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Day 19: Indian Economy

After the year 2008-09 the weightage of Indian Economy in the Civil Services Exam has enhanced drastically. In the year 2010 in IAS prelims about 38 questions were asked which were related to the Indian Economy. Thus in the recent pattern, the Indian Economy is one such area which cannot be ignored. The following are the number of Questions asked in previous years from this topic:

Apart from the increase in the weightage, the pattern of the questions has also changed in this section. The following are the areas which have become the favorite of examiners off late: 1. 2. 3. 4. 5. Developmental economics Issues related to sustainable and balance regional development Concepts of economics which were explicitly or implicitly in news related to various issues International institutions and issues related to globalization Integration of Indian economy with that of World

Chapters covered: National Income Accounting, Money and Banking

National Income Accounting
Important Topics Study Material
http://ncertbooks.prashanthellina.com/class_12.Economics.Macroeconomics/Chapter%202.pdf http://www.halfmantr.com/display-ecomonic-issue/992-concepts-of-economics http://www.halfmantr.com/display-ecomonic-issue/993-concepts-of-economics-ii

Concepts of Economics

Concept of Economic Territory

Introduction National income accounting is a branch of macroeconomics of which estimation of national income and related aggregates is a part. National income, or for that matter any aggregate related to it, is a measure of the value of production activity of a country. But, production activity where and by whom? Is it on the territory of the country? Or, is it by those who live in the territory? In fact it is both. This raises further question. What is the scope of territory? Is it simply political frontiers? Or, is it something else? Who are those who live in the territory? Is it simply citizens? Or, it is something else. The answer to these questions leads us to the concepts of (i) economic territory and (ii) resident. The two have an important bearing on the estimation of national income aggregates. How? This will be explained a little later. Definition

The first thing to note is that economic territory of a country is not simply political frontiers of that country. The two may have common elements, but still they are conceptually different. Let us first see how it is defined. According to the United Nations: Economic territory is the geographical territory administered by a government within which persons, goods and capital circulate freely. The above definition is based on the criterion freedom of circulation of persons, goods and capital. Clearly, those parts of the political frontiers of a country where the government of that, country does not enjoy the above freedom are not to be included in economic territory of that country. One example is embassies. Government of India does not enjoy the above freedom in the foreign embassies located within India. So, these are not treated as a part of economic territory of India. They are treated as part of the economic territories of their respective countries. For example the U.S. embassy in India is a part of economic territory of the U.S.A. Similarly, the Indian embassy in Washington is a part of economic territory of India.
Scope Based on freedom criterion, the scope of economic territory is defined to cover:

(i) Political frontiers including territorial waters and air space. (ii) Embassies, consulates, military bases, etc located abroad, but excluding those located within the political frontiers. (iii) Ships, aircrafts etc, operated by the residents between two or more countries (iv) Fishing vessels, oil and natural gas rigs, etc operated by the residents in the international waters or other areas over which the country enjoys the exclusive rights or jurisdiction. Implication National income and related aggregates are basically measures of production activity. There are two categories of national income aggregates : domestic and national, or domestic product and national product. Production activity of the production units located within the economic territory is domestic product. Gross domestic product, net domestic product are some examples.

Concept of Resident
Introduction Note that citizen and resident are two different terms. This does not mean that a citizen is not a resident, and a resident not a citizen. A person can be a citizen as well as a resident, but it is not necessary that a citizen of a country is necessarily the resident of that country. A person can be a citizen of one country and at the same time a resident of another country. For example a NRI, Non-resident Indian. A NRI is citizen of India but a resident of the country in which he lives. Citizenship is basically a legal concept based on the place of birth of the person or some legal provisions allowing a person to become a citizen. On the other hand residentship is basically an economic concept based on the basic economic activities performed by a person. Definition A resident is defined as follows: A resident, whether a person or an institution, is one whose centre of economic interest lies in the economic territory of the country in which he lives. The centre of economic interest implies two things: (i) the resident lives or is located within the economic territory and (ii) the resident carries out the basic economic activities of earnings, spending and accumulation from that location Implications Production activity of the residents of an economic territory is national product. GNP, NNP, are some examples. National product includes production activities of residents irrespective of whether performed within the economic territory or outside it. In comparison, domestic product includes production activity of the production units located in the economic territory irrespective of whether carried out by the residents or non residents.

Relation between national product and domestic product

The concept of domestic product is based on the production units located within economic territory, operated both by residents and non-residents. The concept of national product is based on residents, and includes their contribution to production both within and outside the economic territory. Normally, in practical estimates, domestic product is estimated first. National product is then derived from the domestic product by making certain adjustments. Let us see how? National product is derived in the following way:
National product = Domestic product + residents contribution to production outside the economic territory - nonresidents contribution to production inside the economic territory

factor income received from abroad. The non-residents contribution inside the economic territory is called factor income paid to residents. Therefore,
In practical estimates the residents contribution outside the economic territory is called

National product = Domestic product + Factor income received from abroad - Factor income paid to abroad.

Factor income received from abroad is added to domestic product because this contribution of residents is in addition to their contribution to domestic product. Factor income paid to abroad is subtracted because this part of domestic product, does not belong to the residents. By subtrac ting factor income paid from factor income received from abroad, we get a net figure Net factor income from abroad popularly abbreviated as NFIA.
National product = Domestic product + Net factor income from abroad = Domestic product + NFIA

Industrial Classification
Introduction It means grouping production units into distinct industrial groups, or sectors. This is the first step required to be taken in estimating national income, irrespective of the method of estimation. It is statistically more convenient to estimate national income originating in a group of similar production units rather than for each production unit separately. It is now a matter of general practice to group all the production units of the economic territory into three broad groups: primary sector, secondary sector and tertiary sectors. Each of these sectors can be further subdivided into smaller groups depending upon the requirement. Let us now explain each sector. Primary Sector Primary sector includes production units exploiting natural resources like land, water, subsoil assets, etc. Growing crops, catching fish, extracting minerals, animal husbandry, forestry, etc. are some examples. Primary means of first importance. It is primary because it is a source of basic raw material s for the secondary sector. Secondary Sector Secondary sector includes production units which are engaged in transforming one good into another good. Such an activity is called manufacturing activity. These units convert raw materials into finished goods. Factories, construction, power generation, water supply are the examples. It is called secondary because it is dependent upon the primary sector for raw materials.

Tertiary Sector Tertiary sector includes production units engaged in producing services. Transport, trade education, hotels and restaurant, finance, government administration, etc are some examples. This sector finds third place because its growth is primarily dependent on the primary and secondary sectors.

National Income Aggregates

There are many aggregates in national income accounting. The basic among these is Gross Domestic Product at Market Price (GDPMP). By making adjustments in GDPMP,

we can derive other aggregates like Net Domestic product at Market Price (NDPMP) and NDP at factor cost (NDPFC).
Net Domestic Product Why is GDPMP called gross? GDPMP is final products valued at market price. This is what buyers pay. But this is not what production units actually receive. Out of what buyers pay the production units have to make provision for depreciation and payment of indirect tax like excise, sales tax, etc. This explains why GDPMP is called gross. It is called gross because no provision has been made for depreciation. However, if depreciation is deducted from the GDP, it becomes Net Domestic Product (NDP). Therefore,
GDPMP - depreciation = NDPMP

Domestic product at Factor Cost Why is GDPmp called at market price ? Out of what buyers pay, the production units have to make payments of indirect taxes, if any. Sometimes production units receive subsidy on production. This is in addition to the market price which production units receive from the buyers. Therefore what production units actually receive is not the market -price but market price - indirect tax + subsidies This is what is actually available to production units for distribution of income among the owners of factors of production. Therefore,
Market price - indirect tax (I.T.) + subsidies = Factor payments (or factor costs)
By making adjustment of indirect tax and subsidies we derive GDP at factor cost (GDPFC) from GDPMP

GDPMP - I.T. + subsidies = GDPFC or, GDP - net I.T. = GDPFC

Net Domestic Product at Factor Cost

fixed capital) we get one more aggregate called Net Domestic Product at Factor Cost (NDPFC)
If we make adjustment of both the net I.T and depreciation (also called consumption of

GDPMP - I.T. + Sub-depreciation = NDPFC or, NDPFC+ I.T. - Sub+depreciation = GDPMP

Net National Product at Factor Cost (NNPFC) or National Income

Net factor income from abroad (NFIA) provides the link between NDP and NNP. Therefore,




Summing up
The three crucial adjustments required for deriving one aggregate from the other are:

1. 2. 3.

Gross - depreciation = Net Market price - I.T. + Subsidies = Factor cost Domestic + NFIA = National

Estimation of national Income (N.I.) and other related aggregates

There are three methods of estimation of national income : production (value added), income-distribution and final expenditure methods. You are familiar with the various steps required to be taken in each. Let us see what aggregates are arrived through each method.

Production method (value added method)

In this method we first find out Gross Value Added at Market Price (GVAMP) in each sector and then take their sum to arrive at GDPMP Sum total of GVAMP by all the sectors = GDPMP Then we make adjustments to arrive at national income or NNPFC
GDPMP - Consumption of fixed capital = NDPMP NDPMP - Indirect .Taxes. + Subsidies = NDPFC NDPFC + NFIA = NNPFC

Income distribution method

In this method we first estimate factor payments by each sector. The sum of such factor payments equals Net value Added at Factor Cost (NVAFC) by that sector. Then we take sum total of NVAfc by all the sectors to arrive at NDPfc. The components of NDPFC are:

1. 2. 3. 4.

Compensation of employees Rent and royalty Interest Profits

_____________________________________ NDPFC


System of National Accounts 1993, a joint publication of the United Nations and the World Bank, has elaborated the above components and recommended their use by all the countries in preparing national income estimates. Compensation of employees is defined as : the total remuneration in cash or in kind, payable by an enterprise to an employee in return for work done by the latter during the accounting period. The main components of compensation of employees are : 1. Wages and salaries in cash in kind

2. Social security contributions by the employers Rent is defined as the amount receivable by a landlord from a tenant for the use of land. Royalty is defined as the amount receivable by the landlord for granting the leasing rights of subsoil assets. Interest is defined as the amount payable to the owners of financial assets in the production unit. The production unit uses these assets for production and in turn makes interest payment, imputed or actual. Profit is a residual factor payment to the owners of a production unit. The production unit uses profit for (i) payment of corporation tax, (ii) dividend payments and (iii) undistributed profits/ retained earnings. The main source of factor payments is the accounts of production units. Since accounts of most production units are not available to the estimators, and also since the accounting practices differ, it is not possible for the estimators to clearly identify the components. Therefore, in cases where total factors payment is estimable but not its different components, an additional factor payment item called mixed income is added. Since this problem arises mainly in case of selfemployed people like doctors, chartered accountants, consultants, etc, this factor payment is popularly called mixed income of the self employed. In case there is such item then: NDPFC = Compensation of employees + Rent and royalty + Interest+ Profit + Mixed income (if any) There is another term used in factor payments. It is operating surplus. It is defined as the sum of rent and royalty, interest and profits. In that case then:
NDPFC = Compensation of employees + operating surplus + mixed income (if any)

Once we estimate NDPFC, we can find NNPFC, or national income, by adding NFIA.

Final expenditure method

In this method we take the sum of final expenditures on consumption and investment. This sum equals GDPMP. These final expenditures are on the output produced within the economic territory of the country. Its main components are:

Private final Consumption expenditure (PFCE)

+ Government final consumption expenditure (GFCE) + Gross domestic Capital formation (GDCF) + Net exports (= Export - imports) (X-M) ___________________________________________ = GDPmp ____________________________________________
By making the usual adjustments we can arrive at national income

OFCE + GFCE + GDCF + (X-M) __________________________________ = GDPMP __________________________________ GDPMP - Consumption of fixed capital= NDPMP NDPMP - Indirect Tax + Subsidies = NDPFC NDPFC+ NFIA = NNPFC (National Income)

Note that GDCF is composed of the following:

GDCF = Net domestic fixed capital formation + Closing stock - Opening stock + Consumption of fixed capital

Also note that. Clossing stock - opening stock equals net change in stocks.

Precautions in Making Estimates of National Income

There are a large number of conceptual and statistical problem that arise in estimating national income of a country. To minimize error, it is necessary that certain precautions are taken in advance. Some of the method wise precautions are: (1) Value added (Production) method (i) Avoid double counting Value added equals value of output less intermediate cost. There is a possibility that instead of counting value added one may count value of output. You can verify by taking some imaginary numerical example that counting only values of output will lead to counting the same output more than once. This will lead to

overestimation of national income. There are two alternative ways of avoiding double counting: (a) count only value added and (b) count only the value of final products. (ii) Do not include sale of second hand goods. Sale of the used goods is not a production activity. The good should not treated as fresh Production , and therefore doesnt should not treated as fresh production, and therefore doesnt qualify for inclusion in national income however, any brokerage or commission paid to facilitate the sale is a fresh production activity. It should be included in production but to the extent of brokerage or commission only. (iii) Self-consumed output must be included. Output produced but retained for self-consumption, rather than selling in market, is output and must be included in estimates. Services of owner-occupied buildings, farmer consuming its own produce, etc are some examples. (2) Income distribution method

Avoid transfers

National income includes only factor payments, i.e. payment for the services rendered to the production units by the owners of factors. Any payment for which no service is rendered is called a transfer, and not a production activity. Gifts, donations, characters, etc are main examples. Since transfers are not a production activity it must not be included in national income. (ii) Avoid capital gain Capital gain refers to the income from the sale of second hand goods and financial assets. Income from the sale of old cars, old house, bonds, debentures, etc. is some examples. These transactions are not production transactions. So, any income arising to the owners of such things is not a factor income. (iii) Include income from self-consumed output When a house owner lives in that house, he does not pay any rent. But in fact he pays rent to himself. Since rent is a payment for services rendered, even though rendered to the owner itself, it must be counted as a factor payment. (iv) Include free services provided by the owners of the production units Owners work in their own unit but do not charge salary. Owners provide finance but do not charge any interest. Owners do production in their own buildings but do not charge rent. Although they do not charge, yet the services have been performed. The imputed value of these must be included in national income. (3) Final expenditure method (i) Avoid intermediate expenditure By definition the method includes only final expenditures, i.e. expenditure on consumption and investment. Like in the value added method, inclusion of intermediate expenditure like that on raw materials, etc, will mean double counting. (ii) Do not include expenditure on second hand goods and financial assets

Buying second hand goods is not a fresh production activity. Buying financial assets is not a production activity because financial assets are neither goods nor services. Therefore they should not be included in estimates of national income. (iii) Include the self use of own produced final products. For example, a house owner using the house for seef. Although explicitly he does not incur

any expenditure, implicitly he is making payment of rent to himself. Since the house is producing a service, the imputed value of this service must be include in national income.
(iv) Avoid transfer expenditures

production takes place. Since no production takes place it has no place in national income. Charities, donations, gifts, scholarships, etc are some examples.
A transfer payment is a payment against which no services are rendered. Therefore no

1. Difference between Final Goods, Consumption Goods, Capital Goods and Consumer Durables 2. The concept of depreciation 3. Methods of National Income calculation: Value Added, Income and expenditure method 4. Meaning of Gross Value Added and Net Value Added 5. Meaning of Investment and Flow Variable 6. Relation and Meaning of GDP, GNP, NNP etc 7. Concept of Resident and Territory 8. Net National Product at factor cost or National Income. 9. Difference between Factor Price and Market Price 10. Personal Income and Net Disposable Income 11. Concept of Real and Nominal GDP, GDP deflator, Base year Price and its utility 12. Consumer Price Index and Wholesale Price Index 13. Transfer payments to the Personal Income (PI) households from the government Money and Banking
Study Material http://ncertbooks.prashanthellina.com/class_12.Economics.Macroeconomics/Chapter%203.pdf http://www.halfmantr.com/bank-po-india-ibps/627-financial-concepts-and-monetary-policy
Important Topics:

1. 2. 3. 4. 5. 6. 7. 8.

Meaning and functions of Money Supply of Money: Concepts like: Narrow and Broad Money Banking and related concepts, definition of Commercial Banks Multiplier effect of Money Instruments of Monetary Policy and the Reserve Bank of India (Very Important) Terms like Bank Rate, SLR, CRR, Moral Suasions, Repo Rate, Reverse Repo Rate, Deficit financing through central bank borrowing, Sterilisation of economy Functions of RBI and SEBI Cheap money and Dear Money Policy


9. Primary and Secondary Markets 10. Debt and Equity 11. Monetary Policy of Indian and the role of RBI

Financial Concepts and Monetary Policy

Concept of financial market
A business is a part of an economic system that consists of two main sectors households which save funds and business firms which invest these funds. A financial market helps to link the savers and the investors by mobilizing funds between them. Two consequences follow: 1. 2. The rate of return offered to households would be higher Scarce resources are allocated to those firms which have the highest productivity for the economy.

There are two major alternative mechanisms through which allocation of funds can be done: via banks or via financial markets. A financial market is a market for the creation and exchange of financial assets . Financial markets exist wherever a financial transaction occurs. Financial transactions could be in the form of creation of financial assets such as the initial issue of shares and debentures by a firm or the purchase and sale of existing financial assets like equity shares, debentures and bonds.

Functions of financial markets

1. 2. 3. 4. Mobilization of Savings and Channeling them into the most Productive Uses Facilitating Price Discovery Providing Liquidity to Financial Assets Reducing the Cost of Transactions

Classification of financial markets


Money Market
The money market is a market for short term funds which deals in monetary assets whose period of maturity is upto one year. These assets are close substitutes for money. It is a market where low risks, unsecured and short term debt instruments that are highly liquid are issued and actively traded every day. It has no physical location, but is an activity conducted over the telephone and through the internet. It enables the raising of short-term funds for meeting the temporary shortages of cash and obligations and the temporary deployment of excess funds for earning returns. The major participants in the market are the Reserve Bank of India (RBI), Commercial Banks, Non-Banking Finance Companies, State Governments, Large Corporate Houses and Mutual Funds.

Money Market Instrument 1. Treasury bill: A Treasury bill is basically an instrument of short-term borrowing by the Government of India maturing in less than one year. They are also known as Zero Coupon Bonds issued by the Reserve Bank of India on behalf of the Central Government to meet its short-term requirement of funds. 2. Commercial Paper: Commercial paper is a short-term unsecured promissory note, negotiable and transferable by endorsement and delivery with a fixed maturity period. It is issued by large and creditworthy companies to raise short-term funds at lower rates of interest than market rates. It usually has a maturity period of 15 days to one year. The issuance of commercial paper is an alternative to bank borrowing for large companies that are generally considered to be financially strong. 3. Call Money: Call money is short term finance repayable on demand, with a maturity period of one day to fifteen days, used for inter-bank transactions. Commercial banks have to maintain a minimum cash balance known as cash reserve ratio. The Reserve Bank of India changes the cash reserve ratio from time to time which in turn affects the amount of funds available to be given as loans by commercial banks. Call money is a method by which banks borrow from each other to be able to maintain the cash reserve ratio. 4. Certificate of Deposit: Certificates of deposit (CD) are unsecured, negotiable, shortterm instruments in bearer form, issued by commercial banks and development 12

financial institutions. They can be issued to individuals, corporations and companies during periods of tight liquidity when the deposit growth of banks is slow but the demand for credit is high. They help to mobilise a large amount of money for short period 5. Commercial Bill: A commercial bill is a bill of exchange used to finance the working capital requirements of business firms. It is a short-term, negotiable, self-liquidating instrument which is used to finance the credit sales of firms. When goods are sold on credit, the buyer becomes liable to make payment on a specific date in future. The seller could wait till the specified date or make use of a bill of exchange. The seller (drawer) of the goods draws the bill and the buyer (drawee) accepts it. On being accepted, the bill becomes a marketable instrument and is called a trade bill. These bills can be discounted with a bank if the seller needs funds before the bill matures. When a trade bill is accepted by a commercial bank it is known as a commercial bill.

Capital Market
The term capital market refers to facilities and institutional arrangements through which long-term funds, both debt and equity are raised and invested. It consists of a series of channels through which savings of the community are made available for industrial and commercial enterprises and for the public in general. It directs these savings into their most productive use leading to growth and development of the economy. The capital market consists of development banks, commercial banks and stock exchanges. The Capital Market can be divided into two parts: 1. Primary Market 2. Secondary Market

Features of Primary Markets 1. There is sale of securities by new companies or further (new issues of securities by existing companies to investors). 2. Securities are sold by the company to the investor directly (or through an intermediary). 3. The flow of funds is from savers to investors, i.e. the primary market directly promotes capital formation. 4. Only buying of securities takes place in the primary market, securities cannot be sold there. 5. Prices are determined and decided by the management of the company. 6. There is no fixed geographical location Features of Secondary Markets 1. There is trading of existing shares only 2. Ownership of existing securities is exchanged between investors. The company is not involved at all. 3. Enhances encashability (liquidity) of shares, i.e. the secondary market indirectly promotes capital formation. 4. Both the buying and the selling of securities can take place on the stock exchange. 13

5. Prices are determined by demand and supply for the security. 6. Located at specified places

Debt and Equity

On the basis of ownership, the sources of business finance can be broadly classified into two categories viz., owners funds and borrowed funds. Owners funds consist of equity share capital, preference share capital and reserves and surpluses or retained earnings. Borrowed funds can be in the form of loans, debentures, public deposits etc. These may be borrowed from banks, other financial institutions, debenture holders and public. Capital structure refers to the mix between owners and borrowed funds. These can be referred as equity and debt. Debt and equity differ significantly in their cost and riskiness for the firm. 1. The cost of debt is lower than the cost of equity for a firm because the lenders risk is lower than the equity shareholders risk, since the lender earns an assured return and repayment of capital and, therefore, they should require a lower rate of return. 2. Additionally, interest paid on debt is a deductible expense for computation of tax liability whereas dividends are paid out of after-tax profit. 3. Increased use of debt, therefore, is likely to lower the over-all cost of capital of the firm provided that the cost of equity remains unaffected. 4. Debt is cheaper but is more risky for a business because the payment of interest and the return of principal is obligatory for the business. 5. Any default in meeting these commitments may force the business to go into liquidation. There is no such compulsion in case of equity, which is therefore, considered riskless for the business. 6. Higher use of debt increases the fixed financial charges of a business. As a result, increased use of debt increases the financial risk of a company. 7. Financial risk is the chance that a firm would fail to meet its payment obligations.

Security and Exchange Bureau of India (S.E.B.I)

The Securities and Exchange Board of India was established by the Government of India on 12 April 1988 as an interim administrative body to promote orderly and healthy growth of securities market and for investor protection.
Objectives of SEBI

The overall objective of SEBI is to protect the interests of investors and to promote the development of, and regulate the securities market. This may be elaborated as follows: 1. To regulate stock exchanges and the securities industry to promote their orderly functioning. 2. To protect the rights and interests of investors, particularly individual investors and to guide and educate them. 3. To prevent trading malpractices and achieve a balance between self regulation by the securities industry and its statutory regulation. 4. To regulate and develop a code of conduct and fair practices by intermediaries like brokers, merchant bankers etc., with a view to making them competitive and professional. 14

Functions of SEBI

Keeping in mind the emerging nature of the securities market in India, SEBI was entrusted with the twin task of both regulation and development of the securities market. It also has certain protective functions.
Regulatory Functions

1. Registration of brokers and sub-brokers and other players in the market. 2. Registration of collective investment schemes and Mutual Funds. 3. Regulation of stock brokers, portfolio exchanges, underwriters and merchant bankers and the business in stock exchanges and any other securities market. 4. Regulation of takeover bids by companies. 5. Calling for information by undertaking inspection, conducting enquiries and audits of stock exchanges and intermediaries. 6. Levying fee or other charges for carrying out the purposes of the Act. 7. Performing and exercising such power under Securities Contracts (Regulation) Act 1956, as may be delegated by the Government of India.
Development Functions

1. Training of intermediaries of the securities market. 2. Conducting research and publishing information useful to all market participants. 3. Undertaking measures to develop the capital markets by adapting a flexible approach.
Protective Functions

1. Prohibition of fraudulent and unfair trade practices like making misleading statements, manipulations, price rigging etc. 2. Controlling insider trading and imposing penalties for such practices. 3. Undertaking steps for investor protection. 4. Promotion of fair practices and code of conduct in securities market.

Reserve Bank of India

One of the most important functions of central banks is formulation and execution of monetary policy. In the Indian context, the basic functions of the Reserve Bank of India as enunciated in the Preamble to the RBI Act, 1934 are: to regulate the issue of Bank notes and the keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage. Thus, the Reserve Banks mandate for monetary policy flows from its monetary stability objective. Essentially, monetary policy deals with the use of various policy instruments for influencing the cost and availability of money in the economy. As macroeconomic conditions change, a central bank may change the choice of instruments in its monetary policy. The overall goal is to promote economic growth and ensure price stability.

Main Functions of RBI:


Monetary Authority
1. Formulates, implements and monitors the monetary policy. 2. Objective: maintaining price stability and ensuring adequate flow of credit to productive sectors. Regulator and supervisor of the financial system 1. Prescribes broad parameters of banking operations within which the country's banking and financial system functions. 2. Objective: maintain public confidence in the system, protect depositors' interest and provide cost-effective banking services to the public. Manager of Foreign Exchange 1. Manages the Foreign Exchange Management Act, 1999. 2. Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.

Issuer of currency
1. Issues and exchanges or destroys currency and coins not fit for circulation. 2. Objective: to give the public adequate quantity of supplies of currency notes and coins and in good quality.

Developmental role
1. Performs a wide range of promotional functions to support national objectives.

Related Functions
1. Banker to the Government: performs merchant banking function for the central and the state governments; also acts as their banker. 2. Banker to banks: maintains banking accounts of all scheduled banks. However, the most important role of RBI is as the controller of money supply and credit creation in the economy. RBI is the independent authority for conducting monetary policy in the best interests of the economy it increases or decreases the supply of high powered money in the economy and creates incentives or disincentives for the commercial banks to give loans or credits to investors.

Monetary Policy in India

Over time, the objectives of monetary policy in India have evolved to include maintaining price stability, ensuring adequate flow of credit to productive sectors of the economy for supporting economic growth, and achieving financial stability. Based on its assessment of macroeconomic and financial conditions, the Reserve Bank takes the call on the stance of monetary policy and


monetary measures. Its monetary policy statements reflect the changing circumstances and priorities of the Reserve Bank and the thrust of policy measures for the future. Faced with multiple tasks and a complex mandate, the Reserve Bank emphasises clear and structured communication for effective functioning of the monetary policy. Improving transparency in its decisions and actions is a constant endeavour at the Reserve Bank. The Governor of the Reserve Bank announces the Monetary Policy in April every year for the financial year that ends in the following March. This is followed by three quarterly reviews in July, October and January. However, depending on the evolving situation, the Reserve Bank may announce monetary measures at any point of time. The main instruments used by RBI are:
Open Market Operations

RBI purchases (or sells) government securities to the general public in a bid to increase (or decrease) the stock of high powered money in the economy.
Varying Reserve Requirements
Cash Reserve Ratio (CRR) indicates

the quantum of cash that banks are required to keep with the Reserve Bank as a proportion of their net demand and time liabilities.
Statutory Liquidity Ratio (SLR) SLR prescribes the amount of money that banks must invest in securities

issued by the government. Market Stabilisation Scheme The Market Stabilisation Scheme (MSS) was introduced in April 2004 under which Government of India dated securities / treasury bills could be issued to absorb surplus structural / durable liquidity created by the Reserve Banks foreign exchange operations. MSS operations are a sterilisation tool used for offsetting the liquidity impact created by intervention in the foreign exchange markets Liquidity Adjustment Facility Auctions

The liquidity management operations are aimed at modulating liquidity conditions such that the overnight rates in the money market remains within the informal corridor set by the repo and reverse repo rates for the liquidity adjustment facility (LAF) operations. In a repo transaction, the Reserve Bank infuses liquidity into the system by taking securities as collateral, while in reverse repo transaction it absorbs liquidity from the system with the Reserve Bank providing securities to the counter parties. The LAF auctions are also conducted electronically with the market participants, such as, banks and Primary Dealers. The LAF auctions are conducted either only once or two times in a day with the operations effectively modulating overnight liquidity conditions in the market.
Monetary Policy Dilemmas/Challenges 1. 2. 3. Appropriate monetary policy response to complex growth-inflation dynamics Making the stakeholders understand the underlying idea behind its policy action because every word of RBI press statement is keenly interpreted. Striking a balance between monetary and fiscal policy. This becomes difficult as fiscal policy is the domain of the government. Fiscal policy is often politically driven. In such a scenario it is a challenge for RBI to keep its monetary policy apolitical.


Questions from Previous Year IAS Exam

1. Which of the following is/are among the noticeable feature of the recommendations of the Thirteenth Finance Commission? (IAS EXAM 2012) 1.) 2.) 3.) A design for the Goods and Services Tax, and a compensation package linked to adherence tot the proposed design A design for the creation of lakhs of jobs in the next ten years in consonance with Indias demographic dividend Devolution of a specified share of central taxes to local bodies as grants

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

Ans. a 2. The Reserve Bank of India (RBI) acts as a bankers bank. This world imply which of the followings? ( IAS

EXAM 2012)
1.) 2.) 3.) Other banks retain their deposits with the RBI. The RBI lends fund to the commercial banks in times of need. The RBI advices the commercial banks on monetary matters.

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

Ans. d 3. 1.) 2.) 3.) Under which of the following circumstances may capital gains arise? (IAS When there is an increase in the sales of a product When there is a natural increase in the value of the property owned When you purchase a painting and there is a growth in its value due to increase in its popularity

EXAM 2012)

Select the correct answer using the codes given below:


a) b) c) d)

1 only 2 and 3 only 2 only 1, 2 and 3

Ans. b 4. Which of the following measures would result in an increase in the money supply in the economy? (IAS

EXAM 2012)
1.) 2.) 3.) 4.) Purchase of government securities from the public by the Central Bank Deposit of currency in commercial banks by the public Borrowing by the government from the Central Bank Sale of government securities to the public by the Central Bank

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

Ans. c 5. Which one of the following statements appropriately describes the fiscal stimulus? (IAS

EXAM 2011)

a) It is a massive investment by the Government in manufacturing sector to ensure the supply of goods to meet the demand surge caused by rapid economic growth b) It is an intense affirmative action of the Government to boost economic activity in the country.

c) It is Governments intensive action on financial institutions to ensure disbursement of loans to agriculture and allied sectors to promote greater food production and contain food inflation. d) It is an extreme affirmative action by the Government to pursue its policy of financial inclusion.

Ans. b 6. a) b) c) Which one of the following is not a feature of Value Added Tax? (IAS It is multi-point destination based system of taxation It is a tax levied on value addition at each stage of transaction in the production-distribution chain It is a tax on the final consumption of goods or services and must ultimately be borne by the consumer

EXAM 2011)


d) It is basically a subject of the Central Government and the State Government are only a facilitator for its successful implementation. Ans. d 7. a) b) c) d) In the parlance of financial investments, the term bear denotes (IAS

EXAM 2010)

An investor who feels that the price of a particular security is going to fall An investor who expects the price of particular shares to rise A shareholder or a bondholder who has an interest in a company, financial or otherwise Any lender whether by making a loan or buying a bond

Ans. a 8. 1.) 2.) 3.) Consider the following actins by the Government: (IAS Cutting the tax rates Increasing the government spending Abolishing the subsidies

EXAM 2010)

4.) In the context of economic recession, which of the above actions can be considered a part of the fiscal stimulus package? a) b) c) d) 1 and 2 only 2 only 1 and 3 only 1, 2 and 3

Ans. a 9. 1.) 2.) With reference to India, consider the following statements: (IAS

EXAM 2010)

The Wholesale Price Index (WPI) in India is available on a monthly basis only As compared to Consumer Price Index for Industrial Workers (CPI(IW)), the WPI gives less weight to food articles.

Which of the statements given above is/are correct? a) b) c) d) 1 only 2 only Both 1 and 2 Neither 1 nor 2


Ans. c 10. With reference to the National Investment Fund to which the disinvestment proceeds are routed, consider the following statements: (IAS EXAM 2010) 1.) 2.) 3.) 4.) The assets in the National Investment Fund are managed by the Union Ministry of Finance The National Investment Fund is to be maintained within the Consolidated Fund of India Certain Asset Management Companies are appointed as the fund managers A certain proportion of annual income is used for financing select social sectors.

Which of the statements given above is/are correct? a) b) c) d) 1 and 2 2 only 3 and 4 3 only

Ans. c 11. In India, the tax proceeds of which one of the following as a percentage of gross tax revenue has significantly declined in the last five years? (IAS EXAM 2010) a) b) c) d) Service tax Personal income tax Excise duty Corporation tax

Ans. c 12. Consider the following statements: (IAS

EXAM 2010)

In India, taxes on transactions in Stock Exchanges and Futures Markets are 1.) 2.) Levied by the Union Collected by the States

Which of the statements given above is/are correct? a) b) c) 1 only 2 only Both 1 and 2



Neither 1 nor 2

Ans. a 13. Consider the following: ( IAS 1.) 2.) 3.) Fringe Benefit Tax Interest Tax Securities Transaction Tax

EXAM 2009)

Which of the above is/are Direct Tax/Taxes? a) b) c) d) 1 only 1 and 3 only 2 and 3 only 1, 2 and 3

Ans. d 14. Which one of the following is correct? (IAS

EXAM 2006)

Fiscal Responsibility and Budget Management Act (FRBMA) concerns a) b) c) d) Fiscal deficit only. Revenue deficit only. Both fiscal deficit and revenue deficit. Neither fiscal deficit nor revenue deficit.

Ans. c 15. Which one of the following is the correct statements? (IAS Service tax is a/an a) b) c) d) Direct tax levied by the Central Government. Indirect tax levied by the Central Government. Direct tax levied by the State Government. Indirect tax levied by the State Government.

EXAM 2006)

Ans. b 16. Consider the following statements: (IAS

EXAM 2005) 22


Global Trust Banks has been amalgamated with the Punjab National Bank.

2.) The second report of the Kelkar Committee dealing with direct and indirect taxes has maintained its original recommendations including the abolition of exemption relating to housing loans. Which of the statements given above is/are correct? a) b) c) d) 1 only 2 only Both 1 and 2 Neither 1 nor 2

Ans. b 17. Which of the following is not a recommendation of the task force on direct taxes under the chairmanship of Dr Vijay L. Kelkar in the year 2002? (IAS EXAM 2004) a) b) c) d) Abolition of Wealth Tax Increase in the exemption limit of personal income to Rs. 1.20 lakh for widows Elimination of standard deduction Exemption from tax on dividends and capital gains from the listed equity

Ans. b 18. Consider the following statements: (IAS 1.)

EXAM 2004)

Reserve Bank of India was nationalized on 26 January, 1950

2.) The borrowing programme of the Government of India is handled by the Department of Expenditure. Ministry of Finance Which of the statements given above is/are correct? a) b) c) d) 1 only 2 only Both 1 and 2 Neither 1 nor 2

Ans. d 19. With reference to the Indian Public Finance, consider the following statements: (IAS 1.) 2.)

EXAM 2002)

External liabilities reported in the Union Budget are based on historical exchange rates. The continued high borrowing has kept the real interest rates high in the economy.


3.) 4.)

The upward trend in the ratio of Fiscal Deficit to GDP in recent years has an adverse effect on private investments. Interest payments is the single largest component of the non-plan revenue expenditure of the Union Government.

Which of these statements are correct? a) b) c) d) 1, 2 and 3 1 and 4 2, 3 and 4 1, 2, 3 and 4

Ans. c 20. Indias external debt increased from US $ 98,158 million as at the end of March 2000 to US $ 100,225 million as at the end of March 2001 due to increase in (IAS EXAM 2002) a) b) c) d) Multilateral and bilateral debt Rupee debt Commercial borrowings and NRI deposits Borrowings from International Monetary Fund

Ans. a 21. A country is said to be in a debt trap if (IAS a) b) c) d)

EXAM 2002)

It has to abide by the conditionalities imposed by the International Monetary Fund It has to borrow to make interest payments on outstanding loans It has been refused loans or aid by creditors abroad The World Bank charges a very high rate of interest on outstanding as well as new loans

Ans. b 22. Consider the following: (IAS 1.) 2.) 3.) Market borrowing Treasury bills Special securities issued by RBI

EXAM 2001)

Which of these is/are components of internal debt? a) b) 1 only 1 and 2


c) d)

2 only 1, 2 and 3

Ans. d 23. Match List I with List II and select the correct answer using the codes given below the Lists: (IAS List I A.) Fiscal deficit B.) C.) Budget deficit Revenue deficit List II 1.) Excess of total Expenditure over Total Receipts 2.) Excess of Revenue Expenditure over Revenue Receipts 3.) Excess of Total Expenditure over Total Receipts less borrowings 4.) Excess of Total Expenditure over Total Receipts less borrowings and Interest Payments Codes: A a) b) c) d) 3 4 1 3 B 1 3 3 1 C 2 2 2 4 D 4 1 4 2

EXAM 2001)

D.) Primary deficit

Ans. a 24. Consider the following taxes: (IAS 1.) 2.) 3.) 4.) Corporation tax Customs duty Wealth tax Excise duty

EXAM 2001)

Which of these is/are indirect taxes? a) b) c) d) 1 only 2 and 4 1 and 3 2 and 3


Ans. b 28. In the context of Indian economy, consider the following statements: ( IAS 1.) 2.) The growth rate of GDP has steadily increased in the last five years. The growth rate in per capita income has steadily increased in the last five years.

EXAM 2011)

Which of the statements given above is/are correct? a) b) c) d) 1 only 2 only Both 1 and 2 Neither 1 nor 2

Ans. d 29. Economic growth is usually coupled with ( IAS a) b) c) d) Deflation Inflation Stagflation Hyperinflation

EXAM 2011)

Ans. b 30. With reference to Indian economy, consider the following statements: (IAS 1.) 2.)

EXAM 2010)

The Gross Domestic Product (GDP) has increased by four times in the last 10 years The percentage share of Public Sector in GDP has declined in the last 10 years.

Which of the statements given above is/are correct? a) b) c) d) 1 only 2 only Both 1 and 2 Neither 1 nor 2

Ans. b 31. Which one of the following is the correct sequences in the decreasing order of contribution of different sectors to the Gross Domestic Product of India? (IAS EXAM 2007) a) Services Industry Agriculture


b) c) d)

Services Agriculture Industry Industry Services Agriculture Industry Agriculture Services

Ans. a 32. With reference to the Indian economy consider the following activities: (IAS 1.) 2.) 3.) 4.) Agriculture, Forestry and Fishing Manufacturing Trade, Hotels, Transport and Communication Financing, Insurance, Real Estate and Business Services

EXAM 2002)

The decreasing order of the contribution of these sectors to the Gross Domestic Product (GDP) at factor cost at constant price (2000-01) is a) b) c) d) 3, 1, 2, 4 1, 3, 4, 2 3, 4, 1, 2 1, 3, 2, 4

Ans. d 33. The most appropriate measure of a countrys economic growth is its (IAS a) b) c) d) Gross Domestic Product Net Domestic Product Net National Product Per Capita Real Income

EXAM 2001)

Ans. d 34. The term National Income represents (IAS a) b) c) d)

EXAM 2001)

Gross national product at market prices minus depreciation Gross national product at market prices minus depreciation plus net factor income from aborad Gross national product at market prices minus depreciation and indirect taxes plus subsidies Gross national product at market prices minus net factor income from abroad

Ans. c


35. The growth rate of per capita income at current prices is higher than that of per capita income at constant prices, because the latter takes into account the rate of (IAS EXAM 2000) a) b) c) d) Growth of population Increase in price level Growth of money supply Increase in the wage rate

Ans. b 36. In an open economy, the national income (Y) of the economy is: (IAS

EXAM 2000)

(C, I, G, X, M stand for Consumption Investment, Government Expenditure, total exports and total imports respectively). a) b) c) d) Y=C+I+G+X Y=C+I+GX+M Y = C + I + G + (X M) Y=C+IG+XM

Ans. c 37. Persons below the poverty line in India are classified as such based on whether (IAS a) b) c) d) The yare entitled to a minimum prescribed food basket They get work for a prescribed minimum number of days in a year They belong to agriculture labourer household and the scheduled caste/tribe social group Their daily wages fall below the prescribed minimum wages

EXAM 1999)

Ans. a

Day 20
Indian Economics
Chapters: Fiscal Policy, Inflation and Convertibility of Rupee Fiscal Policy 1. Difference between Fiscal and Monetary Policy. Monetary Policy was discussed yesterday in detail. 2. Objectives and tools of Fiscal Policy 28

3. 4. 5. 6.

Fiscal Policy Tools Plan and Non Plan Expenditure: Meaning and Difference Difference between Tax and Non Tax Revenue Categorization of Taxes: Direct v/s Indirect, Progressive v/s Regressive, Ad-valoram v/s Specific duty 7. Fiscal Deficit and its importance in the Economy 8. FRBM Act 9. Important Terms related to Fiscal Policy

Fiscal Policy

Fiscal policy refers to the expenditure a government undertakes to provide goods and services and to the way in which the government finances these expenditures. Fiscal policy of a country is concerned with governments expenditure and revenue. Fiscal policy decides on the size and pattern of flow of expenditure from the government to the economy and vice versa. Thus it is important to realize that changes in fiscal policy affect both aggregate demand and aggregate supply.

Objectives of fiscal policy in India

The major objectives of fiscal policy are as follows

Resource mobilization and their efficient allocation To reduce income inequalities through progressive taxation To control inflation To facilitate balance regional development Employment generation Capital formation and growth in national income To allocate resources for social and developmental objectives To reduce Balance of Payment deficits

Tools of fiscal policy

The three tools related to fiscal policy are:

Public expenditure Government borrowings Income of the government

1. Public Expenditure

Public expenditure is incurred in the form of purchases of goods and services, transfer payments and lending. The public expenditure incurred by the government is divided under two heads i.e. Plan Expenditure and Non Plan expenditure. Plan Expenditure


The Five year plans in the country assign the resources for the Plan expenditure. The plan expenditure is developmental in nature. Plan expenditure refers to the expenditure incurred by the Central Government on Programs/Projects, which are recommended by the Planning Commission. Non Plan Expenditure According to the ministry of finance non-Plan expenditure is a generic term, which is used to cover all expenditure of Government not included in the Plan expenditure. It includes both developmental and non-developmental expenditure. Part of the expenditure is obligatory in nature e.g. interest payments, pensionary charges and statutory transfers to States. A part of the expenditure is an essential obligation of a State, e.g. Defense and internal security. Expenditure on maintaining the assets created in previous Plans is also treated as Non-plan expenditure.

2. Governments Income
The revenue earned by government can be categorized under two heads i.e. tax and non-tax revenue. The, other chief elements which are included in the concept of public receipts but excluded from that of public revenue, are receipts from public borrowings and from the sale of public assets. Tax Revenue A tax is a compulsory charge imposed by a legitimate public authority. A tax is a compulsory contribution imposed by a public authority, irrespective of the exact amount of service rendered to the tax payer in return, and not imposed as a penalty for any legal offence. The taxes could be classified on various aspects like: Direct and Indirect Tax: Direct taxes are those taxes which are non-transferable and have to be borne by the persons/entities on which they are imposed. The examples of direct tax are Income Tax, Corporation Tax, Capital Gains Tax, Estate Duty, Gift Tax, and Wealth Tax . On the other hand indirect taxes are those which could be borne partially or fully by the persons/entities other than on which they are imposed. The examples of indirect tax are sales tax, VAT etc Progressive Tax and Regressive Tax: Progressive tax in that tax in which tax rate is directly proportional to the income levels. The income tax in India is progressive in nature. The purpose of progressive tax is to bridge the gap of income inequalities in the society. The regressive tax is opposite to that of progressive where tax rate is inversely proportional to the income levels. Ad valorem and specific duty: Ad valorem refers to the kind of taxation which is levied as per the value of a commodity. However specific duty is charged as per some attribute of the commodity for instance length etc.

Non Tax Revenue

The non-tax revenues of the Union Government include (A) Administrative receipts: This refers to the interest payment on loans received by the Central government on the loans given to the states. (B) Net contribution of Public sector undertaking Railways Posts and Telegraphs Currency and mint Other


(C) Other revenues which include revenue from forests, opium, irrigation, electricity and dividends due from commercial and other undertakings. (D) Fees are another important source of revenue for the government. The government provides certain services and charges certain fees for them. For example, fees are charged for issuing of passports, driving licenses, etc. (E) Fines or penalties 3. Public Debt A welfareist state wants to provide a great deal of goods and services to its people. To provide these goods and services the government requires mobilization resources. While not having the immediate revenue to fund that expenditure through tax and non tax revenue sources, the government can turn to the capital markets to borrow the necessary money. Borrowings could be from the Reserve Bank of India (RBI), from the public by floating bonds, financial institutions, banks and even foreign institutions. Borrowing from capital market is done primarily by issuing securities, either Treasury Bills or Treasury Bonds. Fiscal Deficit

The fiscal deficit is the difference between the government's total expenditure and its total receipts (excluding borrowing). When the government fails to match its expenses with what it earns and thus has to resort to deficit financing. Fiscal deficit is a measure of borrowings by the government in a financial year.
Fiscal deficit- The two sides of the coin

According to economist like Keynes the increase in public expenditure will act as a stimulus for the growth. Thus economist like Keynes have advocated small fiscal deficit. According to Keynes rise in public expenditure would create demand which would result into the growth. Logically, there are two ways in which the fiscal deficit can be reduced by raising revenues or by reducing expenditure. Given the character of our State and the constraints of a liberalized economy, the government has not increased revenues. The main impact of the policy of reduced fiscal deficits has therefore been on the government's expenditure. This has had a number of effects. First, government investment in sectors such as agriculture has been cut. Secondly, expenditure on social sectors like education, health and poverty alleviation has been reduced leading to greater hardship for the unprivileged sections in the society. There is other side of the coin as well. If we incur fiscal deficits together with revenue deficits, it means we are using up borrowed resources for current consumption which may raise growth in the short term, but on the virtue of our future earnings. The rise in public expenditure also results in the increase in money supply in the economy which can result into inflation. However the fiscal deficit is not the only cause of inflation. During the late 1990s the rate of inflation has fallen even when the fiscal deficit was as high as 5.5% of GDP. Likewise in the recent past (200810) the inflation was high irrespective of the fact that the fiscal deficit was under control. Fiscal deficit results into increase in debt and interest obligations. As a result a large share of public resources goes for meeting debt obligations thereby leaving that much less for desirable expenditures such as physical infrastructure (e.g.: roads, power) and social infrastructure (e.g.: education, health). Thus when the fiscal deficit is seen as an instrument to augment the growth the following crucial aspects are need to be addressed: There should be no revenue deficit


Quality of fiscal deficit: It is very important to choose the sectors in which the borrowed money is utilized. It must be keep in mind that the fiscal deficit would result in growth only if the borrowed money is spent in the productive works like producing human capital, physical capital (infrastructure) etc. On the other hand fiscal deficit used in non productive purposes would be counterproductive. The time lag: There is always the time lag between the pumping of money in the economy (deficit financing) and the point at which it start showing the effects. The smaller is the time lag, better it id for the economy. Ideally, the yield on investment on borrowed funds must be higher than the cost of borrowing.

Fiscal Responsibility and Budget Management Act (FRBM)

The FRBM Act was enacted by Parliament in 2003 in order to institutionalize the fiscal discipline. The following were the major features of the act: This act imposes limits on fiscal and revenue deficit. As per the target, revenue deficit, which is revenue expenditure minus revenue receipts, have to be reduced to nil in five years beginning 2004-05. Each year, the government is required to reduce the revenue deficit by 0.5% and fiscal deficit by 0.3% of the GDP. The fiscal deficit is required to be reduced to 3% of the GDP by 2008-09.

However, due to the 2007 international financial crisis, the deadlines for the implementation of the targets in the act was initially postponed and subsequently suspended in 2009. As a result, the fiscal deficit doubled to that of the target i.e. 6% of GDP during 2008-09, the revenue deficit is nowhere near being eliminated as envisaged by the Act. In 2011, given the process of ongoing recovery, Economic Advisory Council publicly advised to reconsider reinstating the provisions of the Act. Proposed amendments in the FRBM Act There is the demand to have a cushion in FRBM Act to make it flexible to meet the unforeseen contingencies. This demand has come as a result of the ongoing debt crisis in Europe and soaring oil prices due to the turmoil in Middle East. The logic behind the demand is that the fixed and rigid targets as envisaged by FRBM Act are impossible to achieve in certain exceptional situations like recession etc. Therefore the government should have the flexibility of not binding to the rigid targets in the contingencies, however otherwise these targets should be a binding on the government.

Some terms related to Fiscal Policy

Components of Budget: There are two components of union Budget i.e. it comprises of the revenue budget and the capital budget. Revenue Budget: The revenue budget consists of revenue receipts of the government (revenues from tax and other sources), and its expenditure. It includes day to day expenditure and income of the government like interest on debt, challans etc Capital Budget: The capital budget is different from the revenue budget as its components are of a long-term nature. Capital receipts are government loans raised from the public, government borrowings from the Reserve Bank and treasury bills, loans received from foreign bodies and divestment of equity holding in public sector enterprises etc. Capital payments are capital expenditures on acquisition of assets like land, buildings, machinery, and equipment. Investments in shares.


Budgetary Deficit: Budgetary Deficit is the difference between all receipts and expenditure of the government, both revenue and capital. Revenue Deficit: Revenue deficit refers to a condition when the revenue expenditure of the government is more than the revenue receipts. Primary Deficit: It is the deficit which is derived after deducting the interest payments component from the total deficit of any budget. Mathematically, it is Fiscal deficit minus the interest payments. Monetized Deficit: Monetized deficit is when the government prints money to pay down the deficit. As a result of this, the economy gets monetized or the money supply increases in the economy. Twin Deficit: Twin deficits refer to a situation where an economy is running both a fiscal deficit and also a deficit on the current account of the balance of payments. Laffer curve: Laffer curve is a theoretical representation of the relationship between government revenue raised by taxation and all possible rates of taxation. Zero Based Budgeting: In traditional incremental budgeting, departmental managers justify only variances versus past years, based on the assumption that the "baseline" is automatically approved. Zero based budgeting is a method of budgeting in which all expenses must be justified for each new period. Zero-based budgeting starts from a zero base and every function within an organization are analyzed for its needs and costs every year Outcome Budget: It means a qualitative exercise under which qualitative impact of expenditure incurred on a certain project has to be assessed. For instance if through a scheme some amount of money is spent, the outcome budget would measure to what extent the scheme has produced the outcomes or the impact on the society.

Study Material: http://www.halfmantr.com/display-ecomonic-issue/250-inflation

1. 2. 3. 4. 5.

Concept and meaning of Inflation Various terms related to Inflation Causes of Inflation Fiscal, Monetary and Administrative mechanism to curb Inflation WPI, CPI and PPI

Inflation: Concepts and Meaning

Inflation: meaning
Inflation refers to a state in the economy where too much money chases too little goods and services. In such state there is general increase in the price level of goods and services over a period of time which results into fall of value of money.

1. 2. 3. 4. Creeping Inflation: It is the mildest form of inflation where prices rise by not more than 3% per annum. Walking Inflation: In the case of walking inflation the prices rise by more than 3% but less than 10% per annum. Running Inflation: An economy is said to be encountering the Running Inflation, when the rate of inflation is 10% to 20% per annum (double digit inflation rate). Galloping Inflation: If the prices rise by more than 20% but less than 1000% per annum , galloping inflation occurs. It is also referred to as jumping inflation. India has been witnessing galloping inflation since the second five year plan period.



6. 7. 8. 9.

Hyperinflation: Hyperinflation refers to a situation when prices rise above 1000% per annum (quadruple or four digit inflation rate). In case of hyperinflation there is such rapid rise in the price level and fall in value of money that people start losing faith in the paper currency of the government. During a worst case scenario of hyperinflation paper money becomes worthless. Two worst examples of hyperinflation recorded in world history are of those experienced by Hungary in year 1946 and Zimbabwe during 2004-2009. Stagflation: It is a situation where inflation coexists with stagnation i.e. recession and unemployment. Classical economics referred this situation as paradoxical. Recession: It is defined as the situation in the economy which is marred by a negative growth rate of GDP for two or more successive quarters. Core Inflation: It refers to inflation which does not include the impact of such factors which are beyond the control of the government . For example international oil prices etc. Depression: It an extreme form of recession where there is contraction in business cycles, fall in demand and investments, rise in unemployment levels, which results to business pessimism and total collapse of economy.

In technical terms an economy is encountering depression if either of the following two conditions holds good: A decline in real GDP exceeding 10%. A recession lasting 2 or more years i.e. negative growth rate of GDP for eight or more successive quarters.

Causes of Inflation
Inflation may be caused by either an increase in the money supply (demand pull) or a decrease in the quantity of goods (cost push) being supplied. Demand pull factors: 1. 2. 3. 4. 5. Increase in population of the country Rise in money supply due to deficit financing or printing of excessive currency Rises in wage and salaries in the country Increase in black money or parallel economy Rise in expenditure of the government especially under the non-plan expenditure head.

Cost push factor: 1. 2. 3. 4. 5. Shortfall of production in the agriculture mainly because of erratic rainfall during monsoon Rise in international fuel prices Rise in income, wages and salaries Speculation, black marketing and hoarding etc. Increase in the import bill due to price hike in the international market especially for inputs like machinery and raw materials.

At any given point of time inflation is the result of a mix of these two factors.

Consequences of Inflation
On development:

Inflation severely affects the condition of marginalized and economically weaker section of the society. It hampers the food security by making the food commodities unaffordable. It also reduces the spending on access to basic healthcare and education when the bulk of the earnings of the poor household goes in the food bill.


Inflation escalates the cost of various developmental and infrastructure projects, thus retarding their pace and feasibility.
On income inequality: Inflation can result into the malpractices like speculation, black marketing and hoarding. It can also lead to increase in black money. All these factors augment the income inequalities and corruption in the society . On exports and Balance of payments: Inflation makes exports less competitive due to higher pricing. As a result the exports might get reduce at the same time imports may rise. This could distort the trade pattern and severely affect the Balance of payment and foreign exchange reserves of the country.

Mechanism to curb Inflation

The mechanism to curb inflation can be divided into three broad categories i.e. monetary policy, fiscal policy and administrative measures: Monetary Policy

Through monetary policy the supply of money is regulated is the market. Inflation refers to a state in the economy where too much money chases too little goods and services, thus the aim of monetary policy to curb inflation is to reduce the money supply from the market. By adjusting Bank Rate, Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), Repo rate, Reverse repo rate etc the central bank can reduce the money supply from the market.
Flip side of monetary controls

The reduced money supply or the dear money policy makes the credit and loans dearer. This could hamper the growth of economy, where the dear money policy acts as a disincentive for investment. Fiscal Policy

The aim of fiscal policy while curbing the inflation is to reduce the government expenditure. The aim is to especially reduce the spending under the non plan expenditure. On the other hand the reduction in indirect taxes like VAT, sale tax etc could also help in curbing the cost push inflation.
Flip side of fiscal controls

In the country like India where bulk of population cannot afford the goods and services at market rate, the reduction in government expenditure that too under non plan expenditure (which includes subsides and transfer payments) would severely affect the agenda of socio-economic transformation and inclusive growth. Furthermore, the reduction in indirect taxes could result in reduction in income of the state.
Administrative measures

The following can be the administrative mechanisms to curb the inflation in the country: 1. Curbing the malpractices like black marketing and hoarding.


2. Strengthening the Public Distribution System (PDS) in the country 3. Timely liberalizing the import of such essential commodities like sugar, edible oils etc where there had been shortfall. 4. Temporary ban on the export of such essential commodities which have been facing shortfall in the domestic markets. For e.g. in 2008-09, government of India banned the export of nonBasmati rice.
Wholesale Price Index (WPI)

WPI is based on the price prevailing in the wholesale markets or the price at which bulk transactions are made. In India, a total of 676 commodities data on price level is tracked through WPI which is an indicator of movement in prices of commodities in all trade and transactions. The base year for the porpose of calculation is 2004-05. It is also the price index which is available on a monthly basis. The Ministry of Commerce and Industry has recently made a decision to discontinue the weekly Wholesale Price Index (WPI) of primary articles and fuel and power components. The primary articles and fuel and power components are traditionally some of the most volatile components of price index components. The Cabinet Committee on Economic Affair believes that these data add little analytical value to the existing monthly WPI data but possibly misrepresent changes in Indias inflation scenario.
Issues with WPI

WPI accounts for wholesale prices, however they are different from the retail prices or the prices at which the end consumer buys the goods. Thus WPI at times might not reflect the real picture. WPI doesnt take the price of services into consideration WPI is too general and cannot be used for specific purposes for different sectors. Some commodities may have higher weights during a particular season and may not be consumed during other. For example, woollen textiles are part of the consumption basket only for four months in a city like Chandigarh. So a constant revision of weights is required in this regard, which WPI does not take into consideration. Consumer Price Index (CPI) is much more representative index for common man as in this index; nearly 57% weight-age is given to the food and primary articles

Need for Producer Price Index (PPI)

Producer Price Index (PPI) would capture the price levels at the producer level itself . Many countries across the world have switched over to Producer Price Index. The major effect of PPI could be that it can help to take corrective measures before the inflation effects the end consumer.

Convertibility of Rupee
Convertibility: meaning
Convertibility refers to the ease with which the domestic currency of a country could be exchanged with that of a foreign currency. It also implies that no restriction is imposed on the end use of the currency exchanged. Thus the four connotations that are attached with the convertibility are:


1. Ease of exchange of domestic currency with the foreign currency 2. There is no limit or cap on the amount, to exchange the currency 3. The above two points (1 and 2) hold good irrespective of the purpose of exchange or the end use. 4. All this (1, 2 and 3) happens without the need for permission from a central bank or government entity.
Current account convertibility

It refers to convertibility of a currency for goods and services and transfer payments.
Capital account convertibility

It refers to the convertibility of currency for transfer of claims to money or titles to investment. SS Tarapore committee on Fuller Convertibility defines Capital account convertibility as the freedom to convert local financial assets into foreign financial assets and vice versa.

Difference between Capital account convertibility and Current account convertibility

Current account convertibility allows free inflows and outflows for all purposes other than for capital purposes such as investments and loans. Thus current account convertibility refers to unrestricted exchange of domestic currency with the foreign currency and vice-versa for goods and services, income, and current transfers. Capital account convertibility refers to exchange of currency for investments and borrowings.

Indian scenario
In India we have partial rupee convertibility i.e. the rupee is convertible on the current account but not on the capital account.

Implications of the Capital account convertibility

Capital account convertibility can be instrumental in attracting foreign investment for domestic companies. At the same time it would tender lot of comfort to foreign investor to convert and reconvert their investment into foreign and domestic currencies respectively. Since investment is generally speculative in nature, and without any restriction of any kind this could lead to frequent inflow and outflow of capital resulting into destabilizing of the economy if it is not robust to withstand such fluctuations. The East Asian financial crisis of late 1990s was the result of destabilization of economies of various East Asian countries which adhered to Capital account convertibility without any cushion against the fluctuations.

Lessons to be learnt from the East Asian Crisis

According to Tarapore committee on Fuller Capital Account Convertibility this crisis in East Asian countries arise mainly from inadequate preparedness before liberalization in terms of domestic and external sector policy consolidation, strengthening of prudential regulation and development of financial markets, including infrastructure, for orderly functioning of these markets. Most currency crises arise out of prolonged overvalued exchange rates, leading to unsustainable current account deficits. A transparent fiscal consolidation is necessary and desirable, to reduce the risk of currency crisis.


Should we go for Capital account convertibility?

Capital account convertibility can be advantageous for the country if we are adequately prepared to handle it. Certain preconditions like limiting fiscal deficit, maintaining adequate foreign exchange reserves, controlling inflation and regulating financial markets are must to accrue the benefit from Capital account convertibility. China has become exemplary for the economies for attracting foreign investment and she has been able to grow double digit without convertibility. We are gradually easing the restrictions on the capital inflow which is the main motto for Capital account convertibility as well. However, committed to the agenda of reforms which has now become irreversible we have to gradually moving towards the Capital account convertibility. But lessons from East Asian economies, experience of China and domestic scenario of high inflation and fiscal deficit suggest that there is no dire need to go for the Capital account convertibility at this moment.

1. 2. 3. 4. 5.

Meaning of Convertibility Capital Account and Current Account Indian Scenario in case of Convertibility Recommendations of SS Tarapore Committee Implications of Capital Account Convertibility

Day 21
Indian Economics
Chapters: Growth, Sustainable Development, Right Based Approach Growth, Development and Inclusive Growth
Study Material: http://www.halfmantr.com/display-ecomonic-issue/257-growth-development-andinclusive-growth

1. 2. 3. 4.

Meaning of Growth: quantitative aspect Development: quantitative and qualitative aspect Inclusive growth: Meaning and indicators (from this section there has been regular questions in last couple of years.) Difference between Growth, Inclusive growth, development and sustainable development

Growth, Development and Inclusive Growth

Very often Growth and Development are used interchangeably like synonyms. Till 1960s there was no difference between the two terms. However, off late it is realized that economic development is a


boarder term than economic growth. In 21st century the novel terms like inclusive growth and sustainable development are also coined, thus it is necessary to know the technical differences between these terms and differentiate them from each other.

Economic Growth
Its a quantitative term. It reflects the increase or decrease in the value of goods and services produced in comparison to a reference period. For example an annual growth of 3% of a country means that the value of goods and services produced in the country this year is 3% more vis--vis that of last year. Economic growth can be measured in following two ways:

An increase/decrease in real GDP occurring over a period of time. An increase/decrease in real GDP per capita occurring over time.

The concept of "Growth" suffers from the following limitations:

It gives only an aggregate picture of increase and decrease in production of goods and services. Most importantly its silent on the distribution pattern of the income arising from the production of the goods and services especially to the disadvantageous and marginalized section of the society.

Economic Development
Development is a qualitative term. In normal parlance this term just not takes into account, the increase in the goods and services produced over a period of time but also account for their mode of production and for their equitable distribution in the society. Thus whereas economic growth merely refers to a rise in output, economic development implies changes in technological and institutional organization of production as well as distributive pattern of income. Traditionally it was believed that the benefits from the rapid growth in overall and per capita GNP would gradually trickle down to all the strata of the society. This would result in equitable distribution of the economic and social benefits of growth resulting in up gradation respective living standards of all the sections in the society. Therefore the focus was on rapid growth and the concepts of growth and development were used interchangeably. During 1950s and 1960s many of the Third World Nations did realize the respective economic growth targets. However the living standards of bulk of population in these countries, especially that of the disadvantageous sections, did not change. As a result the trickle down theory was discarded, and following conclusions were drawn: 1. Growth is necessary but not sufficient condition for development. 2. Markets inherently are not people friendly, thus regulations are required to make them people friendly and development oriented. 3. Government interventions are essential for equitable distribution of income.

Inclusive Growth
The concept of economic development talks about increase in the income levels of the masses in general and excluded groups in particular. However, for eradication of poverty, income inequalities


and unemployment in the long run it is necessary that the interventions for augmentation of income level are sustainable in the long run. The inclusive growth approach takes a longer term perspective as the focus is on the productive employment rather than on direct income redistribution, as a means of increasing incomes for excluded groups. In the short run, governments could use income distribution schemes to increase the income level of poor, but transfer schemes cannot be an answer in the long run and can be problematic also in the short run. Inclusive growth focuses on the following parameters:

It focuses on both the pace and pattern of growth. The way growth is generated is critical for accelerating poverty reduction. It focuses on productive employment rather than income redistribution. Hence the focus is not only on employment growth but also on productivity growth.

Sustainable Development
Sustainable development incorporates the dimension of ecology and environment protection . The strongest argument for protecting the environment is the ethical need to guarantee the future generations opportunities similar to the ones availed by the previous generations. It talks about intergenerational and intra generational equities. Sustainable Development envisions increasing the economic growth and translating it into improvements in human lives, without destroying the ecology to protect the opportunities of future generations.

The following table distinguishes the four terms


Term Growth

Focus Area Profits

Key Features Focus on rapid increase of outputs.


Profits and People

Not just outputs but also the distribution of these outputs to people Not just output and distribution of outputs, but also the pattern of distribution and income of people. Takes into account the environment protection as well.

Inclusive Growth

Profits and People

Sustainable Development

Profits, People and Planet (Environment)


Sustainable Development 1. 2. 3. 4.
Background and scope Earth Summit and Agenda 21 Measuring Sustainable development Constraints in Sustainable development

Sustainable Development

In an era where environmental degradation is rampant, climate change is on the anvil and resources are depleting at a rate faster than what we can ever fathom, the term Sustainable Development is oft repeated and often misused. So what is Sustainable Development (SD)? Heres some background on the concept of Sustainable Development.

Industrial revolution was one of the landmark event in the history of mankind. This revolution had far reaching impact on means of production, distribution pattern and access to resources. One of the consequences of this was the fact that industrialization and development became synonyms. This gave bir th to paradigms like industrialize or perish, thus a blind rat race started across the world in pursuit of industrialization and its persistent growth. The protagonists of this ideology were obsessed with the notion of growth and considered industrialization as panacea for all evils on this planet. These protagonists were committed to achieve growth at any cost. The thrust was on unbridled growth and development without paying heed to environmental and social factors. Nonetheless in the late eighties it was realized that the obsession with growth has resulted into more problems than the solutions. It was realized the growth which was earlier considered as panacea is generating public pathologies like inequity and environmental degradation. In pursuit of growth and industrialization the mankind had piled up huge inventory of by-products resulting in the environmental degradation. Ironically, the most marginalized countries and communities across the world had to bear the brunt of these negative externalities resulting in their further exclusion. Thus it was realized that growth alone is not sufficient to make this planet a better place to live in. It was in this background that in 1987, the World Commission on Environment and Development (WCED) convened by the United Nations came out with the Brundtland Report (also known as Our Common Future). The report came out with a simple yet lucid definition of Sustainable Development. It defined Sustainable Development as Development that meets the needs of the present without compromising the ability of the future generations to meet their own needs. This was followed by the United Nations Conference on Environment and Development (UNCED) in Rio de Janeiro in 1992 where a framework was identified (Agenda 21) for global action on Sustainable Development. In the recent times, summits such as the Copenhagen Summit reinforce the need to ensure SD by limiting world temperature increase to 2C by 2050. The recent Copenhagen Conference was held from 7 to 18 December 2009. After the Rio Conference of 1992, the United Nations Conference on Sustainable th nd Development will take place on the 20 and 22 of June 2012. The two main themes of the summit are: 1. 2. Building a Green Economy in the context of poverty eradication and Sustainable Development Building an Institutional framework for Sustainable Development.

The Concept

Sustainable Development revolves around the concepts of needs and limitations. Economic development put human needs in the centre, without thinking about how exploitative we could become towards the resources obsessed with the concepts like growth. The three indicators of Sustainable Development are Economic Growth, Social Equity and Environmental protection. Combining these three, one can understand Sustainable Development as development that leads to economic growth in such a way that the benefits are equitably distributed and the environment is protected so that the future generations can derive the same benefits as we did. Equity is the central concept of Sustainable Development, i.e., everyone should have equal access to resources and profits and no community or section should be made to bear extra environmental burden on account of the activities of a few people/ community/government. The stress is on Intergenerational Equity; equity across different future generations and intragenerational Equity; equity across communities and countries within one generation.

Implications in Policy and Programs

Post the Brundtland report, there was a clamor to modify the policies of the government in line with the concept of Sustainable Development. But there was and still is utter confusion regarding the means to achieve the same. Some were of the view that pumping in high rates of economic growth will bring about equitable use and distribution of resources while others were of the view that economic growth leads to gross imbalances. The Earth Summit in Rio de Janeiro (1992) identified a framework, Agenda 21, to foster global partnership in achieving the goals of Sustainable Development. This covered 4 aspects of Sustainable Development namely economic development, environmental protection, social justice, and democratic and effective governance. Therefore any policy of governments honoring this concept should ensure that their growth model is such that it exemplifies effective governance and ensures social justice and equitable distribution of resources in a manner that does not harm the environment. Countries are adapting to the concept by forming National Strategy on Sustainable Development at the centre and constituting Green Cabinets and the like. But forming committees and strategies alone will not help address the larger issue. A programme/ scheme is said to be sustainable if the said programme/ activity continues even after the key implementing agencys withdrawal. Decentralization and participation of the stakeholders in decision making and implementation should be ensured to achieve the same. Another prerequisite is enabling the communities with appropriate technology; technology that prevents pollution and decreases the reliance on non renewable energy resources. Community members should not only be trained on how to use it, but also regarding the functioning of the technology. Sustainability measures take a long time to realize and show impacts. Therefore there should be continuous evaluation and feedback to ensure that the government is on the right track. Any policy that takes sustainable development into cognizance entails integration of policies in the sphere of environment, economic growth and social justice. Sustainable Development and Climate Change has thrown words like carbon footprints, ecological deficit and the like. These concepts are being increasingly used by both governments and business houses to ensure sustainability and minimal environmental degradation. Carbon footprint is nothing but the amount of carbon dioxide that is released into the atmosphere as a result of ones activities during a given period of time (applies to products and services too). Companies are being forced to track the carbon footprint of their products; right from the sourcing of the raw materials to delivery of the finished goods to the consumers. Virtual Water is another interesting concept developed by Professor John Anthony Allan from Kings College London and the School of Oriental and African Studies. It tracks the amount of water used in production of a product or a service. Such concepts have proved very useful in policy making with respect to Sustainable Development.


The Clean Development Mechanism has been instrumental in promoting Sustainable Development. It is a mechanism through which developed countries invest in green technologies in developing countries so as to reduce their carbon emissions. It provides developing countries the requisite funds to adopt sustainable projects which benefit local communities and developed countries a means to reduce their green house emissions.

Indian Context
Understanding Sustainable Development in the Indian context requires an understanding of the interconnectedness between various variables such as poverty, health, education et al. There are various communities in India which increasingly depend on forests and natural resources for their survival. Their needs could force them to degrade the environment or use it in ways that are undesirable. Therefore there is a need to spread awareness about environment protection and sustainable Joint Forest Management. Traditional practices and arts and crafts should be encouraged as they are more eco friendly. Another factor that has to be looked into is the rate at which the government is pushing the so called development projects. Mining and land related projects top the list. What the government fails to realize is the fact that there is a limit to activities that can be done on the land, continuous and mindless extraction is not a sustainable proposition. Another lesson to be drawn from the Vedanta, Posco and Kundakulam projects is that attaining the trust and consensus of the local community members is a prerequisite to ensuring sustainability of any project. The civil society has acted as a watchdog on both the government and the private business houses. Business houses are increasing taking up the rhetoric of environment sustainability. Though their intentions are questionable, it is still a good start. For example, Coca Cola is encouraging sustainable behavior through recycling their bottles, doing communication campaigns, putting recycling messages on the package et al. Indias commitment to reducing green house emissions has been reinforced by the number of green technologies and projects undertaken by many players in the country. It is estimated that Indias per capita GHG emissions would be less than four tonnes of CO2, which is lower than the global per capita emission of 4.22 tonnes of CO2 in 2005.

Measuring Sustainable Development

Measuring Sustainable Development has been a widely contested topic. The GDP of a country is not a good indicator of Sustainable Development as it does not take into account the negative and positive externalities of a product or service. Even HDI is not a good index for measuring SD as it does not talk about the productive base/ resources of the country. Many countries and organizations have come up with myriad measures of SD; one of them being the concept of Inclusive Wealth, ie, Sustainable development exists if relative to the countrys population its inclusive investment/capital (at constant prices) hasnt reduced. Another popular measure is the Dashboard of Sustainability developed by Consultative Group on Sustainable Development Indices (CGSDI) convened by IISD. It presents the complex relationship between environmental, social and economic variables. It is been increasing used by countries to measure their progress towards Sustainable Development and also towards meeting MDG goals. However, there is no consensus on a common set of indicators to measure SD as there seems to be some difficulty in defining such a broad concept as SD.


Road Ahead and Constraints

Though there has been significant headway in the field of Sustainable Development, there is still a long way to go. One of the key challenges as mentioned earlier is the absence of a common set of indicators. There has to be more consultations and discussions so as to attain clarity regarding the definition of SD. Clean Development Mechanism is a good step towards Sustainable Development, but there are concerns regarding misappropriation of carbon credits. It is feared that these will be cornered by the powerful and the elite instead of benefitting the local communities. Though Carbon credit is a revolutionary concept, it has been misused by the developed and industrialized countries. Carbon credit is a permit that allows countries to emit 1 tonne of carbon dioxide. No doubt developed countries invest in green technologies in developing countries, but the problem arises when such credits are increasingly used to meet the Kyoto commitments without actually reducing pollution and emissions. The decision to contribute towards Sustainable Development has to come from each and every individual. One has to have a sense of the scarcity of resources and accordingly satisfy needs and aspirations. The Archbishop of Canterbury, Dr Rowan Williams made a profound statement when he asked, How do we live in a way that shows an understanding that we genuinely live in a shared world, not one that simply belongs to us? This is a question that individuals and countries ought to introspect upon.

Right Based Approach 1. 2. 3. 4.

Meaning of Right Based approach Difference between need based and right based approach Right Based approach in India Constraints in Right Based approach

Right Based Approach: New paradigm for development

A rights based approach to development is a framework that integrates the norms, principles, standards and goals of the international human rights system into the plans and processes of development. The human rights system and its inherent notion of power and struggle for development is the unique feature of this approach. This approach refuses to simply place the causes of poverty and injustice on individuals or on abstract notions such as society and globalization. The central dynamic of rights based approach is thus about identifying the root causes of poverty, empowering right holders to claim their rights and enabling duty bearers to meet their obligations. Human rights go beyond the notion of physical needs and include a more holistic perspective of human beings in terms of their civil, political, social, economic and cultural roles. Rights based approach is aimed at addressing all these issues.

Human rights came into global discourse after the United Nations passed the universal declaration of human rights in 1948. During the cold war period human rights became one of the major debates between the West and the Soviet Union, which finally ended abruptly after the fall of soviet bloc. After that Western values and ideas on human rights and development have dominated the political discourse across the globe. Human rights organizations such as Human rights watch and Amnesty


international used to focus primarily on documenting human rights violations on the civil and political level. No longer do these organizations focus solely on human rights violations, but also on social, economic and cultural rights. The evolution of human rights organizations and development organizations, which carried the western idea that rights are asserted through responsibilities, duties, transparency, trust and accountability have led to the development of rights based approach. In 2003 various organizations met to develop a common understanding of a human rights based approach based on the principles of universality and inalienability, indivisibility, inter-dependence and inter-relatedness, equality and non discrimination, participation and inclusion, accountability and rule of law. Since then UN has published their standards and steps to a rights based approach to development, many bilateral donor agencies such as CIDA and DFID, and international NGOs such as CARE and OXFAM have taken similar steps.

Rights Based Approach vis--vis Needs Based Approach

Both Rights Based Approach and the Needs Based Approach are nothing else but different approaches to development. Both have the same objective, i.e., to fulfill the basic needs of those underprivileged. But still, there is a stark difference between the two. A need is a necessity which needs to be fulfilled. But, a need that remains unfulfilled will lead to dissatisfaction and can even create survival issues. On the other hand, a right also has a need which if not honored or addressed leads to a violation. Thus, it can be legally and legitimately claimed by an individual who doesnt have his basic needs satisfied. It thus enforces governments to respect, protect and guarantee these rights. But if its just a needs based approach, often beneficiaries are kept waiting since while their basic requirements are identified, the efforts made to get them carried out remains limited to support initiatives to improve service delivery or advocating for their fulfillment. In needs based approach, the focus is on emphasizing meeting needs compared to emphasizing meeting rights. The NBA is focused towards providing input and getting outcome, while rights based pays attention to the process followed to observe that outcome. This is the reason why the process is such that it requires identification of issues to make a need based assessment, only then the proper formation and implementation of the programme can be successfully done. In NBA, individuals are merely objects of development and intervention, whereas in RBA, they are empowered to claim their rights as a result of development intervention. One very significant statement which can clearly open the difference between the two approaches is that in NBA, individuals are said to deserve assistance, i.e, they ideally should get their basic needs satisfied, which again points to the fact that its quite visibly not an obligation. RBA, on the other hand, entitles them to assistance from the duty bearer (generally governments). One thing that most significantly impacts the outcome in RBA compared to NBA is that while NBA focuses on the immediate cause of problems, RBA focuses on the structural causes and their manifestations, thus ensuring that the root causes and those in the periphery all are rooted out of the system. This helps to suppress that need itself and makes the interventions sustainable. Rights based, thus goes beyond fulfillment of physical needs to include a development of human beings. Today, the development agencies which campaign for the fulfillment of their needs any more. They rather talk support underprivileged people as equal human beings in their efforts hence, address the issues of poverty, suffering and injustice in their lives. more holistic approach in are shifting to RBA dont about human rights and to claim their rights and

Rights Based Approach The Indian Context

In India, development was focused on identifying the needs of the poor and developing a system or programmes to adequately cater to their needs. In this process, the poor were considered to be passive agents, not having the ability/resources to pull them out of their vulnerability. Hence the


state adopted a paternalistic form of give away without actually empowering the poor or building their capacity. It was during the same time that the discourse of a Rights based approach was gaining popularity. One of the earliest and most talked approach struggle based on Rights Based Approach was the SEWA (Self Employed Womens Association) movement. This started off in 1978 when a poor bidi roller, Chandabibi, approached SEWA to help her in her struggle against her employers. A long drawn battle, the movement was not only successful in securing their rights but also was instrumental in forcing the government to issue identity cards and low cost government housing for the bidi works. This is a very important aspect of the RBA; it is not just about building their capacity to fight for their rights but also the additional capacity to influence public policies and make claims in defense of ones rights. The movement of poor villagers in Rajasthan that culminated in the Right to Information Act, 2005 demonstrates the power of the poor to make politicians listen and symbolize the best in the Rights Based Approach. It exerted their right to demand details of expenditures and revenues of the government on various schemes/programmes and right to demand for penalizing the corrupt. The Mahatma Gandhi National Employment Guarantee Act (MNREGA) is a step towards implementing the rights based approach. The act tries to create an environment where the poor would push the bureaucracy for their entitlements and rights. This assumes the government takes up its legal obligation to respect, protect and fulfill peoples rights. In India today, there is growing demand for implementing a rights based approach with respect to Right to food, education and health. Right to information and right to services are also the examples of this approach. One can only hope that the rights based approach is implemented in the letter and spirit of the same and there is no dilution to any extent.

Implementation Constraints
Rights based approach to development has met with criticism. It has been said that the N.G.Os are using the phrases rights based approach just to change the terminology of the work theyre doing. At the end of the day, this change in the terminology does not change the characteristics and the impact of the programs being implemented by the non-governmental organizations. Addressing of root causes like for example distribution of food or construction of school to improve the education infrastructure of a particular area is very difficult. It requires large number of people whove skills in different areas which are required for the implementation of the approach. Such stakeholders sharing common values can be as varied as media organizations, or even a bar association. Also, the work has to be done on both the local as well as the national level. Therefore, because of the resource constraints, it becomes really difficult for smaller organizations to practice a rights based approach to development. The entire process can become really cumbersome needing long term planning. Human rights are also a sensitive issue since they address power and injustice. Therefore, a rights based approach can provoke the government and decision makers into retribution.

The road ahead and Conclusion

Rights based approach deepens and strengthens development interventions by drawing new perspectives & supporting a coherent framework that reaches the web of power relations and causes across the society. In this way, rights based approach offers a response to global issues like poverty by providing precise & meaningful tools for development actors by und erstanding the complexities of peoples lives. It is said that it is really difficult for the smaller organizations to gain from the rights based approach because of their smaller capacities. However, if they allow themselves to adapt to the thinking according to their own environment, needs & capacities and take up the application of this approach in a step by step manner and choose those


aspects of the approach which seem the most relevant, they can easily burst into the scene and work their way towards creating a change. Rights based approach is about supporting people who wish to act on their problems and demand their rights on their own and in their own community and help them create and sustain the inspiration and networks to act and to organize themselves. The focus of the organizations practicing a rights based approach should always remain on the vulnerable. They should try and work in networks to broaden their scope and capacity for multifaceted projects. With its focus on better law, better institutions, empowerment of citizens & the root causes of poverty, rights based approach has the potential for transforming the development process in the world. As a concluding thought, rights based approach should always be addressed with sincerity by adhering to the basic human rights principles with a fixed eye on the central objective of achieving justice.

Human Development Index 1. 2. 3. 4. 5.

Limitation of GDP as a true reflector of Human Development Components of HDI, and role of UNDP New Indicators: MPI and GII (very Important for Prelims 2013 as they are coined this year only by UNDP) Rank of India and SAARC countries in HDR 2013 Comparison in Ranking in 2012 and 2013

Human Development Report 2013

United Nation Development Program (UNDP) publishes an annual Human Development Report (since 1990) to measure and analyze developmental progress. Prior to this the indicators like Gross Domestic Product (GDP) and Per Capita Income (PCI) of a country or region were considered as the indicators for measuring the human development. However, in the late 80s of the 20th century it was realized that there were inherent flaws in these indicators as a measure of Human Development. Therefore since 1990 Human Development Report is internationally accepted as the best indicator for measuring Human Development.

Calculation of HDI
Human Development Report the HDI combines three dimensions:

1. A long and healthy life: Life expectancy at birth 2. Mean years of schooling and Expected years of schooling 3. A decent standard of living: GNI per capita (PPP US$)
Norway, Australia and the United States lead the rankings of 187 countries and territories in the latest Human Development Index (HDI), while conflict-torn Democratic Republic of the Congo and droughtstricken Niger have the lowest scores in the HDIs.


Highlights of Human Development Report 2013

This year the HDI report 2013, entitled The Rise of the South: Human Progress in a Diverse World. The following are the key highlights: 1. 2. 3. The rise of the South is radically reshaping the world of the 21st century, with developing nations driving economic growth, lifting hundreds of millions of people from poverty, and propelling billions more into a new global middle class This phenomenon goes well beyond the so-called BRICs, middle income countries often represented by Brazil, Russia, India and China. More than 40 developing countries have made greater human development gains in recent decades than would have been predicted. These achievements, it says, are largely attributable to sustained investment in education, health care and social programs, and open engagement with an increasingly interconnected world. South as a whole produces about half of world economic output, up from about a third in 1990 Latin America, in contrast to overall global trends, has seen income inequality fall since 2000 There is a clear positive correlation between past public investment in social and physical infrastructure and progress on the Human Development Index.

4. 5. 6.

The 2013 Reports Statistical Annex also includes two experimental indices, the Multidimensional Poverty Index (MPI) and the Gender Inequality Index (GII).

The Multidimensional Poverty Index (MPI) examines factors at the household level that together provide a fuller portrait of poverty than income measurements alone. The MPI is not intended to be used for national rankings, due to significant differences among countries in available household survey data. The countries with the highest percentages of MPI poor are all in Africa: Ethiopia (87%), Liberia (84%), Mozambique (79%) and Sierra Leone (77%). Yet the largest absolute numbers of multi dimensionally poor people live in South Asia, including 612 million in India alone.

The GII is designed to measure gender inequalities as revealed by national data on reproductive health, womens empowerment and labor market participation. The Netherlands, Sweden and Denmark top the GII, with the least gender inequality. The regions with the greatest gender inequality as measured by the GII are sub-Saharan Africa, South Asia and the Arab States.

India in Human Development Report 2013

India was at ranked at 136 among 187 countries this year. The report placed India at the nearbottom of countries which have reached 'medium development. India's HDI has risen by 1.7% annually since 1980. Women representation in Parliament in India is only 10.9 percent. The only worse country than India is Iran with 3.1 percent. The country that has best representation of women in Parliament is Nepal with 33.2 percent.


In India, for every 100000 births, 200 women die during the childbirth or due to complications in childbearing. The only countries to have higher Maternal Mortality Ratio than India are Bangladesh (240), Pakistan (260) and Afghanistan (460). The countries with lowest Maternal Mortality Ratio are Sri Lanka (35) and Iran (21).

Also refer the following Chapter of Economic Survey 2013:

Important Sections/Terms to be covered for Prelims 2013:

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

12. 13. 14. 15. 16. 17. 18.

HUMAN AND GENDER DEVELOPMENT: INTERNATIONAL COMPARISON INCLUSIVE DEVELOPMENT Trends in India's social-sector expenditure (The question is expected from this section). Try to remember figures as a percentage of GDP. Special emphasis of figures related to the Total Social Sector Expenditure, Health and Education. Poverty, Inequality and Unemployment SOCIO-ECONOMIC PROFILE OF STATES AND INTER-STATE COMPARISONS: Try to remember the best and worst performing state POVERTY ALLEVIATION AND EMPLOYMENT GENERATION PROGRAMMES Mahatma Gandhi NREGA Box 13.2 related to Socio Economic and Caste Census (SECC) is very important Box 13.3 : Major recent initiatives under the MGNREGA National Rural Livelihood Mission (NRLM)- Aajeevika, Swarna Jayanti Shahari Rozgar Yojana (SJSRY), Aam Admi Bima Yojana (AABY), Rashtriya Swasthya Bima Yojana (RSBY), The Unorganized Workers Social Security Act 2008 and National Social Security Fund, Social Security Agreements (SSAs). Try to remember the Budgetary allocation and contribution of Centre and State government arrangements RURAL INFRASTRUCTURE AND DEVELOPMENT URBAN INFRASTRUCTURE, HOUSING, AND SANITATION SKILL DEVELOPMENT UNIQUE IDENTIFICATION AUTHORITY OF INDIA (UIDAI) EDUCATION and HEALTH WOMEN AND CHILD DEVELOPMENT WELFARE AND DEVELOPMENT OF SCS, STS, OBCS, AND OTHER WEAKER SECTIONS

Public Health: Study Material

What is Universal Health Coverage?

Universal Health Coverage (UHC) refers to equitable access for all Indian citizens, resident in any part of the country, to affordable, accountable, appropriate health services of assured quality as well as public health services addressing the wider determinants of health, with government being enabler and guarantor. 65th World Health Assembly, 2012 held in Geneva considered Universal health coverage as the single most powerful concept that public health has to offer.


Health indicators in India: One of the poorest in the world

India has one of the unhealthiest populations in the world. In our country about 79% children are anemic, 45% are malnourished and more than 50% children are underweight. India accounts for 25% of child mortality in the world. The Infant Mortality Rate (IMR) and Maternal Mortality Rate (MMR) in India are very high and so iS the number of un-institutional deliveries. The lifestyle diseases like hypertension, diabetes and cardiovascular diseases are also increasing in India.

Need for Universal Health Coverage

The right to good health is of paramount importance. Its sad that we the worlds most populous democracy, cant guarantee that to our citizens. India has the most inequitable healthcare scenario feasible. India currently is facing the challenge of escalating cost of private health care. The high insurance premiums are not affordable by the bulk of population. The cost of most of the life saving drug is also witnessing an upward trend. The government spending on healthcare is grossly inadequate in India. It spends about 1% of the total GDP on healthcare. This has led to very high out-of-pocket expenditure for the general public. This means that 78% of all spends on healthcare are out-of-pocket and 72% of this is on drugs alone. Its estimated that 39 million are forced into poverty every year because of these spends.

Other Issues in India related to Public Health:

The following are the other issues which are related to the Public Health in India: 1. 2. About 10 to 25% of the drugs available in the market are spurious. There is a strong nexus between doctors and drug manufacturers/sellers. Doctors get tangible benefits by prescribing the drugs manufactured by a particular company. 3. India does not have appropriate code for Medical shops selling Schedule drugs without prescription of the doctor 4. The rights of patients are often not respected. 5. The billing of the patients in the private hospitals are very often non transparent. 6. There is a huge urban-rural divide in terms of quality health services. More than 50% of rural population does not have access to quality health services. 7. In states like Uttar Pradesh, the high level corruption cases are reported out of the funds of National Rural Health Mission 8. The health infrastructure is very poor in India. 9. Doctor to Patient ratio is very inadequate in India, it is about 1:1700 in our country. This ratio as prescribed by WHO is 1:300 10. The geographical presence of Medical Colleges is very unevenly distributed in India. About 80% of these are located in South India. The presence of these colleges is very low in North and North Eastern part of the country. 11. Brain Drain is one of the major constraint that the country is facing regarding the doctors from the premium Indian institutions like AIIMS 12. At present Public Sector provides health care facilities to only 22% of the total population.

Suggestions for Universal Health Coverage in India:

The following are the recommendations of the High Level Expert Group formed by Planning Commission for UHC.
1. It is essential to ensure availability of free essential medicines by increasing public spending on drug procurement. An increase in spending from present 0.1% to 0.5% of GDP would ensure universal access to essential drug and reduce out of the pocket expenditure.



The government must use general taxation as the principle source of health care financing- plus deductions for the health care from salaried individuals and tax payers. 3. There should be no fees for use of health care services under UHC. 4. Majority of the health care spending should go for primary health care, curative services at primary levels, screening for risk factors at population level. 5. All Government funded insurance schemes should, over time, be integrated with UHC system, and a system of National Health Entitlement Card must be introduced. 6. A National Health Package offering essential health services must be designed as part of citizen entitlement. 7. The government must facilitate well defined service delivery partnership with private sector as provider and government as purchaser under strong regulation, accreditation and supervisory framework. 8. In urban areas to rationalize health services and focus on the health needs of poor. 9. To establish National Health Regulatory and Development Authority to regulate and monitor public and private health care providers with powers of enforcement and redress. 10. Train enough health care providers and workers to achieve WHO density of at least 23 health workers per 10,000 population.


Health Indicators in India....

Public Health is one of the best reflection of Human Development in a country. India is one of those counrty where the spending on Public Health in proportion to percentage of GDP is one of the lowest in world. In this article we have covered the following indicators:

1. 2. 3. 4. 5.

Infant Mortality Rate Maternal Mortality Rate Under Five Mortality Rate Institutional deliveries Life Expectancy at Birth

Infant Mortality Rate

Infant Mortality Rate means number of infant (below one year deaths) per 1000 live births . Infant Mortality Rate which was 50 in 2009 and 47 in 2010 has declined to 44 as per the Sample Registration System (SRS) Bulletin, 2012. However, there are again variations all over country. For rural areas, the figure is 48 while for the urban areas it is 29. In the bigger states, Kerala has the best rate of 12 while Madhya Pradesh is the worst with IMR of 59. IMR is one of the indicators for the Millennium Development Goals (MDG) and a target of 28 has been set by the year 2015. As per MDG Report, 2011, though IMR for the country as a whole declined by 30 points (rural IMR by 31 points vis--vis urban IMR by 16 points) in the last 20 years at an annual average decline of 1.5 points, it declined by three points between 2008 and 2009. With the present improved trend due to sharp fall during 2008-09, the national level estimate of IMR is likely to be 45.04 which is short of the target.

Under Five Mortality Rate

Under Five Mortality Rate means number of children who died before attaining five years of age. As per data provided by the Census in SRS bulletin, 2011, Under Fiver Mortality Rate in 2009 was 64 and showed an improvement of 5 points over 69 of 2008. This is monitored as one of the indicators of MDG and a target of 28 has set for 2015. As per MDG Report, 2011, India is expected to reach the figure of 54 and likely to miss the target.


Maternal Mortality Ratio (MMR) and Institutional Deliveries

Maternal Mortality Ratio (MMR) means the number of women aged 15-49, who die due to any cause relating to pregnancy during pregnancy or child birth or within 42 days relating to pregnancy per 100,000 live births. MMR has reduced from 254 per 100000 live births in 2004-06 to 212 per 100000 live births in 2007-09 (SRS), a reduction of 42 points over a three year period or 14 points per year on an average. Maternal Mortality Ratio is also being monitored under Millennium Development Goals as per which MMR has to be reduced to 109. As per MDG Report, 2011, expected figure to be reached by 2015 is 139, thus falling short of the target, though sharper decline of 16% during 2003-06 and 17% during 2006-09 can be considered to matter of some relief. As regard the institutional deliveries, the rate of increase in coverage of institutional deliveries in India is rather slow. It increased from 26% in 1992-93 to 47% in 2007-08. As a result, the coverage of deliveries by skilled personnel has also increased almost similarly by 19 percentage points from 33% to 52% during the same period. With the existing rate of increase in deliveries by skilled personnel, the likely achievement for2015 is only to 62%, which is far short of the targeted universal coverage

Life Expectancy at birth

Life expectancy at birth means the age up to which a new born is expected to live. As per data made available by SRS Bulletin, life expectancy has considerable improved from 49.7 years in 1970-75 to 66.1 years in 2006-10. However, this is quite less in comparison to the developed countries while life expectancy is usually above 80. Life expectancy is not uniform and there are variations between male and female, rural and urban and also in various states.

Questions from Previous Year IAS Exam

1. In the last one decade, which one among the following sectors has attracted the highest Foreign Direct Investment into India? ( IAS Exam 2004) a) b) c) d) Chemicals other than fertilizers Services sector Food processing Telecommunication

Ans. d 2. 1.) 2.) Consider the following statements: (IAS

Exam 2004)

The Oil Pool Account of Government of India was dismantled with effect from 1 April 2002 Subsidies on PDS kerosene and domestic LPG are borne by Consolidated Fund of India

3.) An expert committee headed by Dr RA Mashelkar to formulate a national auto fuel policy recommended that Bharat State-II Emission Norms should be applied throughout the country by 1 April 2004 Which of the statement given above are correct? a) b) 1 and 2 2 and 3


c) d)

1 and 3 1, 2 and 3

Ans. a 3. 1.) Consider the following statements: (IAS

Exam 2003)

The maximum limit of shareholding of Indian promoters in private sector banks in India is 49% of paid up capital.

2.) Foreign Direct Investment up to 49 percent from all sources is permitted in private sector banks in India under the automatic route. Which of these statements is/are correct? a) b) c) d) Only 1 Only 2 Both 1 and 2 Neither 1 nor 2

Ans. b 4. With reference to Government of Indias decisions regarding Foreign Direct Investment (FDI) during the year 2001 02, consider the following statements: ( IAS Exam 2003) 1.) Out of the 100% FDI allowed by India in tea sector, the foreign firm would have to disinvest 33% of the equity in favor of an Indian partner within four years. 2.) Regarding the FDI in print media in India, the single largest Indian shareholder should have a holding higher than 26%. Which of these statements is/are correct? a) b) c) d) Only 1 Only 2 Both 1 and 2 Neither 1 nor 2

Ans. b 5. a) b) c) d) The Government holding in BPCL is ( IAS More than 70% Between 60% and 70% Between 50% and 60% Less than 50%

Exam 2003)


Ans. b 6. Consider the following statements: (IAS

Exam 2002)

The objectives of the National Renewal Fund set up in February 1992 were 1.) 2.) To give training counseling for workers affected b retrenchment or VRS. Redeployment of workers

Which of these statements is/are correct? a) b) c) d) Only 1 Only 2 Both 1 and 2 Neither 1 nor 2

Ans. c 7. 1.) 2.) 3.) With reference to Power Sector in India, consider the following statements: (IAS

Exam 2002)

Rural electrification has been treated as a Basic Minimum Service under the Prime Ministers Gramodya Yojana 100 percent Foreign Direct Investment in power is allowed without upper limit The Union Ministry of Power has signed a Memoranda of Understanding with 14 States

Which of these statements is/are correct? a) b) c) d) 1 only 1 and 2 2 and 3 3 only

Ans. b 8. a) b) c) d) The largest share of Foreign Direct Investment (1997-2000) went to (IAS Food and food-product sector Engineering sector Electronics and electric equipment sector Service sector

Exam 2001)

Ans. b


9. a) b) c) d)

Which of the following committees examined and suggested Financial Sector reforms? ( IAS Abid Hussain Committee Bhagwati Committee Chelliah Committee Narasimham Committee

Exam 2001)

Ans. d 10. Economic liberalization in India started with ( IAS a) b) c) d) Substantial changes in industrial licensing policy The convertibility of Indian rupee Doing away with procedural formation for foreign direct investment Significant reduction in tax rates

Exam 2000)

Ans. a 11. Some time back, the Government of India, decided to delicense white goods industry. white goods include (IAS

a) b) c) d) Stainless steel and aluminium utensils Milk and milk products Items purchased for conspicuous consumption Soaps, detergents and other mass consumption goods

Ans. c Programmes 12. With reference to National Rural Health Mission, which of the following are the jobs of ASHA, a trained community health worker? ( IAS Exam 2012) 1.) 2.) 3.) 4.) Accompanying women to the health facility for antenatal care checkup Using pregnancy test kits for early detection of pregnancy Providing information on nutritional and immunization Conducting the delivery of baby

Select he correct answer using the codes given below: a) 1, 2 and 3 only


b) c) d)

2 and 4 only 1 and 3 only 1, 2, 3 and 4

Ans. a 13. The endeavor of Janani Suraksha Yojana Programme is (2012) 1.) 2.) 3.) To promote institutional deliveries To provide monetary assistance to the mother to meet the cost of delivery. To provide for wage loss due to pregnancy and confinement

Which of the statements given above is/are correct? a) b) c) d) 1 and 2 only 2 only 3 only 1, 2 and 3

Ans. a 14. How does the National Rural Livelihood Mission seek to improve livelihood options of rural poor? (IAS

Exam 2012)
1.) 2.) 3.) By setting up a large number of new manufacturing industries and agribusiness centres in rural areas By strengthening self-help groups and providing skill development By supplying seeds, fertilizers, diesel pump-sets and micro-irrigation equipments free of cost to farmers

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

Ans. a 15. Consider the following: (IAS 1.) 2.) Hotels and restaurants Motor transport undertakings

Exam 2012)


3.) 4.)

Newspaper establishments Private medical institutions

The employees of which of the above can have the Social Security coverage under Employees States Insurance Scheme? a) b) c) d) 1, 2 and 3 only 4 only 1, 3 and 4 only 1, 2, 3, and 4

Ans. d 16. How do District Development Agencies (DRDAs) help in the reduction of rural property in India? (IAS

Exam 2012)
1.) DRDAs act as Panchayati Raj Institution in certain Specified backward regions of the country.

2.) DRDAs under take area-specific scientific study of the causes of poverty and malnutrition and prepare detailed remedial measures. 3.) DRDAs secure inter-sectoral and inter-departmental coordination and cooperation for effective implementation of antipoverty programmes. 4.) DRDAs watch over and ensure effective utilization of the funds intended for anti-poverty programmes.

Which of the statements given above is/are correct? a) b) c) d) 1, 2 and 3 only 3 and 4 only 4 only 1, 2, 3 and 4

Ans. b 17. Among the following who are eligible to benefit from the Mahatma Gandhi National Rural Employment Guarantee Act?(IAS Exam 2011) a) b) c) d) Adult members of only the scheduled caste and scheduled tribe households Adult members of below poverty line (BPL) households Adult members of house holds of all backward communities Adult members of any household

Ans. d


18. An objective of the National Food Security Mission is to increase the production of certain crops through area expansion and productivity enhancement in a sustainable manner in the identified districts of the country. What are those crops? (IAS Exam 2010) a) b) c) d) Rice and wheat only Rice, wheat and pulses only Rice, wheat, pulses and oil seeds only Rice, wheat, pulses, oil seeds and vegetables

Ans. b 19. With reference to the schemes launched by the Union Government, consider the following statements: (IAS

Exam 2009)
1.) 2.) Ministry of Health and Family Welfare launched the Rashtriya Swasthya Bima Yojana. Ministry of Textiles launched the Rajiv Gandhi Shilpi Swasthya Bima Yojana.

Which of the statements given above is/are correct? a) b) c) d) 1 only 2 only Both 1 and 2 Neither 1 nor 2

Ans. d 20. Consider the following statements with reference to Indira Gandhi National Old Age Pension Scheme (IGNOAPS): ( IAS Exam 2008) 1.) All persons of 60 years of above belonging to the households below poverty line in rural areas are eligible.

2.) The Central Assistance under this Schemes is at the rate of Rs 300 per month per beneficiary. Under the Schemes, States have been urged to give matching amounts. Which of the statements given above is/are correct? a) b) c) d) 1 only 2 only Both 1 and 2 Neither 1 nor 2

Ans. d


21. What is the nave of the scheme which provide training and skills to women in traditional and non-traditional trades? (IAS Exam 2008) a) b) c) d) Kishori Shakti Yojna Rashtriya Mahila Kosh Swayamsiddha Swawlamban

Ans. d 22. Which one of the following statements is not correct? (IAS

Exam 2004)

a) Under the Targeted Public Distribution System, the families Below Poverty Line are provided 50 kg of food grains per month per family at subsidies price b) Under Annapurna Scheme, indigent senior citizens of 65 years of age or above eligible for National Old Age Pension but not getting pension can get 10 kg of food grains per person per month free of cost c) Ministry of Social Justice and Empowerment has scheme in which indigent people living in welfare institutions like orphanages are given 15 kg of food grains per person per month of BPL rates d) Ministry of Human Resources Development gives financial support to Mid-day Meal Scheme for the benefit of class I to V students in Government or Government aided School Ans. a 23. Consider the following statements: ( IAS

Exam 2004)

1.) The loans disbursed for farmers under Kisan Credit Card Scheme are covered under Rashtriya krishi Beema Yojna of Life Insurance Corporation of India 2.) The Kisan Credit Card holders are provided personal accident insurance of Rs 50,000 for accidental death and Rs 25,000 for permanent disability Which of the statements given above is/are correct? a) b) c) d) 1 only 2 only Both 1 and 2 Neither 1 nor 2

Ans. b 24. With reference to the governments welfare schemes, consider the following statements: (IAS

Exam 2002)

1.) Under the Antyodaya Anna Yojana, the food grains are available to the poorest of the poor families at Rs. 2 per kg for wheat and Rs. 3 per kg for rice.


2.) Under the National Old Age Pension Scheme, the old and destitute are provided Rs. 75 per month as Central Pension, in addition to the amount provided by most State Governments. 3.) Government of India has allocated 25 kg food grains per Below Poverty Line family per month, at less than half the economic cost. Which of these statements are correct? a) b) c) d) 1&2 1&3 2&3 1, 2 & 3

Ans. d 25. The Swarna Jayanti Sahari Rozgar Yojana which came into operations from 1-12-1997 aims to private gainful employment to the urban unemployed or underemployed poor but does not include ( IAS Exam 2000) a) b) c) d) Nehru Rozgar Yojana Urban Basic Services Programme Prime Ministers Integrated Urban Poverty Eradication Programme Prime Ministers Rozgar Yojana

Ans. d 26. Match List I with List II and select the correct answer using the codes given below the lists: ( IAS Exam 2000) List I A.) United Nations Development Programme B.) C.) National Council of Applied Economic Research Indira Gandhi Institute of Development Research

D.) World Bank List II 1.) 2.) 3.) 4.) UN India Human Development Report India Development Report World Development Report Human Development Report



A a) b) c) d) Ans. a 4 4 2 2

B 1 2 3 1

C 2 1 4 4

D 3 3 1 3

27. The Employment Assurance Scheme envisages financial assistance to rural areas for guaranteeing employment to at least ( IAS Exam 1999) a) b) c) d) 50% of the men and women seeking jobs in rural areas 50 percent of the men seeking jobs in rural areas One man and one woman in a rural family living below the poverty line One person in a rural landless household living below the poverty line

Ans. c 28. Which one of the following is the objective of National Renewal Fund? (IAS Exam 1999) a) To safeguard the interests of workers who may be affected by technological upgradation of industry or closure of sick units b) c) d) To develop the core sector of the economy For the development of infrastructure such as energy, transport, communications and irrigation. For human resource development such as full literacy, employment, population control, housing and drinking water

Ans. A

Day 22: Indian Economy

Chapters: Budget 2013, Poverty and related issues, 13th Finance Commission Budget 2013

Important Terms related to Budget

In normal parlance the meaning of budget is a systematic plan for the expenditure of a usually fixed resource during a given period. In Budget revenues from all sources and expenses of all activities undertaken are aggregated.The basic tenet behind the Budget in India is that through this exercise the government anticipates it expenses for the forthcoming year and accordingly plan to mobilize resources to finance them. It is the most


significant economic and financial event in India. It also contains estimates for the next fiscal year called budgeted estimates. Thus, Union Budget, is an exhaustive display of the Governments finances. The Finance Minister puts down a report that contains Government of Indias revenue and expenditure for one fiscal year. The fiscal year runs from April 01 to March 31. The Union budget is preceded by an Economic Survey which outlines the broad direction of the budget and the economic performance of the country.

The documents mandated by the Constitution of India

The following documents are mandated by the Constitution of India as described below. 1. Annual Financial Statement (AFS): Annual Financial Statement (AFS), the document as provided under Article 112, shows estimated receipts and expenditure of the Government of India for 2013-14 in relation to estimates for 2012-13 as also expenditure for the year 2011-12. The receipts and disbursements are shown under the three parts, in which Government Accounts are kept viz.,(i) Consolidated Fund, (ii) Contingency Fund and (iii) Public Account. Under the Constitution, Annual Financial Statement distinguishes expenditure on revenue account from other expenditure. Government Budget, therefore, comprises Revenue Budget and Capital Budget. The estimates of receipts and expenditure included in the Annual Financial Statement are for the expenditure net of refunds and recoveries, as will be reflected in the accounts. 2. Demands for Grants (DG) : Art. 113: Article 113 of the Constitution mandates that the estimates of expenditure from the Consolidated Fund of India included in the Annual Financial Statement and required to be voted by the Lok Sabha are submitted in the form of Demands for Grants. The Demands for Grants are presented to the Lok Sabha along with the Annual Financial Statement. Generally, one Demand for Grant is presented in respect of each Ministry or Department. 3. Appropriation Bill: Art. 114(3): Under Article 114(3) of the Constitution, no amount can be withdrawn from the Consolidated Fund without the enactment of such a law by Parliament. After the Demands for Grants are voted by the Lok Sabha, Parliaments approval to the withdrawal from the Consolidated Fund of the amounts so voted and of the amount required to meet the expenditure charged on the Consolidated Fund is sought through the Appropriation Bill. The whole process beginning with the presentation of the Budget and ending with discussions and voting on the Demands for Grants requires sufficiently long time. The Lok Sabha is, therefore, empowered by the Constitution to make any grant in advance in respect of the estimated expenditure for a part of the financial year pending completion of procedure for the voting of the Demands. 4. Finance Bill:

At the time of presentation of the Annual Financial Statement before Parliament, a Finance Bill is also presented in fulfillment of the requirement of Article 110 (1)(a) of the Constitution, detailing the imposition, abolition, remission, alteration or regulation of taxes proposed in the Budget. A Finance Bill is a Money Bill as defined in Article 110 of the Constitution . It is accompanied by a Memorandum explaining the provisions included in it.

The documents mandated by the FRBM Act, 2003

The following documents are presented as per the provisions of the Fiscal Responsibility and Budget Management Act, 2003.


1. Memorandum Explaining the Provisions in the Finance Bill, 2013 2. Macro-economic framework for the relevant financial year 3. Fiscal Policy Strategy Statement for the financial year 4. Medium Term Fiscal Policy Statement In addition to the above, individual Departments/Ministries also prepare and present to Parliament their Detailed Demands for Grants, Outcome Budget, and their Annual Reports.

Consolidated Fund, the Contingency Fund and the Public Account

The existence of the Consolidated Fund of India (CFI) flows from Article 266 of the Constitution. All revenues received by Government, loans raised by it, and also its receipts from recoveries of loans granted by it form the Consolidated Fund. All expenditure of Government is incurred from the Consolidated Fund of India and no amount can be drawn from the Consolidated Fund without authorisation from Parliament.

Article 267 of the Constitution authorises the Contingency Fund of India which is an imprest placed at the disposal of the President of India to facilitate Government to meet urgent unforeseen expenditure pending authorization from Parliament. Parliamentary approval for such unforeseen expenditure is obtained, post-facto, and an equivalent amount is drawn from the Consolidated Fund to recoup the Contingency Fund. The corpus of the Contingency Fund as authorized by Parliament presently stands at 500 crore. Moneys held by Government in Trust as in the case of Provident Funds, Small Savings collections, income of Government set apart for expenditure on specific objects like road development, primary education, Reserve/Special Funds etc. are kept in the Public Account. Public Account funds do not belong to Government and have to be finally paid back to the persons and authorities who deposited them. Parliamentary authorisation for such payments is, therefore, not required, except where amounts are withdrawn from the Consolidated Fund with the approval of Parliament and kept in the Public Account for expenditure on specific objects, in which case, the actual expenditure on the specific object is again submitted for vote of Parliament for drawal from the Public Account for incurring expenditure on the specific object.

Revenue and Capital Budget

The distinguishing features of Revenue and Capital Budget are presented below. Revenue Budget consists of the revenue receipts of Government (tax revenues and other revenues) and the expenditure met from these revenues. Tax revenues comprise proceeds of taxes and other duties levied by the Union. The estimates of revenue receipts shown in the Annual Financial Statement take into account the effect of various taxation proposals made in the Finance Bill. Other receipts of Government mainly consist of interest and dividend on investments made by Government, fees, and other receipts for services rendered by Government. Revenue expenditure is for the normal running of Government departments and various services, interest payments on debt, subsidies, etc. Broadly, the expenditure which does not result in creation of assets for Government of India is treated as revenue expenditure. All grants given to State Governments/Union Territories and other parties are also treated as revenue expenditure even though some of the grants may be used for creation of assets. Capital Budget consists capital receipts and capital payments. The capital receipts are loans raised by Government from public, called market loans, borrowings by Government from Reserve Bank and other parties through sale of Treasury Bills, loans received from foreign Governments and bodies, disinvestment receipts and recoveries of loans from State and Union Territory Governments and other parties. Capital


payments consist of capital expenditure on acquisition of assets like land, buildings, machinery, equipment, as also investments in shares, etc., and loans and advances granted by Central Government to State and Union Territory Governments, Government companies, Corporations and other parties.

1. 2.

Highlights of Budget 2013 Important terms related to Budget

1. 2. 3. 4. 5.
Calculation and definition of poverty Poverty line in India Tendulkar Committee Recommendation Poverty line calculation as per Tendulkars Committee Important Facts and Figures related to poverty

Poverty and Indian Social Structure

Poverty means lack of some material possession and absolute poverty means deprivation from basic human needs like food, water, clothing, sanitation, shelter and health care facilities . Various agencies have adopted different definition of poverty. United Nations defines poverty as Fundamentally, poverty is a denial of choices and opportunities, a violation of human dignity. It means lack of basic capacity to participate effectively in society. It means not having enough to feed and cloth a family, not having a school or clinic to go to, not having the land on which to grow ones food or a job to earn ones living, not having access to credi t. It means insecurity, powerlessness and exclusion of individuals, households and communities. It means susceptibility to violence, and it often implies living on marginal or fragile environments, without access to clean water or sanitation. As the above definition would indicate, poverty is not only related to income. It is multi dimensional affecting every aspect of human life. Some of the characteristics of poverty are as under: 1. The first aspect is about material possessions. Poverty stricken people have few assets and low income. In rural areas these are mostly landless people. 2. Due to shortage of income there is low consumption, no savings and high indebtedness. The quality of life is low and usually at subsistence level. 3. 4. 5. 6. 7. 8. 9. Poverty arises due to lack of gainful employment and underemployment. One of the reasons is the lack of formal education and training which the poor cannot afford. These people do not have access to proper health facilities. There is lack of proper housing and sanitation. Generally, poor form the marginalized sections of the society and are usually dependent upon others. Participation in power or decision making process is very low They are vulnerable and have low social status and are low on self esteem.


Vicious circle of poverty

The vicious circle of poverty refers to various factors, which are results as well as reasons of poverty. Reasons for this vicious circle can be divided into supply side factors as well as demand side factors. The supply side of the vicious circle indicates that in underdeveloped countries, productivity is so low that it is not enough for capital formation. According to Samuelson, "The backward nations cannot get their heads above water because their production is so low that they can spare nothing for capital formation by which their standard of living could be raised." According to Nurkse on the supply side there is small capacity to save, resulting from low level of national income. The low real income is the result of low productivity, which in turn, is largely due to the lack of capital. The lack of capital is a result of the small capacity to save, and so, the circle is vicious. Thus, the main reason of poverty is the low level of saving. Consequently, investment is not possible in production channels. A huge chunk of GDP is used for consumption purposes. People cannot save. So, there is lack of investment and capital formation. Although rich people can save, they spend their surplus in some on luxurious goods instead of saving. They gave preference to high priced items and foreign products. Thus, their demand does not enlarge the size of the market. The developing countries, therefore, lack investment facilities. According to Nurkse, poverty is caused by several factors in the demand side. In underdeveloped countries the inducement to invest is low because of the low purchasing power of the people, which is due to their small real income. The main reason for poverty in these countries is the low level of demand. Consequently, the sizes of markets remain low. The small size of the market becomes a hurdle in the path of inducement to invest.

Measurement of Poverty
In order to take some concrete steps for poverty alleviation, first step is to quantify it. The World Bank has drawn a poverty line at $1.25 per day which is based on a world average. As per these guidelines, the Head Count Ratio for poverty was 32.7 for the year 2010. Earlier the Government of India was calculating the amount as per calorific consumptions. However, this line was not found appropriate and the Government of India to set up a committee under Prof. Suresh Tendulkar to examine and review conceptualization of poverty. The Committee report, which has been accepted by the Planning Commission, has quantified poverty lines on the basis of expenditure incurred on various variables like food, health, education etc. All India average for rural poverty line for the year 2009-10 has been placed at Rs.672.80 per month per capita while for urban areas the figure is Rs.859.60 per month per capita. However, this is an all India average and figures vary from state. Important points of the report are as under: The all-India HCR has declined by 7.3 percentage points from 37.2% in 2004-05 to 29.8% in 2009-10, with rural poverty declining by 8.0 percentage points from 41.8% to 33.8% and urban poverty declining by 4.8 percentage points from 25.7% to 20.9%. Poverty ratio in Himachal Pradesh, Madhya Pradesh, Maharashtra, Orissa, Sikkim, Tamil Nadu, Karnataka and Uttarakhand has declined by about 10 percentage points and more. In Assam, Meghalaya, Manipur, Mizoram and Nagaland, poverty in 2009-10 has increased. Some of the bigger states such as Bihar, Chhattisgarh and Uttar Pradesh have shown only marginal decline in poverty ratio, particularly in rural areas. In rural areas, Scheduled Tribes exhibit the highest level of poverty (47.4%), followed by Scheduled Castes (SCs), (42.3%), and Other Backward Castes (OBC), (31.9%), against 33.8% for all classes. In urban areas, SCs have HCR of 34.1% followed by STs (30.4%) and OBC (24.3%) against 20.9% for all classes. In rural Bihar and Chhattisgarh, nearly two-third of SCs and STs are poor, whereas in states such as Manipur, Orissa and Uttar Pradesh the poverty ratio for these groups is more than half. Sikhs have lowest HCR in rural areas (11.9%) whereas in urban areas, Christians have the lowest proportion (12.9%) of poor.


In rural areas, the HCR for Muslims is very high in states such as Assam (53.6%), Uttar Pradesh (44.4%), West Bengal (34.4%) and Gujarat (31.4%). In urban areas poverty ratio at all India level is highest for Muslims (33.9%). Similarly, for urban areas the poverty ratio is high for Muslims in states such as Rajasthan (29.5%), Uttar Pradesh (49.5%), Gujarat (42.4%), Bihar (56.5%) and West Bengal (34.9%). Nearly 50% of agricultural labourers and 40% of other labourers are below the poverty line in rural areas, whereas in urban areas, the poverty ratio for casual labourers is 47.1%. As expected, those in regular wage/ salaried employment have the lowest proportion of poor. In the agriculturally prosperous state of Haryana, 55.9% agricultural labourers are poor, whereas in Punjab it is 35.6%. The HCR of casual laborers in urban areas is very high in Bihar (86%), Assam (89%), Orissa (58.8%), Punjab (56.3%), Uttar Pradesh (67.6%) and West Bengal (53.7%). In rural areas, as expected, households with primary level and lower education have the highest poverty ratio, whereas the reverse is true for households with secondary and higher education. Nearly two third households with primary level & lower education in rural areas of Bihar and Chhattisgarh are poor, whereas it is 46.8% for UP and 47.5% for Orissa. The trend is similar in urban areas. In rural areas, it is seen that households headed by minors have poverty ratio of 16.7% and households headed by female and senior citizen have poverty ratio of 29.4% and 30.3% respectively. In urban areas, households headed by minors have poverty ratio of 15.7% and households headed by female and senior citizen have poverty ratio of 22.1% and 20.0% respectively against overall poverty ratio of 20.9%.

The above report indicates that incidence of poverty is maximum in SCs, STs, OBCs and Muslims. Incidentally, these groups are also those which claim that they are being discriminated against and face exclusion from the race of development. Out of these, the first three have been historically discriminated while the prevalence of poverty among Muslims has been amply documented by the Sachar Committee. Rural poverty is higher than urban poverty which indicates a rural urban. Incidence of poverty is also higher in casual labourors and landless labourers. In view of poverty, these sections are more vulnerable to social discrimination and deprivation from basic facilities like health and education. Among these sections, women are more drastically hit by poverty as apart from poverty and social discrimination referred above; they have also to face gender based discrimination. If left on their own, the poor will never be able to come out of poverty due to its vicious circle. Therefore, state intervention is required which in view the variations regarding existence of poverty in various social groups

Latest data on Poverty in India

Below Poverty Line Population in (%)
Survey Year
1993-94 2004-05 2009-10 50.1 41.8 33.8

Rural Urban Total

31.8 25.7 20.9 45.3 37.2 29.8

Poverty ratio in Himachal Pradesh, Madhya Pradesh, Maharashtra, Orissa, Sikkim, Tamil Nadu, Karnataka and Uttarakhand has declined by about 10 percentage points more.


In Assam, Meghalaya, Manipur, Mizoram and Nagaland, poverty in 2009-10 has increased. Some of the bigger states such as Bihar, Chhattisgarh and Uttar Pradesh have shown only marginal decline in poverty ratio, particular in rural areas. States with high incidence of poverty are Bihar at (53.5 per cent), Chhattisgarh (48.7 per cent), Manipur (47.1 per cent), Jharkhand (39.1), Assam (37.9 percent) and Uttar Pradesh (37.7 per cent)

Social Groups
In rural areas, Scheduled Tribes exhibit the highest level of poverty (47.4%), followed by Scheduled Castes (SCs), (42.3%), and Other Backward Castes (OBC), (31.9%), against 33.8% for all classes. In urban areas, SCs have Head Count Ratio of 34.1% followed by STs (30.4%) and OBC (24.3%) against 20.9% for all classes. In rural Bihar and Chhattisgarh, nearly two-third of SCs and STs are poor, whereas in state such as Manipur, Orissa and Uttar Pradesh the poverty ratio for these groups is more than half.

Religious Groups
Sikhs have lowest Head Count Ratio in rural areas (11.9%) whereas in urban areas, Christians have the lowest proportion (12.9%) of poor. In rural areas, the Head Count Ratio for Muslims in very high in states such as Assam (53.6%), Uttar Pradesh (44.4%), West Bengal (34.4%) and Gujarat (31.4%). In urban areas poverty ratio at all India level in highest for Muslims (33.9%). Similarly, for urban areas the poverty ratio is high for Muslims in states such as Rajasthan (29.5%), Uttar Pradesh (49.5%), Gujarat (42.4%), Bihar (56.5%) and West Bengal (34.9%)

Occupational Categories
Nearly 50% of agricultural labourers and 40% of other labourers are below the poverty line in rual areas, whereas in urban areas, the poverty ratio for casual labourers is 47.1%. Those in regular wage/salaried employment have the lowest proportion of poor. In the agriculturally prosperous state of Haryana, 55.9% agricultural labourers are poor, wheareas in Punjab t is 35.6%. The HCR of casual labourers in urban areas is very high in Bihar (86%), Assam (89%), Orissa (58.8), Punjab (56.3%), Uttar Pradesh (67.6%) and West Bengal (53.7%).

1. 2. Only about 46% of household have toilet facilities As per the Household Consumer Expenditure Survey for 2009-10, 29.9 per cent of the population is under BPL 3. Rural poverty declined by 8 percentage points, urban poverty down by 4.8 per cetn 4. Poverty has gone up in the north-eastern States of Assam, Meghalaya, Manipur, Mizoram and Nagaland 5. Bihar has the highest incidence of poverty at 53.5 per cent. 6. Among social groups in the rural areas, Scheduled Tribes (47.4 per cent) suffer the highest level of poverty. 7. Among social groups in the urban areas, Scheduled Castes (34.1 per cent)suffer the highest level of poverty. 8. Among religious groups in the rural areas, Sikhs have the lowest level of poverty at 11.9 per cent 9. Among religious groups in the urban areas, Christians have the lowest level of poverty at 12.9 per cent 10. Both in rural and urban areas, Muslims have a high level of poverty ranging from 29 per cent to 53 per cent 11. Just 32% of households use treated water for drinking 12. About 17% of the households still fetch drinking water from a source located more than 500 m in rural areas 100 m in urban areas


13. About 11% more households have got access to electricity between the years 2001 and 2011. 14. About 45% households owns a cycle which remains the primary mode of transportation.

Defining poverty
Definition of poverty varies considerably among nations, scholars and agencies as per the context. In normal parlance, poverty can be understood as social phenomena in which a proportion of population is unable to fulfill even basic minimum necessities of life. United Nations World Summit on Social Development, the Copenhagen Declaration described poverty as a condition characterized by severe deprivation of basic human needs, including food, safe drinking water, sanitation facilities, health, shelter, education and information.

Causes of poverty in India

The following are the reasons which can attributed for poverty in India: Population explosion The after effects of exploitative colonial structure Illiteracy and unemployment Inadequate investment and low capital formation Acute stress on farm sector Regional disparities Rampant corruption and leakages in delivery of public schemes and programs

Estimation of Poverty in India

The official estimation of poverty in India is based on the minimum calorie intake requirement for an individual. Based on the minimum per capita calorie requirements a bench mark is defined which is termed as Poverty line. The poverty line in India is the monthly expenditure incurred in getting a daily calorie intake of 2,400 kilocalories in rural and 2,100 kilocalories in urban areas. People and families who are unable to meet this benchmark expenditure based on calorie consumption ar e considered to fall in the category of Below Poverty Line. Thus based on this criterion poverty numbers in India are derived from sample surveys carried out by the National Sample Survey Organization (NSSO) on consumer expenditure. As per this concept of estimation of poverty it is estimated that about 26% of the population falls below the poverty line.

Criticism of intake based poverty line

The estimation of poverty on the basis of calorie intake and poverty line is criticized by various scholars on the following grounds:

The quality nutrition required leading a healthy life is altogether different from calorie intake. A person may be able to afford to buy food which contains 2,400 calories, but the quality or nutritional value of this food (in terms of vitamins, minerals etc) may be so low that we can hardly exclude this person from the population of the poor.


The definition of poverty as per the poverty line takes into account the consumption of food only. It does not take into account, the other vital human needs like safe drinking water, sanitation facilities, health, shelter, education and information. The concept of poverty line treats every one below the poverty line at par. The same is true for those who are above the poverty line. In order to have better understanding of the condition of an individual his/her position relative to poverty line must be known. Thus in this context the term Poverty Gap is coined. Poverty gap measure the relative distance of an individual from the poverty line.

New norms for estimation of poverty by Tendulkars Committee Tendulkar committee in 2009 suggested a new methodology to estimate poverty in India. The new methodology has moved away from the calorie intake norms. The committee has suggested inclusion of two more parameters besides food to compute poverty. These two parameters are:

Expenditure on health Expenditure on education

As per the new methodology for poverty estimation as per Tendulkars committee, it is estimated that about 37% of population falls below the poverty line. This estimation of 37% of population falling below poverty line is much higher than the earlier estimated of 26% based on the calorie intake criterion. The following table shows the estimation of rural and urban poverty based on the old and new methodology.


Percentage of Percentage of Average percentage Total number of population below population below of population below households below poverty line in rural poverty line in poverty line (India) poverty line areas urban areas

Calorie Intake 28.3% 25.7% 26.1%

6.5 crores

Tendulkar Committee




8.1 crores

The numbers related to rural poverty which has come out from the new norms adopted by Tendulkars Committee in estimation of poverty are of grave concern. While the percentage of population estimated below the poverty line in urban areas by traditional calorie intake method and new norms defined by Tendulkars committee is same i.e. 25.7%. However, as per the estimation by new norms the rural poverty has shot up sharply from 28.3% to 41.8%. This reflects the dismal condition of health and education sector in rural areas.


Anti-Poverty approaches
The slogan of poverty eradication has been adopted by all political parties in one form or the other and there is a national consensus for the goal of poverty alleviation. Traditional approach to eradicate poverty was based on the premise that economic growth leads to poverty reduction, as it increases per-capita real income levels. It was assumed that heavy investment in modernization and industrialization would increase capital formation and per-capita incomes and these benefits would gradually percolate to lowest strata of society. This is referred to as the trickle down effect of growth, which simply implies a vertical flow of income from the rich to the poor at a given rate. Nevertheless, the past experiences suggest that this approach could not produce the desired impact on poverty alleviation. In the recent times the approach related to the poverty reduction has undergone a significant shift away from the trickle down concept of growth towards the concept of pro poor inclusive growth. It is realized that the multi prong and direct interventions are essentials to eradicate poverty. The present approach is right based approach, which recognizes the existence of entitlements and rights of poor. This approach also reinforces capacities of governments and other duty bearers to respect, protect and guarantee these entitlements and rights. An important issue in the Indian debate is how much reliance should be placed on poverty reduction induced by growth as opposed to poverty reduction resulting from targeted antipoverty programs. India has used both strategies.

Anti-Poverty policies
The policies and programs meant to tackle this problem can be divided into the following broad categories: 1. Reservation and affirmative action: There are provisions for reservation in elected bodies, public sector jobs and educational institutions for the welfare and development of schedule castes, schedule tribes and other backward sections in the society. 2. Wage and self employment programs: Various wage employment programs (like MNREGA) and self employment generation programs (like SGSY) are designed to ensure livelihoods to the poor. 3. Area development programs:The areas where human development indices are relatively low are targeted under area development programs like Drought Prone Area Development Program, Desert Development Program etc. 4. Access to basic amenities:Various schemes and programs are designed to ensure that all villages have access to a minimum standard of educational and health facilities, shelter, safe drinking water and roads. The major programs addressing the access to basic amenities are: Bharat Nirmam, Sarv Shiksha Abhiyan (education), National Rural Health Mission (health care), Indira Awas Yojna (shelter), Pradhan Mantri Gramodaya Yojna (drinking water) and Pradhan Mantri Gram Sadak Yojna (roads). 5. Social Security: Various forms of direct transfers by pension and insurance schemes for aged, disabled and widows are currently running as direct intervention for poverty reduction. The examples in this category are Annapurna Yojna and Indira Gandhi Old age pension scheme. 6. Food Security: A buffer stock of food grains is maintained to ensure the food security. The below poverty line households can avail food grains at a subsidized rate through Public Distribution System (PDS).

Flipside and grey-areas of the Anti-poverty policies


The policies addressing the poverty alleviation are poorly targeted. Huge numbers of beneficiaries who accrue the benefits of the poverty alleviation schemes are non-poor. Anti-poverty policies of wage employment provide only the short term solution to the poor rather than augmenting their productive capacities. The rampant corruption bureaucratic apathy red tapeism, inefficient implementation, duplication and lack of coordination among various agencies result in leakages. There is lack of accountability and transparency involved during the implementation of various schemes and programs. There are no quantifiable targets for these schemes and the emphasis is on inputs and procedures to be followed rather than outcomes. Polices related to the poverty alleviation are highly centralized and are designed from the top down approach. As a result there is lack of involvement of the local communities. In large parts of the country the bulk of population living below the poverty line does not have access to the Public Distribution System (PDS) because of poor distribution channels.

Some Poverty alleviation programs and schemes:


Name of program/scheme

Intervention area

Major features To reduce poverty among rural BPL by promoting diversified and gainful self-employment and wage employment opportunities this would lead to an appreciable increase in income on sustainable basis.

National Rural Livelihood Mission (NRLM)

Self employment

The Mahatma Gandhi National Rural Employment Guarantee Act aims at enhancing the livelihood security of people in rural areas by guaranteeing Mahatma Gandhi National hundred days of wage-employment in a financial Rural Employment Wage employment year to a rural household whose adult members Guarantee Act volunteer to do unskilled manual work. (MGNREGA)

Indira Awas Yojna (IAY)

Rural housing

The broad purpose of the scheme is to provide lump-sum financial assistance to rural below poverty line population. The purpose is to upgrade or construct a house of respectable quality for their personal living.

National Rural Health Mission (NHRM)

To carry out necessary architectural correction in the basic health care delivery system. It seeks to Rural healthcare improve access of rural people, especially poor women and children, to equitable, affordable, accountable and effective primary healthcare. The scheme contemplates identification of one crore poorest of the poor families from amongst the BPL families covered under TPDS within the States and providing them food grains at a highly subsidized rate of Rs.2/ per kg for wheat and Rs. 3/ per kg for rice. The projects under RGNDWM are basically community Participation oriented in nature with a part

Antyodaya Anna Yojna

Food Security

Rajeev Gandhi National Drinking Water Mission (RGNDWM)

Safe drinking Water


(minimum of 10% of the proposal) of the capital cost required to be borne by the community themselves. The balance amount is contributed by the Government of India. 7 Indira Gandhi Old Age Pension Scheme Social Security All persons of 60 years (and above) and belonging to below the poverty line are eligible for the getting pension under this scheme. The pension amount is INR 500 per month to per person.

13th Finance Commission


1. 2. 3. 4.

Constitutional Provision related to Finance Commission Chairman of the Finance Commission (FC) (at least try to remember the names of the chairmen of 11th,12th and 13th FC) Highlights of 13th FC Accepted Recommendations

Thirteenth Finance Commission at a glance

The government on February 25, 2010 presented 13 Finance Commissions Report (2010-15) in the th Parliament. It is worth noting that 13 Finance Commission, under the Chairmanship of Mr. Vijai Kelkar had submitted its report to the President on December 30, 2009. Finance Commission in its report has told governments at the Centre and States to set their fiscal house in order. Report has raised the share of taxes that the states would be entitled to receive over the next five years by 1.5 percentage points. Commission has suggested a roadmap for the introduction of a single-rate goods and service tax (GST). Commissions new roadmap for fiscal responsibility suggests that the overall debt of the centre and states by capped at 68 per cent of GDP from the current 82 per cent level and 75 per cent recommended by the Twelfth Finance Commission has recommended the centre to reduce the level of debt to 45 per cent of GDP by March 2015 from the current level of 54.2 per cent. For states the reduction in debt is recommended at 2 percentage points to 25 per cent. As per commissions recommendations, the centre should transfer 32 per cent of the taxes it collects to states against 30.5 percent at present. The overall ceiling including transfers from the centres gross revenue has been raised from 38 to 39.5 per cent. Among the proposals that provide a thrust to fiscal federalism, the commission has recommended that local bodies get up to 2.5 per cent of the divisible tax pool. Of this, up to 1 per cent can be incentive-linked. Report recommends that the states contribution is centrally sponsored schemes should be 50 per cent of the cost, against 40 per cent for scheme such as Sarve Shiksha Abhiyan . The Finance Commission has projected that tax receipts would register that tax receipts would register a compounded annual growth rate between March 2010 and March 2015 of over 17 per cent while the nominal growth in GDP is estimated at 13.2 per cent.



Commission suggests to initiate fiscal consolidation in 2011-12 so that the centre can reduce the level of fiscal deficit to 3 percent of the GDP by 2013-14. The government should also ensure zero revenue deficit so that borrowing are used to meet investment requirements. Prescribing a zero revenue deficit as the golden rule, the commission has recommended that the Endeavour for all states should be to attain that level by 2014-15. In its action-taken reports, the government has accepted most of the recommendations of the 13 Finance Commission. The government has accepted GST and new fiscal responsibility roadmap in-principle and proposals will be worked out to meet the targets set out by the commission.

Highlights: At a Glance
Thirteenth Finance Commission 2010-15 About Devolution

States to get 32 per cent of central taxes, compared to 30.5 per cent now. Up to 2.5 per cent of divisible pool may be transferred as grants to local bodies. Total transfers to states on the revenue account be capped at 39.5 per cent of the Centres gross tax revenue, compared to 37.5 per cent.

About Fiscal Correction

Centre should target a revenue surplus by 2014.15. Combined debt of Centre and states should be capped at 68 of GDP by March 2015; currently at 82 per cent. In the case of macroeconomic shocks, Centre to borrow and develop to states instead of relaxing the state borrowing limits. The medium term fiscal plan should be made a statement of commitment.

About the Goods and Services Tax

Single rate for goods, services proposed. To make, GST purely consumption based, taxes and cesses should be subsumed. Petrol, diesel, alcohol, tobacco may be charged to GST with additional levies by the Centre and states. Only public services, unprocessed food items, heath, education and transactions between employer and employee be exempted.

13th Finance Commission Accepted Recommendations

National Calamity Contingency Fund to be merged into National Disaster. Response Fund and Calamity.

Grants Approved Rs. 51,800 crore to eight states to meet deficits. Rs. 24,068 crore to states to fund elementary education. Rs. 5,000 crore each to states, for promotion of forests, renewable energy and water sector Rs. 15,000 crore to states for environment.


Rs. 14,446 crore to states for bringing down infant mortality rate, improved delivery status of justice, and grant for unique identification programme.

Accepted in Principle A model GST structure with single rate, Zero rating of exports, inclusion of various indirect taxes at central and state level in GST ambit. Fiscal consolidation road map pegs combined debt of Centre and States at 68% of GDP by 2014 - 1545% for Centre and less than 25% for states. An independent review mechanism should be set up by the Centre to evaluate fiscal reforms process.

Day 23: Indian Economics

Chapters of Economic Survey 2013
Chapter: State of the Economy and Prospects
http://indiabudget.nic.in/es2012-13/echap-01.pdf 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.
GROWTH OF GDP AND OTHER MACRO AGGREGATES: Comparative analysis of Growth of past 5 years. Reasons for slowdown in the recent past. The tables and stats of this chapter are very important from the perspective of the Contribution of different sectors and their respective growth rate INVESTMENT NET EXPORTS PUBLIC FINANCE The Gold Rush (Box 1.2) PRICES AND MONETARY MANAGEMENT THE BALANCE OF PAYMENTS AND EXTERNAL POSITION AGRICULTURE AND FOOD MANAGEMENT INDUSTRY AND INFRASTRUCTURE SERVICES SECTOR FINANCIAL INTERMEDIATION HUMAN DEVELOPMENT

Chapter: Financial Intermediation


1. 2. 3. 4. 5. 6. 7. 8.

Meaning of financial intermediation Interest Rates and its relation with growth Priority-sector Lending RURAL INFRASTRUCTURE DEVELOPMENT FUND FINANCIAL INCLUSION Agricultural Credit (very Important) Interest Subvention Scheme 2012-13 FINANCIAL PERFORMANCE OF BANKS


9. Capital Adequacy Ratio 10. Amalgamation of RRBs (Very Important) 11. NON-BANKING FINANCIAL INSTITUTIONS (NBFIS) 12. Major Policy Developments 13. CAPITAL MARKET 14. Rajiv Gandhi Equity Saving Scheme (RGESS) 15. Initiatives to attract foreign investment and External Commercial Borrowings (very Important) 16. INSURANCE AND PENSION FUNDS

Day 24: Indian Economy

Chapters: Infrastructure, Microfinance, Human Development: Inter-state comparisons Study Material: Infrastructure 1. 2. 3.
Relation of infrastructure with GDP growth rate. Percentage of expenditure on infrastructure Chapter 11 of Economy Survey 2013 is dedicated to infrastructure, it is very important from the point of view of prelims 4. Some important facts to be remembered from this chapter: during the Eleventh Five Year Plan, nearly 55,000 MW of new generation capacity was created. 5. There continued to be an overall energy deficit of 8.7 per cent and peak shortage of 9.0 per cent. 6. In 2010-11, the share of coal and lignite, electricity (hydro and nuclear), and natural gas was 52 per cent, 28 per cent, and 11 per cent respectively. Remember the percentages. 7. Page 234 of Economy Survey, Box 11.1: Energy Pricing is important. 8. Topic POWER on page 234 is very important. Try to remember facts and figure associated with this topic 9. Transmission, Trading, Access, and Exchange, Page 236 is very important 10. Ultra Mega Power Project Initiatives page 236. 11. Trading of Electricity, Aggregate Technical and Commercial losses and Restructured APDRP on page 237 are important 12. Rural Electrification page 237 13. Exploration of Domestic Oil and Gas, Domestic Exploration of other Gaseous Fuel, Shale Gas , Equity Oil and Gas from abroad, Refining Capacity, Pipeline Network and City Gas Distribution, Rajiv Gandhi Gramin LPG Vitaran Yojna, Direct Transfer of Cash- LPG Scheme, COAL, Railways 14. Box 11. 2 : Dedicated Freight Corridor Project page 241 15. Box 11. 3 : Initiatives taken by the Government to expedite projects under NHDP page 244 16. Prime Minister's Reconstruction Plan for J&K Page 244 17. Civil Aviation Air Passenger and Cargo Traffic 18. Ports (very Important topic) try to remember the cargo handling facts given 19. TELECOMMUNICATION page 246 20. URBAN INFRASTRUCTURE, Urban Infrastructure and Governance 21. Box 11.5 : PPP initiatives in India page 251


To attain the double digit growth trajectory, effective infrastructure would have to play an important role. Preliminary exercises by Planning Commission suggest that investment in infrastructure will have to expand to $1,000 billion in the 12th Five Year Plan.


The investment in infrastructure in India has increased from 4.9% of the gross domestic product (GDP) in 2002-03 to 7.18% in 2008-09. It is expected to increase to 8.37% in the final year of the 11th Plan and likely to touch 10% of GDP in the 12th Five Year Plan (2012-2017). According to Assocham-Ernst & Young - Infrastructure, including roads, power, highways, airports, ports and railways, have emerged as an asset class with long-term growth that can provide relatively stable returns to investors. The contribution of private sector in total infrastructure investment in each of the first two years of 11th Plan th (2007-2012) was around 34%. It is expected to rise to 36% by end of 11 Plan and 50% during the 12th Plan (2012-2017).

PPP model
In order to mobilize investment in infrastructure, the government has opted for Public Private Partnership model (PPP) under the Build Operate Transfer (BOT) route. Public-private partnership model describes a public service or private business venture which is funded and operated through a partnership of government and one or more private sector companies. BOT route In BOT, the private sector finances, builds and operates a new infrastructure facility or system according to performance standards set by the government. In the operation period the private financers mobilizes fund from those using the infrastructure in the form of users fees to pay off the construction costs and realize a profit. After the operation period government retains ownership of the project.

Special Purpose Vehicles (SPVs)

SPVs are the legal entities without the management or employee, constituted with the aim to mobilize resources for PPP projects. These SPVs mobilize the capital in the form of debt and not equity . The main reason behind their incorporation is to segregate the finances of the SPV from that of the whole ministry. They stand dissolve once their objective is achieved.

Steps taken by government to increase investment in infrastructure

100% FDI through automatic route is permitted in the infrastructure. India Infrastructure Finance Company Ltd (IIFCL) was established in January 2006 for providing long term financial assistance to various viable infrastructure projects in the country. Adopting PPP model and incorporating SPVs for mobilizing resources for the infrastructure projects. The Viability Gap funding scheme was announced by the government in the 2004. The Scheme provides financial support in the form of grants, one time or deferred, to infrastructure projects undertaken through public private partnerships with a view to make them commercially viable. The launching of tax saving Infrastructure Bonds to mobilize capital for the infrastructure .

The road ahead

Its an established fact that huge investments are required in the infrastructure development in the recent future. The private investment in the form of PPP and FDI would be required to mobilize the investment. However, PPP can only supplement the government in developing the infrastructure. It would be a big st misnomer to assume that PPP model alone is sufficient for infrastructure in 21 century. Government has to remain as biggest actor in infrastructure development. Therefore direct investment by government is essential in infrastructure. Nonetheless, already quagmire with the resource crunch and with increasing fiscal deficit


each year, the government essentially has to come up with new arrangements for resource mobilization. The pension and insurance fund could be two new arrangements of such kind from where the resources could be directed to the infrastructure sector.

Ensuring Energy Security

Energy and prosperity

Energy is one of the basic requirements for performing daily routine activities like lighting and cooking as well as for community purposes and carrying out developmental activities. Energy consumption is an indicator of economic prosperity of a region. Poor people generally have limited resources to spend on their energy requirements and hence these people are at the lowest rung of the energy ladder. A poor household will use energy only for his basic minimum needs i.e cooking and lighting. However, as prosperity grows, the household may start using a refrigerator, a cooler or even an air conditioner. Hence economic prosperity increases energy consumption. In keeping with the economic conditions, per capita power consumption in the country is very low at 733 Kwh as compared to other countries of the world.

Electricity is the most important source for meeting energy requirements of the country. As per figures available with the Central Electricity Authority, the country had generation capacity of 1,73,626 MW as on st 31 March, 2011. Out of this 12160.50 MW was added in the year 2010-11. Gross annual generation of power during the year was 2010-11 was about 811 BU (Billion Units) which was an improvement of 5.6% over last year. However, the demand has risen more sharply at 6%. Demand during the year 2010-11 was about 861 BU while availability was 788 BU thereby causing a deficiency of about 8.5%. Similarly, peak demand during the year was 1,22,827 MW while the peak demand met was 1,10,256 MW causing a deficit of 9.8%. The average per capita consumption of electricity in India is a mere 478 kWh2 (2010), compared to the world average of 2,300 kWh. Apart from the generation being less than the demand, another important aspect is that the present system and processes are oriented towards urban consumers, high end consumers and to a little extent agricultural consumers. This puts the rural households at a disadvantage and makes electricity out of bounds of a number of households. According to The World Energy Outlook 2011, 268 million people of rural India and 21 million people of urban India do not have access to electricity (survey figures of 2009). This together constitutes 25% of the total Indian population.

Cooking and Transport

Energy demands for cooking and transport are met through petroleum products. Where LPG is not available, kerosene and fuel wood are used for cooking. Kerosene is also used for lighting purposes in the absence of electricity. Demands for transport sector are met through petrol and diesel. However, the country imports about 70% of its requirement of crude oil and hence crude oil based products are quite expensive. Renewable energy also plays an important role in meeting energy requirements and its proportion is likely to increase in times to come. Renewable energy installed capacity as on Jan, 2012 was 24 GW. This comprises of wind energy (16GW), small hydropower (3.3GW), biomass power (3.0 GW) and solar power (445 MW). Earlier power sector was closed to the private sector. Now with the advent of the Electricity Act, 2003, private players have started entering the market. This has brought in the required capital as well as a professional attitude. Government of India launched Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY) in the year 2005 for taking up the cause of rural electrification. Under this scheme capital subsidy for 90% of project cost is being provided by Government of India. Under this RGGVY programme, cumulatively up to 31.03.2012, works in 104496 un-electrified villages have been completed and connections to 1.94 crore BPL households have been released.


Jawaharlal Nehru National Solar Mission (JNNSM) was launched in January, 2010. Overall objective of the mission for 2022 is deployment of 20,000 MW of grid connected solar power, 2000 MW of off grid solar applications including 20 million solar lights, 20 million sq. m. solar thermal collector area, creating favourable conditions for developing solar manufacturing capacity in the country and to support R & D and capacity building. The first phase of the mission aims at setting up of 1,100 MW grid connected solar plants, 200 MW capacity equivalent off-grid solar applications and 7 million square meter solar thermal collector area till March, 2013. As per annual report of the Ministry of New and Renewable Energy, the country has a potential of 12 million family biogas plants, which can daily generate on an average 35 million cubic meters of biogas. Apart from th meeting energy requirements it is also a source of organic manure. During the 11 five year plan it is envisaged to install 6.47 lakh biogas plants under the National Bio Mass Management Programme. These plants would have an estimated generation capacity of about 12.94 lakhs cubic meters of biogas per day and would be capable of saving 1.26 crores of LPG cylinders annually and producing organic fertilizer equivalent to 624 lakh kg of urea. The scheme has been running since 1981-82 and 44.04 lakh plants had been installed up till March, 2011, thereby achieving 35.7% of the potential.

Future estimates
Energy requirements of the country would increase at the rate of about 7.4% taking the estimated demand in the year 2031-32 to be around 800 GW. Considering the present installed capacity of 185GW it would mean a five fold increase in the generation capacity. However, the past experience does not show a much encouraging picture. In the tenth plan, a capacity addition of 21,180 MW was achieved which was only 51.5% st of the target. The XIth plan (2007-12) envisaged a target of capacity addition of 62,374 MW but up to 31 March, 2011, a capacity addition of 41,297 MW only had been made which is about 66% of the target and it is very unlikely that the target for the plan period would be achieved. Therefore, if the required energy production is to be achieved, swift action will have to be taken at policy as well as implementation level. It requires substantial increase in capacity as well as optimum use of the capacity available. Increase in capacity would require completion of projects in time and meeting the targets under schemes. Presently, 55% of the power is generated by using coal. Optimum unitization would depend to a large extent on the availability of required amount of coal. Some of the thermal power plants also run on gas. The gas supply to power sector has been lower than the requirement over the last 10 years, although the deficit for gas has reduced from 45% in FY01 to 20% in FY11. Total loss of generation in financial year 2010 due to shortage in gas supply has been to the tune of 3.24 billion units. Therefore, uninterrupted supply of fuel to the thermal power plants has to be ensured to make full use of their capacity. Though efforts have been made to tap the renewable sources, full potential is yet to be exploited and greater stress need to be placed on these sources as they can provide clean energy without any harmful effect on the environment and are also capable of providing energy in remote and inaccessible areas where conventional electrification is difficult. Nuclear energy can also play a big role in providing energy and should be seriously considered as a viable option subject to other related issues including safety measures. Apart from increasing capacity, the issues related to distribution are also important. On the technical side there is the issue of transmission and distribution losses which are substantial. On the managerial side there is the issue of tariff and financial viability of the distribution companies. On the social side there is the issue of availability of adequate equipments for using this energy and its judicial use and conservation. All these require sustained efforts from all stake holders to make the concept of Power for all a reality in the country. Large requirement of energy, particularly in the agricultural sector and rural areas are met through animal power which needs fodder to sustain. Dairy industry is also based on livestock which needs fodder to survive . Generally, the feed and fodders for livestock are classified as roughages and concentrates, dry and fresh, as well as conventional and novel. Roughages are high in crude fibrous material which essentially consists of cellulose, hemi-cellulose and to some extent lignin, the last increasing in level with advances in maturity of the th crop. As per a report of the Working Group for the 11 five year plan, permanent pastures constitute 3.6% of geographical area in the country. Their productivity and carrying capacity are declining, though these lands


support grazing ruminants such as cattle, sheep and goats in large numbers. There are large chunks of common property and community lands which are under the public domain, but becoming drastically reduced for livestock grazing. In India, the forest cover is to the tune of 22.6% of which over 85% are under protection and conservation. These lands used to be a major source of feeds and fodder for the livestock rearing communities dwelling within and nearby the forests. As per the annual report of the Animal husbandry department for 2011-12, the area cultivated under fodder is about 4.6% of the total cultivable area. Exclusive pastures and grasslands are widespread and are grazed by the domestic animals. Total area under permanent pastures and grasslands is about 12.4 million hectares (NABCONS). An area of 15.6 million ha is classified as wasteland and is also available for grazing. However majority of these lands have either been degraded or encroached upon restricting their availability for livestock grazing. As per the draft 12 five year plan, the National Livestock Mission (NLM) will have an important mini-mission of feed and fodder, with an objective to substantially reduce the gap between availability and demand. The deficit of dry fodder (10 per cent), concentrates (33 per cent) and green fodder (35 per cent) continues to be high, although availability of feed resources has improved somewhat. The forage and fodder seed need varietal and quality improvement alongside better availability. The NLM will encourage seed companies and SAUs to take up forage seed production on a priority basis. Developing common property resources, including grazing land and wasteland, and better utilisation and enrichment of crop residues/agricultural by-products is the other priority. Ration balancing, which is being promoted under NDP, will also be promoted under this mini-mission on feed and fodder.

Energy Poverty
Energy is one of the basic requirements for performing daily routine activities like lighting and cooking as well as for community purposes and carrying out developmental activities. Energy consumption is an indicator of economic prosperity of a region. Poor people generally have limited resources to spend on their energy requirements and hence these people are at the lowest rung of the energy ladder. A poor household generally use energy only for its basic minimum needs i.e cooking and lighting. However, as prosperity grows, the household may start using it for luxuries like refrigerator, acooler or even an air conditioner. Hence economic prosperity increases energy consumption. In keeping with the economic conditions, per capita power consumption in India is very low at 733 Kwh as compared to other countries of the world. This brings in the concept of energy poverty. Though the term defies a clear cut definition, yet it can be loosely defined as a stage when people are not able to have access to adequate amount of energy services. This could either be due to non availability of power or due to lack of purchasing power among people. Non availability of clean source of energy adversely affects the well being of the people as well as their productivity. In such a condition, people may resort to use of those sources which are either costly or inefficient or are hazardous to the environment. A poor family without access to LPG and biogas may resort to kerosene or biomass, both of which are less efficient and more polluting then LPG. Similarly, if a farmer does not have access to electricity, he will have to resort to use of diesel for running pumps for irrigation, which is costly and also affects the environment adversely.

Present status of power generation

Electricity is the most important source for meeting energy requirements of the country. As per figures st available with the Central Electricity Authority, the country had generation capacity of 1,73,626 MW as on 31 March, 2011. Out of this 12160.50 MW was added in the year 2010-11. Gross annual power generation during the year was 2010-11 was about 811 BU which was an improvement of 5.6% over last year. However, the demand has risen more sharply at 6%. Demand during the year 2010-11 was about 861 BU while availability was 788 BU thereby causing a deficiency of about 8.5%. Similarly, peak demand during the year was 1,22,827 MW while the peak demand met was 1,10,256 MW causing a deficit of 9.8%. The average per capita consumption of electricity in India is a mere 478 kWh2 (2010), compared to the world average of 2,300 kWh.


Apart from the generation being less than the demand, another important aspect is that the present system and processes are oriented towards urban consumers, high end consumers and to a little extent towards agricultural consumers. This puts the rural households at a disadvantage and makes electricity out of bounds of a number of households. According to The World Energy Outlook 2011, 268 million people of rural India and 21 million people of urban India do not have access to electricity (survey figures of 2009). This together constitutes 25% of the total Indian population. Energy demands for cooking and transport are met through petroleum products. Where LPG is not available, kerosene and fuel wood are used for cooking. Kerosene is also used for lighting purposes in the absence of electricity. Demands for transport sector are met through petrol and diesel. However, the country imports about 70% of its requirement of crude oil and hence crude oil based products are quite expensive. Renewable energy also plays an important role in meeting energy requirements and its proportion is likely to increase in times to come. Renewable energy installed capacity as on Jan, 2012 was 24 GW. This comprises of wind energy (16GW), small hydropower (3.3GW), biomass power (3.0 GW) and solar power (445 MW).

Government initiatives
1. 2. Earlier power sector was closed to the private sector. Now with the advent of the Electricity Act, 2003, private players have started entering the market. This has brought in the required capital as well as a professional attitude. Government of India launched Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY) in the year 2005 for taking up the cause of rural electrification. Under this scheme capital subsidy for 90% of project cost is being provided by Government of India. Under this RGGVY programme, cumulatively up to 31.03.2012, works in 104496 un-electrified villages have been completed and connections to 1.94 crore BPL households have been released. Jawaharlal Nehru National Solar Mission (JNNSM) was launched in January, 2010. Overall objective of the mission for 2022 is deployment of 20,000 MW of grid connected solar power, 2000 MW of off grid solar applications including 20 million solar lights, 20 million sq. m. solar thermal collector area, creating favourable conditions for developing solar manufacturing capacity in the country and to support R & D and capacity building. The first phase of the mission aims at setting up of 1,100 MW grid connected solar plants, 200 MW capacity equivalent off-grid solar applications and 7 million square meter solar thermal collector area till March, 2013. As per annual report of the Ministry of New and Renewable Energy, the country has a potential of 12 million family biogas plants, which can daily generate on an average 35 million cubic meters of biogas. th Apart from meeting energy requirements it is also a source of organic manure. During the 11 five year plan it is envisaged to install 6.47 lakh biogas plants under the National Bio Mass Management Programme. These plants would have an estimated generation capacity of about 12.94 lakhs cubic meters of biogas per day and would be capable of saving 1.26 crores of LPG cylinders annually and producing organic fertilizer equivalent to 624 lakh kg of urea. The scheme has been running since 1981-82 and 44.04 lakh plants had been installed up till March, 2011, thereby achieving 35.7% of the potential. Village energy security projects are being taken up for those villages and hamlets where electrification is not possible by conventional means. 65 projects have been commissioned so far. However, the th scheme is not likely to be continued in the 12 five year plan. A number of other programmes like Biomass Power Programme, Bagasse Cogeneration Programme, Biogas Based Distributed/Grid Power Generation Programme and Small Hydro Power Programme are also being run to augment the energy generation capacity.


4. 5.



Future requirements
Energy requirements of the country would increase at the rate of about 7.4% taking the estimated demand in the year 2031-32 to be around 800 GW. Considering the present installed capacity of 185GW it would mean a five fold increase in the generation capacity. However, the past experience does not show a much encouraging picture. In the tenth plan, a capacity addition of 21,180 MW was achieved which was only 51.5% st of the target. The XIth plan (2007-12) envisaged a target of capacity addition of 62,374 MW but up to 31


March, 2011, a capacity addition of 41,297 MW only had been made which is about 66% of the target and it is very unlikely that the target for the plan period would be achieved. Therefore, if the required energy production is to be achieved, swift action will have to be taken at policy as well as implementation level. It requires substantial increase in capacity as well as optimum use of the capacity available. Increase in capacity would require completion of projects in time and meeting the targets under schemes. Presently, 55% of the power is generated by using coal. Optimum unitization would depend to a large extent on the availability of required amount of coal. Some of the thermal power plants also run on gas. The gas supply to power sector has been lower than the requirement over the last 10 years, although the deficit for gas has reduced from 45% in FY01 to 20% in FY11. Total loss of generation in financial year 2010 due to shortage in gas supply has been to the tune of 3.24 billion units. Therefore, uninterrupted supply of fuel to the thermal power plants has to be ensured to make full use of their capacity. Though efforts have been made to tap the renewable sources, full potential is yet to be exploited and greater stress need to be placed on these sources as they can provide clean energy without any harmful effect on the environment and are also capable of providing energy in remote and inaccessible areas where conventional electrification is difficult. Nuclear energy can also play a big role in providing energy and should be seriously considered as a viable option subject to other related issues including safety measure. Apart from increasing capacity, the issues related to distribution are also important. On the technical side there is the issue of transmission and distribution losses which are substantial. On the managerial side there is the issue of tariff and financial viability of the distribution companies. On the social side there is the issue of availability of adequate equipments for using this energy and its judicial use and conservation. All these require sustained efforts from all stake holders to make the concept of Power for all a reality in the country.

Study Material: Microfinance and Self help Groups

Microfinance: The concept and road ahead

Microfinance: The Concept
Conventional financial services like banks seldom lend to the low income groups especially the women headed families. So most of these communities have to depend on the local money lenders for micro credit who charge exorbitant interest rates which finally leads them into a debt trap which is difficult to come out of. Micro finance has evolved over the years in order to address the issue of providing financial services to the marginalized. We can define micro finance as the extension of very small loans (micro loans) and providing wide range of financial services in particular savings to poor borrowers who typically lack collateral, steady employment and a verifiable credit history. It is also used as a tool to alleviate poverty through financial inclusion of the marginalized communities. The other expected outcomes of the micro finance are to spur entrepreneurship, increase incomes and also to empower women.

Genesis of Microfinance
The history of micro financing can be traced back as long as 1800s but it was only at the end of the Second World War with the Marshall plan the concept had a big impact. The current structure of micro financing has its roots in 1970s when organizations such as Grameen bank of Bangladesh sprang up. One of the main reasons why micro financing is dated to 1970s is that the program showed that people can be relied on to repay their loans and that it is possible to provide financial services to poor people through market based enterprises without subsidies. Shore bank was the first micro finance and community development bank founded in 1974 in Chicago. The year 2005 was proclaimed as the International year of Microcredit by The Economic and Social Council of the United Nations in a call for the financial sector to fuel the strong entrepreneurial spirit of the poor people around the world.


Microfinance vis-a-vis conventional Banking model

The conventional banking model caters to the needs of the organized sector which is mostly urban centric. Large populations in rural India have no access to credit due to various reasons like no assured income, no collateral, seasonal unemployment, lack of banking facilities etc. Microfinance tries to provide small or micro loans to these disadvantaged sections with nominal interest rates which can be paid back based on the agreed terms and conditions. Microfinance has been proclaimed as one of the tools to bring about financial inclusion. Microfinance today has become a means to reach the population which the conventional banking model has excluded.

Grameen Bank model

Grameen bank which means rural bank in Bengali is a microfinance organization and a community development bank started in Bangladesh that grants small loans to the impoverished without requiring collateral. The concept of Grameen bank is based on the idea that poor have many untapped skills that are underutilized due to lack of credit. Grameen bank uses a group based credit approach where a group of 10-15 people are given credit on agreed terms and conditions. This approach utilizes the peer pressure within the group to ensure that borrowers follow through and use caution in conducting their financial affairs with strict discipline, ensuring repayment eventually and allowing the borrower to develop good credit standing. Accepting deposits and running several development oriented businesses including fabric, telephone and energy companies are some of the other services provided by the Grameen bank. One of the distinctive feature of this model is that majority of the borrowers are women.

SHG/JLG model
The SHG model allows people (mostly women) to form groups of 11-20 members, develop savings and credit discipline and are then they are formally linked to a bank for opening a bank account to access loans. The SHG model was aimed at building a credit history of the individuals through the group process of on lending, so that over time each individual would have her own bank account and access to financial services thereby contributing to total financial inclusion. Some of the flaws in the SHG model were that there were no clear margins built into the program to take care of cost of building, managing and scaling the program done only through grants, subsidies and other provisions made by the government. Some of these constraints led to the adoption of the new model called JLG model. Joint liability group (JLG) model is a recent model adopted by Indian microfinance and is widely embraced by Indian development professionals as an alternative to the SHG model. The Joint Liability Group is not linked with a bank but is intermediated by the loan officer of a MFI who is responsible for formation and management of the group. The basic difference between SHG and JLG model is that unlike SHG model wherein the loan is given to the group and the bank does not track individuals credit history, whereas in the Grameen inspired JLG model the loan is given to the individual usually by the MFI, backed by the group guarantee. In a JLG model an individual credit history is created whereas an SHG model aims at building a credit history through the group process.

Issues in India
Social businesses like the microfinance have a very sensitive client base, so they need to strike the right balance between their commercial interests and their social and moral expectations of a wide variety of stakeholders. The state of Andhra Pradesh has made significant investment in subsidizing financial inclusion through SHG programs and also allowed Grameen/JLG model to flourish. This is one of the reasons why four largest MFIs in India are based in AP, alongside numerous other midsized MFIs. The MFIs and the government led SHG programs have coexisted for many years. However, the first signs of friction became visible in the period from 2005-07 when, buoyed by capital from a partnership model launched initially by ICICI bank. MFIs started to finance customers more aggressively than before. A large number of these customers were members of the existing SHGs and this caused the first sign of friction. Between 2005 and 2007 the larger microfinance organizations saw an infusion of private equity in a big way. Large equity infusions in MFIs


such as SKS, Share and Spandana provided them capital to scale up and fueled their ambitions to move beyond state boundaries. Commercial MFIs started to compete with each other and soon outpaced government backed programs in terms of reach. With this rapid commercialization many MFIs were charged with unethical behavior like charging usurious interest rates, using coercive methods to collect the interest which led to the suicides of the poor and also questioned their social mission to help the poor and marginalized. As a result of these fallouts the government of Andhra Pradesh passed an ordinance on October 15, 2010 to regulate the MFIs. This decision was a big blow for the microfinance industry as a whole and started off a debate whether strict regulations by the government would help in improving the current status.

The report of Malegam committee: analysis and recommendations

In the wake of the crisis in Andhra Pradesh, many questions were raised by the stake holders of the micro finance institution and the need was felt for a more rigorous regulation of non banking financial institutions functioning as micro finance institutions. The committee inter alia recommended the following: 1. 2. 3. 4. 5. 6. 7. 8. Creation of separate category of NBFC-MFI. A margin cap and an interest rate cap on individual loans. Transparency in interest charges. Lending by not more than two MFIs to individual borrowers Creation of one or more credit information bureaus. Establishment of a proper system of grievance redressal procedure by MFIs. Creation of one or more social capital funds. Continuation of categorization of bank loans to MFIs, complying with the regulation laid down for NBFC-MFIs, under the priority sector.

The recommendations of the committee were discussed by RBI with all stake holders including Government of India, select state governments, major NBFCs working as MFIs, industry associations of MFIs working in the country, other smaller MFIs and banks. In the light of the feedback received from different stake holders RBI decided to take the following steps: 1. 2. To accept the broad framework of regulations recommended by the committee. Bank loans to all MFIs including NBFCs working as MFIs on or after April 1 2011, will be eligible for classification as priority sector loans under respective category of indirect finance only if the prescribed percentage of their total assets are in the nature of qualifying assets and they adhere to the pricing of interest guidelines to be issued in this regard. That a qualifying asset is required to satisfy the criteria of (a)loan disbursed by a MFI to a borrower with a rural household annual income not exceeding 60000 or urban and semi-urban household income not exceeding 120000. (b) Loan amount not to exceed 35000 in the first cycle and 50000 in the subsequent cycles. (c) Total indebtedness of the borrower not to exceed 50000. (d) Tenure of payment not to be less than 24 months for loan amount in excess of 15000 without pre-payment penalty.(d) loan to be extended without collateral. (e) Aggregate amount of loan given for income generation not to be less than 75 percent of the total loans given by the MFIs. (f) Loan to be repayable by weekly, fortnightly and monthly installments at the choice of the borrower. That banks should ensure a margin cap of 12 percent and an interest rate cap of 26 percent for their lending to be eligible to be classified as priority sector loans. That loans from MFIs can also be extended to individuals outside the self help groups (SHG) through joint liability group (JLG) mechanism. That bank loans to other NBFCs would not be reckoned as priority sector loan with effect from April 1, 2011.


4. 5. 6.

The road ahead

The contemplated regulations of RBI and the contemplated legislation by the government are almost entirely in response to the MFI activity in Andhra Pradesh. It is important for the debate to consider the MFI experience,


and indeed the experience in regard to financial inclusion in the rest of the country, objectively, and then consider whatever actions are required. It is appropriate that the for-profit institutions that have taken risks should bear the risks of the lenders, especially banks who have lent money to these institutions. This will ensure that moral hazard problems do not arise in future and that national-level legislation is based on a wider experience, particularly in states where MFI activity has been successful on a sound basis. In viewing the way forward, it is important to recognize that moneylenders constitute an important segment. A systematic study about the transaction cost incurred the burden on the borrowers and the scope for improvement would provide a framework for bringing moneylenders from the informal to somewhat formal sector, and slowly into the more formal banking sector. Such a broader approach would require a careful consideration and strengthening of the moneylender legislation at the state level. In addressing the issue of MFIs, it is necessary to clarify some conceptual issues. First, how does one distinguish financial services from credit services? Second, how does one ensure that the institutions which perform bank-like functions are subjected to bank-like regulations? Third, for profit-institutions undertaking financial activity can be divided into two categories, viz, financial intermediaries which should be subjected to regulation like any financial intermediary, and moneylenders who should be subject to legislation on par with moneylenders. Fourth, the important issues of centralization and decentralization cannot be ignored in dealing with issues relating to millions of people. Finally, the support of state governments is critical in this regard, and the recent schemes of ensuring the opening of a bank account for purposes of disbursement is an extremely laudable initiative, since it provides a vehicle for providing financial services in general, and for enabling some sort of economic inclusion. This model should be pursued with greater vigor and with the cooperation of the state governments.


Self Help Groups

SHG is group of rural poor who have volunteered to organize themselves into a group for eradication of poverty of the members. They agree to save regularly and convert their savings into a Common fund known as the Group corpus. The members of the group agree to use this common fund and such other funds that they may receive as a group through a common management. The group formation will keep in view the following broad guidelines: Generally a self-help group may consist of 10 to 20 persons. However, in difficult areas like deserts, hills and areas with scattered and sparse population and in case of minor irrigation and disabled persons, this number may be from 5-20. The difficult areas have to be identified by the State Level Swarn Gayanti Gram Swarozgar Yojna Committee and the above relaxation in membership will be permitted only in such areas. Generally all members of the group should belong to families below the poverty line. However, if necessary, a maximum of 20% and in exceptional cases, where essentially required, upto a maximum of 30% of the members of in a group may be taken from families marginally above the poverty line living contiguously with BPL families and if they are acceptable to the BPL members of the group. This will help the families of occupational groups like agricultural labourers. Marginal farmers and artisanswho are marginally above the poverty line, or who may have been excluded from the BPL list to become members of the Self Help Group. However, the APL members will not be eligible for the subsidy under the scheme. The group shall not consist of more than one member from the same family. A person should not be a member of more that one group. The BPL families must actively participates in the management and decision making, which should not ordinarily be entirely in the hands of APL families. Further, APL members of the Self Help Group shall not become office bearers ( Groups Leader, Assistant Group Leader of Treasurer) of the Group. The group should devise a code of to conduct ( Group management norms ) to bind itself. This should be in the form of regular meetings ( weekly or fortnightly), functioning in a democratic manner, allowing free exchange of views, participation by the members in the decision making process.


The group should be able to draw up an agenda for each meeting and take up discussions as per the agenda. The members should build their corpus fund through regular savings. The group should be able go collect the minimum voluntary saving amount from all the members regularly in the group meetings. The savings so collected will be the group corpus fund. The group's corpus fund should be used to advance loans to the members. The groups should develop financial management norms covering the loan sanction procedure, repayment schedule and interest rates. The members in the group meetings should take all the loaning decisions through a participatory decision making process. The group should be able to prioritise the loan applications, fix repayment schedules, fix appropriate rate of rate of interest for the loans advanced and closely monitor the repayment of the loan installments from the loanee. The group should operate a group account preferably in their service area bank branch, so as to deposit the balance amounts left with the groups after disbursing loans to its members. The group should maintain simple basic records such as Minutes book, Attendance register, Loan ledger, General ledger, Cash book Bank passbook and individual passbooks. These could be used with necessary/modifications wherever required. 50% of the groups formed in each block should be exclusively for the women. In the case of disabled persons, the groups formed should ideally be disability-specific wherever possible. However, in case sufficient number of people for formation of disability-specific groups are not available, a group may comprise of persons with diverse disabilities or a group may comprise of both disabled and non-disabled person below the poverty line. In brief the objectives of SHGs are as follow:

1. To sensitize women of target area for the need of SHG and its relevance in their empowerment process. 2. To create group feeling among women. 3. To enhance the confidence and capabilities of women. 4. To develop collective decision making among women. 5. To encourage habit of saving among women and facilitate the accumulation of their own capital resource base. 6. To motivate women taking up social responsibilities particularly related to women development.

Important facts related to development:

1. New Benchmark to identify urban poor: http://www.halfmantr.com/persons-and-places-in-news/1194--


New benchmark to identify Urban poor

The government has come up with a new benchmark to identify urban poor on the basis of social, economic and occupational vulnerabilities. The housing and poverty alleviation ministry has decided to do away with the Planning Commission's income benchmark. The new mechanism is also aimed at ensuring distribution of


benefits of government schemes to city-specific "vulnerable" basket as per the specific needs in a particular city. The aim of the whole exercise is to ensure better targeting of beneficiaries. Since the socio-economic census is going on across the country, the ministry is working on a mechanism according to which urban poor will be defined according to peoples vulnerabilities. According to new guidelines the urban poor will now be identified on the basis of social, economic and occupational vulnerabilities. The move comes as the ministry finds it difficult to identify beneficiaries in metropolises and other cities, where few families earn below the BPL cutoff while many of them live in vulnerable conditions. It has also been noticed that income certificates are forged or are being procured after bribing officials. As of now, families earning below Rs 4,824 a month are put in the bracket of urban poor. Under the mechanism, families will be divided into two groups those automatically included the other automatically excluded -- in the poverty bracket. Those automatically included in the poverty bracket will be the homeless and jobless. Automatically excluded will be families with a pakka house, motor vehicle or electronic appliances such as air-conditioner or refrigerator. Based on data from the caste census, families will be graded and assigned points according to their needs. If a family scores very high on the housing vulnerability index, it would be given priority under slum upgradation schemes and Rajiv Awas Yojana.

Human Development: Inter-state comparisons

Population Related:
Bihar has the highest decadal (2001-11) growth rate of population (25.07 per cent), while Kerala has the lowest rate (4.86 per cent). In 2011, Kerala has the highest sex ratio with 1084 females per 1000 males,

followed by Tamil Nadu (995), while Haryana is at the bottom (877).

Growth Related:
The best performers in terms of growth during 2011-12 are Bihar (16.71 per cent) followed by Madhya Pradesh and Maharashtra. The growth of these states is much above the all India average. The worst performers are Rajasthan (5.41 per cent) followed by Punjab and Uttar Pradesh. States with the highest growth rate for the period 2005-06 to 2011-12 are Bihar (10.17 per cent) followed by Gujarat and Maharashtra.

In terms of growth in per capita income, the best performer in Bihar (15.44 per cent) followed by Madhya Pradesh and Maharashtra due to high growth in gross state domestic product (GSDP) in 2011-12 and despite their high decadal growth in population. Per capita income growth is the lowest in Rajasthan (3.72 per cent), followed by Uttar Pradesh, and Odisha which are all below the all India per capita income growth.
The poverty estimates indicate that the highest poverty headcount ratio (HCR) exists in Bihar at 53.5 per cent as against the national average of 29.8 per cent. In 2009-10 compared to 2004-5, Bihar has displaced Odisha as the poorest state, with Odishas situation improving considerably in 2009 -10. Lowest poverty in Himachal Pradesh (9.5 per cent) followed by Kerala (12 per cent).


Rural Urban Disparity:

Bihar has the lowest MPCE both in rural and urban areas at Rs 780 (with 65 percent food share) and Rs 1238 (with 53 percent food share) respectively. In comparison, Kerala has the highest in both rural and urban areas at Rs 1835 (with 46 percent food share) and Rs 2413 (with 40 percent food share) respectively. It is obvious that poorer states spend a greater proportion of income on food in total consumption expenditure.

As per usual status (adjusted) NSS 66th round 2009-10, the unemployment rate (per 1000) among the major states is the lowest in Gujarat (18) and highest in Kerala (73) and Bihar (73) in urban areas and the lowest in Rajasthan (4) and again highest in Kerala (75) in rural areas. The low unemployment rate in rural areas in Rajasthan may partly be due to high absorption of Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) funds in the state. Kerala, which has performed well in terms of most indicators, performs less well in terms of most indicators, performs less well in terms of unemployment (both rural and urban). This may be due to higher level of education in Kerala resulting in people not opting for manual jobs as observed by some studies.

Kerala is the best performer in terms of life expectancy at birth for both males (71.5 years) and females (76.9 years) whereas Assam is the worst performer for both males (61 years) and females (63.4 years) during 2006-10. Infant mortality rate (IMR) in 2011 is the lowest in Kerala (12) and highest in Madhya Pradesh (59) against the national average of 44. Birth rate is lowest in Kerala (15.2) and highest in Uttar Pradesh (27.8) against the national average of 21.8. Death rate is lowest in West Bengal (6.2) and highest in Odisha (8.5) against the national average of 7.1.

Madhya Pradesh has the highest gross enrolment ration (GER) (6-13 years) in 2010-11 while Assam has the lowest.

Financial Inclusion:
In terms of decadal growth rate in bank branches, Haryana (59.5 per cent) has the highest growth and Bihar the lowest (14.4 per cent). Even a north-eastern state like Assam (16.5 per cent) is better placed than Bihar. Himachal Pradesh (89.1 per cent) has the highest percentage households availing of banking services while Assam (44.1 per cent) is the lowest followed by Bihar (44.4 per cent). This in terms of both these financial inclusion indicators, Bihars performance is among the worst.

Key Social sector Programmes:

The average person-days per household under the MGNREGA in 2011-12 is the highest in Andhra Pradesh (58 days) followed by Himachal Pradesh (53 days) and lowest in Assam an Punjab (both 26 days) against the national average of 43 days. While the share of womens employment under the MGNREGA is the highest in Kerala (92.76 per cent) followed by Tamil Nadu (73.36 per cent), it is the lowest in Uttar Pradesh (16.98 per cent). While the stipulation of one-third womens participation has like Uttar Pradesh, Assam, and Bihar, it has been below the stipulated level.

Day 25: Indian Economy

Chapters: Foreign Capital, Convertibility of Rupee, Economic Survey: Chapter 7 International Trade Foreign Capital

1. 2. 3. 4.

Concessional and Non Concessional assistance Foreign Investment Mechanism of investment in foreign countries FDI, FII, and QFI


5. 6.

Tobin Tax FDI routes

Convertibility of Rupee

1. 2. 3. 4.

Convertibility of Rupee: Meaning Current and Capital Accounts Implications of Capital Account Convertibility SS Tarapore Committee

Economic Survey: Chapter 7 International Trade


1. Present status of world trade (in Value) 2. Share of advanced economies and emerging economies in World Trade 3. Page 150: INDIA'S MERCHANDISE TRADE (very Important) 4. India's export growth, Export growth and exchange rate changes 5. Box 7.1 : How much of recent slowdown in exports is explained by external factors? Page 151 6. Export performance of India and EDEs: Page 153 7. India's import growth: Page 154 8. Trade Deficit, Trade Composition: Page 156 9. Market vs Product Diversification Page 158 10. Direction of Trade : Page 159 11. INDIA'S SERVICES TRADE Page: 161 12. India's Services Imports 13. TRADE CREDIT 14. TRADE POLICY : Page 164 very important 15. Special Economic Zones 16. WTO NEGOTIATIONS AND INDIA Page 167 17. BILATERAL AND REGIONAL COOPERATION Page 169

Foreign Capital in India

The capital from the foreign sources can be broadly classified under three broad categories: Concessional Assistance Non Concessional Assistance Foreign Investments (FDI, Portfolio Investments, Non Resident Deposits)

Concessional assistance
The concessional assistance comprises loans and grants that are obtained at the rate of interest which is lower than the international market rate. Such assistance is provided to meet some crisis, generally has long maturity period and are provided by multilateral bodies like IMF and World Bank.

Non-concessional assistance


The non-concessional assistance mainly consists of External Commercial Borrowings are obtained on the market rate.

Foreign investment
While the Foreign assistance (both concessional and non concessional) have the aim on developmental and social goals, the foreign investment is categorically aimed to maximize the shareholders wealth. The Indian government differentiates cross-border capital inflows into various categories like foreign direct investment (FDI), foreign institutional investment (FII), non-resident Indian (NRI) and person of Indian origin (PIO) investment.
Foreign Direct Investment (FDI)

It refers to the net inflows of investment from a foreign player to acquire a lasting management interest in an enterprise operating in a country. Foreign direct investment targets a specific enterprise, with the aim of escalating its capacity/productivity or altering its management control.
Investment by Non Resident Indian and Overseas Corporate Bodies

NRIs and OCBs are eligible to bring investment through the automatic route of RBI. All other proposals, which do not fulfill any or, all of the criteria for automatic approval are considered by the Government through the Foreign Investment Promotion Board (FIPB).
Foreign Institutional Investment (FII)

The term refers to the outside companies/institutions investing in the financial (share) markets of India. Unlike individuals and citizens in India who can invest in financial market, only foreign institutions (not individuals) can invest in Indian financial markets. However recently some Qualified Foreign Investors (QFIs) are allowed to directly invest in Indian equity market.

The mechanisms through which foreign investors can invest abroad

There are specialized financial medium through the foreign investors invest abroad. The most common are:
Depository Receipts

Depository Receipt is a medium through which an investor could invest in the foreign companies through their regular equity trading account from the local stock exchange. Depository Receipts also allow the investors to trade stocks without undergoing cross currency transaction. A Depository Receipt is a physical certificate which allows the investors to hold shares in equity of the foreign countries. A Depositary Receipt (DR) is a type of financial security that is traded on a local stock exchange but represents a security generally in the form of equity issued by a foreign company. Depository Receipts are excellent means of investment for NRIs and foreign nationals wanting to invest in India. By buying these in their local stock exchanges, they can invest directly in Indian companies since depository receipts are traded like any other stock, NRIs and foreigners can buy these using their regular equity trading accounts. ADR and GDR In the absence of full convertibility of rupee, ADR and GDR are financial products to mobilize financial capital from international market by Indian companies. ADR refers to American Depository Receipt while GDR refers to Global Depository Receipt. ADR represents ownership in a non-U.S stock that is traded in U.S financial markets. GDR are also similar to ADR, however GDR are issued by international bank (like JP Morgan), which can be subject of worldwide circulation on capital markets.


FDI v/s FII: Which is better?

FDI is considered to be better than FII because of following reasons: FDI is a long term investment while FII is very volatile in nature. The purpose of FII is to enjoy the capital gains, so that when the share prices go up the investors may sell their share in the country and quit. However the purpose of FDI is expansion of global business, networks and operations. FII ensures only capital inflow into the country, but in case of FDI the capital inflows are complemented with transfer of technology and sound management skills.

Tobin Tax
Since FII and other portfolio investments are very volatile (short term) in nature, Tobin Tax was proposed by Nobel laureate James Tobin. The purpose of this tax is to make the portfolio investment stable by imposing a tax on their flight from a country. The investment in share market is generally very speculative in nature also referred as hot money; the flight of capital from a countrys financial market could destabilize the whole economy. Thus if a tax is imposed on the flight of investment from a country, it would discourage the investors from frequent investment and disinvestment thus stabilizing the economy.

FDI: Indian scenario

There has been a paradigm shift in the policy related to FDI after 1991. In this era of reforms, the country has adopted an open door policy on foreign investm ent, foreign technology collaboration and foreign exchange. There was a paradigm shift in the policy related to foreign investments; which after 1991 envision management of foreign exchange rather than its restriction. The ongoing measures since 1991 are focused towards dismantling of both direct and indirect barriers to foreign investment. This change in paradigm at policy level was explicitly manifested when FERA (Foreign Exchange Regulating Act, 1973) was replaced with FEMA (Foreign Exchange Management Act, 1999)


The following are major differences in FERA and FEMA: The essence of FERA was to regulate the foreign exchange while that in case of FEMA is management of foreign exchange. Any offence under FERA was considered to be a criminal offence liable to imprisonment however in case if FEMA and offence is considered to be civil offence. Under FERA nothing was permitted unless mentioned as permitted, in case of FEMA everything is permitted unless it is mentioned as prohibited. Under FERA it was necessary to obtain permission from RBI; however its not the case with FEMA.

Thus the objective of FEMA is to facilitate external trade and payments and promote the orderly development and maintenance of foreign exchange market in India.

Importance of FDI for India

1. 2. 3. FDI bridges the gap between the investment required and investment available in India. It provides the technology up gradation, infuses sound management principles and skill set in the projects across different sectors. It plays an important role in the employment generation directly and indirectly.


Routes of FDI in India

There are three routes through which FDI is permitted in India: 1. 2. 3. Automatic route: Under this route foreign investors can straightaway brings in the investment in India. All they need to do is inform RBI within 30 days. The government has notified the sectors which are open to foreign investors under the automatic route e.g. infrastructure. Foreign Investment Promotion Board (FIPB): FIPB was set up in 1992. A foreign investor requires prior approval from FIPB in the sectors which are not listed under automatic route. Cabinet Committee on Foreign Investment (CCFI): The prior approval of Cabinet Committee on Foreign Investment (CCFI) is required before the foreign investment if:

The sector is not is not notified in the automatic route The cost of project is Rs 6000 million or more.

Factors attracting FDI in India

The factors that make India an attractive destination for FDI are: Huge market size with the growing middle class. The GDP growth rate of about 8-9% in recent past. The easy availability of abundant and cheap labor. The rise in consumption culture especially in the younger generation.

Factors hindering FDI inflow in India

The major factors which hinder the inflow of FDI are: Infrastructural bottlenecks: lack of proper connectivity, bad roads, power deficiency etc. Red tapeism, bureaucratic apathy and rampant corruption prevailing in the country Rigid labor laws and Exit policy. Multiple regional parties ruling the states at times brings in political instability or delay in the implementation of the decisions of facilitating FDI.

Cumulative inflow of FDI (2000-2011) in India from the counties (in descending order):

1.Mauritius 2.Singapore 3.U.S. 4.U.K. 5.Netherland

Sectors attracting the highest FDI

The following are the sectors in India which have attracted highest cumulative FDI (In descending order) 1.Service Sector 2.Computer and Software 3.Telecommunications 4.Housing and real Estate 5. Construction


Worlds Investment Report 2011

As per 'World Investment Report 2011', released by UNCTAD, India attracted FDI worth $ 25 billion in 2009-10. In the last fiscal i.e. 2008-09, India attracted th th FDI worth $ 36 billion. As a result its ranking dropped from 8 in 2009 to 14 in 2010. According to UNCTAD, foreign direct investment inflows worldwide in 2009-10 climbed to about $1.24 trillion. India saw FDI inflows of $19.42 billion in 2010-11.


FDI inflow in India


$ 36 billion


$ 25 billion


$ 19.4 billion

Day 26: Indian Economy

Chapters: Agriculture and food management, 12th Five Year Plan, Financial Inclusion, Depreciation of Rupee
Agriculture and food management

1. PERFORMANCE OF THE AGRICULTURE SECTOR: Page 174 2. Table 8.1 : Agriculture Sector : Key Indicators (Very Important) 3. Page 175: CROP PRODUCTION- Try to remember the total production of Rabi and Kharif crop in the year 4. Table 8.3 : Agricultural Production of Principal Crops. Try to remember the trend of Wheat and Rice 5. Box 8.1 : Sugar sector Reforms in India 6. Box 8.2 : Edible Oil Economy 7. AGRICULTURAL INPUTS: page 178 8. Page 180: Irrigation 9. PRICE POLICY FOR AGRICULTURAL PRODUCE, Page: 180 10. MAJOR SCHEMES / PROGRAMMES FOR THE AGRICULTURAL SECTOR (very Important) 11. Agricultural Credit and Insurance schemes 12. AGRICULTURAL MARKETING (APMC Acts) 13. ANIMAL HUSBANDARY, DAIRYING, AND FISHERIES 14. FOOD MANAGEMENT, special emphasis on Food Subsidy 15. The National Food Security Bill 16. COMMODITY FUTURES MARKET
12th Five Year Plan
1. Important targets related to growth and development.


Financial Inclusion

1. 2. 3. 4.

Meaning of financial inclusion Extent in India and World Need for financial inclusion Banking correspondent model

Rupee depreciation

1. 2. 3. 4.

Meaning of depreciation Difference between depreciation and devaluation Causes and Impact of rupee depreciation Intervention by RBI for the depreciation

Twelfth Five Year Plan: Monitorable Targets

Twelfth five year is currently in progress. As per approach paper to the 12 plan, a growth rate of 9% has been th envisaged. The 12 plan has fixed 25 monitorable targets which are as under: Economic Growth 1. 2. 3. Real GDP Growth Rate of 8.2 per cent. Agriculture Growth Rate of 4.0 per cent. Manufacturing Growth Rate of 10.0 per cent.

4. Every State must have a higher average growth rate in the Twelfth Plan than that achieved in the Eleventh Plan. Poverty and Employment 5. Head-count ratio of consumption poverty to be reduced by 10 percentage points over the preceding estimates by the end of Twelfth Five Year Plan. 6. Generate 50 million new work opportunities in the non-farm sector and provide skill certification to equivalent numbers during the Twelfth Five Year Plan. Education 7. Mean Years of Schooling to increase to seven years by the end of Twelfth Five Year Plan

8. Enhance access to higher education by creating two million additional seats for each age cohort aligned to the skill needs of the economy. 9. Eliminate gender and social gap in school enrolment (that is, between girls and boys, and between SCs, STs, Muslims and the rest of the population) by the end of Twelfth Five Year Plan.


Health 5. 6. 7. 10. Reduce IMR to 25 and MMR to 1 per 1000 live births, and improve Child Sex Ratio (0 6 years) to 950 by the end of the Twelfth Five Year Plan. 11. Reduce Total Fertility Rate to 2.1 by the end of Twelfth Five Year Plan. 12. Reduce under-nutrition among children aged 03 years to half of the NFHS-3 levels by the end of Twelfth Five Year Plan. Infrastructure, Including Rural Infrastructure 8. 9. 10. 11. 12. 13. 14. 15. 13. Increase investment in infrastructure as a percentage of GDP to 9 per cent by the end of Twelfth Five Year Plan. 14. Increase the Gross Irrigated Area from 90 million hectare to 103 million hectare by the end of Twelfth Five Year Plan. 15. Provide electricity to all villages and reduce AT&C losses to 20 per cent by the end of Twelfth Five Year Plan. 16. Connect all villages with all-weather roads by the end of Twelfth Five Year Plan. 17. Upgrade national and state highways to the minimum two-lane standard by the end of Twelfth Five Year Plan. 18. Complete Eastern and Western Dedicated Freight Corridors by the end of Twelfth Five Year Plan. 19. Increase rural tele-density to 70 per cent by the end of Twelfth Five Year Plan. 20. Ensure 50 per cent of rural population has access to 55 LPCD piped drinking water supply and 50 per cent of gram panchayats achieve the Nirmal Gram Status by the end of Twelfth Five Year Plan.

Environment and Sustainability 21. Increase green cover (as measured by satellite imagery) by 1 million hectare every year during the Twelfth Five Year Plan. 22. Add 30000 MW of renewable energy capacity in the Twelfth Plan. 23. Reduce emission intensity of GDP in line with the target of 20 per cent to 25 per cent reduction by 2020 over 2005 levels. Service Delivery 24. Provide access to banking services to 90 per cent Indian households by the end of Twelfth Five Year Plan. 25. Major subsidies and welfare related beneficiary payments to be shifted to direct cash transfer by the end of the Twelfth Plan, using the Aadhar platform with linked bank accounts .

Financial Inclusion
Definition of Financial Inclusion
Financial Inclusion is the process of ensuring access to appropriate financial products and services needed by all sections of the society in general and vulnerable groups such as weaker sections and low income groups in particular at an affordable cost in a fair and transparent manner by mainstream institutional players. The vulnerable section in India today also accrue a major proportion of credit and other financial services and products from the uninstitutional players like local moneylenders etc. These players charge exorbitant interest rates, usually adhere to non transparent practices and other stringent terms and conditions on the financial


services. The aim of financial inclusion is to provide access to institutional credit and other financial services to the section which hitherto have remained outside the coverage of institutional players.

Extent of Financial Exclusion -Global

2.5 billion Adults, just over half of worlds adult population, do not use formal financial services to s ave or borrow. 2.2 billion of these unserved adults live in Africa, Asia, Latin America, and the Middle East. Of the 1.2 billion adults who use formal financial services in Africa, Asia, and the Middle East, at least two-thirds, a little more than 800 million, live on less than $5 per day.

Hence, financial exclusion is not an India specific problem but a global one.

Extent of Financial Exclusion -India

In India, almost half the country is unbanked. Only 55 per cent of the population has deposit accounts and 9 per cent have credit accounts with banks. India has the highest number of households (145 million) excluded from Banking. There was only one bank branch per 14,000 people. In 6 lakh villages in India, rural branches of Schedule Commercial Banks including Regional Rural Banks number 33,495 only. Only a little less than 20% of the population has any kind of life insurance and 9.6% of the population has nonlife insurance coverage. Just 18 per cent had debit cards and less than 2 per cent has credit cards.

Financial Inclusion- Need

It is now widely acknowledged that financial exclusion leads to non accessibility, non-affordability and non-availability of financial products. Limited access to funds in an underdeveloped financial system restricts the availability of their own funds to individuals and also leads to high cost credit from informal sources such as moneylenders. Due to lack of access to a bank account and remittance facilities, the individual pays higher charges for basic financial transactions. Absence of bank account also leads to security threat and loss of interest by holding cash. All these impose real costs on individuals. Prolonged and persistent deprivation of banking services to a large segment of the population leads to a decline in investment and has the potential to fuel social tensions causing social exclusion.

Thus, financial inclusion is an explicit strategy for accelerated economic growth and is considered to be critical for achieving inclusive growth in the country.

Financial Inclusion Steps Taken in the Past

Co-operative Movement Setting up of State Bank of India Nationalisation of banks Lead Bank Scheme Regional Rural Banks Service Area Approach Self Help Groups

Financial Exclusion Why did the approach fail?


Absence of Banking Technology Absence of Reach and Coverage Absence of Viable Delivery Mechanism Not having a Business Model Rich have no compassion for poor

Current scenario w.r.t. Financial Exclusion

Focus on Inclusive Growth Banking Technology has arrived Realisation that Poor is bankable

The Indian Way- Multi Agency Approach

Financial Stability and Development Council (FSDC) mandated to focus on Financial Inclusion and Financial Literacy Financial Sector Regulators including the Reserve Bank committed to FI Mission Financial Inclusion is a mammoth task- financial services through mainstream financial institutions to 6 lakh villages

Banking Correspondent Model

The Reserve Bank of India has initiated several policy measures to ensure financial inclusion and increase the outreach of the banking sector. A major initiative taken by the Bank in this direction is the introduction of the business correspondent model. Under this model RBI has permitted banks to use the services of intermediaries such as business facilitators and correspondents to provide banking services for ensuring greater financial inclusion and increasing the outreach of the banking sector By using the Information Technolgy now intermediaries are allowed to extend the banking services in the areas which are bankable.
What has been done so far

ICT based Business Correspondent (BC) Model for low cost door step banking services in remote villages . RBI Board approved Financial Inclusion Plans (FIPs) of banks for 3 years, starting April 2010 . Roadmap to cover villages of above 2000 population by march 2012 Availability of minimum four banking products through ICT model has been ensured Mandatory opening of 25 % of new branches in unbanked rural centers. KYC documentation requirements significantly simplified for small account Guidelines for convergence between Electronic Benefit Transfer and FIP have been issued. Pricing for banks totally freed . Interest rates on advances totally deregulated.

Approach adopted by RBI- Some Specifics

1. 2. 3.

Achieving planned, sustained and structured Financial inclusion. Technology-To be fixed first All Bank branches must be on Core Banking Solution (CBS). All Regional Rural Banks (RRBs) to be on CBS by September 2011. Multi-channel approach (Handheld devices, mobiles, cards, Micro-ATMs, Branches, Kiosks, etc.) Front-end devices transactions must be seamlessly integrated with the banks CBS.


Coverage- Ensuring Transparency

What is meant by Banking Coverage? A village is covered by banking service if either a bank branch is present or a Banking Correspondent is physically present or visiting that village.

Twin Aspects of Financial Inclusion

Financial Inclusion and Financial Literacy are twin pillars. While Financial Inclusion acts from supply side providing the financial market/services what people demand, Financial Literacy stimulates the demand side making people aware of what they can demand.

Slide of Rupee

Depreciation means slide in the value of currency in terms of foreign currencies. In terms of exchange it means the foreign currencies become costlier vis--vis the domestic currency. For example, to understand this more clearly consider US Dollar as any other commodity placed in the market. Let us assume that at any point of time say August 2004 the value of US was Rs 40, some years later say August 2012 the value of Dollar reached to Rs 52. This means that rupee has depreciated. Or in simple terms earlier in August 2004 one need to spend Rs 40 to get a Dollar while in August 2012 one need to spend Rs 12 more to get the same Dollar. This means value of Rupee has slide by Rs 12 vis--vis Dollar. There is a difference between exchange depreciation and devaluation. Devaluation is the result of official government action while Depreciation or decline of exchange of one currency in terms of another is due to market forces. Substantially devaluation and depreciation both refer to the reduction of an international currency in terms of foreign currencies.

Depreciation of Rupee: Causes

The value of any currency in the international market is decided by the market forces. In simple words, if the demand of any good or services is higher relative to its supply, it becomes dearer or costly. Exactly the same holds well for the international currencies as well. Exchange rates are expressed as a comparison of two currencies and it is always relative. Interest rates, rate of inflation and exchange rates are correlated. The following are the major causes for the slide in Rupee: 1. International Economy in Shambles: Role of speculations

The underperforming international economy, Euro zone crisis, sovereign defaults, LIBOR scam etc have raised profound uncertainty in the international market. In such circumstances a host of alternative assets oil, gold and metals among them are dumped in favor of the dollar. This in simple words means that as per speculations of the investors it's safe to buy Dollars rather then any alternative assets. This has increased the demand of Dollar in the international economy and Rupee along with other currencies, it is argued, suffer on account of this. 2. Flight of foreign investment

Foreign Institutional Investments are a prominent source of demand for the Rupee. It is a known fact that Indian stock market is dominated by the overseas investors. When the economy is performing well and stock market is performing better than other countries, overseas investors will become heavy investors here. To invest here, they require rupee. This will increase the demand for rupee and will result in higher value for


rupee. On the other hand, when these investors are pulling money out of Indian stock market, rupee will be depreciated. Indian markets are in a bad shape for the last 1 year. India being an emerging economy was considered to be a lucrative destination for investment on the virtue of its high growth rate in the recent past. As a matter of fact, the return on investment as well as risk is perceived to be higher in the emerging economies. The sentiments after the US downgrade and the European crisis etc. resulted in overseas investors selling in India and buying dollars in order to be risk averse. 3. Constraints with invisible hands of the market forces: Inelastic import bill

It is said that there are invisible hands of the market forces which tend to take corrective actions in the case of anomaly. The same is theoretically true for an international currency that depreciates. In such cases, when currency depreciates the imports become costlier while the exports become cheaper. This adjusts the market forces as dearer imports and cheaper exports acts like a cushion to adjust the demand and supply gap of the currency in the international market. However Indian import bill is price inelastic as it is has a high proportion of expenditure on fuel which is an essential commodity. The fuel pricing in India is not driven by market forces but by the politics of populism this prevents a shift to alterative fuels and fuel optimization. As a result of this the impact of market forces gets nullified. 4. Current account deficit

Current account deficit occurs when a countrys total import exceeds the total exports. This makes the country, a net debtor to the rest of the world. A high deficit indicates, we are doing more trading outside the country than its actual earning inside the country. This is not good for the country because, the country needs to buy more foreign currency. More demand for the foreign currency will reduce the value of that countrys currency. Indias current account deficit is more than the expec ted level now and this also contributes to the depreciation of Indian rupee. 5. Other factors

Certain other factors like prevalence of high corruption and policy paralysis have also which affected investor sentiments globally.

Impact of Rupee depreciation

1. 2. Products and services that are directly imported, such as crude oil, fertilizers, pharmaceutical products, ores and metals, or use imported components such as Personal Computers and laptops, become more expensive following rupee depreciation A weaker domestic currency would help attract more foreign direct investment. This is so because international companies would find it more attractive to set up units in India to service their foreign units because of the cost advantages, which in the case of a strong currency could be partially or fully wiped out. However, a major drawback of depreciation in the value of the rupee is that it will increase the burden of servicing and repaying of foreign debt of the Indian Government (which has dollar denominated debt) and those companies that have raised dollar denominated debt. Depreciating rupee is bad for companies that import things and good for companies that are export oriented. Investors in import oriented companies will be affected badly in a depreciating rupee. For companies, borrowing cost will increase and this will reduce their profit margin . This is good for those, who are posted abroad and are earning in dollars. There is rush from NRIs to send money to India now to take advantage. The prospects of a weaker currency could also lead to a rush for repatriation of funds by FIIs. The FIIs are permitted to transfer money in and out of the country at will and therefore if there were a legitimate

3. 4. 5. 6.


fear of a large fall in the value of currency, they may be tempted to repatriate a part of their funds. This could result in a sell off in the capital markets 7. It escalates the cost of studying overseas and tourism abroad , because one has to pay more rupees to get the same dollar. 8. The depreciating Rupee can be an incentive for the tourism industry in India. 9. In case there is exchange depreciation, Indian importers would prefer to purchase locally manufactured goods. This would add to the growth in demand for goods and services, thus helping in the economic recovery

Intervention by Reserve Bank of India and its implications

In case of depreciation, RBI sells foreign currency from the reserve and this will help in arresting the fall of rupee to some extent. The selling of foreign currency pumps in the foreign currency into the domestic market thus matching its demand. The negative side of this intervention is the fact that selling of the foreign currency by utilizing domestic currency reduces the supply of the domestic currency in the market. This can make borrowings dearer and interest rates high these could have an adverse impact on the growth story.

Day 27: Indian Economy

Chapters: Important Institutions World Bank Group:
Functions and purpose of the following 5 specialized agencies:

1. 2. 3. 4. 5.

the International Bank for Reconstruction and Development (IBRD), established in 1945, which provides debt financing on the basis of sovereign guarantees; the International Finance Corporation (IFC), established in 1956, which provides various forms of financing without sovereign guarantees, primarily to the private sector; the International Development Association (IDA), established in 1960, which provides concessional financing (interest-free loans or grants), usually with sovereign guarantees; the International Centre for Settlement of Investment Disputes (ICSID), established in 1966, which works with governments to reduce investment risk; the Multilateral Investment Guarantee Agency (MIGA), established in 1988, which provides insurance against certain types of risk, including political risk, aw primarily to the private sector.

Asian Development Bank



Structure and major donors

World Trade organization:


1. 2.

GATT and Marrakech Agreement Agenda of Doha Development Round http://en.wikipedia.org/wiki/Doha_Development_Round



1. 2. 3.

Member countries Issues Role of India


1. 2.

Share of worlds GDP, Population and Trade of BRICS countri es BRICS bank http://www.halfmantr.com/persons-and-places-in-news/1280-brics-bank

Recent summits and agenda

Members and recent summits and agenda

Members Relation with India

North Atlantic Free Trade Agreement


Members and relation with India African Union and European Union

World Bank Group

Formation Type Legal status Purpose/focus Membership President Main organ Website 27 December 1945 International organization Treaty Economic development, poverty elimination 187 countries Jim Yong Kim Board of Directors[1] worldbank.org 100

The World Bank Group (WBG) is a family of five international organizations that make leveraged loans to poor countries. It is the largest and most famous development bank in the world and is an observer at the United Nations Development Group.[2] The bank is based in Washington, D.C. and provided around $30 billion in loans and assistance to "developing" and transition countries in 2012.[3] The bank's mission is to reduce poverty.[4] The World Bank's (the IBRD and IDA's) activities are focused on developing countries, in fields such as human development (e.g. education, health), agriculture and rural development (e.g. irrigation, rural services), environmental protection (e.g. pollution reduction, establishing and enforcing regulations), infrastructure (e.g. roads, urban regeneration, electricity), large industrial construction projects, and governance (e.g. anti-corruption, legal institutions development). The IBRD and IDA provide loans at preferential rates to member countries, as well as grants to the poorest countries. Loans or grants for specific projects are often linked to wider policy changes in the sector or the country's economy as a whole. For example, a loan to improve coastal environmental management may be linked to development of new environmental institutions at national and local levels and the implementation of new regulations to limit pollution, or not, such as in the World Bank financed constructions of paper mills along the Rio Uruguay in 2006.[5]

Founding The WBG came into formal existence on 27 December 1945 following international ratification of the Bretton Woods agreements, which emerged from the United Nations Monetary and Financial Conference (122 July 1944). It also provided the foundation of the Osiander Committee in 1951, responsible for the preparation and evaluation of the World Development Report. Commencing operations on 25 June 1946, it approved its first loan on 9 May 1947 (US$250M to France for postwar reconstruction, in real terms the largest loan issued by the Bank to date).


World Bank Group: member states of all five WBG organizations member states of four WBG organizations member states of three WBG organizations member states of two WBG organizations 101

member states only of the IBRD All of the 193 of the UN members and Kosovo that are WBG members participate as a minimum in the IBRD. Most of them also participate in some of the other 4 organizations: IDA, IFC, MIGA, ICSID. WBG members by the number of organizations where they participate are the following: 1. only in IBRD: San Marino 2. IBRD and one other organization: Suriname, Tuvalu, Brunei 3. IBRD and two other organizations: Antigua and Barbuda, Sao Tome and Principe, Namibia, Bhutan, Myanmar, Qatar, Marshall Islands, Kiribati 4. IBRD and three other organizations: Canada, Mexico, Belize, Jamaica, Dominican Republic, Venezuela, Brazil, Bolivia, Uruguay, Ecuador, Dominica, Saint Vincent and the Grenadines, Cape Verde, Guinea-Bissau, Niger, Equatorial Guinea, Angola, South Africa, Comoros, Seychelles, Libya, Somalia, Ethiopia, Eritrea, Djibouti, Bahrain, Iran, Iraq, Malta, Montenegro, Bulgaria, Romania, Moldova, Poland, Russia, Lithuania, Belarus, Kyrgyzstan, Tajikistan, Turkmenistan, India, Thailand, Laos, Vietnam, Palau, Vanuatu, Samoa, Maldives, South Sudan 5. All five WBG organizations: the rest of the 127 WBG members Non-members are:

three Pacific island nation Nauru, Cook Islands, Niue, two communist states Republic of Cuba, Democratic Peoples Republic of Korea four European microstates Principality of Andorra, Principality of Monaco, Principality of Liechtenstein, State of Vatican City and states with limited recognition Republic of Abkhazia, Taiwan, State of Palestine, Sahrawi Arab Democratic Republic, Republic of Somaliland, Republic of South Ossetia, Pridnestrovian Moldavian Republic, Nagorno-Karabakh Republic, Turkish Republic of Northern Cyprus Venezuela and Ecuador, withdrew from the World Bank.[citation needed]

Organizational structure
Together with four affiliated agencies created between 1957 and 1988, the IBRD is part of the World Bank Group. The Group's headquarters are in Washington, D.C. It is an international organization owned by member governments; although it makes profits, these profits are used to support continued efforts in poverty reduction.[citation needed] Technically the World Bank is part of the United Nations system[citation needed], but its governance structure is different: each institution in the World Bank Group is owned by its member governments, which subscribe to its basic share capital, with votes proportional to shareholding. Membership gives certain voting rights that are the same for all countries but there are also additional votes which depend on financial contributions to the organization. The President of the World Bank is nominated by the President of the United States and elected by the Bank's Board of Governors.[7] As of 15 November 2009 the United States held 16.4% of total votes, Japan 7.9%, Germany 4.5%, the United 102

Kingdom 4.3%, and France 4.3%. As changes to the Bank's Charter require an 85% super-majority, the US can block any major change in the Bank's governing structure.[8] World Bank Group agencies The World Bank Group consists of

the International Bank for Reconstruction and Development (IBRD), established in 1945, which provides debt financing on the basis of sovereign guarantees; the International Finance Corporation (IFC), established in 1956, which provides various forms of financing without sovereign guarantees, primarily to the private sector; the International Development Association (IDA), established in 1960, which provides concessional financing (interest-free loans or grants), usually with sovereign guarantees; the International Centre for Settlement of Investment Disputes (ICSID), established in 1966, which works with governments to reduce investment risk; the Multilateral Investment Guarantee Agency (MIGA), established in 1988, which provides insurance against certain types of risk, including political risk, aw primarily to the private sector.

The term "World Bank" generally refers to just the IBRD and IDA, whereas the term World Bank Group or WBG is used to refer to all five institutions collectively.[7] The World Bank Institute is the capacity development branch of the World Bank, providing learning and other capacity-building programs to member countries. The IBRD has 185 member governments, and the other institutions have between 140 and 176 members. The institutions of the World Bank Group are all run by a Board of Governors meeting once a year.[7] Each member country appoints a governor, generally its Minister of Finance. On a daily basis the World Bank Group is run by a Board of 24 Executive Directors to whom the governors have delegated certain powers. Each Director represents either one country (for the largest countries), or a group of countries. Executive Directors are appointed by their respective governments or the constituencies. The agencies of the World Bank are each governed by their Articles of Agreement that serve as the legal and institutional foundation for all of their work.[7] The Bank also serves as one of several Implementing Agencies for the United Nations Global Environment Facility (GEF). The activities of the IFC and MIGA include investment in the private sector and providing insurance respectively. Presidency Traditionally, the Bank President has always been a U.S. citizen nominated by the President of the United States, the largest shareholder in the bank. The nominee is subject to confirmation by the Board of Governors, to serve for a five-year, renewable term.[7]


Current President

Current President Jim Yong Kim AIDS controversy The World Bank is a major source of funding for combating AIDS in poor countries. In the past six years, it has committed about US$2 billion through grants, loans and credits for programs to fight HIV/AIDS.[23] Its critics,[who?] however, claim these financial expenditures to be insufficient. Allegations of corruption The World Bank's Integrity Vice Presidency (INT) is charged with investigation of internal fraud and corruption, including complaint intake, investigation and investigation reports.[24]

List of presidents

Eugene Meyer (June 1946 December 1946) John J. McCloy (March 1947 June 1949) Eugene R. Black, Sr. (19491963) George D. Woods (January 1963 March 1968) Robert McNamara (April 1968 June 1981) Alden W. Clausen (July 1981 June 1986) Barber Conable (July 1986 August 1991) Lewis T. Preston (September 1991 May 1995) James Wolfensohn (May 1995 30 June 2005) Paul Wolfowitz (1 July 2005 30 June 2007) Robert Zoellick (1 July 2007 30 June 2012) Jim Yong Kim (1 July 2012 )

List of chief economists

Main article: World Bank Chief Economist

Hollis B. Chenery (19721982) Anne Osborn Krueger (19821986) Stanley Fischer (19881990) Lawrence Summers (19911993) Michael Bruno (19931996) Joseph E. Stiglitz (19972000) 104

Nicholas Stern (20002003) Franois Bourguignon (20032007) Justin Yifu Lin (June 2008 June 2012) Martin Ravallion - (June 2012- October 2012) Kaushik Basu (October 2012 )

Asian Development Bank

Motto Formation Type Legal status Fighting poverty in Asia and the Pacific 22 August 1966 Regional organization Treaty Mandaluyong City, Metro Manila, Philippines 67 countries Takehiko Nakao Board of Directors[1] 3,051[2] http://www.adb.org

Purpose/focus Crediting Headquarters

Region served Asia-Pacific Membership President Main organ Staff Website

Asian Development Bank member states Outside regions Asia-Pacific region The Asian Development Bank (ADB) is a regional development bank established on 22 August 1966 to facilitate economic development of countries in Asia.[3] The bank admits the members of the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP, formerly known as the United Nations Economic Commission for Asia and the Far East) and non-regional developed countries.[3] From 31 members at its establishment, ADB now has 67 members - of which 48 are from within Asia and the Pacific and 19 outside. ADB was modeled closely on the World Bank, and has a similar weighted voting system where votes are distributed in proportion with member's capital subscriptions. 105

By the end of 2012, both the United States and Japan hold the two largest proportions of shares each at 12.78%. China holds 5.45%, India holds 5.36%.[4]

The highest policy-making body of the bank is the Board of Governors composed of one representative from each member state. The Board of Governors, in turn, elect among themselves the 12 members of the Board of Directors and their deputy. Eight of the 12 members come from regional (Asia-Pacific) members while the others come from non-regional members. The Board of Governors also elect the bank's President who is the chairperson of the Board of Directors and manages ADB. The president has a term of office lasting five years, and may be reelected. Traditionally, and because Japan is one of the largest shareholders of the bank, the president has always been Japanese. The most recent president was Takehiko Nakao, who succeeded Haruhiko Kuroda in 2013.[5] The headquarters of the bank is at 6 ADB Avenue, Mandaluyong City, Metro Manila, Philippines,[6][7] and it has representative offices around the world. The bank employs 3,051 people, of which 1,463 in the Philippines.[2]

Strategy 2020
Strategy 2020 is The Long-Term Strategic Framework of the Asian Development and wide strategic framework to guide all its operations to 2020.[35] It reaffirms both ADB's vision of an Asia and Pacific free of poverty and its mission to help developing member countries improve the living conditions and quality of life of their people. Strategy 2020 identifies drivers of change that will be stressed in all its operations - developing the private sector, encouraging good governance, supporting gender equity, helping developing countries gain knowledge, and expanding partnerships with other development institutions, the private sector, and with community-based organizations.

World Trade Organization

Members Members, dually represented by the EU Observers Non-members Formation Headquarters Membership January 1, 1995 Centre William Rappard, Geneva, Switzerland 159 member states[1]

Official languages English, French, Spanish[2] 106

Director-General Pascal Lamy Budget Staff 196 million Swiss francs (approx. 209 million USD) in 2011.[3] 640[4]

The World Trade Organization (WTO) is an organization that intends to supervise and liberalize international trade. The organization officially commenced on January 1, 1995 under the Marrakech Agreement, replacing the General Agreement on Tariffs and Trade (GATT), which commenced in 1948.[5] The organization deals with regulation of trade between participating countries; it provides a framework for negotiating and formalizing trade agreements, and a dispute resolution process aimed at enforcing participants' adherence to WTO agreements, which are signed by representatives of member governments[6]:fol.9-10 and ratified by their parliaments.[7] Most of the issues that the WTO focuses on derive from previous trade negotiations, especially from the Uruguay Round (19861994). The organization is attempting to complete negotiations on the Doha Development Round, which was launched in 2001 with an explicit focus on addressing the needs of developing countries. As of June 2012, the future of the Doha Round remains uncertain: the work programme lists 21 subjects in which the original deadline of 1 January 2005 was missed, and the round is still incomplete.[8] The conflict between free trade on industrial goods and services but retention of protectionism on farm subsidies to domestic agricultural sector (requested by developed countries) and the substantiation of the international liberalization of fair trade on agricultural products (requested by developing countries) remain the major obstacles. These points of contention have hindered any progress to launch new WTO negotiations beyond the Doha Development Round. As a result of this impasse, there has been an increasing number of bilateral free trade agreements signed.[9] As of July 2012, there are various negotiation groups in the WTO system for the current agricultural trade negotiation which is in the condition of stalemate.[10] WTO's current Director-General is Pascal Lamy, who leads a staff of over 600 people in Geneva, Switzerland.

The economists Harry White (left) and John Maynard Keynes at the Bretton Woods Conference. Both had been strong advocates of a liberal international trade environment and recommended the establishment of three institutions: the IMF (for fiscal and monetary issues); the World Bank (for financial and structural issues); and the ITO (for international economic cooperation).[11] The WTO's predecessor, the General Agreement on Tariffs and Trade (GATT), was established after World War II in the wake of other new multilateral institutions dedicated to international economic cooperation notably the Bretton Woods institutions known as the World Bank and the International Monetary Fund. A comparable international institution for trade, named the International Trade Organization was successfully negotiated. The ITO was to be a United Nations specialized agency and would address not only trade barriers but other issues indirectly related to trade, including employment, investment, restrictive business practices, and commodity agreements. 107

But the ITO treaty was not approved by the U.S. and a few other signatories and never went into effect.[12][13][14] In the absence of an international organization for trade, the GATT would over the years "transform itself" into a de facto international organization.[15] GATT rounds of negotiations See also: General Agreement on Tariffs and Trade The GATT was the only multilateral instrument governing international trade from 1946 until the WTO was established on January 1, 1995.[16] Despite attempts in the mid-1950s and 1960s to create some form of institutional mechanism for international trade, the GATT continued to operate for almost half a century as a semi-institutionalized multilateral treaty regime on a provisional basis.[17] From Geneva to Tokyo Seven rounds of negotiations occurred under GATT. The first real GATT trade rounds concentrated on further reducing tariffs. Then, the Kennedy Round in the mid-sixties brought about a GATT antidumping Agreement and a section on development. The Tokyo Round during the seventies was the first major attempt to tackle trade barriers that do not take the form of tariffs, and to improve the system, adopting a series of agreements on non-tariff barriers, which in some cases interpreted existing GATT rules, and in others broke entirely new ground. Because these plurilateral agreements were not accepted by the full GATT membership, they were often informally called "codes". Several of these codes were amended in the Uruguay Round, and turned into multilateral commitments accepted by all WTO members. Only four remained plurilateral (those on government procurement, bovine meat, civil aircraft and dairy products), but in 1997 WTO members agreed to terminate the bovine meat and dairy agreements, leaving only two.[16] Uruguay Round

During the Doha Round, the US government blamed Brazil and India for being inflexible and the EU for impeding agricultural imports.[18] The then-President of Brazil, Luiz Incio Lula da Silva (above right), responded to the criticisms by arguing that progress would only be achieved if the richest countries (especially the US and countries in the EU) made deeper cuts in their agricultural subsidies and further open their markets for agricultural goods.[19] Main article: Uruguay Round Well before GATT's 40th anniversary, its members concluded that the GATT system was straining to adapt to a new globalizing world economy.[20][21] In response to the problems identified in the 1982 Ministerial Declaration (structural deficiencies, spill-over impacts of certain countries' policies on world trade GATT could not manage etc.), the eighth GATT round known as the Uruguay Round was launched in September 1986, in Punta del Este, Uruguay.[20] It was the biggest negotiating mandate on trade ever agreed: the talks were going to extend the trading system into several new areas, notably trade in services and intellectual property, and to reform trade in the sensitive sectors of agriculture and textiles; all the original GATT articles were up 108

for review.[21] The Final Act concluding the Uruguay Round and officially establishing the WTO regime was signed April 15, 1994, during the ministerial meeting at Marrakesh, Morocco, and hence is known as the Marrakesh Agreement.[22] The GATT still exists as the WTO's umbrella treaty for trade in goods, updated as a result of the Uruguay Round negotiations (a distinction is made between GATT 1994, the updated parts of GATT, and GATT 1947, the original agreement which is still the heart of GATT 1994).[20] GATT 1994 is not however the only legally binding agreement included via the Final Act at Marrakesh; a long list of about 60 agreements, annexes, decisions and understandings was adopted. The agreements fall into a structure with six main parts:

The Agreement Establishing the WTO Goods and investment the Multilateral Agreements on Trade in Goods including the GATT 1994 and the Trade Related Investment Measures (TRIMS) Services the General Agreement on Trade in Services Intellectual property the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) Dispute settlement (DSU) Reviews of governments' trade policies (TPRM)[23]

In terms of the WTO's principle relating to tariff "ceiling-binding" (No. 3), the Uruguay Round has been successful in increasing binding commitments by both developed and developing countries, as may be seen in the percentages of tariffs bound before and after the 1986-1994 talks.[24] Doha Round (The Doha Agenda) Main article: Doha Development Round

The Doha Development Round started in 2001 and continues today. The WTO launched the current round of negotiations, the Doha Development Round, at the fourth ministerial conference in Doha, Qatar in November 2001. This was to be an ambitious effort to make globalization more inclusive and help the world's poor, particularly by slashing barriers and subsidies in farming.[27] The initial agenda comprised both further trade liberalization and new rule-making, underpinned by commitments to strengthen substantial assistance to developing countries.[28] The negotiations have been highly contentious. Disagreements still continue over several key areas including agriculture subsidies, which emerged as critical in July 2006.[29] According to a European Union statement, "The 2008 Ministerial meeting broke down over a disagreement between exporters of agricultural bulk commodities and countries with large numbers of subsistence farmers on the 109

precise terms of a 'special safeguard measure' to protect farmers from surges in imports."[30] The position of the European Commission is that "The successful conclusion of the Doha negotiations would confirm the central role of multilateral liberalisation and rule-making. It would confirm the WTO as a powerful shield against protectionist backsliding."[28] An impasse remains and As of June 2012, agreement has not been reached, despite intense negotiations at several ministerial conferences and at other sessions. GATT and WTO trade rounds

Among the various functions of the WTO, these are regarded by analysts as the most important:

It oversees the implementation, administration and operation of the covered agreements.[32][33] It provides a forum for negotiations and for settling disputes.[34][35]

Additionally, it is the WTO's duty to review and propagate the national trade policies, and to ensure the coherence and transparency of trade policies through surveillance in global economic policymaking.[33][35] Another priority of the WTO is the assistance of developing, least-developed and lowincome countries in transition to adjust to WTO rules and disciplines through technical cooperation and training.[36] The WTO is also a center of economic research and analysis: regular assessments of the global trade picture in its annual publications and research reports on specific topics are produced by the organization.[37] Finally, the WTO cooperates closely with the two other components of the Bretton Woods system, the IMF and the World Bank.[34]

Principles of the trading system

The WTO establishes a framework for trade policies; it does not define or specify outcomes. That is, it is concerned with setting the rules of the trade policy games.[38] Five principles are of particular importance in understanding both the pre-1994 GATT and the WTO: 1. Non-discrimination. It has two major components: the most favoured nation (MFN) rule, and the national treatment policy. Both are embedded in the main WTO rules on goods, services, and intellectual property, but their precise scope and nature differ across these areas. The MFN rule requires that a WTO member must apply the same conditions on all trade with other WTO members, i.e. a WTO member has to grant the most favorable conditions under which it allows trade in a certain product type to all other WTO members.[38] "Grant someone a special favour and you have to do the same for all other WTO members."[24] National treatment means that imported goods should be treated no less favorably than domestically produced goods (at least after the foreign goods have entered the market) and was introduced to tackle non-tariff barriers to trade (e.g. technical standards, security standards et al. discriminating against imported goods).[38] 2. Reciprocity. It reflects both a desire to limit the scope of free-riding that may arise because of the MFN rule, and a desire to obtain better access to foreign markets. A related point is 110

that for a nation to negotiate, it is necessary that the gain from doing so be greater than the gain available from unilateral liberalization; reciprocal concessions intend to ensure that such gains will materialise.[39] 3. Binding and enforceable commitments. The tariff commitments made by WTO members in a multilateral trade negotiation and on accession are enumerated in a schedule (list) of concessions. These schedules establish "ceiling bindings": a country can change its bindings, but only after negotiating with its trading partners, which could mean compensating them for loss of trade. If satisfaction is not obtained, the complaining country may invoke the WTO dispute settlement procedures.[24][39] 4. Transparency. The WTO members are required to publish their trade regulations, to maintain institutions allowing for the review of administrative decisions affecting trade, to respond to requests for information by other members, and to notify changes in trade policies to the WTO. These internal transparency requirements are supplemented and facilitated by periodic country-specific reports (trade policy reviews) through the Trade Policy Review Mechanism (TPRM).[40] The WTO system tries also to improve predictability and stability, discouraging the use of quotas and other measures used to set limits on quantities of imports.[24] 5. Safety valves. In specific circumstances, governments are able to restrict trade. The WTOs agreements permit members to take measures to protect not only the environment but also public health, animal health and plant health.[41] There are three types of provision in this direction:

articles allowing for the use of trade measures to attain non-economic objectives; articles aimed at ensuring "fair competition"; members must not use environmental protection measures as a means of disguising protectionist policies.[41] provisions permitting intervention in trade for economic reasons.[40]

Exceptions to the MFN principle also allow for preferential treatment of developing countries, regional free trade areas and customs unions.[6]:fol.93

Organizational structure
The General Council has the following subsidiary bodies which oversee committees in different areas: Council for Trade in Goods There are 11 committees under the jurisdiction of the Goods Council each with a specific task. All members of the WTO participate in the committees. The Textiles Monitoring Body is separate from the other committees but still under the jurisdiction of Goods Council. The body has its own chairman and only 10 members. The body also has several groups relating to textiles.[42] Council for Trade-Related Aspects of Intellectual Property Rights Information on intellectual property in the WTO, news and official records of the activities of the TRIPS Council, and details of the WTO's work with other international organizations in the field.[43] 111

Council for Trade in Services The Council for Trade in Services operates under the guidance of the General Council and is responsible for overseeing the functioning of the General Agreement on Trade in Services (GATS). It is open to all WTO members, and can create subsidiary bodies as required.[44] Trade Negotiations Committee The Trade Negotiations Committee (TNC) is the committee that deals with the current trade talks round. The chair is WTO's director-general. As of June 2012 the committee was tasked with the Doha Development Round.[45] The Service Council has three subsidiary bodies: financial services, domestic regulations, GATS rules and specific commitments.[42] The General council has several different committees, working groups, and working parties.[46] There are committees on the following: Trade and Environment; Trade and Development (Subcommittee on Least-Developed Countries); Regional Trade Agreements; Balance of Payments Restrictions; and Budget, Finance and Administration. There are working parties on the following: Accession. There are working groups on the following: Trade, debt and finance; and Trade and technology transfer.

The WTO describes itself as "a rules-based, member-driven organization all decisions are made by the member governments, and the rules are the outcome of negotiations among members".[47] The WTO Agreement foresees votes where consensus cannot be reached, but the practice of consensus dominates the process of decision-making.[48] Richard Harold Steinberg (2002) argues that although the WTO's consensus governance model provides law-based initial bargaining, trading rounds close through power-based bargaining favouring Europe and the U.S., and may not lead to Pareto improvement.[49]

Dispute settlement
Main article: Dispute settlement in the WTO In 1994, the WTO members agreed on the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU) annexed to the "Final Act" signed in Marrakesh in 1994.[50] Dispute settlement is regarded by the WTO as the central pillar of the multilateral trading system, and as a "unique contribution to the stability of the global economy".[51] WTO members have agreed that, if they believe fellow-members are violating trade rules, they will use the multilateral system of settling disputes instead of taking action unilaterally.[52] The operation of the WTO dispute settlement process involves the DSB panels, the Appellate Body, the WTO Secretariat, arbitrators, independent experts and several specialized institutions.[53] Bodies involved in the dispute settlement process, World Trade Organization. Members and observers The WTO has 159 members and 25 observer governments.[60] In addition to states, the European Union is a member. WTO members do not have to be full sovereign nation-members. Instead, they must be a customs territory with full autonomy in the conduct of their external commercial relations. 112

Thus Hong Kong has been a member since 1995 (as "Hong Kong, China" since 1997) predating the People's Republic of China, which joined in 2001 after 15 years of negotiations. The Republic of China (Taiwan) acceded to the WTO in 2002 as "Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu" (Chinese Taipei) despite its disputed status.[61] The WTO Secretariat omits the official titles (such as Counselor, First Secretary, Second Secretary and Third Secretary) of the members of Chinese Taipei's Permanent Mission to the WTO, except for the titles of the Permanent Representative and the Deputy Permanent Representative.[62] Iran is the biggest economy outside the WTO.[63] With the exception of the Holy See, observers must start accession negotiations within five years of becoming observers. A number of international intergovernmental organizations have also been granted observer status to WTO bodies.[64] 14 states and two territories so far have no official interaction with the WTO.

Main article: Uruguay Round The WTO oversees about 60 different agreements which have the status of international legal texts. Member countries must sign and ratify all WTO agreements on accession.[65] A discussion of some of the most important agreements follows. The Agreement on Agriculture came into effect with the establishment of the WTO at the beginning of 1995. The AoA has three central concepts, or "pillars": domestic support, market access and export subsidies. The General Agreement on Trade in Services was created to extend the multilateral trading system to service sector, in the same way as the General Agreement on Tariffs and Trade (GATT) provided such a system for merchandise trade. The agreement entered into force in January 1995. The Agreement on Trade-Related Aspects of Intellectual Property Rights sets down minimum standards for many forms of intellectual property (IP) regulation. It was negotiated at the end of the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) in 1994. The Agreement on the Application of Sanitary and Phytosanitary Measuresalso known as the SPS Agreementwas negotiated during the Uruguay Round of GATT, and entered into force with the establishment of the WTO at the beginning of 1995. Under the SPS agreement, the WTO sets constraints on members' policies relating to food safety (bacterial contaminants, pesticides, inspection and labelling) as well as animal and plant health (imported pests and diseases). The Agreement on Technical Barriers to Trade is an international treaty of the World Trade Organization. It was negotiated during the Uruguay Round of the General Agreement on Tariffs and Trade, and entered into force with the establishment of the WTO at the end of 1994. The object ensures that technical negotiations and standards, as well as testing and certification procedures, do not create unnecessary obstacles to trade".[66] The Agreement on Customs Valuation, formally known as the Agreement on Implementation of Article VII of GATT, prescribes methods of customs valuation that Members are to follow. Chiefly, it adopts the "transaction value" approach.

Association of Southeast Asian Nations

Motto: "One Vision, One Identity, One Community" Anthem: The ASEAN Way


Headquarters Working language Membership

Jakarta,a Indonesia

English[show] 10 states[show] 2 observers[show] Leaders

Le Luong Minh[2] Brunei[3]

Secretary General Summit Presidency

Establishment Bangkok Declaration Charter 8 August 1967 16 December 2008

The Association of Southeast Asian Nations[5] (ASEAN pron.: /si.n/ AH-see-ahn,[6] rarely /zi.n/ AH-zee-ahn)[7][8] is a geo-political and economic organization of ten countries located in Southeast Asia, which was formed on 8 August 1967 by Indonesia, Malaysia, the Philippines, Singapore and Thailand.[9] Since then, membership has expanded to include Brunei, Burma (Myanmar), Cambodia, Laos, and Vietnam. Its aims include accelerating economic growth, social progress, cultural development among its members, protection of regional peace and stability, and opportunities for member countries to discuss differences peacefully.[10]

See also: Member states of the Association of Southeast Asian Nations ASEAN was preceded by an organisation called the Association of Southeast Asia, commonly called ASA, an alliance consisting of the Philippines, Malaysia and Thailand that was formed in 1961. The bloc itself, however, was established on 8 August 1967, when foreign ministers of five countries Indonesia, Malaysia, the Philippines, Singapore, and Thailand met at the Thai Department of Foreign Affairs building in Bangkok and signed the ASEAN Declaration, more commonly known as the Bangkok Declaration. The five foreign ministers Adam Malik of Indonesia, Narciso Ramos of the Philippines, Abdul Razak of Malaysia, S. Rajaratnam of Singapore, and Thanat Khoman of Thailand are considered the organisation's Founding Fathers.[12] The motivations for the birth of ASEAN were so that its members governing elite could concentrate on nation building, the common fear of communism, reduced faith in or mistrust of external powers in the 1960s, and a desire for economic development. 114

The bloc grew when Brunei Darussalam became the sixth member on 8 January 1984, barely a week after gaining independence on 1 January.[13] Continued expansion See also: Enlargement of Association of Southeast Asian Nations On 28 July 1995, Vietnam became the seventh member.[14] Laos and Myanmar (Burma) joined two years later on 23 July 1997.[15] Cambodia was to have joined together with Laos and Burma, but was deferred due to the country's internal political struggle. The country later joined on 30 April 1999, following the stabilisation of its government.[15][16] During the 1990s, the bloc experienced an increase in both membership and drive for further integration. In 1990, Malaysia proposed the creation of an East Asia Economic Caucus[17] comprising the then members of ASEAN as well as the People's Republic of China, Japan, and South Korea, with the intention of counterbalancing the growing influence of the United States in the Asia-Pacific Economic Cooperation (APEC) and in the Asian region as a whole.[18][19] This proposal failed, however, because of heavy opposition from the United States and Japan.[18][20] Despite this failure, member states continued to work for further integration and ASEAN Plus Three was created in 1997. In 1992, the Common Effective Preferential Tariff (CEPT) scheme was signed as a schedule for phasing tariffs and as a goal to increase the regions competitive advantage as a production base geared for the world market. This law would act as the framework for the ASEAN Free Trade Area. After the East Asian Financial Crisis of 1997, a revival of the Malaysian proposal was established in Chiang Mai, known as the Chiang Mai Initiative, which calls for better integration between the economies of ASEAN as well as the ASEAN Plus Three countries (China, Japan, and South Korea).[21] Aside from improving each member state's economies, the bloc also focused on peace and stability in the region. On 15 December 1995, the Southeast Asian Nuclear-Weapon-Free Zone Treaty was signed with the intention of turning Southeast Asia into a Nuclear-Weapon-Free Zone. The treaty took effect on 28 March 1997 after all but one of the member states have ratified it. It became fully effective on 21 June 2001, after the Philippines ratified it, effectively banning all nuclear weapons in the region.[22] East Timor and Papua New Guinea East Timor submitted a letter of application to be the eleventh member of ASEAN at the summit in Jakarta in March 2011. Indonesia has shown a warm welcome to East Timor.[23][24][25] Papua New Guinea was accorded Observer status in 1976 and Special Observer status in 1981.[26] Papua New Guinea is a Melanesian state. ASEAN embarked on a program of economic cooperation following the Bali Summit of 1976. This floundered in the mid-1980s and was only revived around 1991 due to a Thai proposal for a regional free trade area. Environment At the turn of the 21st century, issues shifted to include a regional approach to the environment. The organisation started to discuss environmental agreements. These included the signing of the ASEAN 115

Agreement on Transboundary Haze Pollution in 2002 as an attempt to control haze pollution in Southeast Asia.[27] Unfortunately, this was unsuccessful due to the outbreaks of the 2005 Malaysian haze and the 2006 Southeast Asian haze. Other environmental treaties introduced by the organisation include the Cebu Declaration on East Asian Energy Security,[28] the ASEAN Wildlife Enforcement Network in 2005,[29] and the Asia-Pacific Partnership on Clean Development and Climate, both of which are responses to the potential effects of climate change. Climate change is of current interest. Through the Bali Concord II in 2003, ASEAN has subscribed to the notion of democratic peace, which means all member countries believe democratic processes will promote regional peace and stability. Also, the non-democratic members all agreed that it was something all member states should aspire to.[30] ASEAN Plus Three Leaders of each country, particularly Mahathir Mohamad of Malaysia, felt the need to further integrate the region. Beginning in 1997, the bloc began creating organizations within its framework with the intention of achieving this goal. ASEAN Plus Three was the first of these and was created to improve existing ties with the People's Republic of China, Japan, and South Korea. This was followed by the even larger East Asia Summit, which included these countries as well as India, Australia, and New Zealand. This new grouping acted as a prerequisite for the planned East Asia Community, which was supposedly patterned after the now-defunct European Community. The ASEAN Eminent Persons Group was created to study the possible successes and failures of this policy as well as the possibility of drafting an ASEAN Charter. In 2006, ASEAN was given observer status at the United Nations General Assembly.[31] As a response, the organization awarded the status of "dialogue partner" to the United Nations.[32] Free Trade In 2007, ASEAN celebrated its 40th anniversary since its inception, and 30 years of diplomatic relations with the United States.[33] On 26 August 2007, ASEAN stated that it aims to complete all its free trade agreements with China, Japan, South Korea, India, Australia and New Zealand by 2013, in line with the establishment of the ASEAN Economic Community by 2015.[34][35] In November 2007 the ASEAN members signed the ASEAN Charter, a constitution governing relations among the ASEAN members and establishing ASEAN itself as an international legal entity.[citation needed] During the same year, the Cebu Declaration on East Asian Energy Security was signed in Cebu on 15 January 2007, by ASEAN and the other members of the EAS (Australia, People's Republic of China, India, Japan, New Zealand, South Korea), which promotes energy security by finding energy alternatives to conventional fuels.[citation needed] On 27 February 2009 a Free Trade Agreement with the ASEAN regional block of 10 countries and New Zealand and its close partner Australia was signed, it is estimated that this FTA would boost aggregate GDP across the 12 countries by more than US$48 billion over the period 20002020.[36][37] ASEAN members together with the groups six major trading partners Australia, China, India, Japan, New Zealand and South Korea are slated to begin the first round of negotiations on February 2628, 2013 in Bali, Indonesia, on establishment of the Regional Comprehensive Economic Partnership.[38] 116

Thus the signing of the Treaty of Amity and Cooperation in Southeast Asia adopted fundamental principles:[39]

Mutual respect for the independence, sovereignty, equality, territorial integrity, and national identity of all nations The right of every State to lead its national existence free from external interference, subversion or coercion Non-interference in internal affairs Settlement of differences or disputes in a peaceful manner Renunciation of the threat or use of force Effective regional cooperation

The ASEAN way is said to contribute durability and longevity within the organization, by promoting regional identity and enhancing a spirit of mutual confidence and cooperation. ASEAN agreements are negotiated in a close, interpersonal process. The process of consultations and consensus is designed to engender a democratic approach to decision making. These leaders are wary of any effort to legitimize efforts to undermine their nation or contain regional co-operation.]

No 1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th 11th 12th 13th 14th3 15th 16th3 17th 18th4

Date 2324 February 1976 45 August 1977 1415 December 1987 2729 January 1992 1415 December 1995 1516 December 1998 56 November 2001 45 November 2002 78 October 2003 2930 November 2004 1214 December 2005 1114 January 20071 1822 November 2007 27 February 1 March 2009 1011 April 2009 23 October 2009 89 April 2010 2831 October 2010 78 May 2011

ASEAN Formal Summits Country Host Indonesia Bali Malaysia Kuala Lumpur Philippines Manila Singapore Singapore Thailand Bangkok Vietnam Hanoi Bandar Seri Brunei Begawan Cambodia Phnom Penh Indonesia Bali Laos Vientiane Malaysia Kuala Lumpur 2 Philippines Cebu Singapore Singapore
Thailand Thailand Vietnam Vietnam Indonesia Cha Am, Hua Hin Pattaya Cha Am, Hua Hin Hanoi Hanoi Jakarta

Host leader Soeharto Hussein Onn Corazon Aquino Goh Chok Tong Banharn Silpa-archa Phan Vn Khi Hassanal Bolkiah Hun Sen Megawati Soekarnoputri Bounnhang Vorachith Abdullah Ahmad Badawi Gloria Macapagal-Arroyo Lee Hsien Loong Abhisit Vejjajiva

Nguyn Tn Dng Susilo Bambang 117

19th4 1419 November 2011 Indonesia Bali Yudhoyono 20th 34 April 2012 Cambodia Phnom Penh Hun Sen 21st 1720 November 2012 Cambodia Phnom Penh 1 Postponed from 1014 December 2006 due to Typhoon Utor. 2 hosted the summit because Burma backed out due to enormous pressure from US and EU 3 This summit consisted of two parts. The first part was moved from 1217 December 2008 due to the 2008 Thai political crisis. The second part was aborted on 11 April due to protesters entering the summit venue. 4 Indonesia hosted twice in a row by swapping years with Brunei, as it will play host to APEC (and the possibility of hosting the G20 summit which ultimately fell to Russia) in 2013. During the fifth Summit in Bangkok, the leaders decided to meet "informally" between each formal summit:[43]

ASEAN Informal Summits No Date Country Host 1st 30 November 1996 Indonesia Jakarta 2nd 1416 December 1997 Malaysia Kuala Lumpur 3rd 2728 November 1999 Philippines Manila 4th 2225 November 2000 Singapore Singapore
East Asia Summit

Host leader Soeharto Mahathir Mohamad Joseph Estrada Goh Chok Tong

The first summit was held in Kuala Lumpur on 14 December 2005 and subsequent meetings have been held after the annual ASEAN Leaders Meeting. Meeting Country Location Kuala Lumpur Date Note

14 First EAS Malaysia December Russia attended as a guest. 2005 Rescheduled from 13 December 2006. Second 15 January Cebu City Philippines EAS 2007 Cebu Declaration on East Asian Energy Security Singapore Declaration on Climate Change, Energy 21 and the Environment[46] Third Singapore Singapore November EAS 2007 Agreed to establish Economic Research Institute for ASEAN and East Asia The date and location of the venue was rescheduled Cha-am several times, and then a Summit scheduled for 12 Fourth 25 October April 2009 at Pattaya, Thailand was cancelled when Thailand and Hua EAS 2009 Hin protesters stormed the venue. The Summit has been rescheduled for October 2009 and transferred 118

Fifth EAS Sixth EAS

Viet Nam


Indonesia Bali

again from Phuket[47] to Cha-am and Hua Hin.[48] 30 October Officially invited the US and Russia to participate in 2010[49] future EAS as full-fledged members[45] 19 November The United States and Russia to join the Summit. 2011 2012

Seventh Phnom Cambodia EAS Penh

Commemorative summit Main article: ASEAN Free Trade Area A commemorative summit is a summit hosted by a non-ASEAN country to mark a milestone anniversary of the establishment of relations between ASEAN and the host country. The host country invites the heads of government of ASEAN member countries to discuss future cooperation and partnership. Meeting ASEANJapan Commemorative Summit Host Location Note To celebrate the 30th anniversary of the establishment of relations between 11, 12 ASEAN and Japan. The summit was also December notable as the first ASEAN summit held 2003 between ASEAN and a non-ASEAN country outside the region. To celebrate the 15th anniversary of the establishment of relations between ASEAN and China To celebrate the 20th anniversary of the establishment of relations between ASEAN and Republic of Korea Date

Japan Tokyo

ASEANChina Commemorative Summit

30, 31 People's Republic of Nanning October 2006 China 1, 2 June 2009

ASEANRepublic of Korea South Jeju-do Commemorative Korea Summit ASEANIndia New Commemorative India Delhi Summit Comprehensive Investment Area

20, 21 To celebrate the 20th anniversary of the December establishment of relations between 2012 ASEAN and India.

The ASEAN Comprehensive Investment Area (ACIA) will encourage the free flow of investment within ASEAN. The main principles of the ACIA are as follows[67]

All industries are to be opened up for investment, with exclusions to be phased out according to schedules National treatment is granted immediately to ASEAN investors with few exclusions Elimination of investment impediments 119

Streamlining of investment process and procedures Enhancing transparency Undertaking investment facilitation measures

Full realisation of the ACIA with the removal of temporary exclusion lists in manufacturing agriculture, fisheries, forestry and mining is scheduled by 2010 for most ASEAN members and by 2015 for the CLMV (Cambodia, Lao PDR, Burma, and Vietnam) countries.[67] Trade in Services An ASEAN Framework Agreement on Trade in Services was adopted at the ASEAN Summit in Bangkok in December 1995.[68] Under AFAS, ASEAN Member States enter into successive rounds of negotiations to liberalise trade in services with the aim of submitting increasingly higher levels of commitments. The negotiations result in commitments that are set forth in schedules of specific commitments annexed to the Framework Agreement. These schedules are often referred to as packages of services commitments. At present, ASEAN has concluded seven packages of commitments under AFAS.[69] Single Aviation Market The ASEAN Single Aviation Market (ASEAN-SAM), is the region's major aviation policy geared towards the development of a unified and single aviation market in Southeast Asia by 2015. The aviation policy was proposed by the ASEAN Air Transport Working Group, supported by the ASEAN Senior Transport Officials Meeting, and endorsed by the ASEAN Transport Ministers.[70] The ASEAN-SAM is expected to fully liberalize air travel between member states in the ASEAN region, allowing ASEAN countries and airlines operating in the region to directly benefit from the growth in air travel around the world, and also freeing up tourism, trade, investment and services flows between member states.[70][71] Since 1 December 2008, restrictions on the third and fourth freedoms of the air between capital cities of member states for air passengers services have been removed,[72] while from 1 January 2009, full liberalization of air freight services in the region took effect.[70][71] On 1 January 2011, full liberalization on fifth freedom traffic rights between all capital cities took effect.[73] The ASEAN Single Aviation Market policy will supersede existing unilateral, bilateral and multilateral air services agreements among member states which are inconsistent with its provisions. Free-trade agreements with other countries ASEAN has concluded free trade agreements with China (expecting bilateral trade of $500 billion by 2015),[74] Korea, Japan, Australia, New Zealand, and India.[75] ASEAN-India bilateral trade crossed the $ 70 billion target in 2012 (target was to reach the level only by 2015).[citation needed] The agreement with People's Republic of China created the ASEANChina Free Trade Area (ACFTA), which went into full effect on 1 January 2010. In addition, ASEAN is currently negotiating a free trade agreement with the European Union.[76] Republic of China (Taiwan) has also expressed interest in an agreement with ASEAN but needs to overcome diplomatic objections from China.[77]


ASEAN six majors ASEAN six majors refer to the six largest economies in the area with economies many times larger than the remaining four ASEAN countries. The ASEAN six majors are (GDP nominal 2011 based on IMF data. The figures in parentheses are GDP PPP.)

Indonesia: 895.854 billions (1,211 billions) Thailand: 376.989 billions (602.216 billions) Malaysia: 307.178 billions (447.980 billions) Singapore: 267.941 billions (314.906 billions) Philippines: 257.890 billions (416.678 billions) Vietnam: 137.681 billions (320.45 billions)

Heritage Parks ASEAN Heritage Parks[98] is a list of nature parks launched 1984 and relaunched in 2004. It aims to protect the region's natural treasures. There are now 35 such protected areas, including the Tubbataha Reef Marine Park and the Kinabalu National Park.[99] List Site Alaungdaw Kathapa National Park Apo Natural Park Bukit Barisan Selatan National Park Gunung Mulu National Park Hoi An Ancient Town Indawgyi Lake Wildlife Sanctuary Kaeng Krachan National Park Khakaborazi National Park Kinabalu National Park Imperial Citadel of Thang Long Lorentz National Park Mu Ko Surin-Mu Ko Similan Marine National Park Phong Nha-Ke Bang National Park Puerto Princesa Subterranean River

ASEAN Heritage Sites Country Site Ao Phang-nga Marine National Burma Park
Philippines Imperial City, Hu Indonesia Gunung Leuser National Park Malaysia Ha Long Bay

Country Thailand Vietnam Indonesia Vietnam

Vietnam Mounts Iglit-Baco National Park Philippines Burma Inl Lake Wildlife Sanctuary Burma Thailand Kerinci Seblat National Park Indonesia Burma Khao Yai National Park Thailand Malaysia Komodo National Park Indonesia Vietnam Lampi Kyun Wildlife Reserve Burma Meinmhala Kyun Wildlife Indonesia Burma Sanctuary Thailand Nam Ha Protected Area Vietnam Preah Monivong (Bokor) National Park Sungei Buloh Wetland Reserve Laos Cambodia


National Park Taman Negara National Park Tasek Merimbun Wildlife Sanctuary Tubbataha Reef Marine Park Virachey National Park M Sn Mount Malindang Songs and music

Philippines Malaysia Tarutao Marine National Park Thung Yai-Huay Kha Khaeng Brunei National Park Philippines Ujung Kulon National Park

Singapore Thailand Thailand Indonesia Indonesia Vietnam

Keraton Yogyakarta Cambodia Vietnam Citadel of Ho Dynasty Philippines

The ASEAN Way, the official regional anthem of ASEAN. Music by Kittikhun Sodprasert and Sampow Triudom; lyrics by Payom Valaiphatchra. ASEAN Song of Unity or ASEAN Hymn. Music by Ryan Cayabyab. Let Us Move Ahead, an ASEAN song. Composed by Candra Darusman. ASEAN Rise, ASEAN's 40th Anniversary song. Music by Dick Lee; lyrics by Stefanie Sun.

GDP (PPP) in US dollars[show] GDP (nominal) in US dollars[show] Area[show] Population[show]

BRICS, originally "BRIC" before the inclusion of South Africa in 2010, is the title of an association of emerging national economies: Brazil, Russia, India, China and South Africa.[2] With the possible exception of Russia,[3] the BRICS members are all developing or newly industrialised countries, but they are distinguished by their large, fast-growing economies[4] and significant influence on regional and global affairs. As of 2013, the five BRICS countries represent almost 3 billion people, with a combined nominal GDP of US$14.8 trillion,[1] and an estimated US$4 trillion in combined foreign reserves.[5] Presently, South Africa holds the chair of the BRICS group. In 2012, Hu Jintao, who at the time was President of China, described the BRICS countries as defenders and promoters of developing countries and a force for world peace.[6] However, some analysts have highlighted potential divisions and weaknesses in the grouping, such as India and China's disagreements over territorial issues,[7] slowing economic growth rates,[8] and disputes between the members over UN Security Council reform.[9]


The foreign ministers of the initial four BRIC states (Brazil, Russia, India, and China) met in New York City in September 2006, beginning a series of high-level meetings. A full-scale diplomatic meeting was held in Yekaterinburg, Russia, on May 16, 2008.[10] First BRIC summit The BRIC grouping's first formal summit commenced in Yekaterinburg on June 16, 2009,[11] with Luiz Incio Lula da Silva, Dmitry Medvedev, Manmohan Singh, and Hu Jintao, the respective leaders of Brazil, Russia, India and China, all attending.[12] The summit's focus was on means of improving the global economic situation and reforming financial institutions, and discussed how the four countries could better co-operate in the future.[11][12] There was further discussion of ways that developing countries, such as the BRIC members, could become more involved in global affairs.[12] In the aftermath of the Yekaterinburg summit, the BRIC nations announced the need for a new global reserve currency, which would have to be 'diversified, stable and predictable'.[13] Although the statement that was released did not directly criticise the perceived 'dominance' of the US dollar something that Russia had criticised in the past it did spark a fall in the value of the dollar against other major currencies.[14] Entry of South Africa In 2010, South Africa began efforts to join the BRIC grouping, and the process for its formal admission began in August of that year.[15] South Africa officially became a member nation on December 24, 2010, after being formally invited by the BRIC countries to join the group.[15] The group was renamed BRICS with the "S" standing for South Africa to reflect the group's expanded membership.[16] In April 2011, the President of South Africa, Jacob Zuma, attended the 2011 BRICS summit in Sanya, China, as a full member.[17][18][19] Developments The BRICS Forum, an independent international organisation encouraging commercial, political and cultural cooperation between the BRICS nations, was formed in 2011.[20] In June 2012, the BRICS nations pledged $75 billion to boost the lending power of the International Monetary Fund (IMF). However, this loan was conditional on IMF voting reforms.[21] In late March 2013, during the fifth BRICS summit in Durban, South Africa, the member countries agreed to create a global financial institution which would rival the western-dominated IMF.[22]

The grouping has held annual summits since 2009, with member countries taking turns to host. Prior to South Africa's admission, two BRIC summits were held, in 2009 and 2010. The first five-member BRICS summit was held in 2011. The most recent BRICS summit took place in Durban, South Africa, in March 2013.[23] 123

Summit Participants Date Host country Host leader Location 1st BRIC June 16, 2009 Russia Dmitry Medvedev Yekaterinburg 2nd BRIC April 16, 2010 Brazil Luiz Incio Lula da Silva Braslia 3rd BRICS April 14, 2011 China Hu Jintao Sanya 4th BRICS March 29, 2012 India Manmohan Singh New Delhi 5th BRICS March 2627, 2013 South Africa Jacob Zuma Durban 6th BRICS 2014 Brazil Dilma Rousseff TBA

Member countries
Economic data is sourced from the most recent IMF figures and given in US dollars.[1] GDP Life GDP Governme Count Export Impor per Litera expectan Population (nomin HFCE nt HDI ry s ts capita cy rate cy (years, al) spending (PPP) avg.) 193,946,88 $2,395.9 $1,266 $256.0 $238.8 $11,87 .730 $846.6 bn 88.6% 72.2 Brazil 6 bn .3 bn bn bn 5 (high) 143,369,80 $2,021. $671.6 $542.5 $358.1 $17,70 .788 $414.0 bn 99.6% 67.7 Russia 6 9 bn bn bn bn 8 (high) .554 1,210,193,4 $1,824. $737.9 $309.1 $500.3 $3,82 $281.0 bn 83.0% 64.2 (mediu India 22 8 bn bn bn bn 9 m) .699 1,354,040,0 $8,227.0 $1,835. $2,031.0 $2,021 $1,780. $9,16 92.2% 72.7 (mediu China 00 bn 3 bn bn .0 bn 0 bn 1 m) .629 South 51,770,560 $384.3 $173.8 $95.27 bn $101.2 $106.8 $11,37 86.4% 51.2 (mediu bn bn bn bn 5 Africa m)

IBSA Dialogue Forum

India, Brazil and South Africa


Pretoria (South Africa) - Dilma Rousseff, President of Brazil, Jacob Zuma, President of South Africa and Manmohan Singh, Prime Minister of India pose for photo. The IBSA Dialogue Forum (India, Brazil, South Africa) is an international tripartite grouping for promoting international cooperation among these countries. It represents three important poles for galvanizing South-South cooperation and greater understanding between three important continents of the developing world namely, Africa, Asia and South America. The forum provides the three countries with a platform to engage in discussions for cooperation in the field of agriculture, trade, culture, and defence among others. The IBSA Dialogue Forum plays an increasingly important role in the foreign policies of India, Brazil and South Africa. It has become instrumental for promoting ever closer coordination on global issues between three large multicultural and multiracial democracies of Asia, South America and Africa, and contributed to enhancing trilateral India-Brazil-South Africa cooperation in sectoral areas.

Brasilia Declaration

Indian PM Manmohan Singh with South African President Thabo Mbeki and Brazilian President Luiz Incio Lula da Silva during the IBSA Summit, 2007. On 6 June 2003, the Brasilia declaration was signed by the foreign ministers of India, Brazil and South Africa. They agreed on the urgent need for reforms in the United Nations, especially the Security Council. The declaration was of the view that the United Nations Security Council should reflect the current world scenario. It also touched upon the subjects of international terrorism, transnational crime and illegal arms dealing, stating that such threats to international peace must effectively tackled with respect for the sovereignty of States and for International Law.[3] The Ministers highlighted their priorities on promotion of social equity and inclusive growth by reiterating the need for tackling hunger and poverty by means of effective implementation of government schemes. The declaration also highlights the need for promoting family-run farms, food security, health, education, human rights and environmental protection. They recalled that social empowerment makes better use of human potential, contributing to economic development in a significant manner.[3] The ministers also stressed the importance of elimination of racial discrimination and gender bias while framing public policies. 125

While welcoming the benefits that have been achieved through globalization and free market trade in the developing countries, the ministers expressed their concerns that a large part of the world has not benefited from it. In this context, they reiterated their commitment to pursue and implement policies which are inclusive, integrative and equitable. Toward this end, they reaffirmed their stand to carry out negotiations on Doha round of talks, through which the developed countries might eliminate some of their protectionist and trade-distorting practices, thereby providing a level playing field for the developing countries in the field of international trade.[3] The Ministers recommended to their respective Chiefs of State and/or Government the convening of a summit-level meeting of the three countries. They also decided to further intensify dialogue at all levels, when needed, to organize meetings of top officials and experts responsible for issues of mutual interest. They agreed to hold regular meetings and dialogues on issues of common interest. They further agreed to establish a Trilateral Joint Commission. The Foreign Ministries will be the pivots of the Trilateral Joint Commission and the meetings will be co-chaired by the three Foreign Ministers. The secretariat facilities shall be coordinated by the Secretary in charge of this area in the Foreign Ministry of the host country.[3]

The IBSA Dialogue Forum aims to promote South-South cooperation and build consensus on issues of international importance. It also aims at increasing the trade opportunities among the three countries, as well as facilitate the trilateral exchange of information, technologies and skills to complement each other strengths. Subsequently, it promotes the international poverty alleviation and social development with main focus being on equitable development. It also aims to explore avenues to promote cooperation in broad range of areas, which include agriculture, climate change/global Warming, culture, defence, education, energy, health, information society, science and technology, social development, trade and investment, tourism and transport.[1]

IBSA summits
Date Host country Host leader Location held 2006 September, 2006 Brazil Luiz Incio Lula da Silva Brasilia 2007 October, 2007 South Africa Thabo Mbeki Pretoria 2008 October, 2008 India Manmohan Singh New Delhi 2010 15 April 2010 Brazil Luiz Incio Lula da Silva Braslia 2011 18 October 2011 South Africa Jacob Zuma Pretoria 2013 India Manmohan Singh New Delhi

Areas of cooperation
Agriculture A Joint Development Project has been undertaken in Guinea Bissau. It aims to improve production, promote and develop small-scale agro-industry. It also seeks to improve and diversify horticultural crops. IBSA Ministers of Agriculture met in Rome on 22 November 2005 on the margins of a FAO Conference. This was followed by a meeting of IBSA Senior Officials in Agriculture in New Delhi


on 18 & 19 January 2006. The meeting discussed a preparation of a draft Memorandum of Understanding which provides for development of plans for research and capacity building.[4] Education The three countries have recognised Education as a vital instrument for achieving social equity. India is the lead country in the education sector.[4] Three major areas of cooperation have been identified for collaboration namely, Open and distance education, higher and professional education and finally, universal education with focus on gender equality. Each of the three countries are to host one Round Table conference on one of the themes. India chose universal education, Brazil chose higher and professional education while South Africa chose open and distance education.[4] Energy The working group aims to promote clean and efficient sources of energy such as bio-fuels. It also gives an opportunity to exchange information about renewable energy and use of non-conventional energy sources.[4] Science & technology Science & technology has been identified as one of the key areas of tri-lateral cooperation. The following is a list of approved areas of research cooperation and the corresponding lead countries:

HIV/AIDS and Nanotechnology- India Malaria and Oceanography- Brazil Tuberculosis and Biotechnology- South Africa

Activities in each area are implemented by Area coordinators, who are experts in their respective disciplines. Workshops in the above mentioned disciplines have been held in the three countries regularly.[4] Trade The IBSA economic ministers met in New Delhi in March 2005 and agreed on a mechanism to identify and eliminate non-tariff barriers which impede mutual trade.[4] Some of the mechanisms considered include customs cooperation, sharing of expertise in the field of energy, agriculture, food processing, tourism and financial and banking services. It has been decided to promote cooperation in the SME sector. For this purpose, common terms of reference have been developed which can aid in development of this sector. As, all the three countries have a large number of small-scale enterprises, it is expected that cooperation in this sector can have profound development implications.[4] Transport The Working group aims at cooperation between the three countries in the areas of air link expansions, training and knowledge exchange in airports and airspace management, port management, including capacity building in shipbuilding. Discussions on air and maritime agreements are also being considered. Development of trans-shipment facilities for creation of a 127

South-South highway, which integrates sub-regional connection between Mercosur, Southern African Customs Union and Indian regions, is a priority area for the Working group.[4]

Declarations and communiqu

New Delhi agenda for cooperation Yashwant Sinha, Celso Amorim and Dr. Nkosazana Dlamini-Zuma, the foreign ministers of India, Brazil and South Africa respectively, met in New Delhi on 4 and 5 March 2004 for the first meeting of the Trilateral Commission of the IBSA Dialogue Forum. The following issues were discussed: United Nations reforms The ministers were of the view that the current composition of the UN Security Council is not representative of the current world scenario. They highlighted the need for bringing about reforms which would make the Security council reflect the contemporary realities. Toward this end, they emphasised the need for expansion of Security council membership in the permanent as well as nonpermanent categories.[5] Peace and security The ministers took stock of the global security situation and renewed their commitments towards non-proliferation of weapons of mass destruction. They agreed to intensify their cooperation at the IAEA with a view to ensure growth and development of use of nuclear energy for peaceful purposes under appropriate safeguards. On the Israel-Palestine issue, the three countries urged an early resumption of dialogue on the basis of UN Security council resolutions, Arab League peace Initiative and the Quartet roadmap. They reaffirmed their support to the settlement postulated in the UN Security Council Resolution 1397 of two sovereign states, Israel and Palestine, living side by side within secured and recognised borders.[5] The three countries also had common views with respect to Iraq. They stressed the need to maintain the unity & integrity of Iraq and called for transfer of full sovereignty to the Iraqi people. They were of the view that United Nations need to play a vital role in this context. They also emphasised the urgency of reconstruction in Iraq under a democratically elected sovereign government.[5] Social Development The three countries recognised the need to put people in the centre of development. Toward this end, the ministers emphasised the need to formulate people-centric policies which would ensure equitable development. As the three countries have a rich cultural history, strengthening of cultural ties by organising a trilateral cultural fair of music, dance and cinema in Brazil was also discussed.[5] Recalling the Brasilia declaration, the ministers agreed upon the sharing of expertise in diverse areas such as food security, health, education, human rights etc. The Ministers also endorsed a proposal by Brazil to host a seminar on Economic Growth with Social Equity with the aim to promote better knowledge among IBSA members of their national policies and strategies to promote economic and social development.[5]


Cape Town ministerial communiqu The foreign ministers of the three countries met in Cape Town on 10 and 11 March 2005 for the second meeting of the Trilateral Commission of the IBSA Dialogue Forum. The following issues were discussed: Millennium review summit The ministers reiterated their commitments toward achieving the Millennium Development Goals by 2015 as their core strategy in their collective fight against hunger, poverty, and other problems ailing their society. The ministers emphasised that South-South cooperation was essential for achievement of MDGs and they reaffirmed their cooperation under the auspices of IBSA to achieve these targets.[6] New Partnership for Africa's Development The ministers resolved to support the economic development of the African Union and strengthen the IBSA partnership in the implementation of New Partnership for Africa's Development (NEPAD). Numerous opportunities exist in the fields of trade & commerce, energy, education, health and the ministers pledged to explore opportunities for trilateral cooperation in these areas.[6] Latin and South American integration The ministers expressed their support for creation of an Asian-African business summit which would focus on promoting and strengthening the African private sector. They also made a decision to explore ways for closer cooperation with South America. The ministers also welcomed the efforts towards integration in the Latin America and Caribbean region and in this regard recognised the significance of the creation of the South American Community of Nations (CASA).[6] World trade organisation The ministers agreed to intensify their cooperation in the WTO multilateral trade negotiations in the lead-up to the WTO Ministerial Conference of 2005 held in Hong Kong. This cooperation aimed to realise the Doha development agenda and to enhance trade opportunities in a free and fair manner with transparent-rules based multilateral trading system.[6] IBSA sectoral cooperation The ministers reviewed the working of sectoral working groups and decided to add two new sectors namely, agriculture and culture. In the context of Information Technology, the ministers were of the view that their governments had many e-governance schemes which had many similarities, because of which they might share some information, best practices and identify projects for cooperation.[6] The ministers agreed for strengthening consultations between the Ministries and Departments of Agriculture in support of IBSA and G-20 trade consultation processes. They decided that a meeting of IBSA experts would be convened in India to define areas for research and training in the field of agriculture.[6] The ministers welcomed the launch of IBSA Business Council, which would work in tandem with the Working group jointly in the areas such as Small, Medium and Micro Enterprises. 129

With regard to promote tourism between the three countries, a mechanism is being explored to examine the possibility of visa waiver or the issuing of visas on arrival for IBSA nationals.[6] Apart from this cooperation in various other sectors were also explored during this meeting. IBSA facility for hunger and poverty alleviation The Ministers reviewed the progress made with regard to the operationalisation of the IBSA Facility for Hunger and Poverty Alleviation. They also agreed to commit an additional amount of US$ 1 million to the IBSA fund and launch of the facility in Guinea-Bissau, which they hoped would raise the profile of the fund amongst private sector and members of civil society. The Ministers agreed that IBSA would approach the Palestinian Authority with an offer to assist it with its reconstruction efforts.[6] Rio de Janeiro ministerial communiqu Anand Sharma, Celso Amorim and Dr. Nkosazana Dlamini-Zuma, the foreign ministers of India, Brazil and South Africa respectively, met in Rio de Janeiro on 30 March 2006 for the third meeting of the Trilateral Commission of the IBSA Dialogue Forum. The following issues were raised and discussed: United Nations reforms The IBSA countries exchanged their views on UN security council reforms and reiterated their stand that representation of developing countries from Asia, Africa and Latin America as permanent members in the council was essential. They welcomed the creation of Peacebuilding commission and United Nations Human Rights Council, adding further that now UN reform process must include Security Council reform.[7] Non-proliferation, disarmament and arms control The ministers were of the view that multilateral institutions established under various disarmament agreements should be the primary mechanism to achieve the desired objective of disarmament and non-proliferation. They agreed to continue cooperation at IAEA and other forums with regard to peaceful use of atomic energy under suitable safeguards. They also agreed to consider enhancing international civilian nuclear cooperation, with other nations who share similar objectives of nonproliferation. The ministers also hoped for a peaceful resolution to the Iranian nuclear program, within the context of IAEA.[7] International trade The ministers emphasised the need to unite on the issue of Doha round of negotiations. This is supported by increased consultations, by IBSA delegations, in order to strengthen Non-Agricultural Market Access (NAMA), as well as the establishment of the NAMA-11 whose two main principles are supporting flexibilities for developing countries and balance between NAMA and other areas under negotiation.[7] The Ministers took note of the broader objectives of the European Union proposed Registration, Evaluation and Authorization and restriction of Chemicals (REACH) Legislation, in respect of the protection of human health and the environment. They expressed their concern for the consequences REACH may have on the developing economies of the South. Such 130

consequences will negatively affect the attainment of the Millennium Development Goals in these countries. The minsters urged the EU to give due consideration to these consequences and also ensure that REACH does not become a Technical Barrier to Trade (TBT).[7] IBSA facility fund for hunger and poverty alleviation The fundamental character IBSA fund is to disseminate the best practices in alleviation of poverty and hunger. The ministers reaffirmed the importance of participation of institutions governmental as well as non-governmentalin projects financed by the fund. They also recommended that UNDP, as an administrator of the fund, find means to make it possible.[7] The ministers also received and accepted the recommendations of Technical Monitoring Committee (TMC) to Guinea Bissau. It urged the UNDP Office in Bissau to work closely with the UNDP Special Unit for South-South Cooperation in New York, the Coordinator of the project and the Guinean Bissau national authorities. The ministers agreed with the committee's recommendation of signing additional agreements with UNDP in order to clarify rights and obligations of both parties.[7] IBSA sectoral cooperation The member countries made a pledge to promote the production and use of biofuels as a clean and ecofriendly alternative. More emphasis will be placed on exchange of information in areas of energy conservation and hydrogen energy. The ministers stressed the need to boost trade relations among the three nations. Keeping this in perspective, they expressed their satisfaction that Mercosur will be proposing to Southern African Customs Union and India the creation of a Working Group to explore the modalities of a Trilateral Free Trade Agreement (T-FTA) among them. Specific areas of agriculture have also been identified for trilateral cooperation. These include research and capacity building, agricultural trade, rural development and poverty alleviation.[7] IBSA trade and investment forum The attending delegations were of the opinion that trade relations between the three nations can strengthen the South-South union. Substitution of imports from northern countries by imports from southern countries was suggested as a feasible solution towards attaining the said objective. Logistics, custom procedures, lack of information and distances were identified as main barriers which needed to be eliminated for the trilateral trade to flourish.[7] The logistics problem was sought to be solved by suggestion of a study to further address the issue. Problems regarding customs procedures were sought to be tackled by ensuring more cooperation among the governmental institutions in order to simplify many regulations and streamlining the process. The private sector was also of the view that number of flights between India, Brazil and South Africa need to be increased, which eliminate the barrier of distances and lack of information.[7]

Agreements and Memorandum of Understanding

The following agreements have been signed so far:[8]

MoU on Agriculture and Allied Fields MoU on Biofuels 131

Agreement on Merchant Shipping and Other Maritime Transport Matters Action Plan on Trade Facilitation for Standards, Technical Regulations and Conformity Assessment MoU Framework for Cooperation on the Information Society

G-20 major economies

Group of Twenty Finance Ministers and Central Bank Governors

Member countries in the G-20 Permanent guest Members of the European Union not individually represented Abbreviation G-20 or G20 Formation 1999 2008 (Heads of State Summits)

Bring together systemically important industrialized and Purpose/focus developing economies to discuss key issues in the global economy.[1] Membership


The Group of Twenty Finance Ministers and Central Bank Governors (also known as the G-20, G20, and Group of Twenty) is a group of finance ministers and central bank governors from 20 major economies: 19 countries plus the European Union, which is represented by the President of the European Council and by the European Central Bank.[2] The G-20 heads of government or heads of state have also periodically conferred at summits since their initial meeting in 2008. Collectively, the G-20 economies account for more than 80 percent of the gross world product (GWP),[3] 80 percent of world trade (including EU intra-trade), and two-thirds of the world population.[2] They furthermore account for 84.1 percent and 82.2 percent of the world's economic growth by nominal GDP and GDP (PPP) respectively from the years 2010 to 2016, according to the International Monetary Fund (IMF). The G-20 was proposed by former Canadian Prime Minister Paul Martin[4] as a forum for cooperation and consultation on matters pertaining to the international financial system. The group was formally inaugurated in September 1999, and held its first meeting in December 1999. It studies, reviews, and 132

promotes high-level discussion of policy issues pertaining to the promotion of international financial stability, and seeks to address issues that go beyond the responsibilities of any one organization. With the G-20 growing in stature after the 2008 Washington summit, its leaders announced on September 25, 2009, that the group would replace the G8 as the main economic council of wealthy nations.[5] Since its inception, the G-20's membership policies have been criticized by numerous intellectuals,[6][7] and its summits have been a focus for major protests.[8] The heads of the G-20 nations met biannually at G-20 summits between 2008 and 2011. Since the November 2011 Cannes summit, all G-20 summits have been held annually.[2] Russia currently holds the chair of the G-20, and will host the eighth G-20 summit in September 2013.[9]

The G-20, which superseded the G33 (which had itself superseded the G22), was foreshadowed at the Cologne Summit of the G7 in June 1999, but was only formally established at the G7 Finance Ministers' meeting on 26 September 1999. The inaugural meeting took place on 1516 December 1999 in Berlin. In 2008, Spain and the Netherlands were included, by French invitation, in the G-20 Leaders Summit on Financial Markets and the World Economy. Summits Since 2011, when France chaired and hosted the G-20, the summits have been held only once a year.[14] Mexico chaired and hosted the leaders' summit in 2012.[15] Future summits will be held in Russia in 2013, Australia in 2014[16] and Turkey in 2015. Date 1st November 2008 [17] 2nd April 2009 3rd[17] September 2009 4th[18] June 2010 5th[19] November 2010 6th[20] November 2011[21] 7th[15] June 2012[22] 8th[9] September 2013 9th[9] November 2014 10th[9] 2015

Host country Host city Website United States Washington, D.C. [1] United Kingdom London [2] United States Pittsburgh [3] Canada Toronto [4] South Korea Seoul [5] France Cannes [6] Mexico Los Cabos Russia Saint Petersburg [7] Australia Brisbane Turkey TBA

G-20 leaders' chair rotation To decide which nation gets to chair the G-20 leaders' meeting for a given year, all 19 nations are assigned to one of five different groupings. Each group holds a maximum of four nations. This system has been in place since 2010, when South Korea, which is in Group 5, held the G-20 chair. 133

Mexico, the host of the 2012 summit, is in Group 3. In 2013, Russia, which is in Group 2, will host the G-20 leaders' summit. Australia, the host of the 2014 G-20 summit, is in Group 1. The table below lists the nations' groupings:[23]
















Canada Group 1 Group 2

Russia Group 3

Brazil Group 4

Germany Group 5


Saudi Arabia

South Africa




United States


United Kingdom

South Korea

The G-20 operates without a permanent secretariat or staff. The chair rotates annually among the members and is selected from a different regional grouping of countries. The chair is part of a revolving three-member management group of past, present and future chairs referred to as the Troika. The incumbent chair establishes a temporary secretariat for the duration of its term, which coordinates the group's work and organizes its meetings. The role of the Troika is to ensure continuity in the G-20's work and management across host years. The current chair of the G-20 is Russia; the chair was handed over from Mexico after the June 2012 G-20 Summit. Proposed permanent secretariat In 2010, President of France Nicolas Sarkozy proposed the establishment of a permanent G-20 secretariat, similar to the United Nations. Seoul and Paris were suggested as possible locations for its headquarters.[24] China and Brazil supported the establishment of a secretariat, while Italy expressed opposition to the proposal.[24] South Korea proposed a "cyber secretariat" as an alternative.[24]

North American Free Trade Agreement

The North American Free Trade Agreement (NAFTA) is an agreement signed by Canada, Mexico, and the United States, creating a trilateral trade bloc in North America. The agreement came into force on January 1, 1994. It superseded the CanadaUnited States Free Trade Agreement between the U.S. and Canada.


NAFTA has two supplements: the North American Agreement on Environmental Cooperation (NAAEC) and the North American Agreement on Labor Cooperation (NAALC).