INDIAN ECONOMY

(PART-II)

Add : D-108, Sec-2, Noida (U.P.), Pin - 201 301

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Call : 09582948810, 09953007628, 0120-2440265

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 CONTENTS

Sl. No. TOPICS Pg. No.

1. Monetary & Fiscal Policy .................................................................... 5-9

2. Manufacturing Sector ...................................................................... 10-14

3. Parallel Economy in India ............................................................... 15-21

4. Money Laundering: Brief Introduction ........................................... 22-30

5. World Economy ............................................................................... 31-40

6. International Trade and Finance .................................................... 41-53

7. Poverty & Un-employment ............................................................. 54-71

8. Population of India (India's Census) .............................................. 72-79

9. Multilateral Agencies ....................................................................... 80-98

10. Interim Union Budget 2014-2015 ................................................ 99-107

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 MONETARY AND FISCAL POLICY CHRONICLE
OF INDIA IAS ACADEMY
A CIVIL SERVICES CHRONICLE INITIATIVE

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MONETARY POLICY securities in the open market to regulate money

ad e
supply). Monetary policy works through
The use by the Central Bank of interest rate influencing the cost and availability of credit
and other instruments to influence money

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and money.
supply to achieve certain macro economic goals
Ac icl
is known as monetary policy. Credit policy is a Tools of Monetary Policy
part of monetary policy as it deals only with
The tools available for the central bank to
how much and at what rate credit is advanced
achieve the above ends are: Bank rate, Reserve
by the banks. Objectives of monetary policy are:
ratios, Open market operations, Intervention in
accelerating growth of economy, maintaining
the forex market and Moral suasion
price stability, stabilization of exchange rate,
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balancing savings and investment and Bank rate
generating employment.
Bank Rate is the rate at which RBI lends to
Monetary policy is generally referred to as commercial banks. Bank Rate is a tool which
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either being an expansionary policy, or a RBI uses for managing money supply and credit.
contractionary policy, where an expansionary Any revision in Bank Rate by RBI is a signal to
policy increases the total supply of money in banks to revise deposit rates as well as Prime
the economy, and a contractionary policy
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Lending Rate. It stands at 6% presently (2008

decreases the total money supply. Expansionary July)
policy is traditionally used to combat
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unemployment in a recession by lowering Reserve Requirements

interest rates, while contractionary policy has
the goal of raising interest rates to combat In economics, fractional-reserve banking is
inflation. the near-universal practice of banks in which
banks keep a fraction of the total deposits
The Reserve Bank of India announces the managed by a bank as reserves and are not be
Monetary and Credit Policy twice a year- lent. The reserve ratios are periodically changed
October and April. October policy is called busy by the RBI. The reserve requirement (or required
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season as it is the harvesting time for the kharif reserve ratio) is a bank regulation that sets the
season which used to account for the major minimum reserves each bank must hold as a
part of India’s agricultural operations This part of the deposits. These reserves are designed
policy determines the supply of money in the to satisfy various needs like providing loans to
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economy and the rate of interest charged by the Government (SLR) and inflation management
banks. The policy also contains an economic (CRR). They are in the form of RBI approved
overview and presents future forecasts. securities (SLR) kept with themselves or cash
that is kept with the RBI (CRR).
The instruments of monetary policy are bank
rate, SLR, CRR and open market operations by Statutory liquidity Ratio (SLR)
the RBI on the basis of repo and reverse repo
rates (buying and selling of Government It is the portion of time and demand

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 liabilities of banks that they should keep in the 8.75%-high because inflation is also at 13-year
form of designated liquid assets like government high at 1.89% on WPI (July 2008). It needed to
and other RBI-approved securities like public be controlled by a variety of means one of which
sector bonds; current account balances with was hike in CRR.
other banks and gold. SLR is aimed at ensuring
CRR as a tool of monetary policy is used
that the need for government funds is partly
when there is a tremendous need to reduce
but surely met by the banks. The commitment
inflation and tighten credit as in 2008.
of the Government to reduce fiscal deficit means
Otherwise, normally, RBI relies on open market
that it will borrow less and so the SLR was

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operations for liquidity management.
progressively brought down from 38.5% in 1991

e
to 25% today. Open Market Operations (OMOs) of RBI

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The Reserves Bank of India Act, 1934 and
Ac icl OMOs of the RBI can be described as:
the Banking Regulation Act, 1949 fixed the floor Purchases and sales of government and certain
and cap on SLR at 25% and 40% respectively. other securities in the open market (banks and
But the amendment made in these statutes financial institutions) by the RBI in order to
removed the limits-lower and upper: RBI has, influence the volume of money and credit in
as a result, the freedom to fix the SLR at any the economy: Purchases of government
rate depending on the macro economic securities injects money. Into the market and
conditions. The amendment was an enabling
n
thus expands money and credit; sales have the
one.
ad opposite effect – absorb excess
Cash Reserve Ratio (CRR) Liquidity and shrink credit. Open market
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operations are RBI’s most important and flexible

CRR is a monetary tool to regulate money
monetary policy tool. Open market operations
supply. It is the portion of the bank deposits
do not change the total stock of government
that a bank should keep with the RBI in cash
securities but change the proportion held by
form. CRR deposits earn no interest
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the RBI, commercial and cooperative banks.

The Reserve Bank of India Act, 1934 and
Ready Forward Contracts (Repos)
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the Banking Regulation Act, 1949 fixed the floor

and cap on CRR at 3% and 20% respectively. It is a transaction in which two parties agree
But the amendment made in these statutes to sell and repurchase the same security. Under
removed the limits-lower and upper. RBI has, such an agreement the seller sells specified
as a result, the freedom to fix the CRR at any securities with an agreement to repurchase the
rate depending on the macro economic same at a mutually decided future date and a
conditions. The amendment was an enabling price. Similarly, the buyer purchases the
one. securities with an agreement to resell the same
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CRR is adjusted to manage liquidity and to the seller on an agreed date in future at a
inflation the more the CRR, the less the money predetermined price.
available for lending by the banks to players in In India, RBI lends on a short term basis to
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the economy. CRR was 15% in 1991 and today banks on the security of the government paper
it is 8.75%. If inflation is high, money supply (repo). Banks undertake to repurchase the
needs to be taken out and so CRR is generally security at a later date-over night or few days.
increased. But in a regime of moderate inflation, RBI charges a repo rate for the money it lends.
low CRR is in place. It is 8.5% presently (2008 July)
RBI increases CRR to tighten credit for Reverse repo is when RBI borrows from the
example, CRR today (July 2008) stands at market (absorbs excess liquidity) with the sale
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 of securities and repurchases them the next day (a) Fiscal Instruments Related to
or after a few days. The rate at which it borrows Government Expenditure: The government of
is called reverse repo rate as it is the reverse of a country incurs various types of expenditure
the repo operation. Reverse repo rate presently such as expenditure on public works
is 6% (July 2008) (construction of roads, dams, bridges etc),
education and public welfare, defence,
The repo rate and reverse repo rate are 6% maintenance of law and order, various types of
and 8.5% respectively today (July 2008) subsidies, and transfer payments to the public.

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Government corrects the situations of excess
The Repo/Reverse Repo transaction can

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demand or deficient demand in the economy
only be done at Mumbai and in securities as by varying any or all types of expenditure.
approved by RBI (Treasury Bills, Central/State

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Govt securities). RBI uses Repo and Reverse repo (b) Fiscal Instruments Related to Financing
Ac icl
as instruments for liquidity adjustment in the
system.
Selective Credit Controls
of Government Expenditure: Taxation, public
debt and deficit financing are the three fiscal
instruments related to financing of government
expenditure. Government can correct the
situations of excess demand or deficient demand
Certain businesses can be given more and
in the economy by using above mentioned
certain others may get less credit from banks
instruments.
n
on the orders of the RBI. Thus, selective credit
controls can be imposed for meeting various (c) Fiscal Policy and Deficient Demand:
goals like discouraging hoarding and black- Following fiscal measures to correct the situation
marketing of certain essential commodities by of deficient demand:
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traders etc. Either credit can be rationed or (1) Decrease in Taxes: Government
interest rate can be hiked by RBI as a part of decreases taxes, which leaves the households
SCCs. In SCCs, the total quantum of credit does with more purchasing power and the firms with
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not change, but the amount lent and the cost more cash reserves. Direct taxes like income
of credit may be changed for specific sector or tax, corporation tax etc are reduced. As a result
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sectors. both households as well as investors will be

Moral suasion encouraged to spend more. Consequently,
demand will increase.
A persuasion measure used by central bank
(2) Increase in Public Expenditure: To
to influence and pressure, but not force, banks
stimulate the demand the government increases
into adhering to policy. Measures used are expenditure over public health, education,
closed-door meetings with bank directors, subsidies and transfer payments, and public
increased severity of inspections discussion, works. Public expenditure causes the level of
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appeals to community spirit etc. income to increase in economy. Higher level of

income causes high level of demand.
Recently the RBI Governor appealed to
banks not to raise rates even though the central (3) Increase Deficit financing: Deficit
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bank was following a tight money policy. financing (by way of printing more notes for
additional expenditure) is increased during times
FISCAL POLICY of deficient demand so that the overall level of
purchasing power is enhanced in the economy.
Fiscal policy refers to the policy related to
revenue and expenditure of the government (4) Public Borrowing: Public borrowing is
with a view to correcting the situations of excess reduced so that people are left with greater
demand or deficient demand in the economy. disposable income.
The instruments of fiscal policy are:
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 (d) Fiscal Policy and Excess Demand : measures such as tax benefits, the government can
Excess demand generates inflationary pressures raise resources from private sector and households.
in the system. Following fiscal measures are Resources can be mobilized through government
taken to correct the inflationary situation. borrowings by ways of treasury bills, issue of
government bonds, etc., loans from domestic and
(i) Increase in taxes: Tax rates are increased foreign parties and by deficit financing.
progressively to mop up additional purchasing
power within the economy. 2. Efficient allocation of Financial
Resources: The central and state governments

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(ii) Decrease in Government Expenditure: have tried to make efficient allocation of

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Government expenditure is reduced so as to financial resources. These resources are allocated
cause the demand to decline. for Development Activities which includes

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(iii) Reduce Deficit Financing: Deficit
Ac icl expenditure on railways, infrastructure, etc,
financing is greatly restricted. The printing of whereas Non-development Activities includes
more notes would only increase the rate of expenditure on defence, interest payments,
inflation. subsidies, etc.

(iv) Public Borrowing: The situation But generally the fiscal policy should ensure
demands less purchasing power with the that the resources are allocated for generation
people. So, the government takes resort to of goods and services which are socially
n
increased public borrowing. desirable. Therefore, India’s fiscal policy is
ad designed in such a manner so as to encourage
Main Objectives of Fiscal Policy in India production of desirable goods and discourage
those goods which are socially undesirable.
o

The fiscal policy is designed to achieve

certain objectives as follows:- 3. Reduction in inequalities of Income and
Wealth : Fiscal policy aims at achieving equity
1. Development by effective Mobilization or social justice by reducing income inequalities
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of Resources : The principal objective of fiscal among different sections of the society. The
policy is to ensure rapid economic growth and direct taxes such as income tax are charged
development. This objective of economic growth
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more on the rich people as compared to lower

and development can be achieved by income groups. Indirect taxes are also more in
Mobilization of Financial Resources. the case of semi-luxury and luxury items, which
The central and the state governments in are mostly consumed by the upper middle class
India have used fiscal policy to mobilize and the upper class. The government invests a
resources. significant proportion of its tax revenue in the
implementation of Poverty Alleviation
The financial resources can be mobilized by :- Programmes to improve the conditions of poor
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a) Taxation: Through effective fiscal people in society.

policies, the government aims to mobilize 4. Price Stability and Control of Inflation :
resources by way of direct taxes as well as One of the main objectives of fiscal policy is to
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indirect taxes because most important source control inflation and stabilize price. Therefore,
of resource mobilization in India is taxation. the government always aims to control the
b) Public Savings: The resources can be inflation by reducing fiscal deficits, introducing
mobilized through public savings by reducing tax savings schemes, Productive use of financial
government expenditure and increasing resources, etc.
surpluses of public sector enterprises. 5. Employment Generation: The
c) Private Savings: Through effective fiscal government is making every possible effort to
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 increase employment in the country through The foreign exchange earned by way of
effective fiscal measure. exports and saved by way of import substitutes
helps to solve balance of payments problem. In
6. Balanced Regional Development:
this way adverse balance of payment can be
Another main objective of the fiscal policy is to
corrected either by imposing duties on imports
bring about a balanced regional development.
There are various incentives from the government or by giving subsidies to export.
for setting up projects in backward areas such 8. Development of Infrastructure:

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as Cash subsidy, Concession in taxes and duties Government has placed emphasis on the

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in the form of tax holidays, Finance at infrastructure development for the purpose of
concessional interest rates, etc. achieving economic growth. The fiscal policy

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7. Reducing the Deficit in the Balance of measures such as taxation generates revenue to
Ac icl
Payment: Fiscal policy attempts to encourage
more exports by way of fiscal measures like
Exemption of income tax on export earnings,
Exemption of central excise duties and customs,
the government. A part of the government’s
revenue is invested in the infrastructure
development. Due to this, all sectors of the
economy get a boost.
Exemption of sales tax and octroi, etc.
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 MANUFACTURING SECTOR CHRONICLE
IAS ACADEMY
A CIVIL SERVICES CHRONICLE INITIATIVE

MANUFACTURING SECTOR of the manufacturing sector in the country’s

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GDP has remained stagnant at 15% (excluding

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Manufacturing Industry in India has gone mining) for the last 30 years. This share is very
through various phases of development over low, especially when compared with 34 percent

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the period of time. Since independence in 1947,
Ac icl in China and 40 percent in Thailand. The slow
the Indian manufacturing sector has traveled pace of growth of the manufacturing sector at
from the initial phase of building the industrial this stage of India’s development is not an
foundation in 1950’s and early 1960’s, to the acceptable outcome, and we must ensure that
license–permit Raj in the period of 1965–1980, manufacturing becomes the driver for GDP
to a phase of liberalization of 1990’s, emerging growth. This can be accomplished by the
into the current phase of global competitiveness. manufacturing sector growing at a faster rate
It has grown at a robust rate over the past ten than GDP. Only then will manufacturing be
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years and has been one of the best performing
ad
manufacturing economy. In a country like
able to attain a significant share of the GDP. In
order to attain a 25% share of the GDP by
India, where employment generation is one of 2025, manufacturing would need to grow at a
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the key policy issues, this makes this sector a rate of 2-4% higher than the GDP. This will
critical sector to achieve inclusiveness in growth. ensure that manufacturing becomes the engine
The manufacturing sector has been moving of growth for the economy.
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at a slower pace than the overall economy for In addition, manufacturing must provide a
some time now. As a result, the sector’s large portion of the additional employment
contribution to GDP has declined marginally
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opportunities required for India’s increasing

from 16.1 to 15.2% in the five years till March number of youth. Agriculture cannot be
2013. Growth rate in manufacturing reduced expected to provide more jobs. On the contrary,
from 9.7% in 2010-11 to 2.7% in 2011-12 and it should be releasing labour which has very
1% in 2012-13. In FY13, only 3.3% of the low productivity in agriculture to be absorbed
country’s growth was generated by in other sectors. While the services sector has
manufacturing as opposed to 83% contributed been growing fast, it alone cannot absorb the
by services. The sector is not at its strongest at 250 million additional income seekers that are
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the moment, but are the manufacturing expected to join the workforce in the next 15
companies in lockstep with rest of the economy? years. Currently, manufacturing in India
Why do we need focus on manufacturing? provides only 12% of jobs, and this share is
significantly less than that of other countries.
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The Eleventh Plan has targeted growth in Unless manufacturing becomes an engine of
manufacturing at 10 11 percent but actual growth, providing at least 100 million additional
performance will be only about 7.7 percent. It decent jobs, it will be difficult for India’s growth
is a matter of concern that the manufacturing to be inclusive.
sector has not shared in the dynamism of the
India’s trade balance must also be improved,
economy, not just in the XIth Plan, but even in
and this necessitates a larger volume of exports
preceding Plan periods. As a result, the share of manufactured goods In order to increase
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 exports as well as provide its internal market of Industrial Production in the last few years
with domestically produced manufactured while there has been both moderation and
goods that compete with imports, India must decline growth, (IIP), in the last few months as
manufacture a much larger volume of products shown in the previous sections.
at competitive costs and quality.
Government has taken a number of
A strong focus on improving the “depth” initiatives and confidence building measures for
in Indian manufacturing is essential. “Depth” improving the industrial climate and boosting
can be defined as the capability and expertise

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manufacturing in the country. Government had
in all aspects of a product value chain.

ad e
approved the National Manufacturing Policy
Achieving a greater depth in manufacturing
entails ensuring a higher level of value addition (NMP) in October, 2011 with the objectives of
enhancing the share of manufacturing in GDP

em
within the country. This requires focus on a
Ac icl
few key areas like the heavily import-skewed to 25% by 2022 and creating additional 100
capital goods sector, technological million jobs. One of the instruments in the NMP
advancements in nearly all manufacturing is the creation of National Investment and
sectors, and a focus on improved domestic Manufacturing Zones (NIMZ) as planned
research and development. integrated industrial townships. Nine NIMZs
have been announced, eight of which are along
The shape of global manufacturing supply
the Delhi Mumbai Industrial Corridor (DMIC).
chains has changed dramatically with the
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Other measures for facilitation of industrial
advent of computers and telecommunications.
Manufacturing has been ‘deconstructed’. investment include promotion of foreign direct
Therefore, the ability to engineer products investment through consolidation of press notes
into a single document; development of industry
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quickly and at low cost is becoming an

increasing source of competitive advantage. In relevant skills and regular meetings with
today’s open-trade world, it is essential that industry associations and stakeholders to fast
Indian industry develop global competitiveness. track implementation of industrial projects.
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While scale remains an advantage in industry,

National Manufacturing Policy
the deconstructed value chain of manufacturing
ensures that this scale and competitiveness can
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The Government of India notified the

be achieved through growth of networks of
National Manufacturing Policy on 4th
manufacturing enterprises.
November, 2011 with the objective of enhancing
While industrial growth is the need of the the share of manufacturing in GDP to 25%
hour, we must also ensure that this growth within a decade and creating 100 million jobs.
happens in a sustainable manner, especially It also seeks to empower rural youth by
with regard to the environment. Industrial imparting necessary skill sets to make them
growth is a leading factor in the degradation of employable. Sustainable development is integral
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the environment. With the high rates of growth to the policy and technological value addition
targeted by the manufacturing sector, it must in manufacturing has received special focus.
be ensured that this growth happens in a
The policy is based on the principle of industrial
sustainable manner and with minimal cost to
growth in partnership with States. The Central
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the environment.
Government will create the enabling policy
frame work, provide incentives for
INITIATIVES TO BOOST
infrastructure development on a Public Private
MANUFACTURING IN THE LAST FIVE Partnership (PPP) basis through appropriate
YEARS financing instruments, and State Governments
will be encouraged to adopt the
Manufacturing has shown a fluctuating instrumentalities provided in the policy. The
growth trend measured in terms of the Index proposals in the policy are generally sector
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 neutral, location neural and technology neutral appropriate technologies including environment
except incentivisation of green technology. friendly technology.
One of the instruments in the NMP is the For the effective implementation of the
creation of National Investment and NMP, a number of institutional structures have
Manufacturing Zones (NIMZ) as planned been constituted. These include Manufacturing
integrated industrial townships. Nine NIMZs Industry Promotion Board (MIPB), under the
have been announced, eight of which are along Chairmanship of Commerce & Industry
the Delhi Mumbai Industrial Corridor (DMIC). Minister; High Level Committee (HLC) under

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Approval, in principle, has been secured for the Chairmanship of Secretary, DIPP; Board of

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setting up of the ninth NIMZ at Nagpur. Apart Approval (BOA) under the concerned Joint
from NIMZs, NMP also applies to Secretary. In addition Green Manufacturing

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manufacturing industry throughout the country
Ac icl Committee (GMaC) has also been set up to
including wherever industry is able to organize
promote green technology for manufacturing
itself into clusters and adopt a model of self-
under NIMZ.
regulation as enunciated. Policy instruments for
manufacturing industry are applicable to both Delhi Mumbai industrial corridor (DMIC)
NIMZ and Clusters. These include
Rationalization/simplification of business As part of the Japan India Special Economic
regulations; simple/expeditious exit mechanism Partnership Initiative for developing requisite
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for non viable units; Technology development, infrastructure and facilitating investment, DMIC
ad
including green technologies; Industrial training Project was conceptualized to take benefit of
and skill upgradation measures; Incentives for the high quality rail and road connectivity
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MSMEs; Special Focus Sectors; Leveraging offered by 1483 km long Delhi Mumbai
infrastructure deficit and Government Dedicated Rail Freight Corridor (DFC), existing
procurement; and Trade Policy. rail passenger- cum- freight corridor and
National Highways. The vision of DMIC is to
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Major feature of NMP is the rationalization create strong economic base on both the sides
and simplification of regulations based on the
of the Dedicated Freight Corridor with globally
basic tenet of self regulation of industry to the
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competitive environment and state-of-the-art

extent possible. The Central/State Governments
infrastructure to activate local commerce,
will suspend operation of particular provisions
enhance foreign investments and attain
wherever such powers exist subject to an
sustainable development.
alternative mechanism, annual audits by
concerned departments and third party The Government of India accorded in
certification. Other features include delegation principle approval to the project outline of
of powers to a single body in case of other DMIC Project in August, 2007. Twenty four
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provisions, combined application forms and Investment Regions/ Industrial Areas across the
common registers as far as possible and six States of Uttar Pradesh, Haryana, Madhya
Systematization of inspections through third Pradesh, Rajasthan, Gujarat and Maharashtra
party certification.
were identified for development in DMIC. An
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Some of the important initiatives institutional framework with a dedicated Special

undertaken/ being undertaken under NMP, Purpose Vehicle (SPV) viz. Delhi Mumbai
include formulation of a scheme on Job Loss Industrial Corridor Development Corporation
Policy; simplification of forms / register / (DMICDC) was set up for project development,
returns under 13 central Labour Laws into 3 coordination and implementation of the
Forms; setting up of Technology Acquisition and numerous projects.
Development Fund (TADF) for acquisition of
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 As the Master Plans progressed, it was felt The overall perspective plan for the entire
necessary and essential that new industrial cities DMIC Region has been completed. The Master
must be created on the back of world class Planning of the first six industrial cities
trunk infrastructure i.e. drainage, sewage, solid mentioned above have been completed. The
waste, water supply, internal roads. Without concerned State Governments have initiated the
the trunk infrastructure the development of PPP process of Land pooling/ procurement/
projects in Greenfield cities was not feasible and acquisition for the industrial cities as well as
may lead to real estate development without for the Early Bird Projects. Project Development

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trunk infrastructure and a developed backbone. of four (04) Gas Based Power Projects is

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The Government of India, therefore, in complete including the final Environmental
September, 2011 restructured the DMIC Project clearance.

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with an Implementation Fund of Rs.17,500
Ac icl
crore to be utilized over a period of five years PROMOTION OF BUSINESS
and an additional project development Fund of ENVIRONMENT
Rs.1000 crore. The land for the new industrial
Promoting FDI- Significant changes have
cities will be the contribution of the State
been made in the FDI policy regime in the
Government. The Japanese Government have recent times to ensure that India remains
also announced their financial support for increasingly attractive and investor-friendly.
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DMIC project to an extent of US $ 4.5 billion Some of the main changes have been as follows:
for projects with Japanese participation in the
first phase of the project. Consolidation- For ease of reference, all
existing regulations on FDI were integrated into
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Looking at the magnitude and diversity, the one consolidated document. The consolidation
entire project has been planned to be involved integration of 178 Press Notes, covering
implemented in phases. Initially, the following various aspects of FDI policy since 1991, as also
industrial cities have been taken up for
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other regulations governing FDI. The document

development as industrial cities: was released as Circular 1 of 2010, effective 1
(i) Ahmedabad-Dholera Investment April, 2010.
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Region, Gujarat;
Rationalization and liberalization- In order
(ii) Shendra-Bidkin Industrial Park city to make the FDI policy more liberal and
near Aurangabad, Maharashtra; investor-friendly, further rationalization and
(iii) Manesar-Bawal Investment Region, simplification has been carried out since.
Haryana; Accordingly, a number of clarifications were
(iv) Khushkhera-Bhiwadi-Neemrana issued on various subjects, including interalia
the concepts of controlled conditions for FDI in
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Investment Region, Rajasthan;

Agriculture/Animal Husbandry etc., value-
(v) Jodhpur-Pali-Marwar Industrial Area, addition in case of mining and mineral
Rajasthan; separation of Titanium bearing minerals and
(vi) Pithampur-Dhar-Mhow Investment introduction of a specific provision for
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Region, Madhya Pradesh; downstream investment through internal

(vii) Dadri-Noida-Ghaziabad Investment accruals .
Region, Uttar Pradesh; Subsequently, significant policy changes
(viii) Dighi Port Industrial Area, were introduced in Circular 1 of 2011 effective
Maharashtra. from 1.4.2011. These include: (i) flexibility in
(ix) In addition one more NIMZ is being fixing pricing of convertible instruments
considered near Nagpur. through a formula, rather than upfront fixation

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 (ii) Inclusion of fresh items for issue of shares relating to down-stream investments and (v)
against non-cash considerations, including development and production of seeds and
import of capital goods/ machinery/ equipment planting material, without the stipulation of
and pre-operative/ pre-incorporation expenses having to do so under controlled conditions .
(iii) Removal of the condition of prior approval FDI has also recently been permitted in Limited
in case of existing joint ventures/technical Liability Partnerships (LLPs), subject to specified
collaborations in the same field (iv) conditions.
simplification and rationalization of guidelines

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Ac icl
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 PARALLEL ECONOMY IN INDIA CHRONICLE
IAS ACADEMY
A CIVIL SERVICES CHRONICLE INITIATIVE

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The Indian economy has continuously Parallel economy connotes the functioning

ad e
recorded high growth rates and has become an of an unsanctioned sector in the economy. A
attractive destination for investments; but the hidden economy in its broadest sense may

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recent unearthing of corruption cases has thrown consist of - a) illegal economy, such as money
Ac icl
light on the dark side of the growth that is rise
of the black money circulation in the economy.
In 1955, a study conducted by noted
laundering, smuggling, etc; b) unreported
economy including tax evasion; c) unregulated
economy, ie economic activities outside
regulations.
economist Nicholas Kaldor showed that the
black economy accounted for 4-5 % of the Money laundering involves disguising
country's gross domestic product (GDP) financial assets so that they can be used without
n
amounting to roughly Rs 600 crore. In 1969, a detection of the illegal activity that produced
panel headed by Justice Wanchoo recommended them. Through money laundering, the launderer
several measures to streamline the taxation transforms the monetary proceeds derived from
system and estimated the size of the black criminal activity into funds with an apparently
o

economy at Rs 7,000 crore. Since then, several legal source. The most common types of criminals
experts have undertaken various projects and who need to launder money are drug traffickers,
given their assessments of the problem. A study embezzlers, corrupt politicians and public
conducted by the National Institute of Public
r

officials, mobsters, terrorists and con artists.

Finance and Policy under the chairmanship of
Raja Chelliah in 1980-81 showed that the black BRIEF HISTORY OF PARALLEL
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economy accounted for 20% of GDP which

ECONOMY IN INDIA
would now translate to about Rs 15 lakh crore.
A study by S.B Gupta in 1992 put the figure at The Indian black economy is immense,
42% of GDP for 1980-81 and 51% for 1987-88. lucrative, widespread, and has grown
Estimates by eminent economists reveal that significantly since independence. The black
India's parallel economy has risen from a mere economy has grown from about 3% in the mid-
3 percent of the GDP in the mid 50s to around 50s to 20% by 1980, to 35% by 1990, and 40% by
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50 percent today. 1995. As a percentage of GDP and at almost $1

trillion in absolute terms, the black economy is
WHAT IS PARALLEL ECONOMY? larger than both the industrial and agricultural
sectors. Corruption is pervasive from the lowest
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Black money or unaccounted money to the highest levels of public administration,

circulating in the parallel economy is a big public enterprise, bureaucracy, judiciary, law
menace to the economy. Thus it is necessary to enforcement, and elected officials.
understand the concept of parallel economy.
The history of corruption in India can be
According to Feige when economic activities traced to late 18th century British East India
goes unreported or not measured by societies company rule. The first governor-general of
current techniques to monitor economic activity India, Warren Hastings was notably impeached
it falls under parallel or hidden economy. on accounts of corruption in 1787. Though he
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 was acquitted in 1795, his lengthy trial brought violation of controls. All this gave rise to trading
various aspects of illegitimate company activity in permits, quotas and licenses, malpractices in
to light. The East India Company laid the distribution and in the process; it generated
foundations of both a corrupt bureaucracy and sizeable sums of black money.
a parallel economy. During World War II, this
black economy experienced a surge. When large Price and distribution controls have in the
quantities of products and resources were past led to the generation of black money on a
allocated to the war effort, the general public significant scale. Any price control without any
experienced acute shortages of daily necessities. adequate machinery of distribution and speedy

y
Scarcity, government controls, and private arrangement for increasing supplies is

e
hoarding stimulated the growth of the parallel potentially a source of black money generation.
economy. Similarly, the system of licenses requires large

em
Ac icl
The most significant growth in the black number of inspectors for completing various
economy occurred during and after the 1960s. formalities and thus good amount of hush money
Until this time, Gandhian and Nehruvian has to be paid. Where controls are not
politicians who had been part of the implementable, they have led to harassment and
independence struggle had largely administered black money generation.
the government. As their careers ended, officials b) Tax structure:
who lacked their idealism, and were more likely
n
to engage in corruption and rent-seeking High tax rates and defective tax structure
ad
practices, entered the government. have also been responsible for the existence of
black money to a large extent. Till recently the
Today, corruption pervades the political tax on income and on wealth was very high to
o

leadership, the bureaucracy, law enforcement invite evasion. The marginal rate of income tax
and the judiciary. Some of the most prominent was as high as 75 per cent. And when it was
causes have been patron-client relationships and combined with the tax on wealth, it was still
communalism in the democracy, excessive
r

higher. This was the situation in respect of

bureaucratic administration and low wages at
personal taxation until a decade ago. The
the bottom rung of public sector employment,
corporate tax rate too was very high. In these
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ineffective punitive and combative measures, and

circumstances the temptation/gain from tax
a social environment conducive to corrupt
evasion was substantial.
practices.
Tax-laws in country are so complicated that
REASONS FOR GROWTH OF BLACK a layman fails to understand it. Even honest
MONEY assesses are unable to file cor-rect returns. This
encourages people to evade tax.
There are several factors responsible for the
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emergence of black money. c) Donation to political parties:

a) Controls and licensing system: Black money also arises from political
activities such as elections where candidates
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The system of controls, permits, quotas and spend well above the ceiling prescribed by the
licenses which are associated with Election Commission. This huge expense in turn
misdistributions of the commodities in short makes them corrupt.
supply results in the generation of black money.
Since considerable discretionary powers lays in The Government has decided to ban
the hands of those who administered controls donations to political parties in 1968; it prompted
this provided them with a scope for corruption – businessmen to fund political parties, especially
‘speed money’ for turning a blind eye to the the ruling party, with the help of black money.

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 Ostensibly, this decision was taken to reduce the black-money is the genera deterioration in the
influence of big business on the electoral process, moral and civic standards of our people.
but in practice what happened was precisely the
opposite. Businessmen everywhere have by now Our businessmen employ very ingenious
methods to generate black-money. Large
learnt that they should pay a certain charge out
amounts of black-money can be generated
of the black money to the coffers of political
through the sale of fixed assets and scrap.
parties and then be sure that the political leaders
Sometimes influential firms obtain quotas or
will only bark but not bite. Big business, in the

y
import licenses in excess of their actual
process, has been able to tame the political
requirements and sell them at cash premiums.

ad e
leadership. This is evidenced by the relaxation Industrial manufac-turing licenses are similarly
of various controls, permitting business houses obtained through influences and sold to a second

em
to enter areas reserved for the public sector, party at an enhanced value. Purchase bills ore
Ac icl
putting a large number of banned items on the
Open General License list etc.
d) Generation of black money in the public
over-invoiced or dummy bills are prepared.
Large-scale smuggling of gold and various luxury
items is an important source of black-money.
Sometimes, relatives whose income is not taxable
sector:
are kept on the payrolls of a company; they are
Every successive five-year plan is planned for paid their salary which is taken back in the forms
a larger size of investment in the public sector. of black-money.
n
The projects undertaken by the public sector have
to be monitored by the bureaucrats in Government IMPACT OF BLACK MONEY
departments and public sector undertakings.
The economic impact of corruption is a
o

Tenders are invited for the various works and

powerful one. The circulation of black money has
these tenders are awarded by the bureaucracy in
adversely affected the Indian economy in several
consultation with the political bosses. ways.
r

Thus, a symbiotic relationship develops In India, the black economy has resulted in
between the contractors, bureaucracy and the an immense loss of tax revenue. If it accounted
politicians and by a large number of devices costs
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for 40% of GDP in 1998-99, the loss of direct

‘are artificially escalated and black money is
tax revenue at the prevailing rate would amount
generated by underhand deals. Instability of the
to at least Rs. 200,000 crore, or 47.5 billion U.S.
political system has given a further momentum
Dollars (Kumar 1999). According to the BBC
to this process. Since the ministers are not sure
(2004), only 2 million of India's billion people
of their tenure and in a majority of cases, the
pay taxes, just 2% of the population. The
tenure is very short, the principle ‘Make hey
government therefore suffers a perennial
while the sun shines’ is adopted by most of them.
shortage of funds and public services languish.
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The larger number of scandals that are unearthed

by the Opposition only support the contention Because of the growing black economy,
that huge investment in the public sector is a big policies fail both at the macro-level and the
potential source for black money generation. In micro-level. Planning or monetary policy or
IA

this process, bureaucrats act as brokers for fiscal policies do not achieve the desired results
political leaders and thus the nexus between because of the existence of a substantial black
business, bureaucracy and politicians promotes economy. Targets for education, health, drinking
the generation of black money. water and so on are not achieved because
“expenditures do not mean outcomes.” The
e) Deterioration in the moral and civic
economy does not lack resources but faces
standards:
resource shortage. Much investment goes into
The most important reason of tax-evasion and wasteful and unproductive channels, like

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 holding gold or real estate abroad. The flight of since the 1970s if it did not have the black
capital lowers the employment potential and economy. Consequently, India could have been
the level of output in the economy. Capital sent an $8-trillion economy, the second largest in
abroad does not generate output in India but the world. Per capita income could have been
does so where it goes. A country that is seven times larger; India would then have been
considered capital-short has been exporting a middle-income country and not one of the
capital. A nation that gives concessions to poorest.
multinational corporations to bring in capital
loses more capital than it gets, and that too at INITIATIVES BY THE GOVERNMENT

y
a high cost, from foreign institutional TO COMBAT BLACK MONEY

e
investments or foreign direct investment. India's
policies are open to the dictates of international Many steps have been taken by the

em
capital because the country's businessmen and
Ac icl Government from time to time to check the tax-
politicians have taken capital out in large doses evasion.
since Independence. The costs are huge.
Following Wanchoo Committee's recommendations
The direct and indirect costs are of policy the Government enacted the Taxation Laws
failures, unproductive investments, slower (Amendment) Act, 1975. This act has brought on the
development, higher inequity, environmental statute vari-ous provisions for preventing tax-evasion
destruction and a lower rate of growth of the and proliferation of black-money Deterrent punishments
n
economy than would have been possible. It has have been, provided for tax-evasion. The other
ad
enormously worsened the income-distribution, committees were—the Dangli Committee on Controls
and has thereby undermined the fabric of the and Subsidies (1980), The Rajah Chelliah Committee,
o

fixed income salary class finds itself ever be the and the National Institute of Public Finance and Policy
lower rung of the income-ladder. (1985).

The inflation rises while the black money With a view of bringing about simplification
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circulates in the market. The price of eatable and rationalization of the direct tax laws, the
/others goods are increased to supply of that Government appointed a committee of experts
black money and less production of things known as the "Direct Tax Laws Committee' in
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in the market. So people which have that June 1977. The recommendations of the Committee
money they offer more price in the market. are being processed for implementation.
As compared from other person in the
In 1976 the Government imposed a
market.
statutory obligation on the management to
At the social level, the cost is a loss of faith carryout physical verification of its assets for
in society and its functioning. At the political the satisfaction of the auditors to ensure that
level there is fragmentation, with States no money is created through the sale of fixed
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demanding their own packages because the assets. Management is also obliged to maintain
belief that the nation as a whole can deliver a proper record of the sale of scrap.
has been dented. The demand for smaller States
Another step taken by the Government to
is a corollary because the bigger States neglect
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unearth black-money was the launching of the

the less vocal regions. Each caste, community
voluntary disclosure scheme in 1975, No
and region now wants to have its own party to
penalties were impo-sed on the persons
represent its narrow interest, leading to the
disclosing black-money voluntarily.
proliferation of smaller parties.
Demonetization of the notes of higher
In the absence of Black Money India could denomination has also been one of the recent
have been growing faster, by about 5 per cent, steps of the Government to unearth black-

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 money. Curbing of the smuggling activities in “In the case of non-residents, however, it is
the country has been the main concern of the not the "total world income" but only that
Government, The conservation of Foreign income is subjected to tax in India which is
Exchange and Prevention of Smuggling earned in this country. Since a resident is taxed
Activities Act was passed for this matter on in respect of foreign income in his own country
19th December, 1974. as well as in the country where it is earned,
he is subjected to tax in both the countries in
In a bid to mop up black-money, the
respect of the same income. The purpose of

y
Government announced on 12th January, 1981
double tax avoidance agreement is to avoid

ad e
a new scheme of issuing a ten-year bond of the
such double taxation to the extent agreed
face value of Rs. 10,000 each. An ordinance for
upon.
this purpose was issued by the President. The

em
bonds were known as 'Special Bearer Bonds.'
Ac icl The DTAA provides that business profits will
The scheme gives immunity to the investor from be taxable in the source state if the activities
prosecution as well as disclosure of the source of an enterprise constitute a Permanent
of the money in-vested. Several other series of Establishment (PE) there. The Agreement
such bonds have been released in recent years. provides for fixed place PE, building site,
construction & installation PE, service PE,
To tackle the menace of illicit funds, the
insurance PE and agency PE. Dividends,
government has adopted a five-pronged
n
interest and royalties & fees for technical
strategy. It comprises joining the global crusade
services income will be taxed both in the
against ‘black money'; creating an appropriate
country of residence and in the country of
legislative framework; setting up institutions for
source.
o

dealing with illicit funds; developing systems

for implementation; and imparting skills to the India also became a full member of global
manpower for effective action. economic body the Financial Action Task Force
(FATF) last year in pursuit of its fight against
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During the last two years, India has negotiated

black money.
19 new Double Taxation Avoidance Agreements
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(DTAAs) and 17 new Tax Information Exchange The government simultaneously has
Agreements (TIEAs). In addition, 22 existing strengthened its tax enforcement agencies like
DTAAs have been re-negotiated. the Income Tax department, allowing them to
create a new Directorate of Criminal
What is Double Taxation Avoidance
Investigation to probe illicit funds including
Agreement?
those stashed abroad. It has strengthened its
Double taxation refers to taxation by two or Financial Intelligence Unit (FIU) to detect
more countries of the same income, asset or suspicious transactions in economic channels.
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transaction. India has adopted the system under

India has recently signed the Convention
which Income Tax on residents is imposed on
on Mutual Administrative Assistance in Tax
the "total world income" i.e. income earned
Matters, developed jointly by the Council of
anywhere in the world. Whereas the source of
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Europe and the Organisation for Economic Co-

income may be in some other country and that
operation and Development (OECD).
country also claims a right to tax the income
arising in the country. The result is that income All members of the G20 have now become
arising to a resident out of India is subjected to signatories but the Convention will have to be
tax in India as it is part of total world income ratified by the Indian Parliament to become law.
and, also in host country which provides the
source for that income. Tax evasion and illicit flows are a serious
problem and over the last two years, in order
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 to check this trend, India has negotiated 19 Government has suggested new measures to
new double taxation avoidance agreements and check corruption at bureaucratic level. Under
17 new tax information exchange agreements. the civil services code, penalties are divided
The Convention facilitates international co- as major and minor. The major includes the
operation for a better operation of national tax provisions of Reduction to Lower Rank;
laws, while respecting the fundamental rights Compulsory Retirement; Removal from
of taxpayers. The Convention provides for all Service and Dismissal from Service. Whereas
possible forms of administrative co-operation minor penalties include: Censure;

y
between states in the assessment and collection Withholding of Increments; Withholding of

e
of taxes, in particular with a view to combating Promotions; Recovery of Pecuniary Loss.
tax avoidance and evasion. This co-operation The salient features of proposed guidelines are:

em
ranges from exchange of information, including
• After even retirement proceedings against
Ac icl
automatic exchanges, to the recovery of foreign
tax claims. However the Convention imposes
safeguards to protect the confidentiality of the
corrupt government servants will not end.
The person will now have to face a 10 per
cent cut in pension in case of minor penalty.
information exchanged.
Further India has signed an Agreement • Major penalty of compulsory retirement
with the Eurasian Group (EAG) to enhance with full benefits will be changed to a
n
cooperation in curbing Money laundering and new provision of having a cut of 20 per
ad
Terrorist Financing. The agreement was signed cent in pension.
by Dr. Thomas Mathew, Joint Secretary (Capital
• Cases will be solved using fast track
Markets) Division of the Department of
o

method. The intermediaries for

Economic Affairs.
consultation in between will be eliminated
The EAG is a Financial Action Task Force to increase the pace of solving the case.
(FATF) styled regional body with 9 members
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including India, Russia and China and 29 • A cut in pension upto 10 per cent may be
observers of which 12 are countries and 17 are imposed in case of minor penalty. This
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international organisations. India was accorded cut will have a ceiling of five years as a
membership in the EAG in December 2010. life-long reduction in pension would come
under the category of major penalty.
At the 15th Plenary meeting of the Eurasian
Group on Combating Money laundering and • There would be no cut in pension in those
Financing of Terrorism India has offered help cases of compulsory retirement of officers
to member nations in enhancing their technical being weeded out for non-performance.
skills in establishing better financial systems,
• The departments and ministries will have
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capital market monitoring and surveillance

to appoint serving officers as Inquiry and
through sophisticated IT tools. Help was also
Presenting Officers to speed up the process
offered in drafting legislation, law enforcement
of proceedings.
techniques and strengthening of their respective
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Financial Intelligence Units. • In important cases, the officers may

The EAG is soon emerging as an effective request the Central Vigilance Commission
to appoint their Commissioner of Direct
body engaged in combating money laundering
Inquiries as IO (Inquiry officers).
and financing of terrorism.

Government proposes new measures to • The prescribed limit for sanctioning of

tackle bureaucratic corruption prosecution of public servants within 3 months.

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 CONCLUSION developing countries. During the same period,
a sum of $136.5 billion Indian black money was
There had been umpteen talks and deposited. The most notorious of the more than
voluntary disclosure schemes in the past for 70 tax havens in the world is Switzerland. It is
checking evasion and black money, but no estimated that the share in Swiss banks account
perceivable results have come. Rather, the for almost a third of the total black money in
quantum of black money in circulation has the world. Hence, it could be safely assumed
increased substantially in volume. Recently the that some $45 billion out of the 136.5 billion

y
government has been forced to commission a stashed away from India would have been

ad e
study by three top economic thinks tanks to get hoarded in Swiss.
an estimate on the size of the black economy.

em
The study is expected to be over by September India must summon the strength and
Ac icl
2012 and provide fresh insights. courage to bring back the money that is stashed
away in the tax havens. India can enter into
A major factor contributing to the increasing agreements with the foreign banks and
level of black money are the tax havens. Tax governments put the topic on a global agenda
havens are those countries which has zero or and cooperate with other powerful countries.
very low income tax, where no questions are This money belongs to the poor farmers and
asked on origin of money coming into their unorganized workers of India. It is assumed
n
banks, which keep all banking records secrets that, India will be in the top-five league if all
and cooperate very little with other countries. the ill-gotten money is brought back. It will
During the years 2002-06, around $3 trillion change the Indian scenario. It will change the
were deposited in such tax havens from the life of the common man.
ro

•••
Ch
S
IA

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 MONEY LAUNDERING : BRIEF CHRONICLE
INTRODUCTION IAS ACADEMY
A CIVIL SERVICES CHRONICLE INITIATIVE

Money laundering involves disguising financial system or retail economy or are

y
financial assets so that they can be used without smuggled out of the country. The aims of the

e
detection of the illegal activity that produced launderer are to remove the cash from the
them. Through money laundering, the launderer location of acquisition so as to avoid detection

em
transforms the monetary proceeds derived from
Ac icl from the authorities and to then transform it
criminal activity into funds with an apparently into other asset forms; for example: travellers
legal source. The most common types of cheques, postal orders, etc.
criminals who need to launder money are drug
ii) LAYERING
traffickers, embezzlers, corrupt politicians and
public officials, mobsters, terrorists and con In the course of layering, there is the first
artists. attempt at concealment or disguise of the source
n
of the ownership of the funds by creating
Every year, billions of dollars are derived
ad
from drug trade and are then reinvested
complex layers of financial transactions
designed to disguise the audit trail and provide
throughout the world by otherwise legitimate
anonymity. The purpose of layering is to
businessmen, accountants and bankers and it
o

disassociate the illegal monies from the source

is the increasing awareness of the huge profits
of the crime by purposely creating a complex
generated from this criminal activity that has
web of financial transactions aimed at
created the impetus for governments to legislate
r

concealing any audit trail as well as the source

against such activities.
and ownership of funds.
Money laundering is becoming very
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Typically, layers are created by moving monies

protuberant with the passage of time. The
in and out of the offshore bank accounts of bearer
estimated amount of money laundered globally
share shell companies through electronic funds'
in one year is 2 to 5% of the global GDP (or
transfer (EFT). Given that there are over 500,000
USD 800 billion to USD 2 trillion).In December,
wire transfers - representing in excess of $1 trillion
2012, HSBC Holdings Plc. had to agree to pay
- electronically circling the globe daily, most of
a record USD 1.92 billion in fines to US
which is legitimate, there isn’t enough information
authorities for getting itself involved in money-
disclosed on any single wire transfer to know
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laundering issues.
how clean or dirty the money is, therefore
The basic money laundering process has three providing an excellent way for launderers to move
steps: their dirty money. Other forms used by launderers
are complex dealings with stock, commodity and
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i) PLACEMENT
futures brokers. Given the sheer volume of daily
This is the first stage in the washing cycle. transactions, and the high degree of anonymity
Money laundering is a "cash-intensive" business, available, the chances of transactions being traced
generating vast amounts of cash from illegal is insignificant.
activities (for example, street dealing of drugs
iii) INTEGRATION
where payment takes the form of cash in small
denominations). The monies are placed into the The final stage in the process. It is this stage

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 at which the money is integrated into the also have the potential of adversely affecting
legitimate economic and financial system and people who do not prima-facie, seem to be the
is assimilated with all other assets in the system. victims of the crime.
Integration of the "cleaned" money into the
For example, tax evasion results in loss of
economy is accomplished by the launderer
government revenue, thus affecting the potential
making it appear to have been legally earned.
of the government to spend on development
By this stage, it is exceedingly difficult to
schemes thereby affecting a large section of the
distinguish legal and illegal wealth.

y
population who could have benefited from such

ad e
Methods popular to money launderers at government expenditure. A company fraud not
this stage of the game are: only results in cheating of the people who have
invested in that company but may also

em
a) the establishment of anonymous
Ac icl
companies in countries where the right adversely affects investors’ confidence and
to secrecy is guaranteed. They are then eventually the growth of the economy.
able to grant themselves loans out of The negative economic effects of money
the laundered money in the course of a laundering on economic development are
future legal transaction. Furthermore, difficult to quantify, yet it is clear that such
to increase their profits, they will also activity damages the financial-sector institutions
claim tax relief on the loan repayments that are critical to economic growth, reduces
n
and charge themselves interest on the productivity in the economy’s real sector by
loan. diverting resources and encouraging crime and
b) the sending of false export-import corruption, which slow economic growth, and
o

invoices overvaluing goods allows the can distort the economy’s external sector
launderer to move money from one international trade and capital flows to the
company and country to another with detriment of long-term economic development.
the invoices serving to verify the origin
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of the monies placed with financial Developing countries’ strategies to establish

institutions. offshore financial centre (hereinafter OFCS) as
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vehicles for economic development are also

c) a simpler method is to transfer the
impaired by significant money laundering
money (via EFT) to a legitimate bank
activity through OFC channels.
from a bank owned by the launderers,
as ‘off the shelf banks’ are easily The negative effects of money laundering
purchased in many tax havens. activities may be on financial sector, real sector
of formal agents such as state, financial
IMPACT OF MONEY LAUNDERING ON institutions and banking sector.
THE ECONOMY OF THE COUNTRY
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• Effect on financial sector:

Money laundering constitutes a serious
threat to national economies and respective Financial sector may get negative effects of
governments. The infiltration and sometimes money laundering especially financial
IA

saturation of dirty money into legitimate institutions including banking and non –
financial sectors and nations accounts can banking financial institutions (NBFIs),and
threaten economic and political stability. equity markets- may directly or indirectly be
affected. Basically,these institutions facilitate
Economic crimes have a devastating effect concentration of capital resources from domestic
on a national economy since potential victims savings and funds from abroad. These
of such crimes are far more numerous than institutions provide impetus to furtherance of
those in other forms of crime. Economic crimes investment prospects by providing conducive

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 environment and efficient allocation of these are familiar to the criminal, such as bar,
resources to investment projects which contributes restaurant, prostitution. The real estate sector
substantially to long run economic growth. is the largest and most vulnerable sector for
money laundering. Real estate is important for
Money Laundering impairs the money laundering, because it is a non-
sustainability and development of financial transparent market where the values of the
institutions in two ways: objects are often difficult to estimate and where
1. Firstly the financial institutions are weakened big value increases can happen and is an
directly through money laundering as there efficient method to place large amounts of

y
seems to be a correlation between money money. The price increase in real estate is

e
laundering and fraudulent activities profitable and the annual profits on real business
undertaken by employees of the institutions. create a legal basis for income. The real estate

em
Similarly, with the increase in money
Ac icl has the following features, which make it
laundering activities, major parts of financial attractive for criminal money:
institutions of a state are vulnerable to crime 1. a safe investment
by criminal elements. This strengthens the 2. the objective value is difficult to assess
criminals and other parallel system of money
3. it allows to realize “white” returns.
laundering channels. This may lead to the
eviction of less equipped competitors & giving • Threat to Banking System
rise to monopoly.
n
Across the world, banks have become a
ad
2. Customer trust is fundamental to the major target of Money Laundering operations
growth of sound financial institutions, and and financial crime because they provide a
the perceived risk to the growth of sound variety of services and instruments that can be
o

financial institutions, and the perceived risk used to conceal the source of money. With their
to depositors and investors from polished, articulate and disarming behaviour,
institutional fraud and corruption is an Money Launderers attempt to make bankers
r

obstacle to such trust. lower their guard so as to achieve their objective.

Though norms for record keeping, reporting,
• Effect on real sector: account opening and transaction monitoring
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are being introduced by central banks across

Money laundering adversely affects economic
the globe for checking the incidence of Money
growth through the real sector by diverting
Laundering and the employees of banks are
resources to less productive activities and by
also being trained to recognise suspicious
facilitating domestic corruption and crime.
transactions, the dilemma of the banker in the
Money laundering carried out through the context of Money Laundering is to sift the
channels other than financial institutions transactions representing legitimate business
S

includes more “sterile” investments such as real and banking activity from the irregular /
estate, art, antiques, jewelry and luxury suspicious transactions. Launderers generally
automobiles, or investments of the type that use this channel in two stages to disguise the
gives lower marginal productivity in an origin of the funds first, when they place their
IA

economy. These sub optimal allocations of ill gotten money into financial system to
resource give lower level of economic growth legitimize the funds and introduce these funds in
which is a serious detriment to economic growth the financial system and second, once these funds
for developing countries. Criminals reinvest their have entered the banking system, through a series
proceeds in companies and real estate with the of transactions, they distance the funds from illegal
purpose to make further profits, legal or illegal. source. The banks and financial institutions
through whom the ‘dirt money’ is laundered
Most of these investments are in sectors that become unwitting victims of this crime.
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 INTERNATIONAL INITIATIVES TO Excessive money laundering can cause
COMBAT MONEY LAUNDERING increased volatility of international capital
flows and exchange rates, market
Money laundering has become a crucial
disparities, and distortions of investment
crime and there are countless organizations
and trade flows.
trying to get a handle on the problem. In the
United States, the Department of Justice, the 2. Ensure that financial institutions are not
State Department, the Federal Bureau of vulnerable to infiltration or abuse by

y
Investigation, the Internal Revenue Service and organised crime groups: Financial

ad e
the Drug Enforcement Agency all have divisions institutions that are exploited in this manner
investigating money laundering and the are exposed to reputational risk, financial
underlying financial structures that make it

em
instability, diminished public confidence,
work.
Ac icl threats to safety and soundness and other
losses.
State and local police also investigate cases
that fall under their jurisdiction. Because global 3. Build the capacity to fight terrorism and
financial systems play a major role in most high- trace terrorist money: Terrorists need
level laundering schemes, the international money to finance attacks. Tracing this
community is fighting money laundering money is one of the few preventive tools
through various means, including the Financial
n
that governments have against terrorism.
Action Task Force on Money Laundering
(FATF), which as of 2005 has 33 member states 4. Meet binding international obligations,
and organizations. The United Nations, the and avoid the risk of sanctions or other
o

World Bank and the International Monetary action by the international community: The
Fund also have anti-money-laundering international community- through
divisions. numerous international treaties, United
Nations Security Council Resolutions and
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• FINANCIAL ACTION TASK FORCE best practices- has endorsed the FATF
(FATF) Recommendations at the highest political
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The Financial Action Task Force (FATF) is level.

an intergovernmental body that works for the
5. Avoid becoming a haven for criminals:
development of standards for combating money
Countries with weak AML/CFT systems are
laundering and terrorist financing. It also ensures
attractive to criminals because they provide
adherence to its standards by making sure that
an environment in which criminals can
countries across the world bring about legislative
enjoy the profits of their crimes and finance
and regulatory reforms in these areas. It further
their illicit activities with little fear of facing
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monitors the progress of the anti-money

punishment.
laundering efforts of its members. Forty plus nine
recommendations of FATF are considered as India became the 34th country member of
global standards on Anti-money laundering and the Financial Action Task Force in 2010 . India
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combating of financing of terrorism. is also a signatory to various United Nations

Benefits of implementing the FATF Conventions which deal with anti money
Recommendations: laundering and countering financing of
terrorism.
1. Securing a more transparent and stable
financial system that is more attractive to • BASEL STATEMENT OF PRINCIPLES
foreign investors: Corrupt and opaque On the financial front, the Committee on
financial systems are inherently unstable. Banking Regulation and supervisory Practices
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 issued the Basel Statement of Principles on the This is one of the most important
prevention of criminal use of the banking system international treaties in the past 50 years. It not
for the purpose of money laundering in merely requires its signatory states to criminalise
December 1988. the laundering of drug money, and to confiscate
it where found, but lays down so far as possible
The Statement of Principles does not restrict
a common wording for the criminal statutes,
itself to drug-related money laundering but
and a common mode of enforcement. It also
extends to all aspects of laundering through
requires full and prompt co-operation between
the banking system, i. e. the deposit, transfer
the signatory states for the enforcement of these

y
and/or concealment of money derived from
laws anywhere in the world. This agreement in

e
illicit activities whether robbery, terrorism,
December 1988 commits all countries that ratify
fraud or drugs. It seeks to deny the banking
it to introduce a comprehensive criminal law

em
system to those involved in money laundering
Ac icl against laundering the proceeds of drug
by the application of the following principles:
trafficking and to introduce measures to identify,
a) Know your customer - banks should trace, and freeze or seize the proceeds of drug
make reasonable efforts to determine trafficking. The UK was one of the first
the customer’s true identity, and have countries to ratify this Convention which has
effective procedures for verifying the been ratified by over 50 countries.
bona fides of new customers (whether
This UN Treaty is of foundational
n
on the asset or liability side of the
importance in relation to international co-
ad balance sheet)
operation in the area of drug trafficking. In the
b) Compliance with laws - bank
European context alone, it exerted a major
management should ensure that
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influence on the Council of Europe Convention

business is conducted in conformity
on Laundering, Search, Seizure and
with high ethical standards, laws and
Confiscation of the Proceeds from Crime and
regulations being adhered to and
on the EC Directive on prevention of the use of
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ensuring that a service is not provided

the financial system for the purpose of money
where there is good reason to suppose
laundering. On a wider stage it has formed an
that transactions are associated with
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essential framework for the work of the FATF

laundering activities.
and, indeed, implementation and ratification
c) Co-operation with law enforcement of the treaty was the first of the
agencies - within any constraints recommendations made by the FATF. Several
imposed by rules relating to customer United Kingdom legislative provisions are taken
confidentiality, banks should co-operate almost directly from the treaty.
fully with national law enforcement
agencies including, where there are The recitals narrate that the Parties to the
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reasonable grounds for suspecting Convention recognise that links between illicit
money laundering, taking appropriate drug traffic and other related organised criminal
measures which are consistent with the activities which undermine the legitimate
law. economies and threaten the stability, security
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d) Adherence to the Statement - The full and sovereignty of States; and that illicit drug
text of this section of the Statement is trafficking is an international criminal activity
worth quoting in full. that generates large profits and wealth, enabling
transnational, criminal organisations to
• UN CONVENTION AGAINST ILLICIT penetrate, contaminate and corrupt the
TRAFFICKING IN NARCOTIC DRUGS structures of government, legitimate commercial
AND PSYCHOTROPIC SUBSTANCES (THE and financial business and society at all its levels
VIENNA CONVENTION).
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 and they are therefore determined to deprive • The Narcotic Drugs and Psychotropic
persons engaged in illicit traffic of the proceeds Substances Act, 1985.
of their criminal activities and thereby
eliminating their main incentive for so doing. • The Prevention of Illicit Traffic in Narcotic
Drugs and Psychotropic Substances Act, 1988.
• International Money Laundering
Information Network (ImoLIN). However, this was not sufficient with the
growth of varied areas of generating illegal
IMoLIN is an Internet-based network

y
money by selling antiques, rare animal flesh
assisting governments, organizations and and skin, human organ, and many such varied

ad e
individuals in the fight against money new areas of generating money which was
laundering and the financing of terrorism illegal. Money-laundering was an effective way

em
administered by UN office on Drugs and Crime. to launder the black money (wash it to make it
Ac icl
IMoLIN has been developed with the
cooperation of the world's leading anti-money
laundering organizations. It provides with an
international database called Anti-Money
clean) so as to make it white. The international
initiatives as discussed above to obviate the
threat not only to financial systems but also to
the integrity and sovereignty of the nations and
Laundering International Database (AMLID) the Hawala episode in India triggered the need
that analyses jurisdictions' national anti-money for an anti money-laundering law.
laundering legislation. It is intended as a tool
n
for practitioners to assist them in their In view of the urgent need for the enactment
international cooperation and exchange of of a comprehensive legislation inter alia for
information efforts. Currently, the Anti-Money preventing money laundering and connected
o

Laundering International Database (AMLID) activities, confiscation of proceeds of crime,

2nd Round of Legal Analysis has been launched setting up of agencies and mechanisms for
by UNODC on 27 February 2006, IMoLIN has coordinating measures for combating money-
twelve participating organization, four laundering etc., the PML Bill was introduced in
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international organizations85, and five the Lok Sabha on 4th August 1998, which
international financial institutions on its website. ultimately was passed on 17th January 2003.
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Sec. 3 of PMLA defines offence of money

INITIATIVES TAKEN BY INDIA TO
laundering as whosoever directly or indirectly
COMBAT MONEY LAUNDERING attempts to indulge or knowingly assists or
With its growing financial strength, India is knowingly is a party or is actually involved in
vulnerable to money laundering activities. any process or activity connected with the
proceeds of crime and projecting it as untainted
In India, before the enactment of the property shall be guilty of offence of money-
Prevention of Money Laundering Act 2002
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laundering. It prescribes obligation of banking

(PMLA- 02 hereinafter), the following statutes companies, financial institutions and
addressed scantily the issue in question: intermediaries for verification and maintenance
• The Conservation of Foreign Exchange and of records of the identity of all its clients and
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Prevention of Smuggling Activities Act, 1974. also of all transactions and for furnishing
information of such transactions in prescribed
• The Income Tax Act, 1961. form to the Financial Intelligence Unit-India
(FIU-IND). It empowers the Director of FIU-
• The Benami Transactions (Prohibition) Act,
IND to impose fine on banking company,
1988.
financial institution or intermediary if they or
• The Indian Penal Code and Code of any of its officers fails to comply with the
Criminal Procedure, 1973. provisions of the Act as indicated above.

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 PMLA empowers certain officers of the Transaction reports (CTRs) and Suspicious
Directorate of Enforcement to carry out Transaction Reports (STRs) from various
investigations in cases involving offence of reporting entities.
money laundering and also to attach the
property involved in money laundering. PMLA 2. Analysis of Information: Analyze received
envisages setting up of an Adjudicating information in order to uncover patterns of
Authority to exercise jurisdiction, power and transactions suggesting suspicion of money
authority conferred by it essentially to confirm laundering and related crimes.
attachment or order confiscation of attached

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3. Sharing of Information: Share information
properties. It also envisages setting up of an

e
with national intelligence/law enforcement
Appellate Tribunal to hear appeals against the agencies, national regulatory authorities and
order of the Adjudicating Authority and the

em
foreign Financial Intelligence Units.
authorities like Director FIU-IND.
Ac icl 4. Act as Central Repository: Establish and
PMLA envisages designation of one or more
maintain national data base on cash
courts of sessions as Special Court or Special
transactions and suspicious transactions on
Courts to try the offences punishable under
the basis of reports received from reporting
PMLA and offences with which the accused
entities.
may, under the Code of Criminal Procedure
1973, be charged at the same trial. PMLA allows 5. Coordination: Coordinate and strengthen
n
Central Government to enter into an agreement
ad
with Government of any country outside India
collection and sharing of financial
intelligence through an effective national,
for enforcing the provisions of the PMLA, regional and global network to combat
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exchange of information for the prevention of money laundering and related crimes.
any offence under PMLA or under the
corresponding law in force in that country or 6. Research and Analysis: Monitor and
investigation of cases relating to any offence identify strategic key areas on money
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under PMLA. laundering trends, typologies and

developments.
• Financial Intelligence Unit – India (FIU-IND)
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• Enforcement Directorate
It was set by the Government of India vide
O.M. dated 18th November 2004 as the central The Directorate of Enforcement was
national agency responsible for receiving, established in the year 1956 with its
processing, analyzing and disseminating Headquarters at New Delhi. It is responsible
information relating to suspect financial for enforcement of the Foreign Exchange
transactions. FIU-IND is also responsible for Management Act, 1999 (FEMA) and certain
coordinating and strengthening efforts of provisions under the Prevention of Money
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national and international intelligence, Laundering Act. Work relating to investigation

investigation and enforcement agencies in and prosecution of cases under the PML has
pursuing the global efforts against money been entrusted to Enforcement Directorate. The
laundering and related crimes. FIU-IND is an
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Directorate is under the administrative control

independent body reporting directly to the of Department of Revenue for operational
Economic Intelligence Council (EIC) headed by purposes; the policy aspects of the FEMA, its
the Finance Minister. legislation and its amendments are within the
The functions of FIU-IND are: purview of the Department of Economic Affairs.
Policy issues pertaining to PML Act, however,
1. Collection of Information: Act as the are the responsibility of the Department of
central reception point for receiving Cash Revenue. Before FEMA became effective (1 June
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 2000), the Directorate enforced regulations under institutions and various financial markets168.
the Foreign Exchange Regulation Act, 1973. The Board for Financial Supervision (BFS)
continued to exercise its supervisory role over
Functions:-
those segments of the financial institutions that
1. To collect, develop and disseminate are under the purview of the Reserve Bank.
intelligence relating to violations of FEMA,
Recently, the RBI has issued a series of
1999, the intelligence inputs are received
master circulars to the banks, about the
from various sources such as Central and

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precautions to be exercised in handling their
State Intelligence agencies, complaints etc.

ad e
customers’ transactions. Important amongst
2. To investigate suspected violations of the these is a guidance note issued about treatment
of customer and key to knowing the customer.

em
provisions of the FEMA, 1999 relating to
Ac icl
activities such as “hawala” foreign The identity, background and standing of the
exchange racketeering, non-realization of customer should be verified not only at the time
export proceeds, non-repatriation of foreign of commencement of relationship, but also be
exchange and other forms of violations updated from time to time, to reflect the
under FEMA, 1999. changes in circumstances and the nature of
operations of the account.
3. To adjudicate cases of violations of the
RBI plays a significant role in AML activities.
n
erstwhile FERA, 1973 and FEMA, 1999.
RBI, recently blocked the application of Swiss
4. To realize penalties imposed on conclusion bank UBS for a banking license in India on the
of adjudication proceedings. ground that it was involved in $8 billion money-
o

laundering racket. RBI investigators found the

5. To handle adjudication, appeals and link between UBS and Khan, as the
prosecution cases under the erstwhile businessman had deposited $8 billion at a Zurich
FERA, 1973 branch of UBS. They cited it as direct evidence
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for blocking the license of the bank.

6. To process and recommend cases for
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preventive detention under the • Role of Securities Exchange Board of India

Conservation of Foreign Exchange and
Prevention of Smuggling Activities Act Vulnerability of securities market to money-
(COFEPOSA) laundering activities have been discussed in the
earlier part of this paper. Indian securities market
7. To undertake survey, search, seizure, arrest, is also prone to money-laundering activities.
prosecution action etc. against offender of Intermediaries registered under the SEBI are
PMLA offence. under reporting obligation of PMLA 02. FIU-
S

IND has also issued certain guidelines relating

8. To provide and seek mutual legal assistance to KYC to be followed by these intermediaries.
to/from contracting states in respect of
attachment/confiscation of proceeds of The main source of money-laundering would
crime as well as in respect of transfer of be the Participatory Notes Transaction and
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accused persons under PMLA. Overseas Direct Investment Routes.

• Role of Reserve Bank of India The stock market regulator has undertaken
various initiatives to additionally safeguard the
The regulatory purview of the Reserve Bank existing Indian capital market regulatory system.
extends to a large segment of financial Sebi plans to review and consolidate various
institutions, including commercial banks, co- initiatives undertaken by it and the government
operative banks, non-banking financial over the period of time. The initiative is

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 necessary to overcome new challenges in rapid process because the criminals who launder
technological and market advances. money are continuously seeking new ways to
achieve their illegal ends. Many important
All market intermediaries’ i.e. mutual funds,
financial centers have now adopted legislation
brokers, depositories, merchant bankers,
to curb drug-related money laundering.
portfolio managers and investment advisors are
required to adhere to specified client dealing However UN data reveals that terror group
procedures like know your customer (KYC) and financing accounts for just 0.2 per cent of the
mandatory requirement of PAN (Permanent total $856 billion money laundered worldwide.

y
Account Number). While this amounts to just $1.72 billion, this

e
segment of money laundering has the potency
The existing Sebi guideline is based on the
to cause havoc for the global economy.

em
Prevention of Money Laundering (PMLA) Act,
of 2002, which was further amended in 2005
Ac icl
and in 2009. However, Sebi plans to review and
consolidate it by taking into consideration the
In order to reduce the vulnerability of the
international financial system to money
laundering, governments must intensify their
new financial action task force (FAFT) standards. efforts to remove any detrimental rules and
practices which obstruct international co-
CONCLUSION operation against money laundering for this
sharing of information is necessary.
n
Combating money laundering is a dynamic
ad
o

•••
r
Ch
S
IA

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 WORLD ECONOMY CHRONICLE
IAS ACADEMY
A CIVIL SERVICES CHRONICLE INITIATIVE

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There are seven continents in the world viz, the Soviet Union (which along with its allies

ad e
Asia, Europe, Australia, Africa, North America, represented the Second World).
South America (or Latin America) and Antarc-

em
tica. The countries of the world are passing Least developed country (LDC)
Ac icl
through different levels of development. North
America, Western Europe, some East Asian
countries are developed countries whereas large
number of countries in Asia, Africa and Latin
Least developed country (LDC) is the name
given to a country which, according to the
United Nations, exhibits the lowest indicators
of socioeconomic development, with the lowest
America are developing countries, some of them
Human Development Index ratings of all coun-
falling under the category of least developed
tries in the world. The concept of LDCs origi-
countries. The developing countries include
n
nated in the late 1960s and the first group of
'eastern tigers', 'emerging market economies' and
LDCs was listed by the UN in its resolution
many countries of the 'G-20'. It is, therefore,
important to know about them. 2768 (XXVI) of 18 November 1971. A country
is classified as a Least Developed Country if it
o

North and South meets three criteria:

• poverty (three-year average GNI per capita
The developed countries are concentrated in of less than US $905, which must exceed
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the northern hemisphere whereas the underde- $1,086 to leave the list)
veloped countries are concentrated in the south-
• human resource weakness (based on indi-
ern hemisphere. It is because of this reason that
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cators of nutrition, health, education and

the developed and underdeveloped regions are
adult literacy) and
euphemistically mentioned in economic litera-
ture as "North" and "South" respectively. • economic vulnerability (based on instabil-
Though Asia, which contains many poor coun- ity of agricultural production, instability
tries is in Northern hemisphere and Australia, of exports of goods and services, economic
which is rich, is in Southern Hemisphere, by importance of non-traditional activities,
and large this North-South categorization of merchandise export concentration, handi-
cap of economic smallness, and the per-
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developed and underdeveloped countries indi-

cates geographical concentration. centage of population displaced by natu-
ral disasters).
Third world
LDC criteria are reviewed every three years
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The notion of third world refers to underdevel- by the Committee for Development Policy
oped or developing countries which remained (CDP) of the UN Economic and Social Council
aloof from two cold war camps- Soviet Union (ECOSOC). Countries may "graduate" out of
and the United States of America. The word the LDC classification when indicators exceed
third world refers to those countries that re- these criteria. The United Nations Office of the
mained non-aligned or neutral with either capi- High Representative for the Least Developed
talism and NATO (which along with its allies Countries, Landlocked Developing Countries
represented the First World) or communism and and Small Island Developing States (UN
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 OHRLLS) coordinates UN support and provides Although, there are similar notions about de-
advocacy services for Least Developed Coun- veloping and developed countries among the
tries. The classification (as of 1 January 2011) multilateral organizations, they differ in their
applies to 48 countries. methods of classification of developing and de-
veloped nations. While the UN does not give
Since the LDC category was initiated, only
any quantitative specification, the World Bank
three countries have graduated to developing
and the IMF give some quantifiable basis of
country status. The first country to graduate
difference.
from LDC status was Botswana in 1994. The

y
second country was Cape Verde, in 2007.
THE UN SYSTEM OF CLASSIFICATION

e
Maldives became the third country to graduate
to developing country status on 1 January 2011. The United Nations Statistics Division says that
In 2011 the UN suggested that Equatorial

em
there is no established convention for the des-
Guinea, Samoa, Tuvalu, and Vanuatu are
Ac icl ignation of "developed" and "developing" coun-
among the candidates for promotion from LDC tries or areas in the United Nations system.
status. At the UN's fourth conference on LDCs According to the United Nations, the designa-
held in May 2011, delegates endorsed a goal tions "developed" and "developing" are intended
targeting the promotion of at least half the for statistical convenience and do not necessar-
current LDC countries within the next ten years.
ily express a judgment about the stage reached
by a particular country or area in the develop-
n
DEVELOPED AND DEVELOPING ment process. Thus, in common practice, Ja-
ad COUNTRIES pan and South Korea in Asia, Canada and the
United States in northern America, Australia
Developing country
and New Zealand in Oceania, and Europe, are
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Developing country is a term generally used considered "developed" regions or areas. In

to describe a nation with a low level of mate- international trade statistics, the Southern Afri-
rial well being. These are countries with more can Customs Union is also treated as a devel-
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advanced economies than other developing na- oped region and Israel as a developed country;
tions, but which have not yet fully demonstrated countries emerging from the former Yugoslavia
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the signs of a developed country, are catego- are treated as developing countries; and coun-
rized under the term newly industrialized coun- tries of eastern Europe and of the Common-
tries. A developing country, also known as a wealth of Independent States (code 172) in
less-developed country (LDC), is a nation with Europe are not included under either devel-
a low living standard, undeveloped industrial oped or developing regions.
base, and low Human Development Index
(HDI) relative to other countries. THE IMF SYSTEM OF CLASSIFICATION
OF DEVELOPING AND DEVELOPED
S

Developed Nations COUNTRIES

There is no single internationally-recognized The IMF uses a flexible classification system
definition of developed country, and the levels that considers "(1) per capita income level, (2)
of development may vary widely within so-
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export diversification-so oil exporters that have

called developing countries, with some devel- high per capita GDP would not make the ad-
oping countries having high average standards vanced classification because around 70% of its
of living. Kofi Annan, former Secretary Gen- exports are oil, and (3) degree of integration
eral of the United Nations, defined a developed into the global financial system." From the IMF
country as follows. "A developed country is one criteria India, China, Brazil, Mexico, Indonesia,
that allows all its citizens to enjoy a free and Malaysia, the Middle Eastern countries, almost
healthy life in a safe environment." all the African countries fall under the category
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 of developing countries whereas G7 countries, oping counterparts. Another characterization of
South Korea, Australia etc. are developed coun- NICs is that of nations undergoing rapid eco-
tries. Thus, according to the classification nomic growth (usually export-oriented).
from International Monetary Fund (IMF) be- Incipient or ongoing industrialization is an im-
fore April 2004, all the countries of Eastern portant indicator of a NIC. In many NICs, social
Europe (including Central European countries upheaval can occur as primarily rural, agricul-
which still belongs to "Eastern Europe Group" tural populations migrate to the cities, where
in the UN institutions) as well as the former the growth of manufacturing concerns and fac-

y
Soviet Union (USSR) countries in Central Asia tories can draw many thousands of laborers.

ad e
(Kazakhstan, Uzbekistan, Kyrgyzstan,
Tajikistan and Turkmenistan) and Mongolia, Emerging Economies

em
were not included under either developed or
Ac icl In the 2008 Emerging Economy Report the
developing regions, but rather were referred to
Center for Knowledge Societies defines Emerg-
as "countries in transition"; however they are
ing Economies as those "regions of the world
now widely regarded (in the international re-
that are experiencing rapid informationalization
ports) as "developing countries".
under conditions of limited or partial industrial-
The World Bank System of classification of ization." It appears that emerging markets lie at
developing and developed countries. the intersection of non-traditional user behavior,
n
the rise of new user groups and community
The World Bank classifies countries into four adoption of products and services, and innova-
income groups. These are set each year on July 1. tions in product technologies and platforms.
Economies were divided according to 2008 GNI
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per capita using the following ranges of income: Emerging Markets

• Low income countries had GNI per capita
of US$1,005 or less. The term emerging markets is used to de-
scribe a nation's social or business activity in
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• Lower middle income countries had GNI

the process of rapid growth and industrializa-
per capita between US$1,006 and
tion. Originally brought into fashion in the
US$3,975.
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1980s by then World Bank economist Antoine

• Upper middle income countries had GNI van Agtmael, the term is sometimes loosely used
per capita between US$3,976 and as a replacement for emerging economies, but
US$12,275. really signifies a business phenomenon that is
• High income countries had GNI above not fully described by or constrained to geogra-
US$12,276. phy or economic strength; such countries are
considered to be in a transitional phase between
The World Bank classifies all low- and middle- developing and developed status. Examples of
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income countries as developing but notes, "The use emerging markets include China , India, some
of the term is convenient; it is not intended to countries of Latin America (particularly Argen-
imply that all economies in the group are expe- tina, Brazil , Chile, and Mexico), some coun-
riencing similar development or that other econo- tries in Southeast Asia, most countries in East-
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mies have reached a preferred or final stage of ern Europe, Russia, some countries in the
development. Classification by income does not Middle East (particularly in the Persian Gulf
necessarily reflect development status." Arab States), and parts of Africa (particularly
South Africa). Emphasizing the fluid nature of
Newly Industrialised Countries (NIC)
the category, political scientist Ian Bremmer
NICs are countries whose economies have defines an emerging market as "a country
not yet reached First World status but have, in where politics matters at least as much as eco-
a macroeconomic sense, outpaced their devel- nomics to the markets."
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 BRIC Countries The use of the term is convenient; it is not in-
tended to imply that all economies in the group
In recent years, new terms have emerged to are experiencing similar development or that
describe the largest developing countries such other economies have reached a preferred or
as BRIC that stands for Brazil, China, India final stage of development. Classification by
and Russia, along with BRICS (BRIC + South income does not necessarily reflect development
Africa), BRICM (BRIC + Mexico) and BRICK status.
(BRIC + South Korea). These countries do not
share any common agenda, but some experts Lending category: IDA countries are those

y
believe that they are enjoying an increasing role that had a per capita income in 2008 of

e
in the world economy and on political plat- less than $1,135 and lack the financial ability
forms. In economics, BRIC (typically rendered to borrow from IBRD. IDA loans are deeply

em
as the "BRICS" or "the BRIC countries") is an
Ac icl concessional-interest-free loans and grants for
acronym that refers to the fast-growing devel- programs aimed at boosting economic growth
oping economies of Brazil, Russia, India, China and improving living conditions. IBRD loans
and South Africa. The acronym was first coined are noncessional. Blend countries are eligible
and prominently used by Goldman Sachs in for IDA loans because of their low per capita
2001 before South Africa joined in 2011. incomes but are also eligible for IBRD loans
because they are financially creditworthy.
THE WORLD BANK CLASSIFICATION
n
EURO ZONE
ad OF ECONOMIES
The World Bank classifies economies of the The eurozone, officially called the euro area, is
world on the basis of Gross National Income an economic and monetary union (EMU) of 17
o

per capita for operational and analytical purposes. European Union (EU) member states that have
Based on its GNI per capita, every economy is adopted the euro (•) as their common currency
classified as low income, middle income (subdi- and sole legal tender. The eurozone currently
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vided into lower middle and upper middle), or consists of Austria, Belgium, Cyprus, Estonia,
high income. Other analytical groups based on Finland, France, Germany, Greece, Ireland, Italy,
Luxembourg, Malta, the Netherlands, Portugal,
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geographic regions are also used. The World

Bank has identified following groups of coun- Slovakia, Slovenia, and Spain. Most other EU
tries on the basis of GNI per capita: states are obliged to join once they meet the cri-
teria to do so. No state has left and there are no
Income group: Economies are divided accord- provisions to do so or to be expelled.
ing to 2008 GNI per capita, calculated using
the World Bank Atlas method. The groups are: Monetary policy of the zone is the responsi-
low income, $975 or less; lower middle income, bility of the European Central Bank (ECB)
$976 - $3,855; upper middle income, $3,856 - which is governed by a President and a Board
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$11,905; and high income, $11,906 or more.The of the Heads of National Central Banks. The
Bank's analytical income categories (low, principal task of the ECB is to keep inflation
middle, high income) are based on the Bank's under control. Though there is no common rep-
resentation, governance or fiscal policy for the
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operational lending categories (civil works pref-

erences, IDA eligibility, etc.). currency union, some co-operation does take
place through the Euro Group, which makes
Geographic region: Classifications and data political decisions regarding the eurozone and
reported for geographic regions are for low- the euro. The Euro Group is composed of the
income and middle-income economies only. Finance Ministers of eurozone states, however
Low-income and middle-income economies are in emergencies, national leaders also form the
sometimes referred to as developing economies. Euro Group.

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 European Central Bank (ECB) the 1930s. It resulted in the collapse of large
financial institutions, the bailout of banks by
The European Central Bank (ECB) is the in- national governments, and downturns in stock
stitution of the European Union (EU) that ad- markets around the world. In many areas, the
ministers the monetary policy of the 17 EU housing market also suffered, resulting in evic-
Eurozone member states. It is thus one of the tions, foreclosures and prolonged unemploy-
world's most important central banks. The bank ment. The crisis played a significant role in the
was established by the Treaty of Amsterdam in failure of key businesses, declines in consumer

y
1998, and is headquartered in Frankfurt, Ger- wealth estimated in trillions of US dollars, and

ad e
many. The current President of the ECB is Mario a downturn in economic activity leading to the
Draghi, former Governor of the Bank of Italy. 2008-2012 global recession and contributing to

em
The primary objective of the European Cen- the European sovereign-debt crisis.
Ac icl
tral Bank is to maintain price stability within
the Eurozone, which is the same as keeping
inflation low. The Governing Council defined
price stability as inflation (Harmonised Index
Sub Prime Crisis

The U.S. subprime mortgage crisis was a set

of events and conditions that led to the late-
of Consumer Prices) of around 2%. Unlike, for 2000s financial crisis, characterized by a rise in
example, the United States Federal Reserve subprime mortgage delinquencies and foreclo-
n
Bank, the ECB has only one primary objective sures, and the resulting decline of securities
with other objectives subordinate to it. backed by said mortgages.The percentage of
The key tasks of the ECB are to define and new lower-quality subprime mortgages rose
from the historical 8% or lower range to ap-
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implement the monetary policy for the

Eurozone, to conduct foreign exchange opera- proximately 20% from 2004 to 2006, with much
tions, to take care of the foreign reserves of the higher ratios in some parts of the U.S. A high
European System of Central Banks and pro- percentage of these subprime mortgages, over
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mote smooth operation of the financial market 90% in 2006 for example, were adjustable-rate
infrastructure under the TARGET2 payments mortgages. These two changes were part of a
broader trend of lowered lending standards and
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system and the technical platform (currently

being developed) for settlement of securities in higher-risk mortgage products. Further, U.S.
Europe (TARGET2 Securities). Furthermore, it households had become increasingly indebted,
has the exclusive right to authorise the issu- with the ratio of debt to disposable personal
ance of euro banknotes. Member states could income rising from 77% in 1990 to 127% at the
issue euro coins, but the amount must be end of 2007, much of this increase mortgage-
authorised by the ECB beforehand (upon the related.After U.S. house sales prices peaked in
introduction of the euro, the ECB also had mid-2006 and began their steep decline forth-
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exclusive right to issue coins). On 9 May 2010, with, refinancing became more difficult. As
the 27 member states of the European Union adjustable-rate mortgages began to reset at
agreed to incorporate the European Financial higher interest rates (causing higher monthly
Stability Facility. The EFSF's mandate is to safe- payments), mortgage delinquencies soared. Se-
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guard financial stability in Europe by providing curities backed with mortgages, including
financial assistance to Eurozone Member States. subprime mortgages, widely held by financial
firms, lost most of their value. Global investors
2007-2012 GLOBAL FINANCIAL CRISIS also drastically reduced purchases of mortgage-
backed debt and other securities as part of a
The 2007-2012 global financial crisis is con- decline in the capacity and willingness of the
sidered by many economists to be the worst private financial system to support lending.
financial crisis since the Great Depression of Concerns about the soundness of U.S. credit

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 and financial markets led to tightening credit cant amounts of foreign money flowed into the
around the world and slowing economic growth U.S. from fast-growing economies in Asia and
in the U.S. and Europe. oil-producing countries. This inflow of funds
combined with low U.S. interest rates from
The immediate cause or trigger of the crisis
2002-2004 contributed to easy credit conditions,
was the bursting of the United States housing
which fueled both housing and credit bubbles.
bubble which peaked in approximately 2005-
Loans of various types (e.g., mortgage, credit
2006. High default rates on "subprime" and ad-
card, and auto) were easy to obtain and con-
justable rate mortgages (ARM), began to in-
sumers assumed an unprecedented debt load.

y
crease quickly thereafter. Lenders began origi-

e
nating large numbers of high risk mortgages As part of the housing and credit booms,
from around 2004 to 2007, and loans from those the amount of financial agreements called mort-

em
vintage years exhibited higher default rates than gage-backed securities (MBS), which derive
loans made either before or after.
Ac icl
An increase in loan incentives such as easy
initial terms and a long-term trend of rising
their value from mortgage payments and hous-
ing prices, greatly increased. Such financial
innovation enabled institutions and investors
around the world to invest in the U.S. hous-
housing prices had encouraged borrowers to
assume difficult mortgages in the belief they ing market. As housing prices declined, major
would be able to quickly refinance at more fa- global financial institutions that had borrowed
and invested heavily in MBS reported signifi-
n
vorable terms. Additionally, the increased mar-
cant losses. Defaults and losses on other loan
ad
ket power of originators of subprime mortgages
types also increased significantly as the crisis
and the declining role of Government Spon-
sored Enterprises as gatekeepers increased the expanded from the housing market to other
o

number of subprime mortgages provided to con- parts of the economy. Total losses are estimated
sumers who would have otherwise qualified in the trillions of U.S. dollars globally.
for conforming loans. While the housing and credit bubbles were
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The worst performing loans were securitized growing, a series of factors caused the financial
by private investment banks, who generally system to become increasingly fragile.
Policymakers did not recognize the increasingly
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lacked the GSE's market power and influence

over mortgage originators. Once interest rates important role played by financial institutions
began to rise and housing prices started to drop such as investment banks and hedge funds, also
moderately in 2006-2007 in many parts of the known as the shadow banking system. Shadow
U.S., refinancing became more difficult. Defaults banks were able to mask their leverage levels
and foreclosure activity increased dramatically from investors and regulators through the use
as easy initial terms expired, home prices failed of complex, off-balance sheet derivatives and
to go up as anticipated, and ARM interest rates securitizations.
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reset higher. Falling prices also resulted in 23%

These instruments also made it virtually im-
of U.S. homes worth less than the mortgage
possible to reorganize financial institutions in
loan by September 2010, providing a financial
bankruptcy, and contributed to the need for
incentive for borrowers to enter foreclosure. The
government bailouts. Some experts believe these
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ongoing foreclosure epidemic, of which

institutions had become as important as com-
subprime loans are one part, that began in late
mercial (depository) banks in providing credit
2006 in the U.S. continues to be a key factor in
to the U.S. economy, but they were not subject
the global economic crisis, because it drains
to the same regulations. These institutions as
wealth from consumers and erodes the finan-
well as certain regulated banks had also as-
cial strength of banking institutions.
sumed significant debt burdens while provid-
In the years leading up to the crisis, signifi- ing the loans described above and did not have

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 a financial cushion sufficient to absorb large regarding bank solvency, declines in credit avail-
loan defaults or MBS losses. ability and damaged investor confidence had an
impact on global stock markets, where securities
These losses impacted the ability of financial suffered large losses during 2008 and early 2009.
institutions to lend, slowing economic activity. Economies worldwide slowed during this period,
Concerns regarding the stability of key finan- as credit tightened and international trade de-
cial institutions drove central banks to take clined. Governments and central banks responded
action to provide funds to encourage lending with unprecedented fiscal stimulus, monetary

y
and to restore faith in the commercial paper policy expansion and institutional bailouts. Al-

ad e
markets, which are integral to funding busi- though there have been aftershocks, the financial
ness operations. Governments also bailed out crisis itself ended sometime between late-2008 and

em
key financial institutions, assuming significant mid-2009. In the U.S., Congress passed the Ameri-
additional financial commitments.
Ac icl can Recovery and Reinvestment Act of 2009. In
The risks to the broader economy created by the E.U., the U.K. responded with austerity mea-
the housing market downturn and subsequent sures of spending cuts and tax increases without
financial market crisis were primary factors in export growth and it has since slid into a double-
several decisions by central banks around the dip recession.
world to cut interest rates and governments to
Many causes for the financial crisis have been
n
implement economic stimulus packages. Effects
suggested, with varying weight assigned by
on global stock markets due to the crisis have
experts. The U.S. Senate's Levin-Coburn Report
been dramatic. Between 1 January and 11 Oc-
asserted that the crisis was the result of "high
tober 2008, owners of stocks in U.S. corpora-
risk, complex financial products; undisclosed
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tions had suffered about $8 trillion in losses, as

conflicts of interest; the failure of regulators,
their holdings declined in value from $20 tril-
the credit rating agencies, and the market itself
lion to $12 trillion. Losses in other countries
to rein in the excesses of Wall Street." Two
have averaged about 40%.
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factors that have been frequently cited include

Losses in the stock markets and housing the liberal use of the Gaussian Copula function
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value declines place further downward pres- and the failure to track data provenance.
sure on consumer spending, a key economic
engine. Leaders of the larger developed and The 1999 repeal of the Glass-Steagall Act ef-
emerging nations met in November 2008 and fectively removed the separation between in-
March 2009 to formulate strategies for address- vestment banks and depository banks in the
ing the crisis. A variety of solutions have been United States. Critics argued that credit rating
proposed by government officials, central bank- agencies and investors failed to accurately price
ers, economists, and business executives. In the the risk involved with mortgage-related finan-
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U.S., the Dodd-Frank Wall Street Reform and cial products, and that governments did not
Consumer Protection Act was signed into law adjust their regulatory practices to address 21st-
in July 2010 to address some of the causes of century financial markets.
the crisis.
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In response to the financial crisis, both mar-

The bursting of the U.S. housing bubble, which ket-based and regulatory solutions have been
peaked in February 2007, caused the values of implemented or are under consideration. Paul
securities tied to U.S. real estate pricing to plum- Krugman, author of End This Depression Now!
met, damaging financial institutions globally. The (2012), argues that while current solutions have
financial crisis was triggered by a complex inter- stabilized the world economy, the world
play of valuation and liquidity problems in the economy will not improve unless it receives
United States banking system in 2008. Questions further stimulus. Buchanan, Gjerstad, and

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 Smith argue that fiscal and monetary policy Major depository banks around the world had
are ineffective, failing to reignite residential also used financial innovations such as structured
investment and construction as they have in investment vehicles to circumvent capital ratio
past contractions. The current type of contrac- regulations. Notable global failures included
tion requires balance sheet repair via currency Northern Rock, which was nationalized at an
depreciation and export-driven growth. Fiscal estimated cost of £87 billion ($150 billion). In the
stimulus extends a current account deficit and U.S., Washington Mutual (WaMu) was seized in
retards export growth. If the world economy September 2008 by the USA Office of Thrift Su-

y
does not improve, many economists fear sover- pervision (OTS). This would be followed by the
eign default is a real possibility in several Euro- shotgun wedding of Wells Fargo & Wachovia

e
pean countries and even the United States. after it was speculated that without the merger
Wachovia was also going to fail. Dozens of U.S.

em
Ac icl EFFECTS ON FINANCIAL banks received funds as part of the TARP or
INSTITUTIONS $700 billion bailout. The TARP funds gained some
controversy after PNC Financial Services received
Several major financial institutions either
TARP money, only to turn around hours later
failed or were bailed-out by governments, or
and purchase the struggling National City Corp.,
merged (voluntarily or otherwise) during the
which itself had become a victim of the subprime
crisis. While the specific circumstances varied, crisis. As a result of the financial crisis in 2008,
n
in general the decline in the value of mortgage- twenty-five U.S. banks became insolvent and were
ad
backed securities held by these companies re- taken over by the FDIC. As of August 14, 2009,
sulted in either their insolvency, the equivalent an additional 77 banks became insolvent. This
of bank runs as investors pulled funds from seven month tally surpasses the 50 banks that
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them, or inability to secure new funding in the were seized in all of 1993, but is still much smaller
credit markets. These firms had typically bor- than the number of failed banking institutions in
rowed and invested large sums of money rela- 1992, 1991, and 1990. The United States has lost
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tive to their cash or equity capital, meaning over 6 million jobs since the recession began in
they were highly leveraged and vulnerable to December 2007. The FDIC deposit insurance fund,
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unanticipated credit market disruptions. supported by fees on insured banks, fell to $13
billion in the first quarter of 2009 That is the
The five largest U.S. investment banks, with
lowest total since September, 1993.
combined liabilities or debts of $4 trillion, either
went bankrupt (Lehman Brothers), were taken Carl Levin and Tom Coburn committee
over by other companies (Bear Stearns and
Merrill Lynch), or were bailed-out by the U.S. The Permanent Subcommittee on Investigations
government (Goldman Sachs and Morgan (PSI) is the oldest subcommittee of the U.S. Senate
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Stanley) during 2008. Government-sponsored Committee on Homeland Security and Govern-

enterprises (GSE) Fannie Mae and Freddie Mac mental Affairs (formerly the Committee on Gov-
either directly owed or guaranteed nearly $5 ernment Operations). The Permanent Subcommit-
trillion in mortgage obligations, with a simi- tee on Investigations was created at the same time
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larly weak capital base, when they were placed as the Committee on Government Operations in
1952. On April 13, 2011 the Committee released
into receivership in September 2008. For scale,
its report on Wall Street and the Financial Crisis:
this $9 trillion in obligations concentrated in
Anatomy of a Financial Collapse. The 635-page
seven highly leveraged institutions can be com-
bipartisan report was issued under the chairman-
pared to the $14 trillion size of the U.S. economy
ship of Carl Levin and Tom Coburn and also thus
(GDP) or to the total national debt of $10 tril-
referred as the Levin-Coburn Report.
lion in September 2008.
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 Mortgage-backed security (MBS) tions also securitize mortgages, known as "pri-
vate-label" mortgage securities. Issuances of
A mortgage-backed security (MBS) is an as- private-label mortgage-backed securities in-
set-backed security that represents a claim on creased dramatically from 2001 to 2007, and
the cash flows from mortgage loans through a then ended abruptly in 2008 when real estate
process known as securitization. The process of markets began to falter.
securitization is complicated, and is highly de-
pendent on the jurisdiction within which the EUROPEAN SOVEREIGN DEBT CRISIS

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process is conducted. The basics are:
The European sovereign debt crisis is an on-

ad e
1. Mortgage loans (mortgage notes) are pur- going financial crisis that has made it difficult
chased from banks and other lenders, and or impossible for some countries in the euro

em
possibly assigned to a special purpose ve- area to refinance their government debt with-
Ac icl
hicle (SPV).
2. The purchaser or assignee assembles these
loans into collections, or "pools".
out the assistance of third parties. From late
2009, fears of a sovereign debt crisis developed
among investors as a result of the rising private
and government debt levels around the world
3. The purchaser or assignee securitizes the
pools by issuing mortgage-backed securities. together with a wave of downgrading of gov-
ernment debt in some European states.
While a residential mortgage-backed secu-
n
Causes of the crisis varied countrywise. In sev-
rity (RMBS) is secured by single-family or two
eral countries, private debts arising from a prop-
to four family real estate, a commercial mort-
gage-backed security (CMBS) is secured by com- erty bubble were transferred to sovereign debt as
a result of banking system bailouts and govern-
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mercial and multifamily properties, such as

ment responses to slowing economies post-bubble.
apartment buildings, retail or office
properties, hotels, schools, industrial properties In Greece, unsustainable public sector wage and
and other commercial sites. A CMBS is usually pension commitments drove the debt increase.
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The structure of the Eurozone as a monetary union

structured as a different type of security than
an RMBS. (i.e., one currency) without fiscal union (e.g., dif-
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ferent tax and public pension rules) contributed

These securitization trusts include govern- to the crisis and impacted the ability of European
ment-sponsored enterprises and private entities leaders to respond. European banks own a sig-
which may offer credit enhancement features nificant amount of sovereign debt, such that con-
to mitigate the risk of prepayment and default cerns regarding the solvency of banking systems
associated with these mortgages. Since residen- or sovereigns are negatively reinforcing.
tial mortgages in the United States have the
option to pay more than the required monthly Concerns intensified in early 2010 and there-
after, leading Europe's finance ministers on 9
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payment (curtailment) or to pay off the loan in

May 2010 to approve a rescue package worth
its entirety (prepayment), the monthly cash flow
of an MBS is not known in advance, and there- •750 billion aimed at ensuring financial stabil-
fore presents risk to MBS investors. ity across Europe by creating the European Fi-
nancial Stability Facility (EFSF).
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In the United States, the most common

In October 2011 and February 2012, the
securitization trusts are Fannie Mae and Freddie
Mac, U.S. government-sponsored enterprises. eurozone leaders agreed on more measures
Ginnie Mae, a U.S. government-sponsored en- designed to prevent the collapse of member
economies. This included an agreement
terprise backed by the full faith and credit of
the U.S. government, guarantees its investors whereby banks would accept a 53.5% write-off
receive timely payments, but buys limited num- of Greek debt owed to private creditors, increas-
ing the EFSF to about •1 trillion, and requiring
bers of mortgage notes. Some private institu-
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 European banks to achieve 9% capitalisation. cession; fiscal policy choices related to govern-
To restore confidence in Europe, EU leaders ment revenues and expenses; and approaches
also agreed to create a European Fiscal Com- used by nations to bail out troubled banking
pact, including the commitment of each par- industries and private bondholders, assuming
ticipating country to introduce a balanced bud- private debt burdens or socializing losses.
get amendment.
Commentator and Financial Times journal-
While sovereign debt has risen substantially ist Martin Wolf has asserted that the root of the
in only a few eurozone countries, it has be- crisis was growing trade imbalances. He notes

y
come a perceived problem for the area as a in the run-up to the crisis, from 1999 to 2007,

e
whole. Prior to May, 2012, the European cur- Germany had a considerably better public debt
rency remained stable. As of mid-November and fiscal deficit relative to GDP than the most

em
2011, the euro was even trading slightly higher
Ac icl affected eurozone members. In the same pe-
against the bloc's major trading partners than riod, these countries (Portugal, Ireland, Italy
at the beginning of the crisis. Three countries and Spain) had far worse balance of payments
significantly affected, Greece, Ireland and Por- positions. Whereas German trade surpluses in-
tugal, collectively accounted for 6% of the creased as a percentage of GDP after 1999, the
eurozone's gross domestic product (GDP). Dur- deficits of Italy, France and Spain all worsened.
ing June 2012, the Spanish debt crisis became a
prime concern for the Euro-zone. Interest rates Paul Krugman wrote in 2009 that a trade defi-
n
on Spain's debt rose significantly and its ability cit by definition requires a corresponding in-
ad
to access capital markets was affected, leading flow of capital to fund it, which can drive down
to a bailout of its banks and other measures. interest rates and stimulate the creation of
bubbles: "For a while, the inrush of capital cre-
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The European sovereign debt crisis resulted ated the illusion of wealth in these countries,
from a combination of complex factors, includ- just as it did for American homeowners: asset
ing the globalization of finance; easy credit con- prices were rising, currencies were strong, and
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ditions during the 2002-2008 period that en- everything looked fine. But bubbles always burst
couraged high-risk lending and borrowing prac- sooner or later, and yesterday's miracle econo-
tices; the 2007-2012 global financial crisis; in-
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mies have become today's basket cases, nations

ternational trade imbalances; real-estate bubbles whose assets have evaporated but whose debts
that have since burst; the 2008-2012 global re- remain all too real."
S

•••
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 INTERNATIONAL TRADE AND CHRONICLE
FINANCE IAS ACADEMY
A CIVIL SERVICES CHRONICLE INITIATIVE

y
TRADE THEORIES AND that if a nation is more efficient than an-

ad e
INTERNATIONAL FINANCE other in the production of a commodity
but is less efficient in producing a second
The term International trade refers to the

em
commodity, then both nations can gain by
exchange (exports and imports) of goods & ser-
Ac icl each specializing in production of the com-
vices among nations. This process of exports
modity of its absolute advantage and ex-
and imports involves two or more nations with
changing part of the output with other
different national currencies. Therefore in or-
nation for another commodity. Thus in this
der to make the exchange effective, some uni-
theory both nations gain unlike
versally accepted currencies or precious metals
mercantilist's view where in international
are used (other than the barter trade to settle
trade one nation can gain only at the ex-
n
the transactions). The precious metals used are
pense of the other.
generally gold and bullion whereas the univer-
sally accepted currencies are the national cur- (3) Comparative advantage theory: This theory
rencies of a few developed nations who have propounded by David Ricardo in 1817, is
o

substantial presence in the world trade and an improvement over absolute advantage
hence their currencies are easily accepted by theory and is also till date regarded as the
trading nations. These currencies include U.S. most important and unchallenged law of
Dollars, Japanese Yen and European Euro, etc. economics. It says that even if a nation is
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Since international trade worth billions of dol- less efficient (i.e. has an absolute disadvan-
lars takes place annually, it seems that there tage) than another in the production of both
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exists some obvious mutual benefits to the trad- the commodities there is still a basis for
ing nations. Different theories have been put mutually beneficial trade. The first nation
forward to explain their advantages which are should specialize in the production and
listed below:- export of the commodity in which its abso-
lute disadvantage is smaller (i.e its com-
(1) Mercantilism: This was the first formal
modity of comparative advantage) and
writing on international trade, originated
import the commodity in which its abso-
during the seventeenth and eighteenth cen-
lute disadvantage is larger (i.e. its commod-
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tury. This line of thinking advocates that

ity of comparative disadvantage). This can
the way a nation could become rich and
be shown with the help of an example: -
powerful was to export more and import
less. The resulting export surplus would Wheat (bushels/Labor hour) U.S U.K.
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then be settled through inflow of gold and 6 1

bullion. Therefore this way, one nation
Cloth (yards/ Labor hour) 4 2
could gain only at the expense of the other.
This theory was later discarded by other In the above table even though U.K is less
theories which stress that trade will ben- efficient in the production of both the com-
efit both the trading nations. modity, it can trade by exporting cloth (as
its absolute disadvantage is smaller in cloth
(2) Absolute advantage theory: This theory
vis-à-vis wheat) and importing wheat and
was propounded by 'Adam Smith'. It says
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 still both the nations would gain. commodity, which is intensive in the use
(4) Opportunity Cost Theory: Theory of com- of its abundant factor. Thus in other words,
parative advantage has one weakness as this means that a nation will have its com-
it takes labor as the only factor of produc- parative advantage on the commodity
tion in the production of both the com- which intensively uses its abundant fac-
modities and difference in the labor pro- tor. This will happen so because the rela-
ductivity as the cause of trade. However, tive factor price of the abundant factor
since labor is not the only factor of pro- will be lower in that nation and given the
assumption of similar technology and simi-

y
duction, Haberler in 1936 propounded the
lar consumer tastes and preferences, the

e
opportunity cost theory. It says that cost
of a commodity is the amount of a second relative commodity prices will also differ
commodity that a nation must give up to and this will form the basis of compara-

em
release just enough resources to produce
Ac icl tive advantage and international trade.
an additional unit of the first commodity. Thus, the H-O theory identifies differences
Therefore for a 2 nation, 2-commodity in factor endowments out of all other
world, the nation with a lower opportu- possible factors, as the basis of compara-
nity cost in the production of a commod- tive advantage and international trade.
ity has a comparative advantage in that One more extension of the Heckscher -
commodity whereas the other nation Ohlin theory is that International trade will
n
would have a comparative advantage in equalize the relative and absolute returns
ad
the other commodity. If we assume an to homogenous factor in the two nations.
increasing opportunity cost economy, then Thus international trade serves to bridge
both the nations would specialize in the the gap in factor returns in different na-
o

production of their respective commodi- tions and acts as a substitute for Interna-
ties (based on lower opportunity cost) until tional mobility of factors. This equaliza-
the opportunity costs for both the com- tion will come through because differences
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modities equalises in the two nations. Then in relative commodity prices will force
two nations can trade at an exchange rate, trade among nations. As the nation with
which is mutually beneficial to the two the abundant factor will produce more of
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nations. the commodity which is intensive in the

use of its abundant factor, then demand
Modern Theory of International Trade for the abundant factor will increase and
(5) Heckscher - Ohlin Theory: Whereas other hence its relative factor price will increase,
theories explained above assumed com- opposite will happen iwith the other na-
parative advantage i.e. they do not explain tion. This will bring in equality in the rela-
why labor productivity differs (in case of tive factor prices in the two nations and
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Ricardo) or why opportunity costs differs later on will lead to equality in absolute
(in case of Haberler). The Heckscher - factor returns also.
Ohlin)theory propounded originally by Eli
Heckscher in 1899 (later developed by BALANCE OF PAYMENT
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Ohlin) tries to identify the basis of com- Till now our discussion has been largely
parative advantage i.e. what cause differ- focussed on real side of the international trade.
ences in opportunity costs (or relative com- We discussed about the comparative advan-
modity prices when expressed in monetary tages of the nations in terms of relative com-
terms). modity prices and explained how international
H-O theory states that a nation should spe- trade brings about equalisation of relative com-
cialize in the production and export of the modity prices and relative factor prices. How-

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 ever, putting money values to these figures flows such as receipts for exports or when a for-
involves some complication as international eigner invests in the stockmarket, are treated as
trade involves more than one currency and credits or positive entries. Outflows such as pay-
hence we need to explain the concept of ments for imports or the purchase of shares on a
exchange rate, balance of trade, balance of pay- foreign stock market are debits or negative en-
ments, etc. tries. The accounts are double entry and hence
It is an accounting record of international money they are always equal. For eg. the export of goods
flows (current as well as capital) of a nation with involves the receipt of cash (credit) which repre-

y
the rest of the world. It records financial flows in sents a claim on another country (the debit). Thus

ad e
a specific period such as one year. Financial in- by definition, the balance of payments must
balance.

em
Ac icl
n
ro
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Components of Balance of Payments Current Accounts

The format of the balance of payments The current account consists of two major
given below shows the important types of items, namely (a) merchandise (goods) exports
transactions that enter the balance of pay- and imports; and (b) invisible (services such as
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ments. transport, shipping, Banking, insurance, rent,

Balance of trade (BOT) profit and interest etc.) exports and imports.

= Net visibles Capital Account

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= Export of visibles minus import of visibles The capital account consists of short-term and long-
= Export of goods - Import of goods term capital transactions. Capital outflows repre-
sents debit and capital inflow represents credit. It
Balance of payment must, however, be noted that payment and re-
ceipt on loans and dividend are recorded on cur-
= BOT + Net Invisibles
rent account since they are really payments for the
= BOT + (Export of Services - Import of Services) services of capital during a particular period.

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 Unilateral Transfer Account Visible items refer to merchandise or trade
in goods only. Therefore balance of trade refers
Unilateral transfers are another term for gifts, to net exports of goods.
and include private remittances, government
grants, repatriations and disaster relief. Unilat- Balance of trade = Export of goods - Import
eral payments received from abroad are credits of goods.
and those made abroad are debits. These are
Invisible items refer to trade in services plus
often accounted for in the invisible accounts.
various payments and receipts in the form of

y
Official Reserve Account rents, interest, profits and dividends. Trade in
services includes payments and receipts regard-

e
Official reserves represent the holdings by ing Banking, shipping and insurance. Invisibles
the government in the form of foreign currency also include expenditure by tourists and gifts

em
and securities and gold. The official reserves
Ac icl and unilateral remittances by the nationals of a
usually consist of such assets only which are country working abroad.
accepted as a means of international payments.
Balance of payments takes into account the
Official reserves refer to the Gold and for- exchange of both the visible and invisible items.
eign currencies held by the government. It in- So to say
dicates a country's ultimate ability to pay for
imports and signals pressures on the balance of Balance of payments = Balance of Trade + net
n
invisibles.
ad
payments. They are presented as a nominal
value at the day, month and/or year end. A This represents comprehensive picture of a
general yardstick is that a nation should have, country's economic and financial transactions
o

on an average, official reserves sufficient to with the economic and financial transactions
cover three months' imports. Changes in the of the rest of the world than the balance of
level of official reserves suggest foreign exchange trade.
intervention and therefore indicated pressures
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on the currency. A fall in the reserves suggests Balance of Payments Crisis

that there was intervention to offset currency
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weakness whereas a rise suggests intervention As bills must be paid, ultimately a country's
to hold the currency down. The central bank accounts must balance (although because real
intervention gave rise to a new term called ster- life is never that neat a balancing item is usu-
ilization:- It is defined as follows. When a cen- ally inserted to cover up the inconsistencies).
tral bank sells reserves and purchases its own "Balance of payments crisis" is a politically
currency, the domestic money supply is reduced charged phrase. But a country can often sus-
in size by the amount of domestic currency tain a current account deficit for many years
swallowed up by the bank. On the other hand without its economy suffering, because any
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purchases of foreign currency boost the money deficit is likely to be tiny compared with the
supply. Such intervention is sterilized. Central country's National Income and wealth. Indeed,
Bank neutralizes the effect on the money sup- if the deficit is due to firms importing technol-
ply with some other action, such as the pur- ogy and other capital goods from abroad, which
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chase or sale of government bonds. will improve their productivity, the economy
may benefit. A deficit that has to be financed
Balance of Trade and Balance of Payment by the public sector may be more problematic,
particularly if the public sector faces limits on
Balance of Trade - takes into account only
how much it can raise taxes or borrow or has
those transactions arising out of the exports and
few financial reserves. For instance, when the
imports of the visible items, it does not consider
Russian government failed to pay the interest
the exchange of invisible items.
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 on its foreign DEBT in August 1998 it found it currency to keep the exchange rate fixed. In
impossible to borrow any more money in the the case of fluctuating exchange rate, exchange
international financial markets. Nor was it able rate is determined by the demand and supply
to increase taxes in its collapsing economy or to of foreign exchange by the nationals of a coun-
find anybody within Russia willing to lend it try. The exchange rate appreciates or depreci-
money. That truly was a balance of payments ates, depending on the market forces of de-
crisis. mand and supply. This in turn has an impact
on the competitive position of the economy. A

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In the early years of the 21st century, econo- devaluation/depreciation of a nation's currency

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mists started to worry that the United States may decrease imports and increase exports to
would find itself in a balance of payments cri- help improve the foreign exchange position of
sis. Its current account deficit grew to over 5%

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the nation. This is measured and reflected in
of its GDP, making its economy increasingly
Ac icl Balance of Payments position of the nation.
reliant on foreign CREDIT.
Different Exchange Rate Regimes
Terms of trade
Gold Standard: Before 1914, exchange rates were
It refers to the ratio of export prices to import fixed in terms of gold, Trade was mainly in
prices. It measures the volume of imports that physical goods and capital flows were limited.
can be bought with one unit of exports. It is pre-
n
A country, which developed a deficit on its cur-
sented as index numbers. An improvement in the rent account, would first consume its reserves of
nation's terms of trade indicates that export earn- foreign currencies. Then it would have to pay
ings will buy more imports but its effect on trade for the imports by shipping gold. The transfer of
o

balance or BOP will depend on many other re- gold would reduce the money supply in the
lated factors. Terms of trade are said to improve deficit country since currencies were then backed
if export prices rise more highly or fall more slowly by convertibility into gold. The contracting
than import prices. Typically, an exchange rate money supply in the deficit country would re-
r

devaluation or depreciation increases import duce prices and output and hence would lower
prices relative to export prices and causes the its imports. The opposite will happen in the
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terms of trade to deteriorate. surplus country and thus the current account
would automatically return to equilibrium. This
EXCHANGE RATE system got out of balance in 1920's and was
Exchange rate is the amount of the national abandoned by early 1930's.
currency required by a nation to purchase one
unit of foreign currency say US Dollar. Since Flexible/Floating Exchange Rate
most of the international trade that takes place
After breaking down of gold standard and
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today is in money terms exchange rates have

the end of World War II, an international con-
an important influence on the flow of interna-
ference was convened in America at Bretton
tional trade. Two types of exchange rate re- Woods, New Hampshire in June 1944. The par-
gimes exist in the contemporary world today: - ticipants vowed to form the IMF and the World
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a) Fixed exchange rate. Bank and the major currencies were fixed in
b) Floating/Fluctuating exchange rate. relation to the dollar (Pegging). Fluctuations
were allowed to the extent of 1% on either side.
In the fixed exchange rate, the exchange rate In addition, the American Government agreed
of the national currency is fixed and tied to to buy gold on demand at $35 per ounce. How-
another universally accepted foreign currency ever, this pegged Bretton Woods system broke
say US Dollar. The Central Bank of the nation by the 1970's. Persistent American deficits had
stands ready to purchase and sell the foreign led to an international excess of dollars and
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 American gold reserves came under pressure. Effective Exchange rate (EER) and Real Effec-
In 1971, Americans suspended the convertibil- tive Exchange Rate (REER)
ity of the dollar into gold. Major currencies of
the world were allowed to float against each There exist different versions of Exchange
other depending on the demand and supply. rates, including nominal exchange rate (which
Since then exchange rates are largely floating we have discussed so far).
and are determined by the market. EER is the average exchange rate against a
How exchange Rate is fixed in India basket of currencies, with which the nation

y
trades. It is presented as index numbers.

e
The Exchange rate of Indian rupee is deter-
mined on the basis of a basket of currencies, REER measures the competitiveness of a na-
tional currency against the basket of currencies

em
which comprises currencies of its main trading
partners as well as world economic powers such
Ac icl with which the nation trades.
as the USA, the U.K., France, Japan, Germany,
Thus the exchange rate regime in India is a
etc. In India foreign exchange rates are now
managed float with the nominal exchange
completely market determined, i.e Indian ex-
rate(against a basket of currencies) targeted to
change rate is floating exchange rate. Today
achieving the real exchange rate which yields a
Rupee is fully convertible on current account
sustainable current account deficit.
i.e. no prior approval of RBI is required to
n
import goods and services except those in the Foreign Exchange Market: It is a market where
ad
negative list. However, capital account convert- one country's currency can be exchanged for
ibility has till date remained a ticklish issue and another country's. It is not a geographic loca-
it has not been permitted till now. The move-
o

tion; instead it is an informal network of tele-

ment of capital is today regulated through For- phone, telex, facsimile and computer commu-
eign Exchange Management Act (FEMA) 1999. nications between banks, foreign exchange deal-
The Tarapore Committee set up to study the ers - arbitrageurs and speculators. The market
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procedure for the same recommended a phased operates simultaneously at three tiers:-
programme over the three-year period and to
a) Individuals and corporations buy and sell
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achieve the preconditions for CAC. At present

foreign exchange through their commer-
RBI intervenes only occasionally in the market
cial banks.
to prevent any substantial diversion of the ex-
change rate from the fundamental levels. b) Commercial banks trade in foreign ex-
change with other commercial banks in
As to what determines the exchange rate, the same financial centre.
no neat explanation can be given for the same, c) Commercial banks trade in foreign ex-
but two leading theories put forward are:- change with commercial banks in other
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(i) Purchasing Power parity (ii) Investment Port- financial centres.

folios theory. Purchasing Power Parity is de-
fined as the exchange rate, which equates the Foreign exchange market consists of a spot
prices of a basket of goods and services in two market and forward market. In the sport mar-
ket, foreign currencies are sold and bought for
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countries. In the long run it is argued that cur-

rencies should move towards their PPP. Big Mac delivery within two business days after the day
Index is one of the ways to ascertain PPP of a trade. In the forward market, foreign cur-
among nations. The portfolio approach suggests rencies are sold or brought for future delivery.
that exchange rates move to balance total re- There are many types of participants in the
turns (interest + expected exchange rate move- foreign exchange market. They include export-
ments) among nations. ers, governments, importers, multinational com-
panies, tourists, commercial banks and central

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 banks. However large commercial banks and be exercised at maturity, payment and delivery
central banks are the two major participants in in futures contracts are required at maturity.
the foreign exchange market.
Different participants in the foreign exchange
In the foreign exchange market, foreign ex- market enter into spot & forward/futures con-
change quotations are made in terms of num- tract for different reasons. The reasons include
ber of units of local currency required to buy arbitrage, hedging or risk avoidance and specula-
one unit of a foreign country. Hence India quotes tion.

y
its exchange rates in rupees, which can be ex-
Arbitrage: Arbitrage is the purchase of an asset

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changed for one unit of foreign exchange for
example Rs. 46.50/$. This means that we re- or a commodity in one market and its sale in
another market to take advantage of a price dif-

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quire Rs. 46.50 to get one unit of US $. Practi-
cally all-major newspapers in the world print a
Ac icl ferential. Professional arbitrageurs quickly trans-
daily list of exchange rates. fer funds from one currency to another in order
to profit from discrepancies between exchange
Cross rates: Most currencies are traded against rates in different markets. The process of arbi-
the US dollar, but at times exporters and im- trage also works through the foreign exchange
porters need to know the exchange rate be- market to bring interest in national markets to-
tween two non-U.S. currencies. For example, gether.
n
the exchange rate between Indian Rupee and
Korean Won. Because most currency pairs are Hedgers: They enter into forward/future con-
not traded actively, their exchange rate is de- tracts to eliminate possible exchange losses on
termined through their relationship to a widely export and import orders denominated in foreign
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traded third currency such as the U.S. dollars. currencies. Hedgers mostly MNCs, engage in for-
The type of exchange rate desired here is known ward contract to protect the home currency value
as the cross-rate. of foreign-currency denominted assets and liabili-
ties. This way they insulate themselves from fluc-
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The exchange rate quotations in the forward tuations in the foreign exchange market and are
market are made either "outright" or in terms able to focus on the core areas of operation.
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of the spread on the spot rate. For e.g. a trader

may buy the 90-days outright forward quota- Speculations: Deliberately expose themselves
tion as Rs. 46.75/ $ 1 or through spread on to exchange risk by engaging in forward con-
the spot rate in terms of basis points (one basis tracts in order to make a profit from exchange
point - 0.01per cent) fluctuations.

Currency futures and options market: Cur-

rency futures market is just like the currency
ECONOMIC INTEGRATION
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forward market except that trade in the future The term economic integration refers to the kind
market is done in standard units and only in of arrangement between two or more trading
the future market where forward market is an countries that remove artificial trade barriers
informal market in which contracting parties such as tariff and quotas between them. In fact
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enter into a tailor made agreement for exchange the term economic integration is a broad and
rate. general term, which covers several kinds of ar-
rangement by which two or more countries
Currency options market: Currency option is mutually agree to draw their economies closer
simply a contract that gives the holder the right in terms of trade, investment and other kinds
to buy or sell any foreign currency at a speci- of economic cooperation. In a very developed
fied price during a specified period. Whereas kind of arrangement for economic integration,
the currency options do not necessarily need to the countries may agree to integrate their social

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 and national policies as well. If we consider What is Convertibility?
the level of integration in ascending order, there
When one currency is freely exchangeable
are various kinds of economic integration such
with another in the market, this attribute is
as Free Trade Area, Customs Union, Common
Market and Economic Union. referred to as convertibility. In a convertible ex-
change rate regime we can purchase another
Forms of Economic Integration currency by paying in with our currency at the
market exchange rate.
1. Free Trade Area: A Free Trade Area (FTA)
Convertibility of a currency may be full or

y
is a grouping of the countries to bring about
free trade between them. The FTA abol- partial. Full float of a currency in the exchange

e
ishes all restrictions on trade among the market vis-à-vis other currencies for the deter-
members but each member is left free to mination of exchange rate is practiced by the

em
Ac icldetermine its own commercial policy with developed nations. The developing countries like
non- members. There are many examples India usually adopt a policy of "managed float"
of FTA, which are operational at present. or "partial float" (sometimes referred to as dirty
North Atlantic Free Trade area (NAFTA) float as well). India's exchange rate was deter-
is one such arrangement among the USA, mined through managed float till 1992. Before
Mexico and Canada. There is an FTA be- India adopted what we call Liberalised Ex-
tween Singapore and Japan. India has also change Rate Management System (LERMS) in
FTAs with Sri Lanka and Thailand.
n
1992, the exchange rate of Rupee was deter-
ad
2. Customs Union: A customs Union is a mined by the Reserve Bank of India on the basis
more advanced level of economic integra- of a basket of currencies. In LERMS, or Partial
tion than the FTA. It not only eliminates Convertibility 60% of foreign currency holding
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all restrictions on trade among member was permitted to be converted on the market
countries, but also adopts a uniform com- rate whereas remaining 40% on official rate.
mercial policy against the non- members.
Full Convertibility on Trade A/C
The European union started as a customs
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union. A unified exchange rate was introduced in

3. Common Market: The Common market is 1993 & 1994 budgets through the provision of
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a step ahead of the Customs Union. A full convertibility of rupee on trade account
common Market allows free movement of under the unified exchange rate regime; the
labour and capital within the Common 60:40 ratio was extended to 100 per cent con-
Market, besides having the two charac- version. This 100 per cent conversion was ex-
teristics of the Customs Union, namely, tended to almost the entire merchandise trade
free trade among members and uniform transactions (i.e. export and import of goods);
tariff policy towards non-members. In its and all receipts, whether on current or capi-
earlier stage European Union was like a tal account of balance of payments (BOP),
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Common Market. but not all payments.

4. Economic Union: It is the most advanced
level of integration. This satisfies the con- Full Convertibility on Current Account
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ditions of the Common Market and addi-

In February 1994, the RBI undertook several
tionally it also achieves some degree of har-
monization of national economic policies. steps towards achieving full convertibility of
Current A/c. India achieved full convertibility
The European Union is a living example
on current A/c on 19the August, 1994, when
of this kind of arrangement, which requires
the RBI further liberalized its exchange rate
all its members to abide by certain mon-
system of the IMF, under which India is com-
etary and fiscal disciplines along with some
mitted to forsake the use of exchange restric-
harmonization in social and political arena.
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 tions on current international transactions as convertibility:
an instrument in managing the BOP. The trans- 1. First strengthen your own/domestic mar-
actions under current account may be one of ket for Capital and improve financial fun-
the following: damentals such as fiscal deficit and infla-
• All payments due in connection with foreign tion.
trade, current business, including services and 2. Boost exports and then slowly open up.
normal short-term banking and credit facili-
ties.

y
Tarapore Committee on Capital Account Con-
• Payments due as interest on loans and as net vertibility

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income from other investments.
Tarapore Committee on Capital Account Con-

em
• Payments of moderate amount of amortisa-
vertibility suggested that notwithstanding advan-
tion of loans or for depreciation or direct in-
Ac icl tages of Capital Account Convertibility, India
vestments, and
should achieve certain preconditions and sign-
• Moderate remittance for family living expenses. post before making any haste towards full con-
vertibility. As long as the economy is not robust
Full Convertibility on Capital Account
with regard to its fiscal management and exter-
Capital account convertibility refers to easy nal balance of payments, any measure to hasten
full convertibility on the C/A would prove disas-
n
and free conversion of a currency, say rupee,
in dollars for loan and investment purposes. trous.
India has so far not allowed full conversion on
capital account because the health of financial FOREIGN EXCHANGE MANAGEMENT
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sector in India is not considered strong enough ACT (FEMA), 1999

for this. A committee called the Tarapore Com- The Foreign Exchange Management Act
mittee was formed five years back at the behest (FEMA) has replaced the Foreign Exchange
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of the international lending community and pro- Regulation Act (FERA). Main reason for mak-
reformists to suggest a roadmap for CAC. Trans- ing FEMA that relaxes control on foreign ex-
actions in the capital account may include giv-
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change is that India has made its currency, i.e.

ing and taking Loans and credits, investing for Rupee, convertible on current account. This is
speculative purposes, etc. among others. to facilitate the external trade and payments
and promote the orderly development and main-
Main Advantages of capital account con- tenance of the foreign exchange market in
vertibility India.
1. Smooth availability of funds to industries
and traders. PRECONDITIONS AND SIGNPOSTS
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2. A step forward towards globalisation by

way of connecting domestic financial mar- FISCAL CONSOLIDATIONS
ket with world financial market.
• Reduction in Gross Fiscal Deficit as per-
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Apprehensions regarding capital account con- centage of Gross Domestic Product from
vertibility: budgeted 4.5 in 1997-98 to 4.0 in 1998-99
and further to 3.5 in 1999-2000.
1. Flight of capital.
• Introduction of Consolidated Sinking Fund.
2. Dominance of foreign financial institutions
• Introduction of a system of fiscal trans-
over domestic players.
parency and accountability on the lines
Suggestions for moving over to capital account New Zealand Fiscal Responsibility Act.

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 MANDATED INFLATION RATE required. Even on capital account transactions,
the Central Bank has come out with twenty-
• The mandated rate of inflation for the 3 five notifications, some of which cover these
year should be an average of 3% to 5%. transactions as well as areas such as exports
• RBI should be given freedom to attain the and insurance.
tarred mandate of inflation approved by
the Parliament. MONEY LAUNDERING ACT
• There should be clear and transparent The Prevention of Money Laundering Act,

y
guidelines on the circumstances under which was recently amended to remove cer-
which the mandate could be changed.

e
tain shortcomings, came into force on July 1,
2005. The Act, aimed at combating channelling
Some features of FEMA are as follows: -

em
Ac icl of money into illegal activities, provides for at-
Foreign trade transactions could be done only tachment and seizure of property and records.
with the persons authorized by R.B.I. No per- It also provides for stringent punishment, in-
son can acquire, hold, own, possess or transfer cluding rigorous imprisonment of upto 10 years
any foreign exchange, foreign security or im- and fine of upto Rs. 5 lakh.
movable property outside India, except in cases Main features:
where the Act provides for this. Current ac-
• FIs, including chit funds, cooperative banks,
count transactions are freely allowed. However,
n
housing finance companies and non-bank-
ad
in the public interest, the union government, in
consultation with the RBI, may impose reason-
ing financial entities, and intermediaries like
stock-brokers, sub-brokers, share transfer
able restrictions on current account transactions.
agents, bankers and registrars to an issue,
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Foreign exchange can be drawn for all current

merchant bankers, underwriters, portfolio
account transactions, except those that are pro-
managers, investment advisers and others
hibited, while on the capital account forex
have to be registered with SEBI.
outflow is allowed only for transactions that
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are permitted. The three schedules of FEMA • Transactions include all cash of over Rs.
(current account transactions Rules, 2000) 10 lakh or its equivalent in foreign cur-
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specify the restrictions on current account trans- rency, all series of cash transactions inte-
actions. The first schedule mentions the trans- grally connected to each other which have
actions that are prohibited, the second lists the been valued below Rs 10 lakh or its equiva-
transactions that need the government's per- lent in foreign currency where such trans-
mission and the third schedule contains the actions have taken place within one cal-
transactions that need the prior approval of endar month, and all suspicious transac-
the RBI. tions, whether or not made in cash.
• The financial intelligence unit has been set
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Prohibited Transactions: In the First Sched-

up as a multi-disciplinary unit for estab-
ule money earned from lottery winnings, rac-
lishing links between suspicious or unusual
ing/riding or any other hobby is not allowed to
financial transactions and underlying
be remitted. The Second Schedule lists trans-
criminal activities.
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actions that need government's approval such

as cultural tours and health insurance from a • For better coordination and information
company abroad, to mention just two. The sharing, FIU-IND would coordinate and
Third Schedule contains items, which require support efforts of national and global in-
RBI's permission. Thus, if a current account telligence, investigation and enforcement
transaction is not found in any of the above- agencies in pursuing efforts against money
mentioned schedules, RBI permission is not laundering and related crimes.

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 • It would be the central nodal agency Zones Bill, 2005 after adopting an official
responsibility for receiving, processing, amendment to drop the Bill's provision in grant-
analysing and disseminating information ing flexibility in labour laws by the States in the
relating to suspect financial transactions proposed Central Act. The original Act had no
to these agencies who would protect it direct Central role in laying down labour policy
against misuse. in the SEZs. The Central legislation proposed
• Through its research and analysis func- that the States may take suitable steps to grant
tion, FIU-IND would monitor and identify exemption from labour laws (clause 18) appli-

y
strategic key areas on money laundering cable in the special economic zones. Hence, the

ad e
trends, methods and developments. Government moved an amendment to the SEZ
Act, 2005 by dropping this clause.
• For the purpose of money-laundering, the

em
Act has identified certain offences under
Ac icl INDIRECT TAX CHANGES
the Indian Penal Code, Narcotics Drug
and Psychotropic Substances Act, Arms 7 pc additional customs duty would be appli-
Act, Wild Life (Protection) Act, Immoral cable on Laptops as in case of computers.
Traffic (Prevention) Act and Prevention of
Corruption Act. 4 pc countervailing duty removed on compo-
nents used in the manufacture of mobile
The Act, in line with India's commitment to handsets.
n
fight all forms of economic crimes, came into
being in 2002 but could not be brought into Duty on molasses cut from Rs 1,000 per tonne
force due to certain lacunae. It was accord- to Rs 750 per tonne.
o

ingly in the Parliament's session to remove the Excise duty anomaly on nylon tyre cord fab-
shortcomings that it came into effect on 1 July, ric removed.
2005. As per the Act, every banking company,
financial institution and intermediary needs to Objectives of the Act
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maintain a record of all transactions, the na-

ture and value of which is being prescribed in (1) Making available goods and services free
of taxes and duties, bolstered by integrated
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the rules. The Money Laundering (Amendment)

Regulations, 2012, have come into force on 1st infrastructure for export production.
October 2012. (2) A package of incentives to attract foreign
and domestic investments for promoting
The Government has entrusted the work relat- export-led growth.
ing to investigation, attachment of property/pro-
(3) The Bill is silent on conferring powers to
ceeds of crime relating to the scheduled offences
the Development Commissioners for allow-
under the Act and filing of complaints, etc. to the
ing flexible labour policies in SEZ units.
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Directorate of Enforcement in the Finance Minis-

try. India is committed to fight all forms of eco- Important Features of the Act
nomic crimes, including money laundering.
• To attract investment, both domestic and
The government of India has enacted a num-
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foreign.
ber of special laws regulating customs, excise,
• To ensure employment generation since ex-
taxes, foreign exchange, narcotic drugs, bank-
port activities hold the potential for job
ing, insurance, trade and commerce to deal
creation.
with economic crimes.
• Provides for a stable and long-term fiscal
SEZ BILL policy framework with minimum regula-
tory intervention for such zones.
The Lok Sabha passed the Special Economic
• It also provides for a single-window clear-
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 ance mechanism for the establishment of The only condition would be that the units
SEZs. in the zones would have to be a net foreign
• The Act provides that SEZs could also take exchange earner. DTA sales would be on pay-
the form of port, airport, inland container ment of full customs duties and in accordance
depot, land station and land customs sta- with the import policy in force. The movement
tions, as the case may be, under Section 7 of goods between SEZs and ports will be unre-
of the Customs Act. stricted and without any hindrance.
• It empowers the Union Government to The SEZs imply a qualitative transformation

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specify an officer or agency for carrying of the traditional Export Processing Zones

e
out surveys or inspections to verify or (EPZs). The improvements include 100 per cent
ensure compliance with the provisions of FDI investment through automatic route to

em
the Central Act by a developer or an en- manufacturing SEZ units (barring a handful of
trepreneur.
Ac icl
• Under this dispensation, units would be eli-
gible for 100 per cent tax exemption for 5
sensitive industries), no routine examination by
customs of export and import cargo in SEZs,
all imports on self-certification basis, duty free
years, 50 per cent for the next five years and material to be utilized over five years, no pre-
50 per cent of the ploughed back export determined value addition, DTA sales on full
profits for the next five years (in all 15 years). duty payment and various procedural simplifi-
• The Bill also proposes to grant exemption cation for operations like record keeping, inter-
n
unit transfers, subcontracting, disposal of obso-
ad of capital gains on transfer of assets in the
case of shifting of industrial undertaking lete materials, etc.
from urban area or any other area to a SEZs will be permitted to set up in the pub-
o

SEZ on the lines of Section 54G of the lic, private, joint sector or by the State Govern-
Income-Tax Act. ments with a minimum size of not less than
100 hectares. These units may be for manufac-
Special Economic Zones (SEZs)
r

turing, trading or service activity. Package of

A new scheme was introduced in Exim incentives announced so far include exemption
from industrial licensing for manufacture of
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Policy from 1.4.2000 for establishment of Spe-

cial Economic Zones (SEZs) in different parts items reserved for SSIs and removal of sectoral
of the country, with a view to providing an ceilings on FDI in SEZ units.
internationally competitive and hassle free en- From November 1, 2000 Export Processing
vironment for export production. Zones at Kandla, Santa Cruz (Mumbai), Kochi
The units operating in those zones are to be and Surat have been converted into SEZs. Ap-
deemed as outside the country's customs terri- proval has also been given for setting up SEZs
at Nawguneri (Tamilnadu), Positra (Gujarat),
S

tory and will have full flexibility of operations.

They would be able to import capital goods Kulpi (West Bengal), Paradeep (Orissa), Bhadohi
and raw materials duty free and would also be and Kanpur (Uttar Pradesh), Kakinada
able to access the same from Domestic Tariff (Andhra Pradesh), Dronagiri (Maharashtra)
and Indore (Madhya Pradesh).
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Area (DTA) without payment of excise duty.

Further no permission would be necessary The performance of SEZs largely depends
for inter-unit Sales or transfer of goods. There on comprehensive liberalisation and freedom,
would be no wastage norms or input output as inherent in the Chinese SEZ model. How-
norms. They would be able to undertake job ever, Chinese zones are many times larger than
work for the DTA units and would also be able those currently planned in India. The extent of
to get their goods processed in the DTA. success of SEZs in India would, therefore cru-

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 cially depend upon the degree to which do- Export Processing Zones in India—
mestic regulations; restrictions and infrastruc-
ture inadequacies are eliminated in those zones. Seven Export Processing Zones operating in the
country are:
Export Processing Zones, Special Economic 1. Kandla Free Trade Zone (KFTZ), Kandla,
Zones & Export Houses Gujarat.
FTZs/EPZs are industrial estates, which form 2. Santa Cruz Electronics Export Processing

y
enclaves within the national customs territory Zone (SEEPZ), Santa Cruz, Mumbai

ad e
and are usually situated near international port 3. Noida Export Processing Zones, Noida,
and/or airport. The entire production of such UP.
Zones is normally exported. Imports of raw

em
4. Madras Export Processing Zones, Chennai.
materials, intermediate products, equipment &
Ac icl 5. Cochin Export Processing Zones, Cochin, Kerala.
machinery required for export production are
not subject to the payment of customs duty. A 6. Falta Export Processing Zones, Falta, West
characteristic feature of EPZs is the speed and Bengal.
simplicity of import and export transactions. 7. Visakhapatnam Export Processing Zone,
Time-consuming customs procedures on import Visakhapatnam.
into the Zones and exports from the zones are
n
kept to minimum.

•••
ro
Ch
S
IA

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 POVERTY & UNEMPLOYMENT CHRONICLE
IAS ACADEMY
A CIVIL SERVICES CHRONICLE INITIATIVE

WHAT IS POVERTY? Groups and (3) Lower Income Groups.

y
e
Poverty refers to the inability to get the mini- Poverty Ratios by URP and MRP
mum consumption requirement for life, health
S.No Category 1993-94 2004-05

em
and efficiency. Poverty is painful and it leads
Ac icl
to discontentment. If people are left to live By Uniform Recall
amidst poverty for a long time it may have
Period (URP)
serious political repercussions. The people's dis-
contentment may lead to social tension as seen Method
in Bihar, Andhra and M.P. (Naxalite move- 1. Rural 37.3 28.3
ments).
2. Urban 32.4 25.7
The word 'Poverty' is used in two senses:
n
3. All India 36.0 27.5
ad
1. Absolute Poverty
By mixed Recall
2. Relative Poverty
Period (MRP)
o

1. Absolute Poverty: This approach defines

minimum level of income required to sus- Method
tain life: for example, estimating minimum 4. Rural 27.1 21.8
dietary needs and how these can be most
5. Urban 23.6 21.7
r

cheaply met. In the official estimates of

poverty by the Planning Commission in 6. All India 26.1 21.8
India, the concept of 'absolute poverty' has
Ch

been adopted. The concept of absolute pov- Table 1:

erty in India is based on 'nutritional crite-
ria' expressed in terms of 'consumption ex- Source: Planning Commission
penditure'. There is one 'consumption ex-
penditure level' above which the people are Poverty Estimates 2004-05
well-off and below which people are poor. 1. The Planning Commission as the Nodal
This consumption expenditure level is agency in the Government of India for es-
S

known as 'poverty line'. timation of poverty has been estimating the

2. Relative Poverty: This approach defines number and percentage of poor at national
poverty relative to appropriate comparator and state levels. Since, March 1997 it has
groups. Thus while an individual may have been using the Expert Group Method (Ex-
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more than enough income to sustain life, if pert Group on Estimation of Proportion and
it is very low compared to the rest of the Number of Poor) to estimate poverty. Ac-
community, the individual would be cording to this method the estimates of
viewed as being in poverty. As society poverty are made from the large sample
grows richer so the income level defining survey data on household consumer expen-
poverty rises. On this basis we have vari- diture conducted by the National Sample
ous economic categories in society (1) Survey Organization (NSSO) of the Minis-
Higher Income Groups (2) Middle Income try of Statistics and Programme Imple-

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 mentation. Using this methodology the butions.
Planning Commission, in the past, has re- 4. The state specific percentage and number
leased poverty estimates for the year 1973- of poor in rural and urban areas estimated
74, 1977-78, 1983, 1987-88 and 1993-94 from URP consumption distribution gives
by the Government of India on 11th March the state specific percentage and number
1997. Subsequently, the poverty estimates of poor in rural and urban areas estimated
for 1999-2000 were released by the Gov- from MRP consumption distribution.
ernment of India on 22nd February 2001.
5. The percentage and number of poor in

y
While releasing the estimates of poverty
2004-05 estimated from URP consumption

ad e
for 1999-2000, it had been noted that these
distribution of NSS 61st Round of con-
estimates were not strictly comparable with
sumer expenditure data are comparable

em
the estimates for the previous years.
Ac icl with the poverty estimates of 1993-94. The
2. The state-wise rural and urban poverty percentage and number of poor in 2004-
lines for the year 2004-05 are given in 05 estimated from MRP consumption dis-
Table-1. These are estimated using the tribution of NSS 61st Round of consumer
original state-specific poverty lines identi- expenditure data are roughly (but not
fied by the Expert Group and updating strictly) comparable with the poverty esti-
them to 2004-05 prices using the Consumer mates of 1999-2000.
Price Index of Agricultural Labourers
n
6. The URP-consumption distribution data of
(CPIAL) for rural poverty lines and Con- the 61st Round yields a poverty ratio of
sumer Price Index for Industrial Workers 28.3 per cent in the rural areas, 25.7 per
(CPIIW) for urban poverty lines. cent in the urban areas and 27.5 per cent
o

3. The NSSO released the result of the latest for the country as a whole in 2004-05. The
large sample survey data on household corresponding figures obtained from the
consumer expenditure (NSS 61st Round), MRP-consumption distribution data of the
r

covering the period July 2004 to June 2005 61st Round are 21.8 percent in the rural
[Report No.508 (61/1.0/1)]. From this areas, 21.7 per cent in the urban areas
data, two different consumption distribu- and 21.8 per cent for the country as a
Ch

tions for the year 2004-05 have been ob- whole.

tained. The first one from the consump- 7. The poverty estimates in 2004-05 based on
tion data collected using 30-day recall pe- URP consumption distribution (27.5 per-
riod (also known as reference period) for cent) is comparable with the poverty esti-
all the items. The other distribution is ob- mates of 1993-94, which was 36 per cent.
tained from the consumer expenditure data The poverty estimates in 2004-05 based on
collected using 365-day recall period for MRP consumption (21.8 per cent) is
S

five infrequently purchased non-food roughly (but not strictly) comparable with
items, namely, clothing, footwear, durable the poverty estimates of 1999-2000, which
goods, education and institutional medi- was 26.1 per cent.
cal expenses and 30-day recall period for Expert Committee/Lakadawala Committee's
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the remaining items. These two consump- Recommendations

tion distributions have been termed as
Uniform Recall Period (URP) consumption In view of the criticism of the official method
distribution and Mixed Recall Period of estimation of poverty, the Planning Commis-
(MRP) consumption distribution respec- sion Constituted an Expert Group in 1992 un-
tively. The Planning Commission, using the der the chairmanship of Prof. Lakadawala to
Expert Group methodology has estimated examine the methodology and computational
poverty in 2004-05 using both the distri- aspects of poverty ratio. Following are the main

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 features of the expert committee's recommen- unemployment rises everywhere. The simulta-
dation - neous increase in unemployment in many mar-
(1) The expert group retained the concept of kets trends to cyclical unemployment. This kind
poverty line as defined by the earlier offi- of unemployment occurs during recessions
cial method. when employment falls as a result of an imbal-
(2) It suggested changes in the price deflator ance between aggregate supply and demand.
to update the poverty line for use in later Our study of simple demand and supply curves
years. in microeconomics suggest that true exists a
market clearing price at which demand and

y
(3) It suggested the use of state-specific price
supply equals. The commodities market in per-

e
indices so that the changes in the cost of
consumption basket of the people below fect competition gets cleared at this equilibrium
the poverty line may be reflected realisti- price. Since unemployment servants all the time

em
cally.
Ac icl it seems that there is something which prevents
labor markets from getting cleared away. This
It recommended the use of NSS data on con- means to say that there exists inflexibility in
sumption expenditure without adjusting it to wage rates, which prevents them to adjust
the National Accounts estimates of consump- downward and hence unemployment prevents.
tion expenditure for estimation of ratio of people In this context, we now study the terms Volun-
below poverty line. tary & Involuntary unemployment.
n
TYPES OF UNEMPLOYMENT
ad Voluntary unemployment: This refers to those
workers who are not willing to work at the
Frictional Unemployment: This kind of unem-
going wage rate even if they could get one.
ployment arises because of the continuous move-
o

This suggests that voluntarily unemployed

ment of people between regions, jobs or shift-
workers might prefer leisure to jobs at the
ing through different stages of the life cycle.
going wage rate. The existence of voluntary
Even if an economy were at full employment
unemployment suggest that an economy may
r

there would remain some unemployment as

be performing at the peak of efficiency even
there exists a time gap in coincidence of those
though it generates a certain amount of unem-
looking for a job and those who are ready to
Ch

ployment.
employ. This kind of unemployment may also
be called as voluntary unemployment as work- Involuntary unemployment: It refers to those
ers are willingly selecting between Jobs and re- workers currently unemployed even though
gions. they are ready to join at the market wage rate.
Structural Unemployment: This kind of unem- The resultant over supply of labor at the enjoy-
ployment arises because of a mismatch between ing wage rate does not lead to downward move-
the supply of and demand for workers ments in wage rates because of the inflexibility
S

(depending on level of investment and capital of wage rates to move downward. This hap-
formation). Mismatches may occur because the pens due to imperfections in the labor market
demand for one kind of labor is rising while in the form of labor unions (which prevents
the demand for another kind is falling and downward movements of wage rates) or mini-
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supplies do not adjust quickly. This may hap- mum-wage rate stipulation by the government.
pens as certain sectors grow while others de- Unemployment in India
cline.
India is predominantly an agrarian economy.
Cyclical Unemployment: This kind of unem- The industrial sector in India has not grown
ployment exists when the overall demands for sufficiently to absorb the labour force (15-60
labor is low. As total spending and output fall, age group), which is increasing with an increase

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 in population. In an agrarian society where as- they had some prospect of a job. The total
sured source of irrigation is available only to population of working age is far larger than
One-third of the cultivated area, agriculture the officially defined labour force. In the year
turns out to be only a seasonal activity. There- 2000, when employment was 337 million, and
fore our farmers and labourers are faced with the official figure of the labour force was 363
seasonal unemployment. Another remarkable million, the working age population was 578
feature about agriculture is the existence of million. By March 2004, when employment
disguised unemployment in this sector. Since would be 349 million, the working age popula-

y
India is a country where about 65 per cent of tion would have risen to 662 million. In other

ad e
the masses depend on agriculture for livelihood, words, 313 million, or almost half the popula-
the land-man ratio is very adverse. This implies tion in the working age group, are unable to

em
that there is a huge burden on land. Disguised engage in any 'gainful activity' because of the
Ac icl
unemployment refers to employment of a farmer
(or labourer) in agricultural activity even if his/
her marginal productivity is close to zero. For
example if a farm unit is producing 100 quin-
existing economic order and the policies it has
adopted.
The three concepts of unemployment devel-
oped by the NSSO
tals with the help of 10 labourers and now if a
unit of labour is increased (total labourers The three concepts of unemployment devel-
become 11 in number) but production still re- oped by the NSSO primarily refer to chronic
n
mains only 100 quintals, the marginal product unemployment and underemployment. The
of one additional unit of labour is zero. This is three concepts are as follows:-
disguised unemployment, which is peculiar to
(a) Usual Status unemployment - This con-
o

agriculture sector. Prof. Arthur Lewis had sug-

cept is meant to determine the usual Ac-
gested the method for capital formation through
tivity Status - employed or unemployed or
surplus of labour. In such a model disguisedly
outside the labour force - of those covered
unemployed labourers in the agriculture sector
r

by the survey (N.S.S.O). The activity status

were to be shifted to a more productive sector
is determined with reference to a longer
while sticking to the same consumption level,
period; say a year proceeding to the time of
Ch

these labourers produce capital.

survey. The persons covered by the survey
India is a country characterized by inequal- may be classified into those working and/
ity of income and wealth as well as massive or available for work in their principal ac-
poverty with around 36 per cent of the popu- tivity sector, and those working and/or
lation (1993) living below the poverty line. Here available for work in subsidiary sector, that
there are people who have no tangible resources is, a sector other than their principal activ-
to fall back upon. They remain unemployed for ity sector. Hence, within the usual status
S

a large part of the year. This is known as open- concept, the estimates are now derived on
unemployment or chronic unemployment. Then the usual principle status as well as usual
there are people who are partially employed in principal and subsidiary status basis.
terms of their still and qualification as well as (i) The Current Weekly Status - This con-
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time in employment. Such cases are referred to cept determines the activity status of a
as under employment. person with reference to a period of pre-
ceding seven days. If in this period a per-
Labor Force and Unemployment son seeking employment fails to get work
for even one hour on any day, he (or she)
The official definition of "labour force" (Per- is deemed to be unemployed.
sons in the age group of 15-60) leaves out a
(ii) The Current Daily Status - This concept
large number of people who would work if
considers the activity status of a person for
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 each day of the proceeding seven days. A ployment. Government schemes that target
person who works for one hour but less than eradication of both poverty and unemployment
four hours is considered having worked for (which in recent decades has sent millions of
half a day. If he works for four hours or poor and unskilled people into urban areas in
more during a day, he is considered as em- search of livelihoods) attempt to solve the prob-
ployed for the whole day. The current Daily lem, by providing financial assistance for setting
Status unemployment rate is a time rate. up businesses, skill honing, setting up public
It is the most appropriate and comprehen- sector enterprises, reservations in governments,
etc. The decreased role of the public sector after

y
sive measure of unemployment.
liberalization has further underlined the need

e
Employment and Unemployment in India
for focusing on better education and has also
Agricultural and allied sectors accounted for put political pressure on further reforms.

em
about 60% of the total workforce in 2003 same
Ac icl Child labor is a complex problem that is ba-
as in 1993-94. At present agriculture contrib-
sically rooted in poverty. The Indian govern-
utes 52 percent of total employment. While ag-
ment is implementing the world's largest child
riculture has faced stagnation in growth, ser-
labor elimination program, with primary edu-
vices have seen a steady growth. Of the total
cation targeted for 250 million. Numerous non-
workforce, 8% is in the organised sector, two-
governmental and voluntary organizations are
thirds of which are in the public sector. The
also involved. Special investigation cells have
n
NSSO survey estimated that in 1999-2000, 106
been set up in states to enforce existing laws
ad
million, nearly 10% of the population were un-
banning employment of children (under 14) in
employed and the overall unemployment rate
hazardous industries. The allocation of the Gov-
was 7.3%, with rural areas doing marginally
o

ernment of India for the eradication of child labor

better (7.2%) than urban areas (7.7%). India's
was $10 million in 1995-96 and $16 million in
labor force is growing by 2.5% annually, but
1996-97. The allocation for 2007 is $21 million.
employment only at 2.3% a year.
r

Unemployment in India is characterized by Employment

chronic underemployment or disguised unem-
The estimates of employment and unemploy-
Ch

Employment and Unemployment in Million Persons Years (by CDS basis)

Million Million Million Million % Growth
Per Annum

1983 1993-94 1999-00 2004-05 1983 to 1993-94 1993-94 1999-00 to

to 1999-00 2004-05
S

Population 718.10 893.68 10050.5 1092.83 2.11 1.98 1.69

Labour Force 263.82 334.20 364.88 419,65 2.28 1.47 2.84

Work Force 239.49 313.93 338.19 384.91 2.61 1.25 2.62

IA

Unemployment 9.22 6.06 7.31 8.28

Rate (Percent)

No of Unem- 24.34 20.27 26.68 34.74

-ployed
Source: Various Rounds of NSSO Survey on employment and unemployment, Planning
Commission.
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 ment on Usual Principal Status (UPS) basis from tions apart from financial, insurance, real es-
various rounds of NSSO survey are available. tate, business and community, social and per-
In the meantime, the Eleventh Five year Plan sonal services.
has largely used the Current Daily Status (CDS)
basis of estimation of employment and unem- LATEST IN POVERTY AND
ployment in the country. It has also been ob- UNEMPLOYMENT
served that the estimates based on daily status Poverty
are the most inclusive rate of 'unemployment'

y
giving the average level of unemployment on a The Planning Commission, the nodal agency

ad e
day during the survey year. It captures the un- for estimating the number and proportion of
employed days of the chronically unemployed, people living below the poverty line at national
and state levels, separately for rural and urban

em
the unemployed days of usually employed who
Ac icl
become intermittently unemployed during the areas, makes poverty estimates based on a large
reference week and unemployed days of those sample survey of household consumption expen-
classified as employed according to the criterion diture carried out by the National Sample Survey
of current weekly status. The estimates presented Office (NSSO) approximately every five years. The
earlier also need revisiting so as to be based on methodology for estimation of poverty has been
population projections released by National Com- reviewed from time to time. The Planning Com-
mission on Population. mission constituted an Expert Group under the
n
Chairmanship of Professor Suresh D. Tendulkar
Estimates on employment and unemploy- in December 2005, which submitted its report in
ment on CDS basis indicate that employment December 2009. The recomputed poverty esti-
growth during 1999-2000 to 2004-05 has accel- mates for the years 1993-94 and 2004-05 as rec-
o

erated significantly as compared to the growth ommended by the Tendulkar Committee have
witnessed during 1993-94 to 1999-2000. Dur- been accepted by the Planning Commission. As
ing 1999-2000 to 2004-05, about 47 million work per the Tendulkar Committee Report, the national
r

opportunities were created compared to only poverty line at 2004-05 prices was a monthly per
24 million in the period between 1993-94 and capita consumption expenditure of Rs. 446.68 in
1999-00. Employment growth accelerated from rural and ` 578.80 in urban areas in 2004-05. The
Ch

1.25 per cent per annum to 2.62 per cent per above poverty lines which refer to the national
annum. However, since the labour force grew average, vary from state to state because of price
at a faster rate of 2.84 per cent than the differentials.
workforce, unemployment rate also rose. The
incidence of unemployment on CDS basis in- The Tendulkar Committee has mentioned in
creased from 7.31 per cent in 1999-00 to 8.28 its report that the proposed poverty lines have
per cent in 2004-05. been validated by checking the adequacy of
actual private expenditure per capita near the
S

The decline in overall growth of employment poverty lines on food, education, and health by
during 1993-94 to 1999-00 was largely due to comparing them with normative expenditures
the lower absorption in agriculture. The share consistent with nutritional, educational, and
of agriculture in total employment dropped health outcomes. In order to have a two-point
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from 61 per cent to 57 per cent. This trend comparison of changes in head count ratio, the
continued and the share of agriculture in total Expert Group has re-estimated poverty for 1993-
2004-05. While the manufacturing sector's share 94. The head-count ratios for 1993-94 and 2004-
increased marginally during this period, trade, 05 as released earlier by the Planning Commis-
hotel and restaurant sector contributed signifi- sion. Even though the Tendulkar methodology
cantly in earlier years. The other important gives higher estimates of headcount ratios for
sectors whose shares in employment have in- both 1993-94 and 2004-05, the extent of poverty
creased are transport, storage and communica- reduction is 8.1 percentage points which is not
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 very different from the reduction of 8.5 percent- by 1.9 per cent in 2010, which is lower than the
age points during the same period as per annual growth for the previous year. The annual
Lakdawala Methodology. growth rate for the private sector was much higher
than that for the public sector. However, in re-
Inequality spect of both sectors, annual increase in employ-
ment had slowed down in 2010 vis-à-vis 2009.
According to HDR 2011, inequality in India The share of women in organized-sector employ-
for the period 2000-11 in terms of the income ment was 20.4 per cent in 2010 March end and
Gini coefficient was 36.8. India's Gini index was has remained nearly constant in recent years.

y
more favourable than those of comparable coun-

e
tries like South Africa (57.8), Brazil (53.9), Thai- Unemployment
land (53.6), Turkey (39.7), China (41.5), Sri Lanka
(40.3), Malaysia (46.2), Vietnam (37.6), and even A comparison between different estimates of

em
the USA (40.8), Hong Kong (43.4), Argentina
Ac icl unemployment in 2009-10 indicates that the
(45.8), Israel (39.2), and Bulgaria (45.3). CDS estimate of unemployment is the highest.
The higher unemployment rates according to the
Employment CDS approach compared to the weekly status
and usual status approaches indicate a high
The Eleventh Five Year Plan (2007-12) aimed degree of intermittent unemployment. Interest-
at generation of 58 million work opportunities. ingly urban v unemployment was higher under
The NSSO quinquennial survey has reported
n
both the UPSS and CWS but rural
an increase in work opportunities to the tune
ad
of 18 million under the current daily status
unemployment was higher under the CDS
approach. This possibly indicates higher inter-
(CDS) between 2004-05 and 2009-10. However, mittent or seasonal unemployment in rural than
the overall labour force expanded by only 11.7
o

urban areas, something that employment gen-

million. This was considerably lower than in eration schemes like the MGNREGA need to pay
comparable periods earlier, and can be attrib- attention to. However, overall unemployment
uted to the much larger retention of youth in rates were lower in 2009-10 under each approach
r

education and also because of lower labour force vis-a-vis 2004-05. Labour force participation rates
participation among working-age women As a (LFPR) under all three approaches declined in
result, unemployment in absolute terms came
Ch

2009-10 compared to 2004-05. However, the de-

down by 6.3 million. The lower growth in the cline in female LFPRs was larger under each
labour force is not expected to continue as edu- measure in comparison with male LFPRs which
cated youth are expected to join the labour force either declined marginally (UPSS), remained con-
in increasing numbers during the Twelfth Plan stant (CWS), or increased marginally (CDS).
and in the years beyond. This means that the
pace of job/ livelihood creation must be greatly Unemployment Rates all India (2009-10)- 66th
accelerated. The Twelfth Plan Approach Paper round NSSO
therefore lays greater stress on skill building which
S

Rural Urban Total

can be viewed as an instrument for improving
the effectiveness and contribution of labour to UPSS- 1.6 UPSS-3.4 UPSS-2.0 (de
overall production. This will push the production clined from
possibility frontier outward and take the economy 2.3 in 2004-05)
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on to a higher growth trajectory and can also be CWS-3.3 CWS-4.2 CWS-3.6 (de
viewed as a means of empowerment. clined from
4.4 in 2004-05)
Employment in the Organised sector
CDS-6.8 CDS-5.8 CDS-6.6 (in
Employment growth in the organized sec- creased
tor, public and private combined, has increased from 6.2)

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 EMPLOYMENT PROGRAMMES the poverty line by assisting them to take up
incomegenerating economic activities through
(i) MGNREGA a mix of bank credit and government subsidy.
The SGSY specially basic banking services to all
This flagship programme of the Government
poor households, SHGs, and their federations
of India aims at enhancing livelihood security
on both the demand and supply sides of finan-
of households in rural areas of the country by
cial inclusion; in order to ensure affordable
providing at least one hundred days of guaran-
credit, the NRLM has a provision for subsidy

y
teed wage employment in a financial year to
on interest rates above 7 per cent per annum

ad e
every household whose adult members volun-
for all eligible SHGs who have to look at stabi-
teer to do unskilled manual work. It also man-
lizing and enhancing existing livelihoods and
dates 1/3 participation for women. The pri-

em
subsequently diversifying them; to develop back-
mary objective of the scheme is to augment
Ac icl ward and forward linkages and support busi-
wage employment. This is to be done while
ness plans; to pursue skill upgradation and
also focusing on strengthening natural resource
placement projects through partnership mode,
management through works that address causes
with the National Skill Development Corpora-
of chronic poverty like drought, deforestation,
tion (NSDC) being one of the leading partners
and soil erosion and thus encourage sustain-
in this effort and 15 per cent of the central
able development. The MGNREGA was noti-
allocation under the NRLM earmarked for this
n
fied in 200 districts in the first phase with ef-
purpose; and 5 per cent of the central alloca-
fect from 2 February 2006 and then extended
tion to be earmarked for innovations.
to additional 130 districts in the financial year
2007-08. The remaining districts with rural ar-
o

(iii) Swarna Jayanti Shahari Rozgar Yojana

eas were brought under the Act with effect
from 1 April 2008. Out of total outlay of ` 40,000 The Swarna Jayanti Shahari Rozgar Yojana
crore approved for 2011-12, Rs. 21,471.92 crore (SJSRY) was launched by the Government of
r

has been released to the states/union territories India on 1 December1997 to provide gainful
and the total funds available with states in- employment to the urban unemployed and un-
cluding the opening balance of Rs. 18,185.23
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deremployed by encouraging the setting up of

crores (on 1 April 2011) are Rs. 41,615.05 crore. self-employment ventures or provision of wage
Of these Rs. 21,124.74 crore has been utilized employment. This scheme subsumed the ear-
as reported on 19 January 2012. About 3.80 lier three urban poverty alleviation programmes
crore households have been provided employ- and was also revamped with effect from April
ment under the programme. During the same 2009 to include the Urban Self Employment
period, 122.37 crore persondays employment Programme (USEP), Urban Women Self-help
has been generated across the country out of Programme (UWSP), Skill Training for Employ-
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which 60.45 crore were women (49.40 per cent), ment Promotion amongst Urban Poor (STEPUP),
27.27 crore (22.62 per cent) SCs, and 20.97 crore Urban Wage Employment Programme (UWEP),
(17.13 per cent) STs. At national level, the av- and Urban Community Development Network
erage wage paid under the MGNREGA has (UCDN). The annual budgetary provision for
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increased from Rs. 65 in FY 2006-7 to Rs. 120 the SJSRY for the year 2011-12 is Rs. 813.00
in FY 2011-12 (up to November 2011). crore and Rs. 676.80 crore has been released by
16 February 2012. A total of 3,63,794 beneficia-
(ii) Swarnjayanti Gram Swarozgar Yojana ries have been assisted in the year 2011-12.
The Swarnjayanti Gram Swarozgar Yojana Social Sector in India
(SGSY) is a self-employment programme with
the objective of helping poor rural families cross Social sector comprises of education, health,

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 housing and all welfare programmes for the ers' has fallen in 2011-12 (BE).
poor, unemployed, women, children, minori-
ties, farmers and certain programmes for rural SOCIAL PROTECTION PROGRAMMES
development. The development in social sector
Aam Admi Bima Yojana (AABY): Under
in India lags behind because of paucity of funds,
this scheme launched on 2 October 2007, in-
lack of focus of the government, leakages
surance is provided against natural as well as
through corruption and absence of good gover-
accidental and partial /permanent disability of
nance.
the head of the family of rural landless house-

y
holds in the country. Under the scheme, the
Social Sector Spending

e
head of the family or an earning member is
Central government expenditure on social eligible for receiving the benefit of Rs. 30,000 in

em
services and rural development (Plan and non- case of natural death, Rs.75,000 for accidental
Ac icl
Plan) has consistently gone up over the years.
It has increased from 13.38 per cent in 2006-07
to 18.47 per cent in 2011-12. Central support
death, Rs. 75,000 for total permanent disabil-
ity, and Rs. 37,500 for partial permanent dis-
ability. The scheme has provided insurance
coverage to 1.97 crore lives in the country up
for social programmes has continued to expand
in various forms although most social-sector sub- to 31 January 2012.
jects fall within the purview of the states. Major Janashree Bima Yojana (JBY): The JBY was
programme-specific funding is available to states
n
launched on 10 August 2000 to provide life
through centrally sponsored schemes. Expendi-
ad
ture on social services (which include educa-
insurance protection to rural and urban per-
sons living below and marginally above the
tion, sports, art and culture, medical and pub- poverty line. Persons between ages 18 and 59
o

lic health, family welfare, water supply and years and who are the members of the 45 iden-
sanitation, housing, urban development, wel- tified occupational groups are eligible for par-
fare of SCs, STs and OBCs, labour and labour ticipation in this policy. The scheme provides
welfare, social security, nutrition, and relief for coverage of Rs.30,000 in case of natural death,
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natural calamities,) by the general government Rs. 75,000 in case of death or total permanent
(centre and states combined) has also shown disability due to accident, and Rs. 37,500 in
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increase in recent years reflecting the higher case of partial permanent disability. During
priority given to this sector. Expenditure on 2010-11, a total of 2.09 crore lives has been
social services as a proportion of total expendi- covered under the JBY.
ture increased from 21.6 per cent in 2006-07 to
24.1 per cent in 2009-10 and further to 25 per Rashtriya Swasthya Bima Yojana (RSBY): The
cent in 2011-12 (BE). As a proportion of the RSBY was launched on 01 October 2007 to pro-
gross domestic product (GDP), its share in- vide smart card-based cashless health insurance
creased from 5.57 per cent in 2006-07 to 6.76 cover of Rs. 30,000 per family per annum on a
S

per cent, 6.91 per cent, and 7.34 per cent in family floater basis to BPL families (a unit of
2008-09, 2009-10, and 2010-11 respectively, five) in the unorganized sector. The scheme
helping India face the global crisis without much became operational from 01 April 2008. The
adverse impact on the social sector. In 2011-12 premium is shared on 75:25 basis by the centre
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it is expected to be 6.74 per cent as per the BE. and state governments. In the case of the north-
While expenditure on education as a propor- eastern states and Jammu and Kashmir, the
tion of GDP has increased from 2.72 per cent premium is shared in a 90:10 ratio. The scheme
in 2006-7 to 3.11 per cent in 2011-12 (BE), that provides for portability of smart cards by split-
on health has increased from 1.25 per cent in ting the card value for migrant workers. As on
2006-7 to 1.30 per cent in 2011-12 (BE). Of 20 December 2011, the scheme is being imple-
total social services expenditure, that on 'Oth- mented in 23 states /UTs, namely Arunachal

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 Pradesh, Assam, Bihar, Chhattisgarh, Delhi, 2005-06 for building infrastructure and basic
Gujarat, Haryana, Himachal Pradesh, amenities in rural areas, has six components,
Jharkhand, Karnataka, Kerala, Maharashtra, namely rural housing, irrigation potential,
Manipur, Meghalaya, Mizoram, Nagaland, drinking water, rural roads, electrification, and
Orissa, Punjab, Tripura, Uttar Pradesh, rural telephony. A goal has been set to provide
Uttarakhand, West Bengal, and Chandigarh connectivity to all villages with a population of
Administration. More than2.55 crore smart 1000 (500 in hilly or tribal areas) with all-
cards have been issued. weather roads. New connectivity is proposed

y
to a total of 63,940 habitations under Bharat
The Unorganized Workers Social Security Act

ad e
2008: The Act came into force from 16 May Nirman. This will involve construction of 189,897
2009 with the objective of providing social se- km of rural roads. In addition, Bharat Nirman

em
curity to unorganized workers. The Unorga- envisages upgradation /renewal of 194,130 km
Ac icl
nized Workers' Social Security Rules 2009 have
also been framed. Constitution of the National
Social Security Board in 2009 was another sig-
nificant step. The Board recommended that
of existing rural roads. Under the rural roads
component of Bharat Nirman, 42,249 habitations
have been provided allweather road connectiv-
ity up to December 2011 and projects for con-
social security schemes, namely the RSBY pro- necting 16,126 habitations are at different stages
viding health insurance, JBY providing death of implementation. Under the PMGSY, over
19,443 km of all-weather roads have been com-
n
and disability cover and Indira Gandhi National
Old Age Pension Scheme (IGNOAPS) provid- pleted, including upgradation during 2011-12
ing old age pension be extended to building (up to December 2011). New connectivity has
and other construction workers, MGNREGA been provided to 3710 habitations at an expen-
o

workers, Asha workers, Anganwadi workers diture of Rs. 7514 crore.

and helpers, porters/coolies/gangmen, and IAY : The IAY is one of the six components of
casual and daily wagers. the Bharat Nirman programme. During 2010-
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National Social Security Fund: A National So- 11, as against the target of 29.09 lakh houses,
cial Security Fund for Unorganized Sector 27.15 lakh houses were constructed. (Also see
state-wise performance in Table 13.10.) During
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Workers with initial allocation of Rs 1000 crore

has been set up. This Fund will support schemes financial year 2011-12, against the physical
for weavers, toddy tappers, rickshaw pullers, target of 27.26 lakh houses, 21.18 lakh houses
bidi workers, etc. were sanctioned and 7.26 lakh constructed as
on 31October 2011. Since the inception of the
Bilateral Social Security Agreements: Bilateral scheme, 271 lakh houses have been completed
social security agreements have been signed with till September 2011. The unit assistance pro-
Belgium, Switzerland, the Netherlands, Den- vided to rural BPL households for construction
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mark, and Norway to protect the interests of of a dwelling unit under the IAY has been re-
expatriate workers and companies on a recip- vised with effect from 1 April 2010 from Rs
rocal basis. These agreements help workers by 35,000 to Rs. 45,000 for plain areas and from
providing exemption from social security con- Rs. 38,500 to Rs. 48,500 for hilly/ difficult ar-
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tribution in case of posting, totalization of con- eas. In addition, construction of IAY houses
tribution period, and exportability of pension have been included in the differential rate of
in case of relocation to the home country or interest (DRI) scheme for lending up to ` 20,000
any third country. per housing unit at an interest rate of 4 per
cent. Sixty left wing extremism (LWE) affected
RURAL INFRASTRUCTURE AND districts have been made eligible for a higher
DEVELOPMENT rate of unit assistance of Rs. 48,500. Under this
scheme a homestead site of 100-250 sq.m will
Bharat Nirman: This programme, launched in
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 be provided to those rural BPL households who ber 28, 2011, TSC projects have been sanctioned
have neither land nor a house site. For this in 607 rural districts of the country at a total
purpose, Rs. 10,000 per beneficiary, to be shared outlay of Rs. 22,022 crore, with a central share
by the centre and states in a 50 : 50 ratio, will of Rs. 14,425 crore. The approved central out-
be provided to the District Rural Development lay for the TSC in the Eleventh Plan is Rs. 7816
Agencies (DRDAs). crore. The annual budgetary support was
gradually increased from Rs. 202 crore in 2003-
Rural drinking water: Drinking water supply
4 to Rs. 1500 crore in 2011-12. The TSC follows
is one of the components of Bharat Nirman.
a community-led and people-centric approach,

y
The present status of provision of safe drinking
laying emphasis on information, education, and

e
water in rural areas as measured by habita-
communication (IEC) for demand generation
tions where the population is fully covered, as
for sanitation facilities. To motivate the com-

em
per information reported by the states is that
Ac icl munity towards creating sustainable sanitation
about 72 per cent of rural habitations are fully
facilities and their usage, the incentive for Indi-
covered. The rest are either partially covered or
vidual household latrines for BPL households
have chemically contaminated drinking water
has been increased from Rs. 2200 (Rs. 2700 for
sources. As against the target of 653,798 habi-
hilly and difficult areas) to Rs. 3200 (Rs. 3700
tations during the Eleventh Five year Plan, the
for hilly and difficult areas) with effect from 1
coverage up to 31 March 2011 was 526,667
June 2011. With the scaling up of the TSC,
(80.56 per cent). The States of Jharkhand,
combined with higher resource allocation,
n
Chhattisgarh, Nagaland, Madhya Pradesh,
ad
Odisha, Himachal Pradesh, Tamil Nadu,
programme implementation has improved sub-
stantially. As per Census 2001 data, only 21.9
Kerala, and Uttarakhand have exceeded their
per cent rural households had access to latrines.
targets whereas Sikkim, Punjab, Assam,
o

Since 1999, over 8.30 crore toilets have been

Rajasthan, Arunachal Pradesh, and Jammu and
provided for rural households under the TSC.
Kashmir have reported low (less than 50 per
A significant achievement has also been the
cent) achievement against targets. Expenditure
construction of 11.64 lakh school toilet units
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for drinking water supply during the Bharat

and 3.94 lakh Anganwadi toilets. This has led
Nirman period increased considerably from Rs.
to substantial increase in rural sanitation cov-
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4098 crore in 2005-06 to Rs. 8500 crore in 2011-

erage from 21.9 per cent in 2001 to about 85.95
12. All uncovered habitations have been re-
per cent as of January 2012 as per the progress
ported covered as on 1April 2011. In order to
reported by states. With increasing budgetary
give effect to the policy initiatives mentioned in
allocations and focus on rural areas, the num-
the Eleventh Five Year Plan document, the
ber of households being provided with toilets
guidelines for the Rural Water Supply
annually has increased from only 6.21 lakh in
Programme were revised in 2009 and renamed
2002-3 to 122 lakh in 2010-11. In the year 2011-
the National Rural Drinking Water Programme
12 (up to January 2012), more than 63 lakh
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(NRDWP). The Jalmani programme, a scheme

toilets have been provided to rural households.
to provide 100 per cent assistance to states for
The active participation of women and adoles-
installing stand-alone water purification systems
cent girls in the sanitation programme has been
in schools in rural areas was launched in 2008-
encouraged with special components for them.
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09. In pursuance of the same, Rs. 200 crore

The Nirmal Gram Puraskar (NGP) incentive
was released to states in 2008-09 and 2009-10
scheme has been launched to encourage PRIs
to cover 1 lakh schools. So far about 65,503
to take up sanitation promotion. The award is
schools have been covered under this scheme.
given to those PRIs that attain a 100 per cent
Rural Sanitation-Total Sanitation Campaign open defecation-free environment. A total of
(TSC): The TSC is one of the flagship 25,145 gram panchayats, 166 intermediate
programmes of the government. As of Decem- panchayats, and 10 district panchayats have

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 received the award in the last six years. Sikkim EDUCATION
has become the first state to receive the award.
The Twelfth Plan Approach Paper focuses
on teacher training and evaluation and mea-
SKILL DEVELOPMENT sures to enforce accountability. It also stresses
In addition to constituting a three-tier insti- the need to build capacity in secondary schools
tutional structure on Coordinated Action on to absorb the passouts from expanded primary
Skill Development consisting of (i) the Prime enrolments. The GER in higher education must
be targeted to increase from nearly 18 per cent.

y
Minister's National Council on Skill

ad e
Development(NCSD), (ii) National Skill Devel-
opment Coordination Board (NSDCB), and (iii) Initiatives for primary education
National Skill Development Corporation

em
(RTE): Free education for all children between
(NSDC), the NCSD appointed an adviser to
Ac icl the ages of 6 and 14 years has been made a
the Prime Minister in the NCSD in January 2011. fundamental right under the RTE Act 2009.
As on 31 October 2011, the NSDC has approved While the RTE Act was notified on 27 August
34 training projects spread across 177 districts 2009 for general information, the notification
in 20 sectors. The NSDC has also approved for enforcing the provisions of the Act with
eight sector skill councils (SSCs). A new strate- effect from 1 April 2010 was issued on 16 Feb-
gic framework for skill development for early ruary 2010. It mandates that every child has a
n
school leavers and existing workers has been right to elementary education of satisfactory and
developed since May 2007 in close consultation equitable quality in a formal school which sat-
with industry, state governments, and experts. isfies certain essential norms and standards. The
At present, 1386 modules for employable skills reform processes initiated in 2010-11 continued
o

covering 60 sectors have been developed, 36 during the year 2011-12.

assessing bodies empanelled for conducting as-
sessment, 6753 vocational training providers Rashtriya Madhyamik Shiksha Abhiyan
(RMSA): The RMSA was launched in March
r

(VTPs) registered, and more than 12.19 lakh

2009 with the objective of enhancing access to
persons trained / tested (since inception).
secondary education and improving its quality.
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In addition to ensuring access, the quality in-

UIDAI terventions include ensuring all secondary
Implementation of the Unique Identification schools conform to prescribed norms, removing
(UID) project has progressed and about 13 crore gender, socio-economic and disability barriers,
Aadhaar numbers (UID numbers) have already providing universal access to secondary level
been generated. The Unique Identification Au- education by 2017, i.e. by the end of the Twelfth
thority of India (UIDAI) has scaled up enrol- Five Year Plan, and achieving universal reten-
ments and has also established infrastructure tion by 2020. The central and state governments
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capabilities to generate 10 lakh Aadhaar num- bear 75 per cent and 25 per cent of the project
bers every day. The UIDAI is on the verge of expenditure respectively during the Eleventh
commencing Phase III of the scheme, which Five Year Plan. The funding pattern is in the
apart from enrolling residents and issuing ratio of 90:10 for the north-eastern states. The
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Aadhaar numbers extends to providing RMSA Annual Plan 2011-12 proposals received
updation services, a robust authentication pro- from all 35 states/UTs were considered by the
cess as a means of enhancing service delivery Project Approval Board (PAB) of the scheme
of various social schemes, and facilitating and major interventions such as opening of 4032
financial inclusion and development of new schools, strengthening of 15,567 existing
Aadhaar-enabled applications to leverage schools, 832 residential quarters for teachers,
Aadhaar. and 52,352 additional teachers have been
approved.
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 Model Schools Scheme: A scheme for setting education in Classes XI-XII. The components
up 6000 model schools as benchmarks of excel- approved for implementation in the remaining
lence at block level with one school per block period of the Eleventh Plan, i.e. 2011-12, in-
was launched in November 2008 with a view clude (a) strengthening of 1000 existing voca-
to providing quality education to talented rural tional schools and establishment of 100 new
children. The scheme has two modes of imple- ones through state governments, (b) assistance
mentation: (i) 3500 schools are to be set up in to 500 vocational schools under the PPP mode,
as many Educationally Backward Blocks(EBBs) (c) in-service training of seven days for 2000
through state/UT governments and (ii) the re- existing vocational teachers and induction train-

y
maining 2500 schools are to be set up under ing of 30 days for 1000 new ones, (d) develop-

e
PPP mode in blocks that are not educationally ment of 250 competency based modules for each
backward. At present, only the first compo- individual vocational course, (e) establishment

em
nent is being implemented. The implementa-
Ac icl of a vocational education cell within the Cen-
tion of the PPP component will start from tral Board of Secondary Education (CBSE), (f)
Twelfth Five Year Plan. Since the inception of assistance to 150 reputed NGOs to run
the scheme, approval has been granted for set- shortduration innovative vocational education
ting up 1942 model schools in 22 states. Finan- programmes, and (g) pilot programme under
cial sanctions have been accorded for setting the National Vocational Education Qualifica-
up 1538 schools in 20 States and Rs. 1697.95 tions Framework(NVEQF) in Class IX in
n
crore has been released as central share to these Haryana and West Bengal.
ad
states. During 2010-11, (140 schools) had be-
Saakshar Bharat (SB)/Adult Education: The Na-
come functional in Punjab (21 schools),
Karnataka (74 schools), Chhattisgarh (15 tional Literacy Mission, recast as Saakshar Bharat
o

schools), Tamil Nadu (18 schools), and Gujarat (SB) launched by the Prime Minister on 8 Sep-
(12 schools) and Rs. 9.55 crore as recurring tember 2009, reflects the enhanced focus on fe-
grants was released to these states. In 2011-12, male literacy. The literacy rate according to the
the number of functional schools has increased 2001 census was 64.83 per cent, improving to
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to 438 in seven states. 74.04 per cent in 2011. The literacy rate improved
sharply among females as compared to males.
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Inclusive Education for the Disabled While the literacy rate for males rose by 6.9 per
atSecondary Stage (IEDSS): The IEDSS scheme cent from 75.26 per cent to 82.14 per cent, it
was launched in 2009-10 replacing the earlier increased by 11.8 per cent for females from 53.67
Integrated Education for Disabled Children per cent to 65.46 per cent. The target of the Elev-
(IEDC) scheme. While inclusive education for enth Five Year Plan is to achieve 80 per cent
disabled children at elementary level is being literacy. With just one year to go for the Twelfth
provided under the SSA, this scheme provides Five Year Plan, 74 per cent literacy has been
100 per cent central assistance for inclusive achieved. Literacy levels remain uneven across
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education of disabled children studying in states, districts, social groups, and minorities. The
Classes IX-XII in mainstream government, local government has taken positive measures to re-
body, and government-aided schools. The aim duce the disparities by focusing on backward areas
of the scheme is to facilitate continuation of and target groups. By March 2010, the programme
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education of children with special needs up to had reached 167 districts in 19 states covering
higher secondary level. over 81,000 gram panchayats.

Vocational Education: The revised centrally Higher Education

sponsored Vocationalisation of Secondary Edu-
cation scheme aims to address the weaknesses Higher education is of vital importance for
of the earlier scheme to strengthen vocational the country, as it is a powerful tool for building

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 a knowledge-based twenty-first-century society. HEALTH
The Indian higher education system is one of National Health Policy
the largest in the world. At the time of Inde-
pendence, there were only 20 universities and The National Health Policy of 2002 and the
500 colleges with 0.1 million students; these priorities set in the successive Five Year Plans
have increased to 611 universities and univer- provide the framework for the implementation
sity-level institutions and 31,324 colleges as on of policies and programmes for health care. The
August 2011. To prepare for the challenges of National Health Policy seeks to provide pro-

y
the twenty-first century, the government has phylactic and curative health-care services and

ad e
taken a number of initiatives during the Elev- aims at achieving an acceptable standard of
enth Plan period focusing on improvement of good health amongst the general population in

em
access along with equity and excellence, adop- the country by increasing access to the decen-
Ac icl
tion of state-specific strategies, enhancement of
the relevance of higher education through cur-
riculum reforms, vocationalization, networking,
and use of information technology and distance
tralized public health system. Access to the de-
centralized public health system is sought to be
increased through establishment of new infra-
structure in deficient areas and upgrading of
education along with reforms in governance in
existing infrastructure. Success in eliminating
higher education. A large-scale expansion in
university education has been initiated during or controlling diseases such as small pox, lep-
n
the Eleventh Five Year Plan by setting up new rosy, polio, and TB is indicative of the progress
educational institutions comprising 30 central made in some areas of health. Overall sex ratio
universities, 8 new Indian Institutes of Technol- in the country has increased from 933 in 2001
o

ogy (IITs), 8 new Indian Institutes of Manage- to 940 as per census 2011 (prov.). In 2011-12,
ment (IIMs), 10 new National Institutes of Tech- the Plan outlay for health is Rs. 26760 crore.
nology (NITs), 20 new Indian Institutes of infor- This outlay constitutes among others Rs. 17,840
mation Technology (IIITs), 3 new Indian Insti- crore under the NRHM and Rs. 2356 crore for
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tutes of Science education and Research (IISERs), schemes/projects in the north-eastern region
2 new Schools of Planning and Architecture and Sikkim. A provision of Rs. 1616.57 crore
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(SPAs), 374 model colleges, and 1000 polytech- has been earmarked for the Pradhan Mantri
nics. Other important initiatives include Swasthya Suraksha Yojana (PMSSY) aimed at
upgradation of state engineering institutions, strengthening the tertiary sector. The National
expansion of research fellowships and provision Programme for Prevention and Control of Can-
of hostels for girls, reservation for SCs, STs and cer, Diabetes, Cardiovascular Diseases and
OBCs, focus on backward, hilly and remote lo- Stroke (NPCDCS) has been allocated Rs. 125
cations including the north-east, facilitating crore in 2011-12. During 2011- 12, Rs. 1700
greater participation of students belonging to
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crore has been earmarked for the National Aids

minorities, girls, and persons with disabilities,
Control Programme with the objective of halt-
scholarships, provision of education loans with
ing and reversing the HIV epidemic in the coun-
interest free subsidies, setting up of polytechnics
try by integrating programmes for prevention,
in unserved areas, and degree colleges in low
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care, support, and treatment. The government

GER districts. The National Mission in Educa-
also seeks to develop and promote the Indian
tion through ICT, which aims at providing high
speed broadband connectivity to universities and system of medicines in an organized and scien-
colleges and development of e-content in vari- tific manner by involvement/ integration of
ous disciplines, is under implementation. Open AYUSH (Ayurveda, Yoga, Unani, Siddha, and
and distance learning is encouraged for increas- Homeopathy) systems in national health-care
ing access to and making quality education avail- delivery and has allocated Rs. 900 crore plan
able at any time, any place. outlay for it in 2011-12.
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 Health Programmes zation for protection of children from life threat-
ening conditions that are preventable such as
The government has launched a large num- tuberculosis, diphtheria, pertussis, tetanus, po-
ber of programmes and schemes to address lio, and measles.
major concerns and bridge the gaps in existing
health infrastructure and provide accessible, af- Janani Suraksha Yojana (JSY): The JSY was
fordable, equitable health care. These include launched with focus on demand promotion for
the NRHM, National Programme for Health institutional deliveries in states and regions
Care of the Elderly (NPHCE), National Mental where these are low. It integrates cash assis-

y
Health Programme, NPCDCS, Pradhan Mantri tance with delivery and post-delivery care. It

e
Swasthya Suraksha Yojana (PMSSY), targets lowering of MMR by ensuring that de-
upgradation/strengthening of state government liveries are conducted by skilled birth atten-

em
medical colleges, development of paramedical
Ac icl dants. The JSY scheme has shown rapid growth
services and the Programmes of AYUSH. The in the last three years, with 90.37 lakh benefi-
details of major programmes are as follows: ciaries in 2008-9 to 106.96 lakh beneficiaries in
2010-11. The issues of governance, transpar-
NRHM: The NRHM launched in 2005 aims to
ency, and grievance redressal mechanisms are
improve accessibility to quality health care for
now the thrust areas for the JSY.
the rural population, bridge gaps in health care,
facilitate decentralized planning in the health Janani Shishu Suraksha Karyakram (JSSK): The
n
sector and bring about inter-sectoral conver- JSSK is a new initiative launched on 1 June
ad
gence. The NRHM provided an overarching 2011 to give free entitlements to pregnant
umbrella to the existing health and family wel- women and sick new borns for cashless deliv-
fare programmes including Reproductive and ery, C-Section, drugs and consumables, diag-
o

Child Health (RCH-II) and various programmes nostics, diet during stay in the health institu-
for control of diseases, including tuberculosis, tions, provision of blood, exemption from user
leprosy, vector-borne diseases and blindness. The charges, transport from home to health institu-
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effort is to integrate all vertical programmes. tions, transport between facilities in case of
All the programmes have now been brought referral, and drop back from Institutions to
under the District Health Society at district level
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home. A sum of Rs. 1437 crore has been allo-

and State Health Society at state level. Under cated to the states during 2011-12 under the
the NRHM, over 1.4 lakh health human re- JSSK. In order to reach out to difficult, inacces-
sources have been added to the health system sible, backward and underserved areas with
across the country (up to September 2011) poor health indicators, 264 high focus districts
which include 11,712 doctors/specialists, in 21 states have been identified based on con-
10,851 AYUSH doctors, 66,784 auxiliary nurse centration of SC/ST population and presence
midwives (ANMs), 32,860 staff nurses, and of left wing extremism for focused attention.
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14,434 paramedics including AYUSH paramed-

ics. Accredited social health activists (ASHAs) National Vector Borne Disease Control
are engaged in each village / large habitation Programme: This Programme is being imple-
in the ratio of one per 1000 population. mented for prevention and control of vector-
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borne diseases such as malaria, filariasis, kala-

Reproductive and Child Health (RCH): The azar, Japanese encephalitis, dengue, and
RCH Programme was launched in 1997-8 as a chikungunya. The government has taken vari-
separate entity up to the year 2004-5 as a part ous steps for tackling of vector-borne diseases
of the Family Welfare Programme and was including dengue and chikungunya by the
brought under the ambit of the NRHM during states. There are 250 filariaendemic districts in
the Eleventh Plan. It has components such as 20 states /UTs in the country. The National
pulse polio immunization and routine immuni- Health Policy (2002) aims at elimination of lym-
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 phatic filariasis in country by 2015. Kala-azar is 8 identified regional medical institutions, and
endemic in four states, namely Bihar, West Ben- provision of dedicated health-care facilities at
gal, Jharkhand, and Uttar Pradesh. During 2011, district, CHC, PHC and sub-centres levels in 100
31,322 cases and 78 deaths have been reported. identified districts of 21 states of the country.
Revised National Tuberculosis Control NPCDCS: The NPCDCS was launched during
Programme (RNTCP) : The RNTCP, a centrally the Eleventh Five year plan. It envisages health
sponsored ongoing scheme, is an application in promotion and health education advocacy, early

y
India of the WHO-recommended directly ob- detection of persons with high levels of risk
served treatment short course popularly known factors through opportunistic screening and

ad e
as DOTS. Under the progra mme, quality diag- strengthening of health systems at all levels to
nosis and treatment facilities including a sup- tackle Non Communicable Disease (NCDs), and

em
ply of anti-TB drugs are provided free of cost to
Ac icl improvement of quality of care. At present the
all TB patients. More than 13,000 microscopy programme is being implemented in 100 dis-
centres have been established in the country. tricts covering 21 states.
During 2010-11, the programme has achieved
new sputem positive case detection rate of 71 Human Resources and Infrastructure Devel-
per cent and treatment success rate of 87 per opment in Tertiary Health Care: The Eleventh
cent. Plan also witnessed a number of initiatives to
improve the availability of human resources in
n
National Leprosy Eradication Programme the health sector. With a view to strengthening
(NLEP): The NLEP was started in 1983 with government medical colleges, the land require-
the objective of eradication of the disease. In ment norms and infrastructural requirements
o

2005, the dreaded disease after 22 years re- for opening new medical colleges have been
corded a case load less than 1 per 10,000 popu- revised. The faculty requirements have also been
lation at national level. The recorded preva- revised. Besides, increased intake at MBBS level
lence further came down to 0.69 per 10,000 in has been enabled especially in the under-served
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March 2011. states.

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National Programme for Control of Blindness PMSSY: The PMSSY has been launched with
the objectives of correcting regional imbalances
(NPCB): The NPCB, launched in the year 1976
in the availability of affordable/reliable tertiary
as a 100 per cent centrally sponsored scheme
health-care services and augmenting facilities
with the goal of reducing the prevalence of
for quality medical education in the country.
blindness to 0.3 per cent by 2020, showed re-
These are sought to be achieved through estab-
duction in the prevalence rate of blindness from
lishing AIIMS-like Institutions and upgrading
1.1 per cent (2001-2) to 1 per cent (2006-7).
existing medical college institutions. The PMSSY
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National Programme for Health Care of the aims at (i) construction of 6 AIIMS like institu-
Elderly (NPHCE): The NPHCE aims to provide tions in the first phase at Bhopal, Bhubaneswar,
separate and specialized comprehensive health Jodhpur, Patna, Raipur, and Rishikesh and in
care to senior citizens at various levels of the the second phase in West Bengal and Uttar
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state healthcare delivery system including out- Pradesh, ii) upgradation of 13 medical college
reach services. Some of the strategies include institutions in the first phase and 6 in the sec-
preventive and promotive care, management ond phase. The upgradation programmes
of illness, health manpower development for broadly envisages improving health infrastruc-
geriatric services, medical Information Educa- ture through construction of super speciality
tion and Communication(IEC) activities. The blocks/trauma centres, etc. and procurement
major components of the NPHCE are establish- of medical equipment for existing as well as
ment of 30 bedded departments of geriatrics in new facilities. Seven more medical colleges are
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 proposed to be upgraded, one each in Kerala, from the central government for all inputs other
Karnataka and Madhya Pradesh and two each than nutrition provision for which 50 per cent
in Bihar and Uttar Pradesh in the third phase. central assistance is provided. AWCs are the
focal points for delivery of services.
Ayurveda, Yoga & Naturopathy, Unani, Siddha
and Homeopathy (AYUSH): Mainstreaming of The Rajiv Gandhi National Creche Scheme for
AYUSH in national health care delivery is an Children of Working Mothers: This scheme pro-
important goal under the NRHM for which the vides for day-care facilities to 0-6 year-old chil-
government has sanctioned Rs. 42.19 crore upto dren of working mothers by opening crèches

y
December 31, during the current financial year. and development services, i.e. supplementary

e
A new component of upgradation of AYUSH nutrition, health-care inputs like immunization,
dispensaries has been incorporated in the cen- polio drops, basic health monitoring, and rec-

em
trally sponsored scheme of Development of
Ac icl reation. The combined monthly income of both
AYUSH Hospitals and Dispensaries in July the parents should not exceed Rs. 12,000 for
2010. Besides, a component of setting up of availing of the facilities. The number of crèches
50/10 bedded integrated AYUSH hospitals for functional at present are 23,785 and beneficiary
North Eastern and other hilly states has been children are 594,625. The approved outlay for
introduced in 2011. The States of Himachal 2011-12 for the scheme was Rs. 85 crore.
Pradesh, Jammu and Kashmir, Mizoram,
Manipur, Tripura, have been financially assisted Integrated Child Protection Scheme (ICPS): This
n
centrally sponsored scheme implemented
ad
for setting up of 50 bedded hospitals while
Assam and Sikkim for 10 bedded hospitals upto through states was launched in 2009-10 with
December 31, 2011. the objective of providing a safe and secure
o

environment for comprehensive development of

CHILD AND WOMEN DEVELOPMENT children in the country who are in need of care
and protection as well as children in conflict
Integrated Child Development Services (ICDS): with the law. The ICPS provides preventive and
r

The scheme was launched in 1975 for holistic statutory care and rehabilitation services to any
development of children below 6 years of age vulnerable child including, but not limited to,
and proper nutritional and health education of
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children of potentially vulnerable families and

pregnant and lactating mothers with 33 projects families at risk, children of socially excluded
and 4,891 anganwadi centres (AWCs). It has groups like migrant families, families living in
now been universalized with the government extreme poverty, families subjected to or affected
cumulatively approving 7,076 projects and 14 by discrimination and minority families, chil-
lakh AWCs including 20,000 anganwadis 'on dren infected and / or affected by HIV / AIDS,
demand'. orphans, child drug abusers, children of sub-
Rajiv Gandhi Scheme for Empowerment of Ado- stance abusers, child beggars, trafficked or sexu-
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lescent Girls (RGSEAG): This scheme was ally exploited children, children of prisoners,
launched on 19 November 2010 with the objec- and street and working children.
tive of empowering adolescent girls in the age
Support to Training and Employment
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group 11-18 years by bringing improvement in

Programme for Women (STEP) Scheme : This
their nutritional and health status and upgrad-
scheme seeks to provide updated skills and new
ing various skills like home skills, life skills, and
knowledge to poor women in 10 traditional sec-
vocational skills. To start with, it is being imple-
tors of agriculture, animal husbandry, dairy,
mented in 200 selected districts across the coun-
fisheries, handlooms, handicrafts, khadi and vil-
try on a pilot basis. The RGSEAG is being imple-
lage industries, sericulture, social forestry, and
mented through state governments/UT admin-
wasteland development so as to enhance their
istrations with 100 per cent financial assistance
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 productivity and income generation. For ex- and an additional budgetary allocation of Rs.
panding the reach of the programme and fur- 69 crore. Since its creation, the RMK has estab-
ther strengthening it, implementation of the lished itself as a premier advocacy organiza-
scheme was revised in November 2009. The tion for the development of the micro-finance
scheme aims at introduction of locally appro- sector at national and international levels to
priate sectors. enhance the flow of micro credit in the unorga-
nized sector for poor women. It focuses on poor
Rashtriya Mahila Kosh (RMK): The RMK (Na- women and their empowerment through the

y
tional Credit Fund for Women) was created in provision of credit for livelihood-related activi-

ad e
1993 with a corpus fund of Rs. 31crore. The ties. The RMK provides microcredit in a quasi-
initial corpus has now grown to over Rs. 180 informal manner, lending to intermediate mi-

em
crore including reserves and surplus due to cro-credit organizations (IMOs) across states.
Ac icl
credit, investment and recovery management,

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on
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Ch
S
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 POPULATION OF INDIA CHRONICLE
(India's Census) IAS ACADEMY
A CIVIL SERVICES CHRONICLE INITIATIVE

SOME IMPORTANT CENSUS Examples of OGs are railway colonies, univer-

y
CONCEPTS sity campuses, port areas, etc., that may come

e
up near a city or statutory town outside its
Rural-Urban Areas statutory limits but within the revenue limits of

em
Ac icl a village or villages contiguous to the town or
The data in the table on Final Population city. Each such individual area by itself may
Totals census 2011 are presented separately for not satisfy the minimum population limit to
rural and urban areas. The unit of classifica- qualify it to be treated as an independent ur-
tion in this regard is 'town' for urban areas and ban unit but may deserve to be clubbed with
'village' for rural areas. In the Census of India the town as a continuous urban spread.
2011, the definition of urban area adopted is as
follows: (a) All statutory places with a munici- For the purpose of delineation of Urban Ag-
n
glomerations during Census of India 2011, fol-
ad
pality, corporation, cantonment board or noti-
fied town area committee, etc. (b) All other lowing criteria are taken as pre-requisites: (a)
places satisfying the following three criteria si- The core town or at least one of the constituent
o

multaneously: towns of an urban agglomeration should nec-

essarily be a statutory town; and (b) The total
i) a minimum population of 5,000;
population of all the constituents (i.e. towns
ii) at least 75 per cent of male working popu- and outgrowths) of an Urban Agglomeration
r

lation engaged in non-agricultural pursuits; should not be less than 20,000 (as per the 2001
and Census). With these two basic criteria having
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iii) a density of population of at least 400 per been met, the following are the possible differ-
sq. km. (1,000 per sq. mile). ent situations in which Urban Agglomerations
For identification of places which would qualify would be constituted: (i) a city or town with
to be classified as 'urban' all villages, which, as one or more contiguous outgrowths; (ii) two or
per the 2001 Census had a population of 4,000 more adjoining towns with their outgrowths;
and above, a population density of 400 persons and (iii) a city and one or more adjoining towns
per sq. km. and having at least 75 per cent of with their outgrowths all of which form a con-
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male working population engaged in non-agri- tinuous spread.

cultural activity were considered. To work out City
the proportion of male working population re-
ferred to above against b)(ii), the data relating to Towns with population of 1,00,000 and
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main workers were taken into account. above are called cities.

An Urban Agglomeration is a continuous ur- Scheduled Castes & Scheduled Tribes

ban spread constituting a town and its adjoin-
ing urban outgrowths (OGs) or two or more Article 341 of the Constitution provides that
physically contiguous towns together and any the President may, with respect to any State or
adjoining urban outgrowths of such towns. Union territory, specify the castes, races or tribes

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 or parts of or groups within castes, races or tribes Punjab and the Union territories of Chandigarh
which shall for the purposes of the Constitution and Puducherry, the Scheduled Castes and
be deemed to be Scheduled Castes in relation to Scheduled Tribes population figures are fur-
that State or Union territory. Similarly, Article nished for only the relevant category in respect
342 provides for specification of tribes or tribal of these States and Union territories.
communities or parts of or groups within tribes
or tribal communities which are deemed to be for Literates
the purposes of the Constitution the Scheduled

y
A person aged 7 years and above who can
Tribes in relation to that State or Union territory.

ad e
both read and write with understanding in any
In pursuance of these provisions, the list of Sched- language has been taken as literate. It is not
uled Castes and / or Scheduled Tribes are noti- necessary for a person to have received any

em
fied for each State and Union territory and are
Ac icl formal education or passed any minimum edu-
valid only within the jurisdiction of that State or cational standard for being treated as literate.
Union territory and not outside. People who were blind and could read in Braille
are treated to be literates.
It is important to mention here that under
the Constitution (Scheduled Castes) Order, A person, who can neither read nor write or
1950, no person who professed a religion dif- can only read but cannot write in any language,
n
ferent from Hinduism was deemed to be a is treated as illiterate. All children of age 6 years
member of a Scheduled Caste in addition to or less, even if going to school and have picked
every member of the Ramdasi, Kabirpanthi, up reading and writing, are treated as illiterate.
Majhabi or Sikligar caste resident in Punjab or
o

Patiala and East Punjab States Union were in Sex Ratio

relation to that State whether they professed Sex ratio has been defined as the number of
the Hindu or the Sikh religion. Subsequently, in females per 1000 males in the population. It is
r

September, 1956, by an amendment, the Presi- expressed as 'number of females per 1000 males'.
dential Order of 1950 and in all subsequent
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Presidential Orders relating to Scheduled Castes, Number of females

Sex-ratio = × 1000
the population professing the Hindu and the Number of males
Sikh religions were placed on the same footing
Literacy Rate
with regard to their inclusion as Scheduled
Castes. Later on, as per the amendment made Literacy rate of population is defined as the
in the Constitution (Scheduled Castes) Order percentage of literates to the total population
1990, the Hindu, the Sikh and the Buddhist of age 7 years and above.
professing population were placed on the same
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footing with regard to the recognition of the Number of Literates

Scheduled Castes. Literacy rate = Population aged 7+ × 1000

For finalizing the list of Schedule Castes/ Work Participation Rate

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Scheduled Tribes notified in each state/union Work participation rate is defined as the per-
territory, all the constitutional amendments that centage of total workers (main and marginal)
have taken place prior to the conduct of 2011 to total population.
census were taken into account. Since there is
no Scheduled Castes list for the state of Nagaland Work participation rate
and the Union territories of Andaman & Nicobar
Islands and Lakshadweep; and no Scheduled Total Workers (Main+Marginal)
= × 100
Tribes list for the States of Delhi, Haryana and Total Population
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 Definition of Slum (iii) A compact area of at least 300 population
or about 60-70 households of poorly built
Slums have come to form an integral part of congested tenements, in unhygienic envi-
the phenomena of urbanization in India. Com- ronment usually with inadequate infra-
prehensive information on the slums being essen- structure and lacking in proper sanitary
tial for formulation of effective and coordinated and drinking water facilities.
policy for their improvement. Formation and iden-
tification of slum enumeration blocks prior to the Variation in Population Since 1901
conduct of 2011 Census has made it possible to

y
Year Total Rural Urban
compile and repare special tables for slums. It is

e
for the first time in the history of census in the 1901 238,396,327 212,544,454 25,851,873
country that the slum demography is being pre-

em
1911 252,093,390 226,151,757 25,941,633
sented on the basis of the actual count. The sys-
Ac icl
tematic delineation of slums for collection of pri- 1921 251,321,213 223,235,043 28,086,170
mary data on their population characteristics
during population enumeration itself may per- 1931 278,977,238 245,521,249 33,455,989
haps be the first of its type in the world.
1941 318,660,580 274,507,283 44,153,297
For the purpose of Census of India, 2011, the
1951 361,088,090 298,644,381 62,443,709
n
slum areas broadly constitute of :-
ad
(i) All specified areas in a town or city noti- 1961 439,234,771 360,298,168 78,936,603
fied as 'Slum' by State/Local Government 1971 548,159,652 439,045,675 109,113,977
o

and UT Administration under any Act in-

cluding a 'Slum Act'. 1981 683,329,097 523,866,550 159,462,547

(ii) All areas recognized as 'Slum' by State/ 1991 846,302,688 628,691,676 217,611,012
r

Local Government and UT Administration,

Housing and Slum Boards, which may 2001 1,028,737,436 742,490,639 286,119,689
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have not been formally notified as slum

2011 1,210,569,573 833,463,448 377,106,125
under any act;
INDIA, STATES AND UNION TERRITORIES BY POPULATION, PERCENTAGE
DECADAL GROWTH, AREA, DENSITY, SEX RATIO, AND LITERACY-2011

Sr. State Population Growth Area Density/ Sex Literacy

No. Rate Sq.km Sq.km. Ratio Rate
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– India 1,21,05,69,573 17.7 32,87,240 382 943 73.0

1. Uttar Pradesh 19,98,12,341 20.2 2,40,928 829 912 67.7
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2 Maharashtra 11,23,74,333 16.0 3,07,713 365 929 82.3

3 Bihar 10,40,99,452 25.4 94,163 1,106 918 61.8
4 West Bengal 9,12,76,115 13.8 88,752 1,028 950 76.3

5 Andhra Pradesh 8,45,80,777 11.0 2,75,045 308 993 67.0

6 Madhya Pradesh 7,26,26,809 20.3 3,08,245 236 931 69.3

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 7 Tamil Nadu 7,21,47,030 15.6 1,30,058 555 996 80.1
8 Rajasthan 6,85,48,437 21.3 3,42,239 200 928 66.1
9 Karnataka 6,10,95,297 15.6 1,91,791 319 973 75.4
10 Gujarat 6,04,39,692 19.3 1,96,024 308 919 78.0
11 Odisha 4,19,74,218 14.0 1,55,707 270 979 72.9

y
12 Kerala 3,34,06,061 4.9 38,863 860 1,084 94.0

ad e
13 Jharkhand 3,29,88,134 22.4 79,714 414 949 66.4
14 Assam 3,12,05,576 17.1 78,438 398 958 72.2

em
15
16
17
Ac icl
Punjab
Chhattisgarh
Haryana
2,77,43,338
2,55,45,198
2,53,51,462
13.9
22.6
19.9
50,362
1,35,191
44,212
551
189
573
895
991
879
75.8
70.3
75.6
18 NCT of Delhi 1,67,87,941 21.2 1,483 11,320 868 86.2
19 Jammu & Kashmir 1,25,41,302 23.6 2,22,236 124 889 67.2
n
20 Uttarakhand 1,00,86,292 18.8 53,483 189 963 78.8
21 Himachal Pradesh 6,86,41,602 12.9 55,673 123 972 82.8
o

22 Tripura 36,73,917 14.8 10,486 350 960 87.2

23 Meghalaya 29,66,889 27.9 22,429 132 989 74.4
r

24 Manipur 25,70,390 18.6 22,327 115 992 79.2

25 Nagaland 19,78,502 -0.6 16,579 119 931 79.6
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26 Goa 14,58,545 8.2 3,702 394 973 88.7

27 Arunachal Pradesh 13,83,727 26.0 83,743 17 938 65.4
28 Puducherry 12,47,953 28.1 479 2,547 1,037 85.8
29 Mizoram 10,97,206 23.5 21,081 52 976 91.3
30 Chandigarh 10,55,540 17.2 114 9,258 818 86.0
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31 Sikkim 6,10,577 12.9 7,096 86 890 81.4

32 Andaman and 3,80,581 6.9 8,249 46 876 86.6
Nicobar Islands
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33 Dadra and 3,43,709 55.9 491 700 774 76.2

Nagar Haveli
34 Daman and Diu 2,43,247 53.8 112 2,191 618 87.1
35 Lakshadweep 64,473 6.3 32 2,149 947 91.8

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 Population :

Persons 1,21,05,69,573
Males 62,31,21,843
Females 58,74,47,730

y
Highest / Lowest Population :

e
State with Highest Population Uttar Pradesh 199,8,12,341

em
State with Lowest Population
Ac icl Sikkim 6,10,577

UT with Highest Population NCT of Delhi 167,87,941

UT with Lowest Population Lakshadweep 64,473

Literacy Rate
n
ad Persons Males Females
Total Literacy rate 73.0% 80.9% 64.6%
o

Rural Literacy rate 67.8% 77.2% 57.9%

Urban Literacy rate 84.1% 88.8% 79.1%
r
Ch

Persons (%) Males (%) Females (%)

State with Highest Literacy Kerala (94.0) Kerala (96.1)` Kerala (92.1)
Rate
State with Lowest Literacy Bihar (61.8) Bihar (71.2) Bihar (51.5)
Rate
UT with Highest Literacy Rate Lakshadweep Lakshadweep Lakshadweep
S

(95.6) (95.6) (87.9)

UT with Lowest Literacy Rate Dadra & Dadra & Dadra &
Nagar Haveli Nagar Haveli Nagar Haveli
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(85.2) (85.2) (64.3)

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 Population Density
Persons / Sq.
Km
India 382

State with Highest Population Density Bihar 1106

State with Lowest Population Density Arunachal Pradesh 17

y
ad e
UT with Highest Population Density Delhi 11,320

UT with Lowest Population Density Andaman & Nicobar Islands 46

em
Ac icl
District with Highest Population Density
District with Lowest Population Density
North East (Delhi)
Dibang Valley
36,155
1

Rural - Urban Distribution Population (%)

Rural 83,3463,448 68.8%
n
Urban 37,71,6,125 31.2%
State with highest proportion of Goa 62.2
Urban Population
o

State with lowest proportion of Himachal Pradesh 10.0

Urban Population
UT with highest proportion of NCT of Delhi 97.5
r

Urban Population
UT with lowest proportion of A. & Nicobar Islands 37.7
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Urban Population

Sex Ratio (females per thousand males)

India 943

Rural 949
Urban 929
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State with Highest Female Sex Ratio Kerala 1,084

State with Lowest Female Sex Ratio Haryana 879
UT with Highest Female Sex Ratio Puducherry 1,037
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UT with Lowest Female Sex Ratio Daman & Diu 618

District with Highest Female Sex Ratio Mahe (Puducherry) 1,147
District with Lowest Female Sex Ratio Daman (Daman & Diu) 534

Work Participation Rate : 2011 Census

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 Total Workers Number Rate (%)
Persons 48,17,43,311 39.8
Males 33,18,65,930 53.3
Females 14,98,77,381 25.5
Main Workers Percentage of Main Workers
Persons 36,24,46,420 75.2

y
e
Males 27,31,49,359 82.3
Females 8,92,97,061 59.6

em
Ac icl
Marginal Workers
Persons
Males
11,92,96,891
5,87,16,571
Percentage of Marginal Workers
24.8
17.7
Females 6,05,80,320 40.4
n
ad
Population Composition Population (%)
o

(2001 Census)
Hindus 827,578,868 80.5
Muslims 138,188,240 13.4
r

Christians 24,080,016 2.3

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Sikhs 19,215,730 1.9

Buddhists 7,955,207 0.8
Jains 4,225,053 0.4
Other Religions & Persuasions 6,639,626 0.6
Religion not stated 727,588 0.1
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Total 1,028,610,328 100.0

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 Scheduled Castes & Scheduled Tribes Population - (2011 Census)
Scheduled Castes : 20,13,78,086 16.6%
Scheduled Tribes : 10,42,81,034 8.6%
Scheduled Castes
State with highest proportion of Scheduled Castes Punjab ( 31.9%)

y
State with lowest proportion of Scheduled Castes Mizoram ( 0.1%)

ad e
UT with highest proportion of Scheduled Castes Chandigarh (18.9%)

em
UT with lowest proportion of Scheduled Castes D & N Haveli (1.8% )
Ac icl
Scheduled Tribes
State with highest proportion of Scheduled Tribes Mizoram ( 94.4%)
State with lowest proportion of Scheduled Tribes Uttar Pradesh (0.06%)
UT with highest proportion of Scheduled Tribes Lakshadweep (94.8%)
n
UT with lowest proportion of Scheduled Tribes Daman & Diu (6.3%)
ro

•••
Ch
S
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 MULTILATERAL AGENCIES CHRONICLE
IAS ACADEMY
A CIVIL SERVICES CHRONICLE INITIATIVE

INTERNATIONAL MONETARY FUND amount of its subscription, its voting weight, its

y
access to IMF financing, and its allocation of

e
The International Monetary Fund (IMF) is
Special Drawing Rights (SDRs). A member state
an international organization that oversees the
cannot unilaterally increase its quota - increases

em
global financial system by following the macro-
must be approved by the Executive Board and
economic policies of its member countries, in
Ac icl
particular those with an impact on exchange
rates and the balance of payments. It is an or-
ganization formed to stabilize international ex-
are linked to formulas that include many vari-
ables such as the size of a country in the world
economy. For example, in 2001, China was
prevented from increasing its quota as high as
change rates and facilitate development. It also
it wished, ensuring it remained at the level of
offers financial and technical assistance to its
the smallest G7 economy (Canada). In Septem-
members, making it an international lender of
ber 2006, the IMF's member countries agreed to
n
last resort. Its headquarters are located in Wash-
ad
ington, D.C., USA. The International Monetary
the first round of ad hoc quota increases for
four countries, including China.
Fund was created in July of 1944, with a goal to
stabilize exchange rates and assist the reconstruc- The percentage of quotas of the individual
o

tion of the world's international payment sys- member-countries decides not just their voting
tem. Countries contributed to a pool which could rights but also determines their access to the
be borrowed from, on a temporary basis, by Fund resources. Besides, the size of a country's
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countries with payment imbalances. quota is a decisive factor in its level of repre-
sentation in the Fund, as for example, the post
The IMF currently has a near-global mem-
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of a Director or his alternate on the Executive

bership of 188 countries. To become a member,
Board of the Fund.
a country must apply and then be accepted by
a majority of the existing members. In April Industrial countries also attach great impor-
2012, Republic of South Sudan joined the IMF, tance to their ranking in the Fund membership,
becoming the institution's 188th member. which is strictly in accordance with their quota
size. At present the largest member of the IMF
Upon joining, each member country of the IMF
is the US, with a quota of SDR 42,122.4 million
is assigned a quota, based broadly on its rela-
and the smallest is Palau (SDR 3.1 million).
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tive size in the world economy. The IMF's

membership agreed in November 2010 on a The quota largely determines the voting
major overhaul of its quota system to reflect power. Each member has 250 basic votes plus
the changing global economic realities, espe- one additional vote for each SDR 100,000 of
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cially the increased weight of major emerging quota. Accordingly, the US has 421,961 votes
markets in the global economy. (16.75 per cent of the total) and Palau 768 votes
(0.03 per cent).
A member country's quota defines its financial
and organizational relationship with the IMF. The amount of financing a member could
Members Quota in the IMF obtain from the IMF (its access limit) is based
on its quota. Under Stand-By and Extended
A member's quota in the IMF determines the Arrangements, a member can borrow up to 100
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 per cent of its quota annually and 300 per cent • Policy on Emergency Assistance: The IMF
cumulatively. provides emergency assistance by allow-
ing members to make drawings to meet
However, access may be higher in excep-
balance of payments needs arising from
tional circumstances. Further, a member's share
sudden and unforeseeable natural disas-
of general SDR allocations is established in pro-
ters and in postconflict situations. Normally
portion to its quota.
this takes the form of an outright purchase
of up to 25 percent of quota provided that
IMF Financial Facilities

y
the member is cooperating with the IMF.

ad e
The IMF makes its financial resources avail- It does not entail performance criteria or a
able to member countries through a variety of phasing of drawings.

em
financial facilities. Except for the ESAF mem- • Debt and Debt-Service Reduction Poli-
Ac icl
bers avail themselves of the IMF's financial re-
sources by purchasing (drawing) other mem-
bers' currencies or SDRs with an equivalent
amount of their own currency. The IMF levies
cies: Part of a credit extended to a mem-
ber by the IMF under regular facilities can
be set aside to finance operations involv-
ing debt principal and debt service reduc-
charges on these drawings and requires that tion. The exact amount of the set-aside is
members repurchase (repay) their own currency determined on a case-by-case basis; its
from the IMF over a specified time. availability is generally tied to program per-
n
formance.
IMF Financial Policies
Regular IMF Facilities
IMF financial policies govern the modalities
o

for the use of its financial resources under ex- • Stand-by arrangements (SBA): It is
isting IMF facilities. These include: designed to provide short-term balance of
payments assistance for deficits of a tempo-
• Reserve Tranche Policies: A member has
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rary or cyclical nature, such arrangements

a reserve tranche position in the IMF to are typically for 12 to 18 months. Drawings
the extent that its quota exceeds the IMF's are phased on a quarterly basis, with their
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holdings of its currency, excluding credits release made conditional on meeting perfor-
extended to it by the IMF. Subject only to mance criteria and the completion of peri-
balance of payments need, a member may odic program reviews. Repurchases are
draw up to the full amount of its reserve made 3¼ to 5 years after each purchase.
tranche position at any time. This draw-
• Extended Fund Facility (EFF): It is designed
ing does not constitute a use of IMF credit,
to support medium-term programs that
as its reserve position is considered part of
generally run for three years, the EFF aims
the member's foreign reserves, and is not
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at overcoming balance of payments diffi-

subject to an obligation to repay.
culties stemming from macroeconomic and
• Credit Tranche Policies: Credits under structural problems. Performance criteria
regular facilities are made available to mem- are applied, similar to those in stand-by
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bers in tranches (segments) of 25 percent of arrangements, and repurchases are made

quota. For first credit tranche drawings, in 4½ to 10 years.
members must demonstrate reasonable ef-
forts to overcome their balance of payments Concessional IMF Facility
difficulties, and no phasing applies. Upper
• Enhanced Structural Adjustment Facility
credit tranche drawings (over 25 per cent)
(ESAF): It was established in 1987, and
are normally phased in relation to certain
enlarged and extended in 1994. Designed
conditions or "performance criteria."
for low-income member countries with pro-
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 tracted balance of payments problems, its that nations with balance of trade surpluses
ESAF drawings are loans and not pur- can 'draw' upon nations with balance of trade
chases of other members' currencies. They deficits. So-called "paper gold" is little more
are made in support of three-year programs than an accounting transaction within a ledger
and carry an annual interest rate of 0.5 of accounts, which eliminates the logistical and
percent, with a 5½-year grace period and security problems of shipping gold back and
a 10-year maturity. Quarterly benchmarks forth across borders to settle national accounts.
and semiannual performance criteria ap- It has also been suggested that having holders
ply; 80 low-income countries are currently of US dollars convert those dollars into SDRs

y
eligible to use the ESAF. would allow diversification away from the

e
dollar without accelerating the decline of the
Special IMF Facilities value of the dollar. SDRs are defined in terms

em
• Systemic Transformation Facility (STF):
Ac icl of a basket of major currencies used in interna-
It is in effect from April 1993 to April 1995. tional trade and finance. At present, the cur-
The STF was designed to extend financial rencies in the basket are, by weight, the United
assistance to transition economies experi- States dollar, the euro, the Japanese yen, and
encing severe disruption in their trade and the pound sterling. Before the introduction of
payments arrangements. Repurchases are the euro in 1999, the Deutsche Mark and the
made over 4½ to 10 years. French Franc were included in the basket. The
amounts of each currency making up one SDR
n
• Compensatory and Contingency Financ-
ad ing Facility (CCFF): It provides compen-
are chosen in accordance with the relative
importance of the currency in international
satory financing for members experienc-
trade and finance. The determination of the
ing temporary export shortfalls or excesses
o

currencies in the SDR basket and their amounts

in cereal import costs, as well as financial
is made by the IMF Executive Board every five
assistance for external contingencies in
years.
Fund arrangements. Repurchases are made
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over 3¼ to 5 years.
THE WORLD BANK
• Supplemental Reserve Facility (SRF): It
provides financial assistance for exceptional The World Bank is one of two major finan-
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balance of payments difficulties due to a cial institutions created as a result of the Bretton
large short-term financing need resulting Woods Conference in 1944. The United Na-
from a sudden and disruptive loss of mar- tions Monetary and Financial Conference, com-
ket confidence. Repurchases are expected monly known as Bretton Woods conference,
to be made within 1 to 1½ years, but can was a gathering of 730 delegates from all 44
be extended, with IMF Board approval, to Allied nations at the Mount Washington Hotel,
2 to 2½ years. situated in Bretton Woods, New Hampshire to
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regulate the international monetary and finan-

Special Drawing Rights cial order after the conclusion of World War II.
The conference was held from 1 July to 22 July
SDRs were originally created to replace Gold 1944 when the agreements were signed to set
and Silver in large international transactions.
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up the International Bank for Reconstruction

Being that under a strict (international) gold and Development (IBRD), the General Agree-
standard, the quantity of gold worldwide is ment on Tariffs and Trade (GATT), and the
relatively fixed, and the economies of all par- International Monetary Fund (IMF).
ticipating IMF members as an aggregate are
growing, a perceived need arose to increase the The World Bank Group (WBG) is a family of
supply of the basic unit or standard propor- five international organizations makes leveraged
tionately. Thus SDRs, or "paper gold", are cred- loans, generally to poor countries. The Bank

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 came into formal existence on 27 December 1945 how its money is spent. Along with the rest of
following international ratification of the Bretton the developing community, the World Bank cen-
Woods agreements, which emerged from the ters its efforts on reaching the Millennium De-
United Nations Monetary and Financial Con- velopment Goals, agreed to by UN members in
ference (1 July - 22 July 1944). It also provided 2000 and aimed at sustainable poverty reduc-
the foundation of the Osiander-Committee in tion. The "World Bank" is the name that has
1951, responsible for the preparation and evalu- come to be used for the International Bank for
ation of the World Development Report. Com- Reconstruction and Development (IBRD) and

y
mencing operations on 25 June 1946, it ap- the International Development Association

ad e
proved its first loan on 9 May 1947 ($250M to (IDA). Together these organizations provide
France for postwar reconstruction, in real terms low-interest loans, interest-free credit, and

em
the largest loan issued by the Bank to date). Its grants to developing countries. Some 10,000
Ac icl
five agencies are:
• International Bank for Reconstruction and
Development (IBRD)
• International Development Association
development professionals from nearly every
country in the world work in the World Bank's
Washington DC headquarters or in its 109 coun-
try offices. Interest-free credit and grant financ-
(IDA) ing comes from IDA, the world's largest source
of concessional assistance. Some 40 rich coun-
• International Finance Corporation (IFC)
tries provide the money for this funding by
n
• Multilateral Investment Guarantee Agency making contributions every four years. IDA
(MIGA) credits make up about one-quarter of the Bank's
• International Centre for Settlement of In- financial assistance. Aside from IDA funds, very
o

vestment Disputes (ICSID) little of the Bank's income is provided by its

member countries.
The term "World Bank" generally refers to the
IBRD and IDA, whereas the World Bank Group Current President of World Bank
is used to refer to the institutions collectively.
r

An indirect presidential election was held on

The World Bank differs from the World Bank
16 April 2012 to choose a new president of the
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Group, in that the World Bank comprises only

World Bank to replace Robert Zoellick, whose
two institutions:
term expired in June. Although the organiza-
• International Bank for Reconstruction and tion has always had presidents from, and nomi-
Development (IBRD) nated by, the United States, this election fea-
• International Development Association tured the nomination of two non-United States
(IDA) candidates for the first time, originating, respec-
tively, from Nigeria and Colombia. Though the
Whereas the latter incorporates these two in
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Colombian Jose Antonio Ocampo withdrew his

addition to three more:
candidacy in the final stages, the Nigerian Fi-
• International Finance Corporation (IFC) nance Minister Ngozi Okonjo-lweala remained
• Multilateral Investment Guarantee Agency in the race. Eventually, and amid controversy,
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(MIGA) the U.S. nominee Jim Young Kim was an-

• International Centre for Settlement of In- nounced as the new president on 16 April.
vestment Disputes (ICSID)
WTO AND INDIAN ECONOMY
The World Bank is not a "bank" in the com-
mon sense. It is one of the United Nations' spe- The world trade organization (WTO) is an
cialized agencies, and is made up of 188 mem- international trade institution. the wto
ber countries. These countries are jointly respon- superseded and replaced the gatt. the gatt was
sible for how the institution is financed and a provisional, multilateral agreement governing
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 international trade from 1947 until january 1, These new agreements are ambitious issues
1995. the creation of the wto was negotiated in additions to the rule governing the world
the final gatt round, the uruguay round. the trading system. However, at this stage there
wto inherited a number of core principles from are significant enforcement problems and
the gatt. these principles include: numerous loopholes that countries use to evade
their obligations.
• Non–discrimination, which in practice
means two things. The first principle is The WTO differs from the GATT not only
MFN–most favoured nation treatment. Any in scope, but in institutional functioning. The

y
trade concession a nation offers to one WTO has two significant functions that the

e
member, it must offer to all. The second GATT did not. First, the WTO has a Trade Policy
principle is national treatment. This means Review Mechanism. This process periodically

em
that imported products must be treated the accesses a country’s trade policies and notes
same as domestic goods. any changes. It is a non-judgmental, non-

•
Ac icl
Reciprocity of Trade Concessions.
confrontational process.
More controversial is the Dispute Settlement
• Trade Liberalization. Body and its dispute settlement panels. These
panels, composed of economists, hand down
• Transparency and predictability in import
binding judgments in trade disputes.
and export rules and regulations.
n
The WTO has 153 members, representing
•
ad
Favourable treatment to less developed more than 97% of total world trade and 30
countries. observers, most seeking membership. The WTO
is governed by a ministerial conference, meeting
o

Although built on the GATT legacy, the

Uruguay Round and WTO added many new every two years; a general council, which
issues and features. To begin with, many older implements the conference’s policy decisions
agreements were replaced by new, stronger and is responsible for day-to-day administration;
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agreements. For example, the Agreement on and a director-general, who is appointed by

Textiles and Clothing established a time–table to the ministerial conference. The WTO’s
headquarters is at the Centre William Rappard,
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liberalize textile trade, while the Agreement on

Sanitary and Phytosanitary Measures established Geneva, Switzerland.
a more transparent regime for trade in Main Provisions of WTO
agricultural goods and ensures plant and animal
General Agreement on Trade in Services
health standards are followed. The WTO also
(GATS)
broke new ground, adding a number of trade
sectors and issues not addressed by the GATT: The GATS applies in principle to all service
sectors except “services supplied in the exercise
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• The General Agreement on Trade in Services

(GATS) adds services. of governmental authority”. These are services
that are supplied neither on a commercial basis
• Trade in Intellectual Property Rights (TRIPs) nor in competition with other suppliers’ viz
adds copyrights, trademarks and patents. social security schemes and central banking.
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• Trade Related Investment Measures (TRIMs) Modes of supply

sets rules for Foreign Direct Investment.
The GATS sets out four modes of supplying
• The Agreement on Government Procurement services:
(GPA) & the Information Technology Mode 1: Cross-border trade
Agreement (ITA) are also international rules
on new product areas. Mode 2: Consumption abroad
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 Mode 3: Commercial presence MFN Treatment

Mode 4: Presence of natural persons Under Article II of the GATS, “Each Member
shall accord immediately and unconditionally
Mode 1 to services and service suppliers of any other
Cross-border trade corresponds with the Member treatment no less favourable than it
normal form of trade in goods and maintains a accords to like services and service suppliers of
clear geographical separation between seller and any other country”. However, a member is

y
buyer. In this case services flow from the permitted to maintain a measure inconsistent

ad e
territory of one member into the territory of with the general MFN requirement if it has
another member crossing national frontiers. established an exception.

em
(e.g., banking or architectural services However, all exemptions are subject to
Ac icl
transmitted via telecommunications or mail).
Mode 2
Consumption abroad refers to situations
review and they should in principle, not last
longer than 10 years.
Transparency
where a service consumer moves into another The GATS requires each member to publish
member’s territory to obtain a service (e.g., promptly “all relevant measures of general
consumer travelling for tourism, medical
n
application” that affect operation of the
treatment, to attend educational establishment). agreement. Members must also notify the
Mode 3 Council for Trade in Services of new or changed
laws, regulations or administrative guidelines
o

Commercial presence is the supply of a that affect trade in services covered by their
service through the commercial presence of the specific commitments under the agreement.
foreign supplier in the territory of another WTO Each member is required to establish an enquiry
member. In this case a service supplier of one
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point, to respond to requests from other

member establishes a territorial presence, members for information.
including through ownership or lease of
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premises, in another member’s territory to Specific Obligations

provide a service. (e.g., the es tablishment of
Obligations, which apply on the basis of
branch offices or agencies to deliver such services
commitments, laid down in individual country
as banking, legal advice or communications).
schedules concerning market access and
Mode 4 national treatment in specifically designated
sectors. These requirements apply only to
Presence of natural persons involves the scheduled sectors.
admission of foreign nationals to another
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country to provide services there. An Annex to Market Access

the GATS makes it clear, however, that the
agreement has nothing to do with individuals Market access is a negotiated commitment
looking for employment in another country, or in specified sectors. The GATS also sets out
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with citizenship, or residence requirements. The different forms of measure affecting free market
members still have a right to regulate the entry access that should not be applied to the foreign
and stay of the persons concerned, for instance service or its supplier unless their use is clearly
by requiring visas. provided for in the schedule. They are:

General Principles • Limitations on the number of service suppliers

These are basic rules that apply to all • Limitations on the total value of services
members and to all services. transactions or assets
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 • Limitations on the total number of service necessary to prevent deceptive or fraudulent
operations or the total quantity of service output practices.

• Limitations on the number of persons that Also, in the event of serious balance-of-
may be employed in a particular sector or payments difficulties, members are allowed to
by a particular supplier temporarily restrict trade, on a non-
discriminatory basis, despite the existence of
• Measures that restrict or require supply of specific commitments.
the service through specific types of legal
Indian Concerns

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entity or joint venture

e
Services exports account for 40% of India’s
• Percentage limitations on the participation
total exports of goods and services, and stood
of foreign capital, or limitations on the total

em
at $86 billion in 2007–08. The contribution of
value of foreign investment
Ac icl Services to India’s GDP is more than 55%. The
National Treatment sector (domestic and exports) provides
employment to around 142 million people,
A commitment to national treatment means comprising 28% of the work force of the
that in the sectors covered by its schedule, country. India’s exports are mainly in the IT
subjected to any conditions and qualifications and IT enabled sectors, Travel and Transport,
set out in the schedule, each member shall give and Financial sectors.
n
treatment to foreign services and service
ad
suppliers treatment, in measures affecting The main destinations are the US (33%),
supply of services, no less favourable than it the EU (15%) and other developed countries.
India has an obvious interest in the liberalisation
o

gives to its own services and suppliers. Again,

the extension of national treatment in any of services trade and wants commercially
particular sector may be made subject to meaningful access to be provided by the
conditions and qualifications. Members are free developed countries to fulfil the Development
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to tailor the sector coverage and substantive Agenda of this Round. Since the Uruguay
content of such commitments as they see fit. Round, India has autonomously liberalised its
Services trade regime across the board, with
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The commitments thus tend to reflect national

policy objectives and constraints, overall and in significant market access provided in core areas
individual sectors. While some Members have of interest to the India’s interest in services lies
scheduled less than a handful of services, others in the large pool of trained, qualified
have assumed market access and national experienced manpower providing services by
treatment disciplines in over 120 out of a total temporarily moving to provide services and then
of 160-odd services. returning to India (Mode 4). Trade in Mode 4
accounts for only a minuscule 1% of global
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Exemptions trade at the moment. India has asked for a

Members in specified circumstances are commitment from the developed countries in
allowed to introduce or maintain measures in Mode 4, inter alia in I.T and I.T Enabled Services,
contravention of their obligations under the Engineering Services, Health Services, Education
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Agreement, including the MFN requirement or Services, etc. The other manner in which India
specific commitments. These circumstance cover can deliver services is by way of remote supply
measures necessary to protect public morals or of services with improved connectivity and vast
maintain public order, protect human, animal pool of professionals in various services sectors
or plant life or health or secure compliance with (Mode 1). It includes outsourcing, BPO, etc.
laws or regulations not inconsistent with the– Global trade in Mode 1 accounts for only 18%
Agreement including, among others, measures of total trade. In Mode 1, India wants developed

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 countries to take binding commitments in a well-rounded Agreement on Trade-Related
various services sectors–Health Services, R&D Investment Measures (hereinafter the “TRIMs
Services, Engineering & Integrated Engineering Agreement”), the few international agreements
Services, Construction and Related Services, providing disciplines for measures restricting
Computer Related Services, Professional foreign investment provided only limited
Services, Other Business Services like credit guidance in terms of content and country
reporting services, collection agency services, coverage. The OECD Code on Liberalization of
telephone–based support services, data Capital Movements, for example, requires

y
processing services, etc. The major concern for members to liberalize restrictions on direct

ad e
India in the area of services is that the markets investment in a broad range of areas. The
for services in the larger economies are not OECD Code’s efficacy, however, is limited by

em
sufficiently open, particularly in respect of the numerous reservations made by each of the
Ac icl
labour and labour–related services. Furthermore,
in order to realise effective access in the larger
markets, there is a need to ensure that
predictable and transparent disciplines are put
members. In addition, there are other
international treaties, bilateral and multilateral,
under which signatories extend most-favoured-
nation treatment to direct investment. Only a
in place for Domestic Regulations so that they few such treaties, however, provide national
are not abused to deny access or to create treatment for direct investment. Moreover,
barriers. although the APEC Investment Principles
n
adopted in November 1994 provide rules for
Trade–Related Investment Measures (TRIMs)
investment as a whole, including non-
In the late 1980s, there was a significant discrimination and national treatment, they have
o

increase in foreign direct investment no binding force.

throughout the world. However, some of the
Legal Framework
countries receiving foreign investment,
imposed numerous restrictions on that GATT 1947 prohibited investment measures
r

investment designed to protect and foster that violated the principles of national treatment
domestic industries, and to prevent the outflow and the general elimination of quantitative
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of foreign exchange reserves. Examples of these restrictions, but the extent of the prohibitions
restrictions include local content requirements was never clear. The TRIMs Agreement,
(which require that locally-produced goods be however, contains statements prohibiting any
purchased or used), manufacturing TRIMs that are inconsistent with the provisions
requirements (which require the domestic of Articles III or XI of GATT 1994. In addition,
manufacturing of certain components), trade it provides an illustrative list that explicitly
balancing requirements, domestic sales prohibits local content requirements, trade
requirements, technology transfer requirements, balancing requirements, foreign exchange
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export performance requirements (which restrictions and export restrictions (domestic

require the export of a specified percentage of sales requirements) that would violate Article
production volume), local equity restrictions, III:4 or XI:1 of GATT 1994. TRIMs prohibited
foreign exchange restrictions, remittance by the Agreement include those that are
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restrictions, licensing requirements, and mandatory or enforceable under domestic law

employment restrictions. These measures can or administrative rulings, or those with which
also be used in connection with fiscal incentives compliance is necessary to obtain an advantage
as opposed to requirement. Some of these (such as subsidies or tax breaks). The following
investment measures distort trade in violation table contains a list of measures specifically
of GATT Article III and XI, and are therefore prohibited by the TRIMs Agreement. Note that
prohibited. Until the completion of the this table is not exhaustive, but simply illustrates
Uruguay Round negotiations, which produced TRIMs that are prohibited by the TRIMs
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 Agreement. The table, therefore, calls particular III:4 and XI:1 of GATT 1947. Indeed, the TRIMs
attention to several common types of TRIMs. Agreement is not intended to impose new
We would add that this table identifies obligations, but to clarify the pre–existing GATT
measures that were also inconsistent with Article 1947 obligations. Under the WTO TRIMs

Examples of TRIMs Explicitly Prohibited by the TRIMs Agreement

Local Content Trade Balancing Foreign Exchange Export Restrictions
Requirement Requirements Restrictions (Domestic Sales
Requirements)

y
e
Measures requiring 1. Measures requiring Measures restricting the Measures restricting the
the purchase or use that an enterprise’s importation by an exportation or sale for

em
by an enterprise of
Ac icl purchases or use of enterprise of products export by an enterprise
domestic products, imported products be (parts and other goods) of products, whether
whether specified limited to an amount used in or related to specified in terms of
in terms of particular related to the volume its local Production by particular products, in
products, in terms of or value of local exports. restricting its access to terms of volume or value
volume or value of products that it foreign exchange to an of products, or in terms
products, or in terms (Violation of GATT amount related to the of a proportion of volume
of a proportion of Article III:4) 2. Measures foreign exchange inflows or value of its local
volume or value of restricting the importation attributable to the enter- production. (Violation
n
ad
its local production.
(Violation of GATT
by an enterprise of
productsused in or
prise.(Violation of GATT
Article XI:1)
of GATT Article XI:1)

Article III:4) related to its local

production, generally
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or to an amount related
to the volume or value
of local production that
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it exports. (Violation of
GATT Article XI:1)
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Exceptional Provisions of the TRIMs Agreement

Transitional period Exceptions for developing countries Equitable provisions

Measures specifically Developing countries are permitted To avoid damaging the

prohibited by the TRIMs to retain TRIMs that constitute a competitiveness to companies
Agreement need not be violation of GATT Article III or XI, already subject to TRIMs,
eliminated immediately, provided the measures meet the governments are allowed
although such measures conditions of GATT Ariticle XVIII to apply the same TRIMs
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must be notified to the which allows specified derogation to new foreign direct
WTO within 90 days after from the GATT provisions, by investment during the
the entry into force of the virtue of the economic development transitional period described.
TRIMs Agreement. Developed needs of developing countries
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countries will have a period

of two years in which to
abolish such measures; in
principle, developing
countries will have five years
and least-developed countries
will have seven years.

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 GATT and WTO Trade Rounds
Name Start Duration Countries Subjects Covered Achievements
Geneva April 1947 7 months 23 Tariffs Signing of GATT,
45,000 tariff
concessions affecting
$10 billion of trade
Annecy April 1949 5 months 13 Tariffs Countries exchanged

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some 5,000 tariff

ad e
concessions
Torquay September 8 months 38 Tariffs Countries exchanged

em
1950 some 8,700 tariff
Ac icl concessions, cutting
the 1948 tariff levels
by 25%
Geneva II January 5 months 26 Tariffs, $2.5 billion in tariff
1956 admission reductions
of Japan
Dillon September 11 months 26 Tariffs Tariff concessions
1960 worth $4.9 billion of
n
world trade
Kennedy May 1964 37 months 62 Tariffs, Tariff concessions
Anti-dumping worth $40 billion of
world trade
o

Tokyo September 74 months 102 Tariffs, non-tariff Tariff reductions

1973 measures, worth more than
“framework” $300 billion dollars
agreements achieved
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Uruguay September 87 months 123 Tariffs, non-tariff, The round led to the
1986 measures, rules creation of WTO,
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services, intellectual and extended the

property, dispute range of trade
settlement, textiles, negotiations, leading
agriculture, creation to major reductions
of WTO, etc in tariffs (about
40%) and agricultural
subsidies, an agreement
to allow full access for
textiles and clothing
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from developing
countries, and an
extension of intellectual
property rights.
Doha November ? 141 Tariffs, non-tariff The round is not yet
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2001 measures, agriculture, concluded

labor standards,
environment,
competition, invest-
ment, transparency,
patents, etc

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 Agreement, countries are required to rectify any makers, researchers, etc.
measures inconsistent with the Agreement,
Especially in the Doha Development Round
within a set period of time, with a few
of trade talks, agriculture has emerged as one
exceptions the second table.
of the most important issues for negotiations.
Agreement on Trade Related Aspects of Developing countries are particularly concerned
Intellectual Property Rights (TRIPS) about the widespread use of domestic farm
subsidies by developed countries. Estimates
TRIPS contains requirements that nations’
suggest that domestic farm support in

y
laws must meet for copyright rights, including
developed countries amounts to about 300
the rights of performers, producers of sound

e
billion US dollars. Such huge subsidies not only
recordings and broadcasting organizations;
create distortion in the domestic markets of these
geographical indications, including appellations

em
countries, they also distort trade by artificially
of origin; industrial designs; integrated circuit
Ac icl influencing commodity prices. One of the
layout-designs; patents; monopolies for the
priorities of the current round of WTO
developers of new plant varieties; trademarks;
negotiations is to bring substantial reduction in
trade dress; and undisclosed or confidential
trade distorting domestic support.
information. TRIPS also specify enforcement
procedures, remedies, and dispute resolution Background
procedures. Protection and enforcement of all
The Agreement on Agriculture forms a part
n
intellectual property rights shall meet the
ad
objectives to contribute to the promotion of of the Final Act of the Uruguay Round of
Multilateral Trade Negotiations, which was
technological innovation and to the transfer and
dissemination of technology, to the mutual signed by the member countries in April 1994
o

advantage of producers and users of at Marrakesh, Morocco and came into force on
technological knowledge and in a manner 1st January, 1995. The Uruguay Round marked
conducive to social and economic welfare, and a significant turning point in world trade in
agriculture. For the first time, agriculture
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to a balance of rights and obligations.

featured in a major way in the GATT round of
The TRIPS agreement introduced intellectual multilateral trade negotiations. Although the
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property law into the international trading original GATT – the predecessor of the World
system for the first time and remains the most Trade Organisation (WTO) – applied to trade
comprehensive international agreement on in agriculture, various exceptions to the
intellectual property to date. In 2001, developing disciplines on the use of non–tariff measures
countries, concerned that developed countries and subsidy meant that it did not do so
were insisting on an overly narrow reading of effectively. The Uruguay Round agreement
TRIPS, initiated a round of talks that resulted in sought to bring order and fair competition to
the Doha Declaration. The Doha declaration is this highly distorted sector of world trade by
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a WTO statement that clarifies the scope of establishment of a fair and market oriented
TRIPS, stating for example that TRIPS can and agricultural trading sector. The root cause of
should be interpreted in light of the goal “to distortion of international trade in agriculture
promote access to medicines for all.” has been the massive domestic subsidies given
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Impact of WTO on Indian Agriculture by the industrialised countries to their

agricultural sector over many years. This in turn
For the last two decades, the concept of led to excessive production and it’s dumping in
WTO is highlighted in every newspaper, international markets as well as import
electronic media, agriculture and commerce restrictions to keep out foreign agricultural
ministries, states and central government products from their domestic markets. Hence,
forums, farmer’s union, academicians, policy the starting point for the establishment of a fair

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 agricultural trade regime has to be the reduction negligible, the minimum access should not
of domestic production subsidies given by be less than 3% of the domestic
industrialised countries, reduction in the volume consumption, during the base period and
of subsidized exports and minimum market tariff quotas are to be established when
access opportunities for agricultural producers imports constitute less than 3% of domestic
world-wide. consumption. This minimum level is to rise
to 5% by the year 2000 in the case of
The obligations and disciplines incorporated
developed countries and by 2004 in the case

y
in the Agreement on Agriculture, therefore,
of developing countries. However, special

ad e
relate to (a) market access; (b) domestic subsidy
Safeguards Provisions allow for the
or domestic support; and (c) export subsidy.
application of additional duties when

em
Salient Features shipments are made at prices below certain
Ac icl
The Agreement on Agriculture contains
provisions in the following three broad areas of
agriculture and trade policy:
reference levels or when there is a sudden
import surge. The market access provision,
however, does not apply when the
commodity in question is a ‘traditional
(a) Market Access: On market access, the staple’ of a developing country.
Agreement has two basic elements: (b) Domestic support: Provisions of the
n
(i) Tariffication of all non–tariff barriers. That Agreement regarding domestic support have
is to say, non-tariff barriers such as two main objectives– first to identify
quantitative restrictions and export and acceptable measures that support farmers
and second, to deny unacceptable, trade
o

import licensing, etc. are to be replaced by

distorting support to the farmers. These
tariffs to provide the same level of
provisions are aimed largely at the
protection. Tariffs, resulting from this
developed countries where the levels of
“tariffication” process together with other
r

domestic agricultural support have risen to

tariffs on agricultural products, are to be
extremely high levels in recent decades.
reduced by a simple average of 36% over 6
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years in the case of developed countries and All domestic support is quantified through
24% over 10 years in the case of developing the mechanism of total Aggregate Measurement
countries. With India being under balance of Support (AMS). AMS is a means of
of payments cover (which is a GATT- quantifying the aggregate value of domestic
consistent measure), we had not undertaken support or subsidy given to each category of
any commitments with regard to market agricultural product. Each WTO member
access and this has been clearly stated in country has made calculations to determine its
our schedule filed under GATT. The only AMS wherever applicable. Commitment made
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commitment India has undertaken is to bind requires a 20% reduction in total AMS for
its tariffs on primary agricultural products developed countries over 6 years. For developing
at 100%; processed foods at 150%; and countries, this percentage is 13% and no
edible oils at 300%. reduction is required for the least developed
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countries. The base period external reference

(ii) The second element relates to setting up of price on which the reductions were calculated
a minimum level for imports of agricultural was 1986-88.
products by member countries as a share of
domestic consumption. Countries are AMS consists of two parts—product-specific
required to maintain current levels (1986– subsidies and non-product specific subsidies.
88) of access for each individual product. Product-specific subsidy refers to the total level
Where the current level of import is of support provided for each individual

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 agricultural commodity, essentially signified by Under the de minimis provision of Article
procurement price in India. Non-product 6.4 of the Agreement, there is no requirement
specific subsidy, on the other hand, refers to to reduce support in this residual category
the total level of support for the agricultural whose value in any year, in the case of product
sector as a whole, i.e., subsidies on inputs such specific support does not exceed 10% for
as fertilisers, electricity, irrigation, seeds, developing countries of the total value of
credit, etc. production of the basic agricultural product in
question or of the value of total agricultural
There are three categories of support
production in the case of non-product specific

y
measures that are not subject to reduction under
support. Where the support is below 10 per

e
the Agreement, and support within specified
cent, as in the case of India, product–specific
de minimis level is allowed. These three
and non-specific de minimis ceiling may be

em
categories of exempt support measures are:
Ac icl raised to those levels.
1. Measures which have a minimum impact
(c) Export subsidies: The Agreement on
on trade and which meet the basic and
Agriculture lists several types of subsidies
policy specific criteria set out in the
to which reduction commitments apply.
Agreement (the so-called Green Box
However, such subsidies are virtually non-
measures in the terminology of WTO). These
existent in India as exporters of agricultural
measures include Government assistance on
commodities do not get direct subsidy. Even
n
general services like (i) research, pest and
exemption of export profits from income
ad
disease control, training, extension, and
tax under Section 80–tHHC of the Income
advisory services; (ii) public stock holding
Tax Act is not among the listed subsidies. It
for food security purposes; (iii) domestic
o

is also worth noting that developing

food aid; and (iv) direct payment to
countries are free to provide three of the
producers like governmental financial
listed subsidies, namely, reduction of export
participation in income insurance and safety
marketing costs, internal and international
r

nets, relief from natural disasters, and

transport and freight charges. In general, it
payments under environmental assistance
may be noted that the virtual explosion of
programmes.
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export subsidies in the industrialised

2. Developing country measures otherwise countries in the years leading to the
subject to reduction which meet the criteria Uruguay Round was one of the key issues
set out in paragraph 2 of Article 6 of the addressed in the agricultural negotiations.
Agreement (the so-called ‘Special and While under GATT 1947, prohibition of
Differential Treatment’ or the S&D Box). export subsidies for industrial products has
Examples of these are (i) investment been effective since 1956, in the case of
subsidies which are generally available to agricultural primary products, such
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agriculture in developing countries; and (ii) subsidies were only subject to limited
agricultural input services generally disciplines which, moreover, did not prove
available to low–income and resource–poor to be operational or effective. As a result, in
the 1970s and 1980s, success in international
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producers in developing countries.

markets for agricultural products was
3. Direct payments under production limiting increasingly determined by the financial
programme which conform to the power and largesse of national treasuries
requirement set out in paragraph 5 of rather than the efficiency and marketing
Article 6 of the Agreement (the so-called skills of agricultural producers and
Blue Box measures). These are relevant from exporters. Export subsidies also became a
the developed countries point of view only. major factor in depressing or destabilising

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 world market prices for many agricultural by reference to the harmonised system of
commodities. The Uruguay Round marked product classification. The definition covers not
a radical departure from the earlier GATT only basic agricultural products such as wheat,
disciplines in the areas of agricultural export milk and live animals, but the products derived
subsidies. Members are required to reduce from them such as bread, butter, other dairy
the value of direct export subsidies to a level products and meat, as well as all processed
of 36% below the 1986-90 base period level agricultural products such as chocolates and
over a six year implementation period. The sausages. The coverage includes wines, spirits

y
quantity of subsidized export is to be and tobacco products, fibres such as cotton,

ad e
reduced by 21% over the same period. In wool and silk, and raw animal skins destined
the case of developing countries, the for leather production. Fish and fish products

em
reductions are two-thirds those of the are not included nor are forestry products.
Ac icl
developed countries over a ten-year period
and there are no reductions for least
developed countries. Under the Agreement,
export subsidies are defined as “subsidies
Implementation Period
The implementation period for the
country-specific commitments is the six-year
contingent on export performance” and the period commencing in 1995. However,
list covers export subsidy practices such as developing countries have the flexibility to
direct export subsidies contingent on export implement their reduction and other specific
n
performance; sales of noncommercial stocks commitments over a period of up to 10 years.
of agricultural products for export at prices Members had the choice of implementing their
lower than comparable prices for such concessions and commitments on the basis of
o

goods in the domestic markets; producer- calendar, marketing (crop) or fiscal years. A
financed subsidies such as government WTO Member’s implementation year for tariff
programmes which require a levy on reduction may thus differ from the one applied
production which is then used to subsidise to export subsidy reductions. For the purpose
r

the export of the product; cost-reduction of the ‘peace clause’ the implementation
measures such as subsidies to reduce period is the nine-year period commencing in
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marketing costs for exports including 1995.

handling costs and costs of international
freight; internal transport subsidies applying Implications of the Agreement
only to exports; subsidies on incorporated Implications of the Agreement would differ
products i.e., subsidies on agricultural from country to country and would depend
products such as wheat contingent on their largely on the overall agricultural scenario in
incorporation in export products made of the country. Indian agriculture is characterised
wheat, etc. All such export subsidies are
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by a preponderant majority of small and

subject to reduction commitments in terms marginal farmers holding less than two hectares
of both the volume of subsidised export and of land, less than 35.7% of the land, is under
budgetary outlays for such subsidies. As any assured irrigation system and for the large
indicated earlier, such measures are virtually
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majority of farmers, the gains from the

non-existent in India and, hence, the issue application of the science & technology in
of reduction of export subsidy on agriculture are yet to be realised. Farmers,
agricultural products is not of particular therefore, require support in terms of
relevance for India. development of infrastructure as well as
extension of improved technologies and
Product Coverage
provisions of requisite inputs at reasonable cost.
The Agreement defines agricultural products India’s share of world’s agricultural trade is of

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 the order of 1%. There is no doubt that during 7054 million in 1997-98. No tangible opening
the last 30 years, Indian agriculture has grown up of the markets has thus been noticed in the
at a reasonable pace, but with stagnant and post–Agreement period so far. However, it may
declining net cropped area it is indeed going to be premature on this basis to assess the long-
be a formidable task to maintain the growth in term impact of the Agreement on opening up
agricultural production. The implications of the of markets.
Agreement would thus have to be examined in
Regarding freedom to pursue our domestic
the light of the food demand and supply
policies, it is quite evident that in the short term
situation. The size of the country, the level of

y
India will not be affected by the WTO
overall development, balance of payments

e
Agreement on Agriculture. The safeguards
position, realistic future outlook for agricultural
provided for developing countries give enough
development, structure of land holdings, etc.

em
manoeuvres to insulate ourselves from any
are the other relevant factors that would have
Ac icl major impact of trade liberalisation in
a bearing on India’s trade policy in agriculture.
agricultural commodities.
Implications of the Agreement on Agriculture
India has been maintaining quantitative
for India should thus be gauged from the impact
restrictions (QRs) on import of 825 agricultural
it will have on the following:
products as on 1.4.97. QRs are proposed to be
i) Whether the Agreement has opened up eliminated within the overall time frame of six
n
markets and facilitated exports of our years in three phases – 1.4.97 to 31.3.2003. (All
ad
products; our trading partners barring the US have agreed
to this phase-out plan and dispute with the US
ii) Whether we would be able to continue with is pending with Dispute Settlement Body of
o

our domestic policy aimed at improving WTO for adjudication). Within the provisions
infrastructure and provision of inputs at of the GATT Agreement India has bound tariffs
subsidised prices for achieving increased at high levels of 100%, 150% and 300% for
agricultural production.
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primary products, processed products and

edible oils respectively.
Implications–Short Term
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Therefore, the QRs can be replaced with

As far as opening of markets and impact
high import tariff in case we want to restrict
on trade in agriculture is concerned, it may be
imports of these commodities.
noted that the share of developing countries in
world exports of food remained at 44% and of In India, for the present, the minimum
agricultural raw materials increased support price provided to commodities is less
insignificantly from 32% in 1994 to 34% in 1996 than the fixed external reference price
that is the post-Agreement period. The average determined under the Agreement. Therefore,
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growth of developed countries imports of the AMS is negative. Theoretically, therefore,

agricultural products increased by just 1% we could increase the product-specific support
during 1994-96. Nearer home, agricultural up to 10%, the only restraint being the fiscal
exports of ten Asian developing countries sustainability in the country’s context.
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increased from US $ 49252 million in 1994 to

US $ 55902 million in 1996. India’s share in Implications–Long Term
total agricultural exports from developing Asia As mentioned earlier, for a large majority
is 8%, behind China’s 19%, Thailand’s 17%, of farmers in different parts of the country, the
Malaysia’s 14% and Indonesia’s 10%. India’s gains from the application of science and
exports of agricultural products have increased technology in agriculture are yet to be realised
from US $ 4151 million in 1993-94 to US $ which would require infrastructural support,

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 improved technologies and provision of inputs Ganesan, “There will be growing pressure from
at reasonable cost. The Agreement on Agriculture the farmers to realise higher prices for their
thus recognised this and developing countries produce and to narrow the gap between the
have been given the freedom to implement such domestic and external prices. Our industrialists
policies under Article 6 relating to differential are pressing for a ‘level playing field’ vis-a-vis
treatment, but any attempt in future to dilute foreign enterprises; our farmers will press for a
provisions relating to differential treatment for ‘level playing field’ for the prices of their
developing countries could affect us adversely. products vis-a-vis international prices. Both the

y
pattern of production and price expectations

ad e
Regarding the impact of liberalisation of
will increasingly be influenced by the demands
trade in agriculture in the long term, Indian
and trends in world markets. On the one hand,
agriculture enjoys the advantage of cheap

em
the price incentive could be the best incentive
labour. Therefore, despite the lower
Ac icl and could give a strong boost to investment in
productivity, a comparison with world prices
agriculture as well as adoption of modern
of agricultural commodities would reveal that
technologies and thereby to the raising of
domestic prices in India are considerably less
agricultural production and productivity. On
with the exceptions of a few commodities
the other hand, the rise in domestic prices would
(notably oilseeds). Hence, imports to India
put pressure on the public distribution system
would not be attractive in the case of rice, tea,
and accentuate the problem of food subsidy.
n
sunflower oil and cotton. On the whole, large
Furthermore, freedom to export agricultural
scale import of agricultural commodities as a
products without restrictions will also need
result of trade liberalisation is ruled out. Even
shedding the long–nurtured inhibition against
the exports of those foodgrains which are
o

their imports. The nature and character of State

cheaper in the domestic market, but are sensitive
intervention and State support will have to
from the point of view of consumption by the
undergo qualitative changes in order not only
economically weaker sections are not likely to
to realise the opportunities for exports, but also
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rise to unacceptable levels because of high

to cope with the implications of our agriculture
inland transportation cost and inadequate
coming into increasing alignment with the
export infrastructure in India. Through proper
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international market place”.

tariffication, however, we will have to strike a
balance between the competing interest of 10% Doha Round
farmers who generate marketable surpluses and
Non Tariff Measures (NTMs) are all
consumers belonging to the economically poor
measures on international trade that are not in
sections of the society.
the form of a tariff or a tax. These measures
It is also argued that because of increasing include trade related procedures such as
price of domestic agricultural commodities documentation, certification and inspections;
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following improved export prospects, farmers technical regulations; standards; import related
would get benefits which in turn would measures such as restrictions, prohibitions,
encourage investment in the resource scarce seasonal duties, tariff rate quotas; foreign
exchange controls including artificial exchange
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agricultural sector. With the decrease in

production subsidies as well as export subsidies, rates; public procurement practices, etc. Certain
the international prices of agricultural NTMs such as imposition of anti-dumping and
commodities will rise and this will help in safeguard duties have the effect of tariffs. On
making our exports more competitive in world the other hand, some measures are intended to
market. Given our agro diversity, we have the protect human, animal and plant, life and
potential to increase our agro exports in a health, and are known as sanitary and
substantial way. In the words of Shri A.V. phytosanitary (SPS) measures.

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 Non Tariff Barriers (NTBs) are a sub-set of • Decision on non–tariff barriers affecting
NTMs which violate the obligations under the forestry products used in building
Agreements of the WTO. Therefore, NTBs are construction
unfair measures which serve to discriminate
against imports. • Agreement on Non–Tariff Barriers
Pertaining to the Electrical Safety and
The NAMA negotiations focussed on the Electromagnetic Compatibility (EMC) of
listing of NTBs by countries. Subsequently, the Electronic Goods
Negotiating Group went into text based

y
negotiations on various proposals. • Negotiating Proposal on Non–Tariff Barriers

e
in the Chemical Products and Substances
Last Status
Sector

em
In the draft NAMA modalities of 6 December,
• Understanding on the Interpretation of the
Ac icl
2008, there were 13 NTB textual proposals listed
in Annex 5. These could be categorised as:
Horizontal proposals (those related across
Agreement on Technical Barriers to Trade
with respect to the Labelling of Textiles,
Clothing, Footwear, and Travel Goods
sectors)
• Agreement on NTBs pertaining to
• Ministerial Decision on Procedures for the
standards, technical regulations and
Facilitation of Solutions to Non–Tariff Barriers
n
conformity assessment procedures for
(known as the Horizontal Mechanism)
ad automotive products.
• Decision on the elimination of Non-Tariff
Barriers imposed as unilateral trade measures While listing these 13 proposals, the NAMA
o

text states that 7 of the proposals merit

• Ministerial Decision on Trade in particular attention which includes the
Remanufactured Goods proposals on the horizontal mechanism;
remanufactured goods; TBT proposals on
r

Vertical proposals (related to specific sectors)

electronics (2 in number); vertical proposals on
(A) Export related proposals automotives; labelling in textiles, clothing,
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footwear and travel goods; and chemical

• Revised submission on Export Taxes products. Subsequently, the EC came out with
• Protocol on Transparency in Export its proposal on automobiles thereby putting 14
Licensing to the General Agreement on NTB proposals on the table.
Tariffs and Trade 1994 While most proposals have little support
and are unlikely to achieve consensus, the three
(B) TBT (Technical Barriers to Trade) related
key proposals under discussion are:
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proposals
• Understanding on the Interpretation of the • “Ministerial Decision on Procedures for the
Agreement on Technical Barriers to Trade Facilitation of Solutions to NTBs” known as
as Applied to Trade in Fireworks the Horizontal Mechanism
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• Understanding on the Interpretation of the This Horizontal Mechanism was originally

Agreement on Technical Barriers to Trade mooted by the NAMA 11(of which India is a
as Applied to Trade in Lighter Products Member) and European Communities (EC)
with the support of more than 100 Members
• Understanding on the Interpretation of the namely the African Group, Canada, LDCs, New
Agreement on Technical Barriers to Trade Zealand, Norway, Pakistan and Switzerland.
as Applied to Trade in Electronics The Mechanism is an informal dispute resolution
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 mechanism that explores trade solutions without solution arrived at. This has to be vetted by
affecting the rights and obligations under the the parties and then submitted to the
WTO Agreements. It operates through the Committee.
existing WTO Committee’s, takes the help of
an expert in the respective field and enables • While the solution may be trade related, it
faster and more economical resolution of NTBs should not impinge on the rights and
especially those on products of export interest obligations of Members under the WTO
for developing countries. Agreements.

y
• The procedures would be useful especially

ad e
The Procedures have the following salient
features: for developing countries in the context of
the economical and expeditious nature of

em
• The procedures are intended to explore trade the decision making. It would also
Ac icl
solutions to the NTB without getting into
the rights and obligations under the WTO
Agreement.
•
strengthen the WTO Committees especially
in the context of their decision making.

Ministerial Decision on Trade in

• The first stage is of information exchange Remanufactured Goods
between the requesting and responding
Member which seeks to ensure The salient features of the proposal driven
n
transparency. This is non confidential and by the US are that it seeks to enhance market
is circulated to the WTO Committee. access opportunities for remanufactured goods,
it seeks a review of the non tariff measures on
• The Chairman or Vice Chairman get
o

importation of remanufactured goods so that

associated at this stage since they call a they are in compliance with multilateral
meeting for addressing any outstanding obligations and putting in place an institutional
issues and explore possible steps forward. framework for consultations as well as
r

• Third parties can join in based on consent discussing progress in reduction or elimination
of the two parties and on terms and of non tariff barriers on remanufactured goods.
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conditions decided upon by them. Some of the concerns on this proposal are:
• The second stage is purely mandatory at • There is no conceptual clarity on
the consent of both parties. It involves the remanufacturing and the suggested
appointment of a facilitator which is by definition in the textual NTB proposal does
mutual consent or else selected by the not capture the concept of remanufacturing
Chairman of the Council of Trade in Goods across various sectors.
(CTG) after consulting the parties.
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• Re-manufactured imports would adversely

• This stage has flexible procedures in terms affect the domestic manufacturing sector
of the venue, means of communication, especially the unorganised sector and SMEs.
exploration of possible solutions, etc. The
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emphasis is on reaching a mutually agreed • It could serve as a conduit for dumping of

solution. The entire proceedings and content waste (including e waste) into developing
of the discussions in this stage are countries due to stringent standards
confidential. elsewhere.

• If a mutually agreed solution is reached, • Without any extended producer liability

the facilitator will submit a draft report on (EPL) for re-manufactured products, there
the NTB, procedures followed and the could be grave environmental implications

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 • Issues of customs valuation, misclassification 9 out of the 14 NTB proposals are vertical
and intellectual property protection on in nature relating to specific NAMA sectors.
imports of re-manufactured products would They would also have a legal relationship with
crop up. the Agreement on Technical Barriers to Trade
(TBT Agreement) and would affect some of the
• Remanufacturing cannot generate the same provisions of the latter. It was in this context
level of employment or value addition as that India took a decision to seek a horizontal
manufacture of the new goods. solution to specific NTB in NAMA sectors while
retaining some elements of the vertical solutions

y
• In the absence of standards, technical
wherever it was applicable. This was to ensure

e
regulations and conformity assessment
procedures (both domestic and global) for that specific carve outs for sectors did not
create a cobweb of provisions that could

em
remanufactured goods, there is a possibility
Ac icl
of environmental norms being flouted. otherwise be addressed through a horizontal
treatment. The EC later joined India and a
• One needs to look at a Work Programme joint submission on a “Framework for Industry
wherein all these issues are discussed and Specific proposals” was made in September,
thereby generates greater clarity. 2009. Work is now going on to convert this
into a negotiating text.
• TBT Related Proposals
n
ad
o

•••
r
Ch
S
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 INTERIM UNION BUDGET CHRONICLE
2014-2015 IAS ACADEMY
A CIVIL SERVICES CHRONICLE INITIATIVE

Apart from embarking on the path of fiscal

y
INTERIM UNION BUDGET 2014-2015

ad e
consolidation, the objectives of price stability,
In an election year, Finance Minister self sufficiency in food, reviving the growth
presented an Interim Budget short of rhetoric cycle, enhancing investments, promoting

em
and stuck to highlighting the Government’s
Ac icl manufacturing, encouraging exports,
achievements of the last 10 years. Faced with a quickening the phase of implementation of
massive economic slowdown the Finance projects and reducing a stress on important
Minister tinkered with excise duty to make cars, sectors were the goals set in 2012-13.
two-wheelers and mobiles cheaper, announced
the implementation of the long standing One 2. State of economy
Rank, One Pension for defence forces and
(a) Deficit and Inflation
n
expressed hope that the worst of the slowdown
is over.
The fiscal deficit for 2013-14 contained at
4.6 per cent.
Key Features of Budget
o

The currect account deficit projected to be

1. The Current economic situation and the at USD 45 billion in 2013-14 down from
challenges: USD 88 billion in 2012-13.

The state of world economy has been the
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Foreign exchange reserve to grow by USD

most decisive factor affecting the fortunes
15 billion in this Financial Year
of every developing country.
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No more talk of down grade of Indian

The world economy has been witnessing a
Economy by Rating Agencies.
sliding trend in growth, from 3.9 percent in
2011 to 3.1 per cent in 2012 and 3 per cent
Fiscal stability at the top of the Agenda.
in 2013.

Government and RBI have acted in tandem

The economic situation of major trading to bring down inflation.
partners of India, who are also the major
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source of our foreign capital inflows,
WPI inflation down to 5.05 per cent and
continues to be under stress. United States core inflation down to 3.0 per cent in
has just recovered from long recession, Euro January 2014.
zone, as a whole, is reporting a growth of
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Food inflation down to 6.2 per cent from a

0.2 per cent, and China’s growth has also
high of 13.8 per cent.
slowed down.
(b) Agriculture

The economic challenges faced by our
country are common to all emerging
Agricultural sector has performed
economies. Despite these challanges, we remarkably well.
have successfully navigated through this
period of crisis.
Food grain production estimated for the

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 current year is 263 million tonnes compared
8 National Investment and Manufacturing
to 255.36 million tonnes in 2012-13. Zones (NIMZ) along Delhi Mumbai
Industrial Corridor (DMIC) have been

Agriculture export likely to cross USD 45 announced. 9 Projects had been approved
billion higher from USD 41 billion in 2012- by the DMIC trust.
13.

3 more Industrial Corridors connecting

Agricultural credit to exceed the target of Chennai and Bengaluru, Bengaluru and
Rs 7 lakh crore. Mumbai & Amritsar and Kolkata are under

y
different stages of preparatory works.

Agricultural GDP growth for the current

e
year estimated at 4.6 per cent compared to
Additional capacities are being installed in
4.0 per cent in the last four years.

em
major manufacturing industries.
Ac icl
(c) Investment

Savings rate at 30.1 per cent and investment

Notification of a public procurement policy,
establishing technology and common facility
centres, and launching the Khadi Mark are
rate of 34.8 per cent in 2012-13. steps taken to promote Micro Small and

Government set up a Cabinet Committee Medium Enterprises.
on investment and the Project Monitoring (f) Infrastructure
n
ad

Group to boost investment. By end of January In 2012-13 and in nine months of the
2014, Projects numbering 296 with an current financial year, 29, 350 MW of
estimated project cost of Rs 660,000 crore power capacity, 3, 928 kms of National
o

cleared. Highways, 39, 144 kms of Rural Roads,

3,343 kms of New Railway track and 217.5
(d) Foreign Trade
million tonnes of capacity per annum in
r

Despite a decline in growth of global trade, our ports have been created to give a big
our export have recovered sharply. boost to infrastructure industries.
Ch

The estimated merchandise export is
19 Oil and Gas blocks were given out for
estimated to reach USD 326 billion exploration and 7 new airports are under
indicating a growth rate of 6.3 per cent in construction.
comparison to the previous year.
Infrastructure debt funds have been
(e) Manufacturing promoted to provide finances for
infrastructure Projects.

The sluggish import is a matter of concern
S

(g) Exchange Rates

for manufacturing and domestic trade
sector.
Rupee came under pressure following
indications by US Federal Reserve of

Due to deceleration in investment, the
IA

reduction in asset purchases in May 2013.

manufacturing sector has witnessed a
sluggish growth.
Government, RBI and SEBI undertook a
number of measures to facilitate capital

The National Manufacturing Policy has set
inflows and stablize the foriegn exchange
the goal of increasing the share of
markets. As a result among emerging economy
manufacturing in GDP to 25 per cent and
currencies rupee was least affected when
to create 100 million jobs over a decade. actual reduction took place in December 2013.

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 (h) GDP Growth 4. Economic Initiative

The GDP slow-down which began in 2011-
Centrally Sponsored Schemes were
12 reaching 4.4 per cent in Q1 of 2013-14 restructured into 66 Programs for greater
from 7.5 per cent in the corresponding Synergy.
period in 2011-12 has been controlled by

Funds under these programs will be released
numerous measures taken by the
as Central assistance to State Plan, thus
Government. Growth in the third and fourth
giving greater authority and responsibility.

y
quarter of the current year is expected to As a result, Central assistance to plans of

ad e
be 5.2 per cent and that for the whole year States & UTs will rise substantially from Rs
has been estimated at 4.9 per cent. 136,254 crore in BE 2013-14 to Rs 338,562

em

The declining fiscal deficit, stable Exchange crore in 2014-15.
Ac icl
Rate and reducing Current Account Deficit,
moderation in inflation, increasing exports
are reflection of a more stable economy

Record Capital expenditure of Rs 257,641
crores in 2013-14 by public sector
enterprises.
today

About 50,000 MW of Thermal and Hydel
3. Report Card of 2013-14 Power capacity is under construction after
n

De-controlling sugar, gradual correction of receiving all clearances and approvals.
diesel prices, rationalization of railway fares, 78,000 MW of power capacity have been
assured coal supply.
were some of the courageous and long over
due decisions taken by the government.
Liberalised
o

FDI policy in tele-

communication, pharmaceuticals, civil

Applications were invited for issue of new
aviation, power trading exchange, and multi
bank licences.
brand retail to attract large investment.
r

DISCOMS, mostly sick are being restructured

Approval to establish 2 semi conductor
with generous central assistance.
wafer fab units.
Ch

12.8 lakhs land titles covering 18.80 lakh

Approval of IT modernization project of
hectare were distributed under the
Department of Post.
Scheduled Tribes and Other traditional
Forest Dwellers Act.
Kudankulam Nuclear Power Plant Unit-I
achieved criticality and is generating 180

The oppressive colonial law of 1894 was million Units of power.
substituted with the Right to Fair
S

Compensation and Transparency in Land
Fast breeder Reactor at Kalpakkam and 7

Acquisition Rehabilitation and Resettlement Nuclear Power Reactors under construction.
Act.

National Solar Mission to add 4 Ultra Mega

National Food Security Act was passed Solar Power Projects each with the capacity
IA

assuring food to 67 per cent of the of over 500 MW in 2014-15.

population/households.

Ministry of MSME will create the ‘India

The new companies Act replaced a law of Inclusive Innovation Fund’ to promote grass
1956 vintage. root innovations with social returns to
support enterprises in the MSME sector with

The PFRDA Act was passed to establish a an initial contribution of Rs 100 crore to
statutory regulator for the New Pension Scheme. the corpus of the fund.
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 5. Social Sector Initiative safety of women have been approved which
will be funded from the Nirbhaya Fund . A

A Venture Capital Fund to provide
sum of Rs 1000 crore has again been
concessional finance to Scheduled Caste will
provided in FY 2014-15
be set up by IFCI with an initial capital of
200 crore which can be supplemented every
The National Skill Certification and
year. monetary reward schemes launched in
August 2013 with an allocation of Rs 1000

The restructured ICDS, under
crore has been widely hailed as a success.

y
implementation in 400 districts, will be
A sum of Rs 1000 crore is proposed to be

e
rolled out in remaining districts from
transferred to the NSD Trust to scale up its
1.4.2014.
programme rapidly.

em

A National Agro-Forestry Policy 2014 has

Government remains fully committed to
Ac icl
been approved.

A mechanism for marketing minor Forest

Aadhar under which 57 crore Unique
Numbers have been issued so far and to
opening bank accounts for all Aadhar
produce has been introduced and an
allocation of Rs 444.59 crore has been made holders to promote financial inclusion.
to continue the Scheme in 2014-15.

Through the Direct Benefit Transfer (DBT)
n

A new Plan Scheme with an allocation of Scheme, a total of Rs 628 crore (54,20,114
ad
Rs 100 crore has been approved to promote transactions) has been transferred directly
community radio station. to the beneficiaries till 31st January 2014
under 27 Schemes.
o

New technologies such as JE vaccine, a

diagnostic test for Thalassaemia and OVERVIEW OF THE INTERIM BUDGET
Magnivisualizer for detection of Cervical
In order to sustain the pace of plan
r

cancer have been delivered to people.

Additional Central Assistance to some expenditure, it has been kept at the same level
States in 2014-15 at which, it was budgeted in 2013-
Ch

14. Ministries/Departments which run key

A sum of Rs 1200 crore as additional central flagship programmes have been provided
assistance to North Eastern states, Himachal adequate funds in 2014-15 either equal to or
Pradesh and Uttarakhand in this financial higher than in the BE 2013-14. These include
year. Ministries namely, Minority Affairs, Tribal
Affairs, Housing & Poverty Alleviation, Social

Space India joined a handful of countries Justice & Empowerment, Panchayat Raj,
when it launched the Mars Orbiter Mission. Driniking Water and Sanitation, Women & Child
S

The Country has acquired capability in Development, Health & Family Welfare, Human
launch vehicle technology, cryogenics and Resource Development and Rural Development.
navigation ,meteorological and (a) Railways
IA

communication satellites.

Budgetary support to Railways has been

Several flight tests, navigational satellites and increased from Rs 26,000 crore in BE 2013-
space missions are planned for 2014-15. 14 to Rs 29,000 crore in 2014-15.

A Corpus has been created for ‘Nirbhaya
It is proposed to indentify new instruments
Fund’ with a non lapsable grant of Rs 1000 and new mechanisms to raise funds for
crore. 2 Proposals to ensure the dignity and Railway Projects.

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 (b) SC sub-plan and Tribal sub-plan, gender bud-
5,207 new branches have been opened
get and child budget against the target of 8,023.

Rs 48,638 crore and Rs 30,726 crore are
Bhartia Mahila Bank has been established.
allocated to the SC Sub-Plan and Tribal Sub-
Plan respectively.
Rs 6,000 crore and Rs 2,000 crore have been
provided to Rural and Urban Housing
Gender Budget and Child Budget has Rs Funds respectively.
97,533 and Rs 81,024 respectively.

y

The target of Rs 700,000 crore of

ad e
(c) Non plan expenditure Agricultural Credit is likely to be exceeded

Non plan expenditure is estimated Rs by the Banks. The target for 2014-15 is ‘

em
12,07,892 crore. 800,000 Crore.
Ac icl

The expenditure on subsidies for food,
fertilizer and fuel will be Rs 2,46,472 crore
slightly higher than the revised estimates of

Rs 23,924 crore has been released under
the Interest Subvention Scheme on farm
loans, with effective rate of interest on farm
Rs 2,35,453 crore in 2013-14. loans at 4 per cent including subvention of
2 per cent and incentive of 3 per cent for

Rs 1,15,000 crore has been allocated for prompt payment.
n
food subsidies taking in to account,
government’s firm and irrevocable (g) Credit to Minority Communities
commitment to implement the National
The number of bank accounts of minorities
Food Security Act throughout the country.
o

has increased to 43,52,000 at the end of March

(d) Defence 2013 from 14,15,000 ten years ago. The volume
of lending has soared to Rs 66,500 crore from
10 per cent hike in Defence allocation has Rs 4,000 crore in the same period. Loans to
r

been given in comparison to BE 2013-14. minorities stood at Rs 211,451 crore at the end
of December 2013.
Ch

Government has accepted the principle of

one rank one pension for the Defence Forces (h) Self-Help Groups (SHGs) Loans
which will be implemented prospectively from
the FY 2014-15. A sum of Rs 500 crore is Ten years ago, only 9,71,182 women Self-
proposed to be transferred to the Defence Pension Help Groups (SHGs) had ben credit linked to
Account in the current Financial Year itself. banks. At the end of December 2013, 4,11,6000
women SHGs had been provided credit and
(e) Central Armed Police Forces
the outstanding amount of credit was Rs 36,893
S

A modernisation Plan at a cost of Rs 11,009 crore

crore has been approved the capacity of Central I. Education Loans
Armed Police Forces and to provide them the
state-of-art, equipment and technology. A moratorium period is proposed for all
IA

education loans taken up to 31.3.2009 and

(f) Financial sector
outstanding on 31.12.2013. Government will

All the announcements concerning the take over the liability for outstanding interest
Financial sector made in the Budget Speech as on 31.12.2013 but the borrower would have
of February 2013 have been implemented. to pay interest for the period after 1.1.2014. An
amount of Rs 2,600 crore has been provided

Rs 11,300 crore is proposed to be provided this year and it will benefit nearly 9 lakh student
for Capital infusion in Public Sector Banks. borrowers.
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 (k) Insurance
In case of large and mid-segment cars, it is
proposed to reduced excise duty by 3
LIC and the four public sector general percent i.e. 27/24% to 24/20%. All these
insurance companies have opened arround 3000 reduced rates will be applicable upto June
offices in towns with a population of 10,000 or 30, 2014.
more to serve peri-urban and rural areas.

To stimulate growth in capital goods and
l. Financial Markets
consumer non-durable, it is proposed to
Steps envisaged to deepen the Indian reduce the excise duty from 12 to 10 percent

y
Financial Market : on all goods for a period up to June 30,

e
2014. It is applicable to all goods falling

ADR/GDR Scheme revamp, an
under Chapter 84 and 85 of the Schedule

em
enlargement of the scope of depository
to the Central Excise Act.
receipt
Ac icl

Liberalization of rupee denominated
corporate bond market.

To encourage the domestic production of
mobile handsets and reduce the dependence
on imports, it is proposed to restructure the

Currency Derivatives Market to be deepened excise duty for category of mobile handsets.
and strengthened to enable Indian The rates will be 6 percent with CENVAT
Companies to fully hedge against foreign credit or 1 percent without CENVAT credit.
n
currency risk
ad
To boost domestic production of soaps and

To create one record for all financial assets oleo chemicals, it is proposed to rationalize
of every individual the customs duty structure on non-edible
o

grade industrial oils and fractions, fatty

To enable smoother clearing and settlement acids and fatty alcohols at 7.5 percent.
for international investors looking to invest
in Indian bonds.
It is proposed to withdraw the exemption
r

from CVD on similar imported machinery

(m) Commodity Derivatives Markets to encourage domestic production of the
Ch

specified road construction machinery.

Swift action taken to sequester National
Spot Exchange Limited (NSEL) after the
The Government has succeeded in obtaining
payment crisis in the NSEL, this prevented information in 67 cases of illegal Off-shore
spill over of the crisis to the other regulated Accounts and action is underway to
segment of the financial markets. Proposal determine the tax liability as well as impose
to amend the Forward Contracts penalty. Prosecutions for willful tax evasion
(Regualtion) Act. have been launched in 17 other cases.
S

(n) Revenue proposals
Setting-up a Research Funding

To give relief to automobile industry which Organization that will fund research
is registering unprecedented negative projects selected through a competitive
IA

growth, it is proposed to reduce the excise process. Contributions to that organization

duty for the small cars, motor cycles, scooters will be eligible for tax benefit.
and commercial vehicles by 4 percent. It will

The Direct Taxes code (DTC) is ready and
be cut from 12 percent to 8 percent.
it will be placed on the website for a public

The excise duty on SUVs is proposed to be reduced discussion. The Finance Minister appeals to
by 6 percent. From 30 percent to 24 percent. all political parties to resolve to pass the
GST laws and the DTC in 2014-15.
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 Vision for future 10.States to partner in development so as to
enable the Centre to focus on Defence,
India poised to be third largest economy
Railways, National Highways and Tele-
along with US and China, to play a leading an
communication.
important role in global economy.
10 Tasks as part of the road map ahead include HIGHLIGHTS OF THE RAILWAY
: BUDGET – 2014-15

y
1. Fiscal consolidation : We must achieve the Achievements / Initiatives

ad e
target of fiscal deficit of 3 percent of GDP

Major landmark achievement in National
by 2016-17 and remain below that level
Project of Kashmir State of Meghalaya and

em
always.
Ac icl capital of Arunachal Pradesh to be on
2. Current Account Deficit : CAD will be Railway Map by this fiscal.
inevitable for some more years which can

Gauge Conversion of strategically important
be financed only by foriegn investment.
510 km Rangiya Murkongselek line in
Hence, there is no room for any aversion to
Assam to be completed by this fiscal.
foreign investment.

XIth Five Year Plan Targets exceeded in
3. Price Stability and Growth : In a developing
n
New Lines (2,207 km) , Doubling (2,758
economy, a high growth target entails a
km) and Electrification (4,556 km),
moderate level of inflation. RBI must strike a
Production of Diesel (1,288) & Electrical
balance between price stability and growth
(1,218) Locos and Acquisition of Wagons
o

while formulating the monetary policy.

(64,875)
4. Financial Sector reforms to be completed as

Dedicated Freight Corridors on the Eastern
laid down by Financial Sector Legislative
r

and Western Routes leading to strategically

Reforms Commission.
critical capacity augmentation.
Ch

5. Massive investment in infrastructure : to be

Railways met from its own means the total
mobilized through the Public Private
additional impact of Rs one lakh crore due
Partnership.
to implementation of 6th Pay Commission
6. Manufacturing sector to be the base of India’s

In 2013-14, 1532 km of New Lines, Doubling
development : All taxes, Central and State
and Gauge Conversion commissioned.
that go into an exported product should be
waived or rebated. There should be a
Production commenced at the new factories
S

minimum tariff protection to incentiwise Rail Wheel Plant, Chhapra ; Rail Coach
domestic manufacturing. Factory, Rae Bareli ; and Diesel Component
Factory, Dankuni.
7. Subsidies, which are absolutely necessary
should be chosen and targeted only to the
Specially designed coaches for adverse
IA

absolutely deserving. weather condition for rail travel in Kashmir.

8. Urbanisation to be managed to make cities
Successful development of Corrosion
governable and livable. resistant, lighter wagons with higher pay-
load and speed potential upt 100kmph.
9. Skill development must be given priority at
par with secondary and university education,
Railways sportspersons dominate national
sanitation and universal health care. events by winning titles in 23 disciplines

© Chronicle IAS Academy 105

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 and runners up in 9 disciplines. In various with State Governments; Karnataka,
international championships a total of 2 Jharkhand, Maharashtra, Andhra Pradesh and
Gold, 4 Silver and 3 Bronze Medals won. Haryana agreed to several projects.

Unigauge Policy started in 1992 has
Several Public Private Partnerships (PPP)
converted 19,214 km to Broad Gauge, projects are in the pipeline.
benefitting several States including Gujarat,
Rajasthan, Madhya Pradesh, Maharashtra,
FDI being enabled to foster creation of
Karnataka, Uttar Pradesh, Assam and world-class rail infrastructure.

y
Tamil Nadu.

Rail Land Development Authority raised Rs

e
Measures for improving Safety & Security 937 crore so far.

em

No unmanned Level Crossing. A total of
Ac icl Modernisation and Technology Induction-
5,400 unmanned level crossings eleiminated
High Speed Trains
2,310 by manning it and 3,090 by closure /
merger / construction of ROBs or RUBs.
Joint feasibility study by India and Japan for
Mumbai Ahmedabad Corridor to be co-

Improved audio visual warning to road
financed by international Cooperation Agency
users in advance of approaching trains.

Business Development Study by SNCF for
n

Induction of indigenously developed Train
ad
Collision Avoidance System.
Mumbai – Ahmedabad corridor.

Semi- High Speed Projects- Exploring low cost

Development of ‘crashworthy coaches.
o

option of speeds 160- 200 kmph on select routes

In last five years, offering employment to over Green initiative
one lakh persons in Group C categories and
to 1.6 lakh persons in erstwhile Group D
Railway Energy Management Company
r

categories. becomes functional. Windmill and solar

power plants to be set up with 40% subsidy

Provision of Vigilance Control Device in all
Ch

from Ministry of New & Renewable Energy.

locomotives.

200 Stations, rooftops of 26 buildings and

Various measures to prevent fire incidents
2,000 level crossing gates to be covered.
on trains

Railways bagged 22 out of 112 awards given
1. Fire retardant materials.
by the Government.
2. Multi-tier protection for electric

Green Curtains along the track close to major
S

circuits.
stations; Pilot work at Agra and Jaipur.
3. Portable fire extinguishers in coaches.

Coverage of Bio-toilets in 2,500 coaches and
4. Intensive checks against explosives would be increased progressively.
IA

and inflammable materials.

Passenger Friendly Initiatives
5. Induction based cooking to replace

Overwhelming public response to e-booking
LPG in pantry cars.
of ticket.
Financial Health

On-line tracking of exact location and

Rail infrastructure by cost sharing arrangement running of train movements.

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51 Jan-Ahaar outlets for Janta Meals ; 48
Carrying Capacity + 9 tonne + 1 tonne
passenger escalators commisionsed at routes being planned.
stations and 61 more being installed ; air-

Easing of some restrictions on movement of
conditioned EMU services in Mumbai from
imported commodities through containers.
July 2014 ; information display system in
important trains to indicate stations &
Carrying capacity of 20 feet containers
arrival time. increased by 4 tonnes.

y

Upgradation scheme extended to AC Chair
Parcel Terminals & Special Parcel Trains

ad e
Car and Executive Chair car passengers. with scheduled timings.

Demand Management through Dynamic Pricing
New policy on parcels to encourage

em
Ac icl transportation of milk.
Premium AC Special train introduced in
Delhi – Mumbai Sector with shorter advance
New concept of •ehub and spoke•f for
reservation period and dynamically varying parcel business
premium over tatkal fare.
Third party warehousing in Special Parcel
Enhancing Market Share Terminals envisaged.
n
Clearing missing links in Carrying Capacity + Financial Performance 2012-13
8 tonne routes; freight train speeding ; upgradation
Loading of 1,008 Million Tonnes surpassed
of rolling stock ; increasing length of trains ; tariff the R.E. target of 1,007 Million Tonnes.
and incentive schemes to encourage traffic to rail
o

and minimizing empty running.
Paid full dividend Rs 5,389 crore to General
Exchequer.
Rail Tariff Authority

90.2% Operating Ratio in 2012-13.
r

Independent Rail Tariff Authority set-up to

advise on fixing of fares and freight, to engage
Repayment in full with interest of Rs 3,000
Ch

all stake-holders. crore loan from the Government.

Information Technology
Railway Fund Balances of Rs 2,391 crore.

Initiatives taken include – proliferation of Financial Performance 2013-14

cash accepting Automatic Ticket Vending

Loading Target raised to 1,052 Million
Machines ; ticketing on mobile phones in
Tonne from B.E. 1,047 Million Tonne.
unreserved segments ; system update on PNR
S

status; online booking of retiring rooms at
Freight Earnings Target revised to Rs 94,000
important stations ; online booking of meals for crore from B.E. Rs 93,554 crore.
selected en-route stations ; introduction of e-
forwarding note and electronic transmission of
Stringent Financial control exercised and
Ordinary Working Expenses pegged only at
IA

railway receipts for freight customers.

Rs 560 crore higher than Budget Estimates,
Revenue Freight Traffic despite various post-budgetary factors.

Loading target of 1047 Million Tonnes for
Plan Outlay revised to Rs 59,359 crore.
2013-14 would be surpassed.

Operating Ratio likely to be 90.8%.

Empty Flow Discount Scheme to be

Fund Balances to continue to grow to Rs
implemented.
8,018 crore.
© Chronicle IAS Academy ••• 107

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 Sample Questions CHRONICLE
(Economy) IAS ACADEMY
A CIVIL SERVICES CHRONICLE INITIATIVE

1. Consider the following statements about Which of the above statements are false?
Producer Price Index (PPI) which was proposed (a) Only 2 (b) 2 and 3
by the RBI to measure the inflation and select (c) 1 and 3 (d) None of the above
the correct answer:
1. Producer Price Index is the measure of the 4. Consider the following statements about Rajiv
average change in selling prices received Gandhi Equity Savings Scheme (RGESS) and

AD LE
Y
by domestic producers for their output over select the correct answer:
a period of time. 1. RGESS is available to all resident indivi-
2. It will include hidden costs like shipping, duals whose gross total income is less than

EM
taxes and other levies thus providing a Rs. 10 lacs.
much clear picture of inflation. 2. It will be available to those individuals only
AC IC
3. The prices included in the PPI are from the
first commercial transaction for many
products and some services and measures
who are investing in equity for the first
time.
3. Under this scheme, the investor would get
price changes from the perspective of the a 50% tax deduction of the amount so
seller. invested, up to a maximum investment of
S ON
Rs. 50,000.
Codes: 4. Under this scheme, there is a fixed lock-in
(a) 1 and 2 only (b) 1 and 3 only period of total three years.
(c) 2 and 3 only (d) All the above
Codes:
2. Consider the following statements in the context (a) 1 only (b) 1 and 2
of Bank rate: (c) 1, 2 and 3 (d) All the above
1. It is official rate of interest charged by the
IA R

Reserved Bank of India on loans to other banks. 5. In which of the following sectors FDI is not
2. It is the rate at which RBI discounts first allowed in India, both under the Automatic
class securities, including bills of exchange. Route as well as under the Government Route?
CH

3. It is also known as discount rate. 1. Lottery Business

2. Gambling and Betting
Which of the above statements are correct? 3. Housing and Real Estate business
(a) Only 1 (b) Only 2 4. Manufacture of cigars and cigarettes
(c) 2 and 3 (d) 1, 2 and 3
Codes:
3. Banks have recently launched a new system (a) 1, 2 and 3 (b) 2, 3 and 4
for easy transfer of money known as NEFT. (c) All of the above (d) None of the above
Consider the following statements about NEFT:
1. It allows individuals, firms and the 6. Consider the following in the context of types
corporates to electronically transfer funds of loans provided to Indian farmers, and the
from any bank branch to any individual, duration of loans:
firm or corporate having an account with 1. Short term loans - less than 12 months
any other bank branch in the country 2. Medium term loans - 12 months to 5 years
participating in the scheme. 3. Long term loans - more than 5 years
2. The cash remittance is restricted to a
maximum of Rs. 100,000/- per transaction. Which of the above statements are correctly
3. NEFT system also facilitates one-way cross- matched?
border transfer of funds from India to (a) None of the above (b) Only 3
Bhutan. (c) 2 and 3 (d) 1, 2 and 3
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 7. To reduce the incidences of misuse, tampering, 10. Which of the following is/are true about G-20?
alterations, etc. of cheques, RBI has introduced 1. The G-20 Summit was constituted as a
Cheque Truncation System-2010 standard. response both to the financial crisis of 2007-
Consider the following statements about the 2010 and to a growing recognition that key
process of truncation: emerging countries were not adequately
1. An electronic image of the cheque is included in the core of global economic
transmitted to the drawee branch by the discussion and governance.
clearing house, along with relevant 2. The G-20 was proposed by former
information like data on the MICR band, Canadian Prime Minister Paul Martin.
date of presentation, presenting bank, etc. 3. G- 20 has 19 countries as members plus the
2. It makes multi-city handling of cheques easier. European Union, which is represented by
3. Indian Banks Association (IBA) and the President of the European Council and

AD LE
Y
National Payments Corporation of India by the European Central Bank.
(NPCI) are coordinating with the banks on
implementation of the new truncation Codes:

EM
standard. (a) 1, 2 and 3 (b) 1 and 2
(c) 2 and 3 (d) 1 and 3
Which of the above statements are correct?
AC IC
(a) Only 2 (b) 1 and 2 11. Consider the following statements in the context
(c) 2 and 3 (d) All the above of the system of basket of currencies:
1. In this system the exchange value of a
8. Consider the following statements and select country's currency is fixed in terms of some
the correct answer: major international currencies.
S ON
1. The Budget 2013-14 has proposed to 2. Indian rupee is valued against US Dollar,
introduce Inflation-Indexed Bonds or IIBs British Pound, Japanese Yen, French Franc
with the aim to control rising Current and German Deutsche Mark.
Account Deficit, fiscal deficit and inflation. 3. India opted for this system in 1975.
2. Inflation-Indexed Bonds or IIBs will provide
households and other investors a competitive Which of the above statements are correct?
IA R

option against gold and real estate. (a) Only 1 (b) Only 2
(c) 1 and 2 (d) 1, 2 and 3
Codes:
12. Consider the following statements about the
CH

(a) 1 only (b) 2 only

(c) Both (d) None history of banks in India:
1. Reserve Bank of India was set up on the
9. Which of the following statements is/are basis of the recommendations of the Hilton
correct? Young Commission in 1935 and finally
1. The information relating to employment in nationalized in 1949.
the formal sector and informal sector are 2. Bank of India, founded in 1906 in Mumbai
collected by the Union Ministry of Labour was the first Indian bank to open a branch
through employment exchanges located in outside India in London in 1946 and the
different parts of the country. first to open a branch in continental Europe
2. In 2010, out of about 29 million formal at Paris in 1974.
sector workers, about 18 million workers 3. Canara Bank is the first bank in India to be
were employed by the private sector. given an ISO Certification.
3. Women constitute only about one-sixth of
the formal sector workforce. Which of the above statements are false?
(a) Only 1
Codes: (b) Only 2
(a) Only 1 is correct (b) 2 and 3 are correct (c) Only 3
(c) All are correct (d) Only 3 is correct (d) None

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13. Consider the following statements about current Which of the above statements is/are part of
account and select the correct answer: the guidelines?
1. Components of current account include (a) Only 1 (b) 2 and 3
goods, services, income and current transfers. (c) Only 3 (d) 2 and 4
2. In current account calculation, income also
includes a foreign company's investment upon 17. A stock or equity market is a public entity for
a domestic company or a local government. the trading of company stocks (shares) and
3. In current account calculation current derivatives at an agreed price. Consider the
transfers include donations, aids, or official following statements about the Stock Exchanges
assistance. in India:
1. OTCEI is an electronic stock exchange
Codes: comprising of small and medium sized firms
(a) 1, 2 and 3 (b) 1 and 2 looking to gain access to the capital

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(c) 2 and 3 (d) 1 and 3 markets.
2. The National Stock Exchange was
14. Which of the following statements are incorrect? incorporated in 1992 on the recommen-
1. The price elasticity of supply of the goods dations of the "Malhotra Committee".

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measures the responsiveness of quantity 3. NSE was the first exchange in the world to
supplied to changes in the price of the use satellite communication technology for
AC IC
goods.
2. When the supply curve is horizontal, supply
is completely insensitive to price and the
trading, using a client server based system
called National Exchange for Automated
Trading (NEAT).
elasticity of supply is zero.
3. Like the price elasticity of demand, the price Which of the above statements are correct?
elasticity of supply is also independent of units. (a) Only 1 (b) 2 and 3
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(c) 1 and 3 (d) All the above
Codes:
(a) Only 2 (b) Only 1 and 3 18. Consider the following statements about RBI's
(c) Only 2 and 3 (d) None of the above criteria for getting new bank licenses and select
the correct ones:
15. Which of the following committees and their
1. The initial paid-up capital for new banks
mandates are correctly matched?
has been set at Rs. 500 crore.
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1. Malegam Committee Micro finance

2. New banks are required to establish at least
Institutions
25% of their branches in places with less
2. MR Srinivasam Consumer price
than 10,000 population.
Committee index
CH

3. As per the new norms, private corporates

3. MK Gupta Committee Common tax code
and public sector entities must have 10 years'
experience to be eligible to apply for new license.
Codes:
(a) Only 1 (b) 1 and 2 Codes:
(c) 1 and 3 (d) 1, 2 and 3
(a) 1 and 2 only (b) 1 and 3 only
(c) 2 and 3 only (d) All the above
16. Reserve Bank of India has revised the definition
of sickness of micro and small enterprises
19. Which of the following pairs is NOT correctly
(MSEs). Consider the following statements in
matched?
the context of the new guidelines. A MSE would
be considered sick if (a) Grey Revolution Honey
(b) Silver Revolution Eggs (Poultry)
1. Any of the borrowal account remains sub-
(c) Red Revolution Meat, tomato
standard for more than six months.
(d) Silver Fiber Revolution Cotton
2. Any of the borrowal account remains sub-
standard for more than three months. 20. Consider the following items in the context of
3. Any of the borrowal account remains non India's manufactured exports:
performing asset (NPA) for three months 1. Engineering goods
or more. 2. Gems and Jewellery
4. Any of the borrowal account remains NPA 3. Chemicals and related products
for six months or more. 4. Textiles
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 Arrange the above items in the ascending order 2. The secondary market, also called aftermarket,
of their percentage in India's manufactured is the financial market in which previously
exports: issued financial instruments such as stock,
(a) 3, 4, 2, 1 (b) 3, 4, 1, 2 bonds, options, and futures are bought and
(c) 4, 3, 1, 2 (d) 4, 3, 2, 1 sold.
3. The primary market or new issue market
21. To improve the business environment, India has also includes certain other sources of new
launched its first Government-to-business portal long term external finance, such as loans
"eBiz". Consider the following statements with from financial institutions.
respect to the portal:
1. The portal has been developed by HCL in Codes:
a Public Private Partnership (PPP) model. (a) 1 and 2 only (b) 1 and 3 only
2. The project aims to create a business and (c) 2 and 3 only (d) All the above
investor-friendly ecosystem in India by

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making all business and investment related 24. Which of the following are correct about the
regulatory services across Central, State and National Manufacturing Policy (NMP)?
local Governments available on a single 1. The main objective of the policy is

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portal. enhancing the share of manufacturing in
3. It includes inbuilt payment gateway, which
gross domestic product (GDP) to 25 per
allows collection of all payments at one
AC IC cent.
point and then apportioned, split and
routed to the respective heads of account 2. The NMP provides for promotion of clusters
of Central/ State along with generation of and aggregation, especially through the
challans and MIS reports. creation of national investment and
manufacturing zones (NIMZs).
3. The Policy also provides special focus to
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Which of the above statements are correct?
(a) Only 2 (b) Only 3 industries that are employment intensive,
(c) 1, 2 and 3 (d) 2 and 3 producing capital goods and does not give
weightage to those having strategic significance
22. Consider the following statements and select and small and medium enterprises.
the correct answer:
1. Structural unemployment occurs when a Codes:
labour market is unable to provide jobs for (a) 1 and 3 only (b) 1 and 2 only
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everyone who wants one because there is a (c) 2 and 3 only (d) All the above
mismatch between the skills of the
unemployed workers and the skills needed 25. FDI, being a non-debt capital flow, is a leading
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for the available jobs. source of external financing, especially for the
2. Frictional unemployment is the time period developing economies. Consider the following
between jobs when a worker is searching statements in the context of recent changes in
for, or transitioning from one job to the FDI policy in India:
another.
1. Liberalization of conversion of imported
3. Cyclical unemployment, also known as
capital goods/machinery and
deficient-demand unemployment, occurs
when there is not enough aggregate preoperative/pre-incorporation expenses to
demand in the economy to provide jobs for equity instruments.
everyone who wants to work. 2. Pricing of convertible instruments upfront,
on the basis of a conversion formula,
Codes: instead of price.
(a) 1 and 2 only (b) 1 and 3 only 3. FDI, up to 100%, would be permitted for
(c) 2 and 3 only (d) All the above brownfield investments, in the pharma-
ceuticals sector, under the Government
23. Consider the following statements and select approval route.
the correct answer:
1. The primary market is the market where Which of the above statements are now parts
the securities are sold for the first time and of FDI policy in India?
therefore it is also called the New Issue (a) 1 and 2 (b) 2 and 3
Market (NIM).
(c) 1 and 3 (d) 1, 2 and 3
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 ECONOMY SAMPLE QUESTIONS CHRONICLE
(ANSWERS) IAS ACADEMY
A CIVIL SERVICES CHRONICLE INITIATIVE

1. (b) 14. (a)

2. (d) 15. (c)

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3. (b) 16 (c)

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4. (d)
AC IC 17. (c)

5. (c) 18. (d)

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6. (b) 19. (a)

7. (d) 20. (d)

8. (c) 21. (d)

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9. (d) 22. (d)

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10. (a) 23. (a)

11. (d) 24. (b)

12. (d) 25. (d)

13. (a)

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 UPSC Questions CHRONICLE
(Economy) IAS ACADEMY
A CIVIL SERVICES CHRONICLE INITIATIVE

1. Under which of the following circumstances 4. Consider the following statements:

may “capital gains” arise?
The price of any currency in international
1. When there is an increase in the sales of a market is decided by the
product.
1. World Bank.
2. When there is a natural increase in the value
of the property owned. 2. Demand for goods/services provided by the

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country concerned.
3. When you purchase a painting and there
is a growth in its value due to increase in 3. Stability of the government of the
its popularity. concerned country.

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4. Economic potential of the country in
Select the correct answer using the codes given question.
below:AC IC
(a) 1 only (b) 2 and 3 only Which of the statements given above are correct?
(c) 2 only (d) 1, 2 and 3 (a) 1, 2, 3 and 4 (b) 2 and 3 only
(c) 3 and 4 only (d) 1 and 4 only
2. Which of the following measures would result
in an increase in the money supply in the 5. The basic aim of Lead Bank Scheme is that
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economy? (a) Big banks should try to open offices in each
1. Purchase of government securities from the district.
public by the Central Bank.
(b) There should be stiff competition among
2. Deposit of currency in commercial banks the various nationalized banks.
by the public.
(c) Individual banks should adopt particular
3. Borrowing by the government from the districts for inten-sive development.
Central Bank.
IA R

(d) All the banks should make intensive efforts

4. Sale of government securities to the public to mobilize deposits.
by the Central Bank.
6. In India, deficit financing is used for raising
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Select the correct answer using the codes given resources for
below: (a) economic development.
(a) 1 only (b) 2 and 4 only
(b) redemption of public debt.
(c) 1 and 3 (d) 2, 3 and 4
(c) adjusting the balance of payments.
3. Which of the following would include Foreign (d) reducing the foreign debt.
Direct Investment in India?
1. Subsidiaries of foreign companies in India. 7. Which of the following constitute Capital
Account?
2. Majority foreign equity holding in Indian
1. Foreign Loans.
companies.
2. Foreign Direct Investment.
3. Companies exclusively financed by foreign
companies. 3. Private Remittances.
4. Portfolio investment. 4. Portfolio Investment.

Select the correct answer using the codes given Select the correct answer using the codes given
below: below:
(a) 1, 2, 3 and 4 (b) 2 and 4 only (a) 1, 2 and 3 (b) 1, 2 and 4
(c) 1 and 3 only (d) 1, 2 and 3 only (c) 2, 3 and 4 (d) 1, 3 and 4

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8. Consider the following statements: 13. Supply of money remammg the same when
1. Inflation benefits the debtors. there is an increase in demand for money, there
will be
2. Inflation benefits the bond-holders.
(a) a fall in the level of prices.
Which of the statements given above is/are
(b) an increase in the rate of interest.
correct?
(a) 1 only (b) 2 only (c) a decrease in the rate of interest.

(c) Both 1 and 2 (d) Neither 1 nor 2 (d) an increase in the level of income and
employment.
9. Consider the following liquid assets:
14. Which one of the following is likely to be the
1. Demand deposits with the banks.
most inflationary in its effect?
2. Time deposits with the banks.
(a) Repayment of public debt.

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3. Savings deposits with the banks.
(b) Borrowing from the public to finance a
4. Currency. budget deficit.

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The correct sequence of these decreasing order (c) Borrowing from banks to finance a budget
of Liquidity is: deficit.
AC IC
(a) 1-4-3-2
(c) 2-3-1-4
(b) 4-3-2-1
(d) 4-1-3-2
(d) Creating new money to finance a budget
deficit.

10. Which of the following grants/ grant direct 15. Which one of the following groups of items is
credit assistance to rural households? included in India's foreign-exchange reserves?
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1. Regional Rural Banks. (a) Foreign-currency assets, Special Drawing
Rights (SDRs) and loans from foreign
2. National Bank for Agriculture and Rural
Development. countries.

3. Land Development Banks. (b) Foreign-currency assets, gold oldings of the

RBI and SDRs.
Select the correct anser using the codes given
(c) Foreign-currency assets, loans from the
below:
World Bank and SDRs.
IA R

(a) 1 and 2 only (b) 2 only

(d) Foreign-currency assets, gold holdings of the
(c) 1 and 3 only (d) 1, 2 and 3 RBI and loans from the World Bank.
CH

11. The national income of a country for a given 16. A rise in general level of prices may be caused
period is equal to the by
(a) total value of goods and services produced
1. an increase in the money supply.
by the nationals.
2. a decrease in the aggregate level of output.
(b) sum of total consumption and investement
expenditure. 3. an increase in the effective demand.
(c) sum of personal income of all individuals. Select the correct answer using the codes given
(d) money value of final goods and services below:
produced. (a) 1 only (b) 1 and 2 only
12. Economic growth in country X will necessarily (c) 2 and 3 only (d) 1, 2 and 3
have to occur if
17. Priority Sector Lending by banks in India
(a) there is technical progress in the world
constitutes the lending to
economy.
(a) Agriculture.
(b) there is population growth in X.
(b) Micro and small enterprises.
(c) there is capital formation in X.
(c) Weaker sections.
(d) the volume of trade grows in the world
economy. (d) All of the above.
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18. In the context of Indian economy, Open Market 22. A “closed economy’’ is an economy in which
Operations' refers to (a) The money supply is fully controlled.
(a) borrowing by scheduled banks from the RBI. (b) Deficit financing takes place.
(b) lending by commercial banks to industry (c) Only exports take place.
and trade. (d) Neither exports nor imports take place.
(c) purchase and sale of government securities
23. Both foreign direct investment (HDI) and foreign
by the RBI.
institutional investor (FII) are related to
(d) None of the above. investment in a country.

19. Why is the government of India disinvesting its Which one of the following statements best
equity in the central public sector enterprises represents an important difference between the
(CPSEs)? two?

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(a) FII helps bring better management skills and
1. The government intends to use the revenue
technology. While FDM only brings in
earned from the disinvest-ment mainly to capital.
pay back the external debt.
(b) FII helps in increasing capital availability

EM
2. The government no longer intends to retain in general, while FDI only targets specific.
the management control of the CPSEs.
AC IC (c) FDI flows only into the secondary market,
Which of the statements given above is/ in general, while FDI only targets specific
are correct? sectors.
(a) 1 only (d) FII is considered to be more stable than FDI.

(b) 2 only. 24. Microfinance is the provision of financial

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services to people of low-income groups. This
(c) Both 1 and 2
includes both the con-summers and the self-
(d) Neither 1 nor 2 employed. The service/services rendered under
micro- finance is/are:
20. The lowering of bank rate by the reserve bank
1. Credit facilities.
of India leads to:
2. Savings faculties.
(a) More liquidity in the market.
IA R

3. Insurance facilities.
(b) Less liquidity in the market.
4. Fund transfer faculties.
(c) No change in the liquidity in the market.
Select the correct answer using the codes given
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(d) Mobilization of more deposits by the lists?

commercial banks.
(a) 1 only.
21. Which one of the following is not a feature of (b) 1 and 4 only.
“value added tax”?
(c) 2 and 3 only.
(a) It is multi-point destination-based system
of taxation. (d) 1, 2, 3 and 4.

(b) It is a tax levied on value addition at each 25. With reference to the finance commission of
stage of transaction in the production- India, which of the following statements is
distribution chain. correct?
(a) It encourages the inflow of foreign capital
(c) It is a tax on the final consumption of goods for infrastructure development.
or services and must ultimately be borne
by the consumer. (b) It facilities the proper distributor of finances
among the public section undertakings.
(d) It is basically a subject of the central
(c) It ensures transparency in financial
government and the state governments are administration.
only a facilitator for its successful
implementation. (d) None of the statements (a), (b) and (c) given
above is correct in his context.
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 ECONOMY UPSC QUESTIONS CHRONICLE
(ANSWERS) IAS ACADEMY
A CIVIL SERVICES CHRONICLE INITIATIVE

1. (b) 14. (d)

2. (c) 15. (b)

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3. (d) 16 (d)

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4. (c)
AC IC 17. (d)

5. (c) 18. (c)

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6. (a) 19. (d)

7. (b) 20. (a)

8. (a) 21. (d)

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9. (d) 22. (d)

CH

10. (a) 23. (b)

11. (a) 24. (d)

12. (c) 25. (d)

13. (b)

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