistance
The IMF and World Bank should come forward to serve
in many forms and areas including the climate change
the global need for making relations between the
and poverty alleviation thus helped the economies of
developed and developing countries, equitable, fair and
many countries to flourish by putting the
more productive for the development of the developing
conditionalities of focusing on liberalisation - of trade,
countries. The dissatisfaction and grievances of
investment and the financial sector, deregulation and
developing countries have resulted into them taking
privatisation of nationalised industries.
matter in their own hands. New international banks
An excellent example of this is India, to which the loan have emerged over last few years. BRICS nations
was sanctioned in 1991 to overcome the Balance of established a new organization called BRICS Bank.
Payments press on the condition of opening up its Hence credibility of these institutions lies on how
economy and paving the way for LPG (Liberalisation, quickly they reform themselves as per evolving global
Privatisation and Globalisation) reforms The long term order.
impact was seen after 15 years of the reform when the
country achieved a high economic growth rate and 22.5 Other Institutions
showed resilience during The global financial crisis
22.5.1 New Development Bank
However few criticisms have been levelled against them
as following A. Introduction
Conditionalities: The first and foremost criticism is The New Development Bank, also referred as BRICS
about the conditionalities these institutions impose for Bank, is a multilateral development bank established by
sanctioning and granting loans to borrower countries. BRICS States to support infrastructure and sustainable
development efforts in BRICS and other underserved,
Some of the critics also advocate that these institutions
emerging economies for faster development through
are really catering the agenda of neo-colonialism in the
innovation and cutting edge technology. The Bank
grab of its "Structural Adjustment Program
complements the efforts of other existing financial
Bias Towards Certain Projects: Second criticism is institution to realise the common global growth. It is
regarding the type of developmental projects funded. headquartered at Shanghai, China.
Many infrastructure projects financed by the World
Bank Group have social and environmental implications B. History
for the populations in the affected areas and criticism IMF & World Bank, the two Bretton Wood institutions,
has centred on the ethical issues of funding such are west dominated institutions and developing
projects For example. World Bank- funded construction economies like India, China, Brazil etc., have been
voicing their demands for greater say in control of these

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institutions. But no substantial reform was taking place The NDB President is elected on a rotational basis from
in these institutions and hence idea for NDB emerged. one of the founding members, and there is at least one
Vice President from each of the other four founding
At the fourth BRICS Summit in New Delhi (2012), the members. K. V. Kamath, from India, is the first elected
leaders of Brazil, Russia, India, China and South Africa president of the NDB.
considered the possibility of setting up a new
Development Bank to mobilize resources for Bank's Articles of Agreement specify that all members
infrastructure and sustainable development projects in of the United Nations could be members of the bank.
BRICS and other emerging economies, as well as in however the share of the BRICS nations can never be
developing countries. less than 55% of voting power.

Following the report from the Finance Ministers at the The Bank strives for having a short loan-processing
fifth BRICS summit in Durban (2013), the leaders time, aiming to design, negotiate, review and approve
agreed on the feasibility of establishing the New loans within a period of 6 months.
Development Bank and made the decision to do so. It
was also agreed that the initial contribution to the Bank The NDB members represent 42 percent of world
should be substantial and sufficient for it to be effective population, 27 percent of the global surface area and
in financing infrastructure. account for over 20% of the Global GDP.

During the Sixth BRICS Summit in Fortaleza (2014), E. Achievements of NDB

the leaders signed the Agreement establishing the New Innovations: The NDB has managed to innovate in
Development Bank (NDB). It was decided that the some areas, such as lending in local currencies to
Bank shall have an initial authorized capital of US$ 100 protect borrowing countries from a stronger dollar
billion The initial subscribed capital shall be US$ 50 which was one of its founding features Another
billion equally shared among founding members. NDB innovation is that the bank accepts parameters for
focused on sharing responsibilities among the partners compliance with environmental and social standards
in a fair and equitable manner. For example the first designed by borrowers, respecting its members own
chair of the Board of Governors was from Russia, the policies Partnership with other Development Banks: It
first chair of the Board of Directors was from Brazil, the has established partnerships with important
first President of the Bank was from India and the development banks, such as Latin American regional
headquarters of the Bank is located in Shanghai. development bank CAF, the China-led Asian
In 2018, the NDB received observer status in the United Infrastructure Investment Bank, and the World Bank
Nations General Assembly, establishing a firm basis for group AA+ Credit rating: The NDB's credit ratings AA-
active and fruitful cooperation with the UN. one short of the maximum which other development
banks such as AllB have This is despite many of its
C. Objectives of New Development Bank members, notably Brazil and South Africa, facing tough
economic times domestically.
Fostering development of member countries.
Floating Various bonds: The bank has successfully
Supporting economic growth. floated a number of bonds including green bonds in
Promoting competitiveness and facilitating c creation. 2016 and has now approved 42 projects in member
countries for a total of over USD 12 billion more than
Building a knowledge sharing platform among the AllB's roughly USD 8 billion portfolio
developing countries.
F. Issues/Concerns
To fulfil its purpose, the Bank supports public or private
projects through loans, guarantees, equity participation Some concerns have surfaced Development Bank such
and other financial instruments. as:

D. Features Less disbursal of Loans: Though the bank has approved

over USD 12 billion in loans it has disbursed less than
Unlike the World Bank, the New Development Bank USD 1 billion so far, that is a very low figure:
has one vote one member policy and no veto power
provisions.

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Political Turmoil: Relations between China and India. improve the quality of life of their people. It is
soured, sanctions against Russia made it difficult to lend headquartered in Manila, Philippines
to Russian companies, and then there was political
instability and economic crises in both South Africa and ADB raises funds through bond issues on the worlds
Brazil. Continuing to advance the interests of the capital markets, rely on members' contributions,
developing world in a rough political climate proved to retained earnings from their lending operations, and the
be a hard task at which member countries don't seem to repayment of loans. It also provide loans and grants
have excelled from a number o special funds.

Issue of Sustainability: Though the NDB has recently B. Functions

approved loans for climate change mitigation and As a multilateral Development financial Institution
adaptation in Brazil and renewable energy in India, it ADE performs functions such as:
has labelled a number of projects that are
environmentally questionable as sustainable. without Making loans and equity investment for the economy
explaining the criteria it uses One of its sustainable and social advancement of its developing member
projects is the paving of the Trans-Amazonian highway countries.
in Brazil, a highly controversial road that many
environmentalists blame for exacerbating deforestation Providing technical assistance for the preparation and
in the world's largest tropical rainforest. execution of development projects and programmes and
advisory services
China's Domination: The new development bank can be
used by China to pursue its grander vision which Areas of Focus: ADB operations are designed support
include various initiatives like the Belt and Road the three complementary agendas of inclusive economic
Initiative growth, environmentally sustainable grown and
regional integration. The sectors in focus includes
Competition with AllB: Asian Infrastructure Investment Infrastructure (energy, Information and communication
Bank (AIIB) and the NDB compete with one another as technology, transport, urban development and water
there is a certain overlapping between mandates of the financial sector Development, Education and head
NDB and the AllB like both of them are aimed at among others.
developing infrastructure and pay a special attention to
sustainable development. C. Members

G. Major Projects funded by NDB in India Since its inception it has grown from 31 members to 68
members at present-of which 49 are from Asia and
It has committed funding to a number of major pacific region. It is modelled closely on the World
infrastructure projects in India, including the Mumbai Bank, and has similar weighted voting system where
Metro rail, Delhi- Ghaziabad-Meerut Regional Rapid votes are distributed in proportion with members'
Transit System and many Renewable Energy projects. capital subscriptions India has been a founding member
of ADB As of 31 December 2016, Japan and United
The NDB has so far approved 14 Indian projects for an States hold the largest proportion of shares at around 15
amount of nearly USD 4.2 billion. In 2020, India 6% each China holds send 64% India holds around
announced a 1 billion USD loan pact with NDB to 6.3% and Australia holds around 5.8%
boost rural employment and infrastructure.
D. India and ADB
22.5.2 Asian Development Bank
Over the past three decades, millions of people in India
(ADB) Have benefitted from improvements to basic
A. Introduction infrastructure and services brought by ADB-supported
development initiative India was a founding member of
The Asian Development Bank, set up in 1966, is a the bank and at present is the 4 largest shareholder of
regional development bank which aims for an Asia- ADB .ADB commenced operations in India in 1986
Pacific free from poverty. Its mission is to help
ADB's current sovereign portfolio in India includes 79
developing member countries reduce poverty and
projects worth $14.4 billion

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In 2020 ADB provided swift support to the 22.5.3 Asian Investment

government's COVID-19 response programs. To
alleviate the pandemic's effects ADB expanded Infrastructure Bank (AllB)
assistance to protect small businesses, strengthen
primary health care in urban. areas and underpin
A. About
education, social protection, and infrastructure The Asian Infrastructure Investment Bank (AB) sa
development multilateral development bank that aims to support the
Across 2020, ADB continued its regular assistance to building of infrastructure and regional connectivity
energy. transport, urban development, and public sector projects in the Asia-Pacific region it was officially
management in India and committed five energy loans established in December 2015 and opened for business
in January 2016 (The bank was proposed by China in
The Bengaluru Smart Energy Efficient Power 2013) it is headquartered in Beijing China it was formed
Distribution Project supports modernizing power with an initial corpus of $100 billion. It had 57 founding
distribution in the state of Karnataka members (37 Regional and 20 Non Regional members)
of which India was one of the founding members. The
Three projects aim to improve the quality and reliability bank currently has 97 member states while another 27
of electricity supply in Maharashtra Uttar Pradesh and are prospective members for a total of 84 approved
Meghalaya members
ADB committed to build a 120-megawatt hydroelectric
B. Goals of AllB
power plant in Assam To enhance urban mobility, ADB
committed $500 million to build a modern, high-speed To address the daunting infrastructure needs across Asia
Delhi-Meerut Regional Rapid Transit System corridor By furthering inter-connectivity and economic
ADB continued to support sustainable urban development in the region through advancements in
development in secondary and smaller towns of the infrastructure and other productive sectors
states of Rajasthan and Madhya Pradesh
To foster sustainable economic development create
Through its project readiness financing modality, ADB wealth and improve infrastructure connectivity in Asia
committed funds to provide capacity development by investing in infrastructure and other productive
Support for planning and designing urban and tourism sectors To promote regional cooperation and partnership
infrastructure development projects in Tripura and for in addressing development challenges by working in
horticulture expansion in Himachal Pradesh close collaboration with other multilateral and bilateral
development institutions
ADB also provided key knowledge products in 2020
that covered studies on economic corridors, an To promote investment in the public and private capital
industrial park rating system: micro, small, and for development purposes, in particular for development
medium-sized enterprises multimodal logistics parks, of infrastructure and other productive sectors
and India's participation in global value chains
To utilize the resources at its disposal for financing such
As a catalyst for private investments ADB provides development in the region, including those projects and
financial assistance to non-sovereign projects and programs which will contribute most effectively to the
financial intermediaries It also collaborates with harmonious economic growth of the region,
multilateral and bilateral development partners in India
to exchange information on development operations C. Membership of AllB
lessons and best practices it also explores financing
Membership in the AllB is open to all members of the
opportunities on climate finance, urban mobility
World Bank or the Asian Development Bank and is
improvement and COVID 19-related assistance
divided into regional and non-regional members. Unlike
The bank works closely with India’s Department of other MDBs (multilateral development bank), the AllB
Economic Affairs and project partners to build project allows for non- sovereign entities to apply for AllB
pipelines enhance implementation readiness and membership, assuming their home country is a member.
capacity and devise robust implementation monitoring Thus, sovereign wealth funds or state-owned enterprises
and management systems of member countries could potentially join the Bank.

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D. Voting Rights It may also reinforce a regional infrastructure that has

China as its hub.
China is the largest shareholder with 26.61 % voting
shares in the bank followed by India (7.6% ), Russia Opposition from US and Japan: The world's leading
(6.01%) and Germany (4.2%). The regional members industrialized economies, Japan and the U.S. are not
hold 75% of the total voting power in the Bank. members of the AllB because of following expressed
concerns:
E. Finances OF AIIB
Emergence of AllB, largely funded by China, poses a
The AllB's initial total capital is USD 100 billion. China threat to the monopoly of the United States on the
is the largest contributor to the Bank, contributing USD world's financial system for over half a century
50 billion, half of the initial subscribed capital. India is
the second-largest shareholder, contributing USD 8.4 There is no certainty that the bank will maintain its
billion rigorous loan-screening practices or keep its funding
operations separate from China's political ambitions
F. AllB Lending
Joining the AllB would require making a huge financial
The recipients of AIIB financing may include member contribution to the entity.
countries (or agencies and entities or enterprises in
member territories), as well as international or regional AIIB does not have an independent Board of Directors
agencies concerned with the economic development of and therefore there are concerns regarding its
the Asia-Pacific region. transparency and accountability Further, this also
reinforces the perception that the AllB will be much
The AIIB has also signed a co-financing framework more centrally controlled by the Chinese government
agreement with the World Bank and three non-binding
Memoranda of Understanding (MOU) with: Contemporary Economic Realities: A downward trend
in predicted project finance has been predicted because
The Asian Development Bank (ADB) European Bank of slow global economy trade war and the supply chain
for Reconstruction and Development (EBRD). ) disruptions due to the COVID pandemic Slowing
And the European Investment Bank (EIB).The bulk of economies can lead to governments failing to meet
AllB's operations are in South Asia. The Bank can lend contractual obligations towards AllB and trade frictions
outside Asia provided that it supports connectivity with may erode the potential of infrastructure projects
Asia or it is for a global public good and that the ban H. Need for AllB
significantly benefits Asia
The changing global geopolitical architecture has
About two-thirds of the loans approved by the bank necessitated the establishment of other developmental
have been co-financed with other multilateral lending banks outside the post-war Bretton Woods framework
institutions, including the World Bank and the ADB The This will structurally link Asia with Europe and provide
key sectors for the Bank are Energy. Transport Water an alternative for those countries which are unable to
and Urban development access the IMF or World Bank due to unacceptable
condition imposed by these Bretton Woods institutions
G. Critical Analysis (Concerns with AllB)
for getting loans Asia's infrastructure investment needs
Ulterior Motives of China: Certain critics are of the are so vast that no single institutional lender can meet
view that AllB would be used to advance China's that demand on its own
national interests while lowering environmental and
Despite opposition from US for establishment of such
human rights standards. China is investing in a range of
banks, European countries including Britain, France and
institutions and initiatives, including the AllB, and other
Germany joined the AIIB Australia and South Korea -
funding mechanisms such as the Silk Road Fund and
top US allies in the Asia-Pacific also participated in the
the New Development Bank a collective arrangement
development bank as its founding members
with Brazil, Russia, India, and South Africa China seeks
to influence the emerging structure of regional trade and AllB has worked under the guidance and coordination
investment relations and by helping to finance OBOR, with the World Bank and IMF. Also in order to build a
AIIB may influence these relationships more prosperous, equitable economic order across the

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Asia- Pacific region, AllB and other developmental key countries are not sufficiently involved in the
institutions can and should work successfully together. discussions and decisions concerning global economic
issues though their influences were growing in the
1. Road Ahead international financial system.
The AllB is still in its evolutionary phase that must be The group accounts for 85 per cent of world GDP and
nurtured with democratice principles avoiding single- two-thirds of its population, in addition to 80% of
country dominance (Chinese dominance) like that of global investment and 75% of global trade. The first
USA in IMF and World Bank. G20 summit occurred in Berlin, in December 1999, and
India as an emerging economy, can play a vital role in was hosted by the German and Canadian finance
shaping the foundation of AllB for the cause of poor ministers
people spread across developing countries.
B. G20 Members
22.5.4 Blue Dot Network (BDN) The members of the G20 are Argentina, Australia,
Brazil Canada, China, France, Germany, India,
The BDN multi-stakeholder initiative to bring together
Indonesia, Italy Japan, Republic of Korea, Mexico,
governments, the private sector and civil society to
Russia, Saudi Arabia South Africa, Turkey, the United
promote high-quality, trusted standards for global
Kingdom, the United States, and the European Union.
infrastructure development. It is expected to serve as a
Spain as a permanent, non-member invitee, also attends
globally recognised evaluation and certification system
leader summits.
for roads, ports and bridges with a focus on the Indo-
Pacific region. Infrastructure projects would be graded G20 COUNTRIES
on debt, environmental standards, labour standards etc.
and is planned as a direct counter to China's Belt and C. Structure and Functioning of G20
Road Initiative (BRI).
The G20 does not have a permanent secretariat or
However, unlike the BRI, the BDN would not offer Headquarters. Instead, the G20 president is responsible
public funds or loans for the project. BDN will serve as for bringing together the G20 agenda in consultation
a globally recognized seal of approval for major with other members and in response to developments in
infrastructure projects, letting people know that projects the global economy
are sustainable and not exploitative
The G20 Presidency rotates annually according to a
system that ensures a regional balance over time. For
22.5.5 G20 the selection of presidency, the 19 countries are divided
A. About into 5 groups. each having no more than 4 countries.
The presidency rotates between each group. Every year
The Group of Twenty (G20) is an international forum the G20 selects a country from another group to be
that brings together the world's 20 leading industrialised president.
and emerging economies. It consists of 19 member
countries and EU as its 20" member. It also has Group 1: Australia, Canada, Saudi Arabia, USA
representative from World Bank and IMF. It was Group 2: India, Russia, South Africa, Turkey
established in September 1999 as a forum where it was
limited to meeting of the Finance Ministers and Central Group 3: Argentina, Brazil, Mexico
Bank Governors of both developing and developed
Group 4: France, Germany, Italy. UK
countries invited by G7 member countries.
Group 5: China, Indonesia, Japan, South Korea
The leaders of the G20 held the first summit in
Washington DC in 2008 after the collapse of Lehman Each group holds a maximum of four nations. The chair
Brothers and since then summits between G20 leaders rotates among the groups and one country from a group
themselves have become an annual event is selected in a specific year
This was done to promote consultations and TROIKA: Every year when a new country takes on the
coordination with the emerging and developing presidency (in this case Argentina 2018), it works hand
economies in view of the realisation that some of the in hand with the previous presidency (Germany. 2017)

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and the next presidency (Japan, 2019) and this is economy dominate the agenda, additional items have
collectively known as TROIKA This ensures continuity become more important in recent years, like Tax and
and consistency of the group's agenda fiscal policy, Global Health, Financial markets. Climate
Change. 2030 agenda for Sustainable development.
D. Working of G20 Trade. Agriculture. Employment. Advancement of
Tracks: The work of G20 is divided into two tracks women in job market, Inclusive entrepreneurship. Anti-
terrorism, etc
The finance track comprises all meetings with G20
finance ministers and central bank governors and their F. India and G20
deputies meeting several times throughout the year they India's Priorities in G20 Summits include checking tax
focus on monetary and fiscal issues, financial evasion to fight corruption, choking terror funds.
regulations, etc. expanding the market access for key drugs, reforms in
The Sherpa track focuses on broader issues such as the World Trade Organisation to improve its functioning
political engagement, anti-corruption, development. and full implementation of the Paris Agreement, etc
energy etc. Each G20 country is represented by its
Sherpa who plans, guides, implements, etc. on behalf of 22.5.6 G7
the leader of their respective country
The Group of Seven (G7) is an informal bloc of
Policy Advice: The work of G20 members is supported industrialised democracies it is an inter governmental
by several international organisations that provide organisation that was formed in 1975 Its current
policy advice These organisations include: members make up nearly 50 percent of the world
economy and represent more than 60 percent of net
The Financial Stability Board (FSB). The FSB, which global wealth
was established by G20 leaders following the onset of
the global financial crisis. A. Members

The International Labour Organization (ILO). It consists of United States Canada Britain. France.
Germany, Italy and Japan. The bloc meets annually to
The International Monetary Fund (IMF). discuss a wide range of issues, including global
economy. security and energy. The initial group
The Organisation for Economic Co-operation and
contained 6 countries France Germany, the US. Britain,
Development (OECD)
Japan and Italy. A year later Canada was invited to join
United Nations (UN) the grouping, creating the G7. which became formalised
with annual meetings between the heads of the seven
World Bank governments. All G7 Countries are Part of G20.
The World Trade Organization (WTO) Engagement: B. Headquarters
The G20 also regularly engages with non- overnment
sectors Engagement groups from business 20), civil The G7 does not have a formal constitution or fixed
society (C20), labour (L20), think tanks (T20) The headquarters. The decisions taken by leaders during
outcomes of which will contribute to the deliberations annual summits are non binding
youth (Y20) are holding major events during the year.
C. India and G-7
G20 leaders
Previous Participation: The participation of India at the
Voting Power: There are no formal votes or resolutions 45th summit in Biarritz, France, in August 2019 is a
on the basis of fixed voting shares or economic criteria reflection of deepening strategic partnership and
However, there is informal influence of major powers in recognition of India as a major economic power.
the Scission making of G20 group
India was also invited to the 2020 summit hosted by the
E. Issues USA which could not take place due to the pandemic.

The G20 focuses on a broad agenda of issues of global Previously India had attended the G-8 summit (it
importance, although, issues pertaining to the global became G-7 from G-8 with the expulsion of Russia in
2014) five times between 2005 and 2009.

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Important Platform for Deliberations: India's ability to Britain had proposed a 'D10' club of democratic
safeguard its core sovereign concerns such as trade, the partners that groups the G7 nations with Australia and
Kashmir issue and India's relations with Russia and Iran the Asian technology leaders South Korea and India.
can be discussed with G7 members
1. It would include G7 countries- UK, US, Italy,
Taking on Global Stage: India raised issues on climate Germany, France, Japan and Canada plus Australia,
change and at meetings which signalled India's growing South Korea and India.
willingness to lead on issues that are points of
contention for countries like China and the USA. 2. It is aimed for channelling investments into existing
telecommunication companies within the 10 member
Significance of India at G7: As current president of states.
Brazil-Russia-India-China-South Africa (BRICS) and
G20 president in 2023, India will play a key role driving 3. The group aim to create alternative suppliers of 5G
in multilateral cooperation helping to build back better equipment and other technologies to avoid relying on
around the world. China. But now the group is being seen as an alternate
arrangement against the authoritarian states such as
Critical Analysis China, on efforts of Joe Biden, the new US President.

G7 is not representative in current times When it was 22.5.8 Supply Chain Resilience
established it accounted for 2/3rd of global GDP But
now it accounts only for 1/3rd on a PPP basis and less Initiative (SCRI)
than 50% on a nominal basis(market prices) Emerging In April 2021, The Trade Ministers of India, Japan and
7(E7) economies of India, China, Indonesia, Brazil, Australia have formally launched the Supply Chain
Mexico, Russia, Turkey are not part of it. This makes Resilience Initiative (SCRI)
the group ineffective in tackling the global economic
crisis as was seen in the 2007-08 global crisis G20 is The Covid-19 pandemic had an unprecedented impact
more representative than G7 in this respect. .G7 failed in terms of lives lost, livelihoods and economies
in tackling global issues and challenges of Climate affected. and revealed supply chain vulnerabilities
change, terrorism(ISIS etc), West Asian crisis, COVID globally it was observed that in unanticipated events
19 pandemic. Its failures include: whether natural. such as volcanic eruptions, tsunamis,
earthquakes or even a pandemic, or manmade, such as
G7 accounts for 59% of historical CO2 emissions and an armed conflict in a region that disrupt supplies from
pledged phase out fossil fuels. Yet there is no visible a particular country or even intentional halts to trade,
progress of the same and they currently account for could adversely impact economic activity in the
twice the CO2 emission than African continent. destination country
In terms of terrorism many who are joining the terror Therefore, a need was felt for supply chain resilience in
organisation from G7 countries. West Asian crisis in the context of international trade, supply chain
Syria, Yemen, Iraq has led to a migrant exodus to resilience is an approach that helps a country to ensure
European nations. G7 nations failed in addressing this that it has diversified its supply risk across a clutch of
migrant crisis leading to deaths and inhumane supplying nations instead of being dependent on just
statelessness for millions. one or a few
Weakening of rules-based of trade regime through WTO The SCRI aims to create a virtuous cycle of enhancing
and trade wars has the active role of G7 countries. supply chain resilience with a view to eventually
Therefore, G7 needs to be made more inclusive and a attaining strong, sustainable, balanced and inclusive
proposition of D10 has been proposed. growth in the Indo-Pacific region.

A. Objectives of SCRI
22.5.7 D10
To focus on sharing best practices on supply chain
D10 stands for 10 biggest democracies of the world. resilience and holding investment promotion events and
UK decided to pursue top 10 democracies of the world
buyer-seller matching events to provide opportunities
as an alternate to 5G equipment and technologies so as
to avoid reliance on China's telecom giant Huawei.

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for stakeholders to explore the possibility of

diversification of their supply chains

To attract foreign direct investment to turn the Indo-

Pacific into an "economic powerhouse" To build a
mutually complementary relationship among

partner countries. To work out a plan to build on the

existential supply chain network. Japan and India, for
example, have an India-Japan competitiveness
partnership dealing with locating the Japanese
companies in India

To reduce dependence on China amid a likelihood of

rechurning of supply chains in the Indo-Pacific region
amid the Covid-19 pandemic To support the enhanced
utilisation of digital technology and trade and
investment diversification."

B. Significance to India
China still remains a large source of critical imports for
India, from mobile phone components to
pharmaceutical ingredients. An internal push to
suddenly cut links with China would be impractical.

Over time if India enhances self-reliance or works with

exporting nations other than China, it could build
resilience into the economy's supply networks

Following the border tensions with China, partners such

as Japan have sensed that India may be ready for
dialogue on alternative supply chains

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1. To set and enforce rules for international trade to

Chapter - 23 stimulate economy growth and employment

World Trade Organization 2 To provide a forum for negotiating and monitoring

further trade liberalization by lowering trade barriers
and applying principles of known discrimination

3. To resolve trade disputes and contribute to peace and

23.1 Introduction stability of the world.
World Trade Organization (WTO) is a global 4. To increase the transparency of decision-making
multilateral organization established in 1995 for the processes, thereby giving the weak a stronger voice.
rules based trading between the nations of the world. It
is a global membership group that promotes and 5. To cooperate with other major international economic
manages free trade. It is a forum for governments to institutions involved in global economic management.
negotiate trade agreements. It is a place for them to
6. To help developing countries benefit fully from the
settle trade disputes. Essentially, the WTO is a place
global trading system, thereby cutting cost of doing
where member governments try to sort out the trade
business.
problems they face with each other. The goal is to help
producers of goods and services, exporters, and 7. To encourage good governance by reducing
importers conduct their international businesses arbitrariness.
smoothly.
23.4 Evolution of WTO
23.2 Rationale for WTO
The WTO came into existence on 1 January 1995 But
Almost all the nations of the world do not produce all there is a long history attached to the establishment of
the materials required for smooth running of the this organization dating back to 1945.
country. Therefore, they indulge in trade among each
other, so as to acquire the necessary materials and also After World War II, Western Countries came out with an
to earn profit. The concept of trade between nations was idea to create an International Trade Organization (ITO)
well established by Adam Smith in his book 'An Inquiry to handle the trade side of the international economic
into the Nature and Causes of the Wealth of Nations' cooperation. It was conceived as the third international
institution along with two "Bretton woods" institutions
Though free international trade is considered (the International Monetary Fund and the World Bank)
advantageous for all the countries of the world. But, it is Over 50 countries participated in the negotiations to
necessary, to have a multilateral global organization to create an International Trade Organization (ITO) as a
regulate the international trade between the nations. specialized agency of the UN.
This is to ensure that the international trade is bound by
mutually agreed rules and there exists an institutional However, United States along with many other major
mechanism to settle disputes between the trading countries failed to get this treaty ratified in their
nations. The World Trade Organization (WTO) is the respective legislatures and hence it became a dead letter.
only global international organization dealing with the Era of General Agreements on Trade and Tariff
rules of trade between nations. At its heart are the WTO (GATT): An agreement called the General Agreement
agreements, negotiated and signed by the bulk of the on Tariffs and Trade (GATT), signed by 23 countries in
world's trading nations and ratified in their parliaments. Geneva, came into force on Jan. 1, 1948 with the
The WTO has 164 members (including European purpose of phasing of import quotas and reducing tariffs
Union) and 23 observer governments (like Iran, Iraq, on merchandise trades From 1948 to 1994, the General
Bhutan, Libya etc) Agreement on Tariffs and Trade (GATT) provided the
rules for much of world trade.
23.3 Objectives of WTO
In the early years, the GATT trade rounds concentrated
The World Trade Organization (WTO) has 6 key on further reducing tariffs. Much of this was achieved
objectives: through a series of multilateral negotiations known as

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"trade rounds" the biggest leaps forward in international the WTO. The General Council (GC) is composed of
trade liberalization have come through these rounds the representatives of all the members. It is the real
which were held under GATT's auspices. engine of the WTO which acts on behalf of the MC. It
also acts as the Dispute Settlement Body as well as the
Uruguay Round of 1986-94: All was not going well Trade Policy Review Body or Trade in Goods, the
under the GATT and with the world trade becoming Council for Trade in Services and e Council for Trade-
more and more complex, GATT was not able to deal Related Aspects of intellectual Property Rights (TRIPS)
with it. The final chapter of the trade negotiations under operating under the GC. These councils with their
GATT was the Uruguay Round which was most subsidiary bodies carry out their specific responsibilities
extensive of all. It led to the formation of WTO and a
new set of agreements. Director General (DG): The administration of the WTO
conducted by the Secretariat which is headed by the
World Trade Organization (1994 onwards): The WTO Director General (DG) appointed by the MC for the
regime was signed during the April 1994 ministerial tenure of four years. He is assisted by the four Deputy
meeting at Marrakesh, Morocco, and hence is known as Directors from different member countries.
the Marrakesh Agreement. The contracting parties of
GATT 1947 automatically became the members of The Trade Policy Review Body (TPRB): The WTO
WTO and then the agreement was opened to be General Council meets as the TPRB to undertake trade
accession by other countries. The WTO framework policy reviews of members under the TPRM and to
ensures a "single undertaking approach to the results of consider the Director-General's regular reports on trade
the Uruguay Round - thus, membership in the WTO policy development. The TPRB is thus open to all WTO
entails accepting all the results of the Round without Members.
exception.
Dispute Settlement Body (DSU): The General Council
The WTO is not simply a continuation of the GATT. It convenes as the Dispute Settlement Body (DSB) to deal
has a completely different character. WTO was created with disputes between WTO members.
with the purpose of being a stronger and having a more
permanent framework compared to the previous GATT. Such disputes may arise with respect to any agreement
contained in the Final Act of the Uruguay Round that is
It also monitors trade in services and trade-related subject to the Understanding on Rules and Procedures
aspects of intellectual property rights, in addition to Governing the Settlement of Disputes (DSU).
trade in goods.
The DSB has authority to establish dispute settlement
India has been member of GATT since 1948, hence it panels refer matters to arbitration, adopt panel,
was party to Uruguay Round and a founding member of Appellate Body and arbitration reports, maintain
WTO China joined WTO only in 2001 and Russia had surveillance over the implementation of
to wait till 2012. recommendations and rulings contained in such reports,
and authorize suspension of concessions in the event of
23.5 Organizational Structure non-compliance with those recommendations and
rulings.
Ministerial Conference (MC): The Ministerial
Conference (MC) is at the top of the structural Appellate Body: The Appellate Body was established in
organisation of the WTO. It is the supreme governing 1995 under Article 17 of the Understanding on Rules
body which takes ultimate decisions on all matters. It is and Procedures Governing the Settlement of Disputes
constituted by representatives of (usually, Ministers of (DSU) The DSB shall appoint persons to serve on the
Trade) all the member countries. It usually meets after Appellate
every 2 years.
Body for a four-year term. It is a standing body of seven
General Council (GC): The General Council is the persons that hears appeals from reports issued by panels
WTO's in disputes brought by WTO Members.

Three Councils: There are three councils, viz. the The Appellate Body can uphold, modify or reverse the
Council highest-level decision-making body located in legal findings and conclusions of a panel, and Appellate
Geneva. meeting regularly to carry out the functions of Body Reports, once adopted by the Dispute Settlement
Body (DSB), must be accepted by the parties to the

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dispute. The Appellate Body has its seat in Geneva, same should apply to foreign and domestic services, and
Switzerland. to foreign and local trademarks, copyrights and patents.
This principle of "national treatment (giving others the
23.6 Principles of WTO same treatment as one's own nationals) is also found in
all the three main WTO agreements.
Some of the important principles Organization are as
follows It should be noted that National treatment only applies
once a product service or demy of intellectual properly
A. Non-Discrimination has entered the market Therefore, charging customs
duty on an import is not a violation of national
Non-discrimination is a fundamental principle of the treatment As import duty on an item is levied before
multilateral trading system and is recognized in the entry into domestic market) even if locally produced
Preamble of the WTO Agreement, as a key instrument products are not charged an equivalent tax
to achieve the objectives of the WTO In the Preamble:
WTO members express their desire to eliminate B. Free Trade and Market Access
discriminatory treatment in international trade relations
Lowering trade barriers is one of the most obvious
Non-discrimination in the WTO is embodied by two means of encouraging trade. There are many possible
principles, the Most Favoured Nation (MFN) treatment impediments to market access for goods, services and
obligation and the National Treatment Obligation These intellectual property. The two main categories of
principles are described as below: barriers to market access for goods are
1. Most Favoured Nation (MFN): Pursuant to the WTO 1 Tariff and Non-Tariff barriers
agreements countries cannot normally discriminate
between their trading partners. If a Member grants to a From time to time other issues such as red tape and
country a special favour (such as a lower customs duty exchange rate policies have also been discussed. The
on any of its products) it must grant the same favour reduction of tariff and non-tariff barriers to market
immediately and unconditionally to all WTO members access is, together with the elimination of
The MFN principle applies to trade in goods, trade in discrimination, a key instrument to achieve the
services, and trade related aspects of intellectual objectives of the WTO.
property. 1. Reducing Tariff Barriers: One result of the Uruguay
So, India granting MFN status to Pakistan does not give Round was countries' commitments to cut tariffs and to
any special privilege to Pakistan in trade with India.
"bind" their customs duty rates to levels, which cannot
India granted MFN status to Pakistan in 1996 whereas be easily increases. In the Uruguay Round, there was
Pakistan did not reciprocate with the same. The MFN
also a significant increase in the number of "bound"
status was withdrawn in the aftermath of Pulwama tariffs. A "bound tariff is a tariff for which there is a
attacks legal commitment not to raise it above the bound level.
Exceptions to the MFN rule: The bound level of the tariff is the maximum level of
customs duty to be levied on products imported into a
Countries can set up a free trade agreement that applies member country
only to goods traded within the group - discriminating
against goods from outside 2. Reducing Non-Tariff Barriers: Non-tariff barriers
include quantitative restrictions (such as quotas) and
They can give developing countries and LDCs special other barriers (for example, lack of transparency in
access to their markets. A country can raise barriers trade regulation, unfair and arbitrary application of
against products that are considered to be traded trade regulations, customs formalities, technical barriers
unfairly from specific countries. to trade and government procurement practices)
In services, countries are allowed (in limited
circumstances) to discriminate 2. National Treatment
Obligation: It states that, Imported and locally-produced WTO rules prohibit the introduction or maintenance of
goods in a country should be treated equally once the quantitative restrictions. The only restrictions on free
foreign goods have entered the domestic market. The trade that the WTO permits are duties, taxes or other

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charges, and safeguards or emergency actions in limited The Agreement on Agriculture applies not only basic
circumstances. agricultural products (such as wheat and live animals).
but also the products derived from them (such as flour
C. Promoting Fair Competition and meat), as well as most processed agricultural
WTO system of multilateral trading system provides for products (e.g. chocolate and sausages) The coverage of
transparent, fair and undistorted competition among the the Agreement also includes wines, spirits and tobacco
various countries. Rules such as Most favoured Nation products, as well as fibres (such as cotton). Agreement
(MFN) treatment to all trading parties, equal treatment on Agriculture has three pillars
to foreign goods, patents and copings as with nationals Market Access: The market access requires that tariffs
ensure fair competition among trading countries fixed (like custom duties) by individual countries be cut
Besides, WIO agreement provides for discouraging progressively to allow free trade. It also requires
unfair competitive practices such as export subsidies countries to remove non-tariff barriers and convert them
and dumping to Tariff duties
D. Special Concern for Developing Countries Export Competition: Export subsidies are presumed to
The WIO agreements include numerous provisions have trade-distorting effects. They allow exporters,
giving developing and LDCs special rights or extra benefited with such subsidies, to sell below the cost of
leniency production. In that way, export subsidies reduce world
prices undercutting exporters in other countries. Each
"special and differential treatment Among these are Member undertakes not to provide export subsidies
provisions that allow developed countries to treat otherwise than in conformity with this Agreement and
developing countries more favourably than other WTO with the commitments as specified in that Member's
members. Other measures include: Schedule
1 Extra time given to developing countries for fulfilling Domestic Support: This pillar is based upon the
their commitments in respect of various WTO assumption that not all subsidies distort trade to the
agreements same extent. The main conceptual consideration is that
there are basically two categories of domestic support-
2 Provisions designed to increase developing countries
support with no, or minimal distortive effect on trade on
trading opportunities through greater market access
one hand (often referred to as "Green Box" measures)
3 Provisions requiring WTO members to safeguard the and trade-distorting support on the other hand (often
interests of developing countries when adopting some referred to as "Amber Box" measures). For example,
domestic or international measures (e.g., in anti- government provided agricultural research or training is
dumping, safeguards, technical barriers to trade) considered to be of the former type, while government
buying-in at a guaranteed price ("market price support")
23.7 WTO Agreements falls into the latter category.

The WTO oversees about 60 different agreements 23.7.2 Trade Related Intellectual
which have the status of international legal texts. Property Rights
Member countries must sign and ratify all WTO
agreements on accession A. Introduction
23.7.1 Agreement on Agriculture Intellectual Property (IP) is a category of property that
includes intangible creations of the human intellect.
(AOA) Artistic works like music and literature, as well as some
The Agreement on Agriculture (AOA) was negotiated discoveries. inventions, words, phrases, symbols, and
during the Uruguay Round of the General Agreement designs can all be protected as intellectual property.
on Tariff and Trade, and entered into force with the Intellectual Property law is created to encourage the
establishment of the WTO on January 1, 1995 It aims at creation of a large variety of intellectual goods. To
reforming trade in agriculture, envisaging a fair and achieve this, the law gives people and businesses
market-oriented system, which improves predictability property rights to the information and intellectual goods
and stability for both importing and exporting countries

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they create, usually for a limited period of time. technological innovation and to the transfer and
Because they can earn profit from them, this gives dissemination of technology.
economic incentives for their creation.
By unlocking its vaccine technical know-how to the
As the volume of trade in goods and services involving world, India would demonstrate its resolve to walk the
intellectual property has increased in recent years, the talk on the TRIPS waiver.
importance of the protection of intellectual property for
the world economy has grown enormously Favourable Regulatory Environment: A commitment to
supply vaccines to India requires trust in the country's
In the developing countries, the protection of regulatory and institutional environment. which the
intellectual property property rights, has been often government must strive to instil through
insufficient. In contrast, the developed countries have
restrictive intellectual regimes that, openly discriminate dependable commitments Such confidence combined
against foreign nation and provide strict protection, with the expedited process for vaccine approval, can
without exemptions for humanitarian basins. help India quickly overcome its supply shortage.

The WTO sought to establish an appropriate framework 23.7.3 Sanitary and Phyto-Sanitary
for the protection of intellectual property in order to Measures (SPS)
bring greater order to international trade. A consensus
on the TRIPS Agreement was reached in Marrakesh in The Sanitary and Phytosanitary Measures (the SPS
April 1994 and took effect on 1 January 1995. Some of Agreement) was incorporated in World Trade
the salient points of agreement are: Organization on 1 January 1995
It sets down minimum standards for the regulation by It is concerned with the application of food safety,
national governments of many forms of intellectual animal and plant health regulations in cross border trade
property (IP) as applied to nationals of other WTO of biological goods. As a part of SPS, all nations
member nations undertake measures to ensure that food products are
safe for consumers, and also to prevent the spread of
It covers all legally recognized intellectual property
pests or diseases among animals and plants. These
rights (copyright and related rights, patents, industrial
Sanitary and Phytosanitary measures (SPS) may be
designs, trademarks, geographical indications layout-
applied in many forms, such as:
designs of integrated circuits and undisclosed
information). Requiring products to come from a disease-free area
Specific treatment or processing of products
It incorporates and improves upon protection levels of
the earlier frameworks like Paris Convention (for Setting of allowable maximum levels of pesticide
industrial property rights) and the Berne Convention residues
(for copyrights).
Permitted use of only certain additives in food Sanitary
Developed countries were given a transition period of and Phytosanitary measures apply not only to
one year from the date of entry into force of the WTO domestically produced food or local animal and plant
Agreement; developing countries and transformation diseases but also to products coming from other
countries were given five years (until January 2000); countries. Sanitary and Phytosanitary measures allow
and least-developed countries were given 11 years (until countries to set their own standards. But it also says
January 2006). The transition period for least developed regulations must be based on science. They should be
countries to implement TRIPS was further extended to applied only to the extent necessary to protect human,
2013, and until 1 January 2016 for pharmaceutical animal or plant life or health. And they should not
patents, with the possibility of further extensions. arbitrarily or unjustifiably discriminate between
countries where identical or similar conditions prevail.
TRIPS Agreement is to date the most comprehensive
SPS in Times of COVID Pandemic
multilateral agreement on intellectual property (IP)
TRIPS also specifies enforcement procedures, remedies, During the Covid times, several countries imposed SPS
and dispute resolution procedures. Protection and on the import of agricultural goods and other items
enforcement of all intellectual property rights shall meet fearing disease spread. To enhance transparency the
the objectives to contribute to the promotion of members should notify the measures they have taken on

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trade front (import restrictions mainly) to the WTO. As laid down in individual country schedules whose scope
per the WTO data, out of the 175 notifications related to may vary widely between Members
COVID-19, the majority (40%) were submitted under
the WTO's Agreement on Technical Barriers to Trade 23.7.5 Agreement on Trade Related
(TBT) while 25% were notified under the SPS Investment Measures (TRIMS)
Agreement.
The Agreement on TRIMS of the WTO is based on the
23.7.4 General Agreement on Trade belief that there is strong connection between trade and
in Services (GATS) investment. Restrictive measures on investment are
trade distorting According to the TRIMS provision,
The treaty was created to extend the multilateral trading countries should not adopt the investment measures
system to service sector, in the same way the Genera which restrict and distort trade.
Agreement on Tariffs and Trade (GATT) provides such
a system for merchandise trade The objective of TRIMS is to ensure fair treatment on
investments in all member countries.
The creation of the GATS was one of the landmark
achievements of the Uruguay Round whose results WTO gives a list of prohibited investment measures like
entered into force in January 1995 local content requirement, domestic employment,
export obligation, technology transfer requirement etc.
Role of services have been increasing rapidly, that violates trade. Few exemptions to developing
domestically as well as in international trade, with time. countries are also provided under TRIMS.
Services currently account for over 60 percent of global
production and employment. This trend is likely to 23.7.6 Agreement on Subsidies and
continue, owing to the introduction of new transmission Countervailing Measures (SCM)
technologies (eg electronic banking, tele-health or tele-
education services the opening up of long-entrenched Subsidies are used throughout the world by countries as
monopolies (eg. voce telephony and postal services), a tool for realizing government policies. They can take
and regulatory reforms hitherto tightly regulated sectors the form of grants, tax exemptions, low-interest
such as transport financing, equity infusion, and export credits and are
generally categorized as either specific subsidies, which
are limited to specific businesses and industries, or
This is an addition to changing consumer preferences nonspecific Subsidies, which are not limited. Subsidies
such technical and regulatory innovations has enhances usually take the form of:
the "tradability" of services and, thus, created a need for
Export subsidies.
institutional framework for service liberalization
Subsidies contingent upon the use of domestic over
GATS aims for creating a credible and reliable system
imported goods,
of international trade rules; ensuring fair and equitable
treatment of all participants (principle of non- Industrial promotion subsidies
discrimination stimulating economic activity through
guaranteed policy frameworks; and promoting trade and Structural adjustment subsidies
development through progressive liberalization. Regional development subsidies, and
Obligations contained in the GATS may be categorized
into two broad groups Research and development subsidies

1. General Obligations: These apply directly a The WTO SCM Agreement contains a definition of the
automatically to all members and services sectors MFN term "subsidy" The definition contains three basic
and Transparency are the two key obligations under this elements
head.
1. a financial contribution
2. Specific Commitments: These are the commitments
concerning market access and national treatment 2. by a government or any public body within the
specifically designated sectors. Such commitments are territory of a Member

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3. which confers a benefit existing Agreement on Agriculture (AOA) would be

amended to address smallholder agriculture and give
All three of these elements must be satisfied in order for developing countries new instruments to address
a subsidy to exist concerns regarding food security protection of rural
Sometimes some subsidies can cause injury to domestic livelihoods and rural development These instruments
industry of one country due to subsidized imports of are:
other country. Hence it causes a situation of unfair Special Safeguard Mechanism (SSM): WTO's Special
competition and surge of imports. Safeguard Mechanism is a protection measure allowed
Against such subsidies members can take for developing countries to take contingency restrictions
Countervailing Measures, such as imposing against agricultural imports that are causing injuries to
countervailing duties or antidumping duty. These can domestic farmers. The contingency measure is
only be done in a transparent manner and a sunset imposition of tariff if the import surge causes welfare
period should be specified. loss to the domestic poor farmers. SSM is allowable
only to the developing countries, but the design of exact
Countervailing Duty: It is imposed on imported goods rules of the SSM created conflict among the WTO
to counterbalance subsidy provided by the exporter members. Setting the conditions for putting restrictions
country. on imports and the amount of tariff imposition became
contentious issues and it caused the delay in the
Anti-Dumping Duty: At times countries resort to
implementation of the entire Doha Development
subsidize production or exports so heavily that
Agenda Powerful negotiating countries at the WTO, the
exporters are able to sell goods below domestic price or
US and India had conflicting versions about the
even cost of production in foreign markets. It is aimed
structure of the SSM.
at wiping out target country's industry Anti- Dumping
Duty is aimed at counterbalancing such subsidization. Special Products: At the 2005 WTO Ministerial
Conference in Hong Kong, members agreed to allow
23.8 Important Ministerial developing countries to "designate an appropriate
number of tariff lines as Special Products" (SPs) based
Meets on "food security. livelihood security and rural
development". These products do not come under the
23.8.1 Doha Ministerial Meet and Doha Development
Tariff reduction agreement under WTO.
Agenda (DDA)-2001
Non-Agricultural Market Access (NAMA): NAMA
The Agenda was officially launched at the WTO's
covers manufacturing products. fuel and mining
Fourth Ministerial Conference (MC4) in Doha Qatar. in
products, fish and fish products, and forestry products.
November 2001. Its aim was to achieve major reform of
These products are not covered by the Agreement on
the international trading system through the
Agriculture or the negotiations on services. NAMA
introduction of lower trade barriers and revised trade
calls for a reduction or elimination in tariffs,
rules
particularly on exportable goods of interest to
Doha round is the first to focus on helping developing developing countries. The Doha Talks also required
countries join the global marketplace, and boost their adequate and appropriate flexibilities to be provided for
economies as a result. WTO members agreed that for protecting economically vulnerable non-agriculture
realizing this objective, the rules in each of the areas industries The WTO considers the NAMA negotiations
must be appropriately designed. important because NAMA products account for almost
90% of the world's merchandise exports.
The main negotiating issues in the Doha Round are as
follows TRIPS (Compulsory License vs. Patent Protection): The
issue involves the balance of interests between the
Agriculture: It was agreed that agriculture must be pharmaceutical companies in developed countries that
stripped off of all policy distortions, including the held patents on medicines and the public health needs in
unacceptably high levels of subsidies that provide unfair developing countries
advantage to the large conglomerates controlling global
trade in commodities It was also decided that the It was agreed that waiver under TRIPS agreement be
allowed to a member country to export pharma product

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made under Compulsory Licensing to Least Developed agriculture negotiations, cotton, least developed
countries and certain other member countries countries, monitoring mechanism, small and vulnerable
economies, e-commerce, non-violation in intellectual
It also allows members to not to allow evergreening of property etc. The outcome of this conference was called
Patents Evergreening is strategy for extending the term Bali Package which was the first agreement reached
of granted patent which is about to expire without through the WTO that is approved by all its members.
increasing therapeutic efficacy in order to retain
royalties. Peace Clause: It allows countries such as India to
continue to freely procure and stock grains for the
Special and Differential Treatment to Developing public distribution system even if subsidies resulting
Countries: In Doha round, members agreed mar from these breach limits under the WTO's Agreement
Developing and Least Developed Countries will on Agriculture (AOA). The peace clause provided a
continue to be eligible for a favourable treatment Duty four-year reprieve, during which no country would be
Free Quota Free Access should be given to Least penalized for any excessive expenditures on food
Developed Countries (LDCs) security programs to protect against food shortage.
Inordinate Delay in Finalization of Doha Development
Round
Trade Facilitation Agreement (TFA): The TFA contains
The Doha round of talks failed to get the desired provisions for expediting the movement, release and
outcome because of the divide between the developed clearance of goods, including goods in transit. It also
and developing countries on WTO, IMF and World sets out measures for effective cooperation between
Bank customs and other appropriate authorities on trade
The key argument of the developing countries was that facilitation and customs compliance issues. Estimates
the current rules and regulations are more in favour of show that the full implementation of the TFA could
the developed or industrialized countries and the reduce trade costs by an average of 14.3% and boost
developed countries don't come forward for trade global trade by up to $1 trillion per year.
concessions for the developing countries. The Criticism: The developing countries said that the
developing countries set the market conditions as per developed ones are just rallying behind the Trade
their own needs Facilitation Agreement to get the markets opened up in
On the other hand, the developed countries and blocks developing countries to their goods and services without
such as EU argue that the developing economies don't providing permanent solutions to their problems. They
comply with their demands for near zero-tariffs in also wanted an agreement on Special Safeguard
agriculture and services. Measures (SSM) to protect farmers against import
surges.
During most of the Doha talk rounds, the developed
countries pressurized the developing countries to open 23.8.3 Nairobi Ministerial Conference
their markets further via so called Trade Facilitation
Agreement (TFA). On the other hand, the developing The Tenth Ministerial Conference of the WTO was held
countries pressurized the developed countries to bring in Nairobi, Kenya during 15-19 December 2015. The
more transparency to rules and regulations in the global agenda of this meeting was to take forward issues that
financial bodies; and for removing or raising the cap on were unresolved during last ministerial conference in
food and agricultural subsidies (this also known as Bali in 2013. The components of Nairobi Package were:
Aggregate Measure of Support, or AMS). The issue got Elimination of export subsidies: Developed countries
politicized in both the blocks.
such as United States will need to eliminate the farm
export subsidies and other scheme which unfairly
23.8.2 Bali Ministerial Conference agricultural exports
and Bali Package
Flexibility for developing countries: The Developing
The Ninth Ministerial Conference of WTO was held in countries were given flexibility to cover marketing and
Bali, Indonesia on December 2013. The key issues transport costs for agriculture exports and food aid in a
discussed in this meet included trade facilitation, way that does not distort local markets.

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Simplification of conditionalities: Seeking to simplify (Doha Development Agenda). This has raised questions
the conditions that exporters from the poorest countries about the body's ability to govern increasingly disputed
have to meet, so that their products benefit from trade global trade. As a result, there has been an increasing
agreements (so-called rules of origin) Giving more number of bilateral and multilateral Free Trade
opportunities for businesses from the poorest countries Agreements (FTA) between nations, hence creating
to provide services in the WTO's 164 member countries existential crisis for WTO

Information and Technology Trade: The countries

struck a deal on IT trade whereby they would eliminate
23.9 WTO Dispute Settlement
the tariffs on 201 IT products per year The idea is to Mechanism
make all IT products duty-free by 2019

Public stock-holding: No final decision was taken on

23.9.1 Breakdown in WTO Dispute
public stock-holding as well as Special Safeguard Settlement Mechanism
Mechanisms (SSM)
The WTO appellate body has become defunct after
23.8.4 Buenos Aires Ministerial USA consistently blocked the appointment of Judges to
the appellate body. The break down in the dispute
Conference settlement mechanism is a huge blow to the role of
WTO which is facing the threat of trade war and rising
The 11 Ministerial Conference of WTO was held in
protectionist policies of developed economies. Settling
Buenos Aires, Argentina from 10 to 13 December 2017
disputes is the responsibility of the Dispute Settlement
Stalemate on Public Stock-holding: The 11 Ministerial
Body (DSB) which consists of all WTO members.
Conference ended in a stalemate on issue of public
stockholding and no permanent solution to the peace
clause could be reached. However, the peace clause will
23.9.2 Process of Dispute Settlement
continue to be in place until any successful resolution First stage: Consultation (up to 60 days) to settle the
on the issue takes place trade disputes through conciliation.
Subsidy on Fisheries: Some progress did take place in Second stage (up to 1 year): Failure of consultations
furthering the negotiations on fisheries subsidies cut, leads to formation of Dispute Panel by the DSB. The
however no commitment was made at the end of the report of the panel can be rejected only through
meeting. Member states did agree to secure a deal on consensus among the members of the DSB.
elimination of fisheries subsidies by the next ministerial
in December 2019 Appeal Stage: Either side can appeal a panel's ruling
Each appeal is heard by three members of a permanent
India's Stand: India stood firm on its stand on the seven-member Appellate Body set up by the Dispute
fundamental principles of the WTO including
multilateralism, rule-based consensual decision- Settlement Body: The members of the Appellate Body
making, an independent and credible dispute resolution have four-year terms. The appeal can uphold, modify or
and appellate process reverse the panel's legal findings and conclusions The
Dispute Settlement Body has to accept or reject the
23.8.5 MC12 Geneva appeals report and rejection is only possible by
consensus
The General Council agreed on 26 November 2021 to
postpone the 12th Ministerial Conference (MC12) due Present Controversy The sanctioned strength of the
to COVID-19 Pandemic. No date has been set for the Appellate Body (AB) is seven members and these
rescheduling of the Ministerial Conference. This marks members are appointed through consensus among the
the second time that the pandemic has forced a member countries. The AB must have quorum of 3
postponement of MC12 The meeting was originally due judges to hear a particular case
to take place in June 2020 in Nur-Sultan, Kazakhstan.
The US Government believes that AB is biased against
Existential Crises for WTO: The deadlock between the it and has criticised it for being "unfair". Consequently
developing and developed countries has made it US has so far been blocking appointment of members to
impossible to launch new negotiations beyond the DDA the Appellate Body (AB)

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Since December 10, 2019, the AB has been left with India had said the credibility of the WTO would be
only 1 Judge and the quorum required to hear a case is affected without a permanent solution to the issue. This
minimum 3 judges. Hence, the WTO appellate body as is a matter of survival for eight hundred million hungry
become dysfunctional. and undernourished people in the world WTO exists to
promote free & fair trade. "Fair" should include
23.10 India and WTO protection of livelihood & food security of our majority
who depend on farming.
23.10.1 India's Food Security The percentage limit on the subsidies is quite deceptive.
Program and WTO In terms of absolute value, the developed economies
have been providing subsidies far higher than India
The World Trade Organization (WTO) Agreement on
Agriculture allows developing countries broad authority Issue in Subsidy Computation Methodology: The limit
to provide price support and public stockholding for on the subsidy does not factor in the Inflation. It is
food security, if the stocks are acquired to support low calculated as the value of production in 1986-88 Since
income and resource poor producers. The WTO rules then, the prices of agricultural commodities have
allow subsidization of these food security programs as increased.
long as total domestic agricultural subsidies by
developing countries do not exceed 10% of the total The AoA rules on public stockholding are vague and
general While direct provision of food to vulnerable
agricultural output.
consumers at subsidized prices is permitted, such
To implement National Food Security Act (NFSA) the programs are not to have "the effect of providing price
Government is required to procure more food grains by support to producers" At the same time, there is specific
announcing MSP. On account of this. Government exemption with regard to supporting "low- income or
would be required to declare subsidies over and above resource-poor producers According to India, over 90 per
the im specified under AOA. This was being challenged cent of its farmers fall under this category and hence the
by the developed countries such as USA, which wanted subsidies incurred its food security programs would be
India to stick to subsidy limit imposed under AoA. exempt from any reduction commitments under AOA
Hence India is seeking greater clarity on these
At the Bali ministerial conference in December 2013, provisions.
India secured a "peace clause". Under it, if India
breaches the 10% limit on subsidy under AoA, other Under the Green Box Subsidies, direct income support
member countries will not take legal action under the to the farmers (not linked to specific product) is
WTO dispute settlement mechanism. allowed. This has been misused by countries such as
USA The direct cash transfers to the farmers in USA
further in 2014 India forced developed countries to account for almost 50% of its agricultural value
clarity that the peace clause will continue indefinitely production.
until a permanent solution is found Presently, India has
been demanding a permanent solution Procurement of the Commodities under MSP regime is
not for boosting agricultural exports rather it is for
Putstic stockholding in order to implement National meeting food security needs of Indian Citizens Hence
Food Security Act procurement of commodities for ensuring food security
View of Developed Countries (mainly US): They should not be included in the Amber Box rather it
questioned special and differential treatment to should be included in the Green Box
countries with a high GDP They argued emerging India and the Sugar Subsidy Dispute
economies like India does not need such favourable
clause on food subsidies India's Stand The dispute dates back to 2019, when three major sugar
exporting nations. Brazil, Guatemala and Australia
The key arguments of India in finding the Permanent challenged some of India's policies for the sugar sector
Solution to the food security program are: •Developed at the WTO. The complainants alleged that the domestic
countries should see per-capita GDP of India not the support given by India to cane farmers exceeded the
absolute GDP in analysing the requirements of limit set by the WTO. They also said that India provided
developing countries like India. prohibited export subsidies to mills

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WTO Verdict: The panel observed that for five as well as the GATS Annex on Movement of Natural
consecutive sugar seasons, (2014-15 to 2018-19), India Persons Supplying Services, to not discriminate against
provided non-exempt product-specific domestic support or between non-U.S. service providers. US measure is
to sugarcane producers in excess of the permitted level inconsistent with the global norms and it would impact
of 10% of the total value of sugarcane production. It has Indian IT professionals as it makes Indian IT companies
observed that, under the challenged schemes, India has less competitive in that market.
provided subsidies based on the export performance
which is inconsistent with The Agreement on Subsidies 23.10.3 India Solar Panel Dispute and
and Countervailing Measures (SCM Agreement). TRIMS
As a result, the panel found that India was acting
India's Jawahar Lal Nehru National Solar Mission,
inconsistently with its obligations under the Agreement
which was launched in 2010, aims to generate 100 GW
on Agriculture (AOA). India's Response:
of Solar Power by 2022 and also to promote domestic
The Commerce Ministry denied the findings of the industry and manufacturing.
panel as erroneous and completely unacceptable to
In order to be eligible to participate under the
India.
programme, a solar power producer is required
India believes that its measures are consistent with its compulsorily to use certain domestically sourced inputs
obligations under the WTO agreements namely solar cells and modules for certain types of solar
projects. In other words, unless a solar power producer
Also, India has initiated all measures necessary to satisfies this domestic content requirement, the
protect its interests and to file an appeal at the WTO government will not 'guarantee the purchase of the
against the report to protect the interests of its farmers. energy produced.
The Indian government is not extending any assistance In 2013, the U.S. brought a complaint before the WTO
for sugar exports this season (October 2021-September arguing that the domestic content requirement imposed
2022) because of the high global sugar prices, lower under India's national solar programme is in violation of
production and supply issues. the global trading rules. Specifically, it said, India has
violated its "national treatment" obligation by
The Commerce Ministry has said that there will be no
unfavourably discriminating against imported solar cells
impact of the WTO panel's findings on sugar on any of
and modules.
India's existing and ongoing policy measures in the
sugar sector. India's Counter Argument: India principally relied on
the 'government procurement justification, which
23.10.2 H-1B Visa Issue and GATS permitted countries to derogate from their national
treatment obligation provided that the measure was
The H-1B visa program was launched by USA in 1990
related to "the procurement by governmental agencies
and is intended to help American firms deal with labour
of products purchased for governmental purposes and
shortages in rapidly growing fields that demand
not with a view to commercial resale or use in
specialized skills. such as research, engineering and
production of goods for commercial sale".
computer programming.
WTO Decision: World Trade Organisation (WTO)
The program has an annual cap of 65,000, and an
panel, in its ruling on the dispute, found that the
additional 20.000 visas are granted to employees with
domestic content requirement imposed under India's
master's degrees from American universities India has
national solar programme is inconsistent with its treaty
remained a major beneficiary of this program.
obligations under the global trading regime. The panel
India filed a complaint against the United States found that the product being subject to the domestic
decision to impose hefty fees on L-1 and H-1B content requirement was solar cells and modules, but
categories of temporary working visas in the World the product that was ultimately procured or purchased
Trade Organization (WTO) in 2016 by the government was electricity The domestic content
requirement was therefore not an instance of
India has argued that the US is violating its obligations "government procurement"
under General Agreement on Trade in Services (GATS)

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23.10.4 India-US Poultry Dispute Nairobi Treaty on the Protection of the Olympic
Symbol Convention for the Protection of Indian E
India had banned importing of poultry meat and eggs Producers Phonograms Against Unauthorized
from US in 2007. These were banned as a part of Duplication of
precautionary measure undertaken to prevent outbreaks
of Avian Influenza and bird flu. However. The World Their Phonograms. Marrakesh Treaty to facilitate
Access to Published Works by Visually Impaired
Trade Organization (WTO) ruled in 2015 that ban on
import of eggs, poultry meat, pigs from US is not Persons and Persons with Print Disabilities.
consistent with the prevalent international norms Issues with India's and TRIPS A. India and Compulsory
Licensing
23.11 India and TRIPS
Compulsory licensing is when a government allows
(Intellectual Property Rights) someone else to produce a patented product or process
without the consent of the patent owner or plans to use
For India, the WTO's TRIPS Agreement became
the patent-protected invention itself.
binding from 2005 onwards when the country got a ten-
year transition period (1995-2005) to make the domestic The provisions regarding compulsory licenses are given
legislation compatible with TRIPS. Different in the Indian Patents Act, 1970 and in the TRIPS
amendments to the various existing Acts- Patent (Trade- Related Aspects of Intellectual Property Rights)
Amendment Act (2005) and Copyright Amendment Act Agreement at the International level. Although this
(2010), and new legislations were made to strengthen works against the patent holder, generally compulsory
domestic legal framework to fulfil the harmonization licenses are only considered in certain cases of national
with the WTO's TRIPS Agreement. emergency, and health crisis. There are certain pre-
requisite conditions which need to be fulfilled if the
India is a member of the World Trade Organisation and Government wants to grant a compulsory license in
committed to the Agreement on Trade Related Aspects favour of someone.
of Intellectual Property (TRIPS Agreement). India is
also a member of World Intellectual Property As per Section 84, following grounds can be used to
Organization, a body responsible for the promotion of grant compulsory licenses: That the reasonable
the protection of intellectual property rights throughout requirements of the public with respect to the patented
the world. India is also a member of the following invention have not been satisfied, or
important WIPO- administered International Treaties
and Conventions relating to IPRS: That the patented invention is not available to the public
at a reasonably affordable price, or
Budapest Treaty on the International Recognition of the
Deposit of Microorganisms for the Purposes of Patent That the patented invention is not worked in the
Procedure. territory of India.

Paris Convention for the Protection of Industrial In March 2012, India granted its first compulsory
Property. license ever. The license was granted to Indian generic
drug manufacturer Natco Pharma Ltd for Sorafenib
Convention Establishing the World Intellectual Property Tosylate, a cancer drug patented by Bayer.
Organization. Berne Convention for the Protection of
Literary and Artistic Works. B. Section 3(d) of the Indian Patent Act Section 3 of the
Patents Act speaks of inventions which are not
Patent Cooperation Treaty patentable. Section 3(d) of the Patents Act was
introduced by the 2005 Amendment. The section sets a
Protocol Relating to the Madrid Agreement Concerning
'novelty' standard. For a product to be patentable,
the International Registration of Marks-Madrid Protocol something genuinely new should have been discovered
Washington Treaty on Intellectual Property in respect of or added to an existing product.
integrated Circuits.
Evergreening of Patents Not Allowed: Section 3(d) of
the Indian Patent Act restricts grant of patent for
"incremental innovations" in many drugs unless it

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provides significant therapeutic advantages to existing introduced. Foreign investors and MNCs allege that
molecules. The section stipulates following conditions Indian law does not protect against unfair commercial
under which the product will not be patentable: use of test data or other data submitted to the
government during the application for market approval
If the alleged 'new product pust involves the discovery of pharmaceutical or agro-chemical products. For this
of a new form of an existing substance, and it does not they demand a Data Exclusivity law.
enhance the efficacy of the older form of the product
E. The Information Technology Agreement (ITA)
Mere discovery of a new use for an already known
substance eg, discovery of blood thinning property of 1. Information Technology Agreement (ITA-1):
aspirin after it was patented for curing headaches Mere
use of a known process, machine or apparatus unless The Information Technology Agreement (ITA) is a
such known process results in a new product or employs plurilateral agreement under the WTO which came into
at least one new reactant force in 1997. It presently covers 81 WTO member
countries which account for approximately 97 per cent
Novartis Glivec Controversy: One of the prominent of world trade in information technology products
incidents of controversy around section 3(d) of Indian Every member country signing this agreement is
Patent Act was the Novartis case of 2013. In this case. required to eliminate tariffs on IT products listed in the
the Supreme Court upheld the validity of section 3(d) Annex A and Annex B of the IT Agreement. Some of
rejecting Novartis' application of patent for its drug. the IT products covered in this agreement include
Glivec, which helps in treatment of cancer The apex: computers laptops, mobile phones, set up boxes.
court held that Glivec was only a 'beta-crystalline form semiconductors, telecommunication equipment and
of the already existing anti-cancer drug Imatinib. parts etc. India is a signatory to ITA-1 and hence it has
Therefore, Glivec was just a new form of a already eliminated customs duties on 217 IT products over a
known substance. and hence discovery of a new period of time.
property wouldn't qualify it for granting of patent.
2. Information Technology Agreement (ITA-2): In 2015,
C. India in Priority Watch List some of the member countries agreed to expand the
products covered by the Information Technology
India continues to remain on the United States Trade Agreement by eliminating tariffs on an additional list of
Representative's (USTR's) 'Priority Watch List for 201 products. This was done on account of new
alleged violations of intellectual property rights (IPR). advances in the field of information technology. The
Special 301 report is the annual review of the new accord covers new generation semi-conductors,
intellectual property protection and market access semi-conductor manufacturing equipment, optical
practices in foreign countries by United States trade lenses. GPS navigation equipment, and medical
representatives (USTR). equipment such as magnetic resonance imaging
It is conducted in pursuance to the Section 182 of the products and ultra-sonic scanning apparatus. However,
Trade Act of 1974, under which US government can put it is to be noted that India has not signed ITA-2 since it
sanctions on such countries listed under Section 301 would have an adverse impact on domestic
report. USTR has kept India in the 'Priority watch List manufacturing due to cheaper imports.
in its Special 301 report due to weak enforcement of 3. Details About Controversy . India's Viewpoint: The
Intellectual Property Rights. elimination of customs duties on IT products under the
In its latest Special 301 report released by the United ITA-1 has adversely affected the domestic
States Trade Representative (USTR), the US termed manufacturing of IT components in India. In order to
India as "one of the world's most challenging major boost domestic manufacturing of certain IT products,
economies with respect to protection and enforcement customs duties on certain products was increased to
of IP around 20% in Union Budget 2018-19. India has stated
that the IT goods in question do not fall under the ITA-1
D. Data Exclusivity but under ITA-2. Since India is not a signatory to ITA-2,
there is no obligation on India to reduce customs duty
Data exclusivity is the protection of clinical test data on goods.
which is submitted to a regulatory agency in order to
prove safety, quality and efficiency of a new drug to be

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Viewpoints of WTO Member Countries: The WTO and oversee the implementation and future development
member countries have raised concerns with respect to of IPRs in India.
imposition of customs duty on IT products by India.
These countries have alleged that IT products for which The 'Cell for IPR Promotion & Management (CIPAM)
duties were increased fall under ITA-1 and not ITA-2. setup under the aegis of DIPP, is to be the single point
of reference for implementation of the objectives of the
F. Other Issues National IPR Policy.

Enforcement of the Copyright act is weak, and piracy of 3. Achievements under New IPR Policy: Improvement
copyrighted materials is widespread. in Gil Ranking: India's rank in the Global Innovation
Index (GII) issued by WIPO has improved from 81st in
1 National IPR Policy 2016: The National IPR Policy 2015 to 46" place in 2021,Strengthening of Institutional
Mechanism regarding IP protection and promotion.
2016 is a vision document that aims to create and
harness synergies between all forms of intellectual Clearing Backlog/Reducing Pendency IP Applications:
property (IP), concerned statutes and agencies. It sets in Augmentation of technical manpower by the
place an institutional mechanism for implementation government, has resulted in drastic reduction in
monitoring and review of various intellectual properties pendency in IP applications.
The Policy reflects that India has a well-established
TRIPS-compliant legislative administrative and judicial Automatic issuance of electronically generated patent
framework to safeguard IPRS which meets its and trademark certificates has also been introduced
international obligations
Increase in Patent and Trademark Filings: Patent filings
The Policy lays down the following seven objectives have increased by nearly 7% in the first 8 months of
2018-19 vis-à-vis the corresponding period of 2017-18
IPR Awareness: Outreach and Promotion to create Trademark filings have increased by nearly 28% in this
public awareness about the economic social and cultural duration
benefits of IPRS among al sections of society
IP Process Re-engineering Patent Rules, 2003 have
Generation of IPRS: To stimulate the generation of been amended to streamline processes and make them
IPRS. more user friendly. Revamped Trade Marks Rules have
been notified in 2017.
Legal and Legislative Framework: To have strong and
effective IPR laws, which balance the interests of rights Creating IPR Awareness: IPR Awareness programs have
owners with larger public interest. been conducted in academic institutions, including rural
schools through satellite communication, and for
Administration and Management: To modernize and
industry, police, customs and judiciary.
strengthen service-oriented IPR administration
Technology and Innovation Support Centres (TISCS):
Commercialization of IPRS: Get value for IPRS
In conjunction with WIPO, TISCS have been
through commercialization.
established in various institutions across different states.
Enforcement and Adjudication: To strengthen the
enforcement and adjudicatory mechanisms for 23.12 Issues with WTO
combating IPR infringements
China's State Capitalism: The nature of China's
Human Capital Development: To strengthen and expand economic system, combined with the size and growth of
human resources, institutions and capacities for its economy, has created tensions in the global trading
teaching, training, research and skill building in IPRs. system China's state-owned enterprises present a major
challenge to the free-market global trading system
2. Features: It's clarion call is "Creative India;
Innovative India". However, a critical part of the problem is that the
rulebook of the WTO is inadequate for addressing the
Department of Industrial Policy & Promotion (DIPP)
challenges that China presents in respect of intellectual
Ministry of Commerce, Government of India, has been
property, state-owned enterprises and industrial
appointed as the nodal department to coordinate. guide

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subsidies. It is due to this US-China are engaged in the peace clause will continue indefinitely until a
Trade war permanent solution is found.

Plurilateral Vs. Multilateral Agreements: Since the Lack of Transparency: There is a problem in WTO
multilateral agreements are consensus driven, normally negotiations as there is no agreed definition of what
the trade negotiations under multilateral framework constitutes a developed or developing country at the
tend to be slow paced and lead to unnecessary delay WTO. Members can currently self-designate as
However, the good aspect about the multilateral developing countries to receive 'special and differential
agreements is that they take into account the special treatment a practice that is the subject of much
needs and interests of poor and developing countries In contention. Members announce for themselves whether
this regard, the debate has arisen between the developed they are "developed" or "developing" countries.
and developing countries with respect to the nature of However, other members can challenge the decision of
trade negotiations under the WTO a member to make use of provisions available to
developing countries.
The developed countries have put forward four
plurilateral agreements in the areas of e-commerce. The Developing countries enjoy special and differential
investment facilitation, MSME and gender However, provisions such as longer time periods for implementing
developing countries led by India have staunchly agreements and commitments. The US has been
opposed the plurilateral agreement and instead pushed demanding reform in the Developing Country status.
forward for the continuation of multilateral framework US believes that even some of the developed economies
under WTO. such as South Korea, China, Hong Kong, Kuwait,
Singapore, UAE etc. have been claiming the status of
Agreement on Fishery Subsidies: The WTO member developing country. US has also questioned India's
countries are presently negotiating a multilateral treaty status of developing country in the WTO.
of Fishery Subsidies. This agreement seeks to prohibit
certain forms of fisheries subsidies that contribute to Defunct Dispute Settlement Body: The sanctioned
overcapacity and overfishing. Some of the developed strength of the Appellate Body (AB) of WTO's Dispute
countries such as USA have been insisting that larger Settlement Mechanism is seven members and these
developing countries like India and China should not members are appointed through consensus among the
continue to get special and differential treatment. member countries. The quorum required to decide on
disputes is 3 judges.
However, India has argued that special and differential
treatment should be built into the fisheries subsidies The US government believes that AB is biased against it
agreement. and has criticized it for being "unfair". Consequently.
US has so far been blocking appointment of members to
Agreement on e-Commerce: The developed countries the Appellate Body (AB) and it is left with only one
led by USA have put forward a number of proposals judge which is below the quorum of 3 judges needed to
which include tackling barriers that prevent cross- hear appeals
border sales; addressing forced data localization
requirements and permanently banning customs duties Reforms of WTO
on electronic transmissions, among others. India has
clearly stated that it is against any binding rules in e- New Set of Rules: Modernizing the WTO will
commerce. necessitate the development of a new set of rules for
dealing with digital trade and e-commerce
Permanent Solution to Public Stock holding: India has
been demanding a permanent solution on Public WTO members will also have to deal more effectively
stockholding in order to implement National Food with China's trade policies and practices, including how
Security Act. At the Bali Ministerial Conference in to better handle state-owned enterprises and industrial
December 2013, India secured a "peace clause". Under subsidies.
it, if India breaches the 10% limit on subsidy under Environmental Sustainability: Given the pressing issues
AoA, other member countries will not take legal action around climate change, increased efforts to align trade
under the WTO dispute settlement mechanism. Further, and environmental sustainability could help to both
in 2014, India forced developed countries to clarify that tackle climate change and reinvigorate the WTO. Trade
and the WTO have key roles to play in efforts to

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achieve the UN Sustainable Development Goals

(SDGs) and the Paris Agreement climate goals. Also,
the WTO can play a role in reforming fossil fuel
subsidies.

For example, at the Buenos Aires Ministerial

Conference in 2017, a coalition of 12 WTO members
led by New Zealand called on the WTO 'to achieve
ambitious and effective disciplines on inefficient fossil
fuel subsidies that encourage wasteful consumption.

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