Exchange Rate, Monetary Policy and RBI

PYQ
2019
1. Examine the role of capital account convertibility in controlling deficit in the current
account of India's BOP
2. Why is monetary transmission not effective in India? In the context of the recent
announcement by the RBI, compare the efficacy of external benchmarks in bank
loans with internal benchmarks for improving monetary transmissions through the
banking channel
2018
1. The state-controlled section iof India's banking sector continues to be a major
problem for policy makers. Do you agree?
2. Do you believe that capital account convertibility is feasible under the present
circumstances in India?
2017
1. What caused the problem of NPA of Indian commercial banks and what cures are
being suggested to solve the problem?
2. Do you think the recent appreciation is harming India's exports? Can it have a
beneficial side too?
2016
1. Partial Cap account convertibility cannot serve the purpose of integrating Indian
economy with world economy. Examine
2. Monetary policy is often criticised as ineffective because large part of the country
is not yet monetised. Do you agree?
3. Trace the development of NBFCs since liberalisation and comment on their impact
on the effectiveness of the interest rate policies of the RBI
2015
1. Do you think that full convertibility of the rupee on capital account will help in
accelerating India's economic growth?
2. What are the major factors behind the accumulation of NPAs in the Indian banking
sector in recent years?
2014
 1. Discuss the issues involved in capital account convertibility. In the light of this,
explain India's important capital account liberalisation measures.
2. How global financial crisis and sovereign debt crisis of European nations exposed
the disturbing role of speculative motive and fiscal imprudence? What lessons
could India derive from it?
2013
1. An underdeveloped capital and money market has been a major cause of slow
economic growth in India. In the light of this statement, give relative importance of
financial sector vis-a-vis the real sector in Indian economy.
2. Inflation is not a purely monetary phenomenon in India and hence the scope of
monetary policy of the RBI to contain it is limited. Discuss
3. Partial Cap acc conv cannot serve the purpose of integrating Indian economy with
global economy. Analyse
4. Speculators may do no harm as bubbles on a steady stream of enterprise, but the
problem is serious when enterprise becomes the bubble on whirpool of
speculation. When capital development of a country becomes a byproduct of the
activities of a casino, the job s likely to be undone. Explain in the context of global
financial crisis and its impact on India
2012
1. Characterise the inflationary process in the last 3 years. What steps were taken by
the RBI and the govt to control it?
2. Would a flexible exchange rate regime serve India better than a fixed exchange rate
regime in the current international scenario?
2011
1. Critically examine the point of view that RBI's recent measures at containing
inflation have compromised growth.
2. Is India ready for full cap acc conv?
3. In view of fresh fears of global financial crisis arising out of decelerating credit
rating of the US economy and debt crisis in the peripheral Euro-Zone economies,
analyse its likely impact on India's trade and growth performance. Suggest
measures to contain it.
2010
1. In a supply constrained economy, how was it argued in India in 1950s that deficit
financing would help raise the growth rate? In hindsight, analyse the validity of this
view.
2. What are the implications in the replacement of the Prime Lending Rate System by
the Base Rate System recently?
2009

2
 1. Explain the main aspects of the role of the RBI under the present liberalised
financial regime as compared to the regime prior to 1991.
2008
1. Discuss the implications of the 'highest inflation rate in the last 13 years' recently
attained by India
2007
1. Examine the nature and causes of inflation in India. Critically appraise the measures
adopted by the authorities to control it.
2. Critically examine the functioning of the Indian money market
3. Discuss the need and justification for banking sector reforms
2006
1. What are the causes of inflation in India? Suggest policies to check
2. Discuss the factors determining the supply of money in India. What are the money
stock measures of the RBI
3. Examine the purpose of deficit financing in India and point out its evil effects
4. Do you think that a combination of moderate inflation, low rates and healthy capital
markets has set the Indian economy on the path of accelerated growth?
2005
1. Write a detailed note on endogenous money and India
2. Comment on the proposition that inflation in India is a monetary phenomenon
3. Justify the relevance of banking liberalisation in India.
4. What are the pros and cons of inflation targeting as the objective of RBI
2004
1. Enumerate the reco the Committee on Banking Sector Reforms, 1998,. What steps
were taken to implement it
2. In what ways have banks in India diversified their functions and adopted new
technologies since their nationalisation?
2003
1. What measures should be taken to increase the efficiency of nationalised banks in
India?
2. Enumerate the reco of the Chakravorty Committee for restructuring money market
in India. What follow up actions have been undertaken by the govt for implementing
these reco?
3. Is full convertibility of rupee on capital account desirable in the present economic
scenario?

3
 4. Critically analyse the financial sector reforms undertaken in India
2002
1. Explain how inflation can be linked with fiscal policies.
2001
1. How do you account for low profitability of nationalised banks in India?
Suggestions to increase profitability
2. Inflation is economically useful, socially harmful and politically unavoidable in India
today. Elucidate
2000
1. Analyse recent trends in money supply in India and factors affecting it. Which
instruments of monetary policy would be more effective in regulating money supply
in the present situation?
2. Deficit financing is not necessarily an evil in a country like India. Comment
1999
1. The monetary policy of the RBI during the Plan period has achieved, if only partially
the growth objective, but floundered on price stability
2. In the case of nationalised banks in India, autonomy is likely to be dangerous and
state regulation is ineffective. Discuss.
Urijit Patel Committee to Revise and Strengthen the Monetary Policy Framework
With the deregulation of financial markets, the MP has acquired a much greater market
orientation. Post the financial crisis, the MP of EMEs has been complicated by
systemic externalities from the MP of AEs
The primary role of the RBI is monetary stability, i.e. to sustain confidence in the
value of the country's money. This means low and stable inflation expectations, as
well as confidence in financial institutions(prevent bank runs)
Consequences of high inflation
• Pushes up inflation expectations, which further pushes up inflation
• Wage-price spiral
• Negative real rates, which leads to decline in savings
• Reduces external competitiveness.
• If the nominal exchange rate adjusts to offset inflation, it can set off a
depreciation-inflation spiral, undermining macro stability. The Balassa-
Samuelson effect tells that this offset need not be one-for one if India's
productivity is higher than others

4
• The weakening currency imposes balance sheet shocks on the borrowers in
foreign currency
• Reduces inflow of foreign investment
• Inflation pushes up demand for gold as a hedge against erosion of value and
hence widens CAD, as happened during the early 2010s.
• Persistently high inflation impedes allocative efficiency and growth
• Persistently high inflation leads to worsening inequality as the poor are hit

From the financial crisis, the lessons emerged on the need to move away from the
narrow inflation targeting to multiple target multiple instrument approach, by
imparting greater flexibility to the process. But the committee accords primacy to
inflation, and anchored inflation expectations will then provide the room for other
objectives.
Nominal anchor- Central to a credible framework. By acting as a constraint on
discretion, itdisincentivises time inconsistency.
Three anchors considered
• Exchange rate-oldest. But erodes independence of central bank to address
domestic concerns
• Monetary aggregates- Undermined by instability in the demand for money
• Inflation- Best. Simple, easy to understand by the public
◦ Evidence by Svensson, Mishkin that inflation targeting (IT) reduces
volatility, shock impact
◦ Inflation also has a direct impact on demand and hence tweaking inflation
gives control over demand also
◦ Disadvantages that
▪ Some part of inflation, like food and fuel, not controlled by MP.
▪ Inherently a medium term framework because of the long lags in
transmission
▪ Real variables, like output and emp may be negatively affected with
focus on a nominal variable like price
Rationale for Flexible Inflation targeting in India
• The theoretical basis was derived from the New Keynesian Philips Curve as
elaborated by Gali and Gertler, based on the NAIRU model. In this model
expectations take hybrid form(rational+adaptive)
• Recognises the SR growth-inflation tradeoff by setting a band, thus allowing for
growth concerns accommodation
• But also recognises the criticality of inflation stabilisation over the medium
term and hence sets liability for control over a medium term
• Anchors expectations as it spells out target in clear, simple terms

5
Rationale for choice of CPI
• The inflation indicator has to be tracking expectations as the role of expectations
has become more important than output gap in affecting inflation.
◦ Post 2011, RBI's inflation expectations survey shows that expectations
follow CPI
• RBI analysis also shows that shocks to food and fuel prices have the max impact
on exp and these are included in CPI
• CPI is the inflation that affects most Indians directly.
Against CPI
• Food and fuel large components of CPI. Largely beyond RBI control
• ES reco changes
◦ Updating the base from 2011-12
◦ Taking into account the impact of e-commerce
As the recent paper by RBI deputy Governor Michael Patra shows, the trend
inflation has been in 4.1-4.3% since 2014 and hence the FIT target is appropriate.
A lower target will lead to deflationary bias

Among the achievements of FIT are anchoring expectations(see below),

stabilising ancillary variables like exchange rates,and increased expression of
diversity at policy level. The average headline inflation between Oct 2016 and
March 2021 was 3.9%, compared to 7.5% during 2013-16
The govt has retained the target of 4% for 2021-26, thus providing continuity to it
Headline vs Core inflation as Monetary Policy choice-ES
Theory shows that under certain conditions, core targeting max welfare. Conditions
• When prices sticky. In Sticky prices, mark-ups fluctuate and this distorts relative
prices
• Markets complete, allowing households to fully insure against shocks
But in developing nations, impediments
• Markets incomplete, hence inability to smoothen lifetime consumption
• High share of food in household budget
Research by Anand et al shows that under incomplete markets, headline targeting
better.

6
Further RBI research paper(by Nadhanael) shows that stickiness in food prices is
heterogenous across different food categories. Hence key to watch this
stickiness.

Addressing impediments to transmission of MP

Adjustments in the policy rates directly affect the money market rates which then
transmit the effect to the entire spectrum of rates, affecting AD and inflation. Thus
integrated financial systems key for proper transmission
The transmission mechanism is characterised by long, variable and uncertain time
lags. There is also asymmetry in the response in various phases of the business
cycles.
Why transmission weak in EMEs
• Capital markets not deep
• Real estate market fragment and illiquid

Impediments to transmission in India- Weighted Average Lending Rate(WALR) has a

huge markup over repo, and was as high as 5.25% in 2019. It increased despite a 135
bps reduction in repo. Transmission merely 69 bps(Dec 2018-Oct 2019)
• Sustained fiscal dominance- OMOs are deployed to manage yields in the face
of large govt borrowings, which crowds out private investment as banks invest in
Gsecs instead of lending to the private sector.
◦ Statutory pre-emption through SLR- Most financial institutions are statutorily
required to invest a part of their liabilities in gsecs providing a captive market for
gsec and artificially suppressing the cost of borrowing for the govt. This
dampens the transmission of rates
◦ Endogenous Liquidity- As OMO mostly used to smoothen yields on gsec
rather than a purely monetary phenomenon in the light of increasing fiscal
deficits, it has resulted in undermining the credibility of liquidity
management. To prevent crowding out of private borrowing, RBI is forced to
provide additional liquidity. Thus while some expansion of reserve money in
line with the expansion in broad money and growth is desirable, excessive
monetary expansion at times results from indirect monetisation of fiscal
deficits through OMOs.
▪ The effect of high fiscal deficit on transmission was flagged by Subir Gokarn
too
◦ Small Savings Schemes- Besides market borrowings, the other main source of
financing govt deficits is through small savings, primarily post office deposits,
PPF, characterised by administered interest rates and tax concessions. As
rates on these were changed infrequently, they acquired an edge over
banks and hence further reduced efficacy of transmission.

7
 ◦ Subventions- Gov directives to banks of subvention of interest rates or certain
sectoral lending
◦ Taxation- Financial products of non-banks are not taxed as much as bank
products, giving them an edge and hence weakens the transmission
• Large Informal sector and informal finance
• Financial and credit market frictions- See liability side rigidity point below
• High inflation- It makes real estate and gold more attractive, compared to bank
deposits. So banks fear lowering deposit rates in fear of losing deposits to gold
and real estate. This happened for all 4 years between 2009-13, when returns
from gold and real estate exceeded deposit rates
• Reco
◦ SLR should be reduced in consonance with the requirements of the Liquidity
Coverage Ratio as per the BASEL III
◦ More frequent intra-years adjustment of rates on small savings etc
◦ All fixed income financial products should be treated at par for the purpose
of taxation.
◦ To move the cost of banks' liabilities in line with the policy rates, it is key to
develop a culture of external benchmarks for setting rates. Ideally these
benchmarks should emerge from markets.
◦ Detach OMO from fiscal considerations- Central bank independence
◦ Promote a more competitive banking sector so that repricing of deposit and
lending rates becomes faster
Monetary Policy Transmission(Viral Acharya)
MT is the process through which the policy action of the central bank is
transmitted to the ultimate objective of stable inflation and growth.
It hinges crucially on how policy changes influence household and firm behaviour.
This can be through several channels
• Interest rate channel- The immediate impact of a change in policy rate is on
money market rates such as call money rate(call money is money lent by a bank
that has to be repaid on demand. It is the most liquid asset for banks. The impact
is quick and broadly one-to one on short term money market rates. This is
because a bank will be willing to borrow from other banks only if it is at least as
cheap as borrowing from RBI from repo
◦ Among the channels, the interest rate channel is the strongest

8
 • Credit channel- The central idea of lowering policy rate to lower cost of lending
to spur growth has the implicit assumption that bank balance sheets are
strong and in a position to step up quickly the credit supply in response to lower
cost of lending and higher demand for credit. Hence if banks do not have the loss
absorption capacity to deal with their bad loans, it can lead to evergreening of loans
to postpone defaults. This leads to misallocation of resources. Hence if balance
sheets stressed, aggressive policy cuts to promote growth can be ineffective
or counter-productive through bad investments and relaxing the impulse of
banking reforms.
• Exchange rate channel- Lower domestic rates leads to depreciation as foreign
funds flow out. This boosts exports and hence growth but can also lead to
inflation through raised prices of imported products.
• Asset price channel- Lower rates boost asset prices as the demand for assets
increases. This also boosts corporate wealth and hence aids growth.
Furthermore, higher asset prices raises the value of collateral, interacting with
the credit channel and increasing lending and demand
All these channels interact. The MT depends on country to country as per their financial
systems.
Monetary Policy Lags
2-3 quarters lags on output, 3-4 on inflation and effects persist for 8-12 quarters.
Hence MP needs to be forward looking and respond to expected inflation or
slowdown.
Transmission from Policy rates to bank lending rates in India: Performance
Even though the share of NBFCs and markets is rising, Indian financial system is bank
dominated. So adjustment by banks key in MT.
RBI deregulated interest rates in the 1990s. Since then various refinements
• Prime Lending Rate System in 1994 was replaced by the Benchmark PLR in 2003.
This was replaced by the bank rate in 2010, then MCLR in 2016.
• In India, like many other nations, the lending rates are floating rates, with the
rates changing depending on the reset periodicity. The floating rate is linked
to some benchmark rate(internal or external), which ideally varies over time in
tune with the changing macroeconomy.
• Banks also charge a spread over the benchmark to factor in premium and credit
risk and other factors. So the actual lending rate is benchmark plus spread.
• The virtue of an external benchmark is that it is transparent, common across
all banks. This enables the borrowers to compare the various banks by simply
comparing the spread.

9
 • As external benchmark are some market rate or the central bank policy rate, and as
the market rate moves closer to the policy rate, an EB is considered superior in
MT.
• RBI earlier(till Sept 2019) provided banks the option to use either internal or EB.
Banks preferred IB due to 2 reasons
◦ IB reflects their cost of funds
◦ Lack of robust and vibrant EB

PLR
In 1994, RBI deregulated lending rates for credit limits over 2 lakh and required
banks to declare PLR, which is the rate charged from the most creditworthy
borrower, taking into account cost of funds and txn costs. Hence PLR was to be a
floor for loans above 2 lakh. Not satisfactory due to
• Both the PLR and the spread varied widely across banks

BPLR
RBI required banks in 2003 to announce BPLR taking into account cost of funds,
operational costs, minimum margin to cover regulatory requirements like
provisioning, and profit margin. But it also failed as large part of lending was at
rates below BPLR. The residential housing loans and consumer durable loans were
outside BPLR and so sub-BPLR lending became a major distortion in terms of
cross subsidisationacross borrower categories.
Base Rate or bank rate
In 2010. Was also based on cost of funds, But an indicative formula for calculating
the base rate was provided. BR was to be the min rate for all loans with some
borrower specific spread. But the flexibility of banks in determining the cost of funds,
like average, marginal or blended costs, led to opacity in determination of lending
rates and hence prevented proper assessment of the MT speed. Also, banks lowered
spread for new borrowers while leaving the transmission weak for old borrowers.
MCLR
In 2016. Banks required to determine lending rates based on marginal costs of
funds, unlike the BR where banks had the choice to choose which costs. The actual
lending rate was spread + MCLR. But RBI Internal Study Group Report highlighted
that
• The transmission is weak in this also, especially for old loans
• It was also uneven across borrower categories.
• It was also asymmetric across MP cycles. Higher during tightening phase and
lower during easing phase(easing is cutting rates).

10
In 2019, between Feb-Sep when RBI lowered rates by 135 bps, the transmission
by even 2020 was just 69 bps
Issues as highlighted by Acharya
Broad factors.-Spreads charged by banks were adjusted to offset the changes in
MCLR, thereby impacting the overall reduction in lending rates. The Internal Group
highlighted the variations in spreads across banks were arbitrary and too large to
be explained by inter-bank variations in business strategy.
• A sizeable legacy loan portfolio of banks was still linked to the BR(30% of old
loans) and as lending rates under BR are stickier, MT weak.
• Rigidity in liability side of banks as over 90% of all bank liabilities are deposits
which are predominantly at fixed rates
◦ Over 35% of deposits are term deposits of over 3 year maturity, thus their
rates get reset infrequently leading to huge lags
◦ Thus while marginal cost of funds may come down rapidly with a cut in
fresh deposit rates, the average costs are sticky. This forces the banks to
use spreads to offset effects.
• Deterioration in banking sector health. So under-capitalised banks cross
subsidising corporate loan losses by increasing rates in healthier accounts.
Way forward
• Reduce the periodicity of rate resetting to a quarter
• Encourage banks to accept deposits at floating rates linked to the EB.
Thus the underlying theme is to ensure changes transmit in a transparent manner
without any cross-subsidisation and discrimination between old and new loans
Steps already taken by the RBI to improve transmission
• Mandating External benchmark based lending- Was reco by the RBI Internal
Study Group headed by Janak Raj
• Using long tenor repo, of 1, 3 year, at the existing repo rate, to decrease cost of
funds and increase share of repo in banks' funds. Currently only 10%
• Using Operation Twist to manage gsec yields, so that corporate bond demand
goes up
External Benchmark based Lending
RBI made linking of floating loan rates to retail customers and MSMEs, to an external
benchmark, like the repo rate.
4 EBs from which banks can choose:
• Repo rate
• 3 month treasury bill yield
• 6 month treasury bill yield

11
 • Any other benchmark interest rate published by Financial Benchmarks India Pvt
Ltd, eg MIBOR, MIFOR
Prudential guidelines
• Adoption of multiple benchmarks by the same bank is not allowed within a loan
category
• Banks are free to decide on the spread over the EB, credit risk premium can
change only when the borrower's credit assessment undergoes a substantial
change
• Other components of spread, like operating costs could be altered once in 3 years
• The interest rates under EB shall be reset at least once in 3 months
• Existing loans linked to MCLR, base rate or BPLR would continue till repayment or
renewal
• For floating loans eligible for pre-payment without prepay charges will be eligible to
switch over to EB without any charges
The deeper concern about EB is who should bear the interest rate risk, the borrower,
depositor or bank? Retail depositors and borrowers can't and banks should have the
ability. Bulk depositors and borrowers, NBFIs which are less exposed to rate risk can
also be made to share the risk. A combo of rate risk transfer mechanisms through
market products like Collaterised Debt Obligation(CDO) should also be developed.
Why the problem of transmission doesn't arise in developed countries
• Financial system much more developed
• Banks don't bear the burden of lending to everyone as most demands for big
loans are met through corporate bond market
• Depositors are not in the habit of getting a fixed deposit rate and a variable loan
rate
• In India the depositors are far more risk averse(Link the Friedman Savage
hypothesis) and hence unwilling to invest in corporate bonds
NBFC Anchor rate
RBI is considering an anchoring in NBFCs to bring more transparency in their lending
At present there is no anchor rate for NBFCs that is linked to the lending rate of a
particular loan. Eg banks have MCLR as the anchor rate and all the loans are linked to
this.
Spread and Borrowing Costs
• The spread(markup of WALR over repo) between repo and WALR is at its peak
since data is available from 2012.
• The markup in October, 2019 was as high as 5.25%

12
 • This also affects transmission as despite rate reductions of 135 bps by RBI, there
was effect only in the short term money market and wholesale loan markets, with
retail consumers getting very little benefit. Despite the 135 bps rate cut between
Dec 2018 and Oct 2019, the WALR of scheduled commercial banks actually
increased by 5 bps.
• A primary reason for this is the uncertainty surrounding the financial system,
making banks reluctant to pass on benefits to consumers. Several incidents like
IL&FS, DHFL, PMC
Decline in Savings Rate in India(Data taken from ES. So authentic)
After a peak of 37% of GDP in 2007-08, it reduced consistently and is now at around
30% of GDP.
This is primarily due to decline in household savings, as shown by National Account
stats.
Note that households include both households as well as non-corporate business
as well as MSME
Savings and Investment- Patnaik and Pandey, NIPFP
Trends in savings
• Started from less than 10% of GDP in 1951.
• Increased to around 20% by 1980 and around 25% by 1991.
• From 29% in 2003, peaked to 38% in 2007-08 and then fell sharply
• After recovering a bit in 2017-18, is currently at around 30%
• Greatest share of household at around 17%, then corporate sector at around
11%, then public sector at around 2%
• In household savings, physical savings around 60%
• In financial savings, deposits constitute the largest share but is declining and
is currently around 40% and the share of pension and PF increasing. Insurance
penetration is very low. Use this to show the problem in infra finance
• Household savings rose to 21%, very sharply, during COVID, up from 10% in
March 2020(last year, corporate savings had risen and hh savings had fallen a
bit and so was around 10%. Authentic, as per RBI)
◦ The hh savings have fallen to 8% in 2021.
Reasons for the decline
• The financial crisis in 2007-08, eroded wealth in the financial markets
• High inflation led to erosion of the value of savings and hence prompted people to
withdraw, especially in financial savings
Trend of GFCF
• Has broadly followed the trend of savings(just reduce 1-2 % from savings)
• Sharp jump from 26% of GDP in 2003 to 36% in 2007-08(authentic)
• Currently is 26.9%

13
• The decline in Hh GFCF is led by decline in investment in real estate
RBI Household Finance Committee Report, 2017 highlighted thatdominance of
physical savings, like gold and real estate and consumer durables, is a worrying
sign as it reduces the funds for investment
Lessons from Investment-Saving Slowdown from the Economic Survey
The above data is authentic.
Such sharp swings in I and S have not occurred post 1947, and India was an
exception even in the world

• Decline in savings more than investment

• Private decline more than public in investment while public decline more than
pvt in savings(natural as public had to spend more, so its I fell less. Due to fiscal
deficits, its S fell more)
• In pvt, hh led sharp decline in savings even though they did not contribute to the
2007 boom in either savings or investment.
• Sharp fall in pvt corporate investment also
• Thus essentially pvt corporate investment and govt/hh savings are
responsible for the sharp decline
• Within the hh savings, decline heavy in physical assets.
Analysis from the ES
Question about what should India prioritise? Raise I through infra, make in India,
EODB or incentivise savings through financial market reforms
• Rodrik argues that I should be prioritised as growth episodes have been
caused by I booms. Nations with positive saving transitions do not necessarily
experience high growth. Rather, high growth automatically leads to high S. This
was supported by Minsky.
Recovery for India
• India's I slowdown is a balance-sheet induced slowdown(Twin BS problem).
These slowdowns are much more difficult to reverse

14
 • As shown above, India must focus on reviving investment. Mobilising savings
through unearthing black money, converting gold to financial savings, are important
but not as important as reviving investment. In any case, hh financial savings are
rising and are moving towards market instruments like securities, and
demonetisation helped in it
• India's slowdown lacks automatic bounce back of investment, hence the
deeper the slowdown, the slower and shallower the recovery
• Need to urgently step up public investment, like the National Infrastructure
Pipeline
• Create a conducive environment for MSMEs to grow
• Thus revive the animal spirits.
Tie this with the need for banking reforms, monetary policy transmission, 4Rs of
Banking reforms,
Importance of high investment, saving and exports
The Economic Survey points out, using the evidence of the East Asian economies, that
this virtuous cycle is key to growth. All these nations saw very rapid rise in I, X and S.
Sandri(2014) shows that across all global growth spurts, productivity rise has been
combined with a rapidly rising I and an even faster S. As Sandri(2014) and Gourinchas
and Jeanne(2013) point out, as an answer to the Feldstein-Horioka puzzle, that as
I is risky, S has to rise more to achieve a certain I level, allowing for accumulation
ofprecautionary savings
Chinese experience also shows that for the effect of I on jobs, what matters is
whether I enhances productivity or not. Eg Lin(2011) shows that the coming of
computers, while replacing some white collar jobs, have also created labour
intensive jobs like assembling computers
Conduct of Monetary Policy in a globalised environment
Challenge of managing the impossible trinity- An independent monetary policy is
incompatible with a fixed exchange rate and an open capital account. Growing
spillovers fro actions of other central banks. Capital flow Management(CFM)
measures have gained prominence after the crisis, irrespective of the exchange rate
regime, thus collapsing the trilemma into a dilemma-Independent MP with relatively
stable exchange rate is possible only if capital account is managed.
Effect of Quantitative Easing
• Hardening of global commodity prices and worsening CAD and inflation
• Increased capital flows to domestic economies leading to appreciation and
intolerable rise in asset prices
Reverse effects due to taper talks

15
Indian monetary policy in the face of external volatility
India used a combo of exchange rate flexibility, capital controls, monetary
measures, macro prudential tools and reserves.
Since 2002-03, India faced 4 broad phases of volatile capital movements, each
requiring different responses.
• 2003-07- Capital inflows with growth acting as a pull. This created concerns about
competitiveness due to appreciation and also asset price bubbles.
• 2008- Cap outflows due to the crisis, necessitated high monetary easing
• 2009-13- Cap inflows due to QE. Helped finance large CAD.
• 2013+- Outflows due to taper talk
Reco
• Build a sterilisation reserve out of its portfolio of gsec
• Have a standing deposit facility which will give it unlimited sterilisation
capability
◦ It is a remunerated facility that will not require the provision of collateral for
liquidity absorption. RBI uses gsec as collateral when banks lend to the RBI
when they have surplus funds, like post demonetisation.
◦ So by removing the requirement of collateral, RBI can suck as much liquidity as
required
◦ Has been approved by the govt, by amending the RBI Act. Will allow RBI to
set floor rates in the interbank markets in surplus liquidity conditions
◦ Can be used in the pandemic to absorb excess liquidity
• Have adequate forex reserves
• Increase depth of financial markets

Coordination between fiscal and monetary policy and management of debt and
macro prudential policy

16
17
The management of debt must be focused on long term and not on the annual
bond sales targets of the Finance ministry
Management of public debt raises issues of conflict of interest. Eg the RBI may be
incentivised to issue bonds at high price, but this is in conflict with its role of managing
inflation. This was highlighted by RBI'S Jahangir Aziz Working Group and the M Govinda
Rao Working Group
Independent Debt Management Agency

18
19
IDMA will also reduce the creditworthiness of govt as the bonds will not automatically
be bought by the Central Bank if the market does not respond. This will raise the credit
cost for the govt and also the cost of capital.

Inflation
Trends in inflation
• Headline CPI inflation declining continuously for the past 5 years but rose in 2019,
crossing 7.35%, mainly due to food prices
• Was 3.4% in 2018-19 from 6% in 2014-15

20
 • WPI in 2018-19 was 4% and has been fluctuating
• Since 1970-2009, avg inflation 7%

Drivers of inflation
• In CPI-C, goods inflation accounts for 77% and services for 23%.
• In 2018-19, Miscellaneous and Housing were the main drivers. Then fuel and
light
• In 2019-20, most imp driver was food
• Services inflation has been higher than goods inflation and the gap between
the 2 is growing. (Housing is under services. Transport and comm, edu, health
under both.)
• Services also contributing more to the inflation, much more than its weight
• Inflation in health is increasing impact particularly in rural areas given supply
constraints.
Inflation of Plate of Food(ES)
Argues that affordability of a vegetarian thali became 29% more affordable between
2006-20 and a non-veg, by 18%
Changing Inflation Dynamics(Ravindra Dholakia)
Inflation dynamics crucial in an inflation targeting regime.
• Argue that the dynamics change, even in relatively short periods
• Show evidence of significant reduction in inflation persistence, which is sign of
anchoring of expectations. Hence any shock that might hit core inflation will
die down sooner
Change in Inflation dynamics-ES
It is believed that high food-fuel inflation persists as it has effect on household
inflationary expectations and then this feeds into core inflation and prolongs effect on
headline, and hence this phenomenon should lead to divergence of core and headline
inflation. This is called secondary effect of fuel-food inflation. If these are strong,
then monetary policy will need to be tighter if there is food-fuel inflation
But the ES finds evidence of very weak secondary effects between 2012-19 as
there is convergence of core and headline. Implications
• MP need not become tighter in face of short term, transitory price shocks in non-
core elements, but this has to be balanced as food-fuel large part of consumption
basket and demand side also important for this inflation.
◦ This is why RBI has reduced rates by 135 bps when growth was slowing
down and inflation was low, but did not raise rates even when CPI reached
7.35%
Why change in dynamics

21
 • Declining trend of food inflation
• Inflation expectations declining due to success of inflation targeting in
anchoring expectations, and also because hh expectations move closely with food
inflation
NHB RESIDEX
It is a Housing Price Index developed by NHB as a broad measure of residential property
prices within a area. Currently published for 50 cities on a quarterly basis using
2012-13 as base
Efforts to Contain inflation
• Advisories to states to take action against hoarding and black marketing,
especially for commodities in short supply.
• Effective enforcement of the Essential Commodities Act, 1955 and the Prevention
of Black Marketing an Maintenance of Supplies of Essential Commodities Act.
• MSP for incentivising production.
• Prise Stabilisation Fund for procurement of agri-horticultural commodities for
release to maintain prices
Divergence between CPI and WPI
In the past 2 years, while CPI has remained low, except for a brief period in 2019 when
CPI rose due to food-fuel inflation. But WPI has been falling, faster than the rates at
which the RBI has reduced lending rates.Hence real rates have remained high and
have dented investment. Further, as WPI reflects the pricing power of the producers,
falling WPI reduces their profitability and hence further dents investment

22
The divergence further strengthened in October-Dec 2020, mainly due to supply
side bottlenecks and large margins being charged to consumers
Case against inflation targeting(Pulapre balakrishnan)
Administered interest rate changes through monetary policy can impact inflation
through 2 ways
• Affecting output
• Anchoring expectations
The ability of the RBI to anchor expectations in India is weak as Indian inflation is
driven primarily through food inflation, over which the RBI has no control through its
monetary policy, at least in the medium term.
Food price inflation is affected by factors beyond RBI's control
• Infra
• Monsoon
• MSP
RBI can influence inflation by reducing output, but then this shows that a single
minded focus on inflation is harmful.
But as the ES and Dholakia show that inflation anchoring is working, there is a
case for targeting
Theoretical challenges and Evaluation of FIT(Balakrishnan and Parameswaran)
While RBI based FIT on NAIRU and NKPC, there are other ways to model inflation
• Structuralist approach which interprets inflation as the result of relative price
adjustment within the economy and changes in price of imported inputs.
•

•
◦ They find that the this model better explains inflation in India, as corroborated
by others like Hatekar et al.
◦ Hence the output gap is not a significant determinant of inflation in India
contrary to the NKPC model assumption
◦ hence raising rates to lower inflation may lead to loss of output and may not
lower inflation, as output gap is not what is leading to inflation
• They argue that the lower inflation since 2016 is not due to FIT but due to lower oil
price and weaker relative price shifts. Eg growth low after 2016, hence low pressure
on food prices and hence low relative price adjustments

23
Eichengreen, Gupta and Choudhary on FIT
They find that contrary to conventional belief that RBI should focus on core inflation and
look through transient food-fuel inflation, food inflation actually affects expectations
and hence core inflation. So RBI cannot ignore that.
They also find evidence that inflation has become more anchored. Also, increases in
actual inflation do less to raise expectations showing improved anti-inflation
credibility.
They also find that RBI has not become more hawkish following shift to FIT
Gurbachan Singh on FIT and Capital Flows
See important suggestions
Is RBI's successfully targeting inflation a cause for India's slowdown?
Some economists argue that given the Flexible inflation targeting framework, RBI may
have a propensity for keeping inflation below 4%. This low inflation hurts the
nominal growth rate as real growth determined by structural factors. Thus with low
nominal growth, the tax revenues of the govt falls, leading to low public spending,
impacting growth
Also, as wage increases are pegged to inflation, they don't increase and hence
demand low
But as the Urijit Patel Committee outline, there are plenty of negative effects of
inflation and hence they must be kept in a moderate range, which FIT gives the RBI
flexibility to do
Demand Led growth slowdown and inflation targeting (Ashima Goyal)
The effect of aggregate demand on inflation is limited due to the output gap.Hence as
demand has weak impact on inflation, it is better to target inflation through
expectations.
Argues that post 2011, the inflation targeting was too strict leading to a higher output
sacrifice than required to control inflation. This led to rising expectations as people
expected stimulus to raise growth which would raise inflation.
Further, argues that demand pull, cost push and structural inflation must be
treated differently and the single-minded use of rates to affect inflation is not
enough.
Persistence of Core Inflation
In Jan 2021, as the headline inflation tempered down to 4%, core was 5.7%.
• Services sector saw most price rise, as prices rose at retail level

24
 • Pranjul Bhandari argues that services inflation difficult to remove, as they are non-
tradeable and hence can't be imported
• Similarly, the rise of inflation even as demand collapsed following covid is puzzling.
But Jayant Verma of MPC argues that this is due to the imperfect market structure
in India-with several markets being oligopolies and the firms having large pricing
power. So as supply fell during COVID, these companies used it to hike prices
Monetary Management and Financial Intermediation
Monetary aggregates
• Reserve Money(M0)- It is mainly driven by Currency in Circulation. In 2018-19,
expansion in MO was primarily due to RBI lending to the Govt through OMO.
• Narrow Money(M1)
• Broad Money(M3) growth has been declining since 2009, but increased marginally
in 2018-19, due to aggregate deposits
• The money multiplier is M3/M0.
• India's Money multiplier(M3/M0) falling since 2016, after increasing since 1980s.
Currently 5.5. This shows that creation of reserve money is not translating
sufficiently into credit, hence liquidity transmission remains impaired

Insurance
Provides a safety net and encourages savings and long term investments. Its
performance assessed based on 2 parameters
• Insurance penetration- % of insurance premium to GDP. Has increased from 2.7
in 2001 to 3.7 in 2017. Much lower than other EMEs like Malaysia, China
• Insurance density- ratio of premium to population- Increased from $11 to $73.
Still only 15% of China
• Both are much higher for life insurance than non-life

RBI
Evolution of Role of Central Banks (Shaktikanta Das)
Modern day central banks have the responsibility of supporting growth by
maintaining price and financial stability.
Role during the Financial crisis
Given the speed of the transmission of the crisis across nations, central banks were at
the forefront of policy response. In the crisis, the AE central banks found that the
traditional measures were inadequate so they resorted to unconventional QE, like
purchase of private and public assets, lending to financial institutions, negative
policy rates.
The Basel Committee argued that the weaknesses that led to the crisis were
25
 • Excessive build up of on and off balance sheet leverage
• Gradual erosion in the level and quality of capital base
• Insufficient liquidity buffers
• Pro-cyclical deleveraging process
• Interconnectedness of systemic institutions

So the global regulatory response was the Basel III focused on increasing the
quality of capital, constraining bank leverage, improving liquidity
India's implementation approach has been more stringent in terms of schedule and
requirements.
Lessons
• Central banks' role is important both during normal and crisis time
• Communication by central banks key. Eg Fed's communication in Dec 2008
provided clear forward guidance to the market. Similarly, RBI has 3 stances of
neutral, accommodative or calibrated tightening.
• Coordination of policies at global and domestic level is key

The Changing Contours of Monetary Policy in India(Deepak Mohanty)

Post the amendment in the RBI Act, 1934 in 2016, the goal of monetary policy is price
stability bearing in mind the objective of supporting growth. RBI also has the
crucial function of financial stability
Price stability means a low and stable inflation. The threshold of tolerable inflation is
the point beyond which inflation itself becomes inimical to growth. So the MP
framework in 2016 sets it at 4+-2. But the target level for inflation(4%) should be lower
than the threshold(6%) as there are lags in effect of monetary policy.
India has been a low inflation country among EMEs. Since 1970-71 to 2009, the
average inflation was about 7%. Inflation became very high at the end of the
2000s.
The financial crisis showed that high growth and low inflation are not sufficient for
financial stability. Hence it should be an active goal of the MP.
India rightly recognised it as an explicit objective much before the crisis.
Monetary Policy Framework
Has been a continuously evolving system in line with the development of financial
markets, and the degree of global integration
• Post independence, exchange rate anchor set by the proportional reserve
system under which at least 40% of the note issue was to be backed by gold
and sterling. Then the minimum reserve system in 1957 under which a minimum
backing only.

26
 • Then credit aggregates became the nominal anchor with CRR and bank rate as
instruments
• During 1971-85, the monetisation of fiscal deficit was dominant, leading to high
inflation and necessitating high CRR to counter it.
◦ Financial repression in the form of interest rate prescriptions, directed
credit, statutory pre-emptions crowded out the private sector
◦ So the Sukhamoy Chakravorty Committee in 1985 reco a new MP
framework with monetary targeting assuming stable demand for money
• 1980s- Monetary targeting framework with feedback. Broad Money was used as
target. Proved increasingly inadequate. Abandoned in 1997-98.
◦ But the above did not work as the RBI had no control over credit to the Centre
which formed the bulk of the reserve money creation.
◦ Liberalisation raised the foreign inflows, raising the ratio of net foreign assets
to reserve money, rendering the control of monetary aggregates more
difficult.
◦ Due to the above the stability of the money demand function came under
question.
◦ So RBI switched to the multiple indicator approach in 1998-99
• Multiple Indicator Approach- Broad money continued as an information variable.
But greater emphasis on rate channels.
◦ A great number of indicators like rates in different segments of the financial
markets, indicators of currency, credit, fiscal position etc were juxtaposed
with output data for drawing implications for monetary policy formulation.
◦ Thus MP more broad based and flexible.
◦ The framework continued to evolve with forward looking indicators like
industrial outlook surveys, capacity utilisation surveys, inflation exp surveys.
◦ It also gave projections of M3 as an info variable so that resource balance in the
economy was consistent with the credit needs.
◦ Stagflation of the post recession period led to adoption of MPC with FIT
• Post MPC framework- Setting repo rate based on an assessment of the macro
situation and modulation of the liquidity conditions to anchor money market
rates around repo.
◦ Repo changes transmit through the entire financial system through the money
market, influencing AD.
◦ Once the repo is announced, the operating target WACR is attempted to be
anchored around the repo through liquidity management
◦ For instruments of monetary policy see Agencies

Implementation of Monetary policy

• Operating procedure is defined as day-to-day management of monetary
conditions. It involves

27
 ◦ Defining an operating target(WACR)
◦ Setting a policy rate(repo) which could influence the operating target
◦ New MSF was instituted under which SCBs can borrow additional amt of
overnight money from RBI by dipping into their SLR portfolio upto a limit at a
penal rate of interest, providing a safety valve against unanticipated liquidity
shocks to the system
◦ A revised corridor was defined, with the MSF and the reverse repo defining
the corridor for WACR.
◦ Conducting liquidity operations to keep the op target stable and within
corridor
◦ Signalling of policy intentions
◦

• Advantages
◦ Improved transmission
◦ Explicit announcement of the operating target makes market clear about the
policy impact
◦ A single policy rate removes confusion
◦ Improves accuracy of signalling stance
◦ MSF safety valve
◦ Corridor reduce uncertainty and helps in better anchoring of the WACR close to
the repo
The interest rate mode of transmission works better in deficit liquidity mode, so the RBI
has been maintaining systemic liquidity in deficit mode.
Response to the Financial Crisis
• RBI used multiple measures

28
 ◦ Sharply reduced rates to augment liquidity. Repo was reduced 425 bps
between Oct 2008 and April 2009.
◦ Primary liquidity made available to banks was over 10% of GDP.
◦ As growth recovered in 2009 and inflation spiked, the accommodative stance
was changed
Lessons
• MP solely aimed at fine tuning short term objectives can pose risk. Excess
short term perspective leads to build up of vulnerabilities like happened pre crisis
in AEs
• Changed how central banks should proceed to achieve their macro stabilisation
objectives. Financial stability as important as price stability
◦ Brought into question the practicality of Tinbergen's rule of
instruments=targets, as rates affect stability as well as inflation and stability
can affect transmission
• The crisis highlighted the inadequacy of monetary policy instruments, forcing
banks to resort to unconventional measures. Thus there is a need to broaden
the toolkit of the central bank
• Though financial frictions play an important part in business cycles, they were
not an explicit part of the models of central banks. This needs to be actively
tackled
• It was realised that central banks could be more effective if they also have the
powers of micro-prudential regulation and supervision of banks
How does stagflation impact the effectiveness of monetary policy? Eg 2012-14
The response to the components of stagflation are diametrically opposed in isolation
and hence the difficulty that targeting one can exacerbate the other
• Inflation dynamics have changed in India and hence in light of food-fuel
inflation driving high inflation, RBI can still have accommodative MP as argued
by ES
• Moreover, Indian stagflation is not due to demand pull, but due to stagnation in
demand and excess capacity. So raising demand to boost growth will not
increase inflation as there is still excess capacity
• In any case, RBI can't influence food driven inflation, and so it should focus on
boosting demand and investment through its policies
Untitled Attachment

Capital Account Convertibility

29
Is India ready for full capital account convertibility- G Padmanabhan)
Current Account
Article 8 of the IMF, accepted by India in 1994, states that 'no member, without the
approval of the Fund, shall impose restrictions on the making of payments and transfers
for current international transaction'. India is also an active member of the WTO. Hence
the view on free trade in goods and services, or current account convertibility,
which means freedom to convert domestic currency into foreign currency and vice
versa for trade in goods and invisibles(services, transfers, or income from
investment).
Capital Account
Cap Account Con refers to freedom to convert currencies for capital inflows and
outflows. It is not just currency convertibility freedom, but also freedom to invest
in foreign financial assets and for non-residents to invest in domestic assets.
CAC background
• While current conv was in IMF mandate since 1945, CAC entered public policy
debates only in the 90s. This was because throughout the Bretton Woods System,
which was a fixed exchange rate system, full CAC was the left out part of the
impossible trinity. Mundell also stated in his paper that the high mobility of
capital is an overstatement
• The 1990s saw significant capital flows and so advocacy of CAC started
gaining momentum
Capital is diverse. Some may be used to set up a company or some may be just to
book profits in anticipation of policy change. Thus capital flows can be classified into 2
broad categories
• Those that imply long term investment and don't have incentive to exit at the
slightest disturbance
• Those that are motivated by disinterested profit, thus buying at every low and
selling at every high.
A full cap account convertibility will open the door to both without any
discrimination. Article 6 of IMF allows nations to impose controlsas are
necessaryto regulate international capital movements.
Capital Account convertibility(CAC) and internationalisation of currency
Intrinsic relation between the 2. An international currency is one that is held beyond
the borders of the issuing country not merely for transactions with the residents
of the issuer but also non-residents. An intl currency should act as a store of value,
medium of exchange and unit of account for both residents and non-residents. Thus it
can be used for

30
 • Trade and financial transaction invoicing
• Official reserves
• Vehicle currency for forex intervention
• Anchor currency for pegging

Thus necessary features of an international currency

• Freely convertible with the ability to attract significant volumes of intl trade
• Greater degree of stability in its exchange rate determined by the market
• Deep and liquid market with a wide range of hedging products
• Efficient banking system with world class market infra.

Some benefits of CAC

• The most obvious argument used by proponents was that all developed nations
have full CAC so it is natural for developing nations also on their path of
development
• Free global capital flows bring more efficient allocation of global savings
• From developing nations' POV, free access to global capital markets increases
available investible resources which augments domestic savings, reduces
marginal cost of capital and aids growth
• As per Stanley Fischer, open capital accounts support the multilateral trading
systems by broadening the channels through which nations can finance trade
and investment
• Facilitate portfolio diversification by investors
• As the feasibility of CAC rests on sound macro policy, it imposes a commitment
on the nation for better macro management
• Onshore rupee market development- There has been offshore development like
in Hong Kong, Dubai. But trading of the INR is still far lower than other currencies

Above in paper by Ashima Goyal. KA is capital account. The below also based on
paper by Goyal. Answer for 2019 question and theoretical reasons for control on
CAC

31
Harms of CAC

32
The argument that CAC leads to better allocation of resources has been questioned on
the grounds that capital movements are guided by many factors like tax policies.
Also open cap account is not sufficient for attracting capital into a nation and capital
flows, without appropriate institutional framework does not lead to growth. As
Bhagwati remarks, China, Japan, Western Europe all achieved significant
prosperity without CAC. He also argues that most of the claims of benefits of CAC
can be achieved by direct equity investment, encouraged through other policies
The harms of CAC can be summed up in 2 words- Currency Crisis as the currency
market capture the dynamics of cross border asset transactions and also is
treated as an asset with its own dynamics.
• Cap flows are sensitive to macro conditions. So any deterioration in it may cause
reversal of flows which can further the deterioration
• Will reduce the policy space for the country as capital extremely sensitive
• As cap flows result from trade in financial assets, they are prone to volatilities
from info asymmetry, herd behaviour etc. which may be far from the underlying
economic conditions. Keynes- Casino
• As a consequence of impossible trinity, to retain independence in MP, CAC will
lead to losing control over exchange rate, which can lead to large departures in
the rate away from eqm value.
Views of Bretton Woods
IMF, which was a strong votary of CAC, changed its view post 2008, recognising
that under some circumstances, capital management can be an important part of
the policy toolkit. It also recognises that capital flows carry risk and liberalisation of
capital flows before a nation reaches a certain level of financial and institutional
development can accentuate the risks.
The WB has also advocated the use of capital control measures to mitigate
financial crisis. This is what Malaysia did to overcome the 1997 Asian crisis.
Iceland did this in 2008.
Note that capital control imposition can have significant negative spillovers as
capital flight may occur in similar countries for fear of capital controls.
Indian approach
During the 25 years of FERA, there were both capital and current account
restrictions. Starting the 1991 reforms, several reforms in this area too. Most
important was a movement to a managed floating rate system. Then India declared
compliance with Article 8 of IMF removing restrictions on current account.
Then FEMA was enacted,whichdistinguished between cap and current account.
This overarching framework has remained, with some important operating procedure
changes, progressively liberalising cap account

33
 • Virtually no restriction on FDI. There are some restrictions on the extent of entry
in some sectors, which is also being liberalised. Anyway, the restrictions are
motivated by social or strategic concerns
◦ Some operational restrictions on FDI as the instrument of investment is mostly
equity and that these instruments have to be bought and sold at fair value to
prevent an instrument of FDI to be a camouflage for debt. But as the need
for more flexibility in valuation, like in startups is being felt, India is taking the
required steps.
◦ As Bhagwati argued, if growth and welfare are the objectives, then FDI is
best as it. Even though the FDI flows have immense scope for increasing, the
Cap restrictions have not been the hindrance
• The regime of FPI is also fairly liberal. In equity, virtually unlimited access. The
access to both sovereign and corporate debt is wide enough. Though there are
aggregate limits on FPI in sovereign and corporate debt, these limits are
progressively being relaxed.
◦ Usually FPIs are viewed as highly volatile. But Padmanabhan argues that this
view is exaggerated.
▪ FPI flows mostly have a stable core, even though the periphery may be
volatile
• Foreign currency denominated debt- Most imp component of capital flows. Till
now there has not been any sovereign market borrowing in external currency. The
plan announced in the 2019-20 budget was shelved. Borrowing in foreign currency
is attractive for corporates but it can lead to financial instability(See problems of
External borrowing in Economy notes). So India has broadly these restrictions
◦ Restriction on short term borrowing
◦ Loosely monitored overall aggregate limit on foreign currency liability
◦ A discriminatiry regime channeling flow into priority sectors
◦ A cap on overall cost of borrowing
• Corporate foreign debt is often unhedged to minimise cost. But it leads to
volatility. A central authority controlling how a private enterprise should manage its
risk is regressive. Moreover, there is lack of a deep enough market to support
hedging. So we can't mandate hedging. What we need is to create incentives for
it and develop appropriate hedging instruments.
• Borrowing abroad in own currency is very attractive and riskfree. There has been
growing interest in rupee denominated bonds and this needs to be encouraged
Is India ready
A freely convertible currency needs sound, credible and time consistent macro
policy, which translates into fiscal prudence and low inflation. But both these have
their own dynamics in a nation like India. Fiscal prudence is tempered by social

34
expenditure, while inflation depends on fuel and food prices, both largely out of
policy controls
Also there is the threat of contagion of disturbance in global financial markets, which
India's financial system is not ready to deal with, as shown by the NPA crisis, NBFC
crisis
Thus there isno denying that India has benefited well from limited controls on
capital account.But it is also true thatas India becomes more integrated with the
global markets, capital account will have to be liberalised more. Resisting it may
lead to malpractices like under-invoicing to exploit current account, transfer
pricing.Keeping any restriction for too long is counterproductive as people find a
way to bypass it
So India needs tocontinue moving towards CAC while strengthening its
fundamentals, which will determine the pace of liberalisation.
Recommendations of Tarapore committee- can use this in reasons why sovereign
external commercial borrowing is also a dicey step and has preconditions
• First go for fiscal consolidation, requiring centre to have a revenue surplus, which
was to be largely used for repayment of liabilities of borrowing
The Twin Balance Sheet Problem
Over leveraged companies and bad-loan-encumbered banks.
Normally, NPAs soar when there is an economic crisis which leads to bankruptcies.
In this context, India's NPA problem seems odd as India had a robust growth rate.
The reason suddenly the NPA problem was realised was because RBI forced banks to
conduct the Asset Quality Review.
Another striking feature of the problem is that most of the NPAs in the PSBs
Typically countries with a TBS problem follow a standard path
• Corporations over-expand during a boom leaving them with obligations they can't
pay
• So they default leaving banks with a bad BS
• This cripples growth as the bad firms are reluctant to invest while those that can
are unable to as banks reluctant to lend.
Causes
• Origins in the 2000s during which time India was among the fastest growing
economies.
• In this boom, firms launched projects worth lakhs or crores particularly in infra,
setting off the biggest investment boom in India's history, making the
investment GDP ratio soar from 26% in 2003 to 36% in 2008(authentic
figure)

35
 • This inv was financed by a credit boom as well as capital inflow boom.
• All this led to a huge debt buildup in corporations. But then costs of the projects
exceeded the expectations. Problems like land acquisitions, environmental
clearances stalled projects. Then the financial crisis hit.
• To add to this, RBI raised interest rates to combat inflation.
• Firms that had borrowed abroad were also hit as the rupee depreciated sharply
following QE by the Fed. This raised the costs of the debt.
• Thus higher costs of operations and finance and lower revenue.
• By 2015, 40% of debt was in IC1 companies, i..e those with interest coverage
ratio less than 1, implying that they did not earn enough to even pay their
interest obligations
• Thus India also followed the standard TBS route except that it was not a
recession that created the NPAs, rather structural problems like project
completion
• But what separates India is the consequence of TBS. Despite the crisis of this
magnitude, the impact on growth was quite modest.
• Instead India had decent growth, led by domestic AD, as exports low. Thus as per
ES, this was BS Syndrome with Indian Characteristics.
• Causes of this
◦ The unusual structure of the banking system with large govt presence,
which maintained the faith of the people in the banking system despite large
NPAs and prevented bank runs.
◦ The boom of 2000s had relaxed India's supply constraints immensely
through rapid infra development, thus creating ample room for growth even
without further infra development.
◦ Indian creditors gave more time to debtors by evergreening loans, thus
preventing bankruptcies which would have pulled down growth, even though
this would have been beneficial in the long run
Is this strategy of growth through over-leveraged firms sustainable?
For this to be sustainable, one of two scenarios needs to materialise
• Phoenix- Growth would eventually heal the BS of stressed companies- Not
working as growth slowing down and companies profits lowering. This problem is
very severe in the power sector.
• Containment Scenario- Even if the individual accounts don't improve, India's
growth would lead to the NPAs being miniscule in % terms- Not happening as the
stress is spreading, Earlier, it was just some infra companies, large in size. But
now spreading to small companies and MSMEs. Has hit telecom sector badly. Also,
the problem is affecting growth as investment has slowed down considerably.
Pvt inv which was growing rapidly in the boom, has actually contracted
recently.

36
Also, the health of the PSBs has worsened. Banks all over the world, strive for Return
on Assets of at least 1.5%. But in India, ROA has turned negative,which has led to
curtailed credit growth.
As banks have also raised margins on loans, this means that good borrowers are
subsidising the bad borrowers. This has led the good borrowers to seek finance from
elsewhere, leading to disintermediation from the banking system.
Way Forward
• 4 R's- Reform, Recognition, Restructuring and Recapitalisation
◦ Reform is required to prevent moral hazard as cleaned up balance sheets
could lead banks to do the same mistakes as the past.
• RBI has encouraged the establishment of the Asset Restructuring Companies to
buy bad loans from the banks and deploy specialist tools to restructure and
recover corporate debt
◦ But not much success as they have not been able to recover loans and so they
offer low prices to banks which they don't accept
• IBC
• Shashakt
• Sustainable Structuring of Stressed Assets- Creditors could provide debt reduction
of 50% to restore the financial viability of the debtors. But only one small case
resolved under it
• Reasons for limited success till now
◦ taking decisions in the CoC proving difficult as different banks have different
levels of credit exposure
◦ The capitalisation of banks by the govt leads to principal agent problem as the
one with the financial responsibility, the govt, is different from the decision
maker, the bank
Public Sector Asset Rehabilitation Agency(PARA)
The issue for the resolution problem is not whether the govt should take up any new
liability but what steps should be taken to min the existing liability. This is what PARA
aims to do
Working
• Would purchase specified loans and then work them out by either converting
debt to equity and selling the stakes in auctions or by granting debt reduction
• Once the loans are off the books of PSBs the govt should recapitalise them
• PARA would be funded by the govt issuing securities. Though this would
increase govt debt, it will be beneficial in the long run
• Or the private sector could be encouraged to buy equity in PARA
It could eliminate the problems

37
 • It could solve the coordination problem since debts would be centralised in one
agency
• It could have the right incentives as it could be given the explicit mandate to max
recoveries
• It would separate the resolution process from concerns about bank capital.

The Indian Financial Sector- Rakesh Mohan and Partha Ray

Three phases of financial markets in India
• 1950s and 60s- laissez faire but underdeveloped banking
• 70s and 80s- Financial development across India under govt supervision,
accompanied by a great degree of financial repression.
• 1990s+- calibrated liberalisation

1950-90
At independence, the organised banking sector had majorly 3 types of players- The
Imperial Bank of India(later SBI), joint stock banks, both English and Indian and foreign
owned exchange banks.
50-60s had limited access to finance and large number of bank failures, leading to
nationalisation and financial repression- high pre-emption of banks' investible
resources, which led to crowding out, subject to administered interest rates and
quantitative ceilings on sectoral credit.
Besides commercial banks, 4 other types of financial institutions- DFIs, coop banks,
RRBs and post offices.
DFIs were established in the 1950s as there was no efficient capital market. These
were mostly established with the help of external aid agencies. Fund sources of
DFIs
• Domestic bond market
• External agencies
• Refinance window of the RBI
• Govt budgetary provisions
By 90s, as refinance and budgetary support dried up along with NPAs, DFIs were
deemed unviable. This led to IDBI and ICICI being converted into commercial
banks
Coop banks mostly operate in a single state under the state-specific RCS and the
overall supervision of the RBI, leading to dual supervision and problems like local
political interference and other governance issues
RRBs were established in 1975 as local level banks in different states, co-owned by
centre and states and by sponsoring PSB. Unlike coop banks, RRBs structured as

38
commercial banks.
See Paper for more.
Untitled Attachment

39
Agriculture
Land Reforms PYQ
2019
1. 'The progress in the implementation of tenancy and revenue reforms during the
first three decades after Independence was not satisfactory.' Do you agree? Do you
think that the advent of the Green Revolution made such land reforms policy
redundant?
2018
1. How would you justify the policy of land reforms in the light of the farm size-
productivity debate in India?
2017
1. Would you advocate that the income of rich farmers should be taxed in India? Give
reasons
2014
1. Why are land reforms still not complete in India? What are the obstacles in its way?
2013
1. What are the components of Land Reforms in India? Has it been completed? If not,
then what are the obstacles?
2009
1. Evaluate the track record of land reforms in India in its various aspects, bringing
out inter-state differences. How would you interpret this record?
2008
1. Examine the role of land reforms on agriculture development in India. What policy
measures can quicken the pace of land reforms?
2000
1. There seems to be an inherent contradiction between ceiling on landholdings, use
of advanced technology and employment in Indian agriculture. Suggest policy
measures so as to achieve these objectives simultaneously.

Other PYQ Agriculture

2019
1. How has the movement of agricultural prices during the post-liberalisation period
been responsible for farmers' distress?

40
 2. Discuss the technological factors relating to GR
3. Do you think fall in public investment in agri adversely affects productivity growth
of this sector?
4. What reforms would you advocate to make the PDS in India more effective?
5. Critically examine the role of WTO on agri exports in India
2018
1. Analyse the salient features of the interest subvention scheme and its implications
on the farm sector
2. Horticulture is now the growth driver of Indian agriculture. Discuss the issue in the
broad context of rural diversification
3. Explain why the use of organic farming should be encouraged in India
4. Do you think the GR had a limited impact on Indian agri?
2017
1. Subsidies are a source of inefficiency and corruption. Do you agree
2. Relative contribution of agriculture to GDP of India has been going down steadily
since Independence. Do you think this highlights a weakness of the economy?
3. What are the merits and demerits of farm loan waivers?
4. Even though India is self-sufficient in the production of foodgrains, Indian
agriculture is faced with some major challenges. Elucidate.
2016
1. Do you agree with the view that an increase in the productivity of agri as a result of
the GR was only short term?
2. Examine the basic feature of the NFSA, 2013
3. Agricultural subsidy is both an economic as well as social issue, hence the govt
finds it difficult to take a decisive decision. Comment
2015
1. What are the different types of agricultural subsidies that are given to the farmers
in India? How can these be rationalised?
2. High MSP induces distortions, some of which ultimately hurt the poor. Examine its
merits and demerits
3. Highlight the basic features of the NFSA. Can it solve the problem of malnutrition in
India?
4. What is your opinion of the view that the economic reforms have largely bypassed
agriculture?
5. Agro-based industries, especially food processing units, can alter the fate of rural
India. Discuss

41
2014
1. Why GR lost its steam and India needs yet another GR or Evergreen Revolution?
Discuss
2. What are the factors responsible for the large number of farmer suicides in
relatively richer Indian states?
3. Subsidy is a contentious issue and roadblock in the WTO. Examine India's stand for
protecting its farmers' interests
2013
1. Do you agree that focused and target-oriented tech intervention under National
Food Security Mission have made significant impact since its inceptions?
2012
1. Distinguish between cooperative, contractual and corporate farming. Which of
these is best suited for India and why?
2. How was the jute industry affected after partition? What remedial measures were
taken to arrest its decline?
3. Discuss the factors responsible for the slow growth of agri in recent years. What
steps ought to be taken for sustained growth in this sector?
4. Discuss the salient features of TRIPS and Indian positions on i) Geographical
Indicators and ii) plant breeders' rights
2011
1. India urgently needs another Green Rev by infusing modern tech like ICT and
Space Tech and Strategic Management Techniques to come up with demand side
measures resulting in persistent food inflation in the economy. Do you agree?
2. Analyse the recent trend of capital formation in agri. Has it been responsible for the
sluggish growth rate in agriculture?
2010
1. Declining public expenditure in agriculture is largely responsible for deceleration of
growth in this sector. Critically examine
2. Assess the degree of success of the Targeted PDS in meeting its objectives
2009
1. The success of Green Rev shows the importance of the State in agrarian
transformation. Comment
2. What do you think has been the impact of the TPDS on food security for the rural
poor?
2008

42
 1. GR although had helped Indian economy to have self sufficiency in food grain
production it did not have a widespread impact. As such in the long run food grain
production has suffered and Indian economy needs another dose of GR with a
difference. Critically analyse in light of capital formation in agri and spread of tech
and their implications between 1980-81 and 2001-02
2. Analyse the impact of Agreement on Agriculture in WTO on Indian agriculture
2007
1. Discuss the impact of the WTO on Indian agri
2. Critically evaluate the reasons for fluctuations in agri prices in India. What would be
the components of an optimum agricultural price policy regime for India?
2006
1. Make out a case for subsidies contributing to achievement of growth with social
justice in India
2. Bring out the interrelationship between industry and agriculture and make out a
case for broadening the reform process
2005
1. What would be the constituents of an optimal agri exports strategy for India?
2004
1. Discuss the rationale of govt subsidies to various categories of goods in India. Is
granting subsidies to non-merit goods justified?
2003
1. What is the rationale for reduction of subsidies in a welfare state like India?
2002
1. Is there any need for revamp in the PDS?
2001
1. Distinguish between direct subsidies, cross subsidies and covert subsidies. What
role do the subsidies play in agricultural development of India?
2. Agri sector can still play a vital role in increasing exports
2000
1. Discuss the objectives and measures of stabilisation of agri prices initiated in India.
How far have they succeeded?
1999

43
 1. GR in agri despite its success in the sphere of raising the level of crop production,
cared less about i)distributive justice ii)environmental viability in rural areas
2. The problem of distribution of foodgrains is of unique significance in India.

Land Reforms and Land Tenure System

Semi feudal system at independence, with concentration of ownership.
Often tenants sublet their lands in smaller plots, leading to smaller and smaller
landholdings
• Thus incentive for improving productivity lacking
• High rent extraction
• High inequality and impoverishment
• As cultivation of small lands became unviable, the number of agri labour increased,
pushing down agri wages further.
Thus serious discrepancy in man-land relation among three principal groups in
the agri sector
• Proprietors
• Working cultivators
• Labourers
Thus, following independence, land reforms considered vital. India saw the largest
body of land reform laws passed in any country in such a short period.
Land reforms were in the state list, and still are. But this resulted in a lot of variation
in implementation.
Objectives of land reforms
• To remove impediments to improving agri productivity
• To eliminate exploitation
The plan docs clearly recognised equity and efficiency are related when it comes to
land.
Ghatak and Roy
Measures of land reforms taken after independence were in these categories
• Abolition of intermediary rent collectors(zamindars, so that direct rent payment to
the state. Almost half the land was under Zamindari during Independence)
◦ This has been relatively successful
• Tenancy reforms
◦ Rent regulation
◦ Security of tenure
◦ Ownership rights to tenants.
• Reorganisation of agri through Land ceiling and redistribution

44
 • Consolidation of landholdings- Because of variation in land quality across plots, this
has been difficult to implement.
Reasons for failure
• Resistance by landowners politically
• Registering land under various names to escape ceiling laws
• Shuffling tenants across various plots to deny them incumbency rights necessary
for tenancy rights
• Outright eviction of tenants
• Bureaucratic failure
• Land consolidation reforms also failed due to poor land records.
The Task Force On Agrarian Relations of the PC directly blamed the political will of
the state govts as demonstrated by gaps between laws and implementation
Success
Kerala accounted for 23% of the total number of tenants conferred ownership rights,
while WB accounted for 12%, upto 2000 despite being home to only 9% of the total
population in India.
In land ceiling laws, WB's share of total surplus was 20% of all-India, even though it has
only 3% of India's resources.
Effects on productivity- They argue that it had negative effect on productivity though
significant variation among states. The main driver of this negative effect is the land
ceiling legislation. But in WB, the negative relationship absent.
Effects on Inequality- tenancy reforms increased inequality except in WB, probably
because in anticipation of tenancy reforms, landlords evicted tenants.
On equity and efficiency
They argue, along with Abhijit Bannerjee, that
• Small farms tend to be more productive than large farms- A small farmer uses own
and family labour. Large farmers use hired labour. Hence the difference.
• Owner cultivated land tends to be more productive than those under sharecropping
as sharecroppers lose a major part of their produce and so less incentive to work
hard.
Thus, land reforms good not only for equity but for efficiency too. But the fact that
market is not able to incorporate these efficiencies implies failure of the Coase
theorem and so efficiency and distributional considerations cannot be separated
here as the theorem doesn't apply.
PS Appu

45
Argues that only abolition of intermediaries was successful primarily because of the
support that zamindars gave to the British. The record in the other categories is mixed
and varies by state. The ceiling led to redistribution of less than 2% of the cultivated
area, while tenancy reforms led to less than 4% as landowners found ways to evade.
He argues that political will has disappeared as with the abolition of intermediaries,
superior tenants have become powerful. No serious effort to organise the landless and
the rural poor
Thus, reforms, from a political point of view, have become virtually impossible.
Besley and Burgess
Impact on poverty- Mainly comes from reforms which alter the production relations,
not land distribution. Hence, abolition of intermediaries negatively impacted
poverty but had no impact on productivity. Ceiling ineffective in both. Consolidation
positively affected prod but not poverty, because the powerful landowners cornered the
good parcels of land, in light of patchy land records. Tenancy reforms, which altered
the terms of the contracts, had significantly positive impact on poverty.
Effectiveness depended on implementation. A poorly implemented reform may have
negative impact on prod as it might freeze the land lease market
Tenancy reforms were very well implemented in Bengal as a result of Operation Barga
for tenancy reforms, and this impacted prod well.
Impact on growth- Gain in poverty reduction came at the expense of reduction in PCI
due to tenancy reforms, while consolidation had a positive effect. Thus tenancy points
to equity-efficiency tradeoff.
Impact on wages- Intermediary abolition pushed up agri wages, thus reducing poverty.
Thus, reforms, indirectly benefit landless even if they are not directly benefited.
Impact on inequality- None of the reforms made a dent on inequality, measured by the
Gini coeff

46
 Type of Poverty Wages Growth Producti Inequalit Tradeoff
reform vity y
Abolition
of Reduced Pushed Increases No No
intermed poverty up wages growth. impact tradeoff
iary
Tenancy Reduced Reduces No Tradeoff
Reform poverty growth impact
Failure
mainly
because
lack of
seriousne
Land Ineffectiv Ineffectiv ss in
ceiling e e implemen
tation, as
argued
by
Pranab
Bardhan
Consolid No effect Increases
ation growth

What determines implementation

• Conning and Robinson argue likelihood of reforms increased where inequality high
and where peasants had greater political power.
• Besley and Burgess argue that the ideological leaning of the party in power is also a
major determinant. This is confirmed by Pranab Bardhan and Dilip Mookherjee.
Bannerjee
Size-Productivity

47
 • Scale effects- Tech leads to increasing return while incentive effect leads to
decreasing returns. Large farms also have better access to marketing and credit
facilities. Large farmers also able to capture inputs which are politically dependent,
like subsidies, better. Small farms use family labour while large use hired
labour. Thus incentive effects. The dominance of the decreasing returns, and
hence large lands being less productive, were confirmed by the Farm
Management Studies undertaken in India in the 1950s(Incentive and
ownership effects dominate scale effects)
• Ownership effects-If tenancy uncertain, the tenants would not want to invest.
Thus making tenant owner good.
Should land reform be permanent?
Adv of permanent
• Less likely to be undone than a temp reform as in temp the erstwhile landlords can
use their political clout to once again appropriate all land
• Permanent reduces uncertainty and hence leads to efficiency
Disadv
• It limits the extent of redistribution as permanent puts restriction on selling of
redistributed land. The recipient of redistributed land may be better off by selling
it
• Prevents efficient reallocation of land.
• Makes it very difficult to use land as a collateral
• Permanent imposes the need for a permanent bureaucracy to constantly
monitor enforcement
Should landowners be compensated?
• Compensation can make landowners resist less
• But it makes redistribution weaker as the amount of compensation has to be
ultimately borne by the beneficiaries
• But despite the beneficiaries paying for the compensation, there can still be
productivity gains exceeding the compensation.
Market assisted land reform
The govt gives the landless a grant or a subsidised loan with which they can buy
land. But this does not include targets for redistribution or a time scale. Hence the
effects will be less coordinated in a fiat land reform
It also involves uncertainty about the supply of land. This may raise the price of land
Adv
• It is demand driven so those who want the land the most will buy and those who
were not deriving much benefits will sell. Hence raise efficiency

48
Ramesh Chand, Prasanna, Singh(NCAER)- Farm Size and Productivity
During the initial years of independence, it was argued that the inverse relation
would disappear with tech and modernisation. But even in the 21st century, it has
not happened. In western countries, with tech and economic progress, small farms
have disappeared. But it has not happened in Asia in general.
Avg farm size in India in 1970 was 2.3 hectares and in 2005 was only 1.2. China
continues to have much smaller landholdings than India but much higher
productivity. Like India, China has high concentration of workforce in agri, but this has
not come in the way of improving livelihoods of rural pop.
Thus instead of worrying about size of holdings, it is key to worry about improving
productivity and livelihood of rural economy.
The growth in rural pop is the main reason behind increase in number of landholdings,
and decrease in size.
Reasons for high productivity
• Area under irrigation much higher for marginal landholdings than for large
• Small farms also applied double the fertiliser per ha than large farms.
• More use of HYV seeds and more intense cultivation in small
Based on above and the results from NSSO 59th round, the authors conclude the
inverse size-productivity relationship intact even in the 2000s
But per capita output is low on small landholdings due to small size of per capita
land.
Thusproductivity will rise significantly if land inequality is reduced in favour of
lower size holdings.Thus major support for land reforms.
But despite this, small landholders get very low per capita income due to very low land-
man ratio. Per capita availability of land in marginal is just 1200 sq m.Based on
Tendulkar poverty line, a farmer with less than 0.8 ha will be under poverty line.
The proportion of such farmers will rise with further fragmentation of land.
Solutions
• Increase land-man ratio by moving a substantial portion of smallholders out of
agri. But despite rapid economic growth, this has proved difficult.
• Provide more supplementary income sources, in rural areas itself. This approach
greatly helped China
Amartya Sen- Size and Productivity
Argues that profit increases with size but productivity decreases. Profitability high
in large as capital goods indivisible and hence more costly for small farms.
Productivity increases in small as

49
 • Labour based explanation-amount of labour, courtesy of family labour increases
in small farms. Family labour also more motivated to work. In a labour surplus
economy like India, opportunity cost of family labour very low, but wage does
not fall to this level and hence the small farm owner uses more family labour.
• Technique based-More intensive use of inputs
• Fertility based- More fertile land lead to higher earnings and hence develop
larger populations, leading to more subdivisions and hence small farm size.
Hence smaller farms more fertile and more productive
Pranab Bardhan argues that while the small farms have labour advantage leading
to higher productivity. But as agri becomes more intensive in commercial inputs
like machines, credit, fertilisers, small farms have a disadvantage here and hence
their labour advantage can be neutralised. So it is imperative to reform these
markets as well
Wolf Ladejinsky
25% of households had no land and more than 20% had less than an acre. Land ceiling
was initiated by the first FYP itself. The Panel on Land Reforms set up by the PC said
that ceiling should apply to the family and compensation of no more than 25% of the
market value should be provided.
The Second plan concurred, but left compensation to be decided by the states,
resulting in a great tangle of payments.
The 4th plan said that there were problems with the implementation of the laws
But the plans never looked at ceilings as a means to raise agri production. Their
advocacy for ceiling was primarily social justice. Hence this resulted in vagueness as
there was no decision on what the land in future was to be put to use. This also
resulted in vagueness in what the unit of holder, individual or family, should be
The PC also did not specify any penalties for poor implementation on states. So no
state, except MH with a very ineffective penalty, had any punitive measure for
violating the ceiling laws.
Moreover, very importantly, the plan themselves did not repose much faith in the
success of the program, reducing the conviction of implementation
The enactment of the ceiling program began in Kashmir in 1948, and by 1962, all states
had law for the same
But there were a lot of permissible retentions, weakening the law. In Gujarat, the
retention varied from 19 acres of perennially irrigated land to 132 acres of other
types of land. This was the case in all states, making sure that the owners of the
best land parted with very little land.
Tamil Nadu had 26 exemptions. All states had a significant number. Thus,
ultimately, little land to redistribute.

50
Whatever could be redistributed, was not due to corruption For example, in 1960s,
Bihar, Kerala, Odisha and Mysore did not contribute any land to the
surplus.Kashmir was the only exception, with the largest contribution of 190000
hectares and all being distributed. For India as a whole, by 1970, the declared
surplus was just 2.4 million acres, or 0.6% of total cultivated land, and land
actually distributed was less than half of it.
Thus the entire exercise was one of omission and commission. While the states
officially accepted the ceiling programs, they rejected it in practice.
Why land ceiling not enough
Based on Dandekar and Rath, he argues that if all were given redistributed land, the size
of landholdings will be too small to be useful. Hence, redistribution for all cannot work.
Hence needs to be supplemented by other programs
Future Steps
So several intermediary reforms needed before land reforms can be undertaken
• Agricultural income tax
• Agricultural holdings tax, progressive in nature. It may also instill greater efficiency
on farmers who insist on retaining their land.
These will help mobilise the resources needed to create infra and boost employment.
Land related issues
ARC reco
• Renewed impetus to land reforms like redistribution of surplus lands, vesting titles
in tenants
• Step up public investment to provide non-farm and off-farm alternative
employment
• The number of SEZs should be limited, with a larger minimum size, preferably in
backward areas so that they can act as nuclei for growth
MS Swaminathan Committee Reco
• Distribution of ceiling surplus land and wasteland
• Prevent diversion of agri land for non-agri use
• National Land Use Advisory Service to connect land decisions with ecological,
meteorological and marketing factors
Land Acquisition Law, 2013(Right to Fair Compensation and Transparency in Land
Acquisition, Rehabilitation and Resettlement Act)
Replaced the Land Acquisition Act 1894
• Provides for higher compensation to those whose land is taken by the govt for
both public and private projects

51
• Mandates consent of majority of landowners
◦ In case of acq of land by govt for pvt companies for public purposes(like
infra, water, sports, healthcare, tourism), consent of 80% of landowners
◦ In case of acq by govt for PPP, consent of 70%
◦ In both cases, social impact assessment mandatory. Has to be completed in
6 months
◦ Note that in case of acquisition by govt where no pvt party involved, no
consent required. Eminent Domain.
◦ Allows for urgent acquisition of land by govt for defence, natural calamity,
or other purposes with approval of Parl, and 80% of compensation has to
be paid before acquisition
• Provides factors to be considered by Collector for compensation like market
value, damage caused to land by acquirer, expenses on relocation of the
original owner
◦ Makes compulsory grant of solatium of 100% of compensation value in addition
to the compensation
◦ 12% interest for period between notification of Social Impact Assessment and
award by Collector or taking possession
◦ In rural areas, the basic compensation can be upto twice the market value,
while in urban areas, it is to be the market value
◦ Thus compared to 30% solatium, that too after going to court, here 100%
higher solatium in first stage itself, apart from double mkt value in rural
areas
◦ This means upto 4x market value in villages and twice in urban areas
without going to court
• Has provisions for rehab and resettlement including when govt acquires land.
◦ R&R amount paid
◦ House allotted
◦ One time subsistence and transport allowance
• Collector has to ensure basic amenities in the resettlement area
• Land Acquisition, Resettlement and Rehabilitation Authorities to be constituted
for settlement of disputes.
◦ Anyone not satisfied with compensation can ask Collector to refer to the
authority which Collector has to do.
◦ The authority not bound by CPC. 12% interest and 100% solatium mandatory for
authority
◦ Only HC and SC can hear appeals from authority decision
• When an irrigated multi-cropped land is acquired, an equivalent culturable
wasteland has to be developed for agr

52
 • Mandates Social Impact Assessment. An expert group will study the SIA
report and can reco scrapping the project if costs outweigh benefits though
govt can still overrule the expert group after giving reasons in writing
• Section 24-

Issues with section 24

◦
▪ In some cases, the landowners refuse the compensation and that amount is
then deposited in the govt treasury. As per one interpretation, if this is done,
the acquisition is deemed to be made, but others contend it has to be
restarted
▪ Under the latter, landowners benefit, under the former the project promoters
▪ This makes the provision a subject of litigation
▪ In a 2014 judgement, a 3 judge SC bench ruled that compensation was
deemed to be not paid if it was not paid to the landowner or if it was not
deposited in court if the landowner refused. Thus depositing in the
treasury was not considered. Subsequent cases were decided on this
basis
▪ But in 2018, another 3 judge bench ruled the earlier judgement per
incuriam, i.e. a verdict passed in disregard of law and held that the
compensation is deemed to be paid if deposited in treasury
▪ But the benches were of the same size and so the question was referred
to a larger bench.
▪ The larger bench has upheld the previous judgement, thus
compensation is deemed to be paid if deposited in the treasury. Thus
landowners who refuse compensation or ask for higher compensation cannot
claim that the acquisition proceedings had lapsed under 24(2)
Comparison with the Land Acquisition Act, 1894

53
Further issues with LARR Act
• The Modi govt allowed states to amend the LARR as land acquisition is in
concurrent list
• Many states have diluted the law by reducing compensation to bare minimum,
providing large number of exemptions from SIA, consent
• The Land Acquisition Ordinance 2015 exempted projects related to defence,
infra, industrial corridors, rural infra and affordable housing from the
provisions of consent, SIA and restrictions on acquiring agri land in the Act.
Was withdrawn
Ultimately, as Jairam Ramesh, then Minister for Rural Dev argues, land acquisition
should be used only in rarest of rare cases, even by govt. Rather, there should be
sale and purchase of land, which will allow fair determination of price and give
agency to landholders. But that needs robust land records and as that is lacking,
LARR used as interim measure
Also, land pooling should be used as alternative
In a democracy, acquisition is not ideal as it is coercive. Purchase is much better.
But the reason a still persists is that sometimes public purpose is more imp than

54
private right to property
2 reasons why govt procures land for private or PPP projects of public nature
• In India, property rights are poorly defined. So if a pvt party purchases land and in
future a court awards land to someone else, the entire project jeopardized. Govt
acquisition instead of pvt purchase solves this
• Hold up problem. One landlord can deny sale and block the entire project. Or
demand very high price.
Land Pooling
See Vision Sep 2019

Minimum 70% of the land for a project should be pooled before the project being
approved
Land Leasing
See Vision Nov 2019
Digitisation of Land records
See Vision Dec 2019- As per Dalwai Committee, more than 55% of civil disputes in
India are related to land
Swamitva app to help in survey of land in rural areas to help- Was highly reco by
Dalwai committee
Survey of Villages and Mapping with Improvised Technology(SVAMITVA) Scheme
To update rural land records, providing record of rights to villages households. Central
Sector(MORD) .

55
Will survey all rural properties using drones and prepare GIS based maps by Survey
of India, using a Continuously Operating Reference System(See India Science)
The data will be owned by the Survey of India, state govts and Min of Panchayati Raj.
But property data will be owned by state rev dept as it can mutate right of records.
Others can view this data
• Will enhance credit delivery
• Will enhance property tax collections
• Will enhance land leasing
• Better rural planning through Gram Manchitra Application

National Land Management Corporation

See Vision July 2020
Conclusive Land Titling
NITI has prepared a Model Bill on this.
Current system
• Presumptive land titling is currently used. This means that land records are
maintained with information on possession which is determined through past txn.
Ownership established based on current possession
• Registration of land is registration of transactions like sale deeds, inheritance,
mortgage, lease. Thus holding reg papers does not involve the legal framework
guaranteeing ownership
Conclusive system
• Land records designate actual ownership, with the title granted by the govt, which
takes the responsibility for accuracy
• Once title granted, any other claimant needs to settle dispute with govt, not the
title holder
• Govt may provide compensation to claimants but the title holder not in danger of
losing land
Advantage
• Will drastically lower land litigation. Currently dispute in any link of transactions can
lead to cases
• Will boost investments as land acquisition will be smoother
• More property tax collection
• Will remove the black market for land transactions
• Agri credit enhancement
NITI bill

56
 • Calls for Land Authorities to be set up by each state
• LA will appoint a Title Registration officer which will publish a draft list of land
titles based on existing records
• Will allow other claimants to file claims
• TRO will refer dispute to Land Dispute Resolution Officer. But disputes already
pending in courts cannot be resolved this way
• After resolving all disputes, the LA will award titles
• Over a 3 year period, these titles can be challenged before land titling appellate
tribunals
• After the 3 year period, conclusive titles, with further challenge only in HC

Issues
• Land records are outdated especially in semi urban and rural areas. Eg records in
grandparents name with no inheritance proof.
• Need village level surveys backed by community participation as a prerequisite

Unique ID for all plots of land- Unique Land Parcel Identification Number(ULPIN)
The Centre is planning to issue a 14 digit unique ID to every plot in the country in a
year.
• Subsequently, the land records database will be linked with revenue court records,
bank records and UID(voluntary)
Thus it is essentially an Aadhaar for land
• Prevent land fraud
• Property tax collections will increase

Why state support needed for agriculture

• Factors like uncertainty in soil fertility, weather etc render increasing returns to
scale and associated economies difficult to achieve in agri.
◦ This then renders the need for public investment
• Agriculture cannot be mapped into an assembly line as each crop as a climactic
cycle and has to be cultivated at the right time. Hence all farmers cultivating a
crop harvest it at the same time. This makes the price system extremely variable,
making farmers vulnerable
• Difficult for banks to lend to farmers in the above scenario. Hence need state
intervention to extend credit.
Agriculture Income Tax
Three criteria of evaluation
• Equity effects of tax
• Economic effects

57
 • Administrative effects of tax
The agri income tax was imposed for the first time in Bihar in 1938,. Income Tax Act,
1961, Section 10(1) exempts agricultural income from the taxable income. The 7th
schedule puts it in states' domain
The most crucial aspect determining revenue and other effects of tax is the definition of
the base, in this case ' agricultural income'. The definition of agri income used by states
and that given in the Income Tax Act, 1922, was agri activities, allied activities and rent.
Mahesh Bhatt
On his evaluations on the above three grounds, he is comparing agri income tax to land
revenue. Argues against tax
• Equity
◦ Argues that as income is the best measure of the ability to pay, such a tax
would result in equity. For horizontal equity, it is vital the centre levy taxes, not
the states.
◦ But the problem of evasion, which will dilute equity, exists here too, and in
greater extent.
• On economic effects, land revenue is superior as it is a fixed charge, leaving all
increments to the farmer. Income tax will extract some part of every marginal
production, reducing incentives to produce more.
◦ As the MPC is very high among farmers due to low income anyway, the
income tax will further reduce savings and hence impact productivity.
• On administrative grounds
◦ Difficult to implement as it is very hard to measure agri income as most
farmers don't maintain books of accounts. Hence will have to be applied on
a very small number of farmers
◦ In the US, with high tax morale and efficient administration, the Bureau of
Census estimates that there is underreporting to the tune of 50%.
◦ Another method of ascertaining income is the presumptive method, where
certain assumptions are made about the production, revenue and costs and on
the basis of that, income is estimated. But this will be very adhoc, and will
further discourage productivity in order to escape tax.
YK Alagh
Argues in favour of tax. Plantations can be very easily taxed as their activities are
more formalised and large scale and hence easily measurable.
Argues that that the contention that land ceiling laws have made tax redundant is
invalid as ceiling laws have been poorly implemented. Also that the agri sectors
that yield the most incomes, like breeding farms, orchards, plantations, are
exempt from ceiling laws and hence from equity perspective, tax despite ceiling,
especially to make the case of equity stronger after the ceiling.

58
Further, the large units should be taxed as they are in a better position to use the
various schemes of the govt
Countering the argument of disincentive effects, he says that tax holidays can be
given just like it is given in industry to small and new units.
On the argument of assessment of incomes, he says that countries with poorer tax
admin than India like many Latin American countries use presumptive
assessment.
In light of the digitisation of sale by farmers under MSP, the assessment problem
may be further simplified.
Another reason why AIT not good is because it will not be harmonised, with different
states having different rules, harming balanced development
• Productivity of wheat in India is only 66% that of China
• Productivity of rice in India only 46% of China and of cotton, 33% of China.
• Therefore wide gulf between India's performance in output, in which it leads, and
productivity, where it lags behind severely
Role and Performance
Agri is the mainstay of the economy due to its
• High share in employment
• Linkages to industry as supplier of wage goods and raw materials. Rangarajan
estimates that a 1% increase in agri output raises national income by 0.7%
• Impact on poverty and inequality
• Impact on food security and inflation-
• Impact on exports
• The rural sector, dominated by agri, is the key driver of domestic demand

Growth rate of Agri

Analysis of major points
• In 1951- 2%. Grew steadily till fall of -4.1% in 1957-58 which also reduced the
GDP growth rate
• Then declined by -10% and -1% in 1965-66 and 1966-67 when India had bad
droughts and war.
• In 1967-68, grew at 14% due to the effect of Green Revolution, the highest ever.

59
• After growing steadily, the next major jump came in 1975-76, the year of the
Emergency, growing at 13%. But as the Emergency continued and effects
worsened, declined by 5% in 1976-77
• Then had the worst year since Independence due to the major drought in 1979-
80, declining by -12%. It also led to the worst GDP growth since Independence
• Then, in the 1980s, the third phase of the GR started as it was spread to Eastern
India and consequently, the best year since Independence was in 1988-89, at
16%
• Contracted by 1% in 1991-92, but since them has grown steadily, except in
2002-03, when it declined by 5% in 2002, the country experienced the
shortest ever monsoon
Phase Agri growth
Pre GR. 51-67 2%
GR. 1967-1981 3.4
Wider tech
dissemination 3.5
period. 1981-91
Reform
period(1991- 3.2
1999)
Rural distress 2.6
2000-2004
High growth
phase(2005- 3.8
2008)
Post global
crisis(2009- 3.9
2018)

60
Agri Growth
• Role of institutional and technological factors- The thrust of policy in the first
decade after independence was on institutional reform through land reforms. But
by 1960s, need for new technology was felt as land reforms were not proving
effective enough.
◦ So HYV seeds were adopted which can turn nutrients into grain growth
rather than leaf growth. This necessitated the use of additional fertilisers
and water. More water needed for proper application of fertilisers
• Economic aspects of the new tech
◦ The new techniques were expensive for farmers and hence the actual use of
inputs was decided not just by technical requirements but economic
considerations Minhas and Srinivasan have shown that fertiliser use is
subject to diminishing returns and so the eco optimum is smaller than tech
optimum
◦ As the inputs are complementary to each other, their use also depends on other
inputs. Eg fertiliser use will also depend on the availability of water
◦ The new tech also creates incentives for multiple cropping to reduce the risks

Agri at Independence
Hardly 10% of the area was irrigated and the average use of NPK fertilisers was less
than 1 kg per hectare.
Pre GR
In the 1st 2 FYP, the focus was on increasing irrigated area and fertiliser production.

61
Scientists began experimenting with new varieties of wheat and rice. The varieties
cultivated then had tall and thin straw and collapsed to even the smallest
application of fertiliser. Hence varieties with short and stiff straw were needed to
get a positive response from water and fertiliser.
Under the guidance of Dr. K. Ramiah, the rice hybridisation program of indica-
japonica began but it was shelved after the tech was available from Taiwan and
Philippines
Japan had made great progress in agri tech in WW2+period. The Norin semi-dwarf
wheat varieties had short, stiff straws but long panicles, hence high yield. These were
obtained by Norman Borlaug who started the Mexican dwarf wheat breeding program.
These were suited to rabi in India and it could double output.
Similarly hybrids of rice, jowar, maize, bajra were developed by Indian scientists with the
Rockefeller Foundation and so the GoI introduced the High Yileding Varieties Program in
wheat, rice, maize, jowar, bajra.
Green Revolution and Three Phases as per Gulati and Fan-cihn
The term GR was coined by William Gaud to imply synergy among technology,
services, policy and farmers' enthusiasm.
Phase I 1966-72
• Was initiated to end dependence on PL-480 being imported from US as it suffered
2 massive droughts in 1965-67. The strategy was to boost agri production along
with remunerative prices for the farmers
• In 1965, the Agricultural Price Commission was set up along with the FCI, to
recommend MSP and procure foodgrains
• HYV seeds, like Kalyan Sona and Sonalika, for wheat were imported from Mexico
and distributed in PJ, HR and western UP as these states had a good irrigation
network.
• The spread of HYV seeds was supported by public investments in fertilisers, power,
irrigation and credit.
• The total amount of harvest increased from 75 million tonnes in 1966-67 to
105 MT in 1971-72, making India self-sufficient
• A major part of the strategy was the favourable pricing policy and the agri research
system set up to indigenise the seeds and continue further development.
• Credit expanded with the nationalisation of banks and subsidies became an integral
part of the agri policy, in fertiliser, water and power.
• Rural poverty declined from 65% to 55% in this period

Debacle and Second Phase, 1973-1980

62
 • To control food price fluctuations, the govt took over wholesale trade in wheat in
1973-74, which was a major mistake and was soon abandoned
◦ The govt did not have the reach to procure all grains and reach all consumers
◦ Also, many farmers pledged produce with moneylenders and took credit for
harvest. When govt took over trade without providing finance avenues, it was
bad.
• Two consecutive droughts made India a net importer again between 1973-76
• After the oil price shock, to maintain the use of fertilisers, subsidies increased from
0.5% to 4% of agri GDP in this period.
• Private investment in tubewells increased extraction of groundwater, dramatically
increasing power subsidies
• But the extension of HYV to rice, helped by the use of tubewells, increased the
growth of output and decline in poverty.
Third Phase- 1981-1990
• India consolidated its status as a food self sufficient country and in 1986, India had
a 25 MT buffer stock and hence the severe drought of 1987 did not have much
effect.
• GR spread to West Bengal and Bihar where rice production increased, but in the
rest of India, the GR ran out of steam. So input subsidies were increased and by
1991, the subsidies grew to 7% of agri GDP
Throughout the agri revolution, there were severe restrictions on trade in agri
produce, pricing controls as well as barriers to international trade. Similarly there
were high controls on industry and so the terms of trade worsened for agri,
reducing the profitability of it
On account of the overvalued rupee agri was implicitly taxed
This was done for 3 purposes
• Controlling food inflation for consumers
• BOP stability
• Protecting farmers from fluctuations

Negative Impact of the Green Revolution

• The most widely debated aspect of GR, the disparities caused between regions and
classes of farmers
• Inter crop imbalances were created by GR, with the prime beneficiaries being food
grains as the focus was on food security. This reduced areas under other crops and
distorted the sowing practices. Eg the rate of growth of pulses declined from
1.4% pre GR to 0.8 post GR

63
 • GR was mostly focused on the well irrigated areas like PJ, HR, west UP, Andhra
Pradesh, TN. It has hardly touched the eastern states and the semi-arid regions in
western India. To combat this, the Ministry of Agri has launched the scheme
Bringing Green Rev to Eastern India(BGREI)
• The big farmers benefited most from the GR as they had better access to credit
and resources
• Excessive use of fertilisers and exploitation of groundwater, leading to crisis. The
productivity of wheat has grown 4 times since the GR in Punjab but fertiliser
use has increased by 4200 times. The imported seeds needed higher amount of
fertilisers and that trend has continued.
• Fiscal problems due to inflated subsidy bill
ES argues that the GR made agri cereal-centric, input intensive and regionally
biased
Reform Period. 1991- Now
Reforms affected agri in 2 ways
• Higher rate of growth increased food demand, as well as a diversification of food
demand into fruits and vegetables and dairy
• Removing of industrial protection improved ToT for agri, increasing profitability,
increasing private investment in agri which are now double of the public
investment, primarily directed towards horticulture and dairy
• Deceleration in the 1990s
◦ Particularly after 1996, in all states and all subsectors including horticulture and
livestock
◦ Besides there are issues of climate change, soil fertility, capital formation.
• Instability in output
◦ Stability in output is a measure of how resilient the system is against shocks. Eg
in 2009-10, despite the worst drought in nearly 40 years, the agri growth
was positive. Similarly, there has not been a single negative growth year
since 2002-03
◦ Factors for decline in variability
▪ Irrigation expansion, which covers almost 48% net sown area
now(authentic)
▪ More diversified agriculture
▪ More information and newer technology
▪ Watershed development

Factors affecting the growth of agri

• Lack of long-term policy perspective- Indian farmers received lower than
international prices due to controls in other sectors and overvalued rupee. Agri was
less remunerative than other sectors.

64
 • Investment in agri and subsidies- During 80s and 90s, investment in agri hovered
around 8-12% of agri GDP. Given ICOR of 4:1, it was natural that agri would grow
only in the range of 2-3%, assuming other factors like rainfall and price were
benign. During the same period, the public investment in agri declined from 4 to 2%
of agri GDP. In fact, pub inv in agri has been declining since 6th plan, reversing
only in the 10th and 11th plan. GCF in agri rose to 20% in 2010 from 13% in
2004
◦ But despite this, around 70% of investment in agri is private.
◦ A considerable amount pub exp on agri is not on investment but on subsidies.
◦ There are significant complementarity in inv between pub and private.
While private focuses on farm-specific inv, pub inv, in the form of R&D, better
irrigation, soil testing, etc has significant externalities. Pub inv is also more
productive as it is undertaken primarily from a long term perspective.
◦ Mahendra Dev argues that this decreased pub inv in agri was the reason for the
deceleration seen in 90s and early 2000s.
◦ Panagariya argues that rural roads that allow greater market access, electricity
that allows more mechanisation and irrigation projects should be the thrust of
the new inv in agri
• Lagging R&D- As there is hardly any scope for expansion of area under cultivation,
the focus has to be on productivity.
• Technology Generation and Dissemination
• Soil and groundwater management- Insert stats from water crisis and land
degradation. An ICAR study has revealed that the organic content in soils of Punjab
and Haryana has declined from 0.5% in 1960s to 0.2% in 2000, Decontrol of
phosphorus and potash has led to reduced application of these and increased
application of urea(nitrogen)

Farm Distress-covered in hard notes(cihn)

Started earlier, though increased greatly in the 90s. Initially was confined to some
pockets of India, but then spread to states like Punjab and Haryana too. In 2014-16, the
situation worsened due to abnormal monsoon. This distress is the reason for
farmers' suicides
Distress is manifest at 2 levels
• Macro level
• Farm level
Absolute distress means agri becoming nonviable. Relative means divergence between
performance of agri wrt other sectors.
Some symptoms of agrarian distress are
• Increasing indebtedness
• Forced migration

65
 • Rise in hunger
• Distress sales
• Rise in suicides
Genesis
Genesis rooted in structural imbalances reflected in 2 imp indicators.
• Mismatch between share of agri in GDP compared to share of agri in workforce- At
the time of GR, agri had 70% pop and 42% share in GDP. Now only 13% share in
GDP, but still around 53% in emp. While the decline in share is a reflection of a
developing economy, India has not seen the required shift of workers out of agri.
This stagnation in outmigration from agri stopped around 1980, and worsened
after 1991
• Ratio of per-capita income in agri compared to non-agri
• Prices- In the last few years, the agri inflation has been much lower than the
overall inflation. Eg in 2017-18, price deflator for agri was 1% while it was
3.2% overall. In 2018-19, situation worsened further with agri deflator being
0% and total 5%
Solutions
• Prices- Dev and Rangarajan suggest a limited procurement scheme. The govt buys
the surplus at MSP, leaving the normal supply to ensure market price equals
remunerative price.
◦ Price deficiency payment- Govt pays the diff between MSP and market price.
Bhaavantar Bhugtan Yojana of MP
• But a more lasting solution is market reforms to enable better price discovery and
long term policies favourable to exports. Hence creation of a competitive and
unified market needed.
• Higher productivity through investment and efficiency, especially in water and
fertilisers
• Land size- The monthly income of small and marginal farmers is only 4500
compared to 41000 for large farmers.
• Creating opportunities in non-farm sector.
Swaminathan Comm report reco on preventing farmer suicides
• Health insurance at primary health centres
• National Rural Health Mission should be extended to suicide hotspots on priority
• Extending crop insurance

See the employment shares and sectoral share in GDP from the National Income note.

66
Some observations regarding it
• The share of agri in GDP declined very sharply post liberalisation. This was
primarily due to the very high growth in non-agri, led by services as well as
the rural distress in early 2000s.
Reforming the three I's -Investments, Incentives and Institutions
Investment
• IFPRI studu shows that the returns in terms of agri GDP are highest for investment
in agri R&D, then roads, then education, then irrigation and the lowest from fertiliser
subsidies
• Rampant subsidies are proving difficult to resolve. Gujarat's Jyotigram
experiment, separating feeder lines for agri, enabling charging for power and
also reducing transmission losses is an example that can be replicated.
• There are also DBT methods to reduce leakages for farmers. Eg Punjab's Paani
Bachao Paise Kamao Scheme
Incentives
• Pricing policy has to be reformed to correct the cereal bias and also reduce
subsidies. Eg PM AASHA
Institutions
• A World Bank study shows that for horticulture produce, farmers receive about 10%
of the price paid by consumers. This is due to highly fragmented supply chain of
agri

67
 • Marketing and Warehousing- Reforming APMC and Essential Commodities Act
required.
• Land and credit markets- Restricted land lease markets prevents linking small
farmers with industries. For transparency, digitisation of land records is needed.
Improving land markets will also increase access to credit. As per NSSO, small and
marginal farmers account for 80% of farm indebtedness
Action Plan for Doubling Incomes- Dalwai Committee
Doubling farmers' income between 2015-16 to 2022-23 requires an annual real
growth rate of 10.5% of agri
Specific reco that are being implemented
• Market reforms
• Encouraging contract farming by promulgating Model Agri Produce and Livestock
Contract Farming Act
• Upgradation of Gramin hats
• e-NAM
• Soil health cards PM Krishi Sinchayi Yojana to improve IWP. Per drop more crop.
SHC has led to a reduction of fertiliser use by 10% and increased productivity
by 5%
• PM Fasal Bima Yojana
• Providing total interest subvention upto 5% on short term loans upto 3l

A Brief on Doubling Farmers’ Income Report

The Committee focuses on seven major sources of growth, operating within (6) and
outside (1) the agriculture sector. These sources are:
Within the agriculture domain
• Improvement in crop productivity.
• Improvement in livestock productivity.
• Resource use efficiency or saving in cost of production-Improving and optimising
input delivery mechanism and overall input efficiency [technologies, irrigation
methods, mechanisation, Integrated Pest Management (IPM), Integrated Nutrient
Management (INM), farm extension services, adaptation to climate change,
integrated agri-logistics systems, Integrated Farming Systems Approach, etc.].
• Increase in cropping intensity.
• Diversification towards high value crops.
• Improvement in real prices received by farmers-Adopting a “demand-driven
approach” for efficient monetisation of farm produce
Outside the agriculture domain

68
Shift from farm to non-farm occupations-Strengthening linkages with MSMEs, to
accelerate growth in both farm as well as non-farm incomes along with employment
creation.
The DFI Committee addresses agriculture as a value led enterprise and suggests
empowering farmers with “improved market linkages” and enabling “self-sustainable
models” as the basis for continued productivity-production and income growth for
farmers.
In Volume-I, the growth of agriculture in the last 70 years is analysed with the current
An appropriate context is set, with farmers’
status.
income as the basis of agriculture, in place of
production as it has been, for a comprehensive understanding of the
needed directional change.
Farmers’ income is directly related to cost of
agricultural production (including input costs) and
profitable monetisation of the agricultural produce,
through effective market linkages.
In Volumes III–XIII, the DFI Committee deliberates upon specific economic activities
and topics that have a durable impact on farmers’ income. Some of these are
categorised as follows:
1. Developing Hub and Spoke System at back-end as well as front-end to facilitate
and promote a new market architecture so that all kinds of farmers can avail
services that empowers them to physically connect and supply to any market in the
country of their choice. All this should be networked for price smoothening. Also
link domestic and export markets
2. Marketing Intelligence System to provide demand led decision making support
system - forecasting system for agricultural produce demand and supply, and crop
area estimation to aid price stabilisation and risk management.
3. Promoting Sustainable Agriculture – Climate Resilient Agriculture, Rainfed
Agriculture, Conservation Agriculture, Ecology Farming, Watershed Management
System, Integrated Farming System, Organic Farming, Agro-Climatic Regional
Planning, Agricultural Resources Management and Micro-Level Planning, etc.
Ultimately, agriculture has to be viewed as an enterprise and farmer as an
entrepreneur, giving sustainable returns. Hence efficiency for sustainability(in
economic sense, not environmental sense)
Capital formation in Indian Agriculture- Gulati and Bathla (Focuses pre 2000)

69
There was view that capital formation declining since 80s, which was further
squeezed by the 1991 reforms which led to decline in pub inv.
They argue that the situation is not as grim as considered and the structure of
capital formation has changed.
GCFA- Gross Capital formation in Agri
Trend
• In 1960, 63 billion rupees
• Increased steadily to 182 bn in 1978.
• Then declined till 1986, then recovered slightly, to reach 190 in 1998.
• So between 1978-1998, relative stagnation.
• In the 1980s, public inv started falling till early 90s, while private picked up after 86.
• The share of pvt in GFCA increased from 50% in 1980 to 75% in 1998
• The share of GFCA under GDCF was 14% in 1960, peaked at 18% in 78, then
declined to 6% in 1998.
• The share of GFCA in GDCF in 1998 was much lower than share of agri in GDP
which was about 23%. This is argued as evidence of relative neglect of agri.
Recent trends(authentic)
GCF in agri as a % of GCF in economy has been relatively stable at around 8%, with pvt
sector around 10% and public sector around 5%
The share of pub inv started increasing post 2013, but the share of private inv has
started falling
Structure of Capital formation
• Pvt agri inv can be in household or corporate sector(like plantations, cooperatives),
both organised and unorganised. Estimates for unorganised sector and household
sector not good quality
• The organised corporate is less than 5% of pvt GFCA, with the overwhelming
share being household sector.
• Household inv in areas like land reclamation, orchards and plantations, irrigation
sources like wells
• The public inv is mainly in irrigation and it is this that experienced decline with
the public inv. But it has also raised electrification, rural credit, which helps
private irrigation.
Causes of decline in public GFCA
• Neglect of agri as its share fell and focus shifted to secondary and tertiary
sectors
• Increase in subsidies and consequent crowding out of inv due to fiscal
constraint. Chand argues that a 1% increase in subsidy leads to a decline of
2.5% in pub cap formation

70
 • MSP- 10% rise in MSP reduces pub inv by 2%
• Growing opposition to big dam projects
• Dramatic fall in world rice price during 80s, dissuading funding by
international agencies for irrigation schemes in rice areas
Complementarity between public and private investments
• Public induces private
• Private inv is also affected by the Terms of Trade(+), technology(adoption of some
tech requires inv by farmers, also pvt tech increases income, thereby inducing pvt
inv) and the availability of credit
• Private inv is also dependent on lagged private inv
• Ramesh Chand has argued that there is an asymmetry between the effects of
pub on pvt. While an increase certainly induces pvt, a decrease in pub also
forces farmers to raise pvt inv
◦ Pvt responds differently to pub depending on whether pub is rising or falling
◦ This is corroborated from the experience since 1980s, when the pub fell and
pvt rose despite it.
Capital formation and growth
• Pub inv, typically made in major irrigation like dams and canals, as well as power
sectors, have a long gestation period and hence weak immediate relation
between public and private GFCA as the farmers may take years to respond to
the public inv. So the relation much more plausible wrt the actually available
irrigation and power, as a result of past investments, and private inv. So the
relevant variable is the cumulative investment of the public sector over the
years, not just the current year.
• Their empirical analysis finds strong impact of capital formation on growth in
agri. Supported by Panagriya and an IFPRI study, as well as Mahendra Dev
• They argue that despite fall in public inv in 80s and 90s, the agri GDP did not slow
down is due to the lagged effect of earlier inv as well a the response of private inv,
not just to public inv but also to TOT
• Private inv, even if increases, cannot compensate for the declining public inv
as they both are made in different areas. Public in major irrigation, roads,
power, private on land, minor irrigation like wells
Response to Gulati and Bathla by Sawant et al
They argue that the inducement may have weakened in the well irrigated areas, but
are very critical for attracting private inv in non-irrigated areas where they are most
needed. Thus pub inv critical for balanced growth

71
TFP

Moving from Food Security to Nutritional Security

India had solved the food security problem decades ago, but nutrition remains a big
challenge as seen from high stunting, anaemia, wasting figures.
Approach
• Forecast nutrition requirement for 2050 as by then the population and economy
will have largely stabilised
• Draw area production plans based on agro-climactic zones
• Based on the plans, only incentivise the required crops and design a risk and
price support strategy for only such crops. Rice consumes most water but
delivers least in terms of iron, zinc and proteins
• The present farm input subsidies for production, like fertiliser and power subsidies,
needs to shift to payment for farm ecosystem services, like preserving soil
health, water tables
• Investment in robust market intelligence system to predict price changes and
intervene accordingly

72
 • Prioritise human capital in agri by doubling agri R&D and filling vacancies in agri
uni
• Begin a large campaign across India for healthier eating habits, along with taxing
and disallowing ads of such foods
Agriculture and Food Management- ES 2018-19
Argues that Indian agri is in some ways a victim of its own past success, especially
the GR, which has made it cereal-centric, input intensive and regionally biased.
There is also the problem of lack of exit
With decline in the size of landholdings, India has to focus on resource efficiency and
productivity
The philosophy has toshift fromgreen revolutionledproductivitytogreen
methodsledsustainability
Volatility, as measured by the coeff of variation has declined from 3 in 1961-88 to
1 in 2005-2018
In terms of share in GVA, share of fisheries is increasing, while that of crops is declining
while livestock has remained constant
Pattern of agri landholdings
• The share of marginal(less than 1 ha) in total operational holdings has increased
from 63% in 2000 to 70% in 2016, while small fell from 19 to 18%. Large has also
fallen. Thus landholdings size becoming smaller, major reason for rural
distress(size-productivity)
Number of women farmers(Feminisation of of agri)
• The share of operational landholdings owned by women has increased from 11% in
2000 to 14% in 2016
Bringing resource efficiency to smallholder agri
• Predominance of small and marginal, almost 85-90%
• Improving productivity is one of the key source identified by the Dalwai Committee
on Doubling Farmers Income too
• Increasing Irrigation Water Productivity(IWP)
◦ Almost 90% of irrigation is through groundwater, raising sustainability
questions
◦ As per NASA, India's water tables are declining at the rate of 0.3 m per year.
◦ Indian irrigation, whether public through canals or private through
tubewells, are based on flooding type of irrigation, leading to lots of waste.
See GS3 notes on stats

73
 ◦ The cropping pattern is highly skewed towards water guzzling crops. Paddy and
sugarcane consume 60% of irrigation.
◦ Incentive structure through MSP, water, power tariff, fertiliser subsidy, all lead to
the biased cropping pattern.
◦ Unlike China which imports water sensitive crops like soyabeans and exports
fruits and veggies, India is a net 'exporter' of water, through water that is
embedded in the crop inefficient water use.
▪ India's water use in crops among the highest in world. 1 kg of rice takes
5600 l while China takes 300
◦ The states which have very high land productivity have very low IWP.
◦ Solutions
▪ Innovative irrigation practices like Micro Irrigation. This has to be subsidised
for adoption
• In drip, perforated pipes drip water directly on the roots and stems
• An efficient drip irrigation system also reduces use of fertilisers through
fertigation- Introducing fertiliser directly into the crops through the use
of water soluble fertilisers
• Ashok Gulati argues that around 75% of the nitrogen in urea is not
absorbed by plants as it evaporates or leaches into groundwater
▪ New irrigation tech can be accorded Infrastructure Lending status, which is
currently with canal irrigation.
▪ The convergence of various erstwhile schemes into the PM Krishi Sinchayi
Yojana is a good step
▪ Currently the gap between irrigation potential created and irrigation
potential used is 23 million hectares, as per DFI committee. So need to
close this gap immediately to realise Per Drop More Crop. Other Dalwai
reco
• NREGA labour can be leveraged for this
• Crop alignment and conservation agriculture
•

• IIT-Delhi's new innovation, Sub-Surface Porous Vessels(SSPV) can help in

watering in place of drip irrigation for small farmers as it is much cheaper
and gives high yield.
• Economising use of fertilisers and Pesticides
◦ Fertiliser consumption has been declining since 2011
◦ Fertiliser response ratio has been declining, implying declining
responsiveness of soil fertility to increased fertiliser use

74
 ◦ This is due to inadequacy and imbalance in fertiliser use, which increases multi-
nutrient deficiency
▪ Steps
• Improving farmers' knowledge key for rational fertiliser use
• Increased penetration of soil testing
• Promotion of neem-coated urea
• Promotion of micro-nutrients and organic fertiliser
• Increasing sustainability in agri through organic and natural farming
◦ National Mission for Sustainable Agri main mission is to make agri more
productive and sustainable, remunerative and climate resilient by promoting
location specific integrated farming systems
◦ Govt schemes promoting organic farming- Paramparagat Krishi Vikas Yojana,
National Program for Organic Production etc(See GS notes)
• Adopting appropriate tech
◦

◦ Overall farm mech in India low at around 50%, with northern India having
higher mech
◦

reasons for low mech in India. Wheat has highest overall mech in India
though rice and wheat similar mech in seed bed prep
◦ Need to promote it using pub inv and subsidy
◦ Custom Hiring Centres have been set up under the Sub Mission on
Agricultural Mechanisation Scheme
▪ Assistance given to states to provide training and demos to farmers in
mechanisation
▪ CHC can lead to Uberisation of farm machines. Good
◦ New Central Sector Scheme on Promotion of Agricultural Mechanisation for
In-Situ Management of Crop Residue in the States of PJ, HR, Delhi, UP
◦ Adoption of ICT, leveraging high mobile access
◦ Coffee Board has already activated Blockchain Based Marketplace in India
▪ To reduce the layers between farmers and buyers and help in transparent
price discovery

75
 ▪ India is the only country where entire coffee produced under shade,
handpicked and sundried
▪ It is produced by small farmers, mostly concentrated in the east and west
ghats
▪ It will also help in maintaining traceability of coffee from bean to cup so that
authenticity can be ensured for consumers
• Improving Infra and access to markets
◦ Informal actors like local dealers are more prominent in the marketing chain of
small farmers. This increases gap between price received by farmers and paid
by consumers
◦ So use ICT to improve market access, infra like rural roads, better storage
facilities
Tractor Industry
After Independence the Central Tractor Organisation was set up to promote T. It was
placed under the 'Core Sector ' for planned development and hence was tightly
regulated and licensed.
Till 1960, all tractors were imported. In 1961, Eicher Tractors and TAFE started mfg in
India. In 1965, Mahindra started producing and it dramatically increased production.
In 1967 price control was imposed and then lifted in 1974.
In 1974 Punjab Tractors became the first PSU to mfg T and is produced T using
indigenous tech, first being Swaraj.
In 1991, T was de-licensed.
Today India is the largest producer of Tractors(excluding the sub 20 HP belt driven T
used in China)Today India exports around 1 lakh T annually. Great example of
Atmanirbhar Bharat. Factors for success
• Delicensing of production
• Bank credit boosted demand
We need to dovetail tractor services with digital tech, like combining sensors, AI for
precision farming. This can usher in a Brown Revolution
Role of Extension Services
Empowering farmers with knowledge, tech, skills to enable them to realise high
incomes
Key role in improving productivity, income and food security
IFPRI highlighted the need for greater need of locally relevant knowledge
dissemination.
Identifies 2 yield gaps
• Between best scientific practices and best field practices
• Between best field practices and average farmer

76
Weaknesses
• Most farmers use informal advisory like consulting fellow farmers. Thus
greater need for leveraging agri universities, Krishi Vigyan Kendras
• Except 2017-18, increasing trend. Has been in the range of 0.3-0.4% of agri GDP
• Manpower shortage
• Poor targeting and weak outreach

Steps already taken using tech

• Kisan Suvidha Mobile App to provide info on critical parameters like weather, prices,
plant protection
• ICAR has compiled various apps created by agri agencies and universities for
providing info
• mKisan Portal for sending SMS advisories to farmers
• Soil Health Card Scheme to provide info on soil and appropriate practices like
fertilise. Cycle of 2 years
• Space tech use like forecasting agri output using space tech, agro-meteorology
• Providing subsidies under the National Food Security Mission for seeds, tech etc.
• Krishi Kisan App

Way forward(DFI)
• Extend the Extension- make it more broad based, covering all dimensions of
farming
• PPP in KVKs with private sector focusing on farmers who can pay for their services,
so that Public Extension Services can focus on the small and marginal
• Leverage the Panchayati raj in providing ES

Agri R&D
India's national agri research system comprises the ICAR and other national labs of
ICAR, together with agri research uni.
Recently plagued by severe underinvestment. India spends only 0.4% o agri GDP on
agri R&D
IFPRI studu shows that the returns in terms of agri GDP are highest for investment
in agri R&D, then roads, then education, then irrigation and the lowest from
fertiliser subsidies

77
Weaknesses
• In states where agri is more imp, agri ed weak as number of students enrolled in
agri uni low there. Especially true in Punjab and Haryana
• Resource crunch
• Difficulty in attracting talented faculty
• Limited international collab
• Weakening lab to land connect
• Low productivity of scientists

This paralyses the agri extension services, weakening info dissemination about govt
policies or new innovations or correct farming techniques
Way forward(DFI)
• Move from production centric approach to income centric approach
• Focus on both Science of Discovery and Science of Delivery
• Raise expenditure from 0.4% of agri GDP to at least 1%
• Incorporate concept of Research for Development to increase adoption on field

Agri Education
See Vision Aug 2020
Govt Steps
ICAR has launchedNational Agri Higher Ed Project with World Bank giving 4 year
degree
Solutions
• Incorporating the private sector. A pull system, in which the innovator is offered
a large award, but the IPR with the govt
• More funding
• Mandate field time for students in agri universities for increasing land-lab connect

Artificial Intelligence in Agriculture

See Vision July 2019

Agricultural Credit
See GS3

78
Organic, HYV, Food Processing, Allied Sectors (ooooo)
High Value Commodities- The future sources of growth in Agri
Agri basket has
• Food grains
• Cash crops- Cotton, sugarcane, tea primary cash crops. Cotton production more
than doubled between 2002-2008, making India the second largest exporter of
cotton. The prime reason is that Bt cotton now is in 70% of the area under
cotton.
• High value commodities like fruits and vegetables, livestock products like meat and
dairy, marine products.
Why HVC
• High value commodities have high expenditure elasticity compared to food
crops.
• As per NITI, staple crops like pulses, cereals and oilseeds occupy 77% of the
gross cropped area but contribute 40% of output. HV crops contribute similar
amount in output but only with 20% of GCA.
• Plus, there is a shift in preference consumption of Indians for all expenditure
fractiles away from cereals and towards fruits and vegetables, as shown by Deaton
and Dreze using NSSO data. Cereal consumption fell by 14% while chicken
consumption increased by 400% between 1993-2010
This has happened due to
• Rise in incomes
• Demographic shift
• Changing preferences in favour of processed foods
• Changing occupational patters-nutraceuticals
• Rise in aspirations due to advertising
• Urbanisation
Dairy has shown the potential that high value agri has for farm incomes
Plus as per Dalwai Committee, high value crops have larger impact on small and
marginal farmers than large farmers- give example of the importance of dairy
sector
Issues
• Compared to traditional agri, the HVC require better processing, logistics and
storage
NITI Reco
• Develop regional production belt to harness cluster based approach, along with
one district, one product

79
 • Use hybrid tech for veggies. Currently only 10% hybrid
• Rootstock technology for fruits(Rootstock is a part of plant that is used for
further growth)
• Smart horticulture through high density plantation, organic production
• Strengthen market for organic products
Hydroponics
DFI Reco on Horticulture
• Dedicated space for horti in peri-urban areas
• Focus of R&D on H as it provides more scope for absorption of R&D

One District One Product

• Helps in specialisation
• Preserves local skills
• Helps in branding
• Helps link tourism with production

Secondary agriculture
Views agriculture as primary activities and so there are hosts of secondary activities
supporting agri and being supported by it. Mitigate farm income risks. DFI
Committee argues that though this sector has doubled in GDP contribution, it has
stagnated in employment due to very high K/L ratio
DFI reco
• Synergy between R&D institutions and FPOs
• States should train rural youth, especially women in the market linked activities
like grading, packing, online connectivity
• Should be given PSL status for institutional credit

Aquaponics
See Vision October 2020
Food Processing Sector- A part of the Secondary Agriculture
Encompasses all the activities involved in taking the products to the consumer
from the farmer.
Still in nascent stage with only 10% food processedas against 90% in developed
nations, but is growing fast at 5% in the last 6 years.Employs over 7 million
people,out of which around80% is in unorganised sector
Food Processing brings synergy between consumer, industry and agri and hence
seen as key to rural transformation. .
Considered asunrise sector for India.
Potential

80
• Demand for processed food increasing as India grows richer- Deaton and Dreze-
NSSO data shows the increase in demand for High Value commodities. Eg bw
93-2010, demand for chicken increased 400% while demand for cereals fell by 14
• Demand for functional foods, nutraceuticals growing as work patterns change
• Growth of organised retail.
• Demand for renewable agri-bio resources increasing for new energy sources-
Biofuels
A well developed food pro ind has following advantages
• Increase farm-gate prices
• Reduce wastage
• Increase value addition
• Promote crop diversification in areas like medicinal, aromatic plants. Need to
move away from monoculture
• Generate emp and planned withdrawal of the workforce from agri
• Increase export earnings.
• Provides wholesome, nutritious food
• Rural industrialisation

Problems and solutions

• Food processing is largely in unorganised sector, which creates supply
fragmentation, diseconomies of scale
◦ Cluster based approach can be used to solve this. Op Greens for FPO. One
District One Product.
• Inadequate access to credit.
• Processing still in nascent stage with low penetration
• Though India has developed a cold storage capacity of 35 million tonnes, there
are significant gaps in transport to consumers
◦ Dedicated corridors for transport on highways
◦ Multi-modal transport
◦ Contract farming which will incentivise pvt sector to invest in infra and
transport
• Most existing cold chains are single commodity cold chains meaning their
capacity lies idle for 6 months
◦ India's poor cold chain infra also hampers exports as countries have
stringent quality requirements
• The above 2 constitute supply chain infra gaps
• Supply Chain institutional gaps, like APMC procurement
• Lack of trained manpower.
◦ The Ministry of FP is working with the Food Industry Capacity and Skill
Initiative(Prelims Factoids)

81
 ◦ The National Institute of Food Technology Entrepreneurship and
Management(NIFTEM) and Indian Institute of Food Processing Tech has been
set up under the Min off Food Processing
◦ Skill dev component under the SAMPADA Scheme
• Inadequate awareness among consumers, thus putting insufficient pressure
on producers for quality and safety standards
◦ Aggressive promotion of Agmark Scheme, PGS scheme, leveraging Food Safety
Mitras
Key reforms undertaken
• APMC Act
• Rationalisation of food laws
• National Horticulture Mission
• Mega Food Parks with integrated facilities for procurement, processing, storage
and transport
• 100% FDI in food processing and cold chain allowed
• GST, allowing better supply chain management with firms not required to have
warehouses in every state
• Setting up a network of labs
• Promote agripreneurs so that even small farmers can capture a higher share
of value addition from farmgate to foodplate
• Budget for food processing was doubled in the 2018-19 budget
• 10k cr for Formalisation of Micro Food Enterprises(FME)- To help them tech
upgrade to attain FSSAI food standards, marketing
◦ Centrally Sponsored
◦ Food processors will be assisted with credit linked subsidy at 35% of the
project cost with ceiling of 10 lakh
◦ Beneficiary contri will be min 10% and balance from loan
◦ Focus on perishables, with cluster approach
◦ Seed capital of 40000 per SHG member will be pro
◦ States need to ID one food product per district which would then receive
infra and branding support
◦ Also focuses on waste to wealth products, minor forest produce
• Deregulation of key agri goods under the ECA to incentivise development of infra
• The govt has included food processing industries under the PLI scheme
◦ The first component has Ready to Eat/Ready to cook, Mozarella cheese, marine
products, processed fruits and veggies. It also covers innovative organic
products of SMEs. Also has support for branding to help in the emergence of
strong Indian brands. (can give examples of Domino's, McDonalds all of which
started as a very small local shop)

82
Further reforms
• Infra status to agri value chains to allow them fiscal benefits
• Village level procurement centres to help small farmers, and these should be
linked to processing units
• Incentivise feeder separation

SAMPADA Scheme for setting up food processing infra

Supplement agri by modernising processing activities and decreasing agri waste. See
Government Policies and Schemes
Operation Green
Aims to promote Farmer Producer Organisations, agri-logistics, processing facilities
Certification and labelling of agri output
Agmark is voluntary and hence redundant. Hinders progress of HVC and exports to
developed countries. Certification will also help in promotion of GI products
Integrated Cold Chain Availability Platform
Under Sampada
Mega Food Parks
See Vision Dec, 2019.
Draft National Food Processing Policy, 2019
See Vision Dec 2019 note on Mega Food Parks
One District One Product
To use economies of scale, common facilities, distinct identities and better marketing.
Focus on perishables. There may be more than one cluster of ODOP in a district. A
cluster may be also spread across 1+ districts.
The state would identify the product. Waste to wealth also focused. Tribal honey,
turmeric etc also.
Allied Sectors- Animal Husbandry, Dairy and Fisheries
Provide livelihood during seasonal unemployment. Livestock farming in India is part
of composite crop-livestock interaction. The by-products from several crops, like
hay, used for feed, while animal dung used as manure
Animal Husbandry and Dairy
• India top in milk production, 20% of global
• Due to wide inter-state variability, there is wide variability in per capita milk
consumption too. Assam has the lowest, Punjab highest

83
 • Demand for milk rising due to pop growth, urbanisation and income growth.
Small Ruminant(Sheep and goat) Sector
• Livestock contributes 16% of income for farmers
• Small ruminant mostly practiced by poor farmers
• Small have larger survival rates during droughts
• Their short reproductive cycle and multiple births allows farmers to sell them
for additional cash
Schemes for improving livestock and dairy sector

Budget 2020-21 measures

NREGA to be used for developing fodder farms
Eliminating Foot and Mouth Disease, Brucellosis and Peste Des Petitis Ruminants
Under Atmanirbhar Bharat, 15k cr Animal Husbandry Infra Dev Fund created
Way forward for small ruminants and poultry(DFI)
• R&D
• Ease transport constraints
• Upgrading infra for small ruminants under SAMPADA

Fisheries
Nutrition and food security to a large section and emp to 15 million.

84
India 2nd largest fish producer, dominated by inland culture fisheries.
5% of agri GDP and also the largest contributor to agri exports
Umbrella scheme Blue Revolution:Integrated Development and Management of
Fisheries
NITI reco
• Breed indigenous cattle with exotic breeds to arrest the issue of inbreeding
• Promote and develop bull mother farms
• Bulk milk chillers and high value conversion of milk
• Integrate the Blue Revolution scheme with NREGA

Fisheries and Aquaculture Infra Development Fund

NABARD, National Cooperatives Development Corporation and all scheduled
banks are loaning entities who will raise the bulk of the funds, with budgetary support
minimal. It will provide concessional finance to states and state entities, coop,
individuals to invest in fisheries development
See BR in hard notes
Sagar Mitras
Announced in the budget. 3477 sagar mitras to be set up to involve youth in the
develop fisheries
Draft National Fisheries Policy 2020
See Vision May 2020
Shrimp farms
Shrimp is India's biggest seafood export(greater than 50% both by value and volume.
Andhra, WB, OD, GJ, TN biggest producers). So to boost its exports and also
increase trust in India's frozen produce, the Centre has decided to certify hatcheries
and farms that adopt good aquaculture practices
India exported frozen shrimp worth 5 bn USD to US and China in 2019-20
MPEDA also has a certification scheme for aquaculture products called Shaphari
based on FAO's technical guidelines
Issues in shrimp
• Container shortage
• Consignments getting rejected due to food safety due to antibiotic residue

Marine Products Exports Development Authority(MPEDA)

Under Commerce Ministry. Statutory
The Act empowers MPEDA to regulate exports of marine products and take all
measures required for ensuring sustained, quality seafood exports from the country.

85
MPEDA is given the authority to prescribe for itself any matters which the future
might require for protecting and augmenting the seafood exports from the country. It is
also empowered to carry out inspection of marine products, its raw material, fixing
standards, specifications, and training as well as take all necessary steps for
marketing the seafood overseas.
Chairman appointed by Centre.
e-SANTA(Electronic Solution for NaCSA(National Centre for Sustainable
Agriculture, an arm of the MPEDA) Farmers' Trade in Aquaculture)
Platform launched to connect aqua farmers and buyers. .
India is also collaborating with Philippines for boosting fisheries. P will invest in
tuna processing units in India. Or India could export tuna to P for processing. As P
enjoys preferential duty structure in EU, this could help both India and P through
higher exports. (This is essentially subverting the Country of Origin rules)
Dairy Industry
India largest consumer and producer of milk but our exports very low due to very
high domestic consumption.
Has been growing at over 30% for the past 5 years
India also has the highest livestock pop in the world and this is the reason why the
production is very high even though the yield is very low
Women constitute around 70% of the strength of the dairy sector workforce
Only 20% of milk produced is converted into value added products despite them
giving 20% higher revenues(authentic)
As 50-60% of the final value in the dairy sector flows back to the farmer, this
sector has huge potential
Milk is a superior good with income elasticity greater than 1 and hence as India
grows richer, milk demand will increase
Use
• High nutrition
• High liquidity to farmers
• Higher income to farmers

A2 vs A1 milk
• Milk has 2 types of proteins- caseins and whey proteins
• A2 milk has A2 type of Beta-casein protein while A1 has A1 beta casein
• A1 is a natural mutation of A2 and is considered to be harmful and causing
NCD.

86
• Indian native breeds are of A2 type while the exotic breeds like jersey and
holstein have predominant A1 and hence harmful. Hence need to conserve
indigenous breeds
◦ Gokul Gram Mission
◦ National Animal Disease Control Program
◦ Artificial Insemination
Note that cattle may be homozygous(A1A1 or A2A2) or hetero. Also lactose is
present in both A1 and A2 and so shift to A2 cannot help with lactose intolerance
Issues
• Low productivity- Only 3.5 litres per animal per day, while it is 13 in NZ
• Low value addition
• Small scale- The number of milch animals per farm in NZ is 350 compared to
just 2 in India
Dairy and FTAs
• Very stringent opposition to RCEP
• Loss of livelihood as around 10 cr livelihood can be affected
• If farmers don't get remunerative prices from milk, cattle will be discarded onto
roads
Way forward- Quality, Quantity and Value Addition
• Interests of the consumers have to be balanced as huge malnutrition
• Dairy industry needs to modernise to export
• Focus on value addition, like producing cheese which India majorly imports-PLI
for mozarella
• Bring subsidised milk powder into the ambit of the NFSA- this will cure
malnutrition as well as create assured income for farmers
• Artificial insemination and quality germsplasm needs to be developed as per
DFI
• R&D on cattle
• Ration Balancing Program should be spread across all India to provide cheap
feed for livestock(DFI) (It is a software developed by the NDDB which provides
analysis to the farmer on the ideal feed to be given to the livestock)
Dairy Processing and Infrastructure Development Fund(DIDF)
Central Sector Scheme by Dairy Ministry, to augment capacity by infra. Fund under
NABARD, implemented by National Dairy Development Board and National
Cooperative Development Corporation. Funding in the form of interest bearing loan.
Need

87
 • In the light of Operation Flood, a large number of coops and dairy processing plants
set up, but these did not modernise
• The coops pass on most earnings to members, thus unable to modernise
The govt has increased interest subvention to 2.5%
SUTRA PIC- Scientific Utilisation through Research Augmentation-Prime Products
from Indigenous Cows
New research program under the DST with focus on indigenous cows. Partners are
DBT, CSIR, AYUSH Min, ICMR.
5 themes
• Uniqueness of IC
• Prime products from IC for medicine and health
• PP from IC for Agri use
• PP from IC for Food and Nutrition
• PP from IC for utility items
Independent researchers and NGOs can apply for funding
Will aim at complete characterisation of milk and milk products from indigenous cows,
their therapeutic properties and develop standards for the traditional dairy industry
Animal Husbandry Infra Development Fund
To attract investments in dairy sector. Incentives will be given for setting up plants for
exporting niche products
National Dairy Plan
See Govt Schemes note
Dairy sector and the pandemic
Only 40% of the milk produced is sold to cooperatives, as the price paid by
cooperatives is based on milk fat content and hence is less than the price in the open
market. But as the pandemic shut down the normal market, the non-cooperative linked
farmers are suffering, especially as dairy is not covered under MSP
There is also a shortage of nearly 40000 artificial insemination professionals. The
National Artificial Insemination program, running from Aug 2020 to May 2021, was to
achieve AI for those 604 districts with less than 50% AI coverage. It was expected to
boost milk production and hence generate 67k crore additional rural incomes.
Rashtriya Kamdhenu Aayog
High powered apex permanent advisory committee, set up in 2019 as an integral part of
the Gokul Mission. It also develops pastures, promotes schemes

88
Rainbow Revolution
The various colours represent various aspects.
• 2nd Green Revolution- Pulses and oilseeds
• White revolution- Dairy
• Saffron revolution- Solar and renewable energy
• Blue revolution- Fisheries
• Golden revolution- Fruits
• Silver- Eggs
• Grey- Fertiliser
• Pink- Meat

Switch to Pulses
The average yield of wheat and rice are 45 and 40% respectively less than in China. It is
lower than even the world average, even though Punjab and Haryana have much higher
yields.
In pulses, even the best state of MP is only 60% in yield compared to that in China. This
forces India to import pulses.- India is the world's largest importer and consumer
of pulses
The data also reveals India could make rapid gains in productivity
throughconvergence within India. Eg if all states were to attain even Bihar's
productivity in pulses, yield would increase by 40%
Reason for low productivity of pulses is mainly the skewed price policy and the fact that
most pulses grown on unirrigated land.
Hence most ofIndian agri is locked in low value prod even though demand for high
value prodn is booming. This has impact on farm income. NSSO reveals that the
median income of farmers in 17 states is just 20k annually
The skewed price policy towards wheat, rice etc also leads to frequent spikes in prices
of pulses and oilseeds
Pulses should be included in the NFSA. This will also help in weaning farmers away
from water guzzling crops
Steps taken
• PM AASHA

89
 •

• Deregulation of Pulses by removing it from ECA

• Hike in MSP for pulses

Way forward(DFI)
• Take steps to double yield from current 0.7 tonne/ha to 1.4
• Access to quality seeds. Existing seed replacement ratio for pulses is merely
15%. This has to be increased to 40%
• Adopt the model of Krishi Bhagya in Karnataka for developing small ponds in
farms for improving irrigation
• Focus on Integrated Pest Management as pulses are specially vulnerable to
pests
teps taken for self sufficiency in pulses and oilseeds under the National Food Security
Mission by distributing seed minikits.
From the year 2014-15, there has been a renewed focus on increasing the
production of pulses and oilseeds. The efforts have yielded good results. Oilseeds
production has increased from 27.51 million tonnes in 2014-15 to 36.57 million
tonnes in 2020-21 ( 3rd advance estimates), while pulses production has
increased from 17.15 million tonnes in 2014-15 to 25.56 million tonnes in 2020-21
The govt allows import of pulses in March, but on the condition that they have to be
completed before the beginning of kharif season. This import allows govt to control
prices.
Isues in GoI Pulse policy

90
While the govt is encouraging increasing area under pulses, it is also controlling the
prices heavily. In 2021, the govt allowed free import of pulses, in a major departure
from previous policy when only licensed millers and traders were allowed to
import. The govt also asked states to verify stock details of millers and traders, which
is the penultimate step before imposition of stock limits under ECA. This mere
announcement led to fall in pulse prices. But this lower prices will lead to farmers
not planting lentils
See GS3 for sugarcane, oilseeds
Beekepinng
BK dev Comm set up under Eco Adv council to advance bk in India to improve agri
productivity, emp, biodiversity. Recos:
• Recog honeybees as agri inputs and landless beekeepers as farmers
• Planting bee-friendly flora using women SHG
• Institutionalizing Nat Bee Board under Agri Min which will set up Integrated Bee
Dev Centres, honey price stabilization fund and data collection
• Apiculture as a subject of adv research in Ind Council of Agri Research
FAO database, India 8th in honey. BK can help in farm income. Expand products from
BK including bee venom, royal jelly etc
PM Call forSweet Revolution
Honey Mission of KVIC
• To enforce good beekeeping practices and develop quality trainers
• Provides training
• Provides loans for setting up units
Honey is aminor forest produceunder FRA
Apiary on Wheels
MSME Ministry. By theKVIC for the easy upkeep and migration of bee boxes
National Bee Board
Headed by Secretary in Agri Ministry. Any eligible registered beekeeper can apply for
membership of the NBB
Honeybees form hives on tall trees
Imp of Beekeeping
• Increases yield and quality of crops through pollination. Hence significant positive
externalities
• Honey and other products like beewax
• Increases farmers' income
• Export of products

91
 • Tribals
New Scheme
• Infra related to integrated BK dev Centres, Post Harvest Value Addition Facilities
• Capacity Building with focus on women
Way forward
• Expand scope of products
• Expand area

Compared to 2005-06, India's honey production has risen by around 250%.

Agricultural Marketing and Trade(mmmmm)

Domestic agri-marketing reforms

Under the Essential Comm Act, movement of goods can be restricted within states as
well as between states. Limits on private stocks of commodities. It has provided
disincentive for large investment in agri infra by the private sector.
Under the APMC, limited licensing of commission agents creates rent seeking. The
dualistic market created due to MSP further distorts markets
The restrictive prices increase gap between farm prices and retail prices
The Model Agricultural Produce and Livestock Marketing Act provides for progressive
agricultural marketing reforms, like setting up markets in private sector, allowing direct
sales to exporters, e-trading
Model Agri Produce and Livestock Marketing Act
Brought to correct the flaws of the APMC Act
Grameen Agricultural Markets(GrAMs)
Periodic rural markets have been converted into GrAMs to provide better market access
to farmers. It enables aggregation and transport from village to wholesale markets
e-NAM

92
Implemented by the Small Farmers Agribusiness Consortium, with centre providing
software free to states. Funded through the Agri-Tech Infra Fund.
First inter-state trade through e-nam between Andhra and Telangana
Benefits
• Quality assurance
• Boost farm income
• Efficient functioning of markets

E-NAM and COVID

Got major boost as govt has nearly doubled the number of mandis connected to it. The
govt introduced imp new features during the lockdown to connect more
• A trading module allowing FPOs to trade produce directly from their collection
centres without bringing it to mandis
• Warehouse based trading module allowing trade using e-NWR
• Logistics module offering users trackable transport facilities through aggregators
with access to over 10 lakh trucks
More than 1000 FPOs have registered
SFAC
It is a society to promote agri-business. Catalyses private investment through VC
Assistance Scheme. Its board is chaired by the Union Agri minister.
It is implementing the following schemes
• Agri-Business development through VC Assistance and Project Development
Facility
• Equity Grant and Credit Guarantee Fund Scheme For FPOs
◦ Gives grant upto 10 lakh to match the member equity
◦ CGF offers cover of 85% of loans extended by banks to FPOs without
collateral. Tamil Nadu has benefited most
SFAC is also one of the central procurement agencies under Price Stabilisation
Fund for pulses and oilseeds
Farming Produce Trade and Commerce Act, 2020
To operationalise the announcements made under the Atmanirbhar package
• Provide freedom of sale and purchase, barrier free inter and intra state trade
outside the APMC
◦ Trader includes exporter, retailer, wholesaler, food processor, miller
◦ Now anyone with a PAN can buy from farmers in any mandi across India.
Earlier, needed to be licensed with the state APMC
◦ A trader can operate in both trade area and APMC mandi. For trading in
mandi, have to register/license as per APMC act
• Set up an e-trading platform

93
 • Farmers will not be charged any fees or cess or levy for sale
◦ Currently in PJ, the charges come to around 8.5%
• Separate dispute resolution mechanism for farmers, by filing conciliation
proceedings with the SDM who shall refer it to a Conciliation Board appointed
by him and soln will be binding. Does not allow farmers to approach court. If
dispute unresolved by board in 30 days, SDM resolves. Can appeal to
Collector or Additional Collector
• Excludes existing mandis established under APMC acts from the definition of
trade area, thus creating new trade areas
• Has provision to prescribe modalities for registration of traders and txn. So if
the system does not work satisfactorily, the govt can step in
Adv
• Will legalise the already happening txn outside APMCs
• Like milk, allows purchase from farmgate, allowing farmers to be price makers,
rather than price takers
• Will allow small farmers to sell small lots, especially of fruits and veggies as they
mature in lots, like milk which requires daily collection
• Will declog the supply chain, eliminating the wedge
• Create business opp for rural youth
Chand argues that after 2006, there was no growth in APMC infra, major cause of farm
woes as middlemen proliferated and most trade happened outside APMCs. Also states
looked at them as revenue generation sources rather than infra, raising taxes and
levies(tie it with the argument in notes that there was no accountability for these
collections ). These made APMCs uncompetitive and wasteful
So to save APMC, need to bring down the commission and levies in states like PJ

94
Farmers(Empowerment and Protection)Agreement on Price Assurance and Farm
Services Act, 2020
To reduce risks to farmers due to weather dependence, low penetration of insurance,
market uncertainties, small size.
• Will empower farmers to engage with processors, wholsesalers, large retailers,
exporters on a level playing field without any fear of exploitation
• Will transfer the risk of market unpredictability from farmer to sponsor
• Prices and the process of price determination needs to be clearly mentioned
• Sale, lease or mortgage of farmers' land is totally prohibited and farmers' land
is also protected against any recovery
• Effective dispute resolution mechanism with clear timelines. First board, then if
unresolved, SDM. Appeal with Collector or Addl Collector. But no action can be
taken against the land of the farmer for dues recovery
• Min period of contract is one crop season. Max is 5 years unless the prod cycle
is greater than 5 years
Cite example of Nestle milk procurement in Punjab's Moga district since 1961, very
good system. However there are failures as well, like Pepsico in Punjab. So farmers
should be allowed to leave CF without hassle and hence dispute resolution mechanism
needs to be smooth
Also the fear of land being taken over by corporates is invalid as Act has provisions
against this. Plus no instance reported till now. Plus the Act is on contract farming, not
corporate farming

Economic concerns
• See concerns that Himanshu voices about Bihar abolishing its APMC Act and the
consequences in hard notes
• This is based on a study by the NCAER. Resulted in farmers being fleeced by
traders as pvt investments in creation of new markets did not come
• But Chand points out that there is a difference between BR and the FPTC act.
Bihar removed APMCs by allowing it to be completely dysfunctional. FPTC will
induce competition between APMC and pvt traders and hence force using
APMC as service rather than a source of revenue for states.
Thus Centre needs to keep the Bihar crisis in mind while framing rules
• Create a mechanism for recording txn outside APMCs, so as to track distress
and exploitation. This is there in the FPTC Act and can be operationalised when
needed
• Make mandatory for warehouses to register and issue e-receipts. Will help in
gauging stocks

95
Federal concerns
Punjab has raised objection that the above ordinances are a violation of the federal
structure.
Agricultural matters in various lists
• Union List- Inter-state trade and commerce(entry 42), fishing and fisheries
beyond territorial waters
• State list- Agriculture, Agri R&D, protection against pests, prevention of plant
diseases, preservation and improvement of animal stock. Irrigation and canals.
Rights over land, land tenures, transfer and alienation of agri land, land
improvement and agri loans, fisheries(domestic), relief of agri indebtedness, land
revenue and land records, agri taxes, duties
• Concurrent list- Contracts, but specifically excludes contracts related to agri
land, which come under state list.

◦ It is under the entry 33 of the Concurrent list through which centre is making
the laws. It was inserted in the concurrent list by the 3rd amendment to the
Constitution, 1954. This was made to make the provision of Article 369
permanent. The Article allowed Parl to legislate on certain provisions of the
state list as if they were in the Concurrent list, for a period of 5 years, from
the Commencement of Constitution. The govt, while moving the 3rd
amendment, to make the provision permanent, argued that this Union
interference was necessary as there was severe food shortage in several
states. Hence given that situation has changed, the govt use of this
provision is controversial

96
 ◦ Entry 26 of state list makes trade and commerce within state in state list.
Entry 27 makes production, supply and distribution of goods in state list to. But
both these are subject to Entry 33 of Concurrent list
◦ In the Constitution Bench ruling in ITC Ltd vs Agriculture Produce
Marketing Committee and Others, 2002, the SC upheld the legislative
powers of states in intra-state agri trading
• Thus the laws are not violation of the federal structure and were suggested by
the Economic Survey as well. But it also argued that it may go against coop
federalism
•

Implementation concerns
• Time inconsistency problem or policy credibility problem- When a decision
maker's preferences change over time
• Centre-state tussle

97
 •

Arhatiyas
They are middlemen. They are powerful agents in the rural landscape. They also are
important for the govt as they often provide labour and machines to shortstaffed
govt agencies. They get a commission and they are paid the MSP by the govt in
their bank account, and they then pay it to farmers via cash or cheque, with no
records.

98
Their influence also stems from the fact that they are influential moneylenders in the
rural areas.
But this system is very corrupt and leakage prone, with the farmers suffering. The
govt has been trying to eliminate the middlemen by linking the account of the farmers
directly with the PFMS
Other roles
• The arhatiyas also provide services like cleaning and sorting and packing the grains
• Vital difference between PJ-HR arhatiyas and other arhatiyas
◦ In PJ-HR, the sale price is fixed at MSP. So the arhatiyas' role is to maximise the
sale of the produce routed through them. They get the commission from the
buyer, not the farmer. This dependence on quantity as the incentive makes it
non-incentive compatible as it leads to very high stocks for the govt
◦ But in other states where non-MSP crops are sold, or where MSP
procurement weak, there the arhatiyas get commission based on price at
which crops sold. They collect commission from farmers. So their and
farmers' incentive aligned as they have to fetch good price to ensure good
commission
Essential Commodities Act, 1955
Applies to all India.
• EC means those specified in the schedule to the Act
• The Centre adds or removes from the sch, through a notification in the gazette,
also giving reasons in the gazette, in consultation with the state
• Such notification needs to be laid before Parl
• The above powers extends to those commodities under Concurrent list entry
33(can also do so for other goods)
• If the centre feels necessary for securing supply, distribution etc of EC, it may by
order regulate production, distribution, trade, including making licensing
requirements, price control, stock limits, collection of statistics, inspection of
books
◦ Price control order max period 3 months
• Centre may delegate powers or impose duties on state govts and its officers
through the notification for the implementation of the act
◦ Most of the powers have been delegated by the Centre to the States and
food and civil supply authorities in the states execute the act, including
issuing Control Orders
◦ The States can also issue orders under the Legal Metrology Act to ensure
that goods are not sold above MRP

99
 ◦ The states can ask the producers to enhance capacity. Can fix price under
ECA also
◦ Once the order notifying the good as EC is issued by the Centre, the states
can issue their own orders modifying the central order to make necessary
provisions
• The collector can also seize essential commodities if needed. Appeals by
aggrieved persons to a judicial authority appointed by the State govt
• All offences under the act are cognisable
• The court can also cause the details of the offenders to be published in
newspapers etc
• Max jail upto 7 years

Economic Survey on the Essential Commodities Act

Uses the Index of Economic Freedom and the Global Economic Freedom Index to
argue that India has been relatively unfree due to multiple intervention by the govt in
the functioning of the markets. India 129th rank
Shows that economic freedom has significant positive correlation with major indicators
of economic prosperity, like innovation, entrepreneurship, EODB

Note tomato not under EC.

Hank yarn made wholly from cotton also included in Essential Commodity. Face
masks and hand sanitisers also EC
Effects of ECA

100
 • Affects efficient functioning of agri markets.

◦ Agri is seasonal. So stocks necessary to ensure smoothening of supply

◦ ECA interferes by disincentivising investments in warehousing, storage capacity
◦ Act does not distinguish between those who genuinely stock and
speculators
◦ Shows the distortionary effect through the volatility caused in the onion
market in 2019 after the imposition of the Act
▪ There was also increased wedge between wholesale and retail prices
◦ Over 76000 raids conducted by states in 2019, without having any major effect
on containing price rise or wedge in prices.
◦ Conviction rate under the Act is as low as 4%
Way forward
• Strengthen the Price Stabilisation Fund buffer
• Improve implementation of the Act.
• Develop derivative markets
• Effective forecasting mechanisms
As the COVID experience shows, ECA still has relevance as it was used to successfully
control the prices of masks and sanitisers
Changes to ECA under Atmanirbhar Bharat Abhiyan
• Cereals, Edible Oils, Oilseeds, Pulses, Onions and Potato deregulated
• Stock limits will be imposed in exceptional circumstances like natural calamity,
famine when prices surge

101
 ◦ Such limits will not apply to processors or value chain participant, subject to
their installed capacity or to any exporter subject to their export demand
•

The powers of the states to impose licensing, stock limits, or take actions against
hoarders not affected by the recent amendment
The Harshvardhan Patil Committee as well as the High Powered Committee of
Chief Ministers recommended these amendments, to distinguish between
hoarders and genuine service providers
Prevention of Black Marketing and Maintenance of Supplies of Essential
Commodities Act, 1980(PBMMSEC Act)
Allows detention for max 6 months. Power delegated to states
Need for reforms in agri(Ramesh Chand)- Use these as broad points for agri, with
necessary stats inserted
• 1991 did not cover agri and so difference between non-agri income and agri income
has increased to over 1.5 lakh
• Imbalance between domestic demand and supply, with huge stocks while also
importing pulses, oilseeds(which can be grown in India). P and O not grown due
to the inability of farmers to bear the risks and poor marketing infra as well irrigation
and seed coverage
• Improve export competitiveness. Pop growth is decreasing, and so trade can be
a vent for surplus. But this requires aggregation, quality assurance,
transport(remember the problem in India's logistics, lots of small consignments
clogging the logistics network)

102
 • In contrast to agri sectors like milk and fisheries which are not regulated and show
high growth, regulated sectors show poor growth
• 85% of land small holdings and hence lack scale and risk appetite(Friedman savage
hypothesis). It is not economically viable for them to plant HVC like fruits and
veggies and take them to market which are far away(485 km2, DFI) as these
crops mature in lots. Hence need closer markets like milk collection centres
• Agri markets remain fragmented, despite growth of modern T&C. So plenty in one
area and penury in another, leading to price crash in one and high price in
another. Also poor integration of prices between lean and harvest months.
Very high spread between farm gate and foodplate prices due to low storage
and warehousing
• Need to increase food processing which requires desired quality raw materials in
right time. Buying small lots of varying quantities in disaggregated markets raises
costs
• Revive investments in agri

Comparing India's and China's agri reforms(Gulati and Fan's paper: The Dragon
and the Elephant)
• China started by reforming agri, India by mfg. China reforms
◦ Incentive reforms of land use rights. Breaking the commune system
◦ Agri production management through household responsibility system
◦ They ensured that the dismantling of the state planning was gradual, at the
pace of emergence of markets. This ensured that shocks were minimised.
This sequence emerged out of Deng's policy of 'crossing the river by
feeling the stones'.
◦ China also stepped up public investment in rural infrastructure post
reforms, unlike India which stepped up subsidies
• Initial conditions
◦ China had ensured wide access to education and health pre reforms and an
equitable distribution of land(importance of land reforms), ensuring that
reforms benefited all. China also has more smaller farms, but high productivity,
showing evidence for farm-size productivity debate
◦ In India, the failure of land reforms led to a large number of landless
labourers and wide disparity in landholdings, forcing government
handholding
• China's agri growth increased from 2.5% in 1966-77 to 4.6% in 1978-2002. Was
the biggest reason behind reducing poverty from 33% to 3%
• By choosing agri as the starting point for reforms, China ensured wider gains
from reforms and also built a consensus over reforms in other sectors

103
 • It also boosted the Rural Non-Farm(RNF) sector, and became the fulcrum of
growth by generating surplus through TVEs
• The RNF became more competitive than state owned enterprises, forcing their
reforms as well
Private Entrepreneurs Guarantee(PEG) Scheme
For construction of storage godowns in PPP mode by private entrepreneurs, CWC,
state warehousing corporations. No funds provided by govt. The pvt
party/CWC/SWC arranges fund and land. After godown completion, FCI guarantees
rent for 10 years to pvt parties and 9 years to CWC/SWC irrespective of quantum
of grains stored. PJ has the max capacity created under this
Kisan Rail and Krishi Udaan
Rail will set up by the IR through PPP with refrigerated coaches in express as well as
freight trains. For NE and tribal districts, the Ministry of Civil Aviation will launch Krishi
Udaan.
These will help in providing supply of cold storage for perishable
Agri Infra
India's focus on short term crop loans, led to long term infra loans ignored in agri.
Lack of cold chain, post harvest mgmnt infra near farm gate, leads to gaps in value
chain
Govt has announced financing facility of 1 lakh crore, through NABARD by
creatingAgriculture Infrastructure Fund, for funding agri infra atfarm gate and
aggregation points like primary agri coop soc(PACS), FPOs. All loans to have
interest subvention of 3% upto 2 cr
The fund is a major step towards reforming agri markets, complementing the legal
changes brought via the ordinances
The govt has allowed APMCs to tap funding through the AIF, thus showing its
commitment to improving them instead of phasing them out as was feared by
farmers.
Agri infra, especially post harvest infra, is key not just for spatial integration of agri, but
also temporal integration(convergence of spot and future markets- eg if a farmer
can't store, so will sell in spot cheaply. But if can wait, will not sell cheaply in spot as
can wait for higher prices in future. So higher prices in spot also, and hence
convergence)
Importance of the AIF
• Will complement the three farm laws

104
 • But it needs to be complemented with NWRs as small farmers will need liquidity. So
FPOs can given them 75-80% of payment on warehouse delivery. Hence working
capital for FPOs needs to be enhanced. For this banks need to step in with
cheaper loans instead of the current set up of FPOs borrowing mostly from
MFIs at higher rates
• Futures need to be integrated with FPOs participation. See hard notes for reco

Other steps for Agri infra

• Krishi Sinchayee Yojana
• Gram Sadak Yojana
• e-NAM
• DDU- Gram Jyoti Yojana

Grameen Bhandaran Yojana or Agriculture Marketing Infrastructure Scheme

A network of rural godowns set up under the Yojana in 2001-02. The scheme was a
capital investment subsidy scheme for construction/renovation of rural godowns . It
also aimed at promoting grading and standardisation. Construction could be taken
up by anyone, NGO, corp, SHG, individuals.. Free to decide location within municipal
boundary, also size between 100-30000 MT
Has been renamed as Agriculture Marketing Infrastructure scheme,as a sub-
schemeunder the Integrated Scheme for Agriculture Marketing(ISAM)
Capital subsidy at rate 25% or 33.3% is provided depending on type of
beneficiary.
Was coterminous with the 14th fC period and so ended on 31.3.2020
Contract farming
It can be thought of as a form of price futures. The contract- Pre-Harvest
Agreement,specifies theprice and quality of produce to be produced by farmers. This
protects the farmer in case the price falls below the MSP and gives them an assured
market. The buyers get assured price, quality and quantity. In some cases, the
buyers agree to provide technical support, required inputs etc
Advantages
• For farmers
◦ Makes small scale farming competitive as they can access tech, info, support
with minimum transaction costs
◦ Assured market for produce
◦ Reduces risk
• Agro-firms
◦ Optimal use of installed capacity
◦ Assured quality

105
 • Other benefits
◦ Increasing private participation in agri
◦ Improved productivity
◦ Better price discovery by breaking the APMC Monopoly
◦ Benefits to consumers
Challenges
• Lack of enforceability which any contract suffers in India
• Monopsony coordination problems which can bias it in favour of large farmers
thus further aggravating inequality
• Adverse gender effects- Women have less access to contract farming then men
• Lack of homogeneity in laws which can lead to regional inequality
• Promotes monoculture farming
Policy support
• Amending the states Agriculture Produce Marketing Regulation Acts to provide for
registration of sponsors, contracts, dispute settlement mechanisms
• NABARD has special refinance package for CF arrangements

Centre has a Model Contract Farming Act

• Takes out CF from APMC ambit which means fees not levied
• Limits of stockholding not applicable on CF produce
• Considers farmers as the weaker of the parties. Bars transfer of land to sponsor
co and sponsor co setting up permanent structures on land under all
circumstances
• Includes all agronomic, horticulture, livestock, poultry, dairy, fishery and all services
in the value chain, including extension services
• Every agreement to be regd with Registering and Agreement Recording
Committee at taluk, block or district level
• State level Contract Farming Authority for promotion
• Contract Farming Facilitation Group at panchayat level to quick decision
• Contracted produce covered under insurance
• Dispute resolution
◦ Negotiation and Reconciliation for mutual solution
◦ If fail, refer to designated dispute resolution officer
◦ If fail, appealing to Contract Farming Authority
Tamil Nadu first state to adopt the Act. The Budget 2020-1 proposes incentvising
states to adopt it along with APLM Act and Model Land Leasing Ac.Till now only
Arunachal has adopted the Model APLM Act, hence need for the 3 Central laws
Cooperative Farming
An org in which each member remains the owner of his land, but farming is done
jointly and profit distributed in ratio of land

106
Traditional Coop farming systems likePhad(Kolhapur) and Gallashi(Andhra)
Advantages
• Eco of scale
• Solves the problem of fragmented landholding
• Better access to tech and better management
Eg Amul
The Amul model was also used in Dhara, which enabled India to reach 95% self
sufficiency by 1995. Thus this is the best system as this has the benefits of the
three with min risks
Corporate farming-Sukhpal Singh, IIM A
Direct ownership or leasing of farmland by business organisations in order to
produce for their captive processing requirements or for the open market
Pro
• Argued that large scale corporate farming more efficient than peasant farming
• Induces higher private investment
• Will help in promoting exports

Cons
• Will increase landlessness and other stakeholders in the land like tillers will be
further harmed
• Investment by companies to purchase land is a socially wasteful expenditure as
contract farming can offer similar benefit
Agridex-Combine with hard notes on Agri futures

107
Agri Price Policy, Food management and Food Security(ppppp)
Farm Prices, Agri ToT and Rural Distress-cihn
The underlying principle of the price policy is to protect both producers(remunerative
prices) and consumers(food security). It also protects India from international price
volatility
Currently the food security system and the price policy have 3 tools
• Procurement prices
• Buffer stocks
• PDS
After improving steadily from 1990-97, the ToT worsened post 1997 till 2004. It then
improved rapidly post 2004 to 2010-11 and then declined till 2013-14

108
TOT for agri was 81 in 2004-05 and rose to 103 in 2011-12 and then fell to 99 in
2013-14 but the rose to 108 in 2017(authentic). Agri prices declined sharply post
2014. Food inflation declined from 6% in 2014-15 to 0.1% 2018-19, but rose
sharply in 2019-20.
The severely compressed food prices one of the main reason for rural distress
Rural wages after increasing at around 7% between 2007-12, increased just 1% pa
between 2012-19
• Significant increase in MSP and global commodity prices post 2004 reason for
better ToT
• Reverse event was the cause for decline after 2010-11. Further, inputs became
more expensive than the increase in output prices for agri
In 2009, the food inflation touched 20% due to several factors
• Poor monsoon
• Rising international prices
• Global supply shortages due to diversion towards biofuels
• Increase in dd due to higher growth
• NREGA
• Inefficiency in marketing
Hence an increase in domestic supply key for food security
Agricultural Price Policy, Farm Profitability and Food Security(Dev and Rao)
(Combine with hard notes)
Agri price policy has come under attack due to MSP higher than cost of production
leading to distortion of market and food deprivation.
Trends in cost and yields
• Various types of cost. C2 Cost of Cultivation(COC) per hectare, C2 COP per quintal,
A2 COC.
• A2 are paid out costs. Include the value of hired labour, seed and inputs,
depreciation etc. C2= A2+imputed value of family labour+rental value of
owned land+interest on owned fixed capital assets.

So while the intercrop parity between rice and wheat in MSP was heavily distorted
in favour of wheat till 2007, the parity has been restored. It is currently 0.98.

109
Slightly higher MSP for wheat.
Food Price Inflation(Nair and Eapen)

On the recent food inflation

Increased to 14% in Dec 2019, mainly due to supply shocks
• International food prices rising, like edible oil, which India imports a lot. The FAO
Food Price Index(International) highest in Feb 2020 since 2014. Thus
imported inflation
• Rise in inflationary expectations, as shown by RBI surveys, leading to actual
inflation
• Supply shocks due to rains and droughts
• Milk prices have risen, driven by rise in prices of cattle feed

Imports and Food Inflation

After divergence, global and domestic food prices rising again together due to
coronavirus
The FAO's Food Price Index, touched the highest in Feb 2020 since Dec 2014. This
has also been one reason for the rising food inflation in India
• India imports 2/3rd of edible oil needs and hence global inflation pushing food
inflation
• As global prices rise, Indian exports will rise and will further fuel domestic inflation

110
Thus divergence between domestic and global ending in 2018

Correlate this with the trend in agri growth. Eg in 2004-08, when high agr growth,
the food price index also rose from 65.5 to 117.5. Similarly, during the 2014-16

111
collapse, food prices fell from 115 to 92.
Price Fluctuations in Agriculture
Reasons
• Seasonal variations, resulting in changes in supply. For example, onion prices
always rise in Sept.
• Natural factor, like monsoons
• Cobweb phenomenon-Production responding to prices with a lag, causing a
recurring cycle of price variations as farmers base sowing decisions on previous
period
• Market imperfections
• Infrastructure
Govt intervention
• Export Restriction
• Stock limits under Essential Commodities
• Distribution through channels like NAFED and SAFAL

Other, long term measure

• APMC
• Price Stabilisation Fund
• Operation Greens
• Scheme for Agro-Marine Processing and Development of Agro-Processing
Clusters(SAMPADA) incorporates schemes such as mega food parks and cold
chains. Has been renamed as PM Kisan Sampada Yojana. Coterminous with
14th FC cycle. See Government Policies and Schemes
• Connecting APMCs to e-NAM
• Futures market which can help break the cobweb mechanism
Way forward
• Rationalise the NAFED system, procuring more during surplus, thus giving farmers
reasonable price and releasing in shortage so as to save consumers from inflation
• Tech driven price forecasting to allow timely intervention
• Investment in agri-logistics will improve the supply chain and also prevent distress
sales by farmers
◦ Agriculture Infra Fund

Talk about effects of excess volatility on govt, farmers, exporters, industry, consumers
Operation Greens- Ministry of Food Processing Industries
Launched to stabilise the price of Tomato Onion Potato(TOP). Has 3 parts- Short
term price stabilisation measures(NAFED nodal, with MOFPI providing 50%

112
subsidy for transport and storage for TOP), MIEWS, Long Term Integrated Value
Chain Development Projects(this also involves developing FPOs)
Launched in 2018-19. Will also promote FPO, agro-logistics
Onion prices most volatile, then tomato then potato
Potato stable due to high processing to production ratio and a large cold storage
infra dedicated to it
Market Intelligence and Early Earning System(MIEWS) Web Portal
For real time monitoring of Tomato, Onion, Potato Prices, generating alerts for
interventions under Op Greens
Under Ministry of Food Processing
Operation Greens has been extended to cover all fruits and vegetables- Move from
TOP to TOTAL
Will also provide 50% subsidy on transportation from surplus to deficient areas and on
storage
Performance
6 projects have been approved for value chain development. But because it envisages
release of subsidies on a reimbursement basis, only 8/360 cr has been released.
It has not succeeded in price stabilisation as per ICRIER
Price Stabilisation Fund
Any fund for the purpose of containing extreme volatility in prices of selected
commodities
India's first PSF created in 2003 for some export oriented plantation crops. Another
created in 2015 for agriculture and horticulture commodities, limited topotatoes
and onions initially and pulses added later
PSF is different from MSP based initiatives as MSP tempers prices from the perspective
of farmers while PSF does this for consumers
2015 PSF is a Central Sector Scheme
Ministry of Consumer Affairs
A strategic buffer of the commodities is maintained for subsequent calibrated
release. The buffer is built using direct purchases from farmers at the Mandi
The PSF is also used to give interest free advances to govt agencies to undertake
market intervention operations
The actual utilisation of the scheme is heavily dependent on the state govt
Market Intervention Scheme- DACFW
Similar to MSP, MIS is also a price support scheme. Implemented at the request of a
state. For perishable agri goods and horticulture only, iff the production rises by

113
more than 10% or price falls by more than 10% compared to previous year.
States have to bear 50% loss(25% for NE) in case of loss in implementation and the
central share of losses are released to states
Govt using it to procure apples directly from farmers in Kashmir 370 lockdown, with the
help of the National Agricultural Cooperative Marketing Federation of India
The apple industry in Kashmir is over 16000 cr and has a share of 75% in the country's
apple production
Food Management
Objectives are providing fair prices to farmers, cheap food to the poor as well as
maintaining buffer stocks for price stability
For this, the instruments are MSP and Central Issue Price(CIP) at which the GoI
allocates grains to states for distribution, through the Fair Price Shops
The PDS was restructured in 1997 in the form of TPDS to ensure better targeting and
reduce leaks, thus also reducing fiscal burden
While the MSP has consistently gone up due to rising costs, as well as increasing
logistical costs for the govt, theissue price has remained same since 2013 when
they were fixed for NFSA .
Buffer stocks
Against the requirement of 41 MT, the actual buffer stock was 75 MT. This is very costly
due to storage etc. It also leads to inflation.
The concept ofbuffer stocks was introduced from the 4th FYP.
The Operational Requirement is the need for 4 monthsof welfare scheme ops like
TPDS. Rest is Buffer but physically both are not distinguishable
Reco of the Shanta Kumar Committee on restructuring FCI
• On procurement
◦ FCI should hand it over to states that have gained experience and have infra.
The FCI should only accept the leftover from states(after meeting their
respective needs under NFSA) and move it to the deficit states
▪ This is being done through the Decentralised Procurement Scheme but as
participation is voluntary, major states like PJ and HR don't participate. Also
DCP is only for rice and wheat
◦ Central should not accept any extra grain beyond its requirement, if the
states give additional bonus above MSP- Done.. See Decentralised
Procurement

114
 ◦ The statutory levies, including commissions need to be brought down to 3-
4% of MSP and this should be included in MSP itself
◦ Introduce cash transfer in lieu of PDS- Supported by Gulati and Saini, as well
as Chauhan et al
◦ Better support ops for pulses and oilseeds
• On PDS and NFSA
◦ Defer implementation of NFSA in states without sufficient computerisation
to prevent leakages
◦ Bring coverage down to around 40% of pop
◦ Pricing for non-Antyodaya households should be linked to MSP
• On logistics
◦ Outsource stocking
◦ No stocks should remain in warehouses beyond 3 months
◦ Covered and plinth(just putting a cloth over the grains) should be replaced
◦ A transparent liquidation policy should kick in automatically when surplus
over buffer norms
• Abolish levy rice under which govt buys certain % of rice from mills. Mills only
allowed to sell remaining on the market.
• Deregulate fertiliser sector
• FCI should reinvent itself with the primary focus on creating innovation and
competition in the food industry
ES on FCI reforms

115
Food Storage in India
See Vision December, 2019 or Physical notes. Equivalent
New Measures in Budget
• Creation of warehouses through VGF on a PPP mode
• Warehouse building by FCI and Central Warehousing Corporation on their land
• Village storage Scheme run by SHGs
• Integration of e-Negotiable Warehousing Receipts and E-NAM
• NABARD to perform geo-tagging of warehouses

E-NWR
NWR is a document issued by warehouses against the crop deposited. Negotiable
means they are transferable by simple signature, which allows the NWR to be
traded and used as collateral
Defined in the Warehousing Act
Benefits of NWR
• Increases credit to farmers
• Prevents distress sales as farmers can store the goods, including perishables and
avail credit instead of selling them at loss

116
 • Encourages scientific warehousing as the act mandates the warehouses to register
with the Warehousing Development and Regulatory Authority
Agriculture and Climate Change- ES 2017-18
The average increase in temp between 2010 and 1970 in kharif is 0.5* and in rabi is 0.6
degrees. Rainfall has declined in kharif by 26 mm and rabi by 33 mm.
There is also an increase in the number of extreme weather days
Close to 55% of cultivated areas in India water stressed
Spatially, temp increases and rainfall decline correlated
The IPCC report on Land and Climate Change also highlights the negative impact
that CC having on food security, through more pests, droughts, fires
Impact of weather on agri productivity
• The impact of temp and rainfall is highly non-linear and felt almost only when
extreme
• Extreme shocks have highly divergent effects on irrigated and unirrigated(less
than 50% of the cropped area is unirrigated) areas, almost twice on the latter.
• Apart from the level of rains, or the lack of it, the timing also matters. Hence the
number of dry and hot days has significant effects
• Moreover the effects of temp, rainfall and days are additive
• While cereals are relatively immune, pulses are more vulnerable
• Given the above, the ES estimates the decline in farm incomes could be to the
tune of 25% for unirrigated areas and 15% for irrigated ones
Thus though Indian agri seems resilient to moderate climate shocks, there is ample
evidence that extreme weather events are increasing and this shows the vulnerability.
Policy Implications
• India needs to spread irrigation, and this is becoming more challenging in the face
of rising water scarcity. Hence the focus should be on per drop more crop
• Power subsidy needs to be replaced by DBT so that power can be costed and
indiscriminate use of tubewells stopped
• Need to embrace agri R&D with increased rigour, to develop resilient tech and
seeds. Especially imp for crops like pulses and soyabean which are more
vulnerable
• Climate change will increase uncertainty and hence a robust insurance scheme.
The PM Fasal Bima Yojana needs to be combined with drones and weather
modelling for climate impact assessment
• Need to improve Agrometeorology
◦ Currently inadequate infra and reach as well as low awareness among farmers.
Also lack of trained agro meteorologists to combine met data with agri
requirements

117
DFI Reco
• Judicious land use planning
• Perspective plan for treating the degraded land following participative watershed
management
• Adjustment of planting dates
• Create virtual micro weather stations to improve forecast. Eg the Varun Mitra
project of Karnataka showed the benefit of met advisory services to farmers
The ICAR has launched the National Initiative on Climate Resilient Agriculture
Swaminathan argues that there are 2 agri in India. The well irrigated, input-
addled, price and procurement supported cereals in Northern India, where the
concern is replacing inefficient subsidies with DBT
Then there is the inadequate irrigation, ineffective procurement and insufficient
investments, high market barriers crops like pulses, and horticulture and
livestock, primarily in western, east and south India
India can learn from China which is a leader in climate smart agri and
hasconverted the Loess Desert into fertile land. Also coop with Israel
WTO
Trade Policies of agri-products
In 1991, most of agri external trade was subject to barriers, like licensing, canalising etc.
India's agri trade policy has been ad hoc, subservient to the goal of food security
and price stabilisation. In 2004, the import duties were eased, for edible oils and now
India imports more than 60% of its requirements in oil. Exports of cotton, tea and
meat has been gradually opened.
Despite this, still high restrictions, especially in food crops.
Indian agri exportsincreasing from 30 bn in 2016-17 to 39 bn in 2019-20,but India's agri
exports share in global agri trade is just 2.15%. India has atrade surplusof 33% andsince
1991, has always been a net exporter.The Balassa index agri export competitiveness
is 1.6, compared to 1 for manufacturing
The most contributory sector have been meat, dairy and rice.
Agri exports fell in 2014-16, and in 2019-20, the trade surplus was just 11 bn down
from peak of 24 bn in 2013-14
In 2013-14, agri exports reached peak of 43 bn USD and agri trade as a % of agri
GDP was at peak of 20%. Agri was then most globally integrated.

118
Also as India exports mostly raw, unprocessed crops, the Prebisch Singer
hypothesis applies, saying TOT worsens for India

The govt also created a Rice Export Promotion Forum under the APEDA
Problems
• Export controls distort markets
• The policy has a heavy pro-consumer bias, so controls are imposed when
international prices are high, which leads to farmers not investing in exportable
crops
• Huge dependence on oilseeds imports, which alone constitute around 10 bn of
imports
• Low value addition
• Non-tariff barriers by other nations, EU. Eg Basmati exports suffered because of EU
restrictions on pesticide use. Same for pomegranate. Not enough certification
and testing labs
Trade issues
• High level of subsidies given by developed nations, masking them as WTO
compliant, as WTO defines subsidies in aggregate, not product based
• Due to WTO, quantitative restrictions on imports dismantled. Given India's
productivity is low in several commodities, like oilseeds, huge imports of
these
• Developed nations have also used the SPSS agreement to block imports of
agri goods
Way forward
• Exploit India's Comparative advantage. Looking at the revealed CA based on
trade data, fisheries best bet as have highest share currently at 6 bn of exports.
Then rice spices, then buff, then sugar, then tea and coffee, then fresh fruits and
veggies, then cotton

119
 • But as rice and sugar benefit from heavily subsidised inputs, leading to
overexploitation of water, high exports of rice and sugarcane lead to virtual
export of water. Hence need to rationalise subsidies
• Focus on palm oil which has biggest potential to make India reduce imports

Reco of HLEG on Agri exports constituted by 15th FC

• Focus on 22 crop value chain and 7 lighthouse value chains which India must
capture, in rice, shrimps, buffalo, spices, fruits and vegetables, vegetable oil and
wood
• Focus on improving Brand India in foreign markets
• Enable private investment
• Create robust institutional funding mechanism

Use the broad pillars.

Analysis of agri trade 2020-21
Reached record 41 bn USD level, which also improved domestic farm prices and farm
income. But compared to 2013-14, agri trade/agri GDP is 13%, as Indian exports
becoming uncompetitive and imports restrictive
• Rice was the most exported by value and volume (21% of value)
• The n marine products, spices, buffalo meat and sugar.
• The high export of rice and sugar concerning.

120
 •

US Japan protest over Indian onion export bans

Have registered protest over India's frequent export bans in the WTO arguing that these
sudden bans without prior notice harm import countries. They have asked why India
does not have an export quota which will allow it to export a minimum quantity
As per Article 12 of the AoA, prior notification is required for such actions
WTO and Indian Agriculture(Manage.gov.in training material, Biswajit Dhar and
Sudha Narayanan epw paper)(Also has general notes on WTO and GATT)
WTO replaced GATT in 1995. They have greatly increased world trade. Eg the trade in
2000 was 22 times the level seen in 1950.
GATT system was developed through a series of negotiations. The last round of the
GATT, the Uruguay round, led to the WTO.
In 2000, talks on agriculture started under the Doha round.
Over 75% of WTO members are developing or Least Developed nations and so the
agreements include special provisions for them, like longer time periods to implement
commitments
Structure of the WTO
• Decisions made by entire membership, typically by consensus. A majority vote is
also possible
• The topmost decision making body is the Ministerial Conference which meets at
least once in 2 years.
• Below this is the General Council consisting of ambassadors and delegates. The
GC also meets as the Trade Policy review Body and dispute settlement body.

121
Exchange controls limit the amount of forex available to importers, thus acting as a
general restraint on imports.
Exchange rate management- Devaluation raises the price received by exporters and
also make imports expensive. So they are good for trade balance from both
perspective. While devaluation can be achieved through fiat, overvaluation is the result
of delay in timely adjustment of rates when domestic inflation is higher than that of the
trade partners. Countries delay devaluation due to fears of further increasing inflation
WTO Agreement on Agriculture
Was negotiated at the Uruguay round. Developed nations were required to complete
commitments by 2000, developing by 2004 and LDCs no requirement. Excludes
fisheries, forestry products, rubber, jute, sisal, abaca and coir.(These products
can be used in answers on how WTO had impact on agri exports. As they are not
covered, India is not benefiting as developed nations not required to provide
access in them. Jute especially is a product where India has a CA)
Features
• Market access

122
 ◦ Tariffication- All NTBs need to be abolished and converted into tariff
equivalent. Developing nations allowed to maintain ceiling bindings instead
of tariffication
◦ Tariffs are to be reduced with min rate of reduction of 15% and average 36%
over a 6 year period. Developing nations, reduce by 24% over 10 years.
◦ Special safeguard duties allows imposition of additional duties when there are
import surges
◦ Minimum Access equal to 3% of domestic consumption in 1986-88 will have to
be established for 1995, rising to 5% at the end of the implementation period.
◦ Developing nations are allowed to designate some products as special
products which are subject to flexible tariff reduction
• Domestic support
◦ For domestic support policies, the total support given in 1986-88 measured
by Total Aggregate Measure of Support(AMS) will have to be reduced by 20%
for developed and 13.3% for developing nations. Policies that amount to
support of less than 5% of the production value for developed and 10% for
developing nations exempt
◦ Policies which have minimal distortions are also excluded. These include
public stock holding for food security, domestic food aid
◦ Developing nations also allowed special treatment in the form of purchases for
and sale from food security stocks at administered prices provided that the
subsidy to producers is included in the AMS
◦ They are also allowed subsidised food distribution for the poor
◦ Investment and input subsidies are also exempt for developing nations(input
subsidies to only low income farmers in developing nations, otherwise included
in Amber)
◦ Note that reduction commitments refer to total level of support, not
individual commitments, thus giving nations flexibility. Misused by US, EU
◦ Issue
▪ The heavy domestic support by the developed nations depress world prices
and threaten farm viability in developing nations
• Export Subsidies
◦ Developed required to reduce export subsidy expenditure by 36% in 6 years.
For developing, it is 24% for 10 years.
◦ On products not subject to export subsidy reduction commitments, no such
subsidies can be granted in future.
The AOA was meant to encourage low cost, efficient producers against the
financially powerful ones. Eg the reduction of subsidies and more market access
were meant to help the efficient producers.
But despite the expectations, the AoA has failed largely. Developing nations also
suffered as international prices collapsed due to subsidies given by the EU and US

123
The WTO differentiated between trade distorting and non-trade distorting
subsidies, by introducing 3 sets of boxes
• Amber box- Trade distorting. Subject to restrictions
• Blue Box- Special Category
• Green box- Not subject to restrictions
WTO: Domestic Support- Amber, Blue, and Green Boxes
Green box’ roughly translate into a green ‘go’ signal, and amber could be considered a
cautionary light, there is no red box. Instead, the WTO has invented a ‘blue box’ which
is used for what the organization considers production-limiting programs
Green box
• Policies not restricted by the trade agreement because they are not considered
trade distorting
• These green box subsidies must be government-funded — not by charging
consumers higher prices, and they must not involve price support. They tend to
be programs that are not directed at particular products, and they may include
direct income supports for farmers that are decoupled from current production
levels and/or prices. Also involve public service programs like research,
training
◦ The US and EU provide green box subsidies to the tune of almost 100 bn
and this heavily distorts international markets and hence, developing
nations, led by China and India have been demanding scrapping this
Amber box
• Agriculture's amber box is used for all domestic support measures considered to
distort production and trade- Measures to support prices or production
quantity specific support. Both product specific like MSP and non-product
specific like subsidies on inputs like fertiliser
Blue box
• Any support payments that are not subject to the amber box reduction agreement
because they are direct payments under a production limiting program
• The blue box is an exemption from the general rule that all subsidies linked to
production must be reduced or kept within defined minimal levels. It covers
payments directly linked to acreage or animal numbers, but under schemes
which also limit production by imposing production quotas or requiring
farmers to set aside part of their land
• Opponents of the blue box want it eliminated because the payments are only partly
decoupled from production. Others say the blue box is an important tool for
supporting and reforming agriculture, and for achieving certain ‘non-trade'
objectives, and argue that it should not be restricted as it distorts trade less than
other types of support
India's Commitments

124
 • Tariff and Market Access- Binding all commodities(setting upper limit on tariff),
ranging from 100% for primary products to 300% for edible oils
◦ India's bound tariff considerably higher than the actual tariff. Eg for edible
oils, the bound is 300% whereas the actual ranges from 60-80%
◦ For some other products like wheat and rice, the tariff close to the bound to
protect India from cheap imports as their prices slumped due to subsidies by EU
and US
• Domestic support
◦ India was not required to reduce its spending on farm subsidies since its
levels of spending were far lower than the limit set by AOA. Developing
nations were required to reduce subsidies only if the total outlay on them
exceeded 10% of the agri output
◦ India was also allowed exemptions under the Special And Differential Treatment
being a developing nation.
• Export subsidies- India not a traditional user of export subsidies. Indian did not
have any export subsidy except those in which developing nations had been
exempted from reduction commitments under Article 9 of AOA. Hence as per the
AOA, India cannot resort to export subsidies in the future even though EU and
US could continue to offer high amount of export subsidies.
◦ India however benefits from the Special and Discriminatory Measure that
allows subsidy on marketing cost and transport charges related to exports
◦ In this segment, the quantity of subsidised exports increased even though
the subsidies provided fell. Eg in fresh fruit, the quantities of subsidised
exports increased from 23k tonnes in 1996 to 110k tonnes in 2001
Thus India did not take up onerous obligations while signing AOA. It retained
flexibility on farm subsidies and the tariff commitments seem comfortable,
particularly important for addressing both food security and livelihood concerns
Implementation of WTO agreements
• High level of subsidies by EU and US.
• The flexibility to declare subsidies in aggregate terms was used by the US to
provide substantial subsidies in commodities in which it had substantial export
interests, i.e corn, cotton, soybeans and wheat.
◦ This helps US garner more and more share of markets as it can sell at lower
prices It also helped US dispose off its surpluses, while keeping domestic prices
from crashing.
◦ Food aid not under WTO ambit as a separate discipline, which further helped
US especially, to dispose large surpluses as food aid.

125
 ◦ These heavily subsidised exports create serious problems for the net food
importing developing nations as it creates uncertainty for food security as
well as BoP problems. Food aid also delays in production improvement in
developing nations, increasing their dependence.
• The peak tariff rates allowed, eg India 300%, make tariff discipline redundant. In
most nations, the agri tariffs are much higher than non-agri tariffs despite the AOA
NFSA and WTO(Sudha Narayanan)
Under the Act, the combined coverage of priority households and Antyodaya
households amounts to 75% of rural and 50% of urban households. To support these
entitlements, the govt has to procure around 30% of production.
• Stocking and distribution- Under WTO, all food subsidies(NFSA) and public
stocking for food security are green box. Govt aid to private storage also exempt.
The WTO requires that such activities need to be transparently done and in
accordance with officially published guidelines.
◦ Thus the main architecture of food delivery systems under the NFSA are
consistent with AOA
• Purchases- Under WTO, purchases by govt for food security purposes shall be
made at market prices and also should not exceed the world price(an External
reference price committed as part of AOA. The ERP also gives Aggregate
Support Measure as the [MSP-ERP]*Q. The ERP is fixed at the 1986-89 base. For
India, rice ERP is 3520 per tonne and for wheat 3540 per tonne) Thus if the
procurement done at MSP, then a subsidy is involved and is therefore a part of
amber box.
◦ For developing nations like India that have not taken reduction commitments,
there are 2 obligations
▪ Product specific support in respect of a particular product should not exceed
10% value of production of the product.
▪ Non product specific support should not exceed 10% of the total value of
agri prod.
◦ The question is therefore, does the NFSA, for which the procurement is
done at MSP, breach the 10% limit.
◦ NFSA procurement does not breach the 10% limit.
▪ India needs to make sure that if MSP increases, then the production also
increases. Also, there should be limit on open ended procurement.
▪ These aspects are important regardless of the WTO

Agri exports and WTO

AOA requires that sales from food stocks shall be made at no less than the current
domestic market price for the product and quality in question. Export subsidy clauses
also forbid dumping

126
Also On products not subject to export subsidy reduction commitments, no such
subsidies can be granted in future.
Peace Clause
See Vision April 2020

PDS and Subsidies

Casting the Net- PDS after the NFSA- Dreze and Khera
Base analysis on the poorest states of India- BR, JH, OD, CG, MP, WB.
NFSA
The NFSA marks India'stransformation from a ship-to mouth existence to
implementation of the world's largest social protection programagainst hunger
with home-grown food.
The NFSA covers over 80 cr people through the PDS,mandates nutritious mid day
meals and maternity benefits for pregnant women.
• Extends PDS benefits to 75% of rural and 50% of urban pop
• Recipients in 2 categories- Priority households and Antyodaya Anna Yojana
households.
◦ Priority- 5 kg per person per month at price 3, 2, 1 for rice, wheat and millets.
◦ AAY entitled to 35 kg per household per month at same prices irrespective of
family size
• Pregnant and lactating mothers to get maternity benefit of not less than 6k-
The PM Matru Vandana Yojana for its implementation. Food to pregnant, lactating
mothers till 6 months post delivery, free of charge
• Children upto 14 years entitled to nutritious food. (for 6 months to 6 years, in
anganwadis. For 6-14, mid day meal
• In case of non-supply of food, will receive a food security allowance. Paid by state
and prescribed by Centre
• For the purpose of issuing ration cards, the eldest woman in the hh older than
18 shall be the head for the purpose of ration cards
• Every state to appoint State Food Commission to monitor implementation
• State wise ratios(within the overall cap of 75% and 50%) for urban and rural
areas were calculated using NSSO data such that everyone below a given
national per capita expenditure benchmark is covered. The population data
from 2011 census was used to translate these ratios into absolute numbers.
◦ But these numbers are not updated as population increases and hence over
time, coverage falls as population increases

127
 ◦ Hence states are reluctant to issue new ration cards as Centre's
contribution frozen based on 2011 census data
• ID of people, within the number specified above, to be covered under
Antyodaya and TPDS(priority) made by state govt, some states using SECC
and some using simple inclusion-exclusion
• Proportion of eligible households varies between states and rural and urban areas.
So the min coverage of PDS higher in poorer states. Eg 85% of rural JH covered
Impact of the NFSA
• The biggest gain from NFSA for the states was expansion of the PDS, increasing
from 50% to 80% as per NSS data pre and post NFSA
• Post NFSA, the household eligibility list was far more reliable as it reduced
exclusion-inclusion errors. This was facilitated by the expansion of the PDS.
• The switch from per household to per capita for priority households is more
logical and equitable, but it led to missing names. Eg children born after 2011
SECC were often excluded from the ration cards.
• Purchase-entitlement ratios- What entitled households are able to purchase from
the PDS as a proportion of their entitlements. Since allocation of grains at a level is
derived from aggregate requirements, eg aggregate need at district level, PER
shows leakage.
◦ CG, WB, OD have PER higher than 90% showing well functioning PDS.
◦ One major reason is that in CG and OD, private PDS dealers have been
replaced by community institutions like gram panchayats.
• The number of Antyodaya cardholders fell post the NFSA

PDS Reforms
• Broader coverage and clearer entitlements- this opposed by the Shanta Kumar
Committee
• Separation of transport and distribution agencies
• Viable distribution commissions
• Fixed distribution schedules
• Electronic weighing
• Deprivatisation of ration shop management- One major reason that PDS
performs poorly in JH and BR and well in CG and OD is the dominance of private
ration shops in the former
• Computerised ration card management- NFSA forced laggard states to catch up in
this regard.
ES on reforming NFSA

128
 • NFSA should cover only the bottom 20% of the population while the issue
price for the rest needs to be linked to the MSP so as to reduce the food
subsidy. Was reco by the Shanta Kumar Committee as well. But given India's
very high malnutrition, which extends beyond the bottom 20%, this reco is not
good
• Alternatively, give income transfers to the consumers through the DBT

Some best practices

• MP uses Samagra database to update the PDS database reflecting an important
improvement over static ration card database.
• MP also uses offline POS machines, thus circumventing the problem of internet
connectivity
NITI on reforming NFSA
• Schedule I of the Act allows the Centre to modify the Central Issue Price, but has
not yet been done and so 3/2/1 still valid. This was reco by the ES also
• The Act says that the % of population coverage in each state shall be determined
by Centre for urban and rural areas, and the total population to be covered will be
accordingly determined by the Census. Hence frozen since 2013 which was
pointed out by Jean Dreze also. So demand for alternative updation which NITI
provides
◦ Suggests that the coverage ratio for rural-urban be reduced from 75-50 to 60-
40
◦ This will result in savings of 47k cr for the Centre
◦ If the coverage remains same, then the population covered will increase and
additional burden of 15k cr
PDS Leakages- Dreze and Khera
Leakages ranged between 40-50% throughout the 2000s.Declined from 54% in
2004 to 42% in 2012.Leakages more in poorer states raisingquestions of equity.
Leakage also raises food bill
• The decline driven by sharp decline in states that are known to have
undertaken serious PDS reforms like CG, OD, BR.
• A number of states with high leakages have shown virtually no progress, like
MP, UP.
• Some implemented reforms under the ambit of the NFSA.
• Diversion in rice lower than wheat.

In Bihar, the leakages were to the extent of 90% in 2000s. But in 2011, it introduced a
system of tracking coupons, leading to improvements, but it still remains the state

129
with one of the highest leakages. Bihar's experience suggests that the worst
performers are also capable of improvement
Rural poverty and the PDS
PDS can be considered as an implicit transfer, with the transfer being

Qh is the subsidised purchase, p market price and q is the PDS issue price. Thus Th
hives the money saved by households through PDS.
They argue that the price indices used for poverty line estimates do not measure the
contribution of PDS to lower cost of living and hence Th must be used to adjust the
MPCE and hence poverty estimates.
Using this analysis and using the Tendulkar Committee estimates, the authors argue
that PDS has resulted in an 11% reduction in HCR in 2010. The impact was higher in
states where the PDS was more efficient, like OD.
The govt has introduced schemes on End to End Computerisation of
PDS(mandated by NFSA) and also on Integrated Management of PDS
Outdated Census data and PDS
The NFSA covers 67% population based on 2011 census data. But considering the
growth in population between 2011-20 and even after accounting for growing
urbanisation, around 10 cr people left out due to outdated census data, as per
Khera and Dreze. Biggest gap in UP, where approx 3 cr people out
Integrated Management of PDS(IMPDS)
To introduce nationwide portability
PDS Leakage- Gulati and Saini
• 47% of leakage from PDS in 2011-12, with UP, BR, MP, MH and MP, having over
60% of India's poor having more than 50% leakage. Thus PDS also does not help
the poor as much, undermining equity due to leakage
• Opt for DBT instead of PDS.

130
 •
we have to consider the fundamental flaw in the design of
the policy. The system tries to achieve an equity objective
(extending economic access to food for the poor) by
using a price policy instrument, instead of an income
policy instrument. Fundamental principles of policy
making suggest that there is a high probability that the
system will fail to deliver on the promises made (as
corroborated by the various evaluative studies), or will
deliver at a huge cost, which may not be worth the price
because the efficiency losses may exceed welfare gains
that it is trying to achieve. (This is the crux of the PDS
problem)
•
His suggestion of DBT instead of PDS also supported by
Chauhan et al
PDS leakage also harms farmers, as the siphoned off grains
are sold in the open market, dampening the open prices. As
the majority of farmers sell in the open market, they suffer
Targeted PDS
Started in 1997, though the subsidy for APL ended in 2000. TPDS also led to increase in
entitlement of BPL from 20 kg to 35 kg per month per household. The proportion of BPL
households was fixed by the Centre in 1997 based on 1993-94 poverty line. This forced
states to downsize their PDS based on the quota they received from the centre. But
states soon realised that this led to significant exclusions. In 2004-05 only 53% of
poor households had BPL card. This was because the PC PL was too low.
They remained unchanged till 2007, when states began expanding coverage.
Even after the subsidy for APL was phased out, allocations for them continued.
TPDS led to a rise in diversion from 24% in 1999 to 54% in 2004-05.

131
Food Subsidy
• The NFSA made Antyodaya CIP applicable to all beneficiaries by doing away with
the BPL/APL categorisation, unlike the TPDS, where BPL/APL were required to pay
higher CIP
• The wider coverage has raised the subsidy bill

Computerisation of TPDS
• TPDS is operated jointly by Centre and states
• Centre responsible for procurement and transport to FCI depots
• States responsible for allocation and distribution and beneficiary identification
• TPDS through tech like digitisation of ration cards, computerisation of supply chain
management etc has become more transparent
One nation One Ration Card(ONOR)-Ministry of Consumer Affairs, Food and Public
Distribution
RC- Doc issued by state govt for availing benefits of PDS.
Formally called the Integrated Management of PDS.Being implemented in all states
as per PIB
India runs the largest food security prog in the world, distributing 600 lakh tonnes of
subsidised food to 81 crore beneficiaries every year. This is done through FPS
Under the NFS, Each RC is linked to a specific FPS and can be used to buy ration
from that shop only

132
10 states have Integrated Management of PDSwhich allows buying from any FPS
within the state
A RC is issued to the head of the family. Under the NFSA, 2013, just 2 RC, priority
and Antyodaya.
The responsibility for ID eligible families and issuing them RC is of states
RC shops can be private, cooperative or govt. License issued by state govt
Currently wheat, sugar, rice and kerosene, while states have discretion to add
more.
As RC issued by state govt, portability missing
As per Census, 2011,45 cr people are internal migrants, 80% of whom not
completed secondary education and are poor
Features:
• Only for subsidies supported by Centre which include subsidized rice and wheat.
• Migrant will be only able to buy 50% of family quota to prevent misuse.
• If beneficiary moves to state where free grains, won't be able to use the benefits.
• Aadhar linkage necessary to make it work, which is not necessary to normally
avail benefits under NFSA, 2013.
• States have to issue 10 digit RC number and append another 2 numbers to
identify the various family members
• Inter state IMPDS portal and intra state Annavitran Portal

Benefits
• Will allow RC to be used across the country in any PDS shop, helping people,
especially migrant workers by freeing them from being tied up to one ration
shop.- Was recommended by the Partha Mukhopadhyay Working Group on
Migration
• Will curb corruption and improve quality of service by ending monopolies as
beneficiaries will no longer be tied to a single FPS
• Will also help in faster digitisation of food storage and PDS
• Remove bogus RC holders
• Reduce wastage
• Reduce the food subsidy bill

Requirements of the system:

• ePOS machine coverage
• Aadhaar authentication. Currently 85% of RC linked to Aadhaar
• Online supply depot management
• Central repository of NFSA beneficiaries

Challenges

133
 • 10 states lagging behind severely as they don't have the infra.
• Internet connectivity in all areas at all times. JH which was an early adopter of
digitisation, has had widespread complaints of denial of service due to technical
glitches
• Other infra problems- Ministry of Rural Dev data shows that only half the villages
receive more than 12 hrs of power supply
• Awareness
• The states which have the poorest coverage are also the biggest source of
migrants
• Aligning the benefits given by Centre vs state. Eg TN gives 20 kg of free rice, sugar,
oil and pulses above the NFSA. But under ONOR, only the NFSA benefits allowed
• Wil disincentivise local food habits and needs as only central allocation
covered. Eg some states giving additional iodised salt as per local needs may
be tempted to discontinue
• Problems if a single family has split and migrated to different locations as the
guidelines allow the purchase of only half the amount
• Lack of data on interstate migration as the supply will have to be dynamic
keeping with the trends.
As of June 2021, only Assam, Delhi, Chattisgarh and WB have not implemented it

Subsidies
The govt spends 4% of the GDP on subsidies. 90% + of LPG subsidy is consumed by
the richest 30% of the households. Before DBT in LPG through the PAHAL scheme,
households enjoyed subsidy while commercial establishments had to pay full price plus
heavy taxes. Thus One Product Two Priceswere created, leading toleakages as ghost
household beneficiaries were created. With JAM, the LPG customer number is linked
to the Aadhaar, weeding out bogus beneficiaries
With the scheme, the sale of cylinders fell by 30% leading to 13k cr in savings

134
Float is the interest cost for the central govt on idle funds as this is borrowed
money.
Source of errors and leakages
• Aggregate and ex-post accounting created ample scope for corruption
• Forecast errors led to serious misallocation of funds
An Expenditure Information Network should be created as per the ES, on the lines
of GSTN, to scale up DBT which will also bring in more accountability through
more CAG oversight
Fertiliser Sector
There are three basic types of fertiliser used- Urea, Diammonium Phosphate(DAP)
and Muriate of Potash(MOP)

135
Fertiliser accounts for 0.5% of GDP in terms of fiscal cost, the second highest after
food. Most of it is on urea. Butas per the ES, only 35% of it reaches the small
farmers.
The urea sector is highly regulated and leads to three leakages- To inefficient
producers, non-agri uses and large farmers.
• Subsidies are based on end-use, creating multiple markets. Only agri urea is
subsidised, leading to diversion for industrial uses too. One product two
markets
• Urea is also under-priced relative to Phosphorus and Potash, leading to
environmental externalities. Urea most subsidised. It is most produced(86%),
most consumed(74%) and most imported(50%)
• Multiples distortions
◦ Price control- The govt sets a MRP at which urea can be sold(only for urea).
Under the ECA
◦ Producer subsidy- To about 30 domestic producers on a cost plus basis, so
the more inefficient firms get more subsidy
◦ Importer subsidy and canalised with only 3 firms allowed to import
◦ Movement control- The govt tells how much to import and where to sell for
50% of urea
• Effects
◦ This creates a black market harming small farmers as it violates One Market
One Price. Large farmers are better connected and hence able to buy the
subsidised urea
◦ A large part of it is also consumed by large farmers- 65%
◦ The No Denial policy allows bulk buying by non-farmers to be sold to black
markets- 41% of fertilisers leaked
◦ Incentivises production inefficiency
▪

▪
◦ It has also led to stagnation in domestic capacity for production, increasing
imports.
◦ Forecasting errors by the Fertiliser Dept through canalisation can lead to
serious shortages
◦ Leads to over use depleting soil quality and damaging human health. As N:P:K
optimal ratio is 4:2:1, it is not followed and there is overuse of urea, especially in
the most productive states of Punjab, Haryana and UP. The current use ratio is
6.7:2.4:1

136
Already undertaken reforms
• Neem coating of urea reducing diversion of fertiliser for industrial purposes. It also
reduces usage as it reduces nitrogen losses.
• Gas pooling to increase efficiency in production
• Setting up coal gassification based fertiliser plant for urea. One already in
Talcher
Further reforms required
• Liberalising imports through decanalisation to foster greater freedom in imports
and competition. The flexibility will be key in combating effects of climate
change
• JAM- Fertiliser is a good sector to implement as the centre controls it. Replacing
fertiliser subsidies with DBT can help in India meeting its WTO commitments
quite easily as the direct payments are in green box.
◦ Govt planning. Govt will create an e-wallet for farmers
◦ In March 2018, DBT introduced for companies. They are paid the subsidy only
after actual sales made to farmers. Each retailer now has a POS machine linked
to the e-Urvarak portal and UID and KCC number required to purchase
◦

◦
• BAPU(Biometric auth physical Uptake) with limit on the number of subsidised
bags- This will make small farmers get all the urea at subsidised rates while large
farmers will have to pay market price
• Bring urea under the Nutrient Based Subsidy Program in place for DAP and
MOP along with deregulating prices. It would allow producers to receive fixed
subsidies based on nutritional content and charge market prices. This would
encourage efficiency.
• Encourage firms to set up plants in countries where energy prices are cheap like
Iran
Urea subsidy is a Central Sector Scheme of the Dept of Fertiliser. India is the
second largest consumer of fertiliser. Second in urea production while 3rd in
phosphate fertilisers
New reforms proposed in subsidies

137
Centre working on plan to restrict the number of fertiliser bags that can be bought by
farmers during a cropping season. Will reduce retail level diversion
Nutrient Based Subsidy Scheme

The govt has decided to include a complex fertiliser,ammonium phosphate, in the

NBS
The diff between NBS and urea subsidy is that in urea, the govt fixes MRP, so the
subsidy becomes the diff between cost and MRP. So even if the cost of a producer
is very high, no matter, as will receive subsidy. But in NBS, the subsidy is fixed,
instead of MRP. So it becomes profitable for companies to reduce cost.
The ES argues that the reason fertiliser subsidies
benefit manufacturers more than farmers is because
economic incidence of subsidy depends on elasticity,
with the entity with less elastic price response gaining
more benefit from subsidy. As farmers' fertiliser
demand is more elastic than producers' supply,
Producers get most benefit
India imported 11 million tonnes of urea in 2019-20. To make the sector Atmanirbhar, the
govt decided to open new Public sector plants. One of them is in Talcher, set up with
coal gasification tech. But the cost of mfg urea in these PSUs is higher than the
international price. Hence a better alternative would be allowing expansion of the
private sector mfg units.
Subsidies vs Investment as a Farm Support System

138
Mention Dagli Commission report of 1979, which criticised the subsidy system
While subsidies have increased, pub inv has declined from 4% to 2% of agri GDP
between 1970 and 2000. While subsidies, mostly on fertiliser, power and water, are
difficult to rationalise politically, they have had an adverse effect on productivity, both
directly through indiscriminate use as well as indirectly by crowding out pub inv, given
fiscal constraint
TheES shows that investment in agri by the govt is negatively correlated with the
amount of food subsidy
Th 11th plan highlighted that whilebetween 6th and 9th plan, the pub inv in agri
halved, agri subsidies doubled as a proportion of agri GDP
The dominance of subsidies is also exclusionary as small and marginal farmers don't
benefit much, while pub inv will benefit all.
Pub inv becomes even more imp in the context of climate change
As per the 15th FC, due to the uneven structural transformation in agri, with
income share declining much faster than employment share, subsidies act as a
cushion.
Overall, central + subsidies account for over 2.5 lakh cr

It is the limited asset base and poor infra of marketing, research that necessitates highly
distortionary subsidies
Other issues with subsidies as per the 15th FC
• Price subsidies(MSP) distort markets and cropping patterns. They also create
incentives for fraud and diversion
• Power subsidies harm DISCOMS, state finances but most importantly water. As
per the FC, Indian agri consumption of gw is far greater than that of China+US
together
• Dharmadhikari argues that power subsidies cause massive losses to
DISCOMS(eg in Punjab, the flat tariff is 0. Hence no charges). This causes
electricity rationing by DISCOMS. This leads to use of diesel pumpsets which
increases both diesel consumption and carbon emissions

139
Given that subsidies form 21% of farm income, they cannot be withdrawn without
substantial hardship to farmers

But also, mainly due to the extremely low size of farmholdings, even a large increase in
subsidies cannot alleviate rural distress
Way forward
• DBT needs database, which is lacking. DBT should also be based on farm
operator's wealth, which is also lacking. Even if land titling and digitisation is
done, they would not ID the farm operator. For this, the Model Land Leasing
Act and the Land License Cultivators Act(for licensing tenants) of NITI needs
to be considered by the states
• Power subsidies can be shifted to DBT based on power connections
◦

◦
• Interest subvention subsidies in agri useless as formal interest rates are not the
impediment for low formal finance use. Instead this subsidy should be used for
enhancing credit infra and rural banking
Environmental impact of Agricultural Subsidies
See Vision November 2020
JAM
Three basic challenges
• First Mile- Beneficiary identification.

140
 ◦ Targeted schemes difficult under JAM as it required govt to do
identification. One reason why LPG subsidy was well implemented through
JAM as it was universal
• Middle Mile- Distributor opposition. Need for profits for distributors to operate is
genuine and needs to be a feature of subsidies. But simultaneously, the leakages
need to be cut.
• Last Mile- Beneficiary Financial Inclusion. This is the main challenge as per the
ES JAM Preparedness Index. Only 30% of people in rural areas have a bank in
5km radius. But the mobile penetration is very high and India should leverage this
through mobile payments systems
Almost 120 cr people now hold Aadhaar cards
Hence the most conducive areas where JAM can be used are those that are
centrally administered and where leakages are high
DBT vs Biometrically Authenticated Physical Uptake(BAPU)
In DBT, beneficiaries receive subsidy in cash(in bank account). In BAPU, the
beneficiaries do physical authentication and collect the subsidised goods. As per ES
JAM Index, the DBT preparedness is very low in rural areas, mainly on account of last
mile. So in rural areas BAPU better. Only needs POS machines for biometric
authentication

141
142
Farm Loan Waivers

143
RBI report on Agriculture Credit argues that it dents state finances and urged both
Union and states to not resort to it

144
Typically, waivers once announced, are staggered over successive years
Between2014-15 to 2018-19, the total loan waivers announced was 2.36 trillion
INR, of which 1.5 trillion has been waived
The waiverspeaked in 2017-18 in the wake of demonetisation

Two possible impacts of the waivers

• Increases borrowing of the govt from the market to finance the deficit

145
 ◦ Crowds out private investment
• Reduced expenditure
◦ Mostly states cut capex, which is productive instead of the revenue exp like
salaries.
Contrary to the image of state govt as profligate, states generally stick to their deficit
targets, of RD being 0 and FD being 3%, as per NIPFP

But the manner in which the states meet targets is cutting exp as seen above when
actual exp is consistently lower than the Revised estimates
State finances matter. As per NIPFP, all states collectively spend 20% more than the
Centre
Impact on Agri credit
• Loan Waivers promote moral hazard
• Skew credit as banks try shift to low risk farmers
• Impacts health of the banking sector
• Reduces public investment in agri
• Reduces capex by govt in non-agri sectors
• Crowds out pvt investment by raising borrowing costs

ES on debt waivers
Argues that the phenomenon died down in the early 90s, but has again become
widespread after the waiver announced in 2008.
Why waivers are supported
• Helps farmers in escaping the debt overhang, under which any income,
incremental also, is used to repay the debt, thus leaving nothing for fresh
investments

146
 • Such farmers are also unlikely to receive fresh debt as their ability to repay is
doubtful
• Hence the waivers help clean the farmers' balance sheets and help in boosting
investment and welfare
Evidence
• Quotes paper by Kanz which analysed the 2008 waiver under which farmers
with less than 2 ha received full waiver and above partial. So as per the proponents,
there should be more inv from the farmers with less than 2 ha. But neither inv nor
productivity increased.
◦ Full beneficiaries also save less, consume less, invest less and are less
productive than partial beneficiaries
◦ The share of formal credit decreases for the beneficiaries
• Bolton and Rosenthal argue that waivers are good if they are unanticipated and
exceptional. Anticipated waivers can induce moral hazard and destroy the credit
culture. Provide evidence that after the waiver, there were increased defaults on
future loans, most in areas that were heading for election, indicating strategic
default. Also flow of bank credit to waiver beneficiaries declined after the
waiver, thus reducing the share of formal credit in agri
• Swaminathan et al show that the waiver helps when the beneficiaries are
genuinely distressed but severely worsens the credit culture when the waiver is
not conditioned on distress

147
Trade Policy-WTO, FTA
External Sector(ES)
• CAD 2% in 2018-19, increasing for last few years but still manageable
◦ Rise in crude prices
◦ Fall in merchandise exports
◦ Fell to 1.5% in 2019-20
◦ Avg 2.2% in last 10 years but was positive in 2020-21 at 0.1% of GDP
• Trend in trade
◦ India's trade balance(deficit), after rising sharply in the early 2010s, started
falling in 2013-14 but has again started rising and has attained the same
alarming levels as the early 2010s. This has happened despite a large
increase in exports since 2016-17, as imports have risen more
◦ Petroleum products have the highest share in exports, followed by pearls and
stones, drug formulations and biologicals, gold and jewellery
◦ India's top export destinations are US, UAE, China, HK
◦ In imports, crude petroleum highest, then gold, then petroleum products, then
coal, then pearls and stones(these positions change over time, but first 2 same
for long time)
◦ India's top import source in 2018-19 China, US. UAE and Saudi interchange
positions
◦ India's services trade has been consistently increasing and India enjoys a
healthy surplus there
• India's Forex reserves, after showing fluctuations till 2013, has increased
consistently and is now over 500 bn, more than a 100 bn higher than in 2007-08.
India is the 8th largest forex holder in the world
• India remains the top remittance receiver with over 75 bn in 2018-19
• Net foreign inflows increased. Singapore is top FDI source then Mauritius, then
Netherlands, US and Japan
• In total liabilities, the share of FDI rising and that of FPI falling implying more
stable sources of funding.
• India's external debt to GDP ratio is at 20%, is the 4th lowest. India also has to its
advantage that the average age of its debt is much higher than other developing
nations
• Debt service ratio measures the burden of servicing of external debt on
current receipts and measures BoP strain. Has been declining continuously
since 2016 and is now 6.4%
• Long term debt dominates India's external borrowings at 80%. In user
classification, commercial debt highest(40%), followed by NRI deposits.

148
 • USD denominated debt highest at around 53%. Then INR at 35%, then Yen,
SDR and Euro
• India's external debt is lower than forex reserves currently. (became greater in
2020, verified as per 2020-21 ES)
• The International Investment Position is a statistical statement that shows at a
point in time the value of financial assets of residents of an economy that are
claims on non-residents or are gold bullion held as reserve assets; and
liabilities of residents to non-residents. The difference in assets and liab is the
net IIP position. India's net IIP deficit(means India is a net debtor) is 8th
highest in the world. Moreover there has been a continuous deterioration in
India's IIP since 2011
• The BOP is shifting in favour of the advanced nations as they now have a huge
trade surplus, implying a shift in the consumption hub from the advanced nations to
the EMEs
• Sovereign external debt shrank in 2020 to around 100 bn, out of total ED of 560.
Multilateral and bilateral sources form largest component of sovereign debt at
87 bn. Only 4% of GDP as per the ES
Foreign Trade and Trade Policy
The inward looking policy in the years after independence led to an uncompetitive
domestic industry. Rather than viewing trade as an engine of growth, India actively
sought to discourage imports and only exported the necessary amount for generating
the required forex. As a result,India's share in global merchandise exports fell from
2.2% in 1948 to 0.5% in 1983 but has increase post reforms and is now 1.7%
The import surge created by the Second FYP led to a Bop crisis in 1957, which led
to quantitative restrictions, graded import tariffs, rather than a devaluation of
rupee.
Deval had to be carried out in 1966, because of worsening BoP as food imports
surged. It was devalued from 4.75 to 7.5
Following the reco of theAldrexander Committee selective import liberalisation was
carried out in the late 70s.
The Abid Hussain Committee. 84, emphasizedgrowth led exports rather than export
led growth
The 91 crisis
Led to a move away from quantitative restrictions to market led instruments. Tariffs
were substantially reduced and rupee was devalued
Clear shifts in policy
• Move away from import substitution to export promotion
• Reach of export incentives broadened to more sectors

149
• Move away from direct export subsidy to indirect promotional measures
Structural changes in India's foreign trade during 80s and 90s
• Perceptible improvement in export performance both in terms of sectors and
overall level
• The composition of export basket changed in favour of hi-tech products.
• Within primary products, agri products overtook ores and minerals
• Developing nations gained considerably, even though the OECD remained the
top destination.
Critical role of exports
The NITI Aayog in its Three Year Action Agenda notes that there are only 4 nations
that transformed themselves in a short span- Taiwan, Korea, Singapore and China. In
each, exports key. Eg China has accounted for over 15% of the global exports. Thus
exports can be a counter to the surplus capacity that India has developed
Hausman's analysis finds a very high correlation between per capital income
growth and the export of high income goods. So what to export also matters
Schemes for Export Promotion

150
Note that after the adverse ruling in WTO against MEIS, India has decided to
replace MEIS with RoDTEP from 1.4.2020 when new Foreign Trade Policy enters
into force
Imports
Given the dominance of oil imports, efforts to increase domestic production and also
shifting to alternative energy sources key.
Gold and silver imports have ballooned since the termination of the Gold Control Order
in 1991.
Factors affecting composition of trade
• Factor endowments
• Trade policy

151
• Technology
• International prices

Foreign Trade Policy- Notified by Centre under the Foreign Trade(Development

and Regulation) Act, 1992
Framework for increasing exports, employment in line with the Make in India and
emphasis on EODB.
Introduces schemes
• Merchandise Exports from India Scheme for export of specified goods to specified
markets
• Services Exports from India Scheme.
• Export Promotion Capital Goods Scheme
• EOU/EHTP/STP/BTP scheme
Features
• E-Comm exports will also get benefits under MEIS
• Benefits of both the reward schemes extended to SEZs
• Under the Export Promotion Capital Goods Scheme, in case capital goods are
procured from indigenous manufacturers, specific export obligation reduced
to 75% to develop the indigenous capital goods industry
• Make efforts to move towards 24*7 paperless environment and reducing the
number of mandatory documents to 3, comparable to international
benchmarks
◦ Initiatives like e-SANCHIT for computerised handling of indirect tax
documents
• Aayat Niryat forms have been simplified and ambiguities removed
• Approved Exporter System- Manufacturers will be allowed to self certify their
products as originating from India and hence they will be able to use the
various trade agreements
• MSME clusters will be promoted
• Niryat Bandhu Scheme for the objectives of Skill India
• Outreach programs with the help of industry partners and Export Promotion
Councils
• Free passage of export assignment- Will not be stopped by any govt agency. In
case of doubt, ask for undertaking from exporters and release the consignment
• Authorised Economic Operator Program- Reduced examination and faster
clearance. In the framework of WCO's SAFE Framework for Standards. See
Miscellaneous
• Single window system for clearance for agri exports as they are perishable
• Towns of Export Excellence identified where recognised units will be provided
financial assistance
• National Committee on Trade Facilitation headed by Cabsec created

152
MEIS
6 different earlier schemes merged. Three categories nations
• A- Traditional Markets
• B-Emerging and focus markets
• C- Other markets

Critique of New Foreign Trade Policy(Biswajit Dhar)

India's FTP should move beyond export-import incentives and procedures to
improving efficiency and reducing costs
Whole of Govt approach
The policy recognises that FTP can neither be formulated nor implemented in silos,
either across govt departments or across tiers of the govt. While this is a welcome step,
the details point to several limitations
• While it lists the manner of engagement with states and UTs, it is silent on how
govt depts and ministries will be engaged
• The policy mentions that states can play a key role in promoting exports and
rationalising non-essential imports. But it does not recognise that it is very difficult
to do so under the WTO regime
• Furthermore states do not have the policy space to rationalise imports

SEZs
Have been ignored. The FTP says that the export from SEZ increased from 20k cr in
2005-06 to 5 lakh cr in 2014, the policy ignores the fact that only 3 SEZ established
after 2013 and there have been a spate of cancellations in approvals granted to SEZs
Import Substitution Strategy of Development
The origin in the mercantilist views of List(1841) who first gave the Infant Industry
Argument.
Export pessimism was one of the main reason for ISI. Prebisch Singer hypothesis
about declining TOT of primary products, hence the implication that left to themselves,
the developing nations would have industrialised.
Similarly, Nurske also advocated export pessimism based on argument that developed
nations would shift from natural to synthetic primary products, so developing
nations should instead industrialise
Balance of payments crisis also another reason
Self reliance and strategic autonomy another reason
Process

153
 • Starts by restricting consumer goods as the developing nations can relatively
easily compete here. Also, increase in their costs due to ISI would not be very
harmful. Demand for consumer goods is assured due to the growing population in
developing nations
• But Balassa argues that in the second stage, where capital goods are to be
substituted, that problems arise. So nations extend the first stage to maximum.
This is called Premature Widening of the productive sector
Issues with ISI as demonstrated by Isher Ahluwalia, Jagdish Bhagwati and
Meghnad Desai
• Excessive bureaucratisation and corruption- Economists call this Directly
Unproductive Profit(DUP) Seeking Activities
• Discourages private initiative. Leads to inefficiency and higher costs. Bhagwati
and Srinivasan show that in the 1960s, the Effective Rate of Protection
enjoyed by Indian industries was 194%, making them highly inefficient
• Excess imports of capital goods in the first state leads to over capacity and
increased import intensity of consume goods. Main reason for very high capital
output ratio of India
• The premature widening leads to proliferation of all types of consumer goods,
thus depriving benefits of specialisation and economies of scale
Hence export oriented industrialisation should be preferred as shown by the New
Industrial Economies
Based on these critics, the Narasimham Committee reco shifting to indirect
controls and the Abid Hussain Committee reco growth led exports
Modern Export Pessimism
Arvind Panagriya, in his new book, India Unlimited, argues that no economy can
grow sustainably fast without the twin engine of export and investment, as was
argued in the Economic Survey as well
But there is export pessimism, underpinned by 2 arguments. He refutes both
• rising global protectionism- He argues that even if global merchandise trade
reduces from current 18 tn USD to 15 tn USD due to protectionism, which is highly
unlikely, India still has a huge window as India's share of global merchandise
exports is just 1.64%
• Automation- The pessimist argument is that with more automation, scope for
labour intensive exports reducing. But AP argues that for many labour intensive
tasks, automation is still far away. Eg Adidas manufactures just 1 million of its 360
million annual shoe production using automation. The time to exploit labour
intensive mfg is right now as Chinese wages are rising fast

154
India's Inward Return- Is it warranted? Will it work?- Arvind Subramanian and
Shoumitro Chatterjee
Question- What should India model of growth be post COVID- Inward or outward
looking?
India became more liberalised wrt foreign investment, both FDI and FPI after 2014.

But in trade India is becoming more inward looking.

• Tariffs declined from 125% avg in 1991 to 13% in 2014. But have been
increasing since then and now avg 18%. Harms
◦ The biggest increase in tariffs have been in low skill mfg, which dampens
India's prospects of becoming a mfg powerhouse
◦ Even if the goods can enter into India duty free under some FTA, such tariff
increases act as a preferential tariff increase against the non-FTA countries. So
now more imports from the FTA countries. But these new imports are
necessarily low quality or high cost, as otherwise they would have been
imported before the tariff increase. This is trade diversion and harms
welfare
• India has not signed any FTA after 2014. Walked out of RCEP. EU FTA stalled
• The negative import list in defence, rules in public procurement

Myths in the inward orientation

• Myth that India has a big enough domestic market that can make up for the loss
of overseas opportunities, as was invoked by the PM as three Ds of India-
Demography, Demand and Democracy
◦ This propels import substitution as if domestic market large, makes sense for
factories to be located in India rather than supplying from abroad. Also makes
sense to use India as an export base as it gives a large skilled workforce for mfg.
Also creates scope for India to create champions in IT, like China and US did.
◦ But AS and SC counter the notion, arguing that India's market is much
smaller than commonly believed, only about 15-45% of GDP, and much
smaller than China's market. Because large number of poor people, and the
high earners have high saving rates
◦ When China was at a similar level of development, in early 2000s, it used
exports, rather than domestic demand as growth catalyst

155
 ◦ Can mention Nurske's Model also on size of market and how he advocates
for greater trade to take advantage of exports to break the vicious cycle of
poverty
• Exports have not been critical to India's growth
◦ But AS and SC argue that between 1995-2018, India's overall export
growth has averaged 13%, the 3rd best in the world. This is not just
because of services exports but also because of mfg. Eg generic
medicines, minerals exports to China, meat exports. But post 2014, India's
Real Effective Exchange Rate has appreciated by 20%, leading to a severe
fall in exports. Coupled with other factors like beef bans, decline in
reputation of generics due to frauds in several Indian pharma companies,
China growth slowdown
◦ But despite these setbacks, India's export-GDP ratio still high at 20%,
much higher compared to 1990s.
• Export opportunities are shrinking in post COVID world and as WTO withers. Stems
from the Prebisch-Singer Hypothesis
◦ But AS and SC counter this as though goods trade has slowed globally,
services trade is growing. The pandemic may accelerate this, as virtual
options are being adopted more
◦ Post the pandemic, India might also benefit from global efforts to diversify
supply chains. Eg Japanese Supply Chain Initiative.
◦ They also argue that India has a massive opportunity in low skill mfg, also
supported by the Economic Survey. China as a producer is vacating this
space and China as a consumer is also creating new space
They argue thatIndia's exports have a correlation of 0.75 with imports, suggesting
high import content.Thus openness is key for promoting exports, not
protectionism. Protectionism raises costs and promotes inefficiency
Mention Akamatsu's Flying Geese Model, which argued that imports lead to
domestic production and then exports, tying with product cycle model. Even if
import substitution is to be used, protection only to those industries where
comparative advantage can be used
Why import liberalisation is needed- Veermani and Basu

We need easy access to imported inputs. Lower tariff on inputs will also incentivise
companies to set base in India for network products and also promote MII by
domestic firms

156
Exports Preparedness Index
See Vision Aug 2020
WTO agreement on Trade Facilitation- Into force since 2017
• Simplification and modernisation of export-import
• Measures of effective coop between customs and other authorities
• Provisions on technical assistance and capacity building
• Full implementation of the TFA can reduce avg trade costs by 14.3%
(authentic) and boost Indian exports by 3.5% yearly
Provisions
• Requires members to publish info on export-import rules and regulations online
and establish contact points
• Requires members to accept e-payments and electronic version of documents
• Fees and charges for customs processing of imports and exports shall be
limited to the approximate costs of services rendered
• Traders should be allowed to comment on the proposed customs and trade
rules of nations and also appeal against custom administrative decision
• Special and Differential Treatment for developing and LDC.
◦ Have to list their TFA commitments into 3 groups
◦ A- immediate implementation by developing and LDC have one year after
the agreement enters into force, i.e. 2018
◦ B- implemented after a transitional period
◦ C- After a transitional period and requiring support for CB&T
• A Trade Facilitation Agreement Facility(TFAF) established to help them in
implementation. Will also provide grants for category C commitments when
other funding not available
• Other S&DT for developing nations

157
 ◦ Early Warning mechanism- Can request an extension from WTO if facing
difficulty in implementing B or C category. Automatic extension if the time
requested is less than 18 months
◦ Can shift commitments between B and C
◦ Will not be subject to Dispute Settlement for 2 years for category A
India
India has ratified it in 2016. Has constituted a National Committee on Trade
Facilitation led by the Cab Sec.
Other steps taken
• Direct Port Entry Scheme
• Direct Port Delivery Scheme
• RFID in ports
• Port Community System has integrated all maritime trade stakeholders on a single
platform
• e-SANCHIT
Way forward
• Solve issues of technical glitches
• Improve connectivity in the system of different govt units
• More CB&T

Developing the Offshore Fund Management Industry to boost Financial Services

exports

158
159
Comparing Export Performance of India and Bangladesh-ES
Compared to 0.9% export growth for India in 2011-19, B posted 8.6%.
• B's top 5 export commodities have 90% share in B's export basket, thus highly
concentrated in few sectors, compared to India where the top 5 commodities have
40% share
• B's top commodities are in labour intensive areas like textiles. They also reflect B's
CA. India's top are in capital intensive areas and don't reveal India's CA
IPR
A property that is anintangible creation of human intellect. Examples are
copyrights, trademarks, patents. They are created to create a balance between the
rights of innovators and general public interest.
Need
• To foster innovation
• To increase investment
• Spurs growth and jobs- Strongly supported by UN Industrial Development
Organisation
Legal Structure to protect IPR in India
• Patents Act, Patents Rules

160
 • Geographical Indication of Goods Act
• Copyright Act, 1957
• TRIPS compliance
Issues related to IPR in India
• Lacks effective enforcement- In the International IPR Index by the US Chamber
of Commerce, India is 36/50 economies. Though India has made
improvements, it is still very low
• Patent evergreening

Do patents restrict competition

It is often argued that patents provide a license to sue. But in reality patents provide a
structured competition.
• There is free entry into the innovation race
• Patents are a proven solution to the incentives-diffusion paradox proposed by
Ken Arrow(If someone wants to buy the technology, they need to have info on
what the technology does and how it works. But this means that the seller has
already transferred tech. So patent protection allows customers to use a tech and
pay for it based on knowing what the tech does and not how it does it as the patent
agencies have certified the process)
• Patents are a signalling device of competency and hence attract finance

Balance in IPR
India must balance its IPR policy with trade and public interest considerations.
While Indian Patents Act is complaint with TRIPS, it is not compliant with more
stringent requirements of US, particularly in pharma. US takes exception to Section
3d and 84 of the act
• 3d- Prevents new formulations of existing meds from being patented unless they
improve therapeutic efficiency. This is used by big pharma companies for
evergreening
◦

• 84-Provides for Compulsory Licensing to meet reasonable public interest.

161
 ◦ WTO allows Compulsory Licensing(CL) to be issued by the govt to a
company allowing it to make a product without the consent of the patent
holder. India has issued only one CL for a cancer drug, Sorafenib
Indian courts have been judicious. Eg SC denied Novartis the patent for Glivec on
grounds of evergreening
Delhi HC landmark rulings on IPR
Has set important principles like trans-border reputation and well known
trademarks.
• Cipla vs Roche- The court favoured Roche by ruling that Cipla was violating
Roche's patent. Led to stronger enforcement of IP regime in India
• Rameshwari Photocopy shop case- A milestone in copyright for educational
purposes as copyright is intended to increase knowledge. Covid has shown its
importance with teachers facing issues in disbursing reading materials to
students due to copyright issues. Scihub has been challenged by publishers
like Wiley and Elsevier, in Delhi HC
National IPR Policy, 2016
Will endeavour for Creative India, Innovative India
Aims
• To create and exploit synergies between all forms of IP, laws and agencies
• Push IPRs as a marketable asset
• Promote public interest
Policy
• Continuous steps to review and improve the existing laws
• Special focus on awareness generation and IP enforcement
◦ KAPILA program launched for IP awareness
• Encourage commercialisation of IP(Like GI)
• Make the DIPP the nodal agency for all IP, including copyright, which was earlier
under MHRD
• Modernisation of trademark offices to reduce time for registration. Currently 36
months
• Films, music, industrial drawings will be covered by copyright
• Effective Loan Guarantee Scheme for startups
• India will continue to exploit the flexibility under TRIPS, with which the policy is
compliant, for public interest, like making available drugs at affordable prices
• Govt can provide financial support for sale of products based on IPRs generated
from public funded research

162
 ◦ This is in line of the Bayh-Dole Act of the US but Stiglitz has shown that the
Act has led to only crass competition between scientists and not higher
innovation
Impact of the Policy
• Strengthening the Institutional Mechanism- Transfer of the admin of the
Copyright Act to DIPP allowing for an integrated approach
• Clearing backlog and reducing pendency- Automatic issuance of electronically
generated patent and trademark along with increased recruitment of manpower.
Led to a fall in pendency of patent applications by 60k between 2016-18
• Increase in filing- Patent filings have increased by 42% between 2014-
19 trademark by 30%
• IP Process Reengineering
◦ Allowing expedited examination of patent filings under certain conditions
◦ India has acceded to the WIPO Copyright Treaty and WIPO Performances
and Phonograms Treaty extending copyright to internet
▪ These 2 are implemented in the US by the DMCA.
• IPR awareness drive in over 200 acad institutions, for industry, police and judiciary.
IPR content has been also introduced in higher secondary CBSE syllabus
• Global Innovation Index of WIPO ranks India at 48/129. India jumped 4 places
in 2020
• IPR enforcement toolkit for the police to assist in IP crimes

See India Science for details of Patent Prosecution Highway Program

The ProrIISc software developed by IISc is cheap and automates the patent
application process for academic applications. Can provide a major boost
Criticisms of IPR Policy(Sunil Mani)
• Unnecessary as India already has adequate laws on all aspects of IPR.
• The criticism of Indian IPR regime, especially by US, which the Policy seeks to
address, is unfounded as India is a major hub of R&D services and the number of
patents increasing in India
• The policy is ambiguous on trade secrets for which no legislation exists in India
and parties rely on contracts.
◦ Protecting trade secrets can reduce costs of contracts and increase R&D
◦ But it can also reduce tech spillovers from MNCs to domestic firms
• Completely silent on utility models in IPR
◦ UM provides protection for minor inventions, like those by SMEs, even though
they may not fulfil patentability requirements. Thus they are essentially
patents with simpler requirements and lower thresholds
◦ Nations like China have used this greatly

163
Pharma and the IPR policy
Has been criticised as not favouring the Indian generic industry. Indianeeds to
resist the demands of foreign pharma companies for TRIPS Plus- going beyond the
TRIPS agreement which recognises that IP has to be balanced against burning health
issues, especially in developing nations
Joseph Stiglitz has also showed how ruthless enforcement of the IP regime in US
has led to the US health system being one of the most expensivein the world and
has reduced availability of life-saving med.
Stiglitz also argues that IP regime, by creating monopolies, leads to higher
inequality
Eg He argues that after the Bayh-Dole Act was passed in the US in 1980, which
allowed university researchers to profit from uni research, there has not been an
increase in the output of biomedical research
The belief that more patents is good, has led to more expenditure on litigation and
marketing
Evergreening
There is also now increased grabbing of IPR. eg companies claim that some of the
existing traditional knowledge, like medicinal properties of neem or turmeric, is
their patent. But this does not produce any new knowledge
IPR and Pandemics
The purpose of IP is for a public purpose- Innovations should be made public in
exchange for a limited monopoly
But in a pandemic, the question is whether exclusivity given by patents is detrimental.
Steps
• Create a patent pool managed by a central agency and patents which become part
of the pool are readily made available for licensing
• This will ensure that there are ample number of manufacturers across the world
• Pooling is also in line with the Doha Declaration on Public Health which is a part
of the TRIPS
• Generally such pools are made for technologies which are complementary to each
other
Advantages of pooling
• Innovation while minimising the legal issues related to transfer of patents
• Lower txn costs by allowing companies to hold complementary patents
International steps towards pooling
• C-TAP- COVID Technology Access Pool by WHO
• Global Initiative to Share all Influenza Data(GISAID)
• COVAX facility by the WHO

164
Indian Patents Act does not have provisions for pools though govt could create
them by acquiring such patents
But Competition Act considers such pools as restrictive practice
TRIPS- Trade Related Aspects of Intellectual Property Rights
Innovation, mutual advantage of producers and users of knowledge in a manner
conducive to social and economic welfare
Three main features are
• Standards- In each area of IP, sets out the minimum protection to be provided by
each member
◦ Requires that substantive obligations of the WIPO main conventions- Paris
Convention for the Protection of Industrial Property and Berne Convention for
Artistic and Literary Works must be complied with
◦ Also adds additional obligations and hence is called Berne and Paris Plus
Agreement
• Enforcement- Lays down general principles applicable to IPR enforcement
• Makes TRIPS obligation disputes subject to the Dispute Settlement Procedures
Allows longer time for developing nations. It is a minimum standards agreement
Some General Provisions
• National Treatment Clause- Forbids discrimination between a nation's own
nationals and those of other nations
• MFN-Forbids discrimination between nationals of other members

Copyright
• Will extend to expressions and not to ideas, procedures, or mathematical
concepts
• Computer programs protected as literary work, whether it is in source code or
object code.
• Databases also protected as they by their creation constitute intellectual
creations
• With respect to cinematographic works, the exclusive rental right is subject to the
impairment test- A member is excepted from the obligation unless such rental has
led to widespread copying of such works which impairs the exclusive right of
reproduction on creators
• Term of protection shall be the life of the author and 50 years after the death

Trademarks
Any sign or combo of signs capable of distinguishing products of one undertaking
from others must be eligible for registration as a trademark provided that it is visually

165
perceptible.
Initial registration and each renewal shall be for at least 7 years. Can be renewed
indefinitely. Cancellation of mark on the ground of non-use cannot take place before at
least 3 uninterrupted non-use years
Geographical Indications
Indications which identify a good as originating from a territory or region where a
characteristic of the good is essentially attributable to the geographical origin. A
trademark which uses a GI that misleads the public can be cancelled
Members are not obliged to grant GI where it has become a generic term for
describing the product. Valid for 10 years and renewable
Patents
Requires members to make patents available for products and processes in all fields of
tech, irrespective of the place of origin of the place of invention(no discrimination
clause, applies both to grant of patent as well as enforcement of patent), subject
to thetests of novelty, inventiveness(non-obviousness) and industrial
applicability(the three tests)
Three permissible exceptions
• Inventions contrary to public order or morality, which are dangerous for
human, animal, plant, env health. The commercial exploitation of the invention must
also be prevented
• May exclude from patentability diagnostic, therapeutic and surgical methods for
human and animal treatment
• May exclude plants and animals other than micro organisms and essentially
biological processes for the production of plants or animals other than non-
biological and microbiological processes. However any nation excluding plant
varieties from patent protection must provide an effective sui generis(unique)
system of protection.
Members may also provide exceptions to exclusive rights provided that these
exceptions do not hinder normal exploitation of the patent
Term of protection minimum 20 years from the filing date
Compulsory licensing and the govt use without authorisation of the right holder
are allowed(Under Article 8 and 31 of the TRIPS agreement)
Is Section 3d consistent with TRIPS
2 key conditions for grant of patent under 3d is that it should enhance the efficacy
of the existing product or should result in a new product
Section 3d was introduced in 2005 amendment which was to make Indian Patents Act
TRIPS compliant

166
The SC rejected Novartis's patent over Glivec as a case of evergreening and hence
not eligible for protection under 3d of the Patent Act, 1970.
US has consistently challenged India arguing that 3d is inconsistent with both non-
discrimination and the three tests.
Note that discrimination is prohibited on the following grounds only
• Place of invention
• Field of invention- This is the basis on which 3d is challenged. But 3d is not
discriminatory
◦ It does not apply to only pharma but to any chemical product
◦ Even if it applied to only pharma, consideration of the specific characteristic of a
patent claim is obvious to assess the claim and hence the section is valid.
• Whether products are locally produced or imported

Furthermore, an importantflexibility that members enjoy under TRIPS is to define

what an invention is.Hence nations can distinguish between inventions that are
patentable and those that are not.
It also gives the flexibility on the strictness of the inventive step requirement
Hence 3d is not inconsistent but just uses the flexibility. It also raises the bar on
the novelty and inventiveness aspect
3k of the Patent Act
Unconditional exclusion of mathematical and business models, computer programs per
se, and algorithms from patentable subject matter
• Most inventions in softwares are incremental in nature and so patents not good
as it will create barriers for future inventions
• Further, Indian stand is validated by the increasing trends of open source in the
world
Compulsory Licensing
TRIPS allows use of compulsory licensing but nations face pressure from pharma
companies and their parent govts.
Section 83d- Patents do not impede protection of public health. India issued its first
CL in 2012 for a cancer drug. Since then India has rejected a host of CL applications.
Section 84 allows anyone to apply for compulsory licensing after 3 years from
grant of patent on grounds of public health, or that the patented product is not
available at a reasonable cost to the public
Section 92
The Centre, in case of a national emergency or in case of extreme urgency or in
case of public non-commercial use, can issue a compulsory license. There have
been calls to do this due to COVID

167
In 2016, the US-India Business Council made a submission to the USTR that India will
not use CL for commercial purposes. It marks a shift in Indian patent policy andalso
strikes at Art 21 of the Constitution
Way forward
• Train the officers and the judiciary on public health oriented jurisprudence

Note that Indian patents are not applicable worldwide but filing for one in India
enables the applicant to file in other nations within 12 months
Exclusions for patentability in India(authentic)

168
Indian Seed System and Plant variety Protection
Till the 1980s, pvt sector had no role in plant breeding which was led by public
institutions.
The TRIPS requires all nations to have sui generis system for protection of plant
varieties and India was forced to legislate.

169
 Untitled Attachment
SC ruling that Monsanto has patent rights over Bollgard II Bt Cotton helps clear
some regulatory confusion over GMO patents
TRIPS CBD Linkage
Convention on Biological Diversity is for fair and equitable sharing of benefits arising out
of use of genetic resource. Thus protection of traditional knowledge
Importance for India
• Seeks to address bio-piracy
• To ensure mechanism for disclosure of information when a patent is sought
based on traditional knowledge, to help better assess the inventive step
involved.
• So the developing nations seek amendment to TRIPS to make disclosure
mandatory in
◦ Source of genetic resource
▪ Help in better examination of patents and also challenges
▪ Article 29 of the TRIPS Agreement already enjoins upon Members to
require that patent applicants disclose the invention in a manner
sufficiently clear and complete for the invention to be carried out by a
person skilled in the art. This is to ensure the quality of patents as well
as to ensure transparency.
◦ Evidence of prior informed consent of local communities
◦ Benefit sharing
▪ In India it is provided for in the Biological Diversity Act, 2002
▪ It also provides that foreigners, NRIs and foreign companies not involved with
collaborative research projects have to obtain prior approval of National
Biodiversity Authority for undertaking any activity related to biological
resources
Nagoya Protocol of the CBD
On access to genetic resources and benefit sharing. Came into effect in 2014.
Provides a legal framework for the same
Traditional Knowledge
Traditional Knowledge Digital Library: It is a sui generis system created to serve as a
pool of traditional knowledge to prevent misappropriation and promote further
development and utilisation. It solves a major problem of Indian TK as a lot of it is in
languages like Sanskrit, Arabic, Tamil etc. It converts these ancient texts to the
standard 5 international languages. TKDL is available to 13 patent offices like EU,
US, Japan, UK

170
Pharma and the Indian IPR Regime
Indian pharma generic industry plays an important role in health in India as well as other
nations and hence protection to it is key for India's health goals. This depends critically
on access of Indian pharma companies to proprietary technologies, for which
compulsory licensing provision is key
• Incrementally Modified Drugs(Evergreening) Cheap and easy for the pharma
companies to do and so in the US, market flooded with these and patents to them
has resulted in price rise
◦ So Indian Patents Act section 3d prevents this and also conforms to TRIPS. See
above.
• Section 11a of the Patents Act provides that patent holder will receive only
reasonable royalty from generic manufactures who have made significant
investment in med before 1.1.2005, when the amendments to Patents Act in
compliance with TRIPS were effected. This further protects generic
TRIPS Flexibility
See Vision May 2020
Indian companies used voluntary licensing for AIDS meds, like tenofovir, and
brought their prices down from 200-300 USD to 39 USD. Shows how relaxing IPR
can lead to massive welfare gains.
India-South Africa plea in WTO in light of COVID
Asked for a waiver of certain provisions of TRIPS, to allow quick and affordable access
to diagnostics and vaccines.
• Flagged the concerns of nations with little to no mfg capacity, and hence
dependence on Article 31bis of the agreement, which partly waives Article 31(f)
for least developed countries, allowing them to issue compulsory licences for public
health reasons through importing the drugs from other countries.
• Shows India's solidarity with LDCs

171
So the US's decision to support India and SA on TRIPS waiver must be treated
cautiously
• It further requires transfer of tech and knowhow from pharma companies to vaccine
makers in developing nations. This will need persuasion as many nations will be
loath to use compulsory licensing provisions.
•

TRIMS
Signed in Uruguay round. It addresses certaininvestment measures that violate
provisions of GATT like local content requirements, trade balancing
requirements(restrict the volume or value of imports such an enterprise can purchase

172
or use to an amount related to the level of products it exports), export restrictions,
attached to investment decision making. It restricts preferential treatment to
domestic firms and hence allows foreign firms a level playing field
Some other banned policies are
• Tech transfer requirements
• Forex and local equity share restrictions
• Fiscal incentives to promote above
It requires all WTO members to notify the TRIMs inconsistent with provisions of the
GATT and eliminate them after the transition period(2 years for developed, 5 for
developing and 7 for LDC, from 1.1.95, the date when the agreement was effected)
Some other provisions
• Allows temporary deviations on BOP grounds
• India's notified TRIMs
◦ Local content(mixing) requirement in production of news print
◦ Local content requirement in production of rifampicin and Penicilin-G
◦ Dividend balancing requirements in case of investment in 22 categories of
consumer goods
◦ India eliminated all three by 2000 and so does not have any outstanding
obligations wrt TRIMs
It establishes a Committee on TRIMs which will, among other things, monitor the
implementation of these commitments. The agreement also provides for
consideration, at a later date, of whether it should be complemented with provisions on
investment and competition policy more broadly.
Criticisms of TRIMS
• Prevents imposition of performance clauses on foreign firms which can help
developing nations, like tech transfer
• It prevents preferential treatment to domestic firms which can be necessary
for their growth
India and TRIMS
• Though the Ministry claims complete compliance, India still imposes local content
requirements and tech transfer, like in defence
India-US dispute over solar subsidies
India won the case in WTO, with the panel agreeing that subsidies and mandatory
local content requirements in 8 US states breached TRIMS. as well as Agreement
on Subsidies and Countervailing Measures
In 2014, the US won a dispute over the Jawaharlal Nehru Solar Energy Mission on the
ground that it had incentives for domestic produced cells
TRIMS and Indian textile and clothing sector

173
Before WTO, Textiles were governed by separate rules which allowed application of
discriminatory quotas, under the Multifibre Agreement, 1974. This restricted exports
from developing nations. By the time MFA expired in 1994, hardly any developing
nation was engaged in textile exports with Europe or US
WTO Agreement on Textiles and Clothing led to elimination of this discriminatory
regime over time, initially 51% and then the rest 49% by 2005, when the agreement
expired. So from 40 bn $ global textile market, it grew to over 600 bn in 2010, of
which India was a major beneficiary

GATS
GATS entered into force in 1.1.95. Main purpose is to frame rules for non-
discriminatory treatment in service trade and create a predictable environment
Necessitated by enhancement of tradeability of services through developments like
internet, satellite communication.
GATS covers all internationally traded services, 2 exceptions
• Services provided to public in exercise of govt authority
• In air transport sector, traffic rights
GATS provides 4 modes for supply of services
• Mode 1- Cross Border- Service from territory of one to another. Eg architecture
sending architectural plan to client in other nation through email. Equivalent to
cross border movement of goods
• Mode 2- Consumption abroad- Consumer of a service moves into territory of
other. Eg tourist using hotel in foreign nation
• Mode 3- Commercial Presence- Service suppliers establish legal presence in
another nation, through JV, subsidiary, branch
• Mode 4- Presence or movement of natural persons- Service delivered through
personnel temporarily entering another nation to provide services. GATS covers
only temp movement, not citizenship or employment on permanent basis
Obligations under GATS
• General obligations that apply to all WTO members regardless of sectoral
commitments
◦ MFN- Favour One, Favour All. Under GATS, if a nation allows foreign
competition in one sector, equal opportunities should be given to service
providers from all members in that service. Applies to all services but some
temporary exemptions
◦ Transparency- Members required to publish all measures of general application
and establish national enquiry points.
◦ Other- Process of review and appeals should be established
• Conditional obligations- In sectors where the member has assumed market
access and national treatment obligations

174
 ◦ GATS has a positive list approach under which each member required to
undertake specific liberalisation commitments through 'scheduling' process.
◦ Each member identified the sectors and modes in which it is willing to make
commitments and the conditions under which it will allow access and can
place limitations on market access and national treatment
▪ Market Access- May be made subject to limitations, like number of service
suppliers allowed
▪ National Treatment- Means once a foreign company allowed to supply
services, no discrimination. But a member in GATS allowed to place
limitations on it. Not required to apply NT in sectors in which it has not
committed and in committed sectors also limits allowed. Thus national
treatment is not mandatory in GATS, contrary to goods as when a good
cleared customs, it is treated on par with domestic goods
• Schedules- Each members required to have schedules of specific commitments
and the limitations. Allowed to have both sector specific as well as
horizontal(across sectors) limitations
• Specific commitments may be modified only after 3 years after implementation
• Any commitments can be modified or new introduced autonomously but has to be
scheduled
• Once a commitment made under GATS, cannot be rolled back
• Allows measures in violation of GATS in
◦ Serious BOP or financial problems
◦ Protect public health, plant or animal health, morals
◦ Measures necessary to prevent frauds
◦ Take prudential measures in financial sectors
◦ Quality and safety norms for service provisions can be introduced but such have
to be based on objective and transparent criteria
• GATS Article 4 has special provisions for increasing participation of
developing nations in services, like improving their access to new tech,
liberalising markets of interest to developing nations
• Article 5- Recognition of qualification- International standardisation of ed degrees
India and GATS
Mode 1 and Mode 4 of special interest for India. India's IT industry, BPO, outsourcing
all depend on Mode 1. India also has a large pool of high skilled pros and their effective
use depends on Mode 4
Mode 3 also becoming important due to overseas expansion of Indian firms like
pharma, IT, banking firms
India has highlighted the restrictions placed by developed nations in Mode 4 like
strict visa regimes, non-recognition of qualifications

175
The positive list approach of GATS which requires members to liberalise only
sectors as per their comfort means there is little possibility of a surge in service
imports in India but even if it does, GATS has provisions for Emergency Safeguard
Measures
But the biggest concern over GATS is of liberalising socially sensitive sectors like
health and education
Untitled Attachment
Plurilateral process- To reduce transaction costs of negotiations. Allows a group of
countries to place a single request in the sectors they want liberalised
Services Waiver- Allows members to provide preferential treatment to services and
suppliers of LDCs
Non Agricultural Market Access
India supports a more onerous approach called the Swiss formula for tariff reduction
which would result in higher tariff reduction so as to boost India's exports. This also
important given India's relatively low share in regional trade agreements
Agreement on Subsidies and Countervailing Measures
Regulates subsidies by members. Also allows members to seek withdrawal of a
legitimate subsidy if it is harmful, through the dispute settlement procedure and also
allows members to launch domestic investigations to charge countervailing duty
on subsidized imports.
Subsidy and CVD 2 sides of same coin
S can cause trade distortion and so are regulated, both by this agreement as well as
AoA
Meaning of S in the agreement
• Financial contri by the govt or any public body within the territory of the
Member which confers a benefit. All three conditions have to be met for
something to be a subsidy
• For action to be taken, the subsidy must be specific, i.e. be available to the
industry or enterprise in question only. So exemption of an export duty for a
product which does not have taxes on domestic consumption is not subsidy.
There are 4 types of specificity- Enterprise, Industry, regional, prohibited
subsidies(govt targeting export goods or goods using domestic inputs for
subsidization)
• Has 3 types
◦ Prohibited

176
 ▪ Export performance linked subsidies and local content subsidies
dependant on use of domestic over imported goods
▪ Members with GNI<1000$ allowed such S provided that the product does not
have more than 3.25% of world trade for 2 consecutive years. India was also
provided this.
◦ Actionable. Must cause adverse impact on other nations
▪ Export subsidies that are in full conformity with the AoA are not prohibited by
the SCM Agreement though they may be coutervailable.
▪ Peace clause-Domestic support in green box of the AoA neither
countervailable nor actionable multilaterally. Other domestic support in
conformity with AoA may be countervailable
◦ Non-Actionable
CVD/Anti-dumping duty different from customs duty. CVD for fairer trade. Customs
for general purposes, which can include protection to domestic industry, raising
revenue. CVD levied on top of customs. Plus CVD is country specific or exporter
specific, while customs generally applicable to imports irrespective of origin
nation
Requirement for CVD
• Must establish presence of subsidised import, injury to domestic industry and a
causal link between subsidy and injury
Has a Sunset clause, i.e. all CVD be terminated after 5 years unless it is shown that
continuance of a measure is necessary for preventing injury or subsidy
Parameters to assess harmful effects of subsidies
• Material injury to domestic industry of another nation
• Serious prejudice to interests of another member like reducing market share of its
exporters
• Impairment of benefits accruing to another WTO member

177
S&DT for developing nations
When a member’s per capita gross national income (GNI) exceeds $1,000 per annum
(at the 1990 exchange rate) for a third straight year, it has to withdraw its export
subsidies
Under SCM Agreement a CVD investigation must be terminated if the offending
subsidy is de minimis(too small) or imports negligible. These are more relaxed for
developing and LDC and hence being taken off this list makes it easier for US to
impose CVD
• For developing nations, the threshold for terminating CVD investigation is if the
subsidies are less than 2% of value of imports
• For developed nation, 1%. Hence, as India will be treated as developed by US,
threshold lower and easy to impose CVD
Fisheries Subsidies Dispute
Very important for India as the negotiations are going on to limit subsidies, which
account for over 20 bn, and have led to overfishing. But India wants to support its
fishermen most of whom are small.

178
India has proposed to the WTO that role of dispute settlement panels in fisheries
subsidies agreement should be limited.
• India wants nations to have the sovereignty to be able to determine stocks, not
Regional Fisheries Management Organisations
• India is proposing S&DT for nations with PCI below 5000 $ and fishing below a
certain limit. The limit proposed by India is important is it will lead to exclusion
of China from S&DT, as China also provides highest subsidies(China PCI is
11000 USD while India is around 1900)
• India is also arguing that limiting S&DT to only small and marginal fishermen is
not acceptable. It has to be provided to the nation as a whole as such nations
also have to take care of food security and have the necessary policy space
Why needed
• As per FAO, 34% of fish stocks are overfished, compared to 10% in 1974(authentic)
• Over 3 billion people depend on fish for proteins and crores for livelihood(globally)
• Key for SDG 14.
• Hence subsidies need to be prohibited for illegal and unregulated fishing,
which China engages in but India does not
• Hence India is very keen to finalise the agreement as illegal and unregulated
fishing by others is hurting India
High Level Action Group on Trade
See Vision Oct, 2019

179
The Sanitary and Phyto-Sanitary agreement and Implications for India
Concerns the application of food safety and animal and plant health regulations. It
sets basic rules and allows countries to set their own standards, but those should
be based on scientific findings and necessary to protect health.
Thus dual aim of ensuring the safety of food and preventing protectionism..
Features
• Requiring products to come from disease free area.
• Specific treatment or processing of products
• Max level of pesticide residues.
• Requires govts to publish all such standards for transparency and must maintain
Enquiry points for info requests on the measures. Eg in India the FSSAI is the
Enquiry point for food safety issues.
• A specific SPS regulation can be challenged by another nation on the ground that
it is not supported by science
• Any nation that imposes more stringent food safety standards that those
specified by the Codex Alimentarius Commission of the FAO are required to
justify them scientifically.

180
Benefits of SPS agreement
• Consumers in all nations benefit through safer products and prevention of arbitrary
restrictions.
• Developing nations benefit as the agreement provides an international framework
for agreements on SPS irrespective of technical or political capacity. Thus nations
must import the products that meet the safety norms even if the production
was using less advanced methods.
• Exporters and importers of agri products also benefit as it reduces uncertainty

Principle of Non-discrimination in WTO

Based on 2 pillars
• MFN
• National Treatment

After India decided to subject all FDI during COVID from bordering nations to govt
approval, China accused India of violating this. But India has rightly defended its
actions as taken for national security which is allowed in the WTO clauses
India's engagement with WTO-ES
India's proposals for WTO reforms seek to preserve the core of the multilateral trading
system
• India and South Africa jointly proposed some TRIPS waiver for COVID, to prevent
IPR becoming a barrier in the fight
• Appellate Body members have 4 year terms and one reappointment possible. As it
is not functioning with less than 3 members, several nations formed the Multiparty
Interim Arbitration Mechanism. India did not join as India supports normal 2
stage binding WTO dispute settlement mechanism
• India seeks a permanent solution to the issue of public stockholding for food aid,
fisheries dispute
•

• India has the ARTIS platform to receive complaints for conducting CVD
investigations

181
The Digital Moratorium
There is the issue of interpretation
• Indonesia argues that the moratorium applies only to transmission and not on
transmitted goods, like intangible goods, like movies, videogames. If this is valid,
then the revenue loss not major
• However if it applies to the transmitted goods and services as well, given the
explosion in digital goods, major revenue implications
• Also loss of tariffs as a trade policy, which UNCTAD estimates to be 10 bn USD
annually, of which 95% borne by developing nations. This is also an
underestimate as based on only 49 HS codes
• Digitisation affects nations differently and hence need for policies to regulate their
trade. Zero tariffs will continue the dependence of developing nations for
digital goods on developed nations
• Hence India has asked for reconsideration of moratorium.

PTAs
Within PTAs, 5 categories
• Partial Scope Agreement- Allows trade between nations on a small number of
goods
• Free Trade Agreement- A preferential agreement under which members reduce
tariffs on trade among themselves while maintaining their own tariffs for trade with
non-members
• Customs Union- Members apply a common external tariff schedule to imports from
non-members. Eg Turkey is part of the EU Customs Union but not a EU member
• Common Market- Customs union with relatively free movement of factors of
production. No Non-tariff barriers as well, which is not the case in free trade areas
• Economic Union- Common market with coordination of macro and exchange rate
policies
FTAs
It is difficult to assess the impact of FTA on trade balance as FTAs not only give rise to
beneficialtrade creationbut alsodiversion,which is imports shifting from non-FTA
firms to FTA firms who may be inefficient but have become competitive due to FTA
FTA on exports
• There is no guarantee that FTAs aid exports. Most of the trade already happens
at zero duty.
◦ Exports increase through FTAs if the pre-existing tariffs were high, not if
they were already low, which is the case in most nations

182
 • But what prevents exports is generally NTBs, which are typically not negotiated as
part of FTAs and have to be discussed bilaterally. For eg Japan removed tariffs
for Indian garment imports in 2011. But Indian exports to Japan reduced by
about a 100 million $ due to Japan imposing stringent sourcing requirements
FTA on investment flows
• It has been argued that reduction in import duties and hence protection of
domestic industry, encourages investment.
• But too much liberalisation can harm domestic industry too and hence balance
required
• Investment also increases as the economy becomes more efficient and then the
import wall can be lowered
FTA and GVC integration
• India not joining RCEP has also been criticised as India losing chance to become
integrated into GVC
• But GVC integration requires much more, in terms of top quality infra, flexible
regulatory environment. GVCs are time critical. A delay in one part can disrupt
the entire value chain and hence, top notch efficiency required.
◦ The turnaround time, as per the ES, in Indian major ports is 2.48 days while
the global average is just 0.97 days.
India's trade openness ratio, measured as a sum of exports and imports as a % of
GDP, is at 40%, as per NITI, which is higher than US, China and Japan. So the
charge that India is a closed economy is false.
FTAs of India
• South Asian Free Trade Agreement(SAFTA)
• India-ASEAN Comprehensive Economic Cooperation Agreement
• India SL- Oldest FTA for India to enter into force
• India Thailand Early Harvest Scheme
• Nepal
• Bhutan-Also includes Bhutan's access to third countries as Bhutan is landlocked
• India Singapore Comprehensive Economic Partnership Agreement(CEPA)
• India Korea
• India Japan
• India Malaysia
PTAs of India
• Asia Pacific Trade Agreement- Ban, China, India, Laos, Korea, Sri Lanka, Mongolia.
Oldest PTA for India and the only one that links China and India. Initiative of
UNESCAP

183
• Global System of Trade Preferences- 46 nations. But India exchanges tariff
concessions with 12 nations. Export Inspection Council only authorised agency to
issue Cert of Origin under this
• India-Afg
• India-MERCOSUR
• India Chile
• India SAARC
India is reviewing the ASEAN-FTA post the decision to not join the RCEP.
Why join FTAs
• Additional market access helps in expansion of domestic mfg and hence
growth through employment, backward and forward linkage. But see above on
exports.
◦ Can show this using the dynamic EOS model of IT
• Opportunity to join GVC. See above on GVC

NITI report on FTA and India(Kochhar et al)

Argues that India should carefully review existing FTAs before signing new ones.
Argues that export performance and overall growth depend on
• Diversification of export basket
◦ India has diversified both products as well as destinations
◦ But as the ES argues, diversification without specialisation has led to
India's export share thinning
• Composition of the basket in terms of sophistication, quality
◦ There has been a gradual move up the value chain to high value machinery,
auto spares
• Linkages of export products to globally traded products
◦ Worryingly, India's exports have a correlation of 0.75 with imports,
suggesting high import content
Drivers of India's exports
• Indian exports are sensitive to price changes, income changes(more than price)
and global demand and supply bottlenecks
◦ As per the IMF, a 1% increase in India's international relative export price
reduces export growth by 1%.
• Logistics costs
◦ Logistics cost is 14% of the GDP and has to be reduced to less than 10%. A
10% decrease in indirect logistics cost has the potential to increase
exports by 5-8%
As per WEF Global Competitiveness Index, India 68/140, losing out due to infra etc

184
India's experience with FTAs and RTAs
RTAs cover more than half of the international trade now with around 10 RTAs(6 PTAs
also) in force in India and more in negotiation. India's first RTA was the Bangkok
Agreement, 1975 which later became Asia Pacific Trade Agreement
• India's export to FTA nations has not outperformed overall export growth or to the
non-FTA countries
◦ Since 2006, since when India has signed most of the FTAs, India's export to
FTA partners has grown at around 15% yoy, same as that of non-FTA
partners
◦ This is mainly because FTA led to very little reduction in tariffs as argued
above
• FTAs have led to increased imports and exports but imports more leading to
India's trade deficit widening
◦ Eg India's overall trade deficit with ASEAN, Korea and Japan increased
◦ But the ES shows gains in trade surplus. Hence mixed evidence, so need for
careful analysis
• As per the ES, FTAs have a bigger impact on metals on the importing side and on
textiles on the export side
• India's exports are much more responsive to income changes than price
changes and so a reduction in tariffs does not have a significant effect
• Utilisation rate of FTAs by India's exporters is very low, around 20%
◦ Reasons like lack of awareness, delays and admin costs associated with rules of
origin, NTBs
◦ Govt has announced FTA Utilisation Mission to increase awareness of FTAs
• Quality of trade also deteriorates as can be seen under ASEAN FTA.
• ASEAN FTA biggest impact as per ES, possibly because tariff reduction by
India has been greater under it, especially import tariff
◦ The reason for this is that India had higher pre-FTA tariffs than its partners and
so FTA led to a larger reduction in tariffs for India
Rupa Chanda also argues that India has not made use of FTAs for boosting exports
R Ramakamur also argues that India's trade deficit has increased very sharply
with ASEAN, Korea, Japan after FTA with them. With ASEAN from 5 bn to 24 bn.
With China, it ballooned from 4 bn in 2005-06 to 50 bn in 2019-20 even without a
trade deal.
But are FTAs responsible for the deficits?
• Amitendu Palit of NUS argues that rising deficit is because of growth slowdown
in India since 2016-17 and the resulting slowdown in mfg
• Pravin Krishna of John Hopkins argues that trade deficit as a result of FTA is
merely 7% of overall trade deficit of India
• A large chunk of imports from China is of raw materials.

185
FTA With China?
Trade with China has zoomed after China became a WTO member.
The huge trade deficit with China is compounded by the nature of the trade flow. India
exports mostly primary materials like ores, whereas Chinese products are much higher
in the value chain like electronics. Note that India's exports to China different from
India's exports to the rest of the world.
Plus, analysis by the Commerce Ministry shows that China has cumulatively
applied over 2800 non-tariff barriers like SPS, TBT, followed by Korea, over 1800,
Japan(1500) while India has only 450. Thus though India has the highest tariff
among RCEP members, India's trade is still much more open. Only about 10% of
India's imports are subject to such NTBs. As a response, BIS is preparing Indian
Standards for over 4500 HS lines
Reco
• Review existing FTAs
• Negotiating FTAs with nations with trade complementarities beneficial
• Reduce compliance costs and administrative delays
• Set proper safety and quality standards to avoid dumping.
• Strict enforcement of Rules of Origin
• Mode IV- Mode III is setting up of commercial presence. Mode IV covers service
suppliers
ES on FTA
Argues that contrary to the mercantilist arguments against FTA like RCEP, trade theory
teaches that gains arise as trade leads to more efficient allocation of a nation's
resources.
Shows that the mercantilist position is wrong as India clearlygained 0.7% in trade
surplus per year for mfg products
Gravity Model- Attributed to Tinbergen, related bilateral trade flows between nations to
country specific characteristics. Two basic axioms
• Trade flows between nations are directly proportional to the size of the 2 nations as
measured by GDP
• Inversely proportional to the distance, which is a proxy for all trade costs like
transport, language, culture
It is one of the most empirically robust relationships in economics.

Bhagwati and Ramaswami-Domestic distortions, tariffs and the theory of

optimum subsidy

186
Argued that if the govt wants to promote a particular sector, subsidies are better than
tariffs. PLI seems to be going to this route. But the issue is of phasing out of subsidies
and also of cronyism.
Untitled Attachment

187
Pre independence Economic History
Past year questions
• Internal and External drain theory of Naoroji
• Forms of colonial exploitation and impact on India
• Impact of the Great Depression of 1873-1896 on India
• Underdevelopment and poverty of India during British Rule
• Commercialization(forced) of agriculture during British rule
• General analysis of agriculture and rural India
• Swadeshi
• Gandhi's economic ideas
• Industrialisation and deindustrialisation
• Discriminating protection and impact on Indian industry. Impact of British Trade
Policy in general
• Land system and its changes
• Railways
• Roads
• British Attitude towards Indian economy and changes in it. At the turn of the 19th
century
• Modernisation of India during British era.
• India as a complementary economy-2018
• Gold Bullion standard and ratio controversy
• Jute mills

188
The Economy and Society in the Pre-British Era
Landed Property
There was a three tier system of rights:
• Right to cultivate
• Right to collect taxes
• Right to grant taxation rights.
These three correspond to the three classes:
• Peasant- Rights to cultivate could be individual, village or kin rights, with or without
the rights to commons.

189
 • Landlord or zamindar- Well defined in north. In south, warlords lived in forts, taxed
but were not part of the nobility. Mainly military officers with grant of
mansab(military rank) came with jagir. The jagirdar appointed officers to collect
taxes.
• Kings, warlords, commanders- Thus, many layers of the right to taxation rights. But
ultimately vested in the emperor
Although formal property rights did not exist, alienation was difficult due to the
entanglement of various interests and because labour was scarce compared to land.
Agriculture profit was scarce and hence property transactions were limited, besides
being discouraged by both tax collectors and peasants. Thus agricultural growth took
the form of 'extensive growth' by bringing more land under cultivation
4 types of owners:
• Individual cultivators- Were called khudkasht(original settler) and
pahikasht(immigrants)
• Individuals having a share in jointly owned village land- Two types, both based on
the notion of 'coparcenary community' of landholders
◦ In north, a collective of kinsmen who managed the affairs of the village
◦ In west and south it was a share in the total village land. Shareholders called
mirasdars. Mirasi was saleable and leasable
• Holders of offices vested with revenue-free or lowly assessed land
• Tribal chiefs

Revenue farming- Jagirdars given land for military purpose or for some other service.
Theoretically jagirs reverted back to the king upon the fulfilment of the service. The
terms of jagir system fell into disuse after the 17th century because most revenue
grants to warlords became effectively hereditary and land grants were now frequently
made to non-military groups to meet short term deficits. This practice of giving land
grants to non-military groups was called revenue farming.
Village community
Broad features:
• Barter
• Customary dues
• Production for local consumption
• Caste based specialization

Industry
• Artisans produced mainly for local consumers
• Rural craftsmanship was crude

190
 ◦ Unit of production was mostly family, with simple production and low division of
labour
• Urban was very refined, proficient.
• Depended on the support of the elite for purchase as well as protection from
piracy
Foreign Trade
• Indian subcontinent a major link in global trade
• A long coastline
• Textiles and other products in demand across the world
• Well developed shipbuilding industry
• The rise of continental empires like Mughals strengthened the hajj route.
• Principal commodities of trade in the 17-18 century were foodgrains like rice, cotton
textiles, horses and silver. In cotton textiles, calicoes and chintz(colored prints)
were in great demand.
• At the end of the 18th century, the proportion of export in national income was
1-2%.

Reason for European Naval superiority

Indian shipping was not a small scale enterprise. Many owners of ocean ships were
politically powerful. So European dominance can be explained by the balance of power
at sea and by business organisation
• Naval superiority based on a partnership between the state and merchant firms was
key reason. Indian seafarers were rarely backed by the state.
• While Indian ships carried lower freight charges, European ships were bigger,
sturdier and better guarded
• European trade revolved around joint stock companies while Indian around families

Colonialism and Indian Economy

The EIC after receiving taxation rights of Bengal in 1765 after the battle of Buxar and
slowly over the other territories, set out to reform land taxation system.
Obj:
• Weakening the old military elite by separating the taxation and ownership rights and
ending the tax rights of the erstwhile military groups. This made tax collection a
state office and the only private interest in land was ownership. This resolved the
welter-of-rights problem. The state recognized property rights as long as taxes
paid.

191
 • Expanding the tax base
• Make land more marketable
But, although reform of property rights to secure private property is a necessary
condition for growth, the EIC did not deliberately seek to modernize a backward and
institutionally weak system.
Indian rulers keen to secure peasant property rights. Earlier property rights were
entangled in joint rights, creating two problems for the colonists:
• It made the tax-collecting landlord an intermediary between the peasant and the
state, making him powerful and a threat to the Company
• It made land poorly marketable- Removing overlapping rights and securing private
rights would make saleable, attracting moneyed people to transact in land
Thus the Company' obj was political and pecuniary.
But this still needed the support of locals to be implemented. Three ways:
• Eastern India- Zamindari system gave property rights to zamindars and the
peasantry became tenants of zamindars. Also called Permanent Settlement.
Revenue fixed. Hence Permanent
• Southern and Western India- Ryotwari gave property rights to peasants. In this,
property rights granted in exchange for revenue that was revised every 30 years
• Western Gangetic Plains- Property rights accrued to the dominant kinship lineages
in the villages

Zamindari System
After getting Bengal, they continued with revenue farming but made the auctions more
open and lease shorter. Problems:
• Diluted the composition of zamindars
• Auction price often too high, beyond the region's capacity. So the revenue farmer
either defaulted or charged very high rents from the peasants
This made revenue farming very unpopular and hence the Company turned back to the
old Zamindars. The Permanent Settlement was a direct result of this.
• It gave the zamindars ownership and security given they paid taxes. In return they
were allowed to continue as mini-states
• The revenue fixed was 10/11th of the revenue for the Company and 1/11th for the
zamindar. The rates were way higher than the corresponding rates in England
• New zamindars was a mixed class of people, including landlords in pre-British Era
and those who acquired land through revenue farming.
• Old zamindars were retained as
◦ They were more aware of local conditions than the Company.

192
 ◦ Years of revenue farming had weakened traditional offices like patwaris and
amils, further reducing info to British
◦ The above was also because the British, mistakenly thought that zamindars
were superior cultivators like in Britain
• Usually zamindari areas were fertile ones, capable of supporting the zamindar-
tenant-labourer hierarchy, but in some areas this was weak7
• Initial years saw a huge number of distress auction of zamindari estates in Bengal
because of :
◦ Greatly effective revenue collection
◦ Series of agrarian crisis
◦ Incompetence of zamindars in managing their estates. They did not work on
improving productivity
• The new zamindars who acquired through auctions were called 'lotdaars' by the
peasants.
• The British mistakenly assumed that the zamindars, 'grateful for the benefits
secured to them, would foster their tenants', leaving unanswered the question of
whether zamindars could raise rent. So zamindars, left formal rates same but
imposed other 'levies' The dominant tenants were bribed into collusion and hence
the weaker tenants trapped.
• Due to this, the govt fixed the occupancy rents of tenants or khudkashts(tenants
for generations), but the exploitation didn't end. Tenancy continued to be
strengthened, encouraging a proliferation of sub-leases
• These sub-leases and the few powerful tenants made reforms more difficult. But
this also reduced exploitation as raising rents by zamindars became difficult
• The zamindars were deprived of their magesterial and police functions
• It also created a class that was loyal to the British as their interests matched. This
paid rewards to the British, like during the 1857 revolt
• Thus, the system gave social and political stability to Bengal at the price of
neglecting the rights of the lesser landholders and undertenants and of
excluding Indians from any responsible share in the administration
Ryotwari
• While in Bengal, the company had little info and existing institutions were strong,
necessitating the support of zamindars for revenue, in other parts, when the
Company got control, it had greater information and the middle-tier had already
been weakened. So the conditions were there for direct peasant proprietorship
• Cultivators Individually received proprietorship-Ryotwari
• This was adopted in Southern and Western India
• A direct contract between the ryot and the State, it meant a tax contract remained
valid for 30 years. Re-negotiations after 30 years.

193
 • While in principle this was supposed to strengthen the ryot and weaken the former
elite, in reality the ryot differed in regions
◦ In parts of North, joint peasant rights were strengthened
◦ In south and western India, misradars, holders of shares in village land were
granted rights, making this and the joint-landlord system indistinct
◦ The individual shares were called patta, enabling easier sale of rights
• Ryotwari should have eliminated the intermediaries. There were some attempts
initially, but this impaired the village cohesion. So British decided to go slow. So
three outcomes emerged:
◦ Permanent weakening of the office holders like in Western India
◦ Their evolution into substantial cultivators like in SE coast and partly in the Tamil
country
◦ A mix of the two in some areas of western India, with some of them emerging as
substantial cultivators.
• In all cases where the old officers benefited, it was because of inam land. This relief
to the old notables is puzzling when the Company was trying to extract max
revenue.

Mahalwari system
• Mahal means a house or district
• Applied to any compact area containing 1+ villages, called estates
• The revenue settlement made with the estate and there were distinct types of
assessment
• If the zamindar held the estate the payment was from him, otherwise from
individuals.
• In Ganga valley, NWP, parts of Central India and Punjab
• In Punjab some variations, called village settlement
• Revenue was periodically organised and was haphazard and led to high revenue
demands
• There were reforms in 1833 reco by RM Bird, but little improvement in peasantry
condition
See the map on page 44.
Consequences of Institutional Reforms: Tax, Tenancy and Land Markets
• The first round of settlement in Bombay and Madras set revenue demands too high
leading to peasant distress and agrarian depressions. Later rounds moderated this
burden.
• Property rights reforms stimulated land market transactions in India.
• The zamindari and ryotwari areas differed in their developments, like in
investments.

194
 ◦ In zamindari areas, responsibility for investment on zamindar. But in ryotwari, the
govt implicitly assumed responsibility
◦ This was because the revenue was fixed in zamindari areas and so the govt was
not interested in improving the land.
◦ This is perhaps why irrigation developed more in ryotwari areas

Foreign Trade
Indian integration into the global trade increased tremendously from 1800 till the
beginning of WWI, but the pattern of trade changed dramatically. Four features of this
commercialisation
• Importance of foreign trade in the regional economy increased.
◦ The avg annual trade growth rate was 4-5% in 1834-1913 and national
income barely grew at 1.5% during the same time. Hence the ratio of trade
to national income rose continuously, reaching >20% by 1913
• The dramatic fall in India's share in world trade reflected not an absolute decline in
India but rather a rise in the ROW
• Composition of trade changed.
◦ While textiles export and bullion import dominated the 18th, they declined
sharply.
◦ The five major exports in 1850 were opium(30.1% by value), raw cotton(19%),
indigo(11%), sugar(10%) and foodgrains(4%). Post 1850, cotton, jute, tea and
leather dominated
◦ Imports were dominated by textiles, metals and machinery
• Nature of trade fluctuations changed.
◦ 18th century trade fluctuated a lot due to lack of infra and info. Led to
consignment trade(stocking up and auctioning)
◦ This faded away post 1850 in favour of contractual deals as infra and info
improved.

Indigo
• See History

Opium
• Known as an anaesthetic, prophylactic against malaria and an intoxicant
• Varanasi, Bihar and west India lucrative sites for cultivation
• In China despite the state banning it, it was sold widely down to the last person as
the Chinese state was weak and it was lucrative for Chinese traders too.
• Opium wars ended with the Treaty of Nanking, establishing the principle of treaty
ports. Foreign traders would enjoy immunity from local law and transferred Hong
Kong to Britain

195
 • The British sold opium for tea. This exchange helped balance trades of China, India
and Britain
• There was immense pressure on Indian cultivators to grow opium, most of whom
did not want to grow it. There were multiple layers of authority,each taking cuts and
impoverishing the peasant.
• Malwa opium was very popular and demanded

Cotton
• Cotton export to Europe began post 1750, as cotton spinning grew in Britain
• Hargreaves Spinning Jenny and Arkwright Spinning frame and steam engines in
factories led to increased demand for raw cotton. 90% was from US with the
invention of Whitney's saw gin
• With investments made by Indian traders and farmers, railway and the Civil War,
Indian cotton became the fibre of choice in Britain by the 1860s.

Growth and Structural Change. 1857-1947

Three features defined the entire colonial period:
• Structural-The overwhelming importance of natural resources and labour to
economic growth and welfare
• Global-India's economy was more open during this period compared to both before
and after and Ind participated in the 1st globalisation, seeing the movement of
goods, people and capital. Also global innovation in transport and comms, which for
India meant Suez Canal, telegraph and railways.
• Colonial-Large remittances paid by India to Britain, as 'Home charges'. constituting
a drain of wealth.

National Income
Official estimates don't exist
S. Sivasubramonian's series most authentic.

Time National Income Population Per Capita

Income
1900-1914 1.45 0.45 1
1914-47 1.14 1.08 0.06 only

196
National Income=GDP+NFIA+taxes
The pace was unquestionably slow, compared to what was needed to raise the living
standards of the people
Employment grew at only 0.5% in 1900-46
Lessons
• The pre-war phase of expansion ended in the inter-war period, coinciding with a
rapid increase in population. This shift is important and the reason for it:
◦ In pre-war, agri was the mainstay of growth and hence agri-stagnation caused
interwar stagnation. Compared to a growth of 33% in 1870-1914, in 1914-44 it
grew at only 3%
◦ This was because in pre-war, ToT was rising as exports was agri and import was
item of mass consumption like clothes
◦ After 1925, world agri in crisis
◦ In India, as population exploded, land under cultivation stagnated
◦ World demand for Indian agri declined and imports became expensive.
◦ The Great Depression further added to the strain,
◦ The agri crisis and Gandhi's speaking for speaking for them was a major
reason for his appeal.
◦ The non-agri sector was driven by 3 forces:
▪ Industrialisation
▪ Growth of govt
▪ Growth of long-distance trade
◦ This prevented the non-agri from stagnating but was tempered by stagnation in
small scale industry.
◦ This also meant that the share of agri in national income was being replaced by
non-agri sector. Same happened in employment but this change was slower.
• There was a small elite, paid high salaries while on the other end, there was a
marked increase in poverty. Real wages of unskilled and semi-skilled did not rise.
The poorest did not become poorer but more people became poor. Explanations for
stagnant wages:
◦ Deindustrialisation reduced demand for labour
◦ Many pre-war wages were set by custom, not negotiation and hence did not
respond to the rising food prices. This explanation is more supported by data as
the artisanal and agri real wages did not converge.
• The shift in trajectory, resulting from agri stagnation caused increase in poverty and
reduction in food availability
Explanation of the change

197
 • Two ways India globalised:
◦ As per simple trade model, imports of cheap cloth led to deindustrialization and
increased demand for Indian agri till 1900 increased agri prices and expanded
agri as India had surplus land
◦ In the interwar period, growth faced 3 difficulties:
▪ Agri land exhaustion and reduced external demand. This was accompanied
by low agri yield.
▪ In industry, the positive effects of colonial links weakened as British growth
slowed and Indian industry became more inward looking. But at the same
time, domestic demand slowed due to stagnating agri.
▪ Population growth accelerated

Globalisation and Patterns of Trade.

4 general features of colonial foreign trade:
• Increasing openness in the 19th
• Initial specialisation in agri export
• Gradual shift away from agri as industrialisation progressed(here link economies of
scale and hence decrease in price of industrial goods)
• Initial Britain-centered trade tilted towards East Asia in the interwar period.

Crown rule and Suez canal fuelled globalisation. Between 1880-1925, real volume of
trade to-fro India doubled. The age of artisan had ended and age of peasant had
arrived.
The interwar period saw a diversification in capacity and trade partners.
• Capacity- Agri declined and industry increased, also leading to increased imports of
intermediate goods
• Partners-While Britain remained important due to the Imperial Preference Treaty,
1921, others like Germany, Japan, US also important
Saving and Investment
Deposits and Securities were not the only form in which Indians invested. Huge part in
precious metals. Small part also went abroad as purchases of govt bonds in India.
The rates of savings and inv in colonial India were small
• From 1900-1947, net capital formation and savings mere 2-4% of National Income
• There was a large proportion of depreciation or replacement expenditure
• Net foreign pvt inv was mere 1% of national income
• Financial savings were also 2-3.5%. A large part was in gold and silver except the
Great Depression years as during the war gold import was legally curtailed and
during GD, export was heavy. Metals, except when mortgaged, did not lead to
productive investment and hence formed a 'leakage'.

198
 • Net gold and silver took a toll of 2% on the potential aggregate investment/income
ratio
• Roughly 1/3 of public inv and less than 1/10 of pvt inv to agri. Hence net inv to
income in agri ratio was as low as 1-2% throughout 1900-1947, and this, with pop
growth, stagnated the economy.
• Reasons for low investment:
◦ Savings and especially rural savings was small and hence little flowed to rural
India, except a little via govt inv in irrigation. Around 8% of rural income was set
for cap accumulation in agri out of which 1/4th went to gold and silver
◦ The rural credit market was poor and dominated by the village moneylender,
often pushing the peasant into a debt trap. .
Public Finance
Two main types govt exp in British India:
• Expenditure in India
• Exp abroad
◦ Pensions paid in sterling to retired employees
◦ Interest on public debt raised in London
Govt financed exp through
• Current revenues of which 70-80% were taxes
• Borrowings abroad
• Borrowings in India

Pattern
• Govt borrowed heavily in London and India, peaking during the WW
• 2 types of sec sold by the govt
◦ One denominated in sterling
◦ One in ruppee
• Three main heads of inv were
◦ Rail-Largest head. But its share in gross inv fell from 51% in 1898-1913 to 27%
in 1930-38
◦ Irrigation-Small at 11%
◦ Roads and Buildings
• % of public inv as national income declined from 2.21% during 1901-13 to 1.32% in
1940-46
• State capacity was linked to BoP

Balance of Payments
• Govt remittance abroad was politically sensitive. Every year, govt paid to Britain in
sterling a sum called 'Home Charges'. Its constituents were

199
 ◦ Debt Service(50% in the pre war years)
◦ Payment for maintenance of army and navy
◦ Pension payments for British officials
◦ India Office expenses and stores.
◦ These, Indian nationalists, most prominently, Dadabhai, argued, reduced the
capacity of the Indian economy to generate savings and investment. This theory
was called Drain of Wealth.
▪ In principle if such payments were financed from taxes, domestic
consumption and savings would fall
▪ If financed out of the govt own investment, public investment would fall
▪ If financed out of foreign borrowings, then these charges would burgeon as
interest obligations would rise
▪ Interestingly, all three methods were used to finance Home Charges. Salt tax
was used to finance increased govt obligation in sterling in the 1890s
▪ These payments wouldn't be adverse if they were for factor services which
increased national income or supplied public goods. Hence the adverse
effects were due to the 'quality' of the charges.
• Some argue that the differential payment was necessary to Europeans as
Indians did not possess enough skills. The charges for the navy, some
argue was in fact a subsidy for India' defence by the British public which
paid much more than India.
▪ But these payments compromised the govt's ability to pursue a
stabilisation policy independent of British economic interests. This was
evident whenever rupee was under strain like during Great Depression(More
on this later during monetary systems)
• The close link between budget and BoP was maintained by India's export surplus
and the govt raising sterling loans, which financed remittances abroad. This system
broke down interwar period as net exports fell and the govt was unable to raise
sterling loans. Despite this, remittances continued. The casualty was investment-
income ratio.

India was under monetary systems that left money supply sensitive to BoP. Transactions
demand for money was however primarily driven by weather. This dichotomy was
considered a major weakness of the Indian monetary system by Keynes. When bad
harvest, a buoyant world trade could lead to monetary expansion and fuel price rise
even more.

Great Depression
India experienced its onset in 2 ways:

200
 • Demand for agri exports fell
• Prevailing currency system fuelled a deflation(reverse of what happened right
above- global trade weakened, money supply weakened, which along with
oversupply of agri, fuelled a deflation
India was a colony and hence this ruled out any move to adjust the exchange rate. So in
the absence of devaluation, exports fell and continued deflation
• Real rates rose and indebted houses sold assets.
• Indebted businesses failed
• Banks had irrecoverable assets

Normalcy returned due to:

• Wage depression
• Fall of the old currency system
• Bank recovery

Unique impact of GD on India

• Real GDP changed little during the peak GD
◦ India was insulated as trade sector was relatively small. Exports were only 7-9%
of NDP.
◦ Share of net private foreign investment was also low
◦ Unlike other tropical exporters, India had a large manufacturing base too, some
of which received protective tariffs
◦ Most banks lent only short term in commodity trade. Hence effect subdued.

But despite the relatively muted effect the GD turned the freedom struggle truly into a
mass movement. Poor management by British destroyed the little trust between Indian
businesses and British.

Agriculture
Throughout colonial period and well after that too, agri provided livelihood to around
70% of the pop.
Growth rate of agriculture NDP was 0.31% between 1900-1947, exacerbated by deep
regional inequalities, which lasted beyond colonial times. For example. areas poor in
British also poor post. Areas that experienced Green Revolution were also prosperous
during the British rule

201
Trends
• 1850-1900 saw expansion in net sown area, universally, the prime cause of growth
• George Blyn's data reconstruction is the standard for the 20th century period
◦ Foodgrain output was stagnantn, non foodgrain was growing
◦ Output growth was small because acreage growth was small yield grew slowly
and declined for food crops, especially in the interwar period/ Rice saw the most
stagnation
◦ Bengal suffered the most decline
◦ In the interwar period, population grew quicker, leading to a decline in food
availability
◦ Thus one basic conclusion-commercial crops experienced more growth
than subsistence crops. Hence commercialisation, production growth and
regional performance related.

Resources and Tech

• There was a decline in soil fertility due to waterlogging(caused by canals) and
erosion(by deforestation). This was argued by economist Radhakamal Mukherjee.
There was a serious manurial problem as there was low use of manure and hence
nitrogen content depleted.
• Irrigation was available in limited scale and fertiliser use was also low, leading to low
yields. Acreage irrigated % increased from 12 to 22% between 1885-1938, mostly
concentrated in Punjab, deltaic Madras, west UP and Sind.
• Chain of agri research stations improved seed quality

Markets
Commercialisation of agriculture
Refers to a process whereby peasants start producing primarily for sale in distant
markets, rather than to meet their own needs or to sell in local markets. These distant
markets referred to both exports and far away lands in India accessed by rail
The process is important as it implies improved efficiency as peasants use the idle
resources, improve org and tech in response to price incentives.
Organised, large scale, agri markets and trade existed in pre-colonial time too. But the
market expansion in the 19th was qualitatively and quantitatively a departure from the
past. Three main changes:
• Before colonial rule, product markets were limited and subject to imperfections due
to
◦ Multiple weights and measures
◦ Obsolete and risky transport

202
 ◦ Barter
◦ These were weakened by colonialism and railways, enabling closer integration of
global, regional and local markets.
•
•
Measures of commercialisation
• Both direct and indirect
• Export in value increased 500% between 1870-1914, with non-manufactured good
being 3/4th of it
• Constant, unprecedented increase in agri prices. 1928 levels=3*1875 levels
• Acreage increase led by marketable crops like wheat, cotton, oilseeds, sugarcane
and tobacco
• Rent and land price and scale of credit transactions increased. So did land
transfers
• Circulation of labour in-out of agri increased
• Indices of transport, like number of carts, also increased.

Factors facilitating commercialisation:

• World demand for food and raw materials immensely increased due to
industrialisation, aided by faster transport like steam ships, connecting distant,
cheaper markets. Suez Canal was a major factor.
• Railways brought pockets of excess supply and demand closer within India and also
lowered the transport costs
• As cash crop production increased, food crop demand also rose as these farmers
now needed food crops for consumption
• Land taxes, fixed in money, became a lighter burden, encouraging investment as
product prices rose and increased the role of profit motive in peasant
production. With the doubling of prices between 1870-1914, revenue demand fell
by 100%
• Canals increased acreage and cropping intensity
• Improvements in agri tech with better seeds
• Industrial Revolution led to international specialisation due to trade. For example
India specialised in agri exports
The peak of commercialisation was 1860-25. Then conditions deteriorated as global
prices slumped
Cotton
Wave of commercialisation based on cotton and some other crops began in early 19th
centuries. Cotton's acreage increased from 9.6 million hectares in 1891 to 11.6 in 1941.
The direction of marketing in cotton shifted from large domestic users like Bengal
weavers to Britain and China. This also led to growth of Bombay as a port. The Cotton

203
Famine caused by the Civil War greatly expanded the Indian cotton share in British
textile industry. This led to large number of mills in Bombay and by WWI Japan was also
a major destination for Indian cotton. The main cotton areas were Khandesh, south Guj,
south Bombay-Deccan, Madras-Deccan and Punjab

Land Market
Colonial property right reforms led to 2 changes in the rural areas:
• End to the tax collection rights that earlier military groups enjoyed. Tax collection
became a state office
• The welter-of-rights problem was resolved by recognising only property rights.
Hence land now became a source of private investment. As BB Chaudhuri
observes,'The landed society ceased to be a closed one and any moneyed person could
become a landed magnate'.
But despite land becoming more marketable, the market was still sluggish:
• Commercial expansion was limited to some areas.
• Though colonial laws founded property rights, inheritance laws were still based on
custom, putting rights of the extended family before the individual. Land deeds
were in multiple languages and often illegible
These slowed the capitalist expansion of agriculture

Expansionary condition ended in 1920s:

• Rents outpaced product prices
• Export market collapsed
• ToT turned unfavourable to agri

Market for Tenancy

Scale of tenancy increased in colonial times, partly reflecting a shift from customary to
formalized tenancy relations as the British legalised only a small subset of customary
rights. Hence secure tenancy rights were rare.
In the zamindari areas, all peasants were tenants, with the zamindar exploiting the
peasant. Later a series of tenancy laws strengthened the raiyati rights of peasants
settled over land for many generations
Tenancy regulation increased subleases, mainly unregulated, instead of ownership
rights. This process is called 'subinfeudation'.

Labour Market
Wage labour and migrant labour employment increased in colonial India. Causes:

204
 • Deindustrialisation
Wage labour as % of agri workforce increased from 19 to 36% between 1901-31
But this migration happened along specific channels and hence wages did not
converge. For example Bihar workers migrated to Bengal during Jute season

Credit Market
Commercialisation increased peasant dependence on working capital credit. For
example, to procure food crops if self growing cash crops, then borrowing needed.
Further, monetization of rent and tax, coupled with disparity between harvest and tax
seasons necessitated advances
Commercialisation also increased demand for expensive inputs. Eg Cotton needed
heavy ploughing. These crops also remained on the field longer
Laws regarding credit contracts gave creditors more power to recover loans

The high cost of borrowing reflected both the advantageous position of the lenders and
also the unsecured nature of loans.

The fear that land transfers between peasants and lenders posed a threat to the village
stability was unfounded as the power of the moneylenders declined over time. It was
difficult for outsiders(non-agri) to enter agriculture in the form of opaque land laws and
hence most land transactions were internal to the peasant economy. The rich peasants
or those with superior rights commanded the credit markets over time, leading to an
erosion of distinction between non-agri and agri-classes.
During the GD, as prices slumped, peasants sold jewellery and the export of gold
helped revive the economy. The rural debt crisis them helped stabilize formal banking
as much of the proceeds from gold sales ended up in banks.

Effects of commercialisation
The developments in the commodity markets changed rural institutions, factor markets
and agrarian relations
On Peasant earnings
• They rose, in very small amount, till WWI, which is why they willingly migrated for
off-season urban work.
• High seasonality in agriculture earnings

205
Labour wage
• In the long run of 180 years, wages rose marginally, particularly because of the
long-term contracts
• Wages rose mostly where commercialisation was more.
• Stagnated after 1920
• WWII and the Bengal Famine were massive shocks to the real wages as inflation
was very high
• It is the relative immobility of the average wage, together with the rise in
number of wage-dependent households that has defined the persistence of
poverty in modern India
• Real wage stagnation the condition of productivity as suggested by the neo-
classical economics and number of households increased due to deindustrialisation
and population increase, with land remaining fixed.
• One positive aspect was the weakening of the traditional bondages defined by
caste as migration increased.
• But land ownership was still largely caste-biased. In this case, Economics
reinforced subservience.

Famines
After the famines of 1896-98, historians like RC Dutt argued that it was
commercialisation and exports caused famines in times of bad harvest.
Two problems with the view that commercialisation caused famines(19th century
famines):
• For a colonial link, it must be shown that these famines were worse than those
before. Not empirically testable
◦ Famines caused due to dependence on monsoon and price risks, which were
largely same in pre-British times too
◦ Famines due to harvest failure became rarer after 1900, due to a positive
correlation between food security and infrastructure like canals and railways.
• Substitution of food for non-food crops(commercialisation) happened in a limited
scale in India. At Independence, 80% of acreage was under food crops

Amit Bhaduri argues that there was forced commercialisation and evil moneylenders,
who owned land but not tilled it, made no investment as they would then lose the
interest on loans. But this was not true. The flaw with this theory is an analytical one as
it assumes that the expected profit from land improvement was small compared to the
interest

206
Small Scale Industry
In 1900 overwhelming majority employed in industries that did not use either machines
or large factories. Some of these had roots in traditional handicrafts, from the pre-
colonial era. In colonial era, the scale of employment in handicrafts reduced but this
was both product as well spatio-temporal specific. Some disappeared due to internal
competition and most due to competition from machine-based products.
Examples of small scale are handloom weaving, leather manufacturing, furniture etc
Few 'modern' small scale firms that used some machinery were rice mills, edible oil
extractors etc. They were all colonial in origin
Sometimes modern small scale implied creative destruction of the traditional while in
other times, the line between the two was blurred.

Trends
Employment in small scale decreased from 12 million in 1911 to 6 million in 1931 and that
in large increased from 0.9 to 1.6 million in the same period.
But in the same period GDP in small scale increased from 134 per capita to 181. This
was due to productivity increase as the output per worker index almost doubled from
156 to 288 between 1921-1932(base 1900).
Reasons:
• Tech change
• Shift of work from households to wage workshops, increasing the average hours
contributed per worker by 34% between 1900-47
Most were located in United Province, Punjab and Madras due to traditional markets
and skills
Textile had 25% of the workers, being the most important industry
Deindustrialisation
A large number of artisans lost livelihoods. Between 1881-1931 employment in industry
declined from 20 million to 13 million and in agriculture increased from 71-100 million
But despite this, there was survival of the traditional. Because:
• Artisans adopted to the new economic environment characterised by:
◦ Segmented markets
◦ Globalisation
◦ Increasing wage employment

207
• Craft tradition had 4 categories
◦ Intermediate goods like cotton yarn
◦ Tools like ploughs
◦ Consumer goods for the poor
◦ Consumer goods for the rich
• Industrial Revolution decimated the first 3. The surviving ones of the 4th, which
required skills not reproducable by machines, benefited from globalisation through
cheap inputs and new markets. But these adaptations were concentrated in some
towns only where artisans migrated. This migration was male-biased and hence
there was a decline in female employment in industries.
• There was proto-industrialisation where in response to increased potential market,
the workers worked harder.
Large Scale Industry
Three defining features:
• Large factory
• Machinery
• Government regulation
These were of 19th century origin in India
Between 1860-1940 employment in factories increased from 1 lakh to 2 million, at
an average annual rate of 4%, while in the same period, employment in Britain
grew by only 1.1%
A strong boost was provided by WWI
But:
• Despite a strong rise in employment, it was still small compared to overall
employment
• Despite small employment overall, it made significant contributions to national
income
• It had important technological and other spillovers like urbanisation
• These businesses also constructed schools, hospitals, universities etc.
• Big businesses sponsored some of the more stable banks and insurance cos
• Thus colonial industrialisation paved the way for 'industrial districts' which
consistently played a role in successive waves of capitalist enterprise in
Independent India.
Trends
• The share of employment in factories increased from near 0% in 1850 to 11% in
1938
◦ Employment saw a decline in female participation and was male dominated

208
 ◦ Most important change was the fall in employment of children, rapidly in
1928-36 following some provisions of Factories Act and the reco of Royal
Commission on Labour in India, 1931
◦ Factory employment was dominated by textiles, having 42% in large scale
and 26% in small scale. Textiles was cotton, jute spinning ad weaving mills
and gins and presses.
• Share in GDP increased from 15% in 1900 to 45% in 1947
• High regional concentration
◦ Bombay province, mainly dominated by Bombay city had 24% of total factory
employment
◦ Bengal Province led by Calcutta had 28% of total factory employment
◦ This was because these cities were transportation hubs, market for factors of
production and sites of European settlement. They were also located near lands
of cotton(Bombay) and jute(Calcutta) cultivation

Stages of Industrialisation
4 stages:
• Pre war
◦ Railways, Telegraph and Suez Canal had made important changes in
transportation, Spurred by reduction in transportation costs and time, new
forms of manufacturing enterprises began to grow.
◦ Capital came from foreign as well as domestic sources. Growth of India's trade
with China after Company monopoly ended in 1834 was significant as Calcutta
and Bombay were built on profits from foreign trade.
◦ American Civil War and the resulting profits from cotton trade in India was also
important
◦ Similar tea mania in Calcutta and gold mania in Madras
◦ Although all 3 resulted in crashes and harmed many small businesses, they
nevertheless made a lasting impact
• WWI
◦ Britain's engagement in war had 2 contradictory effects on India
▪ Demand for goods made in India shot up as supply from other places was
down
▪ On the other hand, import of machinery from Britain and Germany suddenly
stopped
▪ Thus excess demand and supply bottlenecks
▪ Handloom weaving which relied on English yarn suffered
▪ Steel, jute and cotton mills gained
▪ The inflation also benefited the producers

209
 ◦ By the end of the war, industries had expanded and conditions were ripe for
diversification
• Interwar
◦ War showed usefulness of India as a manufacturing base and resulted in change
in policy. Sole dependence on Britain for supplies like defence equipment had
been harmful during the war
◦ The India Industrial Conference also started pointing out the indifference of the
govt towards Indian industry
◦ The new outlook resulted in the Fiscal Autonomy Convention, 1919 which
formally accepted India's right to pursue an independent tariff policy
◦ But fiscal autonomy was also diluted by the Imperial Preference Policy of
protecting British goods
◦ Indian Munitions Board, 1918. Indian Industrial Commission 1916-18, Indian
Fiscal Commission, 1921 were established, which further helped Indian industry
through protection and domestic purchase policy
◦ But govt help was severely restricted due to poor financial conditions
◦ Factories saw spatial expansion, mainly due to the benefit of non-unionised
labour.
◦ Calcutta and Bombay saw low and fluctuating profits in jute and cotton due to
increased competition
◦ An overvalued rupee also hurt industries during the GD
◦ But in industries, Depression had a mild overall impact primarily because wages
were quite flexible. But this drove a wedge between old towns with unions and
new town where unions were absent or weak
◦ GD lowered prices and saw debtors sell and mortgage assets as their real debts
rose. This and gold liquidation increased credit.
• WWII
◦ Qualitatively similar to those during WWI. But Indian industry was more
diversified now
◦ Thus, real growth of industrial incomes and diversification was greater
◦ But overall WWII was more stressful as India was a war front too, especially
Bengal
◦ Anticipating long engagement, large scale requisitioning of rice began. This,
along with harvest failure, triggered the Bengal famine of 1943
◦ Meeting the needs of the workers became increasingly difficult as prices soared

Common through all 4:

• Dependence on imports for machinery
• Dependence on foreign technicians

210
Cotton Mills
First steam powered cotton yarn factory appeared in Calcutta in 1817, by a European
In 1854, CN Davar started the first successful cotton mill in Bombay, attracting other
merchants
When the crash ended, a furious expansion of mills began.
By 1914 the number of mills rose to 271, with avg daily employment 260000.
Any small town, by 1914, that had these conditions could attract a spinning mill
• Cotton trade
• Railway
• Cheap and non-unionised labour potential pool
• Handloom industry
• So cities like Kanpur, Nagpur, developed.

In 1870-1914, mills were mainly selling yarn to handloom weavers in India and China. But
later loss of China market to Japan and domestic competition also forced Bombay mills
to change
• They started weaving their own yarn more than before. This accelerated the
substitution of British cloth by Indian cloth
• They tried to spin and weave finer yarn
• They tried to save on labour costs, intensifying industrial unrest

The interwar period saw:

• Unemp and labour unrest
• Technical and managerial reorganisation
• Demand for tariffs
• Nationalism among mill owners
• Beginning of bankruptcy in many Bombay mills

Jute Mills
Natural fibre mainly grown in WB and Bangladesh.
The demand for sacks increased tremendously in the 19th century due to the increase
in commodity trade.
Till 1870s Bengal raw jute was processed outside India, mainly in Dundee, Britain but
mechanised jute processing had begun in Calcutta by then
George Acland's mill in 1855 was the pioneer
In a short time, especially after 1870, with rapid expansion, Indian jute industry had a
virtual monopoly in the world
Between 1869-1914, number of mills increased from 5-64 and employment from 5000-
215000.

211
Till WWI the industry was entirely owned and managed by Europeans. This made
Calcutta different from Bombay
Interwar was difficult as sack demand slowed. Cartelisation was unsuccessful and high
prices due to India's monopoly attracted other firms(argue about supernormal profits
being eroded in perfect competition due to free entry)
As per Mancur Olson, large and diverse coalitions have free riding risks and make it
impossible to sustain a cartel
The cartels that did form in Calcutta was ethnic, mainly of British capitalists and the
'fringe' of Indians sensed that they could perform better than them
Eventually the industry was doomed due to the delayed technical improvements.
Labour
Was available cheaply but gathering and training them, who were mostly peasants
formerly, was a challenge
Lewis Model that in traditional societies, surplus labour available for urban-industrial
jobs at low wages till the surplus lasts. The wage needs to be just above the traditional
earnings. This cheap labour can create substantial profits and development of
industries
But contradictory to theory that supply of labour responds positively to real wage, there
were constraints and hence the positive response cannot be taken for granted.
• Information about job
• Difficulty in migrating due to institutional barriers like serfdom
Thus the rational choice model of economics needs to be grounded in institutional
settings. It also does not explain how surplus labour is created in the first place
Choices to labour did exist, for example men going to cities and women staying back
for. The balancing of rural and urban work another choice
Monsoon dependence and the resulting seasonality in agri imposed idleness for long
periods, during which many took up urban industrial jobs
By the interwar period the labour supply function had taken a more traditional shape as
wage disparity between towns and villages grew
Still, agents like brokers, sardars and kanganies were used to get workers. These were
primarily used because the employers did not have enough info about the workers and
also to stabilize labour in the face of seasonality and risk. These contractors also did
the vital job of training.
Large scale industry tended to employ migrants rather than locals.
• This was because local wages were higher than that in places from where migrants
came from. This was because of demographic pressure, like in UP or because of
low productivity of land like in Deccan

212
First successful large scale trade union was the Bombay Textile Labour Union of NM
Joshi in 1926. Trade union membership increased from i to 4 lakh between 1927-1938.
Wages were not sufficient to keep families in cities, leading to slums and diseases.
Despite this, their conditions were better than the rural areas which suffered from
famines and caste oppression
Labour legislation developed in the interwar period

Finance for Industry

• Capital was scarce for industry, most interest rates were high.
• A modern banking system was non-existent at 1850 and developed then
• The community bound informal finance was sectarian in choosing clients.
• The govt banks were also conservative about client choice
• Following English tradition, Indian banks provided loans for working capital only.
• Stock market was small in the 19th and even after the interwar period as a
percentage of the total savings in the economy. Stock markets suffered from
speculation and insider trading due to ethnic controls
• Fixed capital being in short supply, there was a tendency towards over-
capitalisation in booms as investors could mobilize funds then
◦ This, and the tendency to pay high dividends during booms, made firms volatile
• Indian companies tried to popularise preference shares and debentures
• Thus, given the lack of capital and high cost thereof, most industrialists cam
from communities that had specialised in trading and banking activities,
leading to an almost perfect correlation between hereditary trader-bankers
and large scale industry.
The Co-Existence of European and Indian Business
Some economic historians see their contrasting styles and long term success-failure in
terms of 'culture'.
• Before WWI the 2 worlds were quite distinct.
◦ The E, which owned mines, mills and plantations was
▪ More global in commercial links
▪ Had easier access to ports and railways, banks and foreign capital
◦ The Indian dominated 'bazaar' world
▪ Engaged in commodity trade, handicrafts
▪ Relied heavily on caste and community
▪ Dominated the market in shares and bullion
▪ Till 1914 the bazaar supplied raw materials to the modern world but were not
in the same business, nor were equal partners

213
 • Their coexistence made India unique as most colonies received foreign capital but
India also had a strong body of indigenous capitalists having their own sphere of
business
• After the GD, foreign capital declined and Indian business was ascendant

Reason for segmentation

• Two-fields thesis of Morris D Morris
◦ E & I had comparative advantage in distinct spheres
◦ This is confirmed by the integration of the factor markets wit ethnicity. Hence
each group could access a different kind of factor market better than the other
▪ For example Europeans raised capital in London while Indian raised money
from community resources
▪ Europeans sold goods in export markets through a transport and
communication network centered in London, while Indian sold in India and
China
▪ Europeans relied on Indians for raw materials while Indians specialised in
them
▪ Therefore 'culture; here means distinct spheres of specialist knowledge
• Bagchi interprets 'culture' as racial relations
◦ The European economic interests formed an informal ethnic cartel
◦ Thus what marked the different spheres was not only comparative advantage
but also exclusivity and race-consciousness
Reasons for Indian Ascendance after 1929
• BR Tomilson's work points out to a shift in the comparative advantage
◦ The collapse of the world market
◦ Rise of nationalism
◦ Development of formal and informal institutions
◦ Growth of home market under tariff protection in the 1920s
◦ Thus the political and economic environment of the 1920s ensured that the
sphere of businesses where Indians had an advantage became bigger
Technology and Colonialism
• Industrial Technology was all imported from Britain in the factory sector as
colonialism obstructed the diffusion of technical knowledge in India
◦ There were transfers only when it was useful for the colonialists

Banking

214
Banking
Colonial banking can be divided into 2 segments-Informal and formal
• Informal had moneylenders not legally recognized
◦ Supplied the credit needs of the vast informal sector of peasants etc
• Formal banking had 4 constituents :
◦ Exchange Banks
▪ Foreign owned. Handled remittances and foreign trade
◦ Presidency Banks
▪ Handled domestic trade and remittance in a small formal sector
◦ Indian joint stock banks
◦ Cooperative credit societies
▪ Were started after Cooperative Societies Act, 1904
• The borders between these types was not well defined(in the formal sector)
◦ Exchange banks deposited part of balances with P banks
◦ The P and Indian moneylenders often financed different parts of the same
business
• On the whole, formal banks had little to do with any business that had little to do
with foreign trade, remittances or modern factories

The informal sector

• Hundi got connected to trade by the early 20th century as they were very flexible in
use and could have multiplicity of contractual terms
• Apart from hundis, post harvest crop transport was financed by inter-shroff short
term loans. Large shroff houses were recognised by the formal banks
• Community dominated hundi use kept it distant from the more open formal market
• The main clients of the informal sector were those that needed quick money and
unable to give security and hence rejected by the formal banks
• The strength of the moneylenders and the reason they could lend freely without
fear of default was their intimate knowledge of clients

Exchange Banks
• Failure of the agency houses in Calcutta created a gap in the foreign trade finance
• Foreign banks began to enter from 1853
• They were based mostly outside India and most of their clients were foreigners too.

Presidency Banks
• Three- Bank of Bengal, Bombay and Madras were estd with govt participation in
capital and govt control on management

215
 • Performed 5 key functions:
◦ Held govt cash balances
◦ Issued and circulated currency
◦ Discounted bills
◦ Short term working capital credit to private business
◦ Deposits from public
• They helped develop the credit market indirectly and were merged in 1921 to form
Imperial Bank of India, which was nationalised and renamed as the State Bank of
India
• Their main clients were European businesses and few Indian enterprises. Hence to
meet this gap, Indian joint stock banks were started

Indian Joint Stock Banks

• Their history till RBI is a filled with booms and crashes
• First boom in Calcutta in early 19th when the commodity price crashes of the 1830s
finished off agency houses, opening space for these
• Second in Bombay in 1860s due to the cotton boom
• Third boom with the spirit of Swadeshi in 1906
• These banks expanded banking habits among urban households and by 1947 they
formed the largest segment in Indian banking. They grew because:
◦ Conservative Presidency banks as they were govt's banks
◦ Limited reach of P banks. They had almost no branches in small towns where
there was significant credit demand
• Many of them, especially those at the top like PNB, Central Bank, BOI exist till today
as nationalised banks

The Evolution of a Central Bank

• RBI estd in 1935
• Warren Hastings first proposed it in 1773
• Aim of a central bank was to have a govt's banker, compete with the shroffs and
manage the chaos of having multiple currencies in circulation, be a banker to other
banks and manage forex
• The Presidency banks were only commercial banks that functioned as govt's
banker
• The govt was reluctant to have an independent monetary authority for years,
despite endorsement by people like Keynes and many other committes
• Finally when the Currency Commission and Indian Central Banking Enquiry
Committee endorse it it became real

216
Banking and Development
• Growth of formal banking led to a fall in interest rates throughout colonial history,
hence good. But even these rates were high by European standards and there was
widespread credit rationing
• Rationing was, besides ethnic concerns, was also due to poor information on the
creditworthiness of Indian borrowers for European firms
• Indian joint stock banks, especially those lower in hierarchy, engaged in rampant
insider trading and hence also barred credit to outsiders
• This led many firms to opt for capital markets and offering high dividends to secure
investor confidence, leading to low investment of profits and unstable companies
• Thus, the money market suffered from a 'dualistic' structure.
◦ Rich clients, good govt securities and stable banks being one segment
◦ Poor clients, risky securities and unstable banks the other segment.
• Banking did encourage saving habits as deposits increased from 343 to 2500
million between 1900-1937. Deposit/Income ratio doubled

Infrastructure
Perhaps the most tangible legacy of colonialism. The immediate motive towards these
was governance, not development. But once built, they also served public interests. But
an absence of an explicit development goal led to unevenness in their development
Railways
Till mid 19th century, long distance transportation was through pack animals and small
boats on navigable rivers. Short distance travel means were bullock carts and small
river crafts
• Long distance travel means required a lot of time and labour and hence the railways
destroyed them without much resistance but the short distance ones survived well
after 1947
• In the 1840s, there was a vigorous campaign for railways by the City of London
which was the chief financier of it in Britain. Also pressure from business
communities in Calcutta, Bombay and Madras
• Two experimental line, one connecting Bombay with the Deccan cotton zone and
other connecting Calcutta to the Burdwan coalfields were decided
• Two principles agreed since beginning :
◦ Railways would be constructed by private enterprise on a 99 year lease with the
GoI having the option to purchase the lines after 25 years

217
 ◦ The government, from its own budget, would guarantee a 5% return on capital
where a company failed in doing so. In exchange the govt exercised supervisory
and advisory powers over rail development and administration
• Once contract decided, rail began in earnest, financed by British capital Between
1853 and 1940 41000 total route miles of track was laid ad roue miles per million
people increased from 3-107. Passengers increased from 48 million in 1880 to 604
million in 1940
• Principle of rail construction went through 4 stages:
◦ 1849-69 only private enterprise
◦ 1870-80 shift towards state enterprise
◦ 1881-1924 again handed to private enterprise in management with state
ownership
◦ 1924+ state owned as well as controlled
• While in expansion and freight and traffic terms, growth handsome, till 1870 none of
the line earned 5% except East India Railway. Rail companies did not try hard
enough to earn profits given the guarantee clause
• By 1875, the fiscal burden too much as rupee depreciated and interest on govt
borrowings to pay for the guarantee rose
• When govt took ownership leaving management in private till 1924, private barred
from capital expenditure without govt permission
• This dualistic system led to undercapitalisation of railways
• Consequently a great deal of the potential of railways was wasted

Economic Effects of the railways

• Significant forward and backward linkages as railways all over the world simulated
construction, engineering, financial and labour markets
◦ In India the effects on the 1st 3 was weak till WWI as nearly all of the material
was imported from Britain due to a buy-British policy
◦ The repair workshops in India were not extensively used
◦ Coal mining was the only major example of backward linkage
◦ After the war, Indianisation started and hence railways' led demand for metal
industries increased
◦ The spillover to capital market was small since capital came from London
◦ Greater effect on labour market. By 1947 it was the biggest organised employer
in the world, and is till today
◦ It also facilitated channels of internal labour migration
• There was great reduction in transportation costs, both money and time. By 1900s
railway was charging avg 0.18 pies per maund mile which was 1/10 of what a bullock
cart charged
• This increased import-export trade in real terms. Raw cotton, hide exports

218
 • Facilitated integration of markets, evident from declining price differences between
regions
• In railway, the finance came from Britain under guarantee and the buy-British policy
in rolling stock till 1914 restricted backward linkages of railways
Roads and Inland Waterways
• Good and safe roads were scarce in pre-colonial India, reflected by the poor
engineering capacity of bridging rivers
• Company revived and constructed some major roads for military purpose but
regular allocation of funds began only in the 1830s but investment in them
continued to be of low priority and they grew much slower compared to railways
• In 1931 the length of metalled roads as a ratio of 1000 people was as low as 0.4.
Three factors behind the bias against road in favour of rails:
◦ Road construction was considered too costly given the terrains, rivers,
monsoons etc
◦ Roads brought the gov no monetary return while the rail did
◦ Lobbies that pushed govt for transport like the Lancashire mills wanted long
distance bulk transport
• Thus there was increasing inequality between places located on rail network and
those far from them
• Water transport continued to be important particularly in Calcutta-Assam route
Ports
• Carried the bulk of the foreign trade
• Rail, roads and harbours converged here
• Each served as an export outlet for the hinterland products
• Many like Bombay and Calcutta also became industrial centres
• Initially govt was indifferent to them, with very poor facilities even at major ports.
After the devastating 1864 Calcutta cyclone destroyed many ships due to poor port
facilities, port development began better.
Fiscal and Monetary Systems
While the British govt pursued economic policies for British interests, Indian and British
interests sometimes met
• In the pre war globalisation era, trade gains were shared
But as the British economy slowed in the interwar period, Indian and British interests
collided
In the long run the developmental impact of any state should depend on 2 things:
• Whether it considers development to be its goal
• Financial capacity to pursue development

219
In both respects, the British colonial govt was weak compared to other countries like
Meiji Japan as well as other tropical colonies
• The British Indian budget had a high share of defence, leaving little aside for
development
• Revenue per head in India was among the lowest in the world forcing the govt to
borrow

Policymaking
• The Board of Control and the Court of Directors had to report to the Parliament
over the revenue as well as military affairs in India
• After 1858, policymaking at 3 levels
◦ First the India Office in London headed by the Secretary of State to India
◦ Second was the Viceroy
◦ Third were provincial govt
• The three levels had little harmony and had different priorities
◦ Trade, exchange and defence for London
◦ Calcutta was concerned with public finance
◦ Local issue concerned the provincial govt but they were also the financially
weakest
Trade Policy
• Until WWI, India-Britain trade was relatively tariff-free as trade without tariffs was
an ideology that many colonial administrators subscribed to
◦ It also served the British manufacturers like Lancashire Mill owners and they
resisted tariffs as textiles was one of the main imports from India and India was
one of the main markets for British textiles. India bought 30% of the British
textile export in 1865.
◦ Hence till WWI, import duty small on textiles
◦ Such duties were partly offset by excise on competing goods produced by
Bombay mills
• During the War, India's contribution to the war effort was crucial to London and
hence after the war the view of the Indian govt could not be ignored
◦ Tariffs became a convenient way to raise revenues when finances were strained
◦ Indian sentiments in favour of industrialisation was growing and Japan was
emerging as a competitor in Asian markets
◦ These weakened the resistance to customs tariffs and hence there was a steady
and significant increase in average tariffs after 1920
Fiscal System

220
Poverty of the State
• There were several channels of leakage of potential investment funds, most
notorious being government remittances
• Given a net receipt of sterling from abroad and given revenue, remittances lowered
funds available within India and also made import of machinery difficult
• Govt was also poor due to the rate of tax collection. Govt revenue as a proportion
of GDP was 5% in 1929, compared to 19 in UK and 29 in Japan
• This was also a reason why public spending was small
• Reason for small revenue:
◦ Heavy and persistent dependence of the budget on land tax when the yield was
low
◦ This dependence also made the budget unduly static and inflexible

Revenue and Expenditure

• Principal tax throughout 19th century was land revenue
◦ Other was the tax on commodity like export duty on opium or salt tax.
◦ In 1858-59, land accounted for half of the total revenue and the commodity
taxes 25%
◦ More modern taxes like income tax small 12% of revenue
◦ Therefore the tax system was regressive and inelastic
• After WWI, the above pattern of taxation changed
◦ Customs became most important at 26% and land became second at 20%
◦ The opium and salt tax became negligible
◦ This was because of a campaign by landlords against land revenue
▪ Tax in permanent settlement areas was a fixed nominal amount
▪ In ryotwari areas, the administration could not antagonise the peasants as
the nationalist movement was also gaining ground.
◦ The govt did not have the machinery to tax self-employed people and hence
income tax mostly targeted towards those closest to the govt. These groups
resisted being taxed but the resistance faded.
• But none of the experiments led to a sustained rise in revenue
• To limited revenue, there was the burden of defence(34% of expenditure in 1920-
30), administration and debt service
◦ About half of home charges in the pre war period was interest payments, then
army payments to Britain, then pension, then India Office expenses
• Thus the budget continued to be influenced by imperial concerns of
administrative and political stability, leaving too little for spending on
development
◦ Investment was less than 25%, which fell even more towards the end of the
interwar period as debt service and administrative commitments took priority

221
 ◦ A large part of the investment went towards depreciation, leaving net investment
a minuscule amount
• In the 20th century the demand for welfare expenditure gained strength due to
growing nationalism and political decentralisation
◦ As a result education's share in expenditure increased from 2% in 1858-1900 to
6% in 1920-30. Health from 2-3%
• In the prewar period, public investment was mainly financed out of public savings.
But borrowings dominated in the interwar period

Political and Institutional Content

• With WWII, again deficit situation
◦ Expenditure increased as India also became a war front and London took India's
resources with a promise to repay later
◦ India had a central bank and hence greater monetary autonomy. So money
supply increased to finance the deficit, resulting in massive inflation as supply
was diverted to the war
◦ The end of the war saw a liquidation of India's debt on account of Britain's
obligations during war
◦ India thus became independent with a large credit balance in sterling of
around 1500 cr. A large part of it was eroded away in 1949 when Britain
devalued the sterling

The Monetary System

The primary goal of monetary policy in colonial India was to stabilize the exchange
rate
• Appreciation hurt exports from India and depreciation made it difficult for the
budget to meet its sterling obligations
• The govt was not allowed to pursue a stabilization policy independent of British
interests. This was evident whenever the Indian currency was under pressure like
during the GD
• Indian exchange was a modified version of the Gold Standard

Gold Standard
• Gold served 2 functions
◦ Medium of exchange for settling balance of payments
◦ Main component of currency reserves

222
• Countries under the standard needed to settle on value of domestic currency in
terms of gold as that ratio would decide how much gold was needed when transfers
were to be made for settlement
• A currency on the gold standard was thus, convertible to gold and countries
maintained gold reserves
• When importers purchased goods, their banks purchased either the currency of the
latter or gold from their central bank
◦ Money supply in importing country fell and increased in exporting country when
the gold was converted into the exporter currency by the treasury
• If money demand was driven by txn demand alone, price in importing country would
fall and rise in exporting country because of the trade deficit
◦ This adjustment mechanism was called the price-specie-flow mechanism
• Thus changing the exchange rate was a way of changing the demand for money
• Under the Gold Standard, the exchange rate and the prices became fixed and
stable
• But this system can break down if people lose faith in the currency and prefer to
hold gold rather than cash, causing a run on the gold reserves and forcing the govt
to suspend convertibility
◦ This happened during WWI
• It can also cause a strain when a revision in rates is required to stimulate the
economy
◦ This happened during GD when the Gold Standard ended as it could cure one
country when the rest of the world was healthy but when everyone was
suffering, it failed
• Gold Standard was attacked by Keynesian macro which argued that money also has
speculative demand and during trade deficits, interest rates can rise as money
supply falls, worsening the recession
• Rupee was not directly convertible to gold and India had sterling balances and
rupee-sterling ratio
• The counterpart of a specie-flow system was a Council Draft System- Paying
sterling to the Treasury to buy rupee drafts cashable in India. This financed a net
payment made by British exporters

From Silver to Gold Standard

• The currency reform of 1835 introduced silver rupee
• There were 2 ways of sending money from India
◦ The India Office sold Council Bills at an announced exchange rate which the
Exchange banks purchased, sent to India, redeemed at the Treasury and
financed trade demands for money. The receipts in London were used to meet
the home charges

223
 ◦ Traders could buy silver in London, ship it to India and have these minted to
silver coins for a fee
• Post 1875, silver excess supply so price fall making the second mode more
profitable. Saving the Council Bill system required devaluing the rupee exerting a
significant cost to the exchequer
• Free silver coinage was abolished in 1893 and Gold standard was introduced in
1898
• 15 Rupee= 1 sterling pound was the exchange rate as rupee was not directly
convertible into gold
• The Council Bills sale started being used by the India Office to stabilize the
exchange by preventing the free flow of metals for settling balance of trade
• An official Gold Standard Reserve was created and transferred to the India office in
1902, consisting mainly of British Gsec, T-bills, Exchequer bonds etc contributing to
keeping interest rates low in Britain
• The first serious crisis for the GS occurred in WWI end as rupee lost confidence
with inflation in silver prices. A rupee appreciation seemed inevitable and by
December 1919, it had appreciated by 75%
• When silver prices stabilized, rupee depreciated somewhat
• From 1926, rupee was closely controlled at 18d(around 17 rupees for a sterling)

The ratio controversy and the Great Depression

• From 1926 till WWII
• There was belief in India that the rupee was overvalued at 18d.
• This led to the demand for full gold standard and exchange rate autonomy.
• The conduct of monetary policy to serve British interests during the GD worsened
the controversy
• Terms of trade worsened for India as commodity prices fell in the 1920s, weakening
the balance of trade
• Fear of rupee devaluation eroded confidence in the rupee but depreciation was not
acceptable to London for the fear that increase in home charges obligations might
lead the govt to default. This was even though Indian revival needed a devaluation
• Fresh borrowings in London or drawing on the reserves was not available to the
India office in the light of the economic conditions. The options to authorities in
India were even more limited.
• Eventually on London's insistence, the govt carried out monetary contraction,
hoping to reduce prices and make exports competitive.
• But as the demand depression was a global phenomenon, the contraction had to be
a deep and sustained one

224
 • As the contraction continued, it became increasingly difficult to return to
devaluation as it would have to be larger than before requiring larger adjustments in
the budget
• The govt feared that resultant decline in prices would raise real rates and rents,
causing hardships, which turned out to be true, causing widespread transfer of
assets from debtors to creditors and causing rural unrest
◦ The principal way this happened was through sale of gold jewellery
◦ At the same time, the British Govt decision to leave the Gold Standard in 1931
depreciated the pound and hence the rupee against the gold
◦ This led to a rise in the rupee price of gold
◦ But as the exchange rate was fixed at 18d, Indian gold was cheaper and hence a
large part of the gold was sold abroad, restoring the balance of payments and
provided the govt enough balances to meet its sterling obligations
• Despite this, the exports were seen as distress sale and weakened British-
Indian relations
• The establishment of the RBI was the first step in the dissociation of monetary
policy from balance of payments.
Criticism of the Monetary System
• Nationalists argued that the rupee tended to be systematically overvalued to
subsidize govt charges in sterling, effectively taxing exporters, even though it
encouraged private investment through capital goods imports
• While the world retreated from a fixed exchange rate during the Depression, Indian
monetary policy remained overly rigid due to colony status
• Thus the larger aim of British monetary policy to stabilize economic transactions
had three aims:
◦ To reduce exchange risks
◦ Stability in remittance calculation
◦ Restrain India's import of gold
▪ India played a counter-cyclical role in the world economy due to Indian's
desire for gold
▪ Expansion in India led to India absorbing non-monetary gold at the expense
of monetary gold elsewhere
▪ Post war, Britain was afraid Indian appetite for gold might hurt British revival
and tried t restrain expansionary tendencies

225
Employment
PYQ
2019
1. What are the core objectives of MGNREGA? In what ways has a paradigm shift
taken place with the implementation of MGNREGA?
2. Examine the relation between casualisation of employment and poverty in India
2018
1. Do you agree that MGNREGA has been plagued with rampant malpractices,
leakage of funds and diversion of resources? Give reasons
2017
1. The quality of employment, in general, in India, is perceived to be alarming. How
would you analyse the situation
2016
1. What are the basic features of the new National Rural Employment Guarantee
Scheme? What are the impediments in their implementation.
2015
1. Rural poverty continues to be a chronic problem which cannot be taken care of by
anti-poverty programs but by creation of permanent productive assets
2014
1. Examine the labour policy of India and its impact on employment market in the
economy
2. NREGA should be reoriented to create productive permanent assets to promote
employment and generate income in the rural sector. Evaluate
3. Employment pattern in the post reform period has moved in favour of contractual,
casual and self-employment. How public sector employment deceleration would
impact the future of labour market in India?
4. Skill development and thereby raising labour productivity like that in China would
be the only panacea for long term growth
2013
1. Account for the changes in the employment pattern in India after liberalisation.
What are your suggestions for employment security in the informal sector of the
economy? Discuss

226
2011
1. Analyse the impact of NREGA on rural and urban wages and rural migration
2010
1. Examine the key elements of Swarnajayanti Gram Swarozgar Yojana? What are the
major problems in its implementation?
2007
1. Make a critical assessment of the NREGA
2006
1. Account for the static pattern of occupational distribution of the working
population in India. Give suggestions for an alternative model of development
which links growth with employment
2005
1. Critically appraise the NREGA scheme
2004
1. Suggest appropriate strategies for self sustained employment generation in the
rural economy. Is the NREGA a model safety net for those without work?
2. Make an appraisal of economic reforms in India. What has been their impact on
GDP growth, employment and poverty?
3. Account for the transition from central planning to indicative planning. Do you think
adoption of PURA attempts a reconciliation between employment and GDP growth?
2003
1. Indian economy is trapped in a 'jobless growth' situation. Discuss and suggest
suitable measures to tackle the problem of unemployment in India.
2002
1. Bring out the magnitude of unemployment and analyse the sectoral trends in
unemployment in the last decade.
2001
1. Schemes like the NREGA contributed significantly to reduce rural unemployment,
yet failed to reduce poverty effectively.
2000
1. Looking to steady growth of unemployment in India, suggest an outline of
employment-oriented growth strategy for economic development.

227
 2. There seems to be inherent contradiction between ceiling on land holdings, use of
advanced technology and employment generation in Indian agriculture. Suggest
policy measures to achieve these simultaneously
1999
1. In the context of Indian industries, automation is not desirable.
Concepts and Measurement
All persons not in the labour force can not be unemployed.
Labour force=All those who are working and those not working but are seeking and are
available for work, are deemed to be in the labour force.
Growth rate of labour force determined by age structure of the population and the age-
sex specific participation rates.
Labour Force Participation Rate(LFPR)-Labour Force/Total Population
Work Participation Rate=No in the Workforce/Total Population
Unemployment Rate=Unemployed/Labour force
Self Employed- Working in household enterprises as employer or helper
Casual Labour=Working as casual in public works, including NREGA or other type of
works. Or did not work due to sickness or other reasons though there was work
available
Informal Sector=Units with the primary objective of generating employment and
incomes to the persons concerned. Typically operate with low level of organisation with
no division of labour and factors used on small scale. Labour relations are casual, not
contractual. Thus unincorporated enterprises owned by households
Unorganised sector= Total employment not exceeding 10
Organised sector= That which is not unorganised
Concepts used in surveys
• Usual Principal Status= Reflects the status of a person in the reference period of 1
year. A person classified as in the LF if working or seeking for the longer part of the
preceding year. Hence excludes those who work or seek intermittently

228
 • Usual Principal and Subsidiary Status=To include those who are outside the LF
based on the majority time criteria but employed during some part of the year on a
usual basis. They are treated as subsidiary status workers and included in the LF
• Current Weekly status=International organisations use this. In India classified as
part of LF as per CWS if either worked or seeking work for at least one hour during
the reference period of a week preceding the survey.
• Current Daily Status=Proposed by the Dantwala Committee. Used for studying
intensity of work.
Estimates based on daily status are the most inclusive measure of unemployment. It
captures chronically, usually and intermittently unemployed
Characteristics and Structure of the Indian Labour Market
If properly invested in, labour can beappreciating assetsof a company. This is what
Japanese companies did, with their lifetime contracts with workers in investing in
their productivity and so became the most competitive in the world
Labour Market in the 2000s- Surveying the changes- JJ Thomas
• They argue that the reduction in agri workforce as part of Lewisian structural
transformation has clearly begun in India now(-2% growth in agri in 2004-12),
but modernisation of the labour force is slow given the slow pace of generation
of non-agri jobs. Modernisation can happen due to pull factors, as argued by
Lewis, Fei and Ranis, through the non-agri sectors and the push factors of agri
mechanisation.
◦ Limitation of service led employment growth
▪ There has been a net decline in jobs under public administration and
defence since 1993
▪ The chief source of service sector employment in India shifted from
community and personal services during 80s to trade in 90s and to
construction in 2000s(though construction comes under industry)
Employment trends-Mehrotra et al
• The decline in employment growth during 2004-12 was partly due to increased
participation in education, with the passage of RTE. Other causes were
mechanisation of agri, withdrawal of women from agri

229
• Thus, while secondary sector(including mining and
construction) created employment, helped by FDI, infra push
and Beijing Olympics fuelled Chinese demand, and consequent
rise in sec emp growth from 4% growth in 1993-2004 to 4.4% in
2004-09, the agri emp growth fell from 0.67% to -1.98% and
tertiary fell from 3.4% to 2.1%, leading to overall slowdown of
emp growth from 1.84% to 0.45%
• Construction was a major industry that pulled workers away from agri post
2004.
◦ The boom in construction also contributed to casualisation(Casual increased
from 29% to 34% between 2004-08)
• Formal vs informal
◦ Organised employment is half formal
◦ In the regular wage employment, the informal employment decreased to 58%
from 60% of regular(checked, as 8.6 is 60% of 14.3) during 2004-09 but then
again increased to pre 2004 levels by 2011-12 This points to the role of fast
economic growth for high quality employment as this increases both
regular employment as well as formal employment(between 2004-08, the
larger share of increase in regular emp was formal, during 2009-12 the
larger share was informal)
• Explanations
◦ Fewer people joined the labour force between 2004-09 than in the earlier
half of the decade, due to the effect of RTE
◦ Between 1999-04, due to lack of alternative emp, agri distress and
declining farm incomes, a large number of women joined the workforce in
agri. Thus agri emp grew despite stagnation in agri. But between 2004-09,
sharp withdrawal of women due to the reversal of rural distress
▪ Education
▪ Mechanisation of agri
▪ Older girls, who were earlier responsible for looking after siblings,
started going to schools. Male outmigration increased due to
construction. Hence women also withdrew to look after homes
▪ Rising wages, hence the income effect
▪ Decline in household level dairy which was earlier managed by women.
This was due to decline in commons
◦ Explanation for the decline in agri emp post 2004
▪ Remarkable shift in rural wages led by NREGA and shortage of labour due
to education caused withdrawal. Both forced mechanisation
▪ Rising demand in construction with higher wages

230
 ▪ This mechanisation also led to higher productivity and agri saw high growth
of 3.8%
◦ Explanation for construction emp boom post 2004
▪ $500 bn plus of investments in infra in the 11th plan period, led by both
public and private sectors
▪ Expansion of credit, which later led to the NPA crisis
▪ Huge inflows of FDI- FDI inflows tripled in a single year in 2006, from 7 bn to
20 bn
◦ Explanation for slow increase in manufacturing employment between
2004-09 and the sharp increase in 2009-12
▪ Rising import-intensity of manufacturing output. The manufacturing
sector is intrinsically globalised, but this is asymmetric with imports having a
larger share(import intensity means use of imported inputs)
▪ Rising wages
▪ The latter two raised capital intensity. The L/K ratio has declined from 0.16
in 2004-05 to 0.08 in 2011.
▪ The rise post 2009 was due to rising exports and also as construction
slowed due to the crisis.
Quality of Jobs in India- Krishna et al
TheNITI says that only 45% of graduates are employablein India, pointing to a
serious skill deficit
Nayyar defines quality of employment on three parameters
• Wages. But this depends on skills, and hence education important. Service
sector cannot play the role of absorption of labour as it is more skill-intensive.
Construction, in 2011, had only 3% of workers above higher secondary
qualification. As it had the largest contribution to employment creation, it
further shows the poor quality of emp.
• Availability of written job contracts
◦ 71% of regular jobs in non-agri sector had no written contracts(from PLFS)
◦ Construction(85% of total construction emp), mining and quarrying(60%
of total mining emp) had the most casual workers.
◦ Casual workers falling as % of emp in mfg, pointing to potential of mfg for
high quality employment. Also, industry has the highest elasticity of
employment at 0.5, but has been falling. Hence needs to be raised
• Availability of social security benefits
◦ In Non-agri regular wages- 55% not eligible for paid leave while 50% not
eligible for any social security benefit(authentic. From PLFS data)
• Working poor, those who can't afford to remain unemployed and hence take
up job at very low rates, are highest among casual worker at 30%- Hence link
between casualisation and poverty

231
(Use Nayyar's classification and data from PLFS to highlight poor quality)
NITI reco that the creation of the Labour Market Information System(LMIS) should
be fast-tracked to identify skill shortage, training needs and employment created.
Its potential was highlighted during COVID when many states resorted to skill
mapping. It has been created by NSDC
Also ensure wider use of apprenticeship programs
• In 1990, the FLFPR was 37% and it fell to 23.2%in 2015-16 as per PLFS
• Both the overall LFPR and MLFPR are stable, while the FLFPR experiencing a
decline.

• India's labour force participation rate is 50%. It is 23% for females and 75%
for males as per PLFS 2017-18(authentic)
• Regular wage rose from 14% in 1983 to 18% in 2011-12. Sharp rise after 2004, after
2 decades of stagnation. But over 60% of regular workers are informal workers,
hence the 7% figure of formal. The bulk of the increase in regular wage
employment has been in the informal sector, from 8.5% to 11% (due to
construction being dominant)
• Rise in formal very nominal from 5.5% in 2000 to 7% in 2011-12(formal is
regular workers with social security in the organised sector)
• The organised sector has increased
• The unorganised sector has decreased, though still the dominant part of the
employment- 80%
• Casual wage employment similar from 29% to 30%. Has declined in the post reform
period. As per the PLFS, regular wage employment has increased to 23% in
2017-18 while casual labour is at 25% in 2017-18

232
 ◦ Proportion of women workers in regular jobs also increased from 13% to
21%
• Self employment has also declined from 58 to 52 between 83-11. Has declined in
post reform period too. . As per PLFS, self employed in 2017-18 is 52%, thus
same as previous period
Thus the employment pattern wrt growth has been highly exclusionary and hence
the labour market has become dualistic. This dualism has weakenedslightlyafter
2004, with regular, formal and organised sector seeing growth in employment.
• A large part of the employment growth is also due to simply population growth as
the growth of organised and formal sector slow.
• The employment content of growth has also declined
• Sectors with higher employment potential have registered slower growth. This is
why agri, despite a sharp decline in its share of GDP, has the largest share in
employment.
• Most of the employment growth has been contributed by the unorganised sector,
which is characterised by low incomes and poor working conditions.
• Though employment growth has picked up in organised sector, it has largely
been led by contract and casual labour.
Jobless Growth

• Emp growth falling in tertiary(bad) and primary. In primary, negative in 2004-

12(this is good). This is first small evidence of the structural shift in Indian
employment.
• Due to the falling in tertiary and primary both, the overall employment growth has
been falling consistently too even though the secondary has been growing
since 1993. Clearly the growth in secondary is not fast enough.

233
•
Small firms(less than 100 workers) through
dominate in total number of firms, have only 23%
employment share and only 11% Net Value Added,
thus showing the inefficiency of dwarfs(ES.
Authentic)
• Sharp deceleration in employment growth in 2004-12, from 1.8 to 0.4. This
has largely been due to falling FLFPR, largely in rural areas.
• The emp growth has been constantly under the growth of GDP. 83-93, GDP at
5.6%, emp at 2%, 93-04, GDP at 5.5 emp at 2, 04-12, GDP at 8%, emp at 0.4%.
Jobless growth
• This is visible by the falling employment elasticity(ratio of emp growth to GDP
growth), which has fallen to 0.04 in 2004-12
• The tertiary sector has a low elasticity and this shows that it is not able to absorb
labour sufficiently
• Within the secondary sector, the construction sector saw high emp growth,
recording almost double digit employment growth during 2004-12, when the
overall emp growth had virtually stagnated.
• But the quality of employment is casual and irregular with low wages.
• Employment growth in manufacturing, though high, has declined in 2004-12,
after increasing slightly in the previous period.
• In services, trade and transport have shown the best performance during
1993-05, but the financial services sector showed the highest growth in emp
in 2004-12. But this sector is skill intensive and hence absorbs less labour
• The emerging sector of machines maintenance, data processing, though have a
low share of employment, have a very high growth of emp and very high
regular employment share, along with high earnings.

234
 • Until 2012, nearly 7.5 million non-agriculture jobs were being created per year, but
thereafter there was a slight economic slowdown, but still the average GDP growth
over 2004-14 was 8% per annum. There were two years of droughts in 2014-2015.
The slowdown also accelerated after 2014. The rate of non-agricultural jobs was
reduced to 2.9 million per annum. Now, this was happening at a time when young
entrants into the labour force were increasing. Until 2012 the number of new
entrants in the job market was only 2 million per annum (as youth were entering
school in much larger numbers than before). Thereafter, the number looking for
work increased to roughly 5 million per annum. These young people were getting
better educated and no longer wanted to be tied down to agricultural jobs. The
result was open unemployment. And that is how we came to our 45 year high in
open unemployment rate in 2018. The state of the economy and joblessness
continued to worsen through 2019-for demographic dividend to be realised,
India needs to add non-agri jobs faster than the entrants in the labour market

Gender aspects
• Female employment has declined sharply in 2004-12. In all decades, its growth has
been less than the male emp growth. Thus overall between 83-05, fem growth
was 1.73 compared to 2% in male
• The sharp decline in female employment in 2004-12 was due to the decline in
rural areas, which also led to total emp growth in rural areas also decline.

235
 • A number of experts have attributed the declining FLFPR to marginalisation of
women due to lack of suitable jobs. Some have called it a healthy development
indicating increased participation in education and hence withdrawal from
labour force. This is termed the income effect.
Informalisation- Goldar
Informal employment- As per UN SNA, informal sector consists of those who engage
in production of goods and services to provide income and emp to the person
concerned as the primary objective. Operate on small scale, with negligible division
between labour and capital. Labour is mostly casual, rather than with formal
contracts or benefits like social security

Casual work is the engagement of workers on a very short term or on an

occasional and intermittent basis, often for a specific number of hours, days or
weeks, in return for a wage set by the terms of the daily or periodic work
agreement. Casual work is a prominent feature of informal wage employment in low-
income developing countries, but it has also emerged more recently in industrialized
economies, particularly in jobs associated with the “on-demand” or “gig economy”
Has been happening since 80s, with the increasing share of unorganised sector as well
informalisation and contractualisation in organised. Contract labour increased from
12% of all registered mfg workers in 1999 to 25% in 2010 as per the ES
Casual workers are more concentrated in rural areas, unorganised sector and with low
levels of education
The implication of the above is low quality jobs

236
NSS 61st round data shows that in 2004-05, the average wage earned per day by
regular workers in organised manufacturing was about 170 and that by casual
workers only 55. In unorganised it was 85 and 50 respectively
The casual workers are also deprived of social security benefits
Causes for increasing informalisation
• Labour market rigidities with the use of contract workers providing a way around
the labour laws. Besley and Burgess created an index to manufacture rigidities
and it has been used by several researchers to show effects on
informalisation. Though Bhattacharjea has raised doubts on both the BB index
as well as the results of contractualisation attributed to it. But still evidence
points to some role of labour laws.
• Increasing competition from imports-This has been termed by Papola as a 'race
to the bottom' in labour standards with firms using it to cut costs
Mehrotra
Argues that formalisation is an evolutionary process during which units learn the
intricacies of formal economyand hence cannot be forced on the informal sector
Hence the thrust of the policy should not be to reduce the size of the informal
sector forcefully, rather help the informal sector thrive by improving their working
conditions and gradually integrate them.
(Tie it with Japanese Sogo Soshas)
Thus policy implication of the above
• Make it easy for businesses to formalise as it has significant benefits for the
economy, even though the firms themselves may have not internalised the benefits
Formalisation- ES
Formal sector has increased from 7% in 2004 to 10% in 2017-18
Benefits of formalisation
• Better quality jobs, more pay, social security, contract as argued by Nayyar
• ES argues formalisation imp as it allows creation of employment history, which is
key for gaining access to formal credit
• Formal firms are also more productive than informal. Eg formal apparel firms 15x
more productive
• Aids export as argued by Mazumdar and Sarkar
• ES argues that avg share of workers in enterprises eligible for Pm Rozgar
protsahan Yojana has increased from 62% to 64% between 2016-19, showing
increasing formalisation due to PMRPY
Contractualisation- ES

237
Argues that labour laws prevent formalisation and promote rent seeking. This
regulatory cholesterol has encouraged firms to opt for more contract labour. Adv for
firms
• Subcontracts the work of compliance with labour laws to contract labour firm
• Allows firms to stay small enough as the CL are not on firms payroll. Thus escapes
labour laws and also has various benefits for MSMEs

Contract labour increased from 12% of all registered mfg workers in 1999 to 25%
in 2010
• Shows that it is faster in states with stricter labour laws
• It is faster for firms with more than 100 workers, i..e where IDA applies
But despite this, companies prefer regular workers, the ES argues
• More expensive to hire contract
• Regular workers feel more connected to the firm and hence higher productivity
• It is more profitable for companies to invest in training of regular workers than
contract workers. Hence regular accumulate firm specific human capital
Role of competitive federalism
Seen during the COVID also with several states like UP, MP, RJ, GJ relaxing labour laws.
It may lead to a race to the bottom but the ES argues that the possibility of that in India
is remote as India still has a lot of reforms pending
Steps taken

238
 • Aatma Nirbhar Bharat Rozgar Yojana was launched on 1st Oct, 2020. It
incentivises employers for creation of new employment, restoration of loss of
employment through EPFO. Under the scheme, subsidy is provided for two years
from registration for new employees drawing monthly wages less than Rs. 15,000
for both Employer’s and Employee’s share of contribution (total 24% of wages) for
establishment strength upto 1,000 employees; and only employee’s share (12% of
wages) in case of establishment strength of more than 1,000. Benefit of Rs. 902
crore has been given to 21.42 lakh beneficiaries of 79,577 establishments under the
scheme till 18.06.2021
The harms of contract labour was shown in the Wistron facility where contract
labour had not been paid wages for months, by a global giant(Apple). So smaller
companies even more likely to lapse
Impact of COVID on Labour Market-ES
Showed the vulnerability of urban casual workers, who form 11% of urban workforce as
per PLFS
Over 63 lakh migrant workers travelled through the Shramik Special trains, showing the
magnitude of the crisis
Massive rise in gig/platform workers
As per the PLFS April-June 2020 round, the unemp rate for pop aged 15+ was
20.8%. This was even higher at 34.7% for 15-29 age
• The PLFS data also shows that the most affected were casual workers, of whom
50% joined the unemployed group.

Female Labour Force Participation

UNDP report 'Female Work and Labour Force Participation in India'.
FLFPR is the share of women who are employed or are seeking work as a share of
working age female population
• Between 1990-2017 per capita GDP increased five times to almost $1600 but
female labour force participation(LFPR) fell from 37% to 23.7%. as per NSSO.
• As per ES, the FLFPR is 26.5% in 2018-19
• It is 26.7% in rural and 16.2% in urban. Thus higher in rural, though decline in rural
also very sharp.
• Puzzle as it should rise with GDP
• Most decline among women with low edu.

239
• Most of the decline came from reduced participation in agri and allied activities.
MNREGA saw a slight increase in participation. While men's in agri also fell, they
were able to get work in other industries. Men with low edu can do other jobs,
women don't get these jobs. Thus edu and dev of rural transport infra key for
greater participation of women
• Sufficient interest among women to work. ILO 2017 survey shows 70% women
want to have paid jobs There are schemes too, for educating the girl child and get
women in the workforce.
•

• Ashwini Deshpande shows that women also suffered more job losses
compared to men during the COVID crisis
The ES shows that the major reason for decline in FLFPR is higher number of
women attending domestic duties, which is mainly due to lack of attainment of
appropriate skills and education. % in domestic duties falls as ed increases
Answer for decline lies in norms- Rohini Pande
• 2011 Indian Household Development Survey says a large fraction of women
reported they need permission from male members to even go to the local
market.
• Lack of policy support for safe travel, childcare- tie it with men with similar
levels of ed and skills can get jobs despite these constraints
• Competing household-employment tradeoff. Thus gendering of household
roles. Supported by the ES
• Increased cost to companies from Maternity Benefits Act might discourage
companies from hiring women. Tie it with the gendering of occupations as in MB
Act, no child care leave for father, and entire cost borne by companies
• Insufficient participation in STEM courses. IITs have long suffered from a very
poor sex ratio
• Sexual harassment at workplace -31% of firms are not compliant with POSH
Act which mandates ICC.
• Workplace distance and inflexibility in working hours like absence of
opportunities for part time work
Sanghi et al's Analysis of Causes

240
• Participation of female in the labour force is argued to have a U-shape wrt growth.
Initially, as transformation from family based production to large scale, women,
due to norms and low education, withdraw participation. But then with
progress, their education improves and participation increases. Income effect
initially also leads to withdrawal of distress induced employment
• On demand side, lack of proper jobs for women, and significant gender pay
gaps major factors. Supported by the ES
◦ Chandrashekhar and Ghosh also show that though structural
transformation has reduced agri jobs, there has not been commensurate
rise in jobs in mfg or services for women.
• There has been a steady decline in FLFPR in age group 10-19, indicating that
increasing take up of education, though the authors doubt it
• Income effect- Is the withdrawal due to reduction of distress employment. While
data supports this for the lower deciles of consumption expenditure as per NSSO
CES 2011-12, it does not suggest so for middle and upper deciles
The ES shows that the time spent by women on unpaid domestic and
care work is not influenced by level of education, with even women with
higher secondary education spending over 300 minutes per day. This
shows the role of patriarchy and gender norms which are hard to
remove
Benefits of FLFPR
• Working women marry later, have children later, giving health benefits
• As per IMF, if FLPR becomes same as MLPR then Indian GDP could expand by
27%
Steps taken to improve FLFPR
• Enhancing maternity leave and mandatory creche as well as permitting women in
night shifts
• The Equal Remuneration Act as well as the Min Wages Act both have equal pay
equal work
• Providing training to women through ITIs
• Sexual Harassment of Women At Workplace(Prevention, Prohibition and Redressal),
Act(POSH Act)
• Mahila Shakti Kendra Scheme to empower rural women through community
participation
• Working Women hostels have been established
• MUDRA, Startup India
• Rashtriya Mahila Kosh- facilitates provision of financial services to women

241
• In the code of wages, those convicted for sexual harassment will not be
eligible for bonus. Before this, sexual harassment was not a ground for
denying bonus
Ways
• Communication programs for behavioural change
• Gender sensitive legislation keeping in mind the various intersectional
challenges faced by women from rural areas, more socially disadvantaged
groups like SC/ST/OBC/Minorities/PwD. More problems faced by illiterate
women than literate
• MB Act needs to be gender neutral
• Strengthen legal framework to fight discrimination like min wages, maternity
benefits in informal sector
• Create liberal laws encouraging women to re-enter the workforce after a break
• NITI suggests that the govt, with the help of bodies like CII, can persuade the
private sector to have statements like 'We are an equal opportunity
organisation', like the govt does.
• Reward villages and panchayats with equal sex ratio
• Prioritise women groups seeking land leases, etc at the village level to enhance
asset ownership. In this regard, registration of houses built under PMAY in the
female head name is a good step
• Ensure 50% membership of women in Farmer Producer Organisations and
have special focus on skill development of women in agri and allied activities
• Extend the PG Indira Gandhi Scholarship for Single Girl Child to families with 2
girl children and provide higher financial incentives for continuing girls'
education to stem the high dropout rates
• Creches and daycare centres need to increase. Public transport needs to
expand and become safer as reco by JS Verma Committee
Self Employed Women's Association Bank(SEWA) is the largest women bank in India.
Such groups and others like SHGs can foster women networks and help fight for their
empowerment.
India can look into Germany's new quota for women in higher management positions in
companies
Unpaid work by women constitutes 3.1% of the GDP according to Oxfam. Inequality
has a female face, where women less likely to have paid work.
WEF Global gender Gap Index. In 2019, India 112th, deteriorating 4 places.
Women Business and Law report of World Bank India 117/190 nations, way below
least developed nations like Rwanda
SDG Gender Index- India 95, mainly due to gender violence, political participation
low, economic participation low

242
UNDP Gender Social Norm Index shows India almost 100% of population has
biases about women
Motherhood penalty-Working mothers suffer more at work than non mother women
Parenthood employment gap- For child care, women take leave or leave work
altogether in the absence of Maternity laws. If men not share burden of unpaid
household work, women will be constrained. Men also need to share child rearing
burden so that companies don't have bias against women while hiring
Women in CRPF will get their own custom-made uniform designed by DRDO. This will
give added protection and comfort to women officers as they earlier had to use
uniforms designed for men.
Tougher law against sexual harassment at work
The Union constituted a Group of Ministers led by the Home Minister to formulate
reco for a tougher law
• Addition of new provisions to the IPC

IPC and Sexual harassment

• Section 294- on obscene acts, songs etc
• 354- assault or use of criminal force on a woman
• 509- Word, gesture or act intended to insult the modesty of women

Further reforms
There is need to include gender bias, which means discriminatory acts against women
at workplace, which are not of sexual nature, within the ambit of law. Eg not including
them in important tasks
ICC set up by companies should have an NGO member and half of its members should
be women

The compliance is nearly 97% though a large number of companies have complied
by appointing relatives
Ashwini Deshpande paper- Paid work, unpaid work and domestic chores

243
 • Highlights that there are a large number of jobs that are in the grey zone between
the jobs considered as economic under the UN SNA and those are strictly within
the domain of care work- eg helping in the kirana shop, livestock rearing etc. If
these are for family enterprises then they will not be considered as work, either by
the family, the woman herself or the surveys
• Focus on LFPR reduces the entire issue to a labour supply issue while ignoring
demand for female work
◦ The steep fall in FLFPR is led by decline in rural areas. This shows the issue of
work availability in rural areas. So as ed increases and agri jobs fall, men
are able to find employment elsewhere but women aren't
▪ This is corroborated by Sonalde Desai as well

Linda Scott- Oxford University professor book The Double X economy

Argues why exclusion of females from workforce is terrible

244
245
How to measure unpaid care work and address its inequalities?
During the recent assembly elections, various parties made promises of payments for
domestic work done by women
• Assamese parties promised an enhanced Orunodoi scheme
Issues
• Most of the domestic work is done by women- Quote above statistics
• This inequality has a direct relation with participation in the formal economy
• But the time women spend on domestic work is the hidden engine, which keeps
the economy running and contributes significantly to individual well being. Despite
this, most of this this work is undervalued, unpaid and unrecognised
How to measure
• Using time use surveys and then using the replacement cost to arrive at a value at
the time devoted
• But mostly, care work is done 'automatically' and so many respondents may not
report time spent on it
• There is also the issue of multitasking and hence capturing the entire spectrum is
difficult
Currently, the System of National Accounts puts unpaid labour in the category of
'own account services' and so excludes it from activities in the production
account
Current schemes like Goa's Griha Aadhaar scheme and Assam's Orunodoi scheme are
financial support schemes rather than payment for housework
Way forward
• More time use surveys
• Reducing burden of unpaid work by improving physical infra for water, sanitation,
energy, transport.
• Expansion of care services for children
• Maternal policies to distribute burden equally on both parents
Key for fulfilling SDG 5

246
Mahatma Gandhi National Rural Employment Guarantee Act(MGNREGA)
NREGA is the world's largest workfare program, providingemployment to a third of
India's rural population at 0.35% of GDP cost
By ensuring employment for a minimum number of days at a minimum wage, the thrust
was onemployment with growth as an outcome, rather than vice versa
NREGA also has hugeself-selection benefits, something which is a huge problem
in other anti-poverty programs, as only the ones who value the employment most
will be willing to work. But Bhagwati and Panagariya raise question on this as UP,
with most poor in India, has really low NREGA adoption
Features
• Right based framework with employment on demand.
• At least 100 days of guaranteed employment in a fin year to household whose
adults volunteer to do unskilled manual work(thus no BPL restriction)
• In case of natural disasters, provision of requesting an extension to allow 150
days per household
• Payment of unemployment allowance in case of non-provision of employment
within 15 days. The allowance to be 25% of the min wage for 1st 30 days and
50% thereafter
• Work within 5 km of residence. If not, then additional 10% of wage for transport
and living expenses
• Min wages to be paid by states
• Priority for ensuring 1/3rd workers are women with equal pay
• Mandatory basic worksite facilities
• Ban on the use of contractors and machinery and funds ratio 60:40 for unskilled
and skilled/material components to ensure unskilled labour intensive nature. But
this is applicable at the district level to create a balance between the labour
intensiveness and quality of assets. The 40% includes the wages of skilled
and semi-skilled workers
• Covers the entire nation, except the districts with a 100% urban population
• Individual beneficiary oriented works can be undertaken on the job cards of
SC/ST, small or marginal farmers, beneficiaries of land reforms, beneficiaries
under the Indira Awaas Yojana
• Wages are to be paid on weekly basis. In case of delay, compensation at rate of
0.05% of unpaid wages
• Social audit of NREGA is mandatory
• Role of Gram Sabha
◦ Principal forum for workers to raise grievances
◦ The Gram Sabha determines the order of priority of works and monitors
execution
• Role of Gram panchayat

247
 ◦ Receives applications, registers, provides job cards
◦ Allots work within 15 days
• Role of state
◦ Sets up State Employment Guarantee Council to advise the state, evaluate
implementation in the state and prepare the annual report to be laid before
the state legislature
◦ Set up the State Employment Guarantee Fund which receives the central
share of NREGA for on-financing to districts
The NREGA act is a landmark act as it makes employment a right which can be
demanded and enforced. It also strikes at the core of chronic poverty by creating
works that promote equity and sustainable livelihood. Thus it creates a safety net
for the poor. Hence thelitmus test of the success of NREGA, as argued by the 2nd
ARC, would be when the rural areas no longer need NREGA
Under the Ministry of Rural Development
Stats
• In 2014-18, number of persondays generated increased from 160 cr to 270 cr
• This improvement was not broadbased as the number of persondays declined
for women, SC and ST
• Avg days of emp per household increased from 40 to 50.
• But in 2019-20, the number of man days generated has decreased from 270 cr
to 180 cr. The gap between demand and supply of work in NREGA is highest in
2019-20. This has led to increased poverty and economic slowdown
• In 2020-21, the number of persondays increased to 312 cr. Persondays for
women is 53%. SC/ST persondays also above norms
• 99% of wages are paid electronically now
• Noting the importance of NREGA in anti-poverty, the govt has increased
allocation for NREGA by 40k cr, beyond the allocation in budget, to ensure the
migrant returnees get work during COVID
• As a % of GDP, NREGA allocations have been increasing since 2014 and are
now 0.35% of GDP
Success stories
• Andhra Pradesh
• Rajasthan
• Kerala
• TN
• HP
In all these states, the civil society has played a key role

248
During the COVID pandemic, Odisha invested its gram pradhans with magisterial
powers to quickly take action wrt NREGA works and make payments
Impact
• Anti-poverty-The Ministry of Rural development has found that the program
reduced poverty by 32%, preventing 14 million people from falling into
poverty.
• Wages-Imbert and Papp estimate a rise in wages to the tune of 7% directly
attributable to the program, which is very modest
• Asset quality- International Water Management Institute and the Institute of Rural
Management Anand study has found that the NREGA has had significant impacts
on rural water security. But this aspect needs serious improvement
◦ Steps like coop with Britain through the Infrastructure for Climate Resilient
Growth to further improve asset quality taken.(See Environment Prelims
Factoids)
• On demand work- Though Ravallion of the World Bank uses NSSO data for
2009/10 and shows that, among the poorest 2 quintiles of rural households,
over 40% of those who want to work for NREGA did not get employment. The
situation is worse in areas which are poorly administered which are also the
areas most in need of NREGA. The ES shows that BIMARU states which have
over 50% of India's poor receive only 33% of NREGA funds. Major reason is
that low state capacity leads to poor implementation which continues poor
state capacity. Supported by Panagriya and Bhagwati as UP one of the most
poor and has really low NREGA use
• Impact for women- Ministry research shows that around 50% of female NREGA
workers were either not working or worked only on the family farm in 2004-
05. Hence NREGA played a major role in financial independence of women
• Raises agri productivity through asset creation and also climate resilience
• Boost economy by increasing Aggregate Demand
• Increasing participation of women and SC/ST
• Reduce migration
• Timely wages

Core issues in its implementation and others

• Funding by the Union and execution by the states
◦ Ensuring regular flow of funds
▪ The NREGA funds mostly get exhausted by October, delaying payments of
wages

249
 • Eschewing moral hazards and distorted incentives. The beneficiaries have the
incentive to not create durable assets to ensure that the program continues.
Same for creating delays
• Low wages- The national avg of MNREGA is 202(increased from 182 in 2020) per
day, less than minimum wage as recommended by the Satpathy Panel(375)
• Wage disparity among states
• A very few number of applicants get the full 100 days of work.
◦ Also the average number of person-days generated is 45-50
• Low awareness. Dilip Mookerjee shows that less than 20% about the 15 days
wage rule
• Leakages and corruption
• Delayed payments has been one of the most important problems
ARC Reco
• Guaranteeing reach
◦ Awareness generation programs in vernacular languages using AIR,
Community radios. Effectiveness to be regularly monitored through
independent surveys.
• Guaranteeing outcomes
◦ Regular evaluation to assess the socio-economic impact of NREGA with
baseline surveys, which should also assess impact on health, education,
water
◦ Employment should be deemed to be created only when the wages are
disbursed
◦ Max devolution of authority to PRIs like OD did
• Wages
◦ Regular scrutiny of the updation in wages required should be done by the
Labour Ministry so as to ensure they are in sync with the economic conditions
• Financial management systems
◦ Funds from the Union should directly be transferred to the districts
◦ The system of releasing funds through a utilisation certificate should be
replaced by a system of concurrent monitoring and independent audit
• Mode of payment
◦ The person/agency preparing the muster rolls must be different from the
one making payments
◦ In drought prone and remote, tribal areas, part of the wages may be given in
the form of foodgrains
◦ The schedule of rates should be harmonised across all states and the
quantity of labour required for each job should be rationalised
• Capacity building

250
 ◦ Training, including entrepreneurship training should not be seen as a one
time intervention but as a continuous process with funds earmarked for it.
Will help in boosting self-employment and quality of assets
• Leakages, Transparency and Corruption
◦ All records should be digitally maintained, with Geographical Information
System
Jean Dreze reco that e-muster roll registration should be allowed to be done on
the spot to empower workers and loosen the grip of intermediaries.Hiring more
gram rozgar sevaks also required to assist more workers to join. Para teachers can
be mobilised for registration drives
Leakages and Delays(ES)
Delays in wage payments forced those in dire need to look for alternative emp even if at
lower wages.
The scheme was streamlined in 2015, linking NREGA to Aadhaar Linked
Payment(ALP)

251
As a result of the National Electronic Fund Management System, the e-payment of
NREGA has reached 99%.
ALP speeds up payment in the following ways

252
 • As the bank account is seeded with Aadhaar, the likelihood of the account
belonging to a 'ghost' is low. So less time in verifying claims.
• The Centre can directly transfer the amount to the beneficiary instead of the
intermediaries
Impact of DBT on NREGA
• Muster rolls, which are a form of attendance register, are increasingly filled post
DBT. Hence increased participation. This is true for the vulnerable sections also
• Total person days higher implying higher emp generation
• The proportion of wages disbursed within 15 days is 90% now. Was earlier
15%
• In distressed drought affected blocks, the demand for work has significantly
increased. This fulfils NREGA's role as a shock absorbant in bad times.
Pegging the wage rate
The national average wage rate under NREGA is 202 per day, less than the minimum
wage of 375 prescribed by a Labour Ministry Panel. The 7th CPC has prescribed a min
wage of 692. This happened since in 2009, MGNREGA was delinked from the
Minimum Wages Act to counter the rising wages
As there is a slowdown in the economy, led by a weakening demand, the govt has
decided to peg the NREGA wage to an updated inflation index, the CPI-Rural to be
revised annually, which will increase the purchasing power and thus boost rural
demand. But the concern of economists is whether this will be sufficient as NREGA
wages are below the market wages
The MOSPI and labour Ministry are updating the CPI-Rural and CPI-Agricultural
Labourers
The CPI-AL determines NREGA wage revisions. But its consumption basket has not
been updated for more than 3 decades. So it is heavily dominated by food, whereas
in reality rural areas spend less on food as PDS has expanded. Now expenditure is on
schools, transport, health, which needs to be reflected
The CPI-R has more non-food items and so better reflects the consumption basket.
Compared to the AL which gives 73% weightage to Food related consumption, R
gives 57% only
Although this indexation is crucial, it will have an good impact only if the base NREGA
wage is high. But barring three states/UTs, NREGA wages are lower than the state
min wages, in violation of the law.
The min wage is not a charity but instead is calculated as the wage required for basic
nutritional and other other basic needs. The SC in Sanjit Roy vs State of Rajasthan,
1983, noted that providing wage lower than min wage was akin to forced labour

253
Other Reforms initiated by MORD
• Transparency
◦ 100% geotagging of assets, Aadhaar linking and DBT and GIS based
planning of works
◦ 4.24 crore assets geotagged already as per the ES
• Durable Asset Creation-60:40 wage material ratio now to be applied at District
level instead of the Gram panchayat level, thus improving quality of assets
• Convergence with other schemes like Anganwadis, PMAY-Gramin, Solid Waste
Management
• Over 60% of the resources spent on National Resource Management projects
which improve area under cultivation and yields
• Additional employment of 50 days in drought affected areas
• Apps like Gram Samvad and JanMNREGA to provide info to citizens and improve
accountability
Claim that NREGA just raises wages but has no impact on productivity of labour,
reducing farmer's incentive to invest in farms
This depends on the quality of assets created and the impact that the assets can have
on farm productivity. Eg wells and canals can improve productivity even though the
farmers don't invest.
But even if the wages did increase, Kanika Mahajan provides evidence that the rise
in wages is correlated with rising productivity
On the quality of assets
Khera argues that in the initial years, the focus was less on the quality of assets, more
on creating a stable administrative setup for the same
After this was done, focus shifted on asset quality and convergence of NREGA with
other initiatives like the Indira Awaas Yojana

254
Does NREGA fuel inflation
A study by RBI from 2014, which argues that increase in rural wages is the largest driver
of food inflation. But NREGA does not have a significant effect on rural wages as
the NREGA wage is lower than the minimum wage in 23 states and rural wages
have nearly been double than NREGA wages
Caste categories for MNREGA pay
The Centre has in June 2021, asked states to split wage payments under MNREGA
into separate categories for SC/ST(essentially separate budget heads for these).
Expected to have better targeting for SC/ST
But there are concerns that this will complicate the payment system and may
reduce the allocation
Garib Kalyan Rojgar Abhiyan
Launched in June 2020 to provide immediate employment to migrants who have
returned due to COVID. Out of the estimated 1 cr returnees, 67 lakh are to benefit
• 25 public works programs for which the money allotted will be frontloaded
• In 116 districts of 6 states where most migrants have returned- BR, UP, OD, MP, RJ,
JH
• For 4 months immediate relief
• Huge convergence of schemes as 12 different ministries involved

Urban Employment Guarantee program

Badly needed now as highlighted by COVID

255
Decentralised Urban Employment and Training(DUET)- Jean Dreze
He recommends job vouchers being issued to a wide variety of institutions like schools,
public offices, railways, jails etc, which can then use these to hire workers and get their
work done. The govt will then pay the workers on the vouchers issued. Advantages
• Multiple potential employers
• Asset creation and proper maintenance of public services
• Will also have a training component with skilled workers imparting training on the
job
• Priority can be given to women

Link this with urban poor in Poverty notes

Public Employment- Chandrashekar and Ghosh
As per govt data tabled in Parl in 2020, around 7 lakh vacancies in Central govt
itself(around 20%). When a post remains vacant for more than 2 years(3 years for new
posts), they are deemed abolished. There is no provision for abolishing posts in
Railways

256
High level of public employment is necessary for ensuring high quality public
service. Eg Scandinavian nations have the highest levels of pub emp in the world
Relative to population, pub emp in India is only 1/10th of that in Norway, only 1/5th
of that in Brazil
States have to take lead as they employ over 80% of govt employment
Employment in CPSEs also fell by over 2 lakh during 2012-17, for non-executive
workers, which led to a sharp rise in contractual and casual employment in these
areas, now accounting for around 30% of workforce in CPSEs
Other important role of public employment
• Acts as a model employer
• Leads to rise in wages as demand for labour increases
• Leads to balanced development
• FLFPR increases as govt departments in rural areas also

Labour Laws- Bhagwati and Panagariya

257
Indian entrepreneurs show extreme reluctance in employing unskilled workers. (IMP)
• Labour intensive sectors like food and beverages, apparels etc account for
merely 15% of the share of manufacturing.
• High capital intensity- Indian firms are more capital intensive than India's
endowments of capital. Hasan et al show that India's L/K ratio lower than
countries with similar level of development and endowment
Link to firm-size distribution
Unusually high concentration of Indian labour intensive industries at the small scale.
This concentration harms export performance as these small firms have neither the
incentive nor the capability to exploit large markets abroad based on either quality or

258
cost.
Hasan and Jandoc show that
• 85% of all organised mfg firms are 'dwarfs'.
• Small firms(less than 100 workers) through dominate in total number of firms,
have only 23% employment share and only 11% Net Value Added, thus
showing the inefficiency of dwarfs(ES. Authentic)
• Disaggregation shows that small firms are more concentrated in the labour
intensive sectors while the large ones were in capital-intensive sectors. Eg 92%
of the workers working in apparel industry, are in small firms. But these small
firms don't create a lot of employment. So they dominate the labour intensive
sectors but don't actually create a lot of emp
• This is one reason why the Indian textile sector performs poorly in exports
despite India having a comparative advantage
The reason for the above are that in India,reforms have largely been focused on
the product markets, like liberalisation, but thefactor markets, particularly land
and labour, having been ignored.
The past reforms have removed major hindrances like FDI restrictions, small scale
reservation
But despite these, the industry still small scale. Reasons
• Initially it was attributed to the manner in which India implemented multifiber
export quota. India had the policy of giving the unused quota to new
applicants only, thus disallowing the incumbents to expand. But this explanation
does not hold any more with the ending of the multifiber export quota after
the Uruguay round(1995)
• Hence the true reason is the highly inflexible labour market in addition to land
market distortions and poor infrastructure.The problem of bankruptcy law has
been solved after the passing of the IBC
Multitude of Labour Laws
• Under the Constitution, Labour is a concurrent subject, making labour laws
highly variable across states
• Thus there are 52 independent central labour laws and about 150 state laws. This
multitude creates compliance problems also as a lot of them are inconsistent
with each other.
• Trade Unions Act, 1926
◦ Requires firms with 7+ workers to allow them to form a union, thus giving
firms with fewer than 7 workers the most labour market flexibility
• Employees' State Insurance Act, 1948
◦ Factories engaged in manufacturing and employing 10+ workers regardless of
whether they use electric power

259
 ◦ Provides employees, with wage upto 10k per month, benefits related to
sickness, maternity, old age etc
• Factories Act, 1948
◦ Manufacturing Units with 10 workers using power and with 20 workers even
if not using power
◦ Limits the max hours of work per week to 48 and work without a day rest to 10
◦ Requires a paid holiday for each 20 days of work
◦ Prohibits employment of children under 15
◦ Prohibits employment of women for more than 9 hours and between 7 Pm-
6 AM
◦ Factories to be kept clean with whitewashing every 14 months and repainting
every 5 years and separate restrooms
◦ The mandated requirements rise as the number of employees rise. Eg at 250
workers a canteen must be provided. If employs 30 women, a day care centre
mandatory
◦ The problem is that though the regulations are good natured, they are
costly to implement and also, more importantly, lead to a lot of paperwork
• These large number of laws impose compliance costs and it is inevitable that some
violation may occur, creating scope for harassment and corruption by labour
dept
• But the most harmful of acts is the Industrial Disputes Act, 1947
◦ Covers all industrial disputes regardless of the firm size. Defines disputes as
any dismissal, discharge, termination or retrenchment of a worker in a firm of
any size.
◦ The first step in settling is reconciliation, failing which it is referred to courts
which rule overwhelmingly in favour of workers
◦ Harms
▪ Requires employers to give a 3 week notice to workers before making any
change in working conditions, which the worker may challenge leading
to a dispute
▪ Section VB- Effectively make it impossible for an industrial establishment
with 100+ workers to lay off or retrench even if it is unprofitable and
thus forces the unit to close. Was first introduced in 1976 with a
threshold of 300, which was later reduced to 100. It makes
establishments seek permission from labour dept to lay off or retrench,
which are rarely given. Eg in 2009, only 2000 workers laid off despite the
recession, as only 12 firms given permission
• Contract Labour(Regulation and Abolition) Act, 1970
◦ Contract workers are indirect employees, hired and paid by contractors who
have a contract with the firm to provide some services. Firms prefer contract
workers to avoid regulations and to get the required flexibility

260
 ◦ The act allows use of contract labour only in certain establishments. Only
establishments employing 20+ and contractors employing the same
number of workers
◦ Govt has power to deny use of contract labour for work of perennial nature,
or that which is central to the manufacturing process or for the task that other
firms use regular workers
• These laws create incentives to remain small. Only at a very large scale is the
savings from economies of scale enough to comply with the labour costs. This
created the problem of missing middle and also the reason why so many are
employed informally.
• Reforms
◦ All major labour laws are very old, the last being the Contract Worker law of
1970. They had some use in those times for redistributing to the worker as the
firms enjoyed significant protection. But with increasing competition, more
flexibility is required. Give firms the flexibility to reassign workers within a
broad set of pre-specified tasks
◦ A tighter definition of retrenchment in the IDA required. Currently it means
removing the employee for any reason whatsoever.
◦ There has to be limit on the number of trade unions.

TheEconomic Survey uses spatial heterogeneity of entrepreneurship in mfg and

finds that states with flexible labour laws, like GJ, have highest, while states with
inflexible, like WB have lowest

261
Dutta and Roy(2004) have shown that labour laws regulations were statistically
insignificant in explaining output. Deshpande(2004) also shows that labour laws
are hardly implemented and so, are not binding constraint. This is what Jenkins
calls reform by stealth.
• In China also, the labour laws were quite rigid till late 90s. Eg firms could not fire
more than 1% of employees and had to find them another job as well.
• The xiagang subsidies in China were important when China started liberalising
laws. In late 90s, there was large scale firing in SOEs, so these subsidies and
other unemployment benefits are important
Missing Middle- R Nagaraj
Indian labour market is highly dualistic, with a small organised sector and a very
large unorganised sector. Hence Indiamoved from being a Lewisian 2 sector
economy to a 3 sector economy, with agri, unorganised and organised sector. The
non-farm informal sector bears the characteristics of both traditional and modern.
One view of dualism is the labour aristocracy created by labour laws as argued
above, which creates entry barrier for the unorganised sector workers into the
organised sector. It is claimed that thelabour laws have turned the wages into

262
essentially a fixed cost due to the low flexibility and hence it is substituted by
capital
But there arecounter argumentsto the above view(the view of Bhagwati-
Panagriya)
• The chasm between organised and unorganised wages could be due to efficiency
wages being paid as workers have to acquire additional skills for the organised
sector
• Pritchett has argued that even though laws are rigid, they are scarcely
implemented and hence are not a binding constraint. Nagaraj provides evidence
that of the firms required to register under the Factories Act, 2/3rd don't
register.
The propositions and critique
• Missing Middle- The term was used by Anne Kruger to describe the absence of
labour intensive manufacturing in India. Further evidence for missing middle is
presented by Mazumdar, Mehta and Sarkar. They show a U-shaped size
distribution of manufacturing employment.
• Nagaraj argues that dualism in a developing economy is the result of
organisational and technological discontinuities in the modern sector, which
requires the workers in the organised sector to be paid efficiency wages. This
is the source of dualism
• Also argues that the most critiqued provision of labour laws, VB of IDA, is
applicable only to a very small section of workers. It exempts retrenchment of
managerial and admin staff, those having wage above 10000, casual workers
and workers who have not completed a year of continuous service.(verified)
• On missing middle, Nagaraj makes an important argument that though India
has a long tail of mfg firms, making avg size small, it does not necessarily
imply inefficiency. There can be dense intra-industry transactions between
large and small firms. He argues that Japan earlier and Taiwan recently, both
specialised in household level mfg of light manufacturing goods, which were
sold by large trading houses, like Japanese Sogo-Soshas.
Missing Middle- Mazumdar and Sarkar
Two facets of dualism
• Missing Middle.
◦ Two modes in the distribution of firms. 500+ labour firms and 5-9 labour
firms
• Wage-Productivity gap between the 2 sectors
◦ The prod gap between large and small is to the tune of 8:1
They argue that this dualism has following consequences
• Tertiary sector led growth

263
 • Very low productivity of manufacturing, preventing it from being a fast
growing sector and absorbing labour
• Allocative inefficiency and inequality- The wage differential causes very high
inequality between labour employed in small vs large firms
• Dynamic inefficiency- Dualism slows the growth in skills of labour and
entrepreneurship
• Dampening the growth process as dualism has split the product market, with
each segment catering to a distinct group, reducing competition
Causes
• Labour legislation
• Education Policies biased towards tertiary ed
• Reservation for small-scale units and hysteresis(persistence of effects for a long
time)- Small scale reservation has made entrepreneurs focused on horizontal
expansion rather than vertical
From Jobless growth to Job-Loss Growth- Kannan and Raveendran- Based on
NSSO 68th round, 2011-12 and PLFS, 2017-18
Unprecedented decline in employment recently. (2011-2018). There has been job loss
in this period, with a decline in the number of employed, to the tune of 6 million
workers. Thus job-loss growth is defined as net decline in employment in the
presence of a positive output growth.
Dimensions
• Those who have lost jobs are all with edu less than secondary level. Thus ed has
become a very sharp divider
• Rural women workers have been net losers, to the tune of 25 million, while
urban women and men gained, though urban female unemp is higher than
rural female unemp
• Muslims and OBCs also net losers.
• 5/20 subsectors as per NIC classification experienced net job loss, with the
most being in agri, mining and quarrying. This has happened despite a growth
rate of 3% of agri in this period
• Thus clear signs of rural distress with strong education, gender and social
dimensions
Causes
• The ability of the economy to absorb the additional working age pop(WAP), either
in work or in education has declined sharply post 2012. The share of WAP in pop
increased from 65 to 75% between 2005-2018, but share of workforce in pop
declined from 40% to 35%
• The public sector employment has also reported a decline in emp of 4 lakh in
the period. Major cutting in defence hiring. Around 7 lakh vacancies in Centre itself

264
 • In agri, the decline can be due to shift to more mechanisation
• Migration of men, caused by low rural wages, has pushed women into
domestic duties
• Mfg has also become more capital intensive, with the demand for labor mostly in
high skill areas
• Impact on unorganised sector of demonetisation and GST

Labour reforms
During COVID, several states like MP, UP diluted labour laws, like increasing working
hours to 12, ease of hiring and firing, easing safety and health norms
Issues
• Against worker rights, violating DPSP like Article 42
• Against international law- ILO Conventions 87 on right to freedom of association,
98 on Collective bargaining
• Evidence unclear if labour laws are harmful

Rural Wages- Gulati and Saini

2000s have a V shape, with real wages falling by 2% between 2001-2007 and then
rising by 7%. The average rise in 2000s is thus only 2% and this is lower, compared to
4% in 1990s. Thus, if 2000s had seen the same rate of increase as 1990s, then the
real wages would have been higher than compared to that due to NREGA
During 2007-12, the states of AP, RJ, TN and OD recorded the highest growth in
real wages and these are also the states which saw the best implementation of
NREGA
But despite the higher growth in 1990s, there was no protest from the farmers for
higher MSP
In 2012-19, Real rural wages grew by just 1%, major reason for rural distress
Causes
• The pull factors, which are overall growth, growth in construction and other
sectors, growth in agri itself, were stronger than the push factors led by
NREGA
• GSDP, construction GSDP and agri GSDP have 2.5, 3 and 2% effect. Thus
construction has strongest effect. This is because migration rate for labour
accounted for 2% of all rural pop in 2007, implying that construction
competes for labour
• The impact of NREGA, though significant, is less than growth variables. Had 4-8%
increase in wages due to NREGA. Supported by Inbert and Papp

265
 • Growth variables highly significant in all states while NREGA only in Andhra, Assam,
MP, Punjab, RJ, TN, WB but overall effect less. The states where NREGA highly
significant also states which saw the most man-days
Impact
• As farming is labour intensive, it has raised the cost of production and has led the
farmers to demand higher MSP.
• Rising costs also leading to higher food inflation
• As farm labour is at the bottom of the economic pyramid, rising farm wages has
led to declining poverty.
Policy
• Given limited resources, the above would suggest that they should be spent on
growth and construction promotion as they raise wages faster. Given that
resources spent on NREGA are approx 2 lakh cr
• While NREGA has other uses like social empowerment and creation of assets, there
is dire need of better targeting and preventing leakages. Since the inception, 50%
of the works have been related to water and 20% to rural connectivity. Hence
NREGA has other positives
• There is also a need to effectively use NREGA to not only push up wages but also
farm productivity. Hence a fusion between NREGA and agri to raise productivity
needed.
◦ It can be done through farmers registering their need with the Panchayats. It is
already allowed for farms owned by SC/ST, small and marginal farmers, but very
few states apply this
◦ Also NREGA has to be strictly enforced only in lean season so that it doesn't
compete with the agri.
◦ Also NREGA wage needs to be a bit lower than the market wage rate
• As relative price of capital lessens, mechanisation has to be promoted through
cheap credit and also free up land lease market so that a market guided optimal
holding size evolves
Rural wages and role of inflation- Sujatha Kundu, RBI

266
Sharp deceleratin in rural wages post 2012-13. This coupled with the sharp inflation till
2014, has meant that real wages have declined.
• NREGA and construction have weakened in their effects
• The agri output growth was also subdued in 2014-16 due to weak monsoon.
Though this improved in 2016-18, rural wages remained low, implying the
limited impact of agri growth
Phase I
Between 2001-07. Inflation often exceeded the nominal wage growth, and hence real
declined, implying rural distress
Phase II
2007-2012. High growth in real wages
Phase III
Post 2014. Significant deceleration in rural wage growth, also characterised by low
inflation. Avg real growth 1%
Observations
• Nominal wage growth and inflation closely related. A rise in nominal wage growth
is preceded by a rise in inflation
• Role of inflation in decline in wages post 2012
◦ Some events
▪ Global slowdown and collapse of commodity prices
▪ Employment under NREGA also slowed down

267
 ◦ Argument
▪ Econometric analysis using cointegration technique and VECM analysis
shows that rural prices have significant effect on rural wages
▪ This also suggests limited scope of a wage-price spiral as wages have
limited effect on rural prices. This has important implication for inflation
targeting in India
Creating Jobs through Exports of Network Products- ES
By integrating Assemble in India for the World with Make in India.
Can create 4 cr well paid jobs by 2025
Context
• Between 2001-06, China created jobs for 7 cr workers with just primary education
through exports
• US China trade war creating scope for major readjustment in GVC.
• China is anyway losing its edge due to rising wages
• No other country can match China in the abundance of labour
Questions
• Should India target export growth through specialisation(intensive margin) or
through diversification(extensive margin)- See External Sector
Network products- Production process are globally fragmented and controlled by
leading Multi National Enterprises
Right to Work
Was included in the UDHR. In India, we have DPSP Article 41. NREGA implements it.
Right to work is imp not only in the context of unemployment, but also the inherent right
of everyone to earn livelihood
How to implement right to work
• NREGA
• Urban employment programs. ULBs can issue job vouchers to public institutions
like schools and PHCs to hire labour
Note that the right to work is broader than employment guarantee. RTW asks
fundamental questions about the role of state in a capitalist economy. It includes jobs
by both public and private sector. State should create employment of its own as well as
safeguard private employment, eg by doubling farmers' income
Right to work is complementary with rights in work, that is labour rights like min wages,
safety, protection against arbitrary removal. These rights in work become even more
important in a labour surplus economy
Right to work, by tightening the labour market, increases labour bargaining power
and automatically leads to better rights in work

268
Tie this also to casualisation and poverty. Casual labour is surplus labour and hence
very little bargaining power
Decline in mfg employment since 2016-17
As per CMIE data, employment in mfg has fallen from 51 million to 27 million in the 4
years. Reasons
• Even the PLI scheme focuses on capital intensive industries, not on labour intensive
industries like toys, clothes.
• The informal sector mfg has been hard hit by demonetisation. This growing rift in
fortunes of organised and non0organised mfg sector is key reason for the massive
fall in employment.
• When there is a tradeoff between formalisation and employment, focusing on
formalisation can be detrimental.

269
National Income and Per capita income
and Inflation
National Income PYQ
2019
1. Examine the trends in GDP at factor cost in the pre-reform period.
2018
1. Reflect on issues and implications of structural transformation in India's national
income.
2. Critically examine the relative contributions of public and private sector in pre-lib
period.
3. Demonetisation has been a radical step with short-term costs and long-term
benefits. Give reasons in support.
2017
1. What is your assessment of the principal impact of of the recent demonetisation in
India in the immediate and medium terms?
2. How did per-capita income behave in India since independence? Has it improved
the well-being of the people uniformly?
2016
1. Discuss the changes in the sectoral composition of GDP in recent years
2015
1. Explain the major factors that affected the growth rate of the economy in post
independence India till 1991
2014
1. Highlight the structural changes in the Indian economy before 1991
2. Second generation economic reforms are crucial for raising the growth rate of the
economy. Throw light on these dimensions
3. How could e-governance tackle the issues of corruption and inefficiency in the
govt sector to lead to higher growth rate in the economy.
2013

270
 1. Speculators may do no harm as bubbles on a steady stream of enterprise, but the
position is serious when enterprise becomes the bubble on whirlpool of
speculation. When capital development of a country becomes the by-product of
the activities of a casino, the job is likely to be undone. Explain in the context of
global financial crisis and the Indian economy.
2012
1. What do you mean by the Hindu-rate of growth? Why has it been argued that
poverty cannot be eradicated under the Hindu-rate of growth?
2. Trace the growth of real per capita income in India in the pre-lib period, keeping in
view the interplay of increasing population and increasing real national income
3. What are the factors that determine the size and composition of national income?
In this context, contrast the scenarios pre-and post liberalisation
2011
1. The declining share of commodity producing sectors and the rising share of
services is creating imbalances of far-reaching consequences in the economy.
Analyse
2. Write on second generation economic reforms in India
3. In view of fresh fears of global financial crisis arising out of decelerating credit
rating of the US and debt crisis in the Euro zone, analyse the impact on Indian
trade and growth
2009
1. Provide an analytical description of growth and changes in the economy during the
period from 1950-67
2. Analyse whether public and private investments in India are complementary or
competing
2008
1. Growth of the Indian economy was not commensurate with the level of investments
during first 4 decades of planning. Give reasons
2005
1. What are the determinants of the distribution of income in India
2003
1. What macro-economic references can you draw from the changing trends of
consumption and saving in the Indian economy
2002

271
 1. Discuss the reasons for the slow growth rate of the Indian economy despite the
high rate of savings
2001
1. India is a paradoxical case of low growth rate despite high rates of savings and
investment. Comment and account for low growth rate
2000
1. Comment on the trends of savings and capital formation in India briefly. What
reasons account for slow growth despite high savings rate
Broad Factors determining National Income and Distribution
Drivers of growth
• Consumption(70%), specifically PFCE, which has close to 60% share of GDP. Its
growth rate has also been higher than GDP growth rate.
◦ Although consumption remains driver, the pattern of consumption has
changed over time, from essential to luxuries and from goods to services
◦ The share of food is also declining in consumption, with cereals accounting
for almost all the decline. Deaton and Dreze stat
◦ Thus increasing spending on discretionary areas.
◦ GFCE growth is declining, mainly led by decline in revenue expenditure. Avg
GFCE growth in last 5 years has been 9%
• Investment has around 30% share(26.9 in 2019-20)
◦ The investment rate has been declining since 2011-12. Showed some early
signs of recovery in 2017-18, but still very sluggish
◦

◦ But in the recent slowdown, the cause has been both a collapse in household
and corporate investment. Key reason is 4-Balance sheet problem
◦ The private investment grew by only 1% in 2019-20 compared to 10% in
2018-19. This shows the cut in corporate taxes have had little effect
◦ The pattern of investment also changing. In 2011-12, industry led, while
now services lead, hence implications for employment
• Exports have around 20% share, while imports reduce GDP by more than exports
increase GDP
NITI recommends raising GFCF to 35% for optimum growth of 8%
India's tax-GDP ratio is 10.8%, around half of OECD nations and lesser than other
BRICS nations. It should be raised to at least 22%

272
Govt contribution to Fixed capital formation was 4% in 2017-18 and this needs to
be raised to 7%
Drivers of Growth

From 2003-2008, investment saw a sharp increase, from 26% of GDP to 36% of
GDP as per the ES. This rise in inv was due to a decline in consumption and the growth
was largely debt-led. This changed with the crisis as investment sharply declined and
India grew well for a couple of years led by consumption.
In 2013-14, India's net exports grew significantly at 70%, reducing the CAD from
4.8% of GDP in 2012-13 to just 1.7%(authentic)
Thus three visible changes in AD
• While improving growth in pvt consumption, its contribution to GDP growth is
getting aligned to its GDP share. The increase in share of consumption to 60%
supports the consumption led growth revival.

273
• Fixed capital formation has been falling since 2008, and is now around 27%.
• Erosion of global demand for Indian exports significantly dragged down Indian
growth. This also makes India's growth, primarily sustained by domestic
consumption, noteworthy
◦ Quote Subramanian and Shoumitro paper on how India's growth was also
helped greatly by exports
◦ AS and SC argue that between 1995-2018, India's overall export growth
has averaged 13%, the 3rd best in the world. This is not just because of
services exports but also because of mfg. Eg generic medicines, minerals
exports to China, meat exports. But post 2014, India's Real Effective
Exchange Rate has appreciated by 20%, leading to a severe fall in exports.
Coupled with other factors like beef bans, decline in reputation of generics
due to frauds in several Indian pharma companies, China growth slowdown
◦ But despite these setbacks, India's export-GDP ratio still high at 20%,
much higher compared to 1990s.
Growth and Structural Changes since 1951

2009-11- 7.2%, despite heavy slowdown in 2008-09

274
2012-2019- 7%
• Foundational- First three plan periods. Public sector grew with fresh investment,
without nationalisation. The private sector had ample room to grow. The growth
performance good compared to the pre-independence period. Due to ICOR
being the lowest in the post independence period(2.8), and ample pub inv,
saw the biggest rise in share of industry in this period, and biggest decline in
agri also post 1947.
• Crisis- War with Pak and the twin crisis. Political uncertainty too. Focus on the dev
of agri through Green Revolution. Investment in heavy industries continued, led by
fertilisers. This period also saw the real beginning of the subsidy burden in the
form of food and fertiliser.
• Turbulent- 1970 is an important break point as Green Revolution had bore fruit and
poverty reduction, rather than growth was the dominant imperative, with a
public sector oriented strategy. The MRTP Act was tightened and for a period, food
grain trade was nationalised. Banks were under bureaucratic control after
nationalisation. The Janata govt, though more business friendly, continued focus on
anti-poverty.
◦ The years from 1965-1980 saw the worst growth performance. This was
despite high levels of investment. The public investment program was poorly
managed with cost overruns, inefficiency, as seen in the high incremental
capital output ratio.
◦ Hindu rate of Growth- at around 3%. The ICOR was also the highest post
independence, around 5. Raj Krishna
◦ Virmani also finds evidence of TFP growth being lowest at around 0.4%
during 1965-80. Another reason for HRG
• 1980, with a change in govt, marked another change in policy. Various committees
under Dagli, Narasimham, Hussain, Alexander laid out a more pro-market
policy. Poverty focus remained. In the mid 80s, tax cuts happened and import of
capital goods liberalised. But despite increased tax collections, public
expenditure rose more rapidly, fiscal deficit remaining avg 7% in the 1980s,
leading to the 91 crisis. The shift to higher growth in 1980s is referred to as
India's growth turnaround.
◦ The high growth in this period, is imp and puzzling because
▪ This preceded the BOP crisis and the reforms.
▪ Subramanian and Rodrik- Rule out the following explanations
• External liberalisation could not have been a factor as trade became
more restrictive
• Very little reform of product or labour markets
• The delicensing in manufacturing was fairly late and limited
• Alternative explanation
◦ Attitudinal shift in the govt favourable to the private sector

275
 ◦ The shift was pro-business, not pro comp, favouring the
incumbents
◦ The shift resulted in large productivity response as India was far
from its PPF as seen from sharp reduction in ICOR from 5.4 to 3.6
▪ But Ghate challenges the story of Rodrik and Subramanian. He argues that
for their story to be true, the linkages with mfg will have to be impossibly
large for such a small share mfg sector to have such a large effect.
▪ Deepak Nayyar-Several factors
• Expansionary policies stimulated demand as well as eased supply
constraints, as can be seen by the large jump in GFCF
• Liberalisation also imp. Broad-banding, which reduced industrial
licensing.
• The foundational policies of the past 30 years in creating human
resource also bore fruit.
▪ Arvind Panagariya gives an additional explanation that the shift from a
positive list to a negative list in the 1990s was substantial
• 1990s- Despite the high growth, crisis in 91. See lib note
• 2003-2008- Best phase of growth-Annual rate 8.8%, till it was hit by the 2008
crisis
◦ Nagaraj- Output expansion was underpinned by sharp increase in investment
rate, led by booming foreign capital inflows(47 bn USD in 2008)
▪ A sharp upturn in world trade in 2002, tech communication revolution and
deregulation of the US financial sector boosted India's services via
outsourcing. Export/GDP ratio increased by 9% points in the 5 years,
thus export led growth. This is supported by KL Krishna et al
▪ The 2008 crisis took away the fuel
▪ Growth after the crisis was restored due to monetary easing and high public
expenditure
▪ But the expansion has many dark spots
• It had a narrow base, with most of the incremental output coming from a
few capital-intensive sectors like automobiles and outsourcing and
telecom services.
• Employment growth was lowest since independence, at just 0.45%, and
a decline in Female LFPR
• Led to sharp rise in casual employment as construction boom(29%
to 34% in this period)
• The above led to only a marginal rise in infra's share despite bank
credit and foreign capital abundant.
• The growth in power generation capacity was not adequate to reverse
the long term decline. The rural road program was poor

276
 • (But note that India's supply constraints were relaxed substantially
due to this boom which allowed India to grow quickly even after the
NPA crisis, as the ES argues)
• Benefits of growth were unevenly distributed.
• It was a debt led growth as seen by the high credit and foreign
capital. FDI inflows tripled in a single year from 7 bn to 20 bn in 2007
as per Nagesh Kumar But very little of it went to sectors that could
augment potential output
• The disproportionately fast rise in credit compared to fixed investment
growth, raised corporate leverage.
• The inflows also raised the asset prices in all markets and they have
remained stubbornly high, despite the slowdown.
• With the slowdown and the high leverage, the corporate debt burden
turned enormous and led to the NPA crisis
• Thus the boom was characterised by rapid monetary expansion,
inflationary pressures, real rate appreciation, and widening CAD.
▪ The ES argues that the big fiscal push post the AFC coupled with
productivity reforms was a key reason for growth takeoff
• This was also the reason why debt fell from 83% of GDP in 2003 to
70% in 2009-10
▪ Also supported by TT Ram Mohan, that prior to GFC, the NPA ratio in pvt
and Public banks was in favour of PSBs. But due to poor quality of
underwriting and cronyism, a large part of PSB loans were made to
infrastructure sectors. Though they fuelled growth in 2004-08, they
also resulted in a huge NPA crisis in PSBs when the economic conditions
changed, adverse court judgements, China slowing leading to steel
demand crashing
• 2009-11- Recovery from the crisis- 2009-10 was 8%, in 2010-11 was 8.4%, 2011-12
was 6%
◦ Ahluwalia
▪ Huge fiscal stimulus, which raised the fiscal deficit to over 6%
◦ Economic Survey on response differential
▪

▪
• Slowdown in 2011-14
◦ Factors like Euro crisis, oil price rise, domestic policy paralysis and
inflationary pressures.

277
 ◦ India's credit ratings were also lowered, reducing investments. India's
competitiveness in the WEF index also fell
◦ Thus addressing structural constraints key, as the slowdown was
happening despite global growth picking up.
▪ The structural constraints were, as per the Economic Survey of 2013-14
and Prachi Mishra
• Delay in project approvals
• Ill-targeted subsidies reducing fiscal space
• Low manufacturing base for capital goods
• Large informal sector
• Low agri growth
• 2014-18, growth picked up at around 7.5%
◦ Subramanian and Felman argue that it was led by falling crude prices and
global growth, giving a 1-1.5% point boost to growth
◦ 2017-18 saw a real depreciation of rupee by about 13% and increase in
exports

Recent slowdown
Based on a paper by Arvind Subramanian and Josh Felman
Argue that the current slowdown is due to both structural and cyclical problems and
due to the structural issues, the cyclical remedial measures are not having effect.
In 2017-18, three other factors
• 2017-18 saw an uptick in world demand and a real depreciation of the rupee of
about 13%
◦ Hence non-oil export growth increased from -9% in 2015-16 to 9% in 2017-
18. Hence NX gave a boost
• G increased, not through direct expenditure to not breach the FRBM targets but
through govt backed institutions like FCI and NHAI. Off-budget expenditure
which should ideally be counted in fiscal deficit but are not
• Lending spree provided by NBFCs as banks were struggling in NPA
They claim that these factors papered over the demonetisation and GST
disruptions
What derailed the economy
Two broad reasons
• Unresolved TBS problem- Despite the IBC, the resolution process has been very
slow leading to deterioration in the value of the firms every day leading to further
problems in resolution. This spreads to the entire economy as the stressed
companies cannot pay their suppliers, lay off workers

278
 • Fall of NBFCs and the real estate sector- They claim the trigger for the
slowdown was the fall of the IL&FS. IL&FS was a behemoth with 90k cr of debt.
But the larger impact was that the failure of the NBFCs was unexpected which
prompted markets to be very careful. Especially, it was found that most of the
NBFC lending was to the real estate sector and the sector itself was under
duress
◦ After the GFC, the demand for flats as well bank lending has been low
◦ Though the NBFCs took the lead in lending to the real estate sector, the demand
for flats did not pick up and by June 2019, there were over 10 lakh unsold
units in just the top 8 cities
◦ This prompted default by the real estate sector and collapsed the NBFCs
Together they make up the Four Balance Sheet Problem of the Indian Economy.
At this moment, C is down, G is overextended through off-budget exp, I is stuck
and as global demand is weak, NX is also sluggish.
(Authentic from FC report)-Problem of sluggish growth in scheduled commercial bank
credit to the commercial sector and high non-performing assets (NPA) of banks
observed since 2011-12. From a high of 20.6 per cent in 2011-12, such credit growth has
declined every year to reach 7.2 per cent in 2018-19 and around 6 per cent in 2019-20.5
This slowdown, which followed five years of high credit growth of an annual average of
over 24 per cent between 2005 and 2010, was partly a result of the easy money policy
in response to the Global Financial Crisis in 2008
Major hits and their reasons
• 1957-58- -0.7% because of the BOP crisis.
• 1965-66- -3.2% due to war and food crisis
• 1966-67- -0.5%
• 1972-73- -1%
• 1979-80- -6%
• 1991-2- 0.4% fiscal and BOP crisis
• 1997-98- 4%(fell from 8% previous year) due to AFC

Sources of India's growth- Trends in TFP(Arvind Virmani)

• TFP growth started at around 2.5% in 1950 but was on a declining trend
• It averaged just 0.4% during 1965-80.
• It started improving and with a minor setback with the BOP crisis, it was around
2.7% in 2003
• 2003-08 saw the highest TFP growth at around 3.2%, with labour productivity
also seeing a surge.
• It saw a decline post that and after a brief improvement post 2012, is now around
2%

279
Demonetisation and GDP Growth
While economy was growing at avg 8% for the past three years, it immediately came
down to 7% for the next year, then 6% in 2018-19 and then has fallen to below 5% in
2019-20. Then argue that it will be beneficial in the long run due to increased
digitisation and curbs on black economy, increasing tax revenues.
Demonetisation- Economic Survey
Aim of D was
• Curb corruption
◦ India's cash/GDP ratio was higher than other nations even after accounting
for the level of development, implying that a part of it was used for illicit
transactions
• Counterfeit and preventing its use for terrorism
• Curb black money
◦ The soil rate for smaller denomination was 33%, it was 21% for 500 and
10% for 1000 rs note. Shows that they were not used for transactions but for
storing black money
• Increase digital transactions and hence tax revenues
It was preceded by other similar moves like formation of Special Investigation Team
for Black Money, Benami Transactions Act, 2016. It was also followed by other
moves like Fugitive Economic Offenders Act
India's demonetisation was unprecedented as it happened during normal economic
situation, unlike other demo in the world which happened in special circumstances like
wars, hyperinflation
The ES describes it as an unconventional monetary policy, a reverse helicopter
drop or a helicopter hoover.(H drop is pumping money)
Trends in India's currency to GDP ratio
• Fell from 12% in 1952-53 to 9% in 1967-68
• Then started growing when India's GDP growth picked up
• Reached 12% by 2015.
Effects
• Bank deposits increased sharply
• Rise in digital transactions as UPI now accounts for txn worth 10% of India's
GDP. This is a change from the Watal Committee estimate pre-D that cash
accounted for around 80% of all consumer payments
◦ Enabled India to strengthen the M in JAM
• Significant boost to Indian fintech startups
◦ India's fintech startups now attract more investment than Chinese
startups

280
 • Affected both the stock and flow of black money- Though its effects were
dampened by laundering, but it still brought back black money into the taxable
net. It also generated substantial data for the investigation agencies to reduce
flow of black money
◦ It also acted as a transfer of wealth from the illicit holders to the public
sector as when the old notes were declared as no longer legal tender, it raised
RBI's net worth
• Real estate prices fell. These low prices have persisted as demand has remained
low. One major reason for low credit supply as value of collateral has fallen
• Tax collection increases
◦ CBDT data(authentic) shows that direct tax growth rate sharply increased
from 14% in 2016-17 to 18% in 2017-18
◦ Number of income tax filers also increased the sharpest in the past 10
years in 2017-18, by 98 lakh taxpayers
◦ It also improved the direct tax-GDP ratio to 5.98%, highest in 10 years, in
2017-18
◦ Though this is still slow as India's tax-GDP ratio still only 10.8%, but D showed a
wider societal change where black money is not tolerated by a large mass
of India, as shown by the support to demonetisation
Short term impact
• Cash declined sharply- But it was short term as there was rapid remonetisation
with higher currency of 2000
• Impact on GDP as a demand shock as well as supply shock as it affected small
businesses, agri
◦ But aggregate sowing of major rabi, wheat and pulses, exceeded the planned
sowing
◦ High frequency indicators show demand reduction, eg sharp fall in 2 wheeler
sale after demonetisation
◦ Show this using the MV=PY eqn as M reduced, which will have impact on
nominal as well as real income
The govt has taken more steps to complement D, like making tax admin
transparent, like faceless assessment, reduction in corporate tax rates, RERA,
GST
Gita Gopinath, Prachi Mishra, Abhinav Narayanan, Chodorow-Reich
• They quantify the demo shock as a ratio of post and pre demo currency supply in
the area.
• They use a new household survey on employment and nightlights data to argue
that it resulted in compression of economic activity. This allowed them to capture
informal sector as well.

281
 • They argue that in the Q4 2016-17, there was a contraction of growth by 2
percentage points and employment by 3 basis points. But these effects
subsided over time
• They also argue that there was a substantial shift towards alternate forms of
payments. They agree that these are near term effects and longer term benefits like
rise in tax to GDP ratio or shift to financial instrument based savings will help.
Amartya Lahiri
• He argues that ISI research has shown that FICN is merely 0.025% of total currency
in circulation.
• Black money is seldom held for long in cash. It is a flow concept and is also parked
more sophisticatedly in other forms like real estate. Demo would not have much
impact on that.
Growth and Structural Change
Decline in the share of agri in GDP and an increase in the share of industry and
services.
• Between 1951-2000, share of agri fell from 53 to 22%, share of industry increased
from 16 to 27% and services from 30 to 50%
• Between 2000-2018, agri declined from 22 to 16% and services increased to 54%
and industry stagnant at 30%
• Most importantly, between 1990-2000, the entire decline in agri was taken up
by services, with industry gaining very little.
• Between 1950-1980, industrial sector grew faster than services, but since then
reverse. Consequently, the share of industry has remained at 26-28% since 1980
while the entire fall in agri has been taken by services

Disaggregated sectoral growth trends

282
 • Apart from agri, the mining and quarrying sectors also saw a consistent
decline. This indicates need for reforms in the sectors Its share in GDP fell from 3
% in 2000 to 2% in 2013-14
• Manufacturing gained the most during 2004-08- relate Kaldor growth laws and
Verdoon's law here
• Share of services consistently rising, with the biggest drivers of performance
since 2004 being communication and banking and insurance. This is reflective
of the debt led growth in 2004+. Post 2010, in services, domestic trade, hotels
and storage witnessed decline, being a reason for less than commensurate
growth in employment as these are employment intensive sectors.
• But as the ES 2013-14 shows, 50% of the inputs of the services sector comes
from the industry and agri, while services contribute 23% of inputs for agri
while 25% in industry. So if the other two sectors, don't grow, given the inter-
sectoral linkages, it is very difficult to sustain the growth solely based on
services.
Share of agri being overtaken by services is termed asIndia's idiosyncratic
growth, as traditionally, industry grows fast in the transition from lower to middle
income. Services dominate in upper middle to high income. Mfg should start
declining at USD 14700, the high income cutoff for per capita. But both MH and KA
see it fall at around 3000 USD
Talk about employment transformation and exports potential of mfg and services.
Talk about defence indigenisation which has suffered due to lack of large mfg
base.
Chandrashekhar and Ghosh also show that though structural transformation has
reduced agri jobs, there has not been commensurate rise in jobs in mfg or
services for women.
Inter-regional
• Prior to 1980, growth of states was mediocre but uniform
• Post reform, as per Montek Ahluwalia, considerable variation among states. In
the 1990s, the gap between Bihar and Gujarat increased to 7% in growth rates
• The 6 states that grew fastest in 1990s, were well distributed regionally
• Post 2004, all states grew at at least 6%, except Assam and JK which were hit by
insurgencies, but grew at 5.5%
• Arvind Subramanian- Argues that 2 sets of factors.
◦ Different states had different pre-existing capabilities and these could be
expressed only when the overall economic environment changed. This
capability was the diversified manufacturing base of each state, which is a
representative of state's human capital, geography, organisational capital.

283
 ◦ The trigger was the liberalisation that began in 1980 and especially the
decentralisation of political power. Liberalisation meant that the licensing
system, which prioritised balanced development, was abandoned.
◦ Thus path dependency in growth
• Rao argues that while the differences accentuated in the post reform period, they
had been building up in the pre-reform period itself. For example in the 1960s
the per capita GSDP of richer states like MH and GJ was 80% higher than states
like RJ and Bihar. This disparity kept on increasing, declining a bit in the 1980s, but
soared in the post reform period to be 175% in 2007-2010
• States with PC GSDP below the national average have over 60% of the
population and so their progress is key for poverty alleviation and equity
• There is also the issue of intra state disparity
Read Growth Prospect- An Assessment from Uma Kapila Pg 203, for a summary
Kochar, Rajan, Subramanian- Idiosyncratic Growth
India has failed to absorb the labour released from agri. Uneven prospects across
regions, education levels and sectors.
They argue that the policies followed since 1947 till the 80s reforms, created
unique specialisations for India. India's emphasis on tertiary edu and other policies
like state led heavy industrialisation, limit on capacity expansion, rigid labour laws
all limited labour intensive mfg, which should be the usual specialisation in a populous
developing country. These are the idiosyncracies of India.
As far as services was concerned, India was a significant negative outlier in 1981,
primarily because the services sector was dominated by the slow and inefficient
public sector in sectors where India had a skill advantage like telecom.
This trend continued post reforms as well. Eg in 2000, India spent 86% of per
capita GDP per student on tertiary edu and only 14% on primary.
This has also led to the worsening of the regional divides. Decentralisation has allowed
some states to capitalise on the pre-1980s capabilities and grow faster, specialising
in skill-intensive services and manufacturing, while this has scarcely benefited the
more populous and poor states. Eg engineers employed by the Electronic
Corporation of India Ltd provided the backbone for Bengaluru's IT hub.
Rodrik and Subramanian- Mystery of the Indian growth transition(From Hindu
growth to productivity surge)
Till 1980, per capita growth rate was 1.4%. Between 1980-2000, it was 3.7%. They
argue that after returning to power in 1980, Indira Gandhi dropped her socialist
rhetoric and became supportive of private business. This was continued more explicitly
by Rajiv Gandhi and this attitudinal shift is accorded primacy by the authors. They

284
differentiate between pro-market reforms, which foster competition, and pro-
business reforms, which favour the incumbent. These include easing restrictions on
capacity expansion for incumbents, reducing corporate taxes etc. This all took
place in 1980s, while market liberalisation took place in the 1990s.
But the reason why this attitudinal shift had such profound implications is rooted in
India's institutions of rule of law, democracy and property rights higher given its level of
income
• Between 1970-80, TFP grew at -0.5% while in 1980-90, it grew at 2.5%. TFP
growth fell to 1.6% in the 1990s, so 1991 can't have been the growth trigger.
• This is consistent with Hausmann's analysis, who puts the growth break point at
1982, as well as Bosworth and Collins on TFP
• It was a case of productivity based growth, not accumulation based.
• Explanations rejected
◦ Favourable external environment- Not possible as the 1980s was hostile to
developing countries as all suffered except China. The oil crisis was continuing
and the Volcker shock of raising rates in US was also depriving developing
countries of vital foreign capital.
◦ Aggregate demand and the unsustainability of 1980s growth-This is the view
expressed by Srinivasan and Tendulkar that the growth of 1980s was led by
unsustainable fiscal expansion and build up of debt. But the authors argue that
the critics fail to distinguish between the productivity effect and
unsustainability effect of the fiscal expansion
◦ External liberalisation-Not possible as at the all industries level, avg effective
rate of protection was 120% between 1980-1990 and 60% between 1990-2000
◦ Green Revolution-Not possible as agri improvement was less than in mfg and
services. Also Preobrazhensky effect would mean that as agri became more
productive, it would have to drive down agri prices to release resources for
other sectors, implying a worsening terms of trade of agri wrt mfg and
services. This did not happen.
• The explanation
◦ Attitudinal shift, pro-crony, not pro-market
◦ This led to a large productivity surge as India was far from its PPF
◦ Mfg, which was built up through earlier policies, played a key role in the shift

Basu and Maertens

• Sectoral Structural breaks
◦ Balakrishnan and Parameswaram argue that the structural break in agri
happened in 1964-65, before the Green Revolution, given the impact of
increased irrigation.
◦ They argue that the mfg sector has 3 structural breaks
▪ The first negative structural break in the 1960s

285
 ▪ Second positive in 1982-83
▪ Negative in 1995
◦ Bosworth argues that the TFP of the industry has actually been slowing
down in the post-reform period
◦ For services, it has experienced consistently higher growth. Bosworth
attribute this to TFP.
• The first big break for GDP growth was in 1975-76 when the GDP grew by 9%,
when emergency was imposed. This was lost in 1979-80, the worst year in
Independent India. GDP fell by 8%. In 1979-80, like earlier poor years for India, the
cause was a failure of monsoon. Agri GDP fell by 12% in 79. The decline of this
magnitude caused a decline in both industry and manufacturing.
• The saving and investment rates, were traditionally very low but climbed steadily
since then, led by the nationalisation of banks and the formation of the Unit Trust
of India, and crossed the 20% mark in 1978. This was a major contributor to
the growth momentum, along with the limited liberalisation, in the 1970s late and
in the 1980s.
◦ Burgess and Pande argue that nationalisation of banks contributed
significantly to the reduction in rural poverty. .
• Second generation reforms
◦ Better distribution of income
◦ Improved labour and land market
◦ Corruption control
◦ Bureaucratic reforms
◦ More efficient institutions for business
• See the paper last sections on micro reforms for references on labour reforms

R Nagaraj- India's Dream Run, 2003-2008

Argues that it was a debt-ridden, cyclical boom, coinciding with an exceptional
phase of the world economy. This left behind heightened corporate leverage and
frothy(fully of bubbles) asset markets.
After the crisis, growth was restored by liberal credit flows and increasing the fiscal
deficit from 2.5% in 2008 to 5% in 2012.
• Low interest rates boosted risky investment and asset price rise
• But high interest rate and depreciating currency, coupled with collapsing demand
post crisis, led to a sharp fall in private investment.
• Thus reviving public investment to crowd in private investment should be the
growth strategy.
Initial conditions

286
 • In the beginning of the decade, Current account was in surplus of 1% of GDP in
2002. Inflation was moderate at 3.5%. Domestic investment rate was lower than the
savings rate
• Output was well below potential, growing at just 4% in 2002

Conditions in boom
• Exports to GDP ratio increased from 15% to 25% between 2002-09
• Domestic savings rate shot up from 29 to 38% between 2003-2008
• Contribution of private corporate went up. The investment share of the households
declined and public inv roughly same
• The GFCF went up to 36% in 2008, mostly in mfg
• Infra share in GFCF rose merely by 2% points

Concerns
• Bulk of the expansion came from telecom, business services and automobiles
• NSSO shows that despite the boom in output, employment fell, led by decline in
female emp, despite the pop growing by 1.5%. This was because the boom was led
by sectors which were capital and skill-intensive. But real wages rose
• Of the huge capital inflows, only about 40% went into productive sectors as
long term investment. Rest were either short term flows, or were 'round tripping'
funds, i.e. domestic surplus flowing back from the tax havens. This also shows the
volatility created by them.
• The capital inflows, easy credit and the SEZ policy led to amassing of 'land banks'
by corporates, leading to skyrocketing asset prices.
See the paper for the impact of the crisis.
Ghate and Wright- Why were some states so slow to participate in the
turnaround(since 1980s)
Higher initial literacy, urbanisation, access to ports were strong determinants of
growth. But high shares of agri and regd mfg was negatively related with growth in the
data, perhaps because these were symptomatic of high state regulation. Thus it
supports the hypothesis that liberalisation was conducive to growth.
Per capita income trends

287
 Year GDP Pop PCI
1941-1950 1.3
1951-1960 3.5 2 1.5(-2.5 in 57-58)
61-70 4 2.2 1.8(-5,-3 in 65-66, 66-67)
71-80 3 2.2 0.8(-8.2 in 79-80, 7% in 75-76)
81-90 5.6 2.1 3.5(no negative)
91-00 5.8 1.9 3.9(-1.5 in 1991-92, mainly due to the
remittances and oil prices and the crisis)
01-10 6.9 1.7 5.2
11-18 7 1.1 5.9

Middle Income Trap

World Bank estimates that of the 101 middle income economies in 1960, only 13 have
become high income economies
Kelkar and Shah
• Nothing inevitable about growth as only few poor nations like Korea, Taiwan
progressed, but compared to these, India's state capacity declined post
reforms, like corruption
• This lack of growth of state capacity is major reason as once a minimum level
of market economy is reached, a different type of state capacity is required
◦ Contract enforcement
◦ Conflict resolution
◦ Efficient regulators. Cite example of SC AGR revenue case, RBI failing to
control crisis in Yes Bank
◦ Reforms in both product and factor markets
• ES argues that there are 2 reasons for MIT
◦ As an eco grows to middle income, it is overtaken in cheap mfg by poorer
countries
◦ They lack the institutional, human and tech factors to move to the higher
value chain.

288
 ◦ But ES argues that MIT is overemphasized as nations like Korea, Poland
moved to the high income group.
Connect it to the Solow model, where initially an economy is poor and below
steady state and so grows fast to reach it. But any future growth requires raising
the steady state which comes from deep institutional capacity
Economic Survey and Late Convergence Stall In India
Since late 1980s, the world has seen convergence with a vengeance(convergence
with a faster speed).
But post 2008, 4 headwinds that can stall convergence
• Hyper globalisation repudiation
◦ Early nations benefited from glob, like China who had export growth rates of
over 15% for past 30 years. But this led to backlash in advanced nations
◦ The gravity model suggests that a small nation trades more than larger
ones, so if there is convergence then trade increases. But if convergence
slows down, then trade slows down
• Thwarted structural transformation
◦

◦ Rodrik identifies mfg critical for rapid structural transformation, supported

by Kaldor's and Verdoon's laws. Mfg becomes an escalator for rapid
growth, if nations can get onto it
• Human capital regression induced by tech progress
◦ Human capital frontier for structural transformation has shifted further away, like
newer and newer skills even for mfg. Hence even greater challenge than earlier
nations
◦

289
 • Climate change induced tech stress
◦ Lewisian structural transformation requires rising productivity in agri to release
resources. But Indian agri productivity will suffer drastically due to climate
change as argued by ES(see agri notes)
Effects of the pandemic and lockdown(as of December 2020)- Based on paper by
Bertrand and Krishnan(Chicago Booth School)
• While unemployment rate recovered after the unlock, it was largely because there
were far fewer people in the workforce, hence 40 million lesser employed people
• When these people enter the workforce again when the economy stabilises a
bit more, there will be a sharp spike in unemployment
• The household incomes remained depressed, both due to unemployment and less
remunerative jobs, mostly in the lower and middle income groups
• While non-food expenses constituted a larger share pre-pandemic, they
compressed very severely and are now lesser than food expenses, showing fall in
discretionary and non-essential spending

290
Public Finance
PYQ
2019
1. Differentiate between Plan and Non-Plan exp. Is this distinction relevant for govt
finances in India today?
2. What is fiscal federalism? Examine the role of various FC since 2001 in reducing
horizontal and vertical fiscal imbalances
2018
1. The chequered fiscal history of India of the last 15 years has been a saga of fiscal
prudence on the part of the states and profligacy on the part of the Centre. Do you
agree?
2. Do you agree that the fiscal slippage in the recent past is structural in nature? Also
suggest roadmap for fiscal consolidation.
2017
• Explain GST. Analyse its effects on Indian businesses
• Give a short analysis of the state of devolution of resources from the Centre to
states in India in the light of fiscal federalism
2016
• Critically examine the salient features of the FRBM Act

2012
• Distinguish between political and fiscal federalism. How has fiscal federalism been
evolving in relation to special category states in particular and other states in
general?
• Major reco of FCs with regard to augmentation of resources of local govts

Fiscal Federalism
The present fiscal federalism structure is largely based on the Govt of India Act,
1935, which had these parts enacted based on Peel Expert Committee.
• Sharing of income taxes
• Fixed share of states with revision every 5 years
• Levies by centre and these being non-shareable
• Principle of grants in aid like population criteria

291
 • The means to operationalise the provisions was to write off the central govt debt to
states taken before 1935. This has been reco by many subsequent FC as well
Read the Evolution of Fiscal Federalism from YV Reddy Book
Finance Commission
The basic TOR of the FC is in Article 280 of the Constitution
• Distribution of central taxes between centre and states
• Shares of individual states
• The principles of grants to the states
• Measures needed to augment the Consolidated Fund of the States to
supplement the resources of local govt based on the reco of the state finance
commission
• Any other matter of sound finance
◦ Under this, directives are given to the FC in the Presidential Order
• The powers of the FC for their performance are to be governed by law made by
Parliament
Acceptance of reco of the FC
Under Art 281, the Prez receives the Reco of the FC and causes them to be laid
before each house of the Parl along with the Action Taken Report. This was done to
ensure that the executive takes actions on the reco based on the interest of the states
as well
Major developments in the functioning of the FC
• Narrowing the remit of the FC to the non-plan component of the fiscal relations,
from the 4th FC
• The 80th amendment on reco of the 10th FC which removed Article 272 and
made all taxes of the Union shareable with the states except 268(stamp duty, which
is collected and appropriated by states, 269, which is taxes on interstate goods
trade, which is distributed by Parl, GST on interstate supplies, distributed by Parl
based on GST Council reco, cesses and surcharges). Opened the path to IT
reforms
• The 12th FC reco that the GoI should discontinue the practice of borrowing
from the market and lending to the states. This was a landmark development in
the fiscal relations
• The 12th FC introduced well defined fiscal rules to govern fiscal management of
the states by insisting on enactment and implementation of fiscal responsibility
legislation at state level. This was reinforced by 13th
• The 14th FC did not make any reference the distinction between plan and non-
plan.
General criticisms of the FC

292
 • Lead to excess union bias as union in given more fiscal space
• More transfers outside the FC reco, which are discretionary and non-statutory
• Relative weights attached to equity and efficiency in horizontal distribution has
been an issue with states
Grants in Aid
Made from union to states under 275 and by both under 282.
They have generally been recommended by the FC to fill the deficits in states'
revenue account.
Grants under 275 exclusively to be made by FC. Grants under 282 were made under
plan by PC and scheme based by ministries. Post the PC, all grants by FC, but scheme
based still continues.
Article 282- Expenditures defrayable
Allows states and union to make any grants for any purposes even if the purpose is
not within the legislative ambit of the states or the union. Considerable debate whether
such grants are to be made on a regular or exceptional basis. Regardless of the
debate, the amount of grants under this article has grown significantly.
NK Singh has recommended a relook at this Article so as to give states more
flexibility in implementing CSS and hence strengthening fiscal federalism

293
But specific purpose transfers still account for 30% of total transfers, despite
falling following the reco of the 14th FC.
ToR of the 15th FC
• General TOR
• Review the current status of finance, debt, fiscal discipline of the union and
states and reco fiscal consolidation while fostering higher growth and adhering to
the principles of equity, efficiency and transparency
• Examine whether revenue grants may be provided at all
• While making reco, consider
◦ Resources of centre and states for 5 years,
◦ Demand on the resources of the centre on account of defence, internal
security, infra, climate change
◦ Demand on the resources of states on account of socio-eco dev, asset
maintenance
◦ Impact on the fiscal situation of the Union due to enhanced devolution
following 14th FC and the continuing imperative of national dev New India-
2022
◦ Impact of GST and compensation, cess abolition
• Conditions that GOI may impose on states while approving debt under 293
• May consider reco performance based incentives for states in areas like
expansion and deepening of GST net, reduction of pop growth, achievement in
implementation of GoI schemes, progress in capex, reducing power sector loss,
Progress in EODB, control or lack of it in incurring exp on populist measures
• The Commission shall use the pop data of 2011
• Review the present arrangements on financing disaster management initiatives
wrt funds under DM Act
• Consider setting up of a separate mechanism for funding defence and internal
security needs and how to operationalise it
◦ It is needed as defence acquisitions are long processes and so funds given in a
budget lapse if not used. So the non-lapsable fund will ensure supply of
funds when required
◦ This has been suggested by Parliamentary Committee on Defence
repeatedly
Controversy about 15 FC TOR
• Using 2011 Census for deciding share which the states which had worked on
controlling population had opposed.
• Asking the FC to examine whether the revenue deficit grant should be given at
all
◦ This is basically asking whether 275(1) can be ignored.

294
 ◦ The RD grant is integral to how FCs have worked. The basic methodology of the
FCs has been to fill the normatively projected post-devolution gaps in the state
revenue accounts with grants to balance their revenue accounts under Article
275. These grants are provided by the Parliament by law and charged on
the CFI
• Reviewing the impact of increased devolution on the reco of the 14th FC in the
context of the national development program of New India-2022, on the Centre's
finances
◦ Under the 13th FC, 32% devolution was given for non-plan expenditure and
5.5% for plan under the Gadgil formula. So the increase in devolution to
states by the 14 FC was not substantial. It is essentially from 39% to 42%
◦ The Union, after accepting the 14 FC reco, countered it implicitly by raising
the matching ratio for Centrally Sponsored Schemes and resorted to raising
additional revenue through cesses and surcharges which are not shareable
◦ Plus, if national programs get priority in assessment of Union needs, then it
will result in Centre taking recourse to such programs and hence the states
lose out
• Suggesting that the Commission should recommend performance based
incentives to states on the implementation of the GoI schemes and control over
expenditure on 'populist measures'.
◦ But while the nudges for incentivised approach for states, there is no TOR
on the same for the Centre.
◦ The one size-fits all approach may not be relevant to all states
◦ no objective criteria to declare a scheme as populist
• Consideration with regard to the conditions that the GOI may impose on states'
borrowings under 293.
◦ As state borrowing are subject to fiscal responsibility legislations, there
should not be any other conditions attached
• On the defence fund, states objected that it will reduce the share of states

The Punchhi Commission reco on FC TOR- Considerations in TOR should be even

handed between states and centre and states should be consulted before finalising
TOR
15th FC interim reco for 2020-21
• Reco maintaining states' share at 41%, and 1% for JK as it is a UT now, thus
maintaining the same formula as 14th keeping the actual pool same
• On the new TOR for suggesting alternative mech for defence funding, an expert
group will be formed from Finance, Defence and Home Ministries to look into
creation of a non-lapsable fund for def exp

295
• The centre has rejected the reco of granting special grants to states of around
6k cr. It was for 3 states Karnataka, Mizoram, Telangana as sum of devolution
and RD grants for these was estimated to decline in 2020-21 compared to
2019-20
• It tweaked the criteria for weights.
◦ 15% to population compared to 17.5% by 14th
◦ Raised the weight of demographic performance from 10% to 12.5%. This was
done to ensure that states that have done well on population grounds are
not disadvantaged as the FC was mandated to consider the 2011 census
data.
▪ This also places importance on performance in health and education by
states.
▪ Demographic effort is essentially the ratio of state's population in 1971 to
its fertility rate in 2011. As the southern states have lower fertility rates, the
DE will be larger and hence they will get higher share
▪ But its effect is not clear as AP, KA, Kerala which also have lower fertility,
lost out
▪ The FC has argued that it was left with no choice but to use 2011 due to
the TOR and also that for fiscal equalisation, using 2011 was prudent
◦ Gave a weight of 2.5% to tax effort, but despite this, KA, which has the highest
tax-GSDP ratio, lost out heavily. (avg per capita own tax revenue to avg per
capita GSDP for 3 years)
◦ Income distance was given a weight of 45%, down from 50% by 14th.
Haryana's per capita GSDP was used as reference(although Haryana has
the 3rd highest per capita GDP. Goa has highest, Sikkim 2nd highest, but as
these are small, outlier states, Haryana used)
◦ Weight to state area was unchanged at 15%
◦ Weight of forest and ecology was increased from 7.5% to 10%. This is key as
the Himalayan states have been demanding rewards for their ecological
service(note that technically, it is a new criterion of forest and ecology as
14th used forest cover)
▪ Forest and ecology is defined as share of dense forest of the state as a % of
total area of dense forest in all states
▪ Note that GST Council TOR also has provisions for
NE+Sikkim+JK+HP+UK needs.
◦ Thus 45(income distance)+15%(pop, 2011) + 15(area)+ 12.5%
(demographic effort) + 2.5%(tax effort) + 10%(forest cover).
◦ For 14th- 50(ID) + 17.5(pop 71) + 15(area) + 10(demographic change,
based on 2011)+ 7.5(forest cover). No tax effort.
◦ UP has got max share in funds, though its share has fallen as a %.
• On local govt

296
 ◦ Grants 90k cr including for all 3 layers and 50% of the grant is tied to
improving sanitation and water supply, remaining untied
◦ The 90k grant is higher as a proportion of the divisible pool, compared to
the 14th FC
◦ The grants will be divided between rural and urban bodies in 67.5:32.5 ratio
and urban share should be gradually increased to 40%
◦ Will be divided between states based on population and area with weights
90:10
◦ Also grants to 5th and 6th schedule areas as well as cantonment boards
◦ Has highlighted the differential treatment needed by million plus cities
◦ UP has got max grants for local bodies, both urban and rural
• In disaster relief
◦ Recommended creation of a Disaster Mitigation Fund at the Central and
state levels which along with the NDRF and SDRF, will be called National
Disaster Risk Management Fund and State Disaster Risk Management Fund.
The Mitigation Fund was reco by the Standing Committee on Finance as
well
◦ Large scale mitigation measures should be through regular schemes and
not through these funds
◦ Catalytic assistance to 12 most drought prone states
◦ Reco same contri pattern- 75:25 for normal states and 90:10 for NE and
Himalayan states(Note that 13th FC reco this sharing pattern. The 14th FC
reco sharing in 90-10 for all states(verified) The Union in 14th FC ATR had
promised that with GST, the 90-10 pattern would be used but was not
done)
◦ Has allocated around 28000 cr to state management fund of which Centre's
share is 22000 cr and states have been given shares based on past
expenditures, area, pop and risk index
◦ National Disaster Management Fund given around 12.5k cr
◦ In both the levels, 20% funds for mitigation 80% for response, of which
response and relief is 40%, recovery and reconstruction is 30% and capacity
building is 10%
• Revenue Deficit Grants
◦ 14 states have been given Rd grants of total around 74k cr. Kerala gets max
RD grants, Sikkim least. Among NE states, Arunachal only state to not get any
RD grant
• It has also given sectoral grants
◦ Around 7k cr for improving nutrition based on number of 0-6 age infants and
lactating mothers

297
 ◦ Grants for police training and housing, railway projects taken in states
based on cost-sharing, maintenance of PM Gram Sadak Yojana, strengthening
the judiciary and improving the statistical system will be in final report
• Performance based grants
◦ For agri reforms, power sector reforms, enhancing exports, edu and tourism
◦ Will be in final report. Thus not for populist measures, though reforms may
be defined as ending populism
• On fiscal roadmap
◦ A credible roadmap remains difficult because of economic uncertainty and both
states and centre should adhere to FRBM
◦ Both should make full disclosure of off-budget borrowings and these should
be eliminated in a time bound manner. Noted that financing capex using off-
budget borrowing detracts from the FRBM
◦ reco forming an expert group to draft legislation to provide for sound public
financial management system
◦ Highlighted that India's tax/GDP ratio is almost stagnant and various
measures like streamlining rates and broadening base
◦ Highlighted the concern of dependence for GST compensation. 21/29 states
depended on it in 2018-19
• Note that Population, area and forest are need based criteria, income distance
is equity based criteria, while Tax effort and demographic performance are
performance based criteria
Losers and Gainers
• Southern states, except TN, have all had smaller share due to using the 2011
census. KA lost most, overall also
◦ Kerala and KA lost as their GSDP grew faster than most states and so the
income gap for them reduced to around 10% compared to around 30% during
the 14th
• In NE, only Assam lost
• Goa, WB same share
• MH largest gainer. GJ and PJ also gained among the rich states

New Panel to address Fiscal Policy Issues

The 15th FC will set up a panel to address fiscal issues, especially related to debt and
deficit of states and centre and provide a roadmap. It will be done under the legal
framework provided by the FRBM.
15th FC Main report reco

298
• When the sum of the devolution of taxes and various grants(FC and Non-FC) are
considered, the Union has been transferring 50% of its Gross Revenue Receipts to
the states, as demanded by the states(although their demand is for 50% share in
the tax devolution, exclusive of the grants as they are tied). Given this, the FC
recommends sharing the gross revenue receipts in about equal ratio between Union
and states as has been happening, with no decline in divisible pool as a proportion
of GRR. This is done through the 41% devolution of divisible pool to 28 states
and rest through FC grants and other transfers like CSS, Central Sector
schemes(Para 6.25, 6.29)
• The FC categorically favours tax devolution as the more progressive and
frictionless form of transfer, compared to conditional transfers(Para 6.27)
• Horizontal sharing- based on the criteria of need, efficiency and equity
◦ To ensure predictability and stability, the FC retains the criteria and weights
as in the interim report.
• Local governments
◦ Grants of 4,36,361 lakh crore for 2021-26.
◦ Given the fast pace of urbanisation and need of cities to act as engines of
growth, changes the distribution ratio for rural-urban from 67.5:32.5 of the
interim report to 65:35 for 2026. Note that the ratio will gradually move
towards the new definition
◦ For inter-se distribution among states, weight of 90% to population and 10%
to area.
◦ Of the total for PRIs, 60% for national priorities like drinking water,
sanitation, rainwater harvesting, while 40% is untied.
◦ 40% grants to rural bodies unties, 30% for drinking water, water
harvesting and water recycling, 30% for sanitation and ODF, management
of waste.
◦ 50 million+ cities given a Challenge Fund of 38,196 cr over the 5 year period.
About 1/3rd to be used for achieving ambient air quality, while remaining for
meeting benchmark service quality for drinking water, rainwater harvesting,
sanitation, solid waste management, water recycling

299
 ◦ For cities with less than million population, 82, 859 cr. 40% of the grants is
untied while 60 per cent is tied to the national priorities of drinking water,
rainwater harvesting, solid waste management and sanitation
◦ For all LSGs, web based availability of annual accounts of last year and audited
accounts of year previous to that entry level qualification for grants.
◦ For ULBs, an additional entry requirement is notification of minimum floor rates
of property taxes by the state and improvement in property tax collection in line
with the GSDP growth
◦ Out of the total LSG grants, 70,051 cr for health improvement
◦ 8000 cr to states for incubation of new cities and 450 cr for facilitating shared
municipal services, with the MOHUA drawing up modalities for administering
these grants
◦ After March 2024, no LSG grant should be released to states which have
not complied with the constitutional requirement of setting up SFCs timely
and ATR of them being placed in Assemblies
◦ The intra-tier distribution, among village, block and district levels LSGs
shall be made as per reco of the SFCs
• Resource mobilisation reco
◦ The data on GST should be used to strengthen and broaden direct tax base.
◦ TDS and TCS should be expanded to cover more txn and incomes. This will
reduce burden on salary income tax, create a paper trail and reduce evasion
◦ An apex body at the CBDT and CBIC should be formed to provide clarity on tax
provisions. There should be multi year audits. This will help in stemming the
origin of disputes.
◦ States should integrate computerised property records and txn records and
capture market value of txn. This will help in increasing stamp duty and reg fees.
◦ A constitutional amendment to allow President to change professional tax
limits on reco of Finance Commission
14th FC
• Strictly adhered to the ToR.
• Tried to maintain symmetry and trust between Union and states
• On vertical equity, felt there was limited scope of increasing transfers to states but
altered the composition in favour of untied transfers
• On h, did not make a distinction between general category and special
category states. Restricted SCS to just NE states and 3 hilly states. SCS was
first given by NDC to JK, Assam and Nagaland in 1969
• It considered the need to take into account the changes in the pop since 1971
• Properly compensate those with higher forest cover
• Main reco

300
 ◦ Tax dev should be the primary source of transfer, so increased the share of
taxes from 32% to 42%
▪ Note that this does not mean a reduction in fiscal space of the centre as it
comes along with the termination of plan assistance for states. This was
explained by YV Reddy as marking a compositional shift in favour of tax
devolution which are untied, away from grants, while keeping the fiscal space
same
▪ It is essentially an increase from 39% to 42%
▪ This is in the spirit of cooperative fed as it will give more autonomy to
states instead of them just being agencies for implementing agencies for
centrally sponsored schemes
▪ It will also ensure that most of the funds flow through the constitutional
route of the FC.
▪ In 2011-12, the share of taxes in state transfers was 44%. This was
increased to 62% in 2015-16, with a corresponding reduction in GIA.
◦ Total rev def grants for 2015-20 around 2 lakh cr, all general purpose. See GIA
below on arguments
◦ Weights of various indicators in calculation of states' share of taxes- see above
◦ FD of states should be aimed at 3% of GSDP with flexibility of 0.25% if their
debt-GDP ratio less than or equal to 25% in the previous year
◦ Eligible for an addl borrowing of 0.25% of GSDP if interest payments less than
equal to 10% of revenue receipts
◦ An independent compensation fund for compensation for GST for 5 years.
The Fund can be credited with the C cess or other amounts also, although the
govt has announced that it will be credited only with the cess
◦ Grants to local govt in 2 parts- basic grant and performance grant
▪ For Gram Panchayats, 90% basic
▪ For municipalities, 80% basic
▪ The performance grant was based on fulfilment of 3 conditions- that the
accounts are audited, improve own revenues and publish service level
benchmarks. This was done to make data about performance of the bodies
reliable, updated and public as well as to make them self sufficient
◦ FRBM should be amended to remove the defn of effective
revenue(difference between revenue deficit and grants for creation of capital
assets as RD includes all grants to states, even if used for creation of capital
assets)
▪ The govt stopped tracking ERD and RD from 2018-19.
◦ It ended sector and state specific transfers. But this has been reintroduced
by the 15th FC
Fiscal Federalism

301
Transfers of funds to states under 3 types
• Share of states in central taxes
• Finance Commission Grants
• Centrally Sponsored Schemes, now entirely being made through Consolidated Fund
of the States.
Three types of tax collection
• Tax levied by the centre and collected and appropriated by the states, like stamp
duties-268
• Taxes levied and collected by the centre but assigned to the state. Eg taxes on sale
and purchase of goods in the course of inter state trade. This does not include
IGST, which is divided between centre and states based on reco of GST council-
269(IGST is 269A)
• Taxes levied and collected by the union and distributed between the union and
states- This is done on the basis of the FC reco-270. All taxes except 268, 269,
269A, cesses and surcharges
Boost to FF in the past 5 years
• The 14th FC has increased the share of states in the central divisible pool from 32
to 42%. Though there have been compensatory cuts in central grants, the
increased devolution gives the states more fiscal independence
• GST Council
• Removed the distinction between plan and non-plan, making the entire
devolution through the FC, which is the constitutional route
• Rationalisation of the CSS
• Abolition of the practice of routing funds directly to the implementing agencies,
bypassing the CFS
Concerns of states
• State's grievances about the Centre encroaching on their domain through
Centrally Sponsored Schemes.
• The new TOR of the 15th FC about a separate funding mechanism for defence and
internal security and its feasibility have also concerned states.
• Losing out due to GST, with delay in GST compensation and the prospect of GST
compensation being phased out by 2022

302
Political Federalism
India is a union of states with clearly demarcated rights and responsibilities of each unit.
Fiscal federalism is one of the ways through which political federalism is actualised
Fiscal Federalism and Accountability(ES)
Long run institutional dev evolves with fiscal accountability involving
• Declining dependence on devolved funds- Note that even though de jure the
Finance Commission induced funds are not devolution but sharing, they are de
facto devolution. If it was sharing, then states' share should have been as per their
tax bases, but in reality it has a strong current of redistribution.

303
 • Increasing share of direct taxes-Here direct taxes considered as it affects
citizens more due to the higher quantum and also due to the compulsory
nature of the tax, and more visibility of direct taxes. Eg direct taxes account for
over 70% of total taxes in Europe. But more importantly, direct taxes are
progressive while indirect taxes are regressive
India's second and third tier governance lags in both these issues. India's states
generate only 6% of their revenues from direct taxes. Same % for Local govt's
generation of own resources in rural areas. (Use this in PRI debates). Urban local bodies
are much more financially empowered.
Expenditure Patterns of different tiers
• The central and state govt spend 20x more per capita than RLG(Rural Local Govt).

Causes
• Extent of tax powers to these tiers- Devolution reports of the Ministry of
Panchayati Raj shows that the extent of revenue powers assigned to the local govt
substantially less than expenditure responsibilities
◦ The kind of taxation powers given to PRIs are property tax, professional tax,
entertainment tax, but not highly buoyant taxes
• State Finance Commission reports not being followed- As per the MoPR
Devolution Report, 2015-16, the % of acceptance of reco relating to financial
implications is as low as 10% in states, even though states like Kerala have full
acceptance. Highlighted by 11th FC as well
• Over-reliance on devolved funds- (Authentic figures, use in PRI notes). While
ULBs generate 45% of revenue from own sources, RLGs only 5%. The situation
is especially dire in Northern states which rely almost exclusively on devolved
funds.
◦ This leads to the major problem of under-spending on purely local public
goods like irrigation as the devolved funds are tied to some scheme.
• Extent of functional devolution
• These tiers under-collect taxes even relative to the powers they have.
◦ A major reason is lack of data available with the RLGs on commercial
establishments in rural areas
◦ Further, they don't want to be seen as taxing people as the functionaries live
among those taxed, at the local level
◦ Property taxes form a major source of revenue for local govts world over, but
grossly unused in India. PT to GDP ratio is just 0.2% in India, compared to 1.1%
in OECD and as high as 3% of GDP in Canada, US, UK
▪ See best practices for property tax collection in Important Phrases doc
This could lead to a low-equilibrium trap of low collection, poor service delivery,
leading to poor collection and low accountability, as citizens' authority to question
the govt reduces when the citizens do not pay their share. One solution is that

304
resource devolution to these tiers can be linked to the resources that they
generate on their own
Kelkar argues that centre and states should share a fixed % of CGST and SGST
revenue with local bodies. This isfully incentive-compatibleas GST is a
consumption based taxes and areas with better public goods provided by local
bodies will also have more consumption
Local Self Govt and Finance Commissions
Amendment to Art 280 was made to incorporate the additional TOR to suggest
measures to enhance the Consolidated Fund of States to supplement resources of local
govt.
The 10th FC was constituted even before the amendment was made, but it acted on
making grants to states for local bodies, giving around 5k cr for 5 years
The 11th
• Expressed a number of concerns regarding SFC like non-sync of CFC and SFC
periods, failure of many SFCs to indicate responsibilities assigned to LSG and
principles of tax sharing between states and LSG, delay in placing Action Taken
Report in Vidhan Sabha in absence of constitutionally mandated time limits,
lack of uniformity in composition like several states having serving
bureaucrats as SFC members
• These were expressed by all subsequent FC as well, highlighting the poor
state(Use this in the answers for LSG in GS as well)
• Allotted 10000 cr in ratio of 4:1 for rural and urban, for five years (2000 every
year). This substantially reduced local grants as a % of total grants
• For distribution among states, used indicators with pop having max weight,
index of decentralisation having second highest. Also income distance, area and
revenue effort
12th
• Retained the basic structure, but dropped the index of decentralisation
• Gave total 25000 cr for 5 years(5000 each year).
13th
• Reintroduced the index of decentralisation
• For the first time, introduced the local body grant utilisation index
• Substantially increased local grants for 5 years total to 87.5 k cr.
14th
• Took the stand that rural-urban distribution should be left to states based on
SFC reco
• In case the reco not available, provided default of having 90% weight to 2011
pop and 10% to area. It was based on Thaler's idea of Default Option(yes pop
and area for rural urban)

305
• More than tripled the grant to local bodies to 2.87 lakh cr.
15th
• See above.
• For the 2020-21 to 2025-26 cycle, the Panchayati Raj Ministry has asked the
FC to provide 10 lakh cr to the rural local bodies, 5 times the amount given by
14
• The Ministry impact evaluation studies show 78% utilisation rate between
2015-19, of the FC grants
Evolving Centre-State relations and the role of new framework of grants(Pinaki
Chakraborty and Manish Gupta, NIPFP)
Post the abolition of the plan and non-plan distinction, total transfers are now tax
devolution reco by FC, FC grants and Schemes Related transfer.
Why states resent CSS as argued by YV Reddy and M Govinda Rao
CSS proliferated after the Gadgil-Mukherjee formula was adopted by the NDC for
plan based assistance made by the Planning Commission.
• CSS were mainly in areas of state subject, eg agriculture, with the argument that
this will help in better achievement of national priorities.
• The modalities of the CSS, like staffing patterns, were determined by the
Union, leaving them with little flexibility
• The discretionary transfer overtook the formula based transfers, thus eroding
the Finance Commission
• Required matching contributions from states, it eroded their financial autonomy
• When the schemes are discontinued the states are forced to continue them
because of the service conditions attached to employees and from political
pressures
• Many states have better designed schemes than centre but are forced to roll
them back because of the resource constraints
• Despite contributing the funds, machinery for implementation, the credit for the
scheme goes to the Centre
• Number of CSS too large rendering transfers across schemes thin
• The transfers are not linked to service-level outcomes and hence fail to achieve
minimum standards
• Huge differences in the funds earmarked and actually released
• Matching requirements not different based on shortfall in services in states. Eg
Both UP and Keral have to make same matching contri
• Thus CSS is the most sensitive part of the centre-state fiscal relations
Reforms in CSS
• The PC mapped 147 CSS in 2013 and consolidated them under 66

306
• At least 10% of funds under CSS was earmarked as flexi funds for the states to
have flexibility in implementation
• In 2016, on the reco the CM subgroup, further reforms, bringing total CSS to 28
umbrella schemes, though the total remained same. This gave states some
flexibility
Subgroup of CMs on Centrally Sponsored Schemes(Also called the Shivraj Singh
Chouhan Committee in NITI Aayog)
• Reco the focus of the CSS should be on schemes relating to the National
Development Agenda
• Schemes should be divided into core and optional. There should be a core of
core set, with social protection schemes in this.
• For core of core, continuing the existing pattern of funding
• For core, 60:40 for others and 90:10 for Himalayan and NE states
• For optional schemes, 50:50 and 80:20
• The flexi fund increased to 25% for states and 30% for UTs
Based on this, the New Framework for Grants was worked out.
Following this, the total number of CSS was brought down to 28.Butas only 27% of
the grants are related to the core of the core which does not require additional
commitment from the states, the classification indeed results in reduction of
untied fiscal space to states as per Gupta and Chakroborty
Further rationalisation
In 2021, post budget, there will be rationalisation of the 131 CSS.
Way forward as recommended by the 15th FC
• Set a threshold of allocation, below which the ministry should justify why the
scheme should continue

307
Vertical Distribution
Vertical fiscal imbalances refer to the differences in the expenditure responsibilities
and revenue raising avenues assigned to different layers of the govt in a federal
polity
If they are assigned on comparative advantage, then imbalance. Eg Centre has com
adv in raising taxes with a national base while states have CA in service delivery. This
has been the scheme for the Indian fiscal setup too. The states incur over 60% of
govt expenditure but their share in revenue collection is just 40%.To correct this,
the FC is made.
Broadly 2 phases of vertical distt in India
• Phase 1(1st 10 commissions)- Only 2 taxes were shareable- income tax and
union excise tax.
◦ This led to very high share of these taxes going to the states and so created
a perverse incentive for the centre to not work on the rationalisation of the
income tax scheme. By the 9th commission, share of states in IT was 85%.
The 10th commission reco reducing it to 77.5% to create incentive for centre
for IT reform
◦ Similar was for excise duties, with the number of items and the share of states
increasing. By the 10th, it was increased to 47.5.
• Phase 2- In 2000, the 80th amendment was passed making all union taxes
shareable. This was done on the reco of the 10th commission

308
 ◦ Under the 80th amendment, which changed Art 270, all taxes in the union list
except those in 268, 269A, 269 and any cess or surcharge, made shareable
◦ The amendment also deleted 272, which made the additional excise duties out
of the divisible pool
◦ The 11th FC put the share of states in taxes at 29.5% and set the ceiling of
37.5% of central revenue on overall transfers to states. First time a FC
suggested an indicative ceiling on overall transfers to states
◦ The 12th FC raised it to 30.5% and 38%
◦ The 13th FC calculated the vertical gap, as the difference between the
normatively assessed expenditure shares and revenue capacities of union
and states. Taking into account higher tax buoyancy of central taxes,
increased share of cess and surcharge in gross revenue from 3.5% in 2001 to
14% in 2010, and higher non-tax revenue of the centre on account of
natural resource rents like spectrum, and the increased expenditure of
states due to CSS, the commission reco increasing tax to 32%, which could be
accommodated by the centre by rationalising subsidies
◦ The 14th FC brought a pathbreaking change. It examined the spirit of
constitutional provisions, centre and state concerns and capacities and
responsibilities. It agreed that there was no scope available to reduce the
fiscal space of the union. It observed that the non-plan grants as a share of
total transfers were declining and so taxes should be the primary channel of
resource transfer as it was formula based and conducive to fiscal fed.
Keeping aggregate transfers as a share of central revenues fixed at 49%, it
made a compositional shift in favour of tax devolution as they are
unconditional by raising the tax transfer to states to 42%
▪ But note that this was not to put a huge burden on central finances as the
14th FC subsumed normal plan assistance, special sector grants, special
central assistance under the tax devolution. Thus effectively a marginal
increase in transfers while much more flexibility to states
▪ In arriving at 42%, 4 factors
• States not entitled to cess and surcharges which were growing
• Importance of increasing share of tax devolution in total transfers
• Aggregate view of revenue situation of the states without plan-non plan
• The space available for the union

Horizontal Distribution
The magnitude of imbalance between states. Vary depending on a wide set of factors
and so transfers have to achieve parity between states too.
Three phases of HD
• I- the first 7 FC adopted separate criteria for inter se distribution of states' share
◦ The 1st FC reco population and contribution of states to revenue.

309
 ◦ But as Bombay and Calcutta contributed 3/4th to IT, it favoured industrial
states. As pop was scale neutral, no equity.
◦ 2nd retained the broad criteria of pop and contribution and altered their weights
slightly by decreasing the weight of collection. This was changed by the 3rd to
restore the weight of 1st, with pop having 80% and contribution having 20% and
the 4th also followed the same
◦ The 5th increased pop to 90% and 6th and 7th retained it
◦ Thus there was no equity in the inter se dist in the reco of the 1st 7 wrt
income tax.
◦ Excise
▪ The FCs did not adopt consumption as basis, but rather pop, financial
weakness, disparities in level of dev, pop of SC/ST. The last 3 were given
by 3rd FC having some equity for the first time
▪ 4th introduced relative backwardness. This was broadly retained by 5th, 6th
and 7th, with different definitions of backwardness
▪ Thus there was equity in the distribution of excise
• II- 8-10 FC uniform criteria
◦ The 8th agreed that there was no legal or economic basis for allocating
proceeds of IT or excise being based on different criteria. It also saw no
reason why IT cannot be used for equity. So it came to uniform criteria for
distribution of 90% of IT and 40% of excise in the states' share based on
equity, like income distance and population, In IT, the rest 10% on the basis of
contribution. Thus the 8th commission introduced progressivity in the IT
distribution for the first time and used it to address deficits, which was till
then completely addressed by grants.
◦ The 9th continued with the principle. But both still had a small factor of
contribution which prevented complete uniformity in IT and excise
◦ The 10th FC argued that there was increasing interconnectedness in the
country and so locally originating income was no more the case. So
dropped the factor of contribution paving the way for uniform criteria for IT
as well as excise.
• III- Post 2000. All taxes divisible
◦ The 11th retained all 5 criteria of the 10th for inter se distribution, namely
pop, income distance, area, index of infra development, index of tax effort.
It also added the criteria for fiscal discipline
◦ The 12th emphasized evolving a criteria that would balance equity and fiscal
efficiency. So increased pop to 25%, area to 10%, reduced weight to income
distance to 50, tax and fiscal discipline weights retained and dropped infra
arguing that it was correlated with per capita income

310
 ◦ 13th delved on whether the weights should be forward looking or based on
past performance. But as future performance based devolution was difficult, it
went with past performance. It significantly increased the weight of fiscal
discipline to 17..5%. It introduced a new parameter of fiscal capacity
distance as an equity parameter and gave it 47.5. The argument was that for
common standards in public services, comparable level of tax efforts across
states should also prevail.
◦ The 14th took demographic changes since 1971 into account and so assigned
weight based on both 71 and 2011 census. This was done to accommodate
the demographic changes as well as stick to the TOR. It increased the area
weight to 15% and had a floor of 2% for small states. It also recognised that a
large forest cover means ecological benefits to the entire nation as well as
opportunity costs to the state, it assigned weight to it too
▪ The FFC considered 1971 census use unfair. It argued that public services
should be provided to the entire pop and hence the needs of the latest pop
need to be considered
• There is also the question of the efficacy of the tax devolution policy
for pop control
▪ The FFC did not take into account the fiscal performance criteria for
devolution(though it was used for grants)
• No comparable approach for the union
• States are operating in the ambit of the Fiscal Responsibility laws and
hence separate bound by the FC was not required
Thus the criteria for HD can be classified into 5 heads
• Need represented by pop, area, demographic change
• Equity- By income distance, inverse of per capita income, poverty, revenue
equalisation, infra distance, fiscal capacity distance
• Efficiency and performance- Contribution, tax effort
• Fiscal disability- Forest cover. Fiscal equalisation is based on the differences in
resource base and development status of states
• Non-plan revenue deficits
Gainers- Whose share in tax devolution is higher than their share in pop. Losers vice
versa. For General category states, the gainers have been the backward states. All
Special category states winners. Note that in horizontal distribution, there cannot be
gainers without losers

311
Development Imbalance
Kelkar argues that apart from vertical and horizontal imbalance in India, there is also
development imbalance, caused by regional disparities in per capital income. The
ratio of GSDP between poorest and richest states is over 6. Main reason, as
Bhanumurthy argues, is the stock of infra, both physical and social, which leads
topath dependenceover time. This can lead to increased migration and can worsen
the problem
Same by Subramanian, Ghate & Wright, Rao
Grants in Aid

Revenue deficit grants are made to bridge the gap between states' own revenues and
its expenditure responsibilities.
The GIA are routed through the CFI but are charged and hence not subject to the
Parliament vote.

312
Purposes
• For assisting states
• Local bodies
• For specific purposes like calamity relief
• For specific sectors and schemes

Principles
• The 1st FC laid down budgetary needs as the dominant principle, with the state
budget as the starting point. In addition 5 more factors
◦ Tax effort and economy in expenditure
◦ State should first use the existing resources before making request for more
◦ Grants should help in equalising the standards of social services
◦ May be given to help a state meet special burdens of national concern
◦ May be given independent of the budget criterion to incentivise reforms
• It also argued that 275 should not be limited to just unconditional grants and
that grants for broad purposes may be given to stimulate expansion of specific
categories of services.
• The succeeding FC were in broad agreement with the first FC principles

Plan
The second FC began the overlap of the FC and PC as it took requirements of the
second FYP while making reco for grants.
TheThird FCwas the first to point out theunsoundness of distinction between plan
and non-plan. However the GOI accepted a dissent note of 3rd FC member and
since then TOR of FC confined itself to only Non-plan, while it had to take into
account plan requirements only. This both led to unsoundness in finances and also
increased PC, an extra-constitutional body's clout disproportionately
Over time the Normal Central Assistance was overtaken by the Additional Central
Assistance even within the Gadgil formula, through schemes, and the plan
assistance became more and more discretionary. By 2014, the NCA(untied part of
plan transfers) became just 10% of plan assistance

313
The 14th made a significant departure in grants under 275. It considered the entire
revenue exp, both plan and non-plan to arrive at pre-devolution revenue deficit. It
also noted that sector specific grants were too small and inconsistent to make any
impact. So it based its approach to grants on 4 principles
• Devolution of taxes be formula based which should offset revenue and cost
disabilities as much as possible
• Assessment of expenditure should take addl requirements in the case of those
states with per capita exp below all-States' average
• If the assessed exp need of a state exceeded the sum of its revenue capacity
and tax devolution then it should be eligible for general purpose grants
• Grants for state-specific projects would not be considered as these were best
financed by states themselves
Canada health Transfer program
The 15th FC recommends it as a model output based conditional federal transfer. It
provides long term predictable funding for health care. Made on an equal per capita
basis and it is set in law how much they will increase every year, in line with GDP
growth.
Fiscal Consolidation
Fiscal Consolidation
Revenue augmentation, expenditure reprioritisation and rationalisation key in
fiscal consolidation

314
Budget 2020 Fiscal Policy Framework
• Revised estimates of FD to 4.6%(BE was 3.8%). For 2020-21, target 3.5. Aim to
reduce to 3.1% by 2022-23
• Revenue deficit estimate 2019-20 at 3.3%, aim to reduce to 1.9% by 2022-23
• PD 0.7%. Aim to reduce it to 0% by 2022-23
• Central debt at 50.3% and aim to reduce it to 45.5% by 2022-23 and 40% by
2024-25.
Central govt finances review
• In the post FRBM phase, between 04-08, significant consolidation due to high
tax buoyancy
• Post the crisis, consolidation was halted, but was resumed post 2011-12, with
consolidation in revenue exp and tilt towards capex, improving the quality of exp.
This has led to reduction in both primary and fiscal deficit
• Trends in receipts
◦ Non-debt(tax, non-tax, loan recovery and disinvestment) and debt receipts.
◦ Tax GDP ratio only 17.5% as per NITI but 10.8% as per PIB and 2020-21
Budget
◦ GST revenues slowing down, leading to shortfall of 22% in 2018-19
◦ Non-tax revenue exceeding the estimates.
◦ The share of recovery of loans has declined over the years following
disintermediation of loan portion of central assistance to states as per 12th
FC reco and states being allowed to borrow from the market
• Trends in expenditure
◦ Expenditure on defence, salaries, pension, interest and subsidies account
for 60% of govt expenses
◦ Except for defence and subsidies, the other three have little flexibility
◦ MoD is trying to reduce defence exp through self-reliance. Subsidies have seen
significant moderation through better targeting
◦ While food, fertiliser and fuel subsidy formed over 2.2% of GDP in 2013-14,
they form just 1% in 2018-19. Main reason is decline in oil prices, decontrol
and better targeting, but most importantly, off budget expenditures
◦ Budget support to IR was rationalised as IR was encouraged to borrow from the
market which would also lead to greater financial autonomy
• Trends in debt
◦ Debt of the GOI include debt against the CFI as well as liabilities in the Public
Account
◦ Has declined from 55% of GDP in 2004, to 50.3% in 2019-20
◦ Total govt debt is around 72%

315
 ◦ Central debt has low currency and interest rate risks due to low external debt,
with almost entire external borrowing being from official sources. Most of the
debt at fixed rates
◦ There has been gradual elongation of the maturity profile of the debt, with
maturity 0-10 years decreasing in share and 10+ increasing. In 2018-19, 70%
of debt issued was of 10+ maturity
◦ For states, the share of market borrowings rising, while share of central
loans falling
• Trends in state finances
◦ State budgets expanding considerably
◦ Refer to RBI report on State Finance notes. Budgeting

Beyond Fiscal Prudence and Consolidation(Pinaki and Lekha Chakraborty)

Two basic determinants of medium term fiscal policy path are level of primary deficit
and the difference between interest rate on govt debt, i, and the growth of
nominal GDP, g.
Therefore,

316
Thushigh levels of Pd and i>g can lead to unsustainable debt. This was given by
Domar(verified). Thus debt sustainability depends on Interest Rate Growth Rate
Differential(IRGD)
This supports the idea of a relook at the FRBM Act and also the flexibility that
needs to be there in FD, to manage the business cycle.
The golden rule of fiscal consolidation is zero revenue deficit. But even though
revenue deficit is declining, it still forms over 60% of fiscal deficit.
Debt sustainability and Growth-Economic Survey
Argues that growth leads to debt sustainability as then g>i, but not vice versa, i.e.
debt sustainability and austerity do not imply growth.
In advanced nations, very low i has led to negative IGRD and placed limits on
monetary policy. They also have very low potential growth rates and hence the causality
from growth to DS is confounded. But the ES argues that the causality is clear in EMEs
like India, which have high potential g. Thus the ES advocates for counter-cyclical
fiscal policy, but not an irresponsible fiscal policy.
• The Survey shows that India, unlike UK-US has not had a CC FP, as the
correlation between public and pvt spending is only -0.29, compared to -0.9 in
UK-US.
• As Gaspar shows, FP has higher multipliers during slowdowns. Corroborated by
Auerbach and Gorodnichenko. Reasons
◦ during recessions, liquidity constraints bind across a large segment of
agents. So they will readily accept the higher income generated by CC FP,
increasing C

317
 ◦ Fiscal stimulus decreases the spread between deposit and lending rates,
leading to more I. The spread increases during recession and hence FP is very
effective in reducing the spread
◦ During recessions, S is higher due to precautionary S. So FP leads to less
crowding out of I
◦ When labour supply is low, as during a recession, the crowding out of pvt emp is
also small due to FP
◦ Exp FP is good in recession due to Spending Multiplier(higher C-I due to
high G), risk multiplier(reviving animal spirits), expectation
multiplier(building confidence, as CC FP depicts govt commitment to
sound fiscal management)
• In AEs, as public and private labour markets not segmented, exp FP can increase
pub emp, drive pvt wages up and thus crowd out pvt emp.
• But the Survey argues that in India, as labour markets segmented, this crowding out
is absent
• Ozkan and McManus also show that pro-cyclical FP leads to lower growth and
higher volatility, inflation
International experience with fiscal rules
Fiscal rules are quantitative targets with respect to budgetary aggregates like deficits.
In 2000, Chile adopted the structural surplus rule that targeted the overall central govt
structural balance to be a surplus of 1% of GDP every year and was revised to balanced
budget in 2009. Structural balance reflects the medium term fiscal outlook
So when boom, as govt expenditures are capped, there is surplus and hence CC FP.
When bust, the fiscal rule does not allow spending cuts and so deficit. and hence CC
FP. Thus helped Chile grow well even post 2008
Indian case
• g>i consistently. IGRD is projected to be consistently negative over a 5 year
period. When the effect of endogenous monetary policy is considered while
supporting growth, the IGRD negativity is further strengthened. Even a real
growth rate of 4% will make debt sustainable
• Also the g changes more than i. Hence it is g which matters most
• Shows that the fiscal push post the AFC coupled with productivity reforms led to
high growth period of 2004-08. This reduced debt from 83% of GDP in 2003 to
70% in 2009
• Further, the crowding out effect of exp FP(use in Macro) is not present if
expenditure directed towards sectors which raise productivity and raise pvt
propensity to invest, like infra
◦ Further, S also expands with growth and hence crowding out argument
further weakened

318
 ◦ Kulkarni and Erickson find no crowding out in India
◦ Favourable demographics, as in India with a large young population, further
raises savings
◦ Also, India is far from potential output
◦ ES
◦

How higher debt can lead to lower growth?

Ricardian equivalence. So more taxes in future, lowering lifetime wealth and hence C.
Also if pvt savings don't rise to compensate the fall in public savings, it raises interest
rates and reduces I

319
320
Fiscal Deficit
Was3.9% of GDP in 2015-16, then 3.5% for 2 consecutive years. 3.39% in 2018-
19(target was 3.4), 4.6% in 2019-20 due to slowdown
There has been consolidation of revenue deficit with improvement in the quality of
expenditure as govt tilts towards capex.
There has been progressive reduction in primary(amt by which total exp exceeds
total revenue, excluding interest payment on debt). PD was 0.3% in 2018-19 as
compared to 0.7% in 2015-16 and has again gone to 0.7% in 2019-20
Trends
• 1980-1991
◦ The FD of the centre was very high, with min 5% in 1981 and max 8% in
1986. It was consistently above 7% past 1985
◦ The FD of the states was in control most of the years, with the max being
3.2% in 1990
• Post 1991-2003

321
 ◦ Though the centre's FD did not go as high as pre-91 levels, it was still very
high, averaging around 5.5%
◦ States were in control till 1997 with average 2.5%, but then started
becoming profligate with average 4%
• Post 2003(FRBM)
◦ With the act, the FD of the centre came down immediately in 2003-04 from
5.7 to 4.3%. It declined consistently till 2007-08, reaching 2.5%
◦ It then started increasing because of the crisis, when for 2 years, it was above
6% and remained roughly 6% till 2011-12. Consolidation began post 2011-
12
◦ The states remained very fiscally prudent, with their average in this period
has been 2%
Impact of Fiscal Deficit on Saving, Investment and Growth(Rangarajan and
Srivastava)
High FD leads to rise in Debt-GDP ratio and have adverse impact on S, I, G.
The use of FD as acountercyclical tool is also compromised when FD is high and
structural in nature.
Theoretical perspectives
While in the neoclassical perspective, FD harmful for inv and growth, it remains a key
policy tool in Keynesian paradigm
• Neoclassical-FD reduces savings of the govt and if it is not matched by a rise in
private savings, leads to fall in growth
• Keynesian-Multiplier effect of fiscal deficit. Argues that savings and inv may rise
along with FD due to employment of hitherto unemployed resources
• Ricardian equivalence- FD viewed as neutral in terms of growth impact as
financing of deficit amounts to only postponement of taxes. Hence FD only a
smoothening device
On S, I, G
RBI has found that higher pub spending to boost AD crowds out pvt inv while higher
spending on infra crowds in inv.
Market borrowings, off budget borrowings, NSSF and fiscal deficit(ES)
Argues that higher fiscal deficit does not necessarily mean more market borrowings.
Hence market borrowings by govt do not necessarily reflect the FD as in India,
borrowings determined by not just FD but by NSSF also
Flows into NSSF are autonomous, determined by attractiveness like interest rates, tax
breaks.

322
 Net Market Borrowings = Fiscal Deficit- NSSF
net flows
Thus its possible for borrowings to rise even when FD falls
Net NSSF flows are large, were almost 1.2 lakh cr in 2017, representing a quarter
of central FD. These NSSF funds have been so robust that they have led to decline
in reliance on market borrowing by 90 k cr in 2017.
But note that NSSF funds are more costly as they offer higher rates than markets. So
while centre raising reliance on NSSF, states reducing NSSF share. So in 2017, MB for
states rose by 85k cr approx, even though FD of states rose by 50k cr approx only
Higher NSSF rates also lead to poor transmission as banks have to keep savings
rates high and so can't lower lending rates
NSSF rates
The govt after reducing rates on SSF sharply in 2021, immediately withdrew it. The govt
sought to reduce rates to make its borrowing program cheaper and also improve
MP transmission. But the sharp reduction would have hurt small savers, middle class,
who depend on these fixed income products. It would also worsen inflation.
The balance of the NSSF is invested in central and state govt securities and also
securities issued by the IIFCL as per norms decided by the GOI. Administered under
rules made under Article 283. As it is in Public Account it does not affect the FD directly
but its balance constitutes a part of outstanding liabilities of the centre

323
The entire off-budget borrowing scheme works because of cash based accounting of
the Union budget.
Why NSSF rates are not cut
The large jump in FCI subsidy, from the BE 2020-21 of 1.16 lakh cr to Actual of 5.25 lakh
cr, thus bringing them under the budget, should allow the govt to cut NSSF rates, as
under off-budget borrowings, the FCI arrears were financed out of NSSF funds. But
now the govt is no longer compelled to keep these schemes attractive. The reason
they are not cut is political. Eg West Bengal is the largest contributor to small
savings schemes, and so cutting rates before elections was politically costly.
FRBM Act
Aims
• To ensure inter-generational equity and long term macro stability.
• Removing fiscal impediments in the conduct of monetary policy
• Prudential debt management consistent with fiscal sustainability through limits
on Central borrowings, debt and deficits
• Greater transparency in fiscal ops

Note that in principal, as per NR Bhanumurthy of NIPFP, FRBM is a kind of

expenditure switching mechanism, enabling the govt to switch from consumption
to capital expenditure, which would lead to higher growth and reduce debt to GDP
ratio.
FD- Excess of total disbursements from CFI, excluding repayment of debt, over total
receipts into the fund, excluding debt receipts
Central debt- Total liability outstanding on the security of the CFI, including external
debt valued at current exchange rates, as well as the total liabilities in the public
account of India, and financial liabilities of entity owned or controlled by GOI.
Provisions
• Statements
◦ The centre shall lay every year before both houses the Annual Financial
Statement, Medium term FP statement, FP Strategy statement, macro economic
framework statement, medium term expenditure framework
◦ The Medium term FP statement shall set 3 year rolling target for prescribed
financial indicators
• FP Principles
◦ Take measures to limit FD to 3% of GDP by 31.3.2021- note that this has
been amended several times to keep delaying the date, latest in 2018

324
 ◦ General govt debt(state and centre) does not exceed 60% and the central
debt should not exceed 40% by the end of 2024-25. Note that general govt
debt does not include inter-govt liabilities
◦ Not give additional guarantees with respect to any loan on security of CFI in
excess of 0.5% of GDP in any year.
◦ Escape Clause- Provided that exceeding annual fiscal deficit target due to
grounds of national security, act of war, national calamity, collapse of agriculture
severely affecting farm output and incomes, structural reforms in the economy
with unanticipated fiscal implications, decline in real output growth of a
quarter by at least three per cent points below its average of the previous
four quarters, may be allowed for the purposes of this section
▪ Any deviation from FD target shall not exceed 0.5 of GDP in any year
▪ In case of real growth exceeds that of prev 4 q avg by at least 3% points,
then reduce FD by at least 0.25%(note the asymmetry in reducing FD
and escaping FD)
▪ Any deviation for either has to be accompanied with a statement in the Parl
• Borrowing from RBI
◦ The Centre shall not borrow from RBI
◦ May borrow by way of advances to meet temporary cash requirement
◦ The RBI may subscribe to the primary issues of the central gsec and may
trade them in secondary market, in very specific circumstances like war,
calamity. Thus this section 5(3) effectively allows for monetisation
• For ensuring compliance
◦ The FM should review biannually the fiscal situation and place before Parl the
review
◦ Centre should prepare a monthly statement of accounts
◦ Centre can take steps to curb expenditure including those authorised to be paid
out of CFI, excluding those that are charged on CFI
Though the states were restrained in their borrowing, the act proved largely
ineffective in restraining the centre.
Note that the govt did away with the revenue deficit target of 0% that was there in
the original FRBM Act, through the Finance Bill, 2018
Need for a New Act
• The existing act has proved ineffective. Eg it was de facto suspended in 2009 to
tackle the crisis, but even when the crisis abated, the fiscal deficit remained
high for several years.
• The Act has 3% FD target for union and the 14th FC has 3% target for states,
leading to 6% total target. Its reasonableness

325
 ◦ It is much higher than other nations like Brazil and hence crowds out private
investment especially if the household savings are low, like during inflation
◦ The 6% target is still not enough to achieve the debt sustainability even
assuming for benign inflation and high growth.
• There are arguments that the act should not prescribe a specific number but a
band to allow flexibility. But this has the danger of making the upper limit of the
band the effective ceiling if enough conditions not put on violating the central
target
• The flexibility to counter the downturns is necessary but the departure should not
be an open ended departure but one which ensures that the structurally
adjusted deficit remains on track. The SA deficit is what the deficit would have
been if the cyclical shocks had not occurred.
• The approach of deviations must be symmetric with stricter adherence in times
of boom. Currently asymmetric
FRBM Review Committee(NK Singh) Reco
• Repeal the FRBM Act and replace it with the Debt and Fiscal Responsibility
Act(DFRA) and Rules
• Debt to GDP ratio of the govt should be 60%, by 2023. 40% for centre and
20% for states but the debt path of the states should be charted out by the
15th FC.
◦ This is because different states need to have different targets. Eg the states
with higher debt/GDP ratio or lower growth prospects should have lower debt
ceilings and as the FC is a constitutional body, it is best equipped to handle
this contentious issue
• FD should be the key operational target for achieving the debt limit, to be
reduced to 2.5% by 2023
• Escape clause for going 0.5% over the FD target in one year with the grounds for
trigger same as Act
◦ Subramanian points out that the requirement of 4 quarter avg deviation by 3%
points is too stringent and will lead to heavily pro-cyclical govt policy until
the escape clause is triggered
◦ It has also been criticised that the room of 0.5% deviation will not be enough for
the correction required
◦ The Committee pointed out that the current grounds are too opaque and
though the grounds are same as the FRBM Act, the Committee reco setting
up a Fiscal Council to monitor implementation of FRBM and advise
invocation of escape clause
• If there is a sharp rise in growth by 3 % pts above the average of last 4 quarters, FD
must fall by 0.5% pt below target. Hence symmetric

326
 • Revenue deficit should be 0.8% by 2023- Hence contrary to the Act, has a RD
target
• A Fiscal Council to prepare multi-year forecasts for the govts and reco suitable
changes in policy, monitor implementation and advise escape clause trigger
• On central approval for state loans under 293, issue detailed policy guidelines on
the procedure.
Evaluation of proposed Fiscal Council
A fiscal council is an independent financial institution with a mandate to promote stable
and sustainable public finances. Essential features
• Public funded
• Staffed by non-elected pros
• Mandate to provide non-partisan oversight. Hence should report to Parliament
Was first reco by the 13th FC, then 14th FC then reiterated by the FRBM Review
Committee. Was also suggested by the Srivastava Committee established by the
National Statistical Commission. Also reco by Viral Acharya. It has been established in
more than 50 nations as per the IMF
A Council is a permanent agency to independently assess the govt's fiscal plans
against macroeconomic parameters and their projections. This scrutiny is to keep
the govt within fiscal restraint
During times like COVID, when the govt has to exceed deficit targets but also has to be
wary of credit ratings, an institution like the Council can help inspire confidence among
lenders and CRAs of future consolidation
Proposed structure
• Established by Parliament and have own structure and budget
• Ex-ante evaluation of the budget. Ex-post done by CAG
Need(M Govinda Rao)
• Fiscal federalism issues like cesses, surcharges, 293.
• Fiscal prudence
• Transparency in budget, in the light of off-budget financing, repeated deferring of
targets
• Conscience keeper in monitoring rule based policies and raising the level and
awareness of debate in Parliament and among the public
• IMF study of existing Councils in nations
◦ Better fiscal marksmanship
◦ Better fiscal performance as seen in Belgium, Chile, UK
◦ In Belgium the govt is mandated to adopt the forecast of the Federal Planning
Bureau which has reduced bias in estimates
Issues (D Subbarao)

327
 • The accountability measures in FRBM like presenting Fiscal Policy Strategy
Statement, explaining reasons for deviation etc have not been given much
importance by the Parliament as these are seldom discussed
• As per the suggestions of the NKS Committee, the Council will have a wide array of
functions like analysing govt finances, macro projections, suggestions on changes
to fiscal policy. D Subbarao argues that such an institutional behemoth will
create more noise than signal
◦ CSO, RBI and Finance Ministry all have macro forecasts and so the Council will
just add to that. Invalid presumption that the Council's analysis will be
better or more credible than eg RBI or other academic institutions
◦ Its better to allow the Fin Min to use its own forecast for budget making as
it makes the ministry more accountable
◦ The proposed role of the Council to act as a watchdog to prevent the govt
from gaming the fiscal rules like off budget borrowing, is already being
done by a Constitutional body, the CAG
◦ The DSRCs analyse the budget in detail after its presentation
Way forward
• Strengthen the CAG office
• CAG should provide better support to parliamentary committees to help them
scrutinise the budget
Why zero Revenue deficit should be the goal
A paper by Bose and Bhanumurthy has shown that

.
This is where the role of the FRBM comes in, as an expenditure switching one from
revenue to capital and hence adherence to FRBM, if it has RD target also, should
increase India's GDP. This is why the 2018 Finance Act amendment that removed the
FRBM revenue deficit target was the most damaging change to the FRBM act because,
now, focusing on containing fiscal deficit and not containing the revenue deficit,
adherence to FRBM becomes growth reducing

328
There is a case for adding primary deficit in the rules, was even articulated by the CEA
Arvind in his dissent note to the committee as the pd shows the expenditure the govt
can control and hence is a better measure of fd. This becomes even more important
as financial repression ends and the system becomes more market driven making the
interest payments variable.
He also disagrees with the glide path of the report and argues that pd should be
reduced 0.2% every year which would reduce fd to 2% over the same period.
FRBM Relaxation and COVID
Kerala has sought it. This is because the crisis is forcing states to frontload the
borrowing allowed under the FRBM to the beginning of the FY itself. This would, in the
absence of relaxation, harm the state's finances in the rest of the year
FRBM has an escape clause, which can be triggered as the COVID crisis is a national
calamity
Most significant deviation from FRBM happened after the 2008 crisis
Steps announced by Centre
• Has increased states' borrowing limit from 3% to 5% for 2020-21 but the
increase will be linked to reforms like those reco by FC, plugging leakages in
PDS
• Unconditional increase of 0.5%
• Next 1% in 4 tranches of 0.25% with each tranche linked to a specified reform
• Further 0.5% if milestones are achieved in 3/4 reform areas- One Nation One
Ration Card, EODB, Power Distribution, ULB Revenues(had to notify floor rates
for property taxes, water and sewer charges in line with stamp duty guideline
values for property transactions and current costs)
• Thus the centre is unilaterally doing what was there in the FC TOR
But these have had significant benefits as states have used the extra room to
borrow an additional 1.06 lakh crore and implemented reforms in ONOR(17 states,
37600 cr), EODB(20 states, 39521 cr)
Public Debt and Finance Commission(YV Reddy and GR Reddy)
Phases in debt interface between Centre and States
• Pre-Gadgil phase- Dominant source of state debt was Centre, in the form of
loan component in various schemes
• Gadgil- For SCS, 90 grant and 10 loan component. For general states, 30 grant, 70
loan
• But there was also a major component of state debt that was decided by
negotiations, apart from the formula
The interface continued smoothly because of 2 reasons

329
 • RBI being the debt manager of the centre and states. As automatic
monetisation was resorted to, it also encouraged fiscal profligacy
• Bank nationalisation, which provided a captive source of loans as banks made
to buy govt bonds
Post 1991 changes
• The fiscal profligacy led to 1991 crisis. So consolidation needed.
• RBI started estimating aggregate public debt and the borrowing program
consistent with macro stability. The govt then allocated it to centre and states.
• Post 2003, ceiling put on borrowings
• Due to 12th FC reco, GOI stopped intermediation of loans for states. Thus plan
assistance now included only grants and not loans, with states accessing debt
mostly through markets.
• In practice, limits imposed by the FRBM laws were frequently breached, like by
using SPVs.
Finance Commission and Public Debt
The 6th FC was the first to be associated substantially with debt. While the 10th was
the first to link debt relief for states with performance
The 11th was asked to comprehensively review debt situation and suggest reforms as
the fiscal situation of India was deteriorating(see above on FD trends). It argued that
debt relief should be premised on progress towards debt sustainability. Reco
• Creating an incentive fund with 15% of revenue grants withheld and an equal contri
by Centre.
• Eligibility of states for funds from the Fund would depend on reforms like growth of
tax revenue
The 12th made debt relief conditional on states enacting fiscal responsibility
legislations and linking debt relief to revenue deficit of states. It also reco
termination of the centre acting as an intermediary
Fiscal Consolidation Roadmap- 15th FC
The FC XII recommended theDebt Consolidation and Relief Facilityfor states,
conditioning it on enactment of fiscal responsibility legislations that eliminate the
revenue deficit and limit fiscal deficit to 3% of GSDP.
The FC 14 set a FD target of 3% of GSDP for states. There was flexibility of 0.25% if
• There was no revenue deficit in the year of the borrowing and in the preceding year
• The debt/GSDP ratio did not exceed 25% in the preceding year
There was additional flexibility of 0.25% if interest payments were less than or equal to
10% of revenue receipts of preceding year
FRBM Act Section 7A. The 14th FC reco that the Union should take expeditious
steps to implement this. This has been operationalised

330
Govt Debt

Why high debt bad

• Investor confidence
• Sustainability of govt finance
• Ricardian equivalence and future taxes(use Ricardian equivalence only in Eco2)
• Crowding out
• Financial repression of banks
• Inflation
• Profligacy
• Weakening of currency as can lead to flight of foreign capital

331
Current approach of govt to manage debt
See Vision May 2020
GST
GST- A Consumption based Indirect tax
Constitutional Scheme of Indirect taxes before GST
• Before GST, most imp source of indirect tax(IT) revenue for the Union were
customs duty, central excise, service tax, central sales tax on inter-state
trade. CST was however assigned to the state of origin under Art 269
• For states, tax on liquor, opium, narcotics, luxuries, entertainments, betting,
gambling, octroi, electricity tax
• Union had powers to tax goods upto production stage, states had power to tax
sales.
• Union had powers to tax services under residuary powers

Need for GST in India

• The introduction of CENVAT removed largely the cascading burden by
expanding the coverage of credit for all inputs, including capital goods, Similarly
the VAT in states reduced the cascading effect.
• But both VAT and CENVAT had certain incompleteness
◦ CENVAT not extended to include the chain of value addition in the distributive
trade below the stage of production
◦ In VAT, the cascading effect of CENVAT was there
◦ Several taxes in states like entertainment tax, luxury tax, not yet subsumed
under VAT
• Central Sales tax also led to cascading. It was also against the principle of
consumption tax that tax should accrue to the jurisdiction where consumption
takes place
Challenges in designing GST
• Origin based vs Destination based tax- GST is a destination based consumption
tax, unlike the VAT which was based on the origin principle. So many mfg
states expressed concern on losing revenue. But this ignored that any value
addition in a jurisdiction adds income for the residents and hence contributes to
revenues
• Rate structure and compensation- There was uncertainty in gains in revenue
post GST. The Revenue Neutral Rate estimation remains an estimate only. So
states asked for compensation. The RNR was calculated by Arvind Sub
Committee, at 15-15.5%, which was to be different from the standard rate
applicable on most of the goods and services

332
 • Dispute settlement- Any departure from the decision of the GST Council had to
be prevented
• Alcohol and Petroleum- These are major contributor to the state revenue and so the
states unan agreed to exclude these from GST. Though petrol can be brought
under the ambit of the GST by the Council
The Amendment
• It required both Union and states to tax all stages of production and distribution as
well as both goods and services. So the important changes made by the
Constitution(101st Amendment) Act, 2016 are
◦ New article 246A making enabling provisions for the Union and states wrt GST
law and that Parliament has exclusive powers to make laws wrt GST on
inter-state supplies
◦ 268A empowering the Centre to levy service tax omitted as service tax under
GST
◦ 269A inserted providing for GST on supplies in the course of inter-state trade
or commerce, levied and collected by Centre and distributed between both as
provided by Parl on reco of GST Council
◦ 271 prevents application of surcharge on G&S which are subject to GST under
246A
◦ 279 for GST Council
◦ 366 to exclude liquor for human consumption
◦ The list 1 and 2 amended to remove powers to tax those that have been
subsumed under GST
◦ Parl to make compensation for 5 years
◦ Petroleum and petroleum products can be brought under GST based on GST
Council reco
GST Council
• Union FM(Chair), Minister of State(Revenue) and State FM(one of whom is VC)
• Reco on
◦ Taxes, cesses and surcharge to be subsumed under GST
◦ Exemptions
◦ Model GST laws, apportionment of IGST
◦ Rates
◦ Threshold for turnover
◦ Special provisions NE, HP, UK, JK
• Quoum is 50% of members
• Decision by 3/4th majority of the weighted votes of members present and
voting
◦ Centre vote shall have 1/3rd weight of the total vote cast

333
 ◦ Votes of all states together 2/3rd of the votes cast in the meeting
• The Article mandates the Council to be guided by need for a harmoniuos
structure of GST to create a harmonised national market
Coordination between FC and GST Council
Both constitutional bodies, dealing with revenue
• But while the FC makes projections of revenue and expenses and accordingly
suggest devolution, the rates and exemptions of indirect taxes under the GST
Council
Voting
Till the 37th meeting of the Council, decisions were taken by consensus. But for the first
time in the 38th meeting(December 2019), there was voting, on the proposal to have a
higher single rate for lotteries
Composition Scheme
• For small businessmen being supplier of goods and of restaurant services
• A person with annual turnover upto 1.5 cr(75 lakh in Arunachal, Manipur,
Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Uttarakhand) needs to pay
tax equal to 1% to 5% on turnover
• For other service suppliers with turnover upto 50 lakh, 6%
◦ Ecommerce companies that collect tax at source not eligible
• Not eligible for ITC

Design of Indian GST

• Has adopted concurrent dual model due to the unique federal nature. Tax levied
concurrently by the Centre and states on a common base. By centre called
CGST, by states SGST
• IGST(Integrated GST)- On interstate supply. It is a unique contribution of India.
Centre would levy IGST and then distribute it between centre and the consuming
state. The advantages of the IGST model
◦ Uninterrupted ITC chain on inter-state txn
◦ No upfront payment of tax or blockage of funds for the inter state supplier or
recipient
◦ Self monitoring
• Tax rates- 5,12,18,28. For precious metals and affordable housing, 3 and 1%.
Unworked diamonds, precious stones 0.25%. A cess over 28% on luxury items
and sin goods to compensate states

334
• Compensation for 5 years- 2015-16 as base with growth rate of revenue for
states for 5 years assumed to 14% p.a. The base consists of revenues from VAT,
CST, octroi, luxury tax, taxes on ads. Alcohol and petroleum derived revenue
excluded. A GST Compensation cess levied on certain G&S. Note that the base
revenue includes revenue collected by states and local bodies as well. But this
excludes the entertainment tax levied by the state and collected by local
bodies. Also for any of the revenues mentioned to be included in the base
revenue, the revenue should have been included in the CFS. The cess is
credited to a GST Compensation Fund, non-lapsable and part of Public
Account of India and audited by the CAG. Note that the Fund can be credited
with other amounts also, as per GST Council reco, but Centre has declared
that only cess will be credited
• E-way bill- For hassle free movement across the nation
• National Anti-Profiteering Authority
• Exports of G&S are zero rated. Supplies of SEZ developers and SEZ units also
zero rated- Means that entire value chain of the supply is exempt from GST.
Exporters exempt from GST by submitting a simple letter of undertaking.
• Subsuming
◦

◦
• Stamp duty and custom duty excluded
• MH contributes most in GST, Lakshwadeep least. In states Mizoram least.

GSTN
Set up as a private company under Companies Act. GoI 24.5% stake, all states,
including NCT and Puducherry and State FM Committee 24.5%. 51% by non-Govt

335
financial institutions.
The govt has decided to make GSTN into a public company by acquiring the 51%
stake of non-govt entities. Post this, Centre to have 50% stake and rest 50%
among states in pro-rata basis
GST Implementation Committee
There is a three tier structure for implementation of GST- Revenue Secretary, GSTIC
and various Standing Committees
The GSTIC consists of bureaucrats, and manages routine issues like coordination
between players etc. There has recently been concerns raised over excessive
delegation of powers to the GSTIC, by the Punjab Finance Minister.
Benefits of GST
• Benefits for Govt
◦ Less evasion through self-policing mechanism
◦ More transparency due to e-filing
◦ Promotes fiscal federalism
◦ Generates high value data
◦ Promotes formalisation
• Benefits to exporters
◦ Would reduce cost and enhance competitiveness
• To small traders and entrepreneurs
◦ Single registration with threshold for registration along with composition
scheme
◦ Through the creation of a seamless market, will help them expand nationally
with minimal investment
• To agri and industry
◦ Through a wider coverage of ITC
◦ More revenue for govt will reduce avg burden on each as rates are
rationalised
• To consumers
◦ Cascading effects eliminated thus lower prices
• To Make in India
◦ Unified market will boost foreign investment
◦ Make products cheaper boosting AD
◦ Generate more emp, GDP and so a virtuous cycle
• Ease of Doing Business
◦ Harmonising taxes and no cascading
◦ Elimination of checkposts and less interface with tax authorities and hence
better compliance.

336
 ▪ E-waybill required for transporting goods over 50000 beyond 10 km,
generated by the GST portal.
▪ This enables the seamless transportation across states and improving EODB

GST Reforms (M Govinda Rao)

Given India's diversity, implementation of GST remarkable. There is no 'one size fits
all' GST as each country has different systems.
The gains
• Abolition of inter-state check posts erected to enforce cross-border transactions.
This is the single biggest contribution to the creation of a national market by
reducing transportation time and costs by almost 20%
• Has improved supply chain management and it is no longer to have branch
offices just to avoid interstate sales tax
• Compliance gain due to linkage and exchange of info between IT and GST dept
• Reduced cascading due to better system of ITC.
• The creation of GST council is an important achievement in coop federalism

Concerns
• Stagnant revenues, against expectations. For 2017-18, CAG reports that the
Centre's part of GST declined by 10% for the subsumed taxes compared to
previous year
• The budget estimate for 2018-19 was 7.43 trillion rupees, while the actual
collection was 22% lower. In 2019-20 full year, the collection was 4% higher
than 2018-19 but still lower than target
• Delay in compensation release- In 2019-20, there was a shortfall in
compensation collection by 42% which was met by transferring from CFI and
using previously collected cess
Shortcomings in implementation
• Large list of exemptions
◦ Exclusion of petroleum, real estate and electricity has excluded from the net
40% of the internal indirect taxes at the Centre and the states
• Multiplicity of rates- 5,12,18, 28, in addition to the special rates on precious
metals at 0.25%, gold at 3% and job work in the diamond industry at 1.5%. A
special cess is also levied on items in the 28% category.
◦ This enhances compliance and admin costs
◦ High tax rates on automobiles, construction etc when the demand is low in the
economy has contributed to the slowdown
• Exclusion of several items of consumption from the base. Eg almost 50% of the
items from the basket of the CPI have been exempted
• Low compliance composition scheme up to 1.5 cr turnover has added to the
cascading as due to low compliance, ITC is not availed

337
 • As the filing of annual returns is repeatedly postponed, there is no way to match
invoices, giving rise to a fake invoice industry. So far tax fraud of 46000 cr using
this has been detected
• The dysfunctional tech platform has resulted in the allocation of IGST in a
haphazard manner and causes delays in refunds
Reforms
• Firming up the platform
◦ Keep the threshold for registration at a high level, eg at 50 lakh turnover. Eg
data from Karnataka, one of the rich states, shows that these traders
accounted for only 12% of the tax paid but 93% of the total taxpayers.
Thus they clog the system without substantial benefits
◦ 100% invoice matching is not done anywhere in the world. Korea tried it but
gave up. So invoices should be matched only above a certain value, say
10000+.
◦ Invoice matching is matching the supplies of buyer and seller for
calculation of ITC
• Reducing the number of rates, once revenues have stabilised. Remove the 28%
slab and bring it into the 18% slab. The revenue from the 28% category is 22% of
the total. But as these are levied on products which have a high elasticity, lowering
tax rate will bring in additional revenue due to increased demand
◦ The WB has also said that the Indian GST rates are 2nd highest in the world
• Prune the list of exempted goods and services.
◦ Calibrating tax rates based on consumption pattern alone ignores the
employment potential from these sectors. Only those that are difficult to
administer should be exempted. Kelkar strongly argues for this
◦ The ES also shows that the effect of GST rationalisation by including more
products under GST, has a positive effect on GST collections
• Include the petroleum and electricity sectors. But this should be only when the
revenue from the tax stabilises as petroleum makes a very large contribution to
revenue
• Bring in real estate sector under GST which will also improve transparency in the
real estate market. Kelkar reco
• Important to have a strong technical advisory secretariat for the GST Council.
Presently it is advised by tax officials only. There is a need to bring data
specialists, economists. This need was highlighted as the decision to reduce
the rate on over 150 goods from 28% to 12% was taken without much sound
analysis as per Kelkar

338
 • Data, which is not confidential or personally identifiable, should be shared in the
public domain so that independent research can be undertaken. The present
reluctance to share data by the CB of Indirect taxes and Customs(CBIC) was
highlighted by the CAG too
• Reforms suggested by Kelkar
◦ Based on the 13th FC reco, have a single rate of 12%. This is also Revenue
Neutral
◦ But note that Kelkar also argues that the concept of RNR is fallacious as it
is a static concept and as consumption patterns, economic structure
changes, RNR becomes meaningless. Hence it should not be a factor while
deciding the rate for a long term structural reform like the GST

New tax slab

As per the reco of the 15th FC final report, the slabs of 12% and 18% may be merged, to
achieve revenue neutrality by having a simple structure of merit tax(5%), standard
tax(middle ground) and demerit/luxury tax(28%).
IGST Reforms -Vijay Kelkar
Need of IGST
• Arises from GST nature in India as a destination based, consumption, invoice credit
method GST
• This means that consumption is taxed only when it happens in the taxable
jurisdiction. So exports not taxed while imports are taxed
• India has 2 separate tax jurisdictions- Centre and state. Centre jurisdiction means
that exports are zero rated. But for interstate supplies, zero rating should also
apply. But goods mfg in one state and sold in second state has some SGST.
This sticky SGST needs to be stripped off. Ideally, for this, all interstate
supplies should be zero rated. But this would mean that there are 2 taxes on
consumption of same good. If consumed in exporting state, pay CGST+SGST.
For consumption in importing state, pay only CGST. This will give tax arbitrage
opportunities and incentivize misreporting. It will also possible lead to
breakdown of GST chain in consuming state. It will also violate principle of tax
neutrality which requires that there should not be a difference in tax based on
place of consumption
Hence IGST is a substitute for SGST in interstate supplies. IGST collected by the
exporting state would be transferred to the importing state for adjusting against
SGST collected at consumption point

339
IGST should be equal to SGST.Also customs duty should be such that it is
equivalent to sum of SGST and CGST, so that same price. As IGST=SGST, this
implies, customs should be equal to CGST.
Reality

Thus India is unique in levying CGST also only on intrastate supplies. On inter-state,
IGST applies, along with Central Sales Tax(Article 269)
India also levies IGST on exports due to its definition of zero rating not being defined as
per tax rate but as per physical end use of supply. Although the exporter can seek
refund later, it is in contrast to international practice and lowers competitiveness of
India's exports
Way forward
• Ockham's razor- In choosing between 2 equivalent taxation models, choose the
simpler one. The simpler one where IGST=SGST is recognised as the ideal by
the IMF also
• Expedite refund to exporters.
• Bring zero rating at par with international practice
• Simplify registration requirements of suppliers to exporters

Reforms already undertaken

The ES shows various behavioural economics based reforms taken
• E-way bill with PIN code distance mapping to prevent misuse
• Free accounting and billing software for small taxpayers who constituted more
than 80% of all GST payers as per ES
• Compliance rating score of taxpayers to be made available in public domain.
The GST Act authorises this

340
Exemptions on services
• Health and education completely exempt

Reforms in compensation as per Kelkar

• Need to have a relook at the 14% growth rate of compensation, especially due to
COVID
• The Centre can borrow from the market to finance the shortfall in compensation,
as the legality of the Council borrowing from the market is not clear
◦ This loan can be paid back by the cess, which can be continued beyond 5
years, till the time the loan is paid back
• A restructuring of the GST model to correct the inverted rate structure- rate on
inputs more than goods sold
• Increasing the compensation cess
• Increasing the SGST
Note that using previously collected cess is allowed. Also using CFI to apportion
balance of IGST pertaining to previous years allowed as was done by
Centre. The GST Act prohibits drawing funds from the Consolidated Fund of India and
so this route used
In 2019-20, the compensation collection fell short by 42%(verified)
Centre's steps
Argues that states will face 3 lakh cr of revenue gap this year. Of this, cess will cover
22% and hence shortfall of 2.35 lakh cr still. Of this, only 97000 cr is due to GST
implementation and hence only this should be covered by the GST compensation
law. Rest is due to COVID
• Has given states 2 options
◦ Special window in consultation with RBI so that states can borrow the 97k cr at a
reasonable interest and can be repaid after 5 years through cess. For this, the
Centre can remove the conditions around a further 0.5% relaxation in their
borrowing limit under the FRBM Act

341
 ◦

◦ Another option is the entire gap of 2.35 lakh cr can be met by borrowing by
states.
Resolution
• States agreed to go with option 1. This has the advantage that the interest will be
repaid from the cess till the transition period, post which the cess will be extended
to pay the principal and interest as well.
Using the same method as last year, the Centre borrowed 1.58 lakh crore in 2021
for the compensation shortfall, and extended it to states as back to back loans.
But there is a discussion going on for deciding how long to extend the cess beyond
July 2022

Why Centre's stance is wrong

• Centre has, unlike states, many options to raise funds, like sovereign bonds or
loan against PSU shares from RBI
• Centre gets much lower rates from markets than states
• In terms of aggregate public debt, it does not matter for the rating agencies or the
market whether it is the Centre or the states that is borrowing
• Fighting the recession through stimulus is essentially macro stabilisation, which is
the Centre's job
• Breaking the assurance on which GST was implemented will seriously dent
cooperative federalism
• Coop fed is like a repeated game and hence trust is important

342
GST fraud
Due to relaxed registration norms, many fake companies have cropped up, who claim
input tax credit and then these are sold to actual companies for a commission who then
use these ITC to pay their actual GST liability . Changes made
• The govt has mandated physical presence verification before registration
• CBIC has mandated that firms with turnover over 50 lakh will have to pay at
least 1% of GST in cash instead of ITC
• The validity of e-way bills has also been tweaked, requiring double the
distance to be travelled for validity. Till now, an e-way bill allowed 100 km of
travel, now 200 required
GST and MSMEs
India’s entry to global supply chains was facilitated only after the policy reforms of
1991. Late as this was, it began even before the country was looped within itself to
create an obstruction-free national value chain. It was only in 2007 that the
cascading central sales tax (CST), which formed a barrier to inter-state movement
of goods, began to be reduced from its peak of 4%, and only in July 2017 that the
CST was fully eliminated with the introduction of the goods and services tax (GST).
Prior to that, when a consumer anywhere in the country bought, say, a pedestal fan,
its supply chain would typically have been confined within the manufacturing
hotspots of Maharashtra, Gujarat, Tamil Nadu or Punjab. Sure, there were inputs
like steel sourced from outside the state, but because of the CST, input-sourcing
was confined to the extent possible within the state. And until the introduction of
the state-level value added tax (VAT) in 2005, the fan manufacturer preferred to
vertically integrate production within the company so as to save on sales tax on
input purchases even within the state.
Those tax barriers, in turn, led over a period of six decades to a thriving small
enterprise sector that functioned below the tax radar, offering low cost options in a
tax cascading environment. Because of the extremely significant role played by
these tax-defiant small enterprises, in terms of their innovativeness, contribution to
cost cutting and, most of all, spatially dispersed employment generation, it was
vitally important to ensure that the new GST regime wasn’t punitive while trying to
include them in the new regime.

Reverse charge is one way to lessen burden on MSMEs. ITC is another. Making
buyers accept TREDS linked GST invoices from MSME sellers can help free

343
working capital for MSMEs by aligning their cash flow with GST cycle
• But the RCM was frequently modified. First it was applied to only txn over 5000, but
was later completely withdrawn. Then was applied only to a specified group of
commodities like cement, construction equipment. This is odd as these are not
generally supplied by MSMEs.
• The frequent changes and not covering all inputs has led to RCM not helping much
despite it being a good idea
• The exemption of many inputs has also strengthened evasion
• My recommendation would be to place the issue before the GST Council again, and
argue for the restoration of section 9(4) to its original form, with an added provision
for RCM even on purchases from registered dealers, at the option of the buyer, to
provide an audit trail.
Asymmetric Federalism
When different constituent units are accorded different powers. Can be Constitutional
or just in practice. Eg India accords special powers to NE states. NCT and Puducherry
assemblies have less powers Art 371 also has special powers for other states
The genesis of special category
No place in Constitution but was accorded by the Union in connection with the
transfers to be made under FYP. In the initial years, the difference was based on
different schemes approved for each state and the addl resource requirement for
each state. The FC did not have a role in this. To remove the adhoc nature, the Gadgil
formula was adopted from the 4th plan. It provided for the requirements of Assam,
JK and Nagaland to be first met out of total pool of central assistance, which was
later extended to HP, NE. The 5th plan declared them to be special category states
for the first time
Benefits of SCS
• They get higher magnitude of transfers and a better composition of grants and
loans
• Matching contribution in CSS is lower
• In terms of external assistance, while the centre passes the loans to general
states on same terms as it gets from the funding agencies, it passes it to SCS
in grant loan ratio of 90:10
• The unspent money in a year does not lapse

Contrary to govt claims, the SCS still exists de facto though the benefits have
come down drastically
Should States levy cess given the revenue impact of COVID

344
Sikkim has sought permission from the GST Council to levy cess on its power sector
and pharma sales to gain additional revenue. Kerala did it after the 2019 floods. But
issues
• Will reinforce Centre's practice of levying cesses
• Will weaken the GST's integration as more additional taxes outside the GST net
• Firms cannot get credit for the cesses, leading to cascading

345
Doubts for AN Jha Sir
• Meaning of Additional Central Assistance, Special Central Assistance and Normal
Central Assistance
• Permanent Finance Commission?
◦ There will be more pressure on a permanent FC to modify its report. FC will have
to give yearly reports which will make it susceptible to political pressures.
◦ A secretariat in the MoF should be there which has a data repository on public
finances
• 370
• CAA
• Views against govt.
• Can we have a system where for a CSS in the Concurrent list, if there is
already a state scheme for the same purpose, then states should not be
required to run both? Instead the Central matching grant can just be given as a
grant to states for running the erstwhile state scheme itself?
◦ Grey area wrt data.
◦ Ask people in NIPFP
• Why OD does very poor in IMR and MMR compared to JH despite having a better
health infra
• Clash between FRA and development. In general between environmental laws, tribal
rights and development
• Interplay between FRA and FCA. why FCA requires Collector to settle claims under
FRA for the proposal?

• What is the role of DRDA in the CSS?

• What is the problem if there are 3 different schemes within a larger scheme? A
separate focus on primary, secondary and higher can be good.
• What is the rationale for judging schemes by size of sub-schemes? They may be
useful as a supplement but may deserve only a small funding? (Or may be they
could be transferred to states)
• Get state wise allocation for total CSS and individual CSS along with utilisation
• What does expenditure to states in budget documents relating to CSS mean? How
is it calculated?

346
• How to reconcile flexibility to be given to states in norms and devising mechanisms
for monitoring achievements? Eg construction costs may be higher in some states
than others. Giving states this flex is ok. But then how do you check whether that's
true as it will have implication for fund use, outcomes etc like number of houses
made or roads laid

347
Industry
PYQ
2019
1. Evaluate the Competition Act, 2002, relative to the MRTP Act.
2. Explain the principal causes of deceleration of industrial growth during the mid 60s
to mid 70s in India. Do you think the reason for the slowdown in industrial growth
since the late 1990s are basically different from those of the earlier deceleration?
3. Has India been able to exploit the potential of FDI for export-oriented production?
4. Discuss the disinvestment policy adopted by the GOI as a part of the structural
adjustment program of the IMF-WB. Examine the impact of such a policy on
industrial growth in India.
5. How does the strategy of industrialisation under the NEP promote productivity
growth in manufacturing industries in India?
2018
1. Elaborate on 'missing middle' in the mfg sector
2. Comment on the new initiatives taken by the govt to facilitate investment and
EODB
3. Critically examine the relative role of the public and private sector in pre-lib period.
4. How can the organised manufacturing sector be revived as an engine of inclusive
growth?
5. The state controlled section of India's banking sector continues to be a major
problem for policy makers. Do you agree?
6. Why should FDI be preferred over FPI? Comment on govt initiatives in this respect.
2017
1. What is the broad trend of the mfg sector's relative share in GDP over the last 4
decades? How do you view its performance and what actions does the govt
contemplate in this matter?
2. Critically examine the Disinvestment Policy of the GOI
3. What role are MSMEs playing in India's growth?
4. Though liberalisation aimed at industrial growth, actually the service sector led the
economy. Elucidate
5. What developmental role can FDI play in a backward economy? What policies has
India been following to attract FDI and what safeguards should India adopt?
2016
1. Write short notes on Skill India and Make In India

348
 2. During post-Independence era, PSUs were assigned Commanding Heights. Should
this policy be continued?
3. Critically examine the major changes in FDI policies of the GOI since 1991

2015
1. What was the impact of policy reservation in favour of small scale industries in
India during the post-independence but pre-lib era?
2. It is often said that the prime generator of economic growth post lib has been the
service sector. Do you agree? What has been its implications on BoP?
3. Discuss the recent initiatives for augmenting power generation.
4. There is a need of an apex agency to monitor and to regulate the entry and
functioning of transnational corporations in the context of India's broader national
interest. Argue
5. Explain the recent initiatives for enhancing crude oil and natural gas production in
India.
6. What are the main components of the National Manufacturing Policy, 2014?
Discuss
2014
1. While Indian economic growth in recent years is services led and Chinese model is
manufacturing led growth, show the implications of the two models for long term
sustainable development.
2. Write on the Look East Policy of India
3. Write for and against FDI in retail trade.
2013
1. The Industrial Development Agenda framed by the Industrial Policy, 1956
transformed the economy substantially from an agricultural to an industrial
economy. Elucidate in brief the sectoral composition of growth during the period
before 1990
2. What is the present disinvestment policy? What modifications can be introduced to
make it fruit bearing?
3. Accelerated growth of the tertiary sector in the past 2 decades has posed multiple
challenges. Discuss
2012
1. Delineate the trends in growth and industrial composition of public sector in India
during the pre-lib period.
2. How was the jute industry affected after partition? What remedial measures were
taken to arrest its decline?

349
 3. A number of production lines were reserved for the small sector in pre-lib period.
Did such reservation achieve its objectives?
4. Can disinvestment in public sector units be a sustainable alternative for raising
resources for govt expenditure?
5. Why is capital inflow through MNCs preferred over foreign debt?
2011
1. The declining share of commodity producing sectors-agri and industry, and rising
share of services sector is creating imbalances with far reaching consequences.
Discuss
2. Compare the role of FDI and FII in India's economic development. Are FDIs
preferable to Portfolio Investments?
3. Write in brief on SEZs and their socio-economic repercussions.
2010
1. What were the shortages faced by the manufacturing sector at the dawn of
Independence?
2. It was needless export pessimism that led India to adopt ISI in pre-lib period.
Examine.
3. India has of late been over-tertiarised. Do you agree?
2009
1. Critically examine the arguments usually put forward in favour of disinvestment of
PSUs.
2. Examine the role of FDI in the Indian economy empirically.
3. Comment
a. The slowing down of industrial growth in India from the mid 1960s till mid/late
1970s.
b. Whether public and private investments in India are complementary or
competing.
c. Role of small scale and cottage industries in the present context of the
economy.
2008
1. The initial rationale for the growth of the public sector is no longer valid since the
economy now has a strong industrial base. Do you agree?
2. .Examine whether External Commercial Borrowings are a good source of funds for
the Indian industry.
3. The MSME provide employment to a large number and has been identified as a vial
approach to development at grass roots level. Analyse their performance. What are
the major initiatives taken by the govt to revitalise MSME?

350
 4. What are the major objectives of the SEZ Act, 2005? Critically analyse the benefits
realised and some of the vital criticisms as regards SEZ. Would you support the
SEZ Policy?
2007
1. Comment on the recent moves towards liberalisation and their impact on the Indian
industry.
2. Is privatisation a boon or bane?
2006
1. Would you argue that it is not the business of the govt to be in business? What is
the rationale of disinvestment in India? Has there recently been a shift in policy of
privatisation?
2. Examine the impact of WTO on small scale industrial units. Do you think that
withdrawal of reservations and other measures would threaten their survival?
2005
1. What has been the impact of lib on mfg industry?
2004
1. What is the role of small scale industries in the Indian economy? Discuss the reco
of the Study Group on Development of Small Enterprises
2003
1. Examine the impact of globalisation on small scale units
2. What factors have been responsible for industrial sickness in India's large and
medium units? Suggest a policy package for reviving sick units.
3. Between foreign aid and foreign investments, which would you prefer and why?
What has been the impact of liberalisation on foreign investment in India?
2002
1. Discuss the measures to prevent industrial sickness in large and medium units
2. Discuss the role of FDI in view of globalisation and the New Economic Policy
3. State the consequence of disinvestment in the public sector in the recent past.
2001
1. The link between infra and development is not a once for all affair. It is a continuous
process. Elucidate and comment briefly.
2. In spite of its drawbacks, the public sector has an important role to play in a vast
and poor country like India. Examine
3. There are aspects of FDI which seriously impinge on on people's welfare and
national sovereignty. Examine India's FDI policy and recent experience in light of
this statement

351
2000
1. Critically examine the recent policy of disinvestment in PSUs keeping in mind the
contribution of public sector in creating strong industrial base in India. Do you think
it has outlived its utility?
2. Delineate the significance of small scale units and evaluate the measures to
promote them under New Industrial Policy. Comment on their adequacy.
3. A view is held that under new international economic regime, the interests of
transnational corporations will be decisive. Do you agree? Discuss implications in
context of WTO
1999
1. In the context of Indian industries, automation is not desirable. Comment
2. What are the main features of the package announced by the GOI on Aug 6, 1991
for promoting small, tiny and village enterprises?
3. Examine the role assigned to public sector in industrial development of India since
1990. Is it true to say the public sector has completely failed to deliver the goods?
Give the main features of our policy towards multinationals. Do you think this policy
is appropriate and in Indian interest?
Trends in Composition and Growth
Role of Public and Private Sector
Small Scale and Cottage Industries
Strategy of Industrialisation
Privatisation and Disinvestment
Role of FDI and MNC
Land, Labour and Capital Markets

Industry Overview- ES
IIP growth in 2018-19 was 3.6 compared to 4.4 in 2017-18(Note that IIP considers only 3
sectors, mfg, mining and electricity). It further slowed down to less than 1% in 2019-
20. Reasons
• Subdued mfg
◦ Slower credit growth
◦ Reduced lending by NBFCs
◦ Tapering of domestic demand
◦ Volatility in international crude prices
◦ Trade war induced uncertainty

352
But due to higher core industries growth, the real GVA growth in industry was 7% in
2018-19 compared to 6% in 2017-18.
GCF
• Sharp rise in GCF in 2017-18 led by mfg and utility services

Key Initiatives to boost industry

• Ease of doing Business
◦ Simplification and rationalisation of existing rules and regulations
◦ ICT to make governance more transparent and efficient
◦ e-Biz Mission Mode project under the National e-Governance Plan.
◦ Insolvency and bankruptcy Code.
◦ Miscellaneous
◦ Note a major fault with the EODB is that is looks at processes in only Delhi
and Mumbai.
• Startup India, Stand up India, with a plan with 19 action points
◦ Around 30k startups were recognised. 45% of startups were from Tier 2 and
3 cities while 40% of startups have at least one women director
◦ Easing regulations such as exemption from Income Tax on inv raised
◦ 22 regulatory reforms to help startups
◦ Self certification regime for 6 labour laws and 3 environmental laws
◦ Startup India Hub as 'One Stop Shop' for the startup ecosystem in which over
2.5 lakh users availed free Startup India Learning Program
◦ MH, KA and DL are top
◦ IT services top, followed by healthcare and education

Industrial Policy
Industry at Independence
• Preponderance of consumer goods. In 1953, the ratio of consumer goods to
producer goods was 63:37
• Very poor infra

353
 • Highly concentrated ownership structure
• Short supply of technical and managerial skills
So industrialisation was the consensus for development
1948
• Emphasized the importance of a continuous increase in production and equitable
distribution
• State must play an active role in development of industries
• Arms and Ammo, Atomic Energy, Railway would be govt monopolies
• Govt would be exclusively responsible for establishing new undertakings in 6
basic industries, except where private coop necessary for national interest
◦ Coal
◦ Iron and steel
◦ Minerals
◦ Telecommunications equipment except radios
◦ Aircraft mfg
◦ Ship building
• Rest for private sector, but state would also progressively participate here

1st FYP
Aim to overcome the deficiency in the producer goods, whose need was so great the
plan emphasized on the public sector taking the lead as the private sector was unable
to generate the resources or undertake the risks involved. It intended to leave the
rest of the field for the pvt sector.
But by 1956, the idea had changed from focusing on sectors where the private sector
was unable to invest to explicit preference for the pub sector.
1956- became the basis of the 2nd plan
• The Preamble Objectives and the DPSP and other provisions of the Constitution
were given a more precise definition when Parl in 1954 accepted socialist pattern
as the objective of social and economic policy
• To realise the objective, growth required, for which industrialisation, particularly
heavy industries
• Reduce disparities in income and wealth, preventing private monopolies and
power concentration
• The State will assume a predominant role in setting up new industrial units,
transport and State trading
• At the same time the private sector will have the opportunity to expand
• Principle of cooperation and an increasing proportion of activities of the private
sector along cooperative lines

354
• The above require that all industries of basic and strategic importance and
public utility services should be in public sector
• Industries which require large investment which currently only the state can
provide also under public sector
• Industries classified in 3:
◦ Exclusive responsibility of the state
▪ Arms and Ammo
▪ Atomic energy
▪ Iron and Steel
▪ Heavy plant and machinery and machine tools, electrical plant and hydraulics
▪ Coal and lignite
▪ Mineral oils
▪ Mining of iron and manganese, chrome, gypsum, sulphur, gold and diamond
▪ Mining and processing of copper, lead, zinc, tin, molybdenum, wolfram
▪ Minerals specified in Atomic Energy
▪ Aircraft
▪ Air transport
▪ Railway
▪ Ship building
▪ Telephones and telegraph and wireless
▪ Electricity
▪ All new units, except those already estd by the private, will be by state.
This does not preclude the expansion of existing private units or private
cooperation. But rail, atomic, air transport and arms will be state
monopolies
▪ Where private participation necessary, the state will retain control
◦ Progressively state owned, state initiative in new units and private sector
will supplement state
◦ Remaining where private sector will take the lead
▪ But it is always open for the State to undertake any type of industrial
production
▪ The state will encourage the private sector through the various policies as in
various FYPs and by developing transport and other services
◦ Special assistance to cooperative
• Private sector has to fit the social and economic policy of the state and will be
subject to control through legislation like Industries(Disputes and Regulation)
Act. The state would endeavour to give freedom to private sector and in mixed
areas, fair and non-discriminatory treatment
• Active coop between private and public sector and hence the classification not
watertight.

355
 • Role of small and cottage industries in national economy like equity and
employment and so state will take steps to encourage them
• Make resources steadily available in hitherto underdeveloped areas for balanced
development
• Expand the technical and managerial expertise
• Welfare of labour and industrial peace
• Decentralisation in authority. Public enterprises should be given operational
freedom
Industrial Licensing Policy, 1970 and 1973
• Placed restrictions on undertakings belonging to large industrial houses,
particularly through the MRTP Act
Industrial Policy, 1977
• Certain distortions in the system since 1956. So new policy
• Closer interaction between agri and industry
• Highest priority to power generation
• Exhaustive analysis of products to identify those to be reserved for the small
sector and the list to be reserved for them expanded from 180 to 500+, with an
annual review of the list
• District Industries Centre to be set up to provide under a single roof all support
needed by entrepreneurs
• Foreign Companies that diluted their foreign equity upto 40% under FERA to
be treated on par with Indian companies
• A list of sectors where no foreign collab needed as indigenous development
already there
• For all approved foreign investment, complete freedom of remittance
• Fully owned foreign companies permitted only in very sophisticated tech or
highly export oriented areas
• Compulsory export obligations discontinued
• For balanced development, licenses for new units for certain areas around
large metros
• Takeover of sick units to be reviewed as they are a drain on exchequer

Industrial Policy, 1980

• Drive to ramp up efficiency of the public sector
• Economic federalism through set up of few nucleus plants in industrially
backward regions, helping the various industries in the area
• Focus on competition in the domestic market and tech upgradation and
modernisation

356
Industrial Control Regime, 50s to 70s
Licensing originated from the dominance of socialism, nationalism and the inability
of the private sector. It operated through
• FYP
• Import-Export controls
• Control of capital issues
• Control of forex
• Credit allocation
• Price control
• MRTP
But though these were intended to be used for steering development in the desired
direction, they became excessively restrictive
Performance of the Licensing System
In addition to the various licenses, the MRTP act was also a constraint. The govt
appointed various committees to examine the licensing system like the
Mahalonobis Committee, Swaminathan Committee, ARC. Almost all argued that
the licensing system was not working as desired, but little effort was made to
change
• India's import tariffs were among the highest in the world, with tariffs over
200% fairly common
• Huge imbalance in licensing, with most going to states like MH, GJ
Reforms in the 80s
• Experimentation with delicensing
• Weakening of the MRTP Act to provide scope for larger industrial houses
• Incentives for modernisation of capital stock
• A move from physical controls to financial incentives and disincentives.
• But the reservation for small scale continued. This hindered the development of
export capacity particularly at a time when China was taking the lead in it.
• The numerous barriers to exit was also continued, through labour laws etc. They
prevented efficient allocation of resources.
• Even before the 1991 reforms, the 8th plan had recognised the flaws of the
extensive licensing system.
Industrial Policy, 1991(New Economic Policy)
• Objectives:To continue the objectives stated by Nehru and consolidate gains
• Both structural and stabilisation policies.
• This can happen if India grows as part of the world economy, not in isolation
• Foreign investment and tech to be welcomed

357
• In the 1950s and 60s, the instrument for controlling the commanding heights of the
economy was investment in capital of key industries. Today other instruments like
fiscal and monetary instruments. The state also commands the bulk of
national savings as banks are under state control
• Reforms in the following areas
◦ Industrial Licensing Policy
▪ Bedrock of change is that let entrepreneurs make decisions on the basis
of their own commercial judgement
▪ So industrial licensing will abolished for all industries except those
specified, irrespective of the levels of investment.
• Alcohol
• Cigarettes
• Hazardous chemicals
• Industrial explosives
• Electronics
• Aerospace
• Drugs and pharma
• The above require licensing.
▪ The ones reserved for public sector:
• Defence
• Atomic energy
• Railways
▪ Industries reserved for small scale continue to be reserved
◦ Foreign Investment
▪ Approval for FDI upto 51% in high priority industry requiring large
investments and advanced tech. No bottlenecks here
▪ In cases where forex expenditure required, clearance from Secretariat of
Industrial Approvals required
▪ Foreign Investment Promotion Board set up to expedite the
approvals(now wound up)
◦ Foreign Tech Agreements
▪ Automatic approval for tech agreements related to high priority
industries within specified parameters.
▪ Available for others also if they do not require the expenditure of free forex
▪ Hiring of foreign technicians and and foreign testing of indigenously
developed tech also free from approvals
◦ Public Sector Policy
▪ The priority areas for growth of public sector will be the following:
• Essential infra
• Oil and mineral exploration and exploitation
• Tech development

358
 • Manufacture of products of strategic importance
▪ Disinvestment in selected enterprises primarily to finance the fiscal deficit.
Privatisation was not pursued initially.
▪ Board for Industrial and Financial Reconstruction(BIFR) will handle sick
PSUs for rehabilitation
▪ Much greater autonomy to PSUs through MoUs
▪ The better performing PSUs were allowed to access capital markets.
◦ MRTP
▪ Pre-scrutiny of investment decisions by MRTP companies abolished
▪ Repeal of prior permission for investment, M&A etc
▪ MRTP commission will be strengthened to prevent unfair practices

With the reforms, public sector efficiency got a boost with the Board for Industrial and
Financial Reconstruction, selective disinvestment. In 1997, the Disinvestment
Commission was created and based on its reco, major privatisation like Maruti,
VSNL.
National Manufacturing Policy
Obj
• Increase share of mfg in GDP to 25% by 2022.
• 100 million additional jobs
• Enhance global competitiveness
• Enhance technological depth.
• Environmentally sustainable growth.

Industrial Policy and Role of State

While the excessive intervention of the state led to constrained growth between 1950-
80, the state does have a role. Kaldor, Krugman both show the effects of fast
industrial growth on the rest of the economy using positive externalities. Market
failures present a powerful case for industrial policy.
Aspects need attention
• Long term finance- India turned its DFIs into commercial banks, thus constraining
long term finance and investment. The debt market has not deepened enough to fill
the vacuum.
• R&D- Licenses to import tech has dented the private investment in R&D. India
spends 0.8% of its GDP on R&D, while China spends about 2% of its much larger
GDP on R&D
• Trade and investment treaties- India lacks favourable treaties, as seen in the low
skill mfg part.
• Infra

359
Industrial Growth and Structure since 1951
6 phases as pee Krishna(2013)
• 51-66-Evolution of Industrial Development Strategy. Compared to pre-
independence the growth performance was impressive. Against a background
of import pessimism ISI was pursued
◦ The forex crisis in 1957 led to reimposition of exchange controls, harming
growth
◦ The devaluation-liberalisation move, 1966 was unsuccessful and the ISI
strategy had got entrenched. India failed to take advantage of exports in
labour intensive mfg like Korea did.
◦ There were entry barriers too in the form of industrial licensing and so not
enough competition and efficiency
◦ Panagariya argues that this was a huge mistake and was responsible for
the poor performance of industry in the next phase.
• 67-80-Inward orientation and industrial stagnation
◦ ISI and govt control strengthened
◦ Bank, insurance, coal, nationalisation
◦ FERA, MRTP
◦ Increasing reservations for small scale. The IPR 1977 expanded the
reserved sectors greatly to over 500
◦ Political unstability
• 81-91- Deregulation and acceleration of growth. Agri performance also improved
which helped. Fiscal policy was expansionist
• 91-2001- Economic reforms and service led growth
◦ The pace of reforms slackened in the mid 90s and growth slowed
◦ Agri slowdown
◦ AFC
• 2002-2009- Fast industrial growth
• Post 2009- After a brief slump due to the recession, recovered but then sharp
decline post 2012 due to policy paralysis, major SC judgements like 2G and
coal licenses.
◦ Recovered after 2014, but again slowing down post 2018, primarily due to
demand crash, credit issues
Rakshit and Singh argue that India has witnessed Service Led Industrialisation
See industry growth rates in Master sheet

Manufacturing
Balakrishnan. based on IIP, arrives at the growth rates of mfg

360
Growth of total mfg fell in second phase and then rose. Registered mfg has grown
faster than unregistered in all phases
Phase Rate
50-66 6%
1966-1980 4%
1980-1991 5.5%
1991-2000 6%
2000-12 7.5%
2012+ 7%

Post reforms, immediatelythere was a slowdown in mfg and then a brief recovery
till 1996. Nagaraj argues that this was due to the J-curve phenomenon following
liberalisation
• Obsolescence in product lines and the capital used to produce it led to decline
• Gradual adoption of new tech led to the rise

The mfg slowdown(1996-2002)

Witnessed substantial deceleration in 11 industrial groups with a combined weight
of 64% in mfg output. The rest 6 groups posted growth, but as they had lower weight,
overall mfg slowed.
Causes
• Triggers
◦ Saturation of the pent-up demand of 'once-for-all' nature for import-
intensive goods, which could be domestically produced following trade
liberalisation.
◦ Credit crunch due to liquidity tightening in money markets as RBI resorted
to large dollar sales to curb volatility in forex markets
• Cyclical causes
◦ Nayyar- Significant fall in public capex. But while it does have an effect, the
govt capex declined even during the mfg boom of 92-96. So it is not the only
factor

361
 ◦ Decline in capex by industry to correct the over investment during the
previous boom. It was also due to a rise in rates. Real fixed inv in mfg
increased from 7% in 1990 to 13% in 1995 and then declined to 8% by
2002.
◦ Lagged effect of the negative agri growth
◦ Slowdown in export demand- Asian crisis
• Structural factors
◦ The basic cause was inadequate restructuring in the face of growing
openness of the economy and associated external competitive pressure.
Though some sectors responded positively, like automobiles as India
became leader in 2-wheelers
◦ Infra constraints-There was a decline of real gross capital formation in key
sectors like roads, electricity, mainly due to declining govt capex, on account of
rising fiscal constraints
◦ Nagaraj- Post reforms, mfg saw subcontracting of parts and auxiliaries to the
unorganised sector. Constrained both output and employment growth in
mfg. This can be seen in rise of growth rate of unreg mfg post lib below.
Recovery, 2002-03
Recovered in 2002-03 and consolidated in 2003-04 and gained momentum thereafter,
reaching 15% growth in 2007-08 The growth was investment led as there was
significant growth in the capital goods sector.
Causes
• Rising global and domestic demand. Exports registered a CAGR of 20% in the
10th plan as compared to 6% in the 9th plan.
◦ The role of exports for mfg growth in 2000s is supported by Goldar as well
• Cumulative effect of the reforms carried out since 91, with the competitive
environment finally bearing fruit.
Use Goldar's and Virmani-Hashim estimates of TFP growth in mfg also for
arguments
Post 2008, to 2015
• Fluctuating trends as seen by the IIP.
• Initial deceleration was on account of the global slowdown as the previous boom
was greatly helped the exports.
• But as fiscal expansion was carried out to boost economy post the recession, the
industrial growth recovered too in the next 2 years.
• But post 2011, it again declined for 3 successive years. A main reason was
rising rates to combat the very high inflation, declining investment, declining
business confidence, policy paralysis.

362
 • Within mfg, capital goods sector was the hardest hit due to lack of inv due to
policy paralysis. The sharp rupee depreciation due to taper tantrum also led to
decline in import of capital goods.
2015+
• Mfg recovered in 2017. Infra, capital goods had positive impact. Improvement in
EODB
• But then slowed down again. Eg post 2015, IIP registered double digit growth
only in one month
• Severe slowdown in automobile sector which constitutes almost half of mfg GDP.
It had the sharpest decline in 20 years
Change in Mfg structure
In 1980-91, capital goods grew at 10% while consumer goods at 6%. Post lib,
capital goods at 6%(1991-2000), while consumer goods at 6.5%, led by consumer
durables.
Registered mfg grew at 7% in pre-lib decade, while unreg at 5%. Post lib decade,
reg grew at 8% while unreg at 6%
Mfg has contributed 70% to industrial prod(mining and electricity other sectors of
the IIP) in pre-lib decade while it contributed 82% post lib. Currently at 77%
Why Mfg led growth needed-ES

Supported by Lewisian idea of sectoral transformation.

363
Benefits of mfg
• While services are also highly productive, they have higher skill requirements
Thus choice for India to to go forcomparative advantage deifying(unskilled)
sectors, instead of comparative advantage defying(skilled) sectors
ES says that despite the downside of services led growth, it has increased private
returns to education and hence increased pressure on govt to provide better
ed.Evidence by Muralidharan and Kremer

Make What in India(Veermani and Dhir)

364
The experience of East Asian economies as well as China shows that export-led
industrialisation is crucial for sustained growth. This is in contrast to India's pre-
lib strategy as laid down by Abid Hussain Committee which emphasized on growth
led export
Aims of MII
• Promote exports
• Attract FDI
• Increase productivity
• Improve EODB
• Increase share of mfg in GDP to 25% and create 100 million jobs

Questions
• What are the industries that need to be promoted most?-Network products
and low skill mfg
◦ Given our comparative advantage in labour-intensive industries(LII) and given
the need to create employment, 2 types of industries
▪ Traditional unskilled LII like clothing, shoes
▪ Based on imported parts and components as India has a huge potential to
emerge as a final assembly point. These network products, include office
machines, telecom equipment etc. They will also help India move up the
value chain.
• What should be the trade policy? An ultra-export promotion strategy, which
involves subsidising exporters with cheap input and an undervalued exchange
rate(Bhagwati), or a neutral policy that favours neither the domestic market nor
the export market?- Balance needed. Undervaluing the exchange rate is not
good as it can lead to macro instability as well as strain relations with other nations.
Eg China-US war
• Should the govt pursue an activist industrial strategy by promoting some industries
or be a neutral facilitator?
• What roles do MNCs play and what synergies they establish with domestic firms

Global Production Networks(GPNs)

Reduction in transport and communication costs have resulted in unbundling of the
production process. Nations now specialise in particular stages of the value chain.
Trade in these goods takes place on the basis of intra or inter firm relations. This
has resulted in factory economies like China that specialise in the LI part of the
process and the headquarter economies that specialise in the capital intensive
part, like R&D, of the process.
But India has been locked out of the vertically integrated GPNs. Even the firms that
have set up bases in India for production are for catering mainly to the domestic

365
markets.

366
367
Agglomeration advantages
With the geopolitical crisis and also need for ramping up Indian mfg under the
Atmanirbhar Bharat Abhiyan, need to decouple from China
• But China has significant advantages as a huge final demand market. This leads to
agglomeration advantages for businesses as they can set up supply chains
closer to the demand market. This is one of the reason for heavy import
dependence on China
• Further, China has broad based its capacity in almost all aspects of industry, in
all products. So again agglomeration advantages

368
 • Skill set problem, which is the main reason India receives very high FDI in
services, not in mfg despite offering attractive terms to investors. China
receives huge FDI in mfg due to its skill set in mfg. Similar is infra, and
bureaucratic inefficiencies
• This is also the reason why India receives most FDI to acquire existing assets,
like the Walmart-Flipkart deal, and very little greenfield investment that will
create more jobs, as foreign investors don't want to take the hassles
themselves
Export Performance
• India's market share in merchandise exports is 1.7%, paltry compared to
China's 15%
• Despite being a labour intensive nation, India's exports are in capital and skill
intensive products. This has led to India gaining foothold in poorer regions like
Africa but losing on in richer areas like Europe as these areas are highly quality
conscious and themselves have firmly established capital intensive industries.
• Hence greater participation in GPN needed in labour intensive areas

Policy
• To promote India's position as an assembly point, low logistics cost and
efficiency required. .
• Supply disruptions due to infra, bureaucratic, labour issues need to be
minimised
• Skill development
• The first tier suppliers in these industries are often MSMEs. So they need to be
promoted.
• An ultra export promoting strategy will not be successful

Low Skill Manufacturing

Apparel and leather sectors are perfect as they create jobs, especially for women,
help in exports and growth. Rising wages in China presents India a chance but
competition from Bangladesh and Vietnam.
Nearly all post-War growth strategies has seen the 2 sectors contribute a lot. In the
East Asian economies, the exports in these sectors grew at 25%.
Jobs, especially for women
• As per the ES, apparel and footwear have the highest job per lakh investment
ratio of 24 and 8 respectively.
• They also have the highest female jobs per lakh investment ratio at 8 and 4
respectively. Ban benefited tremendously from this.
• Apparels are 80x more labour intensive than autos and 240x more labour
intensive than steel.

369
 • As per the WB employment elasticities, rapid export growth in these sectors
can generate 5 lakh jobs every year.
Current State
• Indian textile industry is the second largest manufacturer and exporter.
• Contributes 2.3% to GDP. and 12% to exports
• Textiles and clothing is the biggest employer after agri. Employ around 10 cr
people in textile and allied
China vacating
• While in 2013, wage costs in China was 250-300 USD per month, all Indian
states have wage costs much lower than China. The highest is in Maharashtra
at 120 USD.
• But India does face wage competition from Bangladesh
• In global footwear exports, China has a share of 45% while India has only 2%.
Same for apparel in which India has only 5%.
Challenges
• India's comparative advantage in cheap labour is being nullified by other factors
• Logistics
◦ The time involved in getting the goods from factory to consumer is far
greater in India. India has per km road transport cost of 7USD while China
has 2.5, Bangladesh has 4. While India takes 6 days for port and other
clearances, China takes just 1.5
◦ There are few Very Large Capacity Containers coming to Indian ports. So
exports have to be routed through Colombo adding to time and costs
• Labour regulations
◦ Act as de facto tax on low paid workers in small firms as firms lower wages to
meet regulatory needs.
◦ High overtime wages, fixed at 2x of normal wages in the Minimum Wages Act
◦ This leads to smaller firms in India. 92% of the workers working in apparel
industry, are in small firms.
• Tax and tariff policy
◦ World demand is shifting towards man made fibres away from cotton based
exports
◦ But in India, high tariff on yarn and fibre increase the cost of producing
clothing. India imposes 10% tariff on man made fibres and 6% on cotton
fibres, as per the ES
• Disadvantages from international trade environment
◦ India major competitors enjoy very low or 0 tariffs in the major importing markets
of US and EU.

370
 ◦ In EU, Ban exports are duty free with Ban being a LDC, while Indian exports
face tariffs 9%. Vietnam also has a FTA with EU
◦ Thus India needs FTA with these nations

Policy response
• India has started providing drawbacks against state taxes, which can be as high as
5%.
• Subsidy for increasing employment, with the govt contributing 12% to the EPF
• GST introduction a very good step as it ends discrimination of man made and
cotton as well leather and non-leather
• FTAs
• Labour law reforms
◦ Reduce the deductions made from the salary of low wage employees for PF, ESI
• Amended Technology Upgradation Fund Scheme for textiles(ATUFS)-
provides production linked additional incentive of 10%
• Relaxation of Section 80JJAA of the IT Act from 240 days to 150 days as textile
emp is seasonal. The section provides for deduction in lieu of employment
generation
• Rates under MEIS enhanced from 2 to 4%
• Scheme of Integrated Textile park- 40% subsidy is provided upto 40 cr for
setting up tex parks
• National Technical Textiles Mission- See GS3
• PowerTex India Scheme for loom upgrade and credit
• Samarth scheme for training youth
• Jute ICARE for increasing income of farmers by at least 50% through certified
seeds, best agronomic practices
• MOU between India and Japan on textile testing including technical textiles.
Will enable Nissenken Quality Evaluation Centre of Japan in assigning Textile
Committee of India as their coop testing and inspection service providers in
India
Productivity Growth in Indian Mfg(Biswanath Goldar)
Estimates that there was rapid growth in productivity. Main reason was providing
access to imported intermediate inputs
TFP growth rate for mfg
1991-1998- 0.25%
1999-2002-(-0.09%)
2002-2008-1.8%
2008-2012-1.5%
• In the second period affected by the crisis

371
 • The growth in TFP was higher in 2000s than 1990s. This is corroborated by
Virmani and Hashim and is also a reason behind the mfg slowdown of late 90s
Virmani and Hashim(IMF)- J curve effects(note that Nagaraj was talking about
earlier J curve, prior to 1996. Also Nagaraj J curve was of Mfg output, this is of
TFP)
The J curve they are talking about is late 90s decline and then fast growth in 2000s
Causes of the effect
• Import liberalisation led to capital obsolescence
• The rise was due to the new technologies diffusing more widely in the economy
• Learning by doing as HR got acclimatised to the new tech
• The rigid labour laws also accentuated the J curve effects as they prevent
immediate reallocation of resources in response to changed environment

Micro, Small and Medium Enterprises(MSMEs)

MSMEs that grow not only create profits but also contribute to job creation and
productivity and hence policies must be focused on unshackling MSMEs.
Nourishing Dwarfs to become Giants- Reorienting Policies for MSME Growth(ES
2018-19)
Dwarfs- Small firms that never grow.
Infants- Small firms that have the potential to grow and become giants rapidly.
• Firms with less than 100 workers and more than 10 years old are dwarfs. Note
that the definition used in the ES is different from the official definition of
MSMEs.
• Account for 85% of all mfg firms in the organised sector, but their contribution
to employment is only 23% and to productivity only 8%.- This is the long tail
that Nagaraj mentioned
• Large(>100, both old and young) account for mere 15% of number, but 75% of
employment and 90% of productivity
• Small firms are often hailed as job creators but the Survey argues that this is
wrong as this calculus ignores the job destruction by small firms. Small firms
find it difficult to sustain the jobs they create while the larger firms create better
quality, permanent jobs.
• Role of policy in dwarfism
◦ The major reason behind this is size-based incentives that are not age
specific.
◦ Labour Laws

372
 ▪ Each labour law, whether in the state or central level, exempts smaller
firms from compliance. Eg IDA, VB for firms with less than 100
employees, no need to take permission for retrenchment. Factories Act, 10
or more workers with power, or 20+ workers without power.
▪ Deregulation of labour laws also creates large number of jobs as RJ
shows. Besley and Burgess also show this.
• Way forward
◦ Incentivizing infants rather than dwarfs- Misuse of the age-based criterion
can be easily avoided using Aadhaar. Eg if a promoter starts a new firm, uses
benefits for 10 years, then closes this and starts a new firm, then the Aadhaar
can alert authorities. Once small firms know that they won't continue to get
benefits despite age, they will try to grow to use economies of scale
◦ Reorienting Priority Sector Lending- 7.5% of ANBC or Credit Equivalent
Amount of Off-Balance sheet exposure has to be lent to the MSMEs. But it is
necessary to prioritize startups and infants, especially in high employment
elasticity sectors. As per the ES, Rubber and Plastic products have the highest
emp elasticity, then electrical equipment, least is wood products.
◦ Sunset clause of incentives

Impact of Small Scale Reservation

Reservation for SSI originated from the Industrial(Dev and Regulation Act), 1951,
mainly for preventing concentration. Under this, capacity expansion in non-SSI
allowed only if it agreed for 75+% export obligation.
The reservationinitiated in 1967 with around 50 items, enlarged to over 500 by
1980and836 items in 1991. The1991 reforms continued them. Reservation in
productionended in 2015 though reservation in public procurement still applicable
for 358 items
Some policies targeting MSMEs are

373
All these promote small sizeirrespective of age.
• The ES argues that dwarfs are much more likely to manufacture reserved
products
• It also argues that reservation limited the incumbent firms that intended to
grow before de-reservation but could not do so for the fear of losing out on
incentives.

374
 • Martin et al show that due to de-reservation, while small firms lost jobs, large firms
created jobs and the net job creation as a result of de-reservation increased
monotonically with size and decreases with age. Thus younger and larger
firms create net jobs due to dereservation
• As per Santana et al, the misallocation of resources due to SSI reservation
originates from 4 sources
◦ SSI policies substantially lower the K/L ratio when compared to the efficient
level.
◦ Due to lower K, the overall demand for L and hence W are much lower.
◦ SSI policies result in inefficient allocation of managerial talent
◦ Results in price in restricted economy being too high, affecting exports.

Impact of SSI Reservation on emp(Harrison et al)

The main rationale for reservation was the belief that they were better at job
creation.
Inference- As a product wasde-reserved, the number of firms increased 20%,
employment 50%, output 40%. Capital and wages also rose.
• The increase in output and emp driven by entrants. The incumbents reduced their
emp.
• But significantly, the incumbents just below the threshold of SSI, increased
their emp after de-reservation, implying that they were constrained by the
reservation policy.
• Thus in line with the ES, that it is young firms, not small firms, that increase
emp. As young firms are small, it was confused as small firms creating jobs.
But it is not true. Hence like the ES argued, there has to be policies
disincentivising remaining small.
Thus issues overall with SSI reservation
• Productivity low - ES.
• Leads to lower output
• Leads to uncompetitive products hence harms exports
• Employment low
• Job quality low
• Misallocation of resources

The size based incentives create a very high marginal tax rate for these small
enterprises. Eg if it is employment based, then jumping from 10 to 11 employees
can take away benefits and so the marginal tax rate due to the 11th employee is
very high, and this creates a small scale trap. This is what happens in poverty
alleviation programs as well as benefits are designed to be phased out with a rise
in income.

375
LPG and SSI performance- MH Balasubrahmanya
To counter the negative effect of intense competition due to dereservation in the era of
globalisation, number of policies were introduced.
The SSI sector has 2 components
• Registered, under Factories Act and with the District Industries Centre.
• Unregistered

• The growth rate in number of units has declined considerably, by more than half
between pre-lib, post-lib.
• Employment also declined by almost half between pre and post-lib. Improved
marginally in the 2000s.
• But in terms of output, the growth rate higher post-lib, with very high growth in
the 2000s.
• Exports, increased, but only marginally post-lib.
• The registered segment suffered in the initial decade after lib but then
improved considerably in the 2000s. This is reflected in sickness also, which
declined from 14% in 2000 to 6% in 2007. The benefits of lib were more
pronounced on the registered segment.
• Explanations
◦ New units may not have come up as quickly as before lib due to competition,
thus affecting emp
◦ Those that did come up post lib were much more competitive and hence
output registered faster growth.
◦ But argue about how dwarfs dominate and emp only 23% share and output
only 11% share
Ancilliarisation

376
 • The promotion of inter-firm linkages between large and SSI through sub-
contracting and ancilliarisation has been an imp feature of policy.
• Benefits of subcontracting and anci
◦ Assured market access
◦ Access to technical, financial, managerial, input assistance
• The % of ancillary units increased from 0.5% to 5% between 87-2000. This
figure will be much higher if the informal contracts also considered. This is
mentioned as a key structural factor by Nagaraj for the mfg slowdown
MSME
Definition
For enterprises other than services:
• Micro-<25 lakh investment in plant and machinery
• Small- >25 lakh but <5 cr
• medium > 5 cr &.<10 cr
Inv in PM is the original cost excluding land and building
For services. Equipment- Excluding land and building, furniture, fittings and other items
not directly related to rendering of services.
• Micro- <10 lakh inv in equipment
• Small- >10 lakh & < 2 cr
• Medium >2 cr & <5 cr

Stats on MSMEs
• Over 6 cr MSMEs in India, but only 4000 large.
• Highest Micro.
• Rural ent higher in number but employ 23% less than urban.
• Total MSME employment 11 cr, second only to agriculture.
• Account for 45% of exports by India.
• Account for 30% of the GDP
• UP has highest MSMEs, followed by WB
• Bank credit to MSMEs has grown at compound annual growth rate(CAGR) of
15% in the last decade, mainly for services MSMEs.
Regulatory Regime
• MSME Development Act, 2006 provides for establishment of National Board for
MSME headed by MSME minister.
• The prime responsibility for dev of MSME is with the states.
As NBFCs are in a liquidity crisis, credit to MSMEs hit and Indian banks not in a
position. So foreign official agencies can be used, like WB for credit to MSMEs

377
MSME procurement policy.
Every central dpet/min target 25% proc from MSE(yes, MSE, not MSME) sector, out
of which 4% from SC/ST enterprises, 3% for women MSE. Tender sets free and no
earnest money(token money). 358 items reserved for exclusive proc from MSEs.
MSEs quoting price within price band L1-15%(L1 lowest bid) when L1 is from non-
MSE, shall be allowed to supply at least 25% of tendered value at L1 if MSE lowers
price to L1.
Issues plaguing
• Biggest is financial crunch- NITI estimates that the credit gap for MSME sector
is 25 lakh cr
◦ Delayed payments
◦ Poor credit
• Poor market access due to lack of knowledge and scale
• Mostly in the informal sector, precluding them from a lot of benefits of the formal
economy, like Input Tax credit for GST
• Deficiencies in basic infra like power, rail etc as a large number in rural areas. This
is also why urban MSMEs, though small in number, perform better
• Resources for cluster development limited- Thus dis-aggregated
• Divergence between the research institutes who create tech and the MSME
requirements
• Cumbersome registration requirements.
• Extremely heterogeneous
• Very small-99% of them are micro, which employ 1-2 people only and are also
less productive.
• Most micro do not qualify for GST registration also

Schemes for development of MSMEs

• Udyog Aadhaar Memorandum- Based on the Kamath Committee on Financial
Architecture. Vastly improves EODB for MSMEs as they just need to fill a single
one page form for registration.
• PM Employment Generation Program- Emp generation through setting up of new
self-employment ventures, to provide sustainable employment to the people to
prevent migration and increase wage earnings. Implemented by KVIC. Anyone
above 18 and 8th standard pass. No collateral or thrid party guarantee reqd.
Only new units are considered for it
• Credit Linked Capital Subsidy Scheme(CLCSS)- Subsidy of 15% on
institutional finance availed by MSEs who have UAM, for induction of new tech.
See Vision Sep 2019

378
 • Credit Guarantee Trust Fund for MSEs(CGTMSE)- Providing guarantee for loans
availed by MSEs(not MSMEs) from NBFCs. Trust established by SIDBI and GOI.
for both term and WC loans upto 1 cr, without collateral. New or existing MSE
• A Scheme for Promotion of Innovation, Rural Industry and
Entrepreneurship(ASPIRE)- Create a database of existing tech and National
Technology Centres for sharing of best practices. Setting up incubators and
accelerators. Develop agropreneurs
• Scheme of Fund for Regeneration of Traditional Industries(SFURTI)-To
organise artisans into clusters to make them competitive.
• Interest Subvention Scheme of 2% for all GST registered MSMEs on incremental
credit upto 1 cr. Will include working cap loans and term loans and loans upto 1 cr
in just 59 minutes
• The Budget 2020-21 has raised the audit limit for MSMEs from 1 cr in turnover
to 5 cr but this would apply only to those that carry out less than 5%
transactions in cash, hence will incentivise Less Cash Economy
• The RBI has waived CRR requirement of 4% for incremental loans to MSMEs
between 31.1.2020-31.7.2020
• Has extended the deadline for one time debt recast for GST-registered MSME
firms which are in default but not yet classified as NPA, i.e. default has been
less than 90 days
◦ This is part of an existing scheme under which MSMEs who defaulted as on
1.1.19 were given one year to restructure their loans with banks. Now this has
been extended to those MSMEs who defaulted by Jan 1.2020
• Has also directed External benchmark linked loans to MSME
• Companies with turnover less than 400 cr will enjoy a lower corp tax of 25% in
budget 2019-20.
• All companies with turnover of more than 500 cr have to be mandatorily
registered on Treds platform so as to increase credit growth based on trade
receivables. Was reco by the UK Sinha Committee
• Gramodyog Vikas Yojana under the KVIC. Various projects under this like
promotion of incense stick mfg
RBI appointed UK Sinha Committee on MSMEs. Key recos see Vision June, 2019
Way to resolve financial crunch
• MSMEs need to have better data management in their financial statements so that
credit assessment can be done
• Fintechs and banks should opt for co-origination of loans, with fintechs providing
market intelligence

379
Changing the definition of MSMEs- Reco of the UK Sinha Committee also as a
turnover based definition
• Will require amendment to the MSME Development Act
• Will help in promoting EODB and generate jobs
• Most countries and institutions use a single variable, mostly employment. India
uses 2, as employment data is not of good quality
• The current definition was decided in 2006 and does not reflect the current
index of prices in plant and machinery
• Many actual MSMEs don't maintain proper books of accounts and hence are not
classified as such, losing out on benefits
International Cooperation Scheme
MSME Min. To capture new markets and improving tech. Financial support provided
to attends meets and exhibitions abroad.
NIFTY has EMERGE SME index which has 62% of total market cap of all SME listed on
NSE. BSE SME IPO index.
Khadi and Village Industries Commission
KVIC is a statutory body estd in 1956
Apex org under MSME ministry for promoting khadi and village industries in rural India
Production of khadi is the largest rural productivity program in the world
Obj
• Employment
• Providing saleable articles
• Self reliance
Activities
• Develop khadi mark for branding
• Khadi Reform and Development Program- Support from GOI and ADB
• Mission Solar Charkha, Terracotta Grinder, REPLAN, PM Employmet
Generation Program
Coir Board
Statutory. India largest coir producer. Under MSME Ministry
Enterprise Development Centres
To be launched in every district by the MSME ministry. Will be similar to incubators
for startups and shall be run by SPV in partnerships with pvt sector and local industry
associations
Will offer courses on entrepreneurship, enterprise clinics for struggling firms to
reduce the debt trap, will offer credit facilitation and syndication, export promotion

380
and supplier inclusion
Punjab Right to Business Bill
To give EODB to the MSME sector. Under this, an MSME unit can be set up after in
principle approval from the DC working under the guidance of the Director, Industries
of the State. Approval for units in industrial parks will be given in 3 days and outside
within 15 days. The unit will have 3.5 years to obtain the other necessary approvals after
setting up, except for Fire NOC and environmental clearance which have to be obtained
before
Note that there is a conflict between the ES and the general notes on MSMEs. ES
focuses on the inefficiency of these firms. Even though the definition of the ES is
different, the argument holds. So, thestrategy should be to promote setting up of
MSMEs and their growth, as it is easy to set them up with little capital. But then
thepolicies should not keep these enterprises small and should actively
encourage them to breach the threshold limits of MSME(as per general notes), to
make use of large scale, high quality job creation, economies of scale.
New measures announced as part of Atmanirbhar Bharat
• New definition for MSMEs in line with ES and UK Sinha Committee report
◦ This will revise the investment limit upward to remove the perverse incentive
to remain small, in line with ES reco
◦ Will also add turnover based limit in line with UKS reco
◦ Will remove distinction bw mfg and service sector
◦

◦ Note that the govt has again revised criteria for Medium enterprises.
Investment-50 cr and Turnover 200 cr

381
 ◦

• Other measures like collateral free additional debt with 100% guarantee by the
GOI.
◦ Interest capped at 9.25% for banks and 14% for NBFCs
◦ Will provide liquidity worth 3 lakh cr
◦ Note that this Emergency Credit Line Guarantee Scheme has been
extended to large businesses and self-employed as well
• A new Fund of Funds established to provide support to MSMEs
• Global tenders of upto 200 cr disallowed to provide incentive for MSMEs
• E-market linkage for MSMEs to act as an alternative for trade fairs
How larger thresholds benefit SMEs
• They are completely exempt from filing cash flow statement and segmented
breakup of financial performance
• Can avail partial reporting exemptions in areas like employee benefit obligations like
pensions, but are still obligated to provide actuarial assumptions used in
determining obligations to employees
• Not required to use present value techniques to arrive at the value in use of assets

Credit Guarantee Scheme for Sub-Ordinate Debt(CGSSD)

Announced as part of Atmanirbhar Bharat for the MSMEs which are stressed and
became NPAs as of 30.4.2020
Guarantees of 20k cr will be provided to the promoters who take debt from banks to
invest in their MSMEs
Solving the financing gap
We need to make our factoring(businesses who provide finance in lieu of receivables)
businesses much more competitive. Integrating GST and TREDS platforms will make a
large number of e-invoices available to businesses and hence enhance competition,
liquidity. We need to go through the announced amendment in the Factoring
Act(proposed in the Budget 2020-21) to allow more NBFCs to join TREDS for factoring.
NBFCs have expertise on lending to MSMEs but currently to qualify as a factor for RBI
reg, they need 50% of their business to be from factoring, which is a constraint
Public Sector

382
Since Independence, the public sector was considered a major vehicle for achieving the
objectives of growth and social justice
• The Mahalonobis plan truly laid the foundation for the public sector.
• The long-term import substitution growth required that the production capacity
be biased towards capital goods
• Other reasons, as per SD Tendulkar were
◦ To prevent the concentration of economic power due to the unbridled market
forces
◦ Private sector may demand a higher risk premium for investment in certain
key sectors than would be socially optimum
◦ The scale of inv required in some industries may be beyond the capital-raising
capacity of the private sector.
◦ The public sector, through an appropriate price policy, could generate
investible surpluses
◦ By production and distribution of some universal inputs like coal, steel, the state
could direct the private sector in a desirable direction.
◦ The public sector could assume the role of a model employer
Some of the reasons were conflicting. Eg generation of investible surpluses is in
conflict with the pub sec being a model employer or subsidising the universal inputs.
India's ranking in industrialisation in countries with similar income levels was
much higher. It also laid the foundations for later private sector led
industrialisation.
Performance of CPSEs
• There are around 350 CPSEs in India as per March 2018, of which around 250 are
operational. Out of these, around 180 are profit making, whose profit aggregated
to around 1,75,000 cr, while loss from the loss making CPSEs was in the range
of 30000 cr.
• But an analysis of profit making CPSEs with those in the pvt sector using five year
average net profit margin shows that there is great scope for improvement for
these CPSEs in some sectors like oil refineries, power, steel, fertilisers etc.
• In 2018-19, the govt received 85000 cr as disinvestment proceeds.
• As per Nagaraj, the public sector's share rose from 9% in 1960 to 25% by
1985, but the share in domestic investment halved. N attributes this to a
dramatic rise in public sector productivity, which also explains fall in public
employment.
• Output and Capital formation
◦ As per Nagaraj, since growth has picked up in the 80s, despite increasing
private share in the economy, the public sector has contributed to the
output growth in equal measure
• Fall in public sector employment growth.

383
 ◦ The growth rate of public employment has declined from about 6% in the 70s
to -1% in the 2000s. This has led to improved productivity as he public
sector was plagued by bloated workforce.
• Profitability
◦ PSEs have a higher depreciation as they not only have to invest in plant and
machinery but also on social overheads
◦ PSEs are geared towards providing goods and services where there is a
market failure, even if it leads to lower profits.
◦ PSEs have a very high proportion of debt as the govt wants interests.
◦ Nagaraj
▪ Measures profitability of PSEs as gross profit to total capital. As per him, the
profitability of PSEs has increased from 8% in the 70s to 20% in the
2000s. But a major driver of these is the petroleum companies
• But even these figures conceal the artificial monopoly nature of
PSUs, the administrative pricing like in petroleum companies
▪ He argues that the real culprit of poor public sector performance is not
the CPSEs, who have been subjected to most of the reforms, but inadequate
pricing of utilities and infrastructure services(railways), which fail to
recover even the costs.
▪ Prices in the public sector rise very slowly compare to the overall
economy.
▪ There has been an improvement in efficiency of the public sector since
the 80s, as seen in the improvement of the K/Y ratio. This can also be a
reason for fall in pub sec emp
• Implications
◦ The reasons for improved performance since 80s
▪ Increased budgetary constraint
▪ Increased managerial autonomy- In 1991, greater autonomy to PS through
MoU
▪ Greater competition in the market forcing efficiency
◦ But despite this, the translation to financial improvement has not been that
good due to the pricing problem.
◦ As BS Minhas argued, the Indian economy is struggling in deep swamps of
inefficiency. So there is no basis for commanding heights model
Public Sector and the NEP
• Portfolio of pub sector to be reviewed to focus on strategic areas only.
• Sick PSEs to be referred to the BIFR
• Increased public participation in the enterprises
• More autonomy, through MoUs, and professionalism to the board

384
Maharatna, Navratna and Miniratna
Maha
• Given to CPSE having Navratna status
• Listed on Indian stock exchange with min prescribed public shareholding
• Avg annual turnover of 25k cr for 3 years
• Avg annual net worth of 15k cr for the past 3 years
• Avg annual net profit of 5k cr for 3 years
• Significant global presence

Navaratna
• Miniratna-I category and Schedule A CPSEs with excellent or very good rating
under MOU in 3/5 last years and composite score of 60+ in the following
parameters
◦ net profit to net worth
◦ manpower cost to total cost of production
◦ EBITDA to capital employed
◦ EBIT to turnover
◦ earning per share
◦ Inter-sectoral performance
Mini
• Profit and net worth positive in the last 3 years

Disinvestment
See
New policy announced under Atmanirbhar Bharat Abhiyan
Aim is to have a policy where all sectors are open to private sector while PSEs will play
an important role in defined areas
• List of strategic sectors requiring presence(not monopoly) of PSEs to be notified
◦ In strategic sectors, at least one PSE, but pvt sector will also be allowed
• In other sectors, PSEs will be privatised
• Number of PSEs in strategic sectors will ordinarily be one to 4

Foreign Direct Investment

While FDI has been a fairly old practice, FPIs representing equity and debt flow
unaccompanied by management control have become highly visible and often
dominant components of foreign capital flows with the rise of FIIs and sovereign wealth
funds that seek to make quick returns through short term speculative activities
abroad.
FDI- Long term investments made abroad. What they bring

385
 • Capital
• Entrepreneurship
• Technology
• Managerial know how
• Market access sometimes
• Manufacturing oriented structural transformation
• Stability
Due to this, most developing nations actively seek FDI
In contrast FPIs have limited development role, if any, give their short-term speculative
role.
• Their distribution across nations is highly uneven as they target the fastest
growing economies.
• They also often bring in volatility to the financial and exchange rate markets.
Hence a number of countries impose capital controls
In India, FDI has become bi-directional.
Evolution of the policy regime towards FDI and FPI
• Post independence, ISI was the goal. But as the pool of domestic assets, like
tech, talent, capital, was limited, FDI was actively sought though majority Indian
ownership was preferred.
• In the 1960s, a more restrictive policy towards FDI was adopted as the local
asset base grew and as outflow on account of remittances of dividends, profits,
etc abroad on account of servicing FDI inflow grew sharply.
• From 1973 onwards, the activities of foreign companies and local large industrial
houses were limited to a select group of core, high priority industries.
◦ Limited foreign ownership to 40% and RBI permission was needed for higher
ownership
• In the 1980s, attitude liberalised as part of overall strategy
◦ Exemptions from foreign equity restrictions under FERA to 100% export-
oriented units
◦ More flexibility concerning foreign ownership.
• In the 90s, definitive change in policy with more efforts to globalise India.
◦ Abolition of the Industrial Licensing System except on strategic or environmental
grounds
◦ Automatic FDI clearance fulfilling the conditions
◦ Opening up of new sectors like mining, banking, aviation etc subject to
sectoral caps.
◦ Foreign ownership upto 100% permitted in most mfg sectors
◦ The dividend balancing and export obligations on foreign investors were
withdrawn in 2000

386
 • Since then India has been constantly liberalising the regime.
• India has also entered into Double Taxation Avoidance Agreements and BITs
The key difference between FERA and FEMA is that in FERA, positive list, and in
FEMA, negative list. Panagriya argues that this was a major reason for FDI growth
post 1991
Trends in FDI inflows
Have been growing since 1991, but the big break came in 2006 when flows tripled
in a single year from 7bn USD to 20. They peaked to 47 in 2008, before declining to
27 in 2010 due to the financial crisis. In 2018-19, FDI equity flows were 44 billion
USD, same as 2017-18. More than 70% came from Singapore, Mauritius,
Netherlands, Japan and UK.
India's share in the global FDI flows are around 2%. The relative importance of the
flows in GCF has also increased in the 2000s, to be around 7%. This is lower than
other developing nations.
Investment climate and prospects for FDI inflows
Hence, while India's large popn is an adv in terms of market size, its low
urbanisation, poor infra and low income levels are hindrances. India also does not
have geographical proximity to major sources of capital like US, EU. Hence India
has to continue to offer favourable policies and has to keep up its growth rates. Nagesh
Kumar has also found broad correlation between industrial performance and FDI
inflows. Hence need to maintain high industrial development.
India's comparative advantage in knowledge-based industries is also a factor, along
with a high-skilled workforce. India also needs to improve its EODB.
UNCTAD's Global Investment Trend Report shows India as among the top 10 FDI
recipients in 2019
Quality of FDI inflows- Nagesh Kumar
Sectoral composition
• It matters whether FDI is going to modern tech-intensive sectors and building
productive capabilities or going to the conventional sectors and crowding out
local business
• There has been a shift in India since 1991.
• Pre-1991, there used to be flows to the mfg, high tech sectors through a
selective policy
• Post-91, substantial portion to services.- Rao and Dhar show that between
2005-09, peak FDI flow period, mfg received just 20% of total FDI flows

387
 • Among the mfg sectors also, the FDI has been more concentrated in food and
beverages, transport equipment(not tech heavy), in sharp contrast to pre 91
when there was concentration in tech heavy sectors like electronics, chemicals.
• In China, the bulk of the FDI, by govt policy, has been directed towards export
oriented mfg, helping it to emerge as the world's factory.
• A large part of FDI in India is acquisition FDI which does not create any new
productive asset. Eg the Walmart-Flipkart deal. The foreign investors do not
want to deal with the bureaucratic procedures in India
• A large part also enter through tax havens, resulting in huge loss to
exchequer.
R&D and Local tech capability
• In India, foreign firms spend more on R&D than local firms, although the gap has
narrowed down.
• But post-lib, in mfg, foreign affiliated firms have a lower R&D intensity, due to
the access that they have to the captive labs of their parents.
• Local firms use R&D to absorb imported knowledge while foreign affiliates use
R&D to import and adapt their parent tech.
• Tech transfer requirements are not very effective(supported by Pant and
Mondal also) in diffusion of tech in the host country. Instead local content
requirements, domestic equity requirements much more effective. The Indian
2-wheeler industry is a case in point where Indian firms used foreign tech to
become self-reliant
• While tech transfer may be superior in case of a sole venture, instead of a JV
for a company, from a host point of view the latter is preferable in terms of
local absorption of knowledge.
• Pant and Mondal- They argue that Foreign owned firms do not create any positive
impact on domestic firms by learning by doing or by backward-forward linkages. .
Hence govt should encourage high quality FDI, and screen for those merely
looking to exploit home resources and market. Encourage foreign firms to
undertake R&D in India.
Impact of FDI on growth and domestic investment
• Two-way relationship between FDI and growth, with both complementing
each other-Nagesh Kumar
• Sometimes, FDI may crowd out domestic inv as they have their own market and
brand power and thus may be immiserizing.
• The effect of FDI on inv depends on the host nation policies. Govts use policies
like Local Content Requirements, like India did in auto industry. This resulted in
India building a global auxiliary parts industry.

388
 • In India, there is evidence of neutrality, with some FDI crowding in dom inv while
other crowding out. This is in contrast to East Asian tigers where FDI distinctly
crowded in dom inv.
• Hence it shows mixed quality FDI and scope for improvement

Export-Platform production
• Nations use FDI to exploit the brand names, market access, best practices etc
to boost their exports.
• Export-oriented FDI is also more effective at crowding in domestic investment
as the foreign investor mainly focusing on export markets
• In China, around 60% of the mfg exports are made by foreign enterprises,
while in India, the share of foreign affiliates is just 10% in exports
• Unlike the East Asian economies and China, India has not been able to exploit
FDI for export-oriented production
◦ The bulk of FDI in India are market-seeking, given India's huge market.
◦ This is another indicator of poor quality FDI
◦ But it is improving as the govt makes more export promoting policies and as
firms shift their production base to India for exports, due to India's cost
advantage
◦ India imposed export obligations only in the areas reserved for the SSI and
imposed indirect export obligations in the form of dividend balancing(requires
dividend payment to be matched by export earnings). But dividend balancing
has also been phased out under TRIMS of WTO. Forex neutrality(requiring
companies to earn forex spent on their imports, by exports) also used. In
the auto industry, foreign companies resorted to exports of spares from
India leading to the creation of a robust spares industry
◦ Kumar also shows that in nations with large markets, the export obligation
policies were effective in promoting export orientation of foreign affiliates.
China stipulates that fully foreign owned enterprises must export 50% of
production.
On Internet MNCs and FDI, and how China used its policy, see External Sector
Notes in GS. Quote Kelkar
Thus essentially, to improve FDI
• Incentives to direct FDI to high tech sectors in mfg
• Promote R&D
• Export obligations. Export promoting FDI also leads to more crowding in
• Local content requirements
• Rao and Dhar advocate for a selective approach for FDI, as adopted by Korea,
Singapore, directing FDI to strategic sectors

389
 • Discourage brownfield FDI
FPI Inflows and their impact
Rose rapidly post 2003. But these are highly volatile. Eg in 2007, FPI inflows peaked
at 27 bn, leading to Sensex zooming and rupee sharply appreciating to 38
compared to 47 in 2006. But in 2008-09, in the wake of the crisis, there was net
outflow of FII to the tune of 14 bn leading to Sensex crashing and a 25% depreciation
in rupee. The depreciation would be greater if the RBI had not intervened, leading to a
depletion of forex reserves by 50 bn $. In 2019, with the announcement of the FPI
surcharge, FPI worth 13 lakh crore withdrew in a single month
As the economy recovered, FPI increased rapidly in 2009-10, at 32 bn, leading to
another appreciation in rupee
ThusFII movements have become prime determinants of stock indices and
exchange rates(in 2019-20 also, post the budget announcement, sharp FII
outflow, leading to RBI intervention).As these are linked to the global
developments, they become achannel of transmission of volatility in the domestic
financial system.Eg the rupee depreciated sharply from 54 in 2012 to over 60 in
2013, during the taper tantrum.
Besides volatility, FPI also has avery high servicing burden. They are the most
expensive in terms of servicing among all foreign resources like FDI, NRI deposits
etc.
• This is because they come to primarily chase good returns at the stock market and
exchange rate speculation
• As they are stock price makers, not takers, they manage to exit before any
major crisis happens, thus leading to a net outflow and also precipitating the
crisis. Eg in 2007, India was providing 44% return.
They alsoforce a country to have a large forex reserveto counter the sharp
volatility in the forex market. If the RBI sterilizes the forex intervention to counter
depreciation(leaning against the wind), then it raises rates and attracts more FPI,
leading to a cycle
In light of their deleterious effects, many nations have resorted to capital controls to
moderate their volatility.
Thus the only good from FPI is that they deepen the capital markets and provide capital
to the economy
Outward FDI from India

390
Like inflows, the major turnaround for outflows also happened in 2006. They peaked
to 20 bn in 2007. Indian enterprises acquired large companies abroad. Indian
enterprises have acquired skills in managing large firms by running business in a very
large and diverse economy like India. This helps them acquire companies abroad.
Given that almost all the Indian companies acquiring the companies emerged from
the ISI and selective FDI policy, it gives credence to the policy. But it also must be
remembered that such a strategy must have a sunset clause as soon as sufficient
domestic capacity has been acquired.
Policy lessons
Even though India is receiving increasing FDI flows, its potential is not realised fully. The
experience also shows that the quality of FDI inflows has been mixed on various
parameters. So some lessons
• Liberalisation of the FDI regime may be necessary but not sufficient. The overall
macro performance key.
• Policies that facilitate domestic investment also attract FDI
• Export performance requirements need to be used. This will also crowd in private
investment.
• Guide FDI in newer areas where local investment is not enough. Eg Malaysia has
used pioneer industry programs for this purpose.
• To promote greenfield investments, acquisitions of domestic firms by foreign
firms may also be restricted.
• Local content requirements to promote diffusion of imported knowledge.
Clusters can also be created to promote inter-firm linkages
• Invest in skill development and higher education as these have significant
positive externalities
• Exports have to be strengthened as it helps in controlling CAD, which attracts FDI.

See Current Affairs on FDI inExternal Sector

MRTP vs Competition Act, 2002- Aditya Bhattacharjea
Basic economic principles
• Anti-trust laws seek to regulate behaviour by market participants that can restrict
competition
• The scrutiny is done at 2 levels
◦ Horizontal agreements- between competitors selling the same or similar
products. Can lead to cartelisation
▪ Cartels harm consumers with hardly any efficiency gains and hence most
countries restrict it without further scrutiny, unlike the below 2, which are
analysed by authorities in more detail

391
 ◦ Vertical- Bw firms at different stages of production. May also restrict
competition by requiring the distributors not to sell a competitor's
products
▪ Scrutinised on case-by-case basis by most nations as it can be good as
well. Eg synergies due to economies of scale
• The behaviour of a dominant single firm may also be considered anti-competitive.
Eg predatory pricing
In light of the preceding discussion, it should be clear that theobjective of
modern anti-trust is to prevent market players from restricting competition in
ways that are on balance harmful to efficiency and consumer welfare. Thus it
targets abuse of position, not firm size or domination
MRTP Act, 1973
• MRTP was repealed in 2009
• Covered 3 categories roughly corresponding to above, but dealt with them
differently from standard anti-trust treatment
◦ On Restrictive Trade Practices(both vertical and horizontal)- vertical and
horizontal agreements scrutinised by the Commission. The firms could
defend these on gateways, like consumer benefit
◦ On monopolistic trade practices(MTP), an enquiry could be ordered if a
monopolistic firm(more than half the market share) if it abused dominance or if
it appeared to "unreasonably" increased prices or limited investment,
which are not concerns of modern anti-trust laws
◦ Firms exceeding certain asset size or market share were required to register
with govt and get permission for M&A, but also for new undertakings,
expansion of old ones. Thus reinforced industrial licensing
◦ The govt was empowered to regulate prices, production, quality.
◦ The govt was not bound by the rulings of the MRTP Commission
• In 1984, an amendment allowed consumers to file complaints against unfair
practices like misleading ads. This took up most of the attention of the
commission
• Amendments in 1984 dictated that any MTP would be deemed prejudicial unless
authorised by the govt. In RTPs the amendment dictated that all agreements listed
in the Act would be termed restrictive. These absolved the commission from any
competition analysis
• The commission was understaffed and underfunded and so it could perform
very little
• Hence between 1991-2007, only 7 cases of cartels were scrutinised by the
Commission
Thus while the implementation of the Act was shoddy as hardly any cases were
taken up by the commission on competition issues, it prevented from bequeathing

392
a body of expertise despite India enacting one of the earliest anti-trust laws in the
world.
Competition Act, 2002
Section 66 provided for repeal of MRTP and its Commission and transfer of consumer
complaint cases to the courts under Consumer Rights Act. But pending a case in SC
over composition of CCI, the section was finally operationalised in 2009.
• Covers the usual 3 areas. Does not deal with unfair trade practices(consumer
complaints) which distracted the MRTP Commission
• It also defined terms that were left open ended by the MRTP
• Lays down economic criteria that the Comm should use as well as time limits
• Unlike the MRTP, here the CCI instead of the govt, will decide the combinations
and abuse of dominance
• Unlike MRTP, whose jurisdiction over foreign firms was severely curtailed by a SC
judgement, the CCI has explicit jurisdiction over foreign firms having anti-
competitive effects in India. This allowed CCI to proceed against Microsoft
bundling software with its OS
• Unlike the MRTP Act, CCI provides for stringent penalties
• Unlike the MRTP, CCI can call outside experts and also undertake awareness
campaigns
• CCI much larger website and resources
Issues with the CC Act
• Allows CCI to take into account the relative advantage by way of contri to eco
dev of a combo of firms or an enterprise abusing position. This creates a loophole
which firms can exploit
• Gives far more discretionary powers to CCI. Eg cartels are not rejected per se like
in developed nations. Instead cartels are judged if they have Appreciable
Adverse Effect on Competition and the guidelines for deciding this are
unsatisfactory
• Allows CCI to break up a firm on grounds of abuse of dominance, without requiring
CCI to provide evidence for this
The Competition Act, which replaced the MRTP Act, shifted the focus from
prevention of dominance, as was the focus of the MRTP, which led to proliferation
of small companies, to regulation of abuse of dominance, allowing genuine
competition.
Competition Law Review Committee- Injeti Srinivas
Recos
• Intro a Green Channel for auto approvals for a vast majority of M&As which
don't have an adverse effect on consumer welfare. EG M&A arising out of IBC

393
 • The Act covers combos through various methods which give one enterprise control
over other, like M&A, but does not define control. Committee introduces a
'material influence' standard for determining control
• Dedicated NCLAT bench for competition law cases
• Introduce new models like hub and spoke models(a third party, hub, facilitates
collusion between other parties, spokes). These should be covered under cartel
catrgory
• For certain markets, like digital markets, transactions may not meet asset value
thresholds, but still have adverse impact on competition. So deal value
thresholds suggested
• Include buyer's cartel
• Strengthen the governance, accountability and investigative capabilities of
CCI.
◦ Act be amended to constitute a governing body of CCI
◦ Under the Act, the Director Gen does investigation Appointed by and
accountable to Centre, Reco that DG be merged with CCI
• Settlement and Commitment as remedies from parties to antitrust disputes, as
used in EU
◦ Settlement involves cartels and has admission of guilt
◦ Commitments to all other cases, no guilt

Anti-trust scenario in India

Data by Aditya Bhattacharjea shows that in over 33% of the industry groups, a single
firm has over 50% market share. Eg ITC in cigarettes, ONGC in oil, Jio in Telecom
The CCI has noted around 1000 cases of anti-trust violations since its inception. But of
the penalty imposed by CCI, not even 1% realised as companies have appealed
against it in NCLT, NCLAT or SC. This is because, as per Bhattacharjea, theC Act has
many loopholes and ambiguities which lead to litigation(See above)
But most important challenge from internet companies, to regulate which theCCI
requires staff trained in modern industrial economics
• The distinguishing feature of internet economy firms is network effects, i.e.
increase in value of a product as more people use it. Eg the network effects
from Jio-Facebook-Google Deal
The CCI should learn from the EU and the FTC which have set really high bars in
negotiating with the tech giants
• Eg the EU has launched multiple investigations against Google AdSense,
Android and fined it over 8 bn Euro
• Alphabet is under investigation by FTC for misusing its position for
advertisements

394
Two sided Markets
The ES argues that digital technology allows the emergence of 2-sided markets

395
Economists
Bank Nationalisation
1. Cole- qty of credit improved but quality fell
2. Burgess and pande- use 4:1 and show positive effects of N on poverty alleviation
3. Kochar and panagariya, separately question B&P results causality to
nationalisation
RBI
1. Svensson and Mishkin- Inflation targeting reduces volatility and impacts of shocks
2. Subir Gokarn- Effect of fiscal deficit on monetary transmission
3. Dholakia finds evidence of weakening of inflation persistence implying more space
for MP to accommodate growth. Supported by ES which finds convergence
between core and headline inflation. Hence weakening of secondary effects of
inflation
4. Ashima Goyal argues that demand pull, cost push and structural inflation must
be treated differently and the single-minded use of rates to affect inflation is
not enough. Can give example of how RBI is trying to broaden its toolkit
through waiving CRR on MSME lending, or Op Twist
5. As the recent paper by rBI deputy Governor Michael Patra shows, the trend
inflation has been in 4.1-4.3% since 2014 and hence the FIT target is
appropriate. A lower target will lead to deflationary bias
Financial Markets
1. Acharya- Transmission and impediments and steps
2. Stanley Fischer- CAC supports the multilateral trading system by broadening the
channels through which nations can finance trade and investment
3. Bhagwati- China, Japan, Western Europe all developed without full CAC and most
of the benefits of CAC can be achieved by direct equity investment attracted by
other means. For growth, FDI is best
4. Padmanabhan- View that FPIs are highly volatile is exaggerated as they have a
stable core.
5. Arvind Subramaniam- Post GST, tax buoyancy of indirect taxes now 1.2, raising
possibility of rising tax-GDP ratio. Pre GST, B of VAT was consistently below 1.
6. Errol D'Souza of IIM-A- Financial stability has both time series and cross sectional
dimensions and hence need to focus on both
7. Blanchard-strong correlation between monetary policy and macro prudential
policy. Eg an accommodative policy that keeps rates low can induce risk taking and
hence need macro prudential tools. Relevant for COVID

396
External Sector
1. Biswajit Dhar- Critique of FTP
2. Sunil Mani- Critique of IPR policy, especially its lack of consideration for utility
models
3. Joseph Stiglitz- Ruthless enforcement of IP regime in US has resulted in US
having one of the most expensive health systems in the world
4. Joseph Stiglitz- IP creates monopoly and leads to widening of inequality
5. Kochar et al- on FTAs
6. Rupa Chanda- India has not utilised FTAs for boosting exports
7. Kanth- US provides support of 50k USD to its farmers while India provides just
200 $
Land Reforms
• Ghatak and Roy- Productivity fell due to land ceiling, inequality rose as landlords
evicted tenants. On components of LR, argues that abolition of zamindars was the
one reasonably successful due to support given by z to British. Supported by PS
Appu
• Besley and Burgess- Inequality did not rise
• Abhijit Bannerjee- Reason for productivity increase as farm size falls, due to
ownership incentives, and use of family labour. Also argues that for efficient
distribution of land and for development of a land market, land reforms should not
be permanent
• PS Appu- Political will has disappeared as superior tenants have become powerful.
Ceiling led to redistribution of only 2% and tenancy reforms led to red of only 4%
• Conning and Robinson- Reforms more successful where peasants politically
powerful
• Pranab Bardhan- Success of reforms depended on political party's ideology.
Confirmed by Dilip Mookherjee, Besley and Burgess. Role of political will also
confirmed by the Task Force on Agrarian Relations of the Planning
Commission
• Ladejensky- Reasons for failure of land reforms- Leaving compensation decisions
to states led to a mess and impacted implementation. Also plans never saw ceilings
as a means to raise productivity but as social justice, leading to poorly defined
laws. No penalties specified by PC on states for poor implementation.. Corruption
• Chand et al- Reasons for inverse size-productivity relation is basically more
intensive farming, like use of more fertilisers per ha, more seeds per ha, more
irrigation on the margin. Based on NSSO 59th round, conclude the relationship
intact even now. But per capita output low as land-man ratio too low

397
 • Amartya Sen- Profits increase with size but productivity falls. Profit high as capital
goods indivisible and hence not affordable by small. Fertility based explanation for
high productivity apart from input and family labour based explanation
Agriculture
• Gulati and Saini- pro consumer bias in agri export policy, which leads to restricting
exports when intl prices peak, lead to harm as farmers have no incentive to produce
exportable crops
• Bhatt- Against agri income tax and in favour of land revenue
• Alagh- In favour of agri income tax. He counters all the arguments of Bhatt
• Rangarajan- estimates that a 1% increase in agri output raises national income by
0.7%, pointing to high linkage between agri and other sectors
• Gulati and Fan- 3 stages of Green Rev
• Mahendra Dev- Fall in pub inv most imp cause of slowdown in agri in late 90s early
2000s
• Panagriya- Rural roads have significant positive impact on agri as it facilitates
market access. This, along with electricity to allow more mechanisation and
irrigation should be thrust of pub inv
• Himanshu- Recent rural distress
• Himanshu- Argues that merely repealing or amending APMC is not the solution.
Their real problem is lack of pub inv and political interference. In BR, even after
repealing APMC, hardly any pvt inv or better price for farmers. Loss of APMC
revenue led to further deterioration of infra. Hence need is to increase pub inv
• Roy and Verma- One major way to increase farm income is product
differentiation as agri product demand is inelastic, so when price falls, demand
does not shift quickly to cheap one. So by producing expensive product, profit
higher
• Dev and Rao- Intercrop price parity between rice and wheat restored which is good
as they have similar costs. Profitability in wheat is higher. Price policy has
dominated agri over non-price interventions which has caused fall in pub inv. This
leads to rising costs as yields fall, which necessitates higher MSP. Thus raising
MSP not the sustainable solution to distress
• Parikh- 10% increase in MSP leads to 2% fall in public investment and a 0.3% fall in
GDP
• Deaton and Dreze- shift in preference consumption of Indians for all expenditure
fractiles away from cereals and towards fruits and vegetables, as shown by Deaton
and Dreze using NSSO data. Cereal consumption fell by 14% while chicken
consumption increased by 400% between 1993-2010. Thus shifting down of
calorie Engel curve

398
• Gulati(very important)- Shows in an OECD-ICRIER study that India's
restrictive agri marketing and trade policies have resulted in farmers being
implicitly taxed to around 45 lakh cr between 2000-17
• Gulati et al- Only 0.004% of NCDEX trade through FPOs. Need for futures market
and ways to develop them
• Gulati and Bathla- GCF in Agri
• Sawant et al- Respond to Gulati, particularly G's argument that despite falling pub
inv, pvt still rose. They say that while that may be true, pub inv critical for balanced
growth due to very strong inducement for pvt in non-irrigated areas
• Chand- 1% increase in subsidy leads to decline of 2.5% in agri pub cap formation
• Ramesh Chand has argued that there is an asymmetry between the effects of
pub on pvt. While an increase certainly induces pvt, a decrease in pub also
forces farmers to raise pvt inv
• Sudha Narayanan- NFSA is WTO compliant and reco for ensuring it remains so-
increase production if MSP increases and resort to DBT
• Dreze and Khera- PDS. They show that the PDS resulted in a 11% reduction in HCR
based on Tendulkar methodology. Due to outdated Census data which was used to
fix the number of beneficiaries, but pop increased, there are over 10 cr people left
out
◦ They also show that the Purchase-Entitlement ratio is as high as 90% in
CG, OD, WB primarily because these states replaced pvt PDS shops with
community led institutions like Gram panchayats
• Gulati and Saini- Arrive at 47% of leakage from PDS in 2011-12, with UP, BR, MP,
MH and MP, having over 60% of India's poor having more than 50% leakage. But
unlike Himanshu and Sen, they favour replacing PDS with DBT, which will be a
better thing for consumers as well(Jayati Ghosh questions this claim as removing
PDS will expose poor to inflationary episodes) and will also save GOI over 30k cr.

399
 ◦
we have to consider the fundamental flaw in the design
of the policy. The system tries to achieve an equity
objective (extending economic access to food for the
poor) by using a price policy instrument, instead of an
income policy instrument. Fundamental principles of
policy making suggest that there is a high probability
that the system will fail to deliver on the promises made
(as corroborated by the various evaluative studies), or
will deliver at a huge cost, which may not be worth the
price because the efficiency losses may exceed
welfare gains that it is trying to achieve.
• Himanshu and Sen- Argue in favour of near universalisation of PDS by taking case
of states with expanded PDS having low leakages. But both Gulati and Saini, and
Khera and Dreze raise questions on H&S results as not counting the leakage well.
Also, given the subsidy burden, universalisation not possible
• ES quotes Bolton & Rosenthal, Kanz, Swaminathan et al on agri loan waiver
• Khera and Sudha Narayanan argue that the belief that only PJ and HR farmers
benefit from MSP is incorrect. After the DCP was launched, MP has 33% of
households benefiting from wheat MSP, compared to 22% in PJ. Similarly for
rice, higher in CG and OD. Similarly the belief that MSP benefits only large
farmers is wrong. Only less than 5% of farmers in wheat and rice were large
farmers
◦

• Dharmadhikari argues that power subsidies cause massive losses to

DISCOMS(eg in Punjab, the flat tariff is 0. Hence no charges). This causes
electricity rationing by DISCOMS. This leads to use of diesel pumpsets which
increases both diesel consumption and carbon emissions
• Barett et al provide evidence that contract farming can help smallholder as
long as the gains are shared equally between the sponsor and the farmer
• Banerji and Meenakshi show non-transparent price discovery behaviour
through collusive agents is pervasive in APMCs.

400
 • Shoumitro Chatterjee shows that removal of inter-state barriers to trade can
increase farmer prices by 11%
• Tony fischer- Has argued that due to PM pollution which reduces sunlight
reaching plants and due to ozone pollution which harms cells and reduces
photosynthesis, as much as 30% of India's wheat output is reduced. Similarly
B sinha et al found that high ozone in HR and PJ reduce rice by a quarter
• Gulati recommends a diversification package, enabling a shift from input
based subsidies to investment subsidies, allowing shift to crops like veggies,
oilseeds, pulses, which consume less water in North India is needed.
NREGA
1. Imbert and Papp- estimate a rise in wages to the tune of 7% directly attributable to
the program, which is very modest. They also find that NREGA reduced short term
migration by 10% but had no perceptible effect on long term migration
2. Ravallion of the World Bank uses NSSO data for 2009/10 and shows that, among
the poorest 2 quintiles of rural households, over 40% of those who want to
work for NREGA did not get employment. The situation is worse in areas
which are poorly administered which are also the areas most in need of
NREGA
3. Dilip Mookerjee- Shows that less than 20% of the rural pop are aware of the key
NREGA rules like 15 days wage rule and resulting compensation
4. Kanika Mahajan argues that rise in wages due to NREGA is linked to productivity
rise. Though Gulati and Saini's arguments on rural wages suggest that for long
term sustainability, need to ensure NREGA is used for more productive purposes
5. Reetika Khera argues that as the admin setup has stabilised for NREGA, focus is
increasingly shifting to quality of assets
6. Jean Dreze- Hiring more Gram Rozgar Swaks and allowing e-muster roll
registration on the spot
FLFPR
1. Rohini Pande- Answer in norms for declining FLFPR
2. Sanghi- U shaped curve of FLFPR with growth(Initially income effect dominates
so decline, as distress induced employment falls. Then positive outcome of
education effect shows and emp increases). Decline sharp in 10-19, showing
increasing ed(Education effect). Also, proportion of women engaged in household
work increased in rural to 60% in 2011, showing key cause of decline in FLFPR
3. Chandrashekhar and Ghosh also show that though structural transformation
has reduced agri jobs, there has not been commensurate rise in jobs in mfg or
services for women.
4. Ashwini Deshpande shows that women lost more jobs than men during COVID
induced crisis

401
Quality of Employment
1. Jayati Ghosh and CP Chandrshekhar- Falling public employment
2. Nayyar- defines quality of employment on 3 parameters- wages, written job
contracts and social security benefits
3. Goldar- Casual mostly low level of ed, wages around 30% of regular jobs
4. Jayachandran- Formalisation is avoided to avoid the intricacies of formalities.
5. Mehrotra- Formalisation is an evolutionary process.
6. Mehrotra et al- Explanation of trends.
7. JJ Thomas- Lewisian transformation
8. Krishna et al- Quality of emp
9. Kannan and Raveendran- Job-loss growth
10. Rani et al(ES)- Min wages have a lighthouse effect and hence increase wages.
They also reduce wage inequality
11. Menon and Rogers(ES)- min wages increase employment
12. Kannan and Papola(ES)- Compliance with min wages improving though significant
gender gaps exist
13. Vidhya Soundararajan of IIM Bangalore argues that import competition raises
formal employment, but mainly of contract labour
Labour laws and labour intensive jobs or lack of it
1. Hasan and Jandoc- India's K/L ratio higher than nations at similar levels of
development and capital endowment
a. 85% of org mfg firms in India are dwarfs
2. Bhagwati and Panagriya- labour laws incentivise corruption and remaining small
3. Nagaraj- Dualistic labour market and can be due to efficiency wages
a. Argues that 2/3rd of eligible factories don't register under the Factories Act
4. Pritchett- Labour laws are scarcely implemented
5. Mazumdar and Sarkar- Consequences of dualism
6. Saha and Sen have found strong link between globalisation and contractualisation,
which is even stronger in states which have strong labour laws
7. Ravi Srivastava- Labour policy in India should aim to reduce the chasm between
under-regulated and over-regulated sectors, by making minimum conditions of
work applicable to all workers, simplifying and modifying labour laws which are
applicable to the formal sector, with the objective of introducing an optimum
degree of flexi-security, making regulation of conditions of work more effective,
and making the machinery for implementation of industrial relations and labour
laws efficient, speedy, and more accessible to workers
Mfg and Industry
1. Goldar- TFP growth rate in Mfg

402
 2. Goldar- Role of exports in mfg growth in 2000s.
3. Virmani and Hashim- Agree with the TFP slowdown in late 1990s-early 2000s as
the reason for slowdown in industry. J curve in late 90s, 2000s
4. Nagaraj- Long tail
5. Martin et al(ES)- net job creation as a result of de-reservation increases
monotonically with size and decreases with age
6. Santana et al(ES)- Misallocation due to SSI res
7. Harrison et al(ES)- Impact of SSI res on emp and output
8. Tendulkar- Rationale behind dominant public sector
9. Nagaraj- Public sector and their profitability
10. As BS Minhas argued, the Indian economy is struggling in deep swamps of
inefficiency. So there is no basis for commanding heights model
11. Meir Alkon(Princeton University)-Shows that SEZs have not given benefits in
India and have not led to development spillovers due to poor political economy
incentive structures facing local politicians, as they face incumbency
disadvantage, incentivising them to instead seek political rents rather than
create conditions for fast growth
12. Dani Rodrik- Argues that emerging economies are facing pre-mature
deindustrialisation. The hump shape relation between industrialisation and income
is shifting downwards and towards origin, implying fewer industrialisation
opportunities for the late nations. Argues that globalisation and labour saving tech
progress are behind this
Services
• Bhagwati- Specialisation Splintering, tech advancement greater impact on services
like internet
• Rupa Chanda- Services for mfg
• Fan, Peters and Zilibotti argue that tertiarization of Indian economy happened not
because India got richer but because of productivity gains in services. This has
important implications for welfare and also for growth in industry
Disinvestment
1. Kelkar- Arguments in support of disinvestment
2. Chibber and Gupta(ES)- Very strong positive effect on labour productivity and
efficiency due to disinvestment
3. Brown et al- Avg effect of disinv is beneficial, but varies in contexts and so, must
be done in good macro conditions. Will also act as a check on govt incentive to
opt for disinv in poor years merely to raise resources
FDI

403
 1. Nagesh Kumar- Export obligations and local content obligations effective. Eg auto
industry. Industrial growth is positively associated with FDI and hence IG should be
focused. Export promoting FDI also leads to more crowding in
2. Nagesh Kumar has also found broad correlation between industrial
performance and FDI inflows.
3. Pant and Mondal- Impact of FDI on Indian mfg technology. Promote R&D.
Automatic tech diffusion through backward-forward linkages or learning by doing
do not work and this policy can be harmful also
4. Rao and Dhar show that between 2005-09, peak FDI flow period, mfg received just
20% of total FDI flows
5. Kumar also shows that in nations with large markets, the export obligation
policies were effective in promoting export orientation of foreign affiliates. China
stipulates that fully foreign owned enterprises must export 50% of
production.
6. Pant and Mondal- Guide FDI in newer areas where local investment is not
enough. Eg Malaysia has used pioneer industry programs for this purpose.
7. Competition Analysis
8. Aditya Bhattacharjea- comparing MRTP and CCI. Major harm of MRTP was that it
left no body of expertise despite India having one of the earliest anti-trust regime
in the world
a. Complement it with Injeti Srinivas Committee reco
b. objective of modern anti-trust is to prevent market players from restricting
competition in ways that are on balance harmful to efficiency and
consumer welfare. Thus it targets abuse of position, not firm size or
domination
c. The Competition Act, which replaced the MRTP Act, shifted the focus from
prevention of dominance, as was the focus of the MRTP, which led to
proliferation of small companies, to regulation of abuse of dominance,
allowing genuine competition.
Missing Middle
1. Anne Kruger- Coined the term to show absence of labour intensive mfg in India
2. Mazumdar, Mehta and Sarkar provided evidence of MM, showing a U shaped size-
employment distribution
3. Nagaraj argues that dualism due to tech and organisation discontinuities in the
labour market, requiring efficiency wages to be paid to the skilled labour in the
organised sector, while the large unskilled labour confined to unorganised sector

404
 4. Virmani- The rigid labour laws also accentuated the J curve effects as they
prevent immediate reallocation of resources in response to changed
environment, post the reforms. This was also a major reason why all the
decline in agri post reforms from 30 to 23% was taken by services, and
prevented India from taking benefit of exports, at a time when China joined
the WTO and zoomed off
Growth explanations
1. Virmani- TFP growth. Supported by Bosworth and Collins
2. Rodrik and Subramanian- the growth in 80s was not due to reforms as trade
became more restrictive, product and labour markets not reformed. Instead, there
was pro-crony shift in the govt. Instead India was away from PPF, so huge
productivity gain, as seen from sharp fall in ICOR from 5.4 in 70-80 to 3.6 in
81-91. Balakrishnan and Parameshwaran also support R&S argument by
showing that mfg growth experienced a positive structural break in 1982.
Supported by Hausmann's TFP break and Bosworth and Collins also. R&S
explanation challenged by Ghate
3. Nayyar- Expansionary policies as GFCF jumped from 16% in previous 10 years to
20%. Liberalisation also imp as licensing reduced
4. Nagaraj- Explanations for 2004-08 growth and its effects. Argues that it was a
debt-ridden, cyclical boom, coinciding with an exceptional phase of the world
economy. This left behind heightened corporate leverage and frothy(fully of
bubbles) asset markets.
5. KL Krishna et al- Support for the argument that India's growth moved in sync with
world growth in 2002-08 period.
6. Ahluwalia- Cause of high growth in 2009-11 period despite recession
7. Mishra and Economic Survey- Slow growth causes in 2012-14
8. Subramanian and Felman- Explanation of high growth in 2014-18
9. Montek Ahluwalia- post reform divergence in growth rate
10. Subramanaian- Reason for divergence as path dependency and abandoning
balanced dev as a goal with increasing market role. Path dependency supported
by Rao, Ghate & Wright
11. Kochar, Rajan and Subramanain- Idiosyncratic growth. Tertiary ed, state led
industrialisation and limit on pvt enterprises like capacity limits, licenses
12. Subramanian and Chatterjee argue that India, contrary to popular belief had
export led growth as well, with exports growing 13% between 1995-2018.
Today exports form 20% of GDP.
Savings and Investment

405
 1. Rodrik- I should be the focus of the govt, not reviving S as world over, growth
booms caused by I, not necessarily by S. S automatically revives as g improves.
Supported by Minsky
2. Patnaik and Pandey- Data on savings and investment, corroborated by ES
3. Gaspar et al, 2020- The multiplier effects of public investment amplify even
more during times of uncertainty, as during COVID
Poverty
1. Dutt and Ravallion- Poverty declined faster in post reform period at 1.36% per
annum compared to 0.44 in pre-reform
2. Radhakrishna- poor elasticity of poverty wrt growth, only -0.8
3. Himanshu- 90s are the lost decade for poverty reduction. Hence trickle down low.
4. Pronab Sen- decline in calorie consumption due to rise in non-food expenditure,
corroborated by Patnaik as common property resources have fallen
5. Basu and Das, Basu and Basole, Bannerjee and Duflo, Dreze and Deaton all
support the calorie consumption puzzle, though different arguments
6. Bannerjee and Duflo argue that small interventions matter in poverty reduction
7. Asha Kapur Mehta- Why Poverty alleviation programs fail
8. Evans and Popova show that sin goods smaller share of consumption as overall
consumption increases. Hence sin goods not an issue with UBI
9. Jha, Nagarajan and Pradhan show that over 50% of rural population prone to
shocks like weather and mostly use debt
10. Burgess and Pande- Bank nationalisation had a significant positive effect on
poverty reduction
Inequality
1. Chancell and Piketty- Inequality at highest in India since Income Tax Act, 1922. Gini
around 0.5
2. Tendulkar- Inequality not an issue as long as there is absence of inequity. i.e.
upward mobility and equal opportunity based on merit. Supported by Hirschman
and Scitovsky
3. Deaton and Dreze- inequality caused HCR to be 1.5% higher than it would have
been for the same growth, if there was no inequality
4. Bannerjee and Piketty- share of the top 1% started increasing post 1982,
consistent with the phasing out of socialist policies
Public Finances
• M Govinda Rao and YV Reddy- Why States resent CSS
Pinaki Chakraborty and Manish Gupta- How CSS rationalisation post Shivraj
Chouhan CM Subgroup led to squeezing of untied funds for states
• Pinaki and Lekha Chakraborty- Impact of PD and I,g on debt sustainability

406
• Rangarajan and Srivastava- Impact of FD on I and g
• M Govinda Rao- Need for Fiscal Council
• D Subbarao- Issues with Fiscal Council
• Bose and Bhanumurthy- Why revenue deficit matters, as revenue multiplier is less
than 1
• Kelkar- Bring real estate under GST. Have a strong technical advisory team at GST
Council
• Domar- If g>i then debt sustainable
•

407
Master Sheet 2
• Defence capex forms nearly 30% of total GOI capex currently. So there is no scope
of increasing its share. Otherwise other sectors of the economy will suffer.

408
Ideas for India-Agriculture
• https://www.ideasforindia.in/topics/agriculture/farm-laws-roadmap-for-agricultural-
marketing-privatisation.html -Dilip Mookerjee
◦ Agricultural marketing privatisation roadmap
◦ There is need for mandi reform, to connect buyers and sellers better. In the
debate over farm laws, we need to separate the issue of private markets
and the issue of how state grain procurement or MSP will affect private
market.
◦ Currently millions of small farmers sell to small traders, outside mandis. At one
level this is necessary to overcome 'natural transaction costs' as the large
buyers will want to buy in bulk and so th intermediate buyers help in
aggregation.
▪ Large farmers and buyers controlling APMCs prevent those who are not in
collusive relationship with them from accessing APMCs.
▪ APMC acts prohibit transactions outside APMCs unless permit from state.
▪ These restrictions allow intermediaries to earn large margins at the expense
of small farmers.
◦ Argues that the fear that agri business companies will destroy existing supply
chains and mandis is exaggerated. They will mostly engage in a few HVCs and
with large farmers mostly, while small farmers will mostly engage in generic agri,
seel them at mandis through intermediaries, due to transaction costs.
◦ We should instead set up institutions which allow collective bargaining by small
farmers and fair arbitration, while also allowing direct sale between buyer and
farmer. . Suggestions on how to design these institutions
▪ Separate the spot sale market from forward(contract) market as spot
markets issues are simpler
▪ ITC's e-Choupal experiment where the buyer's agent sets up a computerised
booth in the villages, accepts produce and pays cash based on price
determined is a good model, which worked in Madhya Pradesh. It also
provides vital price information. These can be also integrated with the
Common Service Centres(this is my suggestion, not DP's)
▪ For contract farming, FPOs need to be strengthened. But their success is not
guaranteed as they have failed in oilseeds. They need factors like economic
equality among farmers, assistance of NGOs, govts.
▪ Third party verification of contracts can be mandated. Escrow services can
also be leveraged.
• E-Symposium

409
 ◦ https://www.ideasforindia.in/topics/agriculture/farm-laws-resolving-the-
deadlock.html
◦ https://www.ideasforindia.in/topics/agriculture/farm-bills-first-principles-and-
the-political-economy-of-agricultural-market-regulation.html
◦ https://www.ideasforindia.in/topics/agriculture/farm-bills-potential-for-positive-
outcomes.html
◦ https://www.ideasforindia.in/topics/agriculture/farm-bills-unlikely-to-bring-
transformative-change.html
◦ https://www.ideasforindia.in/topics/agriculture/farm-bills-design-leaves-much-
to-be-desired.html
◦ https://www.ideasforindia.in/topics/agriculture/farm-bills-liberalisation-of-
agricultural-marketing-is-necessary.html- Bharat Ramaswami
▪
• https://www.ideasforindia.in/topics/agriculture/addressing-the-nutrition-crisis-
reflections-from-odisha-millets-mission.html
• https://www.ideasforindia.in/topics/agriculture/an-agenda-for-agricultural-
reforms.html
• https://www.ideasforindia.in/topics/agriculture/drama-at-the-farm-gate.html
• https://www.ideasforindia.in/topics/agriculture/information-technology-adoption-
and-productivity-role-of-mobile-phones-in-indian-agriculture.html
• https://www.ideasforindia.in/topics/agriculture/need-for-10-year-state-wise-
procurement-plan-for-rice-and-wheat.html
• https://www.ideasforindia.in/topics/agriculture/improving-farmers-income-
learnings-from-a-survey-in-jharkhand.html
• https://www.ideasforindia.in/topics/agriculture/crop-insurance-scheme-20-
implementation-issues-and-weaknesses.html
• https://www.ideasforindia.in/topics/agriculture/how-self-help-groups-enable-
households-to-cope-with-climatic-shocks.html
• https://www.ideasforindia.in/topics/agriculture/when-technology-disrupts-politics-
lessons-from-india-s-green-revolution.html
• https://www.ideasforindia.in/topics/agriculture/climate-change-and-indian-
agriculture.html
• https://www.ideasforindia.in/topics/agriculture/contract-farming-and-the-role-of-
government.html
• https://www.ideasforindia.in/topics/agriculture/how-new-technologies-can-raise-
farm-productivity.html
• https://www.ideasforindia.in/topics/agriculture/facilitating-investment-in-organic-
food-business-through-the-right-policies.html
• https://www.ideasforindia.in/topics/agriculture/are-farm-loan-waivers-really-so-
bad.html
• https://www.ideasforindia.in/topics/agriculture/hazards-of-farm-loan-waivers.html

410
 • https://www.ideasforindia.in/topics/agriculture/the-crisis-of-farmer-suicides.html
• https://www.ideasforindia.in/topics/agriculture/moving-past-the-mandis-a-
revolution-waiting-to-happen.html
• https://www.ideasforindia.in/topics/agriculture/transforming-indian-agriculture-the-
role-of-credit-policy.html
• https://www.ideasforindia.in/topics/agriculture/promoting-the-use-of-a-novel-
water-saving-agricultural-technology-among-indian-farmers.html
• https://www.ideasforindia.in/topics/agriculture/transforming-landholding-
agricultural-workers-into-farmers.html
• https://www.ideasforindia.in/topics/agriculture/financial-inclusion-for-agricultural-
growth-an-alternative-approach.html
• https://www.ideasforindia.in/topics/agriculture/reconstructing-facts-in-bt-cotton-
why-scepticism-fails.html
• https://www.ideasforindia.in/topics/agriculture/why-do-insecure-rural-property-
rights-persist.html
• https://www.ideasforindia.in/topics/agriculture/grain-stocks-is-it-a-problem-of-
storage-capacity.html
• https://www.ideasforindia.in/topics/agriculture/unified-agricultural-markets-where-
are-the-reforms-lacking.html
On the FPTC Act, Sudha Narayanan argues
• Currently, private players look to APMCs to get price reference. If this continues
even in the new trade areas, then not a lot of benefits, except may be lower
commission fees and its benefits being passed onto the farmer. APMC problem of
non-transparent collusive price mechanism will still persist
• However, if the APMCs decline in importance, then how will the reference price be
determined? In the absence of a thick market, with large number of players and
trade volumes,there will be bargaining islands, where price received by farmers
will depend on their bargaining power and this is also not desirable.
She also argues that the three acts invisibilize transactions as they have no mechanism
of recording txn. They also have no regulatory mechanism. In 1991, when India
delicensed dairy firms, it resulted in chaos with the emergence of a large number of
dairies purveying contaminated and adulterated milk. The government then brought in
the Milk and Milk Products Order in 1992, recognizing that deregulation without
safeguards has its own perils.There is need for data collection for regulation and
analysis.
Will private players really come and will competition benefit farmers?-Sudha
Narayanan
Contrary to popular argument, a large part of trade already takes place outside APMCs.
Many states have notified warehouses as marketplaces, allowing warehouse based
sales. Kerala, Bihar and Mizoram don't have APMCs. The experience of these private

411
trade shows that there are strong placement effects-private players choose areas
with low competition, good infra, skilled farmers and high productivity. The
limited presence of pvt players in Bihar shows this. Also, access of small and
marginal farmers will be limited due to txn costs.
She also argues that the common argument of there being high wastage due to
inefficient supply chains is not true. A recent ICAR study showed that wastage is merely
3% for cereals, 6% for pulses, can go to 18% for fruits and 12% for veggies. While these
numbers show scope for improvement,
On e-NAM
https://www.india-seminar.com/2020/725/725_shoumitro_and_mekhala.htm
https://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe1921.pdf
Also, a new working paper by Rudrani Bhattacharya and Sabarni Chowdhury from NIPFP
shows that e-NAM has resulted in major spatial market integration in onion markets and
hence helped in price discovery.
Shoumitro also shows that integration creates more volatility and hence there is need
for insurance

412
I4I- Macro
• https://www.ideasforindia.in/topics/macroeconomics/business-sentiments-and-
labour-markets.html
• https://www.ideasforindia.in/topics/macroeconomics/unmaking-make-in-india-
weak-governance-good-deals-and-their-economic-impact.html
• https://www.ideasforindia.in/topics/macroeconomics/make-in-india-why-didnt-the-
lion-roar.html
• https://www.ideasforindia.in/topics/macroeconomics/atmanirbhar-bharat-abhiyan-
putting-the-cart-before-the-horse.html
• https://www.ideasforindia.in/topics/macroeconomics/the-supply-side-effects-of-
india-s-demonetisation.html
• https://www.ideasforindia.in/topics/macroeconomics/back-to-the-past-
protectionism-and-statism-once-again.html
• https://www.ideasforindia.in/topics/macroeconomics/states-loss-of-fiscal-
autonomy-in-a-centralised-federal-system.html
• https://www.ideasforindia.in/topics/macroeconomics/covid-19-does-the-
government-of-india-really-have-little-fiscal-space.html
• https://www.ideasforindia.in/topics/macroeconomics/we-need-a-marshall-plan-to-
fight-covid-19.html
• https://www.ideasforindia.in/topics/macroeconomics/how-did-demonetisation-
affect-household-consumption.html
• https://www.ideasforindia.in/topics/macroeconomics/rural-infrastructure-
development-and-economic-activity.html
• https://www.ideasforindia.in/topics/macroeconomics/infrastructure-development-
current-bottlenecks-and-way-forward.html
• https://www.ideasforindia.in/topics/macroeconomics/how-india-s-growth-bubble-
fizzled-out.html
• https://www.ideasforindia.in/topics/macroeconomics/the-need-for-a-total-
overhaul-of-the-gst-regime.html
• https://www.ideasforindia.in/topics/macroeconomics/tapping-the-revenue-
potential-of-property-tax-in-india.html
• https://www.ideasforindia.in/topics/macroeconomics/what-should-we-do-about-
the-indian-economy-a-wide-angled-perspective-iv.html
• https://www.ideasforindia.in/topics/macroeconomics/should-we-do-about-the-
indian-economya-wide-angled-perspective-iii.html
• https://www.ideasforindia.in/topics/macroeconomics/what-should-we-do-about-
the-indian-economy-a-wide-angled-perspective-ii.html

413
• https://www.ideasforindia.in/topics/macroeconomics/what-should-we-do-about-
the-indian-economy-a-wide-angled-perspective.html
• https://www.ideasforindia.in/topics/macroeconomics/foreign-currency-sovereign-
bonds-think-before-you-leap2.html
• https://www.ideasforindia.in/topics/money-finance/budget-2021-22-case-for-a-
bad-bank.html
• https://www.ideasforindia.in/topics/macroeconomics/public-debt-through-the-
ages.html
• https://www.ideasforindia.in/topics/macroeconomics/why-external-sovereign-debt-
should-be-avoided.html
• https://www.ideasforindia.in/topics/macroeconomics/government-securities-
market-price-discovery-and-the-cost-of-indian-government-borrowing.html
• https://www.ideasforindia.in/topics/macroeconomics/everything-you-know-about-
cross-country-convergence-is-now-wrong.html
• https://www.ideasforindia.in/topics/macroeconomics/nobel-laureate-paul-romer-s-
contribution-to-endogenous-growth-theory.html
• https://www.ideasforindia.in/topics/macroeconomics/how-tax-incentives-influence-
household-financial-saving.html
• https://www.ideasforindia.in/topics/macroeconomics/global-financial-crisis-and-
india-a-look-at-the-decade-gone-by.html
• https://www.ideasforindia.in/topics/macroeconomics/community-networks-and-
the-growth-of-private-enterprise-in-china1.html
• https://www.ideasforindia.in/topics/macroeconomics/the-effect-of-place-based-
development-policies-evidence-from-indian-sezs.html
• https://www.ideasforindia.in/topics/macroeconomics/impact-of-labour-regulations-
on-indian-manufacturing-sector.html
• https://www.ideasforindia.in/topics/macroeconomics/industrial-policy-in-india.html
• https://www.ideasforindia.in/topics/macroeconomics/communicating-uncertainties-
in-gdp-data.html
• https://www.ideasforindia.in/topics/macroeconomics/west-bengal-s-economic-
performance-relative-to-india-over-the-last-three-decades.html
• https://www.ideasforindia.in/topics/macroeconomics/from-abundant-global-
liquidity-to-selective-lending-how-corporatefinance-has-changed.html
• https://www.ideasforindia.in/topics/macroeconomics/growth-in-india-narratives-
and-evidence.html
• https://www.ideasforindia.in/topics/macroeconomics/de-globalisation-driven-by-
global-crises.html
• https://www.ideasforindia.in/topics/macroeconomics/of-twists-and-turns-
monetary-policy-and-term-premium.html
• https://www.ideasforindia.in/topics/macroeconomics/inflation-targeting-in-india-
an-interim-assessment.html

414
• https://www.ideasforindia.in/topics/macroeconomics/evaluating-inflation-targeting-
in-india.html
• https://www.ideasforindia.in/topics/macroeconomics/inflation-targeting-and-
capital-flows.html
• https://www.ideasforindia.in/topics/macroeconomics/budget-2021-22-missed-
opportunity-for-increasing-tax-collection.html
• https://www.ideasforindia.in/topics/macroeconomics/an-assessment-of-policy-
performance-under-the-current-regime.html
• https://www.ideasforindia.in/topics/macroeconomics/fiscal-rules-during-the-covid-
19-pandemic.html
• https://www.ideasforindia.in/topics/macroeconomics/the-indian-economy-and-
policymaking-towards-openness.html
• https://www.ideasforindia.in/topics/macroeconomics/new-welfarism-old-wine-new-
bottles.html
• https://www.ideasforindia.in/topics/macroeconomics/aatmanirbhar-bharat-foreign-
trade-capital-flows-and-india-s-growth.html
• https://www.ideasforindia.in/topics/macroeconomics/subsidies-merit-goods-and-
fiscal-space.html
• https://www.ideasforindia.in/topics/macroeconomics/subsidies-merit-goods-and-
fiscal-space-ii.html
• https://www.ideasforindia.in/topics/macroeconomics/what-would-make-india-s-
growth-sustainable.html

415
Poverty and Inequality
PYQ
2019
1. Would you advocate a program of Universal Basic Income to reduce extreme
poverty in India?
2. How is the methodology followed by the Rangarajan Committee different from that
of the Tendulkar Committee in measuring poverty in India?
3. Examine the relationship between casualisation of employment and poverty in
India.
2018
1. Explain how Multi-Dimensional poverty index is computed
2. Reflect on the relationship between economic growth, inequality and poverty in the
post-reform period in India
3. Throw light on the poverty debate in the pre-liberalisation era in India.
2017inIndia's growth is associated with rising inequality. How does it happen and what
actions need to be taken to mitigate the problem?
1. The various anti-poverty programs have not achieved the desired socio-economic
progress in India. Write down the major programs and your broad based
assessments of their weakness
2. How did per-capita income in India behave since Independence? Has it improved
the well being of the people uniformly?
2016
1. Critically examine the difference between absolute and relative poverty. Between
the two, which is more appropriate?
2. Examine the major tools for measuring inequality. Highlight the more appropriate
method of measuring inequality
2015
1. Market economy excludes the poor from the consumer as well as the employment
market. Discuss how one can safeguard the interests of population below poverty
line.
2. Rural poverty continues to be a chronic problem in India, which cannot be taken
care of by anti-poverty programs but by creation of permanent productive assets.
Discuss
3. Financial inclusion is one of the most essential components of inclusive growth

416
2014
1. What are the consequences of deviation from socialistic pattern of society and
mixed economy particularly for the persons below the poverty line.
2. Elaborate the growth-mediated security and support led strategies of poverty
alleviation given by Dreze-Sen
3. Highlight the issues of the Bhagwati-Sen controversy over tackling poverty and
slow-growth rate.
4. Why socialist model of development could not bring about equitable distribution of
income in India and the country remained on a slow growth trajectory of 3-3.5 %
for a long time?
5. Elitist bias and crony capitalism have eclipsed issues of efficiency and distributive
justice in India.
6. Vitalisation of rural economy is key to inclusive growth which is possible through
strategic management and technological upgradation.
2013
1. How is development looked upon by Sen in terms of freedom and poverty as
unfreedoms? Point out his narrations of five dimensions of poverty.
2. How are absolute and relative poverty measured? What modification in it has been
suggested by Sen? What are the recent advances in the area of poverty
measurement?
3. What is Crony Capitalism? How it compromises economic and social justice?
2012
1. What do you mean by Hindu Rate of Growth? Why has it been argued that poverty
cannot be eradicated under Hindu Rate of Growth?
2. Explain why in spite of planning, income distribution has turned more unequal over
time
3. Discuss the various measures of poverty with policy implications for removal for
poverty
4. Explain why in spite of poverty alleviation schemes, number of poor has not fallen
very much.
5. Compare the strategies of trickle down growth with inclusive growth. Why should
the strategy of inclusive growth be preferred.
2011
1. Discuss Amartya Sen's poverty measure and recent advances in poverty
measurement
2. By restricting social benefits to BPL households, the poverty line will be fully
converted from a statistical benchmark to a real life social division-Dreze. Discuss

417
 3. Poverty alleviation strategy of the day is moving ahead of Redistribution with
Growth of Chenery and the World Bank and Dreze and Sen's Growth mediated
security and support led security strategies to Empowerment, Opportunities and
Security lines. Elaborate.
2010
1. Discuss the poverty trends- both rural and urban, between 1973-74 to 2004-05
across states in terms of pace of reduction and relate them with changes in growth
rate and between the pre- and post-liberalisation periods.
2. Critically examine the Tendulkar Committee approach to measuring poverty in
India.
3. Recent trends show that poverty incidence in urban areas is higher than its rural
counterpart in more prosperous states. What factors explain this?
2009
1. Carefully examine the argument that over the last 2 decades there is an increasing
divergence between the incidence of poverty based on the Planning Commission's
Expert Methodology Approach and that based on calorie intakes as obtained from
NSS
2. Examine the reforms since 1991 with reference to their effect on inequality, poverty
reduction and vulnerability to external shocks
2008
1. Growth and inequality are directly related. Comment
2. Measures in the Budget to ensure inclusive growth
2007
1. Discuss the nature and incidence of rural poverty in India. Suggestions to solve
2006
1. What is social banking? To what extent has it helped in alleviating poverty and
promoting employment?
2. Have economic reforms been conducive to the achievement of growth with equity
and poverty removal?
3. Make out a case for subsidies contributing to achieving growth with social justice
2005
1. Write a detailed note on the structure and determinants of rural poverty in India.
2. What are the determinants of the distribution of income in India?
3. Critically evaluate the process of trickle down as a policy stance for India
2004

418
 1. Impact of economic reforms on employment and poverty
2002
1. Poverty is the cause and consequence of population growth in India. Comment.
2. Give an account of the techniques of measurement of poverty in India and discuss
the measures taken for eradication of poverty
3. Explain the causes of regional disparity in India and state how far institutional
reforms can help to solve them
2001
1. Poverty is both a cause and effect of rapid population growth. Discuss
2. Schemes like the employment guarantee schemes, though contributed
significantly to reduce rural unemployment, yet failed to reduce poverty effectively.
2000
1. How is poverty measured in India? Give a brief assessment of poverty eradication
measures
Poverty in any country depends on
• Average level of national income
• Degree of inequality in the distribution of national income- For a given income,
more unequal distribution means more poverty
Absolute poverty- Used to represent a specific minimum level of income needed to
satisfy the basic physical needs of food, clothing and shelter in order to ensure
continued survival
• These minimum estimates vary depending upon the physiological, social and
economic requirements
Paul Collier has called the people living below the PPP poverty line as the 'Bottom
Billion'. They suffer from traps of poverty
• Conflict trap-civil wars
• Natural Resource Trap
◦ In general the countries that seem to be that the more endowed a country has
with natural resources, the worse it performs.
◦ This was argued by Sachs and Warner
◦ Casues
▪ There is a negative relation between the size of the labour force in
primary sector and export performance and investment. Positive relation
with external debt and corruption

419
 ▪ The export performance is poor because natural resources are income
inelastic and suffer TOT deterioration
▪ Natural resources may crowd out other activities
• Higher wages in primary sector discouraging
• Revenues from natural resources keep the exchange rate artificially high
making other sectors uncompetitive. This is the Dutch Disease, named
after the phenomenon observed after the discovery of natural gas in
Holland in 1960s
▪ Rents from natural resources are misused by politicians thus hurting rule of
law and democracy
Poverty in India
As per 2011 estimates, India had 22% population below poverty line, declining from
37% in 2004, based on Tendulkar line. The Planning Commission used the NSSO
household surveys to compute poverty. But since the CES was last published in 2011-
12, India doesn't have recent official poverty estimates.
For poverty measurement, the distribution of household expenditure and the cutoff
point needed. Then, a price deflator has to be selected to adjust the poverty line over
time. A normative basket of consumption also required
Poverty at independence was 70%
History
Pre independence poverty estimates: One of the earliest estimations of poverty was
done by Dadabhai Naoroji in his book, ‘Poverty and the Un-British Rule in India’. He
formulated a poverty line ranging from Rs 16 to Rs 35 per capita per year, based on
1867-68 prices. The poverty line proposed by him was based on the cost of a
subsistence diet consisting of ‘rice or flour, dhal, mutton, vegetables, ghee, vegetable
oil and salt’. Next, in 1938, the National Planning Committee (NPC) estimated a
poverty line ranging from Rs 15 to Rs 20 per capita per month. Like the earlier
method, the NPC also formulated its poverty line based on ‘a minimum standard of
living perspective in which nutritional requirements are implicit’. In 1944, the authors of
the ‘Bombay Plan’ (Thakurdas et al 1944) suggested a poverty line of Rs 75 per capita
per year. Post independence poverty estimates: In 1962, the Planning Commission
constituted a working group to estimate poverty nationally, and it formulated separate
poverty lines for rural and urban areas under Pitambar Pant
VM Dandekar and N Rath made the first systematic assessment of poverty in India
in 1971, based on National Sample Survey (NSS) data from 1960-61. They argued that
the poverty line must be derived from the expenditure that was adequate to provide
2250 calories per day in both rural and urban areas. This generated debate on
minimum calorie consumption norms while estimating poverty and variations in these
norms based on age and sex. Alagh Committee (1979): In 1979, a task force

420
constituted by the Planning Commission for the purpose of poverty estimation, chaired
by YK Alagh, constructed a poverty line for rural and urban areas on the basis of
nutritional requirements.
Then Rangarajan reco came. The main criticism of the Tendulkar methodology was
that it had no methodology and was based on level of urban poverty as obtained
from Lakdawala. So Rangarajan expanded the basket to calories, proteins and fat as
well as non-food items like clothing, education, home rent and conveyance and what
was actually spent on these by the relevant fractile class.
The lines are 933-972 in rural and 1181-1407 in urban.
2011-12 Tendulkar Rangarajan
Rural 25.7 30.9
Urban 13.7 26.4
All India 21.9 29.5
Note that though similar in rural, the estimates nearly doubles in urban areas.
Measuring Poverty
Untitled Attachment
Sen- An Ordinal Approach to Measurement
Uses an axiomatic approach, and an ordinal measure of welfare. The novelty is that,
as per Sen, the information required for this measure is quite limited, permitting
practical use.
Identifying the poor and constructing an index of poverty based on the available
info on the poor are the two central problems of poverty measurement
HCR= Number of poor/Total pop
Problem is does not care about the depth of poverty. Also insensitive to inequality
within the poor. Violates both monotonicity and transfer axiom
Poverty Gap- Aggregate shortfall of income from the poverty line for all the poor.
Satisfies the monotonicity axiom but violates the transfer axiom if the transfer
made within poor.
If z is the poverty line, q is the number of poor, n total population and gi individual
deprivation

421
then I= Income gap ratio= Sum(gi)/ qz. Tells the percentage of their mean shortfall
from the poverty level
HCR=q/n
Axioms
• Monotonicity- A reduction in income of a person below the poverty line must
increase the index.
• Transfer axiom-A pure transfer from a person below the line to anyone richer must
increase the index
• Relative equity(E)- If i is worse off then j, the the weight on i's deprivation must be
greater than the weight on j's deprivation
• Ordinal rank weights(R)- The weight on the income gap of i equals the rank order i
in the interpersonal welfare ordering of the poor
• Monotonic Welfare(M)- The relation > defined on the set of individual welfare
numbers for any income configuration is a strict complete ordering and the relation
> defined on the corresponding set of individual incomes is a subrelation of the
former. Thus if yi>yj, then Welfare(i)> Welfare(j)
• Normalized Poverty Value(N)- If all the poor have the same income, then P=HI,
where P is the poverty index as in this case, H and I are sufficient as there is no
need to measure inequality. H tells us the number and I tells us the shortfall.
Poverty Index
For large number of poor, the only index satisfying R, M, N is
P= H[I+(1-I)G]
I by itself does not take care of inequality as the shortfalls are linearly added. So it is
augmented by the Gini coeff among the poor. But this augmented measure does not
tell us about the number of poor. So it is multiplied by H to tell us the composite picture
of poverty where G is the Gini coeff of the income distribution of the poor.
Multidimensional Poverty Index
Captures acute deprivations that each person faces at the same time wrt education,
health and living standards

422
• Measures both incidence and intensity(in how many dimensions is one poor)
of poverty
• Thus each have a total weight of 1/3
• The MPI assesses poverty at individual level.
• MPI Poor if someone is deprived in a third or more of the ten indicators. Extent
of poverty is measured by the % of deprivations they are experiencing. Each
indicator has a deprivation cutoff, and the poverty cutoff overall for a person
is 33.3%(Note this does not mean to measure how much one is deprived in
each indicator, eg how much shortfall in schooling. Rather it just measures the
number of indicators in which one is deprived)
• The MPI permits comparisons both across countries and within countries

423
• The global MPI was developed by the Oxford Poverty and Human Development
Initiative and the UNDP for inclusion in the HDI.
• The index is an application of the Alkire-Foster method.
• The MPI has the same dimensions and weights as the HDI. But the indicators
are different.
• The MPI measures both the HCR(H) and the average proportion of indicators in
which the poor are deprived(A). Hence MPI= H*A
• In 2018, 5 MPI indicators were changed to align them to the SDG. MPI linked to
SDG 1,2,3,4,6,7,11
• Population vulnerable if deprivation score 20-33%. In severe poverty if score
>50%
• India had an MPI of 0.28 in 2005 and 0.12 in 2016, a remarkable progress.
(data for India available only till 2015-16)
• India lifted 271 million people out of poverty between 2005-15
• Highest poverty in ST, then SC
• Poorest district Alirajpur in MP, famous for the Nurjahan mango species.
Bhagoriya festival important
Limitations of MPI
• Main drawbacks are due to data constraints
• Health data relatively weak and overlook many deprivations
• Does not reflect intra-household inequalities
• Does not measure inequality among poor
• Does not measure depth of poverty(gap between poor and non poor)
(Measures intensity-how deprived one is)
Alkire Foster Method
• Builds on the Foster-Green-Thorbecke poverty measures(See Dschool note)
• The crux is measuring overlapping deprivations as individuals experience
them together
• Identifying the poor
◦ Counts the deprivations experienced
◦ People poor if sum of deprivations greater than the poverty cut off(33.33% in
MPI)
• Counting the poor
◦ Having ID the poor, AF constructs a unique class of poverty measures, Ma,
that goes beyond the HCR. Three measures in this class are important
▪ Adjusted HCR(M0) or the MPI- both the incidence and intensity of poverty.
M0=H*A

424
 ▪ Adjusted Poverty Gap(M1)- Incidence, intensity and depth. The depth is
the average gap G between level of deprivation experienced and poverty
cutoff. M1=HAG
▪ Adjusted Squared Poverty Gap(M2) Along with M1, it also captures inequality
among the poor. M2= HA(G)^2
Advantages of AF
• Helps in tracking poverty
• Helps in targeting

Human Poverty Index

See Human Dev Note
Alagh Committee
• Calorie norm of 2400 in rural and 2100 in urban.
• Based on NSSO CES
• The PL for the base year of 73-74 taken as the expenditure at which, on
average, the calorie norms met as per the NSSO survey
• The deflator was derived from the NAS
• There was divergence between NAS and NSS. So there was adjustment necessary
to to have compatibility between 2 important components of the plan model, i.e.
the input-output table based on NAS and the consumption sub-model based
on NSS.
◦ So the NSS expenditure for all expenditure classed was adjusted by a factor
equal to the ratio of the total private cons exp obtained from NAS to that from
NSS
• For state level, the all India poverty line and adjustment applied to state specific
NSS distribution of households by level of consumption expenditure uniformly
across the states.
◦ Assumes that the age-sex-activity pattern in states follows the all-India
pattern. So calorie requirement same in different states. It also assumes that
the consumption basket is same across states.
◦ Also assumes that the price structure identical across states

Lakdawala Committee
Highlighted the criticisms of the PL approach
• The PL is anchored in a norm of calorie consumption which is taken as representing
an absolute nutritional requirement based on age-sex-activity status of the entire
population. It does not take into account intra and inter-personal variations or
homeostatic adaptations and hence PL is not a true indicator of
malnourishment

425
 • Absolute poverty is inadequate because relative poverty is also an equally
important aspect, and it determines absolute poverty at a given level of
national income
• PL freezes the notion of poverty even though societal norms may evolve
• Pl derived from private consumption does not take into account aspects of social
consumption like education, sanitation
• Since poverty line in India is based on consumption, not income, it ignores aspects
like debt
• The HCR based on the PL ignores the depth of poverty

But it did not redefine the poverty line butdiasggregated the one given by the
Alagh Task Force into state specific PL using inter-state price differentials
measured by Fisher's index. These state-specific poverty lines of base year (1973-74)
were updated for subsequent years using state-specific price indices, CPI-IW for urban
and CPI-Al for rural
The national (All-India) poverty line in the Expert Group (Lakdawala) method was
worked out as an interpolated value from the national consumption distribution
obtained from the NSS consumer expenditure data and the national poverty ratio. The
national poverty ratio was estimated as a population-weighted average of the
state-wise poverty ratios, separately for rural and urban areas.
They did not adjust the NSS expenditures to match with NAS
Alternative criteria
• Hunger criteria
◦ Hunger is the most crucial dimension of poverty(SDG 2 is crucial for
achieving SDG1) NSSO 38th round had for the first time the question whether
all members of the household had 2 square meals in a day. Seasonally
hungry(not getting meals sometime), and chronically hungry(not getting most of
the time) were added together to get the hunger ratio. Then it was inferred
that the incidence of hunger was less than the incidence of poverty.
◦ But as hunger, though very imp, is only one criteria, poverty has to be more
broadly considered. So more parameters needed
• Food Share Criteria(Engel)
◦ Engel argued that given tastes and preferences, the proportion of income spent
on food decreases as income increases. Hence poverty means a large share
on the food items. So a fixed proportion on food can be defined as poverty
line and those spending above it are poor
◦ Fails to separate the effects of socio-cultural factors and price differentials
between states
• Calories Consumption Criterion

426
 ◦ NSSO produces a calorie intake distribution table for different states. Then the
required expenditure levels for the calorie norms can be read off from these
tables to arrive at the state poverty line.
◦ This method allows the PL to fully reflect the inter-state differences in
consumer preferences and structure of prices
◦ difficulty is in inter-state comparison due to the different baskets
• Income or Consumption- Indian poverty lines are consumption based due to the
difficulty of measuring income using the surveys. Issues with self employed who
form the bulk in both urban and rural. For wage employment, even though data
available on them in the Employment Unemployment Survey, there is significant
variation in the wages of casual wage employment
• Capabilities approach-But this approach raises issues of measurability and
aggregation. To be aggregatable, the indicators must be independent of one
another and must be related to the same unit like a household.
• Bottom quintile- World Bank suggested tracking the bottom 40%(B40) share in
income. The growth in the income share of the bottom 40% is called Shared
Prosperity by the World Bank
• NITI -Target 5 poorest families in each village and 100 in each municipality with
a modest cash transfer with the aim that the households become capable of
sustaining APL income in 5-7 years
Tendulkar Committee
• The Expert Group (Tendulkar) did not construct a poverty line. It adopted the
officially measured urban poverty line of 2004-05 based on Expert Group
(Lakdawala) methodology and converted this poverty line (which is URP-
consumption based) into MRP-consumption
• Abandoned the anchoring to a calorie intake norm as the calorie consumption
calculated from consumed quantities in the last 30 days collected by NSS has not
been found to be well correlated with nutritional outcomes measured from other
specialised surveys
• Uses MRP instead of URP estimates
• MRP-Equivalent of urban PLB corresponding to the 25.7% urban HCR is
defined as the new reference PLB to be provided to rural as well as urban pop
in all states after adjusting for price differentials
• Instead of separate poverty norms for rural and urban, use a single poverty line
basket, based on the consumption pattern at the existing urban poverty line of
2004-05, because:
◦ Revised poverty lines should be based on some “generally acceptable aspect of
current practice”.
◦ Existing urban HCR is less controversial than rural, and is close to
anthropometric measures of malnutrition while rural HCR is much lower.

427
 ◦ Urban PLB represents a better and preferable living standard as compared to
rural PLB. PLB based on actual consumption pattern observed in 2004-05 is
more relevant than the original 1973-74 PLB
• State-specific urban poverty lines are derived from the (MRP-consumption
based) national urban poverty line using urban state-relative-to-all-India fisher
indices.
• The state-specific rural poverty lines are worked out from the state-specific
urban poverty lines by applying within-state rural-relative-to-urban Fisher
indices
• The indexes are derived from the implicit prices in the NSSO CES survey
• Includes the expenditure on education and health
• The PL came to be 446.68 and 578.8 for rural and urban in 2004-05 and 816
and 1000 for rural and urban in 2011-12
Lakdawala Tendulkar
1993-94 36 45.3
2004-05 27.5 37.2
2009-10 29.8
21.9(Last
2011-12 official poverty
estimates in
India)

Note that even if the Tendulkar reco leads to higher poverty in both years, the
magnitude of reduction in poverty was almost similar.
Between 2004-05 and 2011-12, the Tendulkar also shows that the decline from 37 to 22
was sharper in rural areas, from 42 to 26. Urban from 26 to 14.
Rangarajan Committee
Argue that though some prefer deprivation as a measure of poverty, there are
difficulties in aggregating different deprivations from different data sources to
arrive at a measure and hence some minimum consumption expenditure defined
and poverty defined as a shortfall from it.
Arrive at the all India poverty line as 972 in rural and 1407 in urban areas as MPCE.
Based on 2011-12 prices.

428
This has to be seen in the context of public expenditure on health, education, food
etc and hence the actual welfare will be higher than implied by this measure.
Stand on issues of measurement
• Tendulkar used all-India urban poverty line basket as the reference to derive state-
level rural and urban poverty. Rangarajan reverts to the old practise of using
separate all-India rural and urban poverty basket lines and deriving states
from these.
• Tendulkar decided not to anchor the PL to the then available official calorie norms
used for poverty since 1979 as it found a poor correlation between food consumed
and nutrition outcomes. But R decided that deriving the food component of the
PLB by referencing the simultaneous satisfaction of all three nutrient norms
would be appropriate when seen in conjunction with govt nutrition
supplementary programs like mid-day meals
• The avg requirement of calories, proteins and fats based on ICMR norms
differentiated by age-gender-activity for all-India urban and rural regions used
to derive the normative levels of nourishment
◦ The energy requirements are 2155 kcal per person per day in rural and
2090 per person per day in urban areas
◦ Views the calorie norm not as a single number but as an avg in a band of +-10%
of these values based on Meenakshi and Vishwanathan as well as
Sukhatme's homeostatic adaptation.
◦ For proteins, 48 and 50 gm in rural and urban(yes, protein greater in urban)
◦ For fat 28 and 26 gm in rural and urban
◦ The food basket meeting all the three norms is met by persons in the 6th
fractile in rural areas and 4th fractile in the urban areas. The expenditure is
554 and 656 in rural and urban as per NSSO 68th round
• The median fractile(45-50%) values of clothing, rent, conveyance and edu
expenses treated as normative. This is 141 and 407 in rural and urban areas
• The observed expenses of all other non-food expenses of the fractile classes
that meet the nutrition needs are considered as part of the PLB. This adds upto
277 and 344 in rural and urban
• Adding all, 972 and 1407.
• For validation, they used CMIE data to consider a household as poor if it is unable
to save and the results are similar.
• Compared to the T, Pl 19% and 41% higher in rural and urban areas
• Uses MMRP
• The all-India PLs are converted to state-specific urban and rural PLs by
constructing spatial price indices, using implicit prices (unit values) derived
from CES value and quantity data for items for which quantities are reported.
The same inter-state price differentials are assumed for all other items.

429
 • Using these and the state-specific distribution of persons by expenditure groups
(NSS), state-specific ratios of rural and urban poverty were estimated. State-level
poverty ratio was estimated as weighted average of the rural and urban
poverty ratios and the national poverty ratio was computed again as the
population-weighted average of state-wise poverty ratios.
• Recommendation to update the PLs for future years by using Fisher’s Ideal
Index numbers based on price relatives, using unit values derived from the
CES of the relevant year for food items and CPIs for others – minimizes the
problem of outdated weights- Deaton's method
Nutrition Norms, Nutrition Content of Food Basket and Nutrition Outcome
• Following Alagh, calorie norms became basis of the all India PLB, even though
Tendulkar moved away from the calorie norms to derive PLB due to poor correlation
between calorie consumption inferred from NSS and nutrition outcomes from other
surveys
• Meenakshi and Viswanathan argue that there is a correlation between BMI and
calorie content of consumption for adults, not for children. Hence calories
needed in basket.
• Rangarajan argues that controlling for other nutrient intakes, like fat and protein,
not just calories, improve the nutritional outcomes for children too. Hence they
include calories, proteins and fats.
• Over time, there has been shift away from calorie intensive diet to a diversified
basket richer in proteins and fats, across all consumption classes. Deaton and
Dreze argue that these could be due to lower calorie requirements as a result of
changing occupational patterns, sedentary lifestyle, better sanitation and
health. The Rangarajan group recomputed the avg requirements based on 2010
ICMR norms and it is indeed lower
Difference between NAS and NSS estimates
• NAS consumption estimates higher and difference increasing over time.
• The divergence between consumption from surveys and NAS is common to all
countries. But what is alarming that the difference increasing over time. In
1970s, it was 10%, became 50% between 2004-05
• As NAS is higher, adjusting NSS and then calculating HCR gives a lower
estimate of poverty
◦ The adjustment, made by Alagh, was justified as necessary for using poverty
as a parameter in the medium and long term consistency plan models
◦ This was a major reason for the Lakdawala committee formation as the lower
poverty ratio led to lower allocation for anti-poverty programs
• If poverty estimates should be made without adjustments, then use NSS

430
 ◦ NAS relates to private consumption, not household consumption. HH is the
appropriate basis for poverty estimates
◦ NAS estimates based on residuals, even though for India, significant data gaps
on production in the informal sector.
◦ NSS gives state-wise estimates, for rural and urban areas separately of
private consumption of a large number of goods and services
Poverty Estimates by world Bank
Approach similar to those employed by India. Based on poverty line of USD 1.25 per
person per day measured at 2005 international prices and adjusted locally using
PPP. This poverty line is derived as the avg of the PL of the 15 poorest nations in
terms of consumption per capita using 2005 International Comparison Program
Data
Hence same poverty line for all nations, not allowing for cost of living differential(that
$1.25 equivalent in PPP rupees may buy much less in India than in Bangladesh or
Nigeria)
It also does not distinguish between transient or chronic poverty
PPP Poverty line for India is equivalent to 1.94 $ in 2011-12
Poverty Ratio for eligibility and Entitlements under poverty alleviation programs
Most of the programs meant exclusively for the poor have been universalised. But for a
lot of important programs, like the NFSA provisions, identifying the bottom part of the
population still requires some sort of BPL list
The Rangarajan group recommended that for target group oriented schemes, the
beneficiaries may be selected from the deprivation-specific ranking of
householdsusing the SECC 2011 census and the population census. The Poverty
ratio can play an important role in the allocation among states
Critique of the Rangarajan Report(Ray and Sinha)
Three specific TOR of the R committee
• To gauge whether only consumption based PL or other criteria also
• To gauge the divergence between NAS and NSS consumption estimates.
• To recommend how the estimates evolved should be linked to govt schemes
entitlements
Argue that the committee failed in all three.
• WRT 1, the committee missed the chance to use Multidimensional
Deprivation(MDD) and poverty based on HDI, or the work of Alkire and Foster on
Multidimensional Poverty
◦ Jayaraj and Subramanian show that both these methods(MDD and MDI)
can be implemented in India using NSS and NFHS data

431
 ◦ Question the R committee argument that these measures raise aggregation
and measurement issues. On measurement, plenty of literature available
incorporating. On aggregation, the issues are in consumption based estimates
◦ Also the expenditure based lines exclude the issues of relative poverty as
they have no measure of inequality.
◦ They praise the R committee decision to anchor expenses on clothing,
conveyance, rent and edu at the median class expenditure.
• WRT 2, question the complete ignorance of the NAS-NSS discrepancy
• WRT 3 same criticism as 1 of ignoring MDP
Also criticise the reduction in calorie requirement. Sen has shown that there is no
evidence that calorie requirements have lowered for people near the PL despite
changes in occupational structure or lifestyles. Also question the committee ignoring
the micronutrient criteria as India suffers from major problems like iron
deficiencies
Praises using unit values derived from the NSS, instead of NAS or CPI as they don't
reflect the true prices paid by the poor
Rangarajan and Dev- Counting the Poor(Responses to the criticisms raised by
various scholars)
Argue that Mishra's suggestion of arriving at a socially defined bundle of goods,
which will have components of both public and private goods, and measuring poverty
as deprivation from this bundle is a good idea but the issue is how to define the
bundle.
For a varying vs fixed PLB, they argue that though the PLB remains fixed in
composition, the weights for price indices changes as the PL is to be updated using
Fischer Ideal Index.
On the issue ofmicronutrients, they recognise the importance but cite lack of
measurability.
On MDI they argue about aggregation and about availability of datasets that are
frequent and compatible. Eg child mortality database is for population, not households
and hence can't be used. For aggregation, all databases should consider the same
set of households.
On the criticism that by R's methodology, 13 states showed higher urban poverty
than rural poverty, they give the following explanations
• Both the L and R groups had separate urban and rural baskets while the T group
used the urban PLB. That is why in T rural poverty was higher as affording the
urban basket would cost more in rural areas.
• As the R group includes the expenses on 4 key non-food items, data shows that
expenses on these constitute 15% of the total poverty line in rural and 29% in
urban, twice.

432
 • It may also be possible that despite the MNREGA, a larger number of people may
be migrating to the urban areas, thus exporting poverty from rural to urban
See Trends in Poverty and Analysis from Hard copy notes.
Growth-Mediated Security and Support-Led Strategy(Dreze and Sen in Hunger
and Public Action)
GM- promote economic growth and take the best possible advantages of the
potentialities released by it, including a general expansion of private income and an
expansion of public support.
Criticism
• Growth often leads to widespread inequality so that the most needy people may
benefit the least from growth
• The opportunity for expanding social services offered by high growth may not
be seized by the govt if it is preoccupied with opulence rather than social justice.
• Trickle-down is slow- as shown by Himanshu and Datt and Ravallion.

SL- Resort Directly to wide ranging public support like education to remove
destitution without waiting for a transformation in the level of general affluence.
Here success depends on
• Efficiency of public services
• A redistributive bias in the delivery of public services
Criticism
• Extravagance in a poor economy, as deflecting scarce resources to social
services, away from investment reduces growth and hence future opportunities.
• Some have questioned the very basis of state provisioning.
Interrelations
The two approaches are not completely distinct.
• The distinction is not of activism or disengagement on part of the state. In GM
also, the states have played a vital role in ensuring participation of all in the growth
process.
• The contrast is also not of market vs state provisioning
• Either strategy does not mean surrendering the other. Eg SL does not mean
sacrificing growth. Growth is key to the sustainability of such a strategy
The real contrast is that in SL, countries have notwaitedto grow rich before
providing services.
GM and Unaimed Opulence
Latter means only focusing on growth and not concerned about whether it actually
translates into better living conditions. It can also mean sacrificing public services for
the sake of growth.

433
The countries that have focused on the former are South Korea, Hong Kong
Support Led Strategy and Equivalent Growth
Countries that have used SL are Chile, China. The effect of SL on growth is complex.
For example, on one hand there is diversion of resources away from investment, on
the other hand, better education and health have a direct impact on growth
World Bank Redistribution with Growth(Chenery and Ahluwalia)
Argue that the widespread inequality asks for a revision of the entire policy
framework.
Concern with income distribution is not merely about relative income shares but also
about the level and growth of income in lower income groups. hence distribution can't
be viewed independently of growth.
Incorporation of distribution within growth required as large scale redistribution
not politically possible.
If the various groups are arranged as per income and gi represents the growth rate of
income of the ith group, then rate of increase in welfare of the society is
G=w1g1+...+wngn
Weights show the distributional emphasis on each group.
But a poverty weighted measure would assign higher weights to the lower quintiles
Conventional distributional theories, Marxist or neoclassical, ignore the role of
assets in determining income distribution, by focusing only on wage .
Butasset distribution is more concentrated and has to be the focus of policy.
4 strategies
• Maximising GNP growth to benefit all sections- Even though the poor better off
compared to slow growth, welfare can be improved through transfers.
• Directing investment to poverty groups in the form of credit access, public
facilities etc- Involves sacrificing some output in the short run. But in the long
run, benefits from the trickle-up effects
• Redistributing income or consumption- Not viable in the long run
• Transfer of existing assets to poverty groups like land reforms. Different from
redistribution as defined here as redistribution is about generated income, through
taxes
Large scale public expenditure for wage employment programmes, security
against shocks, augmenting asset base etc. Globally it means favouring foreign

434
aid, international public good, opening markets for poor countries, promoting
global economic stability.
Bhagwati-Sen Debate
The debate came to the fore in two books written by them. Bhagwati and Panagariya-
Why Growth Matters. Sen and Dreze- An Uncertain Glory
• Sen believes that India should invest in its social infra to raise growth,
otherwise inequality widens and this inequality can destroy the growth
momentum. B argues that only growth can give resources. B believes that
inequality may increase initially but will raise enough resources for the state
to redistribute.(Kuznets curve)
• The debate is essentially about timing. Both acknowledge the importance of
growth. But while B accords primacy to growth as one that generates the
resources for poverty alleviation, Sen accords primacy to poverty alleviation and
insists on not waiting for growth, and that growth will follow well only if good
social policies. Eg on his work on famines, he says that they are caused not by
shortage of foodgrains but by lack of purchasing power. If left to the market, it
won't help. Hence the state must create purchasing power through employment.
Then the market will do an efficient job of providing the food. Thus he argues
that unless people are brought to a minimum level of capabilities, they will not
be able to participate in the growth process. Hence social programs should
predicate growth or run simultaneously with it. He argues that in India while the
reforms of 1991 were required, India did not focus much on social indicators like
primary education.
• Thus Sen's views translated into the rights paradigm of development, by
creating right to employment, through MNREGA, or right to food though the
National Food Security Act or the right to education, even though the resources in
India were insufficient for these. Tie with Alesina Rodrik, who argue that
inequality can harm growth
• B argues that significant redistribution in India could not have preceded
growth as there were too many poor and too few rich. He, along with Panagariya,
argue for two kinds of reforms. Track I reforms are those that are growth
inducing and making it more inclusive. Track II are those that make
redistributive programs more effective as their scope widens. He argues that
ignoring I and increasing expenditure on II, i.e. 'populist measures' leads to
inflation which hurts the poor
B camp argues that poverty declined most between 2004-2008, as a result of the high
growth. But as Himanshu shows, only 48% of the decline in poverty was directly
attributable to growth and the rest was attributable to social security programs like
NREGA

435
Thus the debate is more of a argument over sequencing, not an embrace of
growth or rejection of it.
But as TN shows, it is possible to defy the sequencing issue of the BS debate and
achieve both human development and productive dynamism
Relative and Absolute Poverty
A measures poverty in relation to the amount of money necessary to meet basic needs.
Not concerned with the broader quality of life or with the level of inequality in society.
Therefore fails to recognise that individuals have more important social and
cultural needs. So relative poverty was developed
R defines poverty in relation to the economic status of other members of the society.
Thus people are poor if they fall below the prevailing standards of living in a given
societal context
It also recognised the need for society toalwaysassist therelatively
deprivedasunder R,poverty can never be eliminated

Amartya Sen on Relative vs Absolute Poverty

Argues that though focus on relative P, especially in advanced nations, is a welcome
change, poverty ultimately has be to primarily an absolute notion.
Argues that absolute deprivation in capabilities relates to relative deprivation in
commodities and incomes
On criticisms of absolute
• Even under an abs approach, p has to be a fn of some variables, and there is no
reason that these variable fixed over time
Criticism of relative
• Under R, poverty cannot be eliminated as there will always be some who are
relatively deprived
• Makes it difficult to gauge effectiveness of anti-poverty programs

436
 • A shock that affects all, by reducing the level of prosperity in the country, will not
show up as an increase in poverty under R definition. Eg a famine that leads to
widespread starvation but does not change relative positions will not be considered
to increase poverty.
Thus he rejects the hard relativist stance and argues there is anirreducible absolutist
corein the idea of poverty. Eg reducing hunger, no matter what the relative picture
is
Moreover, inequality by itself does not mean poverty. Eg just because someone has
the means to buy only one car while other has 2, does not mean the first person is poor.
Thus relative definitions have to be supplemented by some absolute ideas
So he argues focus on capabilities, which can help solve the A-R dispute
• Argues that poverty is an absolute notion in the space of capabilities but
relative in the space of functionings
◦ Eg not being hungry is a capability, it can be achieved using a different set of
commodities depending on the spatial and temporal context
• This focus on absolute capability and relative commodity also is used by Sen to
justify the violation of the Transfer Axiom(though in very rare cases) for his
poverty measure. He says the violation is a problem only if a very strong
relativist view taken.
ES on Relative and Absolute
If the poverty is conceptualized in relative terms, there is no need to distinguish it from
inequality. A relative measure of poverty is indeed a measure of inequality.
On the other hand, if poverty is conceptualized in an absolute sense, that is, focusing
on the absolute levels of assets, income or consumption of those at the low end of the
distribution, then increases in inequality may be accompanied by reduction in poverty
Poverty as Capability Deprivation
Development is expanding the real freedoms. It requires the removal of major
sources of unfreedoms poverty, tyranny, poor economic opportunities.
Freedom central to the development process for 2 reasons
• Intrinsic, independent valuation
• Instrumental reason
5 distinct types of freedoms
• Political freedoms- Important in themselves as well as in ensuring the political
system does not become exploitative by ensuring accountability

437
 • Economic facilities- Argues that markets are important as they give freedoms to
transact. Thus independently important. They are also instrumentally important as
helping achieve greater prosperity. Economics often misses the first. Eg consider
the familiar setup of a benevolent dictator, achieving the same outcome as a market
may. But even though consequentially the outcomes are same, the process used to
arrive there has rendered the two different. Thus difference between culmination
outcomes(only ends) and comprehensive outcomes(considering means as well)
• Social opportunities- Edu and health
• Transparency guarantees
• Protective security
Each individually important and also complement each other.
Argues that the relevant space for evaluation is not utilities as argued by
welfarists or primary goods as argued by Rawls, but substantive freedoms or
capabilities that people have to choose a life one has reason to value as it
determines ability to convert primary goods into the ends. As process can affect
utility as much as outcome, measuring freedom, which determines process, is
better than utility
Functioning- various things a person may value doing or being
Capability- Alternative combos of functionings that are feasible for her to achieve.
Thus it is a kind of freedom to achieve one's functionings. Eg a rich person who
fasts may have the same functioning in terms of food as a poor person, but the richer
one has more capability as he has the freedom to achieve a more functioning
In the light of the above, poverty must be seen as deprivation of basic capabilities.
Why this approach
• The approach focuses on deprivations that are intrinsically important, unlike
low income, which is only instrumentally important
• There are influences on capability deprivation other than income. But income
poverty and capability poverty are interrelated.
• Sets a higher and more meaningful bar for evaluation
• Allows contextual understanding of poverty
The influence that capability has on income is particularly important for the
removal of income poverty. He argues that while liberalisation opened up more
opportunities for Indians, the capability to make use of them is dependent on the
social context that people exist in. Hence education, health etc important for
removing income poverty.
Challenges
• It requires input not only on material values but also on social, spiritual values.
• General applicability for overall policy making is less.
• Aggregation issues

438
Poverty, Inequality and Unemployment- Some Conceptual issues in
measurement(Amartya Sen)
First Five Year Plan sums it up as 'The two[removing poverty and inequality] have
to be considered together. Only a simultaneous advance along both these lines
can create the conditions in which the community can put forth its best efforts for
promoting development.'
Poverty and ineq related. Given income levels, higher ineq means higher poverty.

439
Poverty has been also related to unemp by ILO. In India, Dandekar and Rath
defined an adequate level of employment in terms of its capacity to provide min
living to the popn. Thus, a person working and getting low wages will be considered
unemployed by this approach.
Inequality measures(See growth handwritten notes from Debraj Ray)
• Variance- problem is that welfare has to be a quadratic function of individual
incomes and this measure is also mean dependent
• Coeff of Variation(SD/Mean *100)- The mean dependence can be avoided but the
welfare problem remains
• Standard deviation of logarithms- Under some cases, perverse results that the
Dalton transfer can reduce the SD
• Gini coeff
• Lorenz curve- Shows the % of incomes received by the bottom x% of the
population. The advantage is that we can comment on welfare without the need
of specifying a welfare function. If given total income, the LC of distribution x is
uniformly higher than the distribution y, then welfare under X is higher, no matter
what welfare function chosen as long as it is symmetric and strictly quasiconcave.
◦ Another good property of Lorenz curves is that if LCx higher than LCy, given
total income, then we can move from y to x through a finite sequence of single
transfers from rich to poor
◦ But the LC fails to give meaningful comparison if two LCs cross

Poverty and Inequality in India- A Re-Examination- Deaton and Dreze

Summary
• State wise poverty trends
◦ In states, in 90s, Odisha had highest poverty at 47% in rural and 44% in
urban. JK had the sharpest declines in poverty in urban while TN had in
rural. JK also had the lowest poverty in both urban and rural
◦ Odisha had very little poverty decline Assam saw stagnation.
◦ The states with low rates of Avg PCE growth are the states with the lowest
rates of SDP growth, the BIMARU states. While the states that had the
highest growth in APCE also grew faster in SDP. Thus divergence
◦ Agricultural real wages has a correlation of -0.8 with HCR. Thus raising agri
wages is key to reducing poverty.
• Inequality has increased in the 1990s in several forms(aspects of inequality)
◦ Inter-state divergence in per cap exp, with the already better off states
particularly in the south and west growing more rapidly.
◦ Rural-urban disparities of per-capita expenditure have risen
◦ Ineq has increased within urban areas in most states

440
Growth, poverty and inequality
• Poverty decline has growth component, shown by rise in APCE, and distribution
component, keeping growth 0.
• Their decomposition of the 2 effects show that poverty due to growth alone would
have declined more than it actually did, due to rising inequality. Hence APCE
growth among the poor was less than the average.
• The all India HCR was also 1.3% pts higher due to the presence of inequality

Hidden costs of Growth

• As market forces act more freely, it leads to more uncertainty and inequality
among those who are not in a position to benefit from the new opportunities or
whose livelihoods are threatened by the changes in the economy
• This is corroborated by the dismal performance of the poor states. Within these
states, the poor have been hit even harder than the other sections.
• On hidden costs- Many migrate seasonally for better living conditions. This has
significant social costs like disrupted school attendance. A large number are simply
displaced by development projects.
Inequality vs Inequity(lack of opportunities)
Tendulkar argues that even if inequality increased initially with growth, people
won't have the feeling of inequity if there is upward mobility. Hirschman and
Scitovsky have also argued that inequality does not necessarily lead to inequity.
As per Tendulkar, social acceptance of a degree of ineq depends on
• Existence of merit based income mobility
• Equality of opportunity
• Improvement in the living conditions at the bottom of the distribution
Mention WEF Global social Mobility Index
The Republic of Hunger- Utsa Patnaik(Answer to the 2009 question on
divergence)
Post the reforms, the per capita annual absorption of foodgrains came down from
177 kg to 155 kg. But this is mainly due to fall in absorption by rural pop, while urban
has seen a rise in absorption.
Some have argued that this is to be expected as incomes are rising and hence the share
of foodgrains fall as people diversify their diets.
Patnaik argues that the decline is due to 2 reasons
• Decline in rural incomes due to deflationary macro policies
• Deterioration of terms of trade for agriculture following opening of trade.
She argues that although the govt claimed that there was a problem of plenty in terms
of overproduction and not consumption, the govt claim of no hunger is wrong as

441
there has been decline in absorption for all purposes, including as animal feed, not
just food for direct consumption. This can be explained only through decline in
purchasing power.
Poverty estimates
NSS surveys, as they tabulate both the value of consumption and the quantities, they
indirectly give the calorie consumption also as the calorie amount in each food item is
known. So if someone consumes 2 kg of rice, his calorie consumption can be derived.
But the PC method is indirect. It read off the consumption that was equivalent to the
calorie norms from the NSS CES survey in 1973-74, and the expenditure on the food
component corresponding to it, to get the poverty line. Eg say 2 kg rice and 3 kg wheat
consumers in the CES. They were having the required calories from food and in 73-74
prices, they spent say 50 rs on food. Hence 50 was the PL and 2 kg rice and 3 kg wheat
the PLB.
But in the Lakdawala Committee method, the PLB was assumed to be the same. Thus,
the PC assumed the quantities that people consumed and hence the pattern on
consumer expenditure was same. Hence it just updated the price, say from 50 to
75, which was enough to afford the same PLB as 73-74.
But the issue is consumption patterns change. Even though with rs 75, people could
afford 2 kg rice and 3 kg wheat, it does not mean they were actually consuming
that.
Reasons for change
• Hardly any wages are paid as grains. So people have to buy all.
• Common property resources giving free meals and fuel have disappeared so
money to be spent on these too- Corroborated by Basole and Basu as the food-
fuel tradeoff
The price-adjusted poverty line is therefore found to correspond to an actual calorie
intake which over time, is further and further below the original calorie norm.
A direct estimate in 1999-2000 of the NSS survey would have given a poverty line
of 567. But the official PL was just 328.
The difference between the 2 methods has been increasing
15% of the rural pop in 1970, 70% for 1999. 91% in 2009-10. For urban, rose to 70% of
the pop below the 2100 kcal norm in 2009-10
Poverty-Hunger Divergence or theCalorie Consumption Puzzle- Deepankar Basu
and Debarshi Das
Hunger is defined as undernutrition- inadequate calorie intake

442
The traditional arguments,
• Dreze and Deaton- Less calorie consumption, as shown by shift down of calorie
engel curve due to reduced need for calories due to shift of emp away from agri
and more mechanisation of agri
• Bannerjee and Duflo- People are choosing more expensive calories in form of
tastier food, as incomes increase
But Basu and Das refute both. To the first, they argue that voluntarily choosing to
consume less calories with rising income is puzzling. They argue that there is
structural coercion due to forced spending on non-food items like edu, health,
transport, fuel. Non-food budget squeeze. Causes
• Loss of common property resources due to
◦ displacement,
◦ migration,
◦ degradation
• Shrinking social expenditure by the govt
• Emulation of the consumption patterns of the rich due to expansion in advertising
On choosing less nutritious food as claimed by Bannerjee and Duflo, they argue that
evidence is scant and even if that is true, the policy response should be to spread more
info on nutrition, eg the Eat Right Campaign. and also to expand the PDS
Food and Nutrition in India-Facts and Interpretations(Deaton and Dreze)- This can
also be tied to the 2009 question
Despite declining poverty and rising incomes,per capita calorie intake is falling.
Only fats increasing. In anthropometric indicators also, India's improvement is
slower than suggested by economic growth. Insert data on malnutrition.
Also argue that There isno tight link between income and calorie consumption as
well as calorie consumption and nutrition.
Data
• In rural India, PC calorie consumption fell from 2250 to 2050 calories between
1984-2004. But the urban calorie consumption was only 50 calories lower in 2004.

443
 • The decline in calories with increasing expenditure over time is in contrast to
the positive relation between the two at a point in time. This is because the calorie
Engel Curve shifts downward over time.
• In both rural and urban India, the relative food prices to non-food prices was lower
in 2005 compared to 1980s. Hence falling calorie consumption cannot be due to
rising food prices
Explanations
• With rising incomes, calorie requirements have fallen. It can also be due to the
changing tastes of consumers
• Pronab Sen argues that as the real value of the original calorie reco of 2400 and
2100 have been kept constant, the fall in consumption despite rising expenditure
has to be due to rise in non-food share of expenses, something Patnaik also
argues, say due to destruction of common property resources. This argument is
stronger, given that relative price of food remained same.
Socio-Economic Caste Census(Saxena)
While the number of poor can be fixed by the sample survey, identifying them is to be
done through a census. While the Planning Commission estimated the number of poor
based on CES, the task of identifying the poor was done by Ministry of Rural
Development
Types of programs
• Universal- Like Mid-day meal
• BPL Plus- Where prime targets are BPL, plus some additional groups
• BPL-Specific

There have been widespread errors of inclusion and exclusion. As per the 11th
Plan doc, more than half of the poor were given APL cards or had no cards and
almost 60% of the BPL cards given to non-poor in 2004-05
Given these errors, the Ministry constituted an expert group under the author's
chairmanship in 2009 for a better census.
Reco dividing all rural households in 3 categories
• Families to be automatically excluded such as those owning motor vehicles(3-4
wheelers) or mechanised farm equipment or drawing a salary of 10k+, or
employed by the govt, or paying income tax.
• Auto inclusion-The poorest such as homeless, PVTGs, households with disabled
as breadearners and bonded labourers
• The rest to be graded on predetermined deprivations and ranked accordingly
It was expected that the three categories would cover the entire rural pop
Also reco to identify the poor in gram sabha meetings to be conducted in camera for
transparency

444
The ministry accepted the classification with some modifications but rejected the
in-camera method.
Instead decided to send surveyors to each house and combined the caste census
with economic deprivations and hence, the SECC was conducted. (Earlier the BPL
census was not SECC)
SECC was a door to door census of the country to study the socio-economic
status of each rural and urban household and to allow ranking households on the
basis of predefined parameters so that state govt depts could prepare lists of
beneficiary families. It was expected that first it would select all those who had to
be compulsorily included and then include who met all 7 deprivation, then 6 and
so on.
The parameters are
• Households with only one room, kuccha walls and roof
• No adult member in household between 18-59
• Female headed household with no adult between 16-59
• Households with differently abled member and no able-bodied adult
• SC/ST households
• Households with no literate adult above 25 years
• Landless households deriving major income from manual labour

Errors on inclusion and exclusion

• The decennial census is based on the premise that neither the surveyor nor the
respondent has any incentive to give false info. But if the answers determine
access to govt programs, then incentive to lie, especially if the surveyor is an
outsider with no knowledge of the village.
• The surveyor also has the temptation to demand bribe to show deprivation so
that the household can get benefits. Although the supervisor and the sarpanch are
to check the surveyor's info, there is high chance of collusion
• Thus high chance of errors in the SECC and the gram sabha method should
have been used.
• In 2011, the Ministry also announced that the state-wise poverty estimates made by
the PC would not be used to impose ceilings on the number of poor in the state to
benefit from govt schemes. In keeping with the spirit of the above the NFSA was
passed that allowed 75% of rural and 50% of urban households to benefit
even though as per PC the number of poor was only 26% and 14%. This was
because 75% and 50% lived below Rs 50 and Rs 70 which was barely enough to
meet basic needs, even though the poverty line was much lower. Thus the most
important targeted program, the PDS, was delinked from the PC poverty
estimates(This can be used as a way forward for the Utsa Patnaik argument)

445
 • In line with the above the SECC decided, rightly, not to give the number of poor in a
village, district or state.
Reliability and Authenticity
• Of the 179 million houses, those automatically excluded was 40% and those
automatically included was just 1%. Of the remaining 106 million, 20 million did not
report any deprivation, possibly because the deprivations were narrowly defined
and the households despite low income, did not meet the criteria.
◦ Eg a widow supporting her 17 year old son will be exluded
• There has been gross under-enumeration of the poorest. Eg those who had to
be compulsorily included is counted as just 1.5 million in the SECC, whereas
Antyodaya card holders are themselves 25 million in number. It is also around 10%
of the number of homeless as estimated by the Ministry
Overreporting the rich
• They were to be excluded if they satisfied any of the 14 parameters of exclusion.
• Such households were counted by the SECC as 70 million.
• Very large number, leading to more than half the rural pop being excluded(20
million + 70 million=90)
• One reason if faulty criteria of exclusion, like owning a two-wheeler. Many
families buy 2-w on credit or get it as dowry
Benefits
• Comprehensive: It takes into account multi dimensional deprivations unlike
poverty line which is based on consumption expenditure
• Welfare schemes: It can be used for better identification and targeting of
intended beneficiaries. NITI Aayog report has recommended its use for disbursal of
subsidies and DBT.
• Demand driven welfare policy: Specific indicator based targeting is possible. For
example households lacking proper housing can be targeted for housing
schemes.
• Monitoring: Unlike census data, there is absence of anonymity and personal
information is open for use. Hence progress can be tracked.
• States can create their own tailor made poverty lines. This will prevent
unnecessary centralisation.
• Caste data will help in framing reservation policy and tracking caste based
indicators.
Dev and Rangarajan on SECC vs NSS based measures
Argue that both for different purposes and not a replacement for the other
• SECC for identification while NSS for measuring proportion of poor

446
 • The deprivation based criteria used in SECC is vague and it is why the
estimates of poor from it is widely different from NSS based consumption
poverty estimates
◦ Eg being landless is automatic inclusion but it does not guarantee poverty
• Incentive of lying and inclusion-exclusion errors in SECC create further distortions
• Need NSS based ratios to gauge effectiveness of poverty alleviation programs

Identifying the urban poor

Earlier states did these, based on the urban poverty line. But led to widespread
exclusion. The PC set up a committee in 2010 under SR Hashim. It gave three
vulnerabilities
Created indicators to measure the depth of deprivation also.
Three stage process
• Automatic exclusion
• Auto inclusion
• Scoring index, with scores from 0-12. 0 scores hh will be excluded

But the govt decided not to implement the report reco and let the states identify
the urban poor themselves
Poverty Alleviation Schemes
5 key drivers of reducing poverty
• Accelerating rural poverty reduction- With 4/5 poor in the rural areas. Not just
focus on agri but also on the growing linkages between rural and urban areas. But
focus on agro growth key. Deaton and Dreze show correlation of -0.8 between
agri real wage growth and poverty reduction
• Creating more and better jobs
• Focusing on women, SC and STs
• Creating more 'good' locations as where people live can have substantial
impact on prospects
• Improving human development outcomes for the poor
In the book Poor Economics, Bannerjee and Duflo argue that small things matter in
poverty reduction. For example, a remedial instruction program Baalsakhi that they ran
along with the NGO Pratham showed remarkable improvements in learning outcomes.
Overview of PAS
• Integrated Rural Dev Program(1980-1999)- All India. Was restructured as
Swarnajayanti Gram Swarozgar Yojana to provide self emp and generate skills
and productive assets. Issues

447
 ◦ Had several sub-components like Training of Rural Youth for Self-
Employment(TRYSEM), Ganga Kalyan Yojana. These did not have the required
linkages
◦ Hence only 3% of IRDP beneficiaries received training under TRYSEM
◦ Lack of Interdept coordination
◦ Inadequate funds
◦ IRDP did not take into account the disabilities from which its beneficiaries
suffered like exclusion from community decision making
◦ Other common problems of all PAS, like leakages due to benefits going to
non-BPL as was highlighted by the World Bank Rural Finance Report, 1998
◦ Most importantly, IRDP totally lacks social intermediation, a process by
which poor borrowers are encouraged to organise themselves into groups,
given awareness on credit culture
◦ The SGSY also suffered from the same ills as IRDP as per the NITI Aayog
• Jawahar Rozgar Yojana- Was launched in 1989 by merging National Rural
Employment Program and Rural Landless Employment Guarantee Program
◦ But as per evaluation by the Ministry of Rural Development, only 11 days of
employment was generated per person
◦ Resources were spread too thinly
◦ Projects selected were devoid of links to the local needs
◦ The works undertaken were high material cost works with inadequate wage
component. One reason why NREGA had limit on material and skilled labour
cost
◦ Rampant use of contractors who hired ineligible workers at lower wages
• Employment Assurance Scheme(1993)- Had universal coverage of rural areas
and so had budgetary demands beyond the state capacity
◦ As per CAG report, the avg employment provided was 15 days
◦ As per the Planning Commission, most states violated the 60:40 ratio through
use of contractors
• National Social Assistance Program(1995)
◦ Had components- Indira Gandhi National Old Age Pension Scheme, Indira
Gandhi National Family Benefit Scheme, IG National Widow Pension Scheme,
IG National Disability Pension Scheme
◦ After initial troubles, the program became quite successful, surpassing targets
and especially helpful for the most vulnerable social groups
• Other schemes such as Housing(Indira Awas Yojana, now PMAY), Land reforms
But despite the shortcomings, these schemes still had substantial impact on
transient poverty by providing immediate succour during lean seasons, droughts
etc

448
Why they fail-Asha Kapur Mehta
• A large number of poverty alleviation programs function in silos.
• Inadequate fund availability, with coverage of a lot of programs cut to meet the
fund requirement, like the NFSA
• Corruption and leakages
• Improper implementation of programs- Eg the NREGA does not give 100 days of
work in most places

Universal Basic Income(ES 2016-17)

UBI has been touted as a major strategy for 'wiping tear from every eye'. It has 3
aspects
• Universality
• Unconditionality
• Agency(not restricting recipient's choice)

It is premised on the idea that a just society needs to guarantee to each individual
the minimum income which they can count on and provide the material foundation for
dignity
How are existing programs helping the poor(can be used in general question on
poverty alleviation schemes)

449
 • The 2016-17 budget shows that there over 900 Central sector or CSS, valued at
over 5% of the GDP. But only 11 schemes take 50% of the allocation. Hence
most schemes small
• Effectiveness judged of the 7 largest schemes like PDS, Urea subsidy, NREGA
◦ The poorest districts receive less funds. Hence misallocation
◦ One major reason for the misallocation is state capacity- Poor state also
means low state capacity
◦ The consequence of the misallocation is exclusion error. Eg, the BIMARU
states, despite accounting for over 50% of the poor, received only 33% of
the funds under MGNREGA in 2015-16
• While govt spends over 4% of GDP on subsidies, major mis-targeting. Gives
example of LPG cylinders where 90% of the LPG subsidy is captured by the richest
30% of households
Can UBI solve these issues
• Misallocation- UBI by definition solves this problem as each receives the benefit,
hence the funds will be in proportion to the population
• Leakage-Using the JAM trinity for DBT, the propensity for leakage also
reduces considerably. There is also no discretion that a bureaucrat will have for
corruption here
• Exclusion- No exclusion as it is universal

Reasons for UBI

• Social justice-Promotes the basic idea of treating all citizens as equal and of
also working towards it.
• Efficiency- Reduces leakages in govt transfers and enhances productivity
• No targeting issue as universal
• Equality- Reducing poverty. ES argues that it may be the fastest system of
poverty reduction. It is also more relevant for a country like India where it can
be pegged at relatively low levels and still have significant welfare gains
• Agency- The poor have traditionally been treated as objects of govt policy, with a
lot of govt policy being aimed at inducing a certain behaviour from them. This
demeans the dignity of the poor. UBI is also practically useful as the govt is not
the best judge of the circumstances responsible for the poverty of each poor.
Hence anti-paternalistic
• Employment- UBI can open up new possibilities for labour markets as it allows
calibrated engagements with the labour market. Hence allows for non-
exploitative bargaining(no distress wage levels)
• Insurance against shocks
• Financial inclusion as money will be transferred to banks
• Psychological benefits as poor will not be constantly worried

450
 ◦ Jha, Nagarajan and Pradhan show that over 50% of rural households face
shocks, like crop loss, diseases and use debt mostly to cope
◦ World Development Report argues that the poor, preoccupied with the daily
hassles are unable to use their cognitive skills for max advantage.
◦ The low self image also blunts aspirations
• Major gains due to saving of bureaucratic costs as the proliferation of govt
schemes can be eliminated
Fallacious arguments against UBI
• Can it reduce the incentive to work(Moral hazard)- ES rejects this as the level
at which the UBI will be pegged will be such that it allows mere subsistence and
hence will not crowd out incentives to work. UBI can make people more
productive as they don't have to constantly worry about necessity
• Should income be detached from employment- The society already does this
through inheritance. So UBI not a problem
• Should income be unconditional, with no concern for people's contribution to the
society- ES counters that individuals do contribute to society in non-wage work
related aspects too, like homemaking. Also the opposition presupposes the
existence of claim 1.
Hence genuine concerns
• Can be ineffective in some cases due to gender concerns like male members
capturing all benefits
• Promote consumption of sin goods- But NSS data shows that sin goods smaller
share as consumption increases. Evans and Popova also show this. Hence not
important
• Implementation issues as banking penetration not 100%
• Funding issue as phasing out of a lot of welfare schemes may be politically
difficult(Political economy of exit)
• Political economy of universality- justifying paying to an Ambani
• May expose households to market risks, like buying food even when prices high, as
schemes like PDS may be phased out
Way forward
• Poverty reduction and fiscal cost- At the target poverty reduction level, the UBI
came to be 7620 for 2016-17. As any program cannot achieve complete
universality, a 75% coverage(de facto UBI, maybe due to excluding the very
rich, due to political reasons) will cost 5% of GDP
• Shows that rationalisation of govt subsidies, like eliminating those aimed at the
middle class, can provide the fiscal space for a de facto UBI. Eliminating
'Bounties for the Well Off' can provide 1 lakh cr

451
 • The govt can initiate an opt out, where individuals eligible for UBI, if they don't
need it, can opt out
• It can also have self-targeting, by requiring beneficiaries who want to avail the
benefits regularly verify themselves.
Assam has launched Orunodoi scheme, transferring ~800 rs monthly to woman
from marginalised communities. Form of UBI
Should Cash Transfers replace public provision of basic goods and services-
Jayati Ghosh
Argues that where cash transfers have worked in reducing poverty, they have
supplemented the public provisions, not replace them. This is key as creation of
infra and systems is as key to reducing poverty as is the ability to access them. Eg
if the poor are given money but there are no public hospitals, then it doesn't help with
poverty if they can only access quacks
For some programs like food, direct provision protects the poor from price rise and
also helps in managing domestic supply.
Also argues that cash transfers cannot help with persistent poverty as they don't
address the fundamental causes of poverty, like lack of productive assets. (But it does
help as it enables poor to start a business and earn, without getting into debt
traps)
Trends in Inequality
Inequality important for 2 reasons
• For the intrinsic ethical nature of inequality
• For the effect of inequality on other macro variables, most importantly growth and
poverty
See trends and explanation in hard notes
Oxfam report on Inequality in India, 2020
The report is titled Time to Care: Unpaid and Underpaid Care Work and the Global
Inequality Crisis.
• An additional 0.5% tax on the global richest 1% can over the next years create
120 million jobs
• Extreme poverty rates are 4% higher for women
• In India, the richest 1% hold 4 times more wealth than the bottom 70%

Measures to reduce inequality

Generally equity and growth are complements, rather than tradeoffs. Higher inequality
adverse impacts
• Weakens impact of growth on poverty

452
 • Increases social discontent
• Increases inefficiency by creating more demands for redistribution
• Distorts incentives
• Reduces human capital
Policy
• Investing in human capital can help flatten the Kuznets curve
• Promote policies for exclusion of marginalised groups like SC/ST/OBC/women

Inequality and Growth-Economic Survey

With the market led economy, concerns of inequality and hence, an apparent conflict
emerges between inequality and growth.
In AEs, Piketty shows that inequality leads to adverse socio-economic outcomes.
Given the high income and low poverty levels, the AEs can resolve the tradeoffs by
focusing on reducing inequality.
But in India, due to high absolute levels of poverty and high potential growth rates,
the tradeoff may change
• The ES argues that in India, both I and g are positively correlated with a range of
socio-economic indicators, showing they converge rather than being in conflict,
in terms of effects.
• Growth also has far greater impact on poverty alleviation than inequality.
• Hence India must focus on expanding the overall pie to combat poverty as
redistribution is possible only when pie expands
This is corroborated by Chinese experience. It reduced HCR by 94% between 1970-
2015 while Gini rose by 62%. Growth benefited the poor, but it benefited the rich
more.

ES on poverty vs inequality
Rawls argued that the most reasonable way to decide upon a fair distributive principle
is to imagine that you must make this decision knowing you will be born into the world
but not knowing anything about what your assets and characteristics ⎯ intelligence,
personality traits, parents, neighbourhood, gender, skin colour, etc. ⎯ will be. Rawls
referred to this hypothetical scenario as the “original position.” He suggested that in
such a situation a rational person would choose a distributive principle requiring
that any increase in inequality increase the income of those at the bottom
Thus the maximin principle also prioritises poverty alleviation over inequality
reduction. Supported by Feldstein

453
Relative impact of growth and inequality on poverty
Growth has very significant impact on poverty, a correlation of -0.45. Inequality does
not.
Also shows that there is a positive relation between poverty and MPI poverty. So
falling poverty also leads to falling MPI poverty
Using evidence from World Bank, argues that during 70s-90s, rise in mean
consumption was responsible for 87% fall in poverty, while redistribution only
13%
Now as poverty pattern has changed(1 in 3 poor lives in urban areas, compared to
1 in 8 in the 50s), showing that urban growth and non-agri growth have become
key for poverty alleviation
(But as the research of Deaton and Dreze as well as Alesina-Rodrik show,
inequality can harm poverty alleviation. Hence cannot ignore it. Also as Wilkinson
and Pickett show, trust is broken in a more unequal society and hence wealth
creation becomes difficult)
Crony(ES)
Argues that pro-business policies needed that increase competition by allowing more
entrants, rather than crony policies that favour incumbents
As evidence of the pro-business benefits, it cites that the time taken by Sensex to
cross every incremental 5000 points is less
Pro-business also means more creative destruction
• This is seen in the composition of the Sensex, showing increasing dynamism in
the economy. Every 5 years, roughly one third firms replaced
• The new firms in Sensex also represented new, diverse sectors.
• It also reflects India's idiosyncratic growth path, from agri to services
domination.
• It also shows market becoming more democratic, with the ratio of market
capitalisation of the largest and smallest firms consistently falling
• Using the Herfindahl index, the survey also shows decreasing market share of
firms in new sectors like IT and Finance. Thus more comp
Thus opp for new entrants key as a 10% increase in new firms at district level
increases district GDP by 1.8%
Winners should win based on efficiency and not political connections. Losers
should be allowed to lose fairly and exit, thus boosting creative destruction
Harms of crony policies
• Erode wealth by fostering inefficiencies

454
• The Survey, using an index of how 'connected' a firm is, shows that before 2010,
these firms performed better than the market, showing pro-crony policies
• As soon as the CAG report on 2G scam released, these firms started
performing poorly, showing that they were inefficient and were performing well
merely because of crony policies
• When scope for pro-crony policies exist, these firms shift focus away from
innovation and towards cultivating political relationships
• Further, the rent earned by such firms is paid by citizens, who are deprived of
benefits of a competitive economy, thus increasing inequality
• Cites evidence from Shapiro et al, who use data from PM Gram Sadak Yojana
and elections to show that after close elections, the contractors close to the
winner more likely to receive the contract
• Also the coal block allocation. The firms that got the blocks through the pro-
crony, committee based allocation, showed poor performance, evidence of more
focus on hiding the rent rather than productive business
• Had wilful defaulters not siphoned off wealth, the resultant gains in the
economy would have been equivalent to the amount required to double the
allocation on health and education in the Union budget
Rodrik and Subramanian also show that India's growth turnaround happened in
1980s due to an attitudinal shift in govt, but it was pro-business, not pro market.
Hence the effect was not as much as it should have been

Urban Poor
See Vision June 2020

455
456
Master Sheet
For At Independence See- Indian Economy at Independence

•
• Govt contribution to fixed capital formation is only 4%.

457
•

The 2019-20 GDP real growth has been revised to4.2% actual.

The per capita GNI grew at3% in 2019-20

458
TFP trends by Virmani

1980-90, it grew at 2.5%. TFP growth fell to 1.6% in the 1990s, so 1991 can't have
been the growth trigger. (Rodrik and Subramanian)

459
IIP growth in 2018-19 was 3.6 compared to 4.4 in 2017-18(Note that IIP considers only 3
sectors, mfg, mining and electricity). It further slowed down to less than 1% in 2019-
20
Mfg growth

(Goldar)

460
Nagaraj
public sector's share rose from 9% in 1960 to 25% by 1985
The growth rate of public employment has declined from about 6% in the 70s to -1%
in the 2000s.
profitability of PSEs has increased from 8% in the 70s to 20% in the 2000s.
In China, around 60% of the mfg exports are made by foreign enterprises, while in
India, the share of foreign affiliates is just 10% in exports
Data by Aditya Bhattacharjea shows that in over 33% of the industry groups, a single
firm has over 50% market share. Eg ITC in cigarettes, ONGC in oil, Jio in Telecom
Change in Mfg structure
In 1980-91, capital goods grew at 10% while consumer goods at 6%. Post lib,
capital goods at 6%(1991-2000), while consumer goods at 6.5%, led by consumer
durables.
Registered mfg grew at 7% in pre-lib decade, while unreg at 5%. Post lib decade,
reg grew at 8% while unreg at 6%
Mfg has contributed 70% to industrial prod(mining and electricity other sectors of
the IIP) in pre-lib decade while it contributed 82% post lib. Currently at 77%
Intl trade and investment
In 2019-20, FDI increased from 44 bn to 50 bn
Tariffs declined from 125% avg in 1991 to 13% in 2014. But have been increasing since
then and now avg 18%
Agriculture

461
• As per ES, the GVA growth in agri in 2014-15 was -0.2% and in 2015-16 was
0.6%. It then increased to 6% and 5% in the next couple of years. Hence
2014-16 extremely low growth
• Farm incomes declined by 1% post 2011-12, as per Himanshu.
• NSSO reveals that the median income of farmers in 17 states is just 20k
annually
•

• Given that subsidies form 21% of farm income, they cannot be withdrawn without
substantial hardship to farmers
• But also, mainly due to the extremely low size of farmholdings, even a large
increase in subsidies cannot alleviate rural distress
• After improving steadily from 1990-97, the ToT worsened post 1997 till 2004. It then
improved rapidly post 2004 to 2010-11 and then declined till 2013-14. The main
reason for improving TOT in 1990-97 was the sharp depreciation and also
ending protection to industry

462
• TOT for agri was 81 in 2004-05 and rose to 103 in 2011-12 and then fell to 99
in 2013-14 but the rose to 108 in 2017(authentic). Agri prices declined sharply
post 2014(despite this, TOT improved as overall inflation was also low). Food
inflation declined from 6% in 2014-15 to 0.1% 2018-19(authentic), but rose
sharply in 2019-20.
• In 2014-15, agri budget fell by 25% in nominal terms compared to 2013-14
• Indian agri exports increasing from 30 bn in 2016-17 to 35 bn in 2018-19, but
India's agri exports share in global agri trade is just 2.15%. India has a trade
surplus of 33% and since 1991, has always been a net exporter
• As per Blyn, per capita agriculture production declined at 0.72% per year bw 1911-
1941 and any absolute growth occurred because of growth in acreage.
• The rate of growth of pulses declined from 1.4% pre GR to 0.8 post GR
• No negative growth in agri post 2002
• Organic content in soils of PJ and HR declined from 0.5% in 1960 to 0.2% in 2000
• As per NITI, staple crops like pulses, cereals and oilseeds occupy 77% of the
gross cropped area but contribute 40% of output. HV crops contribute similar
amount in output but only with 20% of GCA.
• Plus, there is a shift in preference consumption of Indians for all expenditure
fractiles away from cereals and towards fruits and vegetables, as shown by Deaton
and Dreze using NSSO data. Cereal consumption fell by 14% while chicken
consumption increased by 400% between 1993-2010
• The average yield of wheat and rice are 45 and 40% respectively less than in
China
• In pulses, even the best state of MP is only 60% in yield compared to that in
China
• Food processing still in nascent stage with only 10% food processed as against
90% in developed nations, but is growing fast at 5% in the last 6 years.
Employs over 7 million people, out of which around 80% is in unorganised
sector
• Though India has developed a cold storage capacity of 32 million tonnes, very
close to the required of 35, there are significant gaps in transport to
consumers
•

463
• IFPRI studu shows that the returns in terms of agri GDP are highest for investment
in agri R&D, then roads, then education, then irrigation and the lowest from fertiliser
subsidies
• India spends only 0.4% of agri GDP on agri R&D
• There has been an increasing trend of expenditure on agri extension services
and is around 0.4% of GDP
• Th 11th plan highlighted that while between 6th and 9th plan, the pub inv in
agri halved(from 4% to 2%), agri subsidies doubled as a proportion of agri
GDP
• Overall farm mech in India low at around 50%, with northern India having higher
mech
• As per NSSO, small and marginal farmers account for 80% of farm
indebtedness
• NSSO 70th round data shows only 14% of paddy and 16% of wheat farmers sold it
to a govt procurement agency.
• The ratio of geography served by each APMC stands at 1:485 sq km which adds to
significant transport charges(as per Dalwai committee)
• The philosophy has to shift from green revolution led productivity to green
methods led sustainability
• In terms of share in GVA, share of fisheries is increasing, while that of crops is
declining while livestock has remained constant
• GCF in agri
◦ GCF in agri as a % of GCF in economy has been relatively stable at around 8%,
with pvt sector around 10% and public sector around 5%
◦ As a share of GVA, the GCF in agri is fluctuating trend from 17.7 per cent in 2013-
14 to 16.4 per cent in 2018-19, with a dip to 14.7 per cent in 2015-16.
◦ The share of pub inv started increasing post 2013, but the share of private inv
has started falling
◦ In 1960, 63 billion rupees
◦ Increased steadily to 182 bn in 1978.
◦ Then declined till 1986, then recovered slightly, to reach 190 in 1998.
◦ So between 1978-1998, relative stagnation.
◦ In the 1980s, public inv started falling till early 90s, while private picked up after
86.
◦ The share of pvt in GFCA increased from 50% in 1980 to 75% in 1998
◦ The share of GFCA under GDCF was 14% in 1960, peaked at 18% in 78, then
declined to 6% in 1998.
◦ The share of GFCA in GDCF in 1998 was much lower than share of agri in GDP
which was about 23%. This is argued as evidence of relative neglect of agri.
◦ 1% increase in subsidy leads to decline of 2.5% in agri pub cap formation
◦ 10% increase in MSP leads to 0.3% fall in GDP and 2% fall in agri inv
464
• Pattern of agri landholdings
◦ The share of marginal(less than 1 ha) in total operational holdings has increased
from 63% in 2000 to 70% in 2016, while small fell from 19 to 18%. Large has
also fallen
• Number of women farmers(Feminisation of of agri)
◦ The share of operational landholdings owned by women has increased from 11%
in 2000 to 14% in 2016
• Irrigation-Was just 10% of cropped area in 1947
◦ Covers 48% of net sown area, and of the irrigated, under drip is less than 10%
◦ Benefits of drip irrigation as per impact evaluation study by DACFW
◦ Irrigation cost and electricity use reduced by avg 30% each
◦ Fertiliser saving upto 40%
◦ Avg productivity in horticulture increases by upto 50%
◦ Avg income enhancement of farmers 48%
◦ Indian irrigation, whether public through canals or private through
tubewells, are based on flooding type of irrigation, leading to lots of waste.
◦ Water use efficiency of micro irrigation 90% compared to 40% in
conventional flood irrigation
◦ Almost 90% of irrigation is through groundwater, raising sustainability questions
◦ As per NASA, India's water tables are declining at the rate of 0.3 m per year.
◦ Paddy and sugarcane consume 60% of irrigation. India's water use in
crops among the highest in world. 1 kg of rice takes 5600 l while China
takes 300
◦ 39% of the groundwater in India is used in producing cereals
• Fertiliser- Use of NPK fertilisers in 1947 was less than 1 kg/ha
◦ Fertiliser consumption has been declining since 2011
◦ Fertiliser response ratio has been declining, implying declining
responsiveness of soil fertility to increased fertiliser use
◦ Fertiliser accounts for 0.5% of GDP in terms of fiscal cost, the second highest
after food. Most of it is on urea. But as per the ES, only 35% of it reaches
the small farmers.
◦ Urea is also under-priced relative to Phosphorus and Potash, leading to
environmental externalities. Urea most subsidised. It is most
produced(86%), most consumed(74%) and most imported(50%) and
most subsidised
◦ As per ICAR, pests damage 30-35% of crops in India
◦ 41% of fertilisers leaked into the open market as per Bharat Ramaswami
• Overall, central + subsidies account for over 2.5 lakh cr, almost 2.5% of GDP
as per the 15th FC
• Agri credit and insurance

465
 ◦ NE has less than 2% share in agri credit while south India has over 40% share.
Mainly due to community ownership of land in NE
◦ Agri insurance coverage is just 23%. The average sum insured per hectare has
increased from 15,100, during the pre-PMFBY Schemes to 40,700 under PMFBY
• India agri exports merely 2.15% of world agri trade
• CIP has not been revised since 2013 and this is major reason behind burgeoning
food subsidy bill and needs to change.
• Only 0.004% of NCDEX trade through FPOs
• Livestock contributes 16% of income for farmers
• Artificial breeding currently only in 30%. Out of 12 cr semen doses made in
India annually, only 10 lakh are sex-sorted
• Only 20% of milk produced is converted into value added products despite
them giving 20% higher revenues
• India one of the top consumers of agri antibiotics at 3% of global
consumption
• The average increase in temp between 2010 and 1970 in kharif is 0.5* and in
rabi is 0.6 degrees. Rainfall has declined in kharif by 26 mm and rabi by 33
mm. Close to 55% of cultivated areas in India water stressed. ES estimates
the decline in farm incomes could be to the tune of 25% for unirrigated areas
and 15% for irrigated ones
• 47% of leakage from PDS in 2011-12, with UP, BR, MP, MH and MP, having over
60% of India's poor having more than 50% leakage
• illegal HT hybrid market has increased to Rs 472 cr in Kharif
• Seed Certification
◦ About 30% of seeds are saved by the farmer himself which can be replanted
or sold
◦ Of the remaining seeds bought and sold commercially, 45% come through
ICAR system and are properly certified
◦ The other 55% are sold by private companies. most of which are not certified
but are 'truthful label seeds'-They are simply self-certified by the company.
These seeds can be very harmful for the farmers as they often fail and have no
liability system
• Compared to 2005-06, India's honey production has risen by around 250%.
• 100g Fortified Rice has 10mg iron. Copenhagen Consensus estimates that every
1 rupee on fortification saves 9 rupees for the economy
• India is the largest producer of sugar though share in export is only around 5%
as per the Rangarajan Committee
• Despite power subsidies, nearly 3 cr farmers, mostly marginal use expensive
diesel for irrigation. Merely the installation of Off-grid solar pumps under
KUSUM can lead to saving of over 1 billion litres of diesel
• The estimated value of domestic organic market at around 3000 cr

466
• 1.63 lakh farmers are practicing ZBNF
• There were over 10k suicides by people working in the farm sector in 2018, as
per the NCRB data
• Rangarajan estimates that a 1% increase in agri output raises national income
by 0.7%
• Nearly 22.5 crore SHCs have been distributed
•

467
Don't see the trend of MSP in the above hard note picture. See the screenshot
• Slower growth in price realised for rice than wheat, hence wheat profit higher

468
Thus total formal employment has increased to 10% from 7.5% in 2004-05
• As per ES, the FLFPR is 18.6% in 2018-19, increased from 2017-
18
•
71% of regular jobs in non-agri sector had no
written contracts(from PLFS)
•
Non-agri regular wages- 55% not eligible for paid
leave while 50% not eligible for any social security
benefit(authentic. From PLFS data)
469
•
Construction(85% of total construction emp),
mining and quarrying(60% of total mining emp)
had the most casual workers.
•
Working poor, those who can't afford to remain
unemployed and hence take up job at very low
rates, are highest among casual worker at 30%-
Hence link between casualisation and poverty
•
NSS 61st round data shows that in 2004-05, the
average wage earned per day by regular workers in
organised manufacturing was about 170 and that
by casual workers only 55. In unorganised it was 85
and 50 respectively
•
The casual workers are also deprived of social
security benefits
•
Contract labour increased from 12% of all
registered mfg workers in 1999 to 25% in 2010 as
per the ES
•
Employment in CPSEs also fell by over 2 lakh during
2012-17,for non-executive workers, whichled to a
sharp rise in contractual and casual employment in
these areas, now accounting for around 30% of
workforce in CPSEs
•
85% of all organised mfg firms are 'dwarfs'.

470
•
Small firms(less than 100 workers) through
dominate in total number of firms, have only 23%
employment share and only 11% Net Value Added,
thus showing the inefficiency of dwarfs(ES.
Authentic)
•
92% of workers in apparel industry are in small
firms
•
Relative to population, pub emp in India is only
1/10th of that in Norway, only 1/5th of that in Brazil
•
As per PLFS, only 13% of workforce in 15-59 group
has received training, of which 11% is informal
training
•
Service share in emp at 34% is significantly lower
than the GVA share of 54%.
•
As per the Labour Ministry, while informal sector
contributes 90% to employment, their contribution
to GDP is only around 50%
•

• Labour intensive sectors like food and beverages, apparels etc account for
merely 15% of the share of manufacturing.
• The share of WAP in pop increased from 65 to 75% between 2005-2018, but
share of workforce in pop declined from 40% to 35%, largely due to decline in
FLFPR

471
472
The total govt debt(centre + states) is around 70%

473
At the general government level, conditions for debt sustainability - nominal growth of GDP
being higher than nominal interest rate - was being met during the review period.

share ofcess and surchargein gross revenue from3.5% in 2001 to 13% in 2018(as
per 15th FC), but will average 18.4% of Gross Tax Revenue between 2021-26
Direct taxes had a buoyancy of 1.10 during 2011-12 to 2018- 19, significantly lower than
1.80 observed in the previous decade(auth, as per 15th FC)

474
The number of taxpayers who filed returns in AY 2018-19 was about 5.87 crore, which was
only around 4.4 per cent of the total population. Further, out of these, 40.4 per cent were in
the nil tax bracket and another 52.8 per cent in the tax-bracket below Rs. 1.5 lakh.
CAG 2018 report 20 showed that the budgetary under-provision for food subsidies was
around 3.1 lakh cr and for fertiliser was around 40k cr. The recognition of these in the
Budget 2021 a major reform

As per the 15th FC states are able to finance only about 45% of their expenditures from
own resources

When the sum of the devolution of taxes and various grants(FC and Non-FC) are
considered, the Union has been transferring 50% of its Gross Revenue Receipts to the
states, as demanded by the states(although their demand is for 50% share in the tax
devolution, exclusive of the grants as they are tied)
During 2011-19, 70% of the Union’s fiscal deficit was due to the revenue deficit

475
476
Deaton and Dreze show that Agricultural real wages has a correlation of -0.8 with
HCR. Thus raising agri wages is key to reducing poverty.
In rural India, PC calorie consumption fell from 2250 to 2050 calories between
1984-2004.
There have been widespread errors of inclusion and exclusion. As per the 11th
Plan doc, more than half of the poor were given APL cards or had no cards and
almost 60% of the BPL cards given to non-poor in 2004-05
Using evidence from World Bank, argues that during 70s-90s, rise in mean
consumption was responsible for 87% fall in poverty, while redistribution only
13%
Now as poverty pattern has changed(1 in 3 poor lives in urban areas, compared to
1 in 8 in the 50s), showing that urban growth and non-agri growth have become
key for poverty alleviation

477
•
4% of GDP is spent on subsidies
•
90% + of LPG subsidy is consumed by the richest
30% of the households
•
ES JAM Preparedness Index. Only 30% of people in
rural areas have a bank in 5km radius.
•
As per ES JAM Index, the DBT preparedness is very
low in rural areas, mainly on account of last mile. So
in rural areas BAPU better. Only needs POS
machines for biometric authentication

478
Insurance penetration- % of insurance premium to GDP. Has increased from 2.7 in
2001 to 3.7 in 2017. Much lower than other EMEs like Malaysia, China

A 10% increase in R&D is associated with productivity gains from 1.1-1.4% as oer
the ES
MNCs account for over 50% of total corporate tax collections in India(can use in
Eco2 MNC answers)

479
Human Development
Human development Report by UNDP. Seeks to put people at the centre of
development. Has 5 composite indices- HDI, IHDI, Gender Development Index,
Gender Inequality Index and the Multidimensional Poverty Index.
Three components:
• Freedom to be healthy
• Educated
• Decent Standard of Living
But also much beyond these, included political freedoms and human rights. Thus
economic growth is seen as a means of capability expansion and not an end in
itself. It also includes sustainable development as a means for the future
generations to enhance their capabilities
Human Development Index
Based on the work of Mahbub-ul-Haq, who defined development as increasing
choices, and Amartya Sen, who described development as freedom.(in the book
Dev as Freedom)
The UNDP, which calculates it, defines increasing democratisation and and
empowerment of the people as the minimum conditions for development. It also, i
its pathbreaking 1993 report, recognised the role of the Civil Society in
development
An alternative to per-capita income, to emphasize the importance of human
development as central to development
Has three indices.

HDI Index= Geometric Mean of the three indices.

Mean years of schooling for adults aged 25+
Expected years of schooling for children of school entering age
The indicators of education are then used to calculate the overall index of edu by taking
the Arithmetic mean of the two indicators. use of the Am over GM is justified because it
is not the balance of achievements but the mix of past and present education policies
that affect years of schooling and expected years

480
Income is taken as log income to reflect the decreasing importance of income with
increasing GNI. Also income capped at $75000 as assumed beyond that income has
very little effect on HD. Remember that income under capability approach is a mere
proxy for functionings like nutrition and clothing
Geometric mean used to remove linearity so that poor performance in one indicator is
not compensated by good performance in another.
• There is imperfect substitutability between dimensions and the independence of
the ranking to the position of the upper bound
Three levels:
• Very High HDI- 0.8+
• High- 0.7+
• Medium-0.55+
• Low Below 0.55

India:
• At rank 131, medium. Has improved one place in 2019, from 130 to 129. Sri Lanka
and China are much higher than India. But India's annual growth is 1.64, among
the fastest in the world
• 2019 HDI 0.645. Increased from 0.429 in 1990
• The average annual HDI growth during 2010-2019 was 1.21 per cent as compared
to 1.58 per cent during the period 2000-2010
• Only an improvement of 2 places in 2012-17
• Inequality adjusted HDI is only 0.468. In IHDI, India has worsened its position.
Group based inequalities, including gender inequality
• In Gender Inequality Index, India is 122/162 nations. China, SL, Myanmar, Bhutan
are above India
• The 2019 report notes that the world is not on track to achieve the SDG of gender
equality by 2030
• The 2019 report also has a new index showing how prejudices and social beliefs
obstruct gender equality. Shows that only 10% men worldwide are free of
biases
• India has lower LEB than BRICS nations. Even Bangladesh has a higher LEB than
India
• The Subnational HDI shows all states making improvements, with Kerala, Goa, HP
and PJ top.
Importance of HDI
• With the publication of the World Development Report, the UNDP challenged the
primacy attached to per capita income as the sole yardstick of development

481
• The human development paradigm ushered in by the HDR was different in its
challenge to per capita from earlier challenges lie in the basic needs approach
of Jolly, 1976 and Streeten et al 1981
• The human development approach was linked to Sen's capability approach as an
alternative conception of development
◦ Capability approach argues that economic resources are just means to an end
which is better captured by describing the features of the lives people
actually live, called functionings, or the freedom to achieve such
functionings, called capabilities
• Secondly the new HDI, proved more durable than other indicators like Morris's
Physical Quality of Life Index because of
◦ Its link to the capability approach gave it a greater theoretical underpinning
and intellectual coherence
◦ By being housed in a dedicated unit of an international organisation like the
UNDP, it had institutional support
◦ The HDI's global support base, rather than a focus on just the developing
countries, provided it more relevance
• As a result of this, entire world today accepts that development is more than mere
increases in per capita income
◦ This resulted in a shift away from the structural adjustment era of the 80s
and 90s led by the IMF and World Bank, to a more human development
focused agenda of debt relief and poverty reduction programs
• It also led to the evolution of the MDG and SDG

482
Criticisms of the HDI
• Most broadly, given that the HDI was developed when there was a paucity of data
and hence the HDI used only 3 dimensions, it is unjustifiable now as there is plenty
of data available and the world is looking at development more broadly. Eg SDG has
17 goals and 232 indicators. So HDI needs to broaden its vision like including
political rights, human rights
• The three components currently in HDI all receive equal weight which might not
be realistic
• Criticism of the use of GM(the switch to GM was made in 2010)
◦ Amartya Sen's criticism
▪ GM is not very simple, intuitive and transparent thereby reducing one of
the USPs of the HDI, which was its simplicity
◦ Marginal rates of substitution between dimensions at different income
levels. For example, in the poorest countries, a very small increase in income
can have a big impact on life expectancy while to achieve the same in the
richest countries, a huge increase in income would be required
• The goalposts not only set the parameters for the range of the development
outcomes to be considered they also have an impact on the implicit weights of
the HDI components. Eg if the goalpost of life exp is narrowed to 40-85, the
weight of the life exp would increase

483
 • Deriving a composite index from fundamentally different dimensions is like
comparing apples and oranges. Some argue that separate pictures of each
dimension should be presented and the reader should judge for herself
• It is also insensitive to historical factors like colonialism
• It does not cover social problems like crimes, terrorism
Despite the limitations and a burst in other indicators like the OECD's Better Life Index,
the HDI is among the most recognised indicators and also because it has been
canonised in all development economics textbooks
Philosophy of sustainable development- The fundamental uncertainty about what future
will value means we need to ensure equal freedom of choice, the lynchpin of the
capability approach. As AK Sen said, 'the fouled environment in which the future
generations are denied the presence of fresh air will remain foul even if the future
generations are so very rich'.

484
HDR 2019
• Disparities in HD widespread
• New generation of inequalities emerging

485
 • Inequalities accumulate through life

• The inequalities can be addressed if we act now

• Inequality and climate crisis interwoven
India 129, last year 130. India is marginally better than the South Asian Average.
India very low on gender development and gender inequality index
HDI in India
The Planning Commission calculated the HDI for India taking the states/UTs as the units
for analysis
Kerala, then Delhi, HP, Goa, Punjab highest
Bihar, OD, CG lowest
Human Poverty Index
Based on 3 main indices
• % of the pop not expected to survive to the age of 40(P1)
• The adult illiteracy rate(P2)
• A deprivation index based on the average of 3 variables(P3)
◦ % of pop without access to safe water
◦ % of underweight children under 5
◦ % of pop without access to health services
Formula for HPI

• Shows the extent of deprivation on various aspects of human poverty

Happy Planet Index
Was created by Nic Marks
Measures sustainable wellbeing for all by telling how well nations are doing to achieve
long, happy and sustainable lives
Western countries do not rank high due to their very high ecological footprints
Measurement

486
 • HPI= (Life exp* experienced wellbeing)* inequality of outcomes /Ecological
footprint(whole division)
• Reveals the inequality adjusted Happy Life years produced per unit of demand
on the natural environment
• Experienced Wellbeing- Based on responses to the question that where do you
see on a ladder of happiness having 10 rungs, higher the happier. This is the Cantril
Self Anchoring Scale or the Ladder of Life. This has become increasingly
important in the world. UK opened a centre in 2015 to determine what the govt
can do to improve wellbeing
• Ineq of outcomes is the diff in the product of mean life satisfaction and the mean
experienced wellbeing and the inequality adjusted mean satisfaction and wellbeing
• Ecological footprint is the avg amount of land needed per head to sustain the
country's typical consumption patterns
• Since the wellbeing measures the average of the population, it glosses over
human rights abuses
Issues with per-capita income
Advantages
• The reason why per capita income is used is trickle down effect that increase in
income is ultimately reflected in better development outcomes
• Partha Dasgupta has argued that the correlation between income and development
outcomes is even stronger when we consider the ranks of countries in development
outcome and per capita GDP rather than the absolute value
Unless underdevelopment is defined as poverty and development as richness, we must
be careful in using PCI as a measure of development
• It assumes a direct one-on-one relationship between increase in income and
improvement in human development parameters like health, education. Insensitive
to outliers
◦ Consider Guatemala and Sri Lanka. Guatemala had, in 1993, income higher than
Sri Lanka but the life expectancy was 7 years higher in Sri Lanka
• Glosses over the distributional aspects of income
• The measurements of income in developing and underdeveloped countries suffers
from serious measurement issues with a large part going unreported or
underreported while it is relatively easier to get a picture of the development
indicators like life expectancy and schooling
• Inter-country comparisons difficult because the development outcomes and
relationship with PCI depends on specific contexts
• Geographically dual economies where the aggregate income figure masks need for
development within a sizeable region of the country

487
Despite the shortcomings, PCI is still widely used in classifying countries as developed
or developing because it focuses on the raison d'etre of development, i.e raising
standard of living and eradicating poverty
Education
Role of education:
• Capability to read and write has important impacts on the quality of life as it
enhances capability to understand and interact with the world
• Economic opportunities depend greatly on education and the skills earned,
especially with increasing specialisation and globalisation in the economy
• Illiteracy muffles the political voice of the people and feeds to insecurity of the
people. It impedes their ability to access information and hence limits the degree to
which they can exercise their political power
• Basic education can help in promoting public health
• Drives the change in perception and demand for human rights and legal rights
• Education of girls can substantially contribute to women empowerment, which has
a strong downward impact on fertility rate and thereby on health
• It can go a long way in reducing inequalities of caste and class

Amartya Sen's Pratichi Trust's findings that even the poorest of parents want to
send their children to school and whatever reluctance they have stems from the
quality and operational aspects of school like safety of the girl child etc.
Japan's Fundamental Code of Education issued in 1872 during the Meiji restoration
reaffirmed unequivocally public commitment to education, which determined Japan's
rapid economic development
Korea, Taiwan, Singapore, China all followed a similar path focused on state-led
education, which was the fundamental force behind the rise of the East Asian Tigers
India
Had a strong pro-education rhetoric in the freedom movement, school education
expansion considerably slow.
India's literacy rate as per 2011 census is 74% while all major East Asian countries and
Sri Lanka too have more than 90% literacy. The situation is much worse for female
literacy and education and even Bangladesh and Nepal have been better performers in
this area, though poorer than India
Schooling determines what can and cannot be achieved in higher education

488
Data based on ES-2018-19
School
• As per the PROBE report of the Pratichi Trust, Indian states are doing well on
enrolment with GER touching 96%. But this hides serious absenteeism, particularly
in UP, Bihar where attendance is only 60%. as per ASER 2018
• The Mid-Day meal scheme and the RTE have been particularly effective in this
area.
• But despite these, infrastructure remains poor
• But more importantly, pupil absenteeism is more severe
• Dropout rate for
◦ Males in primary was 6.3%, for female 6.4%
◦ Males in Secondary 20%, female 19.8%, both of which are very high
• The recommended PTR is 30:1 for primary and 35:1 for upper primary.
• The Pupil Teacher ratio for primary 23, 24 for upper primary and 37 for senior
secondary. While PTR satisfactory the issues are quality of teachers, absenteesim,
and balanced deployment

489
•

• Shortfall of teachers is a huge problem with 9.08 lakh vacancies in March 2016.
• Thus, 2 problems in school education:
◦ Limitation in coverage
◦ Poor quality
• While the first has improved, the second hasn't much as is evident from the ASER
report on grade competency and the GoI's National Achievement Survey. As per
ASER, only 27% of students in class 3 are grade competent and only 60% of class
5 students can read a class 1 text
• Another huge problem besides low learning levels is that they improve very slowly.
After not being able to read a given text, the improvement after an year of schooling
is very low.
• Classic problems of school education:
◦ Funding by the state with India spending 4.6% of GDP on education, a large part
of which goes to higher education

490
 ◦ Lack of accountability- This is not because of low salary as school teacher
salaries are well beyond private sector norms and international standards. OECD
teacher salary/GDP is around 1.2 while in India it is around 6. It is around 17 in UP
if state per capita used. The steep salary has driven the rapid rise of contract
teachers as many states are unable to foot the bill, lowering quality substantially
◦ School education, as argued by Paul Samuelson, is a public good, with it having
many public externalities, which privatisation of school education cannot
internalise while deciding scale. There is also indivisibility of acquired
knowledge. Both the factors lead to market failure. Hence a high quality,
accessible and efficient public education required
◦ Also, privatisation takes away those whose parents are most likely to improve
the quality of govt schools as the rich and the powerful send their kids to private
schools
◦ The teacher unions have to be considered as helpers rather than hindrances in
improving quality.
Recent initiatives in school education

Higher Education
• In General, female GER 25%, male 26.3%. For STs, female 15% , male 17%. Worst
among all social groups. Thus social divides in access to education
• Despite the very poor state of India's school, Indians receive global acclaim for their
skills as Indian education is very diverse. There are a few 'islands of excellence' like
the IITs and IIMs but below them, the quality of the institutes is deplorable. This
creates inequalities in India as very few students as a proportion of the population
get to study in these elite institutes

491
 • The steep educational hierarchy that has come to be tolerated in India is not
only terribly unjust but also extraordinarily inefficient in generating the basis
of a dynamic economy and a progressive society
Microeconomic theory of fertility
While deciding family size, parents weigh the costs and benefits. Benefits are the
additional income and the old age support. Costs are the opportunity costs of mother's
time and financial costs
Thus birth rates fall when women educated and have a change in their status, so higher
opp cost to mother's time. Also through increase in female wage employment and
wages. Improving social security for the old also

Trends in social service expenditure

As % of GDP, expenditure on ed has been around 3% between 2008-2015. For health,
similarly, less than 2%.

492
Services
ES 2018-19
• 54% of GVA. Over 80% share in CG, Delhi. Sikkim bottom at 30%
• India has the second fastest growing services sector after China, but India also
ranks lowest in terms of services share in emp, among the top 15 nations
• Service share in emp at 34% is significantly lower than the GVA share of
54%.
• Does not generate jobs in proportion to the GVA
• The service trade surplus, largely driven by IT, helps in financing over 50% of
India's trade deficit
• India has a 3.5% share in the global exports of services, the 8th largest. India's
service exports is double the share of India in merchandise exports.
• FDI inflows into the services sector account for more than 60% of all FDI
inflows into India. Service sector FDI in 2018-19 was 28 bn USD
• India also has a highly demanded education market.

Development economics argues that development is a three stage process and

services domination happens in the third stage. Services growth picked up after 80s
and averaged 7.5% in the 90s, much faster than agri and industry. Services growth has
also been the most stable of all.
• Skill-intensive and high-value growth, leading to little employment
• India has leapfrogged from primary to the tertiary sector.
• Services have also led to higher productivity in other sectors.

493
Growth and Sectoral Shares
Three stages of development of Kuznets-Chenery
• Primary falls and industry increases
• Both industry and services share increase as lower income to lower middle income
• Industry falls and services increase as lower middle to upper middle and
higher incomes
• In India, till 1990, the industry and services gained the share of decrease in agri
share equally, while after that the entire loss in agri share has been taken by
services
Factors underlying the Services Growth
• Demand side
◦ One general argument is that income elasticity of demand for services is
greater than 1, so as the income grows, demand for services grows faster
than other segments. This argument rests on Maslow's hierarchy
• Supply side
◦ Specialisation Splintering(Bhagwati) of industrial activity- Technical and
structural changes in an economy make it more efficient to contract out
services that were once part of the industry. Eg legal, security services
▪ Rising TFP of the services sector led to greater subcontracting.
◦ Some of the most imp tech advancements had a greater effect on services,
like computers and internet.
◦ Reforms of the financial sector led to faster growth of the financial services
sector, like SEBI, 4:1 banking expansion policy
◦ In India, services also developed due to a high-quality higher education
system. 86% and 14% on tertiary and primary, of total per capital student
expenses, in 2000
◦ The infra bottlenecks in the industry were less constraining in the services
sector.
◦ Small Scale reservations and labour laws were also not applicable to services.

Barriers to India's service exports

• Infra, regulatory, financial, and regulatory constraints.
• Immigration and labour market regulations
• Backlash against outsourcing in nations like US
• Data privacy issues

Liberalisation of Services in India

Opening up key services areas like telecom, banking to attract foreign investment and
encourage competition. Many on automatic route.

494
Services that have been most liberalised have experienced the most growth. Those with
limited liberalisation, like real estate, limited. Higher productivity also in more liberalised
sectors. It has also resulted in higher exports.
Trade Negotiations in Services
India has taken a proactive position in services negotiations on temporary cross-border
movement of service providers(mode 4) and cross border supply of services(mode 1)
under GATS. It has argued for a Service Provider Visa under GATS, to make market
access for intracompany transferees, contractual service providers more transparent
and predictable
There is more pressure on India from developed nations to make more liberal
commitments under GATS mode 3. But so far, India has taken a quid pro quo
approach to services negotiations
See Uma Kapila page 413-414
Way forward
For more broad-based growth, India needs to move towards an labour-intensive
industry led growth. The service sector is largely fueled by external demand. If high
growth is to be sustained within services, generation of internal demand is necessary
which will happen with higher labour intensive industrial growth as it will generate
higher incomes for a larger section of the pop
ES argues that 50% of inputs of services comes from agri and secondary and
hence their growth needed for services growth
Services for Indian mfg(Rupa Chanda)
The view that mfg is a competing sector with services is a narrow view. Services
constitute an integral part of the mfg process. As per ES, services form 25% of
industrial inputs.
• R&D
• Logistics
• Product design
• Repair and maintenance
• Finance
Thus along with mfg, services sector must also be actively promoted. The Smile curve
of services value added in the global value chains shows how services contribute
throughout the production process.

495
As per WTO, service value added accounts for 36% of mfg exports in India.
Productivity gains are also larger in those industries which use business services
more intensively
Service contribution in exports
• Services value added contribution to India's exports across all sectors is close to
50%, while service exports are around 30%.
• There is scope to create value in exports through the integration of services as
currently, the linkages bw mfg and services is weak
◦ Fragmented mfg making it difficult to integrate services in mfg
◦ Service sector challenges like poor transport infra
▪ The Enabling Trade Index of the WEF shows India's poor status in this

Amirapu and Subramanian(used by the ES)

Note that they argue the same thing, that services cannot be the panacea for India
as it is skill intensive and hence CA defying, not deifying. But the subtlety is that
they argue that mfg by itself does not have any inherent strengths unless it is low

496
skill mfg, eg construction, or apparel and textiles. But construction has low
productivity and is not tradeable and hence does not improve welfare, hence the
other 2 are key
So the choice is not mfg vs services but CA defying or CA deifying structural
transformation

Media
The size is over 1.5 lakh cr. Audio-visual services is one of the Champion sectors identified
by the govt for focused development
India is the 2nd largest pay-TV market after China
DD has the world's largest territorial broadcast facility
Print industry is suffering due to the penetration of the internet
India is the world's biggest producer of films, but has less than 25% of the screens compared
to China or US. This presents an potential area for expansion
The Govt is setting up a National Centre for Excellence in Animation, Visual Effects, Gaming
and Comics. Film and Television Institute has been set up in Arunachal to promote film
making in NE

Liberalisation of Other Service Provider(BPOs) Norms

To improve EODB and increase competitiveness of India's IT sector.
• Reg requirements of OSPs has been eliminated
• BPOs related to data related work taken out of OSP regulations
• Requirements like bank guarantees, static IPs, network diagram eliminated
• Rules preventing companies from engaging in Work from Home and Work From
Anywhere eliminates
Initially they had to register as they used leased telephone lines and hence major
consumer of telecom spectrum. The govt wanted to keep a check on usage of
resources and to prevent frauds

497
Planning
Planning PYQ
2019
1. Differentiate between Plan and Non-plan expenditure as used in the govt budget. Is
this distinction relevant for govt finances today?
2. Do you think planning has a role in the context of market based development of
India?
2018
1. How the setting up of NITI has changed the planning perspective in India?
2017
1. Give a brief account of the evolution of the concept of economic planning in India
after Independence
2016
1. Explain the salient features of the 73-74 amendments and elaborate the impact of
its implementation
2. What were the economic and non-economic rationale for adopting mixed economy
model in India?
3. Discuss the basic features of the 2nd FYP
4. During post-Independence era India assigned the role of Commanding heights to
the PSUs. Should this policy be continued?
2013
1. State the basic features of the Mahalonobis Model
2. Indian planning structure and system still remains largely in favour of a centralised
nature of planning. The 73-74 have hardly brought about any change in reality in
the nature of Indian planning process. Evaluate
2012
1. Explain why in spite of planning income distribution has turned more unequal over
time
2011
1. Throw light on the PURA model of rural development
2. Discuss salient economic features of 73-74
2010
1. Delineate the role of the District Planning Committee
2007
1. Is planning relevant in the context of the globalised economy of India

498
2006
1. Discuss the economic content of the Common Minimum program
2. Enumerate the major weaknesses and failures of Indian planning. Have economic
reforms been conducive to the achievement of growth with equity and poverty
removal

2004
1. Account for the transition from central planning to indicative planning in India. Do
you think that adoption of PURA attempts a reconciliation between employment
and GDP growth objective?
2003
1. Planning in India has failed to achieve the objective of growth with social justice
2002
1. Discuss how far the strategies for growth implied in economic planning have been
integrated with social justice
2001
1. Explain the concept of Indicative planning and give a brief outline of development
strategy under such planning in India in the current context
2. Why has the planning process failed to reduce regional disparities in India?
1999
1. The planned economy has never been as much inconsistent with the freedom of
choice among elitist consumers in the urban areas as it has ever been with basic
manufacturing needs of rural consumers.

Central Planning to Indicative Planning

Relation between planning and markets for growth
Douglas North, Nobel laureate said, 'Institutions are the rules of the game in a
society or, more formally, are the humanly devised constraints that shape human
interaction.' Institutions reduce uncertainties in human exchanges and along with the
technology in place they determine the cost of transactions
Decentralised planning
Devolution of powers i.e. Funds, Functions and Functionaries(3Fs) for providing roles
and responsibilities to the PRIs are the important aspects of decentralised planning.
Through 243G, PRIs are expected to evolve into institutions of local self-governance.
73rd and 74th Amendment

499
Salient features of the amendments
• Gram Sabhas in villages and ward committees for municipalities comprising all the
registered voters to be the basic units of democratic system
• Three tier system of panchayats at village, intermediate
block/taluk/mandal(intermediate varies as it is defined by Governor) and district
level except in states with pop below 20 lakhs (243B)
• Seats at all levels to be filled by direct elections(243C)
• Reservation of seats for SC, ST and women at all levels(243D, relates only to
reservation for women)
• Uniform 5 year term and elections before expiry of term. In the event of dissolution,
fresh elections within 6 months(243E)
• Independent State Election Commissions and State Finance Commissions(243K
and I respectively)
• Panchayats to prepare plans for dev and social justice wrt their subjects
(243G)
• 74th amendment provides for District Planning Committees to consolidate the
plans prepared by panchayats and municipalities(243ZD)
• 243J empowers states to make provisions wrt audit and maintenance of accounts
by local bodies
Kelkar argues that both centre and states should share equal share of the CGST
and SGST revenue with local bodies. This is fully incentive compatible as GST is a
consumption based tax and so it will create incentives for govts to increase
consumption to have more rev. Plus cities with better public goods lead to more
consumption
See Public Finance for issues of finance and FC role and Local Self Govt. for other
issues.
Planning Vs Planning Commission
There was consensus in the pre-independence days that a planned approach to
development was required. But on PC, debate. 2 fears about it
• It would undermine the role of ministries
• May undermine the role of states
Though the PC was meant to be just an advisory body under the NDC which had
representation from states as well, it evolved to have much greater powers and was
largely controlled by the Union govt.
PC performed 4 particular functions
• Perspective and medium term plan
• Advisory on exp including capex by union

500
 • Advising the union on transfers of funds to states and gave approval to state
plans. The transfers later were based on the Gadgil-Mukherjee Formula
reducing discretion. But over the years, the share of non-formula funds was
increasing leading to increasing dissatisfaction by states.
• Representing concerns of states in the union.
Over time, at the behest of the PC, autonomous agencies were created at the
districts which received funds from union and implemented programs, bypassing the
states. This was discontinued in 2014-15 but the agencies exist and now function
under states.
Dissatisfaction with the PC
• States frustrated with the tied nature of the funds
• Ministry of Finance resented the increasing Gross Budgetary Support that the
PC demanded, eroding the capacity of the FinMin to manage the fiscal
• Union Ministries and public enterprises also resented the involvement of the PC in
their functioning
NITI vs Planning Commission
Any planning institution faces two challenges- a constitutional challenge(of division of
powers, moving beyond the electoral cycle and setting up a long term vision) and a
competence challenge
The 4 broad functions of NITI
• Foster coop federalism by sustained support to the states
• Knowledge and innovation hub
• Formulation of strategic vision
• Platform for interdepartmental coordination.
The replacement will help change the emphasis
• From projects and programs to policy and institutions
• From expenditure inputs to real outcomes through better governance

Difference:
• Sharp break from Soviet inspired FYP to policy, making governance more
dynamic
• NITI no power to allocate funds
• In the PC, state's role was limited to National Development Council and annual plan
meetings. The NDC meetings were infrequent making the PC top down. In NITI,
Team India Wing regularly consults states
• In PC, states had to come to the PC every year for approval of their plans. In NITI
no need as the process is consultative
• PC could impose policies on the states but NITI can't do that.

501
 • Truly a step in cooperative federalism as earlier, though states had the major
responsibility of delivering public services, they were largely reduced to tools of the
centre's plan implementation, with them having to take approvals from PC
Structure of NITI
• Research Wing
• Consultancy Wing for central and states to tap into
• Team India wing as a permanent platform with reps from every state and ministry
PM is Chair. Vice Chair of Cabinet rank appointed by PM. Has full time members and 2
part time members. Max 4 Union ministers and a CEO of Secretary rank.

Evolution of Planning
National Planning Committee set up by Bose under Nehru in 1938. Bombay Plan by
industrialists GD Birla, JRD Tata and Lala Shri Ram
• The BP envisaged 3 FYPs, after which India would revert to the free market
model
• They envisioned a major role for the state, showing the popularity of the
Keynesian model
• They also wanted state to invest heavily in primary education and healthcare

502
 • They favoured the ryotwari system over the zamindari system to reform land
system
• They advocated cooperative farming in a big way

PC set up in 1950 just after Independence to make an assessment of resources of the

country and to formulate a plan for most effective and balanced utilisation of
resources.
First Five Year Plan sets out the objectives of Planning as an attempt to coordinate
means and ends'
The Nehruvian view, derived mainly from Fabian socialism, endorsed the need for rapid
development led by state economic activity and planning.
Role of the State as Visualised in the 50s
• It was believed that state could play a significant role both in raising the domestic
rate of savings and in putting it to more productive use
• In pre-modern society as India predominantly was, a large part of the surplus
generated through agriculture was appropriated by a very small class through
the land tenure system
◦ Thus land reforms combined with taxation on agriculture, either directly or
indirectly by influencing the prices of agriculture commodities compared to that
of manufacture, both required strong state intervention
• Apart from the standard roles of defence, law and order as the holder of monopoly
of violence, the state, especially in the light of Independent India's poor record,
invest heavily in education, in a very poor country, something which again
required state intervention.
• Large scale projects which called for heavy investment with a long gestation
period, beyond the reach of the private sector.
• Plus public utilities were natural monopolies and hence called for state
participation
• Given the low income and hence low demand, for the private sector to grow, a
boost to AD required which massive public investment as advocated by Keynes
and also Nurske's Big Push, was required, which could be channelled towards
productive asset construction like roads, irrigation etc
• Balanced development required careful coordination of scarce resources and
investing in hitherto underdeveloped areas. Myrdal's idea of Circular and
Cumulative Causation shows the need for balanced development
• The above did not mean an abolition of the private sector but a progressive
widening of the public sector and a reorientation of the private sector
Thus, our FYPs had 4 major goals:

503
• Growth
• Modernisation
• Self-Reliance
• Equity
Early Experience with Plans
First
• 1951-1956
• Was little more than a collection of ongoing public investment projects
• Aimed at a general increase in standard of living, full employment, economic
equality
• No specific analytically directed strategy of development

Second
• Very ambitious. Also known as Mahalonobis Plan(first appeared in the
paper,'The Approach of Operational Research to Planning in India' in Sankhya,
1955)who provided an analytical foundation for it with a closed-economy, growth
model of 2 sectors- consumer goods and capital goods, with sector specific
capital as the only factor of production
• The model was supposed to give analytical foundations for the project of raising
income via industrialisation already deliberated upon in the INC National
Planning Committee, led by Nehru pre-independence
• The fundamental insight of the model was that the greater the proportion
devoted to investment, the faster the long run growth, with current
consumption demand to be met by employing surplus labour in labour
intensive consumer goods industry
• In a departure from the then economic theory, capital was not subject to
diminishing returns, thus an initial investment leading to a higher stock in the
future
• Hence future output would be higher than when initial allocation was skewed
towards capital goods
• Hence the planner's problem is to arrive at a share of investment given the
target of income
• At the heart of the model was a Heavy Goods Sector
◦ They were described as machine-building complexes with a large capacity to
produce steel, fertilisers, equipment etc. and their growth required
disproportionate investment led by the state as it had long gestation
◦ Hence even though short term growth would be lower compared to when
invested in consumer goods, long term growth would be higher for both
sectors
• The model was quite similar to the Feldman Model of Soviet planning, which
given the high growth USSR was experiencing, was not an unfounded inspiration

504
 • Importantly, Nehru was clear to avoid the forced collectivisation of agriculture
and suppression of democracy to achieve high growth as done in Stalin's USSR
• Economic Criticism
◦ By Lord Meghnad Desai that Mahalonobis Model had no unemployment,
inflation and BoP in it, in addition to the crucial assumption of no
diminishing returns
◦ Second, it was a exclusively a supply side model, with no recognition of a
demand constraint to capital accumulation and the scope for slack demand
for subverting the growth process
▪ A model based on a physical relationship between input and output made
sense in a Soviet Command Economy but not in a mixed economy where
demand is the lubricant on the wheels of growth
▪ But the Plan did explicitly take into account demand even though the
Model did not. On it Mahalonobis lays out the following strategy:
• Create demand by an expansion of basic industries and social sector.
• Meet demand by expansion of consumer goods through both small and
large scale sectors
• As both production and income increases, portion of increased income
diverted towards investment in a balanced, planned manner
• Despite the seemingly restrictive assumptions, the Plan was better than anything
else in offer in India then
• One area where the Plan failed miserably was allocating a paltry sum to primary
education
The Second plan was opposed by a single economist in the panel of economists chosen
to evaluate it. It was BR Shenoy. His main criticism was that it was overambitious,
especially in savings. The shortfall of funds, he argued, would have to be raised by
deficit financing, raising inflation. Friedman also opposed the Mahalonobis plan as
too mathematical and obsessed with capital-output rations instead of human capital.
BV Krishnamurthi opposed the very low sums allocated under the plan to school
education. JC Kumarappa opposed the low priority given to agriculture
Third Plan
The dominant growth oriented Mahalonobis import substitution based
industrialisation strategy was continued in this plan, but with a greater emphasis on
import substitution and hence development of domestic capacity for producing
capital goods.
The public sector had twin roles
• Expand domestic capacity
• Reduce concentration of economic power through public ownership

505
But both the 2nd and 3rd plans, though emphasizing labour intensive consumer
goods production, failed in this regard. Same failure in reduction of inequalities
Growth in the first decade
• Compared to the colonial period where the tertiary sector led by defence and
administration grew fastest, the post independence decade saw a reversal with
the commodity producing sector taking the lead. This is in line with Kuznets's
work on growth where in a poor country with a low base, the production sector has
to lead growth
• India was growing 25% faster than China. While it was growing slower than
Korea and OECD countries, a large part of the slow growth in per capita income
was the rapidly rising population, something which Raj Krishna, who coined
the famous phrase 'Hindu rate of Growth', lamented.
• India's remarkable turnaround is even more commendable given that we started
from a very low base, which might allow for increasing returns to scale initially, but
only with investment, which given the low base, was lacking. In this context, the
strategy of the Mahalonobis model seems even more prescient.
• On the charge of neglect of agriculture, VKRV Rao argues that the charge is
baseless as of the total investment in the first 3 FYP, agriculture and irrigation
received 22.7%. In addition to this direct investment, heavy investment in
industries that produced agricultural inputs and processed agri outputs were
also made. But in the per-capita terms, the allocation to the agri sector was
lower than that of industry but only because the pop in agri dwarfed that engaged
in industry. Also agriculture was much more free from state controls than private
industry was
Second decade
• Export pessimism led to devaluation not being considered as a strategy for
foreign exchange management initially. Instead a 2-fold strategy was adopted
◦ Mobilising external assistance
◦ Rationing scarce forex though import licensing
▪ Since licenses were not given if domestic capacity existed, it gave tailor
made protection to the domestic industry and hence inefficiency-
Cronyism
Changes
Till the 3rd plan, there was only focus on investment, without much focus on
efficiency. This changed after the droughts and forex crisis of 60s
The twin wars and the levelling off of all foreign aid between 1962-65, put the
economy under severe strain. Then droughts hit in 1966 and 67, and the real GDP
declined.

506
This highlighted 2 defects in the strategy
• Neglect of agriculture
• Excessive dependence on foreign aid
The crisis forced India to take help from IMF and the WB, which came with stiff
conditions. Focus on self reliance, which replaced focus on import substitution.
This meant having enough forex, which de facto led to import restrictions
Thus the 4th plan, after 3 annual plans, had food security at its centre, along with
correcting the concentration of wealth
Fifth Plan-The plan innovated with directed anti-poverty programs and recognising
minimum needs along with population control
Sixth plan-Recognised that the savings created due to the 2nd plan had resulted in
excess capacity in some sectors, bringing about a shift from heavy industries to
infra.
Seventh- The plan represents the culmination of the shift that began with the 6th. This
plan also began the first gradual liberalisation.
Eighth- Overtaken by the 1991 crisis, leading to a 2 year plan holiday. This led to a full
reappraisal of the planning philosophy and the plan represents the first efforts
towards a market-oriented economy. Thus this plan stated in its preface that 'This
plan is indicative in nature.'
Ninth- Had for the first time included the financial sector as part of the plan. Also
for the first time recognised that demand, rather than investible surplus, could be
a part of the constraints
The indicative nature of the plan and the state's role as a facilitator was reiterated in
subsequent plans.

507
 Plan Target Actual
1 51-56 2.1 3.6
2 56-61 4.5 4.2
3 61-66 5.6 2.8
4 69-74 5.7 2.1
5 74-79 4.4 4.8
6 80-85 5.2 5.5
7 85-90 5.0 6.0
8 92-97 5.6 6.7
9 97-02 6.5 5.4
10 02-07 8.0 7.5
11 9 8
12 8 7
Public Sector Enterprises and their efficiency-inefficiency
The public sector was huge as it was to play an important role in resource
mobilisation, which was low initially. So as the mobilisation was made by the public
sector, it maintained a strong control too
The Planning Commission, on the second FYP, recommended the following sources for
resource mobilisation:
• Sterling balances
• Taxes
• Expansion of the public sector into commercial activities
This is also echoed in the Industrial Policy Resolution, 1956
Therefore, the idea of the public sector was not welfarist but to raise resources
When it comes to performance, the non-departmental enterprises, i.e. the commercial
arms of the govt consistently churned out a much higher rate of savings than the
corporate sector and other govt arms. Though this does not comment on the

508
efficiency of the public sector as they were monopolies, it shows that they served their
prime purpose of resource mobilisation
Planning and Relevance Today
Planning is relevant today but of a different kind, not the one of centralised controls.
AK Sen argued that planning was important for achieving distributional goals.
Problems with centralised decision making
• Inefficient and bureaucratic
• Multiple levels of accountability leading to sluggishness
• Rule bound and hence low appetite for risk-taking
• Suffers from inertia and less likely to correct course
Further, the communist countries, except China with a state led mixed economy,
collapsed dramatically in 1991. Even China saw breakneck growth only after Deng
Xiaoping's reforms in 1978.
Indian planning failed to achieve even the target of 5% growth set out in the 2-4th
Plans. Nehru, while introducing the Third Plan conceded that the gains of growth
were being distributed unevenly.
Perspective Plan(prepared for longer periods, mostly 20 years, with the FYPs
providing basis for the perspective plans) aimed at bringing everyone to a minimum
level of living within 15 years from 1961-76. This objective could be achieved for the
third decile from the bottom if growth 7%, but even at this rate the poorest 2 deciles
would not benefit much
But growth fell well short of the 7% target. The avg between 1960-80 was 3.5%,
called the Hindu Rate of Growth by Raj Krishna. The weakness, as highlighted by
Sen, was that excessive control of the private sector distorted the incentives. But
this realisation came later as initially the planners accepted the low growth as
unavoidable and focused on anti-poverty programs which also did not have much
effect.
As per VM Dandekar, three major shortcomings of the Planning process
• Use of sophisticated mathematical models to ensure intersectoral
consistency(input-output models) among production targets set out by the plan.
These input-output coefficients are highly aggregative and thus have little
meaning
◦ In the post-reform period, as planning shifted to indicative, a broad direction
was still needed. So govt investment targets were derived based on
incremental capital-output ratios, keeping in mind required output growth and
projected private sector investment.

509
 • Duplication of the jobs of central and state ministries by setting up parallel
divisions in the PC
• The budgeting system, in the absence of annualised break-up of targets set in
the plan, ends up compromising the plan. (i.e dissonance between annual
budgets drawn up by the Ministry of Finance and the plan targets set by the PC)
Growth picked up in the 80s to 5-6% as India liberalised more. The existing controls
were not dismantled but administered more liberally.
Post 1991
Explicit acceptance of the need to bring a systemic change.
But this was not a dismantling of planning, just a reorientation
The results have been very impressive. India became the 5th largest economy in the
world.
But the record is less impressive when distributional outcomes considered. As per a
paper by Chancel and Piketty, From British Raj to Billionaire Raj, income inequality
is at its highest since the Income Tax Act in 1922. HDI, we are at 131 in the world.
Poverty, though declined, is still at 21%.
To correct these, the 11th Plan, had exclusive considerations of inclusive growth.
Planning in a market economy
• The central reason why planning continues to be relevant today is the scarcity of
resources, requiring well-guided actions. Thus indicative role, by providing info.
• Even in a market eco, state has to play a key role in providing social overheads.
• The third key role has to be in the area of redistribution.
• 4th is coordination among various sectors for balanced development

That planning can be helpful in a market economy by providing 'indication,

coordination and prescription' is recognised even in capitalist countries like France
and Korea.
The ideal Planning
• The instruments of Planning have to be different in a market economy than a
state economy. We don't need specific output targets and then direct public
and private investment based on input-output models
• Earlier, sectoral balance in 200 sub-sectors was a staple of planning, but in an
open, liberalised economy, it is meaningless. The planning problem reduced to
managing BoP

510
 ◦ This problem has been handled very well, with India's forex reserves, during
the 1991 crisis, being enough for only about 2 weeks of imports, now have been
beyond $ 500 billion for quite some time
◦ The import control of the past, as part of the strategy of import-led substitution
and save forex, only led to monopolisation by domestic enterprises and
inefficiency.
• But reliance of markets will not take care of all objectives, particularly the
distributional goals, where the state needs to play a key role. The First Welfare
theorem states that outcome of competitive exchange is Pareto optimum but is
silent on the distribution. The Second Welfare Theorem states that any Pareto
optimum distribution can be achieved through suitable distribution, which
requires planning.
• There is also the a role for planning to sketch out a broad perspective of the
economy over a longer term, explore the medium to long term challenges and
instruments This is called indicative planning. Was first spelled out in the 8th
FYP
◦ For example, if we set a target to reach $ 5 trillion economy, with targets for
sectoral income like doubling farmer's income etc. then IP can outline
challenges and steps to achieve them
◦ For this, detailed sectoral targets for input-output are not required, but broad
parameters like national savings and investment, the financial structure,
investment climate etc, required
◦ IP important as long term challenges and structural changes require fairly
advanced planning and changes
◦ Planning also needed to ensure domestic capacity in non-tradable sectors,
like infrastructure, skill development, law and order.
◦ Thus, IP role is to draw attention to problems, indicate a broad direction for
the solution and stimulate debate and discussions to overcoming the
problems, involving stakeholders.
• To be relevant, planning has to realise and incorporate the role of the private
sector through incentives, not through direct control.
• The criticism that the size of the govt is too big, as a criticism of planning, is
unfounded as the size of the state as a % of GDP is much higher in OECD
countries, once social sector expenditure is included, as it should be. Hence
reforms do not mean a reduction in the role of the govt, rather a restructuring.
• The issue of program design crucial in areas like education and health as the
interventions are mostly long term, so resetting policies is difficult.
Sectoral Planning and Regional Planning are the two basic approaches to planning

511
As the PM said, its time to take the Indian economy
out of the Command and Control Mode and into the
Plug and Play mode for a self-reliant India
Plan and Non-Plan
Plan-Any exp on schemes detailed under FYP or as centre's transfer to states for
their plans
Non-plan- For spending during the year on routine functioning of the govt like those
on establishment and maintenance like security, interest payments, subsidies
Abolished
Reasons
• In order to find funds for the plans, over the years a tendency has developed to
view the non-plan as unnecessary and attempts have been made to squeeze
them though many of them are vital.
• Has an adverse effect on the quality of public services by developing a
fragmented view of resource allocation across different activities and sectors. For
example in the social sectors of health and edu, salary constitutes an important
component, a de-facto embargo was imposed on the non-plan posts recruitment.
• Over time, a misplaced tendency developed that plan means better expenditure as
it was meant to be on capex, in reality, over 70% of plan expenditure was on plan
revenue expenses. Thus no relevance of the distinction.
• It also led to reduced transparency in the budget
• A large part of revenue expenditure was financed by borrowing, if they came
under Plan. This was because the PC anticipated that revenue expenditure would
not constitute more than 30% of the total expenditure. So it gave only 30% as
grant, rest as loans. This was, as per the 10th FC, a major factor that bred fiscal
indiscipline among states.
• If a dept wants to launch a new scheme, it has to get 'in principle' approval from
the Planning Commission and this required time.
• States also resented the tied nature of the plan funds
• Gadgil formula led to Plan becoming formula based, so led to proliferation of
CSS which also eroded federalism as well as ignoring of the existing schemes. Eg
the poor utilisation of the irrigation potential created under the Accelerated
Irrigation Development Program. This was pointed out by the Rangarajan
Committee as well
• There was any way a nagging dissonance between budgeting and planning
◦ From a budgeting point of view the important distinction is thus revenue
and capital expenditure.

512
 ◦ The 2nd ARC pointed out that the Plan non-plan divide runs too deep to
give a comprehensive idea about resource availability at an early stage of
budget development
Thus the distinction was abolished. It was anyway outdated with the demise of the
Planning Commission. Need to move from a segmented approach to a holistic view
Also need to move away from input based budgeting to outcome based budgeting
and also shift in budgetary approach from a one year horizon to a multi-year
horizon
There have been reco for its abolishing from numerous commissions like 2nd ARC, 11th
plan, Economic Survey 2007-08. The 2011 High Level Committee under Rangarajan
called the practice an obstacle to outcome based budgeting
Note that separation of revenue and capex is in budget is required by the
Constitution
PURA Model-Provision of Urban amenities in Rural Areas
To address the issue of urbanisation and providing quality amenities to all, India needs
distributed model of urbanisation. This has advantages
• Suits the federal character
• Makes sure that migration doesn't harm or benefit only particular areas
◦ To control migration, PURA necessary

Objective of PURA
• Provide urban amenities
• Bridge rural-urban divide
• Balanced development
• Reducing rural-urban migration

Details
• Although numerous schemes for capital development in rural in the past, very little
focus on maintaining the assets so created.
• Each of the old schemes for rural areas had standards far below that in urban
areas
• Thus PURA aims to achieve development of compact areas around a potential
growth centre in a Panchayat through PPP by providing amenities and
livelihood in rural
◦ Simultaneous delivery of key infra in villages
◦ Funds for Operation and Maintenance of assets for 10 years post
construction and investment in creation of assets also
◦ Combining livelihood creation with infra development

513
 ◦ Enforcement of standards of delivery in rural areas at par with those in
urban, through a legally binding agreement
Syama Prasad Mookherjee Rurban Mission is a way to fulfil these objectives
Pune Model
Used APJ Abdul Kalam PURA initiative to boost infra. Used an infra census and a gap
analysis to identify the areas where the funds are needed, asmost of the times,
the allocations are made without taking into account the need, absolute or
relative, leading to misallocation and funds being unspent in some projects while
falling short in others
Improper mapping also leads to allocation of the same work in 2 schemes, leading
to wastage and red tape.
An online system was created for the panchayat members and Zila parishad
members to access the PURA system, thus improving transparency
District Planning Committee- Article 243ZD
The first ARC stressed on locally flexible plans and hence district planning. The
74th mandated the formation of the DPC for preparation of the district development
plan by consolidating panchayat and municipality plans.
• The state was empowered to make provision for
◦ DPC composition.
◦ Manner to fill seats, provided that at least 4/5th filled by elections from amongst
the elected Panchayat members and municipality members in proportion to the
rural-urban pop ratio.
◦ The functioning related to planning to be assigned to DPC
◦ Manner of choosing chairperson
• Every DPC, in preparation of the plan, shall have regard to
◦ Matters of common interest between Panchayats and municipalities including
spatial planning, water sharing and other resources and integrated infra
development and env conservation
◦ Extent and type of financial resources available
◦ Consult such institutions as the Governor specifies
• The chairperson shall forward the plan to the state

The consolidation of rural and urban plans starts from ground zero with panchayats
preparing Participatory plans and sending to the intermediate level. The process
continues and the DPC consolidates plans of Zila Parishad and ULBs
The planning process in districts is largely sectoral and the DPC has the key task
of integrating the sectoral plans for a unified district plan.
They also bridge the rural-urban divide

514
Issues
• Despite states carrying out necessary changes for the appointment of PRIs, DPCs
neglected.
• DPC only body in the Constitution where upto 1/5th members can be
nominated, thus reducing their autonomy
• In many states, the DPCs were chaired by Ministers, reducing the participative
aspects of the DPCs. It also reduces the DPC to just an arm of the state govt.
• Similarly, having the Collector as the chairperson is also against the policy of
independence and decentralised nature of the DPC
• Lack expertise for planning
• Lack of clarity about the nature of district plans, as merely amalgamation of local
plans or have a more macro view
• Lack of clarity about domain of planning- related to just 11-12th schedules or go
beyond if required
• Parallel planning bodies like Development Authorities, especially in districts
with a large urban areas
The Ramachandran committee gave recos for strengthening the grassroots
planning and noted that several states have not set up DPCs
Way forward as per ARC
• Development Auth like DDA should become the technical arms of the DPC
• A dedicated centre should be created in each district to ensure 2 way flow of info
and help in planning
• States should devise a planning calendar to fix time limits for plans

Metropolitan Planning Committee

243ZE. 2/3rd are from ULBs and chairpersons of Panchayats.
Issues
• Have to contend with a multiplicity of planning agencies like DPC, Municipal
corporations, Dev Authorities
ARC Reco
• States should clarify the jurisdiction

515
516
Vakil, Gadgil and VKRV Rao
PYQ
VKRV Rao
• How did he improve upon the earlier national income estimates of India?
• Discuss in detail his views on deficit financing

CN Vakil
• Highlight the main contributions of Vakil to Indian planning as opposed to that of
the Mahalonobis Model at the time of the formulation of the 2nd FYP
• What is the role played by basic(wage goods) and non-basics(luxury goods) in a
model of development for a mixed economy?
• Throw light on the wage goods model of Vakil and Brahmananda
• A close connection between finance on the one hand and politics and
administration on the other hand and the influence of the latter on the former
cannot be avoided. This is all the more true in India. Do you agree with this
statement of Vakil? Is it relevant today?
• Do you think that pursuit of wage-goods model could have been more appropriate
for post-Independence strategy of development?
DR Gadgil
• Discuss the contributions of DRG to Indian Economic Planning and Policy. Evaluate
the key elements of the Gadgil formula used by the PC
CN Vakil
Was Director of School of Economics and Sociology, Uni of Bombay. Wrote book
Planning for the Shortage Economy along with student PR Brahmananda in 1952,
after publication of First Plan. Gave constructive criticism of planning in India.
• Argued that 4% investment rate as envisaged in the plan was doubtful
• Prevent diversion of land to commercial crops

Criticised the Mahalonobis Model and proposed analternative Wage Goods Model
in famous book Planning for an Expanding Economy. Mahalonobis model
emphasises the capital goods, they emphasized wage good or liquid capital in
employment and growth
Wage Goods Model
PR Brahmananda and Vakil belonged to the Bombay School of thought
They were sceptical about the relevance of Keynesian Economics in India because:

517
 • Keynesian unemployment assumes 'excess capacity' including stock of wage
goods and other circulating capital, while in India,'Unemployment of labour exists
because supply of labour wage goods to sustain labour as a co-factor with
land and K is inadequate.'
• Rate of transfer of employment from farm to non-farm sector depends on
supply of wage goods
Brahmananda listed 14 items as wage goods, they were essentially in two
categories- foodgrains and textiles.'
• Essentially for them, the Keynesian multiplier mechanism cannot work without
wage goods and so employment cannot expand without wage goods
• So agriculture development becomes fundamental and has to be accorded
priority independent of that accorded to industry
• Population pressure on land should be reduced and the resulting freed labour
should be used for producing wage goods
• Forced savings can be used
• Also, an observation still relevant today, that services is more important but can
be expanded only with growing wage goods surplus
• The capital goods can be imported in return for wage goods
• Was classical as employment was determined in the labour market and there
is no autonomous investment
• Despite the importance attached to the wage goods, no serious scheme is
suggested for their development
Comparison with Mahalonobis Model
• In V, complementarity bw consumption and investment, while in M, there is a
conflict between C and I
• M was not concerned with immediate unemployment, while V was concerned
• M is inflationary in short run as production of consumption goods or agri is not
prioritised
Favour of Wage-Goods
• In focusing on unemployment they had homed in on the key problem of India in
the 1950s
• Centrality accorded to agriculture development was important given the
overwhelming share of agriculture and the poor state, something which came to
pass in the 1960s, leading to the green revolution
• As needed lower K/L, was more suited to India then for immediate fast growth
• As wage goods production will not require much skilled labour, will help in
reducing poverty
Drawbacks

518
 • They underestimated the importance of capital goods, like backward and
forward linkages as well as for agri
• Ignores role of TFP
• Import of capital goods was difficult after the war and also the plan advocated
by them, is not clear as the assumption is that wage goods are scarce, so how
can they pay for capital imports?
• Lacks an 'engine of growth' as B asserts that 'If the system is expanding and you
have a supply of food, people can stay at home and produce wage goods'. But
silent on where the expansion is coming from.
The Second plan was opposed by a single economist in the panel of economists
chosen to evaluate it. It was BR Shenoy. His main criticism was that it was
overambitious, especially in savings. The shortfall of funds, he argued, would have
to be raised by deficit financing, raising inflation. Friedman also opposed the
Mahalonobis plan as too mathematical and obsessed with capital-output rations instead
of human capital.
BV Krishnamurthi opposed the very low sums allocated under the plan to school
education. JC Kumarappa opposed the low priority given to agriculture
The 4th plan realised the importance of wage goods as a constraint on growth and
hence devoted significant attention to food security
VKRV Rao
• Viewed Eco as an integral part of social sciences.
• Aimed at people's welfare and quality of life as the aim of eco dev
• Strong belief in good survey data and policy formulation-
• Developed the first scientific estimates of India's national income.
• As Director of Stat, GoI(1944-45)he prepared the first Food Statistics of India
in 1944.
• As Planning Advisor, GoI(1946) brought out a systematic food plan for prod
and distt taking into account nutritional and regional deficiencies. Wrote article
in Sankhya(ISI) that presaged human dev indicators and not merely per capita
income as a measure of eco dev.
• Instrumental in getting food from America under Pl480
• Institution builder-DSE, IEG, Institute of social and economic change in bengaluru.

Deficit Financing and Rao

ArticleDeficit Financing, Capital Formation and Price Behaviour in an
Underdeveloped Economyin 1953. (notes made from paper itself, so authentic)
Context is Indian govt undertaking massive capex in initial years after Independence

519
• DF either is buying of gsec by banks or by the public directly, or printing cash.
Deficit financing arises whenever an attempt is made to step up the rate of
investment beyond the existing rate of saving and it leads to a rise in prices
• Economic development as defined by him, means raising productivity with the
aim of raising standard of living. Rao is primarily concerned about how to raise
productivity by capital formation
• But DF is not necessarily inflationary if the outlay used well. eg if it is used for
raising AD
• Analysis for India
◦ Very relevant given the above context, and that India was an underdeveloped
nation so voluntary savings not enough
◦ So need for forced savings through inflation. Hence DF definitely has a
place in eco dev and only question is extent to which it can be resorted to.
DF should not be resorted beyond the point where it becomes inflationary
▪ DF necessarily leads to price rise, but that does not mean it is inflationary.
Inflationary only when price rise becomes spiral. Inflationary economy
cannot have eco dev as in that case, capital is consumed, not
accumulated
▪ On whether DF has to necessarily be inflationary, his answer is a
categorical NO
◦ So whether DF is good or bad depends on
▪ Scale of investment(as a proportion of national income) and nature of
investment
▪ Effectiveness of investment and time taken for it to fructify
▪ Success of anti-inflationary steps taken
▪ Extent to which nominal wages are rigid
▪ Extent to which the additional incomes are mopped up by the
exchequer
▪ Effect on the additional income not mopped up, whether it is used for
consumption or for capex
▪ Effect it has on import and export
▪ Manner of implementation of DF
◦ Assumptions
1. Inv outlay by govt is spent entirely on wages
2. Additional income accruing to labour is spent entirely on consumption
goods
3. No increase in output of purchasable goods during investment period, hence
the additional expenditure by labour on these goods will be transferred to
entrepreneurs as profit
4. Closed economy
5. Money wages rigid

520
 6. No attempt to control prices
◦ Given the above assumptions, what determines price behavior is the
proportion of the additional outlay which is returned to the govt. As long as
this proportion is positive, Rao argues, inflation should not be feared as it
will taper off
▪

▪ Here pt= price in final year of inv outlay

▪ p0= initial price level
▪ h is % that govt outlay is to national outlay(pvt+govt) in initial year. So if r is
positive, price rise will ultimately taper off
▪ Also as long as h is not big, whatever price rise will be there, will be not
big
▪ Thus while undertaking DF, attempt should be made to keep h small and
increase r through encouraging small savings, imports, projects on
raising consumption goods supply
◦ Dropping assumptions does not lead to change in the conclusion about
importance of r and h
◦ Says that in India, DF primarily considered to be currency creation, like in
Bombay Plan and the 1st FYP, which had 300 cr as required DF
▪ But currency creation and credit creation different in their inflationary
potential, as in credit, it is constrained by the available resources in the
banking system, while in currency, there is expansion of resources in banking
system and hence much more credit possible. Hence inflation much more
likely in currency
▪ Also, in case of pvt credit creation, there is an auto mechanism for
mopping up resources generated by the credit. Eg the borrower repays loan
from the proceeds of the project for which money borrowed. But in case of
govt, when it uses it for projects like roads, schools, there is no direct
income for the govt and additional efforts have to be made to mop income
generated in the society from these expenses, like through tax, hence
more inflationary potential
▪ Lastly, govt projects are generally inefficient and hence require more
resources than same implemented by pvt sector. So more DF and hence
more inflation
▪ Hence govt DF should be financed by bank credit and not be creating
money, contrary to what is proposed in Bombay Plan and 1st FYP
Rao and Multiplier(also see macro hard notes- Sheet on paradox of thrift, which
has Rao arguments on multiplier)

521
Paper- Investment, Income, and the Multiplier in an Underdeveloped
Economy(notes directly from paper)
In K theory, multiplier determined by MPC. Multiplier = 1/(1-MPC). In underdeveloped
economies like India, MPC close to 1, while APC also large. So I size is small but it
can have large multiplier effects as per K.
Full employment(no involuntary unemployment)
• India predominantly agri, with low capital and inferior tech and majority of
employment is self employment and a large part of national income is for own
consumption
• Under this, multiplier does not work as described by K for rich economies. For
the multiplier to work, there has to be secondary and tertiary rounds of increase in
income due to increase in consumption created by the initial I.
• But in India, the consumption goods industries to which the increased demand
is directed are not in a position to expand output and employment because
◦ The chief consumption goods industry in underdeveloped nations like India is
agriculture and agri has an inelastic supply curve in short run.
◦ Also, Indian agri largely dependent on monsoon
◦ Plus, farmers don't behave in same way as other entrepreneurs in response
to increase in profits due to presence of price controls, uncertainty about the
duration of increased profit. So they may not increase output
◦ Even if they want to, they may not be able to due to bottlenecks in supply like
inputs, credit
◦ Thus the multiplier is much higher in nominal terms than real terms due to
predominance of agri
• When we consider agriculturalists as consumers reacting in response to increase in
their money income resulting from the initial investment
◦ As they produce food for themselves, the response could be consumption of
more food or better grains for themselves. Leads to a reduction in marketable
surplus of food and leads to price rise further
◦ In case of consumption of non-agri goods by farmers, the argument is same due
to lack of excess capacity in industries, difficulty in obtaining raw materials,
inelastic supply of skilled workers. Hence even if the farmers spend increased
income on non-agri, there is mainly a price rise of these, not output rise
• Hence multiplier mainly works on nominal income, not real.

522
 •

◦ Involuntary unemployment is lacking in UD economies due to lack of

unemployment social security. So there is disguised unemployment as everyone
has to work to survive.
▪ This weakens the secondary and tertiary effects of I further as there is
no pool of involuntarily unemployed workers who are willing to work and
expand output
National Income and Rao
Carefully evaluated earlier estimates of India's GDP and produced new ones too.
Published 'National Income of British India, 1931-32' in 1940showed India grew
very slowly in 30s and 40s. Arrived at NI to be 1689 cr in 1931-32
Principal method used by Rao in his NI estimates wasoriginating valueor product in
the main sectors. But constrained by lack of data so couldn't evaluate domestic
expenditure, savings or inv. Was aware of the income-exp relation, savings-inv
relation. During that time, economics, particularly Macro was undergoing a profound
change due to the Great Dep. Old classical ideas were discarded in favour of new
ideas like those of Keynes. Rao was greatly influenced by these circumstances and
made him realise the need to develop new tools for macro analysis. His focus on NI
promoted awareness and the need to improve the database as well a the imp of NI.
Once CSO and NSSO started publishing detailed data on prod and cons on a regular
basis, Rao helped refine estimates relating to many sectors, esp Agri and also drew
attention to their policy implications. Was sought by UN to develop its standard sys of
social accounts

523
 • First person to develop scientific estimates of national income in 1931. Divided
Indian eco into 2 parts-Agri(agri, forests, fishing and hunting) and
corporate(industries, construction, transport, business and public services). Used
two different methods for estimating the income in the two sectors. product
method in agri and income method in corporate. finally NFIA was added to the
above sum. before him dadabhai attempted it in 1876 in a very unscientific
manner. dada calculated agri and then added certain percentage as non agri. It
was arbitrary.
• After Independence the National Income Committee was set up by GoI in 1949
with mahalonobis, Gadgil and Rao. They estimated income in 1948-49 to be
8710 cr.
◦ It was largely due to his work with the NI Committee that estimates for
income and other stats were published in the First Five Year Plan for the
plan period and later for a 25 year period.
• As Chairman of the Un Sub Committee on Eco Dev he gave 'analysis of the
national income concept as applied to developing countries.' This was the first
step of aiming for GNP growth as a development obj.
Gadgil
Gadgil-Mukherjee formula on the basis of which the Planning Commission used to
allocate funds.
Initially, the Plan assistance, the volume as well as grant-loan components, were
decided on the basis of the projects approved. In 1969, on demands from the states,
the National Development Council adopted the Gadgil formula for distribution. As
per this, 30% of the total assistance was to be earmarked for special-category
states, which were to receive 90% of the assistance by way of grants and 10% as
loans. For General category states, it was 70-30 in favour of loans.
The distribution among states was done with predominant weightage given to
population and other factors like backwardness, fiscal performance and special
problems.

524
• Gadgil wrote The Industrial Evolution of India in Recent Times, 1860-1939. He
was associated with the Gokhale Institute of Politics and Economics.
• He looked at the role of the state, private sector and foreign capital against the
background of severe inequalities and unemployment.
• On foreign capital
◦ He argued about how colonialism harmed India, with particularly insightful
comments on railways. For example, arguing about the arbitrarily high 5%
guaranteed return or the 'gold plating' which allowed investors to artificially
inflate capital costs to charge higher rates of amortisation.
◦ He viewed the foreign aid given by western countries in the light of their
efforts to wean away the Third World away from the Communist bloc and
also the use of Bretton Woods institutions for the same purpose by the
West. This helped the Indian govt objectively evaluate the aid from the
western countries in the era of the Cold War
◦ On FDI being encouraged by WB and US, Gadgil warned that they required a
return of 15%, which India could not afford. Such investors are also to wield
considerable influence over the country's economic policy.
◦ On foreign capital, he argued that it must not be looked as a means of
obtaining additional capital for investment but for meeting only an urgent
gap. So where domestic capacity was available, foreign collab should not be
allowed. But he supported import of foreign know-how but only as a once
and for all matter.
• On planning
◦ He shared the consensus arrived at by the National Planning Committee of JLN
and Bose and accepted as goals, self reliant economy, removal of
unemployment and inequalities

525
 ◦ He was in support of import substitution and professed that the Indian
industry also depend on domestic demand, not foreign. So for creating the
domestic demand, standard of living of the masses needs to be raised and
production must happen cheaply and efficiently.
◦ He also advocated for focus on basic industries, not consumer industries as
a strategy for long term growth.
◦ He argued that the creation of the basic goods industries is related to the
development of agri, irrigation and electricity and so criticised the first FYP
for its lack of focus on electricity. Also criticised it for lack of focus on
fertiliser, cement and steel. This was duly incorporated in the second plan.
◦ His ideas on small scale and cottage industries were appreciated by
Mahalonobis in the second plan when he advocated that consumer goods
production has to be in the small scale, labour intensively.
• On inequality
◦ He argued that the ratio of salaries of the govt employees to per-capita
income in British India was 1:200, while it was 1:30 in UK, and 1:10 in the US.
He argued that this had to reduce in Independent India for both fostering
equality, saving resources and also to bridge the gap between govt
functionaries and the common people. This was also required for curtailing of
luxurious consumption. He gave reco to the Central Pay Commission in this
regard as well
• He was also a pioneer of cooperative movement and setup numerous sugar
cooperatives in MH

526
Indian Economy at Independence
Statistics
1. Life expectancy at birth 32 years and mortality rates very high at 27/1000
2. Literacy only 18%
3. 70% of population below poverty line
4. In 1951, contribution of agriculture to GDP was 53% and to employment was 73%.
85% of population lived in rural areas
5. Share of manufacturing, industries and mines was 17% and had only 11% of the
population, with those in modern industries only 2%
6. Share of tertiary 15.7% in income and 16% in employment

Overview
• Period of near stagnation
◦ Caught up in a vicious circle of poverty
◦ One of the lowest levels of per capita income resulting in low savings
◦ This resulted in low capital formation and hence low productivity and hence low
income
• Because the size of the market was limited because of low income, entrepreneurs
had little incentive
• First Five Year Plan says,' The transition that followed[after modern industrialisation
briefly during colonial rule] was characterised not by expansion of industry and a
diversification of economic structure but by a decay of India's traditional
industries...This retrogression led to a decline in productivity per person
engaged in agriculture.'
• The economy at Independence was overwhelmingly rural and agriculture
dependent as given by the share of population and share in income. The high share
of agriculture was not the result of a modern capitalist agriculture system but of
agriculture overpopulation, as evidenced by the large proportion of landless labour
• Thus the economy was faced with the problems of mass poverty, ignorance
and diseases aggravated by unequal distribution of resources between
regions and groups

Agrarian Scene
• Stagnation
◦ As per Blyn, per capita agriculture production declined at 0.72% per year bw
1911-1941 and any absolute growth occurred because of growth in acreage.

527
 • Causes:
◦ Regressive agrarian structure- Zamindari system failed to get any investment in
increasing productivity
◦ Internal drain of capital away from agriculture through high land revenue
◦ Poor Technology

Industry
• Absence of capital or producer goods industry as all were imported from Britain,
nearly 90%
• Absence of banking. Only 1 branch for 90000 inhabitants in 1946
• Foreign Investment
◦ Contributed to guided underdevelopment of India by concentrating on
production and export of raw materials
◦ The multiplier effects were largely exported back to the developed countries
• Railways were not of much use either as there was lack of an industrial revolution,
so IR only aided in a commercial revolution. Made India import finished goods and
export primary products, without creating any substantial backward or forward
linkages. Thus the IR served as a social overhead not for India but for British
interests

Thus, the end result of colonial rule was the pauperisation of the people.
Some positives
• A small Indian industrial base
• Indians started setting up consumer goods industries after WW1 and by 1939, India
was largely self-sufficient in major consumer goods
• A small scientific and technical labour force had also developed

528
Liberalisation and Economic Reforms
Liberalisation
Bringing market prices closer to efficiency prices and allowing economic agents the
freedom to make economic decisions. This means reducing the role of the state as a
direct player but increasing the role as coordinator, facilitator and regulator.
The background
The initial steps were taken in the 1980s. Rajiv Gandhi had initiated the New Economic
Policy, but while it tried liberalisation, it did not challenge the fundamental
assumption of the state's role. For example, it tried to replace physical controls
with financial controls but did not challenge why controls were needed. It tried to
reform the PSUs by MOUs but did not ask why state ownership was required at all.
but the reforms really began in 1991, in the backdrop of the macro crisis.
Factors behind the crisis
• Collapse of the Soviet Union which was a major trading partner
• Gulf War which raised oil prices and stopped flow of remittances. From 287 million
$ in June 1990, the oil import bill rose to 671 million in Dec 1990.
• Political uncertainty
All factors combined to trigger lowering of India's credit rating for both short and long
term borrowing

The BoP crisis and gold

• The root cause the unsustainable fiscal policies of the 1980s as well as the fixed
exchange rate policy.
◦ With increased plan allocations made to all ministries in the budgets of
1982-84, India was already in an internal debt trap by 1986, with the banking
system forced to invest more than half of its deposits in gsecs, through very
high SLR.
◦ Taxes were also reduced and imports were liberalised between 1985-87. All
this, led to very high fiscal deficits, which spilled onto the BOP. This was
mainly because the exchange rate policy did not allow adjustments to boost
exports. Hence CAD shot up, necessitating capital inflows for BOP.
◦ The govt resorted to external commercial borrowing and also required state
enterprises to do the same. In addition to ECB, forex deposits of NRIs were
used by RBI by providing exchange guarantee.
◦ As the forex was insufficient, the banks were asked to constantly roll-over
loans and this raised short-term debt to critical levels.

529
 ◦ It also became necessary to draw forex from IMF under the Compensation
and Contingency financing facility
◦ Thus external public sector debt rose to 21% of the GNP
• Bhagwati and Srinivasan have also argued that it was the inefficiencies of the
public sector that was responsible for the crisis. State enterprises failed to
generate profits.
◦ Their inefficiencies multiplied and spread to the entire economy.
◦ The restrictive trade and industrial licensing framework further added to the
inefficiency.
◦ These reduced revenues for the govt and the pursuit of creating employment
and poverty alleviation led inevitably to unsustainable fiscal deficits.
• Thus twin deficits- fiscal deficits, forcing large borrowings by the govt, and
CAD, requiring borrowed capital from external sources. Debt to GDP ratio was
almost 60% by the end of the 80s
• The Gulf War transformed the stress in BP into a full blown crisis, as oil prices shot
up even more, NRI deposits dried up and large scale withdrawals were made.
• The forex reserves declined from 3.1 billion $ in Aug 1990 to 896 million by
Jan 1991. The CAD was 3% of the GDP but financing it was difficult as India's
creditworthiness had plummeted. The rate of credit available to our canalising
agencies rose from 0.25% over LIBOR(London Interbank Offer Rate, the rate
at which global banks charge each other for short term loan) to 2%
Thus
• No forex to import vitals like oil and fertilisers
• No forex to pay interest or principal of the debt incurred
There was also very high inflation.
Short-term steps taken
• Severe import compression through various measures like huge cash margin
imposed on imports of non-essentials
• Pledging of gold to raise forex
• Using all possible lending options from the IMF

Gold-Forex reserves- Foreign currency and gold with the RBI, with the rate of valuation
of gold fixed by law. At the time of the crisis, it was 1/40th of the market rate. So an
ordinance was issued in Oct 1990, to allow for realistic valuation, which almost doubled
the forex reserves.
Gold was leased to SBI so that it could use it as a collateral and raise foreign currency.
So 200 million $ were raised in a deal with the United Bank of Switzerland. This was
done using gold with the govt.
RBI's gold, part of the forex reserves, were pledged to the Bank of England to raise 405
million. Both the ops happened between April-July 1991 and the gold was later

530
retrieved.

Reforms
The Finance Minister in his Budget Speech outlined the need for reforms as 'Neither
the govt nor the economy can live beyond its means year after year.' The agenda for
reform included fiscal consolidation and industrial and financial sector reforms.
Reforms, were both stabilising and structural.
• Structural reforms broadly in the area of industrial licensing, foreign trade and
investment and the financial sector.
◦ Industrial Policy Reforms
▪ The New Industrial Policy was announced on July 24, 1991
▪ Abolished the requirement of obtaining license in all except 5 industries.
These were narcotics, drugs and pharma, hazardous chemicals and industrial
explosives, electronics and aeronautics
▪ All industries were opened to the private sector except defence, atomic
energy and railways. Even defence has been opened up now.
▪ List of items reserved for small scale also substantially pruned and less than
20 items now reserved.
▪ FDI allowed under the automatic route in most sectors.
▪ Threshold of 40% on foreign equity investment was abolished.
▪ Automatic approval for equity investment upto 51% by RBI
▪ Shift to a negative list based system.
▪ Board for Industrial and Financial Reconstruction(BIFR) for sick PSUs.
▪ Repeal of prior permission for mergers and acquisitions removed under
the MRTP act.
◦ Trade Policy reforms
▪ Import licensing system was dismantled
▪ Non-tariff barriers phased out for all except consumer goods.
▪ Tariffs substantially reduced. Peak of 150% in 1990 to peak of 5% in non-
agri.
◦ Financial sector reforms
▪ Current account convertibility in 1994
▪ Capital account partial convertibility
▪ More functional autonomy to banks, more banks opened, including
foreign ones.
▪ Reduction of statutory pre-emption to release more funds for commercial
lending
▪ Initiating prudential norms
▪ SEBI was given statutory power
◦ Fiscal adjustment

531
 ▪ Fiscal deficit had worsened to 8.2% by 1991 and was the most important
reason for the crisis. Compared to this, avg deficit post reform has been 5%
Progress since 1991
• Real GDP growth averaged 7.1% in 2002-07 and
• The growth rate of agriculture declined from 3.2% in 1990s to 2.4% in 2000s. This
was because the momentum created by Green Revolution had died down.
• The growth of industries and services increased
• 2000s marked the inflection point for growth trajectory, with avg GDP growth of
about 9% between 2004-08, and all subsectors also accelerating. Then slowdown
due to financial crisis and growth slowed down to 7.8% for 2008-11
◦ As per Pulin Nayak, a key reason for the high growth rate was the high rate
of savings and GCF that India had since late 1990s. During 2006-07,
savings rate was around 36% and GFCF was 37%. With K/Y at around 4,
the Harrod Domar model would suggest 9% was perfectly feasible.
◦ This high growth was led by the service sector, with its share in GDP being
55%. The share of agri in GDP declined from 55% in 1950 to 13.7% in 2013. This
meant that the share of industry, mostly manufacturing, remained constant at
20%. This has been behind the phenomenon of jobless growth.
◦ While the share of industry remained stagnant, there was structural
transformation within manufacturing sector. During 2004-2009, while GVA grew
at 20%, employment increased only 7.5%
◦ India has also become more open. Share of external trade increased from 23%
of GDP in 1990s to 50% in 2009-2011. As Mohanty argues, with increasing
openness, India's trade cycles were becoming more synchronised with
global cycles.
◦ Net capital inflows also doubled from 2.2% in 1990s to 4.6% in 2004-08.
◦ Outward FDI inflows have also increased sharply to 70% during 2010-11 from
19% in 2000
◦ Fiscal deficit also moderated sharply during 2004-08, which also coincided
with a rule based fiscal process under FRBM
◦ The high growth was achieved during a period of price stability as WPI fell to
5.5% in this period.
Reforms and the vulnerable sections
• Rangarajan argues there are 2 issues
◦ Do reform measures affect the policies for the poor?
▪ Agri investment
▪ Food security system
▪ Employment programs
▪ Education and health expenditure.

532
 ◦ Do new reforms have any anti-poor bias?
Benefits of LPG(ES)
The ES argues that the wealth creation in the economy increased immensely with
the LPG. The sectors that witnessed greater lib saw greater expansion. This is key as
the market economy is based on the fundamental principle that optimal allocation
occurs when the consumers are free to choose the goods they want. Lib
facilitated that choice
• Domestic credit to GDP ratio increases with the entry of private banks after 1991
• Similar effects in mutual funds with its opening in 2003
• Similarly, the growth in open sectors like small ports higher than large ports
which are tightly regulated
• Similarly, the growth in cement and steel higher than in coal
• Growth in passenger and freight traffic higher in roads than in rail

533