BB0029 – Economic Reforms Process In India

Feb drive 2011

Bachelor of Business Administration-BBA Semester 6

BB0029 – Economic Reforms Process In India – 4 Credits

(Book ID: –B0188)

Assignment Set- 1 (60 Marks)

Note: Each question carries 10 Marks. Answer all the questions.

Q.1 What are the factors that characterize underdevelopment.

Ans : There are so many causes of under development, some of those discuss here. Causes of under development are not same in all under developing nation states, somewhere corruption is the major cause, somewhere lack in resources are the major cause, and somewhere wrong policies are the major cause of under development. But the most common cause of under development is the dependency upon developed countries, and terrorism.

1. Dependency theory:

According to dependence theories, the cause of underdevelopment is the dependence on industrialized countries while internal factors of developing countries are considered irrelevant or seen as symptoms and consequences of dependence. The development of industrialized countries and the underdevelopment of developing countries are parts of one historical process. Developing countries are dependent countries.

2. Corruption:

Corruption defined as 'the abuse of public power for personal ends' has always existed. During recent decades, however, it has grown both in terms of geographic extent and intensity. Since the mid 1970s, it has infiltrated virtually every country in the world. It was hoped that the easing of political and economic restrictions that characterized the 1990s after the end of the Cold War would have gone some way to reducing this phenomenon. Through increased openness resulting from political pluralism and the freedom of the press, the process of democratization should, under normal circumstances, mobilize efforts to overcome corruption.

3. Political corruption:

In broad terms, political corruption is when government officials use their governmental powers for illegitimate private gain. Misuse of government power for other purposes, like repression of political opponents and general police brutality, is not considered political corruption. Illegal acts by private persons or corporations not directly involved with the government is not considered political corruption either. Illegal acts by officeholders constitute political corruption only if the acts are directly related to their official duties.

4. Political in-justice:

Political injustice involves the violation of individual liberties, including the denial of voting rights or due process, infringements on rights to freedom of speech or religion, and inadequate protection from cruel and unusual punishment. Such injustice often stems from unfair procedures, and involves political systems in which some but not others are allowed to have voice and representation in the processes and decisions that affect them.

5. Economic in-justice:

Economic injustice involves the state's failure to provide individuals with basic necessities of life, such as access to adequate food and housing, and its maintenance of huge discrepancies in wealth. In the most extreme cases of misdistribution, some individuals suffer from poverty while the elite of that society live in relative luxury. Such injustice can stem from unfair hiring procedures, lack of available jobs and education, and insufficient health care.

6. Over population:

It seems that developed and industrialized countries undergo a decrease in population; therefore, underdeveloped countries should not be initiating birth control programs with the hope of developing economically.

Q.2 What are the consequence of the licensing policy in India.

Ans : Licensing policy Raj refers to the elaborate licences, regulations and accompanying red tape that were required to set up and run businesses in India between 1947 and 1990. Licensing policy are  regulated under the Industries Development Regulation Act 1951. At present Industrial Licensing for manufacturing is required in case of :-

• Industries under compulsory licensing
• Manufacture of item reserved for SSI sector by non SSI units
• Project location attracts locational restrictions
• Compulsory Licensing

Following industries require compulsory industrial licence under the provisions of I(D&R) Act, 1951.

• Distillation and brewing of alcoholic drinks.
• Cigars and cigarettes of tobacco and manufactured tobacco substitutes;
• Electronic Aerospace and defence equipment: all types;
• Industrial explosives, including detonating fuses, safety fuses, gun powder, nitrocellulose and matches;
• Hazardous chemicals;
• Hydrocyanic acid and its derivatives
• Phosgene and its derivatives
• Isocyanates and di-isocyanates of hydrocarbon, not elsewhere specified (example: Methyl Isocyanate).
• Large or medium industries undertaking manufacture of items reserved for SSI  units

The Government has reserved certain items for exclusive manufacture in the small scale sector. Non-small scale units can undertake the manufacture of items reserved for small scale sector, only after obtaining an industrial licence. In such cases, the non-small scale unit is required to undertake an obligation to export 50% of the production of SSI reserved items.

Locational Restrictions

Industrial undertakings are free to select the location of their projects. Industrial licence is however required if the proposed location is within 25 km of standard urban area limits of 23 cities having a population of one million as per 1991 Census. In Gujarat, this provision is applicable in the case of 3 cities namely Ahmedabad, Vadodara and Surat.

The Locational restriction however does not apply:

• If the unit were to be located in an area designated as an “industrial area” before the 25th July, 1991.
• In the case of Electronics, Computer software and Printing and any other industry, which may be notified in future as “non polluting industry”.
• The location of industrial units is subject to applicable local zoning and land use regulations and environmental regulations.

Procedure for obtaining Industrial Licence

Industrial licence is granted by the Secretarial of Industrial Assistance (SIA) on the recommendation of the Licensing Committee. For the purpose, application in the prescribed form (Form FC-IL) accompanied by a crossed demand draft of Rs.2,500/- may be submitted to PR&C Section in SIA.

Delicensed Industries

Industries exempted from the provisions of Industrial Licence are required to file Industrial Entrepreneur’s Memorandum (IEM)

 Q.3 What is the implication of making rupee fully convertible on capital account.

Ans :  Capital account convertibility :

To put is simply, capital account convertibility (CAC) or a floating exchange rate  means the freedom to convert local financial assets into foreign financial assets and vice versa at market determined rates of exchange. This means that capital account convertibility allows anyone to freely move from local currency into foreign currency and back. It refers to the removal of restraints on international flows on a country's capital account, enabling full currency convertibility and opening of the financial system.

Implication of making rupee fully convertible on capital account:

A capital account refers to capital transfers and acquisition or disposal of non-produced, non-financial assets, and is one of the two standard components of a nation's balance of payments. The other being the current account, which refers to goods and services, income, and current transfers.

Capital account convertibility is considered to be one of the major features of a developed economy. It helps attract foreign investment. It offers foreign investors a lot of comfort as they can re-convert local currency into foreign currency anytime they want to and take their money away.

Capital account and, by extension, full convertibility of the rupee has emerged as an often debated issue in the context of the liberalization process in India. It is worth nothing, at the outset, that India is not alone in its endeavour to make its currency convertibility, nor is it the only country which is facing the daunting task of overcoming several hurdles on its way to full currency convertibility. Indeed, only the developed economics of North America, Western Europe, Japan and Australia have joined the race towards full convertibility. A number of Latin American, Central European and Asian Countries, however, have joined the race towards full convertibility. Aside from India, the list of these countries include Argentina, China, Chile, Columbia, Indonesia, Malaysia, Philippines, Republic of Korea and Thailand. Importantly, these countries are not at the same stage of currency convertibility. The Korean currency, for example, is much convertible than the Chinese currency. Indeed, it is important to note at the outset that the issue is not a matter of choice between convertibility and non-convertibility. There exists a wide spectrum between these two extremes, and India and the aforementioned countries lie at various points of this spectrum. The important issue, in other words, is to decide the extent to which a currency (say, the rupee)will be convertible at a point of time, and the pace at which it will attain higher levels of convertibility in the future. In order to appreciate the meaning and the implication of currency convertibility, however, one has to first take into consideration two different aspects. A currency, it has to be noted, can be convertible on the current account of balance of payments (BOP), and/or on the capital account of BOP. The currency is deemed fully convertible if it is convertible on both these accounts. A clear understanding of the notion of convertibility, therefore, entails an understanding of the current and capital accounts of BOP.

Q.4 Discuss the implication of the import substitution policy.

Ans :  Import substitution policy:

These are policies that attempt to reduce foreign dependency of a country's economy through local production of food and industrial products. Import substitution policies advocate replacing imports with domestic production. It is based on the premise that a country should attempt to reduce its foreign dependency through local production of goods, mainly industrial products. Many Latin American countries implemented import substitution policies with the intention of becoming more self-sufficient and less vulnerable to adverse terms of trade.

The import substitution strategy is often complemented with state-led economic development through nationalization, subsidization of vital industries and agriculture.

Implication of the import substitution policy:

import substitution, economic policy adopted in most developing countries from the 1930s to the 1980s to promote industrialization by protecting domestic producers from the competition of imports. Protection—in the form of high tariffs or the restriction of imports through quotas—was applied indiscriminately, often to inherently high-cost industries that had no hope of ever becoming internationally competitive. After the early stages of import substitution, protected new industries tended to be very intensive in the use of capital and especially of imported capital goods—i.e., tangible items such as buildings, machinery, and equipment produced and used in the production of other goods and services.

With high levels of protection for domestic industry, and with exchange rates that were often maintained at unrealistic levels (usually in an effort to make imported capital goods “cheap”), the experience of most countries practicing import substitution was that export earnings grew relatively slowly. The simultaneous sharp increase in demand for imported capital goods (and for raw materials and replacement parts as well) led to critical foreign-exchange shortages, eventually forcing most countries to reduce imports. The cutbacks in imports in turn reduced growth rates, leading in many cases to recessions.

This result led to the view that economic stagnation was caused primarily by a shortage of foreign exchange with which to buy essential industrial inputs. However, contrasting the experience of countries that persisted in policies of import substitution with those that followed alternative policies subsequently demonstrated that a foreign-exchange shortage was a barrier to growth only within the context of the protectionist policies adopted and was not inherently a barrier to the development process itself.

Advantages and disadvantages :

Whilst import substitution policies might create jobs in the short run, as domestic producers replace foreign producers, economics theory would suggest that in the long run output and growth will be lower than it would otherwise have been. This is because import substitution denies the country the benefits to be gained from specialisation. The theory of comparative advantage shows how countries will gain from trade. Moreover, protectionism leads to dynamic inefficiency. Domestic producers have no incentive from foreign competitors to reduce costs or improve products. Import substitution can impede growth through poor allocation of resources, and its effect on exchange rates harms exports.

Q.5 Discuss the securities scam of 1992 that affected the stock markets.

Ans : Harshad Mehta: Rs 5,000 crore: The making of the 1992 security scam:

Mehta, along with his associates, was accused of manipulating the rise in the Bombay Stock Exchange (BSE) in 1992. They took advantage of the many loopholes in the banking system and drained off funds from inter-bank transactions. Subsequently, they bought huge amounts of shares at a premium across many industry verticals causing the Sensex to rise dramatically. However, this was not to continue. The exposure of Mehta's modus operandi led banks to start demanding their money back, causing the Sensex to plunge almost dramatically as it had risen. Mehta was later charged with 72 criminal offences while over 600 civil action suits were filed against him. Significantly, the Harshad Mehta security scandal also became the flavor of Bollywood with Sameer Hanchate's film Gafla.

The 1992 security scam and its exposure:

Mehta's illicit methods of manipulating the stock market were exposed on April 23, 1992, when veteran columnist Sucheta Dalal wrote an article in India's national daily The Times of India. Dalal’s column read: “The crucial mechanism through which the scam was effected was the ready forward (RF) deal. The RF is in essence a secured short-term (typically 15-day) loan from one bank to another. Crudely put, the bank lends against government securities just as a pawnbroker lends against jewelers. The borrowing bank actually sells the securities to the lending bank and buys them back at the end of the period of the loan, typically at a slightly higher price.” In a ready-forward deal, a broker usually brings together two banks for which he is paid a commission. Although the broker does not handle the cash or the securities, this was not the case in the prelude to the Mehta scam. Mehta and his associates used this RF deal with great success to channel money through banks.

Ketan Parekh: Rs 1,000 crore

Ketan Parekh followed Harshad Mehta’s footsteps to swindle crores of rupees from banks. A chartered accountant he used to run a family business, NH Securities. Ketan however had bigger plans in mind. He targeted smaller exchanges like the Allahabad Stock Exchange and the Calcutta Stock Exchange, and bought shares in fictitious names.

His dealings revolved around shares of ten companies like Himachal Futuristic, Global Tele-Systems, SSI Ltd, DSQ Software, Zee Telefilms, Silverline, Pentamedia Graphics and Satyam Computer (K-10 scrips).

Ketan borrowed Rs 250 crore from Global Trust Bank to fuel his ambitions. Ketan alongwith his associates also managed to get Rs 1,000 crore from the Madhavpura Mercantile Co-operative Bank.

According to RBI regulations, a broker is allowed a loan of only Rs 15 crore (Rs 150 million). There was evidence of price rigging in the scrips of Global Trust Bank, Zee Telefilms, HFCL, Lupin Laboratories, Aftek Infosys and Padmini Polymer.

Q.6 What has been the impact of globalization on the Indian Economy.

Ans : Impact of globalization on the Indian Economy :

Indian economy had experienced major policy changes in early 1990s. The new economic reform, popularly known as, Liberalization, Privatization and Globalization (LPG model) aimed at making the Indian economy as fastest growing economy and globally competitive. The series of reforms undertaken with respect to industrial sector, trade as well as financial sector aimed at making the economy more efficient.

With the onset of reforms to liberalize the Indian economy in July of 1991, a new chapter has dawned for India and her billion plus population. This period of economic transition has had a tremendous impact on the overall economic development of almost all major sectors of the economy, and its effects over the last decade can hardly be overlooked. Besides, it also marks the advent of the real integration of the Indian economy into the global economy.

Now that India is in the process of restructuring her economy, with aspirations of elevating herself from her present desolate position in the world, the need to speed up her economic development is even more imperative. And having witnessed the positive role that Foreign Direct Investment (FDI) has played in the rapid economic growth of most of the Southeast Asian countries and most notably China, India has embarked on an ambitious plan to emulate the successes of her neighbors to the east and is trying to sell herself as a safe and profitable destination for FDI.

Globalization has many meanings depending on the context and on the person who is talking about. Though the precise definition of globalization is still unavailable a few definitions are worth viewing, Guy Brainbant: says that the process of globalization not only includes opening up of world trade, development of advanced means of communication, internationalization of financial markets, growing importance of MNCs, population migrations and more generally increased mobility of persons, goods, capital, data and ideas but also infections, diseases and pollution. The term globalization refers to the integration of economies of the world through uninhibited trade and financial flows, as also through mutual exchange of technology and knowledge. Ideally, it also contains free inter-country movement of labor. In context to India, this implies opening up the economy to foreign direct investment by providing facilities to foreign companies to invest in different fields of economic activity in India, removing constraints and obstacles to the entry of MNCs in India, allowing Indian companies to enter into foreign collaborations and also encouraging them to set up joint ventures abroad; carrying out massive import liberalization programs by switching over from quantitative restrictions to tariffs and import duties, therefore globalization has been identified with the policy reforms of 1991 in India.