BUSINESS

ENVIRONMENT
 WHAT’S IN STORE?

 This course provides an overview of the business environment in India

 It provides an application-based view of how government affects business, and how

business affects economic outcomes

 It highlights the importance of different government policies and the impact of these
policies on business outcomes

 Lastly, this course draws upon from various other disciplines, including, Economics,
Strategy, Organizational Behaviour.
 COURSE OUTLINE
Session Number Topic
1-2 Structure of the Business Environment
3 Identifying Market and non-market
factors in Business
4-6 The Indian Economy: Institutions,
Markets and Policy
7-8 Recent Events in the Economy
9 Interest Groups and Policy
10 Role of Ethics and CSR in Business
11 Industrial Policy of India
12-13 Fiscal and Monetary Policy
14-15 India’s Investment Environment
Session Number Topic
16-17 India in a Globalized Environment
18 India’s Trade Policies and Reforms
19-20 Country Risk Analysis and Assessment
GRADING PATTERN

Component Weightage
Group Presentation 30
Quiz 20
End Term 50
READING MATERIAL
Business Environment Text
World Development Report
Economic Survey of India
RBI Bulletins
News Articles
WHAT IS BUSINESS
ENVIRONMENT
Business Environment is closely linked to understanding “strategy”

Economic and Business environments are greatly affected by

government policies

But, what is strategy?

 Michael Porter – What is Strategy?
 What Strategy is not?
WHAT IS BUSINESS
ENVIRONMENT
Business Environment is closely linked to understanding “strategy”

Economic and Business environments are greatly affected by

government policies

But, what is strategy?

 Michael Porter – What is Strategy?
 What Strategy is not?
WHAT MAKES A GOOD
STRATEGY?
A good strategy rests on unique activities
A sustainable strategic positioning requires a trade-off
Rediscovering Strategy: The need to unlearn and learn again

Can we apply the principles of an organization to an economy?

Export-oriented growth
Manufacturing-led growth
THREE CHARACTERISTICS
OF STRATEGY
Creation of a unique market position

Identifying and making trade-offs

Creating fit by aligning company activities with one another

Corporate Strategy
Business Strategy
Operational Strategy
 SECRET SAUCE TO A
COUNTRY’S GROWTH
“[The] rate at which countries grow is
substantially determined by three things:
their ability to integrate with the global
economy through trade and investment;
their capacity to maintain sustainable
government finances and sound money;
and their ability to put in place an
institutional environment in which
contracts can be enforced and property
rights can be established. I would
challenge anyone to identify a country
that has done all three of these things
and has not grown at a substantial rate.”
THE MIDDLE-INCOME TRAP
Why do countries get stuck in a middle-
income trap?
 How to get out of it

Middle income trap is defined as a

situation where economies are between
gross national income (GNI) per capita
ranging from $1,136 to $13,845

Currently, there are 108 countries —

including major economies like China,
Brazil, Türkiye and India — stuck in the
“middle-income trap
HOW DO COUNTRIES COME
OUT OF IT
THE 3I STRATEGY
BREAKING THE MOULD:
UNDERSTANDING THE SMILE CURVE
ECONOMIC VERSUS NON
ECONOMIC ENVIRONMENTS
Economic Environments are the policies and economic conditions
affecting business in the economy
 Economic Systems
 Economic Conditions
 Economic Policies

Non-economic environments are non-economic factors such as

technology, political, social and legal factors that affect the
business environment
 ECONOMIC SYSTEMS
Economic Systems can be of three types
 Capitalist
 Socialist
Capitalist Socialist Mixed
 Mixed
• Firms own • Governme • Both
resources nts own markets
• Markets resources and
allocate • Governme governmen
resources nts ts own
allocate resources
resources • Both
governmen
t and
markets
ECONOMIC CONDITIONS
They refer to the overall macroeconomic environment of an economy
It consist of a set of factors (Mostly macroeconomic variables – GDP per
capita, exports, imports, exchange rates etc.)
Strong macroeconomic fundamentals lead to better and higher
economic growth in the economy
Economic headwinds and economic tailwinds
These can be both – global and domestic
 ECONOMIC POLICIES
Economic policies directly and indirectly impact businesses

There are various kinds of economic policies, namely,

 Industrial Policies – Deals with the regulation and governance principles related to
industrial activities
 Fiscal Policies – Related to taxation and subsidies by the government to drive economic
growth
 Monetary Policies – Related to the central bank of the economy controlling inflation

 Trade Policies – Helps exporters and manufacturers get their goods into global markets

 Investment Policies – Promote growth through FDI and FII in the economy.
FDI POLICIES IN INDIA
Automatic Route Government Route
Insurance Banking
Medical Devices Broadcasting
Petroleum Refining Airlines
Power Exchanges Print Media
Food Product Retail
STATE OF FDI IN INDIA
Total FDI inflows in the country in the last 24 years (Apr 2000 to June 2024)
are $1,013.4 Bn while the total FDI inflows received in the last 10 years (Apr
2014 to Jun 2024) was $689.88 Bn which amounts to nearly 67% of total FDI
inflow in last 24 years.
In FY 2014-15, FDI inflow in India stood at mere $45.14 Bn, which increased to
$60.22 Bn in 2016-17 and further to the highest ever annual FDI inflow of $84.83
Bn reported during the FY 2021-22.
Total FDI inflows in the country in the FY 2023-24 is $70.95 Bn and total FDI
equity inflows stands at $44.42 Bn.
Mauritius (25%), Singapore (23%), USA (9%), Netherland (7%) and Japan (6%)
emerge as top 5 countries for FDI equity inflows into India FY 2023-24.
Top 5 sectors receiving highest FDI Equity Inflow during FY 2023-24 are Services
Sector (Finance, Banking, Insurance, Non Fin/ Business, Outsourcing, R&D,
Courier, Tech. Testing and Analysis, Other) (16%), Computer Software &
Hardware (15%), Trading (6%), Telecommunications (6%) and Automobile
 Business
Environment

External Internal

Macro Micro Value System

Mission and Vision
HR
Physical and Financial
Resources
Suppliers
PESTEL Buyers
Competitors
NON-ECONOMIC
ENVIRONMENT
Socio-Cultural Demographic
Environment Environment Legal Environment
Hofstede Model of Demographic Labour Laws
Culture Dividend

Political Technological
Environment Environment
Political Risk and Digital Economy
Climate
HOFSTEDE CULTURAL
MODEL
THE CULTURE MAP
 DEMOGRAPHIC DIVIDEND
 According to ILO, the youth population in the country will dip to 23 per
cent by 2036, from 27 per cent in 2021.

 youth unemployment was 5.7 per cent in 2000 and jumped to 17.5 per cent
in 2019, showing an increase of more than 300 per cent

 According to the World Bank’s latest “Jobs for Resilience” report on

South Asia, the job scarcity in the region, where India is the dominant
economy, is driving people to other countries. This report says South Asia
records the highest outflow of migrants among the emerging market and
developing economy. From 2010 to 2023, the exodus amounted to 2 per
cent of the region’s working age population.
 POLITICAL ENVIRONMENT
AND BUSINESS

“To me, the most

beautiful word in the
dictionary is ‘tariff.’ It’s
my favorite word.”
 PESTEL ANALYSIS
• How is the political climate in the country
P • How business friendly is the country

• What is the macroeconomic stability of the country

E • How is the employment scenario

• What is the health and education level of economy

S • How skilled is the workforce

• What is the level of digitalization in the economy

T • How tech-friendly are the enterprises

• What is the carbon footprint of the economy

E • How carbon intensive are the industries

• What is the legal environment of the country

L • How quick are the courts in taking legal action
MICRO-
ENVIRONMENT:PORTER’S
FIVE FORCES
WHAT DEFINES A NATION’S
COMPETITIVENESS
VALUE NET MODEL: COMPETITION TO
COOPETITION
VALUE NET MODEL: WHAT IS IT FOR UBER?
 Weakness Strengths
What could you improve? What do you do well
What do other’s have that you don’t? What unique resources do you have?

SWOT

Threats Opportunities
What can harm you? What can you leverage
Which resource of your competitor can What strengths can you draw upon to
reduce your value? take advantage of opportunities
ENVIRONMENTAL Why is it important?
SCANNING
REASONS FOR
ENVIRONMENTAL SCANNING
Market Information and Trend: Understanding consumer demands,
market size, prices of commodities etc. It also includes analyzing
government policies.

Market Strength and Segmentation: How strong is an economy?

What is its GDP per capita?

Strategic analysis: Understanding overall business analysis –

conducting market analysis
STEPS TOWARDS
ENVIRONMENTAL SCANNING

Defining Defining
Defining
the scope the type of Preparing
the Monitoring
of the environme a report
business
project nt
STEPS UNDER
ENVIRONMENTAL SCANNING
Scanning – it is essentially understanding the present environment and
studying possibilities of changes in the environment

Monitoring – Constant eye and check on the changing environment and

dynamism

Forecasting – Making futuristic trends based on the scanning and

monitoring

Assessing – After the initial first three steps, the organization must
evaluate and assess to make a proper evaluation of the system
STEPS IN ENVIRONMENTAL
SCANNING
Scanning the components

Grouping the components

Observing the internal components

Monitoring the external components

Outlining variable for analysis

IMPORTANCE OF MARKET
RESEARCH
READINGS
Chapter 1 and 3 of the text book
World Development Report 2024
 THE INDIA STORY
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FROM GREEN REVOLUTION
TO AMRIT KAAL
INDIA’S ECONOMIC STORY
Though the planned economic development in India began in 1951 with the
inception of First Five Year Plan , there were earlier measures too
Setting up of National Planning Committee by Indian National Congress in 1938 ,
The Bombay Plan & Gandhian Plan in 1944, Peoples Plan in 1945 (by post war
reconstruction Committee of Indian Trade Union), Sarvodaya Plan in 1950 by
Jaiprakash Narayan were steps in this direction
The Planning Commission was charged with the responsibility of making assessment
of all resources of the country, augmenting deficient resources, formulating plans for
the most effective and balanced utilization of resources and determining priorities
The first Five-year Plan was launched in 1951 and two subsequent five-year plans
were formulated till 1965, when there was a break because of the Indo-Pakistan
Conflict. Two successive years of drought, devaluation of the currency, a general rise
in prices and erosion of resources disrupted the planning process and after three
Annual Plans between 1966 and 1969, the fourth Five-year plan was started in 1969
 FIRST FIVE YEAR PLAN
It was based on Harrod-Domar Model. The first five years (1951 – 1956) plan was drafted
by the economist K.N Raj
Influx of refugees, severe food shortage & mounting inflation confronted the country at the
onset of the first five year Plan.
The Plan focused on agriculture, price stability, power and transport. It was a successful
plan primarily because of good harvests in the last two years of the plan.
Nearly 70 per cent of both the total population and the working force are dependent
on agriculture. Holdings are small, 70 per cent of all farms being less than 5 acres each
Objectives of rehabilitation of refugees, food self sufficiency & control of prices were more
or less achieved
During the First Plan period, national income was expected to rise by 11–12 per cent; the
actual increase was over 18 per cent, despite a shortfall in Plan outlays
WAS IT A SUCCESS
The first five-year plan was quite a success, according to growth analysis. When
the plan was only aiming to achieve a growth of 2.1% GDP, the growth reached up
to 3.6%, leading to a huge economic development that India had not seen for
years.
There was an improvement not only in the primary sectors of agriculture and
irrigation, but also there was price stability, lesser inflation, growth in capital
income, better employment chances, and self-sufficiency.
At the end of the first plan, in 1956, India witnessed a total of 5 inaugurations of
new technical institutions named the Indian Institutes of Technology. The
University Grants Commission (UGC) funded these incredible academic institutions
to see India and its students prosper and achieve higher education.
British economist Sir Roy Harrod in 1939 and American
economist Evsey Domar in 1946 independently worked on a model
that linked economic growth to investment and savings. it suggests
that in order to achieve higher growth rates, a country must
increase its savings and investment rates, as these will lead to an
increase in the capital stock. A larger capital stock will then boost
economic growth.
In underdeveloped countries, there is usually an abundance of labor
but a shortage of capital. Thus investment needs to not only be
mobilized via an increase in savings but also channeled efficiently at
a low capital-output ratio to achieve higher growth rates. This ratio
is the amount of capital required to produce a unit of output. A
higher ratio implies that more investment is required to achieve a
given rate of economic growth.
But increasing savings and investment rates can lead to diminishing
returns; that is, the marginal productivity of capital decreases as the
capital stock increases. This means there is a limit to how much an
economy can grow based on investment and savings alone. Further,
the Harrod-Domar model does not take into account factors such as
technological progress and changes in the labor force.
The model formed the basis of India’s First Five-Year Plan (1951–56).
Policy makers believed that the plan would kick off industrialization
in the country. It promoted savings and investment through various
measures such as tax incentives, subsidies, and greater government
spending on infrastructure. Simultaneously, the plan aimed to raise
industrial output by setting up new industries, modernizing existing
 HOW DOES A COUNTRY
GROW?
A country can grow by two factors:
•The level of national saving (S)
•The productivity of capital investment (this is known as the capital-output ratio)

The Capital-Output Ratio (COR)

•For example, if £100 worth of capital equipment produces each £10 of annual output, a
capital-output ratio of 10 to 1 exists. A 3 to 1 capital-output ratio indicates that only £30
of capital is required to produce each £10 of output annually.

•If the capital-output ratio is low, an economy can produce a lot of output from a little
capital. If the capital-output ratio is high then it needs a lot of capital for production, and
it will not get as much value of output for the same amount of capital.

Rate of Growth = Savings Ratio / Capital-Output Ratio

 NATIONALIZATION
BEGINS WITH AIRLINES
Under the Air Corporations Act, 1953, Nehru
nationalised nine airlines—Air India, Air Services of
India, Airways (India), Bharat Airways, Deccan
Airways, Himalayan Aviation, Indian National
Airways, Kalinga Airlines, and Air India International
—and brought them under two PSEs, Indian Airlines,
and Air India International. Overnight, the business
of running airlines by private citizens was made
illegal, with punishments ranging from a minimum
fine of INR 1,000 to a maximum imprisonment for
three months, or both—for each flight, under Section
 ..AND THEN INSURANCE
“The nationalisation of life
insurance is an important step in
our march towards a socialist
society.”
Through the Life Insurance
Corporation Act, 1956, Nehru
nationalised 154 Indian insurers,
16 non-Indian insurers, and 75
provident societies into a single
entity, Life Insurance Corporation
of India (LIC).
SECOND FIVE YEAR PLAN
Simple aggregative Harrod Domar Growth Model was again used for
overall projections and the strategy of resource allocation to broad sectors
as agriculture & Industry was based on two & four sector Model prepared
by Prof. P C Mahalanobis. (Plan is also called Mahalanobis Plan)
The Plan focussed on rapid industrialization- heavy & basic industries .
Advocated huge imports through foreign loans
The Industrial Policy 1956 was based on establishment of a socialistic
pattern of society as the goal of economic policy
Acute shortage of forex led to pruning of development targets , price rise
was also seen ( about 30%) vis a vis decline in the earlier Plan & the 2nd
FYP was only moderately successful
SUCCESS AND DRAWBACK
The target growth rate during the period was 4.5% and the actual growth
rate was 4.27%. Five major Hydro electric power projects and steel plants
at Bhilai, Durgapur and Rourkela were set up during the period
Agriculture and irrigation saw their share in the budget allocation size
shrink from the first five-year plan.
The sum of money allotted to the plan did not end up being enough and
widened the unemployment problem, which was relevant back then and
still a big issue. Other than this, the currency of India had to be devalued
2 times, and a lot of external payments suffered,
 MAHALANOBIS MODEL
OF GROWTH
Policy makers sought rapid growth of the Indian economy through investment in heavy
industry.
The two-sector model, which Mahalanobis proposed in the early 1950s, divided the economy
into capital-goods and consumer-goods sectors and suggested investment should be targeted
at the former. His analysis showed that a higher rate of capital formation would enable higher
economic growth
 Basic and Heavy capital goods

Later, he proposed the four-sector model, which expanded on the two-sector model. The
consumer-goods sector was disaggregated into three sectors: factory enterprises, household
and small-scale enterprises, and provision of services.
Mahalanobis identifies the rate of growth of investment in the economy not with rate of growth
of savings but with rate of growth of output in the capital goods sector within the economy
The growth of capital goods sector in turn depends upon the proportions of total investment
allocated to the capital goods sector and output-capital ratio in the capital goods sector.
Mahalanobis shows that the proportion of total in­vestment resources allocated to the capital
goods industries for each year is the most important factor determining the long-term rate of
 “The only way of eliminating unemployment in India is to build up a
sufficiently large stock of capital which will enable all unemployed
persons being absorbed into productive capacity. Increasing the rate of
investment is, therefore, the only fundamental remedy for unemployment
in India.”
THE LONGEST EARTHEN
DAM IN THE WORLD
THE BIRTH OF INDUSTRIES
 INDUSTRIAL POLICY OF 1956

 The Industrial Policy Revolution of

1956 was taken into action by the Indian
Rapid Prevent
Parliament on 30th April 1956. It is also Development Concentration
known as ‘The Economic Constitution’ of Of Industries of power
India.

 The Industrial Policy was shaped by

the Mahalanobis Model of growth, which
suggested that emphasis on heavy
Incentives to
industries would lead the economy towards Labour
a long-term higher growth path. It provided
a comprehensive framework for the
industrial development of the country.
Iron and Steel
Sugar
Coal
Cotton Textile
Mineral Oils
Paper
Atomic Energy
Machine Tools
Air, Rail, Ship
Telecom
3RD FIVE YEAR PLAN (1961-
66)
Based on the experience of first two plans (agricultural production was seen as
limiting factor in India’s economic development) , agriculture was given top
priority to support the exports and industry
This plan was a failure reaching the targets due to unforeseen events - Chinese
aggression (1962), Indo-Pak war (1965), severe drought 1965-66. Due to conflicts
the approach during the later phase was shifted from development to defence &
development.
This model envisioned that by 1970-1971 national income of the nation’s
population could be double that of 1950-1951. The economic performance of the
nation exceeded expectations due to the first plan.
The Third Five Year Plan (1961-1966) of the Economic Development of India is also
popularly called “Gadgil Yojna”
SUCCESSES AND FAILURES
India experienced a major drought due to poor monsoon from 1964 to 1966 due to
which its agricultural production growth objectives were not met. Moreover, the
lack of coordination between central and state governments also resulted in the
failure of this plan.
The objectives of the Third Five Year Plan were met only in some sectors such as
transportation, social services and communications.
Agricultural growth objectives of this plan failed miserably with agriculture
production falling from 82MT to 72MT per annum.
Due to this reason, there was a significant rise in the prices of food and consumer
products. Besides, the industrial sector of India also fell below expectations.
THE GADGIL FORMULA
The Gadgil formula is named after Dhananjay Ramchandra Gadgil, a social
scientist and the first critic of Indian planning.
Special Category states like Assam, Jammu and Kashmir and Nagaland were given
preference. Their needs should first be met out of the total pool of Central
assistance.
The remaining balance of the Central assistance should be distributed among the
remaining states on the basis of the following criteria:
60 per cent on the basis of population;
7.5 per cent on the basis of tax effort, determined on the basis of individual State's per
capita tax receipts as percentage of the State's per capita income;
25 per cent on the basis of per capita state income, assistance going only to States whose
per capita incomes are below the national average;
7.5 per cent for special problems of individual states.
 THE GADGIL-MUKHERJEE
FORMULA
Population was given the maximum weight
The share of Per Capita Income has increased from 20% to
25%.
Fiscal management, as a new criterion has been introduced
with 5% weightage
special problems under these seven heads:
Coastal areas
Flood and drought prone areas
Desert problems
Special environmental issues
Exceptionally sparse and densely populated areas
Problem of slums in urban areas
Special financial difficulties for achieving minimum
reasonable plan size.
 THE PL-480, AND THE RUPEE
DEVALUATION
In 1966, foreign aid was finally cut off and India was told it had to liberalise its
restrictions on trade before foreign aid would again materialise. The response was
the politically unpopular step of devaluation accompanied by liberalisation. When
India still did not receive foreign aid, the government backed off its commitment
to liberalisation.
The first was India’s war with Pakistan in late 1965. The US and other countries
friendly towards Pakistan, withdrew foreign aid to India, which further necessitated
devaluation. In addition, the large amount of deficit spending required by any war
effort also accelerated inflation and led to a further disparity between Indian and
international prices. Defence spending in 1965/1966 was 24.06% of total
expenditure, the highest it has been in the period from 1965 to 1989
The second factor is the drought of 1965/1966. The sharp rise in prices in this
period, which led to devaluation, is often blamed on the drought. Sacrifice one
meal at least a week!”.
During the late 1950s and early 1960s, the value of PL 480 reached one-third of total US agricultural
exports
4TH FIVE YEAR PLAN (1965-
74)
Focus was on agriculture to produce food
Bank Nationalization was the biggest move in this period: 1969
In the year 1965, the government of India launched the Green Revolution
1.Using seeds with improved genetics (High Yielding Variety seeds).
2.Double cropping in the existing farmland and,
3.The continuing expansion of farming

The oil shock of 1973 caused inflation to rise in India. This coupled with low
productivity of crops led to high food prices and scarcity.
FIFTH FIVE YEAR PLAN
(1974-79)
The final Draft of fifth plan was prepared and launched by D.P. Dhar in the
backdrop of economic crisis arising out of run-away inflation fuelled by hike in oil
prices and failure of the Govt. takeover of the wholesale trade in wheat.
It proposed to achieve two main objectives: 'removal of poverty' (Garibi
Hatao) and 'attainment of self reliance' Promotion of high rate of growth,
better distribution of income and significant growth in the domestic rate of savings
were seen as key instruments
Due to high inflation, cost calculations for the Plan proved to be completely wrong
and the original public sector outlay had to be revised upwards. After
promulgation of emergency in 1975, the emphasis shifted to the implementation
of Prime Ministers 20 Point Programme. FYP was relegated to the background
and when Janta Party came to power in 1978, the Plan was terminated
The Electricity Supply Act was amended in 1975, the Minimum Needs Programme
(MNP), and the Indian National Highway System was introduced.
6TH FIVE YEAR PLAN (1980-
85)
There were 2 Sixth Plans. Janta Govt. put forward a plan for 1978- 1983 emphasizing on
employment, in contrast to Nehru Model which the Govt criticized for concentration of
power, widening inequality & for mounting poverty .
However, the government lasted for only 2 years.
Congress Govt. returned to power in 1980 and launched a different plan aimed at directly
attacking on the problem of poverty by creating conditions of an expanding economy.
The Plan focussed on Increase in national income, modernization of technology,
ensuring continuous decrease in poverty and unemployment through schemes for
transferring skills(TRYSEM) and seets(IRDP) and providing slack season employment
(NREP), controlling population explosion etc.
Broadly , the sixth Plan could be taken as a success as most of the target were realised
even though during the last year (1984-85) many parts of the country faced severe famine
conditions and agricultural output was less than the record output of previous year.
NABARD was developed in 1982 as the bank for agriculture
7TH FIVE YEAR PLAN (1985-
90)
The Plan aimed at accelerating food grain production, increasing employment
opportunities & raising productivity with focus on ‘food, work & productivity’.
The plan was very successful as the economy recorded 6% growth rate against
the targeted 5% with the decade of 80’s struggling out of the’ Hindu Rate of
Growth’.
The seventh five-year plan was one of the most crucial economic plans in the
history of the Indian economy. Before this economic plan, other economic plans
had taken place and did not get into action in the right manner as that needs to
be.
One of the most crucial roles of the seventh five-year economic plan was the
development of the human resource sectors. That further assisted in accurately
solving the regional imbalances and the social development.
1991 REFORMS
The Middle East war, oil prices went up, led to high debt
Political crisis – government collapsed, Rajiv Gandhi assassinated
Narasimha Rao government formed
Gold was hypothecated to Bank of England and Japan. Had to borrow money from
IMF with strong conditionalities
Manmohan Singh took on the job of FM. Dismantled the ‘license permit system’
FDI was allowed in, rupee was depreciated, and more reforms were announced in
Budget speech in 1992
There was a rush or private and foreign investment: Hyundai, Sony, Toyota, Star
TV
Nariman Point became the most expensive real estate market in the world
8TH AND 9TH FIVE YEAR
PLAN
The eighth plan was postponed by two years because of political uncertainty at the Centre
Worsening Balance of Payment position, rising debt burden , widening budget deficits, recession in
industry and inflation were the key issues during the launch of the plan.
The plan undertook drastic policy measures to combat the bad economic situation and to
undertake an annual average growth of 5.6% through introduction of fiscal & economic reforms
including liberalisation under the Prime Minister ship of Shri P V Narasimha Rao.
Some of the main economic outcomes during eighth plan period were rapid economic growth
(highest annual growth rate so far – 6.8 %), high growth of agriculture and allied sector, and
manufacturing sector, growth in exports and imports, improvement in trade and current account
deficit. High growth rate was achieved even though the share of public sector in total investment
had declined considerably to about 34 %
The 9th Plan prepared under United Front Government focussed on “Growth With Social Justice &
Equality “ Ninth Plan aimed to depend predominantly on the private sector – Indian as well as
foreign (FDI) & State was envisaged to increasingly play the role of facilitator & increasingly involve
itself with social sector viz education , health etc and infrastructure where private sector
participation was likely to be limited. It assigned priority to agriculture & rural development with a
view to generate adequate productive employment and eradicate poverty
10TH FIVE YEAR PLAN (2002-
07)
Recognising that economic growth cant be the only objective of national plan, Tenth Plan had
set ‘monitorable targets’ for few key indicators (11) of development besides 8 % growth
target.
The targets included reduction in gender gaps in literacy and wage rate, reduction in Infant &
maternal mortality rates, improvement in literacy, access to potable drinking water cleaning
of major polluted rivers, etc.
Governance was considered as factor of development & agriculture was declared as prime
moving force of the economy.
States role in planning was to be increased with greater involvement of Panchayati Raj
Institutions.
state wise break up of targets for growth and social development sought to achieve balanced
development of all states
 11 Five YEAR PLAN
th

(2007-12)
Eleventh Plan was aimed “Towards Faster & More Inclusive Growth “after UPA rode back to power on the plank of helping
Aam Aadmi (common man). India had emerged as one of the fastest growing economy by the end of the Tenth Plan.

The savings and investment rates had increased , industrial sector had responded well to face competition in the global
economy and foreign investors were keen to invest in India. But the growth was not perceived as sufficiently inclusive for
many groups , specially SCs , STs & minorities as borne out by data on several dimensions like poverty, malnutrition,
mortality, current daily employment etc .

The broad vision for 11th Plan included several inter related components like rapid growth reducing poverty & creating
employment opportunities , access to essential services in health & education, specially for the poor, extension if
employment opportunities using National Rural Employment Guarantee Programme , environmental sustainability ,
reduction of gender inequality etc.

Accordingly various targets were laid down like reduction in unemployment( to less than 5 % among educated youth ) &
headcount ratio of poverty ( by 10 %), reduction in drop out rates , gender gap in literacy , infant mortality , total fertility ,
malnutrition in age group of 0-3 ( to half its present level), improvement in sex ratio, forest & tree cover, air quality in
major cities, , ensuring electricity connection to all villages & BPL households (by 2009) & reliable power by end of 11th
Plan , all weather road connection to habitations with population 1000& above (500 in hilly areas) by 2009, connecting
every village by telephone & providing broad band connectivity to all villages by 2012 .

The Eleventh Plan started well with the first year achieving a growth rate of 9.3 per cent, however the growth
decelerated to 6.7 per cent rate in 2008-09 following the global financial crisis. The economy recovered substantially to
register growth rates of 8.6 per cent and 9.3 per cent in 2009-10 and 2010-11 respectively.
 11TH
FIVE YEAR PLAN
.However, the second bout of global slowdown in 2011 due to the sovereign debt crisis in Europe coupled with domestic
factors such as tight monetary policy and supply side bottlenecks, resulted in deceleration of growth to 6.2 per cent in
2011-12. Consequently, the average annual growth rate of Gross Domestic Product (GDP) achieved during the Eleventh
Plan was 8 per cent, which was lower than the target but better than the Tenth Plan achievement.

Since the period saw two global crises - one in 2008 and another in 2011 – the 8 per cent growth may be termed as
satisfactory. The realised GDP growth rate for the agriculture, industry and services sector during the 11th Plan period is
estimated at 3.7 per cent, 7.2 per cent and 9.7 per cent against the growth target of 4 per cent, 10-11 per cent and 9-11
per cent respectively.

The Eleventh Plan set a target of 34.8 per cent for domestic savings and 36.7 per cent for investment after experiencing
a rising level of domestic savings as well as investment and especially after emergence of structural break during the
Tenth Plan period. However, the domestic savings and investment averaged 33.5 per cent and 36.1 per cent of GDP at
market prices respectively in the Eleventh Plan which is below the target but not very far. Based on the latest estimates
of poverty released by the Planning Commission, poverty in the country has declined by 1.5 percentage points per year
between 2004-05 and 2009-10.

The rate of decline during the period 2004-05 to 2009-10 is twice the rate of decline witnessed during the period 1993-94
to 2004-05. Though the new poverty count based on Tendulkar Formula has been subject of controversy , it is
believed by the Committee that whether we use the old method or the new , the decline in percentage of population
below poverty line is almost same.

On the fiscal front , the expansionary measures taken by the government to counter the effect fo global slowdown led to
increase in key indicators through 2009-10 with some moderation thereafter. The issue of Price Stability remained
resonating for more than half of the Plan period. Inability to pass on burden on costlier imported oil prices might have
constrained the supply of investible funds in the government’s hand causing the 11th Plan to perform at the levels below
its target.
 THE CREATION OF NITI
AAYOG
Planning Commission set up on the 15th of March, 1950 through a Cabinet Resolution was replaced by
NITI Aayog through another such resolution on 1st January, 2015.
Previously, the Planning Commission played a predominant role indetermination of Annual Plans & transfer
of Plan funds to State Govts, a work now being undertaken by Ministry of Finance.
However all that is set to change with constitution of NITI Aayog which has been mandated to work
towards fostering cooperative federalism through structured support initiatives and mechanisms with the
States on a continuous basis, recognizing that strong States make a strong nation.
An important evolutionary change from the past will be replacing a centre-to-state one-way flow of policy
by a genuine and continuing partnership with the states. In this sense, the Planning Process in India , is
poised for a change.
The Chief Minister’s Sub-group on rationalization of Centrally sponsored Schemes (CSS) has recommended
that the number of CSS should be reduced, states should be given more flexibility in implementation of the
schemes, CSS be divided into core and optional schemes along with many other recommendations related
to simplification in release of funds, certainty about availability of funds under these schemes in medium
term etc
WHERE ARE THE JOBS?
WHERE ARE THE JOBS?
THE GROWTH OF AGRICULTURAL PRODUCE
Consumption has
increased…

…but so has income

• The government is building a road network and
expanding rail and air networks at a record pace.
• India built 74 airports in the first 67 years after
14.5 KM
independence. It doubled that number in the last nine
years.
• The number of universities was 723 in 2014, and it
increased to 1,113 in 2023.
30 KM
• More girls are now in higher education than boys. The
Gross Enrolment Ratio (GER) for girls is 27.9 in 2020 vis-
à-vis 12.7 per cent in FY10.
• Total enrolment in higher education was 3.4 crore in
2014. It has gone up to 4.1 crore students in 2023.
• Dedicated programs for road connectivity (Bharatmala), port infrastructure
(Sagarmala), electrification, railways upgradation, and new airports/ air routes
(UDAN),
• large-scale public spending since 2014 to address the infrastructure and
logistics bottlenecks
• Digital infrastructure has enabled the creation of digital identities, improved
access to finance, access to markets, reduced transaction costs, and
improved tax collection and has provided the foundation for sustained and
accelerated economic growth this decade.
• Over 10.11 crore women have been given free gas connections, 11.72
crore toilets have been built for the poor, 51.6 crore Jan Dhan accounts
INDUSTRIAL POLICY 1991
The New Industrial Policy of 1991 was introduced on July 24, 1991, with the
objective of empowering market forces, improving efficiency, and rectifying
distortions and deficiencies in the country’s industrial structure
Under this policy, the government shifted its focus from PSUs (Public Sector
Undertakings),
The new industrial policy didn’t only focus on the economic reforms but also on
LPG(Liberalization, Privatization, and Globalization)
The era of Red Tapism just ended after the end of industrial licensing.
Government focused on under served areas, removed licensing requirements for
private sector, and improved participation in FDI
EXPORT PROCESSING ZONES
oIndia was one of the first in Asia to recognize the effectiveness of the
Export Processing Zone (EPZ) model in promoting exports, with Asia’s first
EPZ set up in Kandla in 1965. Seven more zones were set up thereafter.
o100% Income Tax exemption on export income for SEZ units under
Section 10AA of the Income Tax Act for first 5 years, 50% for next 5 years
thereafter and 50% of the ploughed back export profit for next 5 years
oAll the eight Export Processing Zones (EPZs) located
at Kandla and Surat (Gujarat), Santa Cruz (Maharashtra), Cochin (Kerala),
Chennai(Tamil nadu), Visakhapatnam (Andhra Pradesh), Falta (West
Bengal) and Noida (U.P.) have been converted into Special Economic
Zones
LIST OF EPZ
IIP GROWTH IN %
WHERE IS THE GROWTH
EMERGING
INDIA’S POSITION IN
GLOBAL COMPETITIVENESS
INDEX
NATIONAL MONETIZATION
PIPELINE
WHERE IS
THE
MONEY
GOING
WHERE IS
THE
MONEY
GOING
ECONOMIC LEGISLATIONS
IN INDIA
 MRTP ACT OF INDIA
The MRTP bill was passed in 1969 and the MRTP act India came into full force from 1st June 1970.
This act has seen many amendments in the subsequent years (1974, 1980, 1982, and 1991).
This act is applicable to all the states in India except Jammu and Kashmir.
The MRTP act is no longer active in India as it has been replaced by the Competition Act which
came into effect on September 1st, 2009 by the Competition Commission of India.
Objectives
 The law made sure that the economic power does not get concentrated into the hands of a few
companies.
 To provide for monopolies control
 Regulation of monopolistic and restrictive trade practices
New addition later
 Regulation of unfair trade practices.
COMPETITION COMMISSION
OF INDIA
The Competition Commission of India (CCI) was established in March 2009 by
Government of India under the Competition Act, 2002 for the administration,
implementation, and enforcement of the Act.
Eliminate unfair practices, promote fair competition, promote consumer interest,
free trade
The Competition (Amendment) Act, 2007 was enacted to amend the
Competition Act, 2002.
The Commission used to consist of one chairperson and a minimum of two
members and a maximum of six members
APPLICATION OF CCI INDIA

$18 BN
APPLICATION OF CCI INDIA
FERA AND FEMA
The Foreign Exchange Management Act (FEMA) expands the Foreign
Exchange Regulation Act (FERA), which was enacted in 1973 to manage
and conserve India’s foreign reserves
FEMA was enacted not only to control and facilitate foreign exchange but
also to promote foreign trade and payments, as well as to increase the size
of India’s foreign exchange reserves.
Unlike the previous law, FEMA was enacted in 1999 and significantly
liberalized foreign exchange controls and limits on foreign investments
 FERA AND THE COCA-
COLA STORY
Under the FERA, 1973, all subsidiaries of foreign
companies were required to bring down the foreign
equity share to 40% or less and convert to Indian
companies with at least 60% equity coming from
local participation.
, Coca-Cola tried to work around the FERA rule by
operating two companies in India. One would be a
bottling plant in which it would reduce its holding to
40 percent, and the other would be a technical arm
which owned the formula for the concentrate.

“When I chucked out Coca-Cola in 1977, I made

the point that only 10% of India’s villages have
safe drinking water, whereas Coke had reached
every village”
ATMANIRBHAR BHARAT…WAY BACK IN
1977
 FRBM ACT 2003
The FRBM Act, 2003 (as amended), which became effective from July 5, 2004 mandates the
Central Government to eliminate revenue deficit by March, 2009 and to reduce fiscal deficit
to an amount equivalent to 3 per cent of GDP by March,2008.
The deadline was extended to 2020-21
Improve management of public funds
Provide independence to RBI
This applies to state’s budget as well
Many states have asked for relaxation in 2021
The law contains an “escape clause” under specific circumstances
 FRBM ACT 2003
• It was mandated by the act that the following must be placed along with the Budget
documents annually in the Parliament:
1.Macroeconomic Framework Statement
2.Medium Term Fiscal Policy Statement and
3.Fiscal Policy Strategy Statement
• It was proposed that the four fiscal indicators i.e., revenue deficit as a percentage of GDP,
fiscal deficit as a percentage of GDP, tax revenue as a percentage of GDP, and total
outstanding liabilities as a percentage of GDP be projected in the medium-term fiscal policy
statement
FLOW OF FUNDS IN THE
INDIAN ECONOMY
 MSME ACT OF 2006

Micro Enterprises Small Enterprises Medium Enterprises

• Services: Investment • Services: Investment • Services: Investment

does not exceed 10 does not exceed 2 does not exceed 5 crore
lacs crores • Manufacturing:
• Manufacturing: • Manufacturing: Investment does not
Investment does not Investment does not exceed 10 crores
exceed 25 lacs exceed 5 crores
REVISION IN 2020
WHICH SECTORS ARE THE
MSME’S LOCATED?
80 % are run by
men

99% are micro

enterprises
EMPLOYMENT CREATED
UP, WB, TN, AND MH MAKE UP
50 PERCENT OF TOTAL MSME’S
IN INDIA!
 WB RANKS
THE HIGHEST
IN TERMS OF
FEMALE
PARTICIPATION
ACCESS TO FINANCE FOR
MSME’S

Access to Finance helps

improve productivity and
profitability of firms
THE ROLE OF ACCOUNT
AGGREGATORS IN INDIA
 SEBI
The Securities and Exchange Board of India (SEBI) was founded as the regulating authority for the
Indian securities market on April 12, 1992, by the SEBI Act 1992.
Before the foundation of SEBI, the securities market was regulated by several government institutions,
resulting in inconsistency and inefficiency
The Indian government awarded SEBI new regulatory powers in 2014, allowing it to undertake search
and seizure operations and apply harsher punishments for rigging markets and insider trading.
• The Chairman – Nominated by the Indian Union Government.
• Two members belonging to the Union Finance Ministry of India.
• One member belonging to the Reserve Bank of India or RBI.
• Other five members – Nominated by the Union Government of India.
 AMFI
• Association of Mutual Funds in India (AMFI) is a non-profit industry body of the asset management
companies (AMCs) of all Mutual Funds in India that are registered with Securities and Exchange
Board of India (SEBI).
• AMFI was incorporated on August 22, 1995 under section 25 of the Companies Act, 1956
(corresponding Section 8 of the new Companies Act, 2013), as a non-profit organisation.
• AMFI is dedicated to developing the Indian Mutual Fund industry on professional, healthy and ethical
lines, and to enhance and maintain standards in all areas in the best interest of investors and other
stake holders.
• The role of AMFI, inter-alia, is to (i) address the issues and challenges concerning the mutual fund
industry to facilitate ease of doing business for its members, unitholders and various stakeholders;
(ii) liaison / advocacy with the SEBI/ Reserve bank of India, Government of India etc. with regard to
the issues and policy matters concerning the mutual fund industry; (iii) introduce best practices and
standardised operational guidelines for being uniformly followed by all AMCs (iv) disseminate
important information pertaining to mutual funds on AMFI’s website, such as displaying daily NAVs of
all MF schemes , performance of all MF Schemes and other useful and informational data pertaining
to MF Industry; and (v) creating awareness about mutual funds through mass media.
 ASSETS UNDER MANAGEMENT (AUM)
SPURTED BY NEARLY RS 14 LAKH CRORE TO
A RECORD RS 53.40 LAKH CRORE AS OF
MARCH 2024
Women comprised ~23% of the investors based on
their share of the AUM and men ~77%, while
individual investors comprised ~60% as against
institutional investors ~40%
self-employed women had higher exposure to mutual
funds (17%) and lower investments in bank deposits
(49%) versus salaried women who had 13% and 57%
exposure, respectively.
 women investors indicates almost 50% fall in the 25-44 year age
group, versus around 45% for overall set of individual investors,
showcasing higher inclination among young and middle-age women
to invest in new-age capital market instruments
Family members are the biggest source of guidance for women
investors..
And who better to handhold a woman investor than a woman
herself..
SOCIO-ECONOMIC
PERFORMANCE OF
INDIA
INCOME INEQUALITY HAS
SEEN A DECLINE…

It measures inequality on a
scale from 0 to 1, where
higher values indicate higher
inequality. This can
sometimes be shown as a
percentage from 0 to 100%,
called the “Gini Index”.
HOW IS POVERTY
MEASURED IN INDIA
• The latest poverty line is based on the recommendations of an expert group headed by
Professor Suresh Tendulkar, which submitted its report in December 2009.
• For 2011-12, for rural areas the national poverty line using the Tendulkar methodology is
estimated at Rs 816 per capita per month and Rs 1,000 per capita per month in urban
areas.
• Later in June 2014, a committee under the chairmanship of C Rangarajan also submitted
its report on the poverty line and fixed it at a monthly per capita expenditure of Rs 1,407
in urban areas and Rs 972 in rural areas for 2011-12. This resulted in higher poverty lines
and consequently higher poverty rates compared to the earlier Tendulkar Committee’s
estimates. The panel report was not formally accepted by the government.
MULTIDIMENSI
ONAL POVERTY
INDEX
SESSION 7: INTEREST
GROUPS AND PUBLIC
POLICY
THE PLAN AHEAD
Session 8 and 9: Class Presentations
Quiz 1: Between December 2 and December 9 (till Session 9)
Quiz 2: Between December 16 to December 21 or last week of Dec
(till Session 15)
Class Presentation 2: January 4, 2025
 STEPS IN PUBLIC POLICY
The process of public policy formation involves several stages, including problem
identification, agenda setting, policy formulation, decision-making, implementation, and
evaluation.

 Problem Identification: Identify a problem or issue that requires government

intervention
 Agenda Setting: Determine the importance of the problem and its priority on the policy
agenda. Consider the political and social context in which the problem exists.
 Policy Formulation: Generate alternative solutions to address the problem. Evaluate
the feasibility and effectiveness of each solution
 Decision Making: resent the proposed policy solution to the appropriate decision-
makers. Seek input and feedback from stakeholders and interested parties.
 Implementation and Evaluation: Put the policy into practice through legislation,
regulation, or other means. Monitor the implementation of the policy and make any
necessary adjustments
ELEMENTS OF PUBLIC
POLICY
Goal of the
policy Increase FLPR in
model India

The causal Improve safety for mobility, skilling, job

design opportunities, social norms

The tools of
Free Bus Scheme, PMVKY, improve GER
the policy
in schools

The targets Higher FLPR, lower wage inequality

of the policy

The
implementa NGO’s, PPP..
tion
 WHAT IS A CAUSAL THEORY
A causal theory is a theory about what
causes the problem and what intervention
(i.e., what policy response to the problem)
would alleviate that problem. Without good
causal theory, it is unlikely that a policy
design will be able to deliver the desired
outcomes.
Rather, performance measurement will
remain focused on effort, because
implementers and researchers will find the
connection between effort and outcome so
difficult to make.
Remember correlation is not causation
So, how do we measure causation?
THEORY OF CHANGE

PERVERSE INCENTIVES
CAN LEAD TO WORSE
OUTCOMES
SYSTEMS THINKING SEEMS COMPLICATED
BUT IS MORE IMPACTFUL
GLOBAL LEARNING
CRISIS
SPEND SMARTER, NOT MORE
Sometimes cost-effective solutions work much better than high-cost solutions
For example, providing tablets under the MindSpark program had impact but lower as
compared to hiring teachers for post-school remedial education
Thus, it is important that while designing a policy intervention, it should be
 Equal
 Efficient
 Cost-effective
 ACTORS IN THE POLICY
MAKING PROCESS
Official actors are involved in public policy because their responsibilities are
sanctioned by laws or the Constitution and they therefore have the power to make
and enforce policies.
The legislative, executive, and judicial branches are clearly official institutions,
because they are explicitly mentioned in the Constitution.
Unofficial actors include those who play roles in the policy process without any
explicit legal authority (or duty) to participate.
 INTEREST GROUPS AND
POLICY MAKING
What are interest groups? Kindergartn
Why do they exist? Car Owners ers
How do they effect public policy
making?
IG
How are interest groups spread
across the globe?
NBA Dog
Players Owners
INDIVIDUALS AND GROUP
BEHAVIOUR
Many studies of the policy process seem to be disconnected from the
activities and
preferences of individual citizens.
Individuals play a crucial role in policymaking – especially in democracies
But how do individuals exercise they role.
Individual power is significantly lower than group power (more on that in
your OB course)
Therefore, pressure groups (interest groups) provide a better solution for
bringing change and impact in society
TYPES OF INTEREST GROUPS
One can distinguish between an institutional interest group, whose
members belong to a particular institution, and a membership group,
whose members have chosen to join.
One can also contrast economic interest groups with public interest
groups.
Industry groups are clearly economic groups. They tend to be small
groups in terms of the actual numbers of members, but they are powerful
because they are collections of powerful economic interests that often
enjoy considerable local, regional, or national political support.
WHAT DO INTEREST
GROUPS DO
They make policy related appeals to the government
They try to shape policies by mobilizing voters or pressurize politicians
They gather information for elected officials to pass bills
They target bureaucrats or Parliament (for India)
INTERNATIONAL EXAMPLES
In South Korea, where business have long maintained controversial
relations with politics (Transparency International, 2006), the
government has undergone important reforms to reduce the power and
influence of the Chaebol, which are large conglomerate family controlled
firms characterised by having strong ties with government agencies.
After the Korean Business Association (KFI) successfully lobbied the
government to bail out the Chaebol in three different cases (1974, 1987,
and 1997), labour unions, international investors, small shareholders, as
well as other civil society organisations have advocated for more
regulations on the Chaebol (Lee, 2008).
INTERNATIONAL EXAMPLE -
2
In the United States, AARP has nearly 38 million members and
advocates on behalf of Americans aged 50 and older on issues such as
drug prices, health insurance, taxes, and retirement. It was formed in
1958
In Britain, UK Youth is a group, founded in 1911, that works with 4,000
youth organizations and reaches four million youths, lobbying for
investment in a variety of youth-oriented leadership, skill acquisition,
and health and wellness programs.
 PLURALIST THEORY
The political philosophy of pluralism suggests that we really can and should “all just
get along.”

pluralism permits and even encourages a diversity of political opinion and

participation.

Pluralism assumes that its practice will lead decision-makers to negotiate solutions
that contribute to the “common good” of the entire society.

Eg: collective bargaining in labour laws. the creation of the Environmental Protection
Agency in 1970 were the results of various groups speaking up—and being heard—
and were clear examples of pluralism in action.
 DISTURBANCE THEORY
• Columbia University professor David Truman’s work
• interest groups form in response to the changing complexity of government and
society. In other words, external factors, or “disturbances,” cause people to
form new groups.
• 50 years ago, the idea of legalizing marijuana was unthinkable. As social and
medical norms around the use of cannabis have changed, groups such
as NORML, the Marijuana Policy Project, and the Drug Policy Alliance have
formed to promote the legal use of marijuana in a controlled market and to
reduce “the harms of both drug use and drug prohibition.”
 TRANSACTION THEORY
• The third major theory, transaction theory, refutes the idea of pluralism
• Political scientist Robert H. Salisbury argues that political actors are not
influenced by groups that have mobilized to enact change so much as they are
responding to the interests of narrowly focused elites, and that the relationship
between interest groups and government is that of an exchange.
• idea of collective goods and the free rider problem, individuals will not exert
extra energy to mobilize into groups.
 WHY ARE INTEREST GROUPS
NOT ALWAYS IN THE BEST
INTEREST
• Factionalism: where small groups of people with shared interests work to have
their wishes represented in government despite majority interests.
• Economic Bias: a multitude of interests may be represented, not all are heard
or responded to equally, and a narrow interest may hijack political attention at
the expense of the majority’s needs. Further, the more socially, monetarily, or
institutionally resourced an interest, the more influence it enjoys, regardless of
how narrow or seemingly obscure it might be.
 HOW DO IG’S AFFECT
GOVERNMENT AND POLICY?
• Inside lobbying: when interest groups cultivate contacts and relationships
within government.
• Outside Lobbying: organizations engage in public debate around policy
choices – while also drawing other stakeholders into the dialogue. Rallies and
marches, petitions etc. form outside lobbying
• Political Action Committee: A well defined group that uses the donation
channel that goes to support particular candidates, in an effect to influence
policy
 Bureaucr
ats

Pressure Politician
Groups s

Iron
Triang
le
 THE IRON TRIANGLE IN
PUBLIC POLICY
The “iron triangle” concept originated in a set of debates about power and
influence in the US political system
Iron triangles can lead to the creation of stable and predictable policy outcomes
that often favor entrenched interests over the general public.
Each entity in the iron triangle plays a distinct role: interest groups provide
electoral support and information, bureaucratic agencies implement policies, and
congressional committees oversee and fund these actions
These triangles are often resistant to change, making it difficult for reform
movements or new policy initiatives to penetrate established networks
CASE STUDY 1: FARMER
PROTEST 2020
What was the main problem here?

The Green Revolution was the beginning of the

transformation in the sector

MSP started in the year 1966-67 for wheat

Initially an incentive for farmers to adopt

technology with an aim of increasing the
productivity

Now it is a farmer boosting income scheme

THE FARM BILLS 2020
1.The Farmers' Produce Trade and Commerce (Promotion and
Facilitation) Bill, 2020
2.The Farmers (Empowerment and Protection) Agreement of Price
Assurance and Farm Services Bill, 2020
3.The Essential Commodities (Amendment) Bill, 2020
THE REPEAL OF THE FARM
BILLS - 2021
In 2021, the PM repealed the farm bills due to rising protest, urged
farmers to go back
A committee was set up in 2022, combining growers and government
officials, to ensure minimum support price for all products
However, no representation in the committee was made from protesting
states
SHOULD MSP BE MADE
LEGAL: THE CASE OF 2024
PROTEST
What is MSP?
How does legality change the nature of the market?
In India, only 28 percent of the agricultural produce gets MSP
 23 crops in India make up 28 percent of the produce
 72% of the produce are outside MSP’s

Not all states provide MSP’s to farmers. Many states are selling produce way below MSP
MSP distorts the market mechanics.
But what about the vagaries of the monsoon?
MSP is mostly applied to only rice and wheat (because of the NFSA)
 MSP AND FINANCIAL
VIABILITY
 One opinion is that it is practically impossible to create a legal provision for MSP. The
combined value of all crops covered under MSP, produced in 2020, was Rs 10 lakh
crore. India’s total budgeted expenditure in 2023-24 is around 45 lakh crores; so, it is
practically impossible to spend 10 lakh crores only to buy crops from farmers.

 As on 01.08. 2024, Covered Storage Capacity available with FCI [147.10 LMT
(owned) + 262.38 LMT (Hired)] and State agencies (431.03 LMT) for storage of
Central Pool food grain is 840.51 LMT.
AXE INHERITANCE TAX, STOP SUBSTANDARD IMPORTS
AND SCRAP CARBON TAX ON FERTILISER
FISCAL POLICIES:
TRENDS AND The Indian Story

TRAJECTORY
INDIA’S FISCAL FEDERALISM
ARCHITECTURE
India has a federal form of government with taxing powers and spending responsibilities being divided
between the central and the state governments according to the Constitution.
There is also a third tier of government at the local level.
Since the taxing abilities of the states are not necessarily commensurate with their spending
responsibilities, some of the centres revenues need to be assigned to the state governments.
The central government is responsible for issues that usually concern the country as a whole like
national defence, foreign policy, railways, national highways, shipping, airways, post and telegraphs,
foreign trade and banking.
The state governments are responsible for other items including, law and order, agriculture, fisheries,
water supply and irrigation, and public health.
Some items for which responsibility vests in both the Centre and the states include forests, economic
and social planning, education, trade unions and industrial disputes, price control and electricity.
A SMALL HISTORY BEHIND
OUR TAXES
The government then invited the British economist Nicholas Kaldor to examine the possibility of
reforming the tax system. Kaldor found the system inefficient and inequitable given the narrow tax base
and inadequate reporting of property income and taxation.
He also found the maximum marginal income tax rate at 92 percent to be too high and suggested it be
reduced to 45
The Indian financial year commences on the 1st of April of a calendar year and ends on the 31st of
March of the next calendar year.
In view of his recommendations, the government revived capital gains taxation, brought in a gift tax, a
wealth tax and an expenditure tax (which was not continued due to administrative complexities) (Herd
and Leibfritz, 2008).
 WHO KNOWS THE ECONOMY
BETTER?
First, one needs to determine at which level of government to assign different expenditure
responsibilities.
The conventional starting point is that local governments hold more detailed information on the
preferences and local needs of their citizens than any higher level of government
In general, this suggests that the lowest possible level of government should provide public goods and
services. This consideration is also implicit in the European Union subsidiarity principle and fiscal
decentralisation in most sovereign countries.
However, according to the conventional view, policies concerning macroeconomic stabilisation and
redistribution should be left primarily for higher levels of government, such as the federal government,
since they serve national interests. In addition, policies that induce significant spillover effects to other
jurisdictions could justify assigning particular tasks to the central government
one needs to determine the appropriate instruments (and their degree) to equalise disparities in fiscal
resources and fiscal needs, both over time and across jurisdictions. In most federal systems, there exist
both vertical transfers, in which there are transfers from different levels of government to each other,
and horizontal transfers, in which there are transfers across the same level of government. T
one needs to adopt strategies to cap excessive spending and borrowing at each level of government.
The logic is mainly to avoid fiscal free-riding and moral hazard: given the interconnected area and fiscal
framework, governments may implement policies that have negative spillover effects on other
 TAX REVENUE
(% OF GDP)

34.6
40.6

32.5
25.8
19

43.2

35.7
 EXPENDITURE(
% OF GDP)

36
41

36
34
29

46

38
 WHY IS FISCAL POLICY
IMPORTANT
Fiscal policy is composed of several parts.
These include, tax policy, expenditure policy, investment or disinvestment strategies and
debt or surplus management.
Fiscal policy is an important constituent of the overall economic framework of a country
and is therefore intimately linked with its general economic policy strategy
Fiscal policy also feeds into economic trends and influences monetary policy.
When the government receives more than it spends, it has a surplus.
If the government spends more than it receives it runs a deficit. To meet the additional
expenditures, it needs to borrow from domestic or foreign sources, draw upon its foreign
exchange reserves or print an equivalent amount of money
 Sources of Revenue

Tax Revenue Non-Tax Revenue

Income Tax Interest Receipts

Corporation Tax Dividends and
GST Profits
Taxes on Property General Services
and Wealth Economic
Excise Duty and Services
Customs Social Services
WHERE DOES THE MONEY
COME FROM AND GO TO?
Sources of Fund Application of Funds
Revenue Receipts Revenue Expenditure
Capital Receipts Capital Expenditure
Recovery of Loans Disbursement of Loans
Public Debt Receipts
DIRECT TAXES
Taxes are the main source of government revenues.
Direct taxes are so named since they are charged upon and collected directly from the person or
organisation that ultimately pays the tax (in a legal sense).
Taxes on personal and corporate incomes, personal wealth and professions are direct taxes.
In India the main direct taxes at the central level are the personal and corporate income tax. Both are
till date levied through the same piece of legislation, the Income Tax Act of 1961.
DIRECT TAX AS A PROPORTION OF TOTAL TAX REVENUE HAS INCREASED
OVER THE YEARS
70%

60%

50%

40%

30%

20%

10%

0%
2000- 2001- 2002- 2003- 2004- 2005- 2006- 2007- 2008- 2009- 2010- 2011- 2012- 2013- 2014- 2015- 2016- 2017- 2018- 2019- 2020- 2021- 2022- 2023-
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
90%

80%

70%

60%

50%

40%

30%

20%

10%

0%
78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
7 7- 78- 79- 80- 81- 82- 83- 84- 85- 86- 87- 88- 89- 90- 91- 92- 93- 94- 95- 96- 97- 98- 99- 00- 01- 02- 03- 04- 05- 06- 07- 08- 09- 10- 11- 12- 13- 14- 15- 16- 17- 18- 19- 20- 21- 22- 23- 24-
19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20

Inc Tax (% of DT) Corp Tax (% of DT)

INDIRECT TAXES
Indirect taxes are charged and collected from persons other than those who finally end up paying the
tax (again in a legal sense). For instance, a tax on sale of goods is collected by the seller from the buyer.
The legal responsibility of paying the tax to government lies with the seller, but the tax is paid by the
buyer.
The legal responsibility of paying the tax to government lies with the seller, but the tax is paid by the
buyer. The current central level indirect taxes are the central excise (a tax on manufactured goods), the
service tax, the customs duty (a tax on imports) and the central sales tax on inter-state sale of goods
70%

60%

50%

40%

30%

20%

10%

0%
8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5
7 -7 8-7 9-8 0-8 1-8 2-8 3-8 4-8 5-8 6-8 7-8 8-8 9-9 0-9 1-9 2-9 3-9 4-9 5-9 6-9 7-9 8-9 9-0 0-0 1-0 2-0 3-0 4-0 5-0 6-0 7-0 8-0 9-1 0-1 1-1 2-1 3-1 4-1 5-1 6-1 7-1 8-1 9-2 0-2 1-2 2-2 3-2 4-2
7 7 7 8 8 8 8 8 8 8 8 8 8 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2
19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20

Excise (% of IT) Customs (% of IT)

80%

70%

60%

50%

40%

30%

20%

10%

0%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
-96 -97 -98 -99 -00 -01 -02 -03 -04 -05 -06 -07 -08 -09 -10 -11 -12 -13 -14 -15 -16 -17 -18 -19 -20 -21 -22 -23 -24

Direct (% of total) Indirect (% of total)

NON-TAX REVENUE

Interest Fiscal
Dividends
Payments Services

Social Economic
Services Services
 Fiscal Social Economic
Services Services Services

Currency and Coinage Education and Sports Agriculture

Mint Press Medical Trade

Interest from State and Housing Transport

UT Labour and

Employment

Social Security and

Welfare
 TAX REVENUES FORM A GREATER
PROPORTION AS COMPARED TO NON-TAX
100.00
REVENUES
90.00 87.29 88.02
86.57 86.08
84.82
83.17
80.57
80.00

70.00

60.00

50.00

40.00

30.00

19.43
20.00 16.83
15.18
13.43 13.92
12.71 11.98
10.00

0.00
2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24

TR NTR
NOT SURPRISINGLY, PENINSULAR STATES
HABE HIGHER SOTR as a % OF TOTAL
TAX REVENUE

SLIGHT IMPROVEMENT POST GST

 REVENUE EXPENDITURE
Those expenditures of the government that do not lead to the creation of fixed assets are
called revenue expenditures.
The government spends money under various accounting heads, such as paying interest on
loans, salaries and pensions, subsidies, spends on different ministries and departments, etc
Grants made to state governments and other parties are also treated as revenue expenditures,
even though these might be used for the creation of fixed assets.
Revenue Expenditure includes
(a) Interest payments
(b) Police
(c) Pension
CAPITAL EXPENDITURE
Capital Expenditure (also known as CapEx) is the expenditure made towards
revenue generating assets
The multiplier effect of spending on capex is higher than revenue expenditure
This type of expenditure include bridges, roads, highways and any other sort of
infrastructure that has large scale economic benefits.
India’s capex has been steadily
rising
The growth in capex came about
eve during the period of Covid
 MINISTRY WISE
EXPENDITURE
Ministry of Defence: Rs 6.2 lakh crore
Ministry of Road Transport and Highways: Rs 2.78 lakh crore
Ministry of Railways: Rs 2.55 lakh crore
Ministry of Consumer Affairs, Food and Public Distribution: Rs 2.13 lakh crore
Ministry of Home Affairs: Rs 2.03 lakh crore
Ministry of Chemicals and Fertilisers: Rs 1.68 lakh crore
Ministry of Rural Development: Rs 1.77 lakh crore
Ministry of Agriculture and Farmers’ Welfare: Rs 1.27 lakh crore
Ministry of Communications: Rs 1.37 lakh crore
 GRANTS IN AID
Grant-in-aid for the creation of capital assets refers to financial assistance provided by the government to
entities such as state governments, local bodies, or organizations for the purpose of constructing or
acquiring physical infrastructure and other capital assets. These grants are typically disbursed to support
projects that contribute to public welfare, economic development, and community enhancement.
For example, if a central government allocates Rs 200 crore to a state for improving healthcare facilities or
implementing a rural development project, it helps address local needs and promotes equitable growth
Revenue sharing notwithstanding, vertical imbalances remain, which are filled through grants.
The central government provides many types of grant to the state governments.
Grants-in-aid—which represent only about 7 percent of transfers from the center to the states—are also
recommended by finance commissions and are intended to close residual deficits on the state
governments’ nonplan revenue accounts.
Gap filling has in most cases been determined by projecting historical trends in revenue and expenditure.
However, the Ninth Finance Commission (1990–95) introduced a controversial normative element into its
approach, taking account of the special needs of each state
 TAX BUOYANCY IN INDIA
Tax buoyancy is a ratio of change in tax revenue in relation to change in gross domestic product or GDP of
an economy. It measures how responsive a taxation policy is to growth in economic activities
• It shows an economy’s capacity to finance growing public expenditure with tax revenue. Policy
makers use the tax buoyancy ratio as a measure of their taxation policy’s reliability to deliver a steady flow
of tax revenue. Every developing economy requires buoyant taxation policy to reduce dependency on costly
debts for financing government expenditure.
• Buoyancy of tax policy helps to overcome economic exigencies. A government can finance its
expenditure using tax revenue, income from government-owned enterprises, disinvestment proceeds, and
debts. A highly buoyant tax policy can help a government rely on tax collection despite sudden fluctuations
in earnings from other sources. For example, the planned direct tax buoyancy of India for FY25 is around
1.1. This will help the government meet expenditure even if its disinvestment targets are not met.
• Tax buoyancy as an indicator helps policymakers in designing pro-taxpayer taxation policy. Tax
revenue is essential to sustain government expenditure. But higher tax rates can also negatively affect
willingness to pay tax and increase tax evasion. Besides, a high rate of tax disrupts economic growth.
Policymakers can use the tax buoyancy indicator to increase tax collection without increasing tax rates.
FISCAL, PRIMARY, AND
REVENUE DEFICIT
A Budgetary Deficit can be termed as the excess of the total government expenditure over
the total revenue generated in a financial year. A budgetary deficit happens when the
government spends more money than what is generated through revenue collection,
including direct or indirect taxes. Based on the deficit incurred has been divided into three
forms, i.e., Revenue Deficit, Fiscal Deficit, and Primary Deficit.

Primary Deficit = Fiscal Deficit – Interest Payment

Fiscal Deficit = Total Expenditure – Total Receipts (except borrowings)
Revenue Deficit = Revenue Expenditure – Revenue Receipts
FISCAL DEFICIT AS A % OF GDP HAS INCREASED OVER THE YEARS
TAX DEVOLUTION IN INDIA
• Tax devolution refers to the distribution of tax revenues between the central government and the state
governments. It is a constitutional mechanism established to allocate the proceeds of certain
taxes among the Union and the states in a fair and equitable manner.
• Article 280(3)(a) of the Constitution of India mandates that the Finance Commission (FC) has the
responsibility to make recommendations regarding the division of the net proceeds of
taxes between the Union and the states.
• There are two types of tax devolution in India
• Horizontal
• Vertical
TAX DEVOLUTION
• In the first phase, the period up to the Tenth Finance Commission (1952 to 2000), the Constitution
provided for mandatory sharing of net proceeds of only two types of taxes, income tax and Union
excise duties
• taxes was considerably widened and all taxes in the Union List (except the duties and taxes referred to
in Articles 268, 269 and 269-A, surcharges and any cess levied for a specific purpose under an Act of
Parliament) became shareable with States from the Eleventh Finance Commission (FC-XI) onwards
(Reddy and Reddy, 2019).
• The Tenth Finance Commission made a significant departure from the then existing criteria by
recommending 29 per cent of gross tax revenue of all taxes of the Central Government instead of a
share from the two taxes of Income Tax and Union Excise Duties. This recommendation of devolution,
known as Global sharing (meaning sharing of all taxes), was accepted by the Government of India in
2000 with a modification
• The FC-XI (2000-01 to 2004-05) recommended States’ share in the divisible pool of taxes at 29.5 per
cent. Since then, successive Finance Commissions have made increments in the devolution ratio, with
FC-XIV making a radical departure by recommending a significantly higher share in view of the
abolition of the Planning Commission and cessation of plan grants, thus making tax devolution the
primary vehicle for federal transfers
HORIZONTAL DEVOLUTION
• For horizontal devolution, FC suggested 12.5% weightage to demographic performance, 45% to
income, 15% each to population and area, 10% to forest and ecology and 2.5% to tax and fiscal efforts.
1.Income Distance: Reflects a state’s income relative to the state with the highest per capita income
(Haryana), aiming to maintain equity among states.
2.Population: Based on the 2011 Census, replacing the earlier 1971 Census for determining
weightage.
3.Forest and Ecology: Considers each state’s share of dense forest in the total forest cover.
4.Demographic Performance: Rewards states for efforts in controlling population growth.
5.Tax Effort: Rewards states with higher tax collection efficiency. It is measured as the ratio of the
average per capita own tax revenue and the average per capita state GDP during the three years
between 2016-17 and 2018-19.
DISTRIBUTION OF INCOME TAX ACROSS
STATES OVER TIME
DISTRIBUTION OF STATE SHARE IN
CENTRAL TAXES OVER TIME
VERTICAL FISCAL
IMBALANCE (VFI)
• The financial relationship between the Union government and the States in India is asymmetrical,
reflecting a common feature in federal systems. The States are responsible for 61% of the revenue
expenditure but collect only 38% of the revenue receipts, as highlighted by the 15th Finance
Commission.
• This imbalance means that States rely heavily on transfers from the Union government to meet their
expenditures. The result is a Vertical Fiscal Imbalance (VFI) in India's fiscal federalism, where the
decentralisation of expenditure responsibilities exceeds the States' revenue-raising capacity
DEBT POSITION OF INDIA
Internal Debt comprises loans raised in the open market, Compensation and other bonds, etc.
It also includes borrowings through treasury bills including treasury bills issued to State Governments,
Commercial Banks and other investors, as well as nonnegotiable, non-interest bearing rupee securities
issued to international financial institutions.
An analysis of the public debt outstanding at the beginning of the First Five Year Plan and close of each
year from 2019-2020 to 2022-2023 and that estimated to be outstanding at the close of 2023-2024 and
2024-2025 is given in the Statement of Liabilities.
The amount outstanding under internal and external debt reflects the liability of Government as
represented by the book value of the outstanding debt.
The outstanding stock of external liabilities is reckoned at historical rates of exchange on which the
liability was initially accounted for in the books of accounts after netting the repayments made at
current exchange rates.
DEBT AS A PERCENTAGE OF GDP
 INDIA PUBLIC DEBT
India’s public debt comprises of Internal and External Debt 180

External debt can be defined as the debt borrowed by the 160

7.48
government from outside the country. Sources for external 140
6.58
debts can include foreign governments, International 120 6.15
Monetary Funds (IMF), Foreign Direct Investments (FDI), 100 5.44
Foreign Portfolio Investments (FPI), etc. Government is
forced to borrow funds from external sources when the 80
148.64
132.08
internal sources do not have adequate funds to support the 60
99.66
115.71
operations of the government 40

20
Internal debt can be defined as money borrowed by the
government from inside the country. Sources for internal 0
2019-20 2020-21 2021-22 2022-23
debts can include citizens, the country’s banks, the country’s Internal External
financial institutions, business houses, etc.
 INDIA’S DEBT TO GDP HAS BEEN
CONSISTENTLY RISING, WITH TEMPORAL
DECLINES
 HIGH INTER-STATE VARIATION IN DEBT TO
50 GDP ACROSS STATES IN INDIA
45

40

35

30

25

20

15

10

0
l r r hi
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ga an ha ur
a la m * h h
am
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a m oa ra at a
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d es d es lan lay n th i ipu p era k ki e sh
d es d es r an a a yan g ar a t ak sa G ht jar ish el
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FINANCING AT THE LOCAL
LEVEL
Sustainable financing is paramount to ensure discharge of any function.

The devolved functions can be carried out effectively by ULBs only when they are supported with sufficient financial resources.

Such financial resources could take the form of predictable fiscal transfers or access to own revenue streams that are buoyant
and commensurate with the expenditure obligations, accompanied by appropriate expenditure powers.

14th FC recommended performance grant to ensure accountability of ULBs by specifying three performance criteria i.e. timely
availability of audited accounts, improvement in own revenues and publication of service level benchmarks for basic services.

Own revenue of ULB include

SWM charges

Advertisement Fee

Trade License Fee

FINANCING AT THE LOCAL
LEVEL
The 73rd and 74th Constitution Amendment Acts envisage the Panchayats and Municipal bodies as
institutions of self-government. Considering the need to transfer some resources to enable them to
function more effectively, the Tenth Finance Commission, for the first time, recommended an amount of
Rs. 1000 Crores, and Rs. 4000 Crores to Panchayats and municipalities, respectively. This grant amount
was increased to Rs. 2000 Crores to Panchayats and Rs.5000 Crores to Municipal bodies by the Twelfth
Finance Commission. These grants have contributed to improving the financial position of the local
governments in India
FINANCING POWER OF THE ULB’s NEED TO
INCREASE
 GST: THE
CRUCIAL TAX
REFORM IN
INDIA
WHY IS THERE AN INTER-
STATE VARIATION IN GST
WHAT COULD EXPLAIN
IT?
HIGHER URBANISATION IS ASSOCIATED WITH
HIGHER PER CAPITA GST
MONEY AND BANKING
IN INDIA
MONEY AGGREGATES IN
INDIA
Money Type Definition
Currency in Circulation + Bankers’
Deposits with RBI + ‘Other’ Deposits
with RBI
Currency with public + Demand
Deposits with banking system +Other
deposits with RBI
+ Savings Deposits with post office and
bank savings
+ money market funds
+ all deposits (loans etc)
MONETARY POLICY
INSTRUMENTS
Monetary Policy Instruments are tools used by the Central Bank to adjust
liquidity in the system
This is important as it has an effect on inflation, output, and prices
The Monetary Policy Committee (MPC) meets once a quarter to assess the
economy and provide its view on tackling inflation
The three most important monetary policy tools are
(a) Cash Reserve Ratio
(b) Statutory Liquid Ratio
© Bank Rate
(d) Open Market Operations
INDIA’S CRR HAS SEEN A
MASSIVE DECLINE
BANK AND REPO RATE: THE TWO IMPORTANT
INSTRUMENTS IN BANKING
 INDIA’S REPO RATE ACROSS DECADES: A
GRADUAL DECLINE SIGNIFYING A GROWING
ECONOMY
QUANTITY THEORY OF
MONEY
What is being sold (GDP) is being purchased by the amount of money available
Monetarist assumes that price is directly related to money supply (as V and Y are
relatively constant

This may not always hold true. For example, when Fed increased Money supply,
inflation did not increase. It could be that velocity reduced at that point in time
THE WORKING OF
MONETARY POLICY
The job of the central bank is to primarily reduce inflation
However, there is a trade-off with growth
While inflation is the major source of concern, it should not come ta a
cost of growth
Inflation has two components
Headline
Core
There is a lot of debate as to whether the MPC should take into account
food inflation
A CONTINIUOUS DEBATE
INDIA’S INFLATION HAS SEEN OSCILLATIONS, HOWEVER, ITS CONSIDERABLY
LOWER THAN PREVIOUS DECADES
CREDIT CHANNEL
Under the credit channel, banks have liabilities (borrowings, deposits) and assets
(loans, cash)
When interest rates fall, the bank lending rates decline (or rather should to some
degree)
The decline in bank lending rates increases the capacity for firms to take loans
and invest in operating expenditure activities
As loans increase, and investments rise, GDP increases
Thus, the credit channel is an effective way of improving output in an economy
ASSET PRICE CHANNEL
Under the asset price channel, when interest rates decline:
Cheaper access to homes (physical assets), and also loses attractiveness of
bonds, higher attractiveness for stocks (financial assets)
This lead to higher prices of both physical assets and existing bonds in the
market
The rise in prices leads to the appreciation of prices
Therefore, monetary policy has a very strong channel to asset prices in the
economy
SAVINGS AND INVESTMENT
CHANNEL
Monetary policy rates affect the savings and investment channels
A fall in interest rates leads to
(a) lower incentive to save
(b) higher disposable income
© higher economic growth
(d) but also at the risk of higher inflation
EXCHANGE RATE CHANNEL
Under the exchange rate channel a decrease in interest rates leads to
Interest rate differential
Causing capital outflow
Leading to depreciation of home currency
Higher exports and lower imports
Higher output
EXPECTATIONS CHANNEL
Finally, expectations are another important channel.
Central banks' decisions affect agents' expectations about economy's performance in the
future.
For example, by raising the interest rate to contain inflationary pressures, the central bank
signals a level of activity more contained not only in the present but also for the future.
As a result, households and firms believe that the inflation rate will be lower in the future,
and then today's prices tend to increase less.
Indeed, a high level of credibility of the central bank is essential for this channel to operate
properly.
When credibility is high, the inflationary effects of cost-push shocks are more limited. In the
case of low credibility, the opposite occurs: shocks tend to amplify, generating higher
inflation.
RBI’S BALANCE SHEET
Assets Liabilities
Gold Currency in Circulation
Foreign Exchange Bankers deposit with RBI
Government Securities
THE MONEY MULTIPLIER
Money multiplier is the mechanism by which the money supply in the economy creates
more money
This enables the functioning of the economy and allows the economy to exchange goods and
services
Money is either currency held by the public or bank deposits:
Furthermore, the monetary base either comprises of currency by public or reserves by bank
THE MONEY MULTIPLIER:
1/RESERVE RATIO
The money-multiplier process explains how an increase in the monetary base causes the
money supply to increase by a multiplied amount. For example, suppose that the Federal
Reserve carries out an open-market operation, by creating $100 to buy $100 of Treasury
securities from a bank. The monetary base rises by $100.
The bank has $100 of excess reserves, so it loans the $100 to earn interest. The
borrower uses the money to buy something. The seller receives the $100 and deposits it
in his bank. Assume that the reserve requirement is f = .10. The bank keeps .10 ×$100
= $10 as reserves, and loans the remaining $90 of excess reserves. The borrower uses
the money to buy something
The seller receives the $90 and deposits it in his bank. The bank keeps .10 ×$90 as
reserves, and loans the remaining $81 of excess reserves. The borrower uses the money
to buy something. The seller receives the $81 and deposits it in his bank, and the
process continues
∆M = 100 +90 +81 +··· = 100 +100 ×.90 +100 ×.90 2 +··· ,
This is called fractional reserve banking
GROWTH RATE OF
CURRENCY IN CIRCULATION
50.0

40.0

30.0

20.0

10.0

0.0
4 2 0 8 6 4 2 0 8 6 4 2 0 8 6 4 2 0 8 6 4 2 0 8 6 4 2 0
3 -2 1 -2 9 -2 7 -1 5 -1 3 -1 1 -1 9 -1 7 -0 5 -0 3 -0 1 -0 9 -0 7 -9 5 -9 3 -9 1 -9 9 -9 7 -8 5 -8 3 -8 1 -8 9 -8 7 -7 5 -7 3 -7 1 -7 9 -7
2 2 1 1 1 1 1 0 0 0 0 0 9 9 9 9 9 8 8 8 8 8 7 7 7 7 7 6
20
-10.0 20 20 20 20 20 20 20 20 20 20 20 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19

-20.0

-30.0
HOW LONG DOES IT TAKE FOR A CHANGE IN
THE OFFICIAL RATE TO AFFECT OUTPUT
AND THEN INFLATION?
Old rule of thumb was: one year to output and two years to prices
Simulation with Bank model suggests similar order of magnitude
However, truth may be different in different circumstances and may be
asymmetrical
Range of outcomes based on different reaction functions
WHAT DOES ALL OF THIS
MEAN FOR GROWTH
ACTIVITY
1. State-wise revenue and capital expenditure share over last five years
(compare it to India’s share of revenue and capital expenditure)
2. The association between capital expenditure and GSDP per capita
3. The association between growth in broad money and inflation (yearly
basis)
4. Industry wise credit deployment in India (last five years)
5. Does higher credit to deposit ratio lead to higher growth?
6. Does high FDI lead to economic growth?
7. Does FDI increase the market cap to GDP in India?
EASE OF DOING
BUSINESS
WHY MEASURE THE EASE OF
DOING BUSINESS
The Doing Business project provides objective measures of business regulations
and their enforcement across 190 economies and selected cities at the
subnational and regional level.
The Doing Business project, launched in early 2000’s, looks at domestic small
and medium-size companies and measures the regulations applying to them
through their life cycle.
By gathering and analyzing comprehensive quantitative data to compare
business regulation environments across economies and over time, Doing
Business encourages economies to compete towards more efficient regulation;
offers measurable benchmarks for reform; and serves as a resource for
academics, journalists, private sector researchers and others interested in the
business climate of each economy.
WHAT IS MEASURED IN
THE EODB
EODB SCORE AND EODB
RANK
Data is presented for each indicator and presented in the form of a DB score and
a DB rank for each country
The score illustrates the absolute value for the country and the rank determines
the distance from the best performing country
Who answers these questions
 Lawyers
 Accountants
 Public servant officials
 Firm experts
 THE METHODOLOGY BEHIND
EODB
The indicators are chosen for global comparison and representativeness
Since it is not possible to compute this at the sub-national level, only the biggest city is
chosen to estimate these parameters
From 2015, DB report also included the second biggest city. However, the report is
also complemented with sub-national statistics separately
There are limitations. The EODB does not capture
Macroeconomic stability
Financial market development
Market size
Quality of labour force
Incidence of bribery
 160

142
140
134 132 133 134 132 132 134
130 130

120
120
110

100
100

80 77
Rank

63
60

40

20

0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Business Reforms Action Plan
Top Achievers Achievers Aspirers Emerging

• AP • Himachal • Assam • Andaman

• Gujarat Pradesh • Chhattisgarh • Bihar
• Karnataka • Madhya • Goa • Delhi
• Punjab Pradesh • Jharkhand • NE states
• Tamil Nadu • Maharashtra • Kerala
• Odisha • Rajasthan
• Uttarakhand
• Uttar Pradesh
 KEY RESULTS UNDER THE REGULATORY
FRAMEWORK
Verification of the identify of beneficial owners is required by law in 68 percent of
economies, strengthening business accountability and anti-money laundering
efforts (Business Entry topic).

Paid annual leave and paid sick leave are legally mandated in 72 percent and 88
percent of economies, respectively, allowing workers time for recovery without
risking their income (Labor).

In 90 percent of economies, the regulatory frameworks prohibit anticompetitive

agreements between firms, fostering higher productivity and product quality
(Market Competition).

Enabling speedy resolution of commercial disputes is also an area of regulatory

concern, with only 8 percent of economies legally providing a time standard for all
four procedures measured by B-READY and 66 percent of economies mandating
 KEY RESULTS UNDER THE PUBLIC
SERVICE PILLAR
The registration process for a domestic firm ranges between 3 and 80 days in the
sampled economies, while foreign firms may wait up to 106 days (Business Entry).

Obtaining a construction-related permit takes 30 days on average across

economies, but this can extend up to 120 days in some. Securing an environmental
permit generally requires even more time, averaging 218 days, and, in some cases,
exceeding two years (Business Location).

Firms face an average of four electrical outages per month, although the number
can be as high as 22 in some economies (Utility Services). The time to obtain a loan
varies significantly, ranging from 7 days in the best-performing economy to 45 days
in the worst (Financial Services).

Resolving a business dispute in court takes, on average across economies, just over
2 years, but the duration can vary widely, from as little as 105 days to as long as 5
 KEY RESULTS UNDER THE OPERATIONAL
PILLAR
While 92 percent of economies have taxpayer online tax portals, only 4 percent
offer all three electronic self-service tools measured by B-READY—chatbots, e-
forums, and e-learning—on their website (Taxation).

Similarly, while 92 percent of economies have operational credit bureaus and

registries, data from institutions such as retailers, merchants, and utility
companies are collected and distributed in only 20 percent of economies (Financial
Services).

Only 21 percent of economies implement all seven coordinated border management

features measured by B-READY (International Trade). Innovation remains a
challenge in some countries, with 26 percent of economies having either only
innovation incubators or accelerators, or lacking both (Market Competition).

Lastly, only 44 percent of economies have operational courts with specialized

ECONOMIES DO NOT NEED
TO BE RICH TO DEVELOP A
GOOD BUSINESS
ENVIRONMENT
 ECONOMIES VARY THE
MOST ON PUBLIC SERVICES,
SECOND ON OPERATIONAL
EFFICIENCY, AND THIRD ON
REGULATORY FRAMEWORK
ECONOMIES ARE BETTER AT
ENACTING REGULATIONS
THAN PROVIDING PUBLIC
SERVICES.
THE OPERATION EFFICIENCY
SCORE IS HIGHER THAN THE
OTHER PILLARS FOR MOST
ECONOMIES
 BUSINESS ENTRY AND DISPUTE
RESOLUTION ARE TOP INDICATORS
ACROSS COUNTRIES
WHAT ARE INDIA’S
ACHIEVEMENTS?
India’s major achievement are:
Construction Permits: India’s ranking on this parameter has improved
from 184 in 2014 to 27 in 2019.4 This improvement has been mainly on
the account of a decrease in the number of procedures and time taken
for obtaining construction permits in India.5
Getting Electricity: India’s ranking on this parameter has improved
from 137 in 2014 to 22 in 2019. It takes just 53 days and 4 procedures
for a business to get an electricity connection in India.6
Apart from these significant improvements, among the 190 economies,
India ranks 13th in Protecting Minority Investors and 25th in Getting
Credit.
 • Permanent Account Number (PAN), Tax Deduction & Collection Account
Number (TAN), Director Identification Number (DIN) have now been
merged into a single form (SPICe) for company incorporation
01

• Elimination of incorporation fee for companies with an authorized

capital of up to Rs. 15 Lakh
02

• Five-page form and other attachments for reserving the name of the
Company with the Ministry of Corporate Affairs have been simplified
into a simple
03
 • Municipal Corporations of Delhi, as well as Municipal Corporation of Greater
Mumbai, have introduced fast track approval system for issuing building
permits with features such as Common Application Form (CAF), provision of
01 using digital signature and online scrutiny of building plans

• Delhi has uniform building by-laws which allow for risk-based classification
regimes for different building types. It has a provision of deemed approval
02 of sanctioning building plans within 30 days

• For construction permits, the time reduced from 128.5 to 98 days in

Mumbai and from 157.5 to 113.5 days in Delhi between Doing Business
03 2018 and 2020 reports.

• Cost of obtaining construction permits reduced from 23.2% to 5.4% of the

economy’s per capita income
04
 • The number of mandatory documents required for customs purposes, for
both import and export of goods, has been reduced to three
01

• e-Sanchit, an online application system, allows traders to file all documents

electronically
02

• Central Board of Indirect Taxes and Customs has provided a facility for
Advance Bill of Entry (Advance Import Declaration)
03

• The electronic self-sealing of the container at the factory has reduced time
and cost for exporting firms
04
 • e-filing of cases has been introduced in district courts of Delhi and Mumbai
01

• National Judicial Data Grid (NJDG), provides case data including case
registration, cause list, case status and orders/ judgements of courts
02 district-wise across the country. NJDG is open to the public since 2015

• A case management tool has been developed with the functionality of

sending a notification to lawyers, viewing court orders/ judgements,
03 tracking the status of cases, semi-automatically generate court orders etc.

• The electronic self-sealing of the container at the factory has reduced time
and cost for exporting firms
04
 • Securitization and Reconstruction of Financial Assets and Enforcement of Security
Interest (SARFAESI) (Central Registry) Rules, 2011 was amended to include
additional types of charges, including a security interest in - immovable property
by the mortgage, hypothecation of plant and machinery, stocks, debt including
01 book debt or receivables, intangible assets, patent, copyright, trademark, under-
construction building.

• The definition of property, which now includes immovable as well as

intangible, allows CERSAI to register these additional charges
02

• A case management tool has been developed with the functionality of

sending a notification to lawyers, viewing court orders/ judgements,
tracking the status of cases, semi-automatically generate court orders
03 etc
 • Electricity connection is provided within 7 days if no Right of Way (RoW) is
required and within 15 days where RoW is required
01

• The number of documents required for getting an electricity connection

has been reduced to tWO and no physical documents are accepted
02

• Service line cum Development charges are now capped at

USD 339.84 in Delhi
03
 • The Insolvency and Bankruptcy Code of 2016 has introduced new
dimensions in resolving insolvency in India. It is India’s first comprehensive
legislation on corporate insolvency
01

• Under Fast-track Corporate Insolvency Resolution Process (CIRP)

for mid-sized companies, the process for insolvency shall be
completed within 90 days with a maximum grace period of
another 45 days
02
 • Reduction of corporate tax from 30% to 25% for mid-sized companies
01

• Domestic companies can opt for concessional tax regime @ 22% (effective
tax rate: 25.17% inclusive of surcharge and cess). Such a company cannot
02 claim any income tax incentive or exemption. Such companies are not liable
to pay the Minimum Alternate Tax (MAT)
• The tax rate for new domestic manufacturing companies is now 15% (17.01% inclusive of surcharge
and cess). Companies that have been incorporated on or after 1st October 2019, making fresh
investment manufacturing and commencing production on or before 31 March 2023, may opt for
03 such a concessional tax regime. Such companies cannot avail of any other income tax exemption/
incentive under the Income-tax Act

• The Goods and Service Tax came into effect on 01 July 2017. It subsumes eight taxes at the Central
and nine taxes at the State level.
04

• The Employee State Insurance Corporation (ESIC) has developed a fully online module for electronic
return filing with online payment. This has substantially reduced the time to prepare and file returns
05
 • Total FDI inflows in the country in the FY 22-23 is $70.97 Bn and total FDI equity inflows
Faste
stands at $46.03 Bn.
st • In 2022, India continued its dominance in world trade, being the 7th largest services
Grow
ing exporter in the world and registering a growth of growth 32.7% in April-September 2022
Econ over the same period of previous year
omy

Dem • India has its largest ever adolescent and youth population. It will continue to have one of
ogra
phic the youngest populations in the world till 2030.
Adva
ntag
e

• Barring a few reserved sectors, 100% FDI is allowed through the automatic route in
Favo
urabl
several sectors, without the need of government approval, namely Automobile, Food
e Processing, Construction etc
Polici
es

• India's national accreditation system, Quality Council of India ranks 5th in the Global
Deve Quality Infrastructure Index
lopin
g • Sectors such as Energy (24%), Roads (18%), Urban (17%) and Railways (12%) amount to
Infra
struc
around 71% of the projected infrastructure investments in India.
ture

Glob
• India ranks 40th on the Global Competitiveness Index 2023.
al • India jumps 6 places to Rank 38 in World Bank’s Logistics Performance Index
Innov
ation
Indez
 INVESTMENTS AND
ECONOMIC GROWTH
 FDI AND FII
(FDI) and (FII) are two primary forms of international investments, each
with distinct characteristics, purposes, and economic impacts.
Both FDI and FII are crucial for global economic integration and
development, but their approaches, impacts, and objectives significantly
differ.
FDI is more about physical and long-term investments in foreign
enterprises with control and management interests, often leading to direct
economic benefits like job creation and infrastructure development.
On the other hand, FII focuses on short-term financial investments,
contributing to capital flow and market liquidity but with the potential for
greater volatility and less direct impact on the real economy.
THEORIES OF FDI
There are multiple theories that affect FDI flows in an economy.
Dependency theory:
 The dependency theory builds on a Marxist foundation that perceives globalization
through the prism of exploitation of cheap labor, expansion of market capitalism, and
exchange of primary resources in return for obsolete technological know-how from more
developed countries
 by exploiting profit-making avenues in less developed countries and sending the profits
to their rich home nations, foreign investors crowd out local assets that would otherwise
have been utilized to fund local development

Classical Theory:
 FDI can be beneficial to the domestic economies of less developed countries through a
number of mechanisms: improvement in the balance of payments; transfer of capital,
skills, and advanced technologies; growth of foreign exchange earnings; expansion of the
tax base resulting from exports related to FDI; integration of the domestic economy into
international markets; and development of domestic infrastructure
Middle Path Theory
THE DIFFERENTIAL RATES
OF RETURN
The differential rates of return hypothesis represent one of the first
attempts to explain FDI flows.
 This hypothesis postulates that capital flows from countries with low
rates of return to countries with high rates of return in a process
that eventually leads to the equality of ex ante real rates of return.
 The rationale for this hypothesis is that firms considering FDI
behave in such a way as to equate the marginal return on and the
marginal cost of capital.
 The hypothesis is based on the assumption of risk neutrality,
making the rate of return the only variable upon which the
investment decision depends.
THE MARKET SIZE
HYPOTHESIS
According to the market size hypothesis, the volume of FDI in a host
country depends on its market size, which is measured by the sales of
an MNC in this country or by the country’s GDP (that is, the size of
the economy).
This is particularly so for the case of import-substituting FDI.
As soon as the size of the market of a particular country has grown to
a level warranting the exploitation of economies of scale, this country
becomes a potential target for FDI inflows
THE INDUSTRIAL
ORGANIZATION HYPOTHESIS
When a firm establishes a subsidiary in another country it faces several
disadvantages in competing with local firms.
These disadvantages emanate from differences in language, culture, the legal
system and other inter-country differences.
For example, MNCs may have to pay higher wages in the host country than do
local firms because employment with MNCs is regarded by local workers as
being more risky.
If, in spite of these disadvantages, the firm engages in FDI, it must have some
advantages arising from intangible assets such as a well-known brand name,
patent-protected technology, managerial skills and other firm-specific factors.
The comparative advantage has to be firm-specific, it must be transferable to
foreign subsidiaries, and it should be adequately significant to overcome these
disadvantages.
THE INTERNALIZATION
HYPOTHESIS
FDI arises from actions taken by firms to replace market transactions with internal
transactions.
The idea is an extension of the original argument put forward by Coase that certain
marketing costs can be saved by forming a firm. For example, if buying oil products
on the market is problematical, a firm may decide to buy a foreign refinery.
These problems arise from imperfections and failure of the markets
for intermediate goods, including human capital, knowledge, marketing and
management expertise.
The advantages of internalization are the avoidance of time lags, bargaining and
buyer uncertainty.
Indeed, the main motive for internalization is the presence of externalities in the
goods and factors markets.
THE PRODUCT LIFE CYCLE
HYPOTHESIS
The product life cycle hypothesis was developed by Vernon (1966) to
explain the expansion of U.S. MNCs after World War II.
According to this hypothesis, “products go through a cycle of initiation,
exponential growth, slowdown and decline – a sequence that corresponds
to the process of introduction, spread, maturation and senescence”
The hypothesis postulates that firms indulge in FDI at a particular stage
in the life cycle of the products that they initially produce as innovations.
Hence, FDI takes place as the cost of production becomes an important
consideration, which is the case when the product reaches maturity and
standardization.
FDI is thus a defensive move to maintain the firm’s competitive position
against its domestic and foreign rivals.
THE LOCATION HYPOTHESIS
According to the location hypothesis, FDI exists because of the
international immobility of some factors of production such as labor and
natural resources.
This immobility leads to location-related differences in the cost of factors
of production such as the locational advantage of low wages.
Thus, the level of wages in the host country relative to wages in the home
country is an important determinant of FDI. This is why countries like
India attract labor-intensive production (such as footwear and textiles)
from high-wage countries
Another factor is the presence of ports, airports (infrastructure) that can
lead to better export markets.
OTHER KEY FACTORS
There are fundamental determinants of FDI
policy indicators (e.g., tax, trade, privatization, and macroeconomic
policies),
business dynamics (e.g., incentives for investment),
market-related factors (e.g., market structure, market growth, and
market size),
resource-oriented determinants (e.g., technology availability,
labor costs, and raw materials),
drivers toward economic efficiency (e.g., labor productivity, and
transportation and communication costs)
 THE ECLECTIC PARADIGM (O-L-I Model)
• Proposed by Dunning
• There are three types of advantages
• Ownership (O)
• Location specific (L)
• Internalization (I)
• Ownership advantages: patents, trademarks, knowledge, technical know-how (read about
resource based view of the firm). It could also be distribution network, economies of scale etc.
• Location advantage: access and cost of raw material, market volume, infrastructure and
logistics, political and legal system
• Internalization: In house internalization reduces market failure risk, reduces information
search, and enhances firm specific capabilities.
ENTRY STRATEGIES

Wholly owned Exporti

ng
subsidiaries

Licensi Franchisi
ng ng

Turnke
Joint y
Ventures projects
 ENTRY STRATEGIES OF OVERSEAS
FIRMS
• Most of the MNCs enter into India either with greenfield projects or with joint ventures with local
firms
• On average, MNCs that entered India by way of JVs cater more to the local market, while MNCs
with greenfield entries cater more to overseas markets.
• MNCs aiming to cater to the local market are more likely to tie up with local partners to help
mitigate costs associated with understanding markets and developing business contacts and
distribution networks. MNCs with focus on the global market, on the other hand, are more likely
to retain complete control to ensure that the quality of the products meets global standards,
and that the contractual agreements with global buyers are met
• Technology transfer, brand building, business networks are examples of tangible an intangible
resources deemed importance for MNC’s success.
 THE STORY OF FDI IN INDIA
• India’s regulatory regime for FDI has been gradually liberalized since 1991, and, as a result,
the regime is no longer particularly restrictive by international standards.
• Before 1991 all FDI proposals were considered on a case-by-case basis with FDI capped at 40
percent of total equity investment.
• Under the Industries Development and Regulation Act (1951), it was mandatory for all
companies to get government approval to set up a new production unit or to expand their
activities.
• Also many sectors like textiles were reserved for the small scale sector, thereby making it
difficult for domestic firms belonging to these sectors to enjoy economies of scale, and
making these sectors unattractive to MNCs
• Manufacturers were not allowed to close operations or to reduce their work force without
government approval. The intention was to try to avoid unemployment, but it also promoted
inefficiency in the industrial economy
 THE STORY OF FDI IN INDIA
• FDI policy put severe restrictions on foreign investment. Few foreign companies were allowed
to retain an equity share of more than 40 per cent, and as a result many did not use their best
technologies in India
• Reservation contributed to lack of competition, which reduced the incentive to be efficient.
Over-manning, poor management, obsolete technology and insufficient research and
development activities further contributed to the decay of public sector undertakings.
• The new industrial policy announced in 1991 led to de-licensing of industry, competition rather
than protection as the desired policy environment. The earlier requirement of approvals and
licenses for any investments and expansions were abolished for all except 18 industries.
Within a few years, only five sectors remained under the ambit of industrial licensing.
FDI IN THE INITIAL YEARS IN INDIA
• In 1991, the policy was amended to allow automatic approval of up to 51 percent
ownership in 34 sectors. This list was expanded to cover 111 sectors in 1997. In
2000, the policy was altered to one using a “negative list” approach.
• Since then, 100 percent FDI is permitted in most sectors via the automatic route,
with the requirement that the Reserve Bank of India (RBI) be notified within 30
days.

• The Government of India continued to actively source foreign investment.

• In the wake of COVID-19, India enacted ambitious structural economic reforms

that should help attract private and foreign direct investment (FDI).

• In February 2021, the Finance Minister announced plans to raise $2.4 billion
though an ambitious privatization program that would dramatically reduce the
government’s role in the economy.

• In March 2021, parliament further liberalized India’s insurance sector, increasing

FDI limits to 74 percent from 49 percent, though still requiring a majority of the
 WHERE DOES FDI COME FROM TO
30
INDIA
25
25
23.63

20

15
%

10 9.56

7.37

6.08
4.98
5

0
Mauritius Singapore U.S.A Netherland Japan United Kingdom
 140

125 % CHANGE IN FDI OVER THE

YEARS
120

100 97

80
72
65 64
60

47

40
%

35
28
22
19
20
13
8 9
3
0
2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19
-1 2019–20 2020-21 2021-22
-1 2022-23 2023-24
^ -3

-20 -18 -17

-19
-22

-33
-40 -36

-60
Countries FDI (% of GDP)

Malta 99.7

Guyana 42.8

Singapore 34.9

Hing Kong 29

Namibia 18.5

Palau 18.1

Liberia 17.1

Vietnam 4.3

Brazil 2.9

Canada 2.2

USA 1.7

India 0.7
FDI: THE GOOD CHOLESTROL FOR THE
ECONOMY

• FDI has become a

prominent source compared
to loans and portfolio flows

• FDI allows for technology

transfer – something which
portfolio flows do not carry
with them

• Recipients of FDI often gain

employee training in the
course of operating the new
businesses, which
contributes to human capital
development
 IS HIGH FDI A SIGN OF WEAKNESS?
• Hausmann and Fernández-Arias (2000) point to reasons why a high share of
FDI in total capital inflows may be a sign of a host country's weakness rather
than its strength.

• One striking feature of FDI flows is that their share in total inflows is higher
in riskier countries, with risk measured either by countries' credit ratings for
sovereign (government) debt or by other indicators of country risk

• There is also some evidence that its share is higher in countries where the
quality of institutions is lower
• What can explain this paradox

• In such settings, foreign investors will prefer to operate directly instead of

relying on local financial markets, suppliers, or legal arrangements
 IS HIGH FDI A SIGN OF WEAKNESS?
• Through FDI, foreign investors gain crucial inside information about the productivity
of the firms under their control. This gives them an informational advantage over
"uninformed" domestic savers, whose buying of shares in domestic firms does not
entail control.

• Taking advantage of this superior information, foreign direct investors will tend to
retain high-productivity firms under their ownership and control and sell low-
productivity firms to the uninformed savers.

• FDI is not only a transfer of ownership from domestic to foreign residents but also a
mechanism that makes it possible for foreign investors to exercise management and
control over host country firms—that is, it is a corporate governance mechanism
 IS HIGH FDI A SIGN OF WEAKNESS?
• Both economic theory and recent empirical evidence suggest that FDI has a
beneficial impact on developing host countries.

• But recent work also points to some potential risks: it can be reversed through
financial transactions; it can be excessive owing to adverse selection and fire sales;
its benefits can be limited by leverage; and a high share of FDI in a country's total
capital inflows may reflect its institutions' weakness rather than their strength.

• Policy recommendations for developing countries should focus on improving the

investment climate for all kinds of capital, domestic as well as foreign.
 WHY BUSINESS ETHICS IS
IMPORTANT
From artificial intelligence to facial recognition technology, organizations
face an increasing number of ethical dilemmas.
While innovation can aid business growth, it can also create
opportunities for potential abuse.
Business ethics are principles that guide decision-making. As a leader,
you’ll face many challenges in the workplace because of different
interpretations of what's ethical. Situations often require navigating the
“gray area,” where it’s unclear what’s right and wrong.
What are the externalities that your business creates, both positive and
negative?”
“And, therefore, how do you actually increase the positive element of
externalities? And how do you decrease the negative?”
 WHY BUSINESS ETHICS IS
IMPORTANT
Prioritizing the triple bottom line is an
effective way for your business to fulfill
its environmental responsibilities and
create long-term value. It focuses on
three factors:
•Profit: The financial return your
company generates for shareholders
•People: How your company affects
customers, employees, and
stakeholders
•Planet: Your company’s impact on the
planet and environment
 SOLVING FOR A GLOBAL
PROBLEM: CHILD LABOUR
IS THERE A VALUE TO HUMAN LIFE?
CHEATING EMISSION
TESTS

The world’s top-selling carmaker now admits

that 11 million of its diesel vehicles contain
software that evades emissions controls, far
more than the 482,000 cars identified by the
U.S. Environmental Protection Agency as
violating clean air laws
CHEAP TALK: FREE SPEECH FOR FREE MONEY?

Elon Musk is trying to renegotiate $3 billion of the high-interest-rate loans

that he took out to buy Twitter.

In addition, because of Musk’s actions, an estimated 83% of Twitter’s

workforce has left, and the company is being sued for non-payment of rent
in multiple jurisdictions. Would you be eager to work for him at a
discount, or to rent office space to him for less than at a very high
premium?

From when he took over four months ago, merely 17% of Twitter’s
workforce is still available. The company has lost 40% of its revenue, with
advertisers jumping ship constantly.

The loans Musk took out to buy Twitter (now called X) was about $13
billion and the social media company has to pay about $1.2 billion in
interest payments every year.
THINK BEYOND THE SHAREHOLDER

Ed’s 1984 book was a

watershed moment because it
helped turn the tide and
helped us see business as a
deeply human institution
 THE STAKEHOLDER MAP

High, Low (High, High)

Level of Influence

Low , Low (Low, High)

Level of Interest
CONSUMER CONSCIOUS
SPENDING INDEX
•A survey that interviews a large number of individuals in the US
about the consumption patters and the way they consume. Here is
what they found:
•71% felt it was important to support socially responsible brands.
•66% said they had bought such products and services over the
past year.
•42% reported plans to spend more with socially responsible
companies in 2024.
86% reported being green compared to 81% a year ago
On asked about the name that comes to mind for socially
responsible organizations: Amazon topped the list. It was followed
by Walmart and Goodwill.
ETHICAL RESPONSIBILITIES
TO CUSTOMERS
As a leader, you must ensure you don’t mislead your customers. Doing
so can backfire, negatively impacting your organization’s credibility
and profits.
Actions to avoid include:
•Greenwashing: Taking advantage of customers’ CSR preferences by
claiming your business practices are sustainable when they aren't.
•False advertising: Making unverified or untrue claims in
advertisements or promotional material.
•Making false promises: Lying to make a sale.
These unethical practices can result in multi-million dollar lawsuits, as
well as highly dissatisfied customers.
ETHICAL RESPONSIBILITIES
TO CUSTOMERS
The clothing industry accounts for a significant share of global
greenhouse gas emissions and wastewater. Patagonia chose to
tackle this environmental footprint head on. Its mission statement,
“We’re in business to save our home planet,”
Building the best product while causing the least harm is at the
heart of what we do.
Patagonia has embarked on a long sustainability journey—organic
cotton, a self-imposed earth tax, 1% for the Planet (to which
members contribute at least 1 percent of their annual revenue to
environmental causes), and ultimately the donation of your
company.