This article deals with ‘Merger and Consolidation of Public Sector Banks.’ This is part of our series on ‘Economics’ which is important pillar of GS-3 syllabus . For more articles , you can click here .
2016 : At Gyan Sangam II , it was decided that since
Public Sector Banks aren’t performing well, there is need to consolidate banks by merging small banks with
State Bank of India, Punjab National Bank , Bank of Baroda , Canara Bank
etc. as Anchor Banks.
Crux : government is working on a consolidation
of public sector banks with a view to creating 3-4 global-sized banks and reducing the number of state-owned banks to
Mergers happened till now
2017 : SBI’s 5 Associated Banks & Bhartiya Mahila Bank merged with SBI .
2019 : Vijaya & Dena Bank merged with Bank of Baroda .
2019 : Oriental Bank of Commerce and United Bank of India merged into Punjab National Bank .
2019 : Syndicate Bank merged with Canara Bank .
2019 : Andhra Bank and Corporation Bank merged with Union Bank of India .
2019 : Allahabad Bank merged with Indian Bank .
Points in favour of Merger of Banks
(Economic Survey 2020) It will help to place more Indian Banks in the top 100 banks
of the world . It is sine quo none to have atleast
6-8 top-100 banks of the world in India, if we want to make India a
financial hub of Asia and channelize global savings towards India to make
India $ 5 trillion economy. Currently , India has just one bank in top 100
banks of the world (SBI = 55 Rank) while China has 18.
Earlier State Bank of Saurashtra (2008) & Indore (2010) merger into SBI was successful . Hence, previous experience is pleasant.
Larger banks provide financial stability and act as engines of growth in times of trouble. Eg Chinese Banks in 2008 .
It will lead to branch rationalisation and reduce operating costs .
Larger Public Sector Banks can support the corporate sector better in overseas acquisitions as done by Chinese Banks.
For compliance with BASEL III Norms, if big bank like Consolidated SBI issue shares , they can fetch good response .
Enhanced geographical reach: For example, Vijaya Bank has strength in the South while Bank of Baroda and Dena Bank had a stronger base in Western India. That would mean wider access for both the proposed new entity and its customers.
Points against Merger of Banks
Mergers eat up a lot of top management time . At a time when Public Sector Banks need razor focus to deal with NPA menace , mergers will be very distracting .
Large banks aren’t necessarily efficient banks : The quest to create an Indian banking giant is old one when world looked in awe at the Japanese banking giants . But their big size emboldened them to do excessive lending and ultimately they had to be bailed out by taxpayers money .
The merged State Bank of India is likely to be five times larger than its nearest competitor and can stifle the competition .
Setback to corporate governance :The merger sends out a poor signal of a dominant shareholder (the government) dictating decisions that impact the minority shareholders .
Banks will lose their regional identities .
Political Implications : Kerala Legislative Assembly has passed resolution that State Bank of Travancore’s merger with SBI will affect state’s economic growth negatively.
Protests: Addressing the concerns of unions and shareholders will be challenging.
Harmonization of Technology: It is a big challenge as various banks are currently operating on different technology platforms.
Best way to Merge : Merge banks that are complementary . Eg : Bank of Baroda with Dena and Vijaya Bank so that lay offs aren’t large .
Privatisation of Banks
Government is also reducing its
shareholding to less than 50% in a Public Sector Banks .
Government owned UTI Mutual
Fund applied for UTI Bank License in 90s => Scam => UTI Bank privatised into Axis
2018 : IDBI Bank Privatisation
Government had 81% ownership in
IDBI Bank Limited. But Unlike in the
other public sector banks, the government could reduce its stake in IDBI
Bank below 50%, because this bank
is not governed by the Bank Nationalisation Act, 1969 .
: Government was unable to find suitable private sector buyer for IDBI Bank.
Hence, Government has started discussions with LIC to pick up a controlling stake of
(from around 11% ) in a deal of around Rs 10,000 crore .
March 2019 : RBI changed categorisation of
IDBI to private
lender following acquisition of majority stake by LIC
Budget 2020 : Finance
Minister announced that Government will sell remainder 41% shares of IDBI
Bank as well.
– Government has not to worry about BASEL-recapitalization of IDBI. – LIC can market its insurance policies to IDBI consumers (using bancassurance model) .
– IDBI Bank is the worst performing state-owned lender with NPAs as on March 31, 2018 of 28% . – IRDAI do not permit LIC to raise its shareholding in a single listed entity beyond 15% to ensure that the Corporation does not put policyholders’ money at risk, and has a diversified portfolio. – Funds at the disposal of LIC are policyholders’ money. Using those funds to buy a badly performing bank will deprive them from optimal returns .
This article deals with ‘History of Banking System.’ This is part of our series on ‘Economics’ which is important pillar of GS-3 syllabus . For more articles , you can click here .
that channel funds between surplus and deficit agents are called financial intermediaries.
These include Banks, Insurance companies , pension funds, mutual funds etc. .
Type of Banks
Scheduled Commercial Banks
When RBI is satisfied
that a bank has (Paid Up Capital + Reserves =) Minimum 5 Lakhs & it is not conducting business in a
manner harmful to its depositors, then such bank is listed in the 2nd Schedule
of RBI Act, and it is known as a Scheduled Bank.
Are bound to
maintain CRR with RBI and maintain SLR as mandated by the RBI .
Not required to
maintain SLR and CRR .
benefit , they are eligible to borrow
funds via Liquidity Adjustment Facility (Repo and Bank Rates)
depends on RBI’s discretion to allow them to borrow via this mechanism .
subdivided into two parts
1) Scheduled Commercial Banks e.g. SBI, Axis , PNB, ICICI Bank
2) Schedule Cooperative Banks like Haryana Rajya Sahakari
of cooperative banks are non-Schedule Banks.
Topic : History of Banking System in India
History of Banking System in India before Independence
Present Banking System was
introduced in the western world and was later introduced in India during
the British Raj.
History of Banking system in India goes to 19th
century (then known as Agency Houses ).
During British Times, there
were two type of Banks
– East India Company established Banks in 3 Presidencies 1. Bengal : 1806 2. Bombay : 1840 3. Madras : 1843 – 1921 : These three merged to form Imperial Bank of India . Later, it was nationalised and became SBI . It targeted British Army officers , Civil Servants & Judges.
– These were setup by the Indians , parallel to the British Banks. – First Indian Bank was Allahabad Bank(1856). – Other – Bank of Baroda (backed by Gaekwads of Baroda) , Punjab National Bank (role was played by Lala Lajpat Rai in it’s formation) , Punjab & Sind Bank (by Bhai Vir Singh) . – These banks targeted big merchants particularly raw material exporters
But neither helped in financial inclusion .
Birth of RBI
By the early 1930s, there were large number of banks
operating in India . They were registered under the Company Law and
regulations on this sector were not present. But problem arose during The Great
which started in USA . Due to this, demand of Indian exports in the
foreign market decreased and Indian
merchants started to default .
Consequently , large number of Indian banks collapsed.
deal with such situation and bring banking sector under regulation, British Indian government setup Reserve
Bank of India in 1934 under the recommendations of Hilton
Young Royal Commission.
History after Independence
important steps were taken by Government of India
Nationalisation of RBI
Banking Regulation Act,1949 : It empowered RBI to control
& regulate Banking sector in India .
Nationalisation of Banks
Nationalisation of banks : SBI Case (1st Round )
Bank was nationalised & renamed SBI .
same time, Nationalisation of Insurance Companies also done)
were nationalised & made subsidiaries to State Bank of India
subsidiary Banks were merged (State
Bank of Bikaner & State Bank of Jaipur) leading to the formation of State Bank of Bikaner & Jaipur
Bank of Saurashtra merged with Parent
Bank of Indore merged with Parent Bank .
Till recent times
There were 5 subsidiaries of SBI 1. State Bank of Bikaner & Jaipur 2. State Bank of Hyderabad 3. State Bank of Mysore 4. State Bank of Patiala 5. State Bank of Travancore
subsidiaries merged into Parent Bank
Nationalisation of Banks : Except SBI (2nd Round)
14 Banks having deposits of more than ₹ 50 Crore were nationalised (2019 : 50 years
have passed i.e. Golden Jubilee of Nationalisation.)
1980 : 6 more banks Nationalised having
deposits more than ₹200 Crore .
Nationalised in 1969
Punjab National Bank, Canara Bank etc .
Nationalised in 1980
& Sind Bank, Vijaya Bank, Oriental Bank of Commerce etc.
Reasons of Nationalisation
To remove control &
concentration of economic power in the hands of few industrialists .
Due to misuse of funds by
Due to tendency of banks to ignore the needs
of small scale industrial sector & agriculture .
To remove concentration of
banking sector mostly in Urban areas .
Objectives after Nationalisation
To open more banks in rural
& semi urban areas & to collect saving from these areas .
To provide credit facilities
to areas defined as Priority Sector in economy.
Has the nationalisation of private banks benefitted India?
According to Economic Survey
(2020) , due to nationalisation of banks , allocation of banking
resources to rural areas, agriculture, and priority sectors have increased. For example in the period
Number of rural Bank branches
Credit to rural areas
Credit to agriculture
expanded forty-fold, reaching 13% of GDP from a starting point of 2% of
But Economic Survey (2020)
doubts whether these benefits were
entirely caused by Nationalization as the period also saw various other
events like green revolution, anti-poverty programmes (like Integrated
Rural Development Programme) and policies of RBI (such as RBI’s 4:1
Issues faced by Public Sector Banks due to Bank Nationalisation
Since government was the
majority shareholder of the banks, it started to give loans at populistic
‘Government Administered Interest
Rates’ which decreased the profitability of the
Banks were forced to give loans to fund unviable
projects based on
political considerations which increased
the NPAs of
Public Banks as the recovery of such loans was low. In 2019 public sector
banks reported NPAs of Rs. 7.4 lakh crore amounting to about 80 per cent of the NPAs of India’s banking system.
Public Sector Banks account
for 92.9% of the cases of bank fraud, a large majority (90%) were related
to advances, suggesting poor quality of screening and monitoring processes
for corporate lending adopted by Public Sector Banks.
PSBs perform poorly on Return-on-Assets (RoA),
Return-on-Equity (RoE) etc when compared with
Private Banks. Public Sector Banks are having negative RoA
Politicisation of Bank Boards happened with government
placing it’s favourites in the Board of Directors irrespective of their
knowledge and talent. This reduced the professionalism in the banks.
Due to above reasons, RBI feared that banks can collapse. Hence, it mandated high Cash Reserve Ratio (CRR) , reducing the funds at the disposal of
bank for loan purposes.
Large staff was hired in banks , even more than what was
required, to create government jobs. This led to unionization of staff and inefficient customer
services. Frequent hartals of bank employees were observed in the period
Side Topic : Number of Public Sector Banks Today
Public Sector Banks = 13 ( on July 2020 including Post Payment Bank).
Old Private Banks
All the Big Private Banks were nationalised.
But there were Small Private Banks whose deposits were less than limits and they were not nationalised.
These Banks are now called Old Private Banks .
There are 12 such banks in India .
These are Scheduled Banks and have to maintain Cash Reserve Ratio & Statutory Liquidity Ratio .
Examples : Catholic Syrian Bank, Dhanlaxmi Bank, Federal Bank, Jammu and Kashmir Bank etc. .
Narsimham Committee and (Rise of ) New Private Sector Banks
After the 1980
nationalization, Public Sector Banks had a 91% share in the national banking
market which has reduced to 70% in recent times. Reduced stake has been
absorbed by New Private Banks (NPBs) which came up in early 1990s after
liberalization. This brings us to the topic of New Private Banks .
Private Sector Banks
Balance of Payment crisis finally forced Govt. to set up a Committee for
Banking Sector Reforms under the former RBI Governor M Narsimham . He
Government should decrease its shareholding in Public Sector Banks.
The resources of the banks come from the general public and are held by the banks in trust that they are to be deployed for maximum benefit of the depositors. Even the government had no business to endanger the solvency, health and efficiency of the nationalised banks under the pretext of using banks, resources for economic planning, social banking, poverty alleviation, etc.
RBI should decrease CRR and SLR .
Priority Sector Lending (PSL) given to agriculture and Small Scale Industries (SSIs) should be phased out gradually as they had already grown to a mature stage . They don’t require any special support; two decades of interest subsidy were enough.
Govt. should not dictate interest rates to Banks .
Liberalize the branch expansion policy .
Allow entry of New Private Banks and New Foreign Banks.
This led to 3 Rounds of Banking Licenses
1st Round (1993-95)
10 licenses were given to open following banks. 1. ICICI 2. HDFC 3. Indus 4. DCB 5. UTI => later Axis bank 6. IDBI => now owned by LIC 7. Global Trust Bank => Merged with Oriental Bank #8-9-10: Bank of Punjab, Centurion Bank, Times Bank were merged into HDFC
2nd Round (2001-04)
2 licenses were given in 2nd Round 1. Kotak Mahindra 2. Yes Bank
3rd Round (2013)
Bimal Jalan Committee made selections: 1. Bandan Microfinance (A Microfinance company based in West Bengal) 2. IDFC (An infra finance NBFC based in Maharashtra). Later on, another NBFC “Capital First” merged so renamed into IDFC-First
Side Topic : Number of Private Banks in India
22 Presently ( after IDBI is privatised)
On Tap System of Banking License
Present System : Start & Stop System
RBI issues notification and
interested entities can apply at that time only..
Till now , 3 such rounds have
New Proposed : On Tap System
In this system , there will
be no deadline for application. No need to wait for notification.
When entity thinks that it is
fit to become Bank , they can approach RBI with application.
RBI has issued guidelines
regarding this too.
No one has applied for Banking License through this route yet .
Foreign Commercial Banks
In Nehruvian Socialist Economy there was disdain & apprehensions about
Foreign Banks. Only a handful of them were allowed to open branches. But,
Post-Narasimham-Reform, foreign banks approval policy was liberalized.
1991 : M Narsimham Committee recommended to allow Foreign
Banks on reciprocal basis . Government accepted this proposal.
There are 44 Foreign Banks in India
Foreign Bank has to first open Indian Subsidiary registered in
India under Companies Act .
Core Banking Solution
Core Banking Solution (CBS) is networking of branches, which enables Customers to operate
their accounts, and avail banking services from
any branch of theBank on CBS
network, regardless of where he maintains his account. The customer is no
more the customer of a Branch. He becomes the Bank’s Customer.
It has helped in converting
Branch Banking to Branchless Banking .
This marks end of article on “History of Banking System.’
Convertibility of Current Account & Capital Account
This article deals with ‘Convertibility of Current Account & Capital Account .’ This is part of our series on ‘Economics’ which is important pillar of GS-3 syllabus . For more articles , you can click here .
Why restrictions on Convertibility ?
Bank cant manage floating exchange rate regime all the time otherwise
Forex reserve will get empty. Hence
, quantitative restrictions are placed
on conversion of ₹ to
Two can be two type of
restrictions i.e. on Current Account & on Capital Account .
Current Account Convertibility
account convertibility means freedom to convert currency, both in terms of
outflows and inflows, for current transactions .
In case of India, Current Account is fully convertible (since 1994) & there are no
quantitative restrictions. This means, ₹ is fully convertible
into another currency for current account transactions & vice versa is also true .
Capital Account Convertibility
Full capital account convertibility means :
A foreign investor
can convert any amount of foreign
currency to Indian Rupee and invest in any asset in India without any restriction. This investor is
also able to sell the investment without any restriction, convert the
resulting Indian Rupee amount to a foreign currency and take it out of
investor can convert Indian Rupee to foreign currency and invest in any
asset abroad without any
Domestic investor can raise
any amount from External Market and convert it in India to invest that
amount in India.
₹ is not fully convertible on
capital account . But after the recommendations of the S.S.
Tarapore Committee (1997) on Capital Account Convertibility, India has
been moving in the direction of allowing full Capital Account
There are following
limitations on Capital Account Convertibility
Indian corporates are allowed
full convertibility upto $ 500
million per annum for oversea ventures .
Individuals are allowed to
invest in foreign assets, shares, etc., upto the level of $ 2,50,000 per
Liberalised Remittance Scheme (LRS)
LRS was started by Government
Under the scheme, an Indian
resident (including minor) is allowed to take out upto $2,50,000 from
India either for current account or capital account transaction . (e.g.
paying for college fees abroad, buying shares, bonds, properties, bank
Issue : Panama papers allege
certain various Bollywood celebrities used LRS window to shift money from
India to tax havens for tax avoidance.
Debate : Should there be Full Capital Account Convertibility ?
There is ongoing debate that there should be full capital account convertibility .
Arguments in favour of full Capital Account Convertibility
If capital account
is fully convertible , then India can attract more FDI,FPI and ECB to India , creating
new jobs & pushing economic growth.
It will increase the choices for
investments– Investors get the opportunity to base their investment and
consumption decisions on world interest rates and world prices for
Various committees like SS
Tarapore Committee has also accepted this.
Arguments against Capital Account Convertibility
IMF study says that
there is no correlation between full Capital Account convertibility &
It could lead to the
export of domestic savings .
Companies would get money in
$ via ECB & that would be returned in $s only. But this is not
favourable in times of Exchange rate
currency fall , then whole system can collapse as happened in East Asian Crisis of 1997 . India & China were able to
survive the crisis because both didn’t
have full capital account convertibility.
Various committees like HR
Khan Committee has rejected full
Capital Account Convertibility.
Side Topic : East Asian Financial Crisis
Before 1997 , All East Asian Economies used to deliberately keep their currencies undervalued in order to boost export. (like China is doing now)
All these countries had full capital account convertibility. Foreign investment was quite high and GDP growth was in double digits.
Thailand’s steel & automaker companies filed bankruptcy . Foreign investors panicked and started to pull out $s from similar companies from all South East Asian Nations . As a result, their currencies & economies collapsed . Eg : Indonesian Rupiah collapsed from 1$ = 2,000 to 1$ = 18,000 Indonesian Rupiah.
This led to High inflation culminating in rioting & political instability .
On the other hand, India and China survived this tumultuous period due to the fact that their capital account wasn’t fully convertible . Hence, investors can’t pulloff their investments overnight due to restrictions under Capital Account convertibility.
SS Tarapore Committee (1997)
of the committee
He was in
favour of Full Capital Account convertibility but he also had a fear that
crisis like East Asian Crisis can happen in India too . For this he
advised that there should be some
conditions before doing that
to sustain 6 months imports
India has forex of more than $460 billion (i.e. Can sustain 11 months
Deficit of 3.5% of GDP
for 2020 is 3.5% (but will be breached due to Corona pandemic induced
should be between 3-5% (for 3 years)
new Monetary Policy Framework, it should be contained between 2-6%
This article deals with ‘Exchange Rate Regimes .’ This is part of our series on ‘Economics’ which is important pillar of GS-3 syllabus . For more articles , you can click here .
Types of Exchange Rates
1 . Fixed Exchange Rate
When the central bank of a
country itself decides the exchange rate of local currency to foreign
Eg : Consider an imaginary situation where RBI fix exchange rate of 1$ = 10 ₹.If
excess dollars are entering in the market, the RBI will print more ₹ to
absorb the excess dollars and if less dollars are entering the market, the
central bank will sell the (previously acquired) dollars from its forex
reserve to ensure ₹ doesn’t weaken.
It was in operational
in India upto March 1992 .
Challenge : External Shocks & Fixed Exchange Rate
situation, if demand
of foreign currency in India
increases exponentially, then previous equilibrium which was maintained by
RBI will disturb. Initially, RBI will
try to stabilize the situation by selling $s from its forex reserve. But,
since RBI will not have infinite amount of dollars in its reserve
ultimately it will be forced to be devalue ₹.
biggest drawback of Fixed Exchange rate regime is that it is highly prone
to external factors .
Side Note :Devaluation
This is used
by Central Bank in the Fixed Exchange Rate Economy to cope with situations as seen above.
Implications of above devaluation is as follows
of foreign currency will decrease because ( say) what work can be earlier
done with ₹10 lakh abroad will now need 11 Lakh . So, some people will
abandon their plan.
Exports of country will increase because for importer of
other country, price of things coming from country which devalued its
currency will decrease
1$ = ₹10
1 $ =11 ₹
1 Thumbs Up = ₹10 i.e. $ 1
1 Thumbs up = 10 ₹ i.e. $ 10/11
2 . Floating Exchange Rate
Bank of the country doesn’t intervene at all & exchange
rate is determined by the market forces of demand and supply.
USA and UK are the major
economies following this system
But in this
case , exchange rate is very volatile .
Along with that, this system
is also prone to currency speculation .
3. Managed Floating Exchange Rate
It is the middle path between
the two extremes (floating and fixed).
In this, Central Bank will not
decide the exchange rate . In the ordinary days, Central Bank will let the
market forces of supply and demand decide the exchange rate. But if there
is too much volatility, then Central Bank will intervene by buying or selling
the foreign reserves to keep the volatility under control.
Canada, Japan , India (since
1992–93) etc. follow Managed Floating Exchange Rate.
Exchange Rate in India
1928 to 1948
‘Rupee’ was linked
with the British Pound Sterling .
1948 to 1975
After formation of
IMF, India shifted to the fixed currency system and committed to maintain
rupee’s exchange rate in terms of gold or the US ($ Dollar).
1975 to 1992
determining rupee’s exchange rate with respect to the exchange rate movements
of the basket of world currencies (£, $, ¥, DM, Fr.) .
India shifted to Managed Floating Exchange Rate .
NEER & REER
We keep on reading in newspaper that ₹ has weakened against $. Does
that really mean ₹ is weak currency & has become fragile? Nope , because US
is not the only country we trade with & $ is not the only currency that we
use to do all of our transactions
we want to objectively measure volatility of ₹, we have to compare
volatility with multiple currencies .
1$= ₹50 or 1$ = ₹40
doesn’t decide demand of goods & services between India & USA .
This also depend on relative Inflation .
For this we use NEER & REER
1 . NEER
Nominal Effective Exchange Rate
is the weighted average of bilateral nominal exchange rates of home
currency in term of foreign
Real Effective Exchange Rate
Average of nominal exchange rates adjusted
for inflation. Hence, it captures inflation differentials
between India & its major trading partners .
REER = NEER X ( Indian Inflation (CPI) / US Inflation ) .
What we get with help of NEER & REER?
If REER > 100 : currency
REER < 100 : currency is
Indian ₹ is overvalued (since REER > 100) and according to Economic Survey , this is bad for
Purchasing Power Parity (PPP)
It is a hypothetical
that tries to compare exchange rate of two currencies through their
purchasing power in respective countries.
For example , if 1packet of
bread in India costs ₹ 20 whereas it costs $2 in USA then Dollar to Rupee
exchange rate (PPP) will be $1 = ₹ 10.
According to OECD, in PPP
terms $1=₹ 17 .
This exchange rate can happen
in real life, if both the countries have Floating Exchange Rate without
any intervention of the respective Central banks; and if the bilateral
trade is free of protectionism.
If we look into GDP of various
countries in terms of PPP, then India is the third largest economy of the
world. The ranking is 1) USA , 2) China , 3) India , 4) Japan and 5)
The Great Fall of Indian Rupee
Why this happened ?
Turkish Currency Crisis : Americans started to sell
their bonds and shares from Turkey . This thing spilled over to other
‘Developing economies’ (including India)
Capital moving out because of rising interest rates in US making it more attractive to
In 2019-20 , India rupee
continued to weaken towards $1=77₹ because Corona virus pandemic . Due to
this, foreign investors started
pulling out money from India and investing in US .
What India did to fight ?
FPI investment limits relaxed to attract foreign investors
to India .
Currency Swap Agreements like
with Japan , India has 75 billion $ Currency Swap Agreement.
Currency Swap Agreements with Indian Banks .
Agreement with countries like
Iran to buy Crude Oil directly in ₹.
This article deals with ‘Forex Reserves of India .’ This is part of our series on ‘Economics’ which is important pillar of GS-3 syllabus . For more articles , you can click here .
Current Status of Forex Reserves of India
The total foreign currencies
(of different countries) an economy possesses at a point of time is its
‘foreign currency reserves or forex reserves’.
India’s forex reserves, is
about $460 billion (Jan 2020) .
It is enough to finance 11 months of imports, compared to 7.8
months in March 2014 (just before the Narendra Modi government came to
power and 2.5 months in March 1991 (which forced the country to seek
International Monetary Fund assistance).
Ranking of Foreign Reserves
Foreign Currency and Foreign
SDR’s Reverse Tranche
of Forex Reserves ( India 8th and China topped with 3.2 Trillion Forex)
Currency Swap Agreements of India
of different countries sign Currency Swap Agreements with each other to
help each other in time of crisis.
has signed such agreement for Swap in time of Crisis to the tune of $ 75
agreements have been signed by India with various other countries.
Side Topic : How China reached to top position in foreign exchange Reserve ?
Term used by
Economic Survey for this phenomenon is ‘China’s Mercantile Policy‘ . Under this policy, China refrains from
imports from other countries but at the same time, exports are encouraged.
China restrains from Imports in following ways
SOE (State Owned Enterprises) opaquely controls the domestic market
Inordinate delay in clearance
SPS agreements used to ban
Domestic products are too cheap
And at the same
time, Exports are promoted by
SOE get cheap loans
Subsidies are provided on large scale
Coal , iron, rare earth metals are also exported
Manipulators of Currency
Department makes list of countries which manipulate their currency .
include any country in this list : 3 conditions .
Trade surplus of over $20 billion with the US .
Current account surplus of 3% of the GDP with rest of the world.
Persistent foreign exchange purchases of 2% plus of the
GDP over 12
In 2018, India was included in this list. But , India was removed in
which are included in this list includes countries
This article deals with ‘Balance of Payment.’ This is part of our series on ‘Economics’ which is important pillar of GS-3 syllabus . For more articles , you can click here .
Balance of Payment
is the summary / account sheet made by central
bank of the country that shows
the cash flow between residents of a country with the rest of the world for
a specified time period typically a year.
When a payment is received
from a foreign country, it is a credit transaction while a payment to a
foreign country is a debit transaction.
Format is decided by the IMF and all data is
presented in $s for the comparison
If Balance of Payment
of all countries are added answer will be zero ( credit of one nation
becomes debit of other) .
Components of Balance of Payment
Balance of Payment is made up of two parts: Current Account and
Current Account is the record of trade in goods and services, transfer of income (in the form of profit, interest and dividend) and transfer payments.
Capital Account records all international transactions of assets. An asset is any one of the forms in which wealth can be held, for example : money, stocks, bonds, Government debt, etc.
Part 1 : Current Account
Visible Part and Balance of Trade (BoT)
Movements of goods (export and
import) is also known as ‘visible trade’, because the movement of goods
between countries can be seen by eyes and can be verified physically by
custom authorities of a country .
of Trade is the difference between export & import of goods (from Current part, considering visible part
i.e. goods only) .
India is always trade deficit because Indian imports are
always more than exports.
For 2018-19, Indian Balance of Trade was deficit to the tune of $ 180 billion.
Balance of Trade
(-) $180 bn
Imports & Exports of Goods
Imports and Exports of India have increased (showing growth)
exports have increased
increased (but increased more than exports)
Balance of Trade has increased (More deficit)
1. Petroleum Products (14% of all exports) 2. Pearl, Precious & Semi-Precious Stones 3. Drug and Biologicals 4. Gold and other precious metal Jewellery 5. Iron and steel
1. Petroleum: Crude (22% of all imports) 2. Gold (6% of all imports) 3. Pearl, Precious, Semi-Precious Stones 4. Petroleum Products 5. Coal and Coke
Merchandise Exports from India
Under this scheme, tax credit is given to the exporters of
goods, which they can use for paying Union’s Customs Duty.
Remission of Duties and Taxes
on Exported Products (RoDTEP)
This scheme will replace MEIS
as MEIS was declared against WTO obligations and also due to the
shortcoming that MEIS tax credits can be used to settle Customs Duty only.
Under RoDTEP, tax credit
earned by the merchant can be used to settle (1) Customs Duty , (2) excise
duty and VAT on export of fuel , (3) electricity duty on export of
electricity and APMC Mandi fees on export of agricultural raw material.
Steps to improve Export Competitiveness of India
Some suggestions from
Economic Surveys of recent years is as follows
Change in mindset
– Don’t produce what you can produce => Produce what world wants from you.
– Improve logistics to improve exports .
Fix Inverted Duty Structure
– Fix the anomalies in Inverted Duty Structure because Indian companies suffer due to this .
– India should sign FTAs with as many nations as possible .
– India should make sure that ₹ is not overvalued . – Most of times, it has been observed that REER is greater than 100 and as a result of over valuation of ₹, Indian exports become expensive compared to our competitors like Vietnam and Bangladesh
Promote Make in India
– Make strong industrial base . Export oriented manufacturing should be encouraged (like China)
Combine Assemble in India with MII
– ‘Assemble in India for the world’ should be integrated into the ‘Make in India’. By doing so, India can raise its export market share to about 3.5 per cent by 2025 and 6 per cent by 2030.
Use GI Tags
– Export products like Darjeeling Tea, Basmati rice etc.
– Agri – export policy not stable(to combat price rise govt ban export of onion, pulses etc. at any time ) . – SEZ potential not utilised
Invisible Part & Balance of Invisibles
Balance of Invisibles is the difference between export & import of invisibles i.e. Services, Income and Transfers.
Balance of Invisibles is
positive for India .
Subprime Crisis, Service exports were decreasing but they have recovered now .
India’s Net Services are positive .
(+) $ 82 bn
Note – Trade In Goods and Services (combined) is
Trade Deficit is much larger than Surplus in Services.
Major exports and imports of
India in services are
1. Software , IT and BPO services (40% of all service exports) 2. Business Services (like consultancy, product design and clinical trials) 3. Travel tourism 4. Transportation
1. Business Services (like digital advertisements) 2. Foreign Travel 3. Cargo Transport Services
Service Export from India Scheme (SEIS)
To increase export
of Services from India government introduced this scheme.
for export of Services worth every $ 100, Commerce Ministry transfers $ 5
in Scrip Wallet of that firm. That balance can be used for paying tax
consists of profit earned by FDIs, interest on
loans & dividend earned by investors .
It has to be noted that ,
whenever foreign investor invests in any country , he will get back
dividend (in case of equity) or interest (in case of debt) or profit (in
case company like Amazon doing FDI in India). These incomes are counted in
2018-19, India was witnessed deficit of $ 28 billion in income.
3 . Transfer
Remittances (send to India by
Indians living abroad and by foreigners living in India to their native countries (e.g. Nepal)
According to World
Banks Remittance Report, India receives largest amount of remittance (of
about $80bn) followed by (2) China (67) , (3) Mexico, (4) Philippines and
In 2018-19, there was surplus
of $70 billion in this account.
Current Account of India (Final Stats)
Current Account is in balance
when receipts on current account are equal to the payments on the current
account. A surplus current account means that the nation is a lender to
other countries and a deficit current account means that the nation is a
borrower from other countries.
India generally has DEFICIT CURRENT ACCOUNT . In 2018-19, India’s Current Account Deficit
was that of $57 billion or 2.1% of GDP.
Note : From 2001-04, India had
Current Account Surplus because, Indian exports to western economies were
booming especially in wake of BPO revolution in India.
Trend in Previous Years
2015-16 : 0.6% of GDP
2016-17 : 1.8% of GDP
2017-18 : 2.5% of GDP
2018-19 : 2.1% of GDP
=> Deteriorating but still manageable
Current Account Deficit is not considered good
If CAD increases, Currency
For country like India , which
has high imports, it increases the cost of imports impacting economy
Side Topic : Major Importers and Exporters of India
Importers of Indian Products
1. USA (16% of India exports are send to USA) 2. United Arab Emirates 3. China 4. Hong Kong 5. Singapore
Exporters to India
1. China (14% of all Indian imports are from China) 2. USA 3. United Arab Emirates 4. Saudi Arab 5. Iraq
It has to be noted that
India has large Trade Deficit
with China , Saudi Arabia, Iraq,
Germany, South Korea , Switzerland and Indonesia .
India has Trade Surplus with
USA and UAE consistently since 2014–15. On the other hand, India has trade
deficit continuously since 2014–15.
India had trade surplus with
Hong Kong and Singapore till 2017–18, before it changed to trade deficit
Related Topic : Import of Oil
India is the 2nd largest gold
importer of world( 1st = China) .India imports gold from following destinations
Due to cultural factors,
Indians have high obsession of gold . As most of the gold in India is
imported, this leads to high current account deficit and weakening of ₹
Along with that , high usage
of gold results in following vicious cycle
Steps taken by Government to reduce gold imports
imports of gold, Government has taken various measures
Inflation Indexed Bonds : During period
of high inflation , people invest in Gold because other investments give
real negative interest rate. Interest Rates of Inflation Index
are pegged with Inflation .
Custom Duty on Gold was hiked .
80:20 Rule : 20% of imported Gold must
be exported after adding value to it.
Schemes like Gold Monetisation Scheme, Sovereign
Gold Bond Scheme and Indian Gold Coin have been
started by the government.
Other Issue : There is issue of Quality Control on Gold bought by common people. For this Indian Government Mint + BARC + CSIR + National Physical Lab collaborated to launch its own reference standard called Bharatiya Nirdeshak Dravya (2017) . It is a gold bar with 99.99% purity .
Detail of Gold Schemes
1 . Gold Monetisation Scheme (GMS)
GMS will offer option
to resident Indians to deposit their precious
metal and earn an interest on it (upto 2.5%) .
But that Gold
will be melted to Gold Coins and Bars for valuation .
All residents can invest in
this scheme but are subjected to KYC Norms & have to disclose source of
the Gold .
Deposit limit: Minimum deposit at any one time
is 30 grams with 995
is no maximum limit for the deposit.
Tenure and interest rate:
Short Term of Bank Deposit
(STBD) of 1-3 years : 2.25% interest
Medium (5-7 years) : 2.5%
Long (12-15 years) : 2.5 %
Upon maturity you can redeem
deposit in the form of gold or cash
2. Sovereign Gold Bond Scheme
seeks to shift part of physical gold in form of bars and coins for
investment into Demat (Dematerialised)
gold bonds in
order to reduce the demand for physical gold.
bonds are interest giving (upto
2.75% interest) . On the redemption date you get the principal equivalent of the
latest price of gold in grams. So, if gold price increased then you get
Minimum investment: 2 grams of physical gold; Maximum investment:
500 grams with
lock-in period of 5 years .
Gold bonds: 8 years is the maximum tenure. But there is exit option from
5th year .
are tradable and exchangeable .
3. Indian Gold Coin
It is the India’s first
ever Indian gold coin and bullion to be officially issued by Union Government.
Denominations: The coins will be available in denominations of 5 and 10 grams and
a 20 gram bullion.
and bullion can be easily liquidated.
Related Topic : SEZ (Special Economic Zones)
Export Processing Zone(EPZ) opened in Kandla —> India first in
Asia to do so
SEZ announced with view to attract larger foreign investment .
SEZ Act was passed by
Kalyani Report on SEZs .
than 400 SEZs have been approved by
the government and more than 230 have been operational.
Duty free enclaves i.e. treated as foreign territories for purpose of
trade as far as duties & tariffs are concerned.
No requirement of license for imports .
Units must become net foreign exchange earner within 3 years .
They are subjected to
full custom duty (excise duty) & import
policy when they sell their produce to domestic
investment from domestic and foreign sources
Creation of employment
Development of Infrastructure facilities.
Failed SEZ policy & reasons
Lack of clarity in policy
– Number of changes done at frequent intervals . – Hence, there is lack of stability in policy .
Virtually no Income tax benefits now
The income tax benefits were neutralized by the introduction of the 20% minimum alternate tax (MAT) and the 20% dividend distribution tax (DDT) in 2011-12.
– India choose wrong locations for SEZ. In China, most of the SEZs are located on coastal areas. Eg : Shenzhen . – On the other hand, in India, many SEZs are located in the interior parts such as Haryana . Even in some costal states such as Tamil Nadu, SEZs are not located on coasts.
Free Trade Agreements
SEZs have access to duty-free imports of manufacturing inputs because technically they are considered to be outside of the country’s domestic tariff area. But, with India signing free-trade agreements with countries where duties on many products are eliminated or reduced substantially, the advantage accruing to SEZs was negated.
Absence of complementary infrastructure like port connectivity via roads or railway lines .
WTO – Counterveiling duty
Tax incentives provided inside SEZ are considered against WTO principles by other nations and they impose Countervailing duty on products coming from Indian SEZs .
on sending product for domestic market
Today, it is better for you to manufacture in Thailand and get duty-free access to India than to manufacture in an Indian SEZ and face import duty barrier. This is a huge deterrent to Make in India. May be we should be signing an FTA with all the SEZs first.
– 500 Acre for Multisector and 50 Acre for Single Sector is difficult to acquire . – Land Acquisition is one of the major hurdles.
– Labour laws inside SEZs are equally harsh as mainland . – They can’t fire workers easily and Industrial Dispute Act (IDA) applies if company is employing more than 100 workers .
Why SEZs in China are doing better than Indian SEZs?
The SEZ model in India was
inspired by China’s SEZs which were critical
instruments of its export-led growth. Reasons for better functioning of
SEZs in China are
Location: Located close to ports from where it can export easily .
Size: China’s zones are not many in number but they are huge in size. Hainan, a province in china is one complete SEZ, which covers an area of 33,000 sq. km. India has SEZs which are barely 500 -1000 ha in size.
Laws: China’s has amazingly business friendly laws. Corporates need to give only one month’s notice to an employee before firing him. Contrast that to India, where you need to follow a lengthy procedure to fire an employee if your company has more than 100 employees.
In China the thrust of SEZs has been to attract foreign investments and modern technology, in India the emphasis has been on exports.
Way forward to improve them
SEZs should be allowed to sell within the country
without payment of customs duty on the product.
of MAT and DDT (Dividend Distribution Tax).
relaxed labour laws there .
incentives need to be carefully designed so that it doesn’t violate WTO
Baba Kalyani Report on SEZ (2018)
Instead of giving them blanket general tax holiday, SEZ units should be given tax benefits linked to how many jobs have been created , how much FDI investment attracted , how much goods/ services exported etc. .
SEZs should be converted to Employment and Economic Enclaves (3E) .
Encourage Domestic Electronics Companies in 3Es so that we can end Chinese monopoly in Indian electronics market.
Synergise SEZs with CEZs, DMIC, NIMZ , Mega Food Parks etc. .
Improve connectivity to SEZs .
Related Topic : Foreign Trade Policy, 2015
Made under Foreign
Trade Development & Regulation Act,1992 .
Powers are vested
in Director General of Foreign Policy (DGFP) under Commerce
This policy is applicable
from 2015-2020 .
Export (US billions.)
World Share in Export
What will be done
Provide Tax Credits for Exporters by starting two
new schemes i.e. MEIS (Merchandise Exports from India Scheme) & SEIS
of Export Excellence and give them funds for developing infrastructure export (like
warehouses, transportation , Packaging etc) .
Initiatives for Single Window Clearance to Exporters .
Recognised region-wise opportunities for Indian
Exports where Indian exporters will be encouraged to export. Eg : Tea
to CIS, Project Loans to South America etc .
Signing more Free
Trade Agreements (FTAs).
By promoting Make in India
(& Assemble in India).
But exports decreased after 2013
2016 : 210 Billion $
2020 : Corona epidemic has hit
the world economy and exports have fallen exponentially.
Part 2 : Capital Account
Investment – FDI & FPI
What constitutes Foreign Direct Investment (FDI) ?
no clarity on this .Hence, Government constituted Arvind Mayaram Panel to clear the air .
to Arvind Mayaram Panel, more than 10% equity investment made by a foreign entity into
an Indian company, with the objective to get involved in the
management of that Indian company
is known as FDI.
E. g. : Walmart of USA having
77% stakes in Flipkart .
What constitutes Foreign Portfolio Investors (FPI) ?
It is a foreign entity
registered with SEBI and can have upto 10% in equity of an Indian Company.
FPIs are not involved in the
management of a company. Their primary motive is to earn profit by buying
and selling of shares.
Note : Till 2019, summation of
all the FPIs in a company couldn’t exceed 24%. But in 2019 Budget, 24% cap
Sector-wise Foreign Investment (FDI +
Note – List is not
exhaustive and it keeps on changing
frequently. For latest limits , please cross-check government sources as
100% FDI allowed
1. Single Brand Retail 2. E-commerce (marketplace model) 3. Defence Industry 4. Railway Infrastructure (Construction, operation and maintenance) 5. Industrial Parks 6. Telecom services 7. Pharma Companies 8. Contract manufacturing 9. Asset Reconstruction Company (ARC) 10. Floriculture, Horticulture, and Cultivation of Vegetables 11. Animal Husbandry, Pisciculture, Aquaculture, Apiculture 12. Plantation : Only in plantations of Tea, Coffee , Rubber , Cardamom , Palm oil and Olive oil tree plantations 13. Airports (both Greenfield and Brownfield projects) 14. Air Transport Services 15. Maintenance and Repair in air transport 16. Mining and Exploration of metal and non-metal ores 17. Coal and lignite 18. Exploration activities of oil and natural gas fields 19. DTH and Cable Networks 20. Non-news channels
1. Private Banks 2. Private Security Agencies
1. Multi Brand Retail Trading
1. Insurance Company 2. Pension Sector Companies 3. Power Exchanges 4. FM and News channels
1. Digital Media 2. Newspapers and periodicals
1. Public Sector Banks
1. E-commerce ( inventory based model ) 2. Atomic energy 3. Railway operations (except Metro) 4. Tobacco Products like cigars , cigarillos and cigarettes 5. Real Estate Business and Farm Houses 6. Chit Funds and Nidhi Companies 7. Betting , Gambling, Casino & Lottery.
Foreign Investment Promotion Board (FIPB)
Foreign Investment is
permitted either through:
Automatic Route: i.e. Foreign entity doesn’t require Indian
Government Route: i.e. Approval
of Government is required prior to investment
Earlier, this approval was
given by FIPB.
But, Budget 2017
removed this Board in order to promote Ease of Doing Business in
India by removing Red-Tapism in bureaucratic decision making and reducing
the time for mergers and acquisitions.
Now , Government approval is
given by the Commerce Ministry after consultation with subject ministry.
FDI in India
Computer Hardware &
A state-wise analysis of FDI
inflows to different Indian states shows a clear regional disparity in
FDI inflows . Delhi, Haryana,
Maharashtra, Karnataka, Tamil Nadu, Gujarat and Andhra Pradesh have
together attracted more than 70 % of total FDI inflows to India during the
last 15 years.
However, states with
vast natural resources like Jharkhand, Bihar, Madhya Pradesh,
Chhattisgarh and Odisha have not been able to attract foreign funds
investment in different sectors.
Gist – What government has done to attract FDI ?
Abolished FIPB .
Number of sectors have been opened
for FDI , including defence, construction,
broadcasting, civil aviation etc.
Investor Facilitation Cell has been created under Invest
India Program to
guide , assist & handhold investors
For some countries like Japan,
special program like Japan Plus has been started.
Insolvency and Bankruptcy Code passed.
FDI & FPI Trends in India (2018-19)
FDI was positive (+ 30 billion) i.e. FDI came in India .
FPI was negative (-0.6 billion) i.e. FPI went out of India . (Overall, since FPI is very volatile, so it increases or decreases rapidly)
In loans, we are +ive
External Commercial Borrowing is more than Sovereign
foreign debt .
2018-19, Indian net foreign loans were (+) $ 16 billion .
Such loans are
beneficial during good times as borrower
could enjoy the benefits like lower interest rates, longer maturity, and capital gains . But sharp depreciation in
local currency would mean corresponding increase in debt service liability, as
more domestic currency would be required to buy the same amount of foreign
Composition of Indian Debt
Term (79.6%) more than Short Term (20.4%)
Sector (80%) more than Public Sector (20%)
(49.5%) > ₹ denominated (37.2%) > SDR (5.6%) > Yen (4.3%) > Euro
International Debt Statistics
It is issued by World Bank .
India has been
classified as less vulnerable nation in that .
Capital has two components
Deposits of NRIs (+ive)
Capital account was (+) $
7 billion in 2018-19.
Currency Non-Resident Deposits
NRIs can deposit
their $ (or other foreign currency) in Indian Banks via FCNR Accounts.
be paid on FCNR deposits is tied up with LIBOR (London Interbank Offered
India’s Capital Account is
For 2018-19, the Surplus was
Balance of Payment condition of India
The outcome of the total transactions of an economy with the outside world in one year is known as the balance of payment (BoP) of the economy. Basically, it is the net outcome of the current and capital accounts of an economy.
BoP can be positive
or negative. However, negative BoP doesn’t mean that it is unfavourable for
economy until the economy has the means to fill the gap with help of it’s forex
If BoP is positive
at the end of the year, the money is automatically transferred to the foreign
exchange reserves of the economy.
– If BoP is negative at the end of the year, the foreign exchange is drawn from the country’s forex reserves of the economy. – If the forex reserves are not capable of fulfilling the negativity created by the BoP, it is known as a BoP crisis . India faced such situation in 1991 when India was forced to take forex help from the IMF.
India’s BoP position (for 2018-19)
For 2018-19, India Balance of
Payment was negative i.e. -3
But India has forex reserves
of more than $ 460 billion. Hence, India faced no problem in bridging the
This article deals with ‘Theories on International Trade .’ This is part of our series on ‘Economics’ which is important pillar of GS-3 syllabus . For more articles , you can click here .
International Economics is
that branch of economics which is concerned with the exchange of goods and
services between two or more countries .
The subject matter of
International Economics includes large number of segments :-
Pure Theory of Trade : It includes issues like causes for foreign
trade, composition, direction and volume of trade, exchange rate, balance of trade and balance of
Policy Issues : It includes
policy issues such as free trade vs. protection, use of taxation,
subsidies and dumping, currency convertibility, foreign aid, external
borrowings and foreign direct investment.
International Cartels and
Trade Blocs .
International Financial and
Trade Regulatory Institutions : Most important of which are IMF, WTO and World Bank.
Theories of International Trade
1 . Mercantilist Theory
It takes an us-versus – them view of trade.
According to Mercantilist
Theory, World Trade remains same. Hence, one country gains by damaging the
other. Increase in trade of one country means loss of some other country.
Hence, nation’s wealth and power are best served by increasing exports and
receiving payments in gold, silver and precious metals.
From the 16th to 18th century,
economists believed in mercantilism. One of the leading proponent of
Theory of Mercantilism was Thomas Munn (Director of English East India
2 . Adam Smith’s Theory of Absolute Cost Advantage
Adam Smith was in favour of free trade.
According to Adam Smith, the basis of international trade was absolute cost advantage. Trade between two countries would be mutually beneficial when one country produces a commodity at an absolute cost advantage over the other country which in turn produces another commodity at an absolute cost advantage over the first country.
Example / Illustration
example of India and China in production of Wheat and Cloth . Suppose, one
labourer in India can produce 20 units of wheat and 6 units of cloth while that
in China can produce 8 units of wheat and 14 units of cloth.
Wheat production by one labourer
Cloth production by one labourer
Hence, India has an
absolute advantage in the production of wheat over China and China has an
absolute advantage in the production of cloth over India. Therefore, India
should specialize in the production of wheat and import cloth from China. China
should specialize in the production of
cloth and import wheat from India. This kind of trade would be mutually
beneficial to both India and China.
3 . Ricardo’s Theory of Comparative Cost Advantage
According to David
Ricardo’s Theory of Comparative Cost Advantage , a country can gain from
trade when it produces at relatively lower costs. It means, even when a
country enjoys absolute advantage in both goods, the country would
specialize in the production and export of those goods which are
relatively more advantageous. Similarly, even when a country has absolute
disadvantage in production of both goods, the country would specialize in
production and export of the commodity in which it is relatively less
Example / Illustration
Units of labour required to produce one unit
Domestic Exchange Ratios
1 wheat =1.2 cloth
1 wheat=0.88 cloth
illustration, India has an absolute
advantage in production of both cloth and wheat. However, India should concentrate on the
production of wheat in which she enjoys a comparative cost advantage. For
America the comparative cost disadvantage is lesser in cloth production. Hence
America will specialize in the production of cloth and export it to India in
exchange for wheat.
4 . Heckscher and Ohlin’s Factor – Proportions Theory
Capital-abundant country will
export the capital –intensive goods. E.g. USA exporting Aeroplanes
Labour-Abundant Country will
export labour-intensive goods. E.g. India exporting cotton .
This article deals with ‘Industrial Policies of India.’ This is part of our series on ‘Economics’ which is important pillar of GS-3 syllabus . For more articles , you can click here .
Economic development of a country particularly depends on the process of industrialisation. At the time of Independence, India inherited a weak and shallow industrial base. Therefore , during the post–Independence period, the Government of India put special emphasis on the development of a solid industrial base.
From time to time Government of India declared their Industrial Policies which basically moulded the nature & structure of Indian economy.
Industrial Policy Resolution, 1948
Announced on 8
It was decided that model of the
economy would be ‘Mixed Economy’.
Important industries were here like coal, power, railways ,civil aviation, ammunition, defence etc. .
Industries of medium importance were put here – medicine, textile, cycles, 2 wheelers .
industries were left open for all private sector investment with many having
compulsory licensing provisions.
Policy was to be reviewed after 10 years.
Industrial Policy Resolution,1956
was encouraged by previous success & announced it after 8 years only. This policy structured the nature of
economy till 1991.
Main provisions of Policy
1 . Reservation of Industries
Clear-cut classification was
made into three schedules
Contains 17 areas in
was given monopoly.
under this provision were called Public Sector Undertakings (PSUs) (by 1991 number
those industries as well which were taken over between 1960 to 1980
under nationalisation drive .
12 areas in which state was supposed to take up initiative with more
expansive follow-up by private sector.
It also included the provisions
of Compulsory licensing
nor private sector had monopoly in these industries .
All areas not covered in Schedule A & B.
has provisions to setup industries.
Many of them had provision of licensing .
2 . Provision of Licensing
All Schedule B & number of Schedule C industries came under this .
This provision is also called LICENCE- QUOTA -PERMIT RAJ.
3 . Expansion of Public Sector
Expansion of public sector was pledged for accelerated industrialisation & growth of economy .
Emphasis was on heavy industry .
4 . Regional Disparity
To tackle regional disparities, upcoming PSUs were to be setup more in backward areas (although it was completely against Theory of Industrial location).
5 . Emphasis on Small Industry
Committed on promoting small scale industries as well as Khadi & Village industry .
6 . Agriculture Sector
was pledged as priority .
Industrial Policy of 1969
It was aimed at solving the
short comings of Industrial Policy of 1956.
Industrialists were of view that licensing was serving opposite purpose
than it was mooted . Main
aim behind Licensing policy was socialist & nationalist feeling so
resources could be done for development of all.
of goods purchased from licensed industries .
Checking concentration of economic power .
Channelizing investment into desired direction.
licensing policy wasn’t serving this purpose as
industrial houses were able to procure fresh licenses at expense of
Older & well established
business houses were capable of creating hurdles for new ones with help
of different kinds of trade practices & forcing latter to agree for sell-out &
Policy of 1969 introduced Monopolistic & Restrictive Trade Practices(MRTP) Act. Main features of MRTP
aimed at checking & regulating trade & commercial practices of
the firms along with checking the monopoly & concentration of
Firms with assets
worth ₹ 25 crore (which was later increased to ₹50 crore in 1980 and ₹100 crore in
more were put under obligation of taking permission from government of
India before expansion, greenfield venture & takeover of other firm .
For redressal of
prohibited & restricted practices of trade, Government setup MRTP
Industrial Policy Statement , 1973
1 . Core Industries
Policy introduced new classification of Core Industries.
It includes 6 industries which were of fundamental importance for development of other industries – Iron & Steel ,Cement, Coal, Crude Oil, Oil Refining & electricity
Note : At that time there was 6 Core Industries. Now they are 8
2. Private Companies
Private Companies may apply for licenses under Core industries if they aren’t covered under Schedule A .
They were eligible only if their total assets were above ₹20 crore.
3. Reserved List
Some industries were put under reserved list in which only MSME could setup industry .
4. Joint Sector
It allowed partnership between
center, states & private sector for setting up some industries.
discretionary power to exit such venture in future.
Intention was to
promote private sector with government support.
Exchange Regulation Actwas introduced to regulate foreign exchange in India .
It was draconian law according
to experts which hampered countries growth.
6. Foreign Investment
Limited permission of foreign investment was given with MNCs being allowed to setup subsidiaries in India .
Industrial Policy Statement, 1977
Political setup at
centre changed so did economic policy.
There was more inclination
towards Gandhi -Socialistic view & anti-Indira stance.
in unnecessary areas prohibited ( in practice it was complete no) . During this
period, Coca-Cola, IBM and Chrysler were made to exit India.
Emphasis was placed on village industry
with redefinition of small & cottage industry.
industrialisation was given attention with objective of linking masses to
process of industrialisation .
Khadi & Village
industry was to be reconstructed .
was given to level of production & prices of essential commodities of
everyday use .
Industrial Policy Resolution , 1980
Return of same old
party & Industrial Policy was revised again in 1980 .
investment via technology transfer route was allowed .
MRTP limit was increased to ₹50
crore to promote setting up of bigger industries .
licensing was justified .
attitude followed towards the expansion of private industries .
Industrial Policy Resolution of 1985 & 86
Industrial Policy Resolution
of 1985 & 86 were very much similar in nature & latter tried to
promote initiatives of former
further simplified & more areas were opened . Dominant method of foreign
investment was still technology transfer but foreign MNC can hold upto
49% in their subsidiary.
MRTP limit was increased to ₹100
industrial licensing was further simplified & remained for 64 industries
Higher level of
attention was given to sunrise industries such as telecommunication,
computerisation & electronics.
& profitability aspects of PSU emphasised.
was given in FERA regime concerning use of foreign exchange permitted so
that essential technology could be assimilated. into Indian industry &
international standard can be achieved
missions launched in Agricultural sector.
policies were mooted out by government when developed world was pushing
for formation of WTO.
were attempted at liberalising the economy without any slogan of economic
reform . The government of the time
wanted to go for kind of economic reforms which India pursued after
1991 but it lacked required political support.
By end of 1980s ,
India was in grip of severe Balance of Payment crisis with higher inflation (over 17%) & high fiscal deficit (8%). This was magnified by Gulf war &
high prices of oil . This led to Balance of Payment crisis, IMF bailout & 1991 LPG reforms
New Industrial Policy (NIP) of 1991 – LPG Reforms
Situation of India leading to LPG reforms
India was in severe
crisis in 1991 . Reasons for this were several interconnected factors
which were growing unfavourable for Indian economy
Gulf war of
1990-91 : prices of oil became
higher leading to fast
depletion of Indian Foreign currency reserves .
Sharp decline in private remittances from overseas
Indian workers in Middle East in
wake of gulf war.
Inflation peaking near 17% & fiscal
deficit of central government reaching 8.4%.
By month of June
1991 , Indian
Forex has declined to just 2 weeks of import coverage .
Financial support that India got
from IMF to fight out Balance of Payment crisis of
1990-91 were having a tag of structural readjustment as condition
to be fulfilled by Government of India.
With this policy the
government kickstarted the very process of reform in the economy, that is
why the policy is taken more as a process than a policy.
New Industrial Policy of 1991
Triple pillars of New Economic Policy were Liberalization, Privatization and Globalization (LPG).
1 . Liberalisation
to removal of governmental restrictions in all stages in industry.
1.1 De Licensing of Industries
industries put under compulsory provision of licensing (Schedule B & C) were cut down to 18 in 1991. Now only 5
industries require license and these are
This article deals with ‘Assemble in India.’ This is part of our series on ‘Economics’ which is important pillar of GS-3 syllabus . For more articles , you can click here .
Economic Survey (2020) points
towards the fact that, in just the five year period 2001- 2006, labour-intensive exports enabled China to create 70 million jobs for workers with just primary education.
But now, firms are looking for
US–China trade war : US has
placed large tariffs on products manufactured in China.
Increase in wages in China.
Side Note : Network Product
In modern production lines,
entire production is not done at single place. Different components are
made at different places and then integrated at some third place to make
final product. Such final product is known as Network Product.
Eg : iPhone => it’s screen
is made in South Korea, processor is made in Taiwan , Camera in Japan and
designed in California (USA) but assembly of all components is done in
Wild Geese Flying Model
The pattern of entry, rise, survival, and relative decline of countries in the export market for Network Products follows the “wild- geese flying model”
This process started with Japan which later moved to South Korea , then Taiwan and China and so on.
Japanese Companies (like Sony) first started to assemble Cameras ,TVs, Walkman etc. . When labour costs started to rise, they shifted their manufacturing to South Korea .
Then South Korean Companies like Samsung and LG grew in export of Network Products . After some time, due to cost issues, they outsourced their manufacturing to China and Taiwan.
Hence, Network Goods assembly will continue to move from more advanced countries to less advanced countries. (for image, CLICK HERE)
Economic Survey is of the view that while Japan is in declining stage, most countries including China have reached the inflection point, India is at right stage to enter this and take place of China in assembly of Network Products thus providing us sufficient opportunity to grab.
Why India should focus on Network Products and Assemble in India ?
MNCs are moving away from
China due to trade war between China and US along with rising wages in
China. Hence, India should grab the opportunity to shift large chunk of
Assembly Lines from China to India .
Network Products accounted for
nearly 30 per cent of world exports in 2018. Although India has lot of
potential, India lags behind in export of Network Products. In 2018,
Network Products exports accounted for 10% in India’s export basket, while
these products account for about 50% of the total national exports of
China, Japan and Korea
Economic Survey (2020)
suggests that by integrating “Assemble in India for
the world” into Make in India, India can raise its export market share to about 3.5%
by 2025 and 6% by 2030. In the process, India would create about 4 crore
well-paid jobs by 2025 and about 8 crore by 2030.
To attract MNCs to Assemble in India , India needs to
Reform Taxation laws
Reform Labour Laws
Skill training of workers and middle level supervisors.
Invest heavily in infrastructure and create world class roads, railways and ports .
Sign large number of Free Trade Agreements so that India becomes part of Global Value Chains
While the short to medium term objective is the large scale expansion of assembly activities by making use of imported parts & components, long term objective should be giving a boost to domestic production of parts & components (and create global giants like Samsung developed in Korea and Xiaomi, Huawei etc. developed in China).
This article deals with ‘Make In India (MII).’ This is part of our series on ‘Economics’ which is important pillar of GS-3 syllabus . For more articles , you can click here .
What is Make in India (MII) ?
It is a program started by Government of India with objective of making India a global hub of manufacturing, design and innovation .
Why we want to Make in India ?
Remove excess of population in Agriculture (42%) to be employed in
To reap Demographic Dividend by providing jobs to the
youth in manufacturing sector.
Use Cheap Labour available in the country to
fill the lacunae being left to China where labour wages have started to
We have huge
domestic demand in India & still importing from abroad . Why not make
in India & save our foreign exchange ?
issues created by the fact that India directly jumped from Agricultural to
Service sector economy without first passing through low skill
Make In India : 5 Pillars
1 . Simplify Processes
Ease Regulatory framework and cut red-tapism so that investors can invest easily and entrepreneurs can setup industries .
2. Improve Infrastructure
End infra bottlenecks by investing in New Industrial corridors , smart cities, roads , railways and world class ports .
3. Focus on 10 Champion Sectors
Government has recognised ten ‘Champions sectors’
under Make in India
India has potential to become global champion
Which can drive double digit growth in
Generate significant employment opportunities.
goods, Auto , Defence & Aerospace, Biotechnology, Pharmaceuticals , Food Processing, Gems
& Jewellery, New & Renewable Energy, Construction, Shipping and
4. Open up Sectors
India will open new sectors
for investment .
Steps in this direction taken
eg FDI in Defence 100% and Railways 100% is allowed .
5. IPR protection
Protection & Promotion of Intellectual Property Rights like Patents, GI , Copyrights , Trademarks and Industrial Designs .
Initiatives in various sectors to promote Make in India
1 . Defence and Aviation Sector
Defence Procurement Procedure (DPP) under which government will give first priority to the indigenously designed developed and manufactured (IDDM) equipment.
Defence Offset Norms which states that when government buys defence equipment from a foreign company, that foreign company has to procure certain percentage of components from India.
2 . Food Processing
Opening up of new Mega Food Parks.
Starting SAMPADA Scheme to promote Food Processing Industry.
3 . Automobiles
To promote manufacturing of electric vehicles in India, FAME-India [Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles – India] has been started.
4 . Renewable Energy
Preference given to domestic manufacturers for purchasing equipment for Jawaharlal Nehru National Solar Mission.
5 . Textiles
India Handloom Brand has been
Special Textile Package to
increase jobs and machinery upgradation has been started.
Side Topic – Make Outside India (Budget 2015)
Under Act East
Setup manufacturing units in Cambodia
, Myanmar, Laos & Vietnam(CMLV ) .
This will be
implemented via Special Purpose Vehicle (SPV) .
India will become
part of regional value chain .
export to countries having FTA with CMLV (eg China ) (India has not signed FTA with China but
CMLV countries have signed FTA with
China which can be utilised by opening Indian factories in these
Problems with Make In India
1 . Directly Moving towards high skill model
ideally should have been doing is , moving from
Agrarian Economy to Low Skill
Manufacturing to leverage our Demographic dividend.
But MII is
trying to move directly to high skill jobs from agrarian economy .
2. Time of Launch
Government started Manufacturing led development
model at a time of global slowdown
Push in infrastructure sector would have been better policy at this
3. TAKES MORE TO INCREASE EXPORTS
Only making goods will not increase exports . Along with improving manufacturing , it requires currency undervaluation, signing FTAs on large scale , labour rights exploitation etc. (like China did) .
4. Danger from Automation
Report from Citi group claims that increased use of automation will likely led to a renewed “onshoring” of production .
5. Blindly copying Chinese Model
Don’t follow China success story blindly. It will not replicate everywhere