Service Sector

Role of Service Sector in Indian Economy

Compiled By: Sandesh Gupta

Submitted To: Prof. Sukhada Waknis

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We would like to thank Prof: A.E. Lakdawala for giving us the opportunity to do BMS course in his college. We would also like to Prof: Sukhada Waknis for providing her guidance in completing this project. Lastly, we would also like to thank all those persons who are directly or in directly related to this project. FYBMS (Sem - II)

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

Introduction

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Economy of India : Analysis, Character & Structure

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Early Indian economy

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Indian capital market : An Overview

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Sectors share in national income

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National stock exchange

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Indian stock exchange : An umbrella growth

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Economic planning in India

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Service and Infrastructure sectors

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Indo – Chinese relationship

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Liberalisation

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Manufacturing sector – A comparative study FYBMS (Sem - II)

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Introduction Definition The part of industry or business which deals with the marketing and selling of intangible products rather than physical goods. The service sector has grown steadily in recent years and now contributes the largest share of GDP. This sector includes tourism. As of 2004, the largest numbers of foreign visitors to Germany came from the Netherlands, followed by the United States and the United Kingdom. The tertiary sector of industry, also called the service sector or the service industry, is one of the three main industrial categories of a developed economy, the others being the secondary industry (manufacturing and primary goods production such as agriculture), and primary industry (extraction such as mining and fishing).

Indian economy Salient Features: Economy transformed from primarily agriculture, forestry, fishing, and textile manufacturing in 1947 to major heavy industry, transportation, and telecommunications industries by late 1970s. Central government planning 1950 through late 1970s giving way to economic reforms and more private-sector initiatives in 1980s and 1990s. Agriculture predominates and benefits from infusion of modern technology by government. World Bank Group and developed nations provide most aid; Japan largest donor. Major trade partners United States, Japan, European Union, and nations belonging to Organization of the Petroleum Exporting Countries. FYBMS (Sem - II)

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India Currency and Exchange Rate: Rupee; US$1 = Rs35.67 (July 1996).

Fiscal Year (FY): April 1-March 31.

Gross Domestic Product (GDP): Rs36.7 trillion (nearly US$1.2 trillion) in 1994 (estimated). GDP annual average growth rate 3.8 percent in 1994.

Indian Foreign Trade: Principal export trade with European Union, United States, and Japan. Main commodities agricultural and allied products, gems and jewelry, and ready-made garments. Iron ore, minerals, and leather and leather products also important. Exports 7.7 percent of GDP in FY 1992. Principal import trade with European Union, United States, and Japan. Major imports (28 percent of total) oil products from Middle East. Other major imports chemicals, dyes, plastics, pharmaceuticals, uncut precious stones, iron and steel, fertilizers, nonferrous metals, and pulp paper and paper products. Imports 9.3 percent of GDP in FY 1992.

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Balance of Payments: Negative trade balance in late 1980s and early 1990s. In 1993 estimated exports US$22.7 billion versus US$23.9 billion imports.

Foreign Aid: Most aid provided by Aid-to-India Consortium, consisting of World Bank Group and Austria, Belgium, Britain, Canada, Denmark, Germany, France, Italy, Japan, Netherlands, Norway, Sweden, and United States. Japan largest aid granter and lender; US$337 million grants between 1984 and 1993, US$2.4 billion loans in same period. Indian aid program to Bhutan and Nepal; smaller programs assist Bangladesh and Vietnam.

Industry: Increasing share (27.4 percent in FY 1991) of GDP, but employed only about 9 percent of the work force in 1991. Basic industries: textiles, steel and aluminum, fertilizers and petrochemicals, and electronics and motor vehicles.

Energy: India importer of petroleum and natural gas but has abundant coal, hydroelectric power (especially in parts of North India), and burgeoning nuclear power industry.

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Minerals: Less than 2 percent share of GDP in FY 1990 and 1 percent of labor force involved in mining and quarrying in 1991. Basic minerals: iron, bauxite, copper, lead, zinc, mica, uranium ore, rare earths.

Services: Some 39.8 percent of GDP in FY 1991, then employing about 13 percent of work force. Large and diverse transportation system.

Agriculture: Declining share (32.8 percent) of GDP but employed majority of workers (67 percent of total labor force) in FY 1991. Around 45 percent (136 million hectares) of total land cultivated, 27 percent double cropped, effectively giving India 173 million hectares of cultivated land. Another 5 percent (15 million hectares) permanent pastureland or planted in tree crops or groves. Farming by smallholders; large landholders divested in 1970s. Rice, wheat, pulses, and oilseeds dominate production, but millet, corn (maize), and sorghum important; commercial crops-sugar (India world's largest producer), cotton, jute also important. Green Revolution technological advances and improved high yielding variety seeds, and increased fertilizer production and irrigation between mid-1960s and early 1980s. Dairy farming, fishing, and forestry important parts of agricultural sector. Agricultural products around 18 percent of total exports.

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Science and Technology: Major government investment (80 percent of total) in and control of science and technology sector; 200 national laboratories, 200 government-sector research and development institutions, and about 1,000 research and development units in industrial sector supported by both public and private funds. Substantial investments in research and development in defense, nuclear science, space, and agriculture.

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Economy of India: analysis, Character and Structure. Indian Economy has made great strides in the years since independence. In 1947 the country was poor and shattered by the violence and economic and physical disruption involved in the partition from Pakistan. The economy had stagnated since the late nineteenth century, and industrial development had been restrained to preserve the area as a market for British manufacturers. In fiscal year (FY--see Glossary) 1950, agriculture, forestry, and fishing accounted for 58.9 percent of the gross domestic product (GDP--see Glossary) and for a much larger proportion of employment. Manufacturing, which was dominated by the jute and cotton textile industries, accounted for only 10.3 percent of GDP at that time. India's new leaders sought to use the power of the state to direct economic growth and reduce widespread poverty. The public sector came to dominate heavy industry, transportation, and telecommunications. The private sector produced most consumer goods but was controlled directly by a variety of government regulations and financial institutions that provided major financing for large private-sector projects. Government emphasized self-sufficiency rather than foreign trade and imposed strict controls on imports and exports. In the 1950s, there was steady economic growth, but results in the 1960s and 1970s were less encouraging. Beginning in the late 1970s, successive Indian governments sought to reduce state control of the economy. Progress toward that goal was slow but steady, and many analysts attributed the stronger growth of the 1980s to those efforts. In the late 1980s, FYBMS (Sem - II)

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however, India relied on foreign borrowing to finance development plans to a greater extent than before. As a result, when the price of oil rose sharply in August 1990, the nation faced a balance of payments crisis. The need for emergency loans led the government to make a greater commitment to economic liberalization than it had up to this time. In the early 1990s, India's post-independence development pattern of strong centralized planning, regulation and control of private enterprise, state ownership of many large units of production, trade protectionism, and strict limits on foreign capital was increasingly questioned not only by policy makers but also by most of the intelligentsia. India's population continues to grow at about 1.8% per year and is estimated at one billion. While its GDP is low in dollar terms, India has the world's 13th-largest GNP. About 62% of the population depends directly on agriculture. Industry and services sectors are growing in importance and account for 26% and 48% of GDP, respectively, while agriculture contributes about 25.6% of GDP. More than 35% of the population lives below the poverty line, but a large and growing middle class of 150-200 million has disposable income for consumer goods. India embarked on a series of economic reforms in 1991 in reaction to a severe foreign exchange crisis. Those reforms have included liberalized foreign investment and exchange regimes, significant reductions in tariffs and other trade barriers, reform and modernization of the financial sector, and significant adjustments in government monetary and fiscal policies. The reform process has had some very beneficial effects on the Indian economy, including higher growth rates, lower inflation, and significant increases in foreign investment. FYBMS (Sem - II)

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Real GDP growth was 6.8% in 1998-99, up from 5% in the 1997-98 fiscal years. Growth in 1999-2000 is expected to be around 6%. Foreign portfolio and direct investment flows have risen significantly since reforms began in 1991 and have contributed to healthy foreign currency reserves ($32 billion in February 2000) and a moderate current account deficit of about 1% (1998-99). India's economic growth is constrained, however, by inadequate infrastructure, cumbersome bureaucratic procedures, and high real interest rates. India will have to address these constraints in formulating its economic policies and by pursuing the second generation reforms to maintain recent trends in economic growth. India's trade has increased significantly since reforms began in 1991, largely as a result of staged tariff reductions and elimination of non-tariff barriers. The outlook for further trade liberalization is mixed. India has agreed to eliminate quantitative restrictions on imports of about 1,420 consumer goods by April 2001 to meet its WTO commitments. On the other hand, the government has imposed "additional" import duties of 5% on most products plus a surcharge of 10% over the past 2 years. The U.S. is India's largest trading partner; bilateral trade in 1998-99 was about $10.9 billion. Principal U.S. exports to India are aircraft and parts, advanced machinery, fertilizers, ferrous waste and scrap metal, and computer hardware. Major U.S. imports from India include textiles and ready-made garments, agricultural and related products, gems and jewelry, leather products, and chemicals. Significant liberalization of its investment regime since 1991 has made India an attractive place for foreign direct and portfolio investment. The U.S. is India's largest investment partner, with total inflow of U.S. direct investment estimated at $2 billion (market value) in 1999. U.S. investors also have provided FYBMS (Sem - II)

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an estimated 11% of the $18 billion of foreign portfolio investment that has entered India since 1992. Proposals for direct foreign investment are considered by the Foreign Investment Promotion Board and generally receive government approval. Automatic approvals are available for investments involving up to 100% foreign equity, depending on the kind of industry. Foreign investment is particularly sought after in power generation, telecommunications, ports, roads, petroleum exploration and processing, and mining. As India moved into the mid-1990s, the economic outlook was mixed. Most analysts believed that economic liberalization would continue, although there was disagreement about the speed and scale of the measures that would be implemented. It seemed likely that India would come close to or equal the relatively impressive rate of economic growth attained in the 1980s, but that the poorest sections of the population might not benefit.

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Early Indian Economy Indian economy in the early period was a self sufficient economy comprising of several villages. Indian villages produced and met their requirement according to division of labour and their economic activity was restricted to village economy. Barter system prevailed as an exchange mechanism. Basically, the primary activity was agriculture. Other services like carpentry, weaving, hair dressing, etc. were offered by labourers who extended their services based on hereditary. They received their wages as food products. In short, Indian villages functioned as an independent republics and the only interference was from the King for whom they paid taxes in kind. Thus, India had happy villages. Prior to the British rule, religion, system of the society and king’s law influenced the economy to a great extent. There prevailed caste system which decided the division of labour for the benefit of the society’s economy. Further, the prevalence of joint-family system helped them to pool their resources for their individual family benefit and also for the benefit of the society. Another advantage of the joint-family system was that the cultivable lands were not fragmented, yielding to better economic gains. Another influencer of early Indian economy was the Hindu religion. The religious centers also functioned as Indian trade centres. For example, major pilgrimage spots like Nasik, Allahabad, Varanasi, etc. also functioned as centres of commerce and trade. Many trade and commerce activities were linked to the religious festivals and functions. In short, the Hindu religion acted as an indirect catalyst for the Indian economy. FYBMS (Sem - II)

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One of the major industries in early India was textile. Handicrafts were also part of the Indian industrial activity. Indian textile products like shawls, dhotis, dopattas, woolen products, cotton goods, etc. and handicraft products were exported to overseas markets, such as Egypt, South East Asia, Greece, etc. It is worth noting that when Europe (birth place of modern industrialism) was inhabited by uncivilized people, India was very popular for its craftsmanship and rich economy.

Indian Economy During Colonialism Indian land had been invaded and ruled by many outsiders, amongst which the British regime was considered very important. British East India Company entered India in 1757 through the Battle of Plessey and the Crown took the complete administration during 1858. Politically, India was under the British rule for around two centuries and the Indian economy was significantly influenced during their rule. Indian culture and administration too underwent a major transition during British rule. Other invaders, prior to British, created a feeling of differentiation between Indian citizens and themselves as a separate class. However, British identified themselves as citizens of India. Thanks to this attitude, British followed an administrative set up in India to develop their motherland at the expense of India. Further, the spread of colonialism of the British in South East Asia also led to another problem. They transported Indians to other neighboring countries like Sri Lanka as labourers to work in their plantations. However, when they left this subcontinent, they left several of these issues unsolved. Still today, FYBMS (Sem - II)

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these Indian labourers in Sri Lanka face an identity crisis. In Sri Lanka they are considered as Indians; and in India these labourers are considered as Sri Lankans. Economic activities of their colonies including India were tuned to the interests of Great Britain. During British rule, Indian handicrafts contribution declined and the economy was ruralized. British also introduced new land mechanism to enable them to gain more land revenue in order to suit their imperialistic needs. They adopted an industrial process transition through colonial capitalism. The colonial imperialistic attitude of the British rule has yielded India an unique economic problem, that is, modernization with under-development. Though British provided peace in this country, they failed to extend properity. The only remarkable economic fruit British rulers left for India was in the field of Indian transport system, especially that of railways and roadways. However, this benefit was only incidental. The ultimate motive of all the enterprise during British rule was to serve the benefit of the Great Britain and not that of India. Thus, when British left India in 1947, Indian economy depicted a paradoxical dual picture of modernization and under-development; along with several unsolved political issues, such as the fate of Indian labourers in Sri Lanka.

Indian Economy After Independence It is paradoxical that India is a rich country (in terms of enormous natural and man power resources) with poor people. India adopts a mixed economic model which is tending towards economic liberalization in order to attain self-reliance. FYBMS (Sem - II)

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Indian economy is characterized by lower per capita income, mass unemployment and under employment, overdependence of agriculture, over population, poor standard of living, low level of capital formation, low levels of health and education facilities, etc. Indian population, instead of being an asset, has most often proved to be a liability and economic distress. This calls for more attention by the Government in the upliftment of the population. Thus, any economic policy treatment in India will be viewed with a social mind frame. During 1901, urban population which was at 10.8 per cent of total population has increased to 25.7 per cent during 1991. Further, almost the entire rural population of 1901 (213 million) lives in urban India during 1991 (218 million). This indicates the extent of migration. Savings and capital formation are very important for a country’s anomic development. The gross domestic savings which was at Rs. 2544 crore in 1960-61 rose to Rs 157186 crore in 199293. The contribution of household sector to savings is the largest in India, followed by public sector and private corporate sector. The rate of saving s in India to GDP is not satisfactory due to several reasons, such as, low per Capitan income, poor performance of public sector enterprises, poor contribution of private sector players and untapped rural savings potential. It is worth noting that the gross savings of corporate sector, for the period 1960-61 to 1992-93, indicates an annual average growth rate of 14.23 per cent. However, when the savings and capital formation in the private corporate sector are compared with the gross domestic savings and capital formation, it has remained at more or less the same proportion around oneeighth of the total domestic savings. This is an indication of the FYBMS (Sem - II)

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corporate sector’s dependence on household sector savings for its long term capital requirements, which has led to a broad based structure of share ownership pattern. Indian economy has come a long way, especially after independence. Since independence, the structure of the Indian economy has gone through several changes, out of which sectoral contribution to the economy is the most vital one. The agricultural contribution to GDP is declining gradually as seen in the Table below. While the contribution of industrial sector has not improved to a great extend, the service sector’s contribution to GDP has notably increased. One of the main reasons for this change can be attributed to the economic policies of India.

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INDIAN Capital Market: AN OVERVIEW Evolution Indian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200 years ago. The earliest records of security dealings in India are meager and obscure. The East India Company was the dominant institution in those days and business in its loan securities used to be transacted towards the close of the eighteenth century. By 1830's business on corporate stocks and shares in Bank and Cotton presses took place in Bombay. Though the trading list was broader in 1839, there were only half a dozen brokers recognized by banks and merchants during 1840 and 1850. The 1850's witnessed a rapid development of commercial enterprise and brokerage business attracted many men into the field and by 1860 the number of brokers increased into 60. In 1860-61 the American Civil War broke out and cotton supply from United States of Europe was stopped; thus, the 'Share Mania' in India begun. The number of brokers increased to about 200 to 250. However, at the end of the American Civil War, in 1865, a disastrous slump began (for example, Bank of Bombay Share which had touched Rs 2850 could only be sold at Rs. 87). At the end of the American Civil War, the brokers who thrived out of Civil War in 1874, found a place in a street (now appropriately called as Dalal Street) where they would conveniently assemble and transact business. In 1887, they formally established in Bombay, the "Native Share and Stock Brokers' Association" (which is alternatively known as “The Stock FYBMS (Sem - II)

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Exchange "). In 1895, the Stock Exchange acquired a premise in the same street and it was inaugurated in 1899. Thus, the Stock Exchange at Bombay was consolidated.

Other leading cities in stock market operations Ahmedabad gained importance next to Bombay with respect to cotton textile industry. After 1880, many mills originated from Ahmedabad and rapidly forged ahead. As new mills were floated, the need for a Stock Exchange at Ahmedabad was realised and in 1894 the brokers formed "The Ahmedabad Share and Stock Brokers' Association". What the cotton textile industry was to Bombay and Ahmedabad, the jute industry was to Calcutta. Also tea and coal industries were the other major industrial groups in Calcutta. After the Share Mania in 1861-65, in the 1870's there was a sharp boom in jute shares, which was followed by a boom in tea shares in the 1880's and 1890's; and a coal boom between 1904 and 1908. On June 1908, some leading brokers formed "The Calcutta Stock Exchange Association". In the beginning of the twentieth century, the industrial revolution was on the way in India with the Swadeshi Movement; and with the inauguration of the Tata Iron and Steel Company Limited in 1907, an important stage in industrial advancement under Indian enterprise was reached. Indian cotton and jute textiles, steel, sugar, paper and flour mills and all companies generally enjoyed phenomenal prosperity, due to the First World War. In 1920, the then demure city of Madras had the maiden thrill of a stock exchange functioning in its midst, under the name and style of "The Madras Stock Exchange" with 100 FYBMS (Sem - II)

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members. However, when boom faded, the number of members stood reduced from 100 to 3, by 1923, and so it went out of existence. In 1935, the stock market activity improved, especially in South India where there was a rapid increase in the number of textile mills and many plantation companies were floated. In 1937, a stock exchange was once again organized in Madras - Madras Stock Exchange Association (Pvt) Limited. (In 1957 the name was changed to Madras Stock Exchange Limited). Lahore Stock Exchange was formed in 1934 and it had a brief life. It was merged with the Punjab Stock Exchange Limited, which was incorporated in 1936.

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Sector Share in National Income Sector Years Agriculture Industry Service

1970-71 50 20 30

(figures in percentage) 1995-96 29 28 43

It has to be noted that though the contribution of agriculture to GDP has declined, still majority of the population (around 67 per cent as per 1991 census) is depend on primary sector. This is the reason for the failure of many multinationals in India. They fail to notice this fact and over estimated the demand potential of their products. Therefore, India is not just another country. It has to its credit its own socio-economic features.

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AGRICULTURE Agriculture is the back bone of Indian economy for several centuries. The importance of agriculture in Indian economy is prominently evident. Nearly 70 per cent of the population depends on agriculture either directly or indirectly for their living. According to 1991 Census Report, over 67 per cent of the work force is still engaged in primary sector. However, employment in this sector is not wide spread. In other words, only 0.78 per cent of rural population (or 1.97 per cent of the rural work force) is employed in allied activities, such as, livestock, forestry, etc. Considering India’s wide natural resource potential (sea base, animal stock, etc.) this is a very negligible figure. Thus, there can be found great untapped employment opportunities for rural work force in the allied sector. Indian agriculture is characterized by lack of technology, low productivity, under employment, multiplicity of crops, unequal distribution of land, predominance of small farmers, etc. Indian agricultural crops can be broadly classified into food and cash or commercial crops. In India, selection of crops for farming depends on the nature of soil, climatic conditions prices of crops, size of farms, availability of inputs (seeds, fertilizers and pesticides), availability of irrigation facilities and policies of the Government. The major food crops in India are rice, wheat, bajra, maize, jowar and other pulses and cereals. Important commercial crops of India are sugarcane, groundnut, oil seeds, tea and coffee. India also farms non-food commercial crops like cotton, jute etc. FYBMS (Sem - II)

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Wheat Production in India Year

Production in Million Tones

1991-92

55.6

1992-93

57.0

1993-94

59.1

1994-95

65

1995-96

62.6

1996-97

68.7

1997-98

66.4

Rice Production in India Year

Production in Million Tones

1991-92

74.7

1992-93

72.9

1993-94

79

1994-95

81

1995-96

79.6

1996-97

80.5

1997-98

83.5

Fertilizer consumption per hectare is very low in India, even when compared to other low-income countries like Indonesia and Bangladesh. Thus, higher consumption of fertilizer has to be FYBMS (Sem - II)

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induced in the Indian environment to achieve higher value addition in agriculture. Another major hurdle for the agricultural sector in India is lack of water or proper irrigation policies by the rulers. To improve agricultural production, in a country like India, where net irrigated area (as percentage to net sown area) is only 35.1 per cent, superior water management becomes vital. However, due to political reasons Indian rulers are not able to unify water resources. India, if need to develop economically, can not ignore agricultural sector. Agricultural productivity for higher food supply has to be improved, which in turn will reduce the cost of food, leading to better standard of living.

Giving thrust advantages:

to

agriculture

has

the

following

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Higher production

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Improved productivity

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Greater employment

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No foreign technology required. Thus, no outflow of capital.

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Will check migration. Thus, lesser urbanization problems.

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Agriculture produces no pollution. Thus, lesser expenses on pollution control.

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Further, a thrust to allied rural activities like animal husbandry, fishery, forestry, alternate energy, industries based on rural resources will yield the following benefits: 

Additional income generation

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Generate jobs for the landless labourers

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Better nutrition to the masses

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Low gestation, high income vocation

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No pollution

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Added energy supply

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Reduce migration

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No overseas technology required

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INDUSTRY Industrialization is vital for a country’s economic development. Indian industrial sector is characterized by underutilization of resources, low capital formation, low level of technology, and lack of skilled man power and social attitudes of the population. Indian industrial development is also highly influenced by the political climate of India, the political philosophy of the ruling party, the attitude and culture of the political administrators and Indian Industrial Policies. Indian industry also depends highly on the attitudes and aspirations of the Indian man power and Indian society. The economic structure of India follows a mixed economy. Thus, the functioning of duel sectors - public and private - exists in India. Public sector includes both public utility undertakings and public enterprises. Due to several factors, such as, low returns, long time lag, defence requirements, public utilities, large resource requirement, development of backward regions, development of infrastructure, etc. the Government had to invest in certain capital-intensive segments to share the burden of industrialization and to generate employment opportunities. However, most of the public sector undertakings do not perform well from the angle of profitability and/or efficiency for many reasons, like initial heavy costs, capital-intensive industries, large capacities, heavy social costs, low priced products, labour problems and high expense ratio, unprofessional manpower planning, etc.

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The role of private sector in Indian industrial development can not be under stated. Private sector is also sharing Government’s burden in certain heavy investment ventures today, like infrastructure. This is due to the improved government policy towards private sector. The Indian Government has been form time to time changing its industrial policies to suit the economic and global environment in favour of industrial sector. Further, there can be found a trend towards taking advantage of the liberalised industrial policy frame work. This is vindicated by the various indicators of investment intentions. However, the private sector in India faces several obstacles: undue delay by the government authorities, restrains on capacity, over-dependence of public sector, price restrictions, small scale reservations, finance, etc. Though private sector is facing many problems, its contribution to Indian economy is remarkable. For instance, India achieved a GDP growth rate of 7 per cent in 1995-96 for the first time since 1950, despite a low agricultural growth rate of 2.4 per cent. The major factor which contributed for this growth rate was achievement by the industrial sector which registered a growth rate of 12.1 per cent in 1995-96. Further, besides the output aspect, there is an equally important aspect relating to the pattern of industrial development. There can be found substantial changes in the pattern of Indian industrial development which can be viewed from two dimensions:  There is a fast growth of basic and capital goods industries;  There is a large diversification of industries.

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During independence, industrial production was confined to select industry categories. Progress of industrial sector in India has been a striking feature of Indian economy. Industrial production has gone up by about seven times, registering a compound rate of growth of 6 per cent per annum during Plan period. This is certainly impressive compared to 2.0 per cent rate of industrial growth per annum during pre-independence period 1900-91 to 1945-46. The contribution of industry to GDP has substantially increased from 14.9 per cent in 1950-51 to 28 per cent in 1995-96. Apart from the rise in the quantity of production, the industrial structure has been widely diversified, covering the entire spectrum of consumer, intermediate and capital goods. There has been an acceleration of the production of basic and capital goods industries, particularly since Second Five Year Plan which had a heavy-industry strategy. this has resulted in a larger contribution of these industries to the economy. As a result of the swifter growth of investment goods industries, there has been a big shift in their status in the economy. Prior to Planning in India, industries manufacturing machines, tools etc. were almost non-existent. Currently, these industries account for around 50 per cent of total value added by the industries. (Their importance is also vindicated by the large weight age assigned to them in the index of industrial production.) No less important is the change that has taken place in the composition of industries. The number of industries producing a large variety of goods has increased. And there can be found a change in the relative significance of traditional and new industries. During independence, India inherited an industrial structure which was restricted to a few industries, such as sugar, FYBMS (Sem - II)

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steel and textiles. However, the structure underwent a major transformation during mid 1950’s when industrialization drive was launched; and self reliance became one of the vital objectives of Planning. Thanks to the Second Plan, in particular, India has a large variety of industries today producing goods of varied nature. This change in Indian industrial structure has yielded many fruits to Indian economy. It has strengthened the base of the economy which helps the economy to move towards self reliance

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National Stock Exchange (NSE) With the liberalization of the Indian economy, it was found inevitable to lift the Indian stock market trading system on par with the international standards. On the basis of the recommendations of high powered Pherwani Committee, the National Stock Exchange was incorporated in 1992 by Industrial Development Bank of India, Industrial Credit and Investment Corporation of India, Industrial Finance Corporation of India, all Insurance Corporations, selected commercial banks and others. Trading at NSE can be classified under two broad categories: (a) Wholesale debt market and (b) Capital market. Wholesale debt market operations are similar to money market operations - institutions and corporate bodies enter into high value transactions in financial instruments such as government securities, treasury bills, public sector unit bonds, commercial paper, certificate of deposit, etc. There are two kinds of players in NSE: (a) trading members and (b) participants. Recognized members of NSE are called trading members who trade on behalf of themselves and their clients. Participants include trading members and large players like banks who take direct settlement responsibility. Trading at NSE takes place through a fully automated screen-based trading mechanism which adopts the principle of an FYBMS (Sem - II)

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order-driven market. Trading members can stay at their offices and execute the trading, since they are linked through a communication network. The prices at which the buyer and seller are willing to transact will appear on the screen. When the prices match the transaction will be completed and a confirmation slip will be printed at the office of the trading member. NSE has several advantages over the traditional trading exchanges. They are as follows: NSE brings an integrated stock market trading network across the nation.  Investors can trade at the same price from anywhere in the country since inter-market operations are streamlined coupled with the countrywide access to the securities.  Delays in communication, late payments and the malpractice’s prevailing in the traditional trading mechanism can be done away with greater operational efficiency and informational transparency in the stock market operations, with the support of total computerized network. 

Unless stock markets provide professionalised service, small investors and foreign investors will not be interested in capital market operations. And capital market being one of the major sources of long-term finance for industrial projects, India cannot afford to damage the capital market path. In this regard NSE gains vital importance in the Indian capital market system.

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Indian Stock Exchanges - An Umbrella Growth The Second World War broke out in 1939. It gave a sharp boom which was followed by a slump. But, in 1943, the situation changed radically, when India was fully mobilized as a supply base. On account of the restrictive controls on cotton, bullion, seeds and other commodities, those dealing in them found in the stock market as the only outlet for their activities. They were anxious to join the trade and their number was swelled by numerous others. Many new associations were constituted for the purpose and Stock Exchanges in all parts of the country were floated. The Uttar Pradesh Stock Exchange Limited (1940), Nagpur Stock Exchange Limited (1940) and Hyderabad Stock Exchange Limited (1944) were incorporated. In Delhi two stock exchanges - Delhi Stock and Share Brokers' Association Limited and the Delhi Stocks and Shares Exchange Limited - were floated and later in June 1947, amalgamated into the Delhi Stock Exchange Association Limited.

Post- independence Scenario Most of the exchanges suffered almost a total eclipse during depression. Lahore Exchange was closed during partition of the country and later migrated to Delhi and merged with Delhi Stock Exchange. Bangalore Stock Exchange Limited was registered in 1957 and recognized in 1963. FYBMS (Sem - II)

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Most of the other exchanges languished till 1957 when they applied to the Central Government for recognition under the Securities Contracts (Regulation) Act, 1956. Only Bombay, Calcutta, Madras, Ahmedabad, Delhi, Hyderabad and Indore, the well established exchanges, were recognized under the Act. Some of the members of the other Associations were required to be admitted by the recognized stock exchanges on a concessional basis, but acting on the principle of unitary control, all these pseudo stock exchanges were refused recognition by the Government of India and they thereupon ceased to function. Thus, during early sixties there were eight recognized stock exchanges in India (mentioned above). The number virtually remained unchanged, for nearly two decades. During eighties, however, many stock exchanges were established: Cochin Stock Exchange (1980), Uttar Pradesh Stock Exchange Association Limited (at Kanpur, 1982), and Pune Stock Exchange Limited (1982), Ludhiana Stock Exchange Association Limited (1983), Gauhati Stock Exchange Limited (1984), Kanara Stock Exchange Limited (at Mangalore, 1985), Magadh Stock Exchange Association (at Patna, 1986), Jaipur Stock Exchange Limited (1989), Bhubaneswar Stock Exchange Association Limited (1989), Saurashtra Kutch Stock Exchange Limited (at Rajkot, 1989), Vadodara Stock Exchange Limited (at Baroda, 1990) and recently established exchanges - Coimbatore and Meerut. Thus, at present, there are totally twenty one recognized stock exchanges in India excluding the Over The Counter Exchange of India Limited (OTCEI) and the National Stock Exchange of India Limited (NSEIL). The Table given below portrays the overall growth pattern of Indian stock markets since independence. It is quite FYBMS (Sem - II)

33


evident from the Table that Indian stock markets have not only grown just in number of exchanges, but also in number of listed companies and in capital of listed companies. The remarkable growth after 1985 can be clearly seen from the Table, and this was due to the favoring government policies towards security market industry.

Growth Pattern of the Indian Stock Market Sr. No. 1 2 3

4

5

6

7

8

As on 31st December No. of Stock Exchanges No. of Listed Cos. No. of Stock Issues of Listed Cos. Capital of Listed Cos. (Cr. Rs.) Market value of Capital of Listed Cos. (Cr. Rs.) Capital per Listed Cos. (4/2) (Lakh Rs.) Market Value of Capital per Listed Cos. (Lakh Rs.) (5/2) Appreciated value of Capital per Listed Cos. (Lakh Rs.)

1946

1961

1971

1975

1980

1985

1991

1995

7

7

8

8

9

14

20

22

1125

1203

1599

1552

2265

4344

6229

8593

1506

2111

2838

3230

3697

6174

8967

11784

270

753

1812

2614

3973

9723

32041

5958 3

971

1292

2675

3273

6 750

25302

110279

478121

24

63

113

168

175

224

514

693

86

107

167

211

298

582

1770

5564

358

170

148

126

170

260

344

803

Source: Various issues of the Stock Exchange Official Directory, Vol.2 (9) (iii), Bombay Stock Exchange, Bombay.

Trading Pattern of the Indian Stock Market Trading in Indian stock exchanges are limited to listed securities of public limited companies. They are broadly divided FYBMS (Sem - II)

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into two categories, namely, specified securities (forward list) and non-specified securities (cash list). Equity shares of dividend paying, growth-oriented companies with a paid-up capital of atleast Rs.50 million and a market capitalization of atleast Rs.100 million and having more than 20,000 shareholders are, normally, put in the specified group and the balance in non-specified group. Two types of transactions can be carried out on the Indian stock exchanges: (a) spot delivery transactions "for delivery and payment within the time or on the date stipulated when entering into the contract which shall not be more than 14 days following the date of the contract”: and (b) forward transactions "delivery and payment can be extended by further period of 14 days each so that the overall period does not exceed 90 days from the date of the contract". The latter is permitted only in the case of specified shares. The brokers who carry over the outstanding pay carry over charges (cantango or backwardation) which are usually determined by the rates of interest prevailing. A member broker in an Indian stock exchange can act as an agent, buy and sell securities for his clients on a commission basis and also can act as a trader or dealer as a principal, buy and sell securities on his own account and risk, in contrast with the practice prevailing on New York and London Stock Exchanges, where a member can act as a jobber or a broker only. The nature of trading on Indian Stock Exchanges are that of age old conventional style of face-to-face trading with bids and offers being made by open outcry. However, there is a great amount of effort to modernize the Indian stock exchanges in the very recent times.

Over The Counter Exchange of India (OTCEI) FYBMS (Sem - II)

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The traditional trading mechanism prevailed in the Indian stock markets gave way to many functional inefficiencies, such as, absence of liquidity, lack of transparency, unduly long settlement periods and benami transactions, which affected the small investors to a great extent. To provide improved services to investors, the country's first ring less, scrip less, electronic stock exchange - OTCEI - was created in 1992 by country's premier financial institutions - Unit Trust of India, Industrial Credit and Investment Corporation of India, Industrial Development Bank of India, SBI Capital Markets, Industrial Finance Corporation of India, General Insurance Corporation and its subsidiaries and Bank Financial Services. Trading at OTCEI is done over the centres spread across the country. Securities traded on the OTCEI are classified into: Listed Securities - The shares and debentures of the companies listed on the OTC can be bought or sold at any OTC counter all over the country and they should not be listed anywhere else  Permitted Securities - Certain shares and debentures listed on other exchanges and units of mutual funds are allowed to be traded  Initiated debentures - Any equity holding atleast one lakh debentures of a particular scrip can offer them for trading on the OTC. 

OTC has a unique feature of trading compared to other traditional exchanges. That is, certificates of listed securities and initiated debentures are not traded at OTC. The original certificate will be safely with the custodian. But, a counter FYBMS (Sem - II)

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receipt is generated out at the counter which substitutes the share certificate and is used for all transactions. In the case of permitted securities, the system is similar to a traditional stock exchange. The difference is that the delivery and payment procedure will be completed within 14 days. Compared to the traditional Exchanges, OTC Exchange network has the following advantages: OTCEI has widely dispersed trading mechanism across the country which provides greater liquidity and lesser risk of intermediary charges.  Greater transparency and accuracy of prices is obtained due to the screen-based scrip less trading.  Since the exact price of the transaction is shown on the computer screen, the investor gets to know the exact price at which s/he is trading.  Faster settlement and transfer process compared to other exchanges.  In the case of an OTC issue (new issue), the allotment procedure is completed in a month and trading commences after a month of the issue closure, whereas it takes a longer period for the same with respect to other exchanges. 

Thus, with the superior trading mechanism coupled with information transparency investors are gradually becoming aware of the manifold advantages of the OTCEI.

Economic Planning in India Often, in the economic literature we find the terms ‘development’ and ‘growth’ are used interchangeably. However, FYBMS (Sem - II)

37


there is a difference. Economic growth refers to the sustained increase in per capita or total income, while the term economic development implies sustained structural change, including all the complex effects of economic growth. In other words, growth is associated with free enterprise, where as development requires some sort of control and regulation of the forces affecting development. Thus, economic development is a process and growth is a phenomenon. Economic planning is very critical for a nation, especially a developing country like India to take the country in the path of economic development to attain economic growth.

Why Economic Planning for India? One of the major objective of planning in India is to increase the rate of economic development, implying that increasing the rate of capital formation by raising the levels of income, saving and investment. However, increasing the rate of capital formation in India is beset with a number of difficulties. People are poverty ridden. Their capacity to save is extremely low due to low levels of income and high propensity to consume. Therefore, the rate of investment is low which leads to capital deficiency and low productivity. Low productivity means low income and the vicious circle continues. Thus, to break this vicious economic circle, planning is inevitable for India. The market mechanism works imperfectly in developing nations due to the ignorance and unfamiliarity with it. Therefore, to improve and strengthen market mechanism planning is very vital. In India, a large portion of the economy is non-monitised; the product, factors of production, money and capital markets are not organized properly. Thus the prevailing price mechanism fails FYBMS (Sem - II)

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to bring about adjustments between aggregate demand and supply of goods and services. Thus, to improve the economy, market imperfections has to be removed; available resources has to be mobilized and utilized efficiently; and structural rigidities has to be overcome. These can be attained only through planning. In India, capital is scarce; and unemployment and disguised unemployment is prevalent. Thus, where capital being scarce and labour being abundant, providing useful employment opportunities to an increasing labour force is a difficult exercise. Only a centralized planning model can solve this macro problem of India. Further, in a country like India where agricultural dependence is very high, one can not ignore this segment in the process of economic development. Therefore, an economic development model has to consider a balanced approach to link both agriculture and industry and lead for a paralleled growth. Not to mention, both agriculture and industry can not develop with out adequate infrastructural facilities which only a the state can provide and this is possible only through a well carved out planning strategy. The government’s role in providing infrastructure is unavoidable due to the fact that the role of private sector in infrastructural development of India is very minimal since these infrastructure projects are considered as unprofitable by the private sector. Further, India is a clear case of income disparity. Thus, it is the duty of the state to reduce the prevailing income inequalities. This is possible only through planning.

Planning History of India FYBMS (Sem - II)

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The development of planning in India began prior to the first Five Year Plan of independent India, long before independence even. The idea of central directions of resources to overcome persistent poverty gradually, because one of the main policies advocated by nationalists early in the century. The Congress Party worked out a program for economic advancement during the 1920’s, and 1930’s and by the 1938 they formed a National Planning Committee under the chairmanship of future Prime Minister Nehru. The Committee had little time to do anything but prepare programs and reports before the Second World War which put an end to it. But it was already more than an academic exercise remote from administration. Provisional government had been elected in 1938, and the Congress Party leaders held positions of responsibility. After the war, the Interim government of the pre-independence years appointed an Advisory Planning Board. The Board produced a number of some what disconnected Plans itself. But, more important in the long run, it recommended the appointment of a Planning Commission. The Planning Commission did not start work properly until 1950. During the first three years of independent India, the state and economy scarcely had a stable structure at all, while millions of refugees crossed the newly established borders of India and Pakistan, and while ex-princely states (over 500 of them) were being merged into India or Pakistan. The Planning Commission as it now exists was not set up until the new India had adopted its Constitution in January 1950.

Objectives of Indian Planning The Planning Commission was set up him following Directive principles: FYBMS (Sem - II)

40


To make an assessment of the material, capital and human resources of the country, including technical personnel, and investigate the possibilities of augmenting such of these resources as are found to be deficient in relation to the nation’s requirement.  To formulate a plan for the most effective and balanced use of the country’s resources.  Having determined the priorities, to define the stages in which the plan should be carried out, and propose the allocation of resources for the completion of each stage.  To indicate the factors which are tending to retard economic development, and determine the conditions which, in view of the current social and political situation, should be established for the successful execution of the Plan.  To determine the nature of the machinery which will be necessary for securing the successful implementation of each stage of Plan in all its aspects.  To appraise from time to time the progress achieved in the execution of each stage of the Plan and recommend the adjustments of policy and measures that such appraisals may show to be necessary.  To make such interim or auxiliary recommendations as appear to it to be appropriate either for facilitating the discharge of the duties assigned to it or on a consideration of the prevailing economic conditions, current policies, measures and development programs; or on an examination of such specific problems as may be referred to it for advice by Central or State Governments. 

The long-term general objectives of Indian Planning are as follows:

FYBMS (Sem - II)

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Increasing National Income  Reducing inequalities in the distribution of income and wealth  Elimination of poverty  Providing additional employment; and  Alleviating bottlenecks in the areas of: agricultural production, manufacturing capacity for producer’s goods and balance of payments. 

Economic growth, as the primary objective has remained in focus in all Five Year Plans. Approximately, economic growth has been targeted at a rate of five per cent per annum. High priority to economic growth in Indian Plans looks very much justified in view of long period of stagnation during the British rule.

SERVICE AND INFRASTRUCTURE SECTOR For any developing nation development of service and infrastructure segment is very important to reach its economic goals. India is successful in improving its service and infrastructure areas. It is very evident that the role of service FYBMS (Sem - II)

42


sector in Indian economic development has increased by several notches from the fact that this sector which was contributing only around 20 per cent during independence is contributing over 43 per cent currently to India’s GDP. Service and infrastructure sector is comprised of the following segments: Banking, Insurance, Transport, Telecom and Power.

Banking Performance of the banking sector is considered as a proxy for the economy as a whole, due to banks' wide spectrum of exposure across industries. Unfortunately for India, the banking sector has historically remained under the impact of noncompetitiveness, poor technology integration, high NPAs and grossly under productive manpower. Banking sector in India has a wide mix, comprising of joint sector (scheduled and non-scheduled banks), nationalised sector (Reserve Bank of India, State Bank of India and all other nationalized commercial banks and post office savings bank), specialized corporate financial institutions (specific industrial finance corporations and state finance corporations), co-operative sector (co-operative banks and land development banks) and foreign sector (foreign commercial banks and exchange banks). Keeping in mind the socio-economic goals of the country, banks were under strict control of the regulatory bank - Reserve Bank of India. For instance, during mid-1969, 14 major Indian commercial banks were nationalised. One of the major criticism against nationalisation of commercial banks was with respect to efficiency. And the critics were right. Since nationalisation, the operational efficiency of the commercial banks have come down, FYBMS (Sem - II)

43


thanks to the ‘public-sector working’ attitude of the bank work force. Since, their pay is not linked to performance; there is no inducement for the banking staff to perform well. This has been further, deteriorated by the poor quality to man power planning which is linked to selection of inefficient staff on the basis of social reservations. Earlier profitability gained only secondary importance, since banks lived in the comfort of a controlled environment. However, today banks cannot survive only with government support. They have to set goals of profitability along with service and set targets and evolve strategies to reach them. There is certainly a paradigm shift in banking in India in the recent past. At present profitability, capital restructuring and transparency are considered important and significant for banks. Also, banks in India have started realising the need to be `customer focused' that in turn leads to `customer appreciation' which is imperative for survival and growth. The first change along this line was brought in by the foreign banks with their emphasis on high quality and efficient service combined with the technological advantages like satellite banking and tele-banking manned by skeletal staff and lesser number of branches. Further, development of special manpower, innovative products, technology exploitation and personalized services play a crucial role in the banking industry today, since the customer has more options in choosing a bank. Thus leading to consumerism in the banking sector. Also, since customers are becoming more sophisticated and educated, their expectations from the neighborhood bank are increasing. FYBMS (Sem - II)

44


The private banks wisely chose to use this opportunity to prepare for the future rather than scramble for current business. Many of them refocused their activities, seeking clearly defined identities in terms of services and customer segments. To sum, the new private sector banks are poised to redefine banking in India. Though they do not pose a threat to the existing private banks they will certainly force them to gear up their strategies to remain in the field. This will lead to intense competition among the new banks, which would also serve as a challenge to the foreign banks. The last five years saw a sea-change in banking strategies, with more focus on quality. The adoption of a specialised customer-oriented focus is fast getting wider acceptability. In a market that keeps growing in depth and diversity, niche banking is the new mantra adopted by all. Thus, instead of targeting an entire market segment, banks have adopted a specific business focus to clearly reach their target audience.

The best banks' strategies: (1)

Increase volumes to compensate for declining interest rate spreads; (2) Trim expenditure on provisions and contingencies, thus narrowing the gap between operating profits and net profits; (3) Pare down operating expenses through organisational restructuring; and (4) Adopt a clearly focused communication plan. FYBMS (Sem - II)

45


Thus, today focus is more important than size in achieving success in the banking industry. The latest in technology, innovative retail products and personalized services are vital to carve out a niche in banking sector. Over the last few years, the communication style too has changed with respect to the banking industry. Communication has shifted from branding the bank to branding banking products, highlighting service commitment, convenience, etc. Further, branding of banking products, such as home loans, consumer durable loans, tele banking, ATM's, net banking, etc. have started taking place, especially after the entry of foreign banks and private sector banks which had the advantage of the latest technology.

Insurance Insurance sector in India has been enjoying a statemonopoly status in India for decades. Under Indian conditions there is only two broad classification of insurance companies: life and non-life insurance. The life insurance activities are solely managed by Life Insurance Corporation of India and the rest is handled by General Insurance Corporation of India. Life insurance business was started in India during British rule. Prior to independence, there were several insurance companies: Oriental Life Insurance Company, Bombay Life Assurance, The Madras Equitable Life Insurance Society, Oriental Government Security Life Assurance Company, etc. Most of the insurance companies were charging a very high extra premium of 15 to 20 per cent, since they considered Indian lives as substandard. These insurance companies prevailed during the time of independence failed to sustain on a long term basis. As many as 25 FYBMS (Sem - II)

46


companies were liquidated and another 25 companies had to merge with other companies at a lost to the policy holders. This has forced the Government of India in 1956 to nationalise all the 245 life insurance companies (154 Indian and 16 foreign), and form the Life Insurance Corporation of India.

Financial Performance of Life Insurance Corporation of India, 1997 (figures in Rs crore) Total premium

16240

Investment income

9396

Total income

25921

Management expenses 3504 Total outgo

10843

Total assets

91448

Life fund

87760

Till December 1972, the Indian general insurance market was overcrowded with as many as 107 companies. However, as in the case of commercial banks, all these insurance companies were nationalised under an act in 1972 which has yielded the state-monopoly General Insurance Corporation of India. General Insurance Corporation of India operates through four of its subsidiary companies which are spread geographically. They are: National Insurance Company (Calcutta-based), New India Assurance Company (Mumbai-based), Oriental Insurance Company (New Delhi-based) and United India Insurance Company (Chennaibased). The paid up capital of General Insurance Company is fully subscribed by the Indian Government. FYBMS (Sem - II)

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Financial Performance of General Corporation of India, 1 996- 97

Insurance

(figures in Rs crore) Total gross direct premium

7347.86

Total investment income

1755.07

Profit before tax

1084.08

Paid up capital and free reserves

4812.58

Total assets (March 1997)

18705.89

Total of technical reserves

11400.25

Dividend to Government 64.50 (on an original investment of Rs 21.50 crore)

However, the Government is planning to open this sector for private and overseas players. Towards this end, the Government is planning for a formation of an Insurance Regulatory Authority.

Transport A well developed transport system will support an economy in several ways : supports the industry by increasing the efficiency of production, rises the demand through movement of products, facilitates the location of an industry, helps the development of urbanization, movement of man power, better standard of living, better education, etc. Contribution of transport to Indian economy is very significant. FYBMS (Sem - II)

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Indian transport sector comprises of all forms of transports: railways, roadways, water and air transport. Indian Railways, largest Indian public sector undertaking and largest railway system in Asia run 12000 trains a day, with over 63000 route kms of track. Indian Railways has around 7000 railway stations. The total distance covered by the 12000 trains every day equals three and half times the distance to moon. It takes a gigantic task of carrying nearly 11 million passengers and 1.2 million tonnes of cargo per day. Indian Railways function as a major employment generator in India. Of the 27 million people employed in the organised sector, Indian Railways accounts for 6 per cent directly and an additional 2.5 per cent indirectly. Totally about 1.6 million people are employed by Indian Railways. The importance of road transport to Indian economy can not be neglected. Road transport is vital for the movement of agricultural products and also for industrial development. Thus, roads quicken the rate of growth. Further, road transport functions as a supportive system to railways. Railways can reach only certain locations, and the rest of the link is taken care by road transport. At the time of independence India had only 388000 kms of roads. Today, India has 2178008 km of road length, thanks to Planning efforts. The cheapest mode of transport is water transport, since water-ways provide ready made routes and thus no infrastructure costs involved in developing journey routes, compared to railway or road transport. India has both inland water and marine or shipping transport facilities. India possesses about 14150 kms. of navigable inland water-ways. Notable Indian waterways are: Ganga, Brahmaputra, Godavari, Krishna, Delta Canals, FYBMS (Sem - II)

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Mandovi, Zuari, Buckingham Canal and back-waters and the west coast canals of Kerala. Considering the geographical sea-base benefits of India, there is much scope to improve this mode of transport in the country, especially the coast line transport. The costliest mode of transport is by air, since airline industry is highly capital-intensive. In India, most passengers are infrequent air travelers due to the cost aspect of this mode of transport. They are broadly classified into business and leisure travelers. Air transport was nationalised in India in the year 1953. Since then, for a long time, air transport was monopolized by the government players - Air India operates international flights and Indian Airlines operates domestic flights. However, in the recent past India has allowed private players also to participate in the domestic aviation segment, with adequate restrictions imposed upon them. One of the major hurdles in the aviation industry is the lack of adequate airport infrastructure. Inspite of the low airport infrastructure, there are over 25 international airlines operating from India. International services to India are guided by bilateral air services agreement with around 80 countries. Aviation industry in India is fragmented with relatively less interdependence with other similar agencies within the country and outside. Thus they face global competition from mega airline operators. About 50 to 60 per cent of India’s air space is controlled by defence and the balance by civil. The lack of coordination and in the grab of security, civil aircraft have at times followed very circuitous routes, to avoid defence installations, thus causing immense loss of time and fuel, which can be to the tune of several hundred crores in a year. India needs a comprehensive aviation policy which will facilitate improvement of airport infrastructure and assure FYBMS (Sem - II)

50


smooth flying in India and overseas for the betterment of Indian economy.

Telecom In an economic policy frame work where the role of markets and incentives based on the price system is emphasized, infrastructural goods and services, such as telecommunications are generally characterized by high fixed investments, long gestation lags and relatively low profits, especially during the initial phases of operation. For a long period, almost all the infrastructural projects in India were Government’s responsibility. However, as India moved along the path of economic development, the process of liberalization began and private sector’s supportive role was recognized. Telecom sector was opened up for private sector participation into basic services and value added services with the policy announcement in May 1994. In order to meet the rising demand in the telecom sector, Indian Government decided to invite private players to supplant the government supported agencies in rendering basic as well as value added telecom services. Though opened up, barring a few areas like pagers and mobile phones, Indian telecommunication sector is dominated by Department of Telecom (DOT) and two government companies - VSNL and MTNL. Telecommunication sector in India is characterized by a fundamental failure on the following accounts: 

The number of per capita telephone connections in India is around one-sixth of that found in countries with a comparable per capita GDP. The ratio is even more adverse, in the area of data communication. (In India there are only 13 connections per FYBMS (Sem - II)

51


1000 persons; India has 10 million telephones with a density of one per 100, where the global standard is 10 per 100.)  In India, the current players are not able to meet the demand. The registered demand during 1996-97 was 17430 thousand connections out of which the unmet demand (waiting list) was around 2887 thousand lines.  Telecom facilities in India are noisy and unreliable as compared with what is easily attainable using contemporary technology.  In India, telecom facilities are often hundreds of per cent costlier than the fair price of these services. The usage of modern telecom technology is a vital factor for the rapid growth of Indian economy, since : The application of modern telecom coupled with computer technology has the potential of yielding order of magnitude gains in productivity in a large variety of industries.  Modern telecom and computer networks allows India gain access to ideas from all over the world.  Telecom is special, because, as an alternative, it is substantially cheaper as compared with roads or railways.  Improving the telecom infrastructure will help to boost trading activities of India.  Superior telecom facilities are a must for India today, because many Indian states are focusing on information technology for export earnings. Only a proper telecom facility can assure the industry players a swift data transfer mechanism which will help them to compete with the global players in the information technology field. 

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Telecom sector in India lacks a clear Government policy directive. There are several issues, such as incoming call fee in the case of cellular, which are not solved. The Government has to announce a proper stable and long-term telecom policy for the benefit of the economy, since the development of this sector is a crutial indirect input for the development of the nation.

Power Power is a vital input for the growth of industrial development of any nation - higher the power, higher the industrial growth and higher the employment. Since independence most of the projects in this sector has been financed and managed by government agencies - Center or State (nearly 90 per cent or more investment required for the power sector came from the public sector through Five Year/Annual Plans). However, since liberalisation, the role of private sector, inclusive of foreign players were recognized in the power projects. Power projects involve huge investments and overseas support in terms of financing as well as managing power projects become inevitable for a developing nation like India, since electricity can not be easily imported or stored and hence, creation of generation capacity domestically is critical for meeting the country's demand for power. If the capacity additions are not done in time, power shortages result in the system which leads to inefficient operations and management, decelerate investment in other sectors of the economy and hamper the growth process of the country in general. In India, the endemic power shortages and cuts lead to inadequate capacity utilization, unproductive expenditure such as in back-up FYBMS (Sem - II)

53


generators and much waste, all of which impose a major constraint on economic growth.

Shortage of Power: Demand and Supply In India there is a significant short-fall in the availability of power. With the present installed capacity of about 84000MW, there is a peak shortage of about 15 per cent and an energy shortage of about 5 per cent. The per capita electricity consumption in the country, in spite of a rise to a level of 314KWH in the last four decades, is one of the lowest in the world. In fact, this is in sharp contrast with the average consumption in the developed countries which is over 5000KWH per annum. Over the years, sectoral consumption of electricity in India has changed considerably. The shares of the agricultural and domestic sectors have increased, while the share of the industrial sector has declined. This can be attributed to the setting up of captive power plants by the industry, due to the increasing tariffs and unreliable supply from SEBs. The 15th Electric Power Survey has forecast an energy demand of 570 billion kwh and a peak demand of 957,000 MW in 2001-02. This forecast is less than that forecasted in the 14th EPS for the same year. This is probably due to the enlarging base and the increase in the share of the services sector in the GDP. In order to optimise the utilization of the existing capacity, the Government is planning to initiate steps for the conservation of energy and to reduce the difference in the peak and base loads, through measures such as energy audits and tariff incentives. FYBMS (Sem - II)

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Power: Demand and Supply: All India (figures in billion KWH)

Demand Supply Deficit per-cent 1980-81 120.1

104.9 -15.2

12.7

1981-82 129.2

115.3 -13.9

10.8

1982-83 136.8

124.2 -12.6

9.2

1983-84 145.3

129.7 -15.6

10.7

1984-85 155.4

145.0 -10.4

6.7

1985-86 170.7

157.3 -13.4

7.9

1986-87 192.4

174.3 -18.1

9.4

1987-88 211.0

188.0 -23.0

10.9

1988-89 223.0

205.9 -17.1

7.7

1989-90 247.8

228.2 -19.6

7.9

1990-91 267.6

246.6 -21.0

7.8

1991-92 289.0

266.4 -22.6

7.8

1992-93 305.3

279.8 -25.5

8.4

1993-94 322.8

299.0 -23.8

7.4

1994-95 352.3

327.3 -25.0

7.1

1995-96 389.7

354.0 -35.7

9.2

(Source: Central Electricity Authority)

The future projections made by CEA, the 15th Annual Power Survey and similar other institutions have estimated a growth requirement of about 6-7 per cent per annum. According FYBMS (Sem - II)

55


to the Fifteenth Electric Power Survey of July 1995, energy demand in 1999-2000 is projected at 502254 million KWH. And the Power Survey is reported to have recorded a peak power requirement of 95000MW at the end of the Ninth Five Year Plan (2001-2002) and 130900MW at the end of the Tenth Plan (2006-2007), which corresponds to an installed capacity of 160000MW and 280000MW respectively. In other words, requirement of additional installed capacity during the ninth Plan is 57000MW and 67000MW in the Tenth Plan. To meet the power needs of India by 2005-2006, the country needs Rs.67900 crores of investment. Power Line has projected the loss to the economy due to power shortages in the country as follows : The loss in GDP growth is at least 2 per cent per annum and perhaps as much as 2.5 per cent  GDP loss over the last five years amounted to at least Rs.65000 crore (assuming a 2 per cent loss per annum)  GDP loss in the year - 1996-97 - is close to Rs.18000 crore. Assumes 6 per cent growth with shortages and 8 per cent growth without shortages.  The total projected GDP loss over the next ten years will be at least Rs.1800000 crore. Assumes 6 per cent growth with shortages and 8 per cent growth without shortages.  Every 1000MW project delayed is costing the economy over Rs.1300 crore per year. This is based on the following assumptions : 20 per cent more peak power needed; 16 per cent more capacity needed; 13500MW needed this year; and 18000 crore lost attributable to the above shortfall. 

FYBMS (Sem - II)

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Thus, to attain considerable industrial growth, India needs swift power.

Power Finance During post-independence era, power - one of the major core sector - has been funded by the government/government agencies, when private participation was almost nil in power sector, thanks to government policies. However, with liberalisation, this core sector was opened to private sector and consequently to the foreign players. Further, due to constraints of funds with the Government of India, the public sector would suffer from inadequacy of funds. With present levels of finances, only 20000MW in each plan period could be built in the public sector. Thus, the rest (84000MW) is expected to be financed through private sector, both Indian and foreign. Since the cost outlay in power projects are huge, financing the projects through internal accruals alone becomes inevitable; and further, the government is also slowly changing withdrawing itself from the role of producer and trying to stickon only as a regulator in the long run. Thus, power producers has to look in for alternate source of financing such as, term loans from financial institutions (internally and internationally) like World Bank, ADB, ICICI, etc. and debt market in India and abroad. Some 70 per cent of the finance required by the power sector over the next decade - total estimated at about Rs.5000 billion (US $143 billion) - has to be found through debt. While the sector could expect special consideration in the allocation of foreign debt entitlement, the bulk of the FYBMS (Sem - II)

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debt finance will have to be raised in rupees. Identified level of rupee debt at present is about 75 billion per annum. This would need stepping up significantly. The center has decided to allocate about Rs.14000 crore for nuclear energy to generate an additional 1000MW during the Ninth Plan period. This is a Rs.1000 crore increase over the Eight Plan period allocation which was Rs.13000 crore. Further, according to the estimation of Finance Minister, around 22.5 per cent of the proposed voluntary disclosure scheme for harnessing black money, would be used for financing infrastructure projects and basic minimum services program. The power sector so far in 1996-97 has accessed $2 billion in ECB sanctions. Compared to the previous year ECB sanctions of $0.61 billion, this is a considerable increase. Allocations in power sector have largely been made to non fasttrack projects and captive power projects. Financial institutions have told the Power Ministry that they will not be able to provide funds for additional power generation beyond 5000MW during the Ninth plan. This falls woefully short of the power ministry's target of adding 57000MW during the Plan. The service sector now accounts for more than half of India's GDP: 51.16 per cent in 1998-99. This sector has gained at the expense of both the agricultural and industrial sectors through the 1990s. The rise in the service sector's share in GDP marks a structural shift in the Indian economy and takes it closer to the fundamentals of a developed economy (in the developed economies, the industrial and service sectors contribute a major FYBMS (Sem - II)

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share in GDP while agriculture accounts for a relatively lower share). The service sector's share has grown from 43.69 per cent in 1990-91 to 51.16 per cent in 1998-99. In contrast, the industrial sector's share in GDP has declined from 25.38 per cent to 22.01 per cent in 1990-91 and 1998-99 respectively. The agricultural sector's share has fallen from 30.93 per cent to 26.83 per cent in the respective years. Some economists caution that if the service sector bypasses the industrial sector, economic growth can be distorted. They say that service sector growth must be supported by proportionate growth of the industrial sector; otherwise the service sector grown will not be sustainable. It is true that, in India, the service sector's contribution in GDP has sharply risen and that of industry has fallen (as shown above). But, it is equally true that the industrial sector too has grown, and grown quite impressively through the 1990s (except in 1998-99). Three times between 1993-94 and 1998-99, industry surpassed the growth rate of GDP. Thus, the service sector has grown at a higher rate than industry which too has grown more or less in tandem. The rise of the service sector therefore does not distort the economy. Within the services sector, the share of trade, hotels and restaurants increased from 12.52 per cent in 1990-91 to 15.68 per cent in 1998-99. The share of transport, storage and communications has grown from 5.26 per cent to 7.61 per cent in the years under reference. The share of construction has remained nearly the same during the period while that of financing, insurance, real estate and business services has risen from 10.22 per cent to 11.44 per cent. FYBMS (Sem - II)

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The fact that the service sector now accounts for more than half the GDP probably marks a watershed in the evolution of the Indian economy.

Share of the service sector in India's GDP Share of the service sector in India's GDP (in Rs. crore). Figures in brackets indicate percentage share of different sectors and subsectors. Figures for 1994-95 onwards are on a changed base (1993-94=100), so they show huge increases compared to the preceding period. 199819971996- 1995- 1994- 1993- 1992- 199119901985- 1980Year 99 98 97 96 95* 94 93 92 91 86 81

Services of which Construction

569005 537642 498572 463980 (51.16) (51.24) (49.91) (50.08) 50328 49313 47382 46054 (4.53) (4.70) (4.74) (4.97)

Trade, hotels & restaurants of which

....

i) Trade

....

ii) Hotels & restaurants

....

423200 (49.15) 42560 (4.94)

108974 (45.62) 10517 (4.40)

92733 (43.69) 9833 (4.63)

66306 50177 (42.25) (40.99) 7183 6114 (4.59) (4.99)

164355 155954 143858 127532 31057 28650 26827 26580 (15.68) (15.61) (15.53) (14.81) (13.00) (12.72) (12.54) (12.52)

19649 14713 (12.55) (12.02)

155120 147305 136087 121546 29082 26866 25147 24933 (14.78) (14.75) (14.69) (14.12) (12.18) (11.93) (11.75) (11.75) 9235 8649 7771 5986 1975 1784 1680 1647 (0.88) (0.87) (0.84) (0.70) (0.83) (0.79) (0.79) (0.78)

18498 13839 (11.81) (11.30) 1151 874 (0.74) (0.71)

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102142 97045 (45.34) (45.35) 10386 10047 (4.61) (4.70)

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Role of Service Sector in Indian Economy Transport, storage & communications of which

....

i) Railways

....

ii) Transport by other means

....

iii) Storage

....

iv)Communication

....

Financing, insurance, real estate of which i) Banking & insurance ii) Real estate, dwelling business Community, social, personal of which i) Public admin. & defence

79819 (7.61)

74956 (7.50)

68788 (7.43)

63118 (7.33)

13057 (5.47)

12398 11785 (5.50) (5.51)

11164 (5.26)

7951 (5.08)

5724 (4.68)

11521 (1.10) 50144 (4.78) 655 (0.06) 17499 (1.67)

11189 (1.12) 47895 (4.79) 646 (0.06) 15226 (1.52)

10647 (1.15) 44513 (4.80) 652 (0.07) 12976 (1.40)

9846 (1.14) 41706 (4.84) 621 (0.07) 10945 (1.27)

1746 (0.73) 9209 (3.86) 188 (0.08) 1914 (0.80)

1758 (0.78) 8735 (3.88) 180 (0.08) 1725 (0.77)

1677 (0.79) 7853 (3.70) 177 (0.08) 1457 (0.69)

1404 (0.90) 5309 (3.39) 163 (0.10) 1075 (0.69)

1124 (0.92) 3680 (3.01) 122 (0.10) 798 (0.65)

21700 (10.22)

14708 (9.39)

10791 (8.81)

11169 (5.26) 10531 (4.96)

5828 (3.72) 8880 (5.67)

3408 (2.78) 7383 (6.03)

1778 (0.83) 8275 (3.87) 175 (0.08) 1557 (0.73)

127205 119814 110575 102438 94609 27711 25084 23972 (11.44) (11.42) (11.07) (11.06) (10.99) (11.06) (11.14) (11.20) .... .... 131047 (11.78)

65814 (6.27) 54000 (5.15)

58034 (5.81) 52481 (5.25)

51343 (5.54) 51095 (5.52)

45190 (5.25) 49419 (5.74)

16111 (6.74) 11600 (4.86)

13861 (6.15) 11223 (4.98)

13107 (6.13) 10865 (5.08)

124341 109705 102842 95381 26632 25624 24414 23456 (11.85) (10.98) (11.10) (11.08) (11.15) (11.37) (11.41) (11.05)

16815 12835 (10.74) (10.48)

58631 48736 46635 43620 12483 12170 11570 11328 8016 5794 (5.59) (4.88) (5.03) (5.07) (5.23) (5.40) (5.41) (5.34) (5.12) (4.73) 65710 60969 56207 51761 14149 13454 12844 12128 8799 7041 ii) Other services .... (6.26) (6.10) (6.07) (6.01) (5.92) (5.97) (6.00) (5.71) (5.62) (5.75) Total GDP: 1112206 1049191 998978 926412 861064 238864 225268 213983 212253 156566 122427 * Figures for 1994-95 onwards are on a changed base (1993-94=100), so they show huge increases compared to the preceding period. Source: Studies by Reserve Bank of India ....

INDO- CHINESE RELATIONSHIP Service sector is India is booming. Experts say that in the of shoring world, India could be the hub and other Asian nations, the spokes. But, china is now catching up with the Indian of shoring industry… at the same time, its manufacturing sector in full fledges. China seems to have realized that any sector, no matter how profitable will slump into recession once it reaches the peak. However, in India, the service sector is still being milked FYBMS (Sem - II)

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dry, while we actually need to shift our focus toward the manufacturing sectors. The point however, to be considered, is that china need not be a replacement market for Indian talent but a complementary market for growing business in japan and servicing the local Chinese businesses. But setting up a development centre in china is not that simple. Now, the exit options at the moment are not clear. Even though the cost of a Chinese programmer may be less than that of an Indian programmer, there are other overhead costs which bring the cost of development in china almost on par or above India. 20000

15000

10000

5000

0 INDIA

CHINA

SOUTH AFRICA

On comparison of all the above costs, India is the best alternative. The Indian firms will have to look at these centers as strategic resources to de-risk. As far as the English speaking talent is concerned, India will continue to be the base. At the moment, the Indian talent supply looks sufficient. So much so, that there has been no increase of salaries at the entry level for the last 2-3 years. This is probably an indicator of the soon-to-come recession in the service sector. FYBMS (Sem - II)

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An attempt has been made in this project to identify the various needs as to why India has to concentrate on industrial development and propel the manufacturing sector that is not being exploited to its fullest potential.

Servic Servicee secto sector: r: Indi Indiaa Vs. China China Service Sector in India The growth of the service sector in both the developed and developing world has been phenomenal. As economies become progressively service driven, greater wealth and employment is being generated in this sector. Before we begin, what exactly are the different types of services? FYBMS (Sem - II)

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Services can be classified into four categories on the basis of the service customization and customer contact, and we would look at the categories as follow. First of all would be the Service Factory, with such examples as airlines, hotels/resorts and trucking. This is the type where there is low customer contact and low degree of customization. The services offered need to be warm and exciting, and attention must be paid to ambience and physical surroundings. Secondly, the Service Shops, where there is high degree of customization. The management must deal with skilled labour and the key challenges would be keeping cost down and quality up. Examples are hospital and auto repair. The third type of service would be the Mass Service, where there is high level of customer contact and low level of customization. Managing and controlling the workforce would be the key and examples are retailing, wholesale trade and school. Lastly, the Professional Service Firms, with a high degree of customer contact and customization. The key to this type of services is the managing and controlling of people, management's ability to deal with skilled workforce as well as keeping cost down and quality up. Some examples are doctors, lawyers, consulting firms and so on. Due to the growing importance of the service sector, academics and consultants worldwide have make efforts towards improving the management of service businesses. Similarly, in India, the service sector has been growing rapidly over the last decade or so and the trend is likely to continue. If one describes an economy based on its major economic sector, then India made the transition from an agricultural economy to a service economy in 1979. FYBMS (Sem - II)

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In 1985, the service sector accounted for 47 per cent of GDP, having expanded at an average annual growth rate of 7 per p er cent between 1980 and 1985 The share of services sector in the real GDP in India has surpassed that of agriculture and industry at a relatively faster pace as compared to other industrialized nations. Service sector has become the main contributor to the GDP not merely in developed economies like U.S.A.(71%), Japan(60%) & U.K.(67%) but also in developing economies like China(33%), Indonesia(41%), Pakistan(50%) & Brazil(56%). S H A R E O F S E R V IC IC E S E C T O R I N T H E V A R IO U S E C O N O M IE S

41% 71% U SA JAPAN

33%

U .K CHINA INDONESIA 67%

60%

In the Indian context, it can be safely said that the service sector now accounts for more than half of India's GDP FYBMS (Sem - II)

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This sector has gained at the expense of both the agricultural and industrial sectors through the 1990s. The rise in the service sector's share in GDP marks a structural shift in the Indian economy and takes it closer to the fundamentals of a developed economy (in the developed economies, the industrial and service sectors contribute a major share in GDP while agriculture accounts for a relatively lower share). The service sector's share has grown from 43.69 per cent in 1990-91to 51.16 per cent in 1998-99. In contrast, the industrial sector's share in GDP has declined from 25.38 per cent to 22.01 per cent in 1990-91 and 1998-99 respectively. The agricultural sector's share has fallen from 30.93 per cent to 26.83 per cent in the respective years. It is true that the industrial sector too has grown, 1990s (except in 1998-99). But the service sector has grown at a higher rate than industry. Some economists caution that if the service sector bypasses the industrial sector, economic growth can be distorted. Service sector growth must be supported by proportionate growth of the industrial sector; otherwise the service sector grown will not be sustainable. This project is a comprehensive study of the two important sectors, namely manufacturing and service of China and India.

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SERVICE SECTOR IN CHINA In China, banks continue to be keen on providing support to larger players and are playing a relatively small role in financing the private firms who are rewriting its history. While its banking system made good progress in divorcing itself from interference by government, it still has a long way to go. There is evidence that the government still encourages lending to ailing State Enterprises. Again one gets to see the same moral hazard that is omnipresent. Banks still don't consider bad loans given to State Enterprises a serious problem. At the basic level the problems are similar to those faced by any banking system that grows under the socialist legacy. Competition is very much limited. Profit motive is largely absent. The state ownership of banks and private ownership of business is big mismatch. Unless banks are also privatized, they are unlikely to develop profit motive. the banking sector needs to be opened up for foreign competition and foreign ownership. Deregulation of interest rates will be another area of big change. The change is already visible with many banks gearing up for listing of their shares. The state-owned banks saddled with about $150 bn of NPAs are considered technically bankrupt. Though the bad debts have been transferred to AMCs, it merely transfers the burden from one to another. The bottom line is that the system has to bear the cost of these NPAs. With lack of alternative avenues of investment in the market place, banks are still flush with deposits and the state guarantee is also construed as risk free investment. The need of the hour is to totally liberate the banking system. FYBMS (Sem - II)

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CHINA Vs. INDIA: A COMPARITIVE STUDY China and India each have a population of over 1 billion people. Their collective population amounts to more than 33% of the world population. Their countries are geographically large and their population is composed of a wide range of ethnicity, each speaking their own language or dialect. Yet, over the last 20 years, China's GDP growth, GDP per capita growth and labour productivity have been significantly higher than that of India. Why is this? What should India do to compete with China and establish itself as the world's workshop, factory and supplier of quality goods and services? Although India has the major human resource, it has failed to utilise its potential to create a vibrant manufacturing sector like that of China There was not much difference in the economic performance roughly until 1980, when the per capita incomes were also similar. Over the last quarter century, both instituted economic reforms and economic growth accelerated. As the history goes, in 1947 India achieved independence and it is in the year 1949 that in China communists assumed power. Both the economies made modest beginning toward industrialization. In the early 1950s, China was better placed than India to extract resources from agriculture to finance the planned industrialization program. India didn't pay attention to agriculture until the food crisis of the 1966-67. China's current account balance stands at a huge plus, at nearly $30 billions, while for India it has been a minus throughout the last four decades.

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China's FDI strength stands apart. Over 75 percent of FDI that China received went to new enterprises. In India, about 65 percent of the little FDI went into M&A. Another area where India failed and China achieved immensely is the area of labor reform. India succeeded in overprotecting the interests of workmen making the restructuring of the industry impossible China embraced globalization and trade enthusiastically, welcoming foreign direct investment with no inhibitions, and gradually gaining control of world markets for low-tech laborintensive manufactures. China initiated reforms a decade earlier than India's reform. China's economy grew at double the rate of India's during the '80s and early '90s. While successive Indian governments restricted the import of technology from the West and Japan, the Chinese governments encouraged them. As a result, the gap widened considerably. While reforms in India are supposed to have been initiated in 1991, the doctrinaire socialist policy had begun to be diluted in the second innings of Indira Gandhi. The process of liberalization continued under Rajiv Gandhi, and more dramatically after 1991. The growth rate doubled from the previous rate, but still lagged that of China. The result has been that starting with more or less the same per capita incomes 25 years back, Chinese incomes today are double that of India's -- a result not only of faster GDP growth, but also of a lower population increase. Today, apart from higher incomes and lower poverty, the areas in which China is far ahead of us are literacy, FDI, labor FYBMS (Sem - II)

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rationalization in the public sector and infrastructure investments. Thus, the post-reform China has successfully created manufacturing conditions that have redefined the concept of productivity. With interest rates being relatively low at around 46 percent, high productivity of labor, enabling infrastructure, lower input costs, Chinese private firms have evolved themselves into mighty price warriors.

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LIBERALISATION Causes of liberalisation in China In the early 1990s was that after Tiananmen Square in 1989, the conservative economic planners took control of the country. At that time the State Owned Enterprises (SOEs) i.e. China’s PSUs were virtually bankrupt because of the tight economic controls that the central planners imposed on the country. In the 1980s, there was some private sector activity, but when these activities became politically and ideologically problematic for the leadership after Tiananmen, they cracked down on private firms. So in 1991 there was a substantial reduction of economic growth and the Chinese external sector ran into difficulty. It was this difficulty that prompted the leadership to open up the Chinese economy to FDIs.

Liberalisation – One step at a Time This liberalization strategy of the Chinese government can be broadly classified into two stages: Stage one: Restructuring SOEs, rather than privatizing them. Stage Two: Attracting FDI.

In the first fifteen years of liberalization, China concentrated on aforesaid two areas. FYBMS (Sem - II)

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Then in 1992, they substantially liberalised FDI controls. This strategy has proved successful FDI came in response to the weaknesses in the SOEs, as foreign firms didn't think the SOEs could compete with them and to add to that, the economic prospects of the country looked good. In 1998, Chinese Government also allowed privatisation, especially of smaller SOEs. They allowed the banks to lend capital to private entrepreneurs. They also improved legal and political treatment of private entrepreneurs. Also, they began to liberalise the policies toward the domestic private sector. Reforms focused on bringing an element of micro autonomy. These efforts set in motion a self-propelling mechanism that led to the emergence of new class of private enterprises who changed the economic scenario considerably.

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The TVE Phenomenon: The real force behind China's economic achievement appears to be the country's ability to take the industry to rural China as against the common model of industry concentration in urban cities. Harbingers of this revolution are something called 'Town and Village Enterprises (TVEs). The TVE phenomenon that led to worldwide spread of China's standard and cheap products. By the 1980s the State Enterprises (the public sector companies) were losing steam. This led to displacement of many skilled workers. They had the choice of returning to their native places. About the same time the Non-Resident Chinese became wealthy and were willing to play venture capitalists. They provided funds to the homeland's businesses, which promised a good return. They found that the rural entrepreneurship coupled with the skilled worker from the big industry was an ideal combination to unleash a revolution. They not only funded these businesses but also acted as buyback agents of the production.

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Special thrust was given to light and medium enterprises where investments required are limited. This strategy delivered results. Smaller private enterprises emerged as a force to reckon with. It led to rapid economic growth. Production of consumer goods increased. A consequent rise in exports and foreign currency earnings led to a general rise in personal incomes.

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Liberalisation of Indian economy Since the start of liberalization of its economy in 1991, India has been going through an epochal transformation into one of the world’s fastest growing economies. Its gross domestic product rate was picked up from 1.3 % in 1191 to 1992 to 7.8 % in 119-1997 and despite a global slowdown, moved up from 4.4% in 2000-01 to 5.6% in 2001-2002. Its GDP for 2002-2007 is currently targeted at 8%. New investment opportunities for 2002-2007 total sum of $1.5 trillion spread over the various sectors such as agriculture, bio-technology, communications, electricity, financial services, manufacturing, mining, trade and transport. GDP GROWTH IN INDIA 8 6 1991 PERCENTAGE 4

1992 2001

2

2002 0 YEARS

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Financial liberalization consists of 4 sets of measures: 

To open up a country to the free flow of international finance.



To remove controls and restrictions on the functioning of domestic banks and other financial institutions so that they get properly integrated as participants in the world financial markets.



To provide autonomy from the government to the central bank so that its supervisory and regulatory role vis-à-vis the banking sector is associated from the political process of the country and hence from any accountability to the people.



To ensure that not all these measures are immediately contemplated or demanded but they represent the ultimate goal of financial liberalization which may be ushered in by stages.

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The pre-liberalisation period visualized a subordination of the financial system to the perceived needs of economic development. To this end, the interest rates were kept low. Banks and financial institutions were required to hold government securities upto a certain percent of their total liabilities, permitting the easy sale and cheap servicing of public debt, credit was directed to priority sectors , especially agriculture, the RBI was retained as a part of the government and hence accountable to the parliament for its actions. There were problems with this regime arising from the fact that the economy was experiencing capitalist development and hence the credit needs of vast masses of small producers and even small capitalist could not be met cheaply from institutional sources. But within this overall constrain the logic of the regime was to make the financial sector serve the needs of development, which, it was believed, necessitated its four features, namely: 

Its being anchored to the national economy



Detached from world’s financial flows



It’s being obliged to give precedence to production over speculation for which it also had to observe control on the price and direction of credit.



It’s being accountable to the people via the government.

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The purpose of financial liberalization is to reverse all these features 

To detach the in financial sector from its anchorage in the domestic economy and to make it a part of the international financial sector



To make it operate according to the dictates of the market which means the end of cheap interest rates of the regime of directed credit and of the distinction between productive and speculative credit needs.



To remove it from the ambit of accountability to the people.

In short, the purpose of financial sector reforms is to make the financial sector an aliquot part of globalised finance. An economy that has undertaken financial liberalization also becomes vulnerable to crisis. When short term funds flow in they tend to cause an appreciation of the exchange rate, the consequence of which is to make imports cheaper relative to home production and hence need to deindustrialization. But if this is avoided through the central bank intervention that supports the exchange rate by holding foreign exchange reserves, then that in FYBMS (Sem - II)

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turn enlarges liquidity in the economy which is typically used either for an expansion of luxury consumption or for an expansion of investment in the domestic non-tradable sector such as real estate, or for financing speculative booms in asset markets especially the stock market. When short funds begin to flow out, there is both a downward pressure on the exchange rate and a collapse of asset prices, which reinforce one another and cause an avalance of outflow. Efforts by the central bank to manage the forex market by raising the interest rate to induce short term funds to say or to come back, have very little effect or even have the opposite effect of further enhancing outflows by aggravating the asset market to collapse. On the other hand, interest rate increases which leads to a contraction of the real economy. Thus, while the inflow of short term funds, generally, has little impact by way of increasing the growth rate of the real economy, the withdrawal of short term funds does affect the real economy adversely. Effect of liberalization on the various cross-sections of the Indian society: 

Trade liberalization led to an increase in the poverty gap in the rural districts where industries more exposed to liberalization were concentrated.



Whatever the India-wide effects, of trade liberalization were, rural areas with high concentration of industries that were disproportionately affected by tariff reductions, experienced slower progress in poverty reduction FYBMS (Sem - II)

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Role of Service Sector in Indian Economy 

The regionally disparate effects of liberalization are not consistent with standard trade theory predicting labour migration in response to wage and price shocks, equalizing the incidents of poverty across regions.



There is little evidence of high levels of free allocation with districts across industries.



Especially rigid labour markets fostered by labour market regulations in parts of India prevented the reallocation of factors in the face of trade liberalization in many areas.



As those employed in traded industries were not at the top of the income distribution before trade reforms, the reduction in income caused some to cross the poverty line or fall even deeper into poverty.



This effect was aggravated by the slower overall growth in registered manufacturing employment areas with inflexible labour laws which retarded the pull out of poverty of the poorest subsistence farmers.

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Liberalization has greatly benefited the external sector. The balance of payments, positions is quite comfortable. The current account deficit is far from significant, and foreign exchange reserves are growing steadily. The current level is well above what we need for our developmental purposes. The exchange rate has remained steady equally encouraging is a decline in the size of external debt and the debt servicing burden. All these should boost confidence of the foreign investors in the long term prospect of the economy and one can expect them to continue investing in India. The economic reform continues to remain focused on facilitating foreign investment and liberalization of trade. Policy liberalization has been significant in this respect. The domestic market is exposed to external competition. However, the economic reform still lacks its focus on the imperative of restructuring and competitiveness building of the indigenous industry that continues to suffer from inherent disadvantages of high capital costs, poor infrastructure, irrational duty structure, strangulating labour laws, cumbersome procedures and numerous systematic inefficiencies. The basic objectives behind liberalization of the FDI policy namely: 

Access to latest technology



Management skills



Exports

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Have not been achieved so far. But in many sectors it has destabilized the indigenous enterprises and in certain hi-tech sectors, the foreign companies have secured total control of the markets, even as they have brought little by way of investment. In other words, foreign companies are gaining control of the domestic market at a relatively lower cost and without developing significant stake in the economy.

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Manufacturing Sector – A comparative study China’s emphasis on manufacturing is confirmed by the fact that among the three sectors in China, manufacturing takes the largest slice of the pie, while in India; it is third behind services and agriculture. Apart from this, the Chinese are so competitive on a global basis that most nations, including India, find them as a force to reckon with in textiles, consumer durables, and so on. An essential offshoot of this is the huge trade surplus China enjoys. Its exports race ahead despite global slow down and its foreign investment figures are much higher than India Most people associate China's economy with over investment in singular and unprofitable pursuit of export products, low quality goods and marginal pricing. The truth is that China's growth is the result of not only significant investment, foreign and domestic, but by a sharp increase in labour productivity, a growing export based on foreign investment, strong domestic demand fed by low prices and improved quality of products. The price competitiveness of China's products is unmatched. China's businesses seem to operate on the principle of sales maximization. The strategy of sales maximization calls for setting of prices at very low levels so as to create markets. The focus being maximization of sales the resultant business model necessitated concentration on such products that are amenable to mass production and mass consumption. With pricing set at rates unimaginable to competitors abroad, the product offers tremendous value for money. That must explain why Nike produces 40% of its footwear in China while Galanz has 30% of the global market for FYBMS (Sem - II)

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microwave ovens because of quality enhancements in Chinese factories. China's lower prices are not just due to cheaper wages Indian wages are comparable - but to lower taxes, lower cost of capital, higher productivity of workers and shorter delivery time. Productivity of Chinese workers can be 10 to 300% higher than those of Indian workers, depending on the product. Chinese shipments reach the US less than a month after they leave the factory gate compared to six to 12 weeks for Indian exports. Delays in India are due to bureaucracy in customs, loading and unloading in ports and long transit times. China has attracted £216bn in foreign investment (1980-2000) compared with £120bn in India. China's manufacturing sector in the 1990s expanded at a rate of 12% per year, double the increase in India. Whilst it is true that many Chinese state-owned companies receive loans from state banks at very low interest rates with long repayment periods, about 70% of China's industrial output comes from the private sector, including multinational companies that have prudent cost accounting. Lower taxes, import duties and raw material costs are important factors but a competitive environment and a higher level of component manufacturers also help.

PRODUCT SPECIFIC EXAMPLES 1. China produces more than 25% of the world's televisions and easily surpasses India in both domestic sales and exports. 2. China is planning to increase its textile exports to $ 50 billion in 2006. It is already preparing for the global textile market FYBMS (Sem - II)

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opening up totally. And in India we tax polyester fibre and other raw materials at the highest possible rate. 3. China produces eight times more ceiling fans than India and half the price advantage is because of India's high indirect taxes that affect domestic and export sales.

INDIAN MANUFACTURING SECTOR

8 7.1

7

6.1

6 5 4.2

4

3.4 3

2.7

2 1 0 1998-99

1999-00

2000-01

2001-02

Growth of manufacturing(%)

2002-03

Contributes one-fourth of total GDP Employs 30% of non-agricultural workforce Industrial output valued at US$ 65 billion Rise in growth from 2.7% in 1998-99 to 6.1% in 2002-03 Significant rise in index of growth for the manufacturing sector from 6.5 % in February 2003 as compared to 2.9% in February 2002

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MAJOR PRODUCTS MANUFACTURED PRODUCT

PRODUCTION ($ MILLION)

PRODUCT

PRODUCTION ($ MILLION)

CHEMICALS

31897

ELECTRICAL MACHINERY

6385

FOOD & BEVERAGES

30275

TRANSPORT EQUIPMENT

5043

PETROLEUM PRODUCTS

22422

FABRICATED METAL PRODUCTS

4493

BASIC METALS

20610

COMMUNICATION EQUIPMENT

4490

TEXTILES

16782

FURNITURE

3580

MANUFACTURING SECTOR EXPORTS 20.0 15.4

15.6

1999-00

2000-01

14.8

15.0 10.0 5.0 0.0 -5.0

1998-99 -3.0

2001-02 -2.6

2002-03

Manufacturing sector exports have grown from –3.0 % in 199899 to 14.8% in 2002-03 Transition from largely agrobased raw materials to processed items Need to increase high valueadded component

Growth of manufactur manufactured ed exports orts (%)

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MAJOR MANUFACTURING SECTOR EXPORTS (2002-03) PRODUCT

EXPORTS ($ MILLION)

Gems & jewellery

8877

Engineering goods

8384

Textiles

5753

Ready made garments

5387

Chemicals

4994

Leather goods

1792

Total manufactured exports

38452

India is one of only three countries in the world to have indigenously designed and manufactured Super Computers. It is one of only six countries that can build and launch its own satellites. FUTURE OF INDIAN MANUFACTURING SECTOR Base for export to third countries - Hyundai Motors using India as export base for foreign markets, currently exporting to 8 countries and looking at expanding exports to markets in the European Union and Latin America. The company has also set up an R & D center at its Chennai plant World class R & D facilities FYBMS (Sem - II)

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Emergence as global manufacturing hub with presence of MNCs such as LG, Samsung, Hyundai, Pepsi, GE, General Motors, Ford, Suzuki etc Increased implementation of state-of-the-art IT technologies – current IT usage of 15% Segments showing high potential: automobiles, steel, aluminum, cement, auto ancillaries, forging and pharmaceuticals

Causes of stagnation of India’s Manufacturing sector:

-

1. LACK OF INFRASTRUCTURAL DEVELOPMENT : - The sheer speed with which infrastructure projects get implemented in China is commendable. Financial Times rightly commented (January 21, 2004) "if thousands of villagers have to be moved to make way for roads or power stations, so is it: investment in infrastructure underpins China's success." Eg. The way the giant Three Gorges Dam has come up in China, in contrast to the Narmada Dam project is an example of how the infrastructure projects in India are frustrated by misguided individuals going to court. This is how democracy has been used in India to hinder growth. Agitation, endless court cases, environmentalists, and other manifestations of a democratic, rule-of-law society have not only delayed implementation perhaps by a decade, but also added enormously to the costs while direct cost escalation is perhaps only a small part of the total cost to the economy. One can only imagine the output lost because of the delays in the starting of the project. FYBMS (Sem - II)

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2. OUTDATED LAWS: - China is ahead of India, in labourintensive manufacture. Indian labour laws, which protect existing employment, but at the cost of creating new jobs, have created a bias in favour of capital-intensive investments. An Ambani prefers a refinery, in which the only comparative advantage comes out of the duty structure, to manufacturing, say, toys in billions and exporting them to the world. 3. PROTECTIVE TREATMENT TO PUBLIC SECTOR UNITS : - China does not seem to be treating its PSUs that are the state owned enterprises (SOEs) protectively. Millions of jobs in state-owned enterprises have been lost in preparation for world competition. But new ones keep getting created in larger numbers. In contrast, India not only condones over-manning, but also keep thousands employed in factories that haven't produced anything for decades. As a result, resources are short for the much-needed investments. 4. STEP MOTHERLY TREATMENT TO MANUFACTURITNG SECTOR: - Wherever there is a tug-of-war between agriculture and manufacturing, the government always takes the side of agriculture. The prices of cotton, sugar cane, fertiliser policy are only a few examples of this short sighted approach. 5. DEPLETION OF RESOURCES: - India consumes almost thrice as much energy as any average rich developed country produces. Generally, the rich countries use less oil per unit of output than the developing countries. This is because of variety of reasons like better capital stock and modern infrastructure.

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For Example, the fact that the rich countries are less dependent on manufacturing also helps them to conserve energy. This is where India’s energy-inefficient ways stand out. China, whose economy is powered by manufacturing, is less energy-intensive than India. India’s energy intensity is almost 24% higher than china’s despite the fact that both the countries are at around the same level of development. 300 250 200 150 100 50 0 INDIA

THAILAND

AFRICA

CHINA

REMEDIAL STEPS India needs to immediately set right this situation and give primacy to manufacturing as China has done. In the process, the following steps may have to be taken: 1. REDUCE INTEREST RATES: At real interest rates of 7 or 8 per cent, manufacturing companies will never be able to compete globally because these interest costs, as a percentage of total cost, become high. 2. ENSURE MOBILITY OF LABOUR. There has to be the will to put through a modern labour policy, which will ensure that industry has the right to move labour in and out. The only way FYBMS (Sem - II)

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employment will increase in the manufacturing sector is if we give the comfort to the owner that his labour is a variable cost. 3. TAX CUTS: The indirect taxes are way too high and need to be brought down to international levels. By having high excise duties, we are killing domestic demand, the key component of our growth. 4. REDUCE RED TAPE: Indian Government must free the Indian entrepreneur from the shackles of state and federal bureaucracy and release the savings through lower direct and indirect taxes. 5. ENCOURAGE COMPETITION: The government must make "competition" India's national password and allow the Indian flair for invention and application to take root. 6. SECTOR REGULATOR: Develop infrastructure regulatory bodies funded from outside the government budget. Establish multi-sector regulatory agencies at the state level. 7. DEVELOP LONG TERM DEBT MARKET : Mobilise long term insurance money in the sector and Institute pension reforms. Establish a fully funded pension scheme to increase national savings and the demand for long term debt, making more funds available for infrastructure. 8. CONTRACTING PROJECTS TO PRIVATE SECTOR: Establish a single body for contracting, clearances and interacting with private developers and investors. India should have one public sector agency undertake the project design and contracting, negotiation and documentation on the reasons why award decisions were made. 9. PORTS: Develop a new institutional structure for the sector by separating policy, regulatory and commercial functions. FYBMS (Sem - II)

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10. AIRPORTS: The focus of the airport authority of India has to be shifted from operations to policy planning and statutory functions. A separate independent authority needs to be created to handle economic regulation for the sector such as the leases and concessions. 11. ROADS: The money collected from petrol and diesel must be used only for road development. Monitor and gradually reduce public support for private road projects. 12. RAILWAYS: Corporatise Indian railways into Indian Railways Corporation and focus on the core business and spin off the rest. Railways must get separate institutions for policy regulation and management.

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Complications faced by China due to increased FDI On the competitiveness side, it is seen that increasingly, the gains of Chinese economic growth have gone to foreign firms. The Chinese balance of payments statistics indicates that in the mid-1990s, the foreign income repatriations were only about $6 billion. Today, they are about $30 billion. This is a capital outflow from the current account. Some of that money comes back in the capital account through reinvestment, but, over the long run, the trend of increasing capital repatriations has been dramatic. A lot of the gains from economic growth have gone to foreigners rather than Chinese entrepreneurs. Today, with the FDIs on a constant rise, India is not too far away from facing a similar problem as China in this regards.

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Service Sector

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