B.

Com Semester 6 IMP QUESTIONS For March 2024 Exam

Indian Economy-2
Q.1. Explain the problems of cottage and small scale industries in India OR Explain the
causes of low productivity in small scale industries in India.

Ans. I Meaning of Small scale and cottage industries: Small Scale Industries are industries
in which the investment limit is up to a certain limit which was 1 crore initially and now has
been increased to 5 crores. Cottage Industries are usually very small and are established in
cottages or dwelling places.In Small scale industry outside labour is used whereas in cottage
industries family labour is used. SSI uses both modern and traditional techniques. Cottage
industries depend on traditional techniques of production.

II Problems of Small scale and cottage industries:

1. Shortage of Funds: Small business entrepreneurs don’t have enough long- term or short-
term funds. These are, therefore, short of both fixed assets as well as working capital. Even
thebanks do not come to their help in a big way. Financial institutions like ICICI, IDBI and
IFCI help only large scale industries.

2. Lack of Latest Technology: Small business lacks funds. Latest technology is not used
because it is expensive. Only old methods and techniques are being used. Due to this they
earn less margin of profit.

3. Shortage of Raw Materials: There is shortage of raw material because of less working
capital. They can’t buy in bulk during the season and cannot enjoy the economies of large
scale.

4. Shortage of Power: Because of shortage of power, the small business enterprises are not
able to use full capacity of the plant at their disposal. They cannot afford to have their own
power generators.

5. Labour Problem: The labour is mostly unskilled. Small business don’t have resources to
provide good training. Labour are also not paid well. There is no motivation for professional
growth. Small business is incapable to bargain with powerful trade unions.

6. Marketing Problem: Small business cannot face the competition with large scale units in
marketing and selling. They cannot afford to spend much on advertising and proper
distribution of goods. They have to depend on middlemen, who pay low prices and even the
recovery from the middlemen is very slow.

7. Managerial Skills: Only individuals or a small group of people own and operate the small
business units. They don’t possess professional managerial skills required to run a business
successfully.

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8. Quality: Small business finds it difficult to come upto global standards of the quality.
They also don’t have funds for research in order to improve upon the quality. The product
quality is their weakest point as compared to the standards of the large scale units.

9. Sickness: It is painful to see most of the small units going sick. There is a lack of planning.
Skilled and trained personnel is another hurdle. They have to sell on credit. Their customers
do not pay them in time. There are large scale bad debts. Thus, they fall short of working
capital to keep the production process going. This leads to sickness.

10. Problem of working capital: Many Small Scale Industries face the problem of
inadequate working capital. Due to lack of market knowledge their production exceeds
demand, and capital gets locked in unsold stock. They do not have enough funds to meet
operational expenses and run the business.

11. Problems in Export: They lack knowledge about the export procedures, demand
patterns, product preferences, international currency rates and foreign buyer behavior. Small
Scale Industries are not able to penetrate foreign markets because of their poor quality and
lack of cost competitiveness. In countries like Taiwan, Japan etc. products produced by Small
Scale Industries are exported to many foreign countries. But in India not much thought and
focus has gone into improving the export competitiveness of Small Scale Industries.

12. Delayed payments: Small Scale Industries buy raw materials on cash but due to the
intense competition have to sell their products on credit. Buying on cash and selling on credit
itself places a great strain on finances. The greater problem is payments are delayed,
sometimes even by 6 months to one year. It is not only the private sector but even
government departments are equally guilty. Delayed payments severely impact the survival
of many Small Scale Industries.

13. Poor industrial relations: Many Small Scale Industries are not able to match the pay and
benefits offered by large enterprises, because their revenues and profitability are low and also
uncertain. This leads to labor problems. Employees fight for higher wages and benefits which
the SSI is not able to provide. This may lead to strikes, resulting in damage to property in
case of violence by employees, production losses etc.

14. Strain on government finances: Marketing of products manufactured by Small Scale

Industries is a problem area. The government has to provide high subsidies to promote sales
of products produced by Khadi and Village Industries. This places a great strain on
government finances.

15. Concentration of industrial units: There is high concentration of small scale industrial
units in a few states. Of the estimated 1.37 million registered units as on 2020-21, nearly 35%
were located in three states. Uttar Pradesh, Tamil Nadu and Kerala alone account for 35% of
Small Scale Industries. Due to concentration, there is high competition among them to
procure raw materials and other industrial inputs. This leads to high costs and scarcity of raw
materials and other inputs affecting their production and increasing costs.

16. Inadequate dispersal: One of the objectives of the government in promoting Small Scale
Industries was to increase industrial development and employment opportunities throughout
the country. Since nearly 60% of the Small Scale Industries are concentrated in few states,
the objective of balanced regional development and promotion of backward areas has not

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been achieved. Further majority of Small Scale Industries are located in urban areas and the
aim of industrial development in rural areas has also been defeated.

17. Government interference: Small Scale Industries have to maintain a number of records
and there are endless government inspections. A lot of time, money and effort is wasted in
complying with various inspections and records verification. This prevents Small Scale
Industries from fully concentrating on their business activities.

Q.2. Explain the causes of low agricultural productivity in India.

Ans.IMeaning of agricultural productivity: Productivity Level of Agriculture defines as

the amount of crops production in per hectare land. Agriculture productivity = Total
agriculture crop production/Total land area (hectares). Productivity levels in Indian
agriculture in very low as compared to the productivity levels of other countries, in terms of
global rank, the productivity levels of India in major agricultural crops is very disappointing.

II Causes of low agricultural productivity:

(i) Rural Environment: In India rural social environment is itself an important cause behind
low productivity. Indian farmers are lazy, illiterate, superstitious, primitive outlook,
conservative, unfit and unresponsive to the modern method of cultivation. According to G.S.
Sahato, the marginal productivity of farmer is zero in agriculture due to family-based
cultivation process.

(ii) High Land-Man Ratio: Indian agriculture is characterized by huge population pressure.
According to 2001 Census, about 72.2% of total population lived in rural areas and about
three-quarters of total rural working population, i.e., nearly 228 million workers (out of 310.7
million workers) was engaged in the agriculture sector. Due to rise in population,
uneconomic subdivisions of land take place. All these lead to low productivity.

(iii) Degradation of Land: According to Government of India, about 329 million hectares
(half of the land) have already been degraded. This results in 33 to 67 percent of yield loss.
Moreover, 5% of land has been damaged so badly that it cannot be used further.

(iv) Existence of Big Farmers: Although Zamindari system had been abolished in India, but
the rural big farmers are still playing their shadow roles. These big landowners are regulating
rent, tenure system and rights of tenancy etc for tenants. Thus the position of tenants are
going worse day by day. In this type of tenure system, it extremely difficult to raise
productivity by only applying modern technologies.

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(v) Irregular and Inadequate Credit and Marketing Facilities:According to the study of
Raj Krishna, due to insufficient and inadequate availability of agricultural loans at minimum
rate of interest the poor farmers cannot properly invest money on the land during the peak
season of cultivation. Moreover, the marketing of the agricultural crops is regulated by
middlemen or touts. All these resulted in low agricultural productivity.
(vi) Lack of Modern Technologies:In India about 60% of the cultivatable land are out of
irrigation facilities only 75.14 million hectares (out of 87.94 million hectares) in 2000- 01 are
under irrigation facilities. Thus, ‘Package Programme’ under green revolution turns to be
ineffective in most of the gross cropped areas in India.

(vii) Heavy Burden of the Population:In India, the burden of the population is too much on
the agricultural land; due to which the agricultural activity cannot be properly controlled. In
India, about 70% of people are dependent on agriculture. The increasing burden of the
population on agricultural land is one of the main reasons for low productivity.

(viii) Illiteracy, Superstition, and Malnutrition: The agricultural productivity depends

much on the efficiency, skill, and sincerity of human resources. In India, unfortunately, the
human resources are suffering from various deficiencies, the Indian farmer is illiterate and
superstitious, their health is also frail. In the environment of superstition and conservatism,
the backwardness and low productivity of agriculture is natural

(ix) Defective Social Organisation of Farmers: The Indian Social organization of the
farmers has been defective. The casts system and joint family system have not provided that
encouragement and power by which they can increase their productivity. Due to cast-ism,
proper cooperation of all in the agricultural activity is not possible. The family tensions and
differences have very much responsible for minimizing the productivity of the farmer

(x)Traditional Methods of Farming: In India, fanning is done by traditional methods even

today. By using good seeds, fertilizers and modem machinery per hectare production can be
increased. But, here the same old seeds and traditional methods of farming are used. For
irrigation, the farmer still depends on the monsoon. Due to the shortage of, stores, the farmer
either sells his harvest in the fields or is forced to sell it at low prices, in the market.

(xi) Uncertainty of Rain: From the point of view of both time and result, rain is uncertain.
Due to this reason, Indian agriculture is called a gamble of rains. Scanty rainfall causes
droughts, and heavy rains destroy the crops by floods.

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(xii) Lack of Good Quality manure: The number of animals in India is so much that each
year 165 crore tons of manure can be produced from their urine and dung. Other wastes and
useless articles can produce 8.6 megatons of manure. But, the valuable manure from cow
dung is dried and burned in case of a shortage of wood. Thus, due to a lack of good manure
productivity decreases.

(xiii) Decline in Fertility: The decline in fertility is also responsible for lower productivity in
India. Continuous agricultural activity on land has activated the Law of Diminishing Returns
on it. No effective resolutions have been made to restrict the continuity of this law.

Q.3. Explain the impact/effect of monetary policy on the business environment.

Ans. I Meaning of monetary policy: Monetary policy may be defined as the use of money
supply by the appropriate authority (i.e. central bank) to achieve certain economic goals.
Whenever there is a change in money supply there occurs a change in the rate of interest.
Thus, monetary policy influences interest rate or cost and availability of credit. When the
central bank attempts to contract money supply through various credit control instruments so
as to restrain the economy, the situation is then called tight monetary policy. Oppositely, an
easy monetary policy is employed to boost the economy by increasing money supply through
its credit control instruments.

II Effect of monetary policy on business environment:

A. Effect of Quantitative techniques:

1. Bank Rate:The rate at which commercial banks are able to get their first class bill of
exchange discounted is called bank rate. When there is increase in bank rate, funds become
more costly as commercial banks increase their interest rates. As interest rates increase, the
demand for loans goes down. With reduction in the loans, the money supply reduces. The
purchasing power decreases as a result of which the demand for goods and services goes
down. Production, Employment and income to the factors of production reduces. As a result
new business units are not set up and existing business units incur losses. There is recession
in the economy.

When there is decrease in bank rate, funds become more cheap as commercial banks decrease
their interest rates. As interest rates decrease, the demand for loans goes up. With increase in
the loans, the money supply increases. The purchasing power increases due to which the
demand for goods and services increases. Production, Employment and income to the factors
of production increases. As a result, new business units are set up and existing business units
make profits. There is reinvestment in the economy and as a result boom appears in the
economy.

2. Open Market Operations: When the RBI directly sells securities in the open market,
banks, corporates and individual make investments in such securities. There is reduction of
credit in the market. Money supply in the market reduces. As a result, purchasing power
reduces. Demand for goods and services goes down. Production, Employment and income to

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the factors of production reduces. As a result new business units are not set up and existing
business units incur losses. There is recession in the economy.

When the RBI purchases the securities from the market, there is increase in money supply in
the market. As a result, the purchasing power increases due to which the demand for goods
and services increases. Production, Employment and income to the factors of production
increases. As a result, new business units are set up and existing business units make profits.
There is reinvestment in the economy and as a result boom appears in the economy.

3 Cash Reserve Ratio: Every commercial bank has to maintain a certain percentage of
reserves with the RBI. When the CRR is increased, then commercial banks have less credit to
lend. Their lending capacity reduces. Money supply reduces. Demand for goods and services
decreases. As a result, Production, Employment and income to the factors of production
reduces. New business units are not set up and existing business units incur losses. There is
recession in the economy.

When the CRR is reduced, then commercial banks will have more credit. There will be more
of the money supply in the market. As a result, the purchasing power increases due to which
the demand for goods and services increases. Production, Employment and income to the
factors of production increases. As a result, new business units are set up and existing
business units make profits. There is reinvestment in the economy and as a result boom
appears in the economy.

B. Effect of Qualitative techniques:

1. Credit Rationing: For certain goods, if credit rationing is available, limited credit facilities
would be available for certain goods to be sold or produced. Only some type of business
activities can be developed. If there is no credit rationing, then all types of goods and services
would develop. This would increase the overall economic activity. As a result, there would be
boom in the economy.
2. Credit Control: If there is credit control, then consumers would be getting finance in a
limited manner. The business would not flourish. In modern times, consumer credit is easily
available for consumer durables. Banks provide consumer credit facilities on liberal terms. As
a result, there is a remarkable increase in demand. Production, Employment and Income to
the factors increases. There is boom in the these industries.

3. Margin for credit: If there is less margin for credit, then more credit will be available. If
there is more margin for credit, then less credit will be available. When customers borrow
loans, then banks ask for securities like land, house etc. If there is less margin on loans, credit
would increase. As a result, the purchasing power increases due to which the demand for
goods and services increases. Production, Employment and income to the factors of
production increases. As a result, new business units are set up and existing business units
make profits. There is reinvestment in the economy and as a result boom appears in the
economy.

4. Other measures: Direct measures, moral persuasion and canvassing are also some of the
qualitative measures which boost the economy or vice versa. The RBI, in recent times, have
directed the flow of credit towards productive activity. So the production of these goods

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increases and the investments in speculative activity reduces. As a result, there are positive
growth trends in the economy.

Q.4. Explain the new strategy of agricultural development in India. OR Explain the
Green Revolution strategy in Agriculture in India.

Ans. I Meaning:The new agricultural strategy was adopted in India during the Third Plan,
i.e., during 1960s. Thus, the traditional agricultural practices followed in India are gradually
being replaced by modern technology and agricultural practices. This report afford
Foundation suggested to introduce intensive effort for raising agricultural production and
productivity in selected regions of the country through the introduction of modern inputs like
fertilizers, credit, marketing facilities etc. Accordingly, in 1960, from seven states seven
districts were selected and the Government introduced a pilot project known as Intensive
Area Development Programme (IADP) into those seven districts. Later on, this programme
was extended to remaining states and one district from each state was selected for intensive
development. Accordingly, in 1965, 144 districts (out of 325) were selected for intensive
cultivation and the programme was renamed as Intensive Agricultural Areas Programme
(IAAP).

II New Agricultural Strategy: The following are some of the important features of the new
strategy:

1. Revolutionary: The Green revolution is considered as revolutionary in character as it is

based on new technology, new ideas, new application of inputs like HYV seeds, fertilisers,
irrigation water, pesticides etc. As all these were brought suddenly and spread quickly to
attain dramatic results thus it is termed as revolution in green agriculture.

2. HYV Seeds: The most important strategy followed in green revolution is the application of
high yielding variety (HYV) seeds. Most of these HYV seeds are or dwarf variety (shorter
stature) and matures in a shorter period of time and can be useful where sufficient and
assured water supply is available. These seeds also require four to ten time more of fertilisers
than that of traditional variety.

3. Confined to Wheat Revolution: Green revolution has been largely confined to Wheat
crop neglecting the other crops. Green revolution was first introduced to wheat cultivation in
those areas where sample quantity of water was available throughout the year through
irrigation. Presently 90 per cent of land engaged in wheat cultivation is benefitted from this
new agricultural strategy. Most of the HYV seeds are related to wheat crop and major portion
of chemical fertiliser are also used in wheat cultivation. Therefore, green revolution can be
largely considered as wheat revolution.

4. Narrow Spread: The area covered through green revolution was initially very narrow as it
was very much confined to Punjab, Haryana and Western Uttar Pradesh only. It is only in
recent years that coverage of green revolution is gradually being extended to other states like
West Bengal, Assam, Kerala and other southern states.

5. Irrigation facilities: The HYV seeds were highly effective in regions that had rich
irrigation facilities and were more successful with the wheat crop. Therefore, the Green
Revolution at first focused on states with better infrastructure such as Tamil Nadu and
Punjab.

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6. Use of HVY in other states: During the second phase, the high yielding variety seeds
were given to other states, and crops other than wheat were also included in the plan.

7. Improvement in irrigation: The most important requirement for the high yielding variety
seeds is proper irrigation. Crops grown from HYV seeds need good amounts of water supply
and farmers could not depend on monsoon. Hence, the Green Revolution has improved the
irrigation systems around farms in India.

8. Commercial crops and cash crops: These are cotton, jute, oilseeds, etc were not a part of
the plan. Green revolution in India mainly emphasized food grains such as wheat and rice to
enhance farm productivity. Green revolution increased the availability and use of fertilizers,
weedicides, and pesticides to reduce any damage or loss to the crops.

III Achievements of the New Agricultural Strategy:

Let us now turn our analysis towards the achievement of new agricultural strategy adopted in
India. The most important achievement of new strategy is the substantial increase in the
production of major cereals like rice and wheat. Table 3.3 shows increase in the production of
food crops since 1960-61.

The Table 3.3 reveals that the production of rice has increased from 35 million tonnes in
1960- 61 to 54 million tonnes in 1980-81 and then to 99.2 million tonnes in 2008-2009,
showing a major break-through in its production. The yield per hectare has also improved
from 1013 kgs in 1960 to 2,186 kg in 2008-09.

Again the production of wheat has also increased significantly from 11 million tonnes in
1950-51 to 36 million tonnes in 1980-81 and then to 80.6 million tonnes in 2008-09. During
this period, the yield per hectare also increased from 850 kgs to 2,891 kgs per hectare which
shows that the yield rate has increased by 240 per cent during the last five decades. All these
improvements resulted from the adoption of new agricultural strategy in the production of
wheat and rice.

Total production of food grains in India has been facing wide fluctuations due to vagaries of
monsoons. Inspite of these fluctuations, total production of food grains rose from 82 million
tonnes in 1960-61 to 130 million tonnes in 1980-81 and then to 213.5 million tonnes in 2003-
04 and then increased to 233.9 million tonnes in 2008-09. The new agricultural strategy was
very much restricted to the production of food-grains mostly wheat and rice. Thus, the
commercial crops like sugarcane, cotton, jute, oilseeds could not achieve a significant
increase in its production.

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Q.5. Discuss the impact of fiscal policy on business environment.

Ans. I Meaning of fiscal policy: Fiscal policy refers to the use of government spending and
tax policies to influence economic conditions, especially macro economic conditions,
including aggregate demand for goods and services, employment, inflation, and economic
growth.Some of the major instruments of fiscal policy are as follows: Budget, Taxation,
Public Expenditure, public revenue, Public Debt, and Fiscal Deficit in the economy.

II Effects/Impact of Fiscal policy on business environment: The effects of the fiscal policy
can be studied with the help of its instruments:

1. Taxation: Imposition of taxes results in the reduction of disposable income of the

taxpayers. This will reduce their expenditure on necessaries which are required to be
consumed for the sake of improving efficiency. As efficiency suffers ability to work declines.
This ultimately adversely affects savings and investment. However, this happens in the case
of poor persons. all taxes adversely affect ability to save. Since rich people save more than
the poor, progressive rate of taxation reduces savings potentiality. This means low level of
investment. Lower rate of investment has a dampening effect on economic growth of a
country.

2. Public Expenditure:According to Dalton, the level of production and employment in any

country depends upon three factors namely:(a) Ability of the people to work, save and invest,
(b) Willingness to work save and invest, and(c) Diversion of economic resources as between
different uses and localities.Public expenditure influences all these factors either positively or
negatively. Production depends upon the employment of resources by human labour assisted
with capital. The capital stock of a country depends upon savings or the surplus over
consumption. Public expenditure can influence ability to work, save and invest either
favorably or unfavorably. If public expenditure is used as an instrument to promote the
efficiency of a person to work, it will promote production and national income. For example,
public expenditure on education, medical services, cheap housing facilities etc. can increase
the efficiency of a person to work. Public expenditure can result in increased production in
the society through changes in pattern and composition of production. Public expenditure can
induce diversion of resources from less essential products to more essential products by
offering subsidies and other concessions.

3. Public Debt: It is divided into internal and external debt. When internal debt is incurred,
the purchasing power goes from the public to the Government. The money supply in the
economy is reduced. Demand is reduced. As a result, production, employment and income to
the factors of production is reduced. There is negative effect on the business environment. On
the other hand, when the internal debt is reduced, people receive some money from the
Government. Purchasing power of the people increases. Effective demand increases.
Production, employment and income to the factors increases. There is boom and growth
oriented trends in the economy.

4. Deficit Financing: When the revenue of the government is shorter than its expenditure
then this situation is dealt by printing more currency, buying from public and foreign
institution. This temporary arrangement of the money is known as the deficit financing. So
whenever the expenditure of the government exceeds its revenue then government envisage
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the process of deficit financing. The temporary arrangement of the funds through various
methods is known as deficit financing.

The following is the impact of the Deficit Financing on the country:

1. Increase in inflation due to the increase in the supply of money in the economy.
2. Decrease in average consumption level due to higher inflation.
3. Increase in income disparities, because rich get more opportunities due to higher supply of
money in the economy.
4.Deficit financing leads to inflation and inflation affects the habit of voluntary saving
adversely.
5. In fact it is not possible for the people to maintain the previous rate of saving due to rising
prices.

6. When there is inflation in the economy trade unions/employees demand higher wages to
survive.If their demands are accepted it increases the cost of production which de-motivates
the investors.

Q.6. Explain the meaning and development of Special Economic Zone.

Ans. I Meaning: An SEZ is an enclave within a country that is typically duty-free and has
different business and commercial laws chiefly to encourage investment and create
employment. Apart from generating employment opportunities and promoting investment,
SEZs are created also to better administer these areas, thereby increasing the ease of doing
business.
II Evolution/Development of SEZ in India: In India, the first Export processing zone was
set up in Kandla as early as 1965. The EXIM Policy, 2000 launched a new scheme of Special
Economic Zones (SEZs). Under this scheme, EPZs at Kandla, Santa Cruz, Cochin and Surat
were converted into SEZs.

In 2003, other existing EPZs namely, Noida, Falta, Chennai, Vizag were also converted into
SEZs. In addition, approval has been given for the setting up of 26 SEZs in various parts of
the country. Apparently, India is now promoting the EPZ programme much more vigorously
than in the initial phases of their evolution. Huge amounts of public resources are being
invested in the zones. SEZs in India were announced by the government in March 2000.

To provide a stable economic environment for the promotion of Export-import of goods in a

quick, efficient and hassle-free manner, Government of India enacted the SEZ Act, which
received the assent of the President of India on June 23, 2005. The SEZ Act and the SEZ
Rules, 2006 (“SEZ Rules”) were notified on February 10, 2006. Since then 15 SEZs
including 8 EPZs (Export Processing Zones) have been set up at Kandla, Surat, Mumbai,
Kochi, Noida, Chennai (3 SEZs), Visakhapatnam, Indore, Jaipur and Jodhpur, Falta,
Manikanchan, and Salt Lake.

III SEZ Background

An SEZ Policy was announced for the very first time in 2000 in order to overcome the
obstacles businesses faced.

 There were multiple controls and many clearances to be obtained before starting a
venture.

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  Infrastructure facilities were shoddy and well below world standards in India.
 The fiscal regime was unstable as well.
 In order to attract huge foreign investments into the country, the government
announced the Policy.
 The Parliament passed the Special Economic Zones Act in 2005 after many
consultations and deliberations.
 The Act came into force along with the SEZ Rules in 2006.
 However, SEZs were operational in India from 2000 to 2006 (under the Foreign Trade
Policy).

IV SEZs Facilities & Incentives: The government offers many incentives for companies and
businesses established in SEZs. some of the important ones are:

 Duty-free import or domestic procurement of goods for developing, operating and

maintaining SEZ units.
 100% Income tax exemption on export income for SEZ units under the Income Tax
Act for first 5 years, 50% for next 5 years thereafter and 50% of the ploughed back
export profit for next 5 years. (Sunset Clause for Units will become effective from
2020).
 Units are exempted from Minimum Alternate Tax (MAT).
 They were exempted from Central Sales Tax, Service Tax and State sales tax. These
have now subsumed into GST and supplies to SEZs are zero-rated under the IGST
Act, 2017.
 Single window clearance for Central and State level approvals.
 There is no need for a license for import.
 In the manufacturing sector, barring a few segments, 100% FDI is allowed.
 Profits earned are permitted to be distributed freely with no need for any dividend
balancing.
 There is no need for separate documentation for customs and export-import policy.
 Many SEZs offer developed plots and ready-to-use space.

Q.7. Explain the meaning and process of privatization. Discuss the need/importance of
privatization in the Indian economy.
Ans. I Meaning of Privatization: It means a transfer of ownership, management, and control
of public sector enterprises to the private sector. Privatisation can suggest several things,
including migrating something from the public sector into the private sector. It is also seldom
used as a metonym for deregulation when a massively regulated private firm or industry
becomes less organised. Government services and operations may also be (denationalised)
privatised; in this circumstance, private entities are tasked with the application of government
plans or execution of government assistance that had earlier been the vision of state-run
companies. Some instances involve law enforcement, revenue collection, and prison
management. Privatisation of the public sector companies by selling off part of the equity of
PSEs to the public is known as disinvestment.
II Process/Forms of Privatisation: Government companies are transformed into private
companies in 2 ways,

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 1. Transfer of OwnershipGovernment companies can be converted into private
companies in two ways: (1) By withdrawal of the government from ownership and
management of public sector companies. (2) By outright sale of public sector
companies.
2. Disinvestment: Privatisation of the public sector undertakings by selling off part of
the equity of PSUs to the private sector is known as disinvestment.The purpose of the
sale is mainly to improve financial discipline and facilitate modernization.

3. The public sale of shares: Equity shares of a public company can be sold through the
stock exchange for privatization. The state (Government) gives up complete authority
of an organization’s economic activities through public sale of shares.
4. Public auction: They are held with a motive of raising the highest amount for a
government property. Shares of a public company or the long term assets of the
company can be auctioned through this route.
5. Public tender: It refers to the contract issued to attract offers from interested
procurers. A tender is like an auction where the bidder with the most attractive offer
procures it.
6. Direct negotiations: When the Government enters into dealings with specific private
bodies to carry out privatization of state owned property, it is called direct
negotiations.
7. Lease with a right to purchase: Under this, the Government leases the public sector
units for a specific period of time. After this time period, the Private sector can take
the ownership of the public sector units.

III Need/Importance of Privatization:

1. Increase in efficiency: Private companies always have a better incentive than public
companies. The managers and officials of a private company have skin in the game,
i.e. their income is related to the performance of the company. In public companies,
such an incentive is not present. So privatization usually leads to higher efficiency in
the company.
2. No political interference: In a public company, there is a lot of political interference.
This may dissuade the company from taking economically beneficial decisions.
However, a private company will not let political factors affect their performance.
3. Short term foresight: In public companies, at times the government can only think
about the upcoming elections. So all their goals may be short-term in the process of
trying to gain favours of the voting public. But a private company does not have such
restrictions. They have long-term goals and ambitions and steer the company in the
right direction.
4. Increase in competition: Privatization will also increase competition in the market.
Consequently, this has proved to be verybeneficial to consumers. Healthy
competitiveness in an economy will push efficiency and performances.
5. Shareholders: It is argued that a private firm has pressure from shareholders to
perform efficiently. If the firm is inefficient then the firm could be subject to a
takeover. A state-owned firm doesn’t have this pressure and so it is easier for them to
be inefficient.
6. Government will raise revenue from the sale: Selling state-owned assets to the
private sector raised significant sums for the UK government in the 1980s. However, this

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 is a one-off benefit. It also means we lose out on future dividends from the profits of
public companies.

Q.8. Explain the modern trends of foreign investment in India.

Ans I Foreign investment in India: India ranked 63rd out of 190 countries in the 2020.
Doing Business report published by the World Bank, a significant improvement from the
previous year's spot, when it ranked 77th. As such, India joined the list of 10 most improved
economies for the third year in a row. The country has conducted a remarkable reform effort,
and given the size of the country's economy, these reform efforts are particularly
commendable. Since the implementation of these reforms, more than 2,000 companies have
used the new law.

II Trends of Foreign Investment in India:

Foreign Direct Investment 2017 2018 2019

FDI Inward Flow (million USD) 39,904 42,156 50,553

FDI Stock (million USD) 377,246 386,172 426,928

Number of Greenfield Investments* 703 779 701

Value of Greenfield Investments (million USD) 26,896 54,140 29,788

Source: UNCTAD, Latest available data.

Note: * Greenfield Investments are a form of Foreign Direct Investment where a parent
company starts a new venture in a foreign country by constructing new operational facilities
from the ground up.
III Provisions: The consolidated FDI policy which has been in effect from 28th of August
2017 directs towards liberalization norms and has brought in some key changes which
include:

• FDI in LLPs
• Downstream investment intimation
• Cash and carry wholesale form of trading
• FDI in one single brand retailing
• FDI in e-commerce
 Fresh approval for additional FDI
 FDI linked with the performance conditions
• Foreign Investment Promotion Board (FIPB) abolishment
• FDI in start-ups
• Pension sector
• FDI in other financial services
• FDI in infrastructure companies in the securities market

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• Liberalization in: -Defense -Pharmaceuticals -Broadcasting
• Deferred consideration
• Remittance against pre-incorporation expenses.

Q.9. Explain the current industrial policy and its impact on the business environment.

Ans. I Current Industrial Policy:The long-awaited liberalised industrial policy was

announced by the Government of India in 1991 in the midst of severe economic instability in
the country. The objective of the policy was to raise efficiency and accelerate economic
growth. During this industrial policy, there were many reforms. Out of these, Liberalization,
Privatization, and Globalization were the main economic reforms that were undertaken in the
new policy.

II Features of New Industrial Policy

1. De-reservation of Public sector: Sectors that were earlier exclusively reserved for
public sector were reduced. However, pre-eminent place of public sector in 5 core areas like
arms and ammunition, atomic energy, mineral oils, rail transport and mining was
continued.Presently, only two sectors- Atomic Energy and Railway operations- are reserved
exclusively for the public sector.
2. De-licensing: Abolition of Industrial Licensing for all projects except for a short list of
industries.There are only 4 industries at present related to security, strategic and
environmental concerns, where an industrial license is currently required-Electronic
aerospace and defence equipment, Specified hazardous chemicals, Industrial explosives,
Cigars and cigarettes of tobacco and manufactured tobacco substitutes.
3. Disinvestment of Public Sector: Government stakes in Public Sector Enterprises were
reduced to enhance their efficiency and competitiveness.
4. Liberalisation of Foreign Investment: This was the first Industrial policy in which
foreign companies were allowed to have majority stake in India. In 47 high priority
industries, upto 51% FDI was allowed. For export trading houses, FDI up to 74% was
allowed.Today, there are numerous sectors in the economy where government allows 100%
FDI.
5. Foreign Technology Agreement: Automatic approvals for technology related
agreements.
6. MRTP Act: It was amended to remove the threshold limits of assets in respect of MRTP
companies and dominant undertakings. MRTP Act was replaced by the Competition Act
2002.
III Impact of the New Industrial Policy: The New Industrial Policy, 1991 brought reforms
in terms of Liberalisation, Globalisation and Privatisation. These had a major impact on the
working of enterprises in business and industry. These have posed several challenges to the
Indian corporate sector. They are:

1. Increasing competition: As a result of changes in the rules of industrial licensing, entry of

foreign firms creates competition for Indian firms, especially in service industries like

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telecommunication, airlines, banking, insurance, etc which were earlier placed in the public
sector.

2. More demanding customers: Customers today have become more demanding because
they are well informed. Cut-throat competition in the market gives the customers wider
choice in purchasing better quality of products and services.

3. Rapidly changing technological environment Due to increased competition,

technological advancement are taking very fast. This is specifically a disadvantage to small
firms who are not able to cope up with these changes and sometimes are even forced to shut
down their business.

4.Need for developing human resources: The new market conditions require people with
higher competence and greater commitment. Hence, there is a need of developing human
resources.

5. Necessity for change: After 1991, the market forces have become turbulent. As a result,
business enterprises have to continuously modify their operations.

6. Market orientation Earlier, production was done and whatever was produced was sold.
But with the New Industrial Policy leading to increased competition, there is a shift towards
customer orientation, where study and analysis of market is done before anything is
produced, so that the products are according to the needs and demands of customers.

Q.10.Explain the achievements and limitations of Indian Planning.

Ans. I Meaning of Indian Planning: In India, planning is done both at the centre as well as
the state level. Economic planning is done by the central authority after a complete survey of
the economic situation. The policy objectives are designed based on the future development
goals of the country. In India, until 2014, planning was the responsibility of the National
Planning Commission that was established on March 15, 1950. In 2014, the government led
by Prime Minister Narendra Modi dissolved the Planning Commission and replaced it by the
think tank called NITI Aayog. NITI here, stands for National Institution for Transforming
India.

II Achievements of Indian Planning:

1. Economic Growth:Economic planning in India has been successful in increasing the
national income and the per capita income of the country resulting in economic growth. The
net national income at factor cost increased from Rs. 4393.45 billion in 1966- 67 to Rs.45,
733 billion in 2011-12 (at 2004-05 prices). The per capita income increased from Rs.8876 to
Rs.38,048 during the same period (at 2004-05 prices).The average growth rate has increased
from 3.5 percent during 1950 to 1970 to about 5.5 percent after 1990’s. The economy
recorded a growth rate of 7.8 percent during the eleventh five- year plan.

2. Progress in Agriculture:The first five-year plan focused on agricultural development.

However, agricultural sector did not receive priority in the subsequent plans. Yet, with

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various initiatives implemented in the agricultural sector such as the green revolution and
agricultural pricing policies, there has been a considerable increase in the output of the
agricultural sector.The index of agricultural production increased from 85.9 in 1970-71 to
165.7 in 1999-2000 (Base year- 1981-82). The production of major food grains which
includes rice, wheat, coarse cereals and pulses has increased from 77.14 million tons in 1958-
59 to 252.22 tons in 2015-16. With the introduction of green revolution, the yield per hectare
of food grains has increased from 662 kg in 1959-60 to 2056 kg in 2015-16.

3. Industrial Growth:Economic planning has also contributed to the progress of the

industrial sector. The index of industrial production increased from 54.8 in 1950-51 to 152.0
in 1965-66 (Base year- 1960-61) which is about 176 percent increase in production during the
first three five-year plans.It went up from 109.3 in 1981-82 to 232.0 in 1993-94 (Base year-
1980-81). Taking 2004-05 as the base year, the index of industrial production recorded an
increase from 108.6 in 2005-06 to 181.1 in 2015-16. The introduction of reforms in 1991
relieved the industrial sector from numerous bureaucratic restrictions that were prevalent
earlier.This has led to the rapid growth of the industrial sector in India. India has made
remarkable progress in cotton textiles, paper, medicines, food processing, consumer goods,
light engineering goods etc.

4. Public Sector:The public sector played a predominant role in the economy immediately
after the independence. While there were only 5 industrial public sector enterprises in 1951,
the number increased to 244 in 1990 with an investment of Rs.99, 330 cores. However, the
number of public sector enterprises fell to 217 in March 2010.Very high profits were
recorded by petroleum, telecommunication services, power generation, coal and lignite,
financial services, transport services and minerals and metal industries. The government has
eliminated a number of restrictions on the operational and financial powers of the Navaratnas,
Miniratnas and several other profit making public sector enterprises.

5. Infrastructure:Development of infrastructure such as transport and communication,

power, irrigation etc., is a pre-requisite to rapid economic growth and development.
Expansion of transport facilities enables easy movement of goods and services and also
enlarges the market. Irrigation projects contribute significantly to rural development.
Power projects help in meeting the growing demand for power by both industrial and
household sector. The total road length increased from about 400,000 km in 1951 to about 4.7
million km in 2011. India has the second largest road network in the world with about
5,472,444 kilometers of road, as on March 31, 2015.

6. Education and Health Care:Education and health care are considered as human capital as
they contribute to increased productivity of human beings. Considerable progress was
achieved in the education as well as health sector during the five-year plans. The number of
universities increased from about 22 in 1950-51 to 254 in 2000-01. There were about 22
central universities, 345 state universities, 123 deemed universities and about 41,435 colleges
in 2016.As a result, there has been a fall in the death rate from 27.4 per thousand persons in
1950-51 to 7.3 per thousand persons in 2016. The life expectancy has increased from about
32.1 years in 1951 to 68.01 years in 2014. The infant mortality rate has declined from 149 per
thousand in 1966 to 37.42 per thousand in 2015.

7. Growth of Service Sector:Service sector is the key contributor to the economic growth of
India. The service sector contributed to about 53.2 percent of the gross value added growth in
2015-16. The contribution of the IT sector to India’s GDP increased from about 1.2 percent

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in 1998 to 9.5 percent in 2015. The service sector has recorded a growth rate of about 138.5
percent in the last decade.Financial services, insurance, real estate and business services are
some of the leading services that have been recording a robust growth in the past few years.
The rapid growth of the service sector in India could be attributed to the inflow of huge
amount of FDI in this sector. India’s share of service exports in the world service exports has
increased from 0.6 percent in 1990 to 3.3 percent in 2011.

8. Savings and Investment:Savings and Investments are major driving forces of economic
growth. The gross domestic savings in India as a proportion of GDP has increased from 8.6
percent in 1950-51 to about 30 percent in 2012-13. The gross capital formation has increased
from 8.4 percent in 1950-51 to 34.70 in 2012-13. Capital accumulation is the key to
economic development. It helps in achieving rapid economic growth and has the ability to
break the vicious circle of poverty.

9. Science and Technology:India is the third most preferred destination for technology
investments. It is among the top most countries in scientific research and space exploration.
India is also making rapid progress in nuclear technology. The government has undertaken
various measures such as setting up of new institutions for science education and research,
launching the technology and innovation policy in 2013, strengthening the infrastructure for
research and development in universities, and encouraging public- private partnership etc.

10. Foreign Trade:On the eve of independence, India’s primary exports were agricultural
commodities and UK and US were its major trading partners. India was largely dependent on
other countries for various capital and consumer goods. However, with the development of
heavy industries during the five-year plans, India has been able to reduce its dependence on
other countries and was able to achieve self-reliance in a number of commodities.

III Limitations of Indian Planning:

1. Slow Growth: The planning process in India has been able to achieve considerable
increase in the national income and per capita income. Yet, the rate of increase has been slow
as compared to developing countries like China, which have been able to achieve more than
10 percent growth rate consistently. India was able to achieve a growth rate of only about 4 to
5 percent during the pre-reform period. It was only during the post reform period that is after
1991, that the country could experience a growth rate of over 7 percent.

2. Neglect of Agriculture: The five year plans failed to pay attention to the agricultural
sector except for the first five-year plan. As a result, the agricultural growth rate declined
from 3.62 percent in 1991-92 to 0.81 percent during 2009-10. And the share of agriculture in
GDP declined from about 50 percent during 1950-51 to about 16 percent of the GDP in 2015.

3. Unemployment: The plans have failed to address the problem of unemployment which is
a cause of many social evils. The unemployment rate has marginally reduced from 8.35
percent during 1972-73 to about 6.53 percent in 2009-10. It was about 4.19 percent in 2013.
The growth rate of employment has recorded a decline from 2.61 percent in 1972-73 to 1.50
percent during 2009-10. The employment in primary sector recorded a negative growth rate
of 0.13 percent in 2009-10.

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4. Widespread Poverty: Failure to address the problem of unemployment has resulted in
widespread poverty in the country. The first four plans failed to address the problem of
poverty. It was only during the fifth five-year plan that measures were taken to tackle poverty
directly by introducing various poverty alleviation programmes. These programmes,
however, have achieved only limited success. The poverty rate in India declined from about
26.1 percent in 2000 to 21.9 percent in 2011.

5. Inflation: Poverty is aggravated under the situation of inflation. The five-year plans have
not been able to stabilise the prices due to which there has been a steep rise in the general
prices. The inflation rate was around 10 percent in 2012.

6. Rising Inequality: With rapid economic growth, the country has been witnessing a rise in
the level of inequality. It has been estimated that the richest 1 percent own about 58 percent
of the country’s wealth. Poor performance of the agricultural sector and lack of investments
in rural infrastructure are cited as the primary reason for such rising inequalities.

7. Political Instability: Political instability and inefficient administration are the major
hurdles in successful implementation of the plans. Though the plans are formulated after
complete analysis of the economic situation, most of the plans fail to achieve the targets due
to inefficient administration, corruption, vested interests and red tapism.

The achievements and failures of the economic planning in India, thus, reveal the underlying
gaps in the process of planning. It is an undeniable fact that the current level of growth and
development that the country has achieved could not have been possible without planning.

Q.11. Write a note on NITI Ayog.

Ans. I Meaning: Planning has been in Indian psyche as our leaders came under influence of
the socialist clime of erstwhile USSR. Planning commission served as the planning vehicle
for close to six decades with a focus on control and command approach. Planning
Commission was replaced by a new institution – NITI Aayog on January 1, 2015 with
emphasis on ‘Bottom –Up’ approach to envisage the vision of Maximum Governance,
Minimum Government, echoing the spirit of ‘Cooperative Federalism’.
II Composition of NITI Aayog:
 Chairperson: Prime Minister
 Vice-Chairperson: To be appointed by Prime-Minister
 Governing Council: Chief Ministers of all states and Lt. Governors of Union
Territories.
 Regional Council: To address specific regional issues, Comprising Chief Ministers and
Lt. Governors Chaired by Prime Minister or his nominee.
 Adhoc Membership: 2 member in ex-officio capacity from leading Research
institutions on rotational basis.
 Ex-Officio membership: Maximum four from Union council of ministers to be
nominated by Prime minister.
 Chief Executive Officer: Appointed by Prime-minister for a fixed tenure, in rank of
Secretary to Government of India.

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 Special Invitees: Experts, Specialists with domain knowledge nominated by Prime-
minister.
II Objectives of NITI Aayog:
 To foster cooperative federalism through structured support initiatives and
mechanisms with the States on a continuous basis, recognizing that strong States
make a strong nation.
 To develop mechanisms to formulate credible plans at the village level and
aggregate these progressively at higher levels of government.
 To ensure, on areas that are specifically referred to it, that the interests of national
security are incorporated in economic strategy and policy.
 To pay special attention to the sections of our society that may be at risk of not
benefitting adequately from economic progress.
 To provide advice and encourage partnerships between key stakeholders and
national and international like-minded Think Tanks, as well as educational and
policy research institutions.
 To create a knowledge, innovation and entrepreneurial support system through
a collaborative community of national and international experts, practitioners and
other partners.
 To offer a platform for resolution of inter-sectoral and inter-departmental issues
in order to accelerate the implementation of the development agenda.
 To maintain a state-of-the-art Resource Centre, be a repository of research on
good governance and best practices in sustainable and equitable development as
well as help their dissemination to stake-holders.

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