infrastructural challenges, inflation, balance of payment ... · disequilibrium in which a...

Infrastructural Challenges, Inflation, Balance of

Payment, External Debt & Economic

Reform in India.

General Economics

General Economics:Infrastructural Challenges,Inflation, Balance of Payment 2

Energy Infrastructure plays an important role in

the economic development of an economy. Energy is an important input for most of the production processes and consumption activities. Economic growth and demand for energy are positive co-related.

Primary energy – e.g., Coal Final energy – e.g., electricity


Electricity It is the most important source of

commercial energy. There are 5 major source of electricity

Water Coal Oil Gas Radio active elements like uranium,

thorium and plutonium.


Source of Electricity At present, the capacity in thermal

sector is 62%, 22.5% in the hydel and 2.5% is in the nuclear and rest in the other sectors. In terms of generation of power, thermal is contributing 72.5%, hydel around 14.5% and nuclear 2.5% and others are contributing 10.5%.


Problems relating to energy

Demand and supply imbalance in commercial fuels.

Oil prices and inflationary pressure Growing oil imports bill Transmission and distribution losses Sick State Electricity Board Operational inefficiency Inadequate electrification.


Solution for the above problems To improve in investment and fixing the

power tariffs Electricity Act was passed in 2003 and Electricity Amendment Bills 2005 was passed in 2005.

To improve the generation of power, Ministry of power launched ‘Partnership in Excellence’.

Steps are being taken to improve and add electricity –generating capacity plants.

In order to reduce transmission losses, distribution reforms have been carried out.


Solution for the above problems Government is encouraging private

sector investment in power and for this it is finalizing guidelines.

An All India Power Grid, also called National Grid is envisaged to be developed by the year 2012.

Steps are being taken to provide access to electricity to all areas under ‘Rajiv Gandhi Grameen Vidhyutikaran’ programme was started in 2005.


Transportation

Today along with energy, transport is the basic infrastructural requirement for industrialization. Transport provides a useful link between production centers, distribution areas and ultimate consumers. Important means of transport are railways, roads, water transport and air transports.


Railways Indian railways, Asia’s largest and world’s

second largest rail network under a single management has been contributing to the industrial and economic landscape for over 150 years. To improve the railways performance the following measures are improve in resource management, rational price policy, increased wagon load, faster turnaround time, public-private partnerships, double line freight corridor for efficient freight movements.


Road & Air Transport The Indian road network is one of the

largest network in the world. Road occupy a crucial position in the transportation matrix of India as they carry nearly 65% of freight and 85% of passenger traffic.

In the civil aviation sector, there are three

parts – operational, infrastructural, and developmental (Department of civil Aviation, GOI).


Water Transport

Water transport can be divided into inland water transport and shipping. Shipping can again be divided into costal shipping and overseas shipping. The main problems are operational constraints like obsolescence, frequent breakdown of cargo, no proper handling of container, lack of proper coordination on the entire chain.


Communication Communication means transmission of

information. For the development of industries, commerce and trade in the country, communication is very necessary. The important means of communications are the postal services, telephone services, tele printers, radio and television etc. Telephone, Tele-fax and email have been gradually evolving and telex and telegraph are getting out of fashion.


Health

The general health of Indian people is not satisfactory. There is lack of proper balanced and nutritious diet and medical care. Although over the years many developments have taken place on the health front but considering the size of the population in India these are inadequate both qualitatively and quantitatively.


Education Education is an important ingredient in

the development of an individual and a society. In India, education system suffers from, high percentage of dropouts, inadequate number of educational institution, lack of infrastructural in many rural schools, outdated co-curriculum and so on. For improving the education system in India it is important that the above problems are addressed adequately.


Inflation Inflation refers to a persistent upward

movement in the general price level. It results in a decline of the purchasing power. According to most economist inflation does not occur until price increase averages less than 5% per year for a sustained period.

According to keynes Inflation refers to a rise in the price level after full employment is reached.


Types of inflation Demand-pull inflation: In a market there is

interaction between the flow of money and flow of goods and services. When more money chases relatively less quantity of goods and services the excess of demand relative to supply pushes up the prices of goods and services. Such inflation, as a result of increased money expenditure, is called demand-pull inflation. When demand exceed the supply their price rise.


Types of Inflation Cost-push inflation: It refers to a

situation where prices persistently rise because of growing factor cost. Cost push inflation results when factors of production especially wage earners try to increase their share of the total product by raising their prices. A rise in factor price leads to a rise in the total cost of production and consequently a rise in the price level. This may result in an inflationary spiral.


Stagflation The combined phenomenon of demand-pull and

cost-push inflation is found in many countries, both the developed and the developing. One of these situations is in the form of stagflation under which economic stagnation, in the form of a low rate of growth, combines with the rise in general price level. In the developing countries, this happens when aggregate demand increases at a fast rate due to high public expenditure and expansion of credit money organized labour exerts its influence in raising up wages thus combining cost-push effect with the demand pull inflation.


Deflation

Deflation is a state in which the prices are falling and thus the purchasing power of money is increasing. Deflation is just the opposite of inflation.


Graphic Representation of different terms in inflation and deflation

o

y

Depression

x

Reflation

Inflation

Disinflation

Deflation

A A1

Number of Years

Leve

l of B

usin

ess

Act

ivity


Explanation of Diagram

Deflation or depression is a state of

disequilibrium in which a contraction of purchasing power tends to cause or is the effect of, a decline of the price level. But if the price fall from the level of full employment, is called deflation


Explanation of Diagram

When the action is taken up from depression to the full employment level, it is called Reflation or controlled inflation.

The process of reversing the

inflationary trend without causing unemployment is called Disinflation.


Causes for inflation in India

Increase in public expenditure Deficit financing Erratic agricultural growth Agricultural price policy of the government Inadequate rise in industrial production Upward revision of administered prices Other factors like large scale of tax evasion and

avoidance, increasing reliance on indirect taxes, black marketing, hoarding of essential commodities etc.


Measures to check inflation Since inflation is a phenomenon where

money income or purchasing power is rising faster than the real goods and services, the measures to check inflation should either be of a check on the increase in money income or making available more of real goods and services. The Various measures can be studied under three main heads – Monetary and fiscal measures, Control over investment and other measures.


Measures to check inflation Monetary measure is that the central

banking authorities use various weapons available in its armory to combat inflation through reduction of money supply and credit. The various methods available are

Changing the bank rate Open market operations Increasing the reserve ratio of commercial

banks Placing effective curbs on advances made

by commercial banks.


Measures to check inflation Fiscal Methods: By adopting suitable

measures in taxation, public expenditure and borrowing, the government can effectively curb inflation.

Controlling investment is also considered necessary because due to the multiplier effect, the initial investment leads to large increase in income and expenditure and the demand for both the consumer and capital goods goes up speedily.


Measures to check inflation

Other measures: These measures can be divided in to short term and long term measures. Short term measures can be regarded to PDS and long term as some restriction on present consumption may help in improving savings and investment which may be necessary for accelerating the rate of economic growth in the long run.


Balance of Trade and Balance of Payment Balance of trade may be defined as the

difference between the value of goods sold to foreigners by the residents and firms of the home country and the value of goods purchased by them from foreigners.

Export>Import = Surplus Export<Import= Deficit Export=Import = Equilibrium


Balance of Payment

It is the sum of balance of current account and balance of capital account. It includes all international monetary transactions of the reporting country vis-à-vis the rest of world. The balance of payments must always balance in a book-keeping sense. This is because for any surplus (or deficit) in the overall balance of payment there must be a corresponding debit (or credit) entry in the net changes in external reserves.


Current Account Balance of current Account: It is a broader

concept than the balance of trade. It includes balance of services and balance of unilateral transfers besides including balance of trade. Unlike goods which are visible or tangible like transportation, banking and insurance receipts and payment from and to the foreign countries, tourism, expense of diplomatic and military personnel, interest, profits, dividends and royalties received.


Current Account

Balance of services is the sum of all invisible service receipts and payments which could be zero, positive or negative. Balance of unrequited transfer includes all gifts, donations, grants, and reparation, receipts and payments to foreign countries.


Capital Account

Balance of payment on capital account: It includes balance of private direct investments, portfolio investment and government loans to foreign governments. Balance of capital account basically deals with debts and claims of the country in question or we say it deals with borrowings or lending of the country in questions.


Trends in Balance of Payment of India While analyzing India’s balance of

payments situation we find that it started deteriorating since 1979-80. This happened because growing trade deficits which till fifth plan were offsets by net receipts could not be made good by them in spite of the fact that the rising trend in the net receipts continued till early 80’s. The current account deficit which was 1.3% of GDP in the sixth plan stood at 2.2% during the seventh plan.


Trends in Balance of Payment of India The large and sustained current account deficit had

to be financed by substantial inflow of capital in the form of loans, commercial borrowings and inflow of funds from NRIs. The Gulf crisis further deteriorated our balance of payments position. Our reserves touched very low levels. In order to combat all these problems and to boost export and curb imports changes were made from time to time in exports. Devaluation (reducing the value of local currency vis-à-vis other Currencies) of rupee was carried out, loan was sought from the IMF and new trade policy announced.


External Debt Like any developing economy, India has had

been facing financial crunch. Therefore, it relies on other countries and international organizations for financial assistance. Financial assistance has been in two forms- grants and loans. Till 1980-81, the percentage of grants in total external assistance to India had been quite high. But now, the percentage of commercial loans in total assistance is increasing. India needs to push up its exports so its capability of repaying the loans strengthens.


External Debt

India’s external debt amounted to Rs.

13,470 crore at the end of March 1981. As liberal use of borrowing has been made ever since then, the external debt stood at more than Rs. 4,80,000 crore in March, 2001-02 and nearly Rs. 5,65,000 crore in 2006-07.


Reasons for implementing Economic reform in India

Excess of consumption and expenditure over revenue resulting in heavy government borrowings.

Growing inefficiency in the use of resources.

Over protection to industry Mismanagement of firms and the

economy Mounting losses of public sector

enterprises


Reasons for implementing Economic reform in India Various distortions like poor

technological development shortage of foreign exchanges; and imprudent borrowings from abroad and mismanagement of foreign exchange reserves.

Low foreign exchange reserves. Burden of national debt. Inflation.


Economic reforms in major sectors

The government responded to the crisis by introducing economic reforms in the country. Reform were introduced in all major sectors of the economy namely;

Industrial sector Financial sector External sector Fiscal policy


Industrial Sector

Industrial licensing was abolished for all projects except for 18 industries related to strategic and security concerns, social reasons, hazardous chemicals and over-riding environmental reasons and items of elitist consumption.


Industrial Sector At present there are only 6 industries

which relate to health, strategic and security considerations remain under the purview of industrial licensing. Only 8 industries groups where security and strategic concerns pre-dominate would be reserved exclusively for the public sector. At present there are only 3 industries which are reserved for the public sector.


Industrial Sector In order to invite foreign investment in high

priority industries, requiring large investments and advanced technology, it was decided to provide approval for direct investment up to 51% foreign equity industries.

With a view to injecting the desired level of

technological dynamism in Indian industry, government would provide automatic approval for technology agreements related to high priority industries with specified parameters.


Industrial Sector In the pre-reform period, companies with

more than defined investment in assets were required to take prior approval of central government for establishment of new undertakings, expansion of existing undertakings, merger, amalgamation and take over and appointment of directors. Under the new industrial policy of 1991, this requirement was abolished. Thus, with this action, the constraints imposed on growth and restructuring of large business house were removed.


Financial Sector Banking sector Reform

CRR was gradually lowered from its

peak.

SLR was reduced from its peak to 25% in recent years.

Bank rate has been reduced from 8% to 6% effective from April 2003.


Financial Sector Rate of interest on saving deposits of

commercial banks was reduced.

In 1993, RBI issued guidelines for licensing of new banks in the private sector.

Public sector banks have been encouraged to approach the public to raise resources.


Financial Sector

Other measures includes removing

/relaxing credit restrictions for purchase of consumer durable, enlarging the coverage of priority sector to include software, agro-processing industries and venture capital.


External Sector

Exchange rate stabilization: With unification of exchange rates in March 1993, transaction on trade account were freed from foreign exchange controls. It was in 1994 that various types of current account transactions were liberalized from exchange control regulation with some indicative limits.


External Sector

Foreign investment had played a very limited role in India’s economy prior to 1991. New industrial policy and subsequent policy announcements liberalized the existing industrial policy. The led to liberalization of FDI and foreign technology agreements.


External Sector

India’s foreign trade policy was quite complex till the beginning of 1990s. There were various categories of import licenses and ways of importing. The process of liberalization was given a push announcement of EXIM policy in 1992. The policy allowed free trade of all items except a negative list of imports and exports.


External Sector Quantitative restriction (QRs) were removed

on 714 items in EXIM policy of 2000-01 and on remaining 715 items in EXIM policy of 2001-02. (Except Defense goods, environmentally hazardous goods)

Tariff: Prior to 1991, Indian import tariff

structure was among the highest in the world. India has lowered its average applied tariff rate from 125% in 1990-91 to 41% 1995-96 and to 10% in 2007-08.


External Sector Special economic Zone: Export processing

zone model for promoting exports was not much a successful instrument for export promotion. Therefore, a new policy called SEZ.

FEMA: Foreign exchange management act

was made to set out its objective as “facilitating external trade and payment’ and ‘promoting the orderly development and maintenance of foreign exchange market in India’.


Fiscal Policy Income tax Reform

Income tax slab rate is reduced.

Taxation of partnership firms was

drastically modified.

The tax rate for domestic country has been reduced.


Fiscal Policy

The basic exemption limits for individuals and Hindu Undivided Families (HUFs) have been reduced.

Requirement of filing of return under the “one by six” scheme.

Dematerialization of TDS certificates. Special tax benefits have been allowed to

power sector, SEZs and shipping industries


Fiscal Policy Indirect tax Reforms: Reducing the peak rate of customs

duties Rectifying anomalies like inverted duty

structure Rationalizing excise duties with a

movement towards a median CENVAT Introduction of state-level VAT Introducing innovative financing

mechanism


Effects on Indian Economy

Failure to achieve fiscal discipline to the targeted level.

Failure to implement fully industrial deregulation.

Not fully opening the economy to trade. Ad hoc and unplanned disinvestment. Slow financial sector reforms. Financing of infrastructure.


Solution

To solve the above problems: Extend reform to the states Amend labour laws to bring them in

line with other countries. Strengthen the legal system by

scrapping outdated laws.


MCQ (Multiple Choice Questions) Question 1 At present, nearly --------% of the energy

consumed is obtained from non commercial traditional sources.

45 51 23 10


Question 1

At present, nearly --------% of the energy consumed is obtained from non commercial traditional sources.

45 51 23 10


Question 2

The highest user of commercial energy is

Agriculture Transport Household Industry


Question 3

In terms of generation of power – contribution, is the maximum

Hydel Nuclear Thermal Others


Question 4

NTPC stands for

National Thermal Power Corporation National Tidal Power Corporation National Theological Power Corporation National Talent and Potential Corporation


Question 5

In terms of overseas shipping tonnage, India ranks

10th 15th

20th

17th


Question 6

Our postal network is ----- in the world

Among the largest network Fifth smallest Tenth largest Tenth smallest


Question 7

Who is regulatory authority for telecom in India?

SEBI TRAI MTNL BSNL


Question 8

When too much of money chases too few goods, the resulting inflation is called

Deflation Demand-pull inflation Cost-push inflation Stagflation


Question 9

The combined phenomenon of stagnation and inflation is called ---

Demand-pull inflation Cost-push inflation Money inflation Stagflation


Question 10

When price are falling continuously, the phenomenon is called

Inflation Stagflation Deflation Reflation


Question 11

The difference between the export and import will have to be settled

in gold through a foreign currency accepted as a

medium of exchange both (a) and (b) either (a) and (b)


Question 12

Visible’ items of exports and imports

are these which are physically import and exported

are material imports and exports do not enter into the account of trade balance both (a) and (b)


Question 12

Visible’ items of exports and imports are these which are physically import and

exported are material imports and exports do not enter into the account of trade balance both (a) and (b)


Question 13

The balance of trade is unfavorable

when the value of export is greater than imports

when the value of imports is greater than export

when the value of exports and imports are equal

only when there is much greater difference between exports and imports


Question 13

The balance of trade is unfavorable when the value of export is greater than

imports when the value of imports is greater than

export when the value of exports and imports are

equal only when there is much greater difference

between exports and imports


Question 14

Which one of the following items is the odd one among visible items?

gold silver Merchandise interest on loans


Question 14

Which one of the following items is the odd one among visible items? gold silver Merchandise interest on loans


Question 15

In which of the following plan periods the balance of payments position had surplus?

first plan period second plan period third plan period fifth plan period


Question 15

In which of the following plan periods the balance of payments position had surplus? first plan period second plan period third plan period fifth plan period


Question 16

Devaluation means

reducing the value of foreign currency reducing the value of local currency no change in the value of local currency none of the above


Question 16

Devaluation means reducing the value of foreign currency reducing the value of local currency no change in the value of local currency none of the above


Question 17

As percent of GDP India’s external debt was --------------------- in 2005-06

12% 15.8% 13% 10.6%


Question 17

As percent of GDP India’s external debt was --------------------- in 2005-06 12% 15.8% 13% 10.6%


Question 18

Debt- service payment means returning of principal returning of interest returning of principal and interest none of the above

THE END

Infrastructural Challenges, Inflation, Balance of Payment,

External Debt & Economic Reform in India

infrastructural challenges, inflation, balance of payment ... · disequilibrium in which a...

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