FOREIGN TRADE POLICY OF INDIA (2015-2020)

FOREIGN TRADE POLICY OF INDIA (2015-2020)
The Foreign Trade Policy lays down the ground rules and also modifies them for carrying out
the country’s exports and imports. Apart from prescribing general provisions relating to imports and
exports, it also provides special focus initiatives, duty exemption and remission schemes and
promotional measures to help exporters compete in the global marketplace.
There is not much difference between Foreign Trade Policy and EXIM Policy. They are
basically two names for the same policy. It was in 2004 that Commerce and Industry Minister Kamal
Nath decided it would be more appropriate to call the policy the foreign trade policy. He argued that
it was necessary for the policy to go beyond exports and imports and have an integrated approach to
the developmental requirements of India’s foreign trade.

Highlights of Foreign trade policy of India

1. Merchandise Exports from India Scheme (MEIS):

(a) Earlier there were 5 different schemes (Focus Product Scheme, Market Linked Focus Product
Scheme, Focus Market Scheme, Agri. Infrastructure Incentive Scrip, VKGUY) for rewarding
merchandise exports with different kinds of duty scrips with varying conditions (sector specific or
actual user only) attached to their use. Now all these schemes have been merged into a single scheme,
namely Merchandise Export from India Scheme (MEIS) and there would be no conditionality
attached to the scrips is s used under the scheme.
 Rewards for export of notified goods to notified markets under ‘Merchandise Exports from India
Scheme (MEIS) shall be payable as percentage of realized FOB value (in free foreign exchange).
 Service Exports from India Scheme (SEIS):
a) Served From India Scheme (SFIS) has been replaced with Service Exports from India
Scheme (SEIS). SEIS shall apply to ‘Service Providers located in India’ instead of ‘Indian
Service Providers’. Thus SEIS provides for rewards to all Service providers of notified
services, who are providing services from India, regardless of the constitution or profile of
the service provider.

2. Incentives (MEIS & SEIS) to be available for SEZs:
It is now proposed to extend Incentives (MEIS & SEIS) to units located in SEZs also.

3. Duty credit scrips to be freely transferable and usable for payment of custom duty, excise
duty and service tax:

 All scrips issued under MEIS and SEIS and the goods imported against these scrips would be
fully transferable.
 Scrips issued under Exports from India Schemes can be used for the following:-
 Payment of customs duty for import of inputs / goods.
 Payment of excise duty on domestic procurement of inputs or goods.
 Payment of service tax on procurement of services.

4. Status Holders:

Business leaders who have excelled in international trade and have successfully contributed to
country’s foreign trade are proposed to be recognized as Status Holders and given special treatment
and privileges to facilitate their trade transactions, in order to reduce their transaction costs and time.

5. Boost to Make in India initiative.

1. Reduced Export Obligation (EO) for domestic procurement under EPCG scheme: Specific
Export Obligation under EPCG scheme, in case capital goods are procured from indigenous
manufacturers, which is currently 90% of the normal export obligation (6 times at the duty saved
amount) has been reduced to 75%, in order to promote domestic capital goods manufacturing
industry.
2. Higher level of rewards under MEIS for export items with high domestic content and value
addition.
It is proposed to give higher level of rewards to products with high domestic content and
value addition, as compared to products with high import content and less value addition.
3. Online filing of documents/ applications and Paperless trade in 24×7 environment:

(a) DGFT already provides facility of Online filing of various applications under FTP by the
exporters/ importers. However, certain documents like Certificates issued by Chartered Accountants/
Company Secretary / Cost Accountant etc. have to be filed in physical forms only. In order to move
further towards paperless processing of reward schemes, it has been decided to develop an online
procedure to upload digitally signed documents by Chartered Accountant / Company Secretary / Cost
Accountant. In the new system, it will be possible to upload online documents like annexure attached
to ANF 3B, ANF 3C and ANF 3D, which are at present signed by these signatories and submitted
physically.

(b) Henceforth, hardcopies of applications and specified documents would not be required to
be submitted to RA, saving paper as well as cost and time for the exporters. To start with,
applications under Chapter 3 & 4 of FTP are being covered (which account for nearly 70% of total
applications in DGFT). Applications 8 under Chapter-5 would be taken up in the next phase. (c) As a
measure of ease of doing business, landing documents of export consignment as proofs for notified
market can be digitally uploaded in the following manner:-

(i) Any exporter may upload the scanned copy of Bill of Entry under his digital signature.
(ii) Status holders falling in the category of Three Star, Four Star or Five Star Export House
may upload scanned copies of documents.

4. Online inter-ministerial consultations:

It is proposed to have online inter –ministerial consultations for approval of export of
SCOMET items, Norms fixation, Import Authorizations, Export Authorization, in a phased manner,
with the objective to reduce time for approval. As a result, there would not be any need to submit
hard copies of documents for these purposes by the exporters.
5. Simplification of procedures/processes, digitisation and e-governance:
(a) Under EPCG scheme, obtaining and submitting a certificate from an independent
Chartered Engineer, confirming the use of spares, tools, refractory and catalysts imported for final
redemption of EPCG authorizations has been dispensed with.

(b) At present, the EPCG Authorisation holders are required to maintain records for 3 years
after redemption of Authorisations. Now the EPCG Authorization Holders shall be required to
maintain records for a period of two years only. Government’s endeavour is to gradually phase out
this requirement as the relevant records such as Shipping Bills, e- BRC are likely to be available in
electronic mode which can be archived and retrieved whenever required.

(c) Exporter Importer Profile: Facility has been created to upload documents in
Exporter/Importer Profile. There will be no need to submit copies of permanent records/ documents
(e.g. IEC, Manufacturing license, RCMC, PAN etc.) repeatedly with each application, once uploaded.

(d) Communication with Exporters/Importers: Certain information, like mobile number, email
address etc. has been added as mandatory fields, in IEC data base. This information once
provided by exporters.

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What is meant by public sector, Joint Sector and Cooperative Sector? Discuss the major problems of the public Sector in India

Answer

The mixed economy of India is characterised by the co-existence of public, private, joint and co-operative sectors since the declaration of Industrial Policy in 1948.

Imperative of Public Sectors:

Policy on the public sector has been guided by the Industrial Policy Resolutions 1956 & 1991 which gave the public sector a strategic role in the economy. At the time of India’s independence in 1947, there were various problems confronting the country which needed to be tackled in a planned and systematic manner. India was basically an agrarian economy with a weak industrial base, low level of savings and investment and near absence of infrastructural facilities.

Public, Private, Joint and Co--operative Sectors

A vast percentage of population was extremely poor. There existed considerable inequalities in income, low level of employment opportunities, serious regional imbalances in economic attainments and lack of trained man-power in various fields of management. It was, thus, obvious that if the country was to speed up its economic growth and maintain it in the long run at a steady level, a big push was required. As such, State’s intervention in all the sectors of the economy, was inevitable because private sector had neither the necessary resources in terms of funds, managerial and scientific skill, nor the will to undertake risks involved in large long-gestation investments. Among the imperatives were removal of regional, imbalances, accelerated growth of agricultural and industrial production, better utilisation of natural resources and a wider ownership of economic power to prevent its concentration in a few hands.

Private Sector

In a mixed economy, the private sector too has an important role to play. The Industrial policy resolution 1956 had made it very clear that private sector will also have the opportunity to development and expand. The policy of the state was to encourage the development of industries in the private sector in accordance with the programs formulated in successive five year plans. By ensuring the development of transport, power and other services. And by appropriate budget allotment. Government decided that for both private and publicly owned units, it would continue to give its support which is fair and non-discriminatory to both of them.

Cooperative Sector 

In India the cooperative sector has been assigned an important role in the development of many sectors. In the first five year plan it undertook areas like agricultural, rural and small scale industries, retail distribution, and housing. 

The important objectives of the co-operative sector area:

1) Prevention of concentration of economic power

2) Wider disbursal of ownership of productive resources

3) Active involvement of people in the development programs

4) Speedier economic development

5) Liquidation of unemployment and poverty.

Major Problems of Public Sector (Economy)

1. Inefficient Management & Delayed Decisions

It has been found that these enterprises are managed by public savants. They are not professionally qualified nor expert in the management of industrial enterprises. Public enterprises always suffer from delayed decision making. Whereas private enterprises are managed by professionals which make them more punctual in working. Delayed in decision making is one of the key problems. Lack of personal interest No one wanted to take responsibility for making decisions. The loss in public enterprises is a loss of public. It is not a personal loss.

Public enterprises are usually managed by the bureaucrat. Organisational hierarchy, fix up responsibility, the delegation of authority and management information system is the weak part of public enterprises.

2. Lack of Efficiency and Excessive Government Control

Public sector is not run on commercial principles. Their main motto is social welfare, not the profit earning. If a public enterprise in-cursed losses due to efficiency, it is overlooked. Whereas private enterprises are run for profit. It has been found that the government is always interfering in the petty decisions of public enterprise. Decision making takes a long time due to the complex procedure in public enterprises. Political Interference is the another major problem facing Indian public sector industries.

Public enterprises are becoming means of fulfilling the political objective of political parties. They have to serve the political interests of the ruling parties.

It has been observed that political factors influence decisions about the location of projects, appointments, and even day operations. Location of the project is decided on the basis of political interest and not on the basis of the economic viability of the project, resulting in incurring losses.

3. Lack of Innovations

Innovations are essential for economic development. Public enterprise lacks it due to monopoly or lack of competition. The private sector is always busy with innovating new techniques, new production methods etc.

For the purpose of cost reduction and profit maximization. On the other hand, public sector employees are government employees and their jobs are secure. They do not bother about the cost and profit of public enterprises.

4.Mounting Losses

A review of the working of PSUs reveals that either their profits are deplorably low or they are making losses. The losses are mounting year after year.

 Although some of the public enterprises are earning profits, the amount is very thin in comparison to capital employed and our expectations. The losses in public enterprises can be justified during the gestation period but afterward, they must try to wipe out losses and earn profits.

The government should, therefore, make a case by case study of the loss incurring enterprises and take remedial, measures. 17 Major Problems of Public Sector (Economy).

5. Under Utilization of Capacity

Public enterprise is facing the problems of underutilization of their installed capacity. Thus, the capital resources are not fully utilized by public enterprise.

Therefore, it is necessary to find the causes of low capacity utilization and thus remedy the situation with appropriate measures. Shortage of power, inadequate demand, equipment breakdowns, inadequate raw material, managerial inefficiency etc. Are the major causes of underutilization of capacity.

6. Increase in costs:

Most of the public sector projects take the long ester time to complete than was initially envisaged. The cost of the projects also run upwards due to delay in completion of projects.

Poor and adequate project planning is the main cause of their delay in construction time schedule and increase in cost. Therefore, it is essential to prepare completion of other project and an increase in cost can be avoided.

7. Problems of Price Policy

Public sector cannot charge heavy profits, because of social objectives.   Therefore, they have to keep in mind the social implications of price policy. In many cases, prices are kept low even then the cost. This naturally affects their profitability.

Profit earning is not the main object of public enterprises. They are operated for social welfare. If they indulge themselves in profit-making activities then there will be no difference left between public enterprise.

Regarding price policy, public enterprises should adopt no profit any loss theory or the theory of minimum profit. So that they can maintain their relevance in the economy. If they follow below cost price policy, they have to bear losses and it cannot be justified.

8. Excess Staffing

It has been noticed that in the most public enterprise, manpower is in excess of actual requirement. Due to poor manpower planning, public enterprises are facing the problem of over staffing. Modern Theories of Motivation (Updated for Employees)

There is a lack of proper education and training of the employees in the public sector. Therefore, it is suggested to reduce the staff and top positions should be open to its employees.

9. Lack of Motivation

There is a lack of motivation in public enterprises. Employees get fixed salaries and other perks. There is no reward for good work and no punishment for bad. Thus, efficient and innovative employees are not motivated to do hard work.

10. Problems of Managerial Structure

Public enterprises are governed by a board of directors. All imported decisions are taken by the board. Therefore, The success of the enterprise depends on the ability and efficiency of the members of the board.

It is a difficult question, as to who should be made a member of the board of directors and what should be his qualifications. Politicians, bureau-craft etc. Are nominated as the member of the board of directors in public enterprises.

11. Problems of Audit and Inspection

Although there is a system of audit and inspection in such enterprises, it is not followed in practice. Accounts should be audited by the competent authority at least once a year. It should be seen that public funds are not misused.

The audit department of government is already overburdened and the employees of the enterprise are not cooperative. Hence, it is suggested to appoint an expert committee that can audit the accounts of each public enterprises to judge its efficiency. 

What are the four segment of Environment. Mention the Principles for Sustainable Development.

Answer:

Environment means the surroundings or conditions of life, may be social, political, economic, cultural, natural etc. Natural resources are used with other man made resources in order to produce goods in agriculture, industry or other spheres of economic activity. With continuous use of these natural resources some get depleted, some may get degraded (lose their quality) or some may get polluted, as such on account of these, the future generation will not get enough of such resources for their use and that will adversely affect their output, income, and living standards. Therefore, we should preserve environment by minimizing harm to it

Scope of environment consists of four segments as under:

1. Atmosphere:

The atmosphere implies the protective blanket of gases, surrounding the earth:It sustains life on the earth. It saves it from the hostile environment of outer space. It absorbs most of the cosmic rays from outer space and a major portion of the electromagnetic radiation from the sun. It transmits only ultraviolet, visible, near infrared radiation (300 to 2500nm) and radio waves. (0.14 to 40m) while filtering out tissue-damaging ultraviolet waves below 300 nm. The atmosphere is composed of nitrogen and oxygen. Besides, argon, carbon dioxide, and trace gases.

Hydrosphere:

The Hydrosphere comprises of all types of water resources oceans, seas, lakes, rivers, streams, reservoir, polar icecaps, glaciers, and ground water. Nature 97% of the earth’s water supply is in the oceans,About 2% of the water resources are locked in the polar icecaps and glaciers. Only about 1% is available as fresh surface water-rivers, lakes streams, and ground water fit to be used for human consumption and other uses.

3. Lithosphere:

Lithosphere is the outer mantle of the solid earth. It consists of minerals occurring in the earth’s crust and the soil e.g. minerals, organic matter, air and water.

4. Biosphere:  Biosphere indicates the realm of living organisms and  their interactions with environment, viz atmosphere, hydrosphere and lithosphere..

Principles for Sustainable Development

•       Revive Growth

•       Change the Quality of Growth

•       Conserve and Enhance the Resource Base

•       Ensure A Sustainable Level of Population

•       Reorient Technology and Manage Risks

•       Integrate Environment and Economics

•       Reform International Economic Relations

•       Strengthen International Economic Cooperation.

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What major plans were started by the government of India for removal of Poverty & Unemployment? .

Answer:

Following are important poverty and Unemployment Alleviation Programmes started by government of India:

1. Integrated Rural Development Programme (IRDP):

The Integrated Rural Development Programme (IRDP) was started in 20 selected districts in the country in 1976-77. Later on in 1980, the programme was extended to all the districts of the country. The scheme was funded by centre. The funds for the scheme are shared by centre and State Govt. on equal basis.

The objective of the scheme is to create productive assets for the families in rural areas living below poverty line. Bank Loans were provided to create productive assets to take up self-employment activities. They include agriculture horticulture, animal husbandry, poultry and weaving etc.

This programme was being implemented by the District Rural Development Agencies (DRDA). This scheme was merged with one self-employment programme called Swarn Jayanti Gram Swarozgar  Yojana in year 1999.

2. National Rural Employment Programme (NREP):

This programme was launched in 1980. The main aim of the programme was to create employment opportunities by building and maintaining community assets like village roads, ponds and wells etc. The scheme was expected to generate additional gainful employment to the extent of 30 to 40 crore man-days per annum and to develop community assets. In this programme, food grains was made available for the work. NREP was merged with Jawahar Rozgar Yogana (JRY) in 1989.

 3. Jawahar Rozgar Yojana (JRY):

This scheme came into existence in April 1989. The previous schemes NREP and RLEGP were merged into this scheme. The main objective of JRY was to create additional employment for rural under-employed and unemployed.

The basic feature of this programme was that the funds would be released directly to the village panchayats which would launch the employment programme according to the local needs of the people. It was a Central Govt. sponsored programme and expenditure was shared between the centre and states in the ratio of 80:20. The DRDA directly receives the centre’s share and state’s share from Govt. Then DRDA allots the funds to various panchayats. Contractors were not allowed to execute the projects. In 1999, JRY was renamed as Jawahar Gram Samridhi Yojana.

4. Small and Cottage Industries:

Special measures have been taken by the Government to develop small and cottage industries with a view to removing poverty and unemployment. Large amount is being spent to promote self-employment.

 5. Indira Awas Yojana (LAY):

Indira Awas Yojana was started in 1985-86 to provide residential units free of cost to SC and ST and freed bonded labour. This scheme was extended to Non SC/ST Categories from 1993-94. In 1995-96 families of armed forces and paramilitary forces killed in action brought under this scheme. DRDA is the coordinating agency.

 6. Prime Minister’s Rozgar Yojana (PMRY):

Prime Minister’s Rojgar Yojana (PMRY) was launched in 1993. It is a self-employment scheme meant for the educated unemployed youth. It is meant for poor families having income less than Rs. 25,000 per annum. Each educated unemployed youth is eligible for a loan of Rs. 1 lakh to start a small business. 22:5% reservation is given is SC/ST candidate and 27% reservation is given to OBC 15% of total amount is given as subsidy.

7. Jawahar Gram Samridhi Yojana (JGSY):

Jawahar Gram Samridhi Yojana was started on 1st April 1999 to create rural infrastructure, like roads, bridges etc. The main objective was to create wage employment for the unemployed rural youth. DRDA was the co-ordinating agency. The scheme was sponsored by Centre Govt. The expenditure was shared between centre and state in the ratio of 80:20.

8. Sampooma Gramin Rojgar Yojana (SGRY):

This scheme was started in Sept. 2001 by Prime Minister. The main objective of this scheme was to provide gainful employment & food security to villagers. Employment Assurance Scheme (EAS) and Jawahar Gram Samridhi Yojana (JGSY) have been merged in this scheme because both have the same objectives. DRDA is the nodal agency for this scheme. The expenditure for this scheme is shared by the centre and state in the ratio 80:20.

 9. National Rural Employment Guarantee Act (NREGA):

This scheme has been launched in Feb. 2006 in 200 rural districts of the country and was extended to 600 districts throughout India. The main objective of this scheme is to provide at least 100 days of unskilled manual work to one person from each rural family at the minimum wage fixed by the State Govt. If the manual work is not provided to beneficiary within 15 days, he will be given unemployment allowance. The name of the scheme was later changed to MGNREGA.

The MGNREGA was initiated with the objective of "enhancing livelihood security in rural areas by providing at least 100 days of guaranteed wage employment in a financial year, to every household whose adult members volunteer to do unskilled manual work" Another aim of MGNREGA is to create durable assets (such as roads, canals, ponds and wells). Employment is to be provided within 5 km of an applicant's residence, and minimum wages are to be paid. If work is not provided within 15 days of applying, applicants are entitled to an unemployment allowance.

Labour oriented tasks like rain water harvesting, rural roads, irrigation channels, renovation of traditional water-bodies, soil conservation and land reclamation etc. will be undertaken under this scheme. Contractors will not be allowed to execute the work. The expenses will be shared by centre and state Govt. in the ratio of 90 : 10 respectively. Out of total workers employed, one third must be women. Centre Govt. allotted Rs. 11,000 crore for this scheme.

Explain the theory of Demographic Transition.

The theory of demographic transition states the impact of economic development on the population growth of a country.  The earliest systematic discussion on the theory of population growth is provided by Malthus in 1798. He explained that the food grains grow at arithmetic progression whereas population grows at geometric progression so soon there will be huge gap in the requirement of food grains and the availability of food grains. Malthus stated that population growth always exceeds the growth of means of subsistence and warned that the uncontrolled population had to be corrected by nature which would be very painful. Economists however, argued that the population growth is a transitory phenomenon that is explained by the theory of Demographic transition.  According to this theory there are three distinct stages of population growth:

 First Stage: High Birth-Rate and High Death-Rate

          In the first stage of population growth, the birth rate and death rate are high. This keeps population growth as low. The economy during this stage is underdeveloped with low level of income. The high birth-rate occurs due to traditional religious beliefs, agrarian economic structure, wide spread illiteracy, absence of awareness about family techniques, early age of marriage, attitude towards children and family size etc. The large size of family is expected to provide economic advantage as children contribute at an early age and considered as traditional source of security in the old age of parents. The death rate on the other hand is also high mainly due to ill nourished diet, lack of sanitation and medical facilities. The famines and epidemics also caused high death rates. During this stage the population remains low; however the potential for the population rise is very large due to high birth rate.

 Second Stage: Falling Death Rate and High Birth Rate

          At this stage the death rates start falling rapidly but birth rate remains stable. The rapid decline in death rate occurs due to improved economic development that result in the availability of better food, adequate clothing, housing, improved medical and public health facilities, greater awareness about health and hygiene. The birth rate in this stage remains at high levels mainly because of factors such as better education, change in attitude towards family size and increasing level of urbanization take time to show results. In fact, the high growth potential of the first stage is realized in the high actual growth. The high birth rate and falling death rate contributes to the rapid population growth. The second stage is also termed as the stage of “Population Explosion”.

 Third Stage: Low Birth-Rate and Low Death Rate

           During this stage, the economic development process transforms the country from agrarian to industrialized economy accompanied by the fast urbanization. The birth rate witness a fall as problems of urbanization such as housing problem, increased cot of living etc., compel people to follow small family norms. Further, the expansion of education causes attitudinal changes and the advantage of small family is recognized. Since death rate remained quite low and birth rate falls steadily this stage is characterized by slow population growth rate.

 The theory of demographic transition explains the transformation of traditional high birth and death rate economy into low birth and death rate economy.

Explain the salient features of Foreign Trade Policy, 2015-20.

Foreign Trade Policy

With an aim to make India a significant partner in global trade by 2020, the government on unveiled a new Foreign Trade Policy (FTP) on April 1, 2015.
The new policy, aims at boosting India's exports by integrating 'Make in India' and 'Digital India' with the new Foreign Trade Policy. The government is pitching India as a friendly destination for manufacturing and exporting goods, and the new policy is being seen as an important step towards realising that goal. 

 Features of the new Foreign Trade Policy:
 1. India to be made a significant participant in world trade by 2020
 2. Merchandize exports from India (MEIS) to promote specific services for specific Markets
3. FTP would reduce export obligations by 25% and give boost to domestic manufacturing.

4. FTP benefits from both MEIS & SEIS will be extended to units located in SEZs
5. FTP 2015-20 introduces two new schemes, namely "Merchandise Exports from India Scheme (MEIS)" and "Services Exports from India Scheme (SEIS)". The 'Services Exports from India Scheme' (SEIS) is for increasing exports of notified services. These schemes (MEIS and SEIS) replace multiple schemes earlier in place, each with different conditions for eligibility and usage. Incentives (MEIS & SEIS) to be available for SEZs also. e-Commerce of handicrafts, handlooms, books etc., eligible for benefits of MEIS.
 6. Agricultural and village industry products to be supported across the globe at rates of 3% and 5% under MEIS. Higher level of support to be provided to processed and packaged agricultural and food items under MEIS.
7. Industrial products to be supported in major markets at rates ranging from 2% to 3%.
8. Served From India Scheme (SFIS) will be replaced with Service Export from India Scheme (SEIS).
9. Branding campaigns planned to promote exports in sectors where India has traditional strength.
 10. SEIS shall apply to 'Service Providers located in India' instead of 'Indian Service Providers'.
11. Business services, hotel and restaurants to get rewards scrips under SEIS at 3% and other specified services at 5%.

12. Duty credit scrips to be freely transferable and usable for payment of customs duty, excise duty and service tax.
13. Debits against scrips would be eligible for CENVAT credit or drawback also.
14. Nomenclature of Export House, Star Export House, Trading House, Premier Trading House certificate changed to 1,2,3,4,5 Star Export House.
15. The criteria for export performance for recognition of status holder have been changed from Rupees to US dollar earnings.
16. Manufacturers who are also status holders will be enabled to s elf certify their manufactured goods as originating from India.

17. Reduced Export Obligation (EO) (75%) for domestic procurement under EPCG scheme.
18. Online procedure to upload digitally signed document by Chartered Accountant/Company Secretary/Cost Accountant to be developed.
19. Inter-ministerial consultations to be held online for issue of various licences.
20. No need to repeatedly submit physical copies of documents available on Exporter Importer Profile.
21. Validity period of SCOMET export authorisation extended from present 12 months to 24 months.
22. Export obligation period for export items related to defence, military store, aerospace and nuclear energy to be 24 months instead of 18 months
23. Calicut Airport, Kerala and Arakonam ICDS, Tamil Nadu notified as registered ports for import and export.
24. Vishakhapatnam and Bhimavarm added as Towns of Export Excellence.
25. Certificate from independent chartered engineer for redemption of EPCG authorisation no longer required.
Source: The Economic Times, New Delhi,1 April 2015

Long Answer questions (10 Marks)

Q.1   What are the common characteristics of underdeveloped countries?   10

Answer:

India is a low income developing economy. There is no doubt that one-fourth of its population lives in pathetic condition. It is important to understand the basic characteristics of the Indian economy, considering it as one of the poor but developing economics of the world.

1.            Low per capita income

The level of income as measured by per capita real GNP is very low in underdeveloped countries. The per capita income of India in 2005 was $ 720 except for few countries; the per capita income of the Indian people is the lowest in the world.

2.            Low level of living

Since about three-fourth of world population lives in underdeveloped countries which have less than one-fifth share in world income, it is obvious that a vast majority of people in these countries must be living under conditions of poverty, malnutrition, disease, squalor, illiteracy, etc. even basic necessities of subsistence such as minimum food, clothing and shelter are not easily accessible to the poor masses.

3.            High rate of population growth            

Low productivity combined with high growth rates of population is largely responsible for low income and poor living standards. High growth rate of population means more people to be fed, clothed and provided other necessary goods year after year. In India rate of growth of population which was about 1.31 per cent per annum during 1941-50 has risen to 1.93 per cent during 1991-2001.

4.            High levels of unemployment and underemployment

Unemployment levels are high in the underdeveloped countries. Due to lack of capital and low level of development in various economic sectors. Thus, countries have not been able to make fuller use of their labour force.

5.            Predominance of agriculture in the economy

Since majority of people (around 80 per cent of total population) live in rural areas and work in agriculture, this is the biggest source of employment and biggest contributor to national income.

6.            Low rate of capital formation

Another one of the basic characteristic of the Indian economy is the existence of capital deficiency. Capital deficiency is an important characteristic of underdeveloped economy. Capital formation or investment is low in India, low capital formation leads low productivity which leads to low incomes and the low income leads to low saving, and then low saving leads to low rate of capital formation. Thus it forms the vicious circle of poverty.

7.            Maldistribution of wealth/Assets

RBI survey of assets of rural and urban households for the period July 1991 to June 1992 brings out the existence of sharp inequalities in asset distribution.

The socio-economic indicators of consumption are characteristic of underdeveloped economy in India

Underdevelopment also finds expression through several socio-economic indicators, such as per capita intake of calories, fats and protein, population per TV set and physician. In the table below for selected countries indicate that India is far behind the developed countries so far as these indicators of standard of living are concerned. Illiteracy rate is also very high in India- 35% in 2001, as against less than 5 per cent in developed countries.

Q.2    What is human development?   

Answer:

World Bank in its 1991 'World Development Report' asserted on the following:

"The challenge of development is to improve the quality of life. Especially in the World's poorest countries a better quality of life generally calls for higher incomes, but it involves much more. It encompasses as ends in themselves better education, higher standards of health and nutrition, less poverty, a cleaner environment, more equality of opportunity, greater individual freedom, and a richer cultural life".

Therefore the present day economists are of the view that:

"Development must be conceived of as a multidimensional process which could involve major changes in social structures, popular attitudes, and national institutions, as well as the acceleration of economic growth, the reduction in inequality, and the eradication of poverty. Development, in its essence, must represent the whole gamut of change whereby unsatisfactory life is replaced by a materially and spiritually better life".

Therefore, for the sake of good socio-economic life Prof. Goulet and others present three basic components or core values of economic development.

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Long Answer Questions (10 Marks)

Q.1      Examine the role of economic factors in economic development.

            Determinants of Economic Growth

Determinants of economic growth are inter-related factors that directly influence the rate of economic growth i.e. increase in real GDP of an economy. There are six major determinants of growth. Four of these are typically grouped under supply factors which include natural resources, human resources, capital goods and technology. The other two are demand and efficiency factors.

Supply Factors

These factors affect the value of goods and services supplied in an economy.

Natural Resources: Natural resources include anything that exists in nature and which has exploitable economic value. Rate of economic growth increases on increase in quantity and quality of natural resources. Examples of natural resources which can have major effect on rate of economic growth include fossil fuels, valuable metals, oceans, and wild life.

Human Resources: Human resources include both skilled and unskilled workforce. Increase in the quantity and quality of the workforce increases rate of economic growth. Here, increase in quality refers to improvement of skills the workers possess. When more people work, more goods and services are produced and when more skilled workers do a job, they produce high value goods and services.

Capital Goods: Capital goods are tangible assets such as plant and machinery that can carry out processes which result in the production of other goods and services. Capital goods require big investments initially but they increase production and growth rate in future periods.

Technology: Technology includes methods and procedures used to produce various goods and services. New technology may be invented or current technology may be improved gradually by investing in research. Better techniques once devised, allow faster production and increase rate of economic growth.

Demand Factor

The increased supply of goods and services caused by the supply factors must be sustained by increased demand for goods and services in the economy.

Efficiency Factor

Achieving high output to input ratio is the result of efficiency. Efficiency includes both productive and allocative efficiency. High efficiency increases growth rate when it is coupled with full employment. To achieve maximum growth rate, an economy must use its available resources in the least costly way to produce the optimum mix of goods and services and it must use its resources to the maximum extent possible.

Q.2    What are the main reasons of shift in focus from economic growth to human development?  

The experience of the developing countries during the sixties and seventies showed that whereas target rates of economic growth were in fact achieved trickle-down effect in the form of creation of more employment opportunities, rise in wages and improvement in income distribution did not operate.

The problems of poverty, unemployment and income inequality further worsened instead of getting reduced during the process of growth in the Fifties and Sixties in the developing countries. For instance, in India Dandekar and Rath found that 40 per cent of rural population in India lived below the poverty line in 1968-69.

Thus, due to the failure of traditional strategies of development in solving the problems of poverty, unemployment and inequality, it was realised in the seventies that the concept of development should be broadened so that it should signify that well-being of the people has increased.

This led to the view that economic development should not be judged on the basis of growth in GNP alone. Economic development will take place in true terms only if the poor people are raised above the poverty line. Late Prof. Sukhamoy Chakravarty rightly writes, “The rate of growth strategy is by itself an inadequate device to deal with the problems of generating employment opportunities and for reducing economic disparities. Much depends on the composition of the growth process and how growth is financed and how benefits from growth process are distributed.”

It is worth mentioning that there is no guarantee that when there is increase in GNP, employment will also increase. It can happen that with the use of more capital-intensive technique while produc­tion may be increasing at a rapid rate, employment may be falling instead of rising.

According to the modern perception of economic development, rapid increase in GNP secured through displacing labour by machines and thus causing rise in unemployment and under-employment cannot be called true economic development. Professor Dudley Seers makes the meaning of economic development according to the new perception in the following words:

“The questions to ask about a country’s development are therefore: What has been happening to poverty? What has been happening to unemployment? What has been happening to inequality? If all three of these have declined from high levels, then beyond doubt this has been a period of development for the country concerned. If one or two of these central problems have been growing worse, especially if all three have, it would be strange to call the result development even if per capita income doubled.”

Recently, the concept of economic development has been further widened so that it now involves not only reduction in poverty, inequality and unemployment but also requires improvement in quality of life which includes cleaner environment, better education, good health and nutrition.

Thus World Development Report 1991, published by World Bank asserts: “the challenge of develop­ment is to improve the quality of life, especially in the world’s poor countries, a better quality of life generally calls for higher incomes but it involves much more. It encompasses as ends in themselves better education, higher standards of health and nutrition, less poverty, a cleaner environment, more equality of opportunity “Thus the concept of economic development has been greatly broadened.

Today economic development is interpreted as not only in more growth in Gross Domestic Product (GDP) but also in terms of good quality of life which, according to Prof. Amartya Sen, consists in enlargement of opportunities for people and freedom of human choices’. This new concept of development includes achievement of freedom from servitude to ignorance and illiteracy. It also includes enjoyment of human rights. Thus United Nations ‘Human Development Report’ of 1994 in the writing of which Prof. Amartya Sen made a significant contribution, asserts, “Human beings are born with certain potential capabilities.

On the basis of various ingredients of good quality of life and other criteria such as enlargement of human choices and freedom a human development index is prepared by United Nations Development Programme (UNDP). This human development index is considered as a better indicator of economic development index.

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short answer questions (5 Marks)

Q.1    Examine the role of Natural resources in economic development.     5

            The process of economic growth is a highly complex phenomenon and is influenced by numerous and varied factors such as economic, political, social and cultural factors. It is believed by some economists that the capital is the only requirement for growth and therefore the greatest emphasis is laid on capital formation to bring about economic development. But this is wrong.

As Professor Nurkse rightly remarks, “Economic development has much to do with human en­dowments, social attitudes, political conditions and historical accidents. Capital is a necessary but not a sufficient condition of progress.”

The quantity and quality of natural resources play a vital role in the economic development of a country. Important natural resources are land, minerals and oil resources, water, forests, climate, etc. The quality of natural resources available in a country puts a limit on the level of output of goods which can be attained. Without a minimum of natural resources there is not much hope for economic development. It should, however, be noted that resource availability is not a necessary condition for economic growth. For instance, India, though rich in natural resources, has re­mained poor and under-developed.

This is because resources have not been fully utilised for productive purposes. Thus it is not only the availability of natural resources but also the ability to bring them into use which determines the growth of an economy. On the other hand, Japan has a relatively few natural resources but has shown a very high rate of economic growth and as a result has become one of the richest countries in the world.

How has Japan done this miracle? It is international trade that has made possible for Japan to achieve higher growth rate. Japan imports many of natural resources such as mineral oil it requires for production of manu­factured goods. It then exports manufactured goods to the countries that are rich in natural resources. Thus experience of Japan shows that abundant natural resources are not a necessary condition for economic growth.

Q.2    Examine the role of non-economic factors in economic development.           5

            There are a number of domestic or non-economic factors that act as sources of economic development and barriers to development. Kindleberger presented several non-economic factors: “The various aspects to be touched upon include the orientation of the individual in his society, family, class, race, and religion, rural-urban differences, national character, size of social unit, effect of culture on institutions, and interaction of cultural values and economic change”

Ø  The main institutional factors are

Ø  Education

Ø  Healthcare

Ø  Infrastructure

Ø  Political Stability and corruption

Ø  Legal system

Ø  Financial system, credit and micro finance

Ø  Taxation

Ø  The use of appropriate technology

Ø  The empowerment of women

Ø  Income distribution

Q.3    GNP as a measure of national development is faced with several challenges. What are they?

Economic growth has been defined in two ways. In the first place, economic growth is defined as sustained annual increases in an economy’s real national income over a long period of time. In other words, economic growth means rising trend of net national product at constant prices.

This definition has been criticized by some economists as inadequate and unsatisfactory. They argue that total national income may be increasing and yet the standard of living of the people may be falling. This can happen when the population is increasing at a faster rate than total national income.

For instance, if national income is rising by 1% per year and population is increasing at 2% per year, the standard of living of the people will tend to fall. This is so because when population is increasing more rapidly than national income, per capita income will go on falling. Per capita income will rise when the national income increases faster than population.

Therefore, the second and better way of defining economic growth is to do so in terms of per capita income. According to the second view, “economic growth means the annual increase in real per capita income of a country over the long period. Thus Professor Arthur Lewis says that “economic growth means the growth of output per head of population.” Since the main aim of economic growth is to raise the standards of living of the people, therefore the second way of defining economic growth which runs in terms of per capita income or output is better.

Another point which is worth mentioning in regard to the definition of economic growth is that the increase in national income or more correctly increase in per capita income or output, must be a ‘sustained increase’ if it is to be called economic growth.

By sustained increase in per capita income we mean the upward or rising trend in per capita income over a long period of time. A mere short-period rise in per capita income, such as that occurs over a business cycle, cannot be validly called economic growth.

As a result, per capita income and levels of living of the people of the developed countries are now much higher as compared to those of the developing countries. The problem of the developing countries is to catch up with the developed countries through attaining rapid economic growth so as to enjoy higher levels of living.

For the sake of comparison we have given in Table 39.1 the data of population, Gross National Income (GNI) per capita and growth rate of Gross Domestic Product (GDP) for three periods 1980-90, 1990-2000 and 2000-2009 of some both developed and developing countries. It will be seen from this Table 39.1 that in the last two decades India has become the second fastest growing economy of the world.