UNIT II Structure of Indian Economy – Nature and significance – Economic systems – structure of Indian industry – Economic reforms in various sectors – nature – challenges – social justice – Disinvestment mechanism – problems and procedures – Sickness in Indian industry, competition Act 2002.
Economy
An economy is the way a nation makes economic choices about how the nation will use its resources to produce and distribute goods and services. The following are the different segments of structuring the Indian economy I.
Agriculture sector on the Eve of independence: The following observations describe
the state of Indian agricultural sector on the eve of independence. a. Low level of productivity: Level of productivity p roductivity was very low. b. High degree of Vulnerability: (Rain conditions) c. A wedge between the owners of the soil and Tillers of the soil II.
Industrial sector on the eve of Independence: Systematic de-industrialization is the
term that describes the status of industrial sector during the British rule. It implies two things. a. Decay of handicrafts some important causes i. Discriminatory tariff policy of the state: Heavy duty on exports of Indian handicrafts. ii. Disappearance of princely courts: No support for Handicrafts under British rule. iii. Competition from machine made products. iv. New patterns of demand: Western culture . Demand for western products. v. Introduction to railways in India: Used for British products distribution. b. Bleak growth of the modern industry: The British rule in India witnessed only a bleak growth of modern industry. It was the second half the 19th century that the modern industry started showing its presence.
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III.
Foreign trade under British Rule: India had occupied the place of eminence in the area
of foreign trade, since ancient times. But the British rule in India ended this eminence. India was well known exporter of finished goods (Such as fine cotton, silk textiles, iron goods, wooden goods, ivory work and precious stones). But the British rule in India converted India into exporter of raw material and importer of finished goods. IV.
Demographic profile during the British rule: high birth and death rate. (48 and 40 per
1000), Massive poverty. Poor literacy 16% V.
Infrastructure on the Eve of the Independence: Infrastructure refers to the elements of
economic change (transport, communication, banking, power/energy) and element of social change (education, health and housing) were poor at that stage. Nature and significance
The Indian Economy was called an underdeveloped economy but slowly become a developing economy but is now referred to as the mixed economy. Underdeveloped Economy
An underdeveloped economy is one which is one which is characterized by low per capita income, underutilized manpower and resource along with a low standard of living. All of this could be probably due to improper use of techniques of constraints in socio-economic factors. According to Simon Kuznets “Underdeveloped economy, is that country which fails to provide acceptable levels of living to large portion of the country’s population with resulting misery and material deprivations” Nature of underdeveloped economy: The characteristic features of an underdeveloped economy are: 1. Low per capita income: In underdeveloped countries, per capita real income is very low compared to the developed countries.as per the world development report 2007, the per capita income (GNI) of India in 2005 was $720. This is quite low then compared with the developed economics of different nations. When comparing the purchasing power parity (PPP) of India and America in 2005, India was found to be one twelfth of
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American’s PPP. The per capita income in underdeveloped countries is as low as 7% of the per capita income in some of the advanced nations. 2. Mass poverty and inequitable distribution of income: Income inequalities lead to mass poverty and unequal distribution of income is due to inequality in asset distribution. This has also enhanced due to liberalization policies. The rick took a large percentage of the total income distribution as compared to what the poor received. The higher income people are usually private sector-owners, managers and workers, public sector-managers and workers and small family farmers in prosperous rural areas. 3. Predominance of Agriculture: Most of the less develop countries like India depends upon agriculture sector. The majority of population is engaged in agriculture. But unfortunately agriculture is hope led in a backward stage in the developed countries. So national product remains very low in these countries. 4. Rapid population growth and high dependency: In 2004 the population of India was growing at the rate of 1.44% P.A and was about 1065 million. Birth rate is high as compared to the death rates and all of this also contributes to the population. A rapidly increasing population poses a lot of problems: a. The economic growth rate must match the population growth rate so that the standard of living is kept at a specific level not low. b. The growing population daily essential requirements also increase whereby supply should match the demand. c. Large populations mean more workforces which in turn mean employment for all. But if the demand does not much of development or expansion of the industries to accommodate the Labour force. 5. Scarcity of capital and underdeveloped natural resource: India is a country which has abundant renewable and non-renewable resource. Renewable resource is source of water, tanks, canals, rivers and so on. While non-renewable resources are minerals. But these resources have not utilized properly because of the lace of capital. The scarcity of capital is because of the lack of technical knowledge which results in a low rate of production and ultimately low consumption of steel, cement and electricity. 6. Unemployment: In India there is unemployment due to a large population the supply of Labour being more than the demand. There is deficiency of capital in the Indian 3
economy whereby there is not much of development or expansion of the industries to accommodate the Labour force. 7. Technological backwardness: India still uses outdated technology. There still exist a wide gap between the sophisticated production techniques of the developed countries and Indian technology. The reason is due to the poverty of living. This has led to a continuous low production of output. 8. Lack of entrepreneurs: In India businessmen are concerned about profits only and do not contribute much towards the long term industrial development of the country. 9. Poor quality of Human capital: India is the land of superstition, conservation and labors. Illiteracy is found amongst majority of the population. Developing Economy
1. Sustained growth: The economic growth of India since independence has been erratic but there is an upward trend. Unit recently India’s growth rate has been about 8% which is quite good. 2. Significant changes in sectorial distribution of domestic product: The contribution of agriculture to the gross domestic product since the first two decades of the economic planning has declined steadily due to service sector development. 3. Change in the occupational distribution of the population: The changes in occupational pattern and shirt from agriculture to other sectors. 4. Growth of capital goods industries: Industries developed to produce industrial goods. Ex: Iron, Steel, heavy chemicals, fertilizers, heavy engineering, locomotives, And machine tools. 5. Progress in transport, education and medical sector 6. Banking and financial sector Mixed Economy
It is a mid-way between socialist economy and capitalist economy. Co-existence both public and private sectors is the feature 1. Public sector: Public sector or state owned means of production was mainly for a social welfare cause while the privately owned means of production had an interest mainly in the profit aspect. But they had to operate only within the boundaries specified by the
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Government and abide by their rules and regulations. The main aim of the Government was to promote and control critically important industries and allow private ownership only in those areas where the industries are no top priority. 2. Private ownership: Role of the public sector in the total national output is rapidly diminishing with more and more industries coming under private ownership courtesy the Government which is involved in their active transfer. 3. Decisive role of the market mechanism: The market mechanism for various markets is majorly controlled by the government. Even then the markets run as per the laws prevailing in the market. A licensing system for industries was established but it could only correct the license and control system to some extent. With the introduction of structural reforms in 1991-92 market controls have been deregulated to a large extent. 4. Economic planning: Even since India became independent it has been practicing
economic planning. The main purpose is to develop all sectors and sections of the economy. The government plans the economy for a period of five years. These are called five year plans, some targets are set to be achieved in the agricultural, industrial and other sectors.
Importance/merits of mixed economic system
Economic freedom and capital formation: Since people have the right to acquire and hold
private property, this right encourages capital formation. Economic freedom provides incentive to the people to work hard. It promotes setting up of more business units which in turn promote capital formation.
Competition and efficient production: Healthy competition among the producers keeps the
standard of efficiency high. Because of the possibility of private profit all factors work efficiently. Because of competition, all business units try to reduce their wastages, improve efficiency and make optimum utilization of resource.
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ECONOMIC SYSTEMS
There are four types of economies: 1. Pure Market Economy 2. Pure Command Economy 3. Traditional Economy 4. Mixed Economy Let’s review each of these types of economies. Pure Market Economy
NO government involvement in economic decisions. Private firms account for all production.
Consumers decide WHAT should be produced. They do this through the purchases they make.
Businesses determine HOW the products will be produced. They must be competitive.
WHO buys the products? The people with the most money are able to buy more goods and services.
Problems
Difficulty enforcing property rights - no laws.
Some people have few resources to sell - no minimum income.
Some firms try to monopolize markets - conspiring and price fixing.
No public goods. - National defense?
Pure Command Economy
All resources are government-owned.
One person (dictator) or a group of officials decide WHAT products are needed.
The government runs all businesses, controls all employment, and decides HOW goods and services will be produced.
The government decides WHO receives the products that are produced.
Problems
Consumers get low priority.
Little freedom of choice – few products. 6
Resources owned by the state are often wasted – individuals don’t care if they don’t own it.
Traditional Economy
1. Economy is shaped largely by custom or religion. 2. Customs and religion determine the WHO, WHAT, and HOW. Example: India has a caste system which
restricts occupational choice. (A social class
separated from others by distinctions of hereditary rank, profession, or wealth.) Mixed Economy
1. Most economies in the world today are mixed. 2. Classification is based on how much government intervention there is. Government Philosophies
Countries also have different philosophies of government which reflect not only the laws and rules, but how individuals are treated. There are three political philosophies: 1. Capitalism: Capitalism features private ownership of businesses and marketplace competition. It is the same as a free enterprise system. The political system most frequently associated with capitalism is democracy.
2. Socialism: The main goal of socialism is to keep prices low for all people and to provide employment for many. The government runs key industries, generally in telecommunications, mining, transportation, and banking. Socialist countries tend to have more social services. 3. Communism: Have a totalitarian form of government; this means that the government runs everything and makes all decisions. Theoretically, there is no unemployment in communist countries. The government decides the type of schooling people will receive and also tells them where to live. Many countries are in transition from either communism or socialism to capitalism.
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Privatization is a common aspect of transition from a command economy to free enterprise
system.
Privatization
means
state-owned
industries
are
sold
to
private
individuals
and companies. STRUCTURE OF INDIAN INDUSTRY
In India before independence the industries are ruled by private people. So that most of the priority they will share with profits as well as work exploitation and energy conjunction. After that our India became an independent .so that they can give the priority for self-development of Indian industries. Indian industries can develop in three stages.
In the 1st stage they develop the industries like milling grains, extracting oils, spinning vegetables and tanning leather. In the second stage they develop the industries depending on technology bases like paper, sugar, cement, textile and furniture. After this the Indian govt. gave the priority for consumer and capital goods. Consumer goods means transform from manufacturer to consumer, whereas capital goods transfer from one business to other for producing other products. The role and importance of industrial sector in Indian Economy can be understood with the following: Share of industries in the GDP: The share of industries in GNP of India has been increasing steadily, with it increasing form 13.3% in in 1950-51 to 24.4% in 2001-02 and further to 26% in 2008. Increase in Employment of opportunities: Industrial sector in India is steadily contributing to an increase in employment opportunities. The working population in Industrial sector was 10.7% in 1950-51 and it further increased to 17.56 in 2008-2009. Growth of large scale industries: the tremendous growth of industrial sector during the last 60 years in the form of establishment and development of basic and capital goods industries. Growth in the production of consumer durable: in recent times due to liberalization rapid industrialization has contributed to the healthy growth of consumer durable goods sector. The annual growth rate of consumer durable goods, which was only 14.4% during 1981-85, has increased to 16.9 during 1985-90. Industrial policy, 1991: The new industrial policy, 1991 and the policy of liberalization, by reducing the role of public sector and enhancing the role of private sector, are contributing to rapid industrialization in the country.
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ECONOMIC REFORMS IN VARIOUS SECTORS Nature
In the decades if 80’s and 90’s the whole world has experienced the dramatic changes. Entire Europe and most of the developing countries like India, Vietnam, Peru, Morocco etc., are sweeping with the economic reforms. The economic reforms broadly indicate the necessary structural adjustment to external events. The trade which takes among the various countries of world/between one country of the world and another country of the world is known as international trade. It is said that the volume of trade especially, the volume/value of international trade determines the economic development. It is aptly pointed out that trade in general and international trade in particular, is described as the engine of economic growth and development. The first phase: The first phase of economic reforms had its origin in 1985 initiated by young Prime Minister Mr. Rajiv Gandhi soon after taking over the office. The prime minister in his first national broadcast said “the public sector has entered into too many areas where it should not be. To provide large scope to the Pvt. Sector, a no. of changes in policy were introduced with regard to industrial licensing, export-import policy, fiscal policy, foreign equity policy; etc. The Govt. introduced the various measures in the following manner: 1. Cement: Cement was totally decontrolled. 2. Sugar: The share of free sale of sugar in open market. 3. Broad banding: It is introduced in four wheelers, chemicals, type-writer etc. 4. Drug: 94 drugs were completely delicensed 27 are placed outside. 5. Textile: introduction of new textile policy 1985. 6. Electronics: electronics industry was liberalized from MRTP. 7. Foreign trade. Second phase: Economic reforms introduced under Rajiv Gandhi regime didn’t yield the desired results. Thus India was forced to approach the World Bank and IMF to provide huge loan. The congress Govt, soon after resumption of office on June, 1991 realized the importance of mega-industrialization for country to keep pace with the industrially advanced nations ‘open door’ policy by Dr.Manmohan Singh.
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Economic reforms in new economic policy
Liberalization
Privatization
Globalization
Liberalization of the economy means to free it from direct or physical controls imposed by the government. Measures taken for liberalization: following measures have been taken under economic reforms for liberalization of Indian economy: 1. Abolition of industrial licensing and registration: Main feature of the new industrial policy is to adopt a policy of linearization in place of controlled economy. Till now private sector of the economy was functioning under a rigid licensing system. Under new economic policy private sector has been freed, to a rigid licensing system. Under new economic policy private sector has been freed, to a large extent, from the yoke of licenses and other restrictions. In July 1991 a new industrial licensing has been abolished for all other industries. Industries for which licenses are still necessary are: 1. 2. 3. 4. 5. 6.
Liquor Cigarette Defense equipment Drugs Industrial explosives Dangerous chemicals
Any entrepreneur can float any new company and sell its shares without any restrictions. 2. Concession from Monopolies Act: According to the provisions of monopolies and restrictive trade practices act all those companies having assets worth more than 100 crore used to be declared monopolies and restrictive trade practices firms and were subjected to several restrictions. 3. Freedom for expansion and production to industries: Under the policy of liberalization, industries are free to expand and produce. They need to prior official approval.
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4. Increase in the investment limit of the small industries: Investment limit of the small industries has been raised to one crore so as to enable them to introduce modernization. Investment limit of tiny industries has also been increased to 25 lakh. 5. Freedom to import capital goods : under the policy of liberalization, Indian industries will be free to buy machines and raw material from abroad in order to expand and modernize themselves. 6. Freedom to import technology : New economic policy of economic reforms has laid emphasis on the use of high technique to promote modernization. The objective of this policy is to develop sunrise industries, i.e., computers and electronics. 7. Free determination of interest rates : Interest rate of the banking system of the country will no longer be determined by the Reserve Bank of India as per the policy of liberalization. Banks all over the country are now free to determine the rate of interest as they like. 8. Action plan for information technology and software development: A National Task force on information technology and software development submitted 108 point action plan in July 1998. The recommendations have been accepted by the government and directions for their implementations have been given to all concerned departments. Privatization:
In the context of economic reforms, privatization means allowing the private sector to set up more and more of industries that were previously reserved for public sector. Under it, existing enterprises of the public sector are either wholly or partially sold to private sector. 1. Change in Ownership: The degree of privatization is judged by the extent of ownership transferred from the public enterprise to the private sector.
Total Nationalization Joint venture Liquidation Workers co-operative
2. Organizational Measures: It includes a variety of measures to limit sate control. They include:
A holding company structure Leasing Restructuring
3. Operational Measures : The efficiency of public sector enterprises depends upon the organizational structure. Unless this structure grants a sufficient degree of autonomy to the 11
operators of the enterprise or develops a system of incentives, it cannot raise its efficiency and productivity. Globalization:
Globalization is the third pillar of the structure of economic reforms. Globalization is the process of movement from a closed economy to an open economy and the process of removal of restrictions on foreign trade, investments, innovations in communications and transport systems. Globalization Indicators: There are some variables that can be considered as the indictors of globalization. These indicators of globalization are:
Foreign Direct investments: Foreign firms falls under the category of foreign direct investments by investing in the real assets like factories, sales offices etc. Globalization in the form of FDI happened in the middle of the 1980s Foreign portfolio investment: Foreign portfolio equity investment has also happened globally by the FDI Global governance by international organizations like world trade organizations: from the following three factors outlined it is clear that 1. Economic integration is very deep. 2. Reduction in import duty rates 3. Cooperation between countries for foreign investment is increased. Business Restructuring – Flexibility and closeness to Market 1. Flexible, just in time production system 2. Moving production closer to the consumer and securing access to the local market 3. Diversification of operations.
Challenges
1. High cost: To maintain international standard 2. Poor infrastructure 3. Obsolescence: Outdated technology 4. Resistance to change: Resisted by Labour unions 5. Poor quality image Lack of experience: tact and diplomacy on the part of business in India
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SOCIAL JUSTICE
Social justice generally refers to the idea of creating an egalitarian society or institution that is based on the principles of equality and solidarity, that understands and values human right, and that recognizes the dignity of every human being. The term and modern concept of “Social justice” was coined by the Justice Luigi Taparelli in 1840 based on the teachings of St. Thomas and given further exposure in 1848 by Anotni Rosmini-Serbati. The idea was elaborated by the moral theologian Jhon A. Ryan, who initiated the concept of a living wage. Social justice is based on the concept of human rights and equality and can be defined as “The way in which human rights is manifested in the everyday” lives of people at every level of society. In the year, the erstwhile Ministry of Welfare was bifurcated into the Department of Women and Child Development and the department of welfare. Subsequently, the name of the ministry was changed to the Ministry of social justice and empowerment in May, 1998. Further, in Oct, 1999, the Tribal Development Division had moved out to form separate Ministry of Tribal affairs. In January, 2007, the minorities division along with Wakf Unit have been moved out of the ministry and formed as separate ministry and the child development division has gone to the ministry of women and child development. DIS-INVESTMENT
It means to take return of equities from Govt. public sector units. Means the process of reducing the amount of money in Govt. sectors that was replaced by public and private sector. The Govt. of India has been decided to withdrawal their money from industrial sector in accordance with this decisions the Govt. has adopted the root of disinvestment. Objectives:
1. To strengthening of public sector units. 2. To increase competition. 3. To promote the growth of Indian companies.
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Utilization of fund or money for disinvestment : by the following programme of disinvestment was initiated in 1991-92 the finance minister of central as well as the state as announced that the disinvestment money should be used in the form of NRF (National renewal fund) and also for various schemes like non-inflationary position, employment scheme and for the development of back ward people. The Govt. has used the entire process of disinvestment which will offer to development of Indian natural resources and their proper consumption and also reduce fiscal deficiency. Problems of disinvestment process : The different reason for disinvestment process failure are explained below 1. Unplanned: The govt. carried out the exercise of disinvestment process in a hasty and unplanned and hesitated way. 2. Long term policy frame work: The Govt. launched the disinvestment process without creating the required positions or conditions its takeoff. 3. Competition: the method is face lack of adequate competition to secure best valuation/price which was not generated as financial bids were submitted by only one or two parties in the final stage. 4. Failed to provide essential service: It is not prudent to privatize PSUs for temporary gain like market increase since market economy (Private sector) has failed to provide essential goods and services. 5. Corruption: Privatization has been criticized expressing that it has gone hand-in-hand widespread corruption and insider dealing.
SICKNESS IN INDIAN INDUSTRIES
Industrial sickness is a natural and universal phenomenon of industrial economy. In India the industrial sickness came to being during 1970’s when large industrial units faced closure in west Bengal. The industrial sickness results great unemployment, wastage of natural resources, loss of production of goods and social unrest. Definition:
A sick unit referred to as one that operates at lower than BEP. Another description holds that a sick unit is one that fails to generate internal surplus on continuing basis. According to V.N.Nadkari “To a layman a sick unit is one which is not healthy. To an investor, it is one which skips dividends. To an industrialist, it is unit which his making losses and tottering on the brink of closure. To a banker, it is a unit which has incurred cash losses in the previous year and is likely to repeat the performance in the current and following years.
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Causes OR factors of industrial sickness:
Industrial sickness factors can be classified into two types. I. II.
Internal factors External factors.
Internal factors : internal factors again classified into two types. Born sickness factors and achieved sickness factors. Faulty financial planning : faulty financial planning is the major factor of industrial sickness. Under capitalization is responsible for it and its signs become evident from very beginning of its functioning. Lack of experience of promoters : sometimes promoters are new and they lack in experience. Wrong section of the project and faulty project planning and wrong guidance given by promotional agencies of the govt. may leads to the birth of a sick unit. Selection of wrong location
Technological factors: adoption of inappropriate technology, obsolete technology, standard machinery, wrong technological collaboration, license, production restricted goods etc may also leads to sickness. 1. 2. 3. 4. 5. 6. 7. 8.
Wrong estimation of capital Poor organization structure Marketing conditions. Bad management Unwarranted diversification and diversion Inventory management Failure in marketing Unsatisfactory Labour-management relations.
External factors: The government interference or adverse government policy.
1. 2. 3. 4. 5.
Economic crisis Statutory price control Continuous power cuts Fast technological changes Cut-throat competition.
Extent of industrial sickness : there is no précised information is available regarding the prevalence of sickness in various industries and there is no comprehensive standard and universally accepted definition for sickness .but some other actions taken by the Indian govt for reducing industrial sickness. 15
Govt. policy towards industrial sickness: for handle effectively and systematically the Indian Govt. announced sickness policy in 1985 .according to that policy every govt should concentrate on sickness industries who are running in India. Role of administration plans : The administrative ministers have been assigned the specific responsibility to deal with this problem. At the time of preparation of five years plan govt should give priority for sickness industry. Strengthening monitoring mechanism : banks and financial institutions should strength the system of monitoring and also take timely corrections in industrial sickness. Under taking diagnosis : Before support to the industrial sickness everyone should identify what is the problems reason for sickness and who is responsible for this. Consulting regular meeting between govt. and financial institutions: There is a necessity for conducting meetings between industry people and govt. because of these both have the knowledge about different problems faced by industrialist and policies implemented by govt. Sickness industry Acts: An important peace of legislation dealing with industrial sickness by using industrial sickness act 1985. They take actions like
1. 2. 3. 4. 5. 6.
Timely direction of sick and potential industries who are undertaking by the govt. The speed up actions determined by the Govt. for recovery of such companies. Reconstruction of industries. Efficient management for sickness industries. Takeover by the efficient management. To sale or lease by the other successful industries.
Competition Act 2002:
The competition bill 2001 may be called as the competition act 2002, extends to the whole of India except Jammu and Kashmir. The competition bill 2001, has been introduced into parliament in august .The MRTP act has been replaced by competition act 2002on the recommendations of S.V.rangarajan committee. It will be decided the healthy competition guidelines for business people. Coverage:
This act is applicable throughout India except the state of Jammu & Kashmir. It empowers all enterprises and individuals from the act of applicability. It will supervise all national and international activities. Under his act there is no civil adjudication. This act will provided policies for business activities along with economic conditions of particular country. Competition commission: The act provide for the establishment of competition commission of India consisting of 16
General Deputy manager 2 chair persons 8 other members Register
These all people are recruited by central govt. The chair person have duration of 5 years and he most possess 15 years’ experience as high court judge and 15 years of experience in professionalism and have knowledge in interdisciplinary. The other members in its committee are deputy manager, advisor and consultancies. Objectives:
1. To shift the focus from curing monopolies to promoting competition. 2. To ensure fair and healthy competition. 3. To promote and sustain competition in markets. 4. To protect interest of consumers. 5. To ensure freedom of trade carried by other participants in Indian markets.
Features:
1. 2. 3. 4.
Competition commission of India to be established. Repeal of MRT act Prohibition of abuse dominance. Competition fund released.
Components of the Act:
1. This act has four components. Prohibition of anti-competitive agreement o o Prohibition of abuse dominance Regulation of mergers and acquisitions o Establishment of 10 members in Competition commission of India. o Other applications: To create barriers the new marketers in the market : For protecting the local industries or small scale industries competition act always maintain some barriers to the MNC”s companies and new marketers.
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Hindering entry to market : By intentionally if any business people give any difficulties to the competitors then competition act is prohibited. Promote the production, distribution goods and services : This act not only protect enterprises but also concentrate on production activities, distribution activities and quality of goods and services. Promotion of technical economical and scientific method : This act also concentrate on technology development in the business, development of science methods and also economic development industries as well as govt. Prohibition of anti-competitive agreement : The act prohibits persons and enterprises for entering into any agreement which has adverse impact on any area in business like production, distribution, supply chain, storage, merger and acquisition of goods and services.
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