Indian Economy, 5th edition (112 page)

The tax havens are promoting corruption in India in so many ways:

(i)
They have emerged safe hubs for parking money earned in India.

(ii)
As there are such parking centres, the black money individuals and corporates make in India, are easily hidden with no risk of getting caught.

(iii)
Many Indian corporates have their operations in such places which they use for transfer pricing.

(iv)
The parked funds get back to India in the form of ‘hedge funds’ destabilising the economy.

(v)
As corruption is supposed to be very high in India, even politicians are believed to park their black money.

(vi)
They accelerate hawala, bribery, etc. in India.

Recently, we have seen some effective actions being taken by the victim nations to unearth their funds parked in these havens such as the USA, Germany and many of the OECD nations. The Government of India has also started such initiatives recently.

Q. 8
Write a note on the changing dimensions of planning in India.

Ans.
In the past one and half decades, we have seen great changes taking place in the process of planning in India. We may analyse the changes according to the below broad classifications:

(i)
Phase-I (1991–2002):
As India moved towards the era of economic reforms, the major change the government announced was the greater participation of the private sector in the developmental process and the nature of planning tilted more towards
indicative
planning — every new year has been a movement in this direction.

(ii)
Phase-II (Post 2002):
As the Tenth Five-
y
ear
p
lan (2002–07) commenced, we saw many important changes taking place in the nature of planning — major ones are as given below:

(a)
A serious mention
of the role of states in the process of planning — a complete departure from the past. Statewise growth targets worked in consultation with states, are clear pointers. “Unless states achieve their targets, nation can’t achieve its target”, says the plan. Planning heading towards real kind of
decentralisation
(73
rd
& 74
th
constitutional Amendments were forcing it also).

(b)
Governance
has been recognised as a factor of development – the Plan suggests serious attempts in this direction.

(c)
The Plan is now implemented with special reference to economic reforms with the help of steering Committee.

(d)
Planning Commission now monitors the progress of various central ministries.

(e)
Agriculture sector declared as the
prime moving force
of the economy; governmental investment and attention tilting towards this sector after almost fifty years of the industry’s dominance (as Amartya
s
en suggested India to do).

(f)
The changes in the view of planning are so pronounced that the Government has declared the plan as a
‘reform plan’
. This Plan really intends to reform the way we planned.

Q. 9 ‘Economic reforms with human face’—examine the rationale behind it and the possible outcomes.

Ans.
The new Union government (UPA) announced its committment to economic reforms with this sentence and the proverb got media attention. The political elite looks convinced today that the process of economic reform has not been able to take care of the masses, thus the future of the process will focus on it.

Economic reform with a human face is no empty rhetoric as it is based on stark realities and sound logic. As we know, in the era of reforms, the economy is moving towards the market economy in which demand/supply and price mechanism plays the main role. As a vast section of the population lacks the desired level of purchasing power, the process looks ‘anti-poor’ and thus, ‘pro-rich’. Such reform processes might bring higher economic growth, but for equitable development, a conscious attempt for
inclusive growth
is essential.

The masses who lack the real level of purchasing capacity, should be supplied with subsidised goods and services till micro-level growth takes place. This is why the government is emphasising the
social sector
and enhancing its expenditure on the delivery of the so-called ‘public goods’ (education, water, healthcare, shelter, etc.).

However, analysts have cautioned the government that such policies are going to hamper growth and to increase fiscal deficit which will ultimately hurt development. But, till the poor are capable of taking on the market forces, the economy has to bear some cost. To sum up, we need growth for all—development and growth must be distributive; the Directive Principles of State Policy in our
c
onstitution envisions the same idea.

Q. 10 Write a note on the present situation regarding current and capital account convertibility of rupee.

Ans.
In the Union Budget 1992–93, the
l
iberalised Exchange Rate Mechanism
s
cheme (LERMS) was announced. Since then India has always been moving ahead in the direction of greater rupee convertibility, which may be seen as given below:

•
In August 1994, rupee became
fully convertible
in the current account.

•
In August 1994, the rupee became
partially convertible
in the capital account (60:40).

•
The current policy regarding the capital account convertibility in India stands as given below:

(i)
Rupee got full convertibility on Indian corporate’s proposal of foreign investment upto $ 500 million—put in automatic route approval.

(ii)
Rupee became fully convertible in case of corporates intending to prepay their external commercial borrowings (ECBs) above $ 500 million—automatic route.

(iii)
In August 2007, the Government allowed individuals to invest abroad with an upper limit of $ 20,000 per year.

As India is becoming self-dependent in earning foreign exchange, we may hope that in the near future, government might be announcing rupee’s full convertibility in the capital account. India’s cautious moves towards full capital account convertibility has been appreciated by the IMF.

Q. 11
W
hat is the term ‘balance of payment’? Write a note on recent policies regarding BoP management in India.

Ans.
Balance of Payment or BoP is the overall
statement
of a country’s economic transactions with the rest of the world over a period, generally a year. The statement shows receivings from the world and the payments to the world basically shown in the current and the capital accounts. This statement is based on the principles of
accounting
–
similar to the
balance sheet
of a company. It might turn out to be positive or negative. If it is negative and the economy is incapable to pay it, this is known as a BoP crisis. In such situations, the IMF remains as the last source of rescue.

•
India had to rely on emergency operations from abroad to cope up with periodic BoP crises in 1973, 1979, 1981, and 1991. But after the economic reform process started, the situation started to improve.

As India started ‘opening up’ after 1991, as the part of the external sector reforms, its BoP has become
favourable
with each succeeding year.
Major policies
in this direction could be summed up as given below:

(i)
Steps in the direction of opening the economy for healthy levels of foreign investments (FIs)—FDI as well as the (FIIs).

(ii)
Optimum levels of convertibility to rupee in the current and the capital accounts.

(iii)
Accelerated disinvestment of the prospective PSUs—including ‘strategic sale’ to the foreign bidders, too.

(iv)
Follow up of LERMS (Liberalised Exchange Rate Mechanism System) in 1992–93.

(v)
Modifications in the FERA – FEMA

(vi)
Prudential management of the financial market with inputs of the required kind of reforms– money market, banking, insurance, stock markets, etc.

(vii)
Required kind of trade policy, etc.

Q. 12 Write a note on the role played by the stock market in the development of the economy in India.

Ans.
Aspirations of higher development could only be possible once higher growth rate is maintained. For higher growth rate, we need higher investment. As India had opted industry as its ‘prime moving force’ of the economy, the fund was managed by ‘project financing’ institutions. When banks managed to make their presence felt, they also started providing the investible funds. But the most attractive investible fund i.e. fund made available by the stock market, was not playing any supportive role, as this was not organised. With the help of the conscious efforts made by the successive governments since 1992, Indian stock market has been able to make its presence felt around the world.

The Indian stock market is one of the fastest growing stock market in Asia. Its representative share index has crossed 20,000 mark (
s
ensex). The booming stock market is helping the economy in many ways:

(i)
India is becoming less dependent on institutional project financing for investible funds.

(ii)
Stock market is not only able to manage investible funds, but is increasing our forex receipts also. The government is trying to make it more lucrative by further liberalisation in the Portfolio Investment Scheme (PIS).

(iii)
People’s participation in growth and development is increasing day by day.

(iv)
Stock market has emerged as the new route to manage investible funds.

This is how stock market has emerged as the most attractive route to manage investible funds and sustained growth rate. Naturally it has emerged as the ‘new
mantra
’ of growth and development.

Q. 13
W
rite a note on the logic behind increasing government emphasis on the social sector.

A
ns
.
I
ndia’s expenditure on the social sector has been rather poor (at 1.5 per cent of GDP) upto 1991, in comparison to the South East Asian economies (15 per cent of GDP since mid-1960s). This was basically responsible for the wretched state of education, healthcare, nutrition, drinking water, etc. Once India started economic reforms, the attitude towards its social sector expenditure went for a re-orientation.

As government’s role in economy started shrinking and the nature of planning started shifting more in favour of the ‘indicative’ kind—emergence of the market economy—the people having lower purchasing capacity were badly hit. In this milieu, the government since then, has shown serious resolve regarding strong social sector and increasing emphasis on this sector, specially education and health.

The idea of common minimum programme had a direct bearing on the social sector and ultimately got a new target-oriented meaning in the current government’s (National Common Minimum Programme). At present the government is giving top priority and increased emphasis to this sector in the following manner:

(i)
Poverty alleviation (nutrition) got a new meaning in the NREGA.

(ii)
Health is getting a hefty part of the government expenditure.

(iii)
Drinking water programmes being run under the targets of the Planing Commission, which are easy to monitor.

(iv)
Education (specially primary one) getting more emphasise.

(v)
All programmes targeting quality improvement in the lives of the poor people are being synchronised and more focused now.

Q. 14 Write a short note on the new ideas, promoted by the Twelfth Finance Commission in the area of fiscal management.

Ans.
The President has been asking all
f
inance
c
ommissions (FCs) to advise on the issue of deteriorating fiscal situation of the economy (Centre’s as well states’) since the Tenth FC. Though the Centre has tried to improve its fiscal situation via many tools since then, there has been almost no major step taken to do the same in the case of states—their situation had worsened throughout the 1990s. The recommendations of the 12
th
FC are considered as a watershed example in this regard, which could be considered as the new ideas pointing towards fiscal prudence among states:

(i)
Consolidation of the States loans:
The commission recommends that once the states pass their Fiscal Responsiblity Acts (FRAs) (on the lines of centre’s FRBM Act) their loans raised upto March 31, 2004 would be converted into fresh loans for a further 20 years, that too on a cheaper interest rate of 7.5 per cent p.a. (This would cost the Centre Rs.30,000 crores).

(ii)
Incentive for cut in the revenue deficit:
The amount by which states cut their revenue deficit would be written off by the Centre from their borrowings.

(iii)
Freedom for market borrowings:
Once states start with FRAs, they would be allowed to manage a part of their planned expenditure via market borrowings. This is supposed to bring in fiscal prudence among the states.

States have started following the new ideas suggested by the FC and enacted by the Centre. In this way the historic FRBM Act is getting a new meaning in the economy. At the same time, the complaint of states that they are dependent on central funds is also on the wane.