Unit – II

Economic Reforms

Q1) Explain Privatization and globalisation?

A1) It implies shedding of the ownership or management of a government owned enterprise. Government companies are converted into private companies in two ways (i) by withdrawal of the government from ownership and management of public sector companies and or (ii) by outright sale of public sector companies. Privatisation of the public sector enterprises by selling off part of the equity of PSEs to the public is known as disinvestment. The purpose of the sale, according to the government, was mainly to improve financial discipline and facilitate modernisation. It was also envisaged that private capital and managerial capabilities could be effectively utilised to improve the performance of the PSUs.

The government envisaged that privatisation could provide strong impetus to the inflow of FDI. The government has also made attempts to improve the efficiency of PSUs by giving them autonomy in taking managerial decisions. For instance, some PSUs have been granted special status as maharatnas, navratnas and miniratnas (see Box 3.1). 3.5 GLOBALISATION Although globalisation is generally understood to mean integration of the economy of the country with the world economy, it is a complex phenomenon. It is an outcome of the set of various policies that are aimed at transforming the world towards greater interdependence and integration. It involves creation of networks and activities transcending economic, social and geographical boundaries. Globalisation attempts to establish links in such a way that the happenings in India can be influenced by events happening miles away. It is turning the world into one whole or creating a borderless world.

Outsourcing:

 This is one of the important outcomes of the globalisation process. In outsourcing, a company hires regular service from external sources, mostly from other countries, which was previously provided internally or from within the country (like legal advice, computer service, advertisement, security — each provided by respective departments of the company). As a form of economic activity, outsourcing has intensified, in recent times, because of the growth of fast modes of communication, particularly the growth of Information Technology (IT). Many of the services such as voice-based business processes (popularly known as BPO or call centres), record keeping, accountancy, banking services, music recording, film editing, book transcription, clinical advice or even teaching are being outsourced by companies in developed countries to India.

With the help of modern telecommunication links including the Internet, the text, voice and visual data in respect of these services is digitised and transmitted in real time over continents and national boundaries. Most multinational corporations, and even small companies, are outsourcing their services to India where they can be availed at a cheaper cost with reasonable degree of skill and accuracy. The low wage rates and availability of skilled manpower in India have made it a destination for global outsourcing in the post-reform period.

Global Footprint:

Owing to globalisation, you might find many Indian companies have expanded their wings to many other countries. For example, ONGC Videsh, a subsidiary of the Indian public sector enterprise, Oil and Natural Gas Corporation engaged in oil and gas exploration and production has projects in 16 countries. Tata Steel, a private company established in 1907, is one of the top ten global steel companies in the world which have operations in 26 countries and sell its products in 50 countries. It employs nearly 50,000 persons in other countries. HCL Technologies, one of the top five IT companies in India has offices in 31 countries and employs about 15,000 persons abroad. Dr Reddy's Laboratories, initially was a small company supplying pharmaceutical goods to big Indian companies, today has manufacturing plants and research centres across the world.

World Trade Organisation (WTO): The WTO was founded in 1995 as the successor organisation to the General Agreement on Trade and Tariff (GATT). GATT was established in 1948 with 23 countries as the global trade organisation to administer all multilateral trade agreements by providing equal opportunities to all countries in the international market for trading purposes. WTO is expected to establish a rule-based trading regime in which nations cannot place arbitrary restrictions on trade.  In addition, its purpose is also to enlarge production and trade of services, to ensure optimum utilisation of world resources and to protect the environment.

 The WTO agreements cover trade in goods as well as services to facilitate international trade (bilateral and multilateral) through removal of tariff as well as non-tariff barriers and providing greater market access to all member countries. As an important member of WTO, India has been in the forefront of framing fair global rules, regulations and safeguards and advocating the interests of the developing world. India has kept its commitments towards liberalisation of trade, made in the WTO, by removing quantitative restrictions on imports and reducing tariff rates.

Some scholars question the usefulness of India being a member of the WTO as a major volume of international trade occurs among the developed nations. They also say that while developed countries file complaints over agricultural subsidies given in their countries, developing countries feel cheated as they are forced to open up their markets for developed countries but are not allowed access to the markets of developed countries.

Q2) Give the nature and importance of Agriculture?

A2) Reforms in Agriculture: Reforms have not been able to benefit agriculture, where the growth rate has been decelerating. Public investment in the agriculture sector especially in infrastructure, which includes irrigation, power, roads, market linkages and research and extension (which played a crucial role in the Green Revolution), has fallen in the reform period. Further, the removal of fertiliser subsidy has led to increase in the cost of production, which has severely affected the small and marginal farmers. This sector has been experiencing a number of policy changes such as reduction in import duties on agricultural products, removal of minimum support price and lifting of quantitative restrictions on agricultural products; these have adversely affected Indian farmers as they now have to face increased international competition. Moreover, because of export oriented policy strategies in agriculture, there has been a shift from production for the domestic market towards production for the export market focusing on cash crops in lieu of production of food grains. This puts pressure on prices of food grains.

Agriculture is an important part of India's economy and at present it is among the top two farm producers in the world. This sector provides approximately 52 percent of the total number of jobs available in India and contributes around 18.1 percent to the GDP. Agriculture is the only means of living for almost two-thirds of the employed class in India. As stated by the economic data of financial year 2006-07, agriculture has acquired 18 percent of India's GDP. The agriculture sector of India has occupied almost 43percent of India's geographical area.

Agriculture plays a vital role in the Indian economy. Over 70 per cent of the rural households depend on agriculture. Agriculture is an important sector of Indian economy as it contributes about 17% to the total GDP and provides employment to over 60% of the population. Indian agriculture has registered impressive growth over the last few decades. The food grain production has increased from 51 million tons (MT) in 1950-51 to 250MT during 2011-12 highest ever since independence.

Q3) What are the Important Features of Green Revolution?

A3) The following are some of the important features of Green Revolution:

1. Revolutionary:

The Green revolution is considered as revolutionary in character as it is based on new technology, new ideas, new application of inputs like HYV seeds, fertilisers, irrigation water, pesticides etc. As all these were brought suddenly and spread quickly to attain dramatic results thus it is termed as revolution in green agriculture.

2. HYV Seeds:

The most important strategy followed in green revolution is the application of high yielding variety (HYV) seeds. Most of these HYV seeds are or dwarf variety (shorter stature) and matures in a shorter period of time and can be useful where sufficient and assured water supply is available. These seeds also require four to ten time more of fertilisers than that of traditional variety.

3. Confined to Wheat Revolution:

Green revolution has been largely confined to Wheat crop neglecting the other crops. Green revolution was first introduced to wheat cultivation in those areas where sample quantity of water was available throughout the year through irrigation. Presently 90 per cent of land engaged in wheat cultivation is benefitted from this new agricultural strategy.

Most of the HYV seeds are related to wheat crop and major portion of chemical fertiliser are also used in wheat cultivation. Therefore, green revolution can be largely considered as wheat revolution.

4. Narrow Spread:

The area covered through green revolution was initially very narrow as it was very much confined to Punjab, Haryana and Western Uttar Pradesh only. It is only in recent years that coverage of green revolution is gradually being extended to other states like West Bengal, Assam, Kerala and other southern states.

Achievements of the New Agricultural Strategy:

Let us now turn our analysis towards the achievement of new agricultural strategy adopted in India. The most important achievement of new strategy is the substantial increase in the production of major cereals like rice and wheat. Table 3.3 shows increase in the production of food crops since 1960-61.

Q4) What is the progress in Food grains Production?

A4) The Table 3.3 reveals that the production of rice has increased from 35 million tonnes in 1960- 61 to 54 million tonnes in 1980-81 and then to 99.2 million tonnes in 2008-2009, showing a major break-through in its production. The yield per hectare has also improved from 1013 kgs in 1960 to 2,186 kg in 2008-09.

Again the production of wheat has also increased significantly from 11 million tonnes in 1950-51 to 36 million tonnes in 1980-81 and then to 80.6 million tonnes in 2008-09. During this period, the yield per hectare also increased from 850 kgs to 2,891 kgs per hectare which shows that the yield rate has increased by 240 per cent during the last five decades. All these improvements resulted from the adoption of new agricultural strategy in the production of wheat and rice.

Total production of food grains in India has been facing wide fluctuations due to vagaries of monsoons. Inspite of these fluctuations, total production of food grains rose from 82 million tonnes in 1960-61 to 130 million tonnes in 1980-81 and then to 213.5 million tonnes in 2003-04 and then increased to 233.9 million tonnes in 2008-09.

The new agricultural strategy was very much restricted to the production of food-grains mostly wheat and rice. Thus, the commercial crops like sugarcane, cotton, jute, oilseeds could not achieve a significant increase in its production.

Q5) Explain Second Green Revolution in India?

A5) Considering the limitations of first green revolution in India, the Government of India is now planning to introduce “Second Green Revolution” in the country with the objective of attaining food and nutritional security of the people while at the same time augmenting farm incomes and employment through this new approach.

This new approach would include introduction of “New Deal” to reverse decline in farm investment through increased funds for agricultural research, irrigation and wasteland development.

Prime Minister, Dr. Manmohan Singh while inaugurating the New Delhi office of International Food Policy Research Institute observed that, “Our government will be launching a National Horticulture Mission that is aimed, in part, at stimulating the second green revolution in the range of new crops and commodities.”

The Government is of the view that with more advances in science, and technology in areas such as biotechnology coming from the private sector, it was important to ensure availability of these products to the poor farmers.

Prime Minister Mr. Singh argued, “The challenge is how to encourage this creativity, this innovativeness and at the same time to ensure that new products and new processes will be far affordable for the vast majority of farmers who live on the edges of subsistence.”

Thus under the present circumstances, it can be rightly said that new cutting edge technologies should be taken to the fields for enhancing productivity to make agriculture sector of the country globally competitive.

While addressing at a national workshop on “Enhancing Competitiveness of Indian Agriculture” on 7th April, 2005 at New Delhi, Agriculture Minister Mr. Sharad Pawar observed “There is a big challenge before us. We have to adopt new technologies and familiarize them to the farming community. With 60 per cent more arable land, India produces less than half the quantity of food grains grown by China.”

Even the Brazilian yields of black peppers, originally imported from India, are six times higher than India utilizing the same variety. This simply shows that India is lagging far behind in raising productivity of agriculture.

The Economic Survey, 2006-07 while pointing out the weaknesses of agriculture in India observed, “The Structural Weaknesses of the agriculture sector reflected in low level of public investment, exhaustion of the yield potential of new high yielding varieties of wheat and rice, unbalanced fertilizer use, low seeds replacement rate, an inadequate incentive system and post harvest value addition were manifest in the lack luster agricultural growth during the new millennium.”

The Economic Survey, 2006-07 further observes, “The urgent need for taking agriculture to a higher trajectory of 4 per cent annual growth can be met only with improvement in the scale as well as quality of agricultural reforms undertaken by the various states and agencies at the various levels. These reforms must aim at efficient use of resources and conservation of soil, water and ecology on a sustainable basis and in a holistic framework. Such a holistic framework must incorporate financing of rural infrastructure such as water, roads and power.”

It is also true that today unfortunately the green revolution is a distant memory and its impact has also certainly ebbed. Therefore, it is essential to revisit the problems of the agricultural sector and address the cry of anguish that we hear from farmers from different directions of the country.

There is a strong argument for high agricultural investment, especially irrigation, which has large externalities even if it requires a scaling down of other subsidies and reordering the priorities.

Q6) Give the Industrial Policy of 1948 in India?

A6) Industrial Policy Resolution of April, 1948 classified industries into four categories, which are as follows:

1. Classification:

(i) Defence and strategic industries such as manufacture of arms and ammunition, production and control of atomic energy and ownership and management of railways were to be the exclusive monopoly of the Central Government.

(ii) In the case of basic and key industries such as coal, iron and steel, aircraft manufacture, ship building etc. all new units were to be set-up by the state while the old units were to continue to be run by the private entrepreneurs for the next ten years when the question of their nationalisation was to be decided.

(iii) Some industries were to remain in private ownership but subject to overall regulation and control by the government. Such industries included automobiles and tractors, sugar, cement, cotton and woolen textiles etc.

(iv) Rest of the industries were to remain with the private sector where government was to exercise only an overall general control.

2. Policy towards Foreign Capital:

The Industrial Policy 1948 made it clear that the Government will welcome foreign capital in India provided such capital comes without any strings or conditions attached to such foreign investments. It also emphasized that foreign capital will be allowed in joint participation with Indian capital and that the majority in management and control will remain in Indian hands.

3. Role of Cottage and Small Scale Industries:

The Industrial Policy 1948 emphasised the role of cottage and small scale industries in economic development. It sought to provide encouragement to these industries in India’s industrial development programmes because these industries make use of local resources and provide larger employment opportunities.

The Industrial Policy of 1948 thus laid down the foundation of a mixed economy wherein the public sector (the state) and the private sector were to co-exist and work in their demarcated areas.

Q7) What are the causes of Industrial Sickness?

A7) Causes:

Industrial sickness has become a major problem of India's corporate private sec­tor. Of late, it has assumed serious proportions. A close look reveals that there are, at least, five ma­jor causes of industrial sickness, viz., promotional, managerial, technical, financial and political.

An industrial unit may become sick at its nascent stage or after working for quite some time. For instance, two major traditional industries of India, viz., cot­ton textiles and sugar, have fallen sick largely due to short-sighted financial and depreciation poli­cies. Heavy capital cost escalation arising out of price inflation accentuates the problem. The his­torical method of cost depreciation is highly inad­equate when assets are to be replaced at current cost during inflation.

Moreover, since the depre­ciation funds are often used to meet working capi­tal needs, it does not become readily available for replacement of worn-out plant and equipment. The end result is that the industrial unit is constrained to operate with old and obsolete equipment, its profitability is eroded and, sooner or later, the unit is driven out of the market by the forces of compe­tition.

External vs. Internal Causes:

The factors leading to sickness can be due to reasons of finance, technical issues, mismanagement, non-availability of raw materials, power or natural calamities or disasters such as fire or earthquake or a combination of such factors.

The causes of industrial sickness may be divided into two broad categories:

External causes are those which are beyond the control of its management and seen to be rela­tively more important than internal causes.

The causes which have been identified so far include:

a)     Delay in land acquisition and building construction.

b)    Delay in obtaining financial as­sistance from public financial institutions.

c)     De­layed supply of machinery by the manufacturers.

d)    Problems related to recruitment of technical and managerial staff.

e)     Delay on the part of the Government in sanctioning licences, permits, etc.

f)       Shortages of basic inputs like power and coal. Other causes include.

g)    Cost over-runs due to factors beyond the control of management.

h)     Lack of demand for products or shift of demand to products of rival firms due to delays in project implementation.

i)       Unsatisfactory performance by collaborators—financial and technical.

j)       Large changes in the scale of operation and optimum product mix in the long run and, last but not the least.

k)     Changes in the policy of the Government relating to movement of goods from one place to another within the country.

The primary cause seems to be: “Lack of experience of the promoters in a specific line of activity”.

The other causes are:

a)     Differences among various persons associated with the pro­motion and management of the enterprise

b)    Mechanical defects and breakdown

c)     Inability to purchase raw materials at an economic price and at the right time

d)    Failure to make controls effective in time, in case of deficiencies in work­ings

e)     Deteriorating labour-management rela­tions and the consequent fall in capacity utilisa­tion

f)       Faulty financial planning and lack of balance in the financial (capital) structure.

Q8) What is IRBI and Modernisation Fund?

A8) IRBI -

The Industrial Reconstruction Bank of India (IRBI) set up in 1985 has initiated various steps for checking the growth of industrial sickness and helping in industrial revival. From April 1997 the name of IRBI was changed to Industrial Investment Bank of India (IIBI). By March 2000, cumulative financial assistance sanc­tioned and disbursed by it stood at Rs. 10.090 crores and Rs. 7,353 crores, respectively.

A significant measure taken during 1986 was the setting up of Small Industries Development Fund (SIDF) in the IDBI. This is meant to provide special financial assistance to the small-scale sec­tor. The Fund would be used for providing refi­nancing assistance not only for development, ex­pansion and modernisation, but also for the reha­bilitation of the small-scale sick industries.

Modernisation Fund:

The Government has set up two funds, namely the Textile Modernisa­tion Fund and the Jute Modernisation Fund, for modernisation of the textiles and jute sector. Un­der these two funds, assistance is provided not only to the healthy units for modernisation at 11.5% rate of interest; but also to sick but potentially viable units. Special loans are given to the weak units for meeting a part of the promoters’ contri­bution.

Q9) What is ESP? Give the benefits.

A9) The Employees' Pension Scheme (ESP) is both a defined contribution and defined benefit scheme which provides pension payments for life on retirement and on disablement during employment. It also provides social security cover to the family of the insured in the event of death.

The ESP provides the following Indian benefits:

Pension for life to the member, on retirement or disablement during employment.

Pensions to members of the family upon death of the member:

a)     to widow/widower for life or until re-marriage,

b)    to children/orphans, up to 2 children younger than 25 years of age simultaneously with widow/widower pension,

c)     to children/orphans with total and permanent disability irrespective of age and number of children in the family,

d)    to a nominee in the event of member who is unmarried or without any eligible family member to receive pension, and

e)     to a dependent father/mother in the event the member dies leaving behind no eligible family members and no named survivor.

f)       The Employees' Provident Fund provides an individual account-based lump sum (accumulations plus interest) on retirement at 58 years of age, permanent disablement or death. Partial withdrawals/advances are available in certain contingencies. (Full withdrawal at 55 years of age is possible if the member is retired.)

g)    The Employees' Deposit Linked Insurance Scheme (EDLI) provides a survivor benefit up to a maximum amount and is subject to certain conditions.

Q10) What is Disinvestment policy?

A10) Disinvestment in India is a policy of the Government of India, wherein the Government liquidates its assets in the Public sector Enterprises partially or fully. The decision to disinvest is mainly to reduce the fiscal burden and bridge the revenue shortfall of the government. Disinvestment as a tool is used by governments throughout the world to give up their stake partly in public enterprises mainly to fund their fiscal deficit, balance of payments, infrastructure projects, public debt, and investment to encourage spending in an economy or Social program.

Disinvestment in India started in 1991 when India’s high balance of payments forced Indian government to open Indian economy by adopting policies like opening up of foreign trade and investment, deregulation, privatization and inflation control measures. Part of this policy measures was disinvestment to curb balance of payments and to allow more private players in government firms to improve its efficiency as many public sector undertakings (PSU’s) were not doing well at that time under government rule and also to invest the gained money in improving economy but in subsequent years disinvestment was only used to cover the fiscal hole of government.

The main objective behind opening PSUs was to build infrastructure and rapid economic growth but over the years with the increase in competition from private sectors and loss of monopoly and protectionist regime has seen the decline in market share of PSUs. Also in many instances PSUs have found themselves unable to match technological superiority of foreign and domestic private companies. To make matters worse constant government interventions and inefficacy in operation of PSU has led many PSUs to be highly inefficient and debt-ridden, while many PSUs are there to just fulfill the social welfare programs of the government rather than making money for its own self e.g. of which is BSNL which is used by government to provide network connectivity in rural and remote areas which is a highly loss making proposition.