inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services.It is the percentage change in the value of the Wholesale Price Index (WPI) on a year-on year basis. It effectively measures the change in the prices of a basket of goods and services in a year. In India, inflation is calculated by taking the WPI as base.
Formula for calculating Inflation=
(WPI in month of current year-WPI in same month of previous year)
————————————————————————————– X 100
WPI in same month of previous year
Inflation occurs due to an imbalance between demand and supply of money, changes in production and distribution cost or increase in taxes on products. When economy experiences inflation, i.e. when the price level of goods and services rises, the value of currency reduces. This means now each unit of currency buys fewer goods and services.
It has its worst impact on consumers. High prices of day-to-day goods make it difficult for consumers to afford even the basic commodities in life. This leaves them with no choice but to ask for higher incomes. Hence the government tries to keep inflation under control.
Contrary to its negative effects, a moderate level of inflation characterizes a good economy. An inflation rate of 2 or 3% is beneficial for an economy as it encourages people to buy more and borrow more, because during times of lower inflation, the level of interest rate also remains low. Hence the government as well as the central bank always strive to achieve a limited level of inflation.
Various measures of Inflation are:-
- GDP Deflator
- Cost of Living Index
- Producer Price Index(PPI)
- Wholesale Price Index(WPI)
- Consumer Price Index(CPI)
There are following types on Inflation based on their causes:-
- Demand pull inflation
- cost push inflation
- structural inflation
Various control measures to curb rising inflation are:-
- Fiscal measures like reduction in indirect taxes
- Dual pricing
- Monetary measures
- Supply side measures like importing the shortage goods to meet the demand
- Administrative measures to curb hoarding, Cratelization.
Tax Reforms in India
Sience 1990 ie the liberalization of Indian economy saw the beginning of Taxation reforms in the nation. The taxation system in the nation has been subjected to consistent and comprehensive reform. Following factors arise the need for tax reforms in India:-
- Tax resources must be maximized for increased social sector investment in the economy.
- International competitiveness must be imparted to Indian economy in the globalized world.
- Transaction costs are high which must be reduced.
- Investment flow should be maximized.
- Equity should be improved
- The high cost nature of Indian economy should be changed.
- Compliance should be increased.
Direct & Indirect Tax Reforms
Direct tax reforms undertaken by the government are as follows:-
- Reduction and rationalization of tax rates, India now has three rates of income tax with the highest being at 30%.
- Simplification of process, through e-filling and simplifying the tax return forms.
- Strengthening of administration to check the leakage and increasing the tax base.
- Widening of tax base to include more tax payers in the tax net.
- Withdrawal of tax exceptions gradually.
- Minimum Alternate Tax (MAT) was introduced for the ‘Zero Tax’ companies.
- The direct tax code of 2010 replace the outdated tax code of 1961.
Indirect tax reforms undertaken by the government are as follows:-
- Reduction in the peak tariff rates.
- reduction in the number of slabs
- Progressive change from specific duty to ad valor-em tax.
- VAT is introduced.
- GST has been planned to be introduced.
- Negative list of services since 2012.
Subsidies- Cash Transfer of Subsidy Issue.
A subsidy is a benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The subsidy is usually given to remove some type of burden and is often considered to be in the interest of the public.
Direct Cash Transfer Scheme is a poverty reduction measure in which government subsidies and other benefits are given directly to the poor in cash rather than in the form of subsidies.
It can help the government reach out to identified beneficiaries and can plug leakages. Currently, ration shop owners divert subsidised PDS grains or kerosene to open market and make fast buck. Such Leakages could stop. The scheme will also enhance efficiency of welfare schemes.
The money is directly transferred into bank accounts of beneficiaries. LPG and kerosene subsidies, pension payments, scholarships and employment guarantee scheme payments as well as benefits under other government welfare programmes will be made directly to beneficiaries. The money can then be used to buy services from the market. For eg. if subsidy on LPG or kerosene is abolished and the government still wants to give the subsidy to the poor, the subsidy portion will be transferred as cash into the banks of the intended beneficiaries.
It is feared that the money may not be used for the intended purpose and men may squander it.
Electronic Benefit Transfer (EBT) has already begun on a pilot basis in Andhra Pradesh, Chhattisgarh, Punjab, Rajasthan, Tamil Nadu, West Bengal, Karnataka, Pondicherry and Sikkim. The government claims the results are encouraging.
Only Aadhar card holders will get cash transfer. As of today, only 21 crore of the 120 crore people have Aadhar cards. Two other drawbacks are that most BPL families don’t have bank accounts and several villages don’t have any bank branches. These factors can limit the reach of cash transfer.
Recent Trends in Indian Economy: Role of Foreign Capital, FDI
FDI refers to capital inflows from abroad that are invested in or to enhance the production capacity of the economy. Despite globalization, the essential role of foreign direct investment (FDI) in economic development has not changed.
Foreign Direct Investment (FDI) plays an important role in global business. It can provide a firm with new marketing channels, cheaper production facilities, access to technology transfer, product, skills and financing. With the advent of globalization and strong governmental support, foreign investment has helped the Indian economy grow tremendously. India has continuously sought to attract investment from the world’s major investors. In 1998 and 1999, the Government of India announced a number of reforms designed to encourage and promote a favorable business environment for investors. Foreign investments in the country can take in the form of investments in listed companies i.e., Foreign Institutional Investors’(FIIs) investments, investments in listed/unlisted companies other than through stock exchanges i.e., through the foreign direct investment or private equity/foreign venture capital investment route, investments through American Depository Receipts (ADR), Global Depository Receipts (GDR), or investments by Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs) in various forms.
ROUTES OF FOREIGN INVESTMENT INFLOW
(a) Government (SIA/FIPB)
(d) Acquisition of shares
(e) Equity capital of
(f) Unincorporated bodies
II) Re-invest Dearing
III) Other capital
(III) off-shore funds and others
Main advantages of FDI are:-
1. Inflow of Foreign Capital. Capital base of domestic country increases.
2. Increase in tax revenue.
3. Boost economy by GDP growth.
4. Increase competition, productivity and efficiency.
5. Large employment opportunities -FDI in retail will create lakhs of jobs.
6. Inflow of technology, expertise and know how.
7. Infrastructure facilities improve and it will bring growth and prosperity.
8. Reduce cost of production. Prices of products will come down. This will tame inflationary pressure in the economy.
9. Increase in international trade.
10. High quality products that will help them develop local businesses and industries.
11. Decrease in food wastage: Today a major chunk of the food that is almost 30%, 40% of the produce is wasted in transportation. A lot of grains are also wasted in the government storage and go-downs. The government has made it compulsory to invest 50% of the investment in the development of infrastructure in logistics. Thus it will become critical to save a lot in storage and logistics. More investments in the end to end supply chain and world class cold storage facilities.
12. Benefits to the farmers: Farmers were long been left behind and squeezed between the price raise. Worldwide the big retail giants buy the produce directly from the farmers eliminating the middle men and offering them at least 15% – 20% higher prices then they get.
13. Increase in Forex reserves: As per Government’s proposal in increasing the FDI in retail the each retail giant is supposed to invest a minimum of 100 million dollars. Each retail giant is expected to open atleast 15 stores across India and to open each
14. Better consumer choice: Since most of the retail giants work on a large scale, they have large number product varieties which generally the kirana stores in your neighbourhood are not able to store. Better options and offers to the consumer.
15. Reduction in food inflation: The increase in FDI will create stronger competition among the retailers and will eliminate the middle man, which will eventually help in reducing food prices and the stocks will help in reducing the supply constraint.
16. Increase in economic growth by dealing in various international products.
17. Billion dollars will be invested in Indian retail market.
18. FDI in defence sector will reduce imports; improve country’s capacity to produce defence equipment locally and save foreign money. Definitely, it will create employment opportunities. It will give them a hope that Indian defence equipment will become globally competitive. High technology and expertise will flow to the country.
MNC may be defined as a company, which operates in number of countries and has production and service facilities outside the country of its origin. They are also called Trans National Company (TNC) Their activities have both good and bad impacts on the economy. They take decisions on a global context or basis. Their maximum profit objectives take no account of the reactions produced in the countries felling in their orbit. They operate in different institutional forms Some are: Subsidiaries companies wholly owned by MNC in other countries Subsidiary company enter into joint venture with a company another company Agreement among companies of different countries regarding production and discussion of market.
Role of MNC’s
1. Promotion of Foreign Investment:
MNCs can bridge the gap between the requirements of foreign capital for increasing foreign investment in India.The liberalized foreign investment pursued since 1991, allows MNCs to make investment in India subject to different ceilings fixed for different industries or projects.
2. Non-Debt Creating Capital inflows:
The direct foreign investment by multinational corporations represents non-debt creating capital inflows we can avoid the liability of debt-servicing payments. Moreover, the advantage of investment by MNCs lies in the fact that servicing of non-debt capital begins only when the MNC firm reaches the stage of making profits to repatriate Thus, MNCs can play an important role in reducing stress strains and on India’s balance of payments (BOP).
3. Technology Transfer:
Transfer high sophisticated technology to developing countries which are essential for raising productivity of working class and enable us to start new productive ventures requiring high technology is possible due to mnc’s. Whenever, multinational firms set up their subsidiary production units or joint-venture units, they not only import new equipment and machinery embodying new technology but also skills and technical know-how to use the new equipment and machinery.
4. Promotion of Exports:
With extensive links all over the world and producing products efficiently and therefore with lower costs multinationals can play a significant role in promoting exports of a country in which they invest.
5. Investment in Infrastructure:
With a large command over financial resources and their superior ability to raise resources both globally and inside India it is said that multinational corporations could invest in infrastructure such as power projects, modernisation of airports and posts, telecommunication.
The investment in infrastructure will give a boost to industrial growth and help in creating income and employment in the India economy. The external economies generated by investment in infrastructure by MNCs will therefore crowd in investment by the indigenous private sector and will therefore stimulate economic growth.
Food Security & Public Distribution System(PDS)
WHO Defines Food security to exists when all people, at all times, have physical, social and economic access to sufficient, safe and nutritious food which meets their dietary needs and food preferences for an active and healthy life.
Food security has three interlinked contents such as :-
- Availability of food,
- Access to food and
- absorption of food.
Food security is a multidimensional concept covering even the micro level household food security,energy intakes and indicators of malnutrition.
Major components of food security are:-
- Production and Procurement
Indian Agriculture is rightly called as a gamble with Monsoon, variability in food production and rising population creates food insecurity in the nation and worst effected are the downtrodden section of the society.
While India has seen impressive economic growth in recent years, the country still struggles with widespread poverty and hunger. India’s poor population amounts to more than 300 million people, with almost 30 percent of India’s rural population living in poverty. The good news is, poverty has been on the decline in recent years. According to official government of India estimates, poverty declined from 37.2% in 2004-05 to 29.8% in 2009-10.
Need for Self-Sufficiency:
India suffered two very severe droughts in 1965 and 1966. Food Aid to India was restricted to a monthly basis by USA under the P.L. 480 programme. The Green Revolution made a significant change in the scene. India achieved self-sufficiency in food grains by the year 1976 through the implementation of the seed- water-fertilizer policy adopted by the Government of India.
Food grain production increased four-fold during 1950-51 and 2001-2002 from 51 million tons to 212 million tones. The country is no longer exposed to real famines. But the regional variation in the success of Green Revolution which was chiefly limited to northern- Western states has lead to the divide in the nation. Evergreen revoloution and Bringing green revolution to eastern India is the need of the hour.
Green revolution was focused on wheat and rice and thus the production of pulses was stagnant.
National Food Security Mission comprising rice, wheat and pulses to increase the production of rice by 10 million tons, wheat by 8 million tons and pulses by 2 million tons by the end of the Eleventh Plan (2011-12). The Mission is being continued during 12th Five Year Plan with new targets of additional production of food grains of 25 million tons of food grains comprising of 10 million tons rice, 8 million tons of wheat, 4 million tons of pulses and 3 million tons of coarse cereals by the end of 12th Five Year Plan.
The National Food Security Mission (NFSM) during the 12th Five Year Plan will have five components
(i) NFSM- Rice;
(iv) NFSM-Coarse cereals and
(v) NFSM-Commercial Crops.
Government through Public Distribution System has tried to counter the problem of food insecurity by providing the food grains through fair price shops.
The central Government through Food Corporation of India has assumed the responsibilities of procurement,storage,transfer and bulk allocation of food grains to state governments.
The public distribution system (PDS) has played an important role in attaining higher levels of the household food security and completely eliminating the threats of famines from the face of the country, it will be in the fitness of things that its evolution, working and efficacy are examined in some details.
PDS was initiated as a deliberate social policy of the government with the objectives of:
- i) Providing foodgrains and other essential items to vulnerable sections of the society at resonable (subsidised) prices;
- ii) to have a moderating influence on the open market prices of cereals, the distribution of which constitutes a fairly big share of the total marketable surplus; and
iii) to attempt socialisation in the matter of distribution of essential commodities.
The focus of the Targeted Public Distribution System (TPDS) is on “poor in all areas” and TPDS involves issue of 35 Kg of food grains per family per month for the population Below Poverty Line (BPL) at specially subsidized prices. The TPDS requires the states to Formulate and implement :-
- foolproof arrangements for identification of poor,
- Effective delivery of food grains to Fair Price Shops (FPSs)
- Its distribution in a transparent and accountable manner at the FPS level.
Export Import (EXIM) Policy of India
Export Import Policy or Exim Policy or Foreign Trade Policy is a set of guidelines and instructions related to the import and export of goods.
Various Objectives of Exim Policy are :-
- To facilitate sustained growth in exports from India and import in India.
- To stimulate sustained economic growth by providing access to essential raw materials, intermediates, components, consumables and capital goods scheme required for augmenting production and providing services.
- To enhance the technological strength and efficiency of Industry Agriculture industry and services, thereby improving their competitive strength while generating new employment opportunities, and to encourage the attainment of internationally accepted standards of quality.
- To provide clients with high-quality goods and services at globally competitive rates. Canalization is an important feature of Exim Policy under which certain goods can be imported only by designated agencies. For an example, an item like gold, in bulk, can be imported only by specified banks like SBI and some foreign banks or designated agencies.
The new five year Foreign Trade Policy, 2015-2020 provides a framework for increasing exports of goods and services as well as generation of employment and increasing value addition in the country, in keeping with the “Make in India” vision of our Hon’blc Prime Minister. The focus of the government is to support both the manufacturing and services sectors, with a special emphasis on improving the ‘ease of doing business’.
Merchandise Exports from India Scheme (MEIS):-To offset infrastructural inefficiencies and the associated costs of exporting products produced in India giving special emphasis on those which are of India’s export interest and have the capability to generate employment and enhance India’s competitiveness in the world market.With the aim in making India’s products more competitive in the global markets, the scheme provides incentive in the form of duty credit scrip to the exporter to compensate for his loss on payment of duties.
Service Exports from India Scheme (SEIS) :-Service Provider of eligible services shall be entitled to Duty Credit Scrips at notified rates.
Export Promotion Capital Goods (EPCG) scheme allows import of capital goods including spares for pre production, production and post production at zero duty.
Other Specific steps taken for the developement of international trade are:-
- Trade Facilitation & Ease Of Doing Business
- DGFT as a facilitator of exports/imports
- Niryat Bandhu – Hand Holding Scheme for new export / import entrepreneurs
- Online Complaint Registration and Citizen’s Charter
- Monitoring System
- Issue of e-IEC (Electronic-Importer Exporter Code)
- MoU with State Governments for sharing of e-BRC data
- Exporter Importer Profile
- Reduction in mandatory documents required for Export and Import
- Online Inter-ministerial consultation
- Facility of online filing of applications
- Facility to upload documents by Chartered Accountant / Company Secretary / Cost Accountant
- Electronic Data Interchange (EDI)
- Message Exchange with Community partners
(a) Message Exchange with Customs
(b) Message Exchange with eBiz
(c) Message Exchange with Banks
(d) Message Exchange with EPCs
- Encouraging development of Third Party API
- Forthcoming e-Governance Initiatives
- Free passage of Export consignment
- [/lockercat]No seizure of export related Stock
- 24 X 7 Customs clearance
- Single Window in Customs
- Self-Assessment of Customs Duty
- Authorised Economic Operator (AEO) Programme
- Prior filing facility for Shipping Bills
- Cutting down delay in filing of Export General Manifest (EGM) for duty drawback
- Facility of Common Bond / LUT against authorizations issued under different EP Schemes
- Exemption from Service Tax on Services received abroad
- Export of perishable agricultural Products
- Time Release Study (TRS)
- Towns of Export Excellence (TEE)
12 Finance Commission
The Twelfth Finance Commission was appointed under the chairmanship of C. Rangarajan on November 1, 2002 to make recommendations regarding the distribution between the Union and the States of net proceeds of shareable taxes, the principles which should govern the grants- in-aid of the revenues of States from the Consolidated Fund of India and the measures needed to augment the Consolidated Fund of a State to supplement the resources of local bodies in the State on the basis of the recommendations made by the Finance Commission of the State.
Recommendations of the Twelfth Finance Commission
Restructuring public finances
- Centre and States to improve the combined tax-GDP ratio to 17.6 per cent by 2009-10.
- Combined debt-GDP ratio, with external debt measured at historical exchange rates, to be brought down to 75 percent by 2009-10.
- Fiscal deficit to GDP targets for the Centre and States to be fixed at 3 per cent.
- Revenue deficit of the Centre and States to be brought down to zero by 2008-09.
- Interest payments relative to revenue receipts to be brought down to 28 per cent and 15 per cent in the case of the Centre and States, respectively.
- States to follow a recruitment policy in a manner so that the total salary bill, relative to revenue expenditure, net of interest payments, does not exceed 35 per cent.
- Each State to enact a fiscal responsibility legislation providing for elimination of revenue deficit by 2008-09 and reducing fiscal deficit to 3 per cent of State Domestic Product.
- The system of on-lending to be brought to an end over time. The long term goal should be to bring down debt-GDP ratio to 28 per cent each for the Centre and the States.
Sharing of Union tax revenues
- The share of States in the net proceeds of shareable Central taxes fixed at 30.5 per cent, treating additional excise duties in lieu of sales tax as part of the general pool of Central taxes. Share of States to come down to 29.5 per , when States are allowed to levy sales tax on sugar, textiles and tobacco.
- In case of any legislation enacted in respect of service tax, after the notification of the eighty eighth amendment to the Constitution, revenue accruing to a State should not be less than the share that would accrue to it, had the entire service tax proceeds been part of the shareable pool.
- The indicative amount of overall transfers to States to be fixed at 38 per cent of the Centre’s gross revenue receipts.
- A grant of Rs.20,000 crore for the Panchayati Raj institutions and Rs.5,000 crore for urban local bodies to be given to States for the period 2005-10.
- Priority to be given to expenditure on operation and maintenance (O&M) costs of water supply and sanitation, while utilizing the grants for the Panchayats. At least 50 per cent of the grants recommended for urban local bodies to be earmarked for the scheme of solid waste management through public-private partnership.
- The scheme of Calamity Relief Fund (CRF) to continue in its present form with contributions from the Centre and States in the ratio of 75:25. The size of the Fund worked out at Rs.21,333 crore for the period 2005-10.
The outgo from the Fund to be replenished by way of collection of National Calamity Contingent Duty and levy of special surcharges.
- The definition of natural calamity to include landslides, avalanches, cloud burst and pest attacks.
Provision for disaster preparedness and mitigation to be part of State Plans and not calamity relief.
Grants-in-aid to States
- The present system of Central assistance for State Plans, comprising grant and loan components, to be done away with, and the Centre should confine itself to extending plan grants and leaving it to States to decide their borrowings.
- Non-plan revenue deficit grant of Rs.56,856 crore recommended to 15 States for the period 2005-10. Grants amounting to Rs.10,172 crore recommended for the education sector to eight States. Grants amounting to Rs.5,887 crore recommended for the health sector for seven States. Grants to education and health sectors are additionalities over and above the normal expenditure to be incurred by States.
- A grant of Rs.15,000 crore recommended for roads and bridges, which is in addition to the normal expenditure of States.
- Grants recommended for maintenance of public buildings, forests, heritage conservation and specific needs of States are Rs. 500 crore, Rs.1,000 crore, Rs.625 crore, and Rs.7,100 crore, respectively.
Fiscal reform facility
- With the recommended scheme of debt relief in place, fiscal reform facility not to continue over the period 2005-10.
Debt relief and corrective measures
- Central loans to States contracted till March,2004 and outstanding on March 31, 2005 amounting to Rs.1,28,795 crore to be consolidated and rescheduled for a fresh term of 20 years, and an interest rate of 7.5 per cent to be charged on them. This is subject to enactment of fiscal responsibility legislation by a State.
- A debt write-off scheme linked to reduction of revenue deficit of States to be introduced. Under this scheme,
repayments due from 2005-06 to 2009-10 on Central loans contracted up to March 31,2004 will be eligible for write- off.
- Central Government not to act as an intermediary for future lending to States, except in the case of weak States,
which are unable to raise funds from the market.
- External assistance to be transferred to States on the same terms and conditions as attached to such assistance by external funding agencies.
- All the States to set up sinking funds for amortization of all loans.
- States to set up guarantee redemption funds through earmarked guarantee fees.
- The Centre should share ‘profit petroleum’ from New Exploration and Licensing Policy (NELP) areas in the ratio of 50:50 with States where mineral oil and natural gas are produced. No sharing of profits in respect of nomination fields and non-NELP blocks.
- Every State to set up a high level committee to monitor the utilization of grants recommended by the TFC.
Centre to gradually move towards accrual basis of accounting.
Source:Ministry of Finance
Poverty Alleviation Schemes
- Poverty alleviation programmes can be in form of employment generation programmes or social assistance programmes so that different dimensions of poverty are addressed.
- At present there are three centrally sponsored employment programmes in operation
- MNREGS: Rural, wage employment
- SGSY: Rural, self-employment
- SJSRY: Urban, self and wage employment
- Launched in 200 most backward districts in the first phase. At present 619 districts are covered under the NREGS
- During 2008-09, 4.51 crore households were provided employment under the scheme
- Swarnajayanti Gram Swarozgar Yojana
- 1999 after restructuring the Integrated Rural Development Programme (IRDP) and allied programmes, viz., Development of Women and Children in Rural Areas (DWCRA), Training of Rural Youth for Self-Employment (TRYSEM), Supply of improved tool-kits to rural artisans (SITRA), Ganga Kalyan Yojana (GKY) and Million Wells Scheme (MWS)
- Self-employment programme for rural poor
- Objective is to bring the assisted swarozgaris above the poverty line by providing them income generating assets through bank credit and government subsidy
- Centre: State – 75:25; 90:10 for NE states
- Swarna Jayanti Shahari Rozgar Yojana (SJSRY)
- It is a unified centrally sponsored scheme launched a fresh in lieu of the erstwhile urban poverty alleviation programmes, viz, Nehru Rozgar Yojana (NRY), PM’s Integrated Urban Poverty Eradication Programme (PMIUPEP), and Urban Basic Services for the Poor (UBSP)
- Revamped in 2009
- Self-employment + Wage employment
- The revamped SJSRY has 5 components
- Urban Self-Employment Programme (USEP)
- Urban Woman Self-help Programme (UWSP)
- Skill Training for Employment Promotion amongst urban poor (STEP-UP)
- Urban Wage Employment Programme (UWEP)
- Pradhan Mantri Jan Dhan Yojana (PMJDY):-National Mission for Financial Inclusion to ensure access to financial services, namely, Banking/ Savings & Deposit Accounts, Remittance, Credit, Insurance, Pension in an affordable manner.
- Pradhan Mantri Sukanya Samriddhi Yojana (PMSSY)
- Pradhan Mantri MUDRA Yojana (PMMY):-To create an inclusive, sustainable and value based entrepreneurial culture, in collaboration with our partner institutions in achieving economic success and financial security.
- Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY)
- Pradhan Mantri Suraksha Bima Yojana (PMSBY)
- Atal Pension Yojana (APY)
- Pradhan Mantri Fasal Bima Yojana (PMFBY)
- Pradhan Mantri Gram Sinchai Yojana (PMGSY)
- Pradhan Mantri Garib Kalyan Yojanaye (PMGKY)
- Pradhan Mantri Jan Aushadhi Yojana (PMJAY)
- Deen Dayal Upadhyaya Grameen Kaushalya Yojana (DDUGKY)
- Pradhan Mantri Ujjwala Yojana
- Rajasthan Mission on Skill and Livelihoods
- End to end computerization of PDS
- Bhamashah Yojana
- Primary Health Centre (PHC) Scheme
Role of World Bank, IMF WTO & other Important International Organisations in world Economy
The International Bank for Reconstruction and Development (IBRD), commonly referred to as the World Bank, is an international financial institution whose purposes include assisting the development of its member nation’s territories, promoting and supplementing private foreign investment and promoting long-range balance growth in international trade.
The World Bank was established in December 1945 at the United Nations Monetary and Financial Conference in Bretton Woods, New Hampshire. It opened for business in June 1946 and helped in the reconstruction of nations devastated by World War II. Since 1960s the World Bank has shifted its focus from the advanced industrialized nations to developing third-world countries.
Organization and Structure:
The organization of the bank consists of the Board of Governors, the Board of Executive Directors and the Advisory Committee, the Loan Committee and the president and other staff members. All the powers of the bank are vested in the Board of Governors which is the supreme policy making body of the bank.
Capital Resources of World Bank:
The initial authorized capital of the World Bank was $ 10,000 million, which was divided in 1 lakh shares of $ 1 lakh each. The authorized capital of the Bank has been increased from time to time with the approval of member countries.Member countries repay the share amount to the World Bank in the following ways:
- 2% of allotted share are repaid in gold, US dollar or Special Drawing Rights (SDR).
- Every member country is free to repay 18% of its capital share in its own currency.
- The remaining 80% share deposited by the member country only on demand by the World Bank.
The following objectives are assigned by the World Bank:
- To provide long-run capital to member countries for economic reconstruction and development.
- To induce long-run capital investment for assuring Balance of Payments (BoP) equilibrium and balanced development of international trade.
- To provide guarantee for loans granted to small and large units and other projects of member countries.
- To ensure the implementation of development projects so as to bring about a smooth transference from a war-time to peace economy.
- To promote capital investment in member countries by the following ways;
(a) To provide guarantee on private loans or capital investment.
(b) If private capital is not available even after providing guarantee, then IBRD provides loans for productive activities on considerate conditions.
World Bank is playing main role of providing loans for development works to member countries, especially to underdeveloped countries. The World Bank provides long-term loans for various development projects of 5 to 20 years duration.
The main functions can be explained with the help of the following points:
- World Bank provides various technical services to the member countries. For this purpose, the Bank has established “The Economic Development Institute” and a Staff College in Washington.
- Bank can grant loans to a member country up to 20% of its share in the paid-up capital.
- The quantities of loans, interest rate and terms and conditions are determined by the Bank itself.
- Generally, Bank grants loans for a particular project duly submitted to the Bank by the member country.
- The debtor nation has to repay either in reserve currencies or in the currency in which the loan was sanctioned.
- Bank also provides loan to private investors belonging to member countries on its own guarantee, but for this loan private investors have to seek prior permission from those counties where this amount will be collected.
The major roles of the International Monetary Fund are as follows:
- To promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems.
- To facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy.
- To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation.
- To assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions which hamper the growth of world trade.
- To give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity.
- In accordance with the above, to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members.“Articles of Agreement: Article I—Purposes,” International Monetary Fund
World Trade Organization(WTO
The important objectives of WTO are:
- To improve the standard of living of people in the member countries.
- To ensure full employment and broad increase in effective demand.
- To enlarge production and trade of goods.
- To increase the trade of services.
- To ensure optimum utilization of world resources.
- To protect the environment.
- To accept the concept of sustainable development.
The main functions of WTO are discussed below:
- To implement rules and provisions related to trade policy review mechanism.
- To provide a platform to member countries to decide future strategies related to trade and tariff.
- To provide facilities for implementation, administration and operation of multilateral and bilateral agreements of the world trade.
- To administer the rules and processes related to dispute settlement.
- To ensure the optimum use of world resources.
- To assist international organizations such as, IMF and IBRD for establishing coherence in Universal Economic Policy determination.
Concept of Developing, Emerging and Developed countries.
In 1978, the World Bank, for the first time, constructed an analytical country classification system. The occasion was the launch of the World Development Report. Annexed to the report was a set of World Development Indicators (WDI), which provided the statistical underpinning for the analysis. The first economic classification in the 1978 WDI divided countries into three categories: (1) developing countries, (2) industrialized countries, and (3) capital-surplus oil-exporting countries. Developing countries were categorized as low- income (with GNI/n of US$250 or less) and middle-income (with GNI/n above US$250).
Major Characteristics of Developing Countries are:-
- Lower per-capita income
- Low levels of human capital
- High levels of poverty and under-nutrition
- Higher population growth rates
- Predominance of agriculture and low levels of industrialization
- Low level of urbanization but rapid rural-to-urban migration
- Dominance of informal sector
- Underdeveloped labor, financial, and other markets.
Major Characteristics of Emerging Countries are:-
- the small size of the economy,
- GNP/Capita much lower than in developed countries,
- a reduced opening for accepting foreign investors,
- a high volatility of the exchange rate which implies greater risk in trading.
Major Characteristics of Developed Countries are:-
- Average income per capita of the population is generally high.
- Education level of high average population.
- Life expectancy of the population average height.
- Population growth rate per year is relatively small.
- The death rate per year is relatively small population.
- Life-style market economy.
- His wide and varied field.
- Economic activity in most industry sectors, as well as export commodities.
- The majority of the population lives in cities.
- Relatively high level of population health.
Indian Economy in global Scenario
The global macroeconomic landscape is currently chartering a rough and uncertain terrain characterized by weak growth of world output. The situation has been exacerbated by;
(i) declining prices of a number of commodities, with reduction in crude oil prices being the most visible of them,
(ii) turbulent fnancial markets (more so equity markets), and
(iii) volatile exchange rates.
These conditions refect extreme risk-aversion behaviour of global investors, thus putting many, and in particular, commodities exporting economies under considerable stress.
Even in these trying and uncertain circumstances, India’s growth story has largely remained positive on the strength of domestic absorption, and the country has registered a robust and steady pace of economic growth in 2015-16 as it did in 2014-15. Additionally, its other macroeconomic parameters like infation, fscal defcit and current account balance have exhibited distinct signs of improvement. Wholesale price infation has been in negative territory for more than a year and the all-important consumer prices infation has declined to nearly half of what it was a few years ago.
However, weak growth in advanced and emerging economies has taken its toll on India’s exports. As imports have also declined, principally on account of reduced prices of crude oil for which the country is heavily dependent on imports, trade and current account defcits continue to be moderate. Growth in agriculture has slackened due to two successive years of less-than-normal monsoon rains. Saving and investment rates are showing hardly any signs of revival. The rupee has depreciated vis-à-vis the US dollar, like most other currencies in the world, although less so in magnitude. At the same time, it has appreciated against a number of other major currencies. Given the fact that the government is committed to carrying the reform process forward, aided by the prevailing macroeconomic stability, it appears that conditions do exist for raising the economy’s growth momentum and achieving growth rates of 8 per cent or higher in the next couple of years.APPSC GROUP 1 Notes brings Prelims and Mains programs for APPSC GROUP 1 Prelims and APPSC GROUP 1 Mains Exam preparation. Various Programs initiated by APPSC GROUP 1 Notes are as follows:-
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