Feb drive 2011
Bachelor of Business
Administration-BBA Semester 6
BB0029 - Economic
reforms process in India - 4 Credits
Marks - 60
Note: Answer all questions. Kindly note that answers for 10 marks
questions should be approximately of 400 words. Each question is followed by
evaluation scheme.
Q. 1 Explain privatization through disinvestment in India
Ans : Disinvestment Definition:-
Disinvestment involves the sale of equity and bond capital invested by
the government in PSUs through securitization. Disinvestment can also be
defined as the action of an organisation (or government) selling or liquidating
an asset or subsidiary. It is also referred to as ‘divestment’ or
‘divestiture.’ Securitization is a structured financial process which involves
pooling and repackaging of cash flow producing assets into securities that are
then sold to investors. The government and not the PSU’s receive money from
disinvestment. The disinvested shares are traded in the stock markets. In India
Process of privatization through disinvestment:-
Objectivity & transparency were the key requirements in the whole
disinvestment process. As it was the first case of disinvestment for the Indian
Government, the disinvestment process evolved as the transaction progressed.
• After the issue of the advertisement for inviting bids from the
potential partners, it took around 10 months to complete the disinvestment
process.
• The advisors carried out a review of the company and gave advice on the
extent, mode and methodology for the disinvestment. The issues requiring action
by the management/ approval of the GOI were identified and steps taken to
ensure that the process moved smoothly and shareholder value was maximized.
• The Cabinet gave its approval and the necessary agreement was entered
into with the strategic partner in December 1999. After the full payment
against the shares and execution of share transfer agreement, the management of
the company was handed over to the strategic partner in July 2000.
The cornerstone of the case for privatization is the concept that private
ownership leads to better use of resources and their more efficient allocation.
1.Throughout the world, the preference for market economy received a
boost after it was realized that the State could no longer meet the growing
demands of the economy and the State shareholding inevitably had to come down.
The State in business argument thus lost out and also the presumption that
direct and comprehensive control over the economic life of citizens from the
Central government can deliver results better than those of a more liberal
system that directly responds according to the market driven forces.
2. Another reason for adoption of privatization policies around the globe
has been the inability of the Governments to raise high taxes, pursue deficit
inflationary financing and the development of money markets and private
entrepreneurship.
Further, technology and W.T.O. commitments have made the world a global
village. Unless industries, including public industries do not quickly
restructure, they would not be able to survive. Public enterprises, because of
the nature of their ownership, can restructure only slowly and hence the logic,
of privatization gets stronger.
Q. 2 Briefly discuss the reforms in the banking sector during 1992-2001
Ans : Various reforms are:-
1.Reduced CRR and SLR :
The Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) are
gradually reduced during the economic reforms period in India India
2.Deregulation of Interest Rate :
During the economics reforms period, interest rates of commercial banks
were deregulated. Banks now enjoy freedom of fixing the lower and upper limit
of interest on deposits. Interest rate slabs are reduced from Rs.20 Lakhs to
just Rs. 2 Lakhs. Interest rates on the bank loans above Rs.2 lakhs are full
decontrolled. These measures have resulted in more freedom to commercial banks
in interest rate regime.
3.Fixing prudential Norms :
In order to induce professionalism in its operations, the RBI fixed
prudential norms for commercial banks. It includes recognition of income
sources. Classification of assets, provisions for bad debts, maintaining
international standards in accounting practices, etc. It helped banks in
reducing and restructuring Non-performing assets (NPAs).
4.Introduction of CRAR :
Capital to Risk Weighted Asset Ratio (CRAR) was introduced in 1992. It
resulted in an improvement in the capital position of commercial banks, all
most all the banks in India has reached the Capital Adequacy Ratio (CAR) above
the statutory level of 9%.
5.Operational Autonomy :
During the reforms period commercial banks enjoyed the operational
freedom. If a bank satisfies the CAR then it gets freedom in opening new
branches, upgrading the extension counters, closing down existing branches and
they get liberal lending norms.
6.Banking Diversification :
The Indian banking sector was well diversified, during the economic
reforms period. Many of the banks have stared new services and new products.
Some of them have established subsidiaries in merchant banking, mutual funds,
insurance, venture capital, etc which has led to diversified sources of income
of them.
7.New Generation Banks :
During the reforms period many new generation banks have successfully
emerged on the financial horizon. Banks such as ICICI Bank, HDFC Bank, UTI Bank
have given a big challenge to the public sector banks leading to a greater
degree of competition.
8.Improved Profitability and Efficiency :
During the reform period, the productivity and efficiency of many
commercial banks has improved. It has happened due to the reduced
Non-performing loans, increased use of technology, more computerization and
some other relevant measures adopted by the government.
Q.3 Discuss the impact of convertibility both in current account and
capital account.
Ans : Explanation of impact of convertibility in current account:-
current account convertibility means that any company that wants to
conduct business with outside companies (like TCS, Infy etc.) can convert the
dollar payment into Rupee payment or pay in terms of dollar itself. This is
fully allowed in India India of persons
resident in India or assets
or liabilities in India of
persons resident outside India
Current Account Transactions covers the following.
• All imports and exports of merchandise
• Invisible Exports and Imports (sale/purchase of services
• Inward private remittances to & fro
• Pension payments (to & fro)
• Government Grants (both ways)
Explanation of impact of convertibility in current account:-
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.
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.
At the same time, capital account convertibility makes it easier for
domestic companies to tap foreign markets. At the moment, India has current
account convertibility. This means one can import and export goods or receive
or make payments for services rendered. However, investments and borrowings are
restricted.
Q. 4 Write notes on VAT, MODVAT and Service Tax.
Ans : Explanation of Vat:-
The basic principles of VAT are contained in this document. It indicates
how VAT works and with whom the responsibility for payment lies.
VAT is a tax on consumer spending. It is collected by VAT-registered
traders on their supplies of goods and services effected within the State, for
consideration, to their customers. Generally, each such trader in the chain of
supply from manufacturer through to retailer charges VAT on his or her sales
and is entitled to deduct from this amount the VAT paid on his or her
purchases.
The effect of offsetting VAT on purchases against VAT on sales is to
impose the tax on the added value at each stage of production ? hence
Value-Added Tax. For the final consumer, not being VAT-registered, VAT simply
forms part of the purchase price.
Explanation on MODVAT:-
Modvat stands for "Modified Value Added Tax". It is a scheme
for allowing relief to final manufacturers on the excise duty borne by their
suppliers in respect of goods manufactured by them. eg ABC Ltd is a
manufacturer and it purchases certain components from PQR Ltd for use in
manufacture. POR Ltd would have paid excise duty on components manufactured by
it and it would have recovered that excise duty in its sales price from ABC
Ltd. Now, ABC Ltd has to pay excise duty on toys manufactured by it as well as
bear the excise duty paid by its supplier, PQR Ltd. This amounts to multiple
taxation. Modvat is a scheme where ABC Ltd can take credit for excise duty paid
by PQR Ltd so that lower excise duty is payable by ABC Ltd.The scheme was first
introduced with effect from 1 March 1986. Under this scheme, a manufacturer can
take credit of excise duty paid on raw materials and components used by him in
his manufacture.
Explanation on Service tax:-
Service Tax is a form of indirect tax imposed on specified services
called "taxable services". Service tax cannot be levied on any
service which is not included in the list of taxable services. Over the past
few years, service tax been expanded to cover new services. The objective
behind levying service tax is to reduce the degree of intensity of taxation on
manufacturing and trade without forcing the government to compromise on the
revenue needs. The intention of the government is to gradually increase the
list of taxable services until most services fall within the scope of service
tax. For the purpose of levying service tax, the value of any taxable service
should be the gross amount charged by the service provider for the service
rendered by him.
Service Tax was first brought into force with effect from 1 July 1994.
All service providers in India, except those in the state of Jammu and Kashmir,
are required to pay a Service Tax in India.
Q. 5 Do you think poverty can be reduced through policies of inclusive
growth? Justify
Ans : Yes poverty can be
reduced through inclusive growth.
Justification:-
By definition, inclusive growth entails the equitable allocation of
resources in order to generate benefits that can be incurred by all sectors of
the society, thus alleviating poverty and inequality. Inclusive growth entails
the equitable allocation of resources in order to generate benefits that can be
incurred by all sectors of the society, thus alleviating poverty and
inequality. However, is inclusive growth necessarily pro-poor? And does it
ensure reducing the troubles of the most disadvantaged while benefiting
everyone? There is yet no clear coherent measure to combine all the dimensions
of inclusive growth that involves how the elements of inclusiveness relate to
each other and ultimately how they can collectively induce growth.
Rafael Ranieri from the Ministry of Planning, Budget and Management,
Brazil presented a paper titled “Inclusive growth: Building up a concept” at
the GDN 14th Annual Conference. He tackled the state of the debate on the
concepts of inclusive growth and pro-poor growth; highlighting distinctive
features of the concept of inclusive growth and contributing to the design of
more effective policies through addressing the main issues that can take it
further. He argues that, unlike pro-poor growth concepts, inclusive growth is
not limited to income outcomes but is rather concerned with the process of
growth. In other words, people must actively participate in the growth process
for it to be inclusive.
Greater clarity about the meaning of inclusive growth is important to
determining clearer policy objectives and thus to designing more effective
policies to create more inclusive societies. In their paper, Ranieri and Raquel
A. Ramos from the Centre d’Economie de Paris Nord, France emphasize that actual
manifestation of inclusion in public policy make a country more resilient to
change in the long term, taking into consideration the distinct nature of
national concerns and social forces in each country.
1. Opportunity:
Is the economy generating more and varied ways for people to earn a
living and increase their incomes over time?
2. Capability:
Is the economy providing the means for people to create or enhance their
capabilities in order to exploit available opportunities?
3. Access:
Is the economy providing the means to bring opportunities and
capabilities together?
4. Security:
Is the economy providing the means for people to protect themselves
against a temporary or permanent loss of livelihood
I mean it depends on a number of factors, also including the motivation
and performance of the individual himself. In this sense, it is unreasonable to
hold the growth or development process itself entirely accountable for the
result. It is more appropriate to assess the effectiveness of the process in
terms of whether or not it gives a large
number of people legitimate opportunities to earn incomes.
Q. 6 Has the FDI flows in the current times helped India? Elaborate
Ans : Yes FDI flows in
current times helped India
Explanation:-
FDI inflows to India witnessed significant moderation in 2010-11 while
other EMEs in Asia and Latin America received large inflows. This had raised
concerns in the wake of widening current account deficit in India beyond the
perceived sustainable level of 3.0 per cent of GDP during April-December 2010.
This also assumes significance as FDI is generally known to be the most stable
component of capital flows needed to finance the current account deficit.
Moreover, it adds to investible resources, provides access to advanced
technologies, assists in gaining production know-how and promotes exports.
A perusal of India’s FDI policy vis-à-vis other major emerging market
economies (EMEs) reveals that though India’s approach towards foreign investment
has been relatively conservative to begin with, it progressively started
catching up with the more liberalised policy stance of other EMEs from the
early 1990s onwards, inter alia in terms of wider access to different sectors
of the economy, ease of starting business, repatriation of dividend and profits
and relaxations regarding norms for owning equity. This progressive
liberalisation, coupled with considerable improvement in terms of macroeconomic
fundamentals, reflected in growing size of FDI flows to the country that
increased nearly 5 fold during first decade of the present millennium.
Though the liberal policy stance and strong economic fundamentals appear
to have driven the steep rise in FDI flows in India over past one decade and
sustained their momentum even during the period of global economic crisis
(2008-09 and 2009-10),the subsequent moderation in investment flows despite
faster recovery from the crisis period appears somewhat inexplicable. Survey of
empirical literature and analysis presented in the paper seems to suggest that
these divergent trends in FDI flows could be the result of certain
institutional factors that dampened the investors' sentiments despite continued
strength of economic fundamentals. Findings of the panel exercise, examining
FDI trends in 10 select EMEs over the last 7 year period, suggest that apart
from macro fundamentals, institutional factors such as time taken to meet
various procedural requirements make significant impact on FDI inflows. Foreign
direct investment (FDI) or foreign investment refers to the net inflows of investment to acquire a lasting management
interest (10 percent or more of voting stock) in an enterprise operating in an economy other than
that of the investor. It is the sum of equity capital, reinvestment of
earnings, other long-term capital, and short-term capital as shown in the
balance of payments. It usually involves participation in management,
joint-venture, transfer of technology and expertise. There are two types of
FDI: inward foreign direct investment and outward foreign direct investment,
resulting in a net FDI inflow (positive or negative) and "stock of foreign
direct investment", which is the cumulative number for a given period.
Direct investment excludes investment through purchase of shares. FDI is one
example of international factor movement. An investment abroad, usually where
the company being invested in is controlled by the foreign corporation.
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