Www.angelfire.com Falcon Neeraja-rohit Articles Paper6 4

8/12/2019 Www.angelfire.com Falcon Neeraja-rohit Articles Paper6 4

1/6

Topic : Economic Structure Balance of Payment Page 1 of 6

MBA(E) 3rd Year Business Envir onment ( Economics) Rohit Vishal Kumar , 2001

ECONOM I C STRUCTURE, ECONOM I C POLI CY 1 9 91 AND BALANCE OF PAYMENT

Paper VI Business EnvironmentMBA (Evening) 3 rd Year

COVERAGE

Economic Structuring:- Composition of national output by sector

- Occupational structure of labour

New Economic Policy a.k.a. Restructuring the Economy

- Liberalisation

- Privatisation

- Globalisation

- Expected benefits

Impact of restructuring:

- Stabilization process using Monitory & Fiscal Policies

- and impact on Balance of Payment t rade deficit / Current Account / Capital

Account / Official reserves account

MAI N REFERENCES

Indian Economy Problems of development and planningSilver Jubilee (1999) EditionBy A.N. Agarwal. Publisher Wishwa Publisher

Topic Are a Cha pt e r

1. Workforce and occupat ional st ruct ure 9

2. Nat ional I ncom e by indust r ial or igin 12

3. Privat izat ion of Public Sect or 30

4. New I ndust r ial Policy 34

5. Balance of Paym ent : Problem s and Policies 46

6. Rupee : Exchange rat e and convert ibilit y 50

7. Foreign Capit al 51

8. 9th Five year plan (additional w.r.t to New Industrial Policy) 57

OTHER BOOKS FOR REFERENCE

I ndian Econom y I ndian Econom yBy Mishra & Puri By Dut t & Sundaram

Any good book on Balance of Payment

NOTE:

1. Students are advised that this handout is m eant as a guide and as a short introduction to themain topic. It should not be confused with course material.

2. Students should treat the handout as indicative outl ine as to how to approach t he topic underco n si d er a t io n. Th ey a r e e xpe ct e d t o b u il d u p t h ei r a nsw er s t a kin g i n t o con si d er a t io n t h e

reference material given above and in the course along with class notes, newspaper &magazines etc. Answers by the students should reflect an understanding of the theory and itsimplications in the current economic scenario incorporating recent changes, if any.


2/6



ECONOMI C STRUCTURE

Definition:

Economic structure of an economy is the composition of various economic activities of the countryin which the workforce of the economy participates. The economic structure of any economy canbe broadly divided into three broad sectors :

Primary Sector: Consists of all prim ary economic activities like agriculture, forestry , m ining etc.

Secondary Sector: Consists of manufacturing, construction, electricity etc.

Tertiary Sector: Consists of transport, trade, services and other related industries.

Th e va ri ou s se ct o r s con t r ib u t e t o t h e n at i on al i n co me o f t h e co u nt r y a nd t o t h e o ccup at i on alpattern of the population or the workforce. According to Simon Kutnetz " Share of agriculturalsector in the national income declines in the course of the economic development ... while that ofthe secondary and tert iary sector increases"

Changes in Sectoral composition in I ndia:

The share of the primary sector, as a percentage of Gross Domestic Product ( GDP) fell from 58.3%

in 1950- 51 to 36.2% in 1988-89. The most noticeable change took place in the mining sector. Thecontr ibution of the Mining sector grew from 0.6% in 1950-51 to 12% in 1988-89.

Th e sh ar e o f t h e secon d ar y sect o r r e mai ne d mo r e o r l ess st a bl e. Th e sha r e o f o r ga ni se dma n uf act u r i ng sect o r g r ew f r om 6 . 3 % o f t h e GDP t o 1 2 . 2 % i n 1 9 8 9 - 9 0 . B u t t h i s g r ow t h w asnegated by the fact t hat the unorganised m anufacturing sector declined from 9% in 1950-51 toabout 5% in 1989-90.

The t ert iary sector has shown a steady growth since independence. I t 's share has grown from1 . 9 % o f t h e GD P t o 4 . 6 % i n 1 9 8 8 - 8 9 . Ma j o r con t r ib u t or s t o t h i s g r ow t h w er e t h e t r a n sp o rt a ndco mmu n icat i o n sect o r s. Se r vice s i n du st r i es w h ose co n t r ib u t io n w a s n eg li g ib le i n t h e p r eliberalisation period have shown a marked growth in t he post liberalisation.

Did structural change take place in I ndia?

According to established theories - the tertiary sector and the secondary sector are the dominantsectors in a developed country. Seeing t he changes that have taken place in the three sectorssince independence one can be led t o believe that sectoral changes in India has taken placefollowing the well established norms of economic growth and development.

However a deeper look in the occupational distr ibution of the work force reflects a completelydifferent picture. The theory of structural change is implicit ly l inked with the assumption that thechanges in the sectoral importance of the sectors are also reflected in the occupational distributionof the work force of the country. However that has not been the case in India. The percentage ofp eo pl e e m pl oy ed i n t h e a gr icu lt u r al se ct o r h as r em a in ed m o re o r l ess t h e sa m e si nceindependence. The percentage of people em ployed in the agricultural sector has never fallen below65%. This implies that the gains from the structural changes have been negated due to almostnegligible change in t he work force distribut ion.

Various factors combined to negate the gains of the structural changes. Rapid growt h of populationafter independence coupled with inadequate manpower planning by successive governments canbe identified as the two major factors for the lack of development. After independence stress waslaid on industrialisation leading to a increase in employment in the industrial sector with the hopet h a t e mp lo ymen t g en er a t io n i n i n du st r y w o ul d l ea d t o a f al l i n t h e p r op o rt i o n o f l ab ou r f o rceengaged in agriculture. But since the population growth was rapid and the rate of industrial growthfell short of expectation - the desired transfer of population from agriculture to industry did nott a ke p la ce. To m a ke m a t t er w or se l it t l e at t e nt i on w as g iv en t o m a np ow er p lan ni ng . Th egovernment policies fai led to create adequate jobs outside t he agricultural sector result ing inwidespread unemploym ent.

I n Sum:

Even though t he share of sectors has changed; the levels of employment in the various sectors

have remained the same negating any growth effects of the change in sectoral composition.


3/6



NEW ECONOMI C POLI CY 1991

I ntroduction

Beginning mid 1997, the Government of India made some radical changes in its policies of trade,

foreign investment, exchange rate, industry, f iscal affairs etc. These various elements when puttogether constitute an economic as well as industr ial policy, which marked a big departure form,the old policy.

Th e o ver a ll a im o f t h e n ew p o li cy w a s t o a ch i eve a so r t o f d eve lo p men t w h ich w o u l d m a keindustries dynamic in their growt h and w hich rendered social j ustice. The 3 k ey words t o t he NIP of1991 were LPG i.e. Liberalisation, Privatisation and Globalisation.

Liberalisation:

T h e N I P l a i d a l o t o f st r e ss o n t h e ma r ke t f o r ce s a n d a ma r ke t d r i ve n e co n o my. I t i n t e n d e d t odismantle the restr ict ive and regulatory system and allow private entrepreneurs to venture intoany industrial sector based on their own commercial decisions with no government judgement. Inthe absence of Government controls these decisions were in terms of market prices and profits. Inother words, allocation of r esources among industries with respect to t he scale, size of production

and the nature of the product would be determined by market prices. The role of the state wasconfined to selected non-market areas- to ensure a smooth functioning of the market economy.

Privatisation:

Th e N I P a ime d a t st r en g t he ni n g t h e p r iva t e sect or i n a b i g w a y. Th e t h r u st o f t h e N I P w a s am a rk et d r iv en e co no m y ; so i n l in e w it h t h at o bj e ct i ve , t h e n ew p ol icy p r ov id ed f or t h eprivatisation of the public sector units (PSUs). The NIP provided for an enlargement in the field ofoperation of the private sector (and a contraction in the fields of operation of the public sector). An u mb er o f a ct iv i t i es ( 1 7 i n n u mb e r ) w h ich so f a r h ad b ee n t h e e xcl u si vel y i n t h e r e a lm o f t h epublic sector were thrown open to private sector. Only 8 industr ies where security and strategicconcerns predominated were reserved for the public sector under the new policy. The Governmentalso, to a certain extent, privatised the ownership of the PSUs. This was done by the sale of a partof the capital of some enterprises. Thus by disinvestment of a part of the capital, the Governmentmade the public sector accountable to the private sector criterion, namely market-related profits.

Globalisation:

The NIP took great steps towards the integration or the unification of the Indian economy with theworld economy. I t made the economy outwardly oriented so that i ts activit ies were now governedboth by the domestic as well as the foreign market. The following steps were taken:

1. The rupee was also made fully convertible on current account of the balance of payment s.2. The custom duties on imports were also reduced with a view to bring t hem in l ine with custom

duties of ot her countries.3 . Th e N I P of 1 9 9 1 t h e d o or s o f t h e I n d i an e co no my w e re t h r o w n o p e n t o f or ei g n i n vest men t .

Foreign investors were allowed to have 51% equity holdings.

All this adds up to an open economy with respect to the movements of exchange rate, foreign

exchange, imports, exports and foreign direct investment(FDI).

Features:

1. Abolition of industrial l icensing : I n a m ajor m ove to liberalise the economy t he Government OfIndia abolished all industrial l icensing irrespective of t he levels of investment ,except for certaini n du st r i es( 18 i n n u mb er ) f o r secu r it y a nd socia l co n ce r ns. I n Ap r il 1 9 9 3, t h e Go ver n me ntexempted three more industries from licensing - leaving only 15 industries in which licensing iscompulsory. With this step, almost 80% of t he industry have been taken out of the l icensingframework.

2. Removal of the MRTP limit : Under t he MRTP Act, all f irms wit h assets above a certain lim it (Rs.100 crores since 1985) were classif ied as MRTP f irms. Such f irm s were permitt ed to enterselected industries only and this also on case-by- case approval basis. The new Industrial Policyscrapped the threshold limit of assets in respect to MRTP and dominant undertakings. These

f i rms w e re n o w a t p ar w i t h o t h er f i rms f or e nt r y o r e xpa nsi on i n t o t h e d el ice nse d a r ea s.However firms holding more than 25% of the market share were now identified as monopolies


4/6



and the emphasis had shifted to taking appropriate action against monopolistic and unfair tradepractices.

3. Dilution of the role of t he Public Sector : The NIP removed various industries from t he ReservedList, which were previously the domains of PSUs. Industries, which continue to be reserved forthe public sector, are in areas where security and strategic concerns predominate.

4. Disinvestm ent of Public Holding: Under t he NIP, Government actively t ook part in disinvestm entof public holdings. A beginning in this direction was made in 1991-92 itself by divesting part ofthe equit ies of 30 selected PSUs (which were placed with mutual funds) and Rs. 3000 croreswas raised t hrough t hese means.

5 . En t r y o f f or e ig n i n ve st me n t a nd t e ch n ol og y : Th e NI P e n vi sa ge d a b r oa de r r o le o f f or ei g ninvestment and capital in the industries. The NIP had a specific list of high technology and highinvestment priority industries where automatic permission would be available for FDI up to 51%foreign equity. The l ist contained 34 industr ies. This was a major departure from the earl ierpolicies, which required case-by-case approval of foreign investment normally limited to 40%equity participation.

6. Industr ial location policy l iberalised : The new industr ial policy provides t hat entrepreneurs

w i ll in g t o se t u p n ew i nd u st r i es ma y ch o ose t h e l oca t io n b ase d o n t h e ir o w n j u d ge men t o favailability of resources. Except for industries subject to compulsory licensing entrepreneurswere allowed to have a free hand.

7. Removal of m andatory convert ibil i ty clause : A large part of industr ial investment in I ndia isfinanced by loans from banks and financial institutions. These institutions followed a mandatorypractice of including a convertibility clause in t heir lending operations for new projects. This hasp r ovi de d t h e m w i t h t h e o pt i on o f con ver t i n g p a r t o f t h e ir l oa ns i nt o e qu i t y. T h is o p t io n h asalways been interpreted as a threat to private f irms of take-overs from f inancial institut ions.Th e NI P p r ovi de d t h a t h en ce fo r t h f i na nci al i nst it u t i o ns w o ul d n o t i mp ose t h i s ma n da t or yconvertibility clause.

8 . A bo li t io n o f p ha se d m a nu fa ct u r in g p r og r am m e s f or n ew p r oj e ct s : To f or ce t h e p ace o findigenisation in manufacturing, phased manufacturing programm es had been in force in anumber of engineering and electronic industr ies. The NIP abolished such programmes in thefuture as the Government felt that with substantial reforms made in the trade policy and thedevaluation of the Rupee, there was no longer any need to enforce local content requirementson a case-by-case basis.

S om e e x p e c t e d b e n e f i t s f r o m t h e NI P:

1. Im proved efficiency in t he use and allocation of resources: With the removal of controls andrestr ict ions the NIP would promote individual entrepreneurs and this increased competit ionwould help in promoting industry in India. The privatisation of the PSUs and the entry of FDIwould also bring about an im provement in efficiency.

2. Increase in t he economic growth rate: The growth rate of t he economy was also expected tog o u p si ze ab ly a s a r esu lt o f t h e i m pl em e nt a t io n o f t h e NI P t h r o ug h a n i ncr ea se i n t h e

efficiency of the industries.

3. Increase in employment levels: With higher rate of growth; expansion of employment was alsoexpected.

4. Fall in rate of inflation: The rate of inflation was also predicted to fall due to competition.

5. Im proved Foreign Exchange position: The NIP was also expected to im prove the Forexreserves of the country by improving the Balance of Payments.

[ MAKE A COMPREHENSIV E NOTE ON THE EFFECTIVENESS OF NI P I N THE LAST D ECADE ]


5/6



STABI LI SATI ON PROCESS AND BALANCE OF PAYMENT

Balance of Payment :The Balance of payment (BOP) of the country is a summary record of t he international economicand f inancial transaction of the country during a specif ied period of t ime. In other words, BOP ismerely a way of listing receipts and payment s of international transaction of a country.

In this sense the BOP is an application of the Double Entry Bookkeeping system and done properlythe debits and credits will always balance : hence BOP will always be in equilibrium.

Cre dit s D e bit s

Export of Goods I m port s of Goods

Export of Ser vices I m port of services

Unrequited receipts

(Gifts, indemnities etc.)

Unrequited payments

(Gifts, indemnities etc.)

Capital Receipts

(Borrowings from, capital repayment by, or sale

of assets to foreigners)

Capital Payments

(Lending to, capital repayment to, or purchase

of assets fr om foreigners)

Balance of Trade: Is the countrys visible trade i.e. the exports of goods less the import of goods.

Balance of Current Account: The items that are entered into the current account are as follows:

Tr a nsa ct ion Cr e dit D e bit

Merchandise Export I m port

For eign Travel Ear nings Paym ent

Transport at ion Ear nings Paym ent

I nsurance Pr em ium Receipt s Paym ent s

I nvest m ent I ncom e Dividends Dividends

Sale an d pu rchase of g oods and ser vi ces b y t he g ov er nm en t Receipt s Pay m ent s

Miscellaneous Receipt s Paym ent s

Equilibrium and D isequilibrium of BOP:

A BOP is said t o be in equil ibr ium when the demand for foreign exchange is exactly equal to thesupply of foreign exchange. When there is a deficit in the balance of payments the demand forforeign exchange exceeds the supply of foreign exchange.

Reasons for Disequilibrium:

A. Economic Factors:( 1 ) D eve lo pme n t D ise qu li b ri um: I t i s mo r e commo n i n d eve lo p in g co u nt r i es. D eve lo pme n t

disequilibrium arises because developing nations im port capital goods on a large scale to carryout various development programs.

(2) Capital Disequilibrium: Capital disequilibrium occurs due to cyclical fluctuation in the generalb u si n ess a ct i v it y. D ur i ng d ep r essio n a shr i nkag e i n w o rl d t r a de t a kes p la ce l ea di n g t o adisequilibrium in the BOP.

(3) Secular Disequlibrium: This type of Disequilibr ium is caused by certain secular trends in theeconomy and persists for a long t ime. For example in a developed country the disposableincome and therefore aggregate demand for consumption products is high. This may lead toheavy imports and cause BOP Disequilibrium.

(4) Structural Disequilibrium: Structural changes may also affect the BOP. For example exhaustion(or inadequate production) of productive resource (say petroleum) may lead to Disequilibrium


6/6



as the government may have to purchase t he scarce resource from other countr ies who havean abundance of it.

B. Political Factors: Polit ical stabil ity or instabili ty also plays a large role in maintaining BPOequil ibr ium. A country with polit ical instabili ty may experience large domestic and foreigncapital outflow which may lead to disequilibrium.

C. Social Factors: Changes in taste, preference, fashion of the population may lead to largescale import s of the desired comm odities leading t o BOP problems.

BOP Disequilibrium and Stabilisation policies:

(A) Monitory Measures:

(1) Contraction of money supply: A fal l in money supply leads to a fal l in purchasing power andthereby reduction in aggregate demand and consequently leads to a fall in demand of imports.

( 2 ) D eva lu at i o n: De val u at i on me a ns t h e r ed u ct i on o f t h e o f fi ci al r a t e a t w h ich t h e d ome st i ccurrency is exchanges for foreign currency notably pounds () and Dollars ($) . Devaluationmakes foreign goods costl ier in terms of domestic currency and thereby discourage imports.

On the other hand devaluation m akes domestic exports cheaper in the foreign m arket andthereby stimulate exports.

(3) Exchange Control: The central bank or the government assumes complete control of the forexreserves and earnings of the country, and l imits t he amount of forex t hat can be transacted thereby maintaining the forex reserves.

( B) Fiscal Measures:

(1) Export Promotion: Reduction in export duties, providing export subsidy, and encouraging t heproduction of exportable goods by various incentives thereby earning forex to balance theBOP Disequilibrium .

(2) Im port Controls: Increasing import duties, restr ict ing import t hrough import quotas etc. helpin controlling imports and consequently help in arresting the outflow of forex.

(C) Miscellaneous Measures: Obtaining foreign loans, developing tourism, providing incentivesfor inward remittances, using Special Drawing Rights ( SDR) available with the InternationalMonitory Fund (IMF).

[ SHOW HOW THE STABILI SATION POLICIES HAVE WORKED IN INDI A I N THE LAST DECADEW.R.T NEW ECONOMIC POLICY ]

Documents

Www.angelfire.com Falcon Neeraja-rohit Articles Paper6 4