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com
 LIST OF TOPICS

1. Digital India
2. E-Commerce
3. Power Sector Reforms
4. Ujjwal Discom Assurance Yojana
5. Labour Reforms
6. Shramev Jayate
7. Rising Price of Pulses
8. International Year of Pulses
9. India & Innovation
10. National Innovation Council
11. National IPR Policy & Innovation
12. What is IP?
13. Creative India Innovative India
14. TRIPS v. TRIPS Plus
15. India and Startup Culture
16. COP@21 UNFCCC
17. INDCs
18. The Paris Agreement, COP@21
19. Renewable Energy Sector
20. Disaster Preparedness
21. Goods and Services Tax
22. Declining Oil Prices
23. National Herald Case
24. Gold Monetization Scheme
25. Sovereign Gold Bond Scheme
26. Real Estate (Regulation and Development) Bill, 2015
27. Make in India
28. Ease of Doing Business
29. Financial Inclusion
30. India's Foreign Trade
31. Smaller States
32. Poverty and Development
33. Regional Political Parties

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 34. Multilateralism v. Regionalism
35. Demographic Dividend
36. National Skill Development Mission
37. Inclusive Growth and its Challenges
38. Disinvestment Policy
39. FDI Reforms
40. 14th Finance Commission
41. Women's Reservation Bill
42. Land Acquisition
43. Challenges to India's Development
44. Poor state of Manufacturing
45. Draft National Policy on Capital Goods
46. Corporate Governance: Independent Directors
47. India's Health Sector & Reforms
48. Sub-Prime Crisis
49. Gender Issues
50. Swaccha Bharat Abhiyan
51. E-pharmacies
52. Relevance of NPT/CTBT
53. India's Agricultural Mess
54. Corporate Finance
55. FII v. FDI
56. BoP and BoT
57. Govt. Bonds and Securities
58. Monetary Policy and RBI

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 D I G I TA L I N D I A ( e - G o v e r n a n c e )

Digital India is an initiative by the Government of India to ensure that Government services are
made available to citizens electronically by improving online infrastructure and by increasing
Internet connectivity. It was launched on July 1, 2015 by Prime Minister Narendra Modi.

Background
The journey of e-Governance initiatives in India took a broader dimension in mid 90s for wider
sectoral applications with emphasis on citizen-centric services. Later on, many States/UTs started
various e-Governance projects. Though these e-Governance projects were citizen-centric, they
could make lesser than the desired impact. Government of India launched National e-Governance
Plan (NeGP) in 2006. 31 Mission Mode Projects covering various domains were initiated. Despite
the successful implementation of many e-Governance projects across the country, e-Governance as
a whole has not been able to make the desired impact and fulfil all its objectives.

It has been felt that a lot more thrust is required to ensure e-Governance in the country is able to
promote inclusive growth. It is expected that e-Governance policy thrusts should cover electronic
services, products, devices and job opportunities. Moreover, electronic manufacturing in the country
needs to be strengthened.

In order to transform the entire ecosystem of public services through the use of information
technology, the Government of India has launched the Digital India programme with the vision to
transform India into a digitally empowered society and knowledge economy.

Digital Infrastructure as a Core Utility to every citizen

Availability of high speed internet as a core utility for delivery of services to citizens .
Cradle to grave digital identity that is unique, lifelong, online and authenticable to every
citizen .
Mobile phone & bank account enabling citizen participation in digital & financial space.
Easy access to a Common Service Centre
Shareable private space on a public cloud
Safe and secure cyber-space

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 Governance & Services on Demand
Seamlessly integrated services across departments or jurisdictions.
Availability of services in real time from online & mobile platforms.
All citizen entitlements to be portable and available on the cloud.
Digitally transformed services for improving ease of doing business.
Making financial transactions electronic & cashless.
Leveraging Geospatial Information Systems (GIS) for decision support systems &
development.

Digital empowerment of citizens

Universal digital literacy.
Universally accessible digital resources.
Availability of digital resources services in Indian languages.
Collaborative digital platforms for participative governance.

Approach and Methodology

A two-way platform will be created where both the service providers and the consumers stand to
benefit. The scheme will be monitored and controlled by the Digital India Advisory group which
will be chaired by the Ministry of Communications and IT. It will be an inter-Ministerial initiative
where all ministries and departments shall offer their own services to the public Healthcare,
Education, Judicial services etc. The Publicprivate partnership model shall be adopted selectively.
In addition, there are plans to restructure the National Informatics Centre. This project is one among
the top priority projects of the Modi Administration.

Challenges
Scarce Spectrum: It is a known fact that spectrum is a scarce resource. A further mobile push is
likely to make the situation worse. That is one reason why Bharti Enterprises, which has committed
Rs 1 lakh crore for Digital India programme, recently acquired stake in a company called, OneWeb,
a global team-up of telecom companies aimed at providing affordable internet access. But one such
tie-up is not going to solve the problem completely. A spectrum crunch would result in traffic
congestion and call drops, which are already commonplace in India. Further more, the shortfall in
spectrum is bound to raise demand and prices. We have already seen that in the recently concluded
auctions of spectrum. If price of spectrum increases, companies will not be able to provide internet
at affordable prices. This will defeat the very purpose of Digital India initiative.

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 Lack of an Ecosystem: The initiative also lacks many crucial components including lack of legal
framework, weak sensibility of privacy and data protection laws, possibilities of abuse of civil
liberties, lack of parliamentary oversight for esurveillance in India, lack of intelligence related
reforms in India, insecure Indian cyberspace, etc. These issues have to be managed first before
introducing DI initiative in India. Digital India project is worth exploring and implementation
despite its shortcomings that need to be taken care of before its implementation.

Duty anomalies mar electronic manufacturing: Manufacturing has always been a weak link in
the India story. Electronic manufacturing is all the more so. Sample this: On 22 June, media reports
said Japanese telecom giant SoftBank and Taiwanese Foxconn technologies are in talks to set up
joint ventures in India to make electronics products here. Four days later, on 26 June, The Financial
Express reported that global mobile phone makers, including Foxconn, may have to rethink their
plans because the government has removed the 11.5 percent excise duty concession (this duty
concession existed because importers had to pay 12.5% Counter Vailing Duty, while domestic
manufacturers had to pay only 1% excise tax on manufacture). Because of a Supreme Court
decision delivered recently, and which struck down this gap between taxes paid by importers and
domestic manufacturers, the local manufacturers would also now have to pay the same amount as
are paid by importers. This would result in removing any price advantage that domestic
manufacturers would have gotten otherwise. This SC ruling made domestic manufacturing less
lucrative and thus is having the effect of a 'disincentive'. This essentially is a duty anomaly that has
the potential to put off global majors from investing in e-manufacturing here. Minister of
communication and IT Ravi Shankar Prasad knows this very well. At a recent MoU signing
between National Association of Software and Services Companies (Nasscom) and India
Electronics and Semiconductor Association (IESA) in Delhi, the minister admitted that correction
of duty structure is crucial to increasing electronics manufacturing in the country. According to a
report in The Hindu BusinessLine, the minister also acknowledged that for this finance minister
Arun Jaitley will have to be convinced.

The governments net-zero import target in the sector has been set at 2020. It will have to move fast
on this front to attain this objective. On the whole, while the intent of the initiative is good, it is
riddled with challenges.

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 E-COMMERCE

E-commerce (electronic commerce or EC) is the buying and selling of goods and services, or the
transmitting of funds or data, over an electronic network, primarily the Internet. These business
transactions occur either business-to-business, business-to-consumer, consumer-to-consumer or
consumer-to-business.

Indian e-commerce has seen frenetic activity in the recent past, but it needs to be allowed to
grow out of restrictive government regulations. Global players like Amazon and Alibaba
have stated deep commitments to developing an India presence.
Japanese technology major, SoftBank, has invested about $1 billion in sundry Indian e-
commerce outfits, and it has committed to investing $10 billion over the next few years.
Local e-retailer Flipkart raised funding to the tune of over $1 billion and taken over fashion
major, Myntra. Snapdeal, Jabong, Foodpanda. Foodpanda, Zomato are symbols of
competition in the online market.
The market is substantial and growing very fast, with a cumulative annual growth rate of
over 30 per cent between 2009 and 2014.
Competition is fierce with online sales often highly discounted - so much so that there have
been complaints about predatory pricing from brick and mortar retailers.
By 2018, e-retailing turnover is expected to cross $22 billion. Even that will be a tiny slice,
less than three per cent, of the overall retail market - which should be worth over $800
billion by 2018.
So there is ample room for growth and the coincidence of several favourable socio-
economic trends means growth should accelerate. The rapid adoption of cheap smart phones
implies that close to a billion Indians may soon be on the mobile web. The e-commerce
industry has the ability to service Tier-II and Tier-III cities, where there is little brick and
mortar retail reach. Marketers have worked around low credit-card reach by setting up cash-
on-delivery systems.
Innovative payment portals, such as Paytm, mobile wallets and payments banks, will make
transactions simpler, safer and cheaper. The industry will occupy huge chunks of real estate,
ranging from offices, to data centres, to warehouses.
Apart from providing large revenues to the logistics industry, e-commerce will generate
massive employment. It can offer high-end jobs to data scientists and MBAs, and also
absorb less-skilled labour at the low-end of the delivery and logistics chain.
Red tapism is one of the major stumbling blocks. Restrictions on foreign investment in

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 multi-brand retail remain, in spite of the protestation even of foreign leaders. This
protectionist attitude confines e-retailers to the marketplace model. This is one reason for
industry disputes with state excise and sales tax departments.
It is unclear who is liable for local taxes - is it the seller, or the marketplace? Warehouses
have been raided with states alleging non-compliance with the cumbersome formalities for
transporting goods across state borders. It is high time that the regulatory regime was
simplified to allow free play to e-commerce. If restrictions on foreign direct investment were
removed and state taxes rationalised, efficiencies would dramatically improve.
An opportunity exists to modernise the retail sector, boost inter-state trade, generate mass
employment and create positive spin-offs for real estate and logistics. It would be imprudent
not to take it.
The Department of Posts has initiated the process of starting a Payment Bank and e-
commerce venture. Payment banks are entities that target low value and high volume money
transaction mainly used by laborers, migrants, small businesses. They require vast reach
deep into Indias villages where money can be transferred. Indian Postal network has no
competition in terms of its reach. Usually there is a post office in every village even when
there is no mobile network.
In the past few decades, India has seen a surge in migration of villagers to industrial hubs in
search of employment. A large volume of remittances are sent by these workers to their
families. Currently most of it is carried out by unofficial channels. With payment banks
workers can deposit money in payments banks and their families will take money from their
area office. Also, this service will help in connecting rural market to fast growing e
commerce services by providing them payment options.

Although e-commerce is still at a nascent stage but it has the potential and the room to scale greater
heights. People in rural fringes especially have been familiar with Post offices and money orders for
generations, but are largely unaware of e-commerce marketplaces. Facilitating greater rural reach
for e-commerce ventures, will help DoP(Department of Post) to generate better revenues. Once
established, these payment banks can also be used to transfer cash directly to beneficiaries thus
reducing leakages in government schemes.

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 POWER SECTOR REFORMS

In the modern world, the key progress of a nation is ensured through the availability of regular
electrical energy. Countries individually and collectively have been drawing up plans to tap,
develop and utilize energy. Electricity is a very crucial factor in achieving economic, social and
environmental objectives of sustainable human development. In the present digital age, electricity
has emerged as the critical input for sustaining the process of economic as well as social
development. Though the Indian Power sector has achieved substantial growth during the Post
Independence era, it has been ailing from serious functional problems during the past few decades.
Per capita consumption of electricity in India increased from 178 KWh in 1985-86 to 338 KWh in
1996-97, and to 665 KWh in 2005-06.

Power Scenario in India

In India, there are various power plants, both private and government controlled, which
produce electricity.
Since, electricity is a 'state subject' under the constitution, every state has a local electricity
regulator which sets tariff and electricity prices for the electricity that is used by various
types of consumers such as commercial users, farmers and households.
Electricity is provided to consumers through power distribution companies, most of which
are government owned. Technically, a private company can enter the business of power
distribution, but the market is already saturated with government controlled companies that
are also inefficient.
These distribution companies ('discoms') purchase electricity from power generators and
then supply this purchased electricity to consumers, often at prices lower than what they
were purchased at. This is because of populist pressures. A state government does not want
to alienate its voters by increasing the tariffs of electricity.
However, commercial users of electricity pay a different price as compared to householders.
Most farmers enjoy highly subsidized and almost free electricity.
As a result most discoms purchase at higher cost and sell/distribute at lower costs. Over a
period of time, this has created a huge debt of 4.3 trillion rupees (or 65.3 billion USD, which
is more than the individual GDP (PPP) of 91 countries. It is more than the GDP of couple of
african countries taken together).
Successive governments have feared raising electricity tariffs as they are afraid of losing
favour with the electorate. As a result, only myopic and short-term measures have been
resorted to such as handing out 'bail-out'/rescue packages to distressed and indebted power

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 discoms.
Due to the huge debt, most discoms are unable to expand reach and capacity. They are also
unable to meet the rising power demands of their consumers. They are also unable to take up
loans from banks which are bound to not give loans to financially mismanaged companies.
Since discoms are debted and unable to pay for most of their purchases of electricity, power
plants/generators also reduce production of electricity in order to not overshoot supply
which is lower due to the lower offtake by power discoms. As a result, power generators
work at an inefficient lower generation capacity. Currently, they utilize only 65% of the total
generational capacity, expressed in plant load factor (PLF).
Thus, the entire problem has arisen for the simple and the only reason that users are not
paying as much for the electricity as they are using. The problem became complex when
political leaders lacked enough political will to implement reforms at the earliest sightings
of worsening conditions.

Most of the State Electricity Boards (SEBs) in India have been working under resource crunch and
operating at massive commercial losses. The inefficiencies were mainly due to the following
reasons:-
The technical performance of the SEBs is not satisfactory. Transmission & Distribution
losses are very high, of the order of 22.9%.
Thermal power stations have been operating at very low efficiency and with average plant
load factor of only 65.1%.
Poor billing and collection: Because of incorrect reporting and billing, inadequate collection
efforts, tampering with meters, and misreporting in collusion with consumers, the State
Electricity board is unable to recover the costs of providing electricity to consumers..
Unmanageable size and monolithic structure: The sizes of most discoms are not rationalized
and have grown into monolithic structures making them unwieldy, inefficient and
unresponsive to change. This creates issues such as manpower related problems, poor
productivity, low skills and lack of training for up gradation and low motivation levels, etc.

Recently, India approved a rescue package for its loss-making power utilities in the month of
November. Under this rescue package which envisages a two year implementation period, states
would be allowed to take on 75 percent of the debts of their utility companies, which have grown to
4.3 trillion rupees ($65.3 billion) after years of undercharging customers for electricity. By clearing
past debts and putting them on a better financial footing, the utilities are expected to be returned to
profitability before 2019. States and utilities which want to take up the rescue package will sign

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 agreements with the power ministry committing them to improve performance in return for the debt
swap.

#Plant Load Factory (PLF) is the ratio between the actual energy generated by the plant to the
maximum possible energy that can be generated with the plant working at its rated power and for a
duration of an entire year.

Reforms Needed
Improve Governance of Utilities: Indias landmark 2003 Electricity Act must be utilized as a
viable framework for institutional governance to improve the performance of the sector, expand
access, and ensure sustainability. The various state electricity regulatory bodies must be made to
function as autonomous organizations without outside or political interference. They must also be
held accountable for their performance.

Show Zero Tolerance for Power Theft

Another aspect of Indias power distribution problem is the widespread feeling among consumers
that they are entitled to free power. This leads many towards adopting the Kaatiyabaaz culture of
tapping electricity from the grid without paying. Again, political interference often undermines the
utilities ability to tackle theft or even the collection of bills, as political bosses step in during any
departmental drive to enforce collections.

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 U J J WA L D I S C O M A S S U R A N C E Y O J A N A

UDAY is a path breaking reform for furthering the landmark strides made in the power sector over
the past one and a half years, with the sector witnessing a series of historic improvements across the
entire value chain, from fuel supply (highest coal production growth in over 2 decades), to
generation (highest ever capacity addition), transmission (highest ever increase in transmission
lines) and consumption (over 2.3 crore LED bulbs distributed).

The weakest link in the value chain is distribution, wherein DISCOMs in the country have
accumulated losses of approximately Rs. 3.8 lakh crore and outstanding debt of approximately Rs.
4.3 lakh crore (as on March, 2015). Financially stressed DISCOMs are not able to supply adequate
power at affordable rates, which hampers quality of life and overall economic growth and
development. Efforts towards 100% village electrification, 24X7 power supply and clean energy
cannot be achieved without performing DISCOMs. Power outages also adversely affect national
priorities like Make in India and Digital India. In addition, default on bank loans by financially
stressed DISCOMs has the potential to seriously impact the banking sector and the economy at
large.

Operational efficiency improvements like compulsory smart metering, upgradation of

transformers, meters etc., energy efficiency measures like efficient LED bulbs, agricultural pumps,
fans & air-conditioners etc. will reduce the average transmission and distribution loss from around
22% to 15% and eliminate the gap between Average Revenue Realized (ARR) & Average Cost of
Supply (ACS) by 2018-19.

Reduction in cost of power would be achieved through measures such as increased supply of
cheaper domestic coal, coal linkage rationalization, liberal coal swaps from inefficient to efficient
plants, coal price rationalization based on GCV (Gross Calorific Value), supply of washed and
crushed coal, and faster completion of transmission lines. NTPC alone is expected to save Rs. 0.35 /
unit through higher supply of domestic coal and rationalization / swapping of coal which will be
passed on to DISCOMs / consumers.

Salient Features of UDAY

States shall take over 75% of DISCOM debt as on 30 September 2015 over two years 50%
of DISCOM debt shall be taken over in 2015-16 and 25% in 2016-17. Thus, the state
government would be responsible for paying interest on the debts of the discoms. This

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 would reduce the payouts from discoms and is expected to bring more financial
maneouvring to discoms, which were suffering due to huge operational losses.

DISCOM debt not taken over by the State shall be converted by the Banks / FIs into loans or
bonds with interest rate not more than the banks base rate plus 0.1%. Alternately, this debt
may be fully or partly issued by the DISCOM as State guaranteed DISCOM bonds at the
prevailing market rates which shall be equal to or less than bank base rate plus 0.1%.

States accepting UDAY and performing as per operational milestones will be given
additional / priority funding through Deendayal Upadhyaya Gram Jyoti Yojana (DDUGJY),
Integrated Power Development Scheme (IPDS), Power Sector Development Fund (PSDF)
or other such schemes of Ministry of Power and Ministry of New and Renewable Energy.

Such States shall also be supported with additional coal at notified prices and, in case of
availability through higher capacity utilization, low cost power from NTPC and other
Central Public Sector Undertakings (CPSUs). Thus states that produce more electricity will
be able to get even more cheaper supplies of coal, thus enabling them to erase their debt
gradually through lower cost of input, but equal/normal rates of revenue for generated
output.

States not meeting operational milestones will be liable to forfeit their claim on IPDS and
DDUGJY grants. Thus, a 'carrots and sticks' policy has been devised to bring in
implementation and enforcement.

UDAY is optional for all States. However, States are encouraged to take the benefit at the
earliest as benefits are dependent on the performance.

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 LABOUR REFORMS

Labour law is the Body of laws, administrative rulings and precedents which address the
relationship between employee, employer and labour organizations, often dealing with issues of
public laws. The primary goal of labour laws is to bring employer and employee on the same level
thereby mitigating the difference between the two warring groups.

The History of Indian Labour laws is interwoven with the history of British colonialism. The
industrial/labour legislations enacted by the British were framed in the light of industrial
development in UK. The laws were primarily intended to protect the rights of British industrialists.
The earliest Indian statute that regulated the relationship between employer and employee was
Trade Dispute Act, 1929 which was highly biased towards British employers as there were
provisions to restrict right to strike and lock out without giving any provision to solve disputes.

Similarly other such legislations were enacted to benefit industrialists. After independence these
legislations underwent significant modifications and tilted towards employees to take them out of
problems created during British rule.

Constitutional and other Labour Laws in India

Our constitution has many articles directed towards the labourer's interests for e.g., Article 23
forbids forced labor, Art. 24 forbids child labor (in factories, mines and other hazardous
occupations) below age of 14 years. Further, Article 43A was inserted by 42nd amendment
directing state to take steps to ensure workers participation in management of industries. (Gandhi ji
said that employers are trustees of interests of workers and they must ensure their welfare.) Labor
laws are under concurrent list, meaning thereby that both the Centre and the State can legislate on
labor laws. There are approx. 44 central and state laws, most or all of which seek compliance from
industries.

Important laws related to Industrial relations are

Employee State Insurance Act ESI card is issued, insuring worker against any accident
at work. Theres also ESI corporation .
Employees Provident Fund and Miscellaneous provisions Act Provident fund is one in
which employee pays part of his remuneration (12 % in most cases) and equal contribution
by employer. This is mandatory for establishments employing more than 20 people .
Factories Act, 1948 - it is a social legislation which has been enacted for occupational

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 safety, health and welfare of workers at work places.
Child Labor (prohibition and regulation) Act prohibits children below age of 14 to
work in hazardous jobs. There are demands for a complete ban on employment of children.
Industrial Disputes Act One important provision has played spoilsport with most
industries. It is the provision that bars Industries employing more than 100 people to
terminate employees before obtaining the necessary approval of government. There is a
strong demand from industry to revise this limit, in order to facilitate easy entry and exit. In
the absence of timely approval, the establishment has to continue running the factory, even
at a loss.
Minimum Wages Act. - lays down the basic minimum level of wages that employees must
be paid.
Bonded Labor system (Abolition) Act The Act abolished the system in which one time
payment was made by employer to supplier or leader of group and whole seasons or years
services of labor was taken.
Contract Labor (Regulation and Abolition) Act, 1970 Contract labor is indirectly
employed by an establishment through a contractor or agency. Employers resorted to the
practice of hiring labor on a contractual basis so as to avoid the application of employment
related laws. Workers hired as contract labour are generally discriminated against in terms of
wages, job security, status, employment benefits etc. This act attempts to abolish it in certain
circumstances and to bring contract labourers at par with direct employees.
Apprentices Act, 1961 Since apprentices are only 'trainees' in a technical sense, and not
employers or workers, they could not be brought under the net of other employment/labour
related laws specified above. Thus a separate law had to be legislated for apprentices. This
law lays down a framework for providing a conducive work environment for apprentices. It
also sets down the terms that determine the legal relationship between an employer and an
apprentice.

Major issues in Indian labour market

Child labour
Lack of skilled labour
Lack of Equity in payment
Trade unions
Labour market regulations

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 REFORMS: NEED OF THE HOUR
There is a strong call from Indias strongest and influential quarters for the need of reforms in India.
This is due to the fact that many of the laws are quite irrelevant and do not reflect the current
requirements and needs of the industry. There are several reasons for this. Under the constitution,
labour is a subject in the concurrent list and as a result a large number of labour laws have been
enacted catering to different aspects of labour namely, occupational health, employment, safety,
training of apprentices, fixation, review and revision of minimum wages, child labour, women
labour and social security benefits etc. In total, there are 44 labour legislations at central and almost
4 times than that at the state level. This has created a lot of redundancy and loopholes in the system
which paves the way for labour exploitation. India has emerged as the outsourcing hub of the world
but that did not benefit the Indian labour because of the predominantly heavy handed labour
regulations with exploitable gaps. So MNCs and domestic companies have resorted to alternate
ways i.e. employing contract labour at cheaper rates.

RECENT REFORMS OF THE GOVERNMENT

Apprenticeship Act In apprentice system, trade workers, engineers (both diploma holder and
graduates), 10+2 passed vocational students, need to undergo training in industry to enhance their
skill. On completion of this they become regular workers. For this they get stipend in form of
remuneration. New amendment increases Stipend to 70 % of wage of regular unskilled worker in
first year, and 80% in second year. Non engineers can also be appointed, and their total number
could be up to 10% of the total workforce. Now students other than engineering can also seek
apprenticeship. About 500 new trades have been added. The amendments have also removed some
penalties for Industry employer cant be jailed for non-compliance.

Factories act Overtime (normal hours increase), better working conditions, Allows women for
overnight work provided there are adequate safeguards and transport facility .

Employees Provident Fund Organization: In the Employees Provident Fund Organization about
Rs. 27,000 crore was lying unclaimed. This was due to manual procedures and formalities to get the
amount released. When an employee changed his city then it was not possible for him to get his
balance while being stationed in the new city. Other reason for the huge unclaimed amount was that
some unscrupulous employers deposited the employee's contributions in the name of ghost
employees so that the employers could then claim the amount for themselves later. Facilitating a
Universal Account Number (UAN) would help addressing both the problems and ensure that the
money deposited by the employers for their employees are reaching the latter. This is made possible

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 by allowing easy portability of an employee's EPF account from one employer to another employer
upon switching of jobs.

Self-certification of documents: This aims at elimination of troublesome submission procedures,

under which returns were to be certified by officials. Now by self-certification method, compliance
will be checked randomly through firms/employers selected by computer.

Inspector Raj: A transparent Labor Inspection Scheme for random selection of units for inspection
would end undue harassment meted out under the Inspector Raj, while ensuring better
compliance. Currently, officials have the power to select units on their own discretion. This resulted
in rent seeking and corruption.

Number of forms related to compliance with labor laws that employers have to file will drop from
16 to 1.

Apprentice Protsahan Yojana: The Apprentice Protsahan Yojana and the Effective
Implementation of revamped Rashtriya Swasthya Bima Yojana (RSBY) for labour in the
unorganized sector were also launched today.

Shramev Jayate: Skill development of youth would be created through initiatives under Shramev
Jayate. It is one of the most important elements of the Make in India vision and aims to create an
opportunity for India to meet the global requirement of skilled labour workforce in the years ahead.

(Labour law reforms mentioned above can be used as references and examples for any discussion
involving 'ease of doing business in India')

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 S H R A M E V J AYAT E

Five main schemes have been launched by the Hon'ble Prime Minister regarding labour reforms
A dedicated Shram Suvidha Portal: That would allot Labour Identification Number (LIN)
to nearly 6 lakhs units and allow them to file online compliance for 16 out of 44 labour
laws .
An all-new Random Inspection Scheme: Utilizing technology to eliminate human
discretion in selection of units for Inspection, and uploading of Inspection Reports within 72
hours of inspection has been made mandatory .
Universal Account Number: Enables 4.17 crore employees to have their Provident Fund
account portable, hassle-free and universally accessible.
Apprentice Protsahan Yojana: Will support manufacturing units mainly and other
establishments by reimbursing 50% of the stipend paid to apprentices during first two years
of their training .
Revamped Rashtriya Swasthya Bima Yojana: Introducing a Smart Card for the workers
in the unorganized sector seeded with details of two more social security schemes .

Dedication of Shram Suvidha Portal and Labour Inspection Scheme in Central Sphere:
Multiplicity of labour laws and the difficulty in their compliance has always been cited as an
impediment to industrial development. The World Bank annual report for year 2014 in a
comparative study on Indian Labour Laws has established the fact that Indian states with flexible
labour laws and easier compliance mechanism have fared better in terms of Industrial development
than those where labour laws are rigid and compliance is difficult. The latter category of states have
been found to have not fared as well comparatively. Ease of compliance has also been found to be
important for the growth of the organized sector. Ministry of Labour and Employment and Ministry
of Commerce and Industry are both working in close coordination to fulfill the mission of Make in
India, by facilitating ease of compliance.

Amendments to three major labour laws were presented to Parliament during this Monsoon session
of the Parliament. Government has developed a Shram Suvidha Portal in central sphere to create a
conducive environment for industrial development. The 4 main features of this Portal are:

Unique labour identification number (LIN) will be allotted to Units to facilitate online
registration.
Filing of self-certified and simplified Single Online Return by the industry. Now Units will

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 only file a single consolidated Return online instead of filing 16 separate Returns.
Mandatory uploading of inspection Reports within 72 hours by the Labour inspectors.
Timely redressal of grievances will be ensured with the help of the portal.

This will bring in the necessary ease in compliance of provisions related to labour and will be a step
forward in promoting the ease of doing business. The complete database available centrally at
unified portal will also add to the informed policy process.

Labour Inspection Scheme: So far the units for inspection were selected locally without any
objective criteria. To bring in transparency in labour inspection, a transparent Labour Inspection
scheme is being developed. The four features of the inspection scheme are:

Serious matters are to be covered under the mandatory inspection list.

A computerized list of inspections will be generated randomly based on pre-determined
objective criteria.
Complaints based inspections will also be determined centrally after examination based on
data and evidence.
There will be provision of Emergency List for inspection of serious cases in specific
circumstances.

A transparent Inspection Scheme will provide a check on the arbitrariness currently observed in
compliance mechanisms. .

Dedication of Portability through Universal Account Number (UAN) for Employees Provident
Fund:
Under the scheme complete information for approximately 4 crore subscribers of EPF has been
centrally compiled and digitized and a UAN has been allotted to all. The UAN is being seeded with
Bank account and Aadhar Card and other KYC details for financial inclusion of vulnerable sections
of society and their unique identification. Camps are being organized to facilitate opening of bank
account and Aadhar card for those subscribers who do not have a bank account or Aadhar card as on
date. This will ensure portability of the Social Security Benefits to the labour of organised sector
across jobs and geographic areas. The EPF account of employee will now be updated monthly and
at the same time he will be informed through sms. Finally it will ensure that each of the 4 crore or
more EPF account holders have direct access to their EPF accounts and will also enable them to
consolidate all their previous accounts (approximately Rs 27000 Crore are currently lying with

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 EPFO in inoperative accounts). By 16th October, 2014, approximately 2 crore subscribers will have
the benefit of portability through UAN. Subscribers have been informed through sms/email
immediately on inauguration. The minimum pension for employees has been introduced for the first
time so that employees pension is not less than Rs. 1000 per month. The wage ceiling has been
raised from Rs. 6500 to Rs. 15000 per month to ensure that vulnerable groups are covered under
EPF Scheme.

Recognition of Brand Ambassadors of ITIs :

The Industrial Training Institutes (ITIs) in the country are the backbone of the vocational training
system. They are also the only source of supply of skilled manpower to the manufacturing industry.
There are 11,500 ITIs having about 16 lakh seats. But this is grossly inadequate for supplying
skilled manpower to Indian industry. Only 10% of the workforce have got formal or informal
technical training. Only one fourth of this is formally trained. Whereas in South Korea, Japan, and
Germany, the percentage of workforce having received skills training is 96, 80 and 75 respectively.
There is also another big imbalance. The intake capacity of undergraduate engineering colleges was
more than 16 lakh in India which was almost same as seating capacity of ITIs. Whereas, ideally we
need about at least 10 shop floor workers for an engineer. This translates to almost 160 lakh ITI
diploma graduates annually.

However, as a general trend, pass outs from education system do not take admission in the ITIs as
their first choice. Mostly end up in ITI after exhausting all other options for higher education. This
is because; blue collar work is not respected and regarded highly in the society. For meeting the
skill needs of our industry and for enhancing employability of our youth, we need to attract more
youth to it by enhancing dignity of vocational training.

Launch of Apprenticeship Protsahan Yojna :

The Apprentices Act 1961 was enacted for regulating the Apprenticeship Training Scheme in the
industry for imparting on-the-job training to apprentices. Presently, there are only 2.82 lakh
apprentices undergoing training against 4.9 lakh seats.

Apprenticeship Scheme has huge potential for training a large number of young workforce to make
them employable. If properly revamped, it could also significantly contribute to Make in India
mission. Similar schemes have been highly successful in countries like Germany, China and Japan
where the number of apprentices are stated to be 3 million, 20 million and 10 million respectively.

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 Present framework tightly regulates the number of apprentices trade-wise, and is not attractive to
youth because of the low rate of stipend. Further, the industry is averse to participate because the
scheme is not viable for small scale industries. There are a large number of establishments including
MSMEs where training facilities are available but could not be utilized so far.

A major initiative has been undertaken to revamp the apprenticeship scheme in India after extensive
consultation with industry, states and other stakeholders with the vision of increasing apprenticeship
seats to more than 20 lakhs in the next few years. There are four components of this initiative,
which are given below:

Making the legal framework friendly to both, industry and youth. The necessary Bill
amending the Act was placed and passed in Lok Sabha on 14.8.2014.
Enhancing the rate of stipend and indexing it to minimum wages of semi skilled workers.
Apprentice Protsahan Yojana which will support manufacturing units mainly and other
establishments by reimbursing 50% of the stipend paid to apprentices during first two years
of their training.
Basic training component (mainly class room training part) of the curricula is being
restructured on scientific principles to make it more effective, and MSMEs will be supported
financially by permitting this component in government funded SDI scheme.

The Apprentice Protsahan Yojana will support one lakh apprentices during the period upto March
2017. Selected Apprentices and the Establishments ready to participate in this scheme from various
states will be invited and it is proposed that Prime Minister will give sanction letters to these to
mark the launch of the new scheme.

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 RISING PRICE OF PULSES

India is the biggest producer, consumer and importer of pulses in the world. Pulses are the major
source of vegetarian protein diet for vegetarian Indians, and protein content in most of the pulses is
more than one-fifth by their weight. Pulses crop has the ability to fix nitrogen in the soil. Hence, it
is the finest clean green technology crop among all farm crops on this planet.

This year saw a meteoric rise in the prices of pulses, often breaching the Rs. 200 mark for a couple
of 'dals'. The 'dal' crises was not an unexpected crisis that sprang out of nowhere. Instead, the crisis
systematically built over a couple of years even as the administration remained passive to the rising
prices of pulses. Several causes came together to build a heady cocktail of booming prices.

Causes
Low cultivable land under pulses: India is majorly a producer of rice, wheat and sugar.
Owing to the difficulty in raising/cultivating pulses, it is not a favourite of many Indian
cultivators and farmers, who prefer to raise other crops. As a result, less than 10% of Indian
farmlands are put to use for growing pulses.
Low global world production: Most of the countries around the world prefer 'meat' and
'meat products' as a source of protein. Pulses have not really become a favourite source of
protein for most countries around the world. As a result, the global levels of production are
very low for pulses. Only a handful of countries cultivate pulses. India is the largest
producer of pulses (23.1%), with China, Brazil, Canada and Myanmar comprising 27% of
the production together. Only these 5 countries together produce half of the global pulse
production.
Inflationary price tendency: Low global production is directly responsible for inflationary
price tendencies of the pulse grain. A vicious circle is responsible for the problems of price
stability and low production of pulses. India is a large importer of pulses. In case of an
abnormal shortage in production, both domestic and international prices are bound to go up.
Cropping Pattern and Price volatility: Volatility of pulse prices is an important reason for
the crop receiving a step-motherly treatment from farmers. This may perhaps be the reason
as to why pulses production hasn't been brought under the cover of irrigated areas. Pulses
continue to be largely grown in rain-fed areas, while other crops (cereals) occupy the
irrigated areas.
Import of pulses to control domestic prices is not an option: The pulses that are preferred
majorly by Indians such as pigeon peas (arhar/toor dal), mung beans, black matpe (urad dal),

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 etc., is restricted to a few neighboring suppliers like Myanmar and African countries. Thus,
even if there is a price rise, the government does not enjoy the luxury of importing it from
too many countries, in order to lower domestic price levels. Indias average annual import of
pulses during 2010-11 and 2014-15 was 3.56 million tonnes. That is roughly a quarter of
total pulse exports globally. Any effort to fulfil the production deficit through imports is
both difficult and inflationary.
Low yield for pulse crops: While food technology has grown by leaps and bounds in the
case of wheat and rice which show good yield levels as compared to half a century ago, the
yield in the case of pulses has remained terribly low. Global yield for cereals (rice, wheat,
millet, maize, corn) remains at 3.5 tonnes per hectare but it is only 0.86 tonnes per hectare in
the case of pulses. (FAO, 2008). Yields have increased modestly over the past few decades
(<1%/year). Pulse yields in India are yet to take off. From 1950, yield of pulses have grown
marginally as compared to wheat and rice. While the yields of rice and wheat have grown by
four and five times respectively, the yield of pulses have only doubled, i.e., pulses have seen
only half the growth seen by rice and wheat.
Lack of attention: Compared to cereal crops, pulse crops have not received the same
attention and production resources at the farm level.
Declining production per capita: Owing to lower yields and lack of adequate attention, the
production levels of pulses have not kept pace with the growing population.
Poor Monsoons: The last two years, 2014 and 2015, have seen poor monsoon rainfall.
Foodgrain levels fell by nearly 5% of total production. Areas in Punjab reported lowest
monsoon levels in the last 16 years. As a result there was a direct shortfall of 2 million
tonnes of pulses.
Inadequate Trade: Of the 70 metric tonnes that is produced globally, only 15 metric tonnes
are traded internationally, which is a little above 20% of the total production output. India
imports a third of the internationally traded pulses. This spikes up the prices of pulses.
Absence of a 'futures' commodity market: A 'futures market' helps growers, cultivators,
and dealers in determining the prevalent prices. This is because a futures market enables
traders to establish contracts securing the supply for commodities sometimes in the future.
These contracts necessarily have to mention prices in the documents. This reveals 'prices' to
other market players and helps in better price discovery. Lack of a futures market therefore
directly impedes the price discovery process.

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 Steps taken to curb rising prices
Crackdown against hoarding: Essential Commodities Act, 1955 was implemented by
conducting raids in stores and locations of wholesalers and dealers in order to prevent
'hoarding' of pulses, which is also one of the main reasons behind the upward prices. As part
of the measures adopted under the Act, nearly 75000 tonnes of dal had been recovered from
hoarders and black marketeers.
Banned Exports: The government banned exports as well as futures trading in
commodities. Futures trading in commodities have been banned on the principle that price-
speculation could lead to distorted production market as cultivators would strive to grow
pulses even in areas unsuitable to their production, in case, their production is driven by
speculators betting on the futures market.
Zero Duty Import: The government removed all levies charged at the time of import, in the
case of pulses.
Minimum Support Price increased: To incentivise farmers, the MSP of gram and lentils
(masur dal) has been increased by Rs. 250 per quintal.
Prompt Import: Imported 5000 tonnes of pulses.
Price Stabilization Fund: The Department of Agriculture & Cooperation approved the
Price Stabilisation Fund (PSF) as a Central Sector Scheme, with a corpus of Rs.500 crores,
to support market interventions for price control of perishable agri-horticultural
commodities. Procurement of pulses will be undertaken directly from farmers or farmers
organizations at farm gate/mandi and made available at a more reasonable price to the
consumers, thus eliminating the hoarder/black marketeer who is interested in rising prices.
This fund has also been used to subsidize the cost of transporting, handling and milling of
pulses, so that the 'distribution' costs are reduced.

Future Steps to be undertaken:

Need for Futures Trading in Pulses: The price risks in domestic marketing as well as importing of
pulses underline the need for development of futures trading in pulses for effective price discovery
and efficient price risk management. Already, futures trading is allowed in chana. But other pulse
varieties are devoid of any such risk management avenue. It is therefore necessary to develop
suitable futures contracts for major pulse varieties separately, as also for all pulses together in the
form of index futures. Development of such contracts will not only assist in price discovery and risk
management to the varied physical market functionaries in pulse trade and industry. Such contracts
will also help to bring about price integration among different pulses.

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 Augment Domestic Production: Systematic steps need to be adopted to augment domestic
production as the rest of the world is hardly likely to increase production of pulses.

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 INTERNATIONAL YEAR O F PULSES

Pulses have captured the attention of the United Nation. The General Assembly of the UN has voted
to declare 2016 as the "International Year of Pulses." A variety of pulses including beans, lentils,
peas and chickpeas have been the cornerstone of global nutrition for centuries. Having a UN
dedicated year will raise the level of awareness of pulses globally and the important role pulses can
play in advancing health and nutrition, food security and environmental sustainability.

Beyond traditional markets, pulses have steadily increased in popularity as people around the world
recognize their appeal as nutritious, versatile foods that can play an essential part in healthy diets.
The idea of a year dedicated to recognizing the role of pulses in sustainable agriculture and healthy
diets was conceived., the International Pulse Trade and Industries Confederation. Through the
determined support of the several countries, in particular Turkey and Pakistan, and the support of
the Food and Agriculture Organization, the International Year of Pulses was passed by the UN
General Assembly.

This is the greatest opportunity in a century to give pulses the attention they deserve. Pulses can
help to increase food security and nutrition security for those with shortages and to tackle the
increase of diseases linked to lifestyles such as obesity and diabetes. Plus, they improve cropping
systems and are good for farmers. The International Year of Pulses will give pulses additional
research attention and nutritional programming, which will lead to dietary uptake. Increased pulse
consumption will grow both healthy people and a healthy planet.

A $1.1 million corpus has been set aside to fund activities related to IYP 2016. A series of national
committees are being established around the world by CICILS members to work with their
governments, farmers, NGOs, retailers, food manufacturers, health &science organizations and UN
bodies to make the year a success globally and in each country.

India is the world's largest producer (18.5 million tons), importer (over 3 million tons) and
consumer (22.0 million tons) of a variety of pulses; yet, the per capita availability of this nutritious
vegetable protein is relatively low at about 15 kilograms per annum. For a country that faces
persistent protein inflation and has preference for vegetarian diet, pulses are the most economical
source of vegetable protein. Higher consumption of pulses will help address the scourge of
pervasive malnutrition caused by protein deficiency among large sections of the population.

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 I N D I A & I N N O VAT I O N

Innovation is the specific instrument of entrepreneurship. The act that endows resources with a
new capacity to create wealth. - Peter F. Drucker

India ranks 76 on Global Innovation Index, much below countries such as Malta, Lithuania, Latvia,
the Seychelles, Greece and Brazil.

Grassroots Innovation
India's innovation is considered to mostly arise from the Silicon Valley in Bangalore and other hot-
spots that are seeing start-up frenzy. However, India's rural areas and those living in lower income
groups, have already proven themselves to be innovators that build ideas around sustainable uses of
natural resources. There are umpteen examples of grassroots innovation. These innovations are built
around curbing deficiency of resources and the consequent deprivation that arises due to such
deficiency.

1) Clay refrigerators: A clay potter, Mansukhbhai Prajapati who lives in a village in Rajkot,
Gujarat is the founder of Mitticool Clay Creation, a company that makes refrigerators, water
filters, cookers, hot plates and other such items of daily use from clay. The National
Innovation Fund (NIF) helped Prajapati to supply clay refrigerators even to markets in
London, America, Africa, & Singapore. This model of taking rural innovations to markets
worldwide is known as 'grassroots to global' (G2G model).
2) Low Cost Incubators: Jeganathan, a paediatrician in Chengalpattu Government Medical
College in Tamil Nadu, developed a low-cost infant incubator priced at $100, which is a
fraction of the cost of commercial alternatives, and soon cut the hospital's infant mortality by
nearly half.
3) Laxmi Asu machine: NIF's Chintakindi Mallesham, a weaver from a village in Andhra Pradesh,
has turned out to be a saviour for hundreds of weavers. The Laxmi Asu machine created by
him has relieved women handloom workers from 8-9 hours of labour every day, by
automating some processes that go into making a sari. Earlier, a woman worker had to move
her hand 18,000 times, to make two saris a day.

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 The National Innovation Fund, setup in 2000 (under co-operation and guidance of Prof. Anil
Gupta) acts towards bringing these grassroots innovation to the forefront and in 'scouting, spawning
and sustaining' business ventures built around grassroots innovation. The NIF set up by the
Department of Science and Technology, has taken major initiatives to serve the knowledge-rich,
economically poor people of the country. It is committed to making India innovative by
documenting, adding value, protecting the intellectual property rights of the contemporary unaided
technological innovators, as well as of outstanding traditional knowledge holders and disseminating
them on a commercial as well as non-commercial basis. It's vision is to make India innovative, and
to add value to India's outstanding traditional knowledge base. The NIF also aims to help India
become an inventive and creative society and a global leader in sustainable technologies without
social and economic handicaps affecting evolution and diffusion of green grassroots innovations.

- The NIF allows anyone to submit an innovative idea through the 'Honey Bee Idea Submission App
(android)'.

-The Business Development and Micro Venture Investment Fund (BD & MVIF) of NIF seeks to
build a value chain around grassroot innovations (jugaad, in common parlance) to facilitate their
transition into self-supporting sustainable enterprises. The ultimate objective is to make these
innovative products available to the masses through the market mechanism or otherwise. One of its
stated objective is, 'to scout, spawn and sustain' green grassroots innovation, eventually converting
them into self-sustaining enterprises.

- While innovations have propelled entrepreneurship, yet the risk taking abilities in under
represented segments of technologies or new technologies have not witnessed an increase.
However, with the Government declaring this decade as the decade of innovation and taking bold
steps to support innovation movement in the country, things seem to improve.

Objectives of NIF
Grassroots Innovations Design Studio (GRIDS): Grassroots Innovation Design Studio (GRIDS) for
facilitating formal design inputs to the grassroots innovations at premier institutes viz. National
Institute of Design, Ahmedabad (Gujarat), Indian Institute of Technology, Gandhinagar (Gujarat),
National Institute of Technology, Srinagar (J&K) and Srishti School of Arts, Design and
Technology, Bangalore (Karnataka).

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 Students Club for Augmenting Innovations (SCAI):A nationwide student movement comprising
students from Indias best management and technology institutes to provide product development,
mentoring and monitoring support to innovators and traditional knowledge holders at the grassroots.

Micro Venture Innovation Fund (MVIF): One of its kind of dedicated risk fund in the world setup
with the support of SIDBI in October 2003, and operationalised in January 2004. Under MVIF
financial support to grassroots innovators is extended under a single signature on a simple
agreement of understanding without any collateral or a guarantor.

Grassroots Technological Innovations Acquisition Fund (GTIAF): Sanctioned in 2011 and

operationalised in 2012, GTIAF is to obtain the rights of technologies from innovators after
compensating them for the same with the purpose to disseminate/diffuse them at low cost or no cost
for the larger benefit of the society.

Gandhian Inclusive Innovation Challenge Awards:Announcement of Challenge Awards by Dr RA

Mashelkar in presence of Honble President of India to develop new solutions for three challenges
viz. paddy transplanter, wood stove and tea leaf plucking machine.

NIF consciously pursues only environment friendly 'green' innovations, while striving to expand
policy and institutional space for the same.

NIF has a large database of over 211,600 ideas, innovations and traditional knowledge, including
proprietary, open source and common public knowledge. It maintains a catalogue of innovations.
While the percentage of proprietary traditional knowledge (individual or community) and
innovations where NIF has filed patents in the names of the individuals or communities is quite low,
much knowledge is available (common or open source), which can be disseminated without any IP
considerations.

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 N AT I O N A L I N N O VAT I O N C O U N C I L

Indian Model of Inclusive Growth

Innovation today is increasingly going beyond the confines of formal R&D to redefine everything.
Today innovation can mean new and unique applications of old technologies, using design to
develop new products and services, new processes and structures to improve performance in diverse
areas, organisational creativity, and public sector initiatives to enhance delivery of services.
Innovation is being seen as a means of creating sustainable and cost effective solutions for people at
the bottom of the pyramid, and is being viewed as an important strategy for inclusive growth in
developing economies.

Realising that innovation is the engine for the growth of prosperity and national competitiveness in
the 21st century, the President of India has declared 2010 as the Decade of Innovation. To take this
agenda forward, the (former) Office of Adviser to the PM on Public Information Infrastructure and
Innovations (PIII) worked on developing a national strategy on innovation with a focus on an Indian
model of inclusive growth. The idea is to create an indigenous model of development suited to
Indian needs and challenges.

The former Prime Minister set up the National Innovation Council (NInC) under the Chairmanship
of Mr. Sam Pitroda to discuss, analyse and help implement strategies for inclusive innovation in
India and prepare a Roadmap for Innovation 2010-2020. NInC would be the first step in creating a
crosscutting system which will provide mutually reinforcing policies, recommendations and
methodologies to implement and boost innovation performance in the country.

India has a long tradition of innovation and a significant pool of qualified people, both within the
country as well as the diaspora, presently engaged in innovative activities. This talent pool has to be
leveraged to drive the innovation agenda. Further, there is also a need to capture the multiple
innovations happening in various domains such as government, R&D labs, universities, and across
sectors, to give an impetus to the innovation process in the country. NIC will act as a platform to
facilitate this engagement and collaboration with domain experts, stakeholders and key participants
to create an innovation movement in India. The aim is to herald a mindset change and create a push
at the grassroots level so that more and more people in education, business, government, NGOs,
urban and rural development engaged in innovative activities are co-opted and are part of shaping
the national level innovation strategy.

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 The India Inclusive Innovation Fund
The National Innovation Council (NInC) and the Ministry of Micro, Small and Medium
Enterprises (MSME) came together to launch the India Inclusive Innovation Fund (IIIF).
The Fund will aim to provide modest financial returns, while ensuring significant social
impact to the community. The Funds eventual aim is to expand the corpus to Rs 5,000 crore
over the next 24 months.
The Fund will be registered with an initial corpus of Rs 500 crore, with the Ministry of
MSME committing to 20% (Rs 100 crore) and the balance being given by banks, insurance
companies, overseas financial and development institutions.
The Fund will invest in innovative ventures that are scalable, sustainable and therefore
profitable but address social needs of our less privileged citizens in areas such as healthcare,
food, nutrition, agriculture, education / skill development, energy, financial inclusion, water,
sanitation, employment generation, etc.
Seeks to address the problem of lack of capital at the grassroots level.

Infosys' Innovate India Fund

In a move to help the Indian start-up ecosystem, Indias second largest IT company Infosys
announced the creation of a $250 million (Rs. 1,550 crore) Innovate in India Fund from its
recently expanded innovation fund. Earlier, Infosys had said that it will expand its innovation fund
to $500 million to accelerate the creation of its worldwide ecosystem of innovation. It will be
dedicated for investments in promising new Indian companies that will be inducted into the global
ecosystem of strategic partners that Infosys is building. The Fund will be used to invest in young
companies innovating in next-generation solutions and technologies such as Artificial Intelligence
(AI), automation, pervasive connectedness as well as collaboration and design technologies, the
company said in a statement.

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 N AT I O N A L I P R P O L I C Y A N D I N N O VAT I O N

On Oct, 22 2015, the Indian government constituted a think tank headed by former judge of the
Madras high court and chairperson of Intellectual Property Rights Appellate Tribunal (IPAB)
Prabha Sridevan. The declared mission of the think tank, declared in a draft report submitted on , is
to "establish a dynamic, vibrant and balanced intellectual property system in India, to foster
innovation and creativity in a knowledge economy and to accelerate economic growth, employment
and entrepreneurship."

However, this was done after neglecting another report on draft national IPR policy that had been
submitted earlier on July 24th, 2015. The report was submitted by a committee constituted by the
ruling dispensation itself. Its members were Prabuddha Ganguly, Shamnad Basheer, and Yogesh
Pai. However the submission of the earlier report failed to elicit any response from the government.

The draft national IP policy (24th July, 2015), makes some important comments on the stance to be
adopted by India vis-a-vis international IP regimes. It states:

Promotion of nation-specific IP goals: While India will continue to draw on foreign

precedent from jurisdictions that have had a longer and more sophisticated history with
intellectual property, it will not blindly adopt their norms. It further states that India will
need to evolve new norms to leverage its technological proficiency while keeping in mind
the interests of large segments of the population who are poor and underprivileged and to
whom access to pharmaceuticals is crucial. It essentially means that while India will evolve
more protection systems for IP, it will not be done at the cost of depriving access to
medicines and technology for the vast majority of India's poor.

Promotion of a more open IP environment: It states that India will explore alternative
innovation incentives such as prizes and open source/access models that complement
existing regimes to foster funding for research into drugs for diseases that disproportionately
affect India and the developing world.

Disapproval of profiteering from IP registration: It also states that entities that register IP
for the mere purpose of extracting excessive rents without any interest in developing
products and services will be discouraged. It also suggests data-driven studies to assess the
nexus between foreign direct investment and IP norms and the costs of introducing stronger

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 IP norms.

National Policy must be pro-people than pro-IP: The draft policy unambiguously points
out the right of the government to take pro-public health measures such as compulsory
licences in instances where patents impede access to medicines. It states: While rights
holders will be encouraged to fulfil part of their social bargain, the government will not
hesitate to deploy compulsory licensing, price control and other measures where the rights
holders so fail and where the government deems it necessary to check IP excesses and
abuse. [Compulsory Licensing is resorted to when an IP based product is very 'essential'. It
could be medicine formulations developed for life-threatening diseases or a technical
innovation that is very 'essential' to further innovation or unlocking of large amounts of
value for the public. In this case, an IP holder has to mandatorily share its technology and
innovation with other third parties who wish to sell it. The IP holder must also do so by
treating all the licensees of its IP product on an equal footing without discriminately
charging/pricing any one licensee over another.]

Status Quo of IP Regime: The draft states: India is committed to ensuring TRIPS
compliance and will avoid any TRIPS-plus measures, purely at the behest of a trading
partner. This is a significant policy recommendation in the light of increasing pressures
from the developed world to thrust TRIPS-plus measures on the developing world through
bilateral treaties and regional free trade and investment agreements.

Promotion of Innovation for the Informal Economy: The other specific focus areas that
the draft policy proposes are data-driven studies to explore innovation and creativity in the
informal sectors to find out the role of incentives and create national and international
markets for segments within Indias informal economy.

Monetization of IP through public funded research results: The draft policy also
recommends that public-funded innovation and IP be a key focus of the government and that
the government explore the possibility of capturing IP generated through public-funded
research. For e.g., the research led innovations designed/created at IITs, universities or
public institutions be registered as Intellectual Property of the government/people.

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 The draft National IPR Policy (October 22) released by the new think tank headed by Prabha
Sridevan.
Generating Awareness and promotion of Intellectual Property: To create awareness
among the general public about the economic, social and cultural benefits of IP and promote
entrepreneurship, and competitiveness. For fulfilling this objective, the policy envisions the
launch of a nation-wide program to create awareness on the benefits of IP. In addition, steps
would link IPRs with various national initiatives like, Make in India, Digital India, and
Smart Cities.

Creative India, Innovative India: Secondly, the policy seeks to stimulate the creation of IP
by adopting measures that could encourage IPR generation. To achieve this, a national
slogan Creative India, Innovative India would be adopted to propagate the value of
creativity and innovation.

Survey and Support to Innovators/Inventors/Creators: The policy envisions to carry out

a comprehensive IP Audit in various sectors to evaluate the areas of strength and develop
specific programs to address the needs of targeted inventors and creators.

Stronger IP Regime: to strengthen the legislative and regulatory framework by reviewing

the existing IP Laws, and more importantly, enact laws for developing a protective regime
for Utility models and trade secrets, which are yet to receive statutory protection. [This is a
slight departure, but with huge consequences, from the report submitted by the previous
committee which had suggested that India currently maintain the same level of IP regime
without making it stronger a-la TRIPS Plus measures].

Administrative Reform: restructure, upgrade and grant sufficient autonomy to various

Intellectual Property Offices (IPOs) by augmenting the required manpower for speedy
disposal of backlog of cases and reviewing the process of recruitment for attracting the best
talent to man these IPOs.

Skill Development: The Policy also aims to develop human resources by developing
teaching, training, research and skills in IP to develop an ever-expanding pool of experts and
IP Professionals. To achieve this, the Policy envisions to establish a national level Institute
of Excellence for providing leadership in IPR education, and carrying out empirical and
policy research.

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 Academic Thrust: Other measures to be taken up include empowering IP Chairs in
institutes of higher learning to provide for high-quality research; introducing IP courses or
modules in National Academy of Administration, IIFT, Institute of Foreign Service Training
and Forest Training Institutes. In addition, making of IPR as a compulsory subject in all
legal educational institutions, NIDs, NIFTs, agricultural and management institutes, and
progressive introduction of the IP teaching in schools, colleges and other educational
institutions.

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 WHAT IS IP?

IP stands for Intellectual Property or Intangible Property. It is of a non-corporeal nature, i.e., it does
not have a physical existence per se or a presence that is capable of being possessed as a physical
unit. Land is a tangible / corporeal property because it can be possessed physically by occupying the
land. However, a computer code or chemical combination of a medicine is not capable of being
physically possessed to the exclusion of others as in the case of land. Such type of property is
known as Intangible property. It is also known as Intellectual Property because such property is
generated mostly through the application of a person's intellectual prowess.

The characterization of intellectual property rights may be two-fold first, at their core,
intellectual property rights, are temporary monopolies granted to inter alia, authors and inventors;
and second, they are a tool to ensure innovation, social, scientific and cultural progress and further
access to knowledge. When an inventor/innovator registers a new invention/innovation, he is
capable of applying for grant of an 'exclusive' patent right. This patent right will enable the
inventor/innovator to enjoy a 'monopoly right' over production of the invention. This right will
continue for a fixed period of time. In India, this right is granted for a period of 20 years. This long
duration of 'exclusive' commercial enjoyment of one's invention/innovation is granted as an
'incentive' or a tool to encourage inventors to produce more inventions that would ultimately lead to
the social, cultural and scientific progress of any society. By rewarding inventors with a period of
20 years of exclusive commercial enjoyment, patent rights seek to encourage more inventors to
come out with innovation. Other rights that are included within the broad general term 'Intellectual
Property' (IP) also work along similar principles,i.e., providing an exclusive term protecting one's IP
and designing it in a manner to encourage more production of intellectual property.

This dual nature and purpose of intellectual property protection is particularly critical in developing
economies such as India. Excessive intellectual property protection could result in stunted
innovation and negatively impact various stakeholders.

Two Camps on IP protection:

1. Stronger IP regime camp: The stronger IP regime camp is usually populated by members of the
developed world. This camp suggests that there is strong evidence that robust intellectual property
rights protection fosters economic growth and development.
In a UNIDO (United Nations Industrial Development Organization) review of close to 200
studies on intellectual property rights and economic growth, Falvey, Foster and Memedovic

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 (2006) find overwhelming evidence that strong intellectual property rights protection
generates economic growth.
Moreover, while the impact depends on the countrys level of development, this powerful
result holds true for industrialized and developing nations.
For high-income countries, their analysis concludes that strengthening intellectual property
rights leads to growth through increased innovation and technological diffusion.
For middle-income countries, they establish that a more robust IPR environment boosts
domestic innovation. Although stronger IPR protection will preclude imitation, domestic
firms benefit from technology diffusion through foreign patenting and international trade, all
of which can lead to economic growth.
Finally, for low-income countries, the authors conclude that increased IPR protection
encourages growth, but the manner in which this is manifest is not yet known.
Linkages between strong IP protection and Development: It is suggested that
fundamentally, strong IPRs are an essential foundation for long-term growth. Moreover, this
happens through a variety of welfare-enhancing channels, including technology transfer,
tacit skill acquisition, education, job creation, wage growth, and foreign direct investment.
1) The ideas and innovations protected by intellectual property rights are the engines
of economic growth that spur development.
2) IP-intensive industries sustain greater long-term economic growth and job
creation.
3) IP-intensive industries pay higher wages, generate more sales and value-added,
and result in more exports, R&D spending and capital spending.
FDI: Robust intellectual property rights are an essential component of a nations economic
infrastructure and a prerequisite for attracting Foreign Direct Investment (FDI). Foreign
Direct Investment is far more than an investment of financial and capital resources. FDI
results in technology transfer, the dissemination of new management and production
techniques, the transfer of tacit knowledge, productivity gains and job creation. A foreign
investor that has a lot of IP interests that require to be protected (in case the investor enters a
foreign market) will not be too keen to invest in a country with a relaxed IP regime.
Technology Diffusion through FDI: In countries as disparate as Mexico, Indonesia, China
and Russia as well as India FDI has been shown to have strong, positive effects on a
countrys growth, productivity and incomes. These positive effects reflect not only the direct
benefits from applying the technologies and business methods brought in through FDI, but
also spillover effects from domestic workers learning new skills and domestic companies
adopting the new technologies and business methods.

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 Links between strong IP regimes and Development: Two economists (RJ Shapiro and
Aparna Mathur) concluded in a 2015 research paper that if India achieved greater levels of
intellectual property protection equivalent to those of China, annual FDI inflows would
increase by 33% annually. Further, if India achieved levels of intellectual property
protection equivalent to the United States, the benefits would be greater still, increasing FDI
by as much as 83% annually by 2020.
Stronger IP regimes facilitate greater R&D investment: Earlier in 2015 the market
capitalisation of Apple surpassed $700 billion - marking the first time a US company had
ever reached that milestone. One of the factors contributing to Apple's strong performance
has been its investments in research and development. And the company is doubling down
on those investments. Its R&D spending surged to $1.9 billion in the second quarter of its
fiscal year - a 36 per cent increase relative to a year earlier. Apple says R&D investments are
"critical" to its "future growth and competitive position in the marketplace and are directly
related to timely development of new and enhanced products that are central to the
Company's core business strategy." Apple's willingness to allocate billions to R&D reflects
an under-appreciated reality about the US economy: industries with higher levels of R&D
spending than the average across all manufacturing industries ("IP-intensive") perform
better than industries that spend less than average on R&D ("non-IP-intensive"). Moreover,
there's a well-documented correlation between spending on R&D in major markets around
the world and the quality of IP protections in those markets. In short, the more robust the
protections, the greater the likelihood that businesses - domestic and foreign - will make
investments.
Again, to contrast the experiences of India, China and the United States, it is illustrative to
consider their abilities to attract global R&D spending. In 2009, the U.S. share was 34%,
which has now dropped to 31%. Over the same five year period, Chinas share has risen
from 10% to nearly 18%. India, with its inadequate intellectual property rights regime,
currently attracts a mere 2.7% of global spending on research and development.
Weak IP regimes discourage R&D investment from IP Intensive industries: The reality
of R&D is that it is costly and risky, and in order for companies to justify investments, they
need some confidence they can achieve a strong return on these investments. A climate in
which innovators do not enjoy legal protections will not be conducive to attracting
investment. Lack of adequate R&D spending and insufficient production of research has a
direct impact on the productivity and value addition in an economy.
Better performance by IP intensive industries: A report, by NDP Analytics, shows that
from 2000-2012, IP-intensive industries in the United States outperformed non-IP-intensive

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 industries across a number of economic measures. For example, IP-intensive industries
produced more than triple the exports per employee than non-IP-intensive industries. And
output per employee in IP-intensive industries was double that of non-IP-intensive
industries. Employee income in IP-intensive industries was also 50 per cent higher than the
wages of counterparts in non-IP-intensive industries.
Weak IP regimes undermine innovation/invention in India: The weak IP protections
have also undermined innovation and invention in India. Patent filings, a rough proxy for
innovation, tell the story. Data from the World Intellectual Property Organisation show that
India accounted for a small portion of the patents filed from Asia. While there were close to
1,400 patent applications filed from India, there were nearly 24,000 filed from China, more
than 45,000 filed from Japan, and more than 63,000 from the US.
While all nations have a great deal to gain from attracting FDI and research spending from
multinational firms, developing nations in particular stand to gain tremendously. These
investments create jobs, enhance productivity, and foster economic growth and
development.

2. Weaker IP regime camp: Some developing countries argue that stronger IP regimes weaken
innovation instead of strengthening it. Brazil, Argentina and India (until now) fall in this camp. It is
argued that strong IP rights are an obstacle to economic development.

Development/Diffusion Dichotomy: The basic premise of granting protection to IP to

developers of intellectual property is that in the absence of protection, the IP producers will
not have sufficient incentive to produce IP as they may fear quick replication and imitation
thus leading to financial loss. The idea is that making protection available to IP will
incentivize more people to generate IP and thus help increase social welfare and benefit
society through diffusion of more and more new technology and IP. However, the moment
IP protection is granted over any intellectual property, it becomes exclusive to the
developer/author of the IP thereby denying access to the general public for whose benefit the
IP protections have been put in the first place.

Against Consumer Interest: Opposition to stronger IPR regimes in developing countries

rests on two general arguments. First, there is concern that by enhancing the monopoly
powers of innovators, stronger IPR protection may adversely affect consumer welfare.
Stronger IPR also leads to higher prices. IP intensive industries are suitable in high income
countries where the consumers have a higher ability to pay.

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 Licensors and not innovators: Second, there are fears that stronger IPR protection in
developing countries will hamper their ability to absorb foreign technologies without having
any appreciable effect on innovation in the North. It is argued that if there is a strong IPR
regime, developing nations may only end up licensing a lot of technology without ever
gaining any ability to develop innovation due to lack of funds or costly access to protected
IP.

Absence of IP led to development: For example, critics of stronger IPR enforcement in

developing countries may argue that the rapid post-war industrialisation in East Asian
countries, such as Japan and South Korea, was achieved under relatively weak IPR regimes
and that a premature imposition of a strong IPR regime could retard the industrial
development of today's developing countries.

Innovation is a flow of ideas and not a spark: It is important to understand that there are
no truly novel ideas. Almost all inventions and innovations have been built upon prior
inventions/innovations. This becomes possible because prior inventions/innovations were
not protected and were easily accessible as 'public domain knowledge' which was then
utilized by next stage inventors and innovators. Installing a strong IP regime would deny
access of the public to such 'public domain knowledge'. Thus only the companies backed by
huge investment capacity will be able to innovate further. Therefore, unimpeded diffusion of
existing technology is immediately beneficial not only for consumers but also for those who
would improve that technology. Because technological advance is often an interactive
cumulative process, strong protection of individual achievements may slow down the
general advance.

Denial of access to knowledge: If every idea or innovation is given strong exclusive

protection, it will decrease the amount of scientific and technical knowledge available to the
public. For e.g., the research papers that are excluded from public domain by academic
publishers who provide them for a huge fee. Access to IP and technology is essential for
people to be able to have adequate tools for innovating. Stronger IP regimes make access to
knowledge more costlier and therefore indirectly dissuades people (especially those in
developing and poor countries) from further innovating.

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 Poor infrastructure and investment capacity of developing and poor countries:
Arguments favouring stronger regimes do not take into account the weak investment climate
and poor infrastructure that make it almost incapable for developing and poor nations to
develop and generate sufficient R&D, research results, inventions and innovations. As a
result, developing nations may end up being the consumers of IP based productions and
innovations rather than being generators of the same. The developing countries are hardly in
a position to be able to compete with the massively funded R&D programmes in developed
countries. In view of the limited capacity for innovation in developing and poor countries, it
will not be appropriate to install a strong IP regime that may act as a mechanism for
ensuring funds flow to the western developed world.

Link between strict IP protection and FDI/Investment: The UNCTC (United Nations
Center on Transnational Corporation) warns that the inter-relationship between IP protection
and the promotion of investments/growth is much more complex than what it is suggested to
be. It also claimed that no simple causal link can be established between the two. Turkey
abolished patents in the pharmaceutical sector in 1961, yet the absence of protection has not
negatively influenced the inflow of FDI. Brazil abolished patent protection on
pharmaceuticals, foodstuffs, agricultural chemicals and some metal alloys in 1969, yet there
exists little evidence of any impact on FDI flows or the transfer of technology. On the other
hand, FDI flows in pharmaceuticals only grew by almost 800 percent in a span of 13 years
from 1971-1984.

Stronger IP regimes benefit developed nations: While production of goods developed as

an outcome of R&D may shift to Southern countries (developing and poor countries)
through the actions of multinationals, empirical evidence indicates this technology transfer
will not likely lead to such benefits as productivity growth in the host country (developed
country, generally). Essentially, this means that stronger IPRs lead to technology transfer
that benefits the North but not the South. (Nicholson, 2002).

It is therefore very important that IPR Policy be informed by broader principles of fairness and
equity, balancing intellectual property protections with limitations and exceptions/user rights such
as those that promote freedom of expression, research, education and access to medicines, cultural
rights, data mining, use of governmental works, etc.

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 C R E AT I V E I N D I A I N N O VAT I V E I N D I A

National innovative capacity has to be the countrys important potential for producing competitive
products. Globalization and competitiveness leads to an interconnected economy. This requires the
combined effort of researchers, technologists, production engineers and business leaders. For
building competitiveness what you need is talent. Leadership grows talent. - Dr. APJ Abdul Kalam

The continuation of global economic restructuring in the wake of the current economic crisis has
presented a number of challenges for India as the country attempts to maintain a competitive global
presence through continued prosperity. The present global economic crises presents a unique
opportunity for India to provide leadership through innovation. In the contemporary global
environment, sustainable economic gains come from attracting and retaining a talented and creative
workforce rather than staying focused on existing businesses and industries. Focus on building a
talented and creative workforce is a more productive goal because it helps to create a sustainable
competitive advantage by driving innovation, new business formation, and encouraging broader
improvements in overall productivity and prosperity. In other words; wherever talent goes,
innovation, creativity, and economic growth are sure to follow.

Investing in people during times of crisis (instead of businesses or places) provides a proactive and
flexible approach to economic restructuring that allows labour markets to adapt, while new
businesses, industries, and economic structures emerge. Leading postindustrial nations, such as the
United States, Sweden, Japan, Finland, Canada, Germany and the United Kingdom are now
competing based on creativity and related factors like technology, innovation, and talent attraction.

Establishing an approach to economic development that centres on creativity will help India to re-
build (build) its economy and generate future prosperity. As a result, India should recognize the
importance of building Talent, courting Technology and promoting Tolerance in gaining an
economic advantage. Taken together, the metrics of Talent, Technology, and Tolerance are referred
to as the 3Ts of economic development. Such an approach for India would mean recognizing the
creative talent of its residents in order to develop the businesses and industries of tomorrow;
investing in the infrastructure required to mobilize more innovation and economic growth; and
recognizing the importance of openness and diversity in gaining economic advantage.

Creativity and Innovation are the forces which drive growth, development and progress in the
knowledge economy. Creative India; Innovative India: ; is the motto which

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 will inspire India to take a lead in various fields of human accomplishments. Our Constitution
enjoins us to develop the scientific temper and spirit of inquiry and to strive towards
excellence in all spheres of individual and collective activity so that the nation constantly rises to
higher levels of endeavour and achievement.

In a report prepared by Martin Prosperity Institute, it has been suggested that Delhi is the most
creative state in India, with Chandigarh, Punjab, Kerala, Goa, Mizoram, Andaman & Nicobar
Islands, Puducherry, and Maharashtra rounding out the top 9. Haryana and Manipur are tied for
10th.

The Creative Class in India comprises approximately 14% of the workforce, but varies considerably
from region to region. Two regions (Delhi and Jammu & Kashmir) have over 40% of their
workforce in the Creative Class while another three (Chandigarh, Punjab, and Goa) are over 20%.
Another seventeen have over 10% of their workforce in creative occupations. Within India, the Far
North, Far East, and Southern States and Union Territories appear to have higher concentrations of
the Creative Class than Central and Western regions. High performing regions tend to have lower
overall populations than the low performing regions. Due to smaller populations, the proportion of
the population employed in management and professional occupations is relatively higher compared
to the same in more populous regions. Approximately 4.1% of Indians over the age of 25 hold a
Bachelors degree or higher. Like the concentration of the Creative Class, Degree share is not
evenly distributed around the country. The States or Union Territories with the highest Degree
shares are Chandigarh (16.47%), Delhi (13.12%), and Puducherry (8.59%).

Talent Index is an index used to measure the amount of Talent within a region. Talent is measured as
the percentage of a regions workforce that is employed in Creative Class occupations. The Creative
Class is largely responsible for generating the new and creative ideas that support economic growth.
The Creative Class is individuals who are often engaged in either complex problem solving or in the
generation of new ideas, new technology, and new creative content. This occupational grouping
includes people employed in management, finance, law, healthcare, science, engineering,
architecture, design, education, arts, music, and entertainment). The Talent Index combines Creative
Class and Degree share measures to illustrate which States and Union Territories have been the
most successful in attracting and retaining talented individuals. Chandigarh leads all regions
followed in second by Delhi, Goa, Kerala, and Puducherry.

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 T R I PS v. TR I PS PL U S ME A SU R E S an d W TO's D OHA R OU ND

The Agreement on Trade-Related Aspects of Intellectual Property Rights (or TRIPS Agreement) set
the standards for intellectual property protection in the world today. It came into force on 1 January
1995 and is binding on all members of the World Trade Organization (WTO). The TRIPS
Agreement sets minimum standards in the international rules governing patents, including on
medicines. Countries that are members of the WTO (today, more than 150 countries) agree to
certain common standards in the way they enact and implement their patent laws. These standards
include, amongst others, that patents be given for a minimum of 20 years; that patents may be given
both for products and processes; and that pharmaceutical test data be protected against unfair
commercial use.

But the question of what deserves to be patented is left for countries to determine. The Agreement
only says that patents should be granted for new, inventive and useful inventions - but it does not
define these terms. Deciding whether a new formulation (producing a pill version of a drug that
formerly came as a powder, for instance) or a new combination (combining two or more existing
molecules into a new pill) deserves a new twenty-year patent for example is a prerogative of
countries, and is not determined by the WTO texts. Countries should therefore determine what kind
of inventions deserves patents in the area of pharmaceuticals, in light of their own social and
economic conditions. Some governments, such as Brazil, Thailand or India, have done precisely
that. In todays world, for many patients, that decision can be a question of life or death.

In other words, though there is no such thing as a single international patent law, TRIPS represents a
harmonisation of patent laws. The industry had been pushing for this kind of move for decades.
Its a one-size-fits-all policy that aims at extending the stricter patenting laws previously used in
industrialised countries to developing countries, regardless of their radically different social and
economic conditions.

Developing country members of the WTO generally had until the beginning of 2000 to implement
TRIPS. Some countries were given a longer transition period those like India that did not grant
patents on pharmaceutical products were given until 2005, and least-developed countries were
initially given until 2006.

Implementation of the TRIPS Agreements intellectual property standards is having a considerable

impact on access to medicines and public health. By limiting competition and local manufacturing,

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 the danger is that TRIPS extends high drug prices and worsens the access to medicines crisis.
With TRIPS, life-saving medicines are considered in the same vein as mere consumer goods and the
devastating impact of high prices is mostly ignored. The balance between the private interests of
the patent holder and the larger interests of society is severely skewed.

It didnt take long for the issue to come to a head. In 2001, at the annual ministerial meeting of the
WTO in Doha, Qatar, countries agreed to redress that imbalance, and firmly restated the primacy of
health over commercial interests. The Doha Declaration reaffirmed countries right to use TRIPS
safeguards such as compulsory licences or parallel importation to overcome patent barriers to
promote access to medicines, and guided countries in their use. One final significant achievement of
Doha was to extend the deadline by which the least developed countries had to grant and enforce
pharmaceutical patents, from 2006 to 2016. This deadline needs to be further extended or they will
face the same difficulties that other developing countries already contend with in accessing
medicines.

TRIPS Plus: going even further than TRIPS

Despite the Doha Declaration, in recent years, many developing countries have been coming under
pressure to enact or implement even tougher or more restrictive conditions in their patent laws than
are required by the TRIPS Agreement these are known as TRIPS plus provisions. Countries are
by no means obliged by international law to do this, but many, such as Brazil, China or Central
American states have had no choice but to adopt these, as part of trade agreements with the United
States or the European Union. These have a disastrous impact on access to medicines.

Common examples of TRIPS plus provisions include extending the term of a patent longer than the
twenty-year minimum, or introducing provisions that limit the use of compulsory licences or that
restrict generic competition. One of these provisions is known as data exclusivity. This refers to
exclusive rights, granted over the pharmaceutical test data submitted by companies to drug
regulatory authorities for obtain market authorisation. It means that information concerning a
drugs safety and efficacy is kept confidential for a period of, say, five or ten years.

If a generic manufacturer wants to register a drug in that country, it is not allowed simply to show
that their product is therapeutically equivalent to the originator product. Instead, it must either sit
out the exclusivity period, or take the route of repeating lengthy clinical trials to demonstrate the
safety and efficacy of the drug trials that have already been undertaken. This happens even when
the originator product is not patented. In other words, data exclusivity is a backdoor way of

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 preventing competition, so that even when a medicine is not protected by a patent, a pharmaceutical
company will receive a minimum period of market monopoly when artificially high prices can be
charged. Data exclusivity and other TRIPS plus provisions are frequently pushed as a part of free
trade agreements between developed and developing countries.

What is a compulsory license?

Compulsory licensing is when a government allows someone else to produce the patented product
or process without the consent of the patent owner. It is one of the flexibilities on patent protection
included in the WTOs agreement on intellectual property the TRIPS (Trade-Related Aspects of
Intellectual Property Rights) Agreement. In essence, under a compulsory license, an individual or
company seeking to use another's intellectual property can do so without seeking the rights holder's
consent, and pays the rights holder a set fee for the license. Thus compulsory licenses work against
the basic 'exclusivity' principle of 'IP', because parties other than the IP holder can also
commercially exploit the IP product provided the IP holder is paid license fees for the sale of its
product.

What are parallel imports?

Parallel imports are imports of a patented or trademarked product from a country where it is already
marketed. For example, in Mozambique 100 units of Bayer's ciprofloxacin (500mg) costs US$740,
but in India Bayer sells the same drug for US$15 (owing to local generic competition).
Mozambique can import the product from India without Bayer's consent.

According to the theory of exhaustion of intellectual property rights, the exclusive right of the
patent holder to import the protected product is exhausted, and thus ends, when the product is first
launched on the market. When a state or group of states applies this principle of exhaustion of
intellectual property rights in a given territory, parallel importation is authorized to all residents in
the state in question. In a state that does not recognize this principle, however, only the patent
holder who has been registered has the right to import the protected product.

Sometimes referred to as grey market imports, parallel imports often takes place when there is
differential pricing of the same product - either brand-name or generic drugs - in different markets
(usually owing to local manufacturing costs or market conditions). The Trade-Related Aspects of
Intellectual Property Rights (TRIPS) agreement explicitly states that this practice cannot be
challenged under the World Trade Organization (WTO) dispute settlement system and so is
effectively a matter of national discretion.

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 Parallel imports can reduce the price of health products and pharmaceuticals by introducing
competition. However, they can also affect the negotiation of tiered pricing regimes with
pharmaceutical companies. If a private pharmaceutical company agrees to sell a product at a lower
price in poor countries, it will need some assurance that the cheaper product will not be imported
back into its rich country markets, undercutting its profits (product diversion).

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 I N D I A A N D S TA RT U P C U LT U R E

India is witnessing a startup revolution and to harness the potential of India's innovators and
entrepreneurs a vibrant financial ecosystem is essential. The word 'startups' made its way
explicitly in to the Indian budget lexicon only last year. And then, Prime Minister Narendra
Modi in his Independence Day speech announced a new campaign Startup India; Stand
up India to promote entrepreneurship.
Today, India has about 110 start-up accelerators and in 2014 there were only 80 of them. The
number of platforms where a person can work to build a new venture has gone up
significantly.
Presently, India receives the third highest level of venture capital funding in all the countries
of the world. In 2015, the country received in just six months, the entire funding it received
in 2014. Truly, the year 2015 brought forth a strong wave of start up oriented investments
into India.
Arun Jaitley launched India Aspiration Fund in mid-2015 which has been set up as a fund of
funds under the Small Industries Development Bank of India (SIDBI) in order to boost the
startup ecosystem in the country. The fund has been earmarked with a total corpus of Rs.
2000 crore fund. An initial corpus of Rs 400 crore has been already allocated to various
venture funds under it.
A new scheme called SIDBI Make in India Loan for Small Enterprises (SMILE) with an
allocation of Rs 10,000 crore has also been launched by the current finance minister, Mr.
Arun Jaitley.
The SMILE is expected to catalyse tens of thousands of crore of equity investment in
startups and MSMEs, creating employment for lakhs of people over the next 4-5 years.
(reaping demographic dividend)
The objective of SMILE scheme will be to provide soft loans in the nature of quasi-equity
and term loans on relatively soft terms to MSMEs. The loan scheme's focus will be on 25
sectors under government's 'Make in India' programme with emphasis on financing smaller
enterprises within the MSME sector.
Recently, Telangana launched what is called the T-Hub, India's largest technology incubator.
The facility is almost completely booked, having attracted over 130 startups from across
India. It has also tied-up with 20 venture capitalists, and is in talks with the University of
Texas, MIT Media Lab, Incubio of Spain, and laboratories and academic institutions in India
for collaboration. Despite these examples, India's startups spawn and grow in outer shores
instead of sprouting in India itself because of lack of adequate government encouragement

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 and support.

However, despite the strong wave of startup culture sweeping the country, many startups shift their
bases to other countries owing to the presence of better regulatory environment especially in places
such as London, Singapore and USA.

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 CONFERENCE OF PARTIES ON CLIMATE CHANGE to the UN
FRAMEWORK CONVENTION ON CLIMATE CHANGE

What is United Nations Framework Convention on Climate Change (UNFCCC)?

The United Nations Framework Convention on Climate Change (UNFCCC) is an international
environmental treaty (also known as a multilateral environmental agreement) that was opened for
signature at the Earth Summit held in Rio de Janeiro in 1992 and came into force in 1994.

The ultimate objective of the Convention is to stabilise greenhouse gas concentrations in the
atmosphere at a level that will prevent dangerous human interference with the climate system." It
states that "such a level should be achieved within a time-frame sufficient to allow ecosystems to
adapt naturally to climate change, to ensure that food production is not threatened, and to enable
economic development to proceed in a sustainable manner. 194 countries signed the UNFCCC
showing near universal agreement that there is a problem and that action is required against climate
change.

The treaty itself is not legally binding as it does not set mandatory limits on greenhouse gas
emissions for individual countries and doesnt contain any enforcement mechanisms.

What is Conference of Parties?

The Conference of the Parties (COP) is the "supreme body" of the Convention, that is, its highest
decision-making authority. It is an association of all the countries that are Parties to the Convention.

The COP is responsible for keeping international efforts to address climate change on track. It
reviews the implementation of the Convention and examines the commitments of Parties in light of
the Conventions objective, new scientific findings and experience gained in implementing climate
change policies. A key task for the COP is to review the national communications and emission
inventories submitted by Parties. Based on this information, the COP assesses the effects of the
measures taken by Parties and the progress made in achieving the ultimate objective of the
Convention.

The COP meets every year, unless the Parties decide otherwise. The COP meets in Bonn, the seat of
the secretariat, unless a Party offers to host the session. Just as the COP Presidency rotates among
the five recognized UN regions - that is, Africa, Asia, Latin America and the Caribbean, Central and
Eastern Europe and Western Europe and Others there is a tendency for the venue of the COP to

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 also shift among these groups. The meeting organized this year (2015) at Paris is the 21 st meeting of
the conference and hence the name COP21.

What is COP21 @ Paris all about?

In COP20, that was organized in Lima, Peru last year (2014), the conference had concluded talks
with the 'Lima Call for Climate Action', which was a draft document that laid the foundations for a
new global climate deal. This draft document became the basis for the legally binding agreement
that was negotiated during COP21, Paris.

COP21@Paris had been organized in order to reach a new universal climate agreement that is
applicable to all. In 2015 COP21, also known as the 2015 Paris Climate Conference aimed to
achieve a legally binding and universal agreement on climate, with the aim of keeping global
warming below 2C.

Climate Problem:
Scientists have just determined that the earth has already warmed by 1 degree celsius (World
Meteorological Organization-WMO). This means that the earth is already halfway towards
the danger zone of reaching irreversible climate change that will have dangerous
consequences. It has been scientifically determined that the earth can tolerate a global
climate warm-up of only 2 degree celsius from the temperature levels that existed before the
beginning of industrial revolution.
Latest figures on greenhouse gas concentrations show that levels of carbon dioxide, methane
and nitrous oxide from industrial, agricultural and domestic activities reached record levels
with global average concentrations of carbon dioxide in spring 2015 crossing the 400 parts
per million barrier for the first time.
Delhi's Air Pollution: According to a new report by System of Air Quality and Weather
Forecasting And Research (SAFAR) pollution levels in Delhi have been rising since
November 17 and have reaching Diwali levels on November 21, 22 and 23. While the
particulate matter (PM) 2.5 levels were about 260 micrograms per cubic metre on Diwali
day, the pollution subsided because of moderate winds. The Central Pollution Control
Board's (CPCB) national air quality index bulletin has showed the air quality in Delhi as
"severe", for three consecutive days. In circumstances like this, an emergency is usually
declared in Beijing, and kindergartens and schools are closed down; industries are also
temporarily shut down. According to the World Health Organisation (WHO), the air in Delhi
is one of the worst in terms of quality in the world. Apart from vehicular pollution,

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 pollutants like nitrous oxide and sulfur dioxide that are present in the environment, cause the
airways to get inflamed, and cause eye irritation and damage to the respiratory tract. As a
result, the respiratory tract becomes prone to coughing, mucus secretion and long-term
infections. The air is particularly damaging to those with asthma or weaker immune
systems.
Air pollution accounts for some 500,000 premature deaths each year in china, (Chen Zhu
Ex Minister of Health). China's smog levels are notorious. But air pollution is soaring to
new heights due to the country's rapid industrialization, reliance on coal power and
increased car ownership for a booming population.
The global scientific community has made clear that human activity is already changing the
worlds climate system. Accelerating climate change has caused serious impacts. Higher
temperatures and extreme weather events are damaging food production, rising sea levels
and more damaging storms are putting our coastal cities increasingly at risk and the impacts
of climate change are already harming economies around the world, including those of the
United States and China. These developments urgently require enhanced actions to tackle
the challenge.

Major Polluters
1) China overtook the United States as the world's biggest carbon dioxide polluter in 2006, and
has topped the list ever since. Currently China contributes 9.8 billion tonnes of carbon
dioxide.
2) Since industrial times, the United States is responsible for 28% of the carbon that is in the
atmosphere right now. However, currently United States contributes 5.2 billion tonnes of
carbon dioxide.
3) At position three is India. India contributes 2.2 billion tonnes of carbon dioxide. One in
three Indians currently live in "critically-polluted" areas. And of the 180 cities monitored by
India's Central Pollution Control Board, just two Malapuram and Pathanamthitta in
Kerala have what are considered "low" levels of air pollution.
4) Russia's carbon dioxide emissions plunged after the collapse of Soviet-era smokestack
industries, but it remains the world's fourth largest CO2 polluter at 1.7 billion metric tons in
2012.
5) Japan recently watered down its target to cut carbon dioxide emissions despite the 1.3
million metric tons of CO2 it produced in 2012. The new target, announced in November
2013, reverses course from a goal set in 2010 and now allows a 3.1 percent increase in
emissions from 1990 levels rather than seeking a 25 percent cut. It reflects the country's

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 increased reliance on fossil fuels in the aftermath of the Fukushima nuclear disaster in 2011.

Fossil Fuel Dependence:

China's present dependence on coal:
By 2012, China was consuming 19% of the worlds energy, and was responsible for 26% of
the worlds total CO2 emissions, according to a report by the IEA. Currently China is
responsible for consuming 47% of the coal supply in the world. This means that China
consumes as much as the rest of the world consumes.). Only four cities of China consume as
much coal as the whole of India.
Coal, by far the dirtiest of the major fossil fuels in terms of emissions, accounts for nearly
two-thirds (65%) of Chinas primary energy supply. Over 70% of Chinas 1.4 billion
population are exposed to pollution levels above national regulatory norms, and over 10%
are exposed to concentrations of harmful particles 10 times the level considered safe by the
U.N.s World Health Organization.
China's consumption of coal more than 6 times than that of India's (2014). India 0.565
billion, China 3.8 billion.
The notorious smog in Beijing is 8 times worse than the recommended WHO levels.
138 cities in Beijing have PM 2.5 levels more than 50. 27 cities have PM 2.5 levels more
than 100. (Delhi's PM 2.5 levels hover around 400+)
Although Beijing has taken tentative steps to reduce importance of coal as a fuel, such as
banning the development of new coal mines in the countrys more developed eastern
provinces, coal will still be over 50% of total energy supply even in 2040, according to
official U.S. estimates. The results were published in a Tinghua University study that also
found out that tiny particulate pollutants, especially those smaller than 2.5 micrograms
(known as PM2.5), were linked to 670,000 premature deaths from four diseases strokes,
lung cancer, coronary heart disease and chronic obstructive pulmonary disease in China in
2012.
PARTICULATE MATTER 2.5 LEVELS
0-50 Good
51-100 Moderate
101-150 Unhealthy for Sensitive Groups like elderly, asthmatic and bronchities
patients
151-200 Unhealthy for all
201-300 Very Unhealthy for all
301-500 Hazardous for all

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 India's poor quality of fuel refineries and coal.
Power generation in India suffers due to poor and low quality of coal found in India.
Ash Content of 34% (D grade) in the extracted coal is acceptable which is then sent to coal
washeries which wash the coal and take responsibility of reducing the ash content generally
to 28% (i.e., a reduction of 6%). However, the coal quality extracted in India has 50% ash
content (F and G grade), which coal washeries refuse to take because the excess ash content
is significantly more than the responsibility which coal washeries usually undertake. As a
result, thermal power plants do not produce power or end up producing power using
substandard coal which becomes a major cause of pollution. More ash content translates to
more pollution per unit of energy. With ash content as high as 50% power/energy generation
from coal is highly inefficient.
India's oil refineries are inefficient and work on outdated technology that does not refine
crude oil sufficiently.

India's Developmental Aspirations

India is sitting on a pretty demographic dividend which it hopes to utilize in India's march
towards development. For this alone 1 million new jobs are required to be created every
month in order to absorb the additional workforce of 110 million that will join by the year
2022. This will require a quantum boost in production that will come on the back of
expanded energy demand.
Present model of development that emphasises on material growth can be possible only
through adequate power generation. India's power/energy demand has grown considerably
over the previous years. Indias energy consumption increased by 7.1% in 2014, reaching an
all-time high and accounting for 34.7% of the global consumption increment in 2014
(British Petroleum note). This means that of all the power that was newly generated in 2014,
India consumed one-third of it.
India consumed 572 metric tonnes of coal (CSO) in 2014, a figure which is set to grow even
further as government has promised to enhance coal production in India from the present
levels (565 million tonnes, CSO) to 1.5 billion tonnes
International Energy Agencys (IEA) World Economic Outlook (WEO) 2015 projects that
India will see the fastest growth in energy demand by 2040 as China effects structural
changes to its economy, such as moving towards services.
The IEA expects global energy demand to grow by a third from the current levels by 2040.
Indias consumption is expected to double even after energy efficiency gainsthe overall
energy intensity of Indias economy is expected to reduce from 0.11 tonnes of oil equivalent

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 (toe) per $1,000 of gross domestic product (GDP) in 2013 to 0.05 toe per $1,000 of GDP in
2040.
Indias energy use will more than double to reach 1,900 million tonnes of oil equivalent
(Mtoe). Led by coal, the share of fossil fuels in Indias energy mix will rise to 81% by 2040
from 72% in 2013.

Development Imperatives and Common but Differentiated Responsibilities (CBDR)

The principle of common but differentiated responsibility evolved from the notion of the common
heritage of mankind and is a manifestation of general principles of equity in international law. The
principle recognises historical differences in the contributions of developed and developing States
to global environmental problems, and differences in their respective economic and technical
capacity to tackle these problems. Despite their common responsibilities, important differences
exist between the stated responsibilities of developed and developing countries. The Rio
Declaration states: In view of the different contributions to global environmental degradation,
States have common but differentiated responsibilities. The developed countries acknowledge the
responsibility that they bear in the international pursuit of sustainable development in view of the
pressures their societies place on the global environment and of the technologies and financial
resources they command.

Similar language exists in the Framework Convention on Climate Change; parties should act to
protect the climate system on the basis of equality and in accordance with their common but
differentiated responsibilities and respective capabilities. The principle of common but
differentiated responsibility includes two fundamental elements. The first concerns the common
responsibility of States for the protection of the environment, or parts of it, at the national, regional
and global levels. The second concerns the need to take into account the different circumstances,
particularly each States contribution to the evolution of a particular problem and its ability to
prevent, reduce and control the threat.

Differentiated responsibility of States for the protection of the environment is widely accepted in
treaty and other State practices. It translates into differentiated environmental standards set on the
basis of a range of factors, including special needs and circumstances, future economic
development of countries, and historic contributions to the creation of an environmental problem.

The Stockholm Declaration emphasised the need to consider the applicability of standards which
are valid for the most advanced countries but which may be inappropriate and of unwarranted social

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 cost for the developing countries. In the Rio Declaration, states agreed that environmental
standards, management objectives and priorities should reflect the environmental and
developmental context to which they apply, that the special situation of developing countries,
particularly the least developed and those most environmentally vulnerable, shall be given special
priority, and that standards used by some countries may be inappropriate and of unwarranted
economic and social cost to other countries, in particular developing countries.

Simply put, CBDR principles recognize that while the protection and preservation of global climate
and environment is the responsibility of all the nations together, their responsibilities towards its
mitigation will have to be different. There are two main reasons for ascribing different
responsibilities. The first reason has to do with 'historical contribution' to environmental
degradation. Developed countries contributed more to environmental degradation and therefore
must compensate more towards environment protection and preservation than compared to the
developing countries who have contributed relatively and comparatively lesser harm to global
environment. Secondly, the technological and financial ability to tackle the challenge of
environmental degradation is not similar across all the nations. This is because different countries
are at various levels of development and therefore do not have similar strengths to tackle global
climate problem at an equal footing. In summary, States have common responsibilities to protect the
environment and promote sustainable development, but due to different social, economic, and
ecological situations, countries must shoulder different responsibilities. The principle therefore
provides for asymmetrical rights and obligations regarding environmental standards,

Being pro-environment is also economically rewarding:

At the same time, economic evidence makes increasingly clear that smart action on climate change
now can drive innovation, strengthen economic growth and bring broad benefits from sustainable
development to increased energy security, improved public health and a better quality of life.
Tackling climate change will also strengthen national and international security.

Environmental Technology Innovation:

Technological innovation is essential for reducing the cost of current mitigation technologies,
leading to the invention and dissemination of new zero and low-carbon technologies and enhancing
the capacity of countries to reduce their emissions. The United States and China are two of the
worlds largest investors in clean energy and already have a robust program of energy technology
cooperation.

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 The Sunnylands agreement has achieved several objectives in this regard. It:
Established the U.S.-China Climate Change Working Group (CCWG), under which they
have launched action initiatives on vehicles, smart grids, carbon capture, utilization and
storage, energy efficiency, greenhouse gas data management, forests and industrial boilers;
Agreed to work together towards the global phase down of hydrofluorocarbons (HFCs),
very potent greenhouse gases;
Created the U.S.-China Clean Energy Research Center, which facilitates collaborative work
in carbon capture and storage technologies, energy efficiency in buildings, and clean
vehicles; and
Agreed on a joint peer review of inefficient fossil fuel subsidies under the G-20.

Breakthrough for International Climate Action: U.S.-China Joint Announcement on Climate

Change and Clean Energy Cooperation (Sunnylands Agreement)
President Obamas Ambitious 2025 Target to Cut U.S. Climate Pollution by 26-28 Percent from
2005 Levels. Earlier this year, the United States submitted its target to cut net greenhouse gas
emissions to the United Nations Framework Convention on Climate Change (UNFCCC). The
submission, referred to as an Intended Nationally Determined Contribution (INDC), is a formal
statement of the U.S. target, announced in China last year, to reduce America's emissions by 26-
28% below 2005 levels by 2025, and to make best efforts to reduce by 28%. This had followed the
historic meet President Obama and President Xi leaders of the largest economies and largest
polluters made the historic announcement of the respective post-2020 climate targets for the
United States and China. For the first time, China committed to limit its greenhouse gas emissions,
with a commitment to peak emissions around 2030 and to make best efforts to peak early, and to
double its share of non-fossil energy consumption to around 20 percent (currently 9.8 percent) by
2030 . Together, the U.S. and China account for over one third of global greenhouse gas emissions.
The actions they announced are part of the longer range effort to achieve the deep decarbonization
of the global economy over time. The new U.S. goal will double the pace of carbon pollution
reduction from 1.2 percent per year on average during the 2005-2020 period to 2.3-2.8 percent per
year on average between 2020 and 2025.

US' lack of fairness of its carbon reduction goals

The U.S. discussion concerning the fairness and ambition of its contribution is limited in scope.
Information about these issues is essential to determining how the actions by the United States
compare to other countries and how far they go toward reaching the target level of emissions

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 reductions. In addressing fairness and ambition, the submission notes the doubling of the U.S.
emissions-reduction rate and the goal of an 80 percent or more reduction by 2050. However, the
proposed commitment does not use key indicators of fairness, as other countries submissions have
done, such as emissions per capita, economic capacity or mitigation potential. Presenting its
contribution without this context makes it difficult to determine whether the United States is
realizing its mitigation potential to the greatest extent possible considering its national
circumstances.

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 I N T E N D E D N AT I O N A L LY D E T E R M I N E D C O N T R I B U T I O N S

What is an INDC?
Countries across the globe committed to create a new international climate agreement by the
conclusion of the U.N. Framework Convention on Climate Change (UNFCCC) Conference of the
Parties (COP21) in Paris in December 2015. In preparation, countries have agreed to publicly
outline what post-2020 climate actions they intend to take under a new international agreement,
known as their Intended Nationally Determined Contributions (INDCs). The INDCs will largely
determine whether the world achieves an ambitious 2015 agreement and is put on a path toward a
low-carbon, climate-resilient future.

How does the process work?

The process for INDCs pairs national policy-setting in which countries determine their
contributions in the context of their national priorities, circumstances and capabilities with a
global framework that drives collective action toward a low-carbon, climate-resilient future.

The INDCs can create a constructive feedback loop between national and international decision-
making on climate change.

INDCs are the primary means for governments to communicate internationally the steps they will
take to address climate change in their own countries. INDCs will reflect each countrys ambition
for reducing emissions, taking into account its domestic circumstances and capabilities. Some
countries may also address how theyll adapt to climate change impacts, and what support they need
from, or will provide to, other countries to adopt low-carbon pathways and to build climate
resilience.

What makes a good INDC?

Well-designed INDCs will signal to the world that the country is doing its part to combat climate
change and limit future climate risks. Countries should follow a transparent process when preparing
their INDC in order to build trust and accountability with domestic and international stakeholders. A
good INDC should be ambitious, leading to transformation in carbon-intensive sectors and industry;
transparent, so that stakeholders can track progress and ensure countries meet their stated goals; and
equitable, so that each country does its fair share to address climate change. It is important that
INDCs be clearly communicated so domestic and international stakeholders can anticipate how
these actions will contribute to global emissions reductions and climate resilience in the future.

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 An INDC should also articulate how the country is integrating climate change into other national
priorities, such as sustainable development and poverty reduction, and send signals to the private
sector to contribute to these efforts.

India's Intended Nationally Determined Contribution

As the worlds third-largest emitter and a country thats highly vulnerable to the impacts of climate
change, it is encouraging to witness India invest in actions to tackle climate change while
addressing critical issues such as poverty, food security and access to healthcare and education.

Indias INDC builds on its goal of installing 175 gigawatts (GW) of renewable power capacity by
2022 by setting a new target to increase its share of non-fossil-based power capacity from 30
percent today to about 40 percent by 2030 (with the help of international support). The country also
commits to reduce its emissions intensity per unit GDP by 33 to 35 percent below 2005 by 2030 and
create an additional carbon sink of 2.5 to 3 billion tonnes of carbon dioxide through additional tree
cover. The plan also prioritizes efforts to build resilience to climate change impacts, and gives a
broad indication of the amount of financing necessary to reach its goals.

1) It Sets a Clear Signal for Clean Energy.

Achieving its target of 40 percent non-fossil-based power capacity by 2030 would result in at least
200 GW of new renewable power capacity by 2030. However, if India achieves its previously
announced goal of 175 GW of power renewable power energy by 2022 mostly from solar much
of this capacity addition will come much sooner. The 2022 target is extremely ambitious (the
worlds entire installed solar power capacity was 181 GW in 2014), and clearly positions India as a
major renewable energy player. With approximately 900 GW of estimated renewable energy
potential from commercially exploitable sources and favorable economic conditions, these targets
can be met as long as financing and policy barriers -- and demand-side challenges -- are overcome.

While coal and other fossil fuels will continue to play a role in Indias energy mix in the decades to
come, the targets announced yesterday will spur a transition toward cleaner sources. Thats good
news for the environment, economy and the estimated 300 million Indians who do not have
adequate power supply.

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 2) Its Emissions Intensity Target Could Go Further
Indias emissions intensity (carbon dioxide emissions per unit of GDP) declined by approximately
18 percent between 1990 and 2005, and the country has already committed to reduce it by another
20-25 percent from 2005 levels by 2020. The new INDC target commits India to go further 33-35
percent from 2005 by 2030.

Surprisingly, it is not clear that the countrys intensity target reflects the scale of mitigation that
would result from its planned investments in renewables. In fact, a number of studies suggest that
India could reduce its emissions intensity by that much or more even in the absence of significant
new measures. In the course of meeting its renewable energy and non-fossil targets, and by tapping
the substantial potential of energy efficiency improvements, India should be able to easily exceed its
intensity target.

3) It Will Sequester Carbon by Increasing Forest Cover

Indias INDC recognizes the importance of aggressively restoring forest cover, in a manner
consistent with supporting livelihoods. Creating an additional carbon sink of 2.5 to 3 billion tonnes
of CO2 through additional forest and tree cover would require average annual carbon sequestration
to increase by at least 14 percent over the next 15 years relative to the 2008-2013 period. With the
Green India Mission expected to deliver 50-60 percent of the required total, India needs to provide
further detail on how it plans to achieve the rest. The INDC notes the importance of financing to
address implementation challenges.

4) Adaptation Is a Key Priority

As a country exceptionally vulnerable to climate change, there is heavy focus on adaptation and
resilience in Indias INDC. It highlights current initiatives in sensitive sectors, including agriculture,
water, health, and more, and points toward plans under development in each state. While India
currently spends 3 percent of its GDP on adaptation, the INDC noted that enhanced investment in
these activities will require additional support through domestic and international funds. The
country estimates it will need $206 billion for the period 2015-2030, with additional investments
needed for disaster management.

5) Policies Are Detailed while Targets Remain Vague

While Indias INDC lays out its existing climate measures in detail, it falls short on a number of the
elements of transparency mentioned in a decision made at the Lima climate talks last December .
These include a lack of clarity on emissions intensity in the base year (2005) and target year (2030),

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 as well as the scope and coverage of the intensity target and the methodologies for measuring it.
This information is crucial for monitoring progress towards Indias target and for understanding
how it contributes to the global goal of limiting temperature rise to 2 degrees C.

On the other hand, the INDC lays out a compelling justification of fairness and ambition in the
context of existing efforts and the countrys broader sustainable development challenges. It also
stresses the importance of lifestyle changes and sustainable consumption.

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 C O P 2 1 & T H E PA R I S A G R E E M E N T O N C L I M AT E C H A N G E

The Paris Agreement on climate change was adopted on 12 December 2015 after it was signed into
existence by all the 196 members of the UNFCCC. It is a legally binding agreement that covers all
countries, developed and developing, with the aim to strengthen the global response to the threat of
climate change, in the context of sustainable development and efforts to eradicate poverty. The most
significant gain for India has been the recognition in the Paris Agreement that developing and
developed countries have different levels of obligations and responsibilities to reducing greenhouse
gas emissions and slowing down global temperature rise.

Salient features
(a) The Paris Agreement acknowledges the development imperatives of developing countries. The
Agreement recognizes the developing countries right to development and their efforts to harmonize
development with environment, while protecting the interests of the most vulnerable.

(b) The Paris Agreement recognizes the importance of sustainable lifestyles and sustainable patterns
of consumption with developed countries taking the lead, and notes the importance of climate
justice in its preamble.

(c) The Agreement seeks to enhance the implementation of the Convention whilst reflecting the
principles of equity and common but differentiated responsibilities (CBDR) and respective
capabilities, in the light of different national circumstances. Recognition of the CBDR principle is a
key achievement for India.

(d) The objective of the Agreement further ensures that it is not mitigation-centric and includes
other important elements such as adaptation, loss and damage, finance, technology, capacity
building and transparency of action and support.

(e) Parties contributions under the Paris Agreement are defined as Nationally Determined
Contributions (NDCs), and a top-down approach of undertaking mitigation ambition has been
avoided. The NDCs are country driven and comprehensive.

(f) Agreement maintains differentiation in mitigation actions of developed and developing

countries.

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 (g) The Agreement recognizes that the time frame for peaking will be longer for developing
countries.

(h) The Agreement recognises that enhanced support from developed countries Parties to
developing countries Parties will allow for higher ambition in their action.

(i) The Agreement mandates developed countries to provide financial resources to developing
countries. Other parties may also contribute, but on a purely voluntary basis.

(j) The accompanying decision to the Paris Agreement also lays down that US Dollars 100 billion
mobilization of funds per year by developed countries will be scaled up after 2020 and before 2025
taking into account the needs and priorities of developing countries.

(k) The Agreement also establishes a new technology framework. This framework notes the
importance of fully realizing technology development and transfer in order to improve resilience to
climate change and to reduce greenhouse gas emissions. The framework also strives to support
collaborative approaches to research and development, and facilitating access to technology, in
particular for early stages of the technology cycle, to developing country Parties.

(l) A global goal has been established to increase the adaptive capacity, strengthening resilience and
reducing vulnerability to climate change. Adaptation has also been accorded equal importance as
mitigation as demanded by developing countries.

(m) In addition to adaptation, the Paris Agreement includes the concept of Loss & Damage and
recognizes the importance of averting, minimizing and addressing loss and damage associated with
the adverse effects of climate change and extreme weather events, and identifies various areas of
cooperation and support.

(n) A global stock taking, covering all elements, will take place every five years to assess the
progress in addressing climate change.

(o) Implementation of REDD+ (Reducing Emissions from Deforestation and Forest Degradation)
mechanism has been anchored in the Paris Agreement.

(p) A new market mechanism to provide opportunities for voluntary cooperation in the

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 implementation of the NDCs has been agreed.

(q) An enhanced system for transparency has been agreed to. This will cover not only mitigation
and adaptation actions, but also the support provided by developed countries.

(r) A separate Capacity Building Initiative for transparency to help developing countries has been
agreed to in order to build institutional and technical capacity.

(s) A new institutional arrangement viz. Paris Committee on Capacity Building will be established
for enhancing capacity building activities in developing countries under the Agreement. Developed
countries are to provide financial support for capacity building to developing countries.

(t) Pre-2020 actions are also part of the decisions. The developed country parties are urged to scale
up their level of financial support with a complete road map to achieve the goal of jointly providing
US $ 100 billion by 2020 for mitigation and adaptation by significantly increasing adaptation
finance from current levels and to further provide appropriate technology and capacity building
support.

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 R E N E WA B L E E N E R G Y S E C T O R

India:
India aims to install 60 GW of wind power capacity and 100 GW of solar power capacity by
2022. This target is more than six times the current installed capacities of approximately
22GW and 3GW, respectively.
This important task is made difficult by the governments limited budget, which is
constrained by a large fiscal deficit and multiple development priorities.
In Renewable Energy India should go in for Offshore Wind Farms since it has a long
coastline of 7516.6 km. It is a pity that though India occupies 5th position in the wind, and
offshore energy potential, wind farms are yet to be installed.
Another policy that can be adopted should be to encourage wind farm co-operatives on the
lines of those in Denmark and Germany and community solar on the lines of those in US.
Since the country has huge wastelands it is advisable to go for mass plantation of care free
growth, regenerative CAM plants like Agave and Opuntia for Biogaspower/biofuel/biochar.
These will act as Carbon Sink.
Yet another option is replacing the inefficient agricultural pump sets with efficient ones
(there are 26 Million pump sets in the country) which can save about 25% of power.
Agriculture sector consumes a huge amount power, and is next only to Industry in terms of
consumption.

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 DI S AS T E R PR E PA R ED N E S S C HEN N AI FL O OD S

Is India prepared for disaster?

A year ago, Indians were shocked when catastrophic floods hit the state of Uttarakhand in the
countrys northwest, killing more than 5,500 and affecting more than 100,000 others.

Experts blamed the heavy toll in part on the state governments lack of preparedness to handle
disasters, despite a history of calamities in the region, including 1998 flooding that killed over 300
people in one village.

Last years flood, considered Indias worst natural disaster since the 2004 Asian tsunami, has left
experts questioning whether the country is adequately prepared to respond to disasters, particularly
at the state and local level.

Alarming Disaster Profile:

Almost 85 percent of the country is vulnerable to one or more hazards such as earthquakes,
floods, droughts, cyclones and landslides. More than 50 million people are affected by
natural disasters annually, according to the National Institute of Disaster Management
(NIDM).
Floods, droughts, cyclones, earthquakes and landslides have been a recurrent phenomena.
Being highly vulnerable to natural disaster, 25 states out of a total of 35 states/UTs in India
are considered disaster prone.
68% of Indian land is drought prone, 12% to flood and 8% to cyclone. The loss in terms of
private, community and public assets has been astronomical. Disaster Management should
occupy an important place of consideration for India's policy makers as it is the poor and the
under-privileged who are worst affected on account of calamities/disasters
Yet Indias preparedness lags far behind what is needed given the magnitude of the potential
dangers, experts say. Indias vulnerability arises in part because of a lack of know-how for
assessing risks at very local level, poor enforcement of standards and regulations, and
inadequate risk mitigation.

Disaster Preparedness
India passed National Disaster Management Act, 2005 to lay down a framework for
addressing situations of natural disasters. The act created a National Disaster Management
Authority (NDMA), with the power to allocate resources and supervise disaster management

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 across the country. A national disaster response force (NDRF) was also formed for rescue
and evacuation. In addition, the act authorised the government to strengthen existing
infrastructure in disaster-prone areas and help create an early-warning system.
The states are authorized to set up State Disaster Management Authority that would aid in
disaster management for a particular state.
Although the Act has been put into effect at the national level, it exists only on paper in a
few states and districts.
The few states with functioning state disaster management authorities, such as Odisha,
Andhra Pradesh, Gujarat and Bihar, are the ones with the most serious history of natural
disasters.
Other vulnerable states like Jammu and Kashmir, Uttarakhand, West Bengal, Tamil Nadu,
Sikkim and Assam need to step up their preparedness considerably. Even relatively well-off
states are not necessarily and adequately prepared to respond in a disaster.

Mumbai: A 2014 World Development Report said Maharashtras largest and most
cosmopolitan city, Mumbai, remains highly vulnerable to the heavy rains that occur almost
annually, despite well-identified solutions to reduce the risks.
The drainage system in Mumbai is 70 years old, runs for only 480 km and is incapable
of handling monsoon rains.
Despite passage of several reports and committee recommendations over the last 40
years including Nathu Committee Report (1975), "Brihanmumbai Storm Water Drainage
Project (or BRIMSTOWAD) Report" of 1993, and the "Mithi River Water Pollution and
Recommendation for its Control" by Klean Environment Consultants in 2004. Despite
so many reports and recommendations, nothing has come out in concrete yet.
Strengthening citys infrastructure to resist flood risks and adapt to climate change is
imperative, especially when the citys gravity drainage system was designed way in the
1920s. Its storm water drainage was designed for a rainfall of 25 mm per hour. The 1993
BRIMSTOWAD report had recommended increasing the storm water drainage capacity
to 50 mm per hour. Twenty-two years later, the corporation is still working on it. Had
this work completed, Mumbaikars would have been spared this year's (2015) chaos
during monsoons, which occurred with hourly rainfall of 34.8 mm.
The drainage system works mostly on the function of gravity with no power driven
pumping to drain out excess water.
Apart from overhauling the drainage system of Mumbai, the BRIMSTOWAD report had

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 recommended the construction of eight pumping stations to expel water into the sea in
areas where drains cannot be widened. Of these eight stations, only two have been
completed so far. After years of delay, the other two pumping stations Love Grove in
Worli and Cleveland Bunder in Reay Road had trial runs only last month. The Rs 102-
crore Cleveland pumping station was finally inaugurated this year but it quickly
developed a fault within two days when monsoon rains lashed mumbai in July.
Unhealthy garbage disposal habits such as disposing it off by throwing it in gutters,
drains and rivers also leads to choking the flow of water.

Causes for Chennai Floods A man made disaster

The lack of enforcement of planning: rules has resulted in rampant building violations,
such as encroaching roads and pavements, illegal connections of sewerage lines to storm
water drains and construction on ponds, lakes, marshes and other natural catchment areas.
(Catchment areas are areas around a river, lake or a water body, through which rainfall flows
naturally. Presence of catchment areas help in draining excessive water levels and
transferring it to the water bodies. A storm water drain or simply a drain or drain system is
designed to drain excess rain and ground water from impervious surfaces such as paved
streets, car parks, parking lots, footpaths, sidewalks, and roofs).
The city lacks an adequate drainage network. Despite several crores being allocated (in
the Chennai Corporation budget and JNNURM) to the construction of storm water drains
(SWD), only a fraction of Chennais roads are accompanied by SWD.
Shrinking area of wetlands. Wetlands are important as they help reduce the impact of
storm damage and flooding, by soaking in copious amounts of water. However the area
coming under these are fast shrinking. Some 40 years ago, the area of 'Pallikaranai' was a 50
sq. km marshland and now it has been reduced to a tenth of its size. 90% of the marshland
was lost to construction of IT corridors, gated community, garbage dump, sewage treatment
plant, etc.
Encroachment of water bodies: Areas that were previously water bodies have been
encroached upon by constructors and builders, including the government. Natural drainages
such as these water bodies were converted into an impervious concrete sprawl. Areas,
including MRC Nagar, built on the Adyar estuary, the Mass Rapid Transit System, built
almost wholly on the Buckingham canal, Koyambedu Bus Terminal, the expressway and
buildings on the Old Mahabalipuram Road, that are examples of blatant encroachments on
waterways and water bodies.
Lack of desilting infrastructure: Continuous desilting of flood plains is necessary, as rains

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 cause aggregation of sand and other particles causing the floor level to rise. Regular and
timely desilting dredges out the extra sand brought by rains and thus permits the
maintenance of a naturally low lying area for collection of water and its efficient disposal.

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 GOODS AND SERVICES TAX

Goods and Services Tax is a comprehensive Value Added Tax on manufacture, sale and
consumption of goods and services throughout India, which is to replace indirect taxes like central
excise duty, service tax and additional custom duties, VAT, entertainment tax among others levied
by the Central and State governments. GST would be levied and collected at each stage of sale or
purchase of goods or services based on the input tax credit method.

Current Mechanism: Under the current mechanism, various types of taxes are levied. The first
duty/tax that is levied is the excise tax, which is levied at the point of production or manufacture.

Let us take a cigarette. A cigarette requires tobacco which is cultivated from plants. Once the
plants are cut and tobacco extracted from the leaves, 'production/manufacture' of tobacco is
said to have happened. The excise rate for tobacco is currently 55% of its value. So if Rs.
100 worth of tobacco is produced, then after application of excise rate, the cost price
becomes 100 + 55%(100) = Rs. 155.

Let us assume Rs. 100 worth of tobacco produces 10 Classic Regular cigarettes which is of
length 84 mm each. Once 10 cigarettes are manufactured, then again an excise tax is levied
since 'production' of cigarettes has happened. Excise tax of Rs. 3.375 per cigarette is levied
on the manufacture of cigarettes. So for 10 cigarettes, the excise tax will be Rs. 33.75.
Hence, the total cost would now become Rs. 155 + 33.75 = Rs. 188.75. Add 20 rupees for
cost of production and labour, taking its cost to 208.75.

Let us assume that the manufacturer sells the 10 cigarettes so produced at Rs. 220, i.e., Rs.
22 per cigarette. Then when these cigarettes are sold by the manufacturer to dealers within
the state, the state VAT is applied. This tax is applied on the 'taxable turnover of sale and
purchase'. This essentially means that the state sales tax or VAT shall be applied on the
turnover of sale or on the value of the total sales receipt without taking into consideration
the fact that the value of the commodity being sold has increased due to the presence of
excise tax in it. So when the manufacturer sells the manufactured cigarettes the state specific
VAT tax will be applied on the value of output, i.e., the value at which the 10 cigarettes are
sold, i.e., Rs. 220. Considering VAT to be 4% of the turnover of sales, it then becomes Rs.
8.8 (4% of 220), thus taking the price to Rs. 228.8. This price includes a 4% tax on the 55%
excise tax levied earlier.

The actual sales value of cigarettes is only 100 (tobacco) + 20 (labour) + 11.25 (profit) =
131.25, the remaning Rs. 88.75 (220-131.25) is present purely because of imposition of tax.

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 When VAT is applied, then the 4% VAT gets applied even on the value of Rs. 88.75, which
has been paid purely towards excise tax and not towards the actual production or
manufacture of the goods.

Thus as a result of the present mechanism, tax gets applied on tax leading to a 'cascading
effect' which jacks up the value of the final product. This effect is known as the cascading
effect of taxation, which is to be plainly understood as 'tax on taxes'. This is regressive and
inflationary and moreover, it is least bit connected to the product being taxed. When a dealer
purchases the cigarettes from the manufacturer he will be able to purchase it at Rs. 228.8.
When the dealer resells the 10 cigarettes at Rs. 250, then the dealer has to pay a tax of Rs.
10, i.e., 4% of Rs. 250, thus taking the overall value to Rs. 260, which is the price at which
the 10 cigarettes would be made available to the end consumer. If the sale is made between
dealer in one state to a dealer in another state, then the Central Sales Tax would apply
instead of the state level VAT, with a similar effect as observed in the case of VAT.

Slight Reduction in the cascading effect of taxation through VAT

This was the case with the sales tax few years ago. At that time, a VAT system was introduced
whereby every next stage dealer used to get credit of the tax paid at earlier stage against his tax
liability. So after the implementation of the VAT tax regime, all the states legislated state specific
VAT laws. These laws were based on the 'input credit principle'. Simplistically speaking, the input
credit principle ensures that a dealer/reseller is compensated for the tax paid by him upon purchase.
So in our example provided above, the 2nd dealer who purchases cigarettes at Rs. 228.8 from the
first dealer to sell it at Rs. 260 to the end consumer, will be compensated for the amount of 'tax' that
is already included in the price of Rs. 228.8. In reality out of the Rs. 10 paid as tax by the 2 nd dealer,
Rs. 8.8 has already gone as tax to the state government when the 10 cigarettes were sold by the
manufacturer to the first dealer. This 8.8 rupees is then plugged back into the system through input
credit tax compensation. The 2nd dealer will be able to obtain Rs. 8.8 back as input tax credit back
from the state government, since that amount is included within the final VAT applied on the
product, i.e., Rs. 10 (the 2nd dealier includes this Rs. 10 in the final selling price of Rs. 260). The
implementation of VAT which worked on the input tax credit principle somewhat reduced the
cascading effect of taxation. Similar concept came in the duty on manufacture The Central Excise
Duty much before it came for sales tax. The CENVAT credit scheme (earlier known as MODVAT)
was also a welcome move by trade and industry where credit of excise duty paid at the input stages
was allowed to be set-off against the liability of excise on removal of goods. With effect from 2004,
this system was extended to Service Tax also. Moreover, cross utilisation of credit between excise

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 duty and service tax was also permitted. To a huge extent, the problem of cascading effect of taxes
was resolved by these measures.

Limitations of VAT in reducing the cascading effect of taxes

As seen from above, the 2nd dealer used to get back the input taxes paid by him on the purchase of
10 cigarettes at Rs. 228.8. However, the dealer did not get back the value of excise duty paid on the
cigarettes, which is Rs. 55. Thus, although the input tax credit principle was able to alleviate
cascading effect of taxes, it was applicable only between points of similar taxation, i.e., input tax
credit for VAT was available against purchases for which VAT was paid and likewise input tax credit
for excise tax was available against excise tax that was paid upon production/manufacture. Input tax
credit currently is not available between VAT taxes and excise taxes. Thus, due to the multiplicity
and presence of a variety of taxes, the problem of 'tax on tax' continued to persist. Thus, a dealer
would get back the input tax credit only to the extent of the input VAT paid upon purchase, i.e., Rs.
8.80. The dealer would not get anything back from the VAT that was imposed on Rs. 55 which
exists in the price of Rs. 220 merely due to excise tax.

How does GST Work?

The GST that shall be levied will be an indirect tax. Before going into how the GST will work, it is
necessary to understand the present system of Indirect Taxes.

(* CVD Countervailing Duty; SAD Special Additional Duty)

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 The GST shall subsume all the above taxes, except the Basic Customs Duty that will continue to be
charged even after the introduction of GST. Other indirect taxes, such as stamp duties etc shall also
continue. India shall adopt a Dual GST model, meaning that the GST would be administered both
by the Central and the State Governments. This makes it the first tax of its kind in India!

Dynamics of the GST Regime

As has been explained by now, the GST has been introduced to fight the problem of cascading
taxation. In the previous example, we understood how the imposition of various taxes at various
points in the life cycle of a product leads to a cascading effect of taxation. This effect leads to higher
prices of the products. Moreover, different authorities and departments have been established to
impose, levy and collect the umpteen number of taxes, which in itself is a huge logistical exercise
and often leads to frequent litigation due to disputes regarding wrong imposition of taxes. Presence
of excise taxes on manufacture, import taxes on imported raw materials, additional taxes, VAT taxes
on sale, octroi taxes upon entry of goods from one state into another through vehicular transport
often led to a progressive rise in the price of commodities as the imposition of each new additional
tax would not only be imposed on the value of the commodity but also upon the tax paid earlier in
the supply chain.

If the GST regime is implemented, then the situation would be different. GST, first of all will do
away with the distinction between multiple taxes such as excise and VAT and have just one uniform
all India taxation mechanism. It will also function in the manner VAT system functions, i.e., GST
would be levied on the value addition made to goods and services. So for e.g., when Rs. 100 worth
of tobacco is manufactured, a uniform rate of GST would be applied on the value added, i.e.,
Rs.100. Let's say the tax is 55% of 100, which makes the price of the total tobacco produced to be
Rs. 155. When ten cigarettes are manufactured from the tobacco produced, then the tax imposed
would be Rs. 33.75, which takes the price to Rs. 188.75. Add to this labour and production costs the
effective cost would go to Rs. 208.75. When the manufacturer adds his profit, he would then sell it
to the 1st dealer for Rs. 220. When this is sold, another GST would be imposed on the value of Rs.
220 taking the price to Rs. 228.8 However, the manufacturer will have the option of claiming the
input tax credit paid upon the taxes paid for the manufacture of cigarettes from tobacco, i.e., Rs. 55
+ 33.75 = 88.75, as this is already a part of the GST tax that would be paid by subsequent
purchasers. Thus the manufacturer need not sell it at Rs. 228.8, but rather at Rs. 140.05 (228.8-
88.75). Thus by removing the distinction between various types of taxes and by bringing in one
uniform taxation regime, the cascading effect of tax on taxes would be drastically reduced.

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 The Dual GST Model

We begin by stating the dual GST model and the taxes levied on each kind of transaction. See these
abbreviations before we understand them-

SGST State GST, collected by the State Govt.

CGST Central GST, collected by the Central Govt.

IGST Integrated GST, collected by the Central Govt.

Earlier, production of goods would attract an excise tax and the sale of it within the same state as
the state of production would attract another imposition of state VAT tax without the facility of
availing input tax credit paid during the imposition of excise tax. This tax would be replaced by a
single tax, which would have two components, the state GST and the central GST. Again, earlier
production of goods and sale of it in another state would invite two taxes namely the excise duty at
the time of production and the Central Sales Tax which is a tax levied on the inter-state sale and
purchase of goods. This will be replaced by a single tax, called the Integrated GST.

How GST operates?

Case 1: After production in one state, 1st sale in the same state, 2nd sale (resale) also in the same
state

In the example illustrated below, goods are produced in mumbai, and they are transported and sold
for the 1st time in Pune. Since it is a sale within a state, CGST and SGST will be levied separately at
8%. At Rs. 100, the CGST and SGST comes to Rs. 8 each, i.e., Rs. 16 in total. The collection goes

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 to the Central Government and the State Government as pointed out in the diagram. Then the goods
are resold from Pune to Nagpur (2 nd sale). This is again a sale within a state, so CGST and SGST
will be levied. Sale price has increased from Rs. 100 to Rs. 200, and hence the imposition of the 8%
tax will increase the amount of tax to be paid. Therefore, on resale of the goods purchased, the tax
paid would be 16 each for CGST and SGST (sales within a state would invite both the taxes), i.e.,
Rs. 32 in total. However, of this Rs. 32, Rs. 16 had been paid earlier on its first sale. Therefore, after
payment of Rs. 32 to the state government, the 2nd purchaser will be able to claim an input tax credit
of Rs. 16 from the state government. Thus, the effective tax rate would be Rs. 16 without
engendering a cascading effect.

Case 2: After production, 1st sale in the same state (as the state of production), 2 nd sale (resale)
in another state .

In this case, goods are produced in Indore and are transported to Bhopal where they are sold for the
first time. Since it is a sale within a state, CGST and SGST will be levied. The collection goes to
the Central Government and the State Government as pointed out in the diagram and as explained in
the first case. Later the goods are resold (2 nd sale) from Bhopal to Lucknow (outside the state).
Therefore, IGST will be levied. Whole IGST goes to the central government. Here we see that on
the same good, CGST and SGST has been levied before IGST was levied too. Here we will observe
that cascading effect of taxes is taking place since the purchaser in another state is not only paying
the IGST on the value of the goods being purchased but also on the CGST and SGST that were paid
earlier for the same goods and thus became a part of the taxable price of the goods. The second sale
(or resale) is being made at Rs. 200 outside the state. This would invite an IGST @ 16% = Rs. 32.

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 However, the 2nd purchaser of the other state has already paid Rs. 16 as part of the CGST and SGST
that was made part of the price of goods on its first sale. Hence, because of the working of the input
tax credit principle the purchaser can claim back credit from the central government to the extent of
the CGST and SGST paid earlier on the goods, against the payment of IGST by the creditor to the
central government. Since it is an inter-state sale and the 2 nd purchaser pays IGST to the centre, the
2nd purchaser will also take the tax credit claim back from the centre. The centre will pay Rs. 16 to
the 2nd purchaser. However, the central government got only Rs. 8 as the CGST and it ends up
paying Rs. 16 to the 2nd purchaser for his input tax credit claim. This represents a loss for the central
government and the government will be able to recoup this loss from the state government. Thus,
the state government will compensate the central government with its share of SGST levied earlier
upon the first sale of the goods within the state.

Case 3: After production, 1st sale in the other state (from the state of production), 2 nd sale in
the same other state.

In this case, goods are produced in Delhi, but they are transported to Jaipur (another state) where
they will be sold for the first time. Since it is an interstate sale, IGST will be levied. The collection
goes to the Central Government. Later, the goods are resold (2 nd sale) from Jaipur to Jodhpur
(within the state). Therefore, CGST and SGST will be levied.

In this case, IGST was levied earlier at the rate of 16% on the price of Rs. 100 upon its first sale at
Jaipur after being transported from its place of production, i.e., Delhi. This Rs. 16 was paid by the
first purchaser to the central government. Later the first purchaser sold it at Rs. 200 at which CGST
and SGST would be levied separately at the rates of 8% each, thus raising up a total CGST of Rs.

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 16 and a total SGST of Rs. 16, leading to a total liability of Rs. 32. The 2 nd purchaser will pay Rs.
32 to the state government, however, since the 2 nd purchaser had paid Rs. 16 also as part of the price
of the product, and which has already gone as tax to IGST, the 2 nd purchaser will claim the
compensation from the state government (since the 2 nd purchaser is paying the tax to the state
government). The state government would compensate the 2 nd purchaser with Rs. 16. However, the
state government never received any amount of the IGST even though it is fulfilling the input tax
credit claim of Rs. 16 claimed by the 2 nd purchaser. This represents a loss to the state government
and hence the state government will claim compensation for such loss from the central government.

ADVANTAGES OF GST

Apart from full allowance of credit, there are several other advantages of introducing a GST in
India:

Reduction in prices: Introduction of GST will completely eliminate inflation in prices due
to the cascading effect of taxes. However, if the government seeks to introduce GST with a
higher rate, this might be lost (the rate currently being proposed is 18% standard GST rate
applicable uniformly throughout). Also by being a consumption tax only, the final burden of
the tax falls only on the end-consumer. The producer does not bear any burden since all the
tax paid by it on raw material can be claimed back as credit. This will encourage the
producer to bring down the prices of its commodities as taxes will no longer be a part of the
total pricing. Currently, in the absence of GST, manufacturers are under a burden of an
excise duty of 12 percent on most items and an additional state based levy of VAT which is
sometimes as high as 14.5-15 percent. The reduction in tax would thus incentivize the
manufacturing sector thereby giving a boost to the ambitious, 'Make in India' program.
However, the GST rate of 18% would prove costly for services as currently the service tax is
charged at 14% after it was hiked from 12.36% in this year's Union Budget (2015-2016).

Increase in Government Revenues: This might seem to be a little vague. However, even at
the time of introduction of VAT, the public revenues actually went up instead of falling
because many people resorted to paying taxes rather than evading the same. However, the
government may wish to introduce GST at a Revenue Neutral Rate, in which case the
revenues might not see a significant increase in the short run.

Less compliance and procedural cost: Instead of maintaining big records, returns and
reporting under various different statutes, all assessees will find it a lot more convenient and
comfortable to maintain records under a singular GST system. This drastically reduces the

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 compliance costs for many organizations. It should be noted that the assessees are,
nevertheless, required to keep record of CGST, SGST and IGST separately.

Seamless system: Taxable goods and services are not distinguished from one another and
are taxed at a single rate in a supply chain till the goods or services reach the consumer. The
taxation will also not take into consideration the type of goods and services as it is a tax that
is imposed only on the value added, regardless of the product on which the value has been
added. The latter has been the hallmark of the current system under which separate acts
maintain a scheduled list of various products and services at which different taxes are levied.
This often leads to regulatory arbitrage whereby producers evade the impact of layered
regulation by adopting appropriate modifications. Now, it will be immaterial as to the goods
and services being produced as only the value of the sold and purchased goods and services
will be considered. This will make it more convenient for businesses to comply with
taxation laws. Introduction of the VAT regime (discussed earlier) had similarly improved
collection rates, because the business community had to deal with a much simplified
structure of tax.

Sharing of Service Taxes: Under the present system, only the centre has the power to
impose and levy a tax on services. A state does not have any authority or power to levy taxes
on services. This means that states have been losing out on an important source of revenue
on all the activities carried out within their territories. Since, under the GST mechanism, all
goods and services sold within a state will attract a levy from states (SGST). This will bring
a share of service taxes too to the states where services are being consumed. This is expected
to boost the revenues of state.

Move towards a Unified GST: Internationally, the GST is always preferred in a unified
form (that is, one single GST for the whole nation, instead of the dual GST format).
Although India is adopting Dual GST looking into the federal structure, it is still be a good
move towards a Unified GST which is regarded as the best method of Indirect Taxes. The
unified tax rate would be recommended later by the Goods and Services Tax council once it
is constituted upon the passage of the GST bill.

Rationalization of state-wide variations of taxes: Currently different states impose

different rates of VAT, which is a pain point for the business community, since it needs to do
a lot of due diligence just to ascertain the right amount of tax rate applicable within each
state. This also led to a lot of arbitrage exploitation because industries would be setup only
in those states where the VAT rate is comparatively lower to other states. This led to the

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 problem of skewed development since all the states and regions were not receiving a
balanced level of investment. A nation-wide and uniform GST rate would kill opportunities
for exploitation of the 'taxation arbitrage'.

Beneficial impact on GDP: Because of the elimination of cascading effect of taxation and
also because of the elimination of taxation arbitrage, prices of commodities would reduce
and thus become more competitive. Prices of commodities produced in different states
would also be able to compete with each other keeping other things constant. This increased
competition in the market would lead to lower prices and higher benefit to consumers
(consumer surplus). Higher consumer surplus means more savings and more expenditure,
which in turn pushes the level of total demand in the economy, thus ultimately impacting the
GDP. CEA Arvind Subraniam's panel that submitted a report on its recommendations for
GST mentioned in the report that elimination of any taxes on inter-state movement of goods
would help promote Make in India and ease of doing business.

Governance: The government has placed a great deal of emphasis on curbing black money
reflected in the Black Money Bill. These measures can be very significantly complemented
by a GST, which, especially if it is extended to as many goods and services as possible
(especially alcohol, real estate and precious metals), can be a less intrusive, more self-
policing, and hence more effective way of reducing corruption and rent-seeking.

Under the GST, this can happen in two ways. The first relates to the self-policing incentive
inherent to a valued added tax. To claim input tax credit, each dealer has an incentive to
request documentation from the dealer behind him in the value-added/tax chain. This will
ensure that proper documentation is maintained and preserved. Availability of
documentation enhances tax compliance and increases levy. It will also act as a disincentive
for suppliers who evade taxes as their purchasers will be forced to seek goods and services
from only those suppliers who can provide appropriate documentation to their purchasers for
the purchasers to be able to claim input tax credit on the purchases made by them. This
system of third-party reported paper trail on transactions between firms makes it difficult for
firms to hide such transactions from the government in order to evade taxes. Provided, the
chain is not broken through wide ranging exemptions, especially on intermediate goods, this
self-policing feature can work very powerfully in the GST.

Reduced Evasion: Second, the GST will in effect have a dual monitoring structureone by
the States and one by the Centre. Hence, there will be a greater probability that evasion will
be detected. Even if one set of tax authorities overlooks and/or fails to detect evasion, there
is the possibility that the other overseeing authority may not.

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 Defragmentation of a common internal market: The current tax structure unmakes India,
by fragmenting Indian markets along state lines. States with lower tax rates attract more
investment thus leading to broken up markets and a skewed pattern of development. This
has the collateral consequence of also undermining Make in India, by favouring imports and
disfavouring domestic production. The GST would rectify it not by increasing protection but
by eliminating the negative protection favouring imports and disfavouring domestic
manufacturing. It would also reduce inter-state economic distortions due to variations in tax
rates.

Positive impact on external trade: It will be possible to implement a zero rating for
exports under the GST Regime. This essentially means that exports will not be taxed with
the GST. As a result, exports will become more price-competitive. On the other hand,
imports will be subjected to the dual taxes of CGST and SGST, just like the purchases of
domestically produced goods. This will make exports more cheaper and thus price
competitive boosting exports and manufacturing in India, while at the same time, it will
make the prices of imports and domestically manufactured goods agree on an equal footing.

At present exporters have to suffer an excise duty chargeable generally at 12-12.5%. In

addition they are also burdened with the taxes imposed by the state in which production for
exports is happening. Although, the exporters have been incentivized through various input
duty reimbursement schemes or export promotion schemes, in reality they are re-imbursed
with only those central taxes that have been levied on input materials used in production.
They are not re-imbursed with the taxes paid to the state, even though the objective of such
export based production is not to sell within the state. This leads to an unnecessary inflation
in the prices of exports by almost 4-6%, which when considered for bulk sized quantities is
a significant number.

Benefit to Domestic Manufacturing: It is insufficiently appreciated that Indias border tax

arrangements undermine Indian manufacturing and the Make in India initiative.
Eliminating exemptions in the countervailing duties (CVD) and special additional duties
(SAD) levied on imports will address this problem.

How so?

It is a well-accepted proposition in tax theory that achieving neutrality of incentives between

domestic production and imports requires that all domestic indirect taxes also be levied on
imports. So, if a country levies a sales tax, VAT, or excise or GST on domestic
sales/production, it should also be levied on imports. In India, this is achieved through the

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 CVD/SAD which is levied on imports to offset the impact of the excise duty levied on
domestically manufactured goods.

However, in order to incentivize more international trade, the government creates

exemptions in the list of items that are chargeable with CVD/SAD. These exemptions do not
attract any CVD/SAD duty, nor do they attract any other domestic tax, because of which the
items coming under these exemptions are not liable to any taxation. This makes them cost-
competitive as they turn out to have lower prices than goods produced domestically. These
CVD/SAD exemptions act perversely to favour foreign production over domestically
produced goods; that is, they provide negative protection for Indian manufacturing. Hence,
it becomes cheaper to import foreign goods than produce in India, thus hurting the 'Make in
India' initiative.

When there are no CVD/SAD and excise exemptions, neutrality of incentives between
domestic goods and imports is achieved which is desirable, as then the domestically
produced goods will not be at a disadvantage vis-a-vis imports.

But the important and subtle point relates to a situation when the excise and CVD/SAD are
both exempted. This may seem apparently neutral between domestic production and imports
but it is not. The imported good enters the market without the CVD/SAD imposed on it; and,
because it is zero-rated in the source country, is not burdened by any embedded input taxes
on it. The corresponding domestic good does not face the excise duty, but since it has been
exempted, the input tax credit cannot be claimed. The domestic good is thus less competitive
vis--vis the foreign good because it bears input taxes which the foreign good does not. In
the example, the penalty on domestic producers is over 6 per cent. In effect, a policy
designed to promote domestic manufacturing through making some goods exempt from
excise duty/CVD/SAD creates a perverse incentive for the exempt industry and its eventual
decline.

DISADVANTAGES OF GST

The GST regime is not without its disadvantages and criticism

Uniform rate: A uniform rate of GST is both its advantage as well as a drawback. Although
the idea seems attractive, it would be penalizing for the poor masses. There are different
items available in the market and some of these items are specific to income groups. Having
a uniform rate of taxation across all the products, regardless of whether they are items of
necessity, luxuries or demerit goods, will prove to be costlier for the lower income groups.

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 Currently a standard GST rate of 18% is being mulled. 18% GST imposed even on items of
daily needs and necessaries seems especially cruel when the purchaser is a poor person.
Some countries have a system whereby the poor are in turn compensated by the state
administrative machinery in the form of cash transfers for the excessive tax paid by them.
However, this will prove to be difficult for India as it lacks a systemic IT based nation wide
infrastructure that could ensure such distribution of cash recompensating the poor for the
indirect GST tax paid by them. True, nowadays cash transfers can be affected through IT
systems and directly into the bank account of the poor. However, not everyone in India has
been brought under the financial net and also as per the latest Supreme Court order the
government cannot make the aadhar-linked bank account as a mandatory pre-requisite for
transfer of cash benefits. Thus, the only alternative left for India would be to implement a
nation-wide physical network of cash disbursers, which will be a huge logistical exercise.
Thus it has been proposed to have different rate structure for necessaries and demerit goods.
This has been taken care of, atleast partly, by not bringing tobacco, cigarettes and liquor
under the ambit of the GST. The existing and much higher rates would be applicable for
such goods collectively referred to as 'sin items'.

Compensation of States: Compensation of states for the losses suffered by them when GST
is rolled out has proved to be a thorny issue. It is felt that the states experience in receiving
compensation for CST loss in the past has not been very satisfactory. It is important to recall
that during the regime of the UPA II, P Chidambaram had announced that the Central
government would fully compensate the states for phasing out CST. This compensation to
the states was nearly Rs. 34,000 crore. The former finance minister had set in motion the
process by providing for Rs. 9,300 crore as the first installment of the compensation in the
Budget 2013 but for some reason only Rs. 1,940 crore was finally released.

The states feel that the Centre continues to have difficulty in managing its own fiscal deficit
and, therefore, the states might have a problem in getting timely full payment of the
compensation for the loss of revenue. It is important that the Centre instills confidence in the
states that the commitment made by it would always be respected.

To overcome the issue of compensation of states, the states have been advocating for a
'revenue neutral rate' (RNR), a GST rate that would be only so high so as to ensure that the
states continue to generate the current level of taxation revenue during the GST regime as
well. This has been suggested as a measure to ensure that the states do not lose any revenue
due to the roll out of GST. RNR, in layman terms, is the rate that allows the Centre and
states to sustain the current revenues from tax collections and, therefore, takes within its

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 ambit, amongst others, any tax losses because of taxes subsumed and/or phased out, grant of
input tax credits as well as sharing of the tax base, i.e. taxation of goods and services.

Producing state v. Consuming state: Under the present regime, taxation is imposed in the
state where goods and services are manufactured and not where those goods and services are
consumed. This proves beneficial to the producing state. Also the producing states levied
excise tax on the production of specific goods. All these tax advantages accruing to the
producing states will go away as the GST is destination based (i.e., tax is imposed on the
goods and services in the state of consumption) instead of the current regime which is origin
based, (i.e., tax is imposed on the goods and services in the state of origination). This proves
to be a negative for producing states and beneficial to consuming states. This will harm the
revenue collection for industrialized states. This has been one of the major bones of
contention hampering the passage of the GST bill.

However, the aim of the GST bill in levying the tax in the consumption state is to 1)
facilitate inter-state trade. This is expected to happen because, once the GST regime is rolled
out, the goods and services produced in the producing state, will be priced lower than their
current prices (since the cascading effect has now eliminated). As a result, the goods
produced in one state will become price-competitive to be sold in several other states. This
would facilitate more traders to organize inter-state trade in order to benefit from lower
prices. More inter-state trade = more availability of goods and services = more taxation for
the central government since tax levied on inter-state trade will go to the centre. 2) Because
of GST being a consumption tax, it will prove to be an incentive for more and more states to
develop proper markets, transportation systems, cold storage mechanisms to achieve both
intra-state trade (where the same state is where goods and services are being produced and
consumed) and inter-state trade (where the state promotes itself as an attractive market to
encourage more in-flow of goods and services from other producing states).

However, the truth remains that owing to the consumption-based nature of GST, producing
states have no incentive to encourage more manufacturing and production in their states.
This does not necessarily mean that lesser industries would be set up in the states, but it
definitely leads one to conclude that states will not feel inclined to offer tax sops to
industries and producers because the state of production will not be able to levy any tax until
and unless the goods produced are also consumed within the same state.

In order to correct this apparently disadvantageous situation for the states, it has also been
suggested that the manufacturing states should have the power to levy an additional 1% tax
on the goods manufactured within the state. However, this tax will reverse the beneficial

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 price reducing effect of the GST as the additional levy will not only increase the prices but
will also run counter to the very thematic design of the GST which seeks to eliminate the
effect of 'tax on taxes'. This will run counter to the national government's ambitious plan of
'Make-in-India' as the levy of additional tax would increase the cost price of manufacturers
who will be forced to pass on the additional burden to consumers owing to higher tax
impositions.

Fiscal autonomy: Because the GST bill proposes the setting up of a GST council that would
recommend rates and taxes for levy on goods and services, states fear that they will be
robbed of the legislative powers to extract levy on goods and services. However, these fears
have been allayed by making the nature of the GST council a 'recommendatory' one and not
a mandatory one. Thus, the states will continue to enjoy fiscal autonomy as the centre will
not be able to usurp the taxation powers of the state. Further, sin goods or demerit goods
have currently been kept out of the purview of the GST. This means that the states will
continue to be able to levy taxes on these goods in the same manner as being done presently
(because the GST regime will not be implemented for such goods)

Recommendations by Chief Economic Advisor, Arvind Subramanian

Scrap 1% additional tax rate: Arvind Subramaniam, the current CEA (chief economic
advisor) of India has suggested in the CEA's report that the 1% additional tax to be levied in
manufacturing states must be scrapped.

Three layer system: The CEA panel has suggested a three-rate structure. A concessional rate
of 12 percent for public goods that concerns the deprived or weaker sections, a standard rate
of 17-18 percent that would concern majority of items and a rate of 40 percent for luxury
items and tobacco, aerated drinks and pan masala etc.

Revenue Neutral Rate: The panel has suggested a revenue neutral rate of 15-15.5%, which
seems to be a perfect fit between the poles-apart rates that have been suggested on prior
occasions. Earlier, a sub-panel of the empowered committee of state finance ministers (EC)
had recommended a revenue-neutral rate at 12.77 per cent for the central GST and 13.91 per
cent for state GST, nearly 27 per cent combined. This was referred to the National Institute
for Public Finance and Policy (NIPFP), which also recommended a similar high rate of
27%, that would have made India's GST the most burdensome in the world. Before this, a
task force of the 13th finance commission had suggested a 12 per cent GST rate (five per
cent CGST and seven per cent SGST). This rate is considered as too low.

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 What is a 'Sin Tax'?

In the example provided above, 'tobacco' has been used as our product. Although it must be
mentioned and made very clear that tobacco will be out of the GST regime because tobacco is
considered to be a 'sin' product which are a special category that can invite application of a special
'sin tax'.

Sin tax is a globally prevalent practice under which products like alcohol and tobacco attract
higher rates of tax. Typically, sin tax is an excise tax that is levied on products and services
considered to be bad for health or society such as alcohol, tobacco and gambling. These additional
taxes are also seen as efforts to discourage people from use of such products or services. Besides,
such taxes are often the most common measures by the governments to shore up their tax revenues
as people generally refrain from opposition to such levies as they are indirect in nature and affect
only their end users.

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 WHY OI L PRI C E S C ON T I NU E TO FA L L FU RT HE R ?

Data from the Petroleum Planning and Analysis Cell (PPAC) tells us that as on December 8, 2015,
the price of the Indian basket of crude oil stood at $ 37.34 per barrel. In fact, during the course of
this week, oil prices have touched a seven year low.

What is happening here? The Organization of the Petroleum Exporting Countries (OPEC), an oil
cartel of some of the biggest oil producers in the world, met last Friday on December 4, 2015.

The statement released by OPEC after the meeting as usual was very general in nature. It said:
"emphasizing its commitment to ensuring a long-term stable and balanced oil market for both
producers and consumers, the Conference [i.e. OPEC] agreed that Member Countries should
continue to closely monitor developments in the coming months."What does this "really" mean? In
the past, the OPEC has adjusted its oil production depending on oil demand. If the demand was
high, it increased production so as to ensure that oil prices did not go up too much. This was done in
order to ensure that other forms of energy did not become viable. If the demand was low, it cut
production in order to ensure that oil prices did not fall too much.

In the last one year, OPEC has abandoned this strategy primarily on account of all the oil that is
being produced by the shale oil companies in the United States. As shale oil started to hit the
market, the OPEC countries started to lose market share. Hence, they decided not to cut production
any further, and try and maintain market share, even if that meant low oil prices.

The major producers within the OPEC (the likes of Saudi Arabia, Kuwait and Iraq) produce oil at
anywhere between $9 to $20 a barrel. It costs anywhere between $29 to $90 per barrel to produce
shale oil, as per the International Energy Agency (IEA).

Hence, the idea was to engineer low oil prices and in the process make shale oil unviable and help
OPEC countries maintain their market share. Nevertheless, despite low oil prices, the US shale oil
industry is not shutting down at the rate it was expected to, when the price of oil started to fall,
around a year back.

And this explains why OPEC continues to produce oil full blast. It wants to kill the US shale oil
industry. Further, what the OPEC's statement released last Friday really means is that the cartel will
maintain its production at over 31.5 million barrels per day. In fact, members of the OPEC have
always known to cheat on the side and produce more than their allocated quotas. Hence, the daily
production is likely to be more than 31.5 million barrels per day.

Take a look at the following two charts from the International Energy Agency. One is a chart

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 showing the World Oil Supply. And the other shows World Oil Demand.

As per the chart, the World Oil Supply during the period July to September 2015 was at 96.9
million barrels per day. The demand on the other hand was lower than the supply at 96.35 million
barrels per day.

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 The OPEC oil supply during the period July to September 2015, went up in comparison to the
period April to June 2015. The OPEC production between April to June 2015 was at 31.5 million
barrels per day. Over the next three months it jumped to 31.74 million barrels per day. Hence,
OPEC contributed significantly to the jump in global oil supply.

In fact, the production of OPEC is likely to increase in the months to come as the sanctions on Iran
are lifted and the country is allowed to export more oil.

Over and above this, the global oil inventory is at a record high. As a recent IEA report points out:
"Stockpiles of oil at a record 3 billion barrels are providing world markets with a degree of comfort.
This massive cushion has inflated even as the global oil market adjusts to $50/bbl oil. Demand
growth has risen to a five-year high...with India galloping to its fastest pace in more than a decade.
But gains in demand have been outpaced by vigorous production from OPEC and resilient non-
OPEC supply - with Russian output at a post-Soviet record and likely to remain robust in 2016 as
well. The net result is brimming crude oil stocks that offer an unprecedented buffer against
geopolitical shocks or unexpected supply disruption."

What this clearly means is that oil prices are likely to stay low over the next few months. Further,
the forecast is for a fairly mild winter in Europe as well as North America. This means that the
demand for diesel, which is the fuel of choice for heating in Europe as well as North East America,
is unlikely to go up at a rapid rate. The stockpiles of diesel are at a five-year high.

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 NATIONAL HERALD CASE

The National Herald was an Indian newspaper established in 1938 by Jawaharlal Nehru. The paper
finally ceased operations in 2008, after being temporarily shut down twice before. This paper was
owned by Associated Journalists Private Limited (AJPL), a company that owns prime real estate
properties in the cities of Delhi, Lucknow, Indore, Bhopal, Mumbai and many other places. The
value of these real estate holdings of AJPL are valued at close to Rs. 2000 crore. One of its
properties was situated in Bahadur Shah Zafar Marg, Delhi was granted to it by the government for
it to run a newspaper at a concessionary rate.

The Congress party loaned its money to AJPL (owner of National Herald) from time to time to
assist in its publications. This is one of the issues because of tax implications. Money received by a
political party in the form of donations for the purpose of the political party is exempt from income
tax, whereas money received otherwise for commercial purposes is subjected to income tax. The
donations money received by congress and transferred to AJPL effectively violated the provisions
of the income tax because it resulted in transforming tax exempt money into taxable money but
without the payment of any tax. However, the amount of money (Rs. 90 crore) transferred by
congress to AJPL in this respect is quite small compared to the amount of properties held in AJPL's
name.

Now enters another company, the 'Young Indian Company' (YIC) in which Sonia Gandhi and Rahul
Gandhi together hold 38% of the total number of the company's shares. As mentioned above, AJPL
owed a debt to congress party for Rs. 90 crore. The congress transferred this 'right to receive a debt
of Rs. 90 crore' to the YIC. In return the congress party received a paltry sum of Rs. 50 lakh for
transferring an 'asset' (receivables from AJPL) worth Rs. 90 crore.

YIC becomes the owner of AJPL

From the above, it is clear that AJPL now had to pay Rs. 90 crore to YIC. But here's the twist. AJPL
decided to sell its equity shareholding to YIC in exchange for Rs. 90 crore. Effectively this means
that AJPL paid for Rs. 90 crore owed by it to YIC by making YIC the owner of AJPL. AJPL sold its
shares to YIC in consideration of the Rs. 90 crore owed by AJPL to YIC. As a result YIC now
became the owner of AJPL and all the properties of AJPL running upto an estimated Rs. 2000 crore,
all for just a sum of Rs. 50 lakh. AJPL had 761 other shareholders too, but their shareholding was
reduced to just 1%. With YIC owning 99% of AJPL, Sonia and Rahul effectively became 38%
owners of AJPL and it's 2000 crore worth of properties (because Sonia and Rahul are 38%
shareholders in YIC).

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 GOLD MONETIZATION SCHEME

What is Gold Monetization Scheme?

During budget 2015-2016, the Finance Minister had noted that India possesses close to 20,000
tonnes (1 tonne = 1000 kg) of gold in its households, but none of which is either monetized or
traded, thus resulting in a huge locked up value which is not getting utilized towards economy of
the nation. The government announced the gold monetization scheme on 15 th September to mobilize
gold held by households and institutions and facilitate its use for productive purposes and, in the
long run, to reduce Indias reliance on the import of gold.

It is a scheme that facilitates the depositors of gold to earn interest on their metal accounts. Once the
gold is deposited in a metal account, it will start earning interest on the same. The amount of gold
kept in the metal accounts can be used by the bank towards meeting its SLR requirement (currently
at 21.5%. SLR is statutory liquidity ratio, which tells a bank as to how much of the bank's total time
and demand liabilities must be kept invested in government's securities, bonds and other approved
securities).

If successful, this scheme will reduce the total imports of Gold into India, thus easing off the
pressure on India's Current Account Deficit which currently has widened to 10.1 billion USD (2.1%
of the GDP), mostly on the back of excessive imports of gold and declining exports due to a
recessionary world economic situation.

How it generally works?

When a customer brings in gold to the counter of specified agency or bank, the purity of gold is
determined and exact quantity of gold is credited in the metal account. Customers may be asked to
complete KYC (know-your-customer) process. The deposited gold will be lent by banks to
jewellers at an interest rate little higher than the interest paid to customer.

Banks can accept a minimum of 30g of raw gold of 995 fineness in the form of a bar, coin or
jewellery under the scheme. There is no upper limit on the amount of gold deposit.

The gold will be accepted at the collection and purity testing centres (CPTC) certified by Bureau of
Indian Standards and notified by the central government under the scheme.

Banks accepting gold under the short-term category can sell or lend it to state-owned MMTC Ltd or

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 jewellers. The banks may also choose to lend it to other banks participating in the scheme. The gold
deposited under medium- or long-term deposits will be auctioned by MMTC or any other agency
authorized by the central government and the sale proceeds credited to the governments account
with RBI.

How is it expected to reduce India's dependence on imports of Gold?

In this scheme, the gold-owner will have to give the gold to the assaying agent who will then certify
the purity of the gold and it will then be given to the refiners who will melt the gold and issue a
certificate in lieu of the gold deposited with the latter. The depositor will then have to take the
certificate issued by the refiners and deposit it with the bank. The banks will then create a 'gold
savings account' or a 'metal account' in the name of the gold-owner who deposits a certificate to the
bank. The bank can also verify receipt of gold by the refiner from the depositor by checking with
the refiner. In this manner the depositor is able to utilize his unutilized gold in the form of an
interest bearing asset.

At the time of redemption, the depositor will get the value of the gold at current market prices along
with the interest (around 1-2 percent annually) earned on it. The return from these deposits is tax-
free. The scheme is being designed in such a manner that banks will not handle physical gold. The
depositor will have to bring in a certificate from the refiner after handing over the gold jewellery.

As for the gold that was melted by the refiner and retained by it, it would be converted into bullion
and sold off to jewellers who would then convert it into jewellery for sale in the retail market. This
jewellery will then be purchased by another customer. This new customer also has the option to
monetize the purchased jewellery by adding to an existing gold account or creating a new account
with the bank. When this new customer does so, then the gold purchased by him is added back into
the gold stream, thus creating an endless cycle of gold supply without having to rely on external
imports.

How is the interest rate calculated?

Both principal and interest to be paid to the depositors of gold, will be valued in gold. For example
if a customer deposits 100 gm of gold and gets one per cent interest, then, on maturity he has a
credit of 101 gram. The interest rate is decided by the banks concerned.

What is the tenure?

According to the RBI guidelines released in this relation, banks will be allowed to accept three

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 kinds of deposits under the scheme - a short-term deposit with maturity ranging between one and
three years; a medium-term deposit with a five to seven year horizon; and a long-term deposit
maturing in 12-15 years. Banks can accept short-term gold deposits on their own account, whereas
the medium and long-term deposits will be accepted on behalf of the government.

How does the redemption takes place?

Customer will have the choice to take cash or gold on redemption, but the preference has to be
stated at the time of deposit. However, after the passage of RBI's guidelines regarding the Gold
Monetization (GM) scheme, it has been made mandatory to denominate the principal and the
interest in gold.

Will the scheme work?

Inconducive psychology 'Gold Hoarding Behaviour': The Indian consumer loves buying
gold and to preserve it for a long period of time as a 'hoarder' and not as an 'investor'. The
Indian consumer does not look at gold merely as an investment waiting to be auctioned at
the right time to generate a profit, but rather as a possession of pride that is often put on
display at social events such as weddings. Also, Gold is always looked as a hedge against
inflation and as an insurance against global uncertainty. Gold also provides diversification
by exhibiting low correlation with other asset classes, i.e., it is not as wildly affected as other
asset classes are affected owing to any changes in a related asset class. For all these reasons,
it would be difficult to convince the consumer to utilize gold as an investment.

Cultural Behaviour: The Indian consumer will be reluctant to offer his jewellery pieces for
the purpose of monetization since the jewellery will be melted and formed in the shape of
gold bars. Even the redemption from the bank will be in the form of gold bars. Further, the
gold bars are made only in the pure 24 carat form, whereas standard jewellery pieces are
made in the 22 carat form. Thus conversion of jewellery into gold bars would reduce the
weight of the jewellery for the consumer, which may be another negative incentive for the
consumer to participate in the scheme.

Gold Price Fluctuation: Gold prices fluctuate on a daily basis. Moreover, as regards the
long-term and the medium term gold deposited with the bank, the government will sell
off/auction off the gold in exchange for money. Money always depreciates, whereas gold
always appreciates in a value. Obtaining money (a devaluating asset) in exchange for gold
(an appreciating asset) does not seem to be a very financially sound method. Although, it

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 may be argued that the government need not bother about falling short of money to buy gold
as the government can print as much amount of money as it wants. However, with the RBI's
mandate that the interest and principal in the metal account of a customer will be
denominated in terms of gold only, it becomes obvious that the government has to return in
gold, buying which may prove to be quite costly. It may even make the government appear
as foolish because the government sold off the gold at a lower price (when it accepted gold
from public) but is buying it back at a much higher price (when the government has to return
the principal with the interest).

Interest Rate: The interest rate has been fixed at 2.25 per cent to 2.5 per cent on gold
deposits to ensure the schemes success. The problem here is that rather than encouraging
individuals to part with the gold they already hold, it will encourage more entities to import
large quantities of gold and deposit them with Indian banks as the returns will be high. If
that happens, then the entire purpose of the Gold Monetisation Scheme is negated.

Lower Fungibility: According to the Scheme, the banks can lend or sell this gold to
jewellers or other banks that are part of the Scheme, but gold is not as fungible as cash. A
cash deposit can be given to anybody and almost anybody can demand cash from the bank.
But not everybody would be demanding gold from bank like those who demand cash. Thus,
there is a non-zero chance of banks finding it difficult to match gold borrowers with gold
depositors. That means there could be a situation where banks dont have enough interest
accruing to them to cater to the interest they have to pay gold depositors. It is an unlikely
scenario, but is still worth thinking about.

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 SOVEREIGN GOLD BOND SCHEME

What is the sovereign gold bond scheme?

A bond is a debt instrument, which is a promise or a guarantee backed by the issuer of the debt. A
sovereign bond is a debt instrument which is backed by the government of a nation. A sovereign
gold bond therefore is also another debt instrument backed by the government of India. Investors
who purchase a sovereign gold bond will enjoy the same level of benefits returns as they would
receive from the purchase of gold. This is so because the 'return' from the sovereign gold bond
scheme has been tied to the returns from the actual gold. Moreover, the scheme will also ensure that
banks accept sovereign gold bonds as collateral for providing loans. Sovereign gold bonds will have
to be treated as an 'asset' just as actual gold is considered so for the purpose of granting a loan
amount against it. These bonds have also been made tradable at stock exchanges.

This scheme has been floated on the assumption that people buy gold as an investment and so if
they can be offered the same levels of benefits which they receive from gold, then they can be
weaned away from excessively purchasing gold. Upon achieving this, the government expects
India's CAD to be brought under rein.

What are the modalities of the scheme ?

The gold bonds will be issued by the Reserve Bank of India. Since these are Government of
India bonds, they are sovereign. The bonds will be denominated in grams of gold. Investors
can pay money and buy these bonds from intermediaries.

The bonds can be purchased only by resident individuals or entities. There will be a cap on
bonds that can be purchased. It could be 500 gms per person per year.

The government will decide the rate of interest. The rate will be calculated on the value of
the gold at the time of investment. It could be floating or fixed rate. The principal amount of
investment, which is denominated in grams of gold, will be redeemed at the price of gold at
that time. If the price of gold has fallen from the time that the investment was made, the
depositor will be given an option to roll over the bond for three or more years.

The bonds will be available both in demat and paper form. They will be issued in
denominations of 5, 10, 50, 100 gms of gold or other denominations.

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 The bonds will be issued and redeemed by banks, non-banking finance companies, National
Saving Certificate (NSC) agents for a fee.

Bonds would be allowed to be traded on exchanges to allow early exits for investors who
may so desire.

In Sovereign Gold Bonds, capital gains tax treatment will be the same as for physical gold
for an 'individual' investor. The department of revenue has said that they will consider
indexation benefit if bond is transferred before maturity and complete capital gains tax
exemption at the time of redemption.

Result so far
If the objective of the Sovereign Gold Bond Scheme (SGBS) was to wean away fresh purchases of
gold, the scheme has to be clearly called a disaster. India purchases around 1000t/annum and the
collection of Rs 250 crore under the SGBS accounts for just about 0.1% of the fresh purchases.

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 R E A L E S TAT E ( R E G U L AT I O N A N D D E V E L O P M E N T ) B I L L , 2 0 1 5

On December 9, 2015, the union cabinet led by Prime Minister Narendra Modi approved the Real
Estate (Regulation and Development) Bill, 2015, as reported by the Select Committee of Rajya
Sabha. This bill had been in the offing after past decade's booming construction sector had mostly
home-buyers at the receiving end. (The construction sector grew at an average annual growth rate of
7.7 per cent during the 11th plan (2007-2012). Home-buyers had expressed concerns regarding being
cheated of their life-savings by builders who flew away without delivering the promised
homes/apartments in addition to the perennial delay experienced by them for a majority of the
constructions.

In May earlier this year, the bill had been sent to a Select Committee of the Rajya Sabha. The union
cabinet has accepted all the suggestions made by the Select Committee. The Bill will now be put up
before both the houses of Parliament. These amendments aim at greater accountability, investor
protection, transparency and efficient working in the real estate sector. The bill is expected to boost
buyer's confidence and also help with faster grievance redressal.

What problems does the bill seek to address?

Information Asymmetry problem: The real estate market in India is an excellent example of
information asymmetry where one side has much more information than the other. In this case, the
real estate promoters and the real estate agents have much more information than the home-buyers.
Even getting something as basic as the going price of an apartment in a given area is very difficult.

The Rajya Sabha Select Committee on the Bill met real estate consumers and this is what the
committee reported: "These consumers were unanimous in their submission that they have no
means to know about the real status of the project for example whether all the approvals have been
obtained, who is holding the title of the land, what is the financing pattern of the project and what
has been the past record of the builder etc.? As a result, home-buyers were led to invest their
money without being able to avail any information about the project. In many cases, they were not
given what was promised to them and in almost all cases the project was delayed.

The Bill seeks to tackle this information asymmetry and the fact that the real estate sector does not
have any single regulator regulating it. The Bill talks about setting up of a real estate regulator (Real
Estate Regulatory Authority to be very precise) in every state and union territory.

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 Strong Builder-Civic Officials nexus and Rampant Construction: The real estate situation was
not as murky as it is in these times. Due to a real estate construction boom in the last 2 decades,
unscrupulous elements scrambled to construct buildings indiscriminately without much regard to
adhering to relevant laws such as building regulations or environmental laws. In majority of the
cases, 'Occupancy Certificates' are not obtained (An Occupancy Certificate is an important
document that is issued by the local governmental body, be it a BDO or a municipal authority. This
certificate is issued to the builder after the builder has demonstrated adequate compliance with
building regulations during the construction of the building. The local government body should
inspect the building to determine it as 'safe' for occupancy before issuing the occupancy certificate.
Non-adherence to building regulations can make living in such a building risky). In the absence of
such compliance and a race to build indiscriminately, the system broke down with endemic
corruption.

What does the bill require to be done?

Prior Registration
A real estate promoter who is desirous of building any property anywhere needs to register
the project with the real estate regulator before the promoter starts selling or advertising it.
The real estate promoter also has to specify a time-frame within which the project is sought
to be completed by the promoter.

Real estate agents will also need to register with the regulator. This is another good move
where not anyone and everyone will jump into become a real estate agent or a broker, as is
the case currently.

Greater Transparency
Over and above this an authenticated copy of the approvals and commencement certificate
from the competent authority also needs to be submitted. Other important details like land
title, the layout plan for the proposed project, the location details of the project, also need to
be submitted to the regulator.

The application to the regulator needs to be accompanied with details like the real estate
projects already launched by the real estate promoter in the past five years. It also needs to
be mentioned whether these projects have been completed or are still under development. If
the projects has been delayed, the reasons for the delay need to be mentioned.
After an approval is granted by the real estate regulator, the real estate promoter will have to

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 upload all these details on to the website of the real estate regulator. Any advertisement of
the project should have the precise link to the project details as well.

Larger ambit
Projects that are to be developed over land exceeding five hundred square metres or where
more than eight apartments are to be developed, need to be registered with the real estate
regulator of the state they are based in. In its earlier avatar, the bill mandated registration of
only those projects that were proposed to be constructed over an area of atleast 1000 sq. m.
This reduction in limit will bring more projects, including those of even small constructors,
under the ambit of the real estate law, thereby increasing greater protection to consumers.

Faster occupancy
The bill has also made it speedier for home-buyers to move into their new homes by laying
down a timeline of 2 months. The allottees (home-buyers) will now have to be moved in
their new homes within 2 months from the issuance of an occupancy certificate from the
local municipal authority.

Pro-consumer
At the time of booking and issuing an allotment letter to the buyer, the promoter needs to
make available to the buyer, the time schedule of completion of the project, including the
provisions for civic infrastructure like water, sanitation and electricity. Many real estate
companies over the years have sold homes without the basic amenities in place.

In some cases, housing societies have even lacked a water connection and have needed to
get water delivered through water tankers almost on a daily basis for years. The Real Estate
Bill hopes to correct this. It also hopes to correct the information asymmetry that prevails in
the sector up until now.

Speedier Grievance Redressal

The Bill also allows any real estate buyer to file a complaint against the real estate promoter
or real estate agent with the real estate regulator in case any violation of the provisions of
the Bill as and when it becomes an Act. Also a case has to be disposed off within 60 days as
opposed to the earlier 90 days.

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 Reducing Delivery Delays
A major problem with the sector has been a delay in the delivery of homes. One of the major
reasons this happens is because real estate companies announce a new project, raise money
and then use that money either to complete an earlier project or pay off debt.

This has led to a situation where many projects have been delayed endlessly given that the
trick of starting a new project and raising money doesn't seem to be working anymore. The
Bill seeks to correct this situation. The real estate promoter needs to maintain 50% or "such
higher percent, as notified by the appropriate government" of the amount raised from the
buyers of homes, in a separate bank account.

This money can be used only for the cost of construction and can be withdrawn by the real
estate promoter in proportion to the percentage of completion of the project. This is one of
the major clauses in the Bill and if implemented correctly can bring huge relief for the
buyers.

This clause has been diluted. In the original version of the Bill, the promoter needed to
maintain 70% of the amount raised in a separate bank account. The reason offered for this
dilution is that in many cases land prices form a major part of the project and maintaining
70% of the money raised in a separate bank account isn't the best way forward.

Better Clarity
Up until now the buyer had no clue about what exactly was the area that he was paying for.
The Bill defines the term carpet area exactly as: "carpet area" means the net usable floor
area of an apartment, excluding the area covered by the external walls, areas under services
shafts, exclusive balcony or verandah area and exclusive open terrace area, but includes the
area covered by the internal partition walls of the apartment." Again, if implemented well
this clause can bring huge relief to home buyers.

Prior Approval of Consumers

Currently the real estate promoters kept changing the plans as they keep building the project.
Once the Bill becomes an Act, this may no longer be possible. Any alterations to sanctioned
plans, layout plans and specifications of the buildings or the common areas within the
project will need written consent of at least two-thirds of the buyers other than the promoter,
who have bought apartments in the building.

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 This is another buyer friendly measure. This means that real estate promoters will have to
stop advertising all those swimming pools which are planned at the time a project is
launched but never gets built.

Penalty for Delays

Up until now buyers have had to pay a huge rate of interest every time they miss a payment
to the real estate promoter. But the promoters never pay or at least don't pay the same high
rate of interest, if there is any delay on their part. The Bill essentially calls for the same rate
of interest to be paid by the real estate promoter as well as the buyer in the eventuality of a
default on either side.

On paper, the Bill seems to be well thought out and takes care of all the issues that buyers have had
with real estate promoters in the years gone by. Nevertheless, the implementation of the Bill as and
when it becomes and Act, will be carried out at the state government level. And whether state
governments carry out the implementation in true letter and spirit remains to be seen.

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 M A K E I N I N D I A

The Make in India program was launched by Prime Minister Modi in September 2014 as part of a
wider set of nation-building initiatives. Devised to transform India into a global design and
manufacturing hub, Make in India was a timely response to a critical situation: by 2013, the much-
hyped emerging markets bubble had burst, and Indias growth rate had fallen to its lowest level in a
decade. The promise of the BRICS nations had faded, and India was tagged as one of the so-called
Fragile Five. Global investors debated whether the worlds largest democracy was a risk or an
opportunity. Indias 1.2 billion citizens questioned whether India was too big to succeed or too big
to fail. India was on the brink of severe economic failure.

Make in India has been launched by Prime Minister Modi against the backdrop of this crisis, and
quickly became a rallying cry for Indias innumerable stakeholders and partners. It is a powerful,
galvanising call to action to Indias citizens and business leaders, and an invitation to potential
partners and investors around the world. But, Make in India is much more than an inspiring slogan.
It represents a comprehensive and unprecedented overhaul of out-dated processes and policies.
Most importantly, it represents a complete change of the Governments mindset a shift from
issuing authority to business partner, in keeping with Prime Minister Modis tenet of Minimum
Government, Maximum Governance.

Manufacturing currently contributes just over 15% to the national GDP. The aim of this campaign is
to grow this to a 25% contribution as seen with other developing nations of Asia. In the process, the
government expects to generate jobs, attract much foreign direct investment, and transform India
into a manufacturing hub preferred around the globe. The logo for the Make In India campaign is a
an elegant lion, inspired by the Ashoka Chakra and designed to represent Indias success in all
spheres. The campaign was dedicated by the Prime Minister to the eminent patriot, philosopher and
political personality, Pandit Deen Dayal Upadhyaya who had been born on the same date in 1916.

Objective of Make in India

The major objective behind this initiative is to focus upon the heavy industries and public
enterprises while generating employment in India.
To accommodate the 300 million people who will join Indias workforce between 2010 and
2040, each year 10 million jobs are needed. The thrust on the manufacturing sector will
create about 100 million jobs by 2022.
It is aimed at making India a manufacturing hub and economic transformation in India while

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 eliminating the unnecessary laws and regulations, making bureaucratic processes easier and
shorter, and make government more transparent, responsive and accountable.
The ultimate objective is to make India a renowned manufacturing hub for key sectors.
Companies across the globe would be invited to make investment and set up factories and
expand their facilities in India and use Indias highly talented and skilled manpower to
create world class zero defect products. Mission is to manufacture in India and sell the
products worldwide.

Plan for Achieving 'Make in India' goal

How this would be achieved
Skill development programs would be launched especially for people from rural and poor
ones from urban cities. 25 key sectors have been short listed such as telecommunications,
power, automobile, tourism, pharmaceuticals and others.
Individuals aged 15-35 years would get high quality training in the following key areas such
as welding, masonries, painting, nursing to help elder people.
Skill certifications would be given to make training process, a standardised exercise.
Currently manufacturing in India suffers due to low productivity, rigid laws and poor
infrastructure resulting in low quality products getting manufactured.
Over 1000 training centres would be opened across India in the next 2 years
For companies setting up factories, Invest India unit is being set-up in the Ministry of
Commerce which would be available 24/7. The main focus of this department would be to
make doing business in India easy by making all the approval processes simpler and
resolving the issues in getting regulatory clearances within 48-72 hours so that clearances
are fast. To make this possible, special team would be available to answer all the queries
related to help foreign investors/companies.
An e-biz portal has been launched real time and is available 24/7. This portal facilitates
access to vital information regarding licenses and permissions that are required for the
registration and operation of a business in India. It also allows one to apply for licenses
online and to pay for obtaining governmental approvals.

Criticisms
From a theoretical perspective, Make in India will tend to violate the theory of comparative
advantage. If it is not economically feasible to manufacture a commodity in India, it is best
to import the same from a country which enjoys comparative advantage in its production.
International trade, after all, is welfare augmenting.

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 Reiterating the point made by Dr. Raghuram Rajan, India, unlike China, does not have the
time advantage as it undertakes a manufacturing spree. The essential question is - Is the
world ready for a second China?
Make in India will lead to an unsustainable focus on export promotion measures. One such
measure is artificially undervaluing the rupee. This will have devastating consequences for
the import bill.
A relative neglect of the world economic scenario may not augur well for Make in India.
With the US and Japan economies yet to recover from their economic crises and with the
EU floundering, one needs to be wary about the demand side of Make in India.
The theme of 'Make in India' with its focus on manufacturing lies in a direction opposite to
India's responsibility towards the global goal of working towards protecting the environment
and reversing the damage done to the climate through decades of large scale
industrialization of economies.
Restore broken trust between industry and government.
Environmental clearance has been a contentious issue for many projects. Land acquisition
for industries is a pre-requisite, thus bringing the eternal debate of development vs
displacement.
Skilled labour force is mandatory and it requires huge monetary support. Unlike in Korea,
Japan and Germany which have about 80% of its population skilled, only 12% of Indias
pop
It has been felt that the government does not walk its talk - labour reforms and policy
reforms which are fundamental for the success of the Make In India campaign have not yet
been implemented.
A number of layoffs in companies such as Nokia India cast long shadows over the
campaign. A number of technology based companies have not been enthused by the
campaign launch and have professed to continue getting their components manufactured by
China.
There are also concern among the foreign investors that Indian law does not go far enough
to protect their interest. To give an example, the government must address intellectual
property rights regulations and enforce the rule of law whenever it has been violated which
will protect foreign investors investing resources, technologies and business know-how in
India. Greater protection will ensure higher volume of FDI in industries (debatable),
infrastructure and pharmaceutical sectors.
Infrastructure, transportation infrastructure in particular, remains Indias Achilles heel and is

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 quite frankly inadequate to meet India needs. Conversely, India requires further FDI to
invest in its roads, railway capacity. The benefits of an improved transport connectivity and
capacity will bring the workforce closer to the cities, allow seamless movement of goods
and people and increase economic efficiency. Infrastructure is a vital component to
achieving Modis ambitions be it telecoms, retail, defence & security and transport.

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 E A S E O F D O I N G B U S I N E S S

The ease of doing business index is an index created by the World Bank Group. First published in
2003, the Ease of Doing Business Index is a World Bank project that looks at small-and medium-
sized firms in countries across the world and tracks how easy or difficult it is for them to operate.
Economies are ranked on their ease of doing business, from 1189. A high ease of doing business
ranking means the regulatory environment is more conducive to the starting and operation of a local
firm. The index factors in the following to arrive at a comparative ranking which provides a
snapshot of a countrys business friendliness.

regulatory procedures,
legal loopholes and
cost of doing business

For instance, India has jumped four places this year to end up at the 130th position from the 134th
place last year implying that some processes have eased up for business owners over the past year.

India moved 12 points up to rank 130 from 142nd position which was later revised to 134 after data
corrections among 189 countries in World Banks ease of doing business sector. World Bank earlier
had mentioned that India is a difficult place to do business and that the country needs various
reforms to improve its ranking in the global Doing Business Index. Now, when Indias ranking has
improved, World Bank pointed the following reasons that made the country fare so well in Ease of
Doing Business sector.
Certificate to start business operations: India eliminated the need for a certificate to start
a new business which applies both to Delhi and Mumbai.
Single application form for new companies: Companies need not go through a series of
paperwork to start a new business India, only a single application form is enough. The
process of streamlining operations to start a new business in the country has been made
more user-friendly and easy.
Online registrations: India replaced physical stamp to file taxes with the online version in
2010. Now, value added tax can be registered online which has made the process to start a
business easy. Even for tax identification numbers (TIN), the online version has been
helpful. India now ranks 157 in paying taxes sector.
Electricity connection: Getting an electricity connection has become easier and simpler in
India. The country has eliminated internal wiring inspection by the Electorate Inspectorate.

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 In Mumbai and Delhi, the time required to connect to electricity has been reduced and the
internal process and coordination has also been improved.
Interest rates: Lowering interest rates on larger loans is also one of the sectors where India
has improved largely which helps cut the cost of credit through a faster process. In Reserve
Bank of Indias bi-monthly policy, governor, Raghuram Rajan cut repo rate by 50 basis
points (brought down to 6.75%). This further led state-run banks such as State Bank of
India, IDBI Bank, Axis Bank, Andhra Bank and other banks to cut their lending rates which
have made loans cheaper in the country.

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 F I N A N C I A L I N C L U S I O N

Financial inclusion or inclusive financing is the process of bringing the hitherto unbanked sections
of society who have not been able to access formal banking services such as account maintaining
facilities as well as loan facility. Reasons as to why they may be unable to access such
facilities/services could range from the inability of the formal banking sector to reach the more
interior regions of a country to the higher KYC norms required for availing loan/account
maintenance facilities.

Q.1 Why is financial inclusion important from an Indian point of view?

Financial inclusion is important for India mainly because of these following reasons:-

To inculcate the habit to save money: The unbanked sections suffer from a high
vulnerability index. Vulnerability index is a measure that determines which
sections/groups/communities of society are more vulnerable to becoming poor or remaining
poor. The unbanked/underbanked sections are vulnerable to poverty since due to lack of
banking facilities, they are unable to save enough.

Providing formal credit avenues: The unbanked/underbanked sections have been denied
access to formal banking credit mainly due to, inter alia, absence of collateral or due to
absence of banks in interior regions of the country. This non-access implied that credit had
to be availed from informal channels such as money lenders and loan sharks that charge
usurious rates. Financial inclusion will ensure that the unbanked is able to access credit at
much cheaper interest rates.

Plug gaps in transfer of benefits and subsidy: Much of India's huge subsidy bills do not
reach the targeted members and beneficiaries of various benefit schemes operationalized by
the government. This is due to the meandering bureaucracy that acts as the middle man
between the government and the transferee. Financial inclusion, especially engineered
through technological innovations will ensure that benefits are directly transferred to the
mobile phones/e-wallets/bank accounts of beneficiaries and help reduce India's massive
subsidy bill which stood at Rs. 3600 billion.

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 #DoYouKnow?: It was because of bank nationalization in 1969 that Green Revolution in India
was a success during the 1970s. Green Revolution refers to a rapid increase in the production of
foodgrains in India. As you know, India has been an agrarian economy with a large amount of
population dependent on agriculture. Most of these dependents could not access credit facility
earlier. Green Revolution was made possible by making loans accessible to small and marginal
farmers. This was because lending to small and marginal farmers had become a priority for most
banks after they were nationalized.

W O R D P O W E R
Inter alia is a latin Collateral in banking is Usurious Rates in KYC Norms refer to a list
term that means any 'property' that is moneylending refer of norms set by the RBI
'among other things.' pledged with a bank. to the abnormally requiring banks to first
I study, inter alia, Collateral may be land, high rates set by a insist on certain documents
Economics means building or any other lender with an and identity proofs before
the same thing as 'I asset against the extortionary intent granting banking services
study Economics guarantee of which the instead of a support to a potential banking
among other bank grants a loan. intent. customer.
subjects'.

Q. What are some of the recent steps taken to improve financial inclusion in the economy?

PAYMENT BANKS: At last year's budget speech, the Finance Minister, Mr. Arun Jaitley
had mentioned a new initiative by RBI that would issue licenses for 'differentiated banks'.
Simply put, differentiated banks are intended to be financial institutions that differ from the
traditional banks. These differentiated banks will be different from traditional banks in terms
of the services that they shall offer. Payment banks are an important policy intervention
from the RBI, which expects these differentiated banks to bridge the connectivity gap
between the last-mile customer and a rural branch and therefore contribute to the goals of
financial inclusion.
In August, this year (2015), RBI gave 'in-principle' licenses to 11 entities to permit them for
starting payment bank operations. The guidelines for licensing of payment banks were
issued by the RBI last year in November 2014. Key features of the guidelines are:-

Objective and target groups: To further financial inclusion by providing (1) small
savings accounts and (2) remittance services to migrant labour workforce, low income

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 households, small businesses, other unorganised sector entities and other users.

W O R D P O W E R
Remittance is a sum of money sent In Principle nod/approval is Overdraft Facility is a
back by a worker/employee back to his given to licencees when the facility provided by
family. India receives $70 billion in permission is not finally/fully banks that permits an
foreign remittances. Payment banks are granted. The final permission will account holder to
important for migrant workers in India, be granted when the licencees withdraw more than what
as the latter shall be encouraged to demonstrate full compliance with they have in their
save more and transfer remittances to the requirements of the licence. account/s.
their families.

Entities eligible to apply for a license bank: (1)Existing nonbank Prepaid Payment
Instrument (PPI) issuers (Paytm); NBFCs, corporate Business Correspondents (BCs),
mobile telephone companies (Vodafone m-pesa, Airtel m-commerce), supermarket
chains, companies (Reliance, Cholamandalam), Individuals/Professionals (D.S.
Shanghvi, Vijay Shekhar Sharma), real sector cooperatives that are owned and controlled
by residents. (Names of some of the entities that were granted licences have been given
in brackets)
Acceptance of demand deposits: Will initially be restricted to holding a maximum
balance of Rs. 100,000 per individual customer.
Issuance of ATM/debit cards: Payments banks, however, cannot issue credit cards.
Payments and remittance services through various channels.
Business Correspondents (BCs) of Other Banks: Payment banks acting as BCs will
help bridge the last mile gap which exists between a bank's branch and regions that are
too interior or sparsely populated to be serviced by another branch. By relying on mobile
technology to make money deposits and transfer, the most remote customer would also
now become financially included.
Distribution of simple non-risk sharing simple financial products like mutual fund
units and insurance products.
Payment Banks cannot engage in lending to the customer.
Separate SLR Requirement: Payment Banks have a high SLR of 75% as opposed to
21.5% (as of 15 september, 2015. Please check once for updated rates before your
GD/WAT/PI) for other conventional banks eligible Government securities/treasury bills
with maturity up to one year and hold maximum 25 per cent in current and time/fixed

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 deposits with other scheduled commercial banks for operational purposes and liquidity
management.
W O R D P O W E R
Statutory Liquidity Ratio (SLR) is a Time Liabilities of a bank Demand Liabilities of a
percentage rate applied on a bank's time and refer to the payments bank refer to the
demand liabilities before the bank can lend to which a bank has to make payments which a bank
its customers. SLR determines the amount of to its customer after a has to pay on demand.
money a bank has to maintain as gold or park mutually agreed period of For e.g., the money kept
with the government in the form of government time. For e.g, a fixed in a savings/current
securities. If SLR is high, then a bank will be deposit of 3 years is a account is a demand
able to provide less credit to its customers and time liability since a liability as the bank is
if it is low, then more credit can be made customer cannot 'demand' bound to give money on
available. SLR, therefore is a monetary policy money any time, from the it being demanded by the
tool in the hands of the RBI. (Also see Cash customer's fixed deposit customer.
Reserve Ratio)

PM JAN DHAN YOJANA : Although 'financial inclusion' is not a term new to the Indian
banking sector, but it was made popular by the PMJDY, which was launched last year after
the Indian P.M announced the scheme during his maiden Independence Day speech. After its
launch, the scheme created a record by creating 11.5 Crore accounts in one day.
Features of the scheme:
A bank account to every unbanked person in the country. Additionally, the account
holder will be provided a debit card and a life insurance cover of Rs. 1 lakh.
Overdraft facility of Rs. 5000 for accounts that have been linked with an Aaadhar
number.
An accident insurance of Rs. 1 lakh that comes inbuilt with a Ru Pay debit card.
A Rs. 5,000 monthly remuneration to business correspondents who will provide a
link between the account holders and the bank.

Relaxation on know-your-customer (KYC) norms: KYC requirements for opening bank

accounts were relaxed for small accounts in August 2005, thereby simplifying procedures by
stipulating that introduction by an account holder who has been subjected to the full KYC
drill would suffice for opening such accounts. The banks were also permitted to take any
evidence as to the identity and address of the customer to their satisfaction. It has now been
further relaxed to include the letters issued by the Unique Identification Authority of India

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 containing details of name, address and Aadhaar number.

Engaging business correspondents (BCs):

In January 2006, RBI permitted banks to engage business facilitators (BFs) and BCs as
intermediaries for providing financial and banking services. The BC model allows banks to
provide doorstep delivery of services, especially cash in-cash out transactions, thus
addressing the last-mile problem. The list of eligible individuals and entities that can be
engaged as BCs is being widened from time to time. With effect from September 2010, for-
profit companies have also been allowed to be engaged as BCs. India map of Financial
Inclusion by MIX provides more insights on this. In the grass-root level, the Business
correspondents (BCs), with the help of Village Panchayat (local governing body), has set up
an ecosystem of Common Service Centres (CSC). CSC is a rural electronic hub with a
computer connected to the internet that provides e-governance or business services to rural
citizens.

Use of technology: Recognizing that technology has the potential to address the issues of
outreach and credit delivery in rural and remote areas in a viable manner, banks have been
advised to make effective use of information and communications technology (ICT), to
provide doorstep banking services through the BC model where the accounts can be
operated by even illiterate customers by using biometrics, thus ensuring the security of
transactions and enhancing confidence in the banking system.

Adoption of Electronic Bank Transfer (EBT): Banks have been advised to implement
EBT by leveraging ICT- based banking through BCs to transfer social benefits electronically
to the bank account of the beneficiary and deliver government benefits to the doorstep of the
beneficiary, thus reducing dependence on cash and lowering transaction costs.

General Credit Card Facility: With a view to helping the poor and the disadvantaged with
access to easy credit, banks have been asked to consider introduction of a general purpose
credit card facility up to `25,000 at their rural and semi-urban branches. The objective of the
scheme is to provide hassle-free credit to banks customers based on the assessment of cash
flow without insistence on security, purpose or end use of the credit. This is in the nature of
revolving credit entitling the holder to withdraw up to the limit sanctioned.

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 Simplified branch authorization: To address the issue of uneven spread of bank branches,
in December 2009, domestic scheduled commercial banks were permitted to freely open
branches in tier III to tier VI centres with a population of less than 50,000 under general
permission, subject to reporting.

Opening of branches in unbanked rural centres: To further step up the opening of

branches in rural areas so as to improve banking penetration and financial inclusion rapidly,
the need for the opening of more bricks and mortar branches, besides the use of BCs, was
felt. Accordingly, banks have been mandated in the April monetary policy statement to
allocate at least 25% of the total number of branches to be opened during a year to unbanked
rural centres.

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 I N D I A ' S F O R E I G N T R A D E

Why are India's exports declining?

International trade is subjected to forces that are external to national policy making. As a result
decline in foreign trade could be because of reasons extraneous to a nation. In the case of India's
exports for the year 2015, which have seen a decline in all the preceding 10 months (Jan-April) as
compared to the figures of a year ago, the causes are mainly attributable to global economic
uncertainty.

India's export is mainly composed of engineering goods, petroleum products, gems & jewellery, and
textile products. The value of exports of petroleum products has declined mainly because of the
falling prices of petroleum oil which has made export of petroleum products financially unviable for
some entities as the international prices recoverable from export of petroleum products does not
match the costs incurred in producing them. The fall in export of petroleum products is one of the
major drivers of declining exports of India as their exports have fallen by 60% on a year-on-year (y-
o-y) basis. Another major fall has been recorded in the export of engineering goods and iron ore.
This reduction is due to the present global economic uncertainty that has been engendered by the
crisis in China. The weakening of chinese economy has had a global impact on industrial growth
which has resulted in reduced consumption of engineering goods, base metals and commodities.
The consequent impact of the slowing chinese economy has also dispelled notions that India's
economy is decoupled from the chinese economy. As a result, exports of engineering goods have
fallen by 30% on a y-o-y basis (Comparison with respect to the same months of the previous year).
Exports of iron ore have fallen by 40% on a y-o-y basis. The devaluation of yuan is also part of the
reason for declining exports from India, since the reduced value of yuan has made chinese goods
more competitive. This is because more goods can be now purchased with one dollar when a
currency is devalued. As a result Indian exporters and manufacturers are finding it difficult to
compete on the price front.

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 S M A L L E R S TAT E S

Do smaller states enjoy better levels of development?

History of the shapes and sizes of Indian states
The idea of sub-national regions delineated according to a certain common parameter has been a
point of contemplation for pre-independence leaders. B.R. Ambedkar advocated the idea of 'one
language, many states', and supported the view that states must be organized on a linguistic basis.
This implied that several smaller states could be formed instead of one large states based on
language. For e.g., there could be 4-5 states consisting of people speaking marathi, instead of one
behemoth of a state. On the other hand, the Nehruvian view was against the organization of states
along linguistic lines as he believed that such reorganization could be perilous for the young nation
that has only newly emerged from the pangs of partition. Instead, he supported the view that states
must be large in size. Nehru also opined that inequalities existing in larger states could disappear
over time due to inter-change of the general population between regions of varying equality.
Although, quite sometime thereafter, in 1953, the States Reorganization Commission was formed,
consisting of Fazal Ali, K.M. Panikkar and H.N. Kunzru. The recommendations of the commission
were to an extent incorporated in the States Reorganization Act, 1956 which delineated boundaries
of states along linguistic lines. This however had not solved the problem of development for most
states even as regional imbalances in the growth level of states started to appear.

Trend towards smaller states

The advent of new millennium saw the creation of three new states -- Chhattisgarh, Uttarakhand
(originally named Uttaranchal) and Jharkhand, carved out from the parent states of Madhya
Pradesh, Uttar Pradesh and Bihar in 2000-2001. Last year saw the creation of Telangana after the
continued vociferous demands for the formation of a new state that mirrored the size of the
erstwhile state of Hyderabad. The demand for Telangana arose mainly due to the perceived
injustices inflicted upon the state by the Government of Andhra Pradesh, which was seen to be
favouring growth and development mainly of the coastal areas of A.P. It was alleged by supporters
of the Telangana movement that almost three-fourths of canal based irrigation water flows towards
the coastal regions. They also alleged that Telangana received a paltry allocation for educational and
developmental projects from the state budget. It was also claimed that only one-third of the
budgetary allocations are spared for telangana. A major bone of contention was the capital city of
Hyderabad, which is located in the region under the current state of Telangana. People of the
telangana movement resented the migration of employees and people from coastal areas towards
Hyderabad and partaking of the growth boom of the city, even as natives were deprived of most

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 opportunities.

The example of Telangana has presented a clear assertive view that larger states do suffer from an
imbalanced growth pattern. Creation of smaller states put the deprived regions in larger states under
spotlight and attention.

Renewed Demand for smaller states

Today, the demand for smaller states arises more on the principle of development than on the
principle of language or culture as was the case earlier. More recently, India has witnessed a
renewed assertion from 2 historically constituted regions for the creation of smaller states (Regions
that have had a pre-independence or pre-colonial identity as an identifiable region or a princely
state). Significantly, some of these regions have enormous populations comparable to countries of
the global north in terms of territory and population. The regions include Gorkhaland and Kamtapur
in West Bengal; Coorg in Karnataka; Mithilanchal in Bihar; Saurashtra in Gujarat; Vidarbha in
Maharashtra; Harit Pradesh, Purvanchal, Braj Pradesh and Awadh Pradesh in Uttar Pradesh; Maru
Pradesh in Rajasthan; Bhojpur comprising areas of eastern Uttar Pradesh, Bihar and Chhattisgarh;
Bundelkhand comprising areas of Uttar Pradesh and Madhya Pradesh, a greater Cooch Behar state
out of the parts of Assam and West Bengal.

Reasons for demand for smaller states

Electoral Politics: Most regional political parties and even national political parties, play to
the gallery during times of elections. Most political parties tweak their electoral campaigns
around regional concerns and often base their propaganda along the narrow lines of caste or
regions. The populace is often taken for an emotional ride along the plank of development
vis-a-vis deprivation. This tailoring of campaigns according to specific regional necessities
further dissolves a common identity into highly regionalized identities.
Failure of the Planning model: 60 years of past governance experience has made it quite
clear that the planning commission has failed in its duty to ensure adequate and equitable
regional development. The adoption and consequent failure of the 'freight equalization
policy' that ran from 1951 to 1993 is a strong evidence of the inability of a centralized power
structure to cater to the developmental needs of all the regions.
Competitive Federalism: The implementation of New Economic Policy opened up the
economy to a slew of foreign investments. This led to a rush among the states to bring
investments to their states. States along the coastal regions became natural destinations for
most of these investments because of close proximity to international ports and sea routes.

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 This had the effect of some states receiving a better share of the development pie owing to
their favourable geographical locations or terrains. A spirit of competitive federalism
replaced the spurt of co-operative federalism in the process resulting in few states enjoying
the benefits of NEP.
Poor Development of Sub-Regions within states: The growth trajectory of larger states have
left the hinter regions largely untouched. As a result the peripheral sub-regions of relatively
developed states such as for e.g., Vidarbha & Marathwada in the state of Maharashtra,
Saurashtra in Gujarat, Bodoland in Assam, and Telangana in Andhra Pradesh lag behind in
terms of development, when compared to relatively more developed regions of the same
state.

Arguments for smaller states:

Small & Beautiful: First, the argument that small is beautiful does find resonance in the
developmental experiences of the newly created smaller states. During the tenth five-year
plan period, Chhattisgarh averaged 9.2 percent growth annually compared with 4.3 percent
by Madhya Pradesh, Jharkhand averaged 11.1 per cent annually compared with 4.7 percent
by Bihar, and Uttarakhand achieved 8.8 per cent growth annually compared with 4.6 percent
by Uttar Pradesh.
Better Governance: Smaller and compact geographical entities tend to ensure that there is
better democratic governance, as there is greater awareness among the policy makers about
local needs. Smaller units with culturally and linguistically homogenous populations also
allow for better management, implementation and allocation of public resources. It also
allows for easy communicability, enabling marginal social groups to articulate and raise
their voices.
Better Representation: Smaller states provide gains for the electorates in terms of better
representation of their preferences in the composition of the government. In a patronage-
based democracy like in India, the amount of the transfer of state resources/largesse a
constituency/region gets depends crucially on whether the local representative belongs to the
ruling party. Having representatives from smaller regions also helps in better vocalization of
local concerns, that otherwise may get overshadowed by the concerns of larger regions, in
the absence of creation of smaller states.

Arguments against smaller states: Advocates against smaller states mostly suggest decentralization
and devolution of power to local bodies as a means of addressing lopsided growth and development,
instead of creation of smaller states for better governance. Some arguments against formation of

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 smaller states are:
Administrative Inefficiency: If the basic issue of governance is administrative inefficiency,
then there is no guarantee that creation of smaller states may be for the better as even the
new state may continue to be plagued by such administrative inefficiencies. The argument
that recognization of a new identity works as a catalyst for many people to contribute with a
renewed vigour is highly subjective.
Lack of a criteria on 'how small is small': There exists no set of principles that could
effectively identify a particular territorial size as small enough to be financially and
economically viable. Moreover, in the day and age of modern communication systems, even
far-off regions can be effectively governed using regionally appointed administrative units.
Loss of economies of scale: Smaller states may also not be able to enjoy the amount and
quantity of tax collections that larger states enjoy. As a result of this, smaller states may face
difficulties in implementing massive state funded projects owing to smaller tax collections.
This may end up forcing states to continue relying on the centre and centrally sponsored
schemes, which in the long run works against the idea of federalism.
Huge costs associated with creation of administrative units: Creation of a new smaller state
entails a toll on natural progression of growth and development, since a new state demands
its own assembly, its own departments, its own administrative units, division of civil
services, taxes and decisions relating to infrastructure, all of which can result into huge
delays and economic loss for the region. Experience has suggested that creation of a new
smaller state slows down development in the region for atleast the initial ten years.
Secessionist tendencies: Creation of newer states based on cultural identity may foster
secessionist tendencies. However, this is effectively stemmed by the observance of
recognized principles for creation of smaller states. These principles do not permit creation
of a state based on secessionist or communal lines. Barring the state of Punjab, no other state
has displayed secessionist tendencies after its creation.
Corruption: It is sometimes argued that creation of new states does nothing but create a new
regional elite that appropriates gains and promotes private profiteering and self-interest.
While this may be true, it cannot be a strong argument against creation of smaller states, for
the simple reason that corruption exists inspite of smaller states and is not attributable to that
reason alone.

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 P O V E R T Y A N D D E V E L O P M E N T

Removal of extreme poverty has been one of the major and prime goals of UN member states, who
have, under the auspices of UN's sustainable development goals, pledged to remove extreme
poverty by 2030. Majority of the world's poor are found in south asia and sub-saharan africa.
Although poverty levels have almost halved ever since 1990, one in seven people is still poor. In
absolute terms, 834 million people across the globe are poor (when daily consumption rate is taken
to be $1.25), whereas the number is 984 million (when daily consumption rate is taken to be $1.90).
On the occassion of the 'International Day for recognizing the rights of the Poor' which is observed
throughout the world on October 17 every year, the world bank revised the daily consumption level
(in PPP terms) to $1.90, which resulted in the increase of the poor population by 148 million across
the globe, with the majority of the increase happening in east asian countries.

How is poverty estimated?

Despite the involvement of scientific academics, chief policy makers and expert scholars
researching at premier world institutions, poverty estimation continues to be a highly arbitrary
exercise. However, over a period of time, several measures have been developed to estimate
poverty. The most popular method among several others is quantifying poverty through the
determination of a poverty line which is further based on a consumption metric. Historically, the
poverty line was decided upon by the Planning Commission. After its dismantling and the
consequent replacement by NITI Aayog, it is not clear if the present dispensation would be
amenable to selecting a poverty line, although a taskforce on poverty elimination did get constituted
under the chairmanship of NITI chief Arvind Panagriya. The states have been further directed to set
up state specific taskforces for the elimination of poverty.

Absolute Metric based on consumption:

a) Food-Energy Intake method: The Lakdawaala committee (1989-1993), tasked with the
objective of determining a poverty line first suggested that poverty line should be based on the
minimum calorie intake of an average adult. In rural areas, where the work load by adults is more
physical in nature, the minimum calorie intake was quantified at 2400 calories, whereas for the
urban areas, it was quantified at 2100 calories. Thus, according to this metric, anyone consuming
less than 2400 calories in rural areas or less than 2100 calories in urban areas would be considered
to be living in poverty.

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 b) Monthly expenditure on calorie intake method: The Tendulkar committee (2005-2009) was
constituted by the Planning Commission under the governance of UPA-II. The Tendulkar committee
calculated the expenditure on calories to be at Rs 816 per person per month in rural areas (Rs. 27
per day) and Rs. 972 per person per month in urban areas (Rs. 32 per day). This implied that a
person spending more than Rs. 27 per day in a rural area and Rs. 32 per day in an urban area was
not to be considered poor. Although the Tendulkar committee's rates were based upon the calorific
intake method, the monthly expenditure amount for a person in a rural area was lower than that of a
person in an urban area chiefly for the reason that commodities are costlier in urban areas.

c) Monthly expenditure on basic needs method: After the suggestions proffered by the Tendulkar
committee raised a hue and cry over the abysmally low levels of poverty line estimated in the
committee's report, another committee headed by C. Rangarajan was appointed with the objective
of evaluating the report submitted by the previous committee. The Rangarajan committee report
trashed the assessment of poverty levels by the Tendulkar Committee and proffered its own
estimation of poverty line. According to the report, a family of five spending more than Rs. 4860 in
a rural area and more than Rs. 7035 in an urban area was not to be considered poor. Rangarajan's
methodology is superior since it took into consideration not just calories, but also proteins and fat.
In addition, the non-food items that fell under the ambit of basic needs were also taken into
consideration such as 'education, health, transport and conveyance and rent'. The number for urban
areas is found to be much higher because of the inclusion of non-food items which are costlier in
urban areas. Rangarajan also revised down the calorie intake requirement from 2400 to 2155 in
rural areas and from 2100 to 2090 in urban areas for the simple reason that improvement in basic
infrastructure such as transport and electricity has reduced the reliance of the rural population on
physical labour. However, Rangarajan came under media fire and popular criticism for not revising
the poverty levels much higher than that recommended by Tendulkar. If one takes the figures given
in the Rangarajan committee and breaks them down to a per individual per day basis, then the daily
expenditure amount comes to Rs. 47 for an urban dweller and Rs. 32 for a rural dweller. However,
if taken on purchasing power parity basis, then daily expenditure estimated by Rangarajan comes to
2.44 USD, which is significantly higher than even World Bank's recently revised figure of 1.90
USD. Rangarajan never suggested Rs. 47 or Rs. 32 as the figures in its committee report since its
rationale was that people often do not live individually but as part of families, where costs can be
reduced/shared between family members. (1 LPG burning for 5 family members is cost effective
than 5 LPGs burning for 5 individuals).

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 Relative Metric:
This metric does not take into consideration expenditure levels in absolute terms, neither does it
focus on calorific intake at an individual level. Instead this metric estimates poverty to be a fixed
proportion (usually bottom) of the total population which is below an average measure. For e.g., If
the average income, or average expenditure or any other average measure of a country is given, at
say, 1000 USD, then relative metric would determine poor people having less than a fixed
percentage of that average measure, say, 20% of the average income, i.e., 1000 USD, implying
thereby anyone with an average income of less than 200 USD will be deemed to be poor. This
metric is followed in developed economies where poverty and deprivation is not as palpable/visible
as it is in the middle income and lower income countries. The Rangarajan committee also suggested
a relative metric in its report. The committee suggested that at any given time, 35% of the rural
population and 25% of the urban population should always be considered to be poor.

Why has estimation of poverty line assumed such importance?

Knowing the extent of poverty can help the institutions of governance understand how well the
economy is functioning in terms of providing a certain minimum basic standard of living to its
citizens. Estimation of poverty line is also important from the perspectives of policy making and
implementation of social programmes. Many programmes initiated by the governments are created
for helping people move out of extreme poverty. As such, it becomes crucial for the governments to
be clear about the levels of poverty prevalent in a territory. Clear statistics help in accurate
determination of the size of the programs to be implemented and also in how successfully a
programme has been implemented across the target group. Accurate levels of poverty also help
determine if the nation should be considered to be a lower income or a middle income nation for the
purpose of implementation of programmes by international organizations such as World Bank and
UN. Reduction in poverty numbers can also indicate the efficiency of a national executive.

According to the Tendulkar formula, the number of poor people in 2009-2010 was 29.8 per cent
which declined to 21.9 percent in 2011-2012, whereas for the same period, Rangarajan suggested
that the percentage population figures stood at 38.2 percent ('09-10) and 29.5 percent ('11-12). Thus,
if we go by the Rangarajan formula, one third of the population of India is currently poor.

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 R O L E O F R E G I O N A L P O L I T I C A L PA RT I E S I N I N D I A

REGIONAL PARTIES: Which types of parties are classified as regional parties?

As such there is no official term in the dictionary as a 'regional party'. Election Commission of India
(ECI) recognises three categories of parties national parties, state parties and registered
unrecognised parties. As per its criteria a political party will be recognised as a State party if (a) its
candidates have secured at least six per cent of total valid votes and it has returned at least two
members to the Legislative Assembly; or (b) if it wins at least three per cent of the total number of
seats in the Assembly. A national party is recognised if (a) the candidates set up by it in any four or
more states at the election to the Lok Sabha or to the Assembly concerned have secured at least six
per cent of total votes and it has returned at least four members to the Lok Sabha from any state or
states; or (b) its candidates have been elected to the Lok Sabha from at least two per cent of the total
seats (i.e. 11 seats in the House having 543 members), and these candidates have been elected from
at least three different states.

Rise of Regional Parties: Although regional parties had come into existence in the pre-independence
years, prominent among them being Shiromani Akali Dal that was founded in 1920 and J&K
National Conference that was founded in 1932, regional parties became a force to reckon with only
since the 1990s. The rise of most regional parties is because of two major reasons:-
inadequate representation of regional interests at the central level, which can be said to be a
major reason behind the imbalanced growth patterns in the country. Leaders of most
regional parties have built on and represented deeprooted social and regional aspirations
that had not found adequate space in mainstream polity. Regional parties became a conduit
through which people in different parts of the country could voice their aspirations to the
central government.
Inadequate national representation of various socially and economically backward groups
such as Dalits and OBCs. Leaders of some regional parties have capitalized on specific
social and caste identities of the people of a particular region in order to drive national
politics.
Formation of regional parties was also a way to counter the hold of congress over political
power and its almost complete national monopoly on decision making for the entire nation.
The high point for congress was reached under the leadership of Rajiv Gandhi, when
congress swept the 7th lok sabha elections (1985) with a record tally of 401 seats. Thereafter
national politics has seen an irreversible rise and emergence of regional political party
leaders.

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 Problems with regional political parties: Although regional political parties came up on the plank of
increasing regional representation, history has been witness to continued decadence and heightened
levels of corruption by political parties. Some of the problems associated with regional political
parties are:-
Regional parties have become personal fiefdoms of single families that control the party and
the state. Therefore we see that the Samajwadi Party (SP) in UP, Shiromani Akali Dal (SAD)
in Punjab, Dravida Munnetra Kazhagam (DMK) in Tamil Nadu, Telugu Desam Party (TDP)
in Andhra Pradesh, Telangana Rashtra Samiti Party (TDP) in telangana and several others
have comfortably held control over their respective states for years. The baton continues to
be passed from father to son thus killing the very promise of democratisation of national
politics.
Practice of Crony Capitalism: The biggest disillusionment with regional political parties
has been with the emergence of what is understood as crony capitalism. The regional
players have been its biggest practitioners. The S.P. and the BSP have allegedly
hedged out lucrative projects to their favourite corporate groups. It is common
knowledge that the Sahara group landed the largest number of contracts under the last S.P.
government, and so did the Jaypee group during the last BSP regime.
Private Profiteering and Self-Interest: The main rationale for the existence of regional
political parties was to play a greater role in representing regional interests at the national
level, by advocating for inclusion of regional demands within the bounds of national
policies. However, this promised role has given way to advocating of self-interest. In many
cases, such as in the case of the DMK and the SAD, the families that run the party have
entered big businesses. DMK politics has successfully manifested this practice through what
political analysts have termed the Thirumangalam model. From industries to cable TV
networks, from news channels to educational institutions, from transport companies to
lucrative contracts, all have gone to people who enjoy political privileges in these States.
These parties have successfully managed to create a potent mixture where big business and
sectarian politics not just coexist but also complement each other.
Self-defeating ad-hocism and absence of proper planning: Regional political parties have
also been found to indulge in impulsive and momentary reactions without understanding the
gravitas involved. Often in the race to be the first to represent regional interests, these
parties sacrifice cohesive policies. For e.g., the Trinamool Congress (TC) party of West
Bengal has been severely criticised for displaying impulsive political action rather than
coming out with a political strategy. An example is the way it went about bringing a no

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 confidence motion against the Union government on the issue of FDI. Without consulting
other parties, it unilaterally moved the motion, failing to register a minimum support of 50
members.

Conclusion: Thus, even though the rise of regional parties was expected to bring greater
representation of local concerns and economic development and impart better socio-economic
justice to the hitherto marginalized sections of our population, we see that the movement of
regionalization of politics has devolved into a private profiteering machinery that thrives on
promotion of self-interest at the cost of growth and development. While the emergence of sub-
national parties has had the effect of bringing recognition to regional, cultural and marginalized
communities, it has translated into little change in the lives and regions of people for which these
parties arose.

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 W T O ' S M U LT I L AT E R A L I S M v. R E G I O N A L I S M

Multilateralism is represented by the efforts on worldwide liberalization of international relations,

which started in the field of trade in goods when General Agreement on Tariffs and Trade (GATT)
was signed, and developed into broader fields of trade in services, investment, agricultural products,
public procurement, and intellectual property rights with its more sophisticated successor World
Trade Organization. Collectively, the agreements such as GATT, GATS (General Agreement on
Trade in Services), TRIPS (Trade Related aspects of Intellectual Property Rights) are referred to as
the 'Multilateral Trade Agreements', since they comprise the substantive trade policy obligations
which all the members of the WTO have accepted. That is, all agreements form part of a single
package that was accepted by the members as a whole. Multilateralism is marked by the very
important principle of 'Most Favoured Nation' (MFN) which is essentially an international status
accorded to one nation by another. The principle implies that a country that has been accorded the
MFN status must receive equal trade advantages or disadvantages as the most favoured nation of
the country granting such a status. For e.g., if India imposes 4% customs duty on machinery imports
from Germany, and if India grants MFN status to Pakistan, then India cannot impose any customs
duty higher than 4% on machinery imports coming from Pakistan. WTO's principles require
member states to accord MFN status to each other in order to remove restrictions and barriers on
international trade.

On the other hand regionalism refers to the tendency of countries in a regional economic zone to
offer each other more favourable treatment in trade matters than to countries in the rest of the world
(including WTO members). This is contrary to WTO's MFN principle, since the MFN status is not
accorded to every other country which is a member of the WTO, but only to those countries which
are members of a regional grouping. However, it must be noted that regional trading blocs existed
much before the signing of the WTO. Some have succeeded and formed strong economic voices
such as NAFTA (North American Free Trade Agreement) and the EU-CEE (European Union
Central & Eastern Europe), whereas some RTAs have failed such as CACM (Central American
Common Market) and the Andean Pact.

By now, most of the world has no major expectations of World Trade Organisation (WTO)
Ministerial Conferences. They have become regular exercises where various blocs haggle over
issues important to them without being willing to make any major concession to bring the
discussions to a close. Even as these multilateral trade negotiations flounder, free trade
agreements (FTAs) are flourishing, especially across Asia. Over the last four years, Asian

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 countries have signed over a dozen FTAs. Close to another two dozen are either currently being
negotiated or under study. The inability of multilateral forums, like WTO, to rapidly and
decisively bring about consensus is certainly one of the key factors contributing to this
phenomenon.

In this 'multipolar' world of multiple and complex interests, uneven development, unequal trading
power and divergent views on the scope of multilateralism in the future, are hard realities.
Imbalances, instability and the need for protecting domestic markets increases as countries deepen
their integration. Against this complicated background, regionalism has come to offer Governments,
of both developed and developing countries, an attractive strategy to resolve issues that would be
more difficult to resolve in the wider multilateral system.

Various regional rivalries also accentuate the tendency for countries to get into RTAs/FTAs.
The geo political and geoeconomic compulsions are driving many such agreements today.
The China vs Japan rivalry and their efforts to form various alliances is a case in point.
Similarly ASEAN has also targeted countries like India and New Zealand to enhance ASEANs
bargaining position within an integrated East Asia and also countering the growing economic might
of China. Indias haste in signing the FTA with ASEAN was as much a result of economic
imperatives resulting from similar arrangements of ASEAN with China. So much so, that India
agreed to leave out services from the purview of the discussions, to ensure that the agreement goes
through. (Even though that issue is very important to India and it is currently negotiating vigorously
to sign an agreement on Services on similar lines)

Another important point is that countries can be selective about who they want to get into an RTA
with. If India has concerns about the booming agricultural sector of Brazil, it would either leave out
Brazil as a partner in FTAs or leave out primary goods from such agreements. Therefore
RTAs/FTAs afford a flexibility and maneouvrability that WTO's multilateralism may seldom offer,
with the latter being accused of always ending up favouring the interests of the developed western
world at the costs of the peculiar concerns of the developing and under-developed world. Despite
this FTA signing frenzy that has gripped Asia, some experts have pointed out that there is cause
for concern. In some cases the external reform process is outpacing internal reforms, thereby
endangering local manufacturers. Purely bilateral negotiations also run the risk of excluding smaller
countries with less bargaining power but who do have a voice in a multilateral forum. Also,
the skewed trade structure resulting from such agreements leads to flouting of rules and
undue profiteering. For instance, Indian textile manufacturers can fraudulently take advantage of

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 Bangladeshs FTA with a third country bypassing the rules of origin embedded in the
agreement. This would result in losses to the Bangladeshi manufacturers. Therefore FTAs may
prove to be ineffective against 'big brother' countries, especially if such FTAs are between smaller
countries.

Multilateralism is not dead. It certainly has its place in the world order but unless the mechanisms
and institutions that enforce it can keep up with the rapidly changing economic needs and priorities
of the global economy, these organisations will soon be reduced to mere anachronisms.

What is Preferential Trading Arrangement?

Preferential Trading Arrangement means a system of discriminatory tariffs designed to benefit Less
Developed Countries (LDCs). While some PTAs originate as political expressions of desired closer
economic relations, they can act as a catalyst to eventual free trade among the participants. PTAs
are also employed to help developing countries obtain access to a larger export market, and
therefore gain greater economic development. For e.g., While Kenya may impose an import
restriction on American goods at 10%, it can lower the import restriction on goods arriving from
LDCs such as Uganda in order to benefit Ugandan exports.

Around 50 per cent of world trade is currently carried out under preferential trade arrangements.
Preferential trade is growing at a faster rate than global trade - between 1993 and 1997, preferential
trade grew at 66 per cent annually while global trade grew at 34 per cent annually.

How many types of Regional Trade Agreements are there?

According to their level of integration amongst participating nation-states, RTAs can be described
as the following categories.

First, at the most basic level, Preferential Trading Agreements (PTAs) lower trade barriers
among members. Such preferential trade is usually limited to the portion of actual trade
flows from LDCs, and is often non-reciprocal. An example of such an agreement is the
Papua New Guinea - Australia Trade and Commercial Relations Agreement (PATCRA II)
that has been in effect since 1977.

Second, a Free Trade Agreement/Area (FTA) is a reciprocal arrangement whereby trade

barriers (usually tariffs) between participating nations are abolished. However, each member
determines its external trade policies against non-FTA members independently. Most

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 commonly, barriers to trade are reduced over time, but in most cases, not all trade is
completely free from national barriers. A prominent example of a FTA is the North
American Free Trade Agreement (NAFTA).

The third level of economic integration is the Customs Union. In a Customs Union, trade
barriers among members are eliminated. Also, the participating nations adopt a common
external trade policy (e.g. common external tariff regime or CET). A Customs Union is
equivalent to an FTA plus a common external trade policy. The Customs Union of the
Southern Cone of South America MERCOSUR - represents such an arrangement.
Argentina, Bolivia, Brazil, Paraguay, Uruguay and Venezuela are its full time members.
European Union was a customs union from 1968 to 1993, when it became an Economic
Union after the signing of the Maastricht Treaty.

The fourth level of economic integration is the Common Market. In a Common Market,
countries remove all barriers to movement of both goods and factors, and retain the common
external trade policy. It is equivalent to a customs union plus free mobility of factors. One
example of Common Market is the Common Market for Eastern and Southern Africa
(COMESA).

The fifth level of economic integration is the Economic Union. In an Economic Union,
besides the free goods and factor movements, member countries also adopt common
macroeconomic policies. One example of Economic Union is the European Union (EU).

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 D E M O G R A P H I C D I V I D E N D

What is demographic dividend?

The freeing up of resources for a country's economic development and the future prosperity of its
populace as it switches from an agrarian to an industrial economy is reffered to as the 'demographic
dividend'. In the initial stages of this transition, fertility rates fall, leading to a labor force that is
temporarily growing faster than the population dependent on it. All else being equal, per capita
income grows more rapidly during this time too. Industrial countries have already seen periods of
demographic transition and reaped their demographic dividends with some countries even facing
the post-demographic dividend period, i.e., a period of falling labour force and growing dependent
population. China saw its demographic dividend in the period 1980s and 1990s and since then has
tapered off in the present decade with a growing elderly population. In contrast India is a young
nation. We have 605 million people below the age of 25, while in the age group 10-19, poised for
higher education, we have 225 million. This means that for the next 40 years we would have a
youthful, dynamic and productive workforce when the rest of the world, including China, is aging.
India's young constitute almost 63% of the total national population. The International Labour
Organisation (ILO) has predicted that by 2020, India will have 116 million workers in the work-
starting age bracket of 20 to 24 years, as compared to China's 94 million.

It is further estimated that the average age in India by the year 2020 will be 29 years as against 40
years in the USA, 46 years in Europe and 47 years in Japan. In fact, in 20 years the labour force in
the industrialised world will decline by 4%, in China by 5%, while in India it will increase by 32%.
And the IMF, in 2011, reported that India's demographic dividend has the potential to add 2
percentage points per annum to India's per capita GDP growth over the next two decades

How does the demographic dividend work?

The main reason behind working of the demographic dividend is 'family planning'. Due to better
literacy rates, lifestyle changes, modern living and availability of better contraceptive methods,
families produce lesser and lesser kids (lower fertility). This phenomena occurs alongside the
phenomena of rising incomes of parents who have lesser mouths to feed as there are very less
number of persons dependent upon earning members of the family (freeing up of resources). This
leads to a higher savings rate, which directly translates into better investment and capital formation
rate in the economy through the mechanism of banking. While at the same time, presence of a large
and young population ensures adequate availability of labour to the newly formed investment
projects. Reduction of fertility allows women to lead more healthier lives and also eliminates many

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 economic pressures on family income. This results in families spending more on goods and
commodities thus increasing total demand in the economy. This further leads to emergence of more
suppliers and producers to fulfill that demand. This leads to more jobs being created, more income
being generated and further higher savings, thus leading to an economic boom. This dividend period
is quite long, lasting five decades or more, but eventually a time is reached when lower fertility
reduces the number of labour force addition to the economy of a country. At the same time, the huge
young population grows older at the end of the period of demographic dividend and therefore adds
to the number of dependent persons. This tapers off the boom in the economy since rising number
of dependents and falling numbers of earning members reduces saving and consequently
investments and capital formation as well.

Can India harness its Demographic Dividend?

India needs to create 1 million jobs every month to be able to provide employment for the
population entering working age group and for those moving out of agriculture. Further, the job
creation has to be specific to the needs to Indian population. As young people and agriculturalists
enter the workforce, they would need low and medium skilled jobs. Indias relatively undeveloped
manufacturing sector has to create the jobs for this group. The employment intensity in service
sector is anyways less as compared to manufacturing sector. The manufacturing sector has to thus
be the driver of job creation. This is because the services sector employs lesser number of
employees to produce the same money worth of output than the manufacturing sector. China was
able to reap its demographic dividend because it laid stress on the manufacturing sector which
absorbed large chunks of rural populations.

Poor level of skill development in India's workforce

With its large numbers of working age population, India has the potential not only to meet its own
manpower needs but it can also cater to the manpower demand of other nations. Despite a vast
majority of population in the productive age group, India has not been able to realise its
demographic dividend since a good amount of working population are not employable and most
industries are currently struggling with scarcity of skilled workforce. As Indian economy evolves
from being commodity-centric to knowledge-centric, growth becomes increasingly dependent on
the availability of skills. However, skills have to be marketable and relevant, resulting in economic
value, otherwise there may be abundance of skilled people with sub-optimal employment, resulting
in the skilled unemployed conundrum.

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 The sorry state of availability of skilled manpower can be largely attributed to the Indian education
system, which does not focus on training students in employable skills. Indian education systems
focus has been more on theory and less on practical training, which helps in developing employable
skills. Equally important is upgradation of skills. Unless the workforce upgrades its skill-sets, it is
at the risk of getting rendered irrelevant in the new-age economy.oday, a large section of Indias
labour force carries out tasks with outdated skills.

India's literacy rate, according to Census 2011, is around 74 per cent; the level is well below
the world average literacy rate of 84%. Further, the 2011 census indicated a 20012011
decadal literacy growth of 9.2%, which is slower than the growth seen during the previous
decade. There is a wide gender disparity in the literacy rate in India: effective literacy rates
(age 7 and above) in 2011 were 82.14% for men and 65.46% for women.
Much of what Indian students are taught is procedural or rote-based. Students are poorly
prepared in practical competencies such as measurement, problem-solving, and writing of
meaningful and grammatically-correct sentences. One-quarter to one-third of those who
graduate from primary school lack basic numeracy and literacy skills that would enable
them to further their education.
There are huge concerns with respect to quality of primary education in schools. ASER 2014
finds that in Std III, only a fourth of all children can read a Std II text fluently; 25.3% of Std
III children could do a two digit subtraction.
The proportion of all children in Class 5 who can read a Class 2 level text has declined by
almost 15 percentage points since 2005 and stands at just 47%. This means more than half
of the student population faces difficulty in reading the most basic texts.
The situation in higher education is even more problematic for India's participation in the
global knowledge economy. Firstly, the gross enrolments rate is below 20%.
The overall quality of the higher education system is well below global standards. High-tech
employers complain that a large majority of engineering and other graduates are
unemployable. The large high-tech firms such as IBM, Infosys and Wipro have set up
their own in-house academies to prepare employees for productive work.
The quality of vocational training is weak too. In last decade, the number of private ITIs
increased from 2,000 to about 10,000 in 2013, but there are concerns about the quality of its
trainees.
Further, Only 16 per cent of Indian firms carry out any in-firm training themselves, as
against 80 per cent of Chinese firms. Most of the 16 per cent are large firms; most of the
firms are micro, small and medium size and do little training that is informal or no training.

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 N AT I O N A L S K I L L D E V E L O P M E N T M I S S I O N

Based on data from the 68th Round of NSSO, it is estimated that only 4.69 percent of Indias total
workforce has undergone formal skill training, compared with 52 percent in the USA, 68 percent in
the UK, 75 percent in Germany, 80 percent in Japan and 96 percent in South Korea.

Despite efforts to hasten and scale up skilling through the creation of the National Skill
Development Fund (NSDF) in 2009, the launch of the NSDC in the same year, and creation of the
NSDA in 2013, progress to date has been sporadic. India continues to face a skilling challenge of
vast proportions. Based on the Census 2011 and NSSO (68th Round) data, it is estimated that 104
million fresh entrants to the workforce will require skill training by 2022, and 298 million of the
existing workforce will require additional skill training over the same time period.

The government has been emphasising on providing vocational education and training to the
workforce. It formulated the National Policy on Skill Development and has set a target for
providing skills to 500 million people by 2022. Providing a mechanism to acquire skills,
empowering the disadvantaged sections of the society with skilling opportunities, and creating a
skill growth programme for continuous improvement is the surest way of achieving inclusive and
sustainable growth. The government has also professed skill development as a national priority over
the next 10 years. The 11th Five-Year Plan had a detailed road-map for skill development and
favoured the formation of Skill Development Missions, both at the state and national levels. In
addition, the government aims to set up 1,500 new ITIs and 5,000 skill development centres across
the country as well a National Vocational Qualification Framework (NVQF) for affiliations and
accreditation in vocational, educational and training systems.

Acknowledging the formidable scale of this challenge, the government had notified the creation of
the first dedicated Department of Skill Development and Entrepreneurship on 31st July, 2014,
which became a full-fledged Ministry on 9th Nov, 2014, with NSDA (National Skill Development
Agency formed in 2013), NSDC (National Skill Development Corporation, a 49% government
owned not-for-profit company) and NSDF (National Skill Development Fund) under its purview.
Further, the Training and Apprenticeship verticals, comprising of the entire network of Industrial
Training Institutes (ITIs) and Apprenticeship Training schemes, were transferred from the Ministry
of Labour and Employment to Ministry of Skill Development and Entrepreneurship (MSDE) on
16th April, 2015.

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 How to improve skill levels?
Reform the educational setup in the country to develop students towards skills orientation,
critical thinking, practical training and gradually eliminate the stress on procedural and rote-
learning methods.

Encourage employers and corporate houses to develop on-campus training facilities that can
help bridge the skill gap between what is imparted in educational institutions and the
requirements of the industries

Establish bridges of communication between the business/enterprise world and

schools/colleges/academic institutions so that requirements of the industry in terms of skills
and human capital are effectively conveyed.

Generate awareness among the small and medium scale enterprises to focus on
communication of requirements as well as on skill development and training of its hirees, as
the SME sector is the largest employer in the Indian economy and as such they matter the
most when it comes to reaping the impending demographic dividend of the nation.

Challenges faced in skill development

Huge Population: The vast numbers of population make skilling India a big challenge.
The nation needs to skill 12 million people annually in order to absorb the increasing
number of people joining the workforce. However, the NSDC has a capacity of skilling only
4.3 million people, which is a huge shortfall from the desired number.

Low social perception of vocational jobs: The Indian society perceives vocational jobs as
less desirable than degree-jobs or government jobs. The huge income gap between degree-
jobs and vocational jobs only adds to the perception. As a result, vocational jobs are not
considered to be 'aspirational' among India's youth.

Geographical Issues : It is another serious problem plaguing the labor market and has a more
serious impact in larger economies like India as the geographical set-up is uneven:
The states with much higher economic growth rates have more new jobs with lower rate
of labour-force while on the other hand; the states with slower economic growth rates
have higher population growth rates with fewer new jobs. Thus better states need to rely
on migrant workers and laggard states need more investments so as to cope with this

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 challenge.
Majority of formal institutions are located in urban areas as compared to rural areas and
even private sector institutions are also reluctant to operate in rural areas. Hence, large
proportions of rural population do not have any formal vocational training institutions.
It is also difficult to provide work and job opportunities in less urbanized areas of the
country, as employers are unwilling to setup shops/industries/facilities in lesser
urbanized areas. Therefore, even if the workforce from these areas is trained, they won't
be able to find jobs nearer to home.

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 I N C L U S I V E G R O W T H A N D I T S C H A L L E N G E S

The Commission on Growth and Development, constituted by the World Bank, came out
with the assessment that no country has sustained rapid growth without also keeping up impressive
rates of public investment in infrastructure, education and health. (World Bank 2008).

Inclusive growth is not a new or a novel idea. Defined in the Eleventh Plan as a growth process
which yields broadbased benefits and ensures equality of opportunity for all, it stands for
equitable development or growth with social justice, which have always been the
watchwords of development planning in India. The belief that there is a significant tradeoff
between growth and equity does not seem to be as widespread now as before. There is now a
genuine and widespread recognition about the adverse social consequences of rising inequalities in
the recent high growth phase, which do not seem to be mitigated through the socalled trickle
down mechanism (which is a theoretical mechanism which says that wealth currently enjoyed by
the well-off in the society will eventually trickle down to the lesser privileged ones through the
mechanism of development).

Successive governments have initiated several projects, such as Jawahar Rozgar Yojna, Integrated
Rural Development Program, Rural Housing Scheme, Swarnjayanti Gram Swarozgar Yojana and
Mahatama Gandhi National Rural Employment Guarantee Act to promote inclusive growth.
However, for inclusive growth to happen in a country with the scale and size of India, private sector
involvement is equally important. The private sector has started contributing with initiatives, such
as the ICICI Foundation having been set up with the sole purpose of promoting inclusive growth.
The government and private sector can play complementary roles in driving inclusive growth. There
is a need for the public and the private sector in India to have a unified approach towards how they
can extend, innovate, and collaborate in new ways to drive inclusive growth.

Rapid and sustained poverty reduction requires inclusive growth that allows people to contribute to
and benefit from economic growth.1) Rapid pace of growth is unquestionably necessary for
substantial poverty reduction, but for this growth to be sustainable in the long run, it should be
broad-based across sectors, 2) and inclusive of the large part of the countrys labor force, 3) This
definition of inclusive growth implies a direct link between the macro and micro determinants of
growth. The micro dimension captures the importance of structural transformation for economic
diversification and competition, including creative destruction of jobs and firms. Inclusive growth
refers both to the pace and pattern of growth, which are considered interlinked, and therefore in

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 need to be addressed together. The idea is that both the pace and pattern of growth are critical for
achieving a high, sustainable growth record, as well as poverty reduction.

The inclusive growth approach takes a longer term perspective as the focus is on productive
employment rather than on direct income redistribution, as a means of increasing incomes for
excluded groups.

According to ex-pm Manmohan Singh, the key components of the inclusive growth strategy
included a sharp increase in investment in rural areas, rural infrastructure and agriculture spurt in
credit for farmers, increase in rural employment through a unique social safety net and a sharp
increase in public spending on education and health care.

Do cash transfer schemes work?

In the short run, governments could use income distribution schemes to attenuate negative impacts
on the poor of policies intended to jump start growth, but transfer schemes cannot be the only
answer in the long run. Opponents of such schemes highlight the fact that, in poor countries such
schemes can impose significant burdens on already stretched budgets, as it is considered
theoretically impossible to reduce poverty through redistribution in countries where average income
falls below US$ 700 per year.

However, the number of developing countries using cash with strings programs jumped from 27
in 2008 to 52 in 2013, according to a January report by the Economist. Cash with strings programs
provide money in exchange for committing to something, such as getting a vaccination or enrolling
kids in school.

Brazils Bolsa Familia is an early cash with strings success story. Started in 2003, the program
offered cash to families (usually mothers or female primary caretakers) with no expectations or
rules for how to spend it -- as long as the kids involved were vaccinated and attended school, with
stricter attendance requirements than non-funded families. The program has flourished since it
began over a decade ago, helping more than 14 million families -- 50 million people, or around one-
quarter of the country's population. And the results are in: Bolsa Familia has reduced poverty by 28
percent, according to an article in the Guardian, for only 0.5 percent of Brazil's GDP.

Similarly, in 2008 Uganda's government handed out cash transfers of a hefty $382 (in equivalent
USD) to thousands of poor people, aged 16-35 years, only asking that the recipients explain how

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 they would use the money. Researchers found that four years after receiving the cash, recipients
were two-thirds more likely to be practicing a trade than non-recipients, and their earnings were
more than 40 percent higher. Additionally, they were roughly 40 percent more likely to be paying
taxes.

Yet, in some countries there is a tendency to see cash transfers as a substitute for publicly provided
goods and services. For example, in India, there is an argument for encouraging the government to
give cash transfers to the poor, as that will allow them to access whatever goods and services that
are to be mainly generated by private markets. This is encouraged as a way of ensuring that the
poor avail of goods and services from the private sector on their own, thereby resulting in the
abdication of government's duty to focus on public delivery. This renders cash transfers
immediately ineffective in markets that are seeing rising prices. Public delivery of goods and
services ensures that they are made available at reduced prices to the recipients. However, in case of
direct cash transfers, the excess benefits flowing to the hands of the recipients get eroded due to
prevalent market prices. While it can be argued that cash transfer systems can be indexed to price
indices (for example in the case of food items, to the price index for the foods in question) to get
around this problem, it is well known that in most developing countries the systems of price
indexation of such transfers are typically slow and inadequate to cover the price increases. Given
the lags in public response to price changes, depending on price indexation to take care of the
problem of rising prices is unlikely to prevent erosion of the entitlements of the poor.

What are the challenges and solutions to inclusive growth in India?

In sixty five years since its independence, India has been successful on a number of fronts: the
country has maintained electoral democracy, reduced absolute poverty by more than half,
dramatically improved literacy, and vastly improved health conditions. Its achievements have,
however, created new challenges. Two of the most prominent are:

1. Improving the delivery of core public services: As incomes rise, citizens are demanding better
delivery of core public services such as water and power supply, education, policing, sanitation,
roads and public health. As physical access to services improves, issues of quality have become
more central. There are four avenues for reform: internal reform of public sector agencies;
producing regular and reliable information for citizens; strengthening local governments and
decentralizing responsibilities; and expanding the role of non-state providers. It however cautions
that planned reform alone cannot bring about the desired changes - ultimately implementation is
everything.

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 2. Maintaining rapid growth while making growth more inclusive: With growing disparities
between urban and rural areas, prosperous and lagging states, skilled and low-skilled workers, the
primary medium term policy challenge for India is not to raise growth from 8 to 10 percent but to
sustain rapid growth while spreading its benefits more widely.

3. Infrastructure: India needs to invest an additional 3-4 per cent of GDP on infrastructure to sustain
current levels of growth and to equalize its benefits. Although this will clearly require a government
role, the relative roles of the government and private sector need to be defined. Future economic
progress and prosperity will place a massive demand on power networks, transport, urban
infrastructure, and ports. Inability of infrastructure to keep pace with the demands for rapid and
inclusive growth may derail India's developmental objectives. Infrastructure is also important to
equalize growth, especially those investments that raise productivity and farmer incomes in
agriculture, and helps jobs move to people. Besides there is a crying need for infrastructural
development to connect rural India with the benefits of a growing economy.

4. Labor regulations:: Indias restrictive labor regulations have constrained the growth of the formal
manufacturing sector. Better designed regulations can attract more labor- intensive investment and
improve the job prospects for Indias unemployed millions, those trapped in poor quality jobs, and
the 110 million new entrants who are expected to join the work force over the next decade.

5. Financial sector: Problems in accessing finance are a major impediment to the performance of
small and medium size businesses in India. Improving financial intermediation and ensuring
broader access to financial services is critical for equalizing growth. Inclusive growth needs
financial institutions to be strong and efficient. While aligning regulation with international best
practices, a more relaxed approach is adopted in India for smaller units such as regional rural banks
and small urban cooperative banks operating within a district, without compromising on solvency
and liquidity principles.

6. Agriculture Economy: Raising agricultural productivity requires a return to investments in

agricultural technology and infrastructure. Getting the rural economy moving will also require
facilitating rural-non farm entrepreneurship. A large majority of the nation still lives in large
agricultural pockets throughout the nation, and inclusive growth, by its very definition has to
include the vast majority that dwells in swathes of agricultural land.

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 7. Lagging States: Faster economic growth has seen rising inter-state disparities. Lagging states
need to bring more jobs to their people by creating an attractive investment destination. Reforming
cumbersome regulatory procedures, improving rural connectivity, establishing law and order,
creating a stable platform for natural resource investment that balances business interests with
social concerns, and providing rural finance are important. Good understanding and coordination
between the government machinery is essential for development and inclusive growth.

8. Public-Private Partnerships: Public-private partnerships (PPP) can play an increased role in the
provision of services of all types, from telecommunications to health, from airport modernization to
primary education. As with all other service delivery reforms merely involving the private sector
(which could be either for profit or for non-profit (e.g. NGO)) cannot be expected to improve
services unless it increases accountabilities.

9. Social Development:
Despite significant improvement in our social indices, India still ranks at a measly 135 th
position in the list of countries. Further, social indicators are even more lower for Scheduled
castes and Scheduled tribes.
Malnutrition among children is one major problem (46% of children suffer from
malnutrition) are to be given top priority for inclusive growth.

10. Social Security: Providing social security is a challenge. Lack of concern and commitment by
the government poses a threat for the plight of the majority that falls within the unorganized sector
of the economy. The recent suicides of weavers and farmers in certain parts of the country is a cause
for concern. In this context, the recommendation of National Commission for Enterprises in the
unorganized Sector, (NCEUS), 2006 assume significance. The Government has introduced schemes
to provide social security coverage through life cover, health insurance and old age pension on the
lines recommended by NCEUS, but by restricting those covers to sections below poverty line (BPL)
house holds. It will be better if this is extended to middle class house holds also.

11. Inclusive growth with respect to employment

Generation of productive employment (decent work) for labour force in the economy, as
employment is a key to inclusive growth,
Employment generation should happen in a broad-based manner, i.e., members of all socio-
economic groups should be able to partake in employment opportunities. Employment
generation should also be broad-based when it comes to different sectors as the current

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 sectoral composition in India is highly skewed in favour of services which cannot absorb the
vast number of agricultural labourers quitting farming.
More non-farm ways of generating income should be encouraged for people in rural areas,
in order to give a boost to the rural economy.
Balanced regional development, so that all regions and economic pockets of the country
benefit from growth and development instead of few islands of prosperity.
Social Security schemes like food security act and MGNREGA and direct cash transfers also
contribute their bit in reducing poverty.

12. Social Structure and Social Policy

It has not been possible to evolve a comprehensive and active social policy for providing safety nets
to cope with the adverse consequences of noninclusive growth under the prevailing
iniquitous social structure. A comprehensive social policy at this stage should have four major
elements, viz., land policy, rehabilitation and resettlement policy, social security for the
unorganised sections of labour and financial inclusion

a. Land
Land to the tiller was the overarching principle of land policy in the early post-
independence period, when the sway of zamindari abolition had reached a high point. While
this policy continues to be relevant, especially for tribal areas, half a century of development
has brought some new concerns to the forefront. With growing industrialisation and
urbanisation, the rising demand for land for industrial purposes, including special economic
zones (SEZs), and for housing in expanding urban areas is posing an inevitable threat
of a reverse movement of land from tillers.
While raising agricultural productivity is a must to cope with the shrinkage of agricultural
land, the very slow growth of nonfarm opportunities for employment and livelihoods and
lack of social security for small holders argue for a careful and calibrated approach for land
acquisition.

Land alienation continues to be a serious problem in tribal areas. The enactment of

Scheduled Tribes and Other Traditional Forest Dwellers (Recognition of Forest Rights) Act,
2006, is a major step towards protecting the rights of scheduled tribes and other
traditional forest dwellers. However, past experience suggests that the implementation of
this Act is going to be extremely challenging. A prerequisite for effective implementation is
improvement in land administration in tribal areas by putting in place field machinery with

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 adequate staff, and effective monitoring and review, backed by necessary political will to
counter the pressures from the vested interests. Some spade work in this respect seems to
be in progress But the efforts on the ground so far do not seem to match the
challenges involved.

b. Rehabilitation and Resettlement

Willingness to part with land by the farmers for development projects has to be the guiding
principle for making the sale transaction just and humane. Land pooling has become a viable
option that is gaining better acceptability among the various stakeholders. Steps taken by the
Government of Andhra Pradesh under Chandrababu Naidu for pooling of land in the Guntur
region for the development of a new state capital have showed the way forward for
following a more just policy of making farmer's land available for developmental purposes.

Government and industry should, supplement the principle of fixed compensation at a

point of time with mechanisms for assuring original landowners adequate stake, on a secure
footing, in the new establishments.

This is essential because, in the present context of rising land values and high input
intensity of farming with increasing uncertainty, traditional norms for compensation and
forms of rehabilitation and resettlement (R&R) of displaced persons are proving to be
unviable.

Therefore, while the R&R policy should give a primacy of place to landforland, it should
also address the alternative of ensuring adequate stake in the new projects and enterprises,
including those in SEZs, for the displaced persons. Such a course of action would be fully
justified by the high profitability of new ventures.

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 D I S I N V E S T M E N T P O L I C Y

What is disinvestment?
The action of an organization or government selling or liquidating an asset or subsidiary. Also
known as "divestiture". In India, disinvestment appears in the news whenever the government
decides to sell its stake in any public sector unit (PSU). In this process, the government exits a PSU
by selling the shares held by it. The shares previously held by the government are then sold to a
private person or a company interested in buying a stake in the PSU. Post-disinvestment, a PSU is
then said to have been 'privatized'.

What are the objectives of disinvestment?

The following are the main objectives of the disinvestment policy of the Government.

To reduce the financial burden on the Government.

To improve public finances.
To encourage wider share of ownership.
To introduce competition and market discipline.
To depoliticise essential services.
To help public enterprises upgrade their technology to become competitive (as private
buyers will implement technology)
To rationalise and retrain their workforce.
To build competence and strengthen their R & D.
To initiate diversification and expansion programmes.

Thus, the process of disinvestment is aimed to reduce or mitigate fiscal deficit, bring about a
measure of economic stabilisation or to improve efficiency in public enterprises through structural
adjustments initiated to improve their efficiency and productivity.

What are the reasons for disinvestment?

The public sector undertakings have shown a very negative rate of return on capital employed. On
account of this phenomenon many public sector undertakings have become a burden to the
government. They are infact turning out to be liabilities to the government rather than being assets.
This is a sector which the government clearly wants to get rid off. In this direction the government
has adopted a new approach to reform and improve the public sector undertakings performance i.e

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 'Disinvestment policy'. This had gained lot of importance especially in latter part of 90s. At present
the government seriously perceives the disinvestment policy as an active tool to reduce the burden
of financing the public sector undertakings.

In the face of regular non-performance and less than satisfactory output, the viability and continued
financial support to loss making PSUs had been put to question. The financial crisis faced during
1991 also gave a push to the camp advocating for sale of government stake in loss making PSUs.
However, the debate on disinvestment/divestment is far from clear even now. There has been a bit
of dilly-dallying over disinvestment for the past 2 decades. The whole process of disinvestment is
not encouraging as the total proceeds realized is just 35% as against the target set for the decade of
1991-92 to 2001-02. Though 49 companies so far have been disinvested but in reality only a few
have been genuinely privatized. On the other hand the countries like Taiwan, Hungary, Thailand,
Philippines, Korea, Turkey, Poland, Eastern Europe, West Asia and even China have marched ahead
with their disinvestment programs with a professional approach.

While the first NDA government had gone all out in the disinvestment process, even creating a new
department of disinvestment under the Ministry of Finance back in 1999, the UPA government has
shied away from sales of 'strategic stakes' in PSUs. (A strategic sale implies sales of shares to such
an extent that would result in the loss of control and ownership of the entity selling the shares. If the
government sells its stake to another party such that the equity share-holding of the government
falls lesser than 51% of the issued share capital, then the government will have made a 'strategic
sale). The UPA government maintained that as part of its disinvestment policy, the government
should sell only minority stakes without losing ownership and control of management of PSUs.

The current disinvestment policy recognizes that:

(i) Public Sector Undertakings are the wealth of the nation and this wealth should rest
in the hands of the people.
(ii) While pursuing disinvestment, government has to retain majority shareholding, i.e.
at least 51% and management control of the Public Sector Undertakings.

However, in the annual budget 2015, Finance Minister Arun Jaitley had hinted at government's plan
for returning to sale of strategic stakes in PSUs. Of the Rs 69,500 crore disinvestment target for the
year, the government has so far managed to raise Rs 12,600 crore. The government is once again
toying with the idea of making strategic sales as it would allow the government to sell majority
stakes and thus raise higher funds to achieve its disinvestment target. A cabinet secretary led

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 committee has also been appointed in this regard to look into sales of strategic stakes.

What are the reasons for the lower level of proceeds from disinvestment?
The reasons for such low proceeds from disinvestment against the actual target set are
Unfavorable market conditions
Offers made by the government were not attractive for private sector investors.
Lot of hue and cry being made on valuation process (i.e., parties have not been able to agree
on the valuation of the shares, which decides the total amount for which the stake would be
sold).
Government has no clear-cut policy on disinvestment.
Strong opposition from employee and trade unions.
Lack of transparency in the whole process.
Lack of political will.

Disinvestment and the debate on Budgetary Deficit

When the first NDA government was pushing forward with its strong headed policy on the
disinvestment and privatization of loss making PSUs, Atal Bihari Vajpayee had famously remarked
that "Disinvestment / Privatization is the only panacea for ills of loss making public sector
undertakings." And soon the response from the opposition was "You can't sell the family silver to
meet your daily expenditure."

The debate on disinvestment surrounds the thorny issue of selling major Indian PSUs for the lowly
objective of covering up annual budgetary deficits. It is a well understood fact that budgetary
deficits will increase every year and therefore the notion that disinvestment targets could meet fiscal
deficits is hardly a rational one. Opponents of disinvestment mainly argue that PSUs are national
assets that could churn out much more benefits and advantages, if run and managed properly.
Selling national assets for the sake of meeting short-term expenditures is a short-sighted exercise.

Of the total Rs.12,300 crores earned between 1991-96 through disinvestment, more than Rs. 7,300
crores was used to bridge the deficit. It is also said that the funds raised through disinvestment
process is used to repay past debts, which would lessen the burden of interest on the government.
From this it is quite evident that the government is aimed at reducing the fiscal deficit through
disinvestment proceeds but not focused on improving these undertakings and reinvesting in social
sector.

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 Most nations spend a substantial chunk of their privatization proceeds for meeting their budget
deficits. Many countries have attempted, however, to build a political consensus and garner public
support for the process of privatization by setting aside disinvestments revenues for 'noble' causes.
In Ukraine, for instance, revenues are credited to the State Privatization Fund (kept outside the
budget) and legislation explicitly prohibits the use of revenues from privatization for covering the
budget deficits.

In Estonia, the government can use privatization revenues for development projects only as long as
the fiscal deficit is contained at a specific level (fixed at 3.9% of GDP in '01).

In UK and much of South America, Eastern Europe and Russia, the idea behind privatization was
not merely to raise money, but also driven by ideology privatize swiftly at all costs under the
assumption that this would increase the firm's efficiency and profitability and benefit the economy
as a whole.

Further, disinvestment must be proceeded strategically by assessing market conditions and after
ensuring proper valuation of the shares to be sold, in order to obtain the best prices available.
Disinvestment process must not be implemented with an eye on achieving a pre-determined number
as such an exercise may result in distress selling of government stake just for the sake of meeting
numerical targets without realization of the maximum revenue potential from the sale of shares.

Rather than being motivated mainly by the expenditure needs of the government, disinvestment
must be carried out as a reform required for greater economic efficiency. The inefficient use of
capital has remained a major problem affecting Indias productivity, and PSUs that consume
significant amounts of capital must assume part of the blame. This reason applies even for strategic
sale of government's shares even in those PSUs that are not loss-making. Unfortunately, and in
direct contrast, the disinvestment approach of successive governments has emphasized using
disinvestment proceeds for funding fiscal profligacy.

Therefore, it is highly desirable for the government to put in place an appropriate policy on
disinvestment that lays down a framework for the judicious utilization of the proceeds from the sale
of stakes in national PSUs. Rather than let loss making PSUs operate that not only give a return
lower than the cost of borrowing but also lock-in government resources in inefficient units, the
government should utilize proceeds from disinvestment to develop the much needed infrastructure

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 which this country needs. Rather than have its assets locked in production of tradable commodities
for which there are other umpteen private competitors as well, the government should free up its
resources for the development of crucial turnkey projects to bring growth to lesser developed areas.

Should disinvestment be the only way to deal with sick PSUs?

Sick industrial unit is defined as a unit or a company (having been in existence for not less than five
years) which is found at the end of any financial year to have incurred accumulated losses equal to
or exceeding its entire net worth. The net worth is calculated as sum total of paid up capital and free
reserves of a company less the provisions and expenses, as may be prescribed. An industrial unit is
also regarded as potentially sick or weak unit if at the end of any financial year, it has accumulated
losses equal to or exceeding 50 per cent of its average net worth in the immediately preceding four
financial years and has failed to repay debts to its creditor(s) in three consecutive quarters on
demand made in writing for such repayment.

The problem of industrial sickness has been growing at an annual rate of about 28% and 13%
respectively in terms of number of units and outstanding number of bank credit. It is reckoned that
as of today there are more than 2 lakhs sick units with an outstanding bank credit of over Rs 7000
crore nearly 29000 units are added to sick list every year. It seems that the deterioration of the sick
industries appears to be faster than the growth of sick industries.

The two basic factors which may result in sickness of an industrial unit are:-
Internal factors are those which arise within an organisation. They include:-
Mismanagement in various functional areas of a company like finance, production,
marketing and personnel;
Wrong location of a unit;
Poor implementation of projects which may be due to improper planning or managerial
inefficiency;
Poor inventory management in respect of finished goods as well as inputs;
Failure to modernise the process of production and marketing methods
External factors are those which take place outside an organisation
Energy crisis arising out of power cuts or shortage of coal or oil;
Failure to achieve optimum capacity due to shortage of raw materials as a result of
production set-backs in the supply industries, poor agricultural output because of natural

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 reasons, changes in the import conditions, etc.
Infrastructural problems like transport bottlenecks;
Credit squeeze;
Situations like market recession, changes in technology, etc;
International pressures or circumstances, etc.

Most of the Central Public Sector Enterprises (CPSE) that are sought to be disinvested are CPSEs
that have become sick and are not being operated with healthy profits. The basic premise of
disinvestment is not only to raise money for the government's fiscal expenditures, but to also
eliminate units that guzzle government's expenditures without generating a healthy profit in return.
In that regard, the Dept. Of public enterprises (in the Ministry of Heavy Industry) has been in talks
with the Department of Disinvestment (in the Ministry of Finance) to lay down a plan for the sale of
65 sick CPSEs.

Arguments in favour of disinvestment of sick units:

Commitment to the public sector patterned on a socialistic ethos is a thing of the past.
It is not fair to sustain loss making PSUs/CPSEs by funding it with public money.
Loss making PSUs, not only guzzle public expenditure, but they also mean that public funds
are locked in unproductive assets. These assets could be freed up through disinvestment in
order to make funds available for more pressing projects such as infrastructure.
Measures to revive and reconstruct sick industrial units results in legal wrangling because of
the administrative setup established to resolve disputes relating to sick industries. Banks
claim that Sick Industrial Companies Act (SICA), 1985 has outlived its utility and has
become a hurdle for banks to recover their loans extended to such sick units. The lethargic
functioning of the Board for Industrial and Financial Reconstruction (BIFR is the board
which deals with cases referred to it by sick companies and develops a restructuring plan or
process to turn around a sick company) also does not result in the quick revival of a sick
company. As a result it is argued that sick PSUs are better sold off.

Arguments against disinvestment of sick units:

It is the public sector which addresses situations of market failure and therefore the public
sector has to provide goods and services in the areas which cannot be addressed by the
private economy.
Disinvestment to raise money to fund public expenditure is a doomed exercise. The

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 argument that disinvestment frees up funds to invest in necessary formation of capital has
never been actualized in reality, since most of the funds end up being utilized to meet the
government's fiscal expenditures.
It is argued that profit making units must not be disinvested, while at the same time, loss
making units must be revived and transformed into profit making units. Sick public entities
must be examined for their sickness, their issues sorted out and then revived into a healthy
profit making entity. Only when it is proven beyond doubt that no other alternatives exist to
make a public unit a profit making entity, then the option of disinvesting in it must be taken.
Kerala Model of reviving sick PSUs. The LDF government in kerala revived 28 out of 42
sick units during its period of governance from 2005-06 to 2010-11. The LDF was able to
achieve the revival of sick PSUs without infusing much capital. This was achieved through a
conscious plan to revive the sick units by encouraging inter-PSU co-operation, i.e., various
PSUs co-operated with each other in various processes. The government had intervened in
procurement decision the Kerala State Electricity Board purchases energy meters from
UEI and cables from the Traco Cables, another state PSU. The Kerala State Drugs and
Pharmaceuticals, which was in the doldrums and facing closure was also revived on the
basis of ensuring procurement of medicines by the government's health department from the
company. Inter-PSU co-operation was also encouraged between state PSUs and central
PSUs. While all the 42 PSUs had posted a combined net loss of Rs 69.49 crore in 2005-06
when the new Government came to power, the very next year saw them making a net profit
of Rs 91.43 crore.

#Market Failure: An economic term that encompasses a situation where, in any given market, the
quantity of a product demanded by consumers does not equate to the quantity supplied by
suppliers. This is a direct result of a lack of certain economically ideal factors, such as huge entry
barriers to firms, regulation, huge economies of scale etc. For e.g., Densely populated areas are
attractive markets for the private sector to set up firms and industries due to the nearness of a ready
and available market. Therefore, we may see that private sector may set up schools and hospitals in
densely populated areas such as metros. But the private sector will not set up schools and hospitals
in less densely populated areas, even though people of such areas also equally need the same
facilities, goods and services. One chief reason is that the private sector does not enjoy a huge
economy of scale so as to provide goods and services even to less accessible areas. This problem is
known as one example of a market failure. In such situations, the public sector steps in to provide
the necessary goods and services and it is able to do so since the public sector enjoys huge
economies of scale and has the financial breadth to take losses in the initial years atleast.

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 F O R E I G N D I R E C T I N V E S T M E N T R E F O R M S

The Government last week issued a Press Note announcing reforms ("Reforms") in 15 major sectors
in respect of Foreign Direct Investment (FDI). The objective of the Government is to ease the
process of foreign investments in the country and bring substantial foreign investments under the
automatic route in order to avoid the delay in FDI investment in India. These Reforms are also
another example of the Governments emphasis on the ease of doing business. Before laying out the
key reforms in detail, it is important to first understand how foreign direct investment is made into
India.

An Indian company may receive Foreign Direct Investment under the two routes as given under:

i. Automatic Route

FDI is allowed under the automatic route without prior approval either of the Government or the
Reserve Bank of India in all activities/sectors as specified in the consolidated FDI Policy, issued by
the Government of India from time to time. This means that a foreign investor desirous of investing
in India in a sector for which there is automatic route provisioning, does not require to seek
permission from the Government and may directly purchase the shares or assets of an Indian
company. However, for some sectors, the government may request that it be notified of the infusion
of foreign investment.

ii. Government Route

FDI in activities not covered under the automatic route requires prior approval of the Government
which are considered by the Foreign Investment Promotion Board (FIPB), Department of Economic
Affairs, Ministry of Finance. When the FDI policy says 49% under government route, it essentially
means that the maximum extent of foreign investment possible in the equity share capital of a
company is not more than 49% and for any investment from 1 share to 49% equity stake, prior
permission from the government is necessary. If the government does not approve of the
investment, then the foreign entity will not be able to invest in the economy. Sectors placed in
government route are generally those about which the government is politically sensitive or those
sectors where Indian entrepreneurship is to be encouraged or existing businesses be protected from
foreign competition.

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 The key FDI reforms implemented by the government recently are:

1. Companies owned and controlled by Non Resident Indians (NRIs): NRIs include non-
residents who are Indian citizens or are Overseas Citizens of India (OCI) cardholders.
Currently, investments made by NRIs on non-repatriation basis (i.e., the NRI cannot take out
the incomes generated from such investments) is treated at par with domestic investments
made by residents. Further, for investments made by NRIs on non-repatriation basis, special
dispensation for investment is allowed in construction development (i.e. FDI-linked
conditions are not applicable, as these conditions are burdensome for single individuals) and
civil aviation sector (there are no caps). However, the Government of India realised that
larger investments can be attracted not through individuals but largely through corporate
entities.

Pursuant to the Reforms, the above-mentioned special dispensation is also extended to

companies, trusts and partnership firms, which are incorporated outside India but are owned
and controlled by NRIs. Henceforth, such entities owned and controlled by NRIs will be
treated at par with NRIs for investment in India. Therefore, the government will no longer
impose FDI restrictions on any investment in India made on a non-repatriation basis by a
foreign company that is owned or controlled by an NRI. This is a way for making it more
convenient for NRI owned foreign companies to invest in India and thus improves the speed
of FDI inflow.

2. Construction Development Sector: FDI in the construction projects is permitted under the
automatic route, subject to fulfillment of certain conditions. The Reforms have liberalised
fulfilment of the said conditions, namely:

Conditions of restriction of floor area of 20000 square meters in construction development

projects have been removed;
Investee companys obligation to bring in a minimum FDI of USD 5 million within 6
months of commencement of the project has been done away with;
For projects under the automatic route, a foreign investor will be permitted to exit and
repatriate the foreign investment before the completion of the project, provided that the
lock-in requirement of three years is complied with;
Transfer of stake from one non-resident to another non-resident on a non-repatriation basis
will not be subject to any lock-in period or to any government approval;

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 Exit is permitted at any time if the project or trunk infrastructure is completed before the
lock in period;
Condition of lock-in period will not apply to Hotels &Tourist Resorts, Hospitals, Special
Economic Zones (SEZs), Educational Institutions, Old Age Homes and investment by NRIs;
and 100% FDI under automatic route is permitted in completed projects for operation and
management of townships, malls/ shopping complexes and business centres.
Consequent to foreign investment, transfer of ownership and/or control of the investee
company from residents to non-residents is also permitted. However, there would be a lock-
in-period of three years, calculated with reference to each tranche of FDI, and transfer of
immovable property or part thereof is not permitted during this period.

3. Single Brand Retail Trading (SBRT): Currently products are required to be sold under the
same brand internationally and that the foreign investor is required to be the brand owner or
have the right to use the brand name under a legally tenable agreement with the brand
owner. Also, SBRT by means of e-commerce is not permissible.

Now, entities with foreign investment in SBRT can sell products with an Indian brand name,
and in that case the requirement of using the same brand name internationally and the
foreign investor having right to use or own the brand name does not apply. Instead, Indian
brands are required to be owned and controlled by resident Indian citizens and/or
companies, which are owned and controlled by resident Indian citizens. Further, SBRT can
now be undertaken through e-commerce platform. This means that more e-commerce
websites may be launched offering retail products from a single brand.

4. Wholesale and Retail without Government Approval: As per the Reforms, Indian manufacturers
with foreign investment would be allowed to sell their products through wholesale and/or
retail formats, including through e-commerce platform, without Government approval.
However, for this purpose, the manufacturer is required to be the owner of the Indian brand
and manufacture at least 70% of its products (in terms of value) in-house, i.e. in India, and
source at most 30% of its raw material requirements from Indian manufacturers. It is
pertinent to mention herein that the requirement of sourcing 30 from Indian manufacturers is
a new concept introduced by the government. This has been done with a view to encourage
manufacturing in India.

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 5. Defence Sector: Currently, foreign investment upto 49% is allowed in the Defence Sector
under the Government approval route. Portfolio investment and investment by foreign
venture capital investors (FVCIs) is restricted to 24% only. Foreign investment above 49% is
also permitted, subject to approval of Cabinet Committee on Security (CCS) on case to case
basis, favouring those investments that are likely to result in access to modern and state-of-
art technology in the country.

The Reforms have introduced the following changes:

(a) Foreign investment up to 49% will be under automatic route (earlier it was under
Govt. route);

(b) Portfolio investment and investment by FVCIs will be allowed up to permitted

automatic route level of 49% (26% earlier);

(c) Proposals for foreign investment in excess of 49% will be considered by Foreign
Investment Promotion Board (FIPB), and not CCS, thus relaxing the higher standards
required for an investment proposal to pass through;

(d) In case of infusion of fresh foreign investment within the permitted automatic route
level, resulting in change in the ownership pattern or transfer of stake by existing
investor to new foreign investor, Government approval will be required.

6. Broadcasting Sector: FDI policy on broadcasting sector has also been amended. New
sectoral caps and entry routes now permit 100% automatic approval route for non-news
channels. As for the news-channels, the restriction on government route has been reduced
from the earlier 26% to 49%. There is no window for automatic approval for news channels
yet.

7. Single entity to carry out both Wholesale and SBRT: As per the current FDI policy, 100%
foreign investment is permitted under the automatic route in wholesale cash & carry
activities (e.g. Metro Cash and Carry Stores), but a wholesale/cash & carry trader cannot
open retail shops to sell to the consumer directly (i.e. only B2B is permitted).

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 Now, as per the Reforms, it has now been decided that a single entity will be permitted to
undertake both the activities of single brand retail trading and wholesale with the condition
that conditions of FDI policy on wholesale/ cash & carry and SBRT have to be complied by
both the business arms separately.

8. Raising the threshold limit: As per the FDI policy, Foreign Investment Promotion Board
(FIPB) considers proposals having total foreign equity inflow up to Rs. 3000 crore and
proposals above Rs. 3000 crore are placed for consideration of Cabinet Committee on
Economic Affairs (CCEA). In order to achieve faster approvals on most of the proposals, it
has been decided that the threshold limit for FIPB approval may be increased to Rs.5000
crore.

Criticism of FDI Reforms

The government has been very eager to give important signals to the international investor and
business community, that it is pulling out all stops to create a more conducive and convenient
environment for doing business in India. In this regard, the government has further liberalized
sectoral caps in various sectors as can be seen above, thus making different sectors more amenable
to receiving foreign investment. The idea is that increased flows of foreign investment will result in
generation of more jobs. The process of attracting investment to create jobs by amending the FDI
policy, also underlined in the Union Budget for 201516, was initiated by the National Democratic
Alliance government in August 2014. The first major step was to raise the cap on foreign
investment in defence sector enterprises from 26% to 49%. This was followed by permitting FDI in
rail infrastructure, relaxing the conditions relating to construction development sector, clarifying the
policy towards FDI in medical devices, raising the cap for the insurance sector, pension funds, etc.

Due to the progressive liberalisation of Indias FDI regime, caps on the share of FDI in an
individual companys equity are hitherto applicable to only a few service sectors like retail trade,
banking, insurance, broadcasting and print media, besides defence. This implies that barring a few
exceptions, the entire manufacturing sector and a large number of service sectors are not
constrained by restrictions on foreign ownership. Since the scope for further opening up is quite
limited, the focus has turned to the existing caps. Thus it may be incorrect to view liberalization of
FDI norms as a way of generating employments as the absence of sectoral caps for other sectors
especially manufacturing should have led to generation of employment, but they are afflicted by
associated problems such as obtaining timely clearances from concerned ministries and problems
related to land acquisition.

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 While the FDI policy tries to distinguish between various types of foreign investors, FDI per se is
merely being seen as a source of funds. This was clearly implied in Union Finance Minister Arun
Jaitleys budget speech last February: To further simplify the procedures for Indian Companies to
attract foreign investments, I propose to do away with the distinction between different types of
foreign investments, especially between foreign portfolio investments and foreign direct
investments, and replace them with composite caps. This was the view even earlier; a 2011
discussion paper of the Department of Industrial Policy and Promotion (DIPP), FDI Policy-
Rationale and Relevance of Caps, bears testimony to this approach. The paper clarified that the
methodology for calculating aggregate foreign investment introduced earlier in 2009 implicitly
recognises that foreign equity, up to 49%, is purely a source of funding, as long as control is not
yielded to non-resident investors/entities. This interpretation seemed to have been accepted when
the government rewrote the FDI norms for the defence sector in 2014. The guidelines state that the
applicant company seeking permission of the Government for FDI up to 49% should be an Indian
company owned and controlled by resident Indian citizens.
#Composite Caps: The government has always made a distinction between FDI and FII and
investments by NRIs. FDI is investment that results in change of ownership pattern to some extent.
A foreign investors invests in a company generally by gaining certain amount of ownership and
control and ability to take decisions in its board. This happens through a negotiated sale and
purchase of necessary amount of shares to effect the requisite extent of change in ownership and
control. On the other hand, FII or portfolio investment is generally made through the stock
exchange when foreign investors purchase shares of a company in large bulk. Investments by FII
result in an increase in capital availability without the concomitant change in ownership and
control as is the case with FDI. Why is FDI more important than FII? An Indian company will be
willing to give up a part of its ownership and control to a foreign investor if the foreign investor is
able to provide something of value. Usually this value comes through the transfer of technology
and expertise which the foreign investor brings along with himself. Also, if the Indian company is
not desirous of diluting its stake, then it can form a Joint Venture Company (JV) with the foreign
investor where the ownership and management is decided on the basis of the investments brought
in by each party. If the distinction between FDI and FII is diluted and a composite cap is resorted
to, then the mere purchasing of shares from the stock exchange would be used as an indicator of
inflow of foreign investment. Also, enhancement of composite caps will mean that investment by
way of portfolio and NRI funds will also count towards determining the FDI limits. This enhanced
foreign investment may seem attractive but it will not come along with a transfer of technology, if
the majority of the caps have been filled with FII and NRI funds.

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 A major and relevant question in this regard is whether serious foreign investors who contribute
almost half of the risk capital can accept the position of sleeping partners. Further, it would be
unrealistic to expect foreign investors not to be interested in securing their technologies and
reputation besides maximising their overall returns on their investments. On the other hand, the
Indian partners are likely to seek FDI to get access to critical intangibles, namely, technologies,
goodwill, etc, apart from a stable source of risk capital. Under such circumstances, foreign investors
are more likely to seek control of the operations of the joint venture (JV). If ownership is denied to
them, then they may not be too keen on investing in India even despite liberalization of foreign
investment norms.

Since the distinction between FDI and the other forms of foreign investment is being done away
with, Indias FDI policy is progressively turning into a generic foreign investment policy. The
government is rapidly rendering irrelevant the notion of sectoral caps. It must be noted however that
foreign investment caps provide domestic entrepreneurs the opportunity to form JVs and to
meaningfully contribute to the running of such enterprises. The government can ill-afford to ignore
the significant benefit that can be derived through the promotion of true JVs, namely, opportunities
for Indian entrepreneurship to develop.

In the name of FDI policy reforms, India is merely easing the procedures and enhancing the scope
for foreign equity participation. There cannot be a stand-alone FDI policy with the main objective
of maximising inflows. What it actually should do is to constantly review the requirements of
various sectors, assess the contribution of different constituents, create conditions which force
foreign investors to contribute positively to the national economy and devise ways to enhance the
bargaining power and capabilities of domestic entrepreneurs. Thus, instead of giving the concept of
foreign investment caps a quiet burial, the government needs to carefully review Indias experience
with FDI over the past two decades and proceed further to maximise the net benefits within the
freedom allowed by its international commitments. In his budget speech, the finance minister stated
that the measures relating to FDI in defence, insurance and railway infrastructure, construction and
medical devices sectors were taken to create jobs. It may therefore be worthwhile to look at the
past experiences with FDI in job creation, in order to ensure that such expectations are being
realised.

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 t h
1 4 F I N A N C E C O M M I S S I O N

I feel more and more that we must function more from below than from the top too much of
centralization means decay at the roots and ultimately a withering of branches, leaves and
flowers. -Pandit Jawaharlal Nehru

We want to promote co-operative federalism in the country. At the same time, we want a
competitive element among the states. I call this new form of federalism Co-operative and
Competitive Federalism - Prime Minister Narendra Modi

The Finance Commission is a Constitutional body formulated under Article 280 of the Indian
Constitution. It is constituted every five years by the President of India to review the state of
finances of the Union and the States and suggest measures for maintaining a stable and sustainable
fiscal environment. It also makes recommendations regarding the devolution of taxes between the
Center and the States from the divisible pool which includes all central taxes excluding surcharges
and cess which the Centre is constitutionally mandated to share with the States.

The Fourteenth Finance Commission (FFC) was appointed on 2 nd January, 2013 under the
chairmanship of Dr. Y. V. Reddy. In addition to the primary objectives mentioned above, the terms
of reference for the commission sought suggestions regarding the principles which would govern
the quantum and distribution of grants-in-aid (non plan grants to states), the measures, if needed, to
augment State government finances to supplement the resources of local government and to review
the state of the finances, deficit and debt conditions at different levels of government.

The following are some of the important findings and recommendations made in the report
submitted by the FFC.

The 14th Finance Commission is of the view that tax devolution should be the primary route for
transfer of resources to the States. One of the core tasks of a Finance Commission as stipulated in
Article 280 (3) (a) of the Constitution is to make recommendations regarding the distribution
between the Union and the states of the net proceeds of taxes. This is the most important task of any
Finance Commission, as the share of states in the net proceeds of Union taxes is the predominant
channel of resource transfer from the Centre to states.The FFC has radically enhanced the share of
the states in the central divisible pool from the current 32 percent to 42 per cent which is the biggest
ever increase in vertical tax devolution.

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 The spirit behind the FFC recommendations is to increase the automatic transfers to the states to
give them more fiscal autonomy and this is ensured by increasing share of states from 32 to 42 per
cent of divisible pool. According to the Commission, the increased devolution of the divisible pool
of taxes is a compositional shift in transfers. This would result in the states enjoying better shares
of Union taxes and thus lesser reliance on grants from the state. This is expected to encourage
federalism.

However, in understanding the state's needs for receiving funds from the centre in the form of
greater tax devolution, the FFC has ignored the distinction between plan and non-plan expenditures.
This almost nullifies the effect of the higher devolution of taxes. This is so because the 32%
recommended earlier by the 13th Finance Commission (TFC) was to be considered as part of the
plan expenditures with an additional 7% to be considered as 'non-plan' expenditure. Thus a total of
39% actually flowed to the states. In light of that, 42% seems to be not a very significant jump.
However, the states can still take benefit from the fact that, in the absence of plan and non-plan
distinctions, the states are free to spend their share of union taxes in the manner they like. The 7%
non-plan devolution of taxes was essentially through centrally sponsored schemes or union
programmes designed for specific sectors only. The state government had no say in how that 7%
non-plan share is to be spent as it was decided by the union government. FFC's recommendation of
42% allows states complete discretionary power over the entire corpus.

The FFC has taken the view that majority of the States expressed a preference for tax devolution
over grants. FFC's devolution formula reflects the premise that public spending on development and
welfare is most effectively done at the state or the local level. This allows resources to be allocated
in ways that best reflect local conditions and imperatives, all of which should lead to improved
outcomes. However, member of FFC Abhijit Sen fears that centrally sponsored schemes like
Backward Region Grants Fund (BRGF), will be pruned by the Central Government once states are
left to their own discretion in the way they spend their shares. Due to this, Bihar has been one of the
big losers as the BRGF covered all 38 districts of the state. Between 2006-07 and 2014-15, these
districts were cumulatively allocated around Rs 6,165 crore. But 2014-15's budget did not allocate
any funds under the said scheme.

The FFC has effectively discontinued the distinction between special category and other States. The
Normal Central Assistance Special Central Assistance and Special Plan Assistance, went
overwhelmingly to the special-category states. The Northeastern states together received nearly Rs

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 19,000 crore under these grants in 2014-15 and with them ending, their loss will be slightly more
than the total increase that they have received in tax devolution. (In the past, the National
Development Council considered factors such as hilly and difficult terrain, low population density
and/or a sizeable share of tribal population, strategic location along borders, economic and
infrastructural backwardness, and non-viable nature of state finances to accord 'special category'
status to a state).

The FFC transfers have a more favorable impact on the states that are relatively less developed,
which is an indication that they are progressive, that is, states with lower per capita net state
domestic product (NSDP) are likely to receive on average much larger transfers per capita. This
indicates that the FFC recommendations do go in the direction of equalising the income and fiscal
disparities between the major states.

The FFC has given due consideration to the need to balance management of ecology, environment
and climate change consistent with sustainable economic development. Thus, Forest Cover has been
incorporated as a factor to decide horizontal transfers.

However, a major criticism to the greater devolution of taxes to states stems from the lack of
institutional and governing capacity of some states. There are concerns relating to the capacity of
the states to make best use of the enhanced resource base. It is generally accepted that the wide
disparity of development outcomes across states reflects, at least partly, differences in institutional
capacity across states. More money and more freedom without the capacity to spend wisely could
worsen development outcomes for the country as a whole. It is expected that with the changes
recommended by FFC, greater pressure will fall on the states to perform well since they are left
with the discretionary power to make use of fund transfers. It will create a new incentive and force
state governments to perform better. This directly flows from the commission's view that sharing
pattern in respect to various Centrally-sponsored schemes need to change. The FFC wants the States
to share a greater fiscal responsibility for the implementation of such schemes.

Promotion of Decentralization in the FFC: Doubling of grants to local bodies

The FFC has more than doubled the grant for local bodies and recommended that nearly all of this
money be spent on improving basic services. In its report, which covers the period between 2015
and 2020, the commission has fixed the grant at Rs 2.87 lakh crore - over Rs 2 lakh crore more than
the Thirteenth Finance Commission's.

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 Of this money, nearly Rs 2 lakh crore has been allotted to panchayats, while the rest will go to
municipalities. According to the central government, there are over 2.6 lakh panchayats in India.
The Finance Commission's report notes the allotted grant works to Rs 488 per capita per annum.

The commission has divided the grant in two parts: A basic part and a performance part. The
performance part would be dependent two factors. One, the local authority would need to have an
audited account for the previous year. Second, it will have to demonstrate that it has increased its
own revenue over the previous year.

In the case of gram panchayats, the commission has recommended the ratio between basic and
performance grant as 80 and 20, while in the case of municipalities it has been kept at 90 and 10. To
improve the utilisation of funds, the commission has recommended the grants should go directly to
the gram panchayats and municipalities, without any share for other levels.

The commission has also asked the state governments to take action to facilitate local bodies to
compile accounts and have them audited in time. To improve the resources of local bodies, the
Finance Commission has suggested the state governments to empower local governments to impose
advertisement tax and to assign productive local assets to panchayats.

The Commission also said "it is of the view that mining puts a burden on the local environment and
infrastructure and therefore, it is appropriate that some of the income from royalties be shared with
the local body in whose jurisdiction the mining is done. This would help the local body ameliorate
the effects of mining on the local population."

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 W O M E N ' S R E S E R VAT I O N B I L L

Women continue to be grossly under-represented in Parliament and the State Assemblies and even
at the candidate level, underscoring the need for reservation for them in the legislature. For nearly
two decades, the issue of womens reservation in State Assemblies and Parliament has been marred
by controversy. The Bill seeking to reserve a third of the seats in the legislature has been introduced
and allowed to lapse several times. Although women's representation has steadily increased over the
past seven decades since Independence, the state of affairs in Parliament and State Assemblies is far
from encouraging and clearly points to the need for reservation of seats for women in the
legislature.

Data from the Election Commission of India on the general election to the 16th Lok Sabha in 2014
and the Assembly elections present a dismal picture. Out of the 543 members of the 16th Lok
Sabha, only 66 are womena paltry 12.16 per cent, considering the fact that women make up half
of the country's population. Also distressing is the fact that only 668 women contested for the 543
seats, of whom 206 contested as independent candidates (all of whom lost). The statistics are
telling. Major and minor political parties are still very parsimonious in nominating women as their
candidates in parliamentary elections.

Shockingly, there were no women members of Parliament (MPs) from two major States, Haryana
and Jharkhand, smaller States such as Goa and Himachal Pradesh, and several north-eastern States,
apart from a few Union Territories.

West Bengal topped the list in terms of percentage of women among MPs, having sent 13 women to
the Lok Sabha, 30 per cent of the total number of MPs from the State.

Other States that ranked relatively better included Uttarakhand, Gujarat, Madhya Pradesh, Jammu
& Kashmir and Uttar Pradesh, with women accounting for at least 15 per cent of each of the State's
MPs. West Bengal and Uttar Pradesh also had the highest number of women MPs.

The situation is dire in the State Assemblies too. Out of a total of 4,120 elected members of
legislative assemblies (MLAs) across 28 States, the National Capital Territory of Delhi and the
Puducherry Union Territory (which constitute the electoral college that elects the President), only
359 are women, accounting for a mere 8.71 per cent. Only nine States had the percentage of women
MLAs in double digits. Surprisingly, Haryana had the highest percentage of women MLAs, closely

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 followed by Rajasthan, Bihar and Madhya Pradesh, States that have traditionally scored low on
various development indices, especially those relating to women's development.

The Uttar Pradesh Assembly had the highest number of women MLAs, at 35, closely followed by
West Bengal and Bihar with 34 each.

A look at the ratio of male to female contestants in State Assembly elections shows how the odds
are stacked against women even at the candidate level. Most States had at least 10 male candidates
for every female candidate, with the ratio rising above 15 in several key States.

An international view on women's representation

Unfortunately developed countries and fast developing countries have low women representation in
their respective legislatures. In the most powerful and most advanced nation of the world the United
States, women constitute only 17 percent of legislature. A scientifically advanced nation like
Japan too cannot claim to be at the top in providing women due share in political power.

But in a country like Mozambique, a nation ravaged and pillaged by unending civil war
and unabated famine like conditions, women constitute more than 30 percent of the legislature.
In South Africa too, the country which was under brutal racist regime, women have more than 30
percent representation. These international experiences reveal that industrial development,
economic prosperity and scientific progress do not automatically lead to political empowerment of
women.

Major arguments against Women Reservation Bill and their counters

A. It has been argued that reservation for women will trump over the principle of merit as a
fixed number of seats would always be assured to women. Will it alter the nature of
governance? This question can be countered in two ways.
First, democracy is the most representative form of political organization the human
civilization has heralded so far. There is no meaning of democracy when women who
constitute nearly half of the population, have only twelve percent representation. Due
representation for women shall deepen the democratic process.
Second, several studies have revealed that women in general are more responsive to issues
of human development. According to the UNDP Human Development Report, India ranks
127 among 177 countries. Women suffer more than men due to lack of education, health,
hygiene, sanitation, drinking water, nutrition etc. As a result, women are generally

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 more concerned about these issues. Greater representation for women shall ensure a shift
in the focus of development agenda towards human development and social development.

B. Womens reservations will help those coming from influential political families. The
ordinary women folk cannot avail this facility.
This argument is partly true. But one should keep in mind the simple truth that law alone
cannot change the society. But a conducive legislative atmosphere is essential for a
progressive social change. It is true that influential people would utilize these reservations at
the beginning. But in due course political leadership will emerge. This is also the experience
with scheduled caste and scheduled tribe reservations. At the initial stage landlords have
fielded their henchmen and enjoyed power by proxy. But things have changed substantially
over a period of time.

C. The most important reason for stalling this bill is on the ground that these reservations
would alter the social composition of parliament and legislatures. Some political parties like
Rashtriya Janata Dal (RJD), Samajwadi Party, etc are opposing the bill in its present form
as it is claimed that it would benefit upper caste women. As a result, the composition of
backward castes, minorities would be adversely affected.

Such a possibility cannot be ruled out. However, opposing on this ground is uncalled for. No
law is final. Every law is evolved over a period of time. Women as a social category suffer
discrimination cutting across caste, class, religion in our society. We can begin with
womens reservations and in case the experience reveals that upper caste women are
getting disproportionately higher share, the law can be suitably amended.

In fact, the backward castes constitute nearly one fourth of Indian parliament. This is a result
of social churning process underway in Indian polity and society. In Indian politics,
caste is an important criterion for selection of candidates. If a particular constituency is
reserved for women, a backward caste woman shall replace a backward caste man as a
candidate.

Alternate measures to improve the representation of women in legislative bodies.

The most important among them is to amend the People's Representation Act to mandate
every political party to field women in at least one third of the constituencies.
Although this provision does not mandate a 33% composition of women in legislative

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 bodies, and lays the onus on political parties to be the engineers of change, the very nature
of such a provision proves to be its own drawback. If this proposal is implemented as an
alternative, political parties driven by patriarchal values, would field women in the
constituencies they know they would loose in all probability. As a result, there will be one
third of women contestants, but not one third of women in parliament and legislatures.

But an amendment is suggested to prevent such a misuse. According to this amendment,

every political party has to field women in at least in one third of seats in every state in
parliamentary elections. Similarly, every political party has to field women candidates in at
least one third of seats in every district in case of assembly elections. But, this amendment is
not a complete solution to the possibility of misuse. Every political party can easily identify
weaker seats and field women in those seats. It is in fact difficult to implement such a
proposal in the era of coalitions, as all political parties do not contest all the seats.

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 L A N D A C Q U I S I T I O N

Land acquisition refers to the process by which the union or a state government in India acquires
private land for the purpose of industrialisation, development of infrastructural facilities or
urbanisation of the private land, and provides compensation to the affected land owners and their
rehabilitation and resettlement. Land acquisition in India is governed by the Right to Fair
Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013
(LARR) and which came into force from 1 January 2014. Till 2013, land acquisition in India was
governed by Land Acquisition Act of 1894.

Principle of Eminent Domain and Acquisition of Land

The power to take property from the individual rooted in the idea of eminent domain. Simply put,
eminent domain is the power of a state or a national government to take private property with due
monetary compensation for public use. The doctrine of eminent domain states, the state/national
government can do anything, if the act of state/national government involves public interest. The
doctrine empowers the state/national government to acquire private land for a public use, provided
the public nature of the usage can be demonstrated beyond doubt.

The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and
Resettlement Act, (LARR Act) 2013

Why was there a need for a new act?

This act was passed because the Government of India felt that there is heightened public concern on
land acquisition issues in India. Of particular concern was that despite many amendments, over the
years, to India's Land Acquisition Act of 1894, there was an absence of a cohesive national law that
addresses:
fair compensation when private land is acquired for public use, and
fair rehabilitation of land owners and those directly affected from loss of livelihoods.

The Government believed that a combined law is necessary, one that legally requires rehabilitation
and resettlement necessarily and simultaneously follows government acquisition of land for public
purposes.

The title of the old law (1894 Act) conveyed that its primary purpose was to expedite the acquisition
of land. However, the principle objective of the new Act is fair compensation, thorough resettlement

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 and rehabilitation of those affected, adequate safeguards for their well-being and complete
transparency in the process of land acquisition. The title has been amended to reflect this.

There is unanimity of opinion across the social and political spectrum that the Land Acquisition Act
1894) suffered from various shortcomings. Some of these include:

Forced acquisitions: Under the 1894, legislation, once the acquiring authority has formed the
intention to acquire a particular plot of land, it can carry out the acquisition regardless of
how the owner of the land would be affected.
No safeguards: There is no real appeal mechanism to stop the process of the acquisition. A
hearing (under section 5A) is prescribed but this is not a discussion or negotiation. The
views expressed are not required to be taken on board by the officer conducting the hearing.
Silent on resettlement and rehabilitation of those displaced: There are absolutely no
provisions in the 1894 law relating to the resettlement and rehabilitation of those displaced
by the acquisition.
Urgency clause: This was the most criticised section of the Law. The clause never truly
defines what constitutes an urgent need and leaves it to the discretion of the acquiring
authority. As a result almost all acquisitions under the Act invoke the urgency clause. This
results in the complete dispossession of the land without even the token satisfaction of the
processes listed under the Act.
Low rates of compensation: The rates paid for the land acquired are the prevailing circle
rates in the area which are notorious for being outdated and hence not even remotely
indicative of the actual rates prevailing in the area.
Litigation: Even where acquisition has been carried out the same has been challenged in
litigations on the grounds mentioned above. This results in the stalling of legitimate
infrastructure projects.
In view of these deficiencies, the Supreme Court had observed that the law seems to have
been drafted with scant regard for the welfare of the common man.

Highlights of LARR 2013 Act

Compensation: Given the inaccurate nature of circle rates, the Act mandates the payment of
compensations that are up to four times the market value in rural areas and twice the market
value in urban areas.
R&R: This is the very first law that links land acquisition and the accompanying obligations
for resettlement and rehabilitation.

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 Multiple checks and balances: A comprehensive, participative and meaningful process
(involving the participation of local Panchayati Raj institutions) shall be put in place prior to
the start of any acquisition proceeding. The Act has also established monitoring committees
at the national and state levels to ensure R&R obligations are also complied with.
Special safeguards for tribal communities and other disadvantaged groups: No law can be
acquired in scheduled areas without the consent of the Gram Sabhas. The law also ensures
that all rights guaranteed under such legislation as the Panchayat (Extension to Scheduled
Areas) Act 1996 and the Forest Rights Act 2006 are taken care of. It has special enhanced
benefits for those belonging to Scheduled Castes and Scheduled Tribes.
Safeguards against displacement: The law provides that no one shall be dispossessed until
and unless all payments are made and alternative sites for the resettlement and rehabilitation
have been prepared.
Compensation for livelihood losers: In addition to those losing land, the Act provides
compensation to those who are dependent on the land being acquired for their livelihood.
Consent: In cases where PPP projects are involved or acquisition is taking place for private
companies, the Act requires the consent of no less than 70% and 80% respectively (in both
cases) of those whose land is sought to be acquired. This ensures that no forcible acquisition
can take place..
SIA in consultation with PRIs: The Social Impact Assessment (SIA) has to be carried out in
consultation with the representatives of the Panchayati Raj Institutions (PRIs). In fact, the
appropriate Government is required by the law to ensure adequate representation of these
institutions during the discharge of the process.
Caps on acquisition of multi-crop and agricultural land: To safeguard food security and to
prevent arbitrary acquisition, the Bill directs states to impose limits on the area under
agricultural cultivation that can be acquired.
Return of unutilized land: In case land remains unutilized after acquisition, the new Bill
empowers states to return the land either to the owner or to the State Land Bank.

Why is the government trying to amend the LARR Act, 2013?

Land acquisition is an important stage in the setting up of any new project. The ease and
convenience of acquiring land for major projects facts into the ease of doing business in a country.
The enactment of RFCTLARR had significant impact on the future of the projects. According to
the Centre for Monitoring Indian Economy (CMIE), projects entailing a staggering Rs.6.26 trillion
of investment were shelved, abandoned, or stalled in 2013-14, the highest ever in India's history. A
total number of projects abandoned, shelved or stalled was as high as 524 in 2013-14. According to

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 the CMIE report, the major reasons given were difficulties related to land acquisition, delay in
getting environment clearances and promoters lack of interest. Promoters lack of interest in the
project could be due to non favourable market conditions, delay in getting clearances, high cost of
land, lack of financial resources or inadequate resources.

Therefore, the government had decided to introduce major changes in the existing Land
Acquisition, Rehabilitation and Resettlement Act 2013. It is in many ways aimed to be a course
correction after the Act passed by UPA was deemed as restrictive by industry bodies. It is generally
said of the Act that the LARR is both anti-industry and anti-farmer. Keeping that in mind, the
Government had introduced an 'ordinance' to amend the LARR Act. The government has already
failed thrice in trying to take the ordinance route to amend the Act. The amendment bill to change
the LARR Act has not yet been passed because BJP is in a minority in the Rajya Sabha. The
amendment ordinance has not been able to pass through the Rajya Sabha owing to the majority of
Congress in the upper house of parliament.

What are the changes that have been incorporated in the amendment?
Removal of consent clause and Social Impact Assessment :
The government has amended Section 10(A) of the Act to expand sectors where assessment
and consent will not be required. As explained above consent of 80% of the families affected
by acquisition of land acquired for a private purpose and 70% of the families affected by
acquistion of land for a PPP purpose is a must for clearing a proposal for acquiring land.
However for five sectors, the consent clause has been removed in the proposed amendments
which the government is trying to push through parliament. If passed, the government or
private individuals/companies will no longer need mandatory 70% or 80% (as the case may
be) consent for land acquisition in those five sectors. The mandatory "consent" clause and
Social Impact Assessment (SIA) will not be applicable if the land is acquired for purposes
such as national security, defence, rural infrastructure including electrification, industrial
corridors and housing for the poor including PPP where ownership of land continues to be
vested with the government.

Also whether the land is fertile or not will also not be taken into consideration while
acquiring it for these five specific sectors. Thus even if the land is extremely fertile like it
was the case in Singur, it can be acquired if it fits the criterion of these five sectors, no
question asked.

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 Return of unutilised land: (contentious)
The LARR Act 2013 required that if land acquired under it remained unutilised for five
years, it was to be returned to the original owners or the land bank. The amendment bill
states that the period after which unutilised land will need to be returned will be five years,
or any period specified at the time of setting up the project, whichever is later. This
change has been introduced mainly because some infrastructural projects have a gestation
period much longer than five years. Therefore if any project is expected to be set up in a
period longer than five years, let us say, 8 years, then 8 years shall be considered as the
duration for which the acquired land must remain unutilized for it to revert back to the
owner or a land bank. This is a major point of disagreement over which no political
consensus has been reached yet.

Removal of Difficulty: (contentious)

Another point of disagreement is the proposed amendment that will give the government
overriding powers to make changes in any provision of the Act through executive orders for
removal of difficulty. As per the 2013 Act, this power was limited to only a certain part of
the Act and to a period of two years, which expires on December 31, 2015. In the
amendment bill, it has been proposed to be increased by another five years. Acquiring the
power to change any provision of the act to remove difficulty can be misutilized to remove
obtaining 'consent' or SIA even for those projects that do not fall within the five categories
of exemption envisaged in the Act.

Immunity to bureaucrats: Head of the department cannot be prosecuted without prior

sanction of government (under CrPC Section 197). This immunity is given to ensure
bureaucrats do not sit on the files, fearing media-trials and judicial activism.

Private medical and educational institutions: The LARR Act 2013 excluded the acquisition
of land for private hospitals and private educational institutions from its purview. The
Ordinance removes this restriction. Private colleges and hospitals too can acquire land. But
if they continue to charge hefty-fees then no real public-purpose is served. Mushrooming
of self-financed professional education institutions doesnt help reaping Indias demographic
dividend. Ordinance doesnt specifically say that such private hospitals and school/colleges
are exempt from Social impact assessment (SIA). But they too can circumvent SIA and

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 consent requirement by claiming its a social-infrastructure project.

Andhra Pradesh' Land Pooling Policy

While it has been regularly argued that taking away of farming land for the purposes of private
industry and factories, and where acquisition is often supported by the government sometimes even
with the employment of the state machinery, police and the bureaucracy is a highly colonial
endeavour. Why must the state be interested in snatching the land from the poor and give it to
private individuals? The poor compensation history followed in the cases of land acquisition had
caused the government to implement the new land acquisition law in 2013. However, this too has
proved to be inadequate as it is too rigorous in its procedural aspects and has been found to result in
stalling of projects.

Under land pooling systems, landowners voluntarily sign ownership rights over to a single agency
or government body. This agency develops the land by building roads and laying sewage lines and
electricity connections. Once this is done, it returns a smaller portion of the land to the original
owners. But since the plot now has more amenities, its price has probably risen to match the market
value of the owners original landholding. Land pooling differs from land acquisition in significant
ways. When acquiring land, the authorities sometimes have to compensate owners with up to four
times the value of their plots. But instead of paying four times the market rate of their land,
authorities often pay them four times the registered value. This amount is usually significantly
lower and does not factor in inflation over the years. This makes it difficult to obtain the consent of
the majority of plot owners as they know they would be getting much lesser from the acquisition
than if they sold it in the open market. As a result, land is often acquired by force.

In light of the above-mentioned difficulties, Andhra Pradesh' CM had announced an innovative land
pooling policy for the purposes of building its capital city of 'Amravati'. The land-pooling
mechanism used for acquisition of 32,000 acres of land from farmers by the state government is a
model to replicate.

The state has committed to pay an annuity of Rs 50,000 per acre (for fertile lands) and Rs. 30,000
per acre (for dry lands) for 10 years to the 18,000 farmers from whom the land has been acquired. It
will also give back 1,250 square yards of residential plot and 200 square yard of commercial plot in
the new city for every acre. Furthermore, the state has also exempted the original owners from
capital gains tax and stamp duty on the first sale. The package being given to land owners depends
on the kind of land. For instance, owners of dry land having clear title documents will get 1,000

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 square yards of residential and 200 square yards of commercial plots for every acre surrendered.
Similarly, owners of wet or irrigated land with clear titles will get 1,450 square yards of residential
and 450 square yards of commercial plots while those with assigned lands will get 1,250 square
yards residential and 450 square yards of commercial plot. This policy of land-pooling does not
dislocate land owners and instead makes them part of the development process of the region by
ensuring their just rehabilitation, thus allowing them to participate in the growth that is expected to
ensue. The annual annuity that has been promised to be paid for a period of 10 years is an example
of making the land-losers shares of the 'new economy' that will be generated in the land acquired
from them. Thus land pooling is a much better alternative.

However, Andhra Pradesh is not the first state to implement the policy of land pooling as Gujarat
has been conducting experiments with pooling for several decades. One of the more recent
projects, the Dholera Special Investment Region pooled land from farmers and handed them a share
of the profits. The usual ratio of land acquired to land returned in Gujarat is 40:60, with the
landowner getting back 60% of land. The ratio in Amaravati is closer to 70:30, with the landowner
getting back only 30% of land.

Criticisms to land pooling policy

It is argued that although land-pooling policy does not work along the co-ercive mechanisms
employed by the land acquisition process, it still is far from being a noble way of using farmer's
land for developmental purposes. A major criticism that has been leveled against it that there is no
safeguard for the farmers who have given up land. There is no safety net for the farmers, if the
proposed region does not get developed along the proposed lines. Land pooling works on the
assumption that the land acquired from farmers will surely be developed. What if the projects fail to
come up? How will the farmers ensure that adequate compensation is paid to them for giving up
their lands?

Some have also argued that the government is in a way under-paying the land-owners by not giving
them full compensation in terms of the land's market value. In 2013, the official rate for agricultural
and non-agricultural land in Lingayapalem, a village in Andhra Pradesh was Rs 5 lakh per acre. Had
that land been acquired, the land-owner would have received a flat sum of Rs 12.5 lakh for one
acre of land, according to Andhra Pradeshs rules. With land pooling, the land-owner would receive
Rs 30,000 for ten years (for dry land), with an annual increase of 10%. At the end of this period, the
government will have given him Rs 4.78 lakh. It is only the 'value' of the developed land which the
government is banking upon as a way of compensation to the farmers. The value of the land will lie

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 only to the extent of development and the quality and quantity of amenities are that are available. If
the promised development fails to come up, then there is no mechanism to ensure that farmers are
compensated adequately.

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 C H A L L E N G E S T O I N D I A ' S D E V E L O P M E N T

1 . A G R I C U LT U R E

While agricultures share in Indias economy has progressively declined to less than 15% due to the
high growth rates of the industrial and services sectors, the sectors importance in Indias economic
and social fabric goes well beyond this indicator. First, nearly three-quarters of Indias families
depend on rural incomes. Second, the majority of Indias poor (some 770 million people or about 70
percent) are found in rural areas. And third, Indias food security depends on producing cereal
crops, as well as increasing its production of fruits, vegetables and milk to meet the demands of a
growing population with rising incomes. To do so, a productive, competitive, diversified and
sustainable agricultural sector will need to emerge at an accelerated pace.

India is a global agricultural powerhouse. It is the worlds largest producer of milk, pulses, and
spices, and has the worlds largest cattle herd (buffaloes), as well as the largest area under wheat,
rice and cotton. It is the second largest producer of rice, wheat, cotton, sugarcane, farmed fish,
sheep & goat meat, fruit, vegetables and tea. The country has some 195 m ha (a/c to World Bank or
157 m ha (a/c to India Brand Equity foundation, a trust established by the Ministry of Commerce
and Industry) under cultivation of which some 63 percent are rainfed (roughly 125m ha or 98.91)
while 37 percent are irrigated (70m ha or 58.09). In addition, forests cover some 65m ha (or 78.92
a/c to Ministry of Environment and Forests) of Indias land.

Challenges

Three agriculture sector challenges will be important to Indias overall development and the
improved welfare of its rural poor:

Raising agricultural productivity per unit of land: Raising productivity per unit of land will
need to be the main engine of agricultural growth as virtually all cultivable land is farmed.
Water resources are also limited and water for irrigation must contend with increasing
industrial and urban needs. All measures to increase productivity will need exploiting,
amongst them: increasing yields, diversification to higher value crops, and developing value
chains including establishment of cold-storage warehouses closer to production in order to
reduce marketing and distribution costs.

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 Reducing rural poverty: through a socially inclusive strategy that comprises both agriculture
as well as non-farm employment. Rural development must also benefit the poor, landless,
women, scheduled castes and tribes. Moreover, there are strong regional disparities: the
majority of Indias poor are in rain-fed areas or in the Eastern Indo-Gangetic plains.
Reaching such groups has not been easy. While progress has been made - the rural
population classified as poor fell from nearly 40% in the early 1990s to below 30% by the
mid-2000s (about a 1% fall per year) there is a clear need for a faster reduction.

Ensuring that agricultural growth responds to food security needs: The sharp rise in food-
grain production during Indias Green Revolution of the 1970s enabled the country to
achieve self-sufficiency in food-grains and stave off the threat of famine. Agricultural
intensification in the 1970s to 1980s saw an increased demand for rural labor that raised
rural wages and, together with declining food prices, reduced rural poverty. However
agricultural growth in the 1990s and 2000s slowed down, averaging about 3.5% per annum,
and cereal yields have increased by only 1.4% per annum in the 2000s. The slow-down in
agricultural growth has become a major cause for concern. Indias rice yields are one-third
of Chinas and about half of those in Vietnam and Indonesia. The same is true for most other
agricultural commodities.

Policy makers will thus need to initiate and/or conclude policy actions and public programs to shift
the sector away from the existing policy and institutional regime that appears to be no longer viable
and build a solid foundation for a much more productive, internationally competitive, and
diversified agricultural sector.

1 . a P R I O R I T Y A R E A S F O R S U P P O R T

Enhancing agricultural productivity, competitiveness, and rural growth:

Promoting new technologies and reforming agricultural research and extension: Major
reform and strengthening of Indias agricultural research and extension systems is one of the
most important needs for agricultural growth. These services have declined over time due to
chronic underfunding of infrastructure and operations, no replacement of aging researchers
or broad access to state-of-the-art technologies. Research now has little to provide beyond
the time-worn packages of the past. Public extension services are struggling and offer little

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 new knowledge to farmers. There is too little connection between research and extension, or
between these services and the private sector. Adequate mechanisms should be put in place
to ensure that knowledge generated in research labs is passed to farmers.

Improving Water Resources and Irrigation/Drainage Management: Agriculture is Indias

largest user of water. However, increasing competition for water between industry, domestic
use and agriculture has highlighted the need to plan and manage water on a river basin and
multi-sectoral basis. As urban and other demands multiply, less water is likely to be
available for irrigation. Ways to radically enhance the productivity of irrigation (more crop
per drop) need to be found. Piped conveyance, better on-farm management of water, and
use of more efficient delivery mechanisms such as drip irrigation are among the actions that
should be taken. There is also a need to manage as opposed to exploit the use of
groundwater. Incentives to pump less water such as levying electricity charges or
community monitoring of use have not yet succeeded beyond sporadic initiatives (India
provides a huge subsidy on electricity to farmers which makes it cheaper for farmers to
pump out ground-water than rely on canal based irrigation systems that are inundated with
river waters. Other key priorities include: (i) modernizing Irrigation and Drainage
Departments to integrate the participation of farmers and other agencies in managing
irrigation water; (ii) improving cost recovery; (iii) rationalizing public expenditures, with
priority to completing schemes with the highest returns; and (iv) allocating sufficient
resources for operations and maintenance for the sustainability of investments.

Facilitating agricultural diversification to higher-value commodities: Encouraging farmers to

diversify to higher value commodities will be a significant factor for higher agricultural
growth, particularly in rain-fed areas where poverty is high. Moreover, considerable
potential exists for expanding agro-processing and building competitive value chains from
producers to urban centers and export markets. While diversification initiatives should be
left to farmers and entrepreneurs, the Government can, first and foremost, liberalize
constraints to marketing, transport, export and processing. It can also play a small regulatory
role, taking due care that this does not become an impediment.

Promoting high growth commodities: Some agricultural sub-sectors have particularly high
potential for expansion, notably dairy. The livestock sector, primarily due to dairy,
contributes over a quarter of agricultural GDP and is a source of income for 70% of Indias
rural families, mostly those who are poor and headed by women. Growth in milk

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 production, at about 4% per annum, has been brisk, but future domestic demand is expected
to grow by at least 5% per annum. Milk production is constrained, however, by the poor
genetic quality of cows, inadequate nutrients, inaccessible veterinary care, and other factors.
A targeted program to tackle these constraints could boost production and have good impact
on poverty.

Developing markets, agricultural credit and public expenditures: Indias legacy of extensive
government involvement in agricultural marketing has created restrictions in internal and
external trade, resulting in cumbersome and high-cost marketing and transport options for
agricultural commodities. Even so, private sector investment in marketing, value chains and
agro-processing is growing, but much slower than the actual potential. While some
restrictions are being lifted, considerably more needs to be done to enable diversification
and minimize consumer prices. Direct Marketing mechanisms should be evolved so as to
connect the farmer directly with consumers. Farmers must have access to retail platforms
that deliver to them fair value for their produced. Due to the limited availability of
marketing platforms and the crowded APMC, the rent-seeking middle-men usurp much of
the profits that should go to farmers. Middle-men @ APMCs charge commission to farmers
as well as consumers without bringing in any value addition. Implementation of direct
marketing mechanisms have been found to be very useful as middle-men are removed. Due
to the same, in South Korea, farmer's income rose by 20% while consumer prices dropped
by 30%. Improving access to rural finance for farmers is another need as it remains difficult
for farmers to get credit. Moreover, subsidies on power, fertilizers and irrigation have
progressively come to dominate Government expenditures on the sector, and are now four
times larger than investment expenditures, crowding out top priorities such as agricultural
research and extension.

Poverty alleviation and community actions

While agricultural growth will, in itself, provide the base for increasing incomes, for the 170 million
or so rural persons that are below the poverty line, additional measures are required to make this
growth inclusive. For instance, a rural livelihoods program that empowers communities to become
self-reliant has been found to be particularly effective and well-suited for scaling-up. This program
promotes the formation of self-help groups, increases community savings, and promotes local
initiatives to increase incomes and employment. By federating to become larger entities, these
institutions of the poor gain the strength to negotiate better prices and market access for their
products, and also gain the political power over local governments to provide them with better

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 technical and social services. These self-help groups are particularly effective at reaching women
and impoverished families.

Sustaining the environment and future agricultural productivity

In parts of India, the over-pumping of water for agricultural use is leading to falling groundwater
levels. Conversely, water-logging is leading to the build-up of salts in the soils of some irrigated
areas. In rain-fed areas on the other hand, where the majority of the rural population live,
agricultural practices need adapting to reduce soil erosion and increase the absorption of rainfall.
Overexploited and degrading forest land need mitigation measures. There are proven solutions to
nearly all of these problems. The most comprehensive is through watershed management programs,
where communities engage in land planning and adopt agricultural practices that protect soils,
increase water absorption and raise productivity through higher yields and crop diversification. At
issue, however, is how to scale up such initiatives to cover larger areas of the country. Climate
change must also be considered. More extreme events droughts, floods, erratic rains are
expected and would have greatest impact in rain-fed areas. The watershed program, allied with
initiatives from agricultural research and extension, may be the most suited agricultural program for
promoting new varieties of crops and improved farm practices. But other thrusts, such as the
livelihoods program and development of off-farm employment may also be key.

2 . E M P L O Y M E N T O P P O R T U N I T I E S

India is a vast country with a population of about 1.21 billion and a labour force of around 475
million. There is an open unemployment of 9.5 million as per estimates available for the year 2009-
10 (PIB, GoI). India has a younger population not only in comparison to advanced economies but
also in relation to large developing countries. As a result, the labour force in India is expected to
increase by 32 per cent over the next 20 years, while it will decline by 4.0 per cent in industrialised
countries and by nearly 5.0 per cent in China. Thus, there is a huge demographic dividend looming
around the corner waiting to be exploited. It has been estimated that every year 110 million people
will join the labour force by 2022. In that case, India will need to add 1 million jobs every month to
be able to absorb the increasing workforce. Since the majority of India lives in rural areas, it
becomes logical to bring employment to rural India by creating jobs nearer to rural homes than
encourage investments that would centralize job opportunities away from rural areas thus resulting
in large scale migrations. The Indian economy is already generating approximately 7 million
employment and self-employment opportunities per annum, almost all of them in the informal

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 sector, but in there is a serious lack of accurate information on the types and numbers of these jobs.
The most effective strategy for employment generation will be to provide the missing links and
policy measures needed to accelerate this natural process of employment generation.(This section
will talk only of generation of employment in rural areas. As for 'demographic dividend' and India's
employment gap due to low skills of its workforce, See topic above Demographic Dividend and
National Skills Development Mission)

In a country where the majority of people still work in agriculture, low agricultural productivity is
an important determinant of poverty. Rural workers either work as employees in farms for a low
wage or squeeze a living out of small and low-quality landholdings. There is enormous scope for
raising the productivity of Indian agriculture, doubling crop yields and farm incomes, and
generating significant growth in demand for farm labour. The report presents evidence to
demonstrate that improving plant nutrition through micronutrient analysis and improving irrigation
through deep chiseling of soil can result in a tripling of crop yields.

Rising rural incomes consequent to higher productivity will first of all result in creation of higher
disposable incomes in the hands of rural populace. This increase in the amount of disposable
income will compel them to demand better goods and services, which will also not be limited to
farm-related demands. More and more non-farm goods and services will be demanded. This cycle
will unleash a multiplier effect, as demand for non-farm goods and services will improve rural
incomes further, thereby stimulating rapid growth of employment opportunities in other sectors.

However, the supposed employment benefits from a multiplier effect can flow in only if the
government adopts a systematic approach towards raising agricultural productivity. Efforts to
improve farm productivity suffer from several limitations. Indian agriculture is constrained by weak
linkages between agricultural training and extension (i.e., bringing lab generated research and
technical expertise forward to farmers), crop production, credit, processing, marketing, and
insurance. Thus, agricultural productivity needs to be raised and the following suggestions could be
implemented.
Establishment of village-based Farm Schools to demonstrate and impart advanced
technology to farmers on their own lands.
Establishment of a network of sophisticated soil test laboratories capable of high volume
precision analysis of 13 essential plant nutrients coupled with development of expert
computer systems to interpret soil test results and recommend individualized packages of
cultivation practices for each crop, location and soil profile.

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 Establishment of Rural Information Centres to act as a medium for transmission of soil test
data and recommended practices, access to current input and market prices, and other
essential information for upgrading agriculture.
Policy and legal measures to encourage contract farming arrangements between agri-
business firms and self-help groups in order to increase small farmers access to advanced
technology, quality inputs, bank credit, processing, marketing and crop insurance.
Measures to strengthen farm credit and insurance programmes, including creation of
linkages between crop insurance, crop loans, and farm school training to encourage farmers
who seek credit and crop insurance to adopt improved cultivation practices.
In order to ensure ready markets for the crops that are produced, the report focuses on the
potential for linking crop production with huge untapped markets and specific agro-
industries, including energy plantations to fuel biomass power plants, bio-diesel from
jathropa, ethanol from sugarcane and sugar-beet, edible oil from Paradise Tree, horticulture
crops and cotton.
In order to bridge the skills gap in rural areas, major steps need to be adopted. The
vocational skills sphere is currently dominated by ITIs which have been alleged to be
terribly inefficient and in many cases even completely non-functional. However, while ITIs
provide training for semi-skilled jobs, what is really needed in rural areas is skill
development that would support farming activity. Therefore, in addition to Farm Schools to
impart advanced skills in production agriculture, the government should establish a network
of government-certified, rural vocational institutes providing training and certification in
hundreds of vocational skills not covered by the ITIs. These vocational skills must be linked
to the value chain that is envisaged for agriculture so that agriculture grows organically with
the addition of workforce trained in farm-allied activities and agricultural value chain. In
order to offset the shortage of qualified trainers in every village and the costs of replicating
institutions throughout the country, the report advocates creation of a national network of
Job Shops linked to the Rural Information Centres and offering televised multimedia
training programmes and computerized vocational training programmes. This will result in
an informal broadcast system of pre-recorded videos that will take technical expertise to
every village without having to depute trained technicians in each rural location.

Employment generation in Manufacturing Sector

The Indian government has so far resorted to two steps to improve generation of employment in the
manufacturing sector. While the 'Make in India' slogan was raised last year, it is only this year that a
national policy on capital goods has been developed to augment the manufacturing sector. Apart

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 from the capital goods policy, the other significant reform measure adopted by the government has
been to further liberalize sectoral caps and investment limits in Indian companies in various sectors
of the economy. The idea behind liberalizing sectoral caps and investment limits is that removal of
sectoral caps will enhance the flow of foreign investment into India which will lead to the creation
of more jobs. The reforms in the FDI/Foreign investment policy have already been detailed above
and therefore will not be repeated here. The National Capital Goods policy focuses on employment
generation through absorbing the newly added workforce into the manufacturing sector. The policy
is dealt with in a detailed manner as a separate topic.

3 . M A N A G I N G U R B A N I Z AT I O N

Historically, there has been a strong correlation between urbanization and economic growth across
countries and across time with the causation possibly running both ways. Empirical studies show
that middle income countries reach about 50 per cent urbanization and high income countries
typically have 7080 per cent urbanization. In the twenty years since the start of reforms, the
proportion of urban population increased from 26 per cent in 1991 to just about 31 per cent in 2011.
India's urban population share of the overall population is much lower than for other emerging
market countries, for instance China (48 percent), Mexico (78 percent), South Korea (83 percent)
and Brazil (87 percent).

The costs of unplanned urbanization are already very visible in terms of the huge strains
on infrastructure and sanitation, pressure on utilities and inadequate and low quality social service
provision.

The pace of urbanization is now set to accelerate as the country sets to a more rapid growth.
Economic reform has already unleashed investment and growth offering its citizens rich
opportunities. Surging growth and employment in cities will prove a powerful magnet. 300 million
Indians currently live in towns and cities. Within 20-25 years, another 300 million people will get
added to Indian towns and cities. This will make some of the Indian cities larger than some
countries by 2030. This urban expansion will happen at a speed quite unlike anything that India has
seen before. It took nearly forty years for Indias urban population to rise by 230 million. It could
take only half the time to add the next 250 million. If not well managed, this inevitable increase in
Indias urban population will place enormous stress on the system.

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 Recent reports suggest that India spends $17 per capita per year in urban infrastructure, whereas the
most benchmarks suggest a requirement $100. The investment required for building urban
infrastructure in India, over the next 20 years, is estimated at approximately US$ 1 trillion.

There has been an incomplete devolution of functions to the elected bodies as per 74th
Constitutional Amendment Act (constitutional amendment that provided for greater devolution of
power to urban local bodies such as municipal councils (for towns), municipal corporations (for big
urban cities), and nagar panchayats (for transitional areas or rur-ban areas). This lack of devolution
of powers to local urban bodies is largely attributable to the unwillingness of the state governments
to share greater decentralized power. In addition, very few Indian cities have 2030 master plans that
take into account peak transportation loads, requirements for low-income affordable housing and
climate change. In general, the capacity to execute the urban reforms and projects at the municipal
and state level has been historically inadequate.

What are the reasons for poorly managed urbanization?

Inadequate empowerment of city governments:
In 1992, the 74th constitutional amendment explicitly gave the mandate for the delivery of basic
urban services to local governments. The profusion of parastatals within the jurisdiction of ULBs is
also often cited as further dilution of the accountability and decentralization process in the urban
context.

#Parastatals: Apart from municipal institutions, there are also a number of other statutory bodies
which are set up to administer one particular aspect of urban governance (The Delhi Jal Board for
example, looks after the supply and treatment of water within the city of Delhi). Since these
specialized bodies also work under the control of the state government, the functions and powers
of such bodies (parastatals) and ULBs often overlap, and as a result the state government retains
most of the power over urban governance without any effective devolution of power to the ULBs.

Inadequate representation: While the Panchayati Raj Institutions (PRIs of local government in
rural areas have increased in strength, and have one elected representative per 380 people, in urban
areas Urban Local Bodies (ULBs) remain underdeveloped, and the ratio of elected representatives
to citizens is one elected representative to 3400 citizens. The absence of Ward committees or their
ineffectiveness in comparison with Gram Sabhas is an indicator of the extent of the gap in the
decentralization process between the rural and urban areas.

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 Inadequate financial resources: This was to be matched by financial empowerment through the
mechanism of state governments devolving adequate finances to the local governments. This,
however, has yet to happen. Most local governments remain largely dependent on ad hoc transfers
from the state governments and have also, by and large, not been able to collect tax revenue in the
few areas under their own purview for instance, in areas such as property tax. Inability to collect
revenue and utilize it handicaps the development and implementation or urban plans.

No power to charge users of its services Lack of resources:

Local governments also have little autonomy to set up user charges to cover even just the operation
and maintenance costs of delivering public services. Where they do, they have yet to develop the
culture of persuading users that they must be willing to pay for quality services. This means the
continued sustenance of basic public services depends on the goodwill of the state politocracy than
the needs and requirements of city-dwellers as the flow of funds depends on the pleasure and
satisfaction of state level ministers. Furthermore, there is little capacity to plan and manage at the
city level. This has meant that cities have not been able to fulfill the mandates passed on to them by
the constitutional amendment over 20 years ago.

Inadequate Manpower and lack of accountability: While modern accountability systems may be
in place under the direct technical guidance of the CAG, accounts of many local bodies are in
arrears for years or not prepared entirely at all due to lack of accountants working at the level of
these local bodies. As a result financial accountability suffers because of which it is difficult to
estimate the extent and impact of their functional deliveries.

A Plausible Financial Solution: In order to resolve this, city governments need to be made much
less dependent for their finances on the state government. There must be predictable and guaranteed
transfers to city governments in order to empower them with some basic financial resilience to plan
and implement their budgets. This has been addressed atleast on the financial front after the 14 th
Finance Commission's (FFC) report was submitted which enhanced the amounts allocated to local
governments from the divisible pool of taxes from Rs. 86161 crore to Rs. 287436 crore, an increase
of 234 percent over the grants recommended by the 13th FC. This amounts to a 344 percent
increase in the allocation of basic grants, from Rs. 56335 crore to Rs. 249978 crore. In the case of
performance grants, which, as a proportion of the total grants has been brought down to 10 percent
and 20 percent in the case of rural local governments and urban local governments respectively, the
increase is relatively modest; from Rs. 29826 crore to Rs. 37458 crore. All in all, this amounts to an
increase in the FFC grant to local governments, from 2.28 percent to 4 percent of the central

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 divisible pool of taxes. This is big money, translating at the Gram Panchayat level for instance, to an
increase from Rs. 5 lakhs to Rs. 25 lakhs per year, depending upon the size of the Panchayat
concerned.

World Bank's report on the pattern of India's urbanization: (Excerpts)

Analyzing the patterns of Indias urbanization, the report said while India added seven multicity
agglomerations [Multicity agglomerations are defined as a continuously lit belt of urbanization
containing two or more cities, each of which had a population of at least 100,000 living within its
administrative boundaries in 2010.] between 1999 and 2010 for a total of 30, Indian cities are not
able to take full advantage of these agglomerations. The largest metropolitan centers (Mumbai,
Delhi, Bangalore, Kolkata, Chennai, Hyderabad, and Ahmedabad) saw a 16 percent loss in
manufacturing jobs between 1998 and 2005 within 10 km of their city centers. On the other hand,
job growth in their immediate peripheries increased by almost 12 percent.

Even population growth has been fastest on the peripheries (beyond official administrative
boundaries) of these major cities. For example, population growth for the district of Delhi was 1.9
percent a year between 2001 and 2011, while the population growth in Gautam Budh Nagar (its
eastern periphery) was 4.1 percent a year. This is another example of hidden urbanization as the city
is 'sprawling' out into predominantly non-urban areas but which share characteristics similar to that
of an urban locality.

For many major Indian agglomerations, rapid growth in peripheral areas has been accompanied by
evidence of stagnation at their core, where land management policies are limiting the extent and
intensity at which land can be used by industry, commerce and housing, the report said. The
economic push away from city cores is also imposing a burden on businesses and people by
elevating market connection costs for firms and commuting costs for workers with negative
consequences for productivity, welfare, mobility, and livability in the major cities.

W O R D P O W E R
Messy Urbanization happens when a city is Hidden Urbanization is used to refer to a situation
unable to accomodate all its dwellers across where increasing number of people live in areas that
occupations and residences. With the result have urban like characteristics such as closely
being that majority of the city's populations packed residences, marketing and shopping areas,
ends up living in informal agglomerations booming construction opportunities and expansion,
such as slums. It is a direct fallout of but which do not fulfill the civic criteria of fulfilling

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 uncontrolled and unplanned urbanization the official definition of an 'urban' locality. Hidden
and expansion of cities. Messy urbanization urbanization occurs in the case of urban sprawls
in India is reflected in the nearly 6.55 crore when cities spillover to their peripheries. This is not
Indians who, according to the 2011 Census, good for the core of cities as it puts a challenge both
live in urban slums, as well as the 13.7% of to the administration as well as the finances as the
the urban population that lives below the transport and transaction costs of existing markets
national poverty line. increase due to 'sprawling' of urban centres.

Policy Actions and the Way Forward

India needs to work on several areas to manage its urbanization: The following are perhaps the most
important: Inclusive cities, urban governance, funding, planning, capacity building and low-income
housing India also needs to start a political process where the urban issues are debated with
evolution of meaningful solutions.

To better tap into the economic potential that urbanization offers, policymakers should consider
actions at two levels the institutional level and the policy level. At the institutional level, the
region would benefit from improvements in the ways in which towns and cities are governed and
financed. Specifically, the report said that reform is required to address three fundamental deficits
in empowerment, resources and accountability:

Intergovernmental fiscal relations must be improved to address empowerment.

Practical ways must be identified to increase the resources available to local governments to allow
them to perform their mandated functions [Already achieved through the increased allocations to
local bodies in the report submitted by the 14 th Finance Commission]. Mechanisms must be
strengthened to hold local governments accountable for their actions.

Whilst a necessary pre-condition for meaningful progress, however, these reforms by themselves
will not suffice. To tackle messy urbanization and bring about lasting improvements in both
prosperity and livability, policies are also required to improve the ways in which cities are
connected and planned, the working of land and housing markets, and cities resilience to natural
disasters and the effects of climate change. For instance, Indias Golden Quadrilateral Highway and
Ahmedabad citys Bus Rapid Transit System (BRTS) are examples of good connectivity and
planning. What is required is not a one-size fits all planning, but small-scale, neighborhood-level
urban planning like in Bhendi Bazaar, Mumbai, the report added.

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 Inclusive Cities: The poor and lower income groups must be brought into the mainstream in cities.
Regulations intended to manage densities and discourage migration both limit the supply of land
and require many households to consume more land than they would choose. This drives urban
sprawl and pushes up the price of land and the cost of service delivery for all (Hidden
Urbanization). High standards for parking, coverage limits, setbacks, elevators, road widths,
reservations for health centers schools etc. (often not used) prevent the poor from choosing how
much to consume of the costliest resource (urban land) to put a roof over their heads, and comply
with legal requirements. Informality is now the only path to affordable housing for the bulk of the
population in Indias cities. But informality implies illegality and therefore vulnerability. While
lower income groups pay dearly for shelter and servicesthey are bereft of normal property rights
protections and their investments are thus far riskier than those of the well off. They must instead
depend on the good will of bureaucrats and politiciansto safeguard their homes and places of
business. These barriers to healthy urbanization come not only at a high human cost, but take a toll
on productivity. Chronic informality discourages the very investments in education, health and
housing improvements the lower classes need to improve their own lot and contribute more to the
national economy.

Urban Governance: Meaningful reforms have to happen that enable true devolution of power and
responsibilities from the states to the local and metropolitan bodies according to the 74th
Amendment. Indias urban governance of cities needs an over-haul. Indias current urban
governance is in sharp contrast to large cities elsewhere that have empowered mayors with long
tenures and clear accountability for the citys performance. India also needs to clearly define the
relative roles of its metropolitan and municipal structures for its 20 largest metropolitan areas. With
cities growing beyond municipal boundaries, having fully formed metropolitan authorities with
clearly defined roles will be essential for the successful management of large cities in India.

Financing: Devolution has to be supported by more reforms in urban financing that will reduce
cities dependence on the Centre and the states and unleash internal revenue sources. Consistent
with most international examples, there are several sources of funding that Indian cities could tap
into, to a far greater extent than today: Monetizing land assets; higher collection of property taxes,
user charges that reflect costs; debt and public-private partnerships (PPPs); and central/state
government funding. However, internal funding alone will not be enough, even in large cities. A
portion has to come from the central and state governments. Here one can use central schemes such
as JNNURM and Rajiv Awas Yojana but eventually India needs to move towards a systematic
formula rather than ad-hoc grants. For large cities with deep economies, this might mean allowing

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 them to retain 20 percent of goods and services tax (GST) revenues. This is consistent with the
13th Central Finance Commissions assessment that GSTa consumption-based tax that creates
local incentives for growth and that is therefore well suited for direct allocation to the third tier of
government. For smaller cities, however, a better option would be to give guaranteed annual grants.

Planning: India needs to make urban planning a central, respected function, investing in skilled
people, rigorous fact base and innovative urban form. This can be done through a cascaded
planning structure in which large cities have 40-year and 20-year plans at the metropolitan level that
are binding on municipal development plans. Central to planning in any city is the optimal
allocation of space, especially land use and Floor Area Ratio (FAR) planning. Both should focus on
linking public transportation with zoning for affordable houses for low-income groups. These plans
need to be detailed, comprehensive, and enforceable.

Local capacity building: A real step-up in the capabilities and expertise of urban local bodies will
be critical to devolution and improvement of service delivery. Reforms will have to address the
development of professional managers for urban management functions, who are in short supply
and will be required in large numbers. New innovative approaches will have to be explored to tap
into the expertise available in the private and social sectors.

India needs to build technical and managerial depth in its city administrations. In the Indian Civil
Services, India has a benchmark for how to build a dedicated cadre for governance. India now
needs to create an equivalent cadre for cities, as well as allow for lateral entry of private-sector
executives.

Affordable housing: Affordable housing is a particularly critical concern for low-income groups
in the absence of a viable model that caters to their needs, India can meet the challenge through a
set of policies and incentives that will bridge the gap between price and affordability. This will
enable a sustainable and economically viable affordable housing model for both government
housing agencies and as well as private developers. India also needs to encourage rental housing as
an option particularly for the poorest of the poor, who may not be able to afford a home even with
these incentives.

Recent Government Measures:

In a determined bid to recast the urban landscape of the country to make urban areas more
livable and inclusive besides driving the economic growth, on April 29, 2015 the Union

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 Cabinet approved Central Government spending of about one lakh crore on urban
development under two new urban missions over the next five years. The Cabinet has
approved the Smart Cities Mission and the Atal Mission for Rejuvenation and Urban
Transformation of 500 cities (AMRUT) with outlays of Rs.48,000 crore and Rs.50,000 crore
respectively.
The architecture of the Smart Cities Mission and AMRUT is guided by the twin objectives
of meeting the challenges of growing urbanization in the country in a sustainable manner as
well as ensuring the benefits of urban development to the poor through increased access to
urban spaces and enhanced employment opportunities.

S M A R T C I T I E S
Under the Smart Cities Mission, each selected city would get central assistance of Rs.100
crore per year for five years. Smart City aspirants will be selected through a 'City Challenge
Competition' intended to link financing with the ability of the cities to perform to achieve
the mission objectives. Each state will shortlist a certain number of smart city aspirants as
per the norms to be indicated and they will prepare smart city proposals for further
evaluation for extending Central support. [In the month of August, 2015, the government
announced a list of 98 cities from the proposals sent in by various states. J&K is yet to
submit their list of potential cities, while all the other states have done so.]
This Mission of building 100 smart cities intends to promote adoption of smart solutions for
efficient use of available assets, resources and infrastructure with the objective of enhancing
the quality of urban life and providing a clean and sustainable environment. Special
emphasis will be given to participation of citizens in prioritizing and planning urban
interventions. It will be implemented through 'area based' approach consisting of retrofitting,
redevelopment, pan-city initiatives and development of new cities. Under retrofitting,
deficiencies in an identified area will be addressed through necessary interventions as in the
case of Local Area Plan for downtown Ahmedabad. Redevelopment enables reconstruction
of already built-up area that is not amenable for any interventions, to make it smart, as in the
case of Bhendi Bazar of Mumbai and West Kidwai Nagar in New Delhi. Pan-city
components could be interventions like Intelligent Transport Solutions that benefits all
residents by reducing commuting time.
Under smart cities initiative, focus will be on core infrastructure services like: Adequate and
clean Water supply, Sanitation and Solid Waste Management, Efficient Urban Mobility and
Public Transportation, affordable housing for the poor, power supply, robust IT connectivity,
Governance, especially e-governance and citizen participation, safety and security of

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 citizens, health and education and sustainable urban environment.
Smart City Action Plans will be implemented by Special Purpose Vehicles (SPV) to be
created for each city and state governments will ensure steady stream of resources for SPVs.

4 . I N F R A S T R U C T U R A L D E F I C I T

If theres one thing holding back Indias economic growth, its the countrys massive infrastructure
deficit. The lack of good roads, bridges and ports cant be blamed entirely on red tape, which often
leaves major projects stalled for years. Financing is an equally critical roadblock. The previous
Congress-led government estimated that India needed to invest somewhere around $1.2 trillion in
infrastructure between 2012 and 2017 in order to bridge the deficit in order to sustain an
uninterrupted 8% growth rate. India requires a large amount of infrastructure across many sectors
such as transportation, telecommunications, power, education, and urban services. It is clear that the
government cannot finance all of this based on tax revenue alone.

More importantly, the central, state, and local governments do not have the capacity, both in terms
of quantity and quality of manpower, to deliver this vast amount of infrastructure. PPPs therefore
certainly have a role to play. The planning commission and other sources have suggested that 50%
of Indias infrastructure needs over the next five years will need to be met through PPPs, a non-
trivial amount of infrastructure asset creation and service delivery.

In the World Economic Forums Global Competitiveness Report for 2011-2012, India ranked 89th
out of 142 countries for its infrastructure. The report criticized India's transport, Information and
Communication Technologies (ICT) and energy infrastructure as largely insufficient and ill
adapted to the needs of business, adding: The Indian business community continues to cite
infrastructure as the single biggest hindrance to doing business in the country.

Big Financial Crunch: In 2013-2014, the government spent nearly 69.4% of its receipts on paying
salaries, pensions and interest on its accumulated debt, and repaying the debt that fell due. In 2015-
2016, this had gone up to nearly 75.3%. That means out of every 100 rupees that the government
receives as income, it spends 75 rupees in those areas (salaries, pensions and debt servicing) that are
entirely unproductive and do not build capacity into the system. Out of the remaining 25 rupees that
the government is left with after meeting its non-productive expenditures, the government has to
spend on everything including education, defence, health, agriculture and infrastructure (since the

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 government cannot meet all of its expenditures it borrows money to furnish its expenditures. Taken
as a percentage of total expenditures the proportion of salaries, pensions and debt servicing is still a
solid 50%. Things have improved since 2005-06 when the proportion of 50% was as high as 80%).
This implies a serious paucity of funds that could be generated for the purposes of infrastructural
development. Even if the government were to commit 1% of Indias GDP annually to infrastructure
spending, that would only amount to $100 billion over the next five years barely a tenth of the
required investment. In the unlikely event that the government slashed all subsidies on food and
fertilizers, and invested up to 2% of GDP annually, it would still fall 80% short of its target.

The fact is that there are only two sustainable ways to raise money for infrastructure via a
thriving bond market, or through state-owned development finance institutions. The bond market is
by far the best place to raise long-term finance. Yet its very underdeveloped in India, largely
because it is dominated by the government, which has traditionally used it to raise cheap finance for
its own profligate spending. The first step to building a truly vibrant bond market is fiscal
responsibility.

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 But even such rectitude is not enough. Indias regulatory machinery needs a radical overhaul. For
depth, bond markets require investors, both domestic and foreign. Those investors need to be able to
hedge their risks credit risk, interest-rate risk and currency risk in appropriate derivatives
markets for each. Currently, Indias regulatory apparatus frowns on hedging interest-rate risk and
currency risk. It is suspicious of complex financial instruments and the 2008 global financial crisis
only reinforced those suspicions. The country has thus singularly failed to develop the kind of bond-
currency- derivatives nexus that would underpin a thriving bond market. Theres a good case to be
made for shifting the responsibility for regulating these markets from the central bank which has
reason to be excessively cautious as manager of the governments debt to the Securities and
Exchange Board of India (Sebi), which oversees the countrys bourses.

Developing a true bond market will take time, of course. So in the short run, the government also
needs to encourage non-banking financial institutions to step in with financing. A number of such
bodies already exist, from the India Infrastructure Finance Company to the Infrastructure Leasing
and Finance Company and the Infrastructure Development Finance Company. But they lack scale
and are dependent on Indias narrow bond markets to raise money. One radical idea thats been
floated would be to create a sovereign wealth fund using the shares of public-sector companies,
rather than foreign exchange as with other similar funds around the world. That would give such a
fund $200 billion to work with immediately, a number that could be quickly scaled up to $1 trillion
by diluting equity and by raising debt funds from markets.

At this point, radical ideas are exactly what India needs. Theres no other realistic way to meet the
countrys infrastructure needs within a reasonably quick time frame.

Why isn't there a vibrant and booming infrastructural business when there is a serious
deficit?
Given the scale of this infrastructure gap, its small wonder that India is one of the worlds most
attractive markets for companies in the infrastructure business. A recent report by Business Monitor
International predicted that Indias infrastructure sector will grow by 7.9% in the 2013 fiscal year
down from a previous estimate of 9.4%, but still a formidable rate of growth. The opportunities are
so extensive that money has poured in from overseas, including investments in 2011 from leading
private equity firms such as Kohlberg Kravis Roberts and the Blackstone Group. But Indias
difficult business environment has sapped the enthusiasm of many foreign investors. Among other
things, they complain about unpredictable regulations; bureaucratic delays in approving projects;

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 endless struggles to secure land rights; and the governments stalled attempts at reform.

The countrys reputation for corruption is also a major deterrent: in 2011, India ranked 95th out of
182 countries in Transparency Internationals Corruption Perceptions Index, down from 87th in
2010. The telecom sector has been struggling with a scandal over licenses. And the government has
rattled foreign investors by trying to claim over $2 billion in taxes from Vodafone Group,
attempting to change the law retroactively after Indias highest court ruled in the firms favor.

Not surprisingly, some investors have retreated. According to Reuters, private equity investments in
Indian infrastructure sank to $183 million in the first quarter of 2012, down from $459 million in
the same period of 2011.

The experiment with Public-Private-Partnership models

Poor completion record under PPP model: Ever since the PPP projects were mooted under the new
industrial policy since the 1990s, the completion record of PPP projects have been quite poor. When
we look at the overall developments of infrastructure under PPP model ever since the only 305
projects in the roads, ports, civil aviation and urban infrastructure have been materialised under the
Government of India scheme (uptil 2014). Investment in these projects is expected to be around
Rs.229,793 crore. However, only about 57 projects have been completed and the remaining projects
are in progress (uptil 2014. The figures presented are as per records of planning commission
continued with the NITI Ayog).

The government had sought to attract private capital for major infrastructure projects. In theory,
private companies would complete projects faster, deliver better and higher quality and more
efficiently than the state would, as long as they were insulated against the initial risk. Instead, the
system of public-private partnerships quickly degenerated into rampant crony capitalism, where big
companies accumulated profits and the public sector absorbed losses. The process led to high-
profile scandals and in response, a halt to many ongoing projects. That in turn left private
companies with huge debt burdens and state-owned banks (the biggest lenders) with a large amount
of non-performing assets. The rise in NPAs is due to a fundamental mismatch between the short-
term nature of bank deposits (usually bank loans are called back after 7 years) and the long-term
nature of infrastructure funding (infrastructural projects have a longer gestation period before which
they could start incurring revenue).

Indias experiment with PPP has been around for roughly 20 years where the focus has been

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 predominantly on asset creation. There is no surprise that most of the PPP concessions have been
given to development of national highways and ports. The World Bank cited in its 2011 report that
private participation was highly concentrated only in India. It ranks India as the largest market for
PPP in the developing world, accounting for over half of the total investments in new PPP projects
mapped across developing countries when it implemented 43 projects which attracted a total
investment of $20 billion. Global experiences with PPP on some infrastructural projects such as
urban metro rails have not been favourable. The models have suffered cost overruns and losses
despite government support. They have often failed to meet the core objective of increasing
passenger volumes. Low ridership, increased operational cost and fare hike lead to their near
collapse. The governments, otherwise keen on private capital, end up becoming liable for their debt
repayments and also run them. Something similar too happened in the case of the Delhi Metro
Airport express link which was a PPP project undertaken by Reliance Infrastructure and Delhi
Metro Rail Corporation (DMRC)

Problems With PPP Model: Apart from the major financial crunch being faced by the Government
in developing infrastructure for India's growth needs, there are several other problems that exist
when it comes to implementation of PPP.

The lowest bid method: One of the key elements of successful PPP projects is a clear
understanding of the proposed asset and prudent risk sharing and rewards associated with the
project. Due to inaccuracies in these, risk-sharing and mitigation measures prove inadequate and
inappropriate. For e.g., for the building of the Airport Express link for the DMRC, the financial
viability of the proposed asset was determined on the basis of the foot-fall calculation that was
estimated to be 40,000 per day. Instead it was found to be less than 20,000 per day and continued
falling. This increased the operational costs and eventually led to higher prices. Better preparation
before the bidding process for a PPP project is the key point. It is a known fact that technical data
availability and its quality has been a constraint in the way PPP projects are planned across India. A
major reason for the failure of PPP projects could be the appointment of consultants/tenderers on
the basis of the lowest bids submitted. Instead, the technical and skill capability must be assessed as
well in addition to the bids before granting a project to any tenderer/consultant. Further, the
tendering process also suffers from granting projects to vested interests, which results in dilution of
qualification criteria.

Inadequate Experience: It has been noted by World Bank in 2011, that India sees the largest
number of PPP projects. As such these type of projects are fairly recent, having seen a life of only

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 20 years so far in the context of India. Due to this inadequate experience, these is a lack of capacity
in India to structure and undertake PPPs. Due to lack of data and inability to ascertain the revenue
projections, the drafters of PPPs are stilted in their attempt to allocate risk sharing between the
participating public and private companies. Both the public and private sector should agree that it is
impossible to predict eventualities across the agreements 2030-year horizon and must be open to
being flexible and renegotiating a contract along the way. To be effective, PPPs should not be
governed strictly by an initial contract, and strong relationships between the public and private
sector should play a key role. Also both the public and private sector lack understanding of the
dynamic nature of PPPs, as well as the nature of risk sharing, as these arrangements are different
from engineering, procurement, and construction (EPC) contracts that the private and public sector
have traditionally entered into.

Therefore, a culture of partnering between the public and private sector needs to be built that is
currently absent. Capacity building could perhaps be the most potent tool here. There are not many
initiatives in this area, which may act as a limiting factor to the growth of PPPs in India.

Poor assessment of financial viability: If there is a favorable environment and good projects,
money will follow. However, for this to happen, financial viability must be assessed properly in
light of the environment and the project. The environment must have an eco-system that will
provide the necessary operational profitability. Wrong selection of projects entailing huge costs can
also deal a debilitating blow to the idea of public-private partnerships. There, it must be ensured that
the financial/revenue projects of the project to be implemented are made transparent and
predictable. The project must also be pre-screened to see whether there is a capacity to enact
partnerships and when selected so, an unbiased approach must be adopted to ensure risks are
allocated equitably. Such an environment can foster projects where the private sector earns a
reasonable return on investment, while simultaneously providing services more efficiently to
citizens than what the government is able to do. Certainly today, it is the environment and the
quality of projects that matter more than the innovations that drive financing.

The road ahead for PPP projects in India is proper integration wherein the lesson to learn is that
designs and construction should be taken care on the life cycle basis. Better preparation before the
process of bidding and transparency with regard to dissemination of technical data and its quality
and the elimination of ill-equipped consultants will go a long way to revive investor confidence.

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 Tendency for large value contracts: There is often a preoccupation with the build-operate-transfer
(BOT) approach to partnerships while other lighter forms of PPPs, such as operations and
management (O&M) contracts, are often ignored or not considered. BOT contracts require the
private partner to invest to a considerable extent in the project, then operate it for a pre-determined
period in order to generate revenues to cover its initial costs, and then eventually transfer it to the
ownership and management of the public partner. On the other hand, O&M contracts require the
public entity to invest in the building of the infrastructure, which upon completion is then handed
over to the private entity for operationalising and managing it. BOTs impose a burden on the private
entity to bring in the necessary finance, a condition that may act as a disincentive for private
entitites especially in light of unproven financial viability of a project. Whereas, O&M contracts
require the public entity to fund the project. It is far more easier for the public entity to source funds
and therefore the initial development of the project can go hindrance-free. These lighter forms of
PPPs are often easier to enact, carry lower risks that can be more easily allocated and mitigated than
the BOT type, and are more likely to succeed, thereby building capacity and awareness for PPPs.
BOTs could then be a logical next step in Indias PPP trajectory. Therefore, India may consider
starting with lighter forms of PPPs, such as O&M contracts, and then, as the environment and
understanding of PPPs improves, to migrate toward more complex forms of partnerships.

W O R D P O W E R
Life Cycle Costing: Owners, users and managers need to make decisions on the acquisition and
ongoing use of many different assets including items of equipment and the facilities to house them.
The initial capital outlay cost (i.e., the initial cost of purchasing and installing the assets) is usually
clearly defined and is often a key factor influencing the choice of asset given a number of
alternatives from which to select. The initial capital outlay cost is, however, only a portion of the
costs over an assets life cycle that needs to be considered in making the right choice for asset
investment. The process of identifying and documenting all the costs involved over the life of an
asset is known as Life Cycle Costing (LCC). The total cost of ownership of an asset is often far
greater than the initial capital outlay cost and can vary significantly between different alternative
solutions to a given operational need. Thus, it can be said that LCC will include such costs as
maintenance and servicing costs, sourcing costs for spare parts, manpower costs for sustaining the
asset. These costs will vary according to the choice of asset as different assets owing to their
different compositional nature will involve different costs. Consideration of the costs over the
whole life of an asset provides a sound basis for decision-making.

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 #Public-Private Partnership Typically, the PPP is not a privatisation. At the same time, it cannot be
described as partial privatisation also. Privatisation has generally been defined as a process of
shifting the ownership or management of a service or activity, in whole or part, from the
government to the private sector. The privatisation may be of many forms, which include
outsourcing, management contracts, franchise, service shedding, corporatisation, disinvestment,
asset sales, long-term lease, etc. The key difference between the PPP and privatisation is that the
responsibility for delivery and funding a particular service rests with the private sector in
privatisation. The PPP, on the other hand, involves full retention of responsibility by the
government for providing the services. In case of ownership, while ownership rights under
privatisation are sold to the private sector along with associated benefits and costs, the PPP may
continue to retain the legal ownership of assets by the public sector. The nature and scope of the
services under privatisation is determined by the private provider, while it is contractually
determined between the parties in PPP. Under privatisation, all the risks inherent in the business
rest with the private sector while, under the PPP, risks and rewards are shared between the
government and the private sector.

Thus, the PPP operates at the boundary of the public and private sectors, being neither nationalised
nor privatised. Thus, politically, the PPP represents a third way in which governments deliver some
public services in conjunction with private sector. Moreover, in a practical sense, the PPP
represents a form of collaboration under a contract by which public and private sectors act
together, usually on a project basis.

5 . I M P R O V I N G T H E S O C I A L S E C T O R
The Human Development Report 2014 issued by the UNDP (United Nations Development
Programme) makes a shocking revelation that India continues to remain in 135th position among
187 countries in the Human Development Index (HDI). It means that our country has not made any
improvement on its record of the previous year and places us in the medium human development
category along with some of the Asian and African countries. Indias score for 2013, at 0.586,
places it near the bottom of the Medium category -- which is understandable since it crossed from
Low to Medium only six or seven years ago. India has done better than the average in terms of the
rate at which it has improved its score on the index. The annual increase in 2000-13 has been 1.49
for India, against an average of 1.17 for other countries that are in the same 'Medium' category as
India.

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 However, quite a few countries have managed to improve their index faster than India -- among
them Bangladesh, which now has a better index than Pakistan despite being much poorer (both
countries are ranked somewhat lower than India). At Indias present rate of progress on human
development, it may take some 15 years for India to get to where China is today, (in the High
development category, with an index of 0.719).

Despite, the statistical improvement in India's HDI, India still lags far behind in several social sector
indicators. India accounts for a mammoth 40 per cent of those who suffer from multi-dimensional
poverty -- UNDPs term for deprivation.

W O R D P O W E R
Multidimensional poverty is made up of several factors that constitute poor people's experience of
deprivation such as poor health, lack of education, inadequate living standard, lack of income (as
one of several factors considered), disempowerment, poor quality of work and threat from
violence. It complements traditional income-based poverty measures by capturing the severe
deprivations that each person faces at the same time with respect to education, health and living
standards. The MPI assesses poverty at the individual level. If someone is deprived in a third or
more of ten (weighted) indicators, the global index identifies them as MPI poor, and the extent
or intensity of their poverty is measured by the number of deprivations they are experiencing.
The MPI can be used to create a comprehensive picture of people living in poverty, and permits
comparisons both across countries, regions and the world and within countries by ethnic group,
urban/rural location, as well as other key household and community characteristics.

Low levels of Gender Equality: Indias Gender Development Index (GDI) released in 2014 is
based on sex disaggregated HDI. It shows the ratio of female HDI to male HDI as 0.828. Female
HDI (0.519) is much below that of male HDI (0.627), which indicates prevalence of sex-based
inequalities assessed on the three basic dimensions of human development. The country has earned
the distinction of recording the lowest female HDI in the region. On gender inequality index, India
ranks 127 out of 152 countries.

Increasing Inequality: India today is home to the third largest numbers of dollar billionaires in the
world but, at the same time, harbours within its borders a third of the worlds poor and hungry.
From two resident billionaires with an income of $3.2 billion in the mid-1990s their numbers grew
to 46 and combined wealth to $176 billion in 2012, and their share in GDP rose from one to 10 per

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 cent. By contrast, if judged by the median developing country poverty line of two dollars a day on
purchasing power parity, more than 80 per cent rural and just below 70 per cent urban inhabitants in
India continue to be poor.

The first India Development Policy Review (2006) by the World Bank pointed out that uneven
development has resulted in poverty becoming concentrated in the slower-growing states, with
more than half of India's poor now living in Uttar Pradesh, Bihar, Madhya Pradesh and Orissa.
While the HDI measure for India in 2014 report was 0.586, the inequality adjusted measure of HDI
for India fell down 0.418, which is a drastic fall of nearly 30%. It was 14.26% for Sri Lanka,
14.89% for Vietnam. Although Pakistan and Nepal have shown similar fall in the inequality
adjusted HDI, but that is hardly a consolation. Even It Up, a 2015 report by OxFam (an international
charity committed to reducing poverty and inequality) noted that if India just stops inequality from
rising, it could end extreme poverty for 90 million people by 2019. If it reduces inequality by 36 per
cent, it could completely eliminate extreme poverty. The report also pointed out that extremes of
poverty are bad for growth. It suggested that robust and lasting growth requires reducing
inequalities, which otherwise undermine the productivity and morale of working people, and limit
the number of people who could participate in the market. Indeed public investments like in
MNREGA not only extend social protection to Indias impoverished populations: they also place
more disposable income in millions of more hands which spurs growth, but equitably, from below.

#HDI was introduced by the Human Development Report (HDR) published by the UNDP since
1990. It grouped countries in three grades of developmentthose showing HDI of less than and
equal to 0.500 as low, those showing HDI of more than 0.500 and less than and equal to 0.800 as
medium, and those showing HDI greater than 0.800 as high in human development. The index
ranks countries by the level of development based on the factor of human well-being. This factor
is considered to be much wider and more realistic than the wealth factor that it replaced. Earlier,
national development indices focused only on the national income that was being generated by the
economy of a nation. Mahbub-Ul-Haq and Amartya Sen are credited with providing the underlying
conceptual framework over which the HDI was developed.

Low levels of literacy: India faces one of the worst literacy rates in Asia. Indias adult literacy rate
(for those above 15 years of age) is 71% (64% in rural areas and 84% in urban areas) (NSSO,
2015), with . Despite improving from a level of just 48% in 1991, India still has a relatively low
literacy rate especially compared to other major emerging markets in Asia. A relatively low
literacy rate is a severe disadvantage as countries try to advance their economic prospects. It is quite

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 evident from the HDI rankings that nations that have a higher income level also have a higher HDI.
But for one to generate higher income from employment, one needs to have higher employable
skills. Lack of higher employable skills is directly attributable to illiteracy or low levels of literacy.
Worldwide, there are only ten countries in which the number of illiterate adults exceeds ten million
India (286 million 37% of the world's illiterate population), China (54 million), Pakistan (52
million), Bangladesh (44 million), Nigeria (41 million), Ethiopia (27 million), Egypt (15 million),
Brazil (13 million), Indonesia (12 million) and the Democratic Republic of the Congo (12 million).

Gender Inequality in literacy: A particularly dire aspect of Indias illiteracy problem is the large gap
between male and female literacy. About 75% of Indian men had at least a basic level of literacy
24 percentage points higher than the 51% literacy rate for women. The gender gap is lower but
still wide for young Indians. The 88% literacy rate for young Indian men is 14 points higher than
the 74% rate for young women. More than one-third of all women around the world who are
illiterate are Indian women (187 million).

A major reason attributed to the abysmally low levels of literacy is the negligence of the Indian
government towards investing in health and education sectors. India's spending on higher education,
at 1.22 per cent of the GDP, is quite low compared to the US's 3.1 per cent. Therefore, despite
launching of various educational schemes, the goals of such schemes fall by the wayside owing to
the lack of adequate funds. This year's budget (2015-16) in fact reduced the outlay for education
from the previous year's budget by 2.02%. The total outlay for education in this year's budget has
been 69,074. School education sector has got an outlay of Rs 42,219.50 crore for 2015-16, whereas
the higher education sector has got Rs 26,855 crore.

Poor quality of healthcare: Universal Healthcare in India is still a far distant dream. In 2000, the
World Health Organization's 2000 World Health Report ranked India's healthcare system at 112 out
of 190 countries. India still spends only around 4.2% of its national GDP towards healthcare goods
and services (compared to 18% by the US ). Additionally, there are wide gaps between the rural and
urban populations in its healthcare system which worsen the problem. A staggering 70% of the
population still lives in rural areas and has no or limited access to hospitals and clinics.
Consequently, the rural population mostly relies on alternative medicine and government
programmes in rural health clinics .

Besides the rural-urban divide, another key driver of Indias healthcare landscape is the high out-of-
pocket expenditure (roughly 70%). This means that most Indian patients pay for their hospital visits

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 and doctors appointments with straight up cash after care with no payment arrangements.
According to the World Bank and National Commissions report on Macroeconomics, only 5% of
Indians are covered by health insurance policies. Such a low figure has resulted in a nascent health
insurance market which is only available for the urban, middle and high income populations.
However, a sort of a consolation is that the penetration of the health insurance market has been
increasing over the years; it has been one of the fastest-growing segments of business in India.

Poor levels of primary healthcare: India faces a growing need to fix its basic health concerns in the
areas of HIV, malaria, tuberculosis, and diarrhoea. Additionally, children under five are born
underweight and roughly 7% (compared to 0.8% in the US) of them die before their fifth birthday.
Sadly, only a small percentage of the population has access to quality sanitation, which further
exacerbates some key concerns above. India has about 60.4% of its population that lacks access to
toilets with a water supply.

For primary healthcare, the Indian government spends only about 30% of the countrys total
healthcare budget. This is just a fraction of what the US and the UK spend every year. One way to
solve this problem is to address the infrastructure issue, firstly by standardising diagnostic
procedures (so that it could be executed as a routine procedure with minimal intervention from a
doctor), building rural clinics (that could deliver basic and primary medical attention along with
standardised procedures of diagnostics), and developing streamlined health IT systems, and
improving efficiency. The need for skilled medical graduates continues to grow, especially in rural
areas which fail to attract new graduates because of financial reasons. A sizeable percentage of the
graduates also go abroad to pursue higher studies and employment.

Underdeveloped medical devices sector: The medical devices sector is the smallest piece of Indias
healthcare pie. However, it is one of the fastest-growing sectors in the country like the health
insurance marketplace. Till date, the industry has faced a number of regulatory challenges which
has prevented its growth and development.
Inverted Duty Structure: Due to the twisted duty structure existing in the medical devices
sector, it is easier to import finished medical devices than to purchase raw materials and
manufacture it in India. As a result imports are cheaper and more cost-competitive than
domestically manufacturing medical devices. Because of this, India imports 70% of its
requirement. This has resulted in discouraging the development of medical devices in India.
Recently, the government released its policy on capital goods wherein the government has
made its focus to tackle situations of such inverted duty structures in underdeveloped

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 manufacturing sectors.
Inadequate regulatory regime laying down quality controls: Currently, only 14 devices are
notified as medical devices and have specific regulations. Other medical devices are treated
as 'drugs' under the Drugs & Cosmetics Act, 1940 & Rules. As a result, these medical
devices instead of coming under a legal regime that is applicable according to the
specificities of those devices, are governed by the restrictive code/laws of the
pharmaceutical sector. The lack of specific regulatory framework to govern those medical
devices result in the non-establishment of manufacturing standards and quality control
systems. This has resulted in creation of a large number of small players and a fragmented
industry, but which does not follow any particular standard. Consequently medical devices
made in India are manufactured only for domestic consumption as they do not meet the
quality parameters demanded of by other countries.

Highest Maternal Mortality Rate: The World Health Organization (WHO) reported that Indias
MMR, which was 560 in 1990, reduced to 178 in 2010-2012. However, as per the MDG mandate,
India needs to reduce its MMR further down to 140. Though Indias MMR is reducing at an average
of 4.5 per cent annually, it has to bring down the MMR at the annual rate of 5.5% to meet the
Millennium Development Goal. At India's present rate of reduction for MMR, India is expected to
reach 160, 20 short of the MDG5 target.

Infant Mortality Rate: The MDG 4 target is for reduction of child mortality by two-third between
1990 and 2015. In terms of Infant Mortality Rate (IMR), this translates into IMR of 29/1000 live
births to be achieved by 2015. As per the latest, Sample Registration System (SRS) report published
by the Registrar General of India (RGI) in 2013, the IMR in India is 40/1000 live births, which is
short of the target by 11.

Child Malnutrition: Malnutrition has been one of the enduring enigmas of contemporary India.
Despite years of rapid economic growth, child malnutrition rates remained unchanged for years.
Two key drivers of malnutrition in India are: 1) lack of adequate sanitation, which increases the risk
of diseases and creates an unhealthy environment in which to grow and develop and 2) low social
status of women which is directly responsible for less consideration for maternal health and care,
which then is responsible for low weights of neo-natals. India has far higher number of
malnourished children than even some poorer African countries. A nationwide survey called the
Rapid Survey on Children (RSOC), conducted by the ministry of women and child development in
2013-14 in league with Unicef, showed that the proportion of underweight children in India was

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 29.4% (1 in every 3), and that of stunted children 38.7% (2 in every 5).

6 . N AT U R A L R E S O U R C E D E P L E T I O N

Natural resource depletion is the sum of net forest depletion; energy depletion; and mineral
depletion, as a country's population continues on the path of unbridled industrial growth and
development.

India is facing an ecological crisis and is degrading her natural resources day by day. Now the
shortage of natural resources is a matter of international concern. There is increasing deficiency of
energy, metals, coal, non-fuel and non-metallic materials. With regard to fuels there is great concern
over the huge outflow of foreign exchange and every year enough oil is purchased from the Middle-
East countries which are major sources of petroleum.

India suffers from natural resource depletion at a rate that equals 4.9 per cent of gross national
income -- which must be placed against annual GDP growth in the last three years of 5.3 per cent. It
does not help that the figure for China is 6.1 per cent. Also a matter of concern is the picture on
water. India draws 33.9 per cent of its renewable water resources each year, compared to a Medium
(medium according to UN's HDI) category average of 13.9 per cent, and Chinas figure of 19.5 per
cent. It should be clear that growth achieved while doing damage to the environment is not
sustainable.

If one factors in the additional point that the people who suffer the most on account of
environmental damage are the poor, then it should be clear that a growth process that is
environmentally harmful is also anti-poor.

7 . G O O D G O V E R N A N C E

The prima facie task of any government is governance, but there is a world of difference between
governance and 'good governance' and very few governments over the years have practised it. Good
governance has to be a relative term rather than being absolute. The global definition of good
governance may not fit into the scenario of every country since the demand side of governance may
differ from one country to another. The UNDP definition of 'good governance' encompasses three

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 key words: transparency, accountability and participation. According to Modi, good governance
means putting people at the centre of the development process. Former UN Secretary-General Kofi
Annan noted that good governance is perhaps the single most important factor in eradicating
poverty and promoting development. In general, work by the World Bank and other multilateral
development banks on good governance identify the components of good governance as 'economic
institutions and public sector management, including transparency and accountability, regulatory
reform, and public sector skills and leadership'. Other organizations, like the United Nations,
European Commission and OECD, are more likely to highlight democratic governance and human
rights, aspects of political governance avoided by the Bank.

Understanding Good Governance:

The term governance was first used in the sense in which it is deployed today by the World
Bank in a 1989 report on African economies. Trying to account for the failure of its Structural
Adjustment Programmes (SAPs), the World Bank put the blame on a crisis of governance.

But crisis of governance doesnt convey much unless one defines governance. The World Bank
initially defined it simply as the exercise of political power to manage a nations affairs. This
early definition merely explained that governance meant management of a nation's affairs through
the exercise of political power without taking into consideration whether that political power is
exercised through a legitimate mechanism (such as through a representative democracy) or through
an illegitimate dictatorship. It was silent on the legitimacy or otherwise of the political power in
question. So whether the banks client was a democracy or a dictatorship didnt matter. What
mattered for governance is that efficient management must trump politics. In this regard, the over-
reliance on efficient management ignored several other aspects such as dislocation of people due to
development, violation of rights of indigenous people, deprivation of land due to industrial
acquisition etc. There is an inherent problem with linking 'development' alone to the concept of
good governance. Rwanda provides just one illustration of this inherent problem. As many
observers note, Rwanda has made clear progress in terms of economic growth, public sector
management and regulatory reform since the genocide in 1994. As many other observers note, its
record with respect to democracy and respect for civil and political rights has been extremely
problematic. Should Rwanda be considered well governed because of its economic progress, or
poorly governed because of its democratic deficits?

Over the years, the World Bank expanded its governance model to include elements of a liberal
democracy, such as a legal framework for enforcement of contracts, accountability, and ushering in

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 development through increasing people participation in the process and management of the
resources to be utilized for the purpose of development. For the aspect of increasing participation of
people in development and improving democratization, it has been emphasised that people should
be provided with better forms of empowerment social, legal, and economic instead of being
provided with doles and concessions that do nothing but make people more dependent on the
political honchos of the day.

Challenges to Good Governance:

Building better Institutions or enforcing present ones
Good governance does not occur by chance. It must be demanded by citizens and nourished
explicitly and consciously by the nation state. It is, therefore, necessary that the citizens are
allowed to participate freely, openly and fully in the political process. The citizens must
have the right to compete for office, form political party and enjoy fundamental rights and
civil liberty. Good governance is accordingly associated with accountable political
leadership, enlightened policy-making and a civil service imbued with a professional ethos.
The presence of a strong civil society including a free press and independent judiciary are
pre-conditions for good governance. Also, from an economic perspective, it is also
important that an environment is created which allows economic activity to prosper and
achieve due fruition. Positive regulatory frameworks, effective legal mechanisms to enforce
commercial contracts and rule of law that guarantee equality of opportunity and curb
unethical and anti-competitive activities are necessary pre-conditions to evolution of a
healthy environment conducive to economic development. India has been notoriously
famous in the international business community for having very poor contractual
enforcement mechanisms that allow considerable costs and delay to seep into a business
relationship. That is, if a party to a commercial arrangement breaches a contract, the other
party faces difficulty in forcing the breaching party to observe and honour the contract. As a
result, the costs of entering into a business transaction rise considerably thus discouraging
investors.

Delivery of Administrative Services

The Indian administrative scene is marked by few successful innovations and practices in
public service delivery and a large number of pathetic performances. The general weakness
of accountability mechanisms is an impediment to improving services across the board.
Bureaucratic complexities and procedures make it difficult for a citizen as well as the civil
society to navigate the system for timely and quality delivery of services. The lack of

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 transparency and secrecy that have been associated with the administrative system from
colonial times, besides generating corruption, has also led to injustice and favouritism. The
frequent transfer of key civil servants has enormously contributed to failures in delivery of
services. In some states, the average tenure of a District Magistrate is less than one year.
Development projects have also suffered as a result of frequent changes in project directors.

The individual initiative and commitment of a Project Director or a District Magistrate is

crucial not only to innovation and application of new methods in delivery of services but to
overall image of administration and in its responsiveness towards the needs of the people.
The message is clear that when properly empowered by political leadership, a Project
Director or a District Magistrate can be transformed into an effective instrument not only for
innovation in service delivery but also for its quality and delivery on time.

Criminalisation of Politics
The criminalisation of the political process and the unholy nexus between politicians, civil
servants, and business houses are having a baneful influence on public policy formulation
and governance. The more insidious threat to Indias democratic governance is from
criminals and musclemen who are entering into state legislative assemblies and national
Parliament in sizeable numbers. A political culture seems to be taking roots in which
membership of state legislatures and Parliament are viewed as offices for seeking private
gain and for making money. Such elements have also found place in Council of Ministers or
a Chief Minister's office. The Gandhian values of simple living and self-less service to
public causes are rapidly vanishing. The dictum that howsoever high, the law is above you
is sought to be replaced by rule of men.

Corruption
The high level of corruption in India has been widely perceived as a major obstacle in
improving the quality of governance. While human greed is obviously a driver of
corruption, it is the structural incentives and poor enforcement system to punish the corrupt
that have contributed to the rising curve of graft in India. The complex and non-transparent
system of command and control, monopoly of the government as a service provider,
underdeveloped legal framework, lack of information and weak notion of citizens rights
have provided incentives for corruption in India.

A conscious programme for strengthening of public awareness and also empowering the

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 existing anti-corruption agencies would be required. The statutory right to information has
been one of the most significant reforms in public administration. The Right to Information
Act provides a strong national framework within which public awareness programmes could
take place. Corruption takes place within a frame.

Accordingly, basic reforms in file management, government rules and regulations, provision
of public expenditure review could provide the concerned citizens the relevant knowledge to
hold service providers accountable. This would ensure that the resources that belong to
people are used in the right way.

Crony Capitalism
Crony capitalism is a concept that puts the spotlight on the nexus between politicians and
businesspersons. It refers to an economic scenario wherein the success of businesses is
dependent on the owner's relationships with politicians and other people in power. Its called
crony capitalism because the cronies of those in power get preferential treatment. This
preferential treatment may come in the form of reduced taxes, subsidised loan availability
from public sector banks, faster approval of licenses than the normal duration it takes for an
unconnected businessman or even grant of natural resources for commercial exploitation at
prices lower than their market value.

The Economists Crony Capitalism Index: The Economist annually publishes a Crony
Capitalism Index. India ranked 9 out of 23 countries in the 2014 version of the Index. This
was an improvement over Indias 2013 ranking of 6.

Issues arising out of crony capitalism: High prevalence of crony capitalism is generally an
indicator of wealth being concentrated in the hands of a few people, high levels of
corruption and great economic inequality. It slows down economic growth by eliminating
competition in the markets and creating a virtual monopoly of the powerful. It undermines
the principles of natural law, due process and the bedrock on which a democratic society is
built. Democracy devolves into an oligarchy or a plutocracy.

An inevitable side-effect? Some consider crony capitalism to be an unavoidable outcome in a

capitalist economy. The socialist critique of crony capitalism propounds that in a capitalist
economy, money is power and holds supreme; and hence, it follows that people with
economic clout can buy influence with the political class which is usually the manager of

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 constitutionally devolved powers. However, the capitalist critique of crony capitalism also
opposes it, but perceives it to be an outcome of excessive governmental regulation. The
capitalists argue that favouring free market forces would eliminate the need for overbearing
government intervention and the discretion in the hands of bureaucrats and political bosses,
which power makes the businessmen chummy with the former. In such a scenario, it is
argued that crony capitalism wouldn't come into play. It is this type of reduction of
government that Modi points to in his exhortation of maximum governance, minimum
government.

Crony capitalism received an impetus from the License Raj in India. The requirement of
government licenses and approvals for every small endeavour made India especially
vulnerable to cronyism. There are multiple instances of politicians having favoured certain
business families or enterprises throughout Indias history. However, in the post-
liberalisation era, the situation has slightly improved due to the decrease in governmental
role with respect to private enterprise.

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 W H Y M A N U FA C T U R I N G I N I N D I A I S I N A P O O R S TAT E ?

Poor state of Indian Manufacturing

Manufacturing contributes only 17.1% of India's GVA (Gross Value Added) in contrast to the
services sector which contributes ~53% of India's GVA. India's manufacturing value added is less
than a tenth compared to that of China and India's share of global manufacturing value added is
~2%. In other countries such as South Korea and Germany, contribution of manufacturing value
added currently ranges between 20-30%. A strong manufacturing sector is critical to sustained
growth of the economy as it generates employment potential - exploiting India's 'demographic
dividend' and builds strategic self-reliance in key industries thereby promoting a favorable trade
balance. Recognizing this, the Government of India announced the 'National Manufacturing Policy'
in 2011 with the vision to increase the share of manufacturing in Gross Value Added (GVA) to 25%
and create 100 million jobs.

Capital goods consist of plant machinery, equipment and accessories required, either directly or
indirectly, for manufacture or production of goods or for rendering services, including those
required for replacement, modernization, technological upgradation and expansion of
manufacturing facilities.

Capital goods sector is a key contributor to manufacturing; currently contributing ~12% which
translates to ~2% of GDP. Importantly, the sector has a significant multiplier effect on overall
economic growth as it provides the foundational building blocks for a large number of user
industries by providing critical inputs, that is, machinery and equipment, necessary for
manufacturing. Further, the development of domestic capabilities in capital goods sector is essential
to ensure national self reliance, as the sector directly or indirectly influences core infrastructure
development within India. Moreover, a globally competitive and dynamic capital goods sector will
induce the same characteristics into Indian manufacturing.

Capital Goods sector is also a major employment driver, with ~15,00,000 people employed across
various sub-sectors. It also indirectly creates employment for a large number of people in a variety
of user industries. A strong capital goods sector has the potential to generate significant employment
opportunities across a variety of sub-sectors and user industries.

The sector can also play an important role in improving India's trade balance. India currently has an
overall trade deficit of US$ 138 Bn (2014-15)2 and has large negative trade balance with countries

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 including China, Saudi Arabia, Switzerland, Iraq and Iran. The Capital Goods sector imports are
substantial at ~US$20 Bn. An increase in high value capital goods exports and reduction of imports
can play a pivotal role in improving India's trade balance with such countries and reducing the
country's current account deficit.

Challenges currently faced by the Indian Manufacturing Sector

Capacity underutilization:
The domestic industry had invested in capacity based on the projections for the capital
goods sector but the built up capacity is currently under-utilized at ~60-70% in most sub-
sectors due to sluggish domestic demand.

Imports of second hand machinery: Second-hand import of machinery comprises 15- 20%
of domestic production and hurts both domestic manufacturers and users in the long run.
Persistent use of aged and old machinery in end user industry is observed and there is no
incentive for replacement of such machine.

Zero duty import under Project Imports: Several goods can be imported under 'Project
Imports' at zero duty which places Indian manufacturers at a disadvantage, thus
discouraging investment and production. Project Imports are the imports of machinery,
instruments, and apparatus etc., required for initial setting up of a unit or for substantial
expansion of an existing unit.

Delays in project implementation: Delays in implementation of approved projects in end

user industry, most critically in infrastructure and power, are a key concern limiting
domestic production of capital goods.

Need for inter-ministerial coordination: There is need for coordinated approach across
ministries at an Apex level as needs of the capital goods industry needs to be balanced vis--
vis requirements of other end user industries.

Issues related to export: The capital goods sector is also unable to participate in the larger
world trade due to several shortcomings and limitations.

Trade policies not aligned to shift in India's export map: Trends over the last decade
suggest that India's capital goods exports which were historically led by developed

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 countries like USA, UAE, UK, Germany and Singapore are now fast shifting towards
developing regions such as South East Asia, Central and Eastern Europe, CIS, South
America and Africa which are the new growth centers of the world. However, trade
policies are not aligned with this fundamental shift in target export territories. The
current set of trade agreements are with several countries who have comparative
advantage over India vs. where India has strong export potential. It is critical to ensure
that policy actions increase focus on the new destinations with high export potential to
bolster India's overall exports.

Non trade barriers faced in export markets: Indian capital goods industry faces several
non-tariff barriers in export markets which deny market access including among others,
insistence on overseas experience, biased qualification clauses, insistence on local
participation and requirement of testing outside India.

Limited understanding of international market requirements: Domestic manufacturers

need to have better understanding of international products and market requirements. In
addition, there is limited market intelligence and understanding of vendor registration
and other processes which inhibits smooth entry to focus markets.

Inadequate availability of short and long-term financing: Inadequate availability of

financing in focus export countries at competitive rates, e.g. availability of lines of credit
is an issue in regions such as CIS countries, Latin America, Bangladesh and Indonesia.
Further, rates offered are not internationally competitive. Long-term financing for
projects with long gestation periods is also an issue. The tenure offered in India is 7
years vs. 15 years globally, which means that Indians who borrow for starting a capital
goods manufacturing unit have to pay loans much quicker than their counterparts in
foreign countries.

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 WHY INDIAN MANUFACTURING IS NOT KNOWN FOR EXCELLENT TECHNOLOGY?

Significant technology gaps across sub-sectors: Significant challenges and gaps exist in
high-end, heavy-duty, high-productivity and high precision technologies across sub-sectors.
Also, there is relatively low ability in advanced metallurgy and development of special
materials, and lack of research funds to facilitate the same. Lack of funding directly impacts
the research and development activity that should precede the advent of high technology
based manufacturing.

Lack of end user acceptance of new Indian technology: A cautious approach is adopted
by end user industry in accepting new technology or product developed by Indian
manufacturers, with purchase cost still being the key criterion as opposed to lifecycle cost.

Lack of skill availability: The capital goods sector also suffers from major challenges in
human resource development. Skilled manpower and support facilities continue to lag
behind global standards as shown by India' rank of 45 on the availability of scientists and
engineers and 130 on quality of scientific research institutions. Industry and sub-sector
specific skill development and training institutes with appropriate capability development
agenda & curriculum are lacking. This is a key contributing factor towards low technology
depth. India has been negligent in investing in its education and health sector, as a result of
which there has been a poor formation of human capital and poor development of skills.

Weak support infrastructure: Support infrastructure including skill availability, design

standards, testing & certification infrastructure lags global standards which inhibits
technology development.

Long lead time from patent application to grant: There is a long lead time from stage of
patent applications to patent grant. The process from filing to grant of a patent takes ~6
years in India compared to ~3.5 years in the US. Longer time taken for granting a patent
translates to longer periods of gestation and consequent implementation of technological
advances. The longer time taken for clearing a patent request deals a debilitating blow to
most companies and applicants since their investment in R&D remains locked for the
duration of the patent grant.

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 Inadequate fiscal incentives: The prevailing incentive structure for research and
development is not generating sufficient pull for industries to participate vigorously in R&D
activities. There is a need to evaluate options for incentivizing R&D through new tax
instruments and improve the qualifying conditions on existing schemes.

Need to improve Indian standards: There is a need to improve India's participation in

international standard development conferences so as to make more Indians aware of the on-
going technological changes and advances occurring in the rest of the world. Adequate
resource and skills needs to be made available to Standards Developing Organizations
(SDOs) to ensure their smooth functioning. Well-functioning SDOs are an asset to this
nation since they ensure that Indian manufactured items adhere to internationally mandated
standards.

Higher infrastructure and logistics costs reducing cost competitiveness: Indian

manufacturers face higher power, infrastructure, logistics and transaction costs which further
reduce their global competitiveness. Further power generation in India is already very low.
India currently ranks 90 globally on the quality of infrastructure.

Limited ability of MSMEs to develop new products & processes: Majority of the labour
engaged in manufacturing processes are employed in MSME units, but the small scale of
MSMEs inhibit their growth. Their small operating scale discourages capacities to acquire
technology or develop new products and processes and the units get caught in a self-feeding
and vicious cycle. Further, there is an absence of institutional mechanisms in public/ private
sector to support MSMEs in product/ process development.

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 DRAF T NATIONAL P OLICY ON CAPITAL GO ODS

In an effort to boost domestic manufacture and consumption in order to quickly generate

employment for the majority of Indians joining the workforce, the ruling dispensation recently came
out with a draft national policy on capital goods. The draft proposal was released by the ministry of
heavy industries. The important highlights of this policy are:-

The National Capital Goods Policy has been formulated with the vision to increase the share of
capital goods contribution from present 12% to 20% of total manufacturing activity by 2025.

The policy aims to achieve the following goals:-

To become one of the top capital goods producing nations of the world by raising the total
production to over twice the current level;
To raise exports to a significant level of at least 40% of total production and thus gain
substantial share in global exports of capital goods;
To improve technology depth (better and high quality standards of output) in Indian capital
goods from the current basic and intermediate levels to advanced levels.

The objectives of the National Capital Goods Policy are to:

Increase total production: To create an ecosystem for a globally competitive capital goods
sector to achieve total production in excess of ~Rs. 500,000 Cr by 2025 from the current
~Rs. 220,000 Cr.

Increase employment: To increase domestic employment from the current 15,00,000 to at

least 50,00,000 by 2025 thus providing additional employment to over 35,00,000 people.

Increase domestic market share: To increase the share of domestic production in India's
capital goods demand from 56% to 80% by 2025 and in the process improve domestic
capacity utilization to 80-90%.

Increase exports: To increase exports to 40% of total production (from Rs 62,000 Cr to ~Rs
200,000 Cr) by 2025, enabling India's share of global exports in capital goods to increase to
~2.5%.

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 Improve skill availability: To significantly enhance availability of skilled manpower with
higher productivity in the capital goods sector by training ~50 lakh people by 2025, and
create institutions to deliver the human resources with the skills, knowledge and capabilities
to fuel growth and profitability.

Improve technology depth: To improve 'technology depth' in capital goods sub-sectors by

increasing research intensity in India from 0.9% to at least 2.8% of GDP to rank amongst the
Top-10 countries in research intensity and achieve global benchmarks for intellectual
property in the capital goods sector.

Promote standards: To curb inflow of sub-standard capital goods by mandating technical

and safety standards which conform to international standards and ensuring compliance to
the same.

Promote SMEs: To promote growth and build capacity of SMEs to compete with
established domestic and international firms and become national and global champions
of capital goods in the future.

Increasing investment allowance: to upto 25% over a period of 5 years. This scheme is
available to companies that purchase machinery worth Rs. 100 crore or more in the period
2013-2014 to 2015-2016. The acquirer is free to take allowance of 15% at the time of
acquisition and can claim depreciation for the entire life of the asset. This means that the
company's outgo in the form of tax will be lesser because of this scheme. In addition, the
machinery will be allowed to depreciate for its entire life. Addition of depreciation to a
company's books also reduces a company's tax outgo. Its a kind of double benefit which
will surely affect the business of manufacturing & production. The inducement effects (i.e.,
the no. of machinery purchases that various companies were induced to make because of the
incentive offered by this scheme) of investment allowance have been found to be substantial.
For the period of 1986-87 to 1991-92, it was found that the likely growth of fixed capital
(machinery) would have been 286 percent with investment allowance scheme, whereas
without the scheme it would be only 214 percent (National Institute of Public Finance and
Policy)

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 INDEPENDENT DIRECTORS IN A COMPANY: CORPORATE GOVERNANCE

The Companies Act, 2013 ("Act"), overhauled the provisions relating to independent directors
entirely by conferring greater power and responsibility in the governance of a company. There were
no explicit provisions for independent directors under Companies Act 1956 ("1956 Act").
Independent directors as the name suggests are directors on Board of a company who are
independent individuals, not having any other relationship or transaction with the company. The
concept of Independent directors gained momentum in the late 1980s and early 1990s due to the
uncovering of various corporate frauds and misfeasance. In India, Clause 49 of the listing
agreement (a document that a company has to sign wherein the company agrees to abide by certain
rules and regulations before being listed in a stock exchange, where its shares issued to the public
can be traded) mandates appointment of independent directors on Board of a listed company. With
the passage of the new Companies Act of 2013, the concept of independent directors has found
place in the Companies Act itself. The requirements prescribed under the Companies Act 2013 seem
to be much more stringent than that of the listing agreement.

Why independent directors are important?

A corporate board's independence from external influences is critical and directly proportional for
effective corporate governance.

Appointment : The Act imposes a specific obligation on listed companies to have at least
one third of the total number of directors as independent directors and, also empowers
Central Government to include other class/classes of companies within the scope of this
requirement.
Accordingly, the above condition will be applicable to public companies with a paid-up
capital of INR 1 billion (approximately US$ 16 million, or a turnover of INR 3 billion
(approximately US$ 48 million) or aggregate loans/debentures/borrowings of more than
INR 2 billion (approximately US$ 3,225,065)4. To ease the process of selection, the Central
Government and organizations authorized by the Central Government will maintain a data
bank of persons willing and eligible to be appointed as independent directors, from which
the companies can choose suitable persons for the position. But, the critical issue will be if
there are enough number of qualified individuals to fulfill the demand. Chances are
companies may find it difficult to satisfy the requirement of the Act (This has proved
especially true in the case of SEBI's mandate to have women representation on the boards of
listed companies, where many companies are still non-compliant with the rule despite the

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 crossing of SEBI's deadline for its implementation). Though the Act provides one year
period for companies to implement the provision, it would still be a difficult task until
sufficient persons with requisite skill sets are developed in India. Accordingly, it will
become necessary to conduct and organize appropriate training sessions by recognized
organizations/associations for suitable persons to develop the required skill sets for
performing their entrusted responsibilities.
Prescribed statutory requirements: An independent director is someone who does not have
any material or pecuniary relationship with the company/directors. Following is the
prescribed criteria:
such individuals must possess integrity and relevant industrial expertise;
such individuals must not have any material or pecuniary relationship with the company
or its subsidiaries;
they or their relatives should not have had any pecuniary relationship with the company
or its subsidiaries, amounting to 2% or more of its gross turnover or total income or INR
5 million (approximately US$ 80,645), whichever is less, during the two immediately
preceding financial years or in the current financial year;
such appointees or their relatives should not have any key managerial position in the
company or its subsidiary companies during any of the three preceding financial years;
such persons or their relatives should not have been an employee of the company or its
subsidiary companies during any of the three preceding financial years;
they or their relatives must not be a director of a nonprofit organization, which receives
25% or more of its receipts from the company or its subsidiary companies or its
promoters/directors or from anyone who holds 2% of voting rights in such companies;
such individuals must not be a promoter of the company or its subsidiaries;
they must not hold more than 2% voting rights in the company either by themselves or
together with their relatives.

The Act also casts great responsibility on the independent directors. For instance, it specifies
that any decisions taken by the board in the absence of independent directors must be
circulated to all directors and can be final only upon receiving the ratification from at least
one independent director.
The tenure of the independent and such alternate directors must not exceed two consecutive
periods of 5 years each, and can be extended for a second term only after the board passes a
special resolution. Further, the rules also mandate that reappointment after the expiry of
second term can be done only after a cooling period of three years. Hopefully, this will

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 ensure impartiality and varied person(s) can come on the board.
Remuneration: The Act expressly disallows independent directors from obtaining stock
options and remuneration other than sitting fees and reimbursement of travel expenses for
attending the board and other meetings. Profit related commission may be paid to them, but
subject to the approval of the shareholders. The reason for restricting the remuneration was
to prevent personal financial nexus with the company and to safeguard their independence.
However, the flip side is if the remuneration is not attractive then it would be difficult for
companies to attract suitable and experienced persons for the position.
Committees : The Act has mandated presence of independent directors on certain
committees, which are described below:

Corporate Social Responsibility ("CSR") Committee - The Act lays down that every
company with a net worth of INR 5 billion (approximately US$ 80 million) or more, or
turnover of INR 100 billion (approximately US$ 161 million) or more, or net profit of
INR 50 million (approximately US$ 806,451) during any financial year must constitute a
CSR committee with 3 or more directors out of which at least one director must be an
independent director.
It is a mandatory commitment for the company to contribute for the social, economic
or environment development activities, which includes promotion of education,
promotion of gender equality and empowerment of women, eradication of hunger or
poverty, contribution to Prime Minister's national relief fund.
The designated committee has to formulate the CSR policy and recommend
proposed activities in each financial year. It is mandatory for qualifying companies
(as outlined above) to spend at least 2% of their average net profits on CSR
activities.
The legislation mandates the presence of independent directors to oversee that the
CSR activities are implemented in an effective manner. The legislation does not have
any coercive provisions against defaulting companies except a report to be submitted
by them explaining the reason for failure to perform the CSR activities.

Nomination and Remuneration committee ("NRC")

The Act mandates every listed company to constitute a NRC with three or more non-
executive directors out of which one-half must be independent.
The chairman of the company cannot chair the NRC but can become a member. The
main functions of NRC are: (i) identify suitable persons with requisite qualifications

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 to hold the office of directors; (ii) recommend appointment/removal of directors; (iii)
evaluate director's performance; (iv) formulate suitable remuneration policy and
establish criteria for determining qualifications, positive attributes and independence
of directors.
The presence of independent directors in NRC will ensure identification and
appointment of skilled individuals as directors/key managerial personnel of the
company which, in turn, will imbibe high proficiency at board/managerial levels.

Audit Committees
The Act specifically stipulates that every listed company must constitute an audit
committee of at least three directors with a majority of independent directors.
Audit committees are entrusted with various vital fiscal functions including among
many others,
assisting the board in the appointment of the auditors, issuing approval for
related party transactions,
examining financial statements/auditor's report,
reviewing auditor's independence,
providing valuation for the undertakings or assets of the company,
evaluating the internal financial control,
monitoring the utilization of funds raised through public offers and
if necessary can conduct investigation into any issues relating to these functions
for preventing fraud by the companies.

Code of conduct, functions and duties -

The Act prescribes a Code of conduct and other functions and duties which raise the
bar of standards and performances of independent directors. The duties include
constructive attendance in all board/general meetings,
reporting unethical practices,
fraud and violation of law,
retaining any confidential information pertaining to company as confidential,
ensuring the concerns relating to management are placed before the board and
be recorded in the minutes of board meeting. In short, there is a significant onus
on them to assist in safeguarding the legitimate interest of the company and its
stakeholders.

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 While the power of the independent director is fortified on one hand but the level of responsibility
has been increased and, thus, the director must possess necessary skills and experience to perform
the functions diligently.

Conclusion

The Act empowers independent directors with proper checks and balances, so that such extensive
powers are not exercised in an unbridled manner, but in a rational and accountable way. The
changes are a step in the right direction. They should enhance corporate governance and ensure the
management and affairs of the companies are conducted in the interest of stakeholders. It is
expected that these changes will thwart corporate scandals in future and insulate shareholders
interest. However, since the provisions are not yet in force, the actual effectiveness and practical
defects can be determined only in the time to come.

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 I N D I A ' S H E A LT H S E C T O R & R E F O R M S

There are 7 physicians per 10,000 population in India, compared to 19 in Brazil, 15 in China and 43
in Russia. Though schemes like the National Health Mission have improved service delivery, health
services in India still suffer from lack of reach and constraints of quality.

Health for All is a dictum that has to be implemented through a practical framework. Developed
nations possess sound healthcare systems to take care of the medical needs of their populations.
While we can study these systems for adoption, we on account of our size, population and diversity
have to follow a model that best suit our needs.

Indias public expenditure on health is meager. We fare below our BRIC peers on this count as well.
Indias per capita government expenditure on health in PPP terms is US Dollar 44, as against 809 in
Russia, 474 in Brazil and 236 in China. Considering that we are a sixth of humanity, a significant
rise in health expenditure is urgently required to ensure universal health coverage.

Healthcare Insurance models in US, UK, Europe and India. Tertiary medical care in our country
poses a challenge on account of lack of accessibility and affordability. Costly medical treatments
effectively deny cure to those who cannot afford. In India, out-of-pocket expenditure comprises 86
percent of private expenditure on health. Due to lack of financial risk protection, many in our
country plunge into poverty fighting ailments and bearing high costs of treatment.

A health insurance mechanism that can take care of all is the need of the hour. As per estimates,
about 216 million people in India or 17 percent of the population were covered under various health
insurance schemes as at end-March 2014. We need to do much more to bring the uncovered
population under the health security net. An insured population will also be a healthy population,
which will exhibit a greater propensity to seek education, acquire knowledge and access job
opportunities. Good health and fitness of the people will truly be a reflection of our countrys
progress.

Health Insurance Schemes

There are about 200 countries on our planet, and each country devises its own set of arrangements
for meeting the three basic goals of a health care system: keeping people healthy, treating the sick,
and protecting families against financial ruin from medical bills.

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 Beveridge Model
Named after William Beveridge, the daring social reformer who designed Britains National
Health Service. In this system, health care is provided and financed by the government
through tax payments, just like the police force or the public library.

Many, but not all, hospitals and clinics are owned by the government; some doctors are
government employees, but there are also private doctors who collect their fees from the
government. In Britain, you never get a doctor bill. These systems tend to have low costs per
capita, because the government, as the sole payer, controls what doctors can do and what
they can charge.

Countries using the Beveridge plan or variations on it include its birthplace Great Britain,
Spain, most of Scandinavia and New Zealand. Hong Kong still has its own Beveridge-style
health care, because the populace simply refused to give it up when the Chinese took over
that former British colony in 1997. Cuba represents the extreme application of the Beveridge
approach; it is probably the worlds purest example of total government control.

The Bismarck Model

Named for the Prussian Chancellor Otto von Bismarck, who invented the welfare state as
part of the unification of Germany in the 19th century. Despite its European heritage, this
system of providing health care would look fairly familiar to Americans. It uses an insurance
system the insurers are called sickness funds usually financed jointly by employers
and employees through payroll deduction.

Unlike the U.S. insurance industry, though, Bismarck-type health insurance plans have to
cover everybody, and they dont make a profit. Doctors and hospitals tend to be private in
Bismarck countries; Japan has more private hospitals than the U.S. Although this is a multi-
payer model Germany has about 240 different funds tight regulation gives
government much of the cost-control clout that the single-payer Beveridge Model provides.

The Bismarck model is found in Germany, of course, and France, Belgium, the Netherlands,
Japan, Switzerland, and, to a degree, in Latin America.

The National Health Insurance Model

This system has elements of both Beveridge and Bismarck. It uses private-sector providers,

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 but payment comes from a government-run insurance program that every citizen pays into.
Since theres no need for marketing, no financial motive to deny claims and no profit, these
universal insurance programs tend to be cheaper and much simpler administratively than
American-style for-profit insurance.

The single payer tends to have considerable market power to negotiate for lower prices;
Canadas system, for example, has negotiated such low prices from pharmaceutical
companies that Americans have spurned their own drug stores to buy pills north of the
border. National Health Insurance plans also control costs by limiting the medical services
they will pay for, or by making patients wait to be treated.

The classic NHI system is found in Canada, but some newly industrialized countries
Taiwan and South Korea, for example have also adopted the NHI model.

The Out-of-Pocket Model

Only the developed, industrialized countries perhaps 40 of the worlds 200 countries
have established health care systems. Most of the nations on the planet are too poor and too
disorganized to provide any kind of mass medical care. The basic rule in such countries is
that the rich get medical care; the poor stay sick or die.

In rural regions of Africa, India, China and South America, hundreds of millions of people
go their whole lives without ever seeing a doctor. They may have access, though, to a village
healer using home-brewed remedies that may or not be effective against disease.

In the poor world, patients can sometimes scratch together enough money to pay a doctor
bill; otherwise, they pay in potatoes or goats milk or child care or whatever else they may
have to give. If they have nothing, they dont get medical care.

The Indian Health Insurance Model

We have elements of all of the four models above. When it comes to treating veterans and defence
personnel, we provide them free medical care funded from taxes collected by everyone.
Veterans/Defence Personnel are treated free of cost in state run hospitals that serve only the defence
personnel (both retired and active, although it is slightly different for those who are retired. This is
part of the Central Government Health Scheme a medical scheme for central government
employees). This tax funded model for treating defence personnel free of cost is similar to the

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 British model or the Cuban model. For Indians in the organized sector, the company itself is
responsible for ensuring health care insurance. The healthcare insurance costs are funded both by
the employee and the employer who can be either a private or a government company. Appropriate
amounts are deducted from the employee's salary for maintaining the healthcare insurance schemes.
This insurance system for working professionals that is also paid by them is the Bismarck model.
However, a direct fallout of this is that a large number of Indians employed in the unorganized
sector are not able to enjoy any kind of healthcare insurance. For the rest of our countrymen who
reside largely in rural India, there is effectively no healthcare insurance systems at all and medical
aid is acquired through out-of-pocket expenses.

The U.S. Model

Medicare is a national social insurance program, administered by the U.S. federal government since
1966, currently using about 30 private insurance companies across the United States. Medicare
provides health insurance for Americans aged 65 and older who have worked and paid into the
system. It also provides health insurance to younger people with disabilities, end stage renal disease
and amyotrophic lateral sclerosis (lou gehrig's disease). Under the medicare facility, any person can
go to a private practitioner or a private hospital and get services for half-the-cost only. The first half
of the costs are borne by the Medicare Insurance scheme whereas the other half is borne by the
individual either through out of pocket expenses or through a private insurance scheme.

For individuals belonging to low income groups, the United States has another health insurance
program designed for them, called the Medicaid. Such individuals that are living below the poverty
line are eligible to receive healthcare completely free of cost. In all states, Medicaid provides
coverage for some low-income people, families and children, pregnant women, the elderly, and
people with disabilities. In some states, Medicaid has been expanded to cover all adults below a
certain income level. Some Medicaid programs pay for an individual patient's care directly. Others
use private insurance companies to provide Medicaid coverage. The Medicaid program is jointly
funded by the federal government and states. The federal government pays states for a specified
percentage of program expenditures, called the Federal Medical Assistance Percentage (FMAP).

FMAP varies by state based on criteria such as per capita income. The regular average state FMAP
is 57%, but ranges from 50% in wealthier states up to 75% in states with lower per capita incomes
(the maximum regular FMAP is 82 %).

States must ensure they can fund their share of Medicaid expenditures for the care and services

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 available under their state plan. Recognized sources of funding for the state share of Medicaid
payments include:

India's Healthcare systems

A coherent and sustainable plan that addresses the healthcare needs of the masses is strikingly
absent. There are no national standards by which physicians, nurses, pharmacists and hospitals are
trained.

Financial incentives between specialists and hospitals from referring doctors govern the way a
substantial proportion of patients are treated. Guidelines and protocols for the management of
disease, including the length of stay, are virtually non-existent and the ability of hospitals to
determine the appropriateness of medical and surgical therapy seems years away.

Quality management remains an elusive dream; it is not sufficient to know the mortality rate of a
surgical operation; one must know if the care was timely and appropriate. Judging from the
incredible advances that have been made in information technology in India, it is noteworthy that
these advances have not been applied on a large scale to healthcare.

The lack of an Electronic Health Record (EHR) prevents the development of transparency
throughout the healthcare system. And compounding all this is the widespread use of spurious drugs
that interfere with proper treatment. Above all, there is not enough availability of a patient's
historical evidence of what it costs for the treatment of a particular condition for insurers to
adequately set their premiums.

India needs to add 1.7 million beds, double its medical manpower and increase its paramedical
manpower three-fold to match WHO standards. Poor technological development of the medical
sector and an almost non-existent domestic production capability for manufacturing medical
devices.

Problem of Accessibility and Indebtedness

It is estimated that more than 40% of hospitalised people borrow money or sell assets to cover
expenses, and 35% of hospitalised Indians fall below the poverty line because of hospital expenses.
Out-of-pocket medical costs alone may push 2.2% of the population below poverty line in one year
(Selvaraju and Annigeri 2001; Mahal et al. 2002). Approximately 29 percent of the Indian
population (almost 300 million people) live below the poverty line and depend on free health

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 services from the public sector. The inequities in the health system are further aggravated by the
fact that public spending on health has remained stagnant at around one percent of GDP (0.9%)
compared to the global average of 5.5%. Yet even the public subsidy on health does not
automatically benefit the poor. The poorest quintile of the population uses only one-tenth of the
public (state) subsidies on health care while the richest quintile accesses 34 percent of the
subsidies (Mahal et al. 2002).

A few suggestions are timely and should be considered:

Develop and implement national standards for examination by which doctors, nurses and
pharmacists are able to practice and get employment.
Rapidly develop and implement national accreditation of hospitals; those that do not
comply would not get paid by insurance companies. However, a performance incentive plan
that targets specific treatment parameters would be a useful adjunct.
Obtain proposals from private insurance companies and the government on ways to provide
medical insurance coverage to the population at large and execute the strategy. It is healthy
to have competition in healthcare, and provide health insurance to the millions who cannot
afford it.
Utilise and apply medical information systems that encourage the use of evidence-based
medicine, guidelines and protocols as well as electronic prescribing in inpatient and
outpatient settings. This is possible though the implementation of the EHR; this will, in
time, encourage healthcare data collection, transparency, quality management, patient safety,
efficiency, efficacy and appropriateness of care.
Perverse incentives between specialists, hospitals, imaging and diagnostic centres on the one
hand and referring physicians on the other need to be removed and a level of clarity needs to
be introduced. The practice of referring inflates the costs of provision of medical services
since the fee is calculated after including the costs of commission payable upon referrals.
Develop multi-specialty group practices that have their incentives aligned with those of
hospitals and payers. It is much easier to teach the techniques of sophisticated medical care
to a group of employed physicians than it is to physicians as a whole. It is also important
that doctors are paid adequately for what they do.
Encourage business schools to develop executive training programmes in healthcare, which
will effectively reduce the talent gap for leadership in this area.
Revise the curriculum in medical, nursing, pharmacy and other schools that train healthcare
professionals, so that they too are trained in the new paradigms evolving in the economy.
Develop partnerships between the public and private sectors that design newer ways to

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 deliver healthcare.
The government should appoint a commission which makes recommendations for the
healthcare system and monitors its performance.

The present system (and its escalating costs) is not sustainable due to its inefficiency and a lack of
aligned incentives for improving performance. A country that has leapfrogged from rotary phones to
a ubiquitous presence of mobile phones must make a similar change in healthcare.

It will not be easy and it will not be inexpensive. But it has been done in other parts of the world
before and it can be done here too. The potential to create the best healthcare system in the world
exists. It is time to commence the debate, develop a plan and execute it.

National Rural Health Mission:

The launch of the National Rural Health Mission in 2005 marked a turning point for public health
planning in India. One of its key features was the commitment to increase public health expenditure
from 0.9% of gross domestic product to at least 3%. It set out public health standards that specify
the human resources required for each facility.2,3 The federal government provided funds for
increasing the number of posts sanctioned by state governments to meet Indian public health
standard norms. As an immediate measure, states were encouraged to hire, on a contractual basis, an
additional auxiliary nurse-midwife for peripheral health subcentres, three nurses and a second
doctor for primary health centres; nine nurses and seven doctors including five specialists in the 30-
bed community health centres.

Unsolvable Problem of Incentives for Rural Doctors

Since 2007, monthly financial incentives in addition to salaries have been widely introduced across
all the states for doctors, nurses and midwives working in remote areas. There is a wide diversity
between states in categorizing difficult areas. States have used criteria including: distance from
urban areas; geographical terrain such as hilly, desert or forest areas; access by roads and public
transport; availability of housing; and tribal areas or extremist insurgencies. The incentive amount
depends on the cadre of the worker and on the way each state grades difficult areas.

The use of incentives increased significantly once integrated in the National Rural Health Mission.
A national scheme for incentives for difficult areas is also proposed. Are incentives effective? It is
still too early to comment. At the time of writing, most of these initiatives had been in place for less
than two years. The workers welcome the use of incentives. However, whether they are adequate to

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 increase willingness for rural postings has not yet been evaluated. There is reason to be cautious.
Studies from other sources show a limited role of incentives, especially when the incentive amount
is modest (WHO, 2002). The threat is that if incentives are not found to make a difference, then
there is a strong temptation to consider the problem of retention as unsolvable. An example of this
unsolvable problem comes from Telangana. The Telangana government's offer of providing Rs. 1
lakh salary to a private medical practitioner who works in a hilly or tribal area was not quite taken
up. The government then increased the incentive by a further 30% in order to encourage more
private practitioners to provide services in a rural area.

Workforce Management
The National Rural Health Mission is trying to encourage states to adopt workforce management
policies that ensure transparent transfer and placement for doctors and nurses and better residential
infrastructure for all health personnel. Although this is apparently a simple reform, in practice it
often proves to be the most difficult, given its linkages to basic issues of governance.

One key strategy of the National Rural Health Mission is to appoint workers on contracts, usually
for one to three years duration. There is a perception among health administrators that contractual
appointments ensure more accountability, less absenteeism, more appropriate postings and therefore
better workforce performance. Since contractual appointment is made to the facility, whereas
permanent appointment is to the state public system, they may make it easier to prioritize rural and
remote postings. But whether reduced job security from contractual appointments is the key to
better performance and accountability is an open question.

Education
Another set of measures is through preferentially drawing students for medical and nursing
education from those who are willing to work in underserviced areas. The pioneer programme in
this regard is in West Bengal state and, as preliminary reports suggest, it has been quite successful.7
The state faced the challenge of adding 10 000 auxiliary nurse-midwives within five years, while
simultaneously addressing the problem of keeping the existing ones at their place of work. As a first
step, 24 government schools for auxiliary nurse-midwives were revived and another 18 were started
in partnerships with private hospitals. Then the local governance body (village panchayats) were
given the power to select a woman resident in the village to train as an auxiliary nurse-midwife for
that village to be employed by the local government institution. At the time of writing, more than
4000 such auxiliary nurse-midwives had been given appointments, with many more in training.

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 Another example is the Swalamban Yojana (self-reliance plan), launched in Madhya Pradesh state
in 200607 with the objective of filling the gap of staff nurses. Women with rural backgrounds from
under-served districts are selected and sponsored for the nursing courses. They are bonded to serve
in the rural areas for 7 years after training or else they have to pay a penalty of 200 000 Indian
rupees. The initial responses to this strategy are very encouraging though it is still too early to
judge.

Continuous Professional Development

Almost all states have been addressing specialist shortages by providing doctors with short-term
1824 week training courses in emergency obstetric care including Caesarean section and
anaesthesia. Two states, Assam and Chhattisgarh, have created a cadre of rural medical practitioner
with three years training, exclusively for working in primary health care in rural areas. Assam has
insisted on local selection and conditional licensing to work only in rural areas and in the public
sector.

Another form of multiskilling is to train and deploy doctors trained in the indigenous streams of
medicine to work as medical officers in primary health centres. This has been used extensively in
some states. About 700 000 female community health workers called ASHA (accredited social
health activists) are trained to provide basic, first-contact health care and to encourage families to
seek pregnancy and child health services.8 The pioneering effort for this was the Mitanin
programme in Chhattisgarh. The first evaluations of this programme are promising but they also
point to the need for much more investment to be made in this cadre for a greater outcome.

What does the national healthcare policy state?

Expenditure on public health care sector be enhanced to 2% from the current levels of 1.2% of the
GDP. The budget was expected to deliver infrastructure status to the sector but that too has been
given a miss, although the opportunity of extending the tax-free infrastructure bonds to health-care
infrastructure beyond roads and railways was there, the finance minister chose not to include it.
Under the Make in India programme, the government was expected to encourage indigenous
production of medical equipment and devices by exempting indigenous manufacturers from excise
duty for products produced or assembled in India, wherein the value of imported raw material does
not exceed 50 per cent of the equipment cost. Income Tax / MAT exemption of 15 years for
domestically manufactured medical technology products to promote the 'Make in India' initiative

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 was also expected. The budget is silent on this front too and that takes away a big opportunity of
kick-starting growth of the domestic medical technology sector.

Pros and Cons of Private Medical Healthcare:

Cons
Bennet et al. (1994) identified five main problems associated with private-for-profit provision of
health services. They are related to the use of illegitimate or unethical means to maximise profit,
less concern towards public health goals, lack of interest in sharing clinical information, creating
brain drain among public sector health staff, and lack of regulatory control over their practices.

Pros
Its strength is its innovativeness, efficiency and learning from competition. Management standards
are generally higher in the private (for-profit) sector. The private sector can play an important role
in transferring management skills and best practices to the public sector. In India, the formal for-
profit sector has the most diverse group of facilities and practitioners. Since it accounts for the
largest proportion of services and resources in the health sector, it is argued that future strategies to
improve public health should take into account the strengths of the private sector (World Bank
2004).

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 S U B - P R I M E C R I S I S

This topic is the one which has consistently eluded popular understanding despite after the passage
of almost a decade since it first struck out to the rest of the world after originating from America.
The sub-prime crisis reverberated throughout the world and affected the economies of several
countries, including major European nations and China. China even pledged a national stimulus
package of $586 billion dollar, which essentially implied that China was taking the plunge for the
american crisis. Regardless, the explanation of what this crisis really was, requires awareness of few
terms and processes, which have been dealth with individually at the end of 'The Sub-Prime Saga'.

The Sub-Prime Saga:

The sub-prime crisis was an american banking emergency which occurred due to payment defaults
by home-owners and it includes the consequent financial crises that snowballed out of the housing
sector collapse.

Characters:
1. Home Borrowers The home borrowers were mostly sub-prime borrowers of home-loans
without having the capability in terms of collateral/assets to repay the loan undertaken.
2. General Banks - Banks which give loans and take deposits.
3. Mortgage Brokers Middle-men who were chiefly responsible for helping the banks sell
mortgage products to borrowers. Mortgage brokers were responsible for originating almost a one-
third of all the sub-prime loans.
4. Special Purpose Vehicles: Companies that are created for a sole/special/specific purpose. Often
such companies are created to acquire financial products/assets or assets of a liquidated company.
They were created by lenders/bankers to create Mortgage Backed Securities (MBS).
5. Credit Rating Agencies: Organizations that impart 'ratings' to various financial products for the
purpose of investors. Investors make use of the ratings given by CRAs to take decisions regarding
investing in any financial product. Main players involved Big Three 'Standard & Poor's,
Moody's & Fitch'.
6. Investment Bankers: Investment bankers would purchase MBS from SPVs in order to trade in
them and make profit. This was so because after securitization of MBS, these could be traded in the
open market (over the counter OTC transactions, i.e., transactions that do not come under any
regulation or law). Main players involved 'Lehman Brothers' went bankrupt, whereas, 'AIG,
Merrill Lynch, Freddie Mac and Fannie Mae' all came within an inch of becoming bankrupt and

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 were rescued by the US Fed Govt.'s bailout package.
7. Investors: Various trust funds, endowment funds and pension funds invested in the CDOs
because they were given a AAA rating by the CRAs.

Stage-1: Setting up of the Stage

Scene 1: Easy money policy of the federal bank
As has been mentioned earlier, the sub-prime crisis emerged in the backdrop of a recession that was
ongoing in America. To kick-start the economy, the federal bank had lowered interest rates on
money lent to institutions, banks mostly, because of which the lower interest rates were passed onto
the banks. This led to a situation where credit/money was available at a much cheaper cost.
Availability of cheaper money led to higher capital liquidity (which essentially meant that more
money could be obtained much easily and which could be now employed as capital to further
improve one's returns or invest in businesses or profit ventures). Generation of this sentiment led to
the bankers taking on even more riskier ventures such as lending to sub-prime borrowers who
otherwise would not have been considered fit to be lent money. Hence the start of this financial
crisis could be traced back to the bankers taking on riskier loan-borrowers such as sub-prime home
purchasers. But at that time, lending money to borrowers to enable them to purchase homes was not
considered to be that risky. This was because of the then observable fact that prices of home and
real-estate are always rising. So the banks felt that even if the borrowers defaulted on their
payments, the banks would not be at much loss as they could easily recover the amount of loan
granted by selling off the borrower's home at an auction. This could be done by the bank, because,
as was explained earlier, the homeowners had obtained loans from banks to purchase homes under a
'mortgage contract', which implied that in case of non-repayment, the homes would be auctioned off
by the banks. Hence in light of easy availability of money and credit, the banks sold a huge number
of home-loans which saw the size of sub-prime mortgage market in America to swell from $173
billion in 2001 to $665 billion in 2005, which represented an increase of nearly 300%.

Scene 2: The mortgages

Most of the loans that were made available to the home-buyers were Adjustable Rate Mortgages
(ARMs), which meant that the rate of interest chargeable on the loan amount and concomitantly the
monthly payments would be lower in times of lower interest rates. Thus ARMs were easily sold to
even sub-prime homebuyers who thought they were getting a good deal because of the lower
monthly payments and any fears of inability to repay were set aside by the knowledge that prices of
homes will always appreciate. Alas, this was a mere assumption and as someone from our

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 generation must be well aware now of the adage, 'assumption is the mother of all fuck-ups', the
home-buyers should have been similarly aware of it then. Further, the brokers were only too happy
to push the ARMs because this type of mortgage came with a higher commission, as they were
more complex than the simpler fixed rate mortgages. In many instances mortgages were sold even
to home-buyers who clearly had no capability to repay back their home-loans. The brokers did not
bother themselves enough to verify the credentials of the home-buyers. Some of the home-buyers
too on their part quoted an income levels fives time higher than the actual level in order to make
them appear as safe borrowers to who money could be lent without fears of default.

Scene 3: Sub-prime borrowers

The banks lent money even to borrowers who were not falling within the 'prime' category, i.e., the
category which can be safely trusted with the ability to repay back all of the amounts borrowed as
loan. The banks could do so on the assumption that any default by sub-prime borrowers could be
made good by auctioning of their homes for which they secured the loans. And since the house
prices were expected/assumed to always rise, the banks had no hesitation in offering loans even to
sub-prime borrowers, some of who clearly had no means or ability to repay back their loans.

Stage 2: Transferring the risk of non-payments to the next purchaser.

Scene 1: Transfer of risk from banks to SPVs
The major risk involved in any loan transaction is the risk of default or the risk of non-repayment.
Risk is minimized by either spreading it across multiple entities (as in the case of insurance) or by
securitization. Transfering the risk of credit instruments through securitization or insurance has been
around since 1970s. (See below on 'securitization'). By the process of securitization, an entity is
able to convert an otherwise 'illiquid' commodity/product/instrument into a tradable or liquid
product. Liquidity is a measure of how fast can a product be converted into cash of equivalent
value. Liquidity also implies available cash, but in the context of this section, we will go by the first
definition. Thus, while FMCG goods may be very liquid, real estate is not considered to be very
liquid or easily tradable since you won't get customers to purchase real estate that easily, whereas
you have daily customers who will give you cash in exchange for FMCG goods. In the same vein,
loans provided by banks to its customers are not tradable, and therefore 'illiquid'. By the process of
securitization, they are converted into Mortgage Backed Securities (MBS see below on
securitization). These mortgage backed securities are further structured and formed into a form of
tiered or layered securities, after which they are known as Collateralized Debt Obligations (CDOs
see below on CDOs). By securitizing the loans, banks were able to sell/transfer these to other
entities such as an SPV, and consequently offload a certain amount of risk from their shoulders. The

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 repayments on the loans that were to go to the bank earlier would now go to the SPV to which the
bank has transferred its loans.

After transferring the loans to the SPVs, the banks take upon themselves the responsibility for
collection of interest and repayments, for which the bank deducts a service charge. In this way, the
bank is able to offload risk to another entity, while at the same time generate a new revenue stream
for itself. However, at this stage the SPVs bear the risk of non-payment by borrowers.

Scene 2: Transfer of risk from SPVs to Investment Bankers

In order to minimize the risks arising from MBSes for an SPV, the SPV decided to take various
individual mortgages and put them all into one pool. The SPV then proceeded to slice these pools
into multiple tranches, viz., 'Senior & Mezzanine' tranches. A tranche termed senior would imply
that the tranche is formed from MBSes that have the least risk of payment defaults. These 'senior
tranches' were further sold off to various investors such as fund bodies and investment banks.
Besides the senior tranche, there was the mezannine tranche as well, which had a higher risk of
default in repayments. These mezzanine tranches were obviously difficult to be resold. The senior
tranches were given investment grade ratings, some of which were even given the highest rating of
triple-A (A triple A rating meant that the bond being issued is very safe and carries very little or no
risk of default). On the other hand, the mezzanine tranches were not rated as favourably and
therefore the SPVs were finding it difficult to sell those. The investment bankers step in the picture
from this moment onwards. They investment bankers purchased the mezzanine tranches from the
SPVs and pooled them all together in various proportions of their default carrying risk. The idea
behind pooling of different MBSes in the mezzanine tranches carrying different default risks was
the 'concept of large numbers'. The concept implied that even if one mortgagor falls back on his
repayments, it will not affect the 'pool of MBSes' since the default of one mortgagor will be spread
equally among the other MBS and therefore any such loss arising from such a default can be shared
by other MBSes, thus minimizing risk. This led the bankers to believe that there would not be any
major risk to structuring MBS into CDOs as risk could be spread and thus minimized. These
bankers then took the pool and categorized the securities in a structured format. Under a structured
format, these CDOs were then split up into three layers of CDOs, viz., 'easy,' ,'mildly risky' and
'risky'. The pool labelled 'easy' implied that it carried the least risk of a default in payment. So if a
few mortgagors failed to make their payments, and if only some of them did make their payments,
then the top tranche labelled 'easy' would receive back all the payments made by mortgagors. If the
payments are found to be insufficient to pay back all the tranches of the CDOs then the tranches
lower in the categories would have to bear the burden of non-repayment, whereas the tranches in

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 the top would be the first one to receive payments, whenever they are made. In this manner, we saw
how the SPVs were able to offload the riskier mortgages to the investment bankers, which in turn
converted the riskier mezzanine tranches into a structured format called the CDOs.

Scene 3: Turning Dross into Gold

Now, the question arises as to why would an investment bank be interested in purchasing MBSes of
risky sub-prime borrowers, and that too MBSes of the mezzanine tranches, which carried a higher
risk of default in payment? This was done so because, a lot of investors which had money to invest
in, could not find any alternate source that could generate a favourable return of money on their
investments. Since America was in a recession and the federal bank's interest rate had been 1
percent for a long time, investors were finding it difficult to invest their money in a revenue
generating source. This made them participate in riskier ventures such as 'mezzanine tranches of
MBSes'. Therefore the investment bankers did not hesitate in offering riskier mortgages to
investors.

However, the investors still needed to be assured of the safety of their investments. This fear of the
investors was easily allayed by the CRAs, which rated most of such mezzanine tranches as
investment grade securities. After the mezzanine tranches of MBSes with the SPVs were sold off to
the investment bankers, these MBSes were then further structured into CDOs of essentially three
types as detailed above. The CDOs structured at the top were considered safer than those at the
bottom. These CDOs that were at the top were given investment grade ratings by the CRAs, without
conducting adequate due diligence into what these financial instruments or debt obligations could
mean or what kind of financial risks they carried. The CDOs that were given investment ratings
were easily lapped up by various investors, some of which included fund bodies such as Harvard
Endowment Fund and pension funds, which are usually required by their charters of formation to
invest in safe investments such as those given investment grade ratings.

However, the reality remained unchanged, viz., that the CDOs structured at the top and which were
given investment grade ratings were essentially mezzanine tranches of MBSes which essentially
were securities converted from mortgage loans to sub-prime borrowers, who were people with high
default risks. Thus, the investment bankers and the ratings agencies together played a stellar role in
turning 'dross into gold' or turning worthless junk into glittering diamonds through the process of
creating 'derivatives'.

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 The investment bankers then issued these CDOs by promising a coupon rate for the duration for
which the investors stayed invested in these CDOs. The CDOs at the top being rated the safest
investments carried the lowest coupon rate, while the CDOs at the bottom carried the highest
coupon rate, since they were the riskiest investments. Some investment bankers had taken the
lowest grade CDOs and further transformed them into another derivative called, 'CDO squared',
which followed a similar process of converting low-grade MBSes into CDOs.

Stage 3: The Risk-Chain

Scene 1: The formation
At this stage, let us rewind back a little to understand the risk chain that had emerged out of the
transactions described above. As is clear by now, the result of the fed lowering interest rates resulted
in a lot of money floating around in a state of recession. This made investors run for newer
investment grade securities. Seizing this opportunity, investment bankers offered CDOs to those
investors after getting the CDOs rated by CRAs. The investment bankers had converted MBSes into
CDOs after acquiring the former from the SPVs which had been created by lenders to offload their
debt obligations and maintain a healthy balance in their account books. The banks had transferred
its mortgage loans to the SPVs, which had converted these loans into 'securities' to make them
tradable. The banks had generated loans through mortgage brokers who connected home-buyers
with the lenders. Thus, we see that a chain was created connecting the home-buyer with the final
investor.

Investors such as
Mortgage Brokers pension funds

Home Banks mortgage owners & traders Special Purpose Vehicles (converts
Buyers (Freddie Mac/Fannie Mae) mortgages into securities - MBS)

Investors such as pension Investment Bankers (converts

funds mezzanine MBS into CDOs)

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 1. Home Buyers Banks: Banks, oftentimes with the help of mortgage brokers, generate mortgages
by helping home buyers purchase a home using the mortgage loan offered by the bank.
2. Banks Special Purpose Vehicles A new entity is especially created to hold financial assets
such as mortgage loans. The banks transfer their 'receivables from customers', viz., loan repayments
+ interest to these SPVs. In return they charge a service fee to the SPVs for collecting and
processing mortgage repayments.
3. SPVs Investment Bankers: SPVs classify MBS into various tranches and obtain credit rating
for them and are further sold to investors and investment banks. Thus the SPVs are able to transfer
their risk onwards to investment bankers
4. Investment Bankers: IBs further convert the lower grade MBS into a structured form of security,
i.e., a CDO and sell them onwards to investors. The CDOs were issued as bonds in which the
investor had to invest money in return for a fixed coupon rate. In this way the IBs too were able to
transfer the risk of non-payments to others.

This chain was created for the simple reason that nobody wanted to take on the risk of sub-prime
borrowers, but everyone wanted to profit from the opportunity. Thus we see at each point of
transaction in the chain, an entity has further transferred the risk to the other entity after selling the
'debt obligations' (since the derivative being transferred is based out of a 'debt', i.e., a mortgage and
arises from an obligation to pay, such securities are also known as debt obligations).

Scene 2: The Gamble

Now the situation begs the question as to why did various entities in the above-described risk chain
continued investing in what was apparently known to be financial products/assets backed by sub-
prime mortgages? This risk chain progressed and developed further chiefly on the assumption that
prices of real estate/homes will always appreciate. Yes, it has been a historical observation that
prices of real estate always increase, even when sometimes purchased by sub-prime borrowers. On
this assumption, it was felt that even if few of the borrowers fell back in their payments, their
houses could be auctioned off at prices higher than at which loans were taken out by their buyers. In
this way, even a shortfall in the repayment of loans could easily be serviced through the sale-auction
of the mortgaged houses. Besides, through several layers of pooling and securitization, the risk was
spread across multiple investors and the risk of loss due to default was minimized (as shown
above).

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 However, post 2001, the situation was a little bit different and it can be said that the seeds of the
sub-prime crisis had been sown much before the actual crisis arose. You see, collateralization and
securitization had been in vogue since 1970s and it is an effective way of spreading the risk among
multiple entities to reduce potential loss. It was not for the first time that these financial tools were
deployed to minimize risk arising from sub-prime mortgages. However, this time around the
situation was different in these key aspects:

a) Very low federal interest rates: Very low federal interest rates meant that the lending banks could
borrow money from federal bank at very low interest rates. This led to excess liquidity in the market
and thus a lot of money was available to be provided as credit. This led to an increase in the
proportion of sub-prime mortgages as a portion of the total mortgages, since banks had no hesitation
in lending money to every tom, dick and harry as the federal bank was following a cheap credit
policy post-2001. The federal bank has been criticized by some sections as being the prime reason
behind the sub-prime crisis.

b) Securitization led to release of more money: Availability of cheap credit implied that banks could
provide a huge number of mortgage loans to borrowers. Further, when SPVs were created to
securitize the mortgage loans, the banks transferred all the loans from their books to the SPVs in
return for cash. This freed up the cash of banks, without reducing the loans, as the loans simply got
transferred from one entity to another entity. This new cash that got freed up for banks due to
securitization meant that the banks could originate even more mortgage loans, which led to a rush to
seek borrowers, even those with a clear financial inability to pay back loans.

c) Lack of Due Diligence: Credit Rating Agencies convinced due to past successful mortgage
securitization believed that the pooled securitized assets could give the financial returns which the
investment banks touted. Further CRAs also felt that, in case of a downturn, these assets could be
further securitized into a number of assets and thus be made recession-proof. It was this confidence
coupled with the assumption that prices of real estate are never going to fall, which led to the rating
agencies becoming reckless towards rating of mortgage securities. The complexity of structured
securities (CDOs) further hid the rot from these CRAs, who otherwise were supposed to carry out
the necessary due diligence into the nature of these financial products and whether they could
provide returns the way their holders touted them to be capable of. Consequently, the CRAs rated
most of these securities as AAA, the highest investment grade rating. The complicity and role of
rating agencies in the creation of the sub-prime crisis is on-going in the US with the Justice

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 Department currently investigating the role of Moody's. Another rating agency, 'Standard & Poor'
has already settled with the Justice Department for a total sum of 1.5 billion USD, although it
settled without admission of guilt.

Scene 3: The Bust

Several factors came together to create a heady mix of potent financial crisis. These factors will be
taken up one by one

1) Increase in sub-prime lending: Sub-prime lending had been continuing from the past and it was
not as if it occurred only in 2000s. However, historically it had stayed at a stable 8% proportion of
the total mortgages. However, in the years leading upto the crisis, i.e., between 2004 and 2006, the
proportion of sub-prime mortgages had shot up from 8% to 20%. An overwhelming majority of
these mortgages were ARMs (adjustable rate mortgages).

2) Adjustable Rate Mortgages: ARMs as has been explained at another instance, are mortgages that
come bundled with interest rates that tag along with an agreed upon benchmark index rate, such as
for e.g., LIBOR or fed's prime lending rate. These are attractive in times of lower federal interest
rates, but costly during higher federal interest rates, as the lenders re-adjust the mortgage interest
rates according to the changing federal rates. This became a problem for borrowers/home-buyers
when the federal bank increased the unusually low interest rate of one percent by almost 400% to
5.25 percent by 2006. This huge spike in the federal interest rates meant the mortgage interest rates
also went up on the loans taken by home-buyers.

3) Refinancing Costs and Huge monthly payments: When there is a change in the interest rates
chargeable on a loan/mortgage, then the lenders typically have a provision in the mortgage contracts
that allows them to re-adjust the loan amounts. This process is called refinancing. So when the
federal hiked its interest rates, it proved to be costly for home-buyers/borrowers as they had to pay
higher monthly installments based on the higher interest rate. This made it very costly for borrowers
to finance their homes. Seizing this opportunity, the lenders asked the borrowers to refinance their
loans. Usually, the terms of refinancing take into account the price of the house purchased through a
loan. However, a point in time was reached where the price of the house was not adequate enough
(home equity) to back the mortgage loans. This made the banks ask for an even higher amount of
monthly payments from borrowers to adjust their loans. This became a financially untenable
position for most borrowers, who simply vacated their homes instead of paying up the higher
monthly amounts.

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 Stage 4: The Aftermath
When refinancing became impossible for most sub-prime home owners, they decided to simply
leave their homes. This contagion then gradually spread through the housing market first, as more
and more home-buyers decided to vacate their homes instead of paying higher monthly amounts.
Since this time around almost a fifth of the mortgages were backed on sub-prime mortgages,
decision by borrowers to not pay the higher monthly installments meant that the securities created
based upon those sub-prime mortgages could no longer be serviced. This led to the domino effect of
a drastic reduction in the value of assets created on the basis of these mortgages and a consequent
implosion of account books of several big financial firms. The immediate aftermath was the
complete bankruptcy of lehmann brothers and a reduction in the value of assets of most banks,
lending institutions, reinsurance companies, investment banks, often to the tune of billions of
dollars with the largest reduction seen by Citigroup (39.9 billion USD), UBS (37.7 billion USD)
and Merrill Lynch (29.1 billion USD)

Q. What do the pre-fixes 'sub-prime' or 'prime' imply?

In banking parlance, the word, 'prime', in the context of a bank customer, implies that, that bank
customer is a credit-worthy individual. Banks assess the credit-worthiness of an individual based on
an assessment of that individual's assets, past credit history, quality of collateral offered for
obtaining loans and any other financial consideration that the bank may consider appropriate. If the
assessment reveals that the individual seeking loan from the bank (bank's customer) is capable of
timely/scheduled repayments or if the individual has offered good quality collateral that can be
serviced (auctioned off in case of default in repayment), then the bank considers the customer as a
'prime borrower'. In contradistinctions, a 'sub-prime' borrower is a person whose credit history has
been less palatable, or who has offered no collateral or a collateral of poor quality, or is a person
who has been considered by the bank to be not sufficiently capable of scheduled repayments. So if a
person takes loan from the bank but without offering any collateral or offers inadequate collateral,
then that person will be considered as a 'sub-prime' borrower by the bank.

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 From the above explanation it is clear that banks need not worry about repayments from prime
borrowers, but they have to worry about sub-prime borrowers as their repayment capability is less
than adequate. In other words, 'sub-prime' borrowers are a risky asset for a bank.

Q. But if sub-prime borrowers are a risky asset for the bank, then why will a bank provide
loan to these borrowers?
The simplistic answer would be to ascribe such a tendency of the bank to arise from inherent
'greed', an answer that has been most commonly profferred by commentators. However, it must be
understood in the context of the pressures that are often put on the bottom lines of companies by
their shareholders. The capitalist economic system imposes a natural tendency on companies to
generate as much in the bottom line as is possible in order to present to the shareholders, a rozy
financial picture of the company. Before the sub-prime crisis broke out, America was generally
reeling under a slowly rising wave of recession that the Federal Bank (of America) found difficult to
reverse. After the dot-com bubble burst in the 2000 and America's war on terror started post 9/11,
the american economy was finding it hard to put itself back on a high growth trajectory. In this
context, the federal bank had lowered the interest rates for banks implying thereby that banks would
now be able to issue credit/loan to borrowers at reduced interest rates. This was done so under the
belief that reduced interest rates will make money more liquid and easily accessible in the market.
(This aspect of monetary policy is adopted when the central bank of an economy wishes to create
more economic activities in the nation. Availability of easily accessible credit will mean more
borrowers can take loans to finance their business requirements/start-ups). This release of money
into the system was interpreted as a signal by the banks that credit is to be made cheaper. This
wrongly interpreted signal combined with the pressures on company's executives to bloat the
bottomline caused several banks to furnish loan backed homes (mortgages) even to the 'sub-prime
borrowers', in the wrong expectation that those borrowers would be able to repay back their loans,
most of which were availed by borrowers to purchase homes. This phenomenon was compounded
by the unbridled greed of mortgage brokers who were pushing mortgage loans in order to rake up
'commission cash'. In some cases, mortgage brokers even fudged up income levels of the borrowers
in order to make them eligible to banks and other lenders.

W O R D P O W E R
Top Line is a term used to describe a sum of amount Bottom Line is a term used to describe a sum
mentioned in the top line of a company's income of amount mentioned in the bottom line of a
statement (a financial report that details the profit company's income statement and hence the

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 and losses of a company) and hence the name Top name 'bottom line'. It refers to the 'net profit'
Line. It refers to the gross profits/revenues which that is derived from the gross
have not been accounted yet for costs, deductions profits/revenues after deduction of a
and liabilities. Therefore top-line growth of a company's costs and liabilities. Higher the
company implies increase in its sales figure. A bottom line, greater is the efficiency of the
higher top line figure may not indicate that the company and consequently, better is its
company is financially healthy as it may have huge financial health.
costs to service

Q. What is a mortgage?
Mortgage is a legal arrangement whereby a bank or a lending institution lends the borrower a
certain sum of money at a pre-determined interest rate. In exchange for this loan, the borrower
conveys the title (ownership) of an identifiable property to the lender, on the condition that the
lender shall return the title of the property if the borrower manages to pay back his installments on
time. If the borrower is unable to do so, then the lender shall be free to auction off the borrower's
property that was given (mortgaged) to the lender. There are two types of mortgages, viz., fixed rate
mortgage and an adjustable rate mortgage (ARM). The difference between the two is necessary to
be understood as the ARMs can be considered as one of the reasons engineering the sub-prime
crisis. While a fixed rate mortgage implies that the rate of interest chargeable upon the mortgage
will be fixed throughout the length and tenure of the mortgage, the ARM implies that the rate of
interest chargeable upon the mortgage will keep on moving in accordance with an acceptable and
agreed rate index such as prime lending rate or London Inter-Bank Operating Rate (LIBOR). An
ARM's rate of interest will be lower with a lower index and it will be higher with a higher index.
Thus ARMs are suitable in times of lower interest rates in the market and unsuitable in times of
higher interest rates.

Q. What is securitization?
Securitization is the process of converting an illiquid asset into a security. For e.g., a loan taken by a
borrower, Mr. A from a bank PQR Ltd. is an example of an illiquid asset. Illiquidity of the loan
implies that the loan cannot be sold by the bank PQR Ltd. to any other entity that may be interested
in buying it, since the liability has been created specifically between the borrower and the bank
PQR. However, sometimes banks securitize the interests payable on those loans in order to be able
to transfer the 'right to receive such interests (customer receivables)'. They create 'securities' by
forming a 'new agreement/contract' with another company (say company SPV Ltd.), which transfers

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 the 'right to receive interests/securities' to the other company. This 'transferee' company which is
given the 'security' is specially created to purchase such 'securities' from the bank. Such type of a
company specifically created for a particular task, viz., acquisition or divestment of financial assets
is called a 'special purpose vehicle'. In this new arrangement the lender bank PQR does not have to
run after the borrowers anymore, as the interest receipts from the borrowers will now go to the SPV,
whereas the bank will just take a servicing charge from the SPC for management and servicing of
the interest receipts. In this way the bank has achieved two favourable conditions, 1) lowering of
costs, by raising a service charge on the SPV for management and servicing of interest receipts, 2)
securitization of the illiquid loan assets and selling them off to a third party special purpose vehicle,
thereby reducing the risks associated with slow or delayed repayments.

Q. Why would an SPV take on the risk of buying sub-prime loans from banks that securitized
their assets?
The banks, who loaned even to sub-prime borrowers, were aware of the risks associated with sub-
prime borrowers and it was this very reason that prompted them to look out for alternative ways of
minimizing risks associated with a default in payments. So when an SPV is created, the loan assets
are generally sold for a value which is lesser than the market value of the loans. This makes the loan
assets attractive from the SPV point of view, since if the repayments are paid in completely, then the
SPV ends up earning more than what it paid to the bank for obtaining those loans. Besides, the bank
also provides a guarantee for the securitized loans. These guarantees imply that the bank shall
undertake to make good the shortfall in the receipt of payments by the SPV from the customer, in
case there is a payment default. Thus, the SPV feels covered and takes on the loans of sub-prime
borrowers. However, the saga does not stop here as the answer to the next question may show. So
here we have a new entity, a SPV whose assets are mortgage-backed securities, since it holds the
'right to receive payments' (a security) and the bank shall receive payments from mortgagors
(backed by a mortgage with a bank). The SPV is also free to sell of these mortgage-backed
securities as the very nature of a security makes it a 'tradable' instrument, and consequently a liquid
asset.

Q. What is meant by credit enhancement?

'Credit enhancement' refers to a process by which a company may enhance its credit-worthiness or
debt worthiness. Through credit enhancement, potential/existing investors are assured of the ability
of borrowers of loans to make timely payments. In order for an SPV or the bank to securitize and
trade in mortgage-backed securities (MBS), potential investors who shall buy those securities, are
assured of the repayment ability of the mortgagors, whose mortgage contracts are the underlying

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 basis of those securities. For e.g., one of the methods of credit enhancement is by way of getting a
guarantee from the bank or a third party that would make good any shortfall in the repayment of
interest by the mortgagors. So in case, a mortgagor fails to make timely payments to the SPV, which
has purchased the MBSes, then the bank shall step in place of the mortgagor and make good the
shortfall in the payments to the SPV, as if the bank had placed itself in the shoes of the mortgagor.
Another method of 'credit enhancement' is by having various credit-rating agencies rate your
financial product favourably. The highest rating available is the AAA rating while the lowest rating
available is 'junk' status.

Q. What is meant by 'collateralized debt obligations'?

You must be clear now about what 'mortgage-backed securities' are. Sometimes, these mortgage
backed securities are further split up into three basic categories or classes. However, before any
such classification is undertaken, various mortgage backed securities are put in one pool. For each
such MBS in the pool, classes/categories are then decided on the basis of 'credit-worthiness' of the
borrower who has to make repayments on his mortgage. If a borrower behind a mortgage is
considered 'credit-worthy' and capable of making repayments on his mortgage, then the security
backed by his mortgage (MBS) is considered to be in the class, 'safe'. Similarly, classes, 'mildly
risky' and 'very risky' are further accorded categories i.e.., an MBS considered mildly risky will
have lesser likelihood of repayments by the borrowers and an MBS considered risky are those ones
for which there exists the highest risk of default by borrowers. After the MBSes have been
classified or 'structured' in this manner of risk associated with it, these come to be known as
'Collateralized Debt Obligations (CDOs). Thus, these CDOs are nothing but those very same
'mortgage backed securities', however which now have been categorized/structured according to the
risk associated with them. Further, these categories were rated differently as well. The security with
the least risk of default carried a lower rate of interest, which in times of american recession and an
even lower federal bank interest rate, seemed attractive to investors. Likewise, the security
categorized as 'mildly risky' offered a higher rate of interest/return on investment for an investor,
and the security categorized as 'very risky' was packaged with the highest rate of return available
under the CDO. So if an investor with a risk-averse nature, and who wants to park his moolah in an
asset with the most assured return, then the CDO considered the safest shall be offered to the
investor by the investment bank, which acts as the middle-man between the former and banks/SPVs
which have the MBS. On the other hand, an investor with a greater risk appetite will prefer
securities considered as 'risky' on the expectation of receiving higher returns.

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 G E N D E R I S S U E S

1 . S TAT U S O F W O M E N D I R E C T O R S / G L A S S C E I L I N G
Gender representation on corporate boards of directors refers to the proportion of men and women
who occupy board member positions. Globally, men occupy more board seats than woman. This
disproportionality is being addressed in various ways by both governments and corporations.
Globally, also the pace of increasing women representation in corporate boards continues to be slow
with many western countries having passed gender representation legislations only in the past
decade.
1. According to a study by search firm Korn/Ferry Institution in 2012 women directors account for
only 4.7 per cent of all boards of directors in Indias 100 largest companies by market capitalisation.

2. In India, the New Companies Act, 2013 lays down the following
The new Companies Act makes it mandatory for companies to provide for womens
representation on their boards. The Act requires every listed company to have at least one
woman director within a year, the deadline of which was March 31, 2014. Others reporting
minimum revenue of Rs 300 crore have three years to comply (Why bigger companies have
a longer compliance period? If nothing else, it definitely points to the deeper entrenchment
of patriarchy in companies with greater depth.
SEBI incorporated this law into its norms in February 2014, although it's deadline for
implementation was extended till 31st March, 2015.
As of 20 April, 2015, India inc. is reported to have continued with a poor representation of
women in corporate boards. Even now more than 70% of Indias top companies have made
only token appointments of women to their boards, indicating a small pool of talent, an
inability to retain them in the workforce and plain reluctance to induct them.
An IndiaSpend analysis of the benchmark 50-share Nifty of the National Stock Exchange
(NSE) showed that only five companiesAxis Bank Ltd, Bharti Airtel Ltd, Idea Cellular
Ltd, Infosys Ltd and UltraTech Cement Ltdhave as many as three women directors on
boards that vary from seven to 17 members. IndiaSpend is a data journalism initiative.
The analysis also found that five state-owned companies have no women on their boards,
namely Bharat Petroleum Corp. Ltd, NTPC Ltd, Oil and Natural Gas Corp. Ltd, Punjab
National Bank and GAIL (India) Ltd.
Tokenism in appointments:
Those who have appointed a woman to their boards, have not gone beyond the
appointment of a single women director.

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 In most of the cases, such a woman director is a non-independent director (almost 42%).
Presence of a non-independent director means the woman is already related to the
board's members or the company or any of its subsidiary in some or the other way. This
is often done through appointing a family relative or an existing top-level employee of
the company. As a result, the goal of ensuring genuine gender diversity is defeated, since
the female non-independent director will repeat the same voice expressed by the rest of
the board.

2 . W O M E N I N C O M B AT R O L E S

Historically, armed forces have employed women only as nurses/ doctors.

The first batch of female inductees had joined only in 1992. But even then they were
allowed them to serve as short commissioned officers , but not as permanent commissioned
officers. Initially they were commissioned only for a period of five years, then seven years
and then fourteen years. But after the end of this period, they were asked to leave, whereas
men recruited under SSC were given extensions. This resulted in the denial of pension
benefits to women recruits as the minimum period of service required to avail such benefits
is 20 years. Although, the government has prospectively granted permanent commission to
women in some non-combat roles.
They are not allowed in combat role (army doesnt allows them into infantry, artillery, navy
doesnt allow them on warships; However, the Indian airforce in October 2015 announced
that it will induct women as fighter pilots by the year 2017, although Pakistan has already
taken the lead by inducting 5 women fighter pilots in its airforce as far back as 2013. It
opened the position since 2006, when it became the first south asian country to do so)
There are currently 1,500 women serving in the IAF, including 94 pilots and 14 navigators.
However, female pilots and navigators have so far been confined to non-combat roles and
serve in transport and helicopter units. This constitutes nearly 8.5% of the total recruits in
the airforce.
The representation of women is abysmally low in the army (3%) and navy (2.8%)

Arguments against including more women:

Armed forces have been constituted with the sole purpose of ensuring defence of the country
and all policy decisions should be guided by this overriding factor. All matters concerning
defence of the country have to be considered in a dispassionate manner.

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 No decision should be taken which even remotely affects the cohesiveness and efficiency of
the military. Concern for equality of sexes or political expediency should not influence
defence policies.

The profession of arms requires both mental and physical prowess. That is the reason why
even advanced countries are wary of inducting women in fighting units. They have been
taking precautions to ensure that women are neither pitched against enemy in face-to-face
direct combat nor exposed to the risk of capture by the adversary. No wonder then that
despite the much touted huge presence of women in US forces in Iraq, there has not been a
single woman casualty so far whereas close to 3,000 men have lost their lives. They have
been kept sheltered in safe appointments.

A British study released late last year (2014) found that physiological differences put
women at a disadvantage in strength-based and aerobic fitness tests. Even women who are
able to overcome the physiological disadvantages will likely be injured more easily or
become tired more quickly, making them easier targets and poorer marksmen in combat.

Disruption in service due to marriage and child bearing (a lot of money is invested in their
training).

Most of the women opting for a career in the services belong to families where their
upbringing has been in a highly sheltered environment. A career in the military is at the
other extreme. They admit having limited knowledge of military life at the time of joining.
Subsequently, life in the military comes as a big shock to them. While some adapt to it well
others find the task to be too daunting.

India's cultural mindset and social mores have not developed enough for the military to
prove conducive for the entry of women. Junior officers who have a patriarchal mindset
would not like taking orders from a women officer. Also, men in the military are said to be
obedient to a training officer who himself has a proven physical mettle in training, which
may not be the case for women, who are factually and biologically of a different make. This
may prove harmful for ensuring obedience and discipline.

Sexual harassment is one single concern that has defied solution so far how to ensure
safety and protect dignity of women in the forces. Almost all women view this as their major

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 fear. The American and the British societies are highly emancipated and liberal with women
having equal status in all fields. Yet, the level of sexual harassment of women in their forces
is startling. What hurts women most is the attitude of military officials who dismiss
complaints as frivolous and due to over-sensitivities of women involved. Even serious
accusations of sexual assault are many times treated in a perfunctory manner. Moreover,
many officers tend to adopt an attitude of acquiescence by resorting to boys will be boys
apology. In the US, only two to three percent perpetrators are court-martialled and they are
also let off with minimal punishment.

Doubts about Role Definition : The profession of arms is all about violence and brutality. To
kill another human is not moral but soldiers are trained to kill. They tend to acquire a streak
of raw ruthlessness and coarseness. This makes the environment highly non-conducive and
rough for women. Women, in general, are confused about the way they should conduct
themselves. If they behave lady-like, their acceptance amongst male colleagues is low. On
the other hand, the ..

Arguments in favour of inducting more women:

They have proved their mettle in every field. As historical examples, Lakshmi Bai Rani of
Jhansi led her troops into a historic battle and Begum Hazrat Mahal of Awadh fought against
the British heroically.

They are included in paramilitary forces (except Assam Rifles) which are also physically
demanding in nature. BSF already has an all women battalion force to guard international
borders. (The battalion has not been positioned on the Line of Control where firing and
infiltration attempts are frequent. Instead, it has been deployed near Ferozepur on the
International Border (IB) which is totally peaceful and where Indian and Pak troops
routinely exchange sweets on festivals. Earlier, village women along the border were not
allowed to go across the border fence to cultivate their fields as no women sentries were
available to frisk them. It was a sore point with the border folks. The sole purpose of raising
the women battalion is to redress this long standing grievance.)

Nature of fighting is changing; it's more technology driven instead of hand-hand combat as
in the case of infantry forces. In view of the same the physiological disadvantage for women
is nullified. (However, the Indian forces are still a second generation technology force which
is trying desperately to graduate to the third generation. Indian defence forces are man-

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 power intensive needing physical ground effort. India has very few high-tech jobs).

Even conservative countries like UAE and Pakistan allow women in combat duties.

Delhi HC in 2010 and recently in August 2015 ordered the government to give women
permanent commission.

Women doctors/nurses are already involved in combat. Lt. Colonel Mitali Madhumita (a
doctor) won a gallantry award for saving the lives of 19 people during a February 2010
terror attack on Indian embassy in Kabul.

International Experience
United States: The United States is considered a pioneer and a trend-setter as regards induction of
women in the services. There are approximately 200,000 American women on active duty in the US
armed forces. They constitute nearly 20 percent of its strength. Women are also participating in Iraq
operations in large numbers, albeit in support functions as they are forbidden to be placed in direct
ground combat with enemy. They, however, are assigned combat support duties on voluntary
basis. Other countries that have opened close combat roles for women are Australia, France and
Germany.

Israel: Though Israel has conscription for women (as well as men), a large number of them are
exempted for various reasons. Women are generally not allotted active battle field duties. They
serve in many technical and administrative posts to release men for active duty. Although they make
excellent instructors as well, most women occupy lower and middle level appointments. Only a
handful reach senior ranks.

United Kingdom: A major enlargement of womens role in the British armed forces took place in
early 1990s. A number of new duties were assigned to them. Today, 71% of all jobs in the Navy,
67% in the Army and 96% in the Air Force are tenable by women. Women are primarily excluded
from the duties which require battling enemy at close quarters. Service-wise, the Navy has a women
population of 9.4%, the Army 7.1% and the Air Force 11.9%. The total being 10% of the total staff.

Canada: For Canadian women it has been a long and slow struggle to be part of the armed forces.
For over a hundred years, women were considered suitable only for nursing duties. However, things
changed rapidly during the recent past and today women account for close to 13 percent of the total

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 strength of the Canadian forces. Women are permitted in all corps and can rise upto senior decision-
making levels.

Every country has its own social/cultural moorings, type of hostilities encountered, level of
technology and larger manpower issues. it is now commonly accepted that women should be
encouraged to join the services only under the following circumstances:
When a country is short of men or there are not enough men volunteering to join the forces.
When the armed forces of a country are technologically very advanced and there is a huge
requirement for highly qualified personnel for high-tech support functions. Women can be
gainfully employed for the same.
Where societal and cultural ethos have matured to the extent that barriers of gender
prejudices have vanished and both sexes have adjusted to the desired level of mutual
comfort.
Where militaries are not deployed on active combat duties and are generally assigned
comparatively passive tasks. A number of countries like Canada and Australia induct women
in their forces as they are aware that they will never be required to participate in an
operation at home or abroad.
The above parameters act as a universally accepted benchmark to determine the need and
extent of womens employment in the forces.

3 . WORKING WOMEN

Findings of Progress of the Worlds Women 2015-2016 report (report published by UN

Women in April 2015 )

Globally, only half of women participate in the labour force, compared to three quarters
of men; in India only a third of women are in the labour force.
Millions of women are still consigned to work in low paid, poor quality jobs, denied
even basic levels of health care, without access to clean water and decent sanitation.
South Asia has the worlds most skewed gender wage gap and is among the few regions
where the gender labour force participation gap is both large and growing.
In developing regions, up to 95 per cent of womens employment is informal, in jobs
that are unprotected by labour laws and lack social protection.

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 Simultaneously, women shoulder the bulk of the burden of unpaid care work. In India,
for instance, women do nearly six hours of unpaid care and housework every day as
compared to half an hour for men.
While on average globally, women are paid 24 per cent less than men, the gaps for
women with children are even wider. In South Asia, the gender pay gap is 35 per cent for
women with children compared to 14 per cent for those without.
Women are forced to work under harsh conditions.

Until very recently, females were not allowed into the make-up industry in bollywood,
which was maintained as a male bastion.
Women were banned from enrolling as members in Mumbais Cine Costume, Make-up
Artist & Hair Dressers Association.
Now without membership, women make-up artists were barred from working in
Bollywood or any regional film industry.
In this background Charu Khurana (a makeup artist) filed a case in SC.
In April, 2015 she won the case in SC.
And subsequently she made history by becoming the first woman to get enrolled in the
Association.

Reasons for rise in working women

Number of working women are on rise due to various reasons like
Increasing education.
They are becoming more aware that only economic empowerment can lead to overall
empowerment, i.e., increasing influence of feminist movements have played a role in it.
Due to urbanization, rising stand of living, increasing consumerism and increasing cost of
raising a children, there is more need of money and thus double salary is needed and thus
husbands now want a working women.
Service sector is growing and most of the employment opportunities in the services sector
are gender neutral.
Rise of SHG (self help group) movement has played a major role in creating self
employment among womens.

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 Equal Pay for Equal Work principle is not observed
The World Banks latest World Development Report 2012: Gender Equality and
Development notes that globally women in salaried jobs still earn, on average, only 71 per
cent of what men do for the same kind of work.
Casual workers are even worse off, averaging only 56 per cent of the income of their
male counterparts.
A total of 56 global sports were looked at in an extensive study by BBC. Out of 35
sports that pay prize money, 25 pay equally and 10 do not. Fourteen sports, including
rugby union and hockey, do not pay any prize money at all. Five sports did not provide
information for the investigation and men and women compete alongside each other in
horse racing and equestrian.
Athletics, bowls, skating, marathons, shooting, tennis and volleyball have all paid equal
prize money since before 2004.
In the past decade, nine more sports have starting doing so with five - diving, sailing,
taekwondo, windsurfing and some cycling events - achieving equality in the past couple
of years.
Women's pay is not the same as men's pay in 30% of the sports. (However, this could be
explained on the basis of less audience and lower commercial interest in female versions
of the game)

All prize amounts are for 2015 tournaments, except for the men's World Cup (2014), the women's
ICC World Cup (2013), and the men's and women's PSA Championship (2014). The Wimbledon
figures reflect the currency conversion rate on 09th July 2015.

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 4 . M AT E R N I T Y L E AV E S

It is generally felt that women in India tend to backtrack, opting for less ambitious roles
after returning back from taking a maternity leave. This results in a waste of their expertise
and experience.
Employers must be encouraged to ensure the same level of opportunities for women
returning from maternity leaves, as are available to any other normal employee. Numerous
studies have shown that improved retention rates generate greater profits and avoid costly
staff turnover.
The Maternity Benefits Act, 1961, grants employees mandatory paid leave and extends to
the whole of India, but is implemented with variable success. Increasingly, Indian
employees have been challenging breaches to the Maternity Benefits Act in court, adding
much needed pressure on employers to comply.
Currently, female employees can avail a maximum of 12 weeks full paid leave with six of
these weeks to be taken after the date of delivery. An additional medical bonus for US $56
(Rs. 3,500) is also available.
In order to claim six weeks leave prior to expected delivery, the employee should give a
notice in writing stating the date of absence from work and a certificate of pregnancy. The
employer is obliged to make payment in advance of this period. Following the date of
delivery, the employee must also send another notice with a certificate of delivery. Notably,
remaining payment must be transferred within 48 hours.
Ten weeks before delivery, employees are exempt from night shifts or any activities which
would adversely affect their health, pregnancy or fetal development. After returning to work,
employees are permitted two nursing breaks until the child is 15 months old.
Recently, the government has held meetings to discuss a possible amendment of the 1961
Act to enhance the duration of paid maternity leave from the current 12 months to 26
months.
If the amendments are made to the Maternity Benefits Act then India will be among
countries that offer the best benefits for mothers across the world. While the US has no
national programme for paid maternity leave (it allows only an unpaid maternity leave and
that too not under any dedicated maternity benefits legislation, but under another act, which
permits working women a period of recuperation after undergoing the specified medical
conditions, including the birth of a baby), Germany, Japan, and New Zealand offer 14 weeks
of paid leave. Most of Europe, especially the Scandinavian countries, offer great benefits,

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 ranging from nine months of leave to even a year.
Concerns:
However, a point of concern is that increased duration of maternity leave benefits may
work against working women as the companies may be loathe to hire women during the
period when they get pregnant. Instead of changing mindsets, mere changing of law will
not shift the perspective of employers who may view this latest amendment as nothing
but a 'cost escalation'. In light of the same, employers may not be too keen on hiring
women during the prime years of their fertility.
Further, majority of the working women in India are engaged in the unorganized sector,
where the letter of the law never permeates through for them to benefit from. As a result
the proposed changes may end up benefiting only a very limited number of women.

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 S WA C C H A B H A R AT A B H I YA A N

Facts :-
NBA (Nirmal Bharat Abhiyan) has been restructured into the Swachh Bharat Mission with
two sub-Missions - Swachh Bharat Mission (Gramin) and Swachh Bharat Mission (Urban).
Launched on 2nd, 2014 .
Nodal ministry:
Urban Development Ministry for Urban Area.
Ministry of Drinking Water and Sanitation for Rural Areas.
Aim To build 12 crore toilets in rural India at a cost of Rs. 2 lakh crore. By 2 nd Oct 2019
(i.e. 150th birth anniversary of Gandhiji), every city, town and village has to be clean which
means having:-
Toilets
i. Public convenience to be build.
ii. Pucca toilets in all households and schools.
iii. Safe drinking water
iv. Safe disposal system
v. Clean roads and neighborhood
How to achieve this aim?
Focus on behavioral change; creation of enhanced demand, convergent action through
various agencies and stakeholders with triggering through enhanced IEC (information,
education & communication), Inter Personal Communication (IPC);
Encourage cost effective and appropriate technologies for ecologically safe and
sustainable sanitation.
Strengthening of implementation and delivery mechanisms;
Monitoring Outputs (construction) and Outcomes (use) at the Gram Panchayat and
household levels leading to Swachh Bharat.
Challenges: The success of swaccha bharat abhiyan depends upon
Behavioral change. Even despite the building of toilets, many beneficiaries are finding it
difficult to adapt to defecating in enclosures. Many beneficiaries find enclosed
surroundings as suffocating as opposed to open air fields.
Cooperation of states. This is because of the total funds allocated towards the mission,
75% has to be generated by the states and urban local bodies, with the rest coming from
the centre.

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 Empowerment of local bodies by tech, funds and functionaries. This is because it is the
local bodies such as the Panchayat which will be the functional link between building of
toilets and arranging for their funding through central schemes such as MNREGA,
NRLM (National Rural Livelihoods Mission)
Steps taken under the scheme
Toilet constructions - After the launch of Swachh Bharat Mission (Rural) as much as 80
lakh toilets have been built.
Swachh Bharat Kosh has been set up to facilitate channelisation of philanthropic
contributions and Corporate Social Responsibility (CSR) funds towards Clean India
(Swachh Bharat). The fund was launched after individuals and philanthropists expressed
interest in contributing to efforts to achieve the objective of Clean India (Swachh
Bharat) by the year 2019.
The HRD Ministry has mandated to include cleanliness as part of a school's curriculum.
CBSE has also been advised to set up questions on cleanliness, hygiene and environment
in the examinations conducted by them.
Nationwide Real Time Monitoring of use of toilets
i. The Ministry of Drinking Water and Sanitation launched a nationwide real time
monitoring of use of toilets in January 2015.
ii. People across the country will be mobilized to check and verify the use of toilets in
the rural areas through Mobile Phones, Tablets or I- Pads and upload the same in
case of any discrepancy on the Ministrys website in tune with online citizen
monitoring.
iii. Earlier, the monitoring was done only about the construction of toilets, but now the
actual use of toilets will be ascertained on a sustained basis.
Tourism ministry announced cleanliness index for cities to encourage best performance.
Cities have been ranked on the basis of cleanliness. The top three cleanest cities
according to the index are Mysore (Karnataka), Thiruchirapalli (Tamil Nadu), and Navi
Mumbai. The bottom three (from the last) are Damoh (Madhya Pradesh), Bhind (MP),
Palwal (MP)
Budget 2015 Tax proposals for Swachh Bharat under it:
i. 100% deduction for contributions, other than by way of CSR contribution, to
Swachh Bharat Kosh and Clean Ganga Fund.
ii. Clean energy cess increased from 100 to 200 per metric tonne of coal, etc. to finance
clean environment initiatives.
iii. Excise duty on sacks and bags of polymers of ethylene other than

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 iv. for industrial use increased from 12% to 15%.
v. Enabling provision to levy Swachh Bharat cess at a rate of 2% or less on all or
certain services, if need arises. From November 15, 2015 onwards, a Swachh Bharat
cess is being levied at a rate of 0.5% of the amount of services rendered.
vi. Services by common affluent treatment plant exempt from Service- tax.
vii. Concessions on custom and excise duty available to electrically operated vehicles
and hybrid vehicles extended upto 31.03.2016.

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 SHOULD ONLINE SALE OF DRUGS BE BANNED?

The Maharashtra Food and Drug Administration had recently cracked down on e-marketplaces
including Snapdeal for selling medicines online. As pharma e-tailing is at a nascent stage, compared
to other e-commerce segments, and offers huge growth opportunities, the development has not
deterred entrepreneurs looking to make a mark in the online space. The latest to join the bandwagon
is former iGate CEO Phaneesh Murthy-promoted PM Health and Life Care (PMHLC), which is set
to launch an e-venture for selling pharmaceutical products. The retail market place for medicines is
estimated to be around $10 billion which is likely to become $56 billion by 2020. But despite all
this, the sale of the drugs through e-commerce is rising. The emergence of pharmacy retail chains
like MedPlus, Apollo and Global Healthline have seen revenue generated by the online sales grow
to Rs 507.59 crore in FY2015 from Rs 77.10 crore in FY2012 - a CAGR of over 85%. Average
sizes of orders have also increased, hitting an average of Rs 1,762.

Increasing Ubiquity of E-Commerce

Over the last two decades, rising internet and mobile phone penetration has changed the way we
communicate and do business. Various store and non-store retail formats have evolved to cater to
this growing market and E-commerce is one such non-store retail format. The advent of e-
commerce marketplaces has brought a paradigm shift in doing business transactions and in tandem
with the digital world. People today can shop literally everywhere within minutes, be it their
workstations or homes, and most importantly, at any time of the day when convenient. The online
market space in the country is budding in terms of offerings ranging from travel, movies, hotel
reservations and books to the likes of matrimonial services, electronic gadgets, fashion accessories
and even groceries. Now with implementation of National e-Governance, lot of government to
consumer services (pan card, passport etc.) can be availed online. Nowadays, more and more small
businesses are incorporating e-commerce platforms as part of their business systems. With the
advent of the internet and smart phones, it is now easier than ever to integrate a workable solution
that will work for many people. Even though the sector is at a nascent stage, it has seen
unprecedented growth in 2014. It is expected that Indias e-commerce market will grow from US$
2.9 billion in 2013 to over US$ 100 billion by 2020. E-Commerce is increasingly attracting
customers from Tier 2 and 3 cities, where people have limited access to brands but have high
aspirations, these cities have seen a 30% to 50% rise in transactions.

What is E-Pharmacy?
The growth of the Internet has made it possible to compare prices and buy products without having

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 to leave home. It started with books, gradually moving to gadgets, cars and clothes. One of the
progressive technology models that have evolved in the last few years is tele-medicine that has
enabled accessibility to the finest doctors at the tap of a button. Another recent innovation that has
positioned itself as an attractive model in the healthcare space is E-pharmacy.

Three models of E-pharmacy have been misunderstood and used interchangeably. Clearly, model
under organized e pharmacy has scope of adding value to the ecosystem. While the unorganized
and international trade models need to be controlled, it is important to enable and support the
organized model which has tremendous benefits and opportunity to create significant innovation.

1. The Organized e-pharmacy: There are two models which operate in this category. One is a
market place model where a technology company connects neighbourhood licensed
pharmacies to the end user. Other is an inventory based model where E-pharmacy is an
online service of an offline licensed pharmacy. In an Organized Pharmacy, every order that
is received is verified and checked by a team of registered pharmacists. Drugs requiring a
prescription medicine are checked for a copy of the prescription. The validity of the
prescription is checked as the set format. The medicines are dispensed by registered
pharmacists in a licensed premise in a sealed tamper proof pack. Without a prescription the
medicines are not dispensed. With the most advanced technology aligned with their
processes, they keep track of each and every order. Drugs that do not require prescription
from a medical practitioner or are sold over-the-counter ("OTC Drugs") are even better
administered in Organized Pharmacy. Given that OTC Drugs can be sold by any person
holding a 'Restricted Drug License' and does not require involvement of a registered
pharmacist, such persons should be allowed to sell OTC Drugs online as long as they hold a
valid license.

2. Unorganized e-pharmacy: In this model prescription medicines are ordered without any
validated prescription. There is no check on the genuineness of the order due to absence of
qualified pharmacists. Also improper record keeping and no audits is a major area of
concern.

3. Illegal International trade through E pharmacy: Drugs being shipped across the international
borders without any prescription and approval from the concerned authorities.

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 Benefits of E- Pharmacy for the Patients
1. Increased Convenience and access: The E-pharmacy can be very convenient and significantly
improve the access of medicines for the patients. This will be pertinent with increasing
nuclear family concept, working couples, increasing number of elderly population and urban
development in periphery of the metro cities. The access of medicines is difficult for a
significant number of people in the country, especially when one is sick
2. Improved Availability: Offline pharmacies can only keep limited inventory, resulting in a
patient visiting multiple stores to get his or her medicine. With the use of technology and
access to Inventory of multiple stores at a time an E-Pharmacy concept can significantly
improve the availability of the drugs.
3. Enhanced Services of the Pharmacist and Pharmacologist: The E- pharmacy can enhance the
services of the pharmacist. Routine questions about medication can be answered by online
pharmacists using e-mail or other real-time chat options. Knowledge of a patients diagnosis,
results of laboratory tests, and established drug monitoring parameters, largely unavailable
to pharmacists at present, could be made accessible through the Internet. Digitally, very
important information can be provided to help a patient learn more
4. Data records and Analytics: All medicine purchases can be tracked - effectively reducing the
problem of drug abuse and self-medication. The records of patients name and address of
delivery can be tracked. Online pharmacies can store and analyse large amounts of data on
consumers across the nation which can be very useful for planning public health policies.
5. Patients Compliance and Education: E-pharmacies have the technology infrastructure to
provide value added information to consumers, such as precautions, side effects and
information on cheaper substitutes. The more aware consumer will always benefit from the
power of knowledge, which is easily distributed through the electronic medium. Using
Medication reminders the compliance of the patients can be improved.

6. Transparency in the system: Patients can compare the prices of affordable equivalents and can
discuss with their health care provider. All the transactions will be digitally stored so making
it easy to track the supply chain therefore decreasing the risk of counterfeit medicines.
7. Medicine Authenticity: With full tracking systems and solid technology backend, counterfeit
medicines can be traced back to the channel/ manufacturer/ supplier thereby making the
market a lot more transparent and ensuring authenticity is strictly maintained
8. Transaction records: Organized online players would have systematic records for all
transactions, with full taxes paid on each transaction. A great benefit to the state considering
the size of the market.

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 Online pharmacies have been specifically notified in many of the largest economies such as
Germany, USA & Britain. China is also expected to provide guidelines for Internet sales of
prescription drugs under the new regulations set to become effective from this year. It is suggested
that India too defines the regulatory framework to help online pharmacies have a clear operating
model, in line with the concerns of the regulator, while providing the benefits to consumers.

W O R D P O W E R
Over the Counter Drugs: Prescription Drugs: Are those drugs that cannot be easily brought
Over the counter drugs, as from a medical store unless one also provides a doctor's
opposed to prescription drugs prescription for those drugs. The prescription drugs therefore can
are those drugs which do not be availed only on furnishing a current prescription from a doctor.
require one to provide a Further any seller of medicine cannot sell prescription drugs. To be
doctor's prescription at the able to sell prescription drugs, sellers must first register themselves
time of purchasing from a as registered pharmacists. The restrictions in the case of
pharmacy. They can be easily prescription drugs are in place in order to avoid misuse/abuse of
availed from any medical certain drugs and to avoid medical accidents by removing the
store by simply purchasing it possibility of unqualified sellers selling such drugs. The fear is that
from the 'store counter' and unqualified sellers or those with insufficient knowledge of
hence the name 'over the medicine or pharmacy may give the wrong medicine to a patient
counter drugs' or OTC drugs. resulting in medical accidents.

With the Centre willing to rewrite the rules related to sale of prescription drugs, the decks are being
cleared for their online sales. In an industry meeting in New Delhi on June 17, Dr. G.N. Singh, the
Drugs Controller General (India), said the pharmaceutical industry needs a new regulatory
framework to bring e-pharmacy under its ambit. The Drugs and Cosmetics Act, 1945, does not have
any provision for online sale of drugs. The regulator is planning to discuss and develop the
guidelines within a few months in consultation with various stakeholders, including doctors,
retailers, pharmacists and drug manufacturers. "The interests of small retailers will be protected and
it will be ensured that e-pharmacy does not disturb the existing supply chain system. The aim would
be to integrate e-pharmacy in the existing system," says Singh.

While pressure from industry lobbies is mounting on the regulator to allow sale of drugs online,
other stakeholders are raising concerns about the safety aspect of such a move. "We are not going to
allow e-commerce of medicines. Now, almost all children are capable of using the Internet and the

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 concept of prescription drugs against a photocopy of a prescription uploaded online to get a
medicine can create havoc," says J.S. Shinde, President, All India Organisation of Chemists and
Druggists (AIOCD), which has 5.5 lakh medical shops registered as members. The AIOCD is
planning a nationwide agitation against the move. The Indian Pharmaceutical Association, too, has
written to the DCGI protesting the move.

In India, one cannot sell or buy drugs on an e-commerce site. Drug sales are regulated by the Drugs
and Cosmetics Act, 1940, and the Drugs and Magic Remedies and Objectionable Advertisement
Act, 1945. Under existing laws, only licensed retailers are allowed to sell drugs on the basis of a
doctor's prescription. Even for over-the-counter (OTC) drugs, a licence is mandatory. However,
many companies are selling drugs online illegally and many more want to take the e-tailing route to
tap the Rs 83,000 crore market.

In May 2015, the Maharashtra Food and Drug Administration (FDA) had filed a case against e-
commerce major Snapdeal for selling drugs. The Gujarat FDA, too, initiated action against online
pharmacies. "By law, there is nothing called an e-pharmacy and, hence, there are no guidelines
required to regulate them. If a patient orders sleeping pills online and takes an extra dose, who will
be held responsible?" asks Maharashtra FDA Commissioner Harshdeep Kamble.

Recently, the Interpol, in a joint operation with other local international law enforcement agencies,
initiated action against online pharmacies in 114 countries, closing down over 2,400 sites. From
July 1, the European Union has mandated registration of such operators with regulatory authorities.
The US FDA, too, recently took action against 400 online pharmacies. The US has comprehensive
laws covering e-health and telemedicine.

"The drug distribution industry in India is poised to grow to $55 billion by 2020 and there is no
harm in technology acting as an enabler in offering convenience to customers," says Phaneesh
Murthy, Chairman of the soon-to-be-launched e-health exchange, PM Health & Life Care, and
former i-Gate CEO. "Our lawyers studied the business plan and model. We have devised a system
which complies with existing rules. Some former regulatory officials also vetted our system and
found it fool-proof," says Hemant Kumar Bhardwaj, Chief Executive of PM Health.

There are 8,00,000 chemists in the country. The proposed provision of online sale of medicines
would lead to all these chemists becoming unemployed,

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 General Secretary of the Association Chandra Prakash Baatla said the proposed provision of online
sales would also promote sale of banned medicines and also those sold only on doctors
prescription.

Referring to the ban on MTP Kit used in termination of pregnancy, without doctors prescription,
Baatla said, In Delhi alone more than 350 such kits have been purchased online. Expressing his
concerns, Rohit Khanduja of Haryana State Pharmacy Council said the online sale of medicines
would lift any check on sale of medicines used by drug addicts.

Challenges: Determining liability who will be responsible? And costs of enforcement what
enforcement mechanism should be in place. Linked directly to continuance of licence.

Pros: works against cartelization in small areas that do not offer discounts anymore. Increased
competition = reduced prices

The role, responsibilities and liabilities of e-commerce marketplace and the product sellers need to
be clearly defined. It becomes even more critical to have a framework in place when the
intermediary is selling drugs where the safety and health of the consumer is of paramount
importance.

Cons:
1. Sale of medicines without prescription leading to significant cases of drug abuse.
2. High levels of self-medication leading to wrong usage, adverse reactions and drug interactions.
3. Sub-standard and counterfeit medicines
4. Poor documentation for sale of scheduled drugs
5. Drugs may not be labelled, stored, or shipped correctly
6. Chances of medication errors
7. Growth of generic e-Commerce marketplaces without the threat of penal actions for the misuse of
their platforms by third parties by selling prescribed drugs.
8. Self-Medication and growth of resistance to antibiotics: self-medication is a rampant practice in
India, and online sale of drugs would only encourage it. Indiscriminate use leads to patient
resistance which is very dangerous as has been the case with tuberculosis drugs.

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 INTERMEDIARY LIABILITY
Concept of Intermediaries: An Intermediary may be defined as any person who receives, stores,
transmits or provides any services with respect to an electronic record, on behalf of another person,
is an intermediary. By way of illustration, the following entities have been specifically identified
[Section 2(w)] as intermediaries in the Information Technology Act, 2000 (IT Act):
1. Telecom service providers, such as Vodafone, Airtel
2. Network service providers
3. Internet Service Providers, such as Airtel, MTNL
4. Web-hosting Service providers, such as GoDaddy
5. Search Engines, such as Google
6. Online Payment Sites, such as Paytm
7. Online-Auction Sites, such as eBid
8. Online-Market Places, such as Amazon, Flipkart, Snapdeal
9. Cyber Cafes

While the intermediary platform is susceptible of risk of misuse by third party users of its platform
including pharmaceutical sales over the internet, the principle of safe harbour should be used in
dealing with intermediaries. It will be unfair to put the onus on the intermediary for the wrongs of
third parties who uses the intermediary platform. Online marketplaces are specifically regulated by
a specific statute i.e. Information Technology Act, 2000 (as duly amended from time to time) under
which online marketplaces are specifically categorized as Intermediaries. By virtue of section
79(1) of the IT Act, intermediaries are exempted from liability for third-party information, data or
communication link shared or made available or hosted by the intermediary. The status of an
intermediary and the protection endowed on them is limited by the following conditions

[section 79(2)]:
Intermediary should not initiate the transmission of information
Intermediary should not select who receives the information
Intermediary must not select or modify the information being transmitted.
The intermediarys function should be limited to providing access to a communication system
over which third party information is transmitted/temporarily stored/hosted
The intermediary should observe due diligence

Although the intent of the Information Technology Act 2000 as amended from time to time and its
rule, is to provide immunity to the Intermediaries provided Intermediary abide by Section 79 of

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 Information Technology Act and The Information Technology (Intermediary Guidelines) Rules,
2011, however it seems either FDA is not fully aware of this or does not appreciate the intent of the
aforesaid legislation related to Intermediary. Therefore it is recommended that FDA may be
educated about the role and responsibility of the Intermediary.

For any sale of prescription drugs over generic e-Commerce marketplaces, the safe harbour
provisions provided to them under IT Act should be used and promoted within the regulatory
framework. This would provide a reasonable precaution against misuse of e-commerce platforms
for any illegitimate transactions. To support intermediaries in preventing the misuse of their
platform by third parties, the Government need to have a proper guideline for the regulator or the
administrator to provide appropriate information to intermediaries in taking down and removing the
advertisements for sale of prescribed drugs under the parameters of IT Act. This is also in line with
the recent ruling of Honble Supreme Court of India in Shreya Singhal vs. UOI (2015)

Rahul Khullar said that E-pharmacy can be integrated into the existing framework: Either an
aggregator or online site of a physical licensee. However, the following steps must be adopted to
ensure that the e-pharmacists are in compliance with the IT Act.

1. Prohibited Products classifier:

a) The Prohibited Products Classifier (PPC) is an automated tool which can be used to
monitor all products sold on such sites. The tool can search the product catalogue,
identify products that match a set of keyword-based rules. It uses machine learning
technology to determine if the product should be allowed on the site.
b) Products flagged by the tool can then manually reviewed by a dedicated team that
works 7 days a week to confirm that the product is actually restricted and not a false
positive. Intermediaries should perform this extra step because the rules cast a broad
net when searching the site for products that may be illegal or otherwise violate the
policies, which means lot of legitimate products are picked up during the sweep by
an automated tool.

2. Seller Vetting:
a) In addition to searching the catalogue for problematic products, a number of
measures to be implemented to vet the sellers. For instance, a machine learning
model can be used to identify sellers that are more likely to sell products that violate
the policies. In certain categories, such as Health & Personal Care, Beauty and

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 Grocery, pre-approval is required for all new sellers. The pre-approval process can be
discussed in more detail separately.

3. Enforcement against sellers:

In addition to removing a sellers listings of restricted products, audits of third-party
sellers can be performed and enforcement action against seller accounts with
multiple violations to be taken, such as removing their selling privileges.

4. Validation of Prescription:
In a market place model there should be a team of Qualified Pharmacist and
Pharmacologists for Validation of Prescription. The email id and phone no should be
accessible for the users to report any adverse effect or solve any drug related query.

5. Ban on Listing of Certain Drugs:

There should be no listing and sale of Schedule X drugs (includes narcotics and
psychotropic drugs causing delusion, hallucination, psychosis, sedation and hypnosis
and other risky drugs (Schedule H-1 -This list mostly comprises of third and fourth
generation antibiotics, anti-TB among others). There should be adequate checks and
balances in place to prevent sale of any schedule X drugs. For the physical sale of
Schedule X drugs and Schedule H1 drugs, the pharmacist needs to preserve the
prescription received against the sale of those medicines. The pharmacist is required
to preserve the prescription for two years. Although sale of Schedule X drugs and
Schedule H1 drugs online can be risky, but the fact of online mechanisms enjoying
better prescription preservation capability must also not be overlooked. It is much
better to preserve prescription records in a digital system than in a paper and pen
mode/register mode.

6. Valid Prescription:
Orders of scheduled drugs should require a valid prescription of a registered medical
practitioner.
7. Consumer Awareness:
Increase consumer awareness to educate consumers about how to identify if an
online pharmacy is validly registered for selling prescription drugs or not.

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 Status of E Pharmacy / Online Pharmacy in other Countries
United States
The online pharmacies are permitted in US but Pharmacy must be domiciled within the US.
Online pharmacies must be registered with the DEA to dispense "controlled substances,
must be compliant with Federal Food, Drug and Cosmetic Act, Federal Controlled
Substances Act and cannot dispense medications that are not approved by the FDA.
Pharmacy must comply with state-specific rules in addition to federal rules. Prescription
drugs can only be sold if the patient submits valid prescriptions. A prescription is only
considered valid if issued by an authorised medical practitioner. Online pharmacies will
have to build robust systems in place to verify the accuracy of drug prescriptions that on the
face appear to be issued by authorised medical practitioners (e.g. frequent orders of opioids
might indicate that patient suffers from drug-abuse and is likely getting his prescriptions
from an unethical medical practitioner). Patients must have the ability to easily contact
online pharmacies should they have questions regarding dosage, drug type and/or adverse
effects post-drug usage.

Brazil
Brazil-based pharmacies may fill online orders, but with the restrictions. Pharmacy has to be
licensed in Brazil. An Internet pharmacy must post its ANVISA (Brazilian Health
Surveillance Agency) permit number on its website. An Internet pharmacy must post its
ANVISA permit number on its website, which provides a link to a searchable database of
licensed Internet pharmacies These pharmacies must be open to the public, with a
pharmacist present during all hours of operation.

Canada
Canada-based pharmacies may fill online orders, but with the restrictions. The licensed
pharmacy selling drugs over the Internet must be the website of a brick and-mortar
pharmacy with a physical street address. However, there is no national licensure for
pharmacies it happens at the provincial level. According to Health Canada, any licensed
pharmacy that offers Internet services must meet the standards of practice within its own
province.

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 Great Britain
Internet Pharmacies are permitted in Great Britain but that must be registered with the
General Pharmaceutical Council (GphC). The GPhC operates an internet pharmacy logo
scheme to identify legitimate online pharmacies so that the public can be sure they are
purchasing safe and genuine medicines online. The logo not only provides a visual means to
help patients identify whether a website is connected to a registered pharmacy, but it will
also provide a direct link to the GPhC website. By clicking on the logo, visitors can verify
the registration details of both the pharmacy and the pharmacist(s) behind the website.

China
Internet pharmacies are permitted in China. Online pharmacies are mandated to display
certification on their websites; customers can check the pharmacy domain name/registration
# with the CFDA database. Chinese online pharmacies operate on a market-place model.
Recent news from Reuters/Bloomberg appears to indicate that Chinese regulators will soon
allow online sale of prescription drugs although the time-frame for regulatory clearance is
unclear.

Conclusion: The world is headed in a relentless march towards a digital economy and the
emergence of E-pharmacy can also not be stopped. However, with better evaluation and monitoring
mechanisms, this sector can be made to function smoothly and without any hassles.

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 R E L E VA N C E O F N P T / C T B T T R E AT I E S

The Non-Proliferation Treaty (NPT) is a landmark international treaty whose objective is to prevent
the spread of nuclear weapons and weapons technology, to promote cooperation in the peaceful uses
of nuclear energy and to further the goal of achieving nuclear disarmament and general and
complete disarmament. It is one of the major legal document establishing international cooperation
in the peaceful use of nuclear energy. The NPT, signed by 190 nations and in effect since 1970, is a
treaty in which the non-nuclear nations agreed to forgo developing nuclear weapons and the nuclear
nations agreed to divest themselves of their nuclear weapons. It recognizes five nuclear nations: the
United States, United Kingdom, France, China, and Russia. Briefly put, it establishes a strict quid
pro quo: in exchange for promises by non-nuclear states not to pursue nuclear armament, the
nuclear powers will undertake nuclear disarmament.

The Treaty represents the only binding commitment in a multilateral treaty to the goal of
disarmament by the nuclear-weapon states. The membership of treaty includes the five nuclear-
weapon States (NWS). In order of acquisition of nuclear arsenal in the descending order, these 5
NWS states are 1) the United States, Russia (successor state to the Soviet Union), the United
Kingdom, France, and China.

Under the NPT, all signatories were categorised as either nuclear weapon states (NWS) or non
nuclear weapon states (NNWS) based on their status at the time. Essentially, the NPT recognised
and legitimised the possession of nuclear weapons by all five declared powers - the U.S., Britain,
France, Russia and China. All other signatories fell within the Non-NWS category and agreed
thenceforth not to develop or acquire nuclear weapon technology.

However, at that time, India, Pakistan and Israel were among the countries that did not accede to the
NPT, and were consequently not bound by these restrictions.

The provisions of the Treaty, envisage a review of the operation of the Treaty every five years, a
provision which was reaffirmed by the States parties at the 1995 NPT Review and Extension
Conference. To further the goal of non-proliferation and as a confidence-building measure between
States parties, the Treaty establishes a safeguards system under the responsibility of the
International Atomic Energy Agency (IAEA).

Safeguards are used to verify compliance with the Treaty through inspections conducted by the

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 IAEA. The Treaty promotes cooperation in the field of peaceful nuclear technology and equal
access to this technology for all States parties, while safeguards prevent the diversion of fissile
material for weapons use.

What is NPT Review Conference or REVCON?

A quinquennial event (since 1995), the RevCon is supposed to review the functional health of the
Treaty, resolve its shortcomings and update it according to the times, in order to progress towards
its objectives. The 2015 Review Conference (Titled: Reaching Critical Will) of the Parties to the
Treaty on the Non-Proliferation of Nuclear Weapons (NPT) was held at the United Nations in New
York from 27 April to 22 May 2015.

Outcome: There was a failure to agree on an outcome document. This reflected inadequacies and
disagreements permeating the global nuclear disarmament regime- attributed to the discussions
around the establishment of a WMD-free zone in the Middle East.

What was Indias stand?: India, as always, did not participate in the RevCon.

Challenges to NPT:
1. Issue of Non-Compliance: These challenges include unresolved issues of Treaty compliance and
the role of NPT Parties and the review process in addressing them NPT rules and regulations
that have been continually flouted by its member states, with the US being the biggest
flouter of all. Although the number of warheads since the height of the Cold War has gone
down, those warheads have become far more deadly, as the nuclear states continue to
research and implement upgrades on weapons and delivery systems. Washington will spend
an average of $35 billion a year for the next decade to modernize and maintain the nations
nuclear force, according to the United States Congressional Budget Office estimates. And, of
course, if the US upgrades its arsenal, so will Russia. And vice versa. The situation has not
shifted too much from a perpetual arms-race which was the very international political crisis
the NPT sought to defuse.

The US has placed nuclear weapons in many other nations as part of NATOs nuclear
sharing program. These nations not only store US nuclear weapons, they practice handling
and delivering them. Under this system the United States has nuclear weapons in Belgium,
Germany, Italy, the Netherlands, and Turkey. Many see this as a violation of NPT, which
bars nuclear states from delegating the control of their nuclear weapons directly or

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 indirectly to others.

2. Convening the Middle East Conference: In 2010, NPT RevCon, it was endorsed by the
participating members to convene a conference for making the Middle-Eastern zone free
from Weapons of Mass Destruction. The RevCon 2015 has been termed as a failure with
respect to reaching a consensus on making the Middle East WMD free.

3. Nuclear NPT states are not demonstrating tangible progress towards disarmament:
Weapon States need to demonstrate further, tangible progress toward nuclear disarmament.
This paper will address several challenges facing the 2015 RevCon, and will offer initial
ideas for overcoming these barriers to success.

4. Narrow monitoring of non-compliant Non-NWS: Noncompliance by NPT NNWS has been

seen as a narrow preoccupation of the United States and its friends and allies during NPT
reviews. The members of the Non-Aligned Movement group (currently headed by Iran) rally
around each other on the point of NAM solidarity and effectively block passage of
consensus documents designed to review non-compliance by Non-NWS. It is their argument
that effective review can be executed at the level of UN and IAEA without doing so at the
NPT level. Most of the developing nations fall in this group which additionally also
advocates that compliance by the five nuclear states and confirmed disarmament of their
nuclear arsenal is key to the success of the NPT.

5. Inadequate and Ineffective amount of concern for violations of NPT: Most of the member
nations pay ineffective and inadequate attention to nuclearisation efforts by other member
states, for e.g., Iran and North Korea, as a result of which the treaty NNWS continue to
improve their nuclear arsenal. This leads to undermining of the system's integrity.

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 I N D I A ' S A G R I C U LT U R A L M E S S

It can be stated without much hesitation and with utmost clarity that India's agricultural sector is in
dire straits. After all three of India's major economic problems arose out of the mess that envelops
India's agriculture; the three problems being:
1) Negative growth of real agricultural GDP
2) Rising food insecurity among the nation's poor and persistent food inflation
3) Decreasing productivity of land.

Although the economy has been witnessing a structural shift that has been in motion since the last 2
decades, problems of India's agriculture have compounded further. Agriculture's contribution to the
Indian economy has remained steady at 16-18% of the GDP while its share of employed people has
come down from the previously touted 65% to the current level of slightly under 50% to 48.9%
(NSSO, 2013). The problems with which the Indian agricultural sector began after independence
continue to ail the sector with surprisingly minimal improvements. It is true that India's green
revolution took India out from the clutches of chronic famine like situations and rescued the Indian
treasurer from costs involving billions of dollars of food imports, however, it is also true, that Indian
agriculture continues to be heavily reliant on periodicity of monsoons and goes completely haywire
during times of inadequate rains or drought years.

What are the various factors responsible for the poor state of Indian Agriculture?
Briefly, the factors responsible for the poor state of Indian agriculture are as follows: National
agricultural policies, minimum support price debacles, apathetic political leadership, lack of
irrigation or inequitable distribution where its available, a humongous irrigation backlog,
introduction of water and money-intensive GM cotton, rising input costs of seeds, fertilisers and
pesticides, diversion of irrigation water from farms to power plants and industries, bad crop
insurance policies, hopeless revenue tools of calculating farm-losses in the event of
droughts/excessive rainfall, arm twisting by middlemen, corrupt agro-produce committees, poor
household economic management by farmers, opportunistic money-lenders and even more
opportunistic politicians and market recession and the apathy of the government in addressing the
crisis.

In what ways are our national policies responsible for the poor state of Indian agriculture?
Despite having the second highest area of arable land and the second highest area of irrigated land,
and also despite having fertile land that can produce an harvest twice an year (double-cropped land)

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 compared to the mono-crops as for lands of other countries, and also despite having a comparative
advantage over most countries in terms of production of food-grains, fruits and nuts, India's
agricultural production lags behind. A major reason for this is due to the fact that after improvement
of yields post-green revolution, agricultural growth slowed down since the 1980s. An opportunity
did arise in the 1990s when the new economic policy was implemented. However, barring the
exception of removal of restrictive trade regulations, the economic reforms of the 1990s left Indian
agriculture largely untouched.

Highly subsidized prices of water: India's inefficient canal system relies on extensive form of
irrigation over intensive, i.e., it has been so designed as to supply vast amounts of water over
extended areas of land than supply water through resource efficient mechanisms. This state of
affairs can be directly attributed to the highly subsidized prices of water, especially for use in
agriculture. Availability of water at cheap prices creates a situation of over-exploitation of water.

Highly subsidized prices of inputs: Inputs into agriculture such as electricity and mechanized farm
equipment are also subsidized. This leads to over-consumption of electricity.

High costs of building and maintenance of canal based irrigation systems: Canal irrigation
systems require building of dams, reservoirs and canals, which come at a huge cost to the
exchequer. Rising costs of investment and reduced recovery thereof makes canal based irrigation
systems not only non-feasible but also unpopular among the farmers who are loathe to pay for
higher costs when they can extract ground-water for free using subsidized electricity and subsidized
water-pumps. Capital costs for extending irrigation on per hectare basis have almost doubled in
range to 40,000-2,50,000 per hectare. The state is unable to recover higher costs from farmers and
most projects see a recovery rate of a mere 30% of the total investment or even lesser. As a result,
the state has inevitably encouraged the use of private electric pump based irrigation of ground water
instead of building river water fed irrigation systems. This has made some of the existing irrigation
infrastructures redundant, mainly due to not receiving adequate repairs. Consequently, there is a
huge gap between the actual irrigated area and the potential area which can be irrigated using the
existing infrastructure. The gap is almost a one-fifth of the irrigation acreage of the country, i.e., a
14 million hectares difference between the actual and the potential irrigated areas. Surface water
based irrigation systems face another problem of supplying huge amounts of water over long
distances. It suffers from an efficiency rate of as low as 35-40 percent in contrast with efficiency of
ground water usage which stands at 65-70%.

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 Over-extraction of ground water: India's farmers rely less on canals and more on electrical pump
driven water supply. This situation is directly attributable to the highly subsidized prices of inputs
such as electricity and water as discussed above. Drop dead subsidized prices for electricity have
only led farmers to rely more on electrical pump driven irrigation mechanisms that extract ground
water.

Moreover, India currently lacks a legal regime that demarcates or clarifies rights and ownership of
underground water. As a result, it becomes a free for all situation where farmers extract ground
water without taking into consideration replenishment thereof. Also, it is more of a practical
problem since bringing ground water under a regulatory regime would imply covering 19 million
users.

Minimum Support Prices (MSPs):

Under the policy of minimum support prices, farmers are guaranteed a pre-determined minimum
price at which all of their produce will be procured by the government. This policy According to
NSSO, over 70 per cent of farmers are not even aware of the existence of MSPs! Hardly 13.5 per
cent of the paddy sellers actually got the MSP in the last two seasons. Historical evidence suggests
that MSPs do nothing but get absorbed into the land value and labour wages, meaning thereby that
instead of helping out distressed farmers, MSPs ended up increasing the land and labour costs in
agriculturally advanced north-western states. Increase in land and labour costs further pushes down
profitability, a situation which leads to another cycle of demands asking for hikes in MSPs. This
results in an endless vicious cycle of MSP hikes that are often populist and ad-hoc in nature. The
guaranteed MSPs also sometimes have the effect of discouraging cost-reducing initiatives. In a way,
therefore, farm's resources end up being inefficiently utilized. Recently, the GoI announced hikes in
the MSPs of pulses by Rs. 250/quintal and of wheat by Rs. 75/quintal, largely with the intention to
encourage the production of pulses.

Food Subsidies (Read below in detail)

Food subsidies refer to the relief provided in the form of reduced prices of food grains or nutritional
food items. Low income families are the recipient of food subsidies, which are often distributed
through a public distribution system (PDS). It has been found from various studies that costs
attributable to food items vary for different individuals at different levels of income. The proportion
of expenditure on food items increases for an individual with decreasing income level. This means
that poor individuals spend a greater proportion of their incomes in purchasing food items than do
richer individuals. This also implies that in times of food inflation, the poorer individuals bear a

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 greater economic brunt as compared to their better off counterparts. However

Issues related to Indian Agriculture:

A) Water related issues
1) Dependent on monsoons: The benefits of green revolution have been reaped only by
those states that are well fed with irrigation systems and adequate supply of water. Regions
that have not been invested with irrigation systems continue to have farmers basing the
success of their crops entirely on monsoons.
2) Inadequate irrigation: Although India's arable land (land that can be used for agricultural
purposes or as temporary pasture for cattle) is one of the largest in the world in terms of
availability, standing at 157.3 million hectare (mha), only about 35% (58 mha) of the
agricultural land was reliably irrigated with the rest of the land being left to erratic or no
irrigation supply.
3)Lopsided irrigation: most of India's irrigation systems are based on bore-well systems that
feed irrigation water to 67% of the lands (40 mha) as compared to the other system of
irrigation, namely, canal/river water feed irrigation systems. Bore-well systems rely on
ground water extraction. Ground water, although renewable, cannot be sustained at
exploitative levels of extraction. Further, it is only the rich and the middle-income farmers
that are able to benefit from bore-well systems as the poor or landless farmers have to rely
either on canal based irrigation

B) Poor Land Productivity: The total cultivable land or arable land in India is 157.3 mha, which
makes 60% of India's land fit for cultivation. This quantity is next only to the agricultural
land available for cultivation in the USA. In comparison China has lesser available arable
land than India, yet China's rice and wheat production is 40 percent more than the
production in India. China's productivity, i.e., yield per hectare for rice is thrice that of
India's productivity. China beats India hands-down in the production of fruits as China
produces more than three times the quantity produced in India. Below is a comparative table
that provides data (based on FAO's reports) on production from the two nations:

INDIA
Rice 106.9 million tonnes
Land under rice production 44 million hectares
Rice productivity yield 2.4 tonnes per hectare
Wheat 93.51 million tonnes
CHINA
203.6 million tonnes
30 million hectares
6.5 tonnes per hectare
121 million tonnes

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 Land under wheat production 29.65 million hectares 24 million hectares
Wheat productivity yield 3.15 tonnes per hectare 5 tonnes per hectare

Why does India have poor land productivity?

Average annual growth rate of yield has been consistently falling down after reaching its achieving
its highest growth rate of 2.95 during the decade of 1981-1991, when the gains from Green
Revolution were visible in full. However, since then, the CAGR has only fallen down. For the
decade 1991-2001, the yield growth rate stood at 1.65%, whereas it touched a miserly low of 1.03%
for the decade of 2001-2011. The high growth that was seen earlier was due to the introduction of
high yielding variety seeds. But Indian agriculture has not seen any significant improvement since
then.

Reasons ascribable to India's poor land productivity are diverse. Also, India's poor land productivity
is due to a mix of causes that come together to deliver a potent and debilitating attack on attempts to
increase yields. They are as follows:

1) Small size of landholdings: The availability of land per farmer in India has continued to decline
since Independence. Even in 1947, farmers had to deal with small sizes of their farms, which
make farming non-feasible for many. Further, small sizes prevent implementation of
technology in agricultural activities as most of the modern agricultural equipments are huge
in size and therefore bulky in nature. They require the farm sizes to be adequately big
enough for the equipments to manoeuvre and function properly. As a result, the small size of
landholdings becomes directly responsible for the inability to implement the use of modern
technology.

The average per capita operational size of landholding in India is 1.33 hectares, which is far
below the world average of 3.7 hectare per person. Further, landholdings have shown a
marginal decrease from the holding size of that of a decade ago (1.41 hectares).

78% of the landholdings in India are classified as small and marginal landholdings
(agricultural census, 2002). India is clearly dominated by small and marginal farmers.

2) Population Pressure: India's proportion of total landmass in the world is relatively very less to
India's proportion of total population of the world. As a result land available per capita is
very low. The population density is also among the highest in the world and which currently

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 stands at 382 persons per sq. km. Additionally, large sizes of joint families in rural areas is
also responsible for the existence of small landholdings. Due to large size of joint families,
even historically larger pieces of land become non-feasible once they are partitioned among
the heirs of each generation. As a result, the subsequent generation gets an even smaller size
of land to cultivate upon.

3) Fragmentation: Small size of landholdings is also because of 'fragmentation' of farmlands.

Fragmentation of land refers to a situation where non-contiguous farms are cultivated by a
single farmer. It means that all the farmed land is not available together in one contiguous
manner, but instead the farmed land is scattered across an area. As a result, even a farmer
with a large quantity of farms may find it difficult to implement modern technology because
the farmed land is spread across several smaller farms which are spread/scattered across an
area.

4) Subsistence Farming: India still continues to have a lot of farmers that live on subsistence
farming. As mentioned above, India is clearly dominated by small and marginal farmers who
survive mainly on agriculture. Small size of landholdings not only deprives farmers from
access to institutional credit, but it also bars the use of implementing technology in farms.
This forces many to continue farming on a subsistence basis, where the excess is
immediately offloaded at cheaper prices.

5) Lack of utilization of modern technology: Due to several reasons mentioned above, viz., small
landholdings and fragmentation, it becomes a logistical problem to implement modern
agricultural equipments on farmlands. Further institutional credit is required to purchase
these agricultural equipments as they do not come cheap. Small and marginal farmers face
difficulty in obtaining institutional credit, in part because of the small sizes of their
landholdings.

6) Inadequate and Inefficient irrigation system: In India only 30% of the land is irrigated
whereas the rest of the cultivable land is entirely rain fed. This dangerous reliance on an
unpredictable weather phenomenon leaves several farmers to the mercy of monsoons. As a
result, any drought affected year can considerably reduce farm output.

7) Fertilizers and degrading soil quality: The years of Green Revolution had fostered a culture of
excessive usage of fertilizers as a way of improving farm productivity. The chemical

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 fertilizers (urea, and phosphatic & potassic) are also heavily subsidized. They are priced
significantly lower than their actual costs of production. Because of such a huge subsidy,
farmers took to heavy utilization, often mis-utilization of the fertilizers. This did have a huge
impact on total farm productivity, but over the past 40 years, usage of chemical fertilizers
has led to a degradation of soil. Usage of potassic fertilizers, (also found in NPK fertilizer,
another popular fertilizer used by Indian farmers) increases the salinity levels of soil, which
directly impacts the crop yield.

8) Pesticides and degrading soil quality: Pesticides also followed a similar pattern as in the case
of fertilizers and farm productivity. Even though usage of pesticides improved agricultural
productivity, excessive usage of subsidized pesticides led to increased resistance of pests to
such controlling measures. Due to natural evolution, pests became resistant to these
pesticides thus rendering them almost ineffective. The natural response to this was an even
more excessive application of pesticide which had the effect of slowly killing beneficial
bacteria and micro-organisms present in the soil.

9) Subsidies: Subsidies in the form of lower prices of inputs such as fertilizers and pesticides and
support prices form a major portion of public spending. Subsidies provide short term relief,
but they end up masking structural problems afflicting the agricultural sector. Instead of
investments in capital creation and infrastructure, public spending gets diverted towards
myopic and populist policies. Also subsidies are wrongly used as an incentive to encourage
production of desired crops, when ideally that amount should be utilized in building storage
facilities and producing capital goods for agriculture. Since the decades of Green
Revolution, Indian agriculture has seen a falling growth rate of yield. The ensuing income-
gap has been filled with the help of subsidies instead of investments that could have led to
higher productivity and incomes. As subsidies do not help in the formation of capital or
infrastructure, a major proportion of India's public spending is thus wasted.

What are the various causes of farmer suicides?

Farmer suicide has become a burning national issue over the past decade with the epicentres being
Maharashtra and Andhra Pradesh. The numbers of farmer suicides started increasing at the turn of
the millennium and reached the highest level of 18, 241 suicides in the year of 2004. The highest
number of reported suicides have emerged from the marathwada region and vidarbha region. The
number of suicides from marathwada have exceeded 10,000 over the past three years. Farmer
suicides have also been reported from Karnataka, Chattisgarh and Madhya Pradesh. National Crime

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 Records Bureau (NCRB) statistics claim that a total of 5,650 farmers committed suicides in the year
2014, which as a proportion of total number of suicides stands at 4.3%, a figure that climbed down
from the high of 11.2%. Of that number, 2568 farmers committed suicide in the state of
Maharashtra alone. Of the total reported number of farmer suicides, 72.4% of the suicides have
been committed by small and marginal farmers thus indicating that the concerned category is the
most vulnerable. However, it must be noted that there is a discrepancy between the statistics
reported by the state governments and the NCRB. This discrepancy is mainly due to the different
definitions given to 'farmer' by various agencies. The figures reported by NCRB consider only
landed agriculturists as 'farmers' and exclude agricultural labourers from the statistic. The latter
group of farm dependents have been categorised as 'self-employed' for the purposes of NCRB
statistics.

Across all the various causes and reasons that cause a farmer to commit suicide, lies a common
theme, viz., loss of financial freedom, a feeling of helplessness, and inability to come out of the
vicious cycle of poverty. Crop failure is one of the major reasons that add to a farmer's indebtedness
and bankruptcy conditions. A crop may fail due to inclement weather, inability to control pests that
have, over a period of time, become resistant to pesticides, and usage of corporatised seeds that
have non-renewable traits. Additionally, even when there is a bumper crop, the farmer is unable to
garner adequate benefits in the absence of, or poorly maintained, storage facilities as the farmer is
forced to sell the bumper harvest at low prices. Following are some of the causes that have led to
farmer suicides in the past.

Lack of Institutional credit: Small size of landholdings is in a way directly responsible for
depriving farmers access to formal sources of credit such as bank loans as the size of their
landholdings is found to be too small to make them eligible to receive loans. Research
suggests that only 14% of marginal and 27% of small holdings were able to get credit from
institutional sources, and as a result, most of them continue to rely, even now, upon
moneylenders who charge exorbitant rates on loans, often upto 20% interest on a four month
term loan. This creates a vicious cycle of continued dependence on moneylenders and more
often than not leads to impoverishment and consequently suicide of the farmer.

Failure of delivery of institutional credit: Even where institutional mechanisms of

providing credit are available, farmers have suffered from lack of adequate credit provision.
Total amount of loans disbursed by banks constitutes only 11-12% of their total loaned
amount against the mandatorily stipulated target of 18%. Although the government has tried

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 bringing down the rate of interest on agricultural loans to 8-9%, most private banks continue
to lend at rates as high as 14%. Banks have been shy of lending to farmers due to several
reasons. They are:
Small size of landholdings do not work in the farmer's favour as they are insufficient
collateral.
Although no collateral security is required for small loans upto 50,000, banks continue
to be chary of lending to farmers because of the highly unpredictable harvest patterns.
Handling and servicing of a large amount of small loans by banks is a logistical issue as
well as a tedious process. Small loans are not as financially rewarding for banks as are
other types of loans such as corporate, car and home loans.
Mounting size of Non-Performing Assets (NPAs) for banks has curbed bank's interest in
lending to farmers.
Most private banks tend to offer bigger sized loans such as for purchasing costly farm
equipment and tractors. They do not offer smaller loans which are needed by farmers to
purchase inputs such as seeds and fertilizers. As a result, small and marginal farmers are
the ones who find it difficult to access institutional credit.

Inclement Weather conditions: 65% of India is drought prone, 12% area is flood prone and
8% area is cyclone prone. Untimely rainfall or an unexpected downpour of hailstorm
damages crops severely leading to huge losses to farmers. It has been seen that years
receiving inclement weather have directly resulted in a hike in the number of farmer
suicides. In 2009, for example, more than 17,000 farmers killed themselves a six year
high, according to the National Crime Records Bureau. That year India saw the worst
drought it had seen since 1972.

Industrial approach to boosting crop yields: Globalization and WTO's farm policies that
opened up world markets to industrially developed and genetically modified seeds are also
responsible to a certain extent as noted by navdanya's Vandana Shiva. As GM seeds have
been marketed as high yielding varieties they are also priced costlier than the naturally
occurring seeds or farm saved seeds. Also, unlike farm saved seeds, GM seeds have non-
renewable traits meaning thereby that they cannot be utilized after a crop has been
harvested. This means that farmers will have to purchase GM seeds over and over again,
thus sustaining revenue streams for big agricultural corporations such as Cargill and
Monsanto. Since these seeds have been developed in R&D centres and away from native
soils, they have also been found to be ill-equipped for utilization by farmers of different

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 regions with differing soil varieties. As a result, these seeds are often not able to produce the
high yields promised. When Monsanto first introduced Bt Cotton in India in 2002, the
farmers lost Rs. 1 billion due to crop failure. Instead of 1,500 Kg/acre as promised by the
company, the harvest was as low as 200 kg. Instead of increased incomes of Rs. 10,000/acre,
farmers ran into losses of Rs. 6,400/acre. In the state of Bihar, when farm saved corn seed
was displaced by Monsantos hybrid corn, the entire crop failed creating Rs. 4 billion losses
and hence increased poverty for desperately poor farmers.

New Economic Policy (NEP) and Globalization: The new economic policies adopted by
the government have largely left Indian agriculture untouched, in the beneficial sense.
Although, liberalization and opening up of national markets post-WTO reforms have had an
impact on Indian agriculture. Indian farmers had to face increased global competition after
removal of quantitative restrictions on imports. The terms of this new global competition are
heavily biased against the Indian farmer. Farmers in western economies receive unparalleled
amount of subsidies that can never be matched by the government of a developing country
such as India. Because of the huge subsidy assistance received by western farmers, they are
able to compete better in the global agricultural market by pricing their produce cheaper.
This exposure to subsidized prices in the global market has adversely affected the
marketability of Indian farm produce, especially cotton which had to face competition from
cheaper global supplies. While the agricultural subsidies given to farmers of developed
western nations have increased, global commodity prices have halved. Global prices have
dropped from $ 216/ton in 1995 to $ 133/ton in 2001 for wheat, $ 98.2/ton in 1995 to $
49.1/ton in 2001 for cotton, $ 273/ ton in 1995 to $ 178/ton for soyabean. This reduction is
not due to a doubling of farm productivity but due to an increase in subsidies. As a result the
cotton growing belt falling mainly in the vidarbha region of maharashtra has seen the
highest number of farmer suicides in the last decade and a half. Indian farmers also find it
difficult to get foreign markets because of the application of stricter rules and regulations on
the presence of pesticides in farm produce. Indiscriminate use of pesticides by Indian
farmers makes their produce ineligible to be imported by western countries with stricter
regulations.

Increasing prices of input: The GM seeds have non-renewable traits and therefore can be
re-used the way farm-saved seeds can be. GM seeds, especially of Bt cotton were sold to
farmers on the promise of reduced dependence upon costly chemical pesticides and
increased yield. This led many farmers to take loans from moneylenders to purchase GM

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 seeds, which were priced much higher than the usual seeds. However, since their
introduction in 2002, these seeds have consistently required pesticides. Failure of weather
and the low output from these seeds did not do anything to increase the revenue, while at the
same time the high prices of GM seeds and pesticides increased the cost burden for farmers.

Lack of Storage facilities: Farmers suffer from access to storage facilities. Either the
storage facilities are poorly maintained, lying defunct or simply absent. In some cases the
storage facilities do not enjoy good linkage with market areas or trading points. As a result,
producers of surplus harvest are forced to immediately offload the excess at drop down
prices. Inability to sell their produce at the right price leads many farmers towards
disappointment. For e.g., in 2013-2014, Orissa produced a total of 4.32 lakh tonnes of onion
against its required consumption level of 2.28 lakh tonnes. In spite of excess production in
one part of the country, other parts of the country saw prices of onions skyrocket to Rs. 80
per kg. A major reason for this imbalance is due to the fact that the farmers had to
immediately sell/export the excess to Bangladesh.

India has a total of 6300 cold storage facilities with a total installed capacity of 30.11
million metric tonnes, which is just about half of the total capacity that India actually
needs.
Most of the cold storage facilities are unevenly spread across the nation and at places
that suffer from inadequate market linkage. 60 percent of cold storage facilities are
located closer to the point of production and that too in just four states. The rest is spread
across 24 states. Very few cold storage facilities are located near distribution points.
Cold storage facilities should ideally be closer to distribution points in order to reduce
the costs of refrigerated transport from the farmland to the table. Further, storage
facilities that are closer to distribution points are also easily accessible by retailers.
Because of the lack of adequate storage facilities and inadequate market linkages, Indian
farmers end up throwing away food grains, fruits and vegetables worth Rs. 44,000 crore
annually (study by Central Institute of Post Harvest Engineering and Technology
(CIPHET), 2013). GoI admitted in 2010, 58000 crore worth is wasted.
Lack of awareness of best cold storage practices among industry players and lack of
awareness of facilities and preservation techniques among farmers also contributes to a
loss of earnings from distress selling or wasted produce.

Insignificant food processing industry in India: India produces over 600 million tonnes of

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 food products annually, is the second largest rice and wheat producer, and the largest
producer of pulses and milk. However, only about 2% of Indias fruit and vegetable output is
processed. Compare this with 70% in Brazil and 6070% in developed countries. In the
foods segment, processed foods account for a mere 2% of the total production. About 30%
of farm produce is wasted every year for want of storage, transportation, cold chain
and other infrastructure facilities.

How To Improve Agriculture?

Extend Irrigation systems to southern India: Currently irrigation networks predominate only
western and northern Indian region whereas the southern regions largely depend on
monsoon rains. For raising overall productivity and enhancing food production, irrigation
systems must be extended to the southern as well as eastern regions so that farmers are
ensued with sufficient supply.
In order to promote inclusive growth and enhance rural income, the Government has lined
out a four pronged strategy in agricultural sector as part of the general budget 201011. The
government intends to follow a fourpronged strategy covering (a) agricultural
production; (b) reduction in wastage of produce; (c) credit support to farmers; and (d) a
thrust to the food processing
sector.
The first element of the strategy is to extend the green revolution to the Eastern region of the
country comprising Bihar, Chattisgarh, Jharkhand, Eastern UP, West Bengal and Orissa by
providing Rs. 400 crore (approx. 66 million) for this initiative during 201011. It is also
proposed to organize 60,000 Pulses and oil seed villages in rainfed areas for providing
water harvesting, watershed management and enhance productivity of the dry land farming
areas by allocating Rs.300 crore. An allocation of Rs. 200 crore has also been provided for
sustaining the gains already made in the green revolution areas through conservation
farming.
The second element of the strategy relates to reduction of significant wastage in storage as
well as in the operations of the existing food supply chains in the country. The deficit in
storage capacity is met through an ongoing scheme for private sector participation where the
FCI has been hiring godowns from private parties for a guaranteed period of 5 years. This
period is now being extended to seven years.
The third element of the strategy relates to improving the availability of credit to farmers.
The banks have been consistently meeting the targets set for agriculture credit flow in the

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 past few years. For the year 201011, the target has been set at Rs. 3,75,000 crore ( 62
billion).

The fourth element of the strategy aims at lending a further impetus to the development
of food processing sector by providing stateoftheart infrastructure. In addition to the 10
mega food park projects already being set up, the government has decided to set up five
more such parks.

What is the justification for the government to subsidise food?

Food subsidies are an effective social safety net that help people dealing with extreme forms of
poverty. Since poor individuals spend a significant portion of their incomes on purchasing food
items, they are the most vulnerable to price fluctuations of food-items. Times of food inflation can
even destabilize their entire financial arrangements. Individual Indians falling in the bottom ten
percent on the basis of income levels spend an almost 65% (rural) and 62% (urban) of their budget
on food items. This means that inflationary prices have a more adverse effect upon poor individuals
as compared to better off ones. In this context, the principle of socio-economic justice dictates the
state to provide food at subsidized prices and therefore it is completely justifiable for the national
government to assist poor individuals in this manner. Moreover, food subsidies, among other social
protection measures have been consistently found to eradicate hunger and poverty and improve the
lives of villagers. Subsidized prices for food allow recipients to plan better for the future and invest
more on those activities that are capable of delivering to them better returns. Absence of food
subsidies may leave very little for poor individuals to diversity any of their income to more
productive activities or investments.

What is India's current food subsidy bill?

Subsidies in Indian agriculture have increased significantly in the post-reforms period. Food
subsidies increased from Rs. 2,850 crore in 1991-92 to about Rs. 72,823 crore in 2011-12 (Revised
Estimates), an increase of over 25 times in 21 years As a result, its share in total central
government subsidies under non-plan expenditure increased from 23.3 per cent to 33.7 per cent
between 1991-92 and 2011-12.

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 C O R P O R AT E F I N A N C E

A company's management may wish to expand its business activities by installing a new machinery
or establishing a new factory or for initiating entry into a new product market. Organizing such
expansion will require finance/capital. The development of new products can be enormously costly
and here again capital may be required. A private company does not have the option to take money
from the public or accept deposits. A private company can issue shares only to its directors or
members. However, a public company does have the option to issue shares to the public and in
return accept money from the public. This money which a public company shall receive against the
issuance of shares is known as the company's share capital. Another method by which a company
can raise money is by way of debentures. A public company can issue various types of debentures
freely to the public and receive principal amounts against their issue. On the other hand a private
company is not permitted to issue debentures to the public. A private company, does have the right
to issue bonds, which are debentures backed by a specific immovable security. Thus corporate
finance refers to all the sources through which the management is able to raise finance/capital to
fund the activities of a company. We shall deal in detail with the various sources of corporate
finance from hereon.

The two main instruments through which a company's management may raise finance are:
a) By issuing shares, i.e., by giving the right over profit. For e.g., Issuance of equity shares
or preference shares
b) By issuing debt instruments, i.e., by raising debt. For e.g., Issuance of bonds and
debentures

R A I S I N G M O N E Y B Y I S S U I N G H A R E S

Before we discuss how money is raised through shares, it is important to understand the two kinds
of shares that may be issued by the management of a company. They are:

Equity Shares: Equity shares are ordinary shares that are issued to shareholders. Holding equity
shares of a company makes the holder an owner of a company. For e.g., if a person holds 10,000
equity shares out of total shares of 1,00,000 issued by a company, then the person shall be
considered to be a 10% equity owner (10,000 of 1,00,000 is 10%). 10% equity owner means that
the shareholder has a right to 10% of the profits that shall be made by the company. Usually, on

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 years that are profitable for a company, the management awards dividend to the shareholders on the
basis of the number of shares held by them. In case a year is not profitable, equity share holders do
not get any dividend on the shares held by them. For years of higher profit, higher dividend is
announced by the management and for years of lower profit, lower dividend is awarded.

Preference Shares: Preference shares are another type of shares that can be issued to shareholders.
In the case of preference shares too, the holders of preference shares are entitled to a portion of the
profits in the form of dividend. However, the difference lies in the fact that preference shares have
the first 'preference' over the dividend that may be announced by the company. If a year generates
profits for the company, the management has to first award dividend to holders of 'preference
shares' and then if there is any profit leftover from that, only then will the management award
dividend to holders of 'equity shares'. Thus holders of preference shares have the first right to
receive dividends from a company. The dividend that preference shareholders may receive remains
fixed from year to year and does not change according to the profits generated by a company. This
is in contrast with equity shares where the amount of dividend that is awarded keeps varying
according to the amount of profit earned by a company.

Now the question arises as to how may finance be raised by issuing of shares and where are these
shares actually issued and to whom they are issued? For this it is important to understand the two
different occasions when shares may be issued by a company. They are:
1) First Issue of shares: As the name suggests, shares may be issued for the first time by a company.
Both private company and a public company which is newly incorporated can initiate this type of an
issue. If a private company issues its shares to few selected members alone, then it is known as
'private placement of shares'. However, if a private company decides to issue shares to the general
public at large, then it will have to become a public company. Otherwise a private company cannot
issue shares to the general public. In contrast, a public company that is newly incorporated can also
initiate make an issue of this type, by offering its shares to the public.
2) Regular issue of shares: A regular issue of shares is an issue of shares of the type that has been
issued earlier. For e.g., if a company has issued equity shares earlier, then a new issue of equity
shares will be considered as a regular issue. However, if a company has issued equity shares earlier
and then decides to issue preference shares, then it will not be considered a regular issue as it would
be the first issue for preference shares.

As stated earlier, when a private company issue shares, it is known as 'private placement' of shares.
Private placement of shares does not happen in a public manner as the offer for issue of shares by a

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 private company is circulated among few selected people to who the company has made the offer.
However, in the case of a public company or a private company that wishes to become a public
company, the process of issuing shares is a long-drawn out one. The process of offering shares for
public issue, begins with the company first releasing a prospectus. A prospectus is an offer
document that details the terms of the offer for issue of shares, i.e., the price at which a share is
being offered, the premium that may or may not be charged, the structure on which the value of the
shares will be called by the company towards payment for the shares. A prospectus also contains
details regarding the financial position of a company, which is provided in the prospectus as a way
of informing potential investors of the risks or benefits associated with investing in shares of the
issuing company. When a private company goes public and issues shares to the public for the first
time, then it is known as an 'Initial Public Offer' (IPO). Thus an IPO is the first instance on which
the company sells its stock to the general public. At this stage it becomes imperative to understand
the marketplaces where the shares are issued. The marketplaces where the shares can be bought or
purchased are known as 'capital markets' There exist two types of capital markets for the issue of
shares by a company, viz., the primary capital market and the secondary capital market.

PRIMARY CAPITALMARKET V. SECONDARY CAPITALMARKET

The difference between the primary capital market and the secondary capital market is that in the
primary market, investors buy shares directly from the company issuing them, while in the
secondary market, investors trade shares among themselves, and the company whose shares are
being traded does not participate in the transaction.

When a company publicly sells new shares for the first time, it does so on the primary capital
market. In many cases, this takes the form of an initial public offering, or IPO. A company issues
shares numbering lakhs and crores in sums and as such an ordinary investor like the common man
cannot purchase them in such huge numbers. Moreover, the main reasons for the company to issue
shares is to quickly raise finances and in a short span of time. Therefore selling shares on a
piecemeal basis to thousands of small investors is going to be hugely time consuming and resource
draining. In order to overcome these shortcomings, the company instead hires an 'underwriter' to
subscribe the company's shares. This underwriter is a company, usually an investment bank, which
purchases all of the company's shares or atleast 90% of the company's shares. It may also be the
case that the issuing company be approached by other companies who may have interest in buying
the shares of the company. These companies and investment banks that purchase the shares of
companies that are issuing them are known as 'institutional investors'. Then the underwriter
company, either by itself or alongwith the issuing company scouts for further buyers (retail

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 investors) who can purchase the shares on a piecemeal basis. The institutional investors, who can
either be foreign (FII) or domestic (DII), then offer their shares for sale to retail investors in the
secondary capital market.

The secondary market is where shares are traded between multiple retail investors or between the
institutional investors and the retail investors. In India the secondary capital market is comprised of
stock exchanges such as the Bombay Stock Exchange (BSE) and the National Stock Exchange
(NSE). These are the platforms where the retail investors can buy or sell shares issued by a
company earlier through its IPO. In the secondary capital market, the company who has issued
shares no longer participates in the transaction on its shares and therefore is agnostic of all the
buying and selling that happens. However, if the management of a company wants to consolidate its
ownership over the company, the management can chose to buyback the shares. Then the company
will have to buy the shares back from the secondary capital market.

On the secondary market, small investors have a better chance of buying or selling shares, because
they are no longer excluded from. Anyone can purchase shares on the secondary market as long as
they are willing to pay the price for which the share is being traded.

On the secondary market, an investor requires a broker to purchase the shares on his or her behalf.
That is because governing institutions of capital markets in most countries (Securities Exchange
Commission, USA and Securities & Exchange Board of India, India) require only registered brokers
to be able to sell or buy shares in the secondary capital market. The broker charges a commission on
every transaction that is made by a retail investor on the shares of a company. The price of the
shares fluctuates with the market, and the cost to the investor includes the commission paid to the
broker.

F I I v. F D I

FII stands for Foreign Institutional Investors and by now it must be clear as to what an 'institutional
investor' means. As explained above an institutional investor is someone who buys the shares of a
company and trades in it in the secondary capital market. Therefore, the foreign institutional
investor is only interested in the current price of the shares held by the FII. If the share prices are
attractive enough to be traded for a profit, then the FII will be interested in investing money in the
shares. FIIs are more interested in booking profits from the fluctuating prices of shares. As such,
FIIs can quickly buy or sell shares. Therefore, the money that is brought into a country through

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 investments by FIIs is known as 'hot money', since FIIs enjoy easy liquidity. They can enter and exit
very quickly. Thus it can be said that FIIs are interested in 'financial markets' or the secondary
capital market only. The money inflow due to FII is of a short-term nature. As a result, FII inflows
do not really contribute to constructive developmental activities of a company or that of the nation
as FII inflows arrive mainly with the objective of booking profits from price fluctuations. Because
of easy liquidity and flow of hot money, these investments can easily flow in and out of the
economy, which in some situations can lead to boom and bust cycles.

On the other hand FDI stands for Foreign Direct Investment. In contrast to FII, FDI flows into the
primary capital market, i.e., FDI investment happens 'directly' when the FDI investors purchase the
shares offered in large numbers by a company. FDI investors do not trade the purchased shares on
the secondary capital market possess the shares for mid to longer terms. The objective of FDI
investment is to not merely book profits from fluctuating share prices, as the money that flows in
due to FDI is applied in changing the composition of the management or for enhancing the
production and manufacturing capacity of the company receiving the FDI. In contrast to an FII
which may have a portfolio of companies in which they invest, FDI generally flows to a specific
company in a specific sector, which is usually the sector that the FDI investor is familiar with. For
e.g., a Japanese car company that purchases the shares of an Indian car company in order to become
15% stock owner of the company will be considered to be an FDI investor. The money raised from
such an investment will be utilized according to the agreed terms between the management of the
Indian company and the Japanese company. Thus, FDI investments are more stable and stay in the
economy for a longer period of time.

Therefore, FDI is preferred over FII investments since it is considered to be the most beneficial
form of foreign investment for the economy as a whole. In the case of FII investment that flows into
the secondary market, the effect is to increase capital availability in general , rather than availability
of capital to a particular enterprise.

Moreover, FDI brings not just capital but also better management and governance practices and,
often, technology transfer. The know-how thus transferred along with FDI is often more crucial than
the capital per se. No such benefit accrues in the case of FII inflows, although the search by FIIs for
credible investment options has tended to improve accounting and governance practices among
listed Indian companies.

#News: India has emerged as the most favoured destination for foreign direct investment (FDI) in

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 2015 so far, outpacing China and the US. FDI inflows into India during January-June stood at $31
billion, ahead of Chinas $28 billion and the USs $27 billion. Separately, India also jumped 16
notches to 55 among 140 countries in the World Economic Forums Global Competitiveness Index
that ranks countries on the basis of parameters such as institutions, macroeconomic environment,
education, market size and infrastructure among others. (Source: Financial Times, London)

B A L A N C E O F PAY M E N T S

The balance of payments (BOP) is an accounting place where countries record their monetary
transactions with the rest of the world. Transactions are either marked as a credit or a debit. Cash
outflows due to imports, interest payments or trading activities are recorded as a debit in the current
account. Within the BOP there are three separate categories under which different transactions are
categorized: the current account, the capital account and a balancing item. In the current account,
goods, services, income and current transfers (mostly trading) are recorded. In the capital account,
physical assets such as a building or a factory are recorded (assets that would incur benefit over a
longer period of time say more than 2-3 years). And in the financial account, assets pertaining to
international monetary flows of, for example, business or portfolio investments, are noted.

C U R R E N T A C C O U N T D E F I C I T

Current account deficit (CAD) is a measure of a country's foreign trade. Current account deficit
occurs for a country when the revenues from exports are lesser than the expenditures on imports.
The difference between export revenues and import expenditures gives the CAD of a country. the
difference between export earnings and import spending. As is fairly well known, most of the
foreign trade happens with the american dollar as the chosen currency, since it is universally
accepted by most banks and also utilized as a reserve currency by most countries. Therefore the
CAD is expressed in dollar terms.

India has always experienced a current account deficit instead of a current account surplus. A deficit
implies India imports more value of goods than the value of goods it exports. A deficit means that a
country is dependent upon imports to service the consumption requirements of its citizens.
Additionally a nation having a deficit is also characterized by high personal consumption in contrast
to production and manufacture. On the other hand a current account surplus implies that a country is
heavily dependent on exports and has otherwise weak domestic demand. The latter is the case with

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 China which has enjoyed a huge surplus for quite sometime due to its strong export based economy.
The size of India's current account deficit as a portion of Gross Domestic Product (GDP) reached its
highest under the UPA-II regime in 2012 when it was 4.7% as a proportion of India's GDP. So far
now in 2015 (Oct, 10) the CAD has been reduced to 1.3% of the GDP. This was largely due to the
reduction in India's import bill owing to falling prices of global crude oil, even as India's exports
continue to decline.

Weak domestic demand usually happens due to lack of investment activity within the domestic
economy. So a current account surplus is also associated with weak investment activity within the
nation, while a current account deficit is associated with more investment activity in the nation as
the latter leads to more internal consumption, thus putting a demand on more imports. A developing
nation like India should ideally have a current account deficit. CAD, therefore, is considered to be a
good indicator of a developing nation's intention to grow.

Components of the Current Account

1. Goods - These are movable and physical in nature, and in order for a transaction to be recorded
under "goods", a change of ownership from/to a resident (of the local country) to/from a non-
resident (in a foreign country) has to take place. Movable goods include general merchandise, goods
used for processing other goods, and non-monetary gold. An export is marked as a credit (money
coming in) and an import is noted as a debit (money going out).

2. Services - These transactions result from an intangible action such as transportation, business
services, tourism, royalties or licensing. If money is being paid for a service it is recorded like an
import (a debit), and if money is received it is recorded like an export (credit).

3. Income - Income is money going in (credit) or out (debit) of a country from salaries, portfolio
investments (in the form of dividends, for example), direct investments or any other type of
investment. Together, goods, services and income provide an economy with fuel to function. This
means that items under these categories are actual resources that are transferred to and from a
country for economic production.

4. Current Transfers - Current transfers are unilateral transfers with nothing received in return.
These include workers' remittances, donations, aids and grants, official assistance and pensions.
Due to their nature, current transfers are not considered real resources that affect economic

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 production.

B A L A N C E O F T R A D E v. C U R R E N T A C C O U N T

To be able to understand and appreciate the difference between the two, it becomes necessary to be
aware of the term, 'non-factor' payments and earnings. 'Factors' of production, traditionally used to
refer to physical inputs that were required to produce goods. These factors were land, labour,
capital. However, to this mix, another component has been added, viz., 'services', which is non-
physical and therefore considered as an 'invisible'. Payments and earnings due to these services are
categorised as 'non-factor' payments and earnings respectively. For e.g., export of softwares is
considered as a 'non-factor' service and therefore is an 'invisible' in the BoP. Exports of softwares
are essentially a form of service being provided to a customer to help the customer achieve his/her
goals of production or further service. This constitutes an 'export' of services. Similarly, when a
company in India pays fees for management consultancy to a foreign company or pays royalty for
using technology, then these types of payments go out as non-factor service payments. These
constitute the imports of services.

When non-factor payments due to export and import of services, are also taken into consideration,
along with the export and imports of physically visible items like goods, then we get the current
account. Thus current account records both visible (goods) and non-visible (services) items. In
contrast, balance of trade (BoT) records only visible items. Thus, the BoT is a narrower concept and
is included with the current account which records both the BoT as well as the invisibles.

C A P I TA L A C C O U N T

While the current account records transactions involving export/import of goods and services, the
capital account records sales and purchases of 'assets'. Assets are considered to be different from
goods and services. Assets are capable of enhancing the production or earning capacity of a person
or a business whereas goods and services are mostly capable of being consumed only. Thus when a
person imports a computer, then the value of the computer is recorded in the current account,
whereas if a person buys a computer building machinery in a foreign country, then the money paid
by the person in buying that is recorded in the capital account. Capital account transactions are
usually classified by one of the following four categories: foreign direct investment, or FDI;

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 portfolio investments (FIIs) of a longer term nature; other investments; and the reserve account. It
gives a summary of the net flow of both private and public investment into an economy.

Components of Capital Account:

The main components of capital account are:

1. Borrowings and landings to and from abroad:

A. All transactions relating to borrowings from abroad by private sector, government, etc.
Receipts of such loans and repayment of loans by foreigners are recorded on the positive
(credit) side.

B. All transactions of lending to abroad by private sector and government. Lending abroad
and repayment of loans to abroad is recorded as negative or debit item.

2. Investments to and from abroad:

A. Investments by rest of the world in shares of Indian companies, real estate in India, etc.
Such investments from abroad are recorded on the positive (credit) side as they bring in
foreign exchange. However, it also means that foreign ownership of Indian assets has
increased.

B. Investments by Indian residents in shares of foreign companies, real estate abroad, etc.
Such investments to abroad be recorded on the negative (debit) side as they lead to outflow
of foreign exchange. Although, when investments are made in a foreign country, it increases
ownership of foreign assets held by Indians, and hence there is an implied return.

3. Change in Foreign Exchange Reserves:

The foreign exchange reserves are the financial assets of the government held in the central
bank. A change in reserves serves as the financing item in Indias BOP. So, any withdrawal
from the reserves is recorded on the positive (credit) side and any addition to these reserves
is recorded on the negative (debit) side. It must be noted that change in reserves is recorded
in the BOP account and not reserves.

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 The International Monetary Fund (IMF) has re-named capital account as a 'financial
account'.

G O V E R N M E N T B O N D S / S E C U R I T I E S

Government Securities are securities issued by the Government for raising a public loan or as
notified in the official Gazette. They consist of Government Promissory Notes, Bearer Bonds,
Stocks or Bonds held in Bond Ledger Account. They may be in the form of Treasury Bills or Dated
Government Securities. When a person buys a government bond, the person/investor pays money.
So essentially, the government is raising money from the public through the issue of government
bonds/securities. (bonds and securities are not inter-changeable terms, but 'bonds that are secured
with the backing of an asset or a collateral' are a type of securities, namely, 'debt securities'. In the
case of government bonds, the bonds are secured, even though they are not backed by collateral or
asset as in the case of bonds issued by a person or a company, but they are backed by the
'sovereign's good faith' and 'promise to pay'. Since the government is never expected to default on
the payments a bond issued by the government is also considered to be 'secured' and hence the name
government 'securities').

Government Securities are mostly interest bearing dated securities issued by RBI on behalf of the
Government of India. GOI uses these funds to meet its expenditure commitments. These securities
are generally fixed maturity and fixed coupon securities carrying semi-annual coupon (rate of
interest on a bond is known as 'coupon' or 'coupon rate'). Since the date of maturity is specified in
the securities, these are known as dated Government Securities, e.g. 8.24% GOI 2018 is a Central
Government Security maturing in 2018, which carries a coupon of 8.24% payable half yearly.

A sovereign debt bond / government bond is considered to be the safest and most secure of all
securities for investors. This is because sovereign nations and governments carry very little risk of
defaulting as any shortfall can be met by either raising taxes or ordering the central bank to print
more money, although the government is very less likely to do the latter. Even otherwise, the bond
issuer in this case, i.e., the government cannot run and hide in any place in the likely event of a
default and therefore there are very less chances of the sovereign being unable to pay investors their
bond money. Even if the investor feels that the government will be unable to pay, the investor
enjoys convenience as the government bonds are very liquid in nature, i.e., they can be traded in the
secondary capital market.

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 G-Secs, State Development Loans & T-Bills are regularly sold by RBI through periodic public
auctions.

Treasury Bills are short term (up to one year) borrowing instruments of the Government of India
which enable investors to park their short term surplus funds while reducing their market risk. They
are auctioned by Reserve Bank of India at regular intervals and issued at a discount to face value.
On the other hand, Government securities are dated securities that are issued for a much longer
period ranging anywhere from 2-30 years.

M O N E TA R Y P O L I C Y A N D T H E R B I

Monetary policy is the macroeconomic policy laid down by the central bank, which in India's case
is the Reserve Bank of India or the RBI. It involves management of money supply and interest rate
and is the demand side economic policy used by the government of a country to achieve
macroeconomic objectives like managing inflation, i.e., price stability, & market liquidity as well as
encouraging growth, full employment & consumption. Johnson defines monetary policy as policy
employing central banks control of the supply of money as an instrument for achieving the
objectives of general economic policy. G.K. Shaw defines it as any conscious action undertaken
by the monetary authorities to change the quantity, availability or cost of money.

Thus, monetary policy is an important tool that is employed by the central bank to govern and
manage the economy of a country. For an economy to function properly, thereby leading to higher
employment in the longer run, there must be adequate market liquidity so that credit availability
does not suffer. This is so because more employment is created with the establishment of more
businesses and enterprise, for which credit must be reasonably accessible. The RBI employs several
benchmark rates in order to manage adequate liquidity in the market, because too less liquidity will
make credit costlier for businesses, thereby slowing down economic expansion and too much
liquidity will make prices of goods rise higher thus slowing down growth and consumption. The
RBI is able to pull the strings on market liquidity by altering benchmark rates such as CRR, SLR,
Repo Rate, Reverse Repo Rate.

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 C A S H R E S E R V E R AT I O

What is Cash Reserve Ratio?

Cash Reserve Ratio (CRR) will determine the amount of funds that various banks in the country
will have to keep as deposits with the RBI. Therefore, CRR is an indication of the amount of bank's
cash kept with the RBI. Currently (as of 16 th November, 2015), the CRR is 4%. If the RBI decides
to increase the CRR, then it will mean that the banks will have to leave more cash with the RBI. It
will reduce the amount of funds available with the banks for distribution as credit to borrowers in
the economy. If the RBI decides to decrease the CRR, then it will mean that the banks will have to
leave lesser cash with the RBI, thus increasing the bank's availability of funds for distribution as
credit. Higher liquidity will urge RBI to enhance CRR and lower liquidity will urge RBI to decrease
the CRR. In this manner, the RBI is able to manage market liquidity through the CRR.

S TAT U T O R Y L I Q U I D I T Y R AT I O

What is Statutory Liquidity Ratio?

Apart from keeping a portion of deposits with RBI as cash (CRR), banks are also required to
maintain a minimum percentage of deposits with them at the end of every business day, in the form
of gold, cash, government bonds or other approved securities. This minimum percentage which
is called Statutory Liquidity Ratio (SLR). Thus, SLR is an indication of the amount of funds that
a bank is required to keep available with itself as a 'reserve' at its beck and call. A bank does not
maintain every deposit that is made with it by bank's customers. The bank uses the deposits
available with it to provide credit to interested borrowers. This is done on the assumption and also
observable fact that not all customers call their deposits from the bank in one go and only a small
portion do so at any given point of time. Therefore, the bank is free to use the rest of the deposits
for the purposes of lending credit. However, RBI requires banks to keep a minimum portion of
those deposits lying available with itself at all times. This results in the creation of a 'reserve' with
the bank. The size of this reserve is determined by the SLR. A bank has to maintain this minimum
reserve amount before it can start lending credit to borrowers. If RBI increases the SLR, then the
banks will have to maintain a higher reserve amount. This will have the effect of reducing the
amount of deposits available with the bank, which it can offer as credit to borrowers. As a result
credit becomes costlier to obtain and therefore the interest rates charged by banks will rise. On the
other hand, if RBI decreases the SLR, it frees up a portion of the reserve, thus resulting in higher
credit availability, thereby reducing interest rates. If interest rates are higher in the economy, there

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 will be lesser borrowing and therefore the economy will slow down bringing down inflation and if
interest rates are lower in the economy, there will be higher borrowing and more economic activity,
thus leading to higher inflation in the longer run. In this manner, RBI is able to manage market
liquidity and inflation.

B A N K R AT E

What is the bank rate?

Unlike other policy rates, the bank rate is purely a signaling rate and most interest rates are delinked
from the bank rate. Also, the bank rate is the indicative rate at which RBI lends money to
other banks (or financial institutions) The bank rate signals the central banks longterm outlook on
interest rates. If the bank rate moves up, then it means that other banks will have to pay a higher
interest on the loans and advances obtained from the RBI. This increased interest payments will
increase costs for other banks, who in turn will then decide to charge higher interests on loans and
advances to their customers. Thus, if the bank rate increases, longterm interest rates also tend to
move up, and viceversa. Thus in times of high unemployment, RBI will reduce the bank rate
charged to other banks in a way indirectly signaling to the economy that the cost of credit has come
down.

I N T E R - B A N K R AT E

What is the inter-bank rate?

The interbank lending market is a market in which banks extend loans to one another for a specified
term. Most of the loans which a bank takes from other banks to comply with the central bank's
reserve requirements are taken only on an overnight basis. The inter-bank rate reflects the rate at
which loans are facilitated from one bank to another bank to meet their liquidity requirements. As
we will see below, the RBI or the central bank requires all the banks to maintain a certain amount of
funds ready and available with the banks in order to fulfill their time and demand liabilities which
may get called. A bank need not save up every penny it receives as deposits. The bank is allowed to
lend the amounts received as deposits. This enables the bank to generate income from providing
loans at an interest to its customers. However, the bank's customers may at any time call their
deposits or withdraw their amounts. All the customers won't do so together at one single point of
time, as not all customers will require money in the same time-frame (if they withdraw all at the
same time, the banks will never be able to pay out the full amounts received as deposits. This

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 happens in the situations of economic crisis, when the citizens lose faith in the government/banking
system and rush to withdraw money). However, in order to meet the withdrawal demands of some
of its customers, a bank is made to keep a certain portion aside to meet such demands. Sometimes,
at the end of the day, a bank finds itself short of funds to comply with the central bank's
requirements. To fill the gap, the bank borrows from another bank that may have excess liquidity.
This borrowing from the other bank is known as inter-bank lending and the rate at which loans are
borrowed by banks from other banks is known as inter-bank rate.

L I Q U I D I T Y A D J U S T M E N T FA C I L I T Y

What is Liquidity Adjustment Facility (LAF)?

LAF is a facility extended by the Reserve Bank of India to the scheduled commercial banks
(excluding RRBs) and primary dealers to avail of liquidity in case of requirement or park excess
funds with the RBI in case of excess liquidity on an overnight basis against the collateral of
Government securities including State Government securities. Basically, LAF enables liquidity
management on a day to day basis. The operations of LAF are conducted by way of repurchase
agreements (repos and reverse repos) with RBI being the counter-party to all the transactions. The
interest rate in LAF is fixed by the RBI from time to time. Currently the rate of interest on repo
under LAF (borrowing by the participants) is 6.25% and that of reverse repo (placing funds with
RBI) is 5.25%. LAF is an important tool of monetary policy and enables RBI to transmit interest
rate signals to the market.

What is repo rate?

Repo rate, or repurchase rate, is the rate at which RBI lends to banks for short periods. Every bank
is mandated to hold government securities as part of their SLR. However, if a bank finds that it is
short of money or liquidity, then it can offer the government securities held by the bank to the RBI.
In exchange for the government securities, RBI offers money to the bank in the form of a very short
term loan, often overnight, with the tenor being not more than one day. When the bank returns the
money and takes the government securities back from the RBI, it will have to pay back along with
an interest based on a 'rate'. This is called as the repo rate or the rate at which the bank is able to
'repurchase' the government securities from the RBI after having given those to the latter. If in order
to curb inflation by reducing the supply of money in the market, the RBI wants to make it more
expensive for banks to borrow money, it increases the repo rate. Similarly, if it wants to make it
cheaper for banks to borrow money, it reduces the repo rate.

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 What is reverse repo rate?
Reverse repurchase rate is the rate of interest at which the RBI borrows funds from other banks in
the short term. In this case, the RBI sells government securities to banks who want to park their
excess funds available with them. If the excess funds flow back to the RBI instead of the retail
market, it will reduce the money supply. Like the repo rate, this is done by RBI selling government
bonds to banks with the commitment to buy them back at a future date. The banks use the reverse
repo facility to deposit their shortterm excess funds with the RBI and earn interest on it. RBI can
reduce liquidity in the banking system by increasing the rate at which it borrows from banks and
improve liquidity by reducing the reverse repo rate. If the banks get lower interest from their money
advanced to the RBI, they will prefer lending it to retail customers by making their credit cheaper,
thus increasing the supply of money in the market.

As a result, when there is excess liquidity in the system, the reverse repo is more effective. When
liquidity is tight and banks need short term funds from the RBI to manage mismatches, then the
repo rate emerges as the effective policy rate. But if liquidity returns to the system the reverse repo
would become the operative policy rate as the RBI would be draining out funds from the system.
The reverse repo rate is always 100 basis points lesser than the repo rate. As of 1 st December, 2015
Repo Rate was 6.75 and therefore Reverse Repo Rate will be 5.75, as the latter is lesser than the
former by 100 basis points.

M A R G I N A L S TA N D I N G FA C I L I T Y

Marginal Standing Facility is a new Liquidity Adjustment Facility (LAF) window that was created
by Reserve Bank of India in its credit policy of May 2011. MSF is the rate at which the banks are
able to borrow overnight funds from RBI against approved government securities. The question is
Banks are already able to borrow from RBI via Repo Rate, then why MSF is needed? We note here
that this window was created for commercial banks to borrow from RBI in certain emergency
conditions when inter-bank liquidity dries up completely and there is a volatility in the overnight
interest rates. To curb this volatility, RBI allowed them to pledge G-secs (government securities)
and get more funds from RBI at a rate higher than the repo rate. Thus, overall idea behind the MSF
is to contain volatility in the overnight inter- bank rates, which had reached quite higher levels of
volatility in the wake of the 2008 financial crisis and its aftermath. Further, monetary policy
changes necessitating a change in the RBI rates in order to manage liquidity also results in volatility
in the inter bank market in the short-run. The MSF rate always stays 100 base points above the repo

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 rate and 200 base points above the reverse repo rate. As of 1st December, 2015, the repo rate was
6.75%, and therefore the MSF rate was 7.75%

B A S E R AT E

What is base rate?

It is the minimum lending rate that banks can charge their customers. So far, all lending rates were
pegged to a banks prime lending rate (PLR). Prime lending rate is an interest rate at which a
bank offers loans to its best or prime customers. Best customers are designated according to their
liquidity position and creditworthiness. Under the previous system that ran till June 30, 2010
system, banks charged customers interest rate either above the PLR or below PLR. Thus PLR
worked as an anchor rate. However, from July 1, the base rate will not only replace the PLR as the
benchmark, but it will also be the new floor rate below which no bank can lend.

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