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IGNOU MEC-005 Solved Assignment 2012
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MEC-005: INDIAN ECONOMIC POLICY
Assignment (TMA)
Course Code: MEC-005
Assignment Code: MEC-005/AST/2011-12
Maximum Marks: 100
Note: Answer all the questions. While questions in Section A carry 20 marks each (to
be answered in about 500 words each) those in Section B carry 12 marks each (to be
answered in about 300 words each).
Section A
1. “A number of steps can reduce the severity, spread and size of the black
economy in India” Give the future directives on the parallel economy and cite
the practical obstacles faced on the way to fight the black economy.
Ans
The spread and size of the black incomes, especially, its growing concentration in the
hands of the very rich sections invades and corrupts the consumption sphere as well.
The black-financed consumption spree breaches all social norms and cultural barriers.
It helps to create the mentality that fails to resist the black related behaviour and
recruits new entrants to the black circuit of activities.
The underground economy works under the wings of the informal and formal sectors.
It enters the consumption sphere and values and along with the economy also involves
the executive, legislative and judicial wings of the state. It concentrates social power
and influence in the hands of the black economy operators and, thus, becomes a
powerful player in the policy arena. It was concentrated in the hands of a few
monopolistic industrial conglomerates with location largely in a few states and
metropolitan centres. The urge of hoard black wealth in the form of gold gave a
double boost to stashing away of black wealth worth thousands of crores of rupees. A
huge, widespread black economy, with active, indulgent, supporting and/or
collaborative role of state processes and personnel, expands itself by reinvesting the
black incomes and savings into the black circuit to finance politics, crime syndicates
and some businesses on a growing scale. The protection and clandestine support
provided by the political-administrative structures to the black deals, extends over
time to public expenditure by forging a nexus between public works contractors,
suppliers of goods and services to public agencies, including the public enterprises,
appointment authorities of public personnel, approver of foreign collaboration deals,
including for defence supplies, proposing schemes of incentives and taxation to
various industries, granting of industrial, imports, capital issue licences etc.
A number of steps can reduce the severity, spread and size of the black
economy by means of a number of policy, institutional, administrative and other
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policy and programmatic measures. An essential precondition for effective
intervention by the people is that they must have at least a minimum of livelihood
adequacy and security. This is essential for building up in a democratic society with
robust political and civil society institutions their capacity and willingness to work for
a clean and just social order. The existing order and its beneficiaries are the fountain
head of the black economy and perversion of policy processes. Hence, it is natural
that beyond a point they would not like the policies which strike at the very roots of
the underground economy and their capacity to manipulate the policies away from the
general interest and towards their group, class and/or personal interests. Hence, a
political framework which guarantees the livelihood adequacy and security may be
treated a positive sign for strengthening the anti-black economy forces in the
economy. Then, methods of checkmating benami, that fictitious transactions, is also
another major prerequisite for dealing some effective blows against the black money
phenomenon. The secrecy of public decision-making and totally unwarranted
protection available to Government functionaries against public scrutiny are also
factors which must be curbed in order to reduce corruption and increase public
accountability and transparency in public affairs. The prevailing bad money
dominated politics and politicians are an active agency distorting the policy processes
from the declared lofty objectives and for amassing illegal wealth. Democratisation of
political parties and electoral reforms in order to break the unholy nexus between
politicians, corrupt business persons, bureaucrats and the criminal mafia gangs can go
a long way in moving towards a clean democratic society. Then a series of changes in
our planning, policies, administration and methods of policy and programme
implementation are essential for effective and honest policies. Democracy and
peoples’ own efforts are the means which may be slow, difficult, at times frustrating,
but they do produce overtime desirable outcomes. There is every reason to hope that
over time India would move towards a genuine, honest pro-people state, economy and
society. Then the black economy and policy perversions would become marginal
instances of deviant behaviour, unable to change the basic course and character of
system.
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2.
“In the wake of globalisation, in order to protect the vulnerable groups, different
strategies of employment need to be followed”. Comment.
Ans. In the wake of globalisation, in order to protect the vulnerable groups, different
strategies of employment are as follows for various target groups: (a)
For those who are already unemployed, macroeconomic policy needs to be
formulated and implemented in such a way as to deploy national and local resources
for creating large-scale employment opportunities in the growth process. Three
elements to a strategy to expand employment can be considered:



Redistribution of income in favour of low income groups;
Creation of public investment; and
Provision of incentives to private investment.
Investment in agriculture and necessary infrastructure in terms of roads and
electrification would play a crucial role in employment generation. Efforts need to be
made to create productive employment in agriculture and not treating it as a residual
sector for the surplus labour. Development of agriculture in backward regions has
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very high potentiality for employment generation. The potential for indirect
employment in the form of agro-industries and other allied activities like food
processing, dairy development, etc have a high potential for employment. All these
have a large export potential as well as possibility of expanding domestic market.
Concerted policy and action plan is needed to effectively tape this potential. Adequate
investment, suitable technological upgradation and proper marketing arrangements
are needed to develop them. Along with agriculture, the non-farm sector has potential
for employment generation in rural areas. Adequate credit facility, technology,
marketing and other support services need to be provided for developing various subsectors of non-farm sector in rural areas.
(b)
Increasing number of workers engaged as contract and temporary workers in
the organized sector. The Government enforcement machinery and trade unions have
the responsibilities to safeguard the interest of such vulnerable workers. There is a
need to make minimum wages more comprehensive for the organized sector workers.
Training, skill development and vocationalisation of education should be focused to
take care of redundant and retrenched workers in the organized sector.
(c)
The role of direct poverty alleviation and employment generation programmes
need to be widened and strengthened for irregular wage workers.
(d)
Self-employed workers including home-based workers, street vendors etc.
should be given adequate access to inputs, services and marketing facilities. There is a
need for creating more supportive environment for self-employment both in rural as
well as in urban areas.
(e)
Effective policies are needed to abolish the gender discrimination in the labour
market. Gender differentials in skill and expertise levels and gender biases operating
in the labour market have to be removed to enhance levels of utilization of the female
labour force.
(f)
Independent producers/service providers, marginal farmers, forest dwellers,
pavement dwellers in the urban slums etc need to be provided with a proper mix of
insurance scheme, measures to provide them some capital, effective steps towards
lessening the uncertainties of frequent loss of income and measures towards providing
supplementary sources of income and employment.
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Section B
3.
Discuss the instruments of monetary policy and throw light on the main features
of monetary policy from the late-1990’s onwards.
Ans. Central Bank (eg RBI in India) seek to achieve its ultimate objective (of price
stability, growth etc) though some intermediate targets. These intermediate targets of
exchange rate, money supply growth or a level of interest rate etc could be achieved
through operation of monetary policy instruments. These instruments are of two types
– direct and indirect. The direct instruments include cash reserve ratio (CRR),
liquidity reserve ratios, directed credit and administered interest rates. CRR specifies
the amount of reserves, banks need to maintain as cash or with the central bank as
percentage of their liabilities (deposits). Liquidity reserves ratio, called Statutory
Liquidity Ratio (SLR) in India, specifies the amount of money banks must invest in
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Government securities (and bonds of PSUs) as proportion of their deposits. Directed
credit programme is used to channelize flow of credit to preferred/priority sectors.
Administered interest rates are used to control lending and deposit rates directly. The
direct instruments influence the financial system through changing the quantity of
credit availability.
The direct instruments generally operate through price channel. That is, these
instruments first cause the rates (or prices) to change, which, in turn, causes flow of
credit/liquidity to change. The indirect instruments consist of the repos (repurchase
agreement), Open Market Operations (OMOs), refinance facility, and the discount
window of RBI. The repos/reverse repos are used to mop up or inject liquidity for a
short duration. Both these instruments are operated by the RBI at its own discretion.
There has been gradual shift from direct to indirect instruments from the late1990s onwards. The main features of monetary policy from the late -1990s onwards
are as follows: (a)
OMOs (including repos) were re-activated in 1992-93 in order to develop a
market-based mechanism to inject/absorb liquidity from the system.
(b)
The Liquidity Adjustment Facility (LAF) was introduced in two phases in
April 1999 and June 2000. The RBI is now able to control liquidity in the system on a
daily basis through repos/reverse repos under LAF.
(c)
The Bank Rate was re-activated in April 1997.
(d)
In order to disentangle monetary policy from the clutch of fiscal policy, an
auction system for the Central Government’s market borrowing programme was
introduced in June 1992.
(e)
The interest rates were deregulated gradually with lending rates deregulated
first followed by deregulation of deposit rates.
(f)
Deposit rate deregulation started in April 1992 with removal of RBI prescribed
multiple rates for different maturities and replacing these with a single ceiling rate.
===============================================================
4.
In the light of the parameters for assessing economic reforms, critically examine
its impact on the Indian economy.
Ans.
The goals of economic development have been defined in the First and Second FiveYear Plan. They alone become the parameters for assessing the impact of economic
reforms. The major goals are:

A higher rate of growth of GDP 7-8 per cent per annum

Enlargement of the employment potential leading to full employment.

Reduction of the proportion of the population below the poverty line.

Promotion of equity or distributive justice

Reduction of regional disparities between the rich and the poor states of the
India
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
Improvement in Human Development in terms of health and education of
population.
While economic reforms may be justified on the basis that they have helped to
improve rate of growth of GDP, they cannot be justified in reducing unemployment
and poverty to the desired extent. Their record in terms of increasing unemployment
rates is too glaring. As far as their impact on labour is concerned, it is adverse. They
pushed labour from secure to insecure employment, increasing employers’ militancy
and weakened trade unions. Economic reforms neglected the agricultural sectors,
more especially in terms of reducing investment in irrigation by the public sector.
GDP in agriculture which showed a growth rate of 3.7 per cent per annum during the
pre-reform period (1981-91) witnessed a decline in the 11-year post-reform period to
2.9 per cent. Economic reforms have also not been successful in accelerating
industrial growth, more especially in electricity generation and mining. The failure
was also manifest in basic and capital goods industries. The index of industrial
production which showed a growth rate of 7.8 per cent in the pre-reform period
(1981-91) decelerated to 5.8 per cent during the post-reform period (1993-94 to 200203). Regarding foreign trade, economic reforms have helped foreigners to penetrate
the Indian market to greater extent than Indians to penetrate foreign markets.
Economic reforms have not succeeded in improving growth rates of infrastructure in
electricity, coal and petroleum, though they have shown better record in saleable steel
and cement. Economic reforms have failed in reducing regional inequalities. Rather
they held guilty for increasing regional inequalities as data showed that the richer
states recorded high growth rate of GDP than poor states.
===============================================================
5.
Explain how Minimum support price (MSP), microfinance, easy access to credit
and agricultural marketing help in addressing the issues in the agricultural
sector?
Ans
Minimum Support Price, microfinance, easy access to credit and agricultural
marketing help in addressing the issued in the agricultural sector. They are explained
in following ways: Agricultural Marketing.
Marketing of agricultural produce is the most important
activity for the farming community as it is the means to getting a value for the
produce. It is particularly important for the small produces with small marketable
surplus. Since crop output is a seasonal phenomenon, there is every possibility of the
crop price being low in the harvest season and the farmers being exploited for their
viability to hold the crop for a long period. To promote the interests of the farmers,
Government has organised marketing of agricultural commodities through a network
of regulated markets. The gap between the consumer prices of agricultural products
and the producer prices received by farmers will be reduced through direct purchase
centres.
Minimum Support Prices (MSP). MSP system acts as an insurance against
excessive price fall in the years of boom in production. There are prices at which the
Government is willing to buy any amount of grain from the farmer. A very large
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number of crops are covered by the MSP system. MSP must fully cover the cost of
production but there is considerable debate on what constitutes true element of cost.
The MSP system has also been a factor contributing to the growing stocks of food
grains.
Easy Access to Credit.
There was a need for credit not only for cropping but
also for building some capital base for long-term improvement at the farm level.
There has also been a priority accorded to credit to be given by commercial banks to
agriculture. Subsidised interest rates for the agricultural sector was also
recommended. Access to credit will help the farmers for easily availability of high
yielding varieties of seeds, pesticides etc.
Microfinance. Around 60 per cent of the credit requirement of the farmers are now
being met by institutional sources and the remaining 40 per cent by informal sources.
The increase in total amount of credit to small and marginal farmers will reduce the
role of moneylenders who charges high rate of interest.
===============================================================
6.
‘Policy-reform is an on-going process’ – discuss the statement by making
suggestions for foreign capital policy.
Ans
The Industrial Policy Resolution 1948 emphasised the need for carefully regulating as
well as inviting private foreign capital. It laid special stress, inter-alia, on the need to
ensure that in all cases of foreign collaboration, the majority interest was always
Indian. This was followed by the Fiscal Commission of 1949-50 which recommended
that foreign investment may be permitted, first, in the public sector projects needing
imported capital good, and secondly, in new capital industries where no indigenous
capital or technical know-how was likely to be available. Foreign capital once
admitted will be treated as par with indigenous capital. Facilities for remittance of
profits abroad will continue. The major interest in ownership and effective control of
an undertaking should be in Indians hands. If an enterprise is acquired, compensation
will be paid on a fair and equitable basis. The Government should not object to
foreign capital having control of a concern for a limited period and each individual
case will be dealt with on its merits.
The New Industrial Policy 1991 brings various changes in the Government
policy towards foreign investment and foreign agreements. They are classified into
four categories as follows: (a)
Choice of Product: The number of products in which foreign investment is
freely permitted has been significantly increased.
(b)
Choice of Market: The foreign investors are free to compete with the
domestic produces in the Indian market.
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(c)
Choice of Ownership Structure:
to own a majority share in equity.
In most cases, the foreign investor is free
(d)
Simplification of Procedure:
India has opened two routes for Foreign
Direct Investment (FDI) inflows. First, the RBI route (or the Mumbai route). This is
transparent in the sense that the guidelines are clear. If projects satisfy the guidelines,
the approvals are practically automatic.
The second route is the Foreign Investment Promotion Board (FIPB) route (or the
Delhi route). Foreigners are welcome to make proposals that don no fit into the first
case. Such proposals are considered case by case. The government has also set up
Foreign Investment Implementation Authority, independent of FIPB, to act as a single
point interface between the investor and Government agencies.
The economic reform of 1991 has laid the foundation for foreign investment in
India by Liberalisation of rules & regulation to attract FDI and FII in phases.
===============================================================
7.
Explain any three of the following.
b)
Ans.
Issues in union-state financial relations.
The issues in Union-state financial relations are





The unitary elements already embedded in the Indian Constitution have
gained further strength over the years with concentration of fiscal powers
in the Centre and growing dependence of the States on transfers from the
Centre.
The institutions contemplated in the Constitution to safeguard the fiscal
autonomy of the States have not helped to correct the vertical imbalance.
In the distribution of responsibilities and powers delineated in the Indian
Constitution, there is a chronic imbalance with concentration of fiscal
powers in the Centre. This is not uncommon in fiscal federalism
About one-fifth of the transfers takes place at the discretion of the Centre.
The fact that the Planning Commission was a creature of the Centre and
not a statutory body continued to be a point of discord.
Union-State differences become sharp and cause anxiety in different ways and
under different conditions.
===============================================================
d)
Poverty Ratio and Working Poor
Ans Poverty ratio is a measure of poverty. It is also called Had Count Ration
(HCR). It measures incidence of poverty and is used for comparing the poverty
situation in two areas or two regions or two periods of time etc. It is expressed as a
percentage and is defined as:
Number of people below poverty line
Incidence of Poverty = PR = HCR = ----------------------------------------------- x 100
Total population
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Working Poor: Persons who are employed but who receive wages that are too low to
enable him/her and his dependents to raise their level of consumption to the minimum
desired standard level specified by the poverty line.
===============================================================
e)
Ans.
Functions and Objective of the WTO
Functions of the WTO are:  It administers through various councils and committees the 29 agreements
contained in the final act of the Uruguay Round of World talks, plus a
number of plurilateral agreements, including those on Govt. Procurement.
 It oversees implementation of the significant tariff cuts and reduction of
non-tariff barriers.
 It examines the international trade
 It provides conciliation mechanisms for arriving at an amicable solutions
to trade conflict among members.
 Trade disputes that cannot be solved through bilateral talks are adjudicated
under the WTO dispute settlement court.
Objectives of the WTO are:
 Raising standards of living and incomes, ensuring full employment,
expanding production and trade, optimal use of world’s resources, at the
same time extending the objectives of services and making them more
precise.
 Introduces the idea of sustainable development in relation to the optimal
use of world’s resources, and the need to protect and preserve the
environment in a manner consistent with the various levels of national
economic development.
 Recognises the need for positive efforts designed to ensure that developing
countries, especially the least developed ones, secure a better share of
growth in international trade.
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