ASSIGNMENTDRIVE FALL 2013PROGRAM BBA SEMESTER VBBA 503 ECONOMIC PLANNING AND POLICIES

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Q.No1 Identify the different factors that play a vital role in the growth of Indias economy.Discuss FDI prospects in IndiaAnswer:Factors:Different sectors such as industry, agriculture and others play a major role in development.

(a) Role of agricultureDuring the five-year plans, the contribution of agriculture to the national income in different years has been ranging between 61 per cent and 14.8 per cent. Agriculture provides employment to 51 per cent of the workforce in India, and therefore, it is considered the backbone of the Indian economy. Agricultural products constitute 9 per cent of our exports and manufactures from agricultural items like cloth, sugar and jute contribute to another 11 per cent of Indias export. Agriculture also plays an important role in the industrial development of the economy. Raw materials like sugar, jute, cotton, ground-nut and oilseeds are supplied by the agricultural sector to the agro based industries. A market for the industrial products is also directly and indirectly provided by agriculture. Agricultural sector consumes industrial products like chemical fertilizers, pesticides, insecticides, and small tools and equipment, directly.Agricultural sector success indirectly increases the power of the people to purchase industrial products.Thus, agriculture occupies an important position in the Indian economy. An economys rapid development depends on the smooth and sustained growth in the agricultural sector. In 2011, India had a huge and diverse agricultural sector, and this accounted for about 16 per cent of GDP and 10 per cent of export earnings. After United States of America, India has an arable land area of 159.7 million hectares (394.6 million acres) and this is the second largest in the world. India has the largest gross irrigated crop area of 82.6 million hectares (215.6 million acres) in the world. India is amongst the top three global producers of crops, like wheat, rice, pulses, cotton, peanuts, fruits, and vegetables. In 2011, India had the highest number of buffalo and other cattle, and was the largest producer of milk. It also has one of the largest and fastest growing poultry industries in the world. In the last 60 years, agriculture in India has shown an increase in average output per hectare. Over 40 years, farm productivity has increased between 40 per cent and 50 per cent and this is due to improved roads and power generation infrastructure, knowledge gains and reforms. Indias crop yields form around 30 per cent to 60 per cent of the best crop yields from the farms of developed and other developing countries. However, loss of produce after harvest because of poor infrastructure and unorganized retail has cost India a large part of the expected revenue.

(b) Role of industryThe Gross Domestic Product (GDP) of an economy requires contribution from major industries and in India agriculture makes a major contribution to the GDP. Though there has been a slowdown in the Indian economy because of the global recession, it still has huge potential for expansion.

(c) Role of servicesThe services sector covers a wide array of activities ranging from services provided by the most sophisticated sectors like telecommunications, satellite mapping, and computer software to simple services like those performed by the barber, the carpenter, and the plumber; highly capital-intensive activities like civil aviation and shipping to employment-oriented activities like tourism, real estate, and housing; infrastructure-related activities like railways, roadways, and ports to social sector-related activities like health and education. Thus, there is no one-size-fits-all definition of services resulting in some overlapping and some borderline inclusions. The National Accounts classification of the services sector incorporates trade, hotels, and restaurants; transport, storage, and mcommunication; financing, insurance, real estate, and business services; and community, social, and personal services. In the World Trade Organization (WTO) list of services and the Reserve Bank of India (RBI) classification, construction is also included. In world GDP of US$70.2 trillion in 2011, the share of services was 67.5 per cent, more or less the same as in 2001. Interestingly, the top 15 countries in terms of services GDP are also the same in overall GDP in 2011. This list includes the major developed countries and Brazil, Russia, India and China. Among the top 15 countries with highest overall GDP in 2011, India ranked 9 in overall GDP and 10 in services GDP. A comparison of the services performance of the top 15 countries in the eleven-year period from 2001 to 2011 shows that the increase in share of services in GDP is the highest for India (8.1 percentage points) followed by Spain.Indias services sector has emerged as a prominent sector in terms of its contribution to national and states incomes, trade flows, FDI inflows, and employment The growth story overall and services of world and India in the 2000s began from almost the same level of around 4-5 per cent in 2000. But over the years, Indias overall and services growth rates have outpaced those of the world. Interestingly, unlike world services growth, which has been moving in tandem with its overall growth with mild see-saw movements over the years, Indias services growth has been consistently above its overall growth in the last decade except for 2003 (when the former was marginally lower than the latter).

Role of FDI:Latest terms of trade development with respect to important areas like auto components, apparels, chemicals, pharmaceuticals, jewellery, etc., form the basis for FDI in India although its rigid FDI policies made for an important obstacle in this context. Recently, a more liberalized FDI policy of India allowed upto 100 per cent FDI stake in different ventures which includes the real-estate sector as well. Some of the industrial policy reforms are removal of restrictions on development providing easy access to foreign technology and FDI and fulfilling industrial licensing requirements. Many changes were approved on the FDI policy to eliminate the restrictions imposed in most of the sectors. Restrictions will be reduced in different sectors like civil aviation, construction development, industrial parks, commodity exchanges, petroleum and natural gas, credit-information services, mining etc. But there is an agenda which needs to be considered for allowing increased foreign investment in sectors such as insurance and retailing.According to the governments Secretariat for Industrial Assistance, FDI inflows in India during the fiscal year April-March 200607 reached a record US$ 19.5 bn which was more than double the total of US$7.8 bn in the previous fiscal year (April and September, 2007) when FDI inflows were US$8.2bn. In the first half of 2012 FDI had contracted by 42.8% to reach US$ 10.4 bn, according to figures by the United Nations Conference on Trade and Development.

2 Prepare a report on the trends in Indias national income growth and structure.Answer:

In order to understand the impact of planning in India, a study of trends in national income is necessary. It would be, therefore, better if the trends in national income and changes in the structure of national product are analysed over the past 57 years of planning, or over all the developments that have taken place through the five-year plans which started in 1947-48.

(i) Trends in Net National Product (NNP) and per capita incomeFigures of national and per capita income are collected at current prices. But figures of national income at current prices do not give a correct picture of the growth of the economy, for the increase in national income at current prices reflects the combined influence of two factors viz., (a) the increase in the production of real goods and services and (b) the rise in prices. If the increase in national income is due to the first factor, it is an indicator of real growth because it implies that more goods and services become available to the people. If it is due to the second factor, it represents an unreal inflation of national income in money terms. Consequently, national income figures are deflated at constant prices to eliminate the effect of any change of price level during the period. National income figures at constant prices, therefore, become comparable, but they conceal the population effect. To eliminate the effect of growth of population, per capita national product or per capita income is calculated. Whereas the growth of the net national product at constant prices is an index of the total productive effort on the part of the community and indicates the rate of growth of goods and services in the economy, the growth of per capita income at constant prices is an indicator of the change in the standard of living of the people.

(ii) Annual Growth Rates during the plansDuring the First Plan, annual average growth rate of NNP was 4.4 per cent (at 1999-00 prices), which declined to 3.8 per cent during the Second Plan. However, during the Third Plan, annual average increase in national income slumped down to 2.6 per cent which was just sufficient to neutralize the growth of population. This is indicated by the fact that there was 0.4 rate of growth of per capita income during the Third Plan. During the Fourth Plan (1969-74) period, the average annual rate of growth of national income declined to 3.1 per cent and that of real per capita income to 0.8 per cent per annum. The sharp increase in prices during 1972-73 and 1973-74 and the shortfalls in production on account of lower utilization of capacity were the principal factors responsible for a lower growth rate during the Fourth Plan. During the Fifth Plan (1974-79) the average annual increase in national income was of the order of 4.9 per cent and that of per capita income was barely 2.6 per cent. On the whole, the performance of the economy during the Fifth Plan can be considered very satisfactory. Indias national income registered a growth rate of 5.4 per cent during the Sixth Plan (1980-85) with a per capita income growth rate of 3.1 per cent. During the Seventh Plan (1985-90), Indias NNP grew on the average at the rate of 5.5 per cent per annum and the annual growth of per capita NNP was 3.3 per cent. Obviously, Seventh Plan achieved its objective of 5 per cent growth rate of NNP along with 3 per cent targeted growth rate of per capita NNP. This was a welcome development. Please see table 3.2 for specific data per Plan.

Annual Average Growth Rate in Various Plans

Per capita NNP Per Capita NNPNNP (` crores) NNP (`) (` crores) (`)Rates of Growth1950-51 to 1960-61 4.2 2.3 5.5 3.21960-61 to 1970-71 3.5 1.2 9.9 7.51970-71 to 1980-81 2.9 0.6 11.7 9.21980-81 to 1990-91 5.2 3.0 14.2 11.81990-91 to 2000-01 5.5 3.4 14.0 11.92000-01 to 2004-05 7.5 5.9 12.4 10.71950-51 to 1980-81 3.5 1.4 9.0 6.71980-81 to 2000-01 5.6 3.2 14.1 11.82000-01 to 2004-05 6.4 4.7 10.5 3.62004-05 to 2011-12 8.2 6.7 15.7 14.1Source: CSO, National Accounts Statistics, and Economic Survey (2011-12)During the Eighth Plan (1992-97) NNP growth rate of the order of 6.7 per cent has been achieved with a per capita growth of about 4.5 per cent. This healthy trend needs to be sustained. During the Tenth Plan (2002-07), NNP growth rate was 7.8 per cent per and the per capita NNP growth was 6.1 per cent the highest recorded so far.

(iii) Trends in the share of the public sectorThe share of public sector in GDP was 14.9 per cent in 1970-71, it rose to 25.9 per cent in 1993-94 and then declined to 20.8 per cent in 2008-09. The gradual increase in the share of the public sector is the direct result of the expansion of the economic activities of the State, both on the side of enlarging administrative services and of increasing productive activities in public enterprises during the first four decades of development. Thereafter, economic reforms initiated in 1991 stressed the need for restricting the area of operation of public enterprises. It emphasized phasing out of enterprises incurring losses and withdrawing from such sectors like consumer goods, hotels and others which served no social purpose. The factors contributing to the increase in the share of nondepartmental enterprises are the setting up of new industries, expansion of existing enterprises, nationalization of coal mining companies, banks and insurance and the like, and merger of private electricity companies into electricity boards.

(iv) Urban and Rural Income Break-upNational Accounts Statistics (1999) and (2006) give a break-up of the net domestic product for the rural and urban sectors separately. The data reveal that as against 62.4 per cent of the total Net Domestic Product being contributed by the rural sector in 1970-71, its share in NDP declined to 54.3 per cent in 1993-94. Consequently, during the 23 year period, the share of the urban sector in NDP improved from 37.6 per cent to 45.7 per cent. The per capita NDP for the rural sector was `529 in 1970-71 and that of the urban sector was `1,294. Thus, urban-rural disparity ratio in per capita NDP was 2.45. However, this ratio declined marginally to 2.34 in 1993-94 since per capita NDP for urban sector as `13,525 as against `5,783 for the rural sector.

(v) Changing Structure of Rural GDPThe National Council of applied Economic Research (NCAER) has studied the changing structure of rural GDP.

(vii) Share of Organized and Unorganized Sectors in NDPOrganized enterprises are defined by the CSO as all enterprises which are either registered or come under the purview of any of the Acts and/or maintain annual accounts and balance sheets. Among the unorganized enterprises are included all unincorporated enterprises and household industries other than the organized ones which are regulated by any of the Acts and which do not maintainannual accounts and balance sheets. From the data given in Table 3.5, it is evident that the share of the organized sector has risen from 30 per cent in 1980-81 to 42.9 per cent in 2007-08. Consequently, the share of the unorganized sector declined from 70 per cent to 57.1 per cent during the same period. It may also be noted that the share of the organized sector in mining, manufacturing and others improved from 56.8 per cent to 70.2 per cent and that in the services sector improved from about 40 per cent in 1980-81 to 46 per cent in 2007-08. On the other hand, in agriculture, forestry and fishing, the contribution of the unorganized sector slightly declined from 95.2 per cent in 1980-81 to 91.2 per cent in 2007-08. The shift in the composition of NDP from the unorganized to the organized sector is a consequence of the process of development.

3 Write a short note on social infrastructureAnswer:

The ultimate objective of planned development is to ensure well-being through sustained development in the quality of life of the people, particularly the poor and the vulnerable segments of the population. In terms of policy measures, it requires emphasis on social sector development and programmes. The development of human resources contributes to sustained growth and productive employment. A healthy, educated and skilled workforce can contribute more significantly and effectively to economic development. From this it follows that there are two major areas in the social sector which require investment: education and health. For this purpose, there is need for heavy investment in developing social infrastructure. For development of education sector, there is a need for investment in lower primary, upper primary, secondary and higher secondary schools so that people can send their children to school to acquire education. This would necessitate investment in school building and equipment, provision of teachers and other supporting staff. The process of moving from urban areas has been extended to rural, hilly and tribal areas. After independence, the Government took upon itself the task of expanding education. At the higher education level, investment is required in colleges, universities and research institutions so that the products of school education can further improve their knowledge and higher order skills. To improve vocational education, there is a need to expand institutes of technology, engineering colleges and medical institutions to train technical persons at various levels. For sophisticated research, specialized institutions like National Physical Laboratory,Indian Council of Agriculture Research and other institutions in atomic energy and space research are needed. For improvement in health of the people, there is a need for creating hospitals in allopathic, Homeopathy, Unani and Ayurvedic medicines. For expansion of medical facilities in rural areas, there is a need for having Community Health Centers (CHCs), Primary Health Centers (PHCs) and Sub-Centers (SCs) in rural areas. The rural population can take advantage of hospitals at the district and state levels for more serious diseases. For all these purposes, there is a need to train doctors, nurses and paramedical personnel to provide service to the people. This implies the development of physical and human infrastructure. For instance, the Government of India launched Sarva Shiksha Abhiyan (SSA) with the aim of providing universal elementary education. This has been implemented by making the 86th Amendment to the Constitution of India, which provides free and compulsory education to the children of 6-14 years age group, as a fundamental right.The Central Government will be working in coordination with the State Governments to ensure that the programme covers the entire country and addresses the needs of 192 million children in 1.1 million habitations. The programme also aims to open new schools in those territories which do not have schooling facilities and reinforce existing school infrastructure through provision of additional classrooms, toilets, drinking water, maintenance grant and school improvement grants.

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4 a. Identify the reasons attributed to the growth of the public sector.Answer:

To this basic argument for the growth of the public sector, the government added additional reasons over time, e.g.:(a) To hasten the growth of the key sectors of the economy.(b) To fulfill the equipment needs of vital sectors like railways, telecommunications, nuclear power, defense, etc.(c) To exert countervailing power on the operation of private monopolies and multinationals in selected areas;(d) To ascertain easy accessibility of articles of mass consumption, to restrain price hike of important articles etc. the rationale behind setting up consumer-oriented industries;(e) To protect employment, the Government was forced to take over sick industrial units.

b. Explain the role of public sector in different fields in India.Answer:It would not be appropriate to use any single measure to estimate the role of the public sector in the Indian economy; rather it would be desirable to use a few indicators:

(a) Share of public sector in employment: There are two important categories of public sector employment : (a) Government administration and defense and other government services like health, education, research and various activities to promote economic development; and

(b) Public sector proper, i.e., economic enterprises owned by the Centre, State and Local Governments.

(b) Share of the public sector in GDP: From 1960 onwards, the share of the public sector in GDP has shown a steady improvement. Measured at current prices, public sector accounted for 7.5 per cent of GDP in 1950- 51, its share in 1993-1994 had risen to 23.6 per cent. However, it declined to 21.2 per cent in 2009-10. Public sector, therefore, accounts for about one-fourth of national output. This is largely due to the rapid expansion of the public sector enterprises.

(c) Share of the public sector in saving and capital formation: Gross domestic capital formation has increased from 10.7 per cent of GNP during the First Plan to 24.6 per cent during the Eighth Plan.

(d) Infrastructure development by the public sector: Rapid industrialization of a backward but developing country like India depends upon the creation of infrastructure or economic overheads such as transportation, communication, power development, basic and key industries, etc. Unless the infrastructure is created, it is not possible for other industries to come into existence or to develop fast enough. But the development of basic and capital goods industries and creation of infrastructure involves heavy investment, low yield and a long gestation period. These investments were, therefore, not attractive to the private sector nor could the private sector raise such huge resources in the Fifties and Sixties. Naturally, it was left to the Government to develop them and most of the public enterprises were set up in these industries. The private sector welcomed government investment in developing these industries, as it stood to gain directly.

(e) Role of public sector in export promotion: Most of the public sector enterprises have been started keeping in mind the requirements of the Indian economy in the fields of production and distribution. However, some public enterprises have done much to promote Indias exports. The State Trading Corporation (STC) and the Minerals and Metals Trading Corporation (MMTC) have done a wonderful job of export promotion in all parts of the world, especially in the East European countries. The foreign exchange earnings of the public sector enterprises have been rising from `35 crores in 1965-66 to `5,830 crores in 1984-85 and finally to `43,576 crores in 2005-06. There is no denying the fact that the export performance of the public sector enterprises has been quite creditable.

(f) Role of the public sector in import substitution: Some public sector enterprises were started specifically to produce goods which were formerly imported and thus to save foreign exchange. The entry of Hindustan Antibiotics Ltd. and the Indian Drugs and Pharmaceuticals Ltd. (IDPL) into the manufacture of drugs and pharmaceuticals so as to remove the monopolistic stranglehold of foreign concerns in this field helped India save foreign exchange used for importing these items.

(g) Role of public sector in raising internal resources: The generation of internal resources by the public sector has assumed greater importance because, in addition to financing their own planned expansion and development, they are also expected to generate surplus for financing the needs of other priority sectors. Internal resources consist of depreciation and retained profits. With every five year plan, the public sector was able to mobilize larger internal resources. During the Seventh Plan, internal resources of the order of `29,750 crores were generated. During the Eighth Plan, PSUs generatedinternal resources of the order of `1, 01,212 croresa creditable record indeed. During the Tenth Plan (2002-03 to 2006-07), total internal resources generated by the CPSEs were of the order of `3, 95,686 crores. It is really encouraging to note that Central public enterprises have succeeded in increasing their internal resource generation over the years. This trend should be welcomed.

(h) Contribution to the exchequer: The Government exchequer has been receiving significant contribution from the public in the form of payment of corporate taxes, excise duty, customs duty and other duties. In this manner, they help in bringing together funds for financing the needs for the planneddevelopment of the country.

5 Discuss the objectives of Price policy.Answer: We may set out the important objectives of price policy suitable for India during the Twelfth Plan period:

Price Policy for Agricultural Produce as given in the Twelfth Plan

The governments price policy for agricultural produce seeks to ensure remunerative prices to growers for their produce with a view to encourage higher investment and production as well as safeguarding the interests of consumers by making available supplies at reasonable prices.

The price policy also seeks to evolve a balanced and integrated price structure from the perspective of the overall needs of the economy. To achieve this end, the government in each season announces Minimum Support Prices (MSPs) for major agricultural commodities and organizes purchase operations, wherever required, through public, cooperative, and other designated agencies to ensure that prices do not fall below that level. Prices of manufactured and the prices of various services.

6 Elaborate on the financial relations between the Centre and the States.Answer:

India has a federal structure, in which a clear demarcation is made between the Union and state functions and sources of revenue, but the residual powers belong to the Centre. The Constitution of India makes a clear division of fiscal powers between the Union (in the centre) and the state governments.Apart from the taxes levied and collected by the states, the constitution had provided for the revenues for certain taxes on the Union list to be allocated, partly or wholly, to the states. These provisions fall into various categories. Firstly, there are certain duties which are levied by the Union but are collected and appropriated by the states. These consist of stamp duties and excise duties on medical preparations containing alcohol or narcotics. Secondly, there are certain taxes which are levied and collected by the Union, but the entire advance of which are assigned to the states, in ratio ascertained by the Parliament. These taxes comprise succession and estate duties, terminal taxes on goods and passengers, taxes levied on railway freight and fares, taxes levied on transactions in stock exchanges and futures markets and the taxes levied on the sale and purchase of newspapers and advertisements.

Thirdly, Central tax on income and Union excise duties were levied and collected by the Union but were shared by it with the states in a stipulated manner.

Finally, the proceeds of additional excise duties on mill-made textiles, sugar and tobacco, which were levied by the Union in 1957 in replacement of states sales taxes on these commodities, are wholly distributed among the states in a manner as to guarantee their former incomes from the displaced sales taxes.

Grants-in-aid: As states perform various significant welfare and development functions, there are bound to be disparities between their revenues and expenditure and this can be rectified through transfer of resources from the Centre. This is achieved to a certain extent by sharing of taxes.

Loans: The States are permitted to borrow money from the market. However, they also borrow from the Union Government which gives the latter significant control over state borrowing and expenses. The rate of annual borrowing by the states from the Union has considerably increased during recent years.Centre has been increasingly contributing funds to the states. On an average, the states received `280 crores per year from the Centre during the First Plan, `3,020 crores per year during the fourth plan and`21,000 crores per year during the Seventh Plan.During the first plan, 36 per cent of the state expenditure was met by resources transferred by the Centre. Currently, transferred resources from the Centre pay for 46 per cent of the total expenditure of the states. The growing transference of resources from the Centre to the states is evidence of: (a) Increasing integration between the Central and state finances (b) Helpless dependence of states on the Centre (c) Growing power and interference of the Centre in the affairs of the state.