Methodology of Economic Research

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B. A. Part-III : Economics Paper-5 (Old) Paper-8 & 13 (New)

Methodology of Economic Research

Additional part of study material as per revised syllabus

of concerned subject for the Semester-V

Unit-3 : Data Analysis

Index

3.0 Objectives

3.1 Introduction

3.4 Analysis of the unit

3.2.1 Need and importance of data analysis

3.3.3 Measures of Central Tendency : Mean, Mode, Median (Direct Method)

3.2.3 Measures of Dispersion – Standard Deviation (Direct Method)

3.2.4 Correlation – Meaning and Importance

3.3 Summary

3.4 Glossary

3.5 Self-study questions and their answers.

3.6 Questions for Practice

3.7 Books for further reading

3.0 Objectives

After going through this unit No. 3, you will be able to know-

l The need and importance of data analysis.

l Measures of Central Tendency : Mean, Mode and Median.

l Measures of Dispersion and Standard deviation.

l Meaning and importance of correlation.

3.1 Introduction

Research plays an important role in enriching knowledge of a particular subject

to the society. Most of the research projects requires the essential data to solve the

research problem. We have collected the information in respect of the selection of

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sample size and the process of representing the data collected by the researcher.

Here, in this particular unit no. 3, we will get the details in respect of data analysis.

The process of data analysis is depend on the four different methods i.e. need and

importance of data analysis, measures of central tendency, measures of dispersion

and correlation.

3.2 Analysis of the unit

The details regarding these sub-unit are as under.

3.2.1 Need and Importance of Data Analysis

Most of the researcher collect data for the improvement of their research. The

quality of research is depend on the data collected by the researcher. So that the

researcher collects data to support his reliable study in the different subjects. The

collection of data is most important for the solution of the problem selected by him.

The appropriate and good data enables to prove the objectives and hypothesis

mentioned in the project. Now we will see the need of data analysis.

Need of data analysis

Data analysis is an important for overall progress of a research. Data analysis

is a systematic process of the information collected by a research. When a re-

searcher is in a confusing position about the information related to facts, collected by

him, he has to analysis the data for further progress of his research work. Now we

will see the need of data analysis.

A) Data analysis is necessary for the testing of hypothesis and theories

The researcher’s data can not give proper explanation about the hypothesis or

theories mentioned in the research design. So that it is require to analise the data.

For testing the hypothesis.

B) For the organization and clarification of data

Data analysis is needed for well organization of the information collected by the

researcher. It also clears the most important clarification in respect of the results and

facts.

C) To explain the causal analysis

Data analysis is required for the causal analysis of facts and results of the

research.

D) To explain the scientific relationship between the variables

Data analysis is required for the explanation of the two variables and their inter

relationship i.e. poverty and unemployment are co-related terms. The researcher has

to prove their inter relationship with the help of data analysis.

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E) For the formulation of new hypothesis or theories

The need for data analysis is not only for the interpretation of data, but also it

requires for the formulation of new hypothesis and theories. The overall progress of

research and its implications is depend on the analysis of data collected by the

researcher.

F) To solve the complications between the facts and report writing

Data analysis in needed for the solution over the complications arises during the

research analysis. It also requires for establishing concret results to be mentioned in

final report-writing.

Thus, data analysis establishes the linkage between facts and theories as well

as it denotes the quality of research so that, there is greater need of data analysis

in fundamental as well as applied research.

Importance of Data Analysis

Most of the research projects requires data and data analysis. Data analysis is

important for business and sectoral development of economy. Now we will see the

basic points related to the importance of data analysis.

A) To study the working of two or more variables

The data analysis is important for the detail study in respect of two or more

variables used in research project. The direction and nature of variables working in

the research project must be analised, otherwise such type of information does not

give practical value.

B) Data analysis is important for qualitative factors measurement

In a research, data analysis is more important for the calculation of qualitative

factors, used in the research activity i.e. if we classify the data of number of students

of a particular college according to the indicator of rural and urban, it gives more

reliable results. Such type of analysis increases the quality of research also.

C) For proper explanation of complicated information

Sometimes the researcher collects huge information which is complicated for

analysis. So that such type of information should be minimize with the help of data

analysis tools i.e. percentage, bar-diagramme, tabular form, when the researcher

uses these statistical methods for data analysis, the results becomes more useful for

planning.

D) Data analysis is useful for the advancement of research

Data analysis is important for getting more information about the topic and

information collected by the researcher. Now-a-days, the academic and scientific

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standard of research projects is calculated on the statistical analysis made by the

researcher, so that, in a fundamental as well as applied research, data analysis is

most important for final results and suggestions.

Thus, the need and importance of data analysis is most useful in fundamental

and applied research projects.

3.3 Summary

Most of the researcher collects huge data of a particular subject of a research.

But this data should be analised for the various purposes. The need and importance

of data analysis for the final results and improvement in a research for wide progress

of a nation.

3.4 Glossary

Data Analysis – Data analysis is a systematic process of the information col-

lected by researcher.

3.5 Self study questions

1) The researcher should considered …………. Before studying a problem.

a) Minimisation b) analysis c) tabulation d) classification

2) ………………… is a tool of data analysis.

a) Percentage b) population c) growth d) poverty

3) Data analysis establishes the linkage between……….. .

a) the two variables b) facts and research

c) Classification and tabulation d) Mean & mode

H Answers of the self study questions

1) The researcher should consider minimization before study a problem.

2) Percentage is a tool of data analysis

3) Data analysis establishes the linkage between the two variables.

3.6 Questions for practice

A) Write short notes

a) Need of Data Analysis

b) Importance of Data Analysis

B) Answer the following questions.

a) What do you mean by data analysis? State its importance.

b) Explain the need and importance of data analysis.

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3.7 Books for further Reading.

1) Kothari C. R. – Research Methodology 2nd Revised Edition-2008.

2) Kumbhojkar G. V. – Research Methodology and Statistics (2010) Phadke

Prakashan, Kolhapur.

3) nmQ>rc/nR>mU/VmåhUH$a - AW©emñÌr` g§emoYZmMr "Vm|S>AmoiI' ¹$m°pÝQ>Z|Q>c àH$meZ, nwUo.Latest Edition 2011.

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6


History of Economic Thoughts


of concerned subject for the Semester-VI

3.1 Mahatma Jyotiba Phuly: 1827-1890

3.1.1 Objective:

Following are the objectives of this unit-

1. To study Mahatma Jyotiba Phuly’s Life and History.

2. To study Economic Views of Mahatma Jyotiba Phuly.

3.1.2 Introduction:

Mahatma Jyotiba Phuly is well-known in whole India. The greatest social-re-

former of Maharashtra, a revolutionary thinker of social status and the exploitation of

the farmers and labors. Father of Indian Education System and the great leader fought

for Indian women’s rights and freedom as well as social equality.

3.1.3 Life and Achievement

Mahatma Jyotiba Phuly’s great grandfather was a chougula, an inferior villager

serves at Katgun, which is twenty-five miles from Satara. The family of this great

grandfather of Jyotiba belonged to the Kshtriya Mali caste and subsisted on the

meager produce its petty farm yielded. His family name was Gorhe. One day he had

a clash with the Brahmin Kulkarni. Then the chougula shifted his family to Khanwadi,a

village in the Purander taluka of Pune district. The Phuly family belonged to the

agriculturist class of the lower strait of the Hindu society. They reared flowers and

fruit trees, grew vegetables and dealt in flowers.

Jyoti was born in 1827. He was named Jyoti, which means a flame. When Jyoti

was about a year old his mother Chimanabai died. Gowindrao was greatly grieved at

the loss of his wife. Instead of marrying a second time, he engaged a wet- nurse to

look after the infant boy. Gowindrao was a respectable man of his caste; he was by

nature religious, quiet and straight-forward and observes tradition norms and ways of

life. Although men of his generation had no education, as it was not a thing to be

aspired to by men of castes other than the Brahmin. He gave his thought to this

question and decided to put his loving son to school.

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Education in India, in the modern sense of the world, did not exist before the

birth of Jyoti. Schools were run by private individuals at centre’s containing a consid-

erable high caste population, Pundits gave instruction in Sanskrit, Grammar, Logic,

Philosophy and Law. The lower classes were not supposed to receive education, nor

did they feel the necessity of it either. Village’s schools were scattered over the

country. Where rudimentary education was given to the children of traders and reach

cultivators.

The village schools were started in 1836 as an experimental. The Act of 1813

education was set free in India. During this period of transition when the doors of

education were ajar for low caste students. Some wise and far – seeing men sent their

children to school. Gowindrao, thought it wise to send his son to school and at the age

of seven Jyoti began his rudimentary studies at a Marathi school. His marriage was

celebrated when he was about thirteen. The girl-wife was about eight years old and

came of a family called Zagade-Patil from the village of Kavadi near Pune. Though

there was a break in his schooling, he had not given up his love of books. After his

days work in field and garden, he used to read by the light of the metal lamp at night.

Gaffuhar Baig Munshi, and Legit impressed upon Gowindrao Phuly the necessity

of education for his son urged him to give him a chance for the betterment of his mind

and future. Gowindrao was agreed to send him back to school. Gowindrao, therefore

again sent Jyoti in 1841 to a mission school. A boy with resolute will and eager to

grasp the lessons, he showed a keen interest in his studies. He scored high marks in

his examinations. He was died on Thursday, Nov 27, 1890.

3.1.4 Mahatma Jyotiba Phuly’s Contribution of Economics:

1. Agricultural Thoughts:

The farmer should be educated until they know how to use modern implements

for agriculture. The Europeans in India and the Muslims, should be prohibited under

a law from eating beef. Instead they should be compelled to accept goat and sheep

meat only. At the most they should import cows and oxen for these purposes. Unless

a law was enacted to restrict beef eating, the condition of the farmer would not

improve. If this is done according to Phuly, the farmers would be able to have a good

supply of bullocks and agriculture would improve.

The government should build dams across the valleys at important places with

the help of the army, and with the help of the reserved police force. Tanks should be

built on hills, dams should be built across the rivers, the river water should be stored

in the wells for watering gardens and fields. Those farmers who would be able to sink

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wells should be given suitable economical aids/funds and the lakes and rivers should

be furnished for farmer’s sake.

The grazing grounds should be returned to the villagers, wood for fuel, foliage

and dry leaves should be given to them, but trees should not be cut down. A law

should be passed prohibiting the cutting down of trees.

New fine breeds of sheep and goats should be imported and given to the farmers,

so that they would be useful for wool and the droppings would be useful too. Farmers

should be provided with guns, to protect their farms. If pigs and such other wild

animals did damage to crops, the loss should be made, the compensation be given to

the farmers through the salaries of the police officers. In every Hindu year, there

should be exhibitions for the agriculturists and farmers should be awarded prizes for

producing the best crops. Farmers should be provided with books on farming and

agriculture.

The local cess must be utilized for the education of the farmer’s children.

He wanted to put the land to the fullest use. He was worried about the diminish-

ing yields of crops and about soil conservation. According to him much protection

should be guaranteed by law against money- lenders and landlords and landlordism

must be almost abolished.

2. Mahatma Jyotiba Phuly’s thoughts regarding the education:

About 25 years ago, the missionaries had established a female school at Pune but

no indigenous school for girls was existed at the time. Jyoti therefore, was induced,

about the year 1851, to establish such a school and in which with his wife together

fought for many years. A year after the institution of the female schools, he also

established an indigenous mixed school for the lower classes especially the Mahars

and Mangs. He had taught for some years in a mission female boarding school.

According to him primary education of the masses should be made compulsory up to

a certain age of at least 12 years. Muhammadans also hold aloof from these schools,

as they had no liking to Marathi or English. There are a few Muhammadans primary

schools, where their own language was taught. The Maharas and Mangs and other

lower classes were practically excluded from all schools owing to caste prejudices, as

they were not allowed to sit by the children of higher castes. Consequently special

school for these had been opened by government. The teachers employed in the

primary schools were almost all Brahmins. A few of them were from the normal

training college and the rest being all untrained men. Their salaries were very low.

Phuly thought that teachers for primary schools should be trained as far as possible,

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out of the cultivating classes, who would be able to mix freely with them and

understand their wants and wishes much better than a Brahmin teacher, who generally

kept himself aloof under religious prejudices. The course of training for them taught

to include, besides the ordinary subjects, an elementary knowledge of agriculture and

sanitation. To secure their betterment, the good salaries should be given to them.

The course of instruction should consist of reading, writing Modi and Balbodh

and accounts and a rudimentary knowledge of general history, general geography and

grammar. Also an elementary knowledge of agriculture and a few lessons on moral

duties and sanitation should be provided to children.

The text books in use, both in the primary and Anglo vernacular schools should

require a revision and recasting as much as they were not practical or progressive in

their scope. Lessons on technical education and morality, sanitation and agriculture

and some useful arts, should be interspersed among them in a progressive series.

The supervising agency over these primary schools was very defective and insuf-

ficient, at that time. All these schools ought to be inspected quarterly. Phuly also

suggested the advisability of visiting these schools at other times, without any intima-

tion being given.

He was of the view that the prices and scholarships to the people and capitation

or other allowance to the teachers if provided, an encouragement, to render these

schools more efficient.

The higher and primary education requires all the fostering care and attention,

which government should bestow on it to certain extent, to create a spirit of self-

reliance for local purpose in the higher and wealthy classes.

Reference Books:

1. Dhananjay Keer (1974),

Mahatma Jyotirao Phuly Father of Indian Social Revolution,

Popular Prakashan, Mumbai.

Question for self study:

1. Write an answer in one sentence:

a. What was the name of Jyoti’s father?

b. When did Jyoti’s mother die?

c. What was the name of Jyoti’s wife?

d. When did Jyoti establish a school for female

e. Where did Phuly’s family shift after a clash with Brahmin Kulkarni?

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Answers: a. Govindrao, b. Jyoti was a year old, c. Sawitribai, d.1851, e. Khanwadi

2. Descriptive Question:

1. Summarize the economic ideas of Mahatma Jyotirao Phuly.

2. Discuss the Mahatma Jyotirao Phuly’s life and works.

3. Short Question:

1. The Agricultural thoughts of Mahatma Jyotirao Phuly.

2. The Education thoughts of Mahatma Jyotirao Phuly

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History of Economic Thoughts



4.1 Dada Bhai Naoroji (1815-1917)

4.1.1. Objectives:


1. To study Dada Bhai Naoroji’s Life and Works.

2. To study Economic Views of Dada Bhai Naoroji.

4.1.2 Introduction:

During the later half of the nineteenth century, the economic and social life of the

country underwent far reaching changes, under the impact of the political administration,

educational system and economic politics of the British in India. The changed economic

and political condition resulted in the development of a new line of thinking in the

country. From now on wards, we find that the thinking on economic matters was

largely influenced by a revolt against the British rule. Before taking up the economic

ideas of modern economic thinkers of India, it would be necessary to throw light on

the factors which influenced the development of economic thought during the nineteenth

century.

4.1.3 Life and Works:

Dada Bhai Naoroji was born on September 4, 1815. He came from a Parsi family

of Bombay. He showed great promise from his very boyhood regarding the devotion

to economic and political reforms in the country. He was the first Indian to be

appointed as the Professor at Elphinstone College, Bombay. He is the first Indian to

found several social organizations, the first Indian to occupy a seat in the parliament

in England, and the first Indian to be a member of the Royal Commission in 1885.

In 1856, he was appointed as the Professor of Gujarati language at the University

College, London, on which post he remained for ten years. While in England, he

studied the working of various British Institutions and was convinced that the British

people, if they were true to their traditions and spirit of justice and fair play, would

help Indians to obtain equality of status and justice. On December 1, 1886, he

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founded, in collaboration with English officers, the East India Association. Naoroji

continued to work hard to apprise the British people of the defects of the British rule

in India through his writings and speeches in the British Parliament. He fought for

financial justice for India. Naoroji was appointed as the Prime Minister of Baroda

State in 1892. He was elected as the member of the House of Commons. He was

elected President of the Indian National Congress in 1886 and 1906. He was the first

Indian to calculate the National Income on the per capita basis. He also emphasized

the importance of the state policies in the economy of the country. The British people

were very fond of him and used to call him the Grand Old Man of India.

4.1.4 His Literature:

Dada Bhai Naoroji had written more books. Following are some important books

written by him.

1. Students Literary Miscellany (1850)

2. Poverty of India (1878)

3. Poverty and British Rule In India (1901)

4. Rast Goftar

4.1.5 Economic Ideas of Dada Bhai Naoroji:

His chief contribution was the Drain Theory

1. The Drain Theory:

The central thread of this theory was demonstrated that system of British

administration in India was destructive for India as well to Britain. It is known as ‘The

Drain Theory?, which is based on an explanation of the fact that the appalling poverty

of the Indian people was due to the British rule (which was a heavy drain on the

resources of the country), under this heavy taxes were imposed on the people. If the

income from various taxes is spent in the country in which it has been collected, and

then the money circulated, among the people of that country, the economic activities

are promoted and the prosperity of the people is increased. But when income rose

through the taxes in one country’s and transferred to another country, it is a loss

forever for that taxpaying country trade and industries. It does not stimulate trade and

industries. He calculated that by 1900, over £ 20 million were drained out from the

revenues of India. He has cleared this process in following two ways:

1. By way of remittances by European officials of their savings in India, for their

expenditure in England for pensions and salaries paid in England and from

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government expenditure both in England and in India.

2. In the form of remittances by non-official Europeans. This process prevents the

formation of capital in the country.

Not only had that, the British, by bringing back the same capital, which they have

drained from India, monopolized all trade and important industries. The sources of the

evil are, thus, the official drains. He, therefore, held that, if the country’s entire

production was not employed in the country itself, the reproduction will become more

difficult. Hence, instead of a saving at the existing rate of production, there would be

a continuous subtraction from the annual production. It thus worked as a double –

edged weapon- Continuous diminution of capital and since industry and labor is

limited by capital. They will be left with a little amount of it, even to maintain the rate

of production. It appears, as if Naoroji was opposed to the use of foreign capital, but

this was not entirely so. He wanted foreign participation within certain limits. He said

that in very other country the English capitalists simply lent their money. The people

of the debater country used and enjoyed the benefits of that capital and paid to the

capitalists the interest or the dividend. The case was quite different with India. The

English capitalists did not nearly lend their capital, but they themselves invaded the

country.

Conclusion:

His chief contribution was the drain theory. Naoroji calculated the national income.

His name shall always be remembered in the history of the nation as a nationalist. A

true son of Mother India and a practical economist with a clear vision of the problems

of the country.

4.1.6 Reference:

1. T.N.Hajela (2009) History Of Economic Thought, Ane Books Private Limited

4.1.7 Questions for self study:

a. Write an answer in one sentence.

1. When was Dada Bhai Naoroji elected as president of the Indian National

Congress?

2. When was Dada Bhai Naoroji appointed Prime Minister of Baroda State?

3. When did Dada Bhai Naoroji write a book-‘Poverty and British Rule in

India’?

4. What is the chief contribution of Dada Bhai Naoroji?

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5. What is the effect of Drain Theory on the Taxpaying country?

Answers: 1.1886 and 1906. 2. 1892. 3. 1901. 4. The Drain Theory

5. Affects seriously to the prosperity of a tax-paying country.

b. Descriptive questions:

1. Discuss the economic idea of Dada Bhai Naoroji.

2. Discuss the Drain Theory.

c. Short questions:

1. Works of Dada Bhai Naoroji.

2. Life of Dada Bhai Naoroji.

3. What are the reasons of poverty in India according Dada Bhai Naoroji.

ggg

4.2 M.K.Gandhi (1869-1948)

4.2.1 Objectives:


3. To study Gandhi’s Life and Works.

4. To study Economic Views of Gandhi.

4.2.2. Introduction:

Mohandas Karamchand Gandhi appeared at a time, when the national movement

was gaining momentum. But Gandhi’s appearance changed its shape and direction.

Those were the days when Indian intellectuals had complete faith in the British

justice. People were afraid of the British administration and the spirit of fearlessness

had not developed in them. Gandhi removed the fear of the people and boosted up

their morale. Gandhi adopted a non violent attitude, based on the principle of self

suffering rather than making the adversary to suffer. It was in 1947 that India achieved

independence under the impact of new programme, new principles and ideas introduced

by Gandhi.

4.2.3. Life and Works:

M.K. Gandhi was born on October, 2 1869 at Porbander. In 1887, he went to

England for his education in law. In 1891 he was called to the Bar. From 1893 to 1914

Gandhi rendered great service to the cause of racial discrimination in South Africa.

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His philosophy of passive resistance, won the hearts even of the opponents. He served

the people of South Africa for two decades and came back to India in 1915. It was in

1920 that Gandhi started the non cooperation movement. In 1930, he led the salt

satyagraha(Dandy March). In 1919, he conducted the civil disobedience movement

and in 1942 launched the Quit India movement. It was on Jan 30, 1948 that Gandhi

was shot dead by an Indian, named Nathuram Godase.

Gandhi’s economic and political ideas are deeply influenced, mainly, by the

philosophy of Tolstoy and Thoreau. The concepts of egalitarianism, simplicity and

asceticism, are the corner stone’s of his economic thought. Gandhi drew a lot of

inspiration from Ruskin’s, Un To The Last. His views on the decentralization of

political power are derived from the ideas of Prince Kropotkin. Gandhi was a worshiper

of the Geeta and hence the influence of the Geeta and the Upanishads was in no way

less significant. Gandhi gave a lot of importance to truth, simplicity and non violence

in his life. The writing of the Hindu saints and Nanak had also played their part in

shaping the ideas of Gandhi.

That’s why the people of India were calling him Bapu or Bapuji and father of the

nation.

4.2.4. His Literature:

1. Hind Swaraj (1908)

2. Young India (1919)

3. Navajeevan (1919)

4. My Experiments with Truth and Non-violence (1927)

5. Harijan (1933)

4.2.5. His Economic Ideas:

Gandhi did not believe in any definite scheme of economic thought. His economic

ideas are found scattered all over his writings and speeches. Gandhi’s economic ideas

are based on four cardinal principles – truth, non violence, dignity of labor and

simplicity. What to say of his economic ideas, his entire life and philosophy - social

and political, was governed by these principles.

1. Decentralization:

Gandhi apposed a centralized economy because he felt that its foundation was

laid on the violence. Gandhi, therefore, advocated decentralized economy. i.e.

production should be organized at large number of places at a small scale. In other

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words, he wanted that small units should be established in the people’s homes. Gandhi

said, if you multiply individual production to millions of times, it would not give you

mass production on a tremendous scale. But I quite understand that your mass

production is a technical term for production by the fewest possible number through

the aid of highly complicated machinery. I have said to myself, that is wrong. My

machinery must be of the most elementary type which I can put in the home of the

millions. Gandhi thus, was for the development of cottage and rural industries. And

therefore, he suggested delocalization of production as against the concentration of

production in particular areas. Gandhi’s faith in decentralized economy was all the

more strengthened because he thought that it was essential for the establishment of a

non violent state. He opposed to the centralization of heavy industries. He really

wanted that the centralization of heavy industries, should take place in such a way that

it does not hamper the growth of cottage industries and that it forms only a small part

of the national activity.

In his opinion, the mechanization of village industries should be undertaken

gradually. He also accepted that electricity and motor transport had not proved to the

detrimental to the development of small industries.

2. Rural Development :

We know that at the ancient time, Indian villages were self reliable. Agriculture

business was prosperous. Whatever the rural industries available at the time, were

necessarily caterings the needs of the people. Migration towards urban area was

significantly nil. It means the life in the rural region was simply satisfactory. That’s

why Mahatma Gandhi always says, “Real India lives in the village”.

In short, for the development of rural part of India, economical development of

village is necessary. For this purpose villages must be established with the systematic

plan. They should be perfectly self-dependant regarding the basic needs of food,

clothing and shelter. Primary education should be made compulsory. Transport and

communication facilities, clean and pure drinking water, recreation centers and

sanitation should be provided basically. All the transactions should be based on the

cooperative principles. Efforts are necessary to abolish the caste, religion system,

from the villages. Local market system should make available for the villagers products.

Then only the Indian villages and consequently whole nation may be developed.

These were the thoughts of Mahatma Gandhi, regarding the Rural Development.

Conclusion:

Mahatma Gandhi, thus, gave a new direction to the economical thinking of

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nation as well as the world. All these thoughts are essential in the present situation of

privatization and globalization. In short, in today’s changing scene, Gandhism has

become very essential.

4.2.6. Summary:

It would be observed that economic ideas of Gandhi did not lead to any economic

theory. Since Gandhi had never been a student of economics, it would be too much to

have expected from him that he would enunciate in economic theory.

4.2.7. Reference Books:

1. T. N. Hajela (2009) History Of Economic Thought.

Ane Books Private Limited, New Delhi

4.2.8. Questions for self study:

a. Write an answer in one sentence.

1. When did Gandhi start the non cooperation movement?

2. Where Gandhi was born?

3. When he wrote Harijan journal?

4. What type of machinery Gandhi expected?

5. Which are the principles of Gandhi?

Answers: 1. 1920. 2. Porbander. 3.1933. 4.Elementry. 5. Truth, Non-violence, Dignity

of Labor and Simplicity.

b. Descriptive questions:

1. Summarize the economic idea of Gandhi.

2. Discuss Gandhi’s life and works.

c. Short Questions:

1. Gandhi’s economic idea of decentralization.

2. Gandhi’s economic idea of rural development.

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B. A. Part-III : Economics Paper-7 (A) (Old) Paper-10 & 15 (A)(New)

International Economics



Unit 1.4

Heckscher - Ohlin Theory of International Trade

Introduction :

The Ricardian theory of comparative cost was explained in terms of the Labour cost of

productiion. The modern economies are money economies at the valume and direction of

international trade is not determined by comparative differences in the Labour cost of production

by the differences in money prices of goods and services. This does not, however, present any

difficulty because the compartive cost differences in the Labour costs of producing commodites

can be translated into absolute differences in the money prices.

Ricardo was confined to trade between only two countries and in only two commodities.

According to the Theory, a country will specialise in the production and export of that good

in which it commands a comparative cost advantage over the other conunty and import that

good in the production of which it suffers from a comparative disadvantage. The theory point

out that international trade arises because of differences in compartive cost. But it does not

explain why the differences in compartive costs arise.

This raises the important question : why do relative prices of commodities differ from

country to country ? The classical Economics failed to answer the question proparly. The

reasons for differences in costs were explained be Eli Heckscher at Berfil Ohlin.

Heckscher - Ohlin’s the pure theory of international trade have based on the principles

of factor production Analysis.’ Eli Heckscher was Ohlin’s teachers at the University of

Stockholm. He was professor of Economics of University of copen hagen from 1924 to 1929

at Subsequently at the Stockholm School of Economics from 1929 to 1955. He was Swedish

Minister of commerce during 1944-45. He shared the corveted Nobel Price 1977 for Economics

with Proffessor James E. Mede. Heckshcher published his essay ‘The Effect of foreign trade

on the Distribution of Income in their famous Book ‘Ekonamisk Tidaskrift’ in 1969 and Ohlin

explained veiw of international trade in their Book Intraregional and International Trade in

1933.

19

Assumption’s of Heckscher - Ohlin’ Theory :

Heckscher - Ohlin’s theory of international trade also called Modern Theory of

international trade. The theory is depend upon following two things.

1. Relative differences in the endownment of nations with the factors of production will

tend to result in relative differences in factor prices.

2. Defferent factor requirement for the production of various commodities.

These two conditions combined with the logic of generally accepted prices theory form

the care of the modern theory of international trade. The Hechscher-Ohlin proposstion or

factor proportions theory in shorts is that a country will export such goods which require for

their productioin realatively large amounts of its abundant factor. Two alternatively definitions

can be given for factor abundance. One definition runs in terms of factor prices. It says that

a country is capital rich comparted to another if capital is relatively cheaper in the country

than in the other. The second definition compares overall physical amounts of labour and

capital. It says that a country is rich in capital if the ratio of capital to labour is large in that

country than in the other. This type of explaination, Heckscher - Ohlin theory of In international

trade is called Factor Endowment theory. He explained new concepts, that is factor

endownment and factor abundance in their theory.

Assumption :

1. Two countries, two commodities and two factors : The Heckscher - Ohlin theory

of international trade may be discribed as a two country, two commodity and two factor in

trade. i.e. 2 X 2 X 2 trade model.

2. Equal Technology : There must be equal technology in two countries.

3. Constant returns to scale : Production is governed by constant returns to scale.

4. Perfect competition : There is perfect copetition both in commodity and factors of

production markets.

5. Full employment : Both the factors of productions are employed fully in each

country.

6. Constant consumer tastes : Consumer tastes are fixed and identical in the two

countries.

7. Factors Mobility : Factors of production are perfectly mobile within a country while

they are immobile between countries.

8. Free trade : There is free trade between the countries.

9. No cost of transport, Insurance : There are no cost of transport, insurance, tariff

and other barriers to trade.

20

10. Labour and capitel intersive technique : Productiion of commodities between the

two countries based upon the Labour and capital intensive technique.

11. Different production capacity : Production sability of factors different in two

countries.

12. Commodity trade : The transactions are included in internatiional trade related to

only commodities. The theory Ignores transactions arising from capital investment, remittance

& interest or dividends.

Important Concepts :

Heckscher - Ohlin traced the cause for cost differences in relative factor Endownment

and factor Internsity. There are important concepts in the modern theory.

1. Factor Endownment :

Countries differ from one another in the endownment of factors of production. In

Australia posses relatively large amount of land while other posses relatively large amount of

Labour. The first cause for trade is the difference in factor endownments. Scarcity of factor

is considered in relation to demand. A relatively abundant factor is relatively cheap. A scare

factor is relatively dear. Its differences in factors endownment in different countries lead to

relative differences in factor prices.

2. Factor abundance :

The concept of relative factor abundance is used in

(i) Physical Criterion : According to the physical criterian, a country is said to be

relatively capital abundant if and only if it is endowed with large proportion of capitel to

labour than the other country.

(ii) Price Criterion : According to the price criterian, a country having capital relatively

cheap and labour relatively dear is a capital abundant country, irrespective of the ratio of the

total physical quantity of capital to the physical quantity of Labour compared with the other

country.

The production of different commodities requires factors of production in different

proportions. Some commodities require for their production relatively more labour compared

to capital. These commodities are called labour intersive or commodities. Commodities

which require relatively more capital for their production are called capital intensive or

commodities.

It follows that a capital rich country will produce and export capital intensive commodities

and a labour rich country will produce and export labour intensive commodities. That is why

this theory is also known as factor proportions and factor - intensity theory.

21

According to Heckscher and Ohlin, among the factors which couse differences in the

commodity prices between different countries factor endownments of different countries

exhibit great variations. While some countries, like Australia and Argentina, are endowed

with abaudant land, Germany and United Kingdom, possess relatively large amount of

capital. Some other countries, like India and China, command abundant labour force. Country

will produce those commodities requiring for their production much of the former and little

of the latter are exported in exchange for goods that call for factors in opposite proportion.

Thus, indirectly, factors in abundant supply are exported and factors scanty supply are

imported. On this basis, Australia and Argentia where land abands in plenty and is cheap

should produce and export land intensive goods while west Germony and United Kingdom

where capital is cheap should produce and export capital tensive goods. Similarly, India

China where labour is abundant is cheaps should produce and export labour intensive goods.

Diagrram show the international trade between the different countries.

Export - capital intensive goods

Import - Labour intersive goods

Import - capital intensive goods

Export - labour intensive goods

Capital

rich

Country

Labour

rich

Country

Diagram No. 1

22

Explaination with the help of Diagram

Diagram No. 2Y

C

C

EK

a1Capitol

K1

O M a M1 a1X

WD

W

a

Labour

We can show that the capital rich countries will export capital - intensive goods and

Labour rich countries will export labour - intensive goods. If capital is relatively cheap in

country 'I' the country is rich in capital And if labour is relatively cheap in country II, the

country is rich in labour.

We can now demostrate with the help of the following diagram, that the country I will

export capital - intensive goods. Ther are two isoquant 'CC' and 'WW' which characterize the

production functions and are the same for both the countries. According to these isoquants,

A is the capital intensive goods while, B is the labour intensive goods. Relative factor prices

in country I where capital is cheap are given by the factor price line 'aa'. Let us assume that

the isoquants repesent one unit of respective goods. Then one unit of 'A will be produced

with 'OK' of capital and 'OM' of labour. Country 'I' will produce 'A' goods and export it.

Relative factor prices in country II, where labour is cheap are given by the factor price

line 'aa', Let us assume that the isoquant represent one unit of respective goods, The one unit

of 'B' will be produced with OK1 of capital and 'Om1', of labour. One unit of 'B' requires only

'OK1', amount of capital which is less than the labour. Country will produce 'B' goods and

export it because it is a labour abundunt country.

23

Criticism :

1. Two countries two commodities and two inputs : Heackscher - Ohlin theory of

international trrade is 2 x 2 x 2 trade model. But in practice, trade takes place between many

countries and in many commodities, which are produced in several inputs. The theory cannot

explain the actual complex trade pattern.

2. Perfect compitation : H. O. theory assumes that the perfect competition in goods

markets, not only shown the perfect competition but shown the Monopoly, monopolistic

competition, duology etc. theory is based on unrealistic assumption.

3. Difficult process : International process is a difficult process because it includes

various commodities of various countries and different political almospihare in different

countries.

4. Same as classical theory : There is no difference between the canpartive cost theory

and Heckscher - Ohlin they, The theory is equal to classical theory.

5. Product differentation : Heckscher - Ohlin theory ignores the role of product

differentation in international trade. If there is product differentation, trade may be take place

even if the two nations are similarly endowed with the productive agents.

6. Ignores transport cost, external economies : The theory is faulty an explanation of

specialisation and trade because it ignores several sevral other factors like transport costs,

economies of scale, external economies etc. which together with differences in factor

proporations account for the differences in costs and in prices to products between different

regions giving rise to trade between these regions.

7. Neglect the problems of long-run development and their effect : Heckscher-

Ohlin theory neglect the problems of long run historical development and their impact on the

nature and pattern of international trade. The assumptions of fixed factor endowments and

unchanging technology are difficult to defend. None of the country's factors is fixed for all

time.

8. Absence of international factor Mobility : John H.Williams has argued that

international factor mobility was greater than suppoased to be. According to him, Factor

mobility was, infact, greater between countries than within a single country. The theory rest

the absence of international factor mobility.

9. Consumers are not fixed & Identical : Despite indentical factor proportion in

different countries, trade may be take place if the consumer preferences are not identical. If

consumer tastes in the two countries are different for various reasons.

24

Questions for self study :

(A) Fill in the blanks.

1. Heckscher - Ohlin theory of international trade also called ................ theory of

international trade.

2. Heckscher - Ohlin explained ................ and ................ concepts in their modern

theory of international trade.

3. Heckscher - Ohlin's the pure theory of international trade have based on the principle

of ................

4. Heckscher - Ohlin theory is ................ trade model.

Answer :

1. Modern 2. Factor Endowment & factor Abunalance

3. Factor production Analaysis

4. 2 x 2 x 2

(B) Write short Notes.

1. Assumptions of Heckscher - Ohlin theory.

2. Concept of Facter Advandance

(C) Explain the Heckscher - Ohlin theory of International Trade.

EEE

25





Unit 3.1

Exchange Rate - Purchasing Power Parity Theory

Introduction :

Every country in the world has its own currency which is legal tender within its

frontiers only. If an Indian wants to buy goods from England, he will have to pay in pount,

because Englishmen will not like to be paid in terms of any other currency except in their

own. Hence, It is essential for Indian importer first to buy the pound of England and then to

use the pound for buying his requirements from England. The rupee, therefore, can buy

goods in a foreign country not directly but indirectly through the help of foreign currency.

Foreign Exchange Rate is important concept in international trade because every country

has different currency. e. g. In India - Rupee, America - Dollar, England - pound, Russia -

Rubal. Foreign exchange rates link the different national currencies and make the international

cost of price comparisons possible.

Meaning of Exchange Rate :

Foreign Exchange Rate between the currency units of two countries means the number

of units of one national currency that are needed to buy one unit of the other national

currency. They play an important role in determining the volume, composition and direction

of the flow of international trade.

Definitions :

1. The rate at which one currency buys or exchanges for another currency is known as

the rate of exchange.

2. According to Clare and Cramp - "Rate of exchange is only a price of one currency

quoted in terms of another currency."

Thus, the rate of exchange of currency expresses its external value or purchasing

power. Suppose Rs. 75 exchanges for 1 pound of the English currency. It means that what 75

rupees can buy in India, 1 pound can buy in England. Hence, by converting a rupees into

sterling an Indian can buy 1 pound wath of goods in England. It is, therefore, clear that the

rate of exchange expresses the external purchasing power of a currency.

Value of one currency in another currency is called Rate of exchange.

Example, 1 Dollar = Rs. 50, 1 Pound = Rs. 75, 1 Uro = Rs. 70.

26

Features of exchange Rate :

1. The word 'Exchange Rate' used in international trade.

2. Foreign exchange Rate between the currency units of two countries.

3. Exchange rate means the price of one currency expressed in terms of other currency.

4. The different theories of determination of foreign exchange rate stated by many

experts.

5. Concept of exchange rate is an important in the equilibrim of international Balance

of payment.

6. It is play an important role in dermining the valume and direction of international

trade.

Today, All countries in world have inconvertible paper currency. The rate of exchange

between two inconvertible currencies is determined by the ratio of their respective purchasing

powers.

The foreign exchange rate is determined in the free foreign exchange market by the

demand for and supply of foreign currency.

Purchasing Power Parity Theory :

Introduction :

During the world war I, trade had been interrupted, international gold standard had

been abandoned and monetary conditions in various countries were in a bad shape.

Consequently, when trade was resumed at the end of the war, the problem before the

countries was to choose an equilibrium rate of exchange that would ensure equilibrium in

their external balance of payments of all such explanation, the one given by Prof. Gustar

Cassel appears most satisfactory.

Purchasing Power Parity Theory :

The Purchasing Power Parity theory of foreign exchange rate was stated by Richard

wheatly in 1802 in his famous work Remarks on currency and Commerce. It was clearly set

out by Mr. William Blacke in 1810 and was restated by Mr. David Recardo. The Theory was

later developed and popularised in 1918 by the famous Swedish Economist, Prof. Gustay

Cassel who used the term 'Purchasing Power Parity', while explaining the working of the

theory.

Accourding to the theory, the equilibrium rate of exchange between two inconvertible

currencies is determined by the ratio of their respective purchasing powers. The rate of

exchange tends to be staabilized at the point of equality between the purchasing power of the

two countries.

27

For example, a given amount of certain goods & services demanded in the two countries

say America and India, can be purchased for 1 dollar in America and for Rs. 10 in India.

According, the purchasing power of 1 dollar is equal to that of Rs. 10 Indian Rupees. In other

words, 1 dollar = Rs. 10 or Rs. 1 = 0.10 dollar. This exchange rate can be decided upon.

Therre are two approaches or versions of this theory.

1. Absolute approach or varsion :

According to this approach, the rate of exchange is determined at the point at which the

purchasing power of the two currencies become equal. The purchasing power of the two

currencies is compared either in terms of one commodity or group of same commodities. For

this the following formula is used.

R =Pb Qo

Pa Qo

where, R = Rate of exchange

Pa = Price in country 'A' of a commodity

Pb = Price in country 'B' of the same commodity

Qo = Weight of the index number.

For example, let us assume that the prices of commodity 'X' in countries 'A' and 'B' are

Rs. 10 per unit adn 1$ per unit. respectively, with the weight of index number being 20 in

both the countries. Then the rate would be

R =1$ (20)

Rs.10 (20)

=20$

=1$

= 1$ = 10Rs. 200 Rs.10

OR Rs.1 = 0.1$

Thus, on the basis of absolute prices of one commodity, the rale of exchange can be

determined.

2. Relative approach or Version :

The absolute approach of this theory explains the determination of equilibrium rate but

does not explain the changes in the rate The relative approach explaining and dealing with

the causes and degree of fluctuations in the rate of exchange. This approach takes into

account the ratios of prices in the two countries at two different points of time for comparsion.

The following formula is used.

28

R1= RPb1/Pbo

Pa1/Pao

R1 = New Exchange rate

R = Base year exchange rate

Pb1 = Price Index of current year in country 'B'

Pbo = Price Index of Base year in country 'B'

Pa1 = Price Index of current year in country 'A'

Pao = Price Index of base year in country 'A'

The new rate of exchange can be easily determined by using this formula.

For example, let us assume that the current year price Index in 'A' & 'B' are 150 and 75

respectively and the base year exchange rate is Rs. 1 = 20 cents. The new exchange rate

would be,

R1 = 20 cens x75 / 100

150 / 100

= 20 cens x75

x100

100 150

= 10 cents.

The new exchange rate would be Re. 1 = 10 cents Gustav Cassel has explained the

determinatiion of exchange rate and the changes therein by giving absolute and relative

approaches of the purchasing power parity theory.

The P. P. P. theory of foreign exchange rate applies to those countries which have

inconvertable paper currencies. For those countries which are on the gold standard, the mint

parity suffices to determine the exuilibrium rate of foreign exchange between two such

countries currences. The difference between the mint parity and the purchasing power parity

is that while the former is a fixed parity the purchasing power parity is moving parity which

moves with fluctuations in prices in the countries concerned. Changes in the market rate of

exchange arising on account of changes in the demand for and supply of a particular

country's currency around this parity go on as before. The limit to these changes are

determined by the cost of transporting goods including tariff, insurance, banking and interest

charges, cost of uninsurable risks, advertisement of goods in the foreign market etc. from one

country to another. These limits are not fixed unlike the specie points in the case of the gold

standard countries.

Diagram shows, the moving parity. The upper and Lower limits of fluctuations of this

moving parity are determined by the commodity import and export points. The market rate

29

of exchange is determined by the intersection of the demand and supply curves of fereign

exchange. With SS supply curve and DD demand Curve the market rate of exchange is OR

which lies within the range of the commodity import and commodity export points. When

the demand and supply curves change their positions as shown by D1 D1 and S1 S1 Curves

the market rate of Foreign exchange rises from OR to OR1.

Y

D1 S1

SD

R1

R

S1 S D D1

XO

Fo

reig

n E

xch

ang

e R

ate

Demand & supply of Foreign Exchange

Import Commodity Points

Purchasing Power Par

Export Commodity Points

Criticisms :

1. Inaccuracies of Index numbers and their differences in different countries : The

rate of exchange is based on the compavison of index number of prices in two cuntries. But

price indices in diffenent countries are not comparble because they are constructed on

different bases and differt in respect of base period. Thus comparison between such index

numbers does not give us a true purchasing power parity.

2. Changes in economic relations between the two countries, ignored : The theory

does not consider the fact that economic relations between countries change following which

the equilibrium rate of exchange might also change, although prices in the concerned countries

may not change at all.

3. Cost of transportation ignored : The purchasing power parity theory ignores. The

cost of transpartation. But the prices of goods rise in one country and fall in the other with

the changes of transport expenses.

4. Unrealistic assumption : The theory is based on the unrealistic assumption that (a)

the balance of payments in the base period was in equilibrium and (b) no structural changes

have taken place in the factors underlying this equilibrium i. e. technology, resources and

30

taste including attitudes toward foreign investment influencing portfolio decisions are all

assumed as given.

5. Changes in fashion and Level of Income : Such changes will upset the rate of

exchange but no allowance has been made for them in the theory.

6. Difficulty in selecting a suitable index number : Since the index number of

general prices are to be taken, there is a problem as to which index number should be

included. e. g. wholesale price index, agricultural price index, Retail price index, Raw

material index etc.

7. Inclusion of domestically traded goods in indices : An index number of internal

prices included prices of commodities which does not enter into internal trade and hence, do

not give rise to foreign exchange transaction. A change in prices of domestically traded

goods may extend itself over the whole economy, affecting the prices of international goods

also.

8. Interference in trade by tarrifs, quotas and other restriction : If a country

imposes tariff duties on its imports which the other countries do not, then the demand for its

own currency will remain the same while demand for foreign currency will go down. Hence,

exchange value of the currency of tariff imposing country shall rise, while the price index

may not show any appreciable change.

9. Ignores the demand for and supply of foreign exchange : The purchasing power

parity theoryignores the demand for and the supply of foreign exchange arising from sources

other than international trade in visible goods. The theory overlooks the fact that the demand

for and supply of foreign exchange arises on account of imports and exports of invisible

serivces like, insurance, shipping and banking. So, The theory does not offer a complete

explanation of the determination of equilibrium role of foreign exchange between incovertible

paper currencies.


(A) Fill in the gaps.

1. The price of one country's currency in terms of another is called ................

2. The Purchasing power parity theory of Foreign Exchange Rate was developed by

................

3. ................ is the currency of America.

Answer :

1. Exchange Rate 2. Gustav Casse

3. Dollar.

31


1. Exchange Rate

2. Absolute and Relative approach of the purchasing power parity theory of exchange

rate.

(C) Explain the the purchasing power parity theory of exchange rate.

ooo

32





Unit 4.3

Barrier to trade : Tarrif

Introduction :

A tariff is a protectionist device which restricts the consumer's freedom of choice in the

country. It has two effects upon the National Income. By using a price - rise, it control the

consumption on the one hand and by bringing about the utilisation of the idle resources of

the economy. It increases production on the other hand. A tariff is charge as the impart goods,

so that the price - rise will be moderate while production will rise substantially and the result

that the net effect of the tariff is beneficial.

Tariff - meaning :

A tariff is a duty or tax or lexy which is imposed on the commodities when they cross

the national borders. It is lexied on import and export of the country's. However, It is charged

or lexyied by country's government on their imports.

A tariff is a control the traditional way of international trade. All the Country's in the

world, it use in their international trade policy for a long-period of time.

1. On the bases of originating goods and place :

(A) Import Duties : It is levied on the goods orignating abroad and are scheduled for

import to the duty leving country.

(B) Export Duties : It is levied on the commodities originating inthe duty levying

country and are scheduled for abroad.

(C) Transit Duties : It is levied on the goods crossing the national border originating

from and scheduled for some other third countries. Transit duties are significant concern for

the Landlocked countries.

2. On the basis of different rate of lavying :

(A) Specific Duty : The tarrifs, which are leyies of fixed sums of money on each unit

of quantity imported. Thus, a duty levied as a fixed number of rupees per pound, gallon,

Kilogram or other unit is called a specific duty. Specific duties are easy to administer as they

do not involve the problem of determing the value of export or import goods.

33

(B) Ad-Valorem Duties : Duties are stated in terms of a fixed percentage of the value

of the imported or exported commodity. It ignorres the weight and measurement of the

commodity to be taxed.

(C) Compound / Combined Duties : Sometimes a combined Schedule of specific and

ad - valorem duties is prepared by the legislature and the importers are give the option to

choose the duty, known as Combined Duties.

3. On the basis of different Countries :

(A) Single - Column Tariff : It is one in which only are tariff duty is established by

Law for each and every Commodity, without discriminating between commodities and

countries.

(B) Double - Column Tariff : It is one in which, for each commodity class, two or

more duties are established by law and depend on the categery of the country of origin.

(C) Conventional Tariff : It is one in which a basic duty is established by Law for

each commodity class with the proviso that each such duty may be reduced by international

agreement.

4. On the basis of the objective or purpose :

(A) Revenue Duties : Revenue duties are those, the primary purpose of which is to

provide the state with revenue. This Tariff is designed to provide any revenue to the home

government. A tariff inposed with the view of raising revenue is levied on the consumption

goods and on the luxrious goods whose demand from the rich may be inelastic.

(B) Protective Duties : The main purpose of protective duties is not to create a new

source of income for the state or government but to maintain and encourage the domestic

industries from cut-trroat competition of cheap imports. Protective tariff is levied on the

import of foreign goods competing with the domestic products. The high rate of this tariff the

greater will be the protective effect. But it has the effect of stopping completely the imports

of foreign goods competing with the home-made goods yielding no revenue.

Effects of Tariff :

Effects of tariff may be analysed either in terms of economy as a whole or in terms of

market. The famous economist, kindleberger, have been discussed, the different effects

which follow the imposition of import tariff on economy.

1. Protective Effect

2. Consumptiion Effect

3. Redistribution Effect

4. Revenue Effect

5. Competitive Effect

6. Income & Employment Effect

34

7. Balance of Payment Effect

8. Terms of trade Effect

Diagram - 1 : Effects of tariff on economy

Y

S

P1

P

M N

B

D

X

bRaA

O Q Q1 Q2 Q3

P

r

i

c

e

Quantity

S = Demestic supply curve

D = Domestic demand curve

In diagram ox axis shows the quantity of demand & supply of commodity and 'OY` axis

shows the price of the commodities 'S' is a domestic supply curve and 'D' is a domestic

demand curve. 'OP' is constant price level in open trade. 'PB' supply cunce of import goods

is perfectly elastic at 'OP' price level. Curve 'D' and curve 'PB' intersect at point 'B'. At that

point, total demand for goods is 'OQ3' and domestic supply is 'OQ'. The difference between

demand and supply of domestic goods is 'QQ3'. The gap between 'QQ3' is filled by importing

the commodity from abroad.

If tariff increases from 'P' to 'P1', then the prices of commodities also increases 'PP1'.

It is also called price effect. As the result of increase in price, the total demand for comodity

is 'OQ2' and supply is 'OQ1'. After duty levied the import is 'Q1Q2'.

1. Protective effect : PP1 per unit tariff is imposed. The post-tariff price of the

commodity in the domestic Market, however, increases by the full amount of tariff and

become OP1. The foreign supply curve after the imposition of tariff shifts upward horizontally.

At the OP1 price the mports of the commodity decrease (Q1Q2). While the domestic

35

production of commodity increases from OQ to OQ1. The increase of QQ1, quantity in the

domestic production of the commodity is the protective or production effect of tariff.

2. Consumption effect : Higher tariff rate increase the price of commodity and decrease

the comsuption e. g. In diagram, The total amount of commodity consumed by the consumers

at the OP1 higher price is reduced by the amount Q2Q3, Thus the full in the total quantity

of the commodity consumed amounting to Q2Q3 is the consumption effect of tariff.

3. Redistribution effect : Due to tariff levied, the transfer of consumer's surplus from

consumers to producers is known as the redistribution effect of tariff. It is the transfer of

income from the consumers in the form of an economic rent accruing to the producers.

In the diagram, the total loss of consumers surplus due to import tariff imposition. It is

suffered by the consumers 'PP1 MA' amount is Transfered to the domestic producers. This

effect shows the loss of comsumers surplus in one hand and increase the benefit of producers

in other hand. So the unequal distribution of Income.

4. Revenue effect : The total quantity of commodity imported in the country multiplied

by the amount of per unit tariff imposed on each unit is known as the revenue effect. The

import duty of 'PP1' on each unit of the commodity imported by the importer is collected by

the customs authorities. The total quantity of commodity imported is Q1Q2. Consequently,

Q1Q2 x PP1 = (R) is the revenue effect of tariff.

5. Competitive effect : In order to protect the domestic industries from cut-throat

competition of cheap imports, tariff is levied on the import goods coupeting with the

domestic product. The higher rate of tariff the greater will be protective to home industries.

As the result of that, the completly stopping the imports goods and home industries creats the

monopoly in the market. Decrease the efficiencey and competing capacity of domestic

industries.

6. Income & Employment effect : Duty reduces the total expenditure on the purchase

of foreign goods. So, save the money. It will be spent on the domestically produced goods.

It will create employment and Income in the economy.

7. Balance of Payment effect : A trariff is highly effective in improving the balance

of payments at a country. A rise in the tariff rate tends to divert demand at any given national

income from imports on to the other goods. By reducing imports in this way, a deficit in the

Balance of payment is sought to be reduced.

In the diagram, when tariff is zero in open trade, QQ3 import at OP price.

The total amount of imports, shows in diagram by AQQ3B. There is a deficit balance

of payment, PP1 tariff levied on imports, decrease the imports from QQ1 to QQ2. 'R' is

revenue got to the government and save the foreign exchange because current imports

aQ1Q2b is less than the import AQQ3B. and it help the promoting balance of payment.

36

8. Terms of trade effect : The use of tariff is recommended to take advantage of their

tendency to force down prices in the exporting country, if this occurs the tariff raising

country gains from obtaining its imports on better terms.



1. The tax on import and export commodities are called as ................

2. ................ levied on the goods crossing the national frontier originating from &

scheduled for some other third countries.

3. When a fixed sum of money, keeping in view the weight and measurement of the

the commodity, is charged by the government as tariff, it is known as the ................

duty.

4. When a fixed percentage of the value of a commodity is taken away as tariff, it is

known as ................ duty.

5. A tariff which is designed to provide only revenue to the home government, known

as ................

Answer :

1. Tariff 2. Transit duty 3. Specific 4. Ad-valorem 5. Revenue duty.


1. Types of tariff

2. Effects of tariff

3. Objectives of import duty.

(C) Discriptive questions.

1. Explain the various types of tariff.

2. Explain the effects of tariffs.

EEE

37

Unit 4.4

Non-Tariff Barries to trade

Non-Tariff Barriers (NTBS)

Introduction :

Non-tariff barries, which are discribed new protectionism measures, have grown

corsiderably, Particularly since the beginning of 1980. NTBs are obstacles to impart other

than tariffs tariffs which are regarded or traditional barries. The export growth of many

developing countires has been seriously affected by NTBs. According to a world Bank study,

NTBs in major industrial countries affect more than one-third of Imports from developing

countries as campared to more than one fourth from all countries.

Over the year, NTBs have been becoming more extensive and intensive Today, they are

confined to the labour intesive products, where the developing countries have a advantage,

but also cover capital intensive products. Japan and newly industrilising countries, like S.

Korea are also among the most affected countries by NTBs. The NTBs have came to affect

the intra - OECD (i.e. trade between developed countries).

The NTBs fall in two catagories. The first category includes those tariffs which are

generally used by developing countries to prevent foreign exchange outflows or those which

result from their chosen strategy of economic development.

The second category includes, those which are mostly used by developed economies to

protect domestic industries which have lost international competitiveness or which are

politically sensitive for governments of these countries.

Classification of Non-tariff barriers :

NTBs are usually classified as under :

NTBs

1. Quantitative Trade 2. Fiscal measures 3. Administration or Others

Restrictions Standard & Requlations

1. Quantitative trade restrictions are import quotes, tariffs, quotas, voluntary export

restraints, ordinary marketing, arrangement, multifibre arrangement.

2. Fiscal measures are export or production subsidies, tax concession on export,

government procurement, anti-dumping duties etc.

3. Administrative or standards and Regulations relate to health, sanitory and safety

regulations environmental, controls, customs valuation, making and packaging requirements,

licensing procedures state trading etc.

38

4. Others include bilateral agreement, dumping international commodity agreement.

A brief account of the important NTBs are as follows :

1. Voluntary Export Restraints :

It is an agreement by an exporter country's exporters or government with an importing

country to limit their exports to it. It is entered into by the importing country when its

domestic industry is suffering from large imports. The limit to imports may be set in terms

of quantity value or market share. VERs are seldons 'Voluntary'. They are accepted by

exporters lest they may be restricted to trade by powerful trade barriers on part of the

importing country. The United States and the European commodity have, thus, regulated

imports of several products. Other bilateral arrangements have involved restraining the

growth of specific exports, from Japan and newly industrialising countries.

The VERs are usually highly disriminatory. The Uraguay Round Agreement has sought

to abolish VERs.

2. Health and Product standards :

Several health and product standards imposed by the developed countries hinder the

exports of developing countries because of the added costs or technical requirements. The

need for maintaining health and product standards is unquestionable. The objection should

be to their use with the deliberate intention of trade restriction or discrimination.

The Agreement on technical Barriers to evolved by the Tokyo Round of the GATT lays

down that when the agreements or other bodies adopt technical regulation or standards for

reasons of safety, health, sanitary regulations, industrial standsards, labelling and packaging

regulations, consumer or environmental protection or for other purposes. Such requlations

impose additional costs on foreign suppliers of goods in order to restrict their imports. These

should not create unnecessary obstacles to trade. However, exporters from developing countries

complain that the code is not respected by developed countries in several cases.

3. Customs Procedures :

Certain customs procedures of many countries become trade barriers. Often custom

officials value imports at a higher price above the specified tariff rate for goods. For

example, studies pointout that frequent changes of Japan's customs requlations are a magor

barrier to exporters, especially those not affilliated with Japanese overseas joint ventures.

Custom procedure is to deliberatly delay the clearance of goods by custom officials so as to

increase the cost of importing goods, as an import tariff does. The customs officials often

charge high triff rates by their own categorisation of goods with high rates such prodedures

restrict imports because they make them dearer and non-conpetitive in the local market. They

are meant to create uncertainty amoung importers.

4. Licensing Procedures :

39

Many countries regulate foreign trade particularly imports, by complicated & expensive

import licensing procedures. In most cases the purpose of import licensing is to restrict

imports. Import licensing are often auctioned to the higest bidders. In other cases, Importers

are required to deposit large sums of money with the government for getting import licenses.

There are also administrative hurdles which importer have to overcome in filling lengthy

forms, obtaining permits and getting clearance of goods through customs.

5. Consular Formalities :

A number of countries insist on certain consular formalities, like certification of export

documents by the respective consulate of the importing country, in the exporting country.

This becomes a international trade barrier when the fees charged for this is very high or the

procedure is cumbersome.

6. Local content Regulations :

In developing countries, import of manufactured products like, cars, computers, laptops,

TVs, are restricted if they do not meet local content regulations. Foreign manufacturers of

products in India are required to have sufficient local content in the form of spare parts

manufactured within India. This is done to protect domestic producers of parts from foreign

competition.

7. Government Procurement :

These often tend to hinder free trade. Government discriminate between domestic and

foreign suppliers of goods and services required by the government departments. In some

countries, there is legislatiion to buy domestic goods and services even if they are available

from abroad at low rate. In some other countries, tenders for government purchases are

called only from demestic suppliers. Japanese government agencies do not consider foreign

bids. Government also exercise discretionary powers not to accept or reject bids from

foreign suppliers. The main aim is to support demestic industry.

8. Safeguards :

Safeguard actions, which under the WTO Articles enable countries to undertake

temparary restrictions against 'influxes' threatening the viability of domestic industries, have

a became a common form of administered protection. Although such measures are resorted

to provide some breathing space and flexibility for structurul adjustment, they often lead to

some or the other forms of permanent barriers.

9. Subsidies :

Protection to have industries is also granted by giving subsidies to the demestic producers.

Especially when the cost of production is high and demestic producers are incapable of

either competing with foreign goods or sell goods at a cheaper rate, the government may give

them subsidies in the form of tax exemption, development rebate or tax remittance, priority

in the allocation of scarce raw materials or foreign currency or a segment of the cost of

production may also be borne by the state. Further, in order to Incourage exporters, they may

40

be given export bounties. Export bounties in effect artifically bring down the domestic price

of goods to be exported, hence exporters will be in position to sell them at low prices in the

foreign market.

10. Dumping :

Discriminatory monopoly pricing in foreign trade is described as 'dumping'. It implies

different prices in the domestic and foreign markets. Haberler defincs dumping as ' the sale

of a good aborad at a price which is lower than the selling price of the same good at the same

time and in the same circumstances at home, taking account of differences in transport costs'.

Under dumping a producer possessing monopoly in the domestic market for his product

changes a high price to demestic buyers and sells it at low conpetitive price to the demestic

buyers and sells it at a low conperitive price in the foreign market. The rationale behind the

dumping is that it enables the exporter to compete in the foreign market and capture the

market by selling at a low price, even sometimes below cost and to make for deficiency in

sale revenue by charging high prices to the home buyers. Dumping also hinder / hurdles free

international trade.

11. Quotas :

Import and export quotas are one of the several important restrictive trade practices

which limit either the value or total quantity of the commodity to be imported into or

exported from the country during the any specified period of time. The use of quotas as a

restrictive device was almost ubiquitous in the European and other countries in the interwar

period when these countries were under serious deflationary pressurre from abroad and in

the postwar period when they were forced with the serious shortage of foreign exchanges.

12. International Cartels :

As a kind of trade restriction, international cartels had an important impact on

international trade in the interwar period. In general terms an international cartel. May be

defined as an arrangement between producers or sellers of two or more countries for the

purpose of regulating competition in the production and selling of an international commodity.

Such cartels are sometimes formed with government participation.

According to Kindleberger, 'Cartels are international business agreements to regulate

price, division of markets or other aspects of competition. They occur in industries with less

than perfect competition.' Thus international cartels are sort of monopoly combines to

eliminate competition in the foreign markets. Cartels members usually form an orginised

association through explicit agreement which would ensuer them higher profits than would

be possible otherwise.

13. State Trading :

State trading refers to the socialisation of economic policy pertaining to foreign trade.

Under state trading, government arranges all the details regarding the bulk purchases and

sales of goods, fixing their prices, making payments, negotiating credit etc. State trading,

41

therefore, implies a partial or complete monopoly of state in the sphere of international trade.

State trading also hinders free trade many times because of the countertrade practices,

canalisation etc. With economic liberalisation in most of the countries the role of state

trading has declined.

14. Environmental Protection Laws :

The growing cancern for environmental protectiion has led to the extension of

environmental Protection regulation to the imports. For examples, the US Congress has

framed a legislation to prohibit the import of shrimp harvested with commercial fishing

technology which might adversely affect the endangered or threatened sea turtles unless the

president certified that the supplying country has a turtle conservation programme comparable

to that of the US.

15. Monetay Controls :

In addition to foreign exchange regulations, other monetany controls are sometimes

employed to regulate trade, particalarly import trade.

16. Foreign Exchange Regulations :

Foreign exchange regulations are an important way of regulating import trade in number

of countries. Restrictions on currency convertibility can a adversely affect imports. Sometimes,

not releasing foreign exchange for import of items which the government do not approve of

for various reasons.

Conclusion :

All non-tariff Barriers to international trade tend to reduce imports.



1. ................ relate to health, sanitary and safety regulations, environmental control,

customs valuation, licensing procedures etc.

2. ................ imples different prices in the domestic and foreign markets.

3. ................ is the currency of USA.

Answer :

1. Administrative or standards and Regulations

2. Duming 3. Dollar.


1. Non-tariff Barriers to trade

2. Dumping

(C) Explain the non-tariff barriers to international trade.

ooo

42





Unit 2.3

INDIA'S BALANCE OF TRADE AND

BALANCE OF PAYMENT

Introduction :

The balance of trade is the difference between the monetary value of exports and imports

in an economy over a certain period of time.

1) Positive balance of trade is known as a trade surplus and consists of exporting more

than is imported;

2) Negative balance of trade is known as a trade deficit or, informally, a trade gap.

The balance of trade forms part of the current account, which also includes other

transactions such as income from the international investment position as well as international

aid. If the current account is in surplus, the country's net international asset position increases

correspondingly. Equally, a deficit decreases the net international asset position. The Balance

of Trade is identical to the difference between a country's output and its domestic demand - the

difference between what goods a country produces and how many goods it buys from abroad;

this does not include money respent on foreign stocks, nor does it factor the concept of importing

goods to produce for the domestic market.

Before 1947 when India was a colony of the British the pattern of her foreign trade was

typically colonial. India was a supplier of foodstuffs and raw materials to the industrialized

nations particularly England and an importer of manufactured goods. This dependence on foreign

countries for manufactures did not permit industrialization at home, rather as a result of the

competition from British manufactures; the indigenous handicrafts suffered a serve below.

With the dawn of independence, the colonial pattern of trade had been changed to suit the

needs of a developing economy.

43

Table No. 1. Presents information on the value of foreign trade in India. Over the period

of 1950-51 to 2009-10 in terms of Rs.

Table. No1. : INDIA'S BALANCE OF TRADE (In. Rs.)

YEAR EXPORT IMPORTTRADE

Balance

1950-51 647 650 -3

1960-61 631 1,106 -475

1970-71 1,535 1,634 -99

1980-81 6,711 12,549 -5,838

1990-91 32,558 43,193 -10,635

2000-01 2,03,571 2,30,873 -27,302

2009-10 8,45,534 13,63,736 -5,18,202

Source: Reserve Bank of India Bulletin, Handbook of Statistics on the Indian Economy.

As is clear from this table, the value of India's export and imports has increased considerably

over the period of planning. After Indians Independence in 1947, the balance of trade has been

quite unfavourable. The foreign trade of India showed an excess of imports over exports.

Persistent adverse balance of trade since 1950-51 to 2009-10. It can also be noted that the

country has facade substantial trade deficits during the period of planning. Fact is that the trade

deficit has increased significantly over the years.

Imports during the 1950-51 was 647 crores and that of exports Rs. 650 crores, the trade

deficit worked out to be Rs.3 crores. During 1960-61 value of imports was Rs.1,106 crores and

value of export only Rs. 631 crores trade deficit was Rs. 475 crores. Trade deficit was largely

due to programme of industrialisation which gathered momentum and pushed up the imports of

capital goods. There was no improvement in exports. India's balance of trade which was

unfavourable to the tune of Rs.99 crores in 1970-71. Declined significantly because of the

policies of import restriction and reduction in foodgrain imports coupled with vigorous measures

of export promotion.

During 1980-81 of imports was Rs.12,549 crores and value of exports was Rs. 6,711.

Trade deficit was Rs.5,838 crores. Trade deficit rapidly increase due to increase in the prices of

petroleum products by OPEC. Value of exports fell much short of imports.

During 1990-91 there is no doubt that a push was given to our export effort and exports

shopt up to Rs. 32,558 crores in 1990-91.indicating an increase of 17.7 %, but as a consequence

of the Gulf War, the Government failed to curb imports and they reached a record level of Rs.

43,163 crores an increase of 22.6 per cent. As a result of the sharp increase in imports, trade

deficit shot upto a high figure of Rs. 10,635.

44

As a result of the sharp deterioration in world economic enviourment in trade, the South-

East Asian crisis, continued recession in Japan, severe economic crisis in Russia in 1998 and

fall in world output by 2 per cent in 1997-98 leading to decline in world trade, all resulted in a

slowdown in India's foreign trade. During 2000-2001 exported picked up and reached a record

level of Rs.2, 03,571 crores. During 2000-2001 export increased form Rs. 32,558 crores in

1990-91 to Rs. 2,03,571 crores in

2000-01 showing sharp rise by 21.01 per cent. This was largely due to rupee depreciation

along with further trade liberalisation, reduction in tariffs and more openness to foreign

investment in export oriented sectors like information technology. However import side during

2000-2001, there has been a sharp increase in the international price of crude oil.

Trade deficit rapidly increased in period of 2000-01 to 2009-10. The situation became

much worse in 2009-10 and imports touched a record level of Rs. 13,63,736 crores. Trade

deficit reaching a figure of Rs. 5,18,202 crores. This was due to a sharp increase in POL prices.

India must restrict the relatively higher increase of imports. If the goal is to reduce trade deficit

the higher exports. India is leading exporter of gems and jewellery, textiles, engineering goods,

chemicals, leather manufactures and services. India is poor in oil resources and is currently

heavily dependent on coal and foreign oil imports for its energy needs. Other imported products

are; machinery, gems, fertilizers and chemicals. Main trading partners are European Union,

The United States, China and UAE.

India's Balance of Payments

Introduction:

Balance of payments (BoP) accounts are an accounting record of all monetary transactions

between a country and the rest of the world. These transactions include payments for the country's

exports and imports of goods, services, financial capital, and financial transfers. The BoP

accounts summarize international transactions for a specific period, usually a year, and are

prepared in a single currency, typically the domestic currency for the country concerned. Sources

of funds for a nation, such as exports or the receipts of loans and investments, are recorded as

positive or surplus items. Uses of funds, such as for imports or to invest in foreign countries,

are recorded as negative or deficit items.

A balance of payments statement is essentially a doubt-entry system of record of all

economic transactions between the 'residents' of a country and the rest of the world carried out

in a specific period of time

Reserve Bank of India ----“ The balance of payments of a country is a systemataic record

of all economic transations between the 'residents' of a country and the rest of the world. It

presents a classified recore of all receipts an account of goods exported, services rendered and

capital received by 'residents' and payments made by them on account of goods imported and

services received from thecapital transferred to ' nonresidents, or foreigners,.”

45

The balance of payments of India is classified into;

a) balance of payments on current account,and

b) balance of payments on capital account.

The current account

The current account of the balance of payments of India includes three items

a) visiable trade relating to imports and exports;

b) invisible items, viz., receipts and payments for such services as shipping , banking

insurance , travel, etc., and

c) unilateral transfers such as donations.

The current account shows whether India has a favorable balance or deficit balance of

payment in any given year.

Capital Account. : Capital account in India is classified into three main sectors (i) private

capital (ii) banking capital and (iii) official capital. The balance of payments on capital account

shows the implication of current transactions for the country's international financial position.

For instance, the surplus and the deficit of the current account are reflected in the capital

account , through changes in the foreign exchange reserve of country, , which are an index of

the current strength or weakness of a country's international payments position, are also included

in the capital account.

Table No. 2 INDIAS BALANCE OF PAYMENT

YEAR BALANCE OF PAYMENT

First Plan -42

Second Plan -1,725

Third Plan -1,951

Annual Plan -2,015

Fourth Plan +100

Fifth Plan +3,082

Sixth Plan -11,384

Seventh Plan -41,047

Eight Plan -52,983

Ninth Plan -62,914

Tenth Plan -53175

Eleventh Plan -5,651

2009-10 -1,80,626

Economic Survey (2010-11) and other earlier issues.

46

Table No. 1. : Presents information on the balance of payment over the period of 1950-

51 to 2009-10 in terms of Rs.

When India became Independent, it had a 'sterling' balance of Rs. 1,733 crore. This was

the result of sizeable surplus on balance of trade with U.K. during the Second World War

Period when U.K. had made large-scale purchasing from India to meet it war requirement. The

foreign exchange position of the country was therefore satisfactory. However, the immediate

post Independence period was characterised by the release of 'pen-up demand' for imports

(suppressed during the War) and shortages of food and raw material. Thus import bill increased

substantially while exports reminded stagnant. The deficit had to be made good from the sterling

balance.

First Plan Period

During the first plan period, the balance of payments was affected by the Korean War

boom, American recession of 1953 and favorable monsoon. At home which helped to boost

agricultural and industrial production Indi's balance of payment during the first plan was only

Rs. 42 crores. The overall picture during the First Plan was however, quite satisfactory.

Second Plan Period

An important feature of the Second Plan Period was the heavy deficit in the balance of

trade which aggregated to Rs. 2,339 crores. Unfavorable in the balance of payments during the

Second Plan Period was of the order of Rs. 1,725 crores. . The highly unfavorable balance of

payment was the result of a) heavy imports of capital goods to develop heavy and basic

industries b) the failure of agricultural production to rise to meet the growing demand for food

and raw materials from rapidly growing population and expanding industry; c) the inability of

the economy to increase exports; and d) the necessity of making minimum 'maintenance imports'

for a developing economy As a result, the foreign exchange reserves sharply declined and the

country was left with no choice but to think of ways and means to restrict imports and expand

exports.

Third Plan and Annual Plans :-

Table No 2 it is clear that the balance of payments which started with the Second Plan

continued relentlessly during the Third and the Annual Plans. It will observe that the trade

deficit during the Annual Plans was quite large. This was because of the heavy imports of

foodgrains to overcome famine conditions and internal shortage of foodgrains on the one side

and inadequate exports due to economic recession on the other.

Fourth Plan Period

One of the objectives of the Fourth Plan was self-reliance Government managed to restrict

imports and succeeded in expanding exports. On the import side, restriction of imports was

made possible through good crop in 1968-69 and 1970-71, and consequent significant reduction

of imports of foodgrains. On the export side, vigorous export promotion measure succeeded in

boosting exports of traditional as well as non-traditional items. The trade deficit during the

47

Fourth Plan was Rs. 1,564 croeres and the surplus in net invisibles accounted for Rs 1,664

crores. The net result was a surplus in the balance of payments, for the first time, though the

surplus was only a nominal amount of Rs 100 crores.

The Fifth Plan Period

There has been a sea change in the balance of payments position since 1979-80. AS

against the surplus balance of payments experi4end by the country during whole of the Fifth

Plan. During the Fifth Plan, trade balance was affected by two factors: (a) the value of imports

was rapidly mounting due to the hike in oil price, and (b) the value of exports was also rising

the under the impact of promotional measures. During the Fifth Five Plan balance of payments

of Rs. 3,082. For the first time since planning. India was in comfortable position in its external

account.

The Sixth and the Seven Plan Period

The current balance of payments became adverse to tune of Rs. 11,384 crores during the

Sixth Plan. Apart from net external assistance. India had to meet this colossal deficit in the

current account through withdrawals of SDRs and borrowing from IMF under the extended

facility arrangement. Besides, India used part of itws accumulated foreign exchange reserves

to meet its deficit in the balance payments. During 1985-86 and 1989-90, the total trade deficit

amounted to Rs. 54,204 crores for the Seventh Plan. Making an adjustment for the positive

balance on invisible account, the deficit in balance of payment on current account was Rs.

41,047 crores.

The highly adverse balance of payments position was the cause for serious concern.

1990-91 and Thereafter

During the Eight Plan deficit, trade deficit has reached a record level Rs. 52,561 crores.

For the Eight Plan period, invisibles neutralized the trade deficit to the extent of about 58 per

cent a really commendable achievement. The balance of payments continuously a deficit in all

years. During the Ninth Five Plan balance of payments of Rs. 62,914 crores. In the Tenth Five

Plan balance of payments of Rs. 53,175 crores. During the Eleven Five Plan balance of payments

of Rs. 5,651 crores.

Since economic liberalisation in the 1990s, precipitated by a balance of payment crisis,

India's exports rose consistently, covering 80.3% of its imports in 200203, up from 66.2% in

199091. However, the global economic slump followed by a general deceleration in world

trade saw the exports as a percentage of imports drop to 61.4% in 200809.

Since independence, India's balance of payments on its current account has been negative.

Due to the global late-2000s recession, both Indian exports and imports declined by 29.2%

and 39.2% respectively in June 2009. The steep decline was because countries hit hardest by

the global recession, such as United States and members of the European Union, account for

48

more than 60% of Indian exports. However, since the decline in imports was much sharper

compared to the decline in exports, India's trade deficit reduced to 25,250 crore .

India's reliance on external assistance and concessional debt has decreased since

liberalisation of the economy, and the debt service ratio decreased from 35.3% in 199091 to

4.4% in 200809. In India,

Conclusion : Since independence, India's balance of payments on its current account has

been negative Deficits in balance of payments have become large and pose a serious problem

to the economy.

EEE

49





Unit 3.4

3.4 FEMA (The Foreign Exchange

Management Act, 1999)

Introduction :

Soon after India's Independence, the Government of India enacted the Foreign Exchange

Regulation Act, 1947(FERA) to regulate the operation of foreign controlled companies in In-

dia. The act was amended comprehensively in 1973.

The Foreign Exchange Management Act (FEMA) was introduced in July 1998 in Parlia-

ment to repeal FERA. 1973 and to consolidate and simplify the law relating to foreign ex-

change with the objective of facilitating external trade and payments and for promoting the

orderly development and maintenance of foreign exchange market in India.

It shall come into force on such date as the Central Government may, by notification in

the Official Gazette, appoint: Provided that different dates may be appointed for different pro-

visions of this Act and any reference in any such provision to the commencement of this Act

shall be construed as a reference to the coming into force of that provision.

This Act may be called the Foreign Exchange Management Act, 1999. It extends to the

whole of India, and also apply to all branches, offices and agencies outside India owned or

controlled by a person resident in India and also to any contravention. There under committed

outside India by any person to whom this Act applies. It shall come into force on such date as

the Central Government may, by notification in the Official Gazette, appoint: Provided that

different dates may be appointed for different provisions of this Act and any reference in any

such provision to the commencement of this Act shall be construed a s a reference to the

coming into force of that provision .

The Salient Features of FEMA :

According to section 3 of FEMA, 1998, no person shall deal in or transfer foreign ex-

change of foreign security to any unauthorized person.

Section 4 provides that no person resident in India shall acquire, hold, own, possess or

transfer any foreign security or any immovable property situated outside India, save as other-

wise provided in this Act.

50

Section 5 provides that any person may sell or draw foreign exchange to or from an

authorized person if such sale or drawl is a current account transaction, provide that the Central

Government may, in public interest and in consultation with RBI, impose such reasonable

restrictions for current account transactions as may be prescribed.

Section 6 states that any person may sell or draw foreign exchange to or from an autho-

rized person for a capital account transaction. RBI, in consultation with the Government of

India, may specify the class of capital account transactions which are permissible, the limit up

to which foreign exchange shall be admissible for such transactions. RBI may prohibit, restrict

or regulate the following ;

a) Transfer or issue any foreign security by a person resident in India;

b) Any borrowing or lending in foreign exchange in whatever form or by whatever form

or by whatever name called;

c) Any borrowing or lending in rupees between a person resident in India and a person

resident outside India;

d) Deposits between persons resident in India and person s resident outside India;

e) Export, import or holding of currency or currency notes;

f) Transfer of immovable property outside India, other than a lease not exceeding five

years by a person resident in India; likewise, acquisition or transfer of immovable property in

India, than a lease not exceeding five years, by a person resident in India and owed to a person

resident outside India.

g) Giving a guarantee or surety in respect of any debt, obligation or other liability in-

curred by a person resident outside India.

Section 6, subsection 4 provides that a person resident in India may hold, own, transfer or

invest in foreign currency, foreign security or any immovable property situated outside India, if

such currency, security or property was acquired, held or owned by such person when he was

resident outside India or inherited from a person who was resident outside India.

Section 6, subsection 5 applies to person who reside outside India i.e., they may hold,

own transfer or invest in Indian currency, security or any immovable property situated in India

if such currency, security or property was acquired, held or owned by such person when he was

resident in India.

Under subsection 6 RBI may , by regulation , prohibit, restrict, or regulate establishment

in India of a branch, office or other place of business by a person resident outside India, for

carrying on any activity relating to such branch, office or other place of business.

Under FEMA, 1998, every exporter of goods shall furnish to RBI a declaration contain-

ing true and correct material particulars including the amount representing the full export value

of the goods exported for the purpose ensuring the realization of the full export proceeds by

51

such exporter without any delay. Further, every exporter of services shall furnish to RBI a

declaration containing the true and correct material particulars to payment for such services.

Where any amount of foreign exchange is due or has accrued to any person resident in

India. Such person shall take all reasonable steps to realize and repatriate the amount to India

within a period and manner specified buy RBI.

Section 9 refers to certain exemptions from realization and repatriation of foreign ex-

change in certain cases.

Contravention and Penalties. If any person contravenes any provision of FEMA, 1998

or contravenes any rule, regulation, notification, direction or order issued in exercise of the

powers under this Act or contravenes any condition subject to which authorization is issued by

RBI, he shall be liable to penalty up to twice the sum involved in such contravention.

The central Government shall establish an Appellate Tribunal for Foreign Exchange to

hear appeals against the orders of the adjudicating authorities under this Act. Appeal against

the judgment of the Appellat3e Tribunal lies with the High Court.

The Central Government shall establish a Directorate of Enforcement of enforcement the

provisions of this Act.

Section 40 of the Act gives power to the Central Government to suspend or relax, either

indefinitely or for a specific period, the operation of all or any of the provisions of FEMA. The

notification issued by the Central Government in this regard will have to be placed before the

Parliament and got approved within a specified period.

ooo

52





Unit 4.3

ASIAN DEVELOPMENT BANK (ADB)

3.1 Introduction & Establishment :

The Asian Development Bank Popularly know as the ADB. is a multinational regional

development bank established for the purpose of Lending funds promoting investment and

providing technical assistance to the developing member countries and generally for fostering

Economic growth and Co-operation in the Asia region.

The Economic Commission for Asia and For East (ECAFE) had made in 1963 a

suggestion for a regional development bank for Asian countries Representative of the mojar

Asian countries met at manila in December 1965 to finalise the proposal and the Asia

development Bank came to be formally established in December 1966. The Bank has its

headquarters at manila in the Philippines ADB opened its residentional office in New-Delhi

which started functioning since 10 Dec. 1993.

4.3.2 Membership of the Asia Development Bank :

The membership is open to (i) Members of ECAFE (ii) Associate members of ECAFE

(iii) other courtries in the ECAFE region which are members of the United Nations or any

of its specialised agencies. Till December 1995 the total membership of ADB was 56 which

includes 40 members from outside the region. The chairman is always allotted to a Japanese

which its three deputy chairman belong to USA Europ and Asia.

4.3.3 Functions and objectives of ADB :

The basic objective behind the establishment of the ADB is "to promote economic

development of and mutual co-operation among the countries of Asia." The ADB's objective

is to help accelerate the process of economic development of developing countries in the

Asian region.

To realise the objective the ADB performs the following functions :

1) To promote investment of public and private capital for economic development of

Asia countries.

2) To channelise investible funds of the ADB for the implementation of those projects

which are important for the development of major sectors of the country's economics.

53

3) To meet requests from members in the region to assist them in coordination of their

development policies and plans with a view to achieving better utilisation of their resources,

making their economics more complementary and promoting the orderly expansion of their

foreign trade in particular intra-regional trade.

4) To provide technical assistance for preparation financing and execution of development

projects and programmes including the formulation of specific proposals.

5) To mobilise funds for economic development of member-countries by extending co-

operation to the world Bank, ECAFE and other United Nations bodies and public as also

private istitutions located among member - countries.

6) To undertake such other activities and to provide such other services as may

advance its purpose.

4.3.4 Capital of the A.D.B. :

The Banks initial capital was $1,000 million 60% of which was to be contributed by the

countries in the region and the remaining 40% from the external members. Only 50% of a

country's share was to the subscribed and the remaining 50% was callable capital.

Initially the Asian Development Bank had an authorised capital of US$ 2,985.71

million of which $ 1,091.75 million had been subscribed of the subscribed capital. One-half

was in the form of Paid-in capital and the other half remained as callables shares to serve as

security for the obligations of the Bank. The callable capital constitues in effect, a guarantee

for the Banks securities and thus facilitates the Bank's borrowing of funds in the Capital

Markets of the world.

The Paid-in-portion is to be paid in five equal in five equal annual instalments. One

half of of each instalment must be paid in local or convertible currency and the other half

may be paid in local currency. The Bank may also accept non-interest - bearing demand

notes in lieve of the amount payable in Local curency, provided such currency is not needed

by the Bank for the conduct of its operations.

4.3.5 Organization of the Asian Development Bank :

The Bank has a Board of Governors a Board of Directors, a president, a vice-president

and the other staff.

The Board of Governors is the highest policy making body of the Bank. Each member

country nominates one Governor and Alternate Governor who sits in the meeting of the

Board in the absence of the Governor. All the powers of the Bank are vested in the Board of

Governors which may delegate some of them to the Board of Directors. The Board meets at

least once in a year to chalk out the general policy of the Bank.

The responsibility of the general conduct of the Bank rests with the Board of Directors.

This Board comprises 12 directors, 8 representing regional member countries and 4

representing non-regional member countries. The Board of Directors exercises all those

powers which have been delegated to it by the Board of Governors.

54

The president who is elected by the Board of Directors is the chairman of the Board.

He works under the general directions of the Board and is responsible for the day-to-day

routine working of the Bank. The Prresident serves for a 5 year term but may be re-elected

by the Board for another term. There is also one vice-president who helps the president in

carrying on the day-to-day management of the Bank.

4.3.6 Bank's Lending Operations :

ADB's operations are diverse, covering agriculture and natural resources, energy, finance,

industry and non-fuel minerals, social infrastructun transport and communication, activities

involving multiple sectors. ADB lends to governments and the public and private enterprises

in its developing member countries. Its principl tools are loans and technical assistance,

which are provided to governments for specific, high priority development projects and

programmes. The lending operations of the Bank have been classified under two heads.

1. Ordinary Operations : The ordinary operations relate to those lending activities of

the Bank which are financed out of the ordinary capital resources of the Bank - ordinary loan

operations of the bank consist of the financing of the foreign exchange of local currency

component of the cost structure of specific projects insofar as the Bank can make such

currencies available to the borrower countries from its resources. In addition to giving direct

loans for particular development projects.

2. Special Operations : The special operations refer to those lending operations of the

Bank which are financed out of the various special funds of the Bank. Such as technical

assistance, special fund, agricultural special fund multipurpose special fund. Asian

Development Fund etc. These funds have been crreated by the Bank itself out of its paid-up

capital. The Bank extends loans out of the special funds to the member countries on liberal

terms. Loans give out of these funds carry lower interest rates and are also for a longer

duration of time. The Bank is authorized by its charter to earmark up to percent of its paid-

up capital for the creation of special funds. The Asian Development Fund is the 'Soft

Window' of the Asian Development Bank the counterpart of the I.D.A. in the case of the

world Bank.

3. Technical Assistance : In addition to lending funds for specific development projects,

the Bank also provides technical assistance to its member countries in various forms. This

technical assistance is interned to help the member countries in the preparation, financing

and implementation of development projects. This assistance may also be given to the

member countries for the certain of new institutions on a national or regional basis in such

fields as agriculture industries, transport, etc.

The technical assistance activieies funded through grants, loans or both help maximise

development impact. The Bank also organizes technical assistance missions to visit member

countries to help them to slove their economic problems.

The Asian Development Bank started functioning from Jane. 1st 1967. The birth of the

ADB. is an important milestone of the first Development Decade.

55

4.3.7 Criticism of the Role and Functioning of the ADB :

Following are the main points of criticism that are generally made in regard to the role

and functioning of the ADB.

(i) Though the ADB is a financial institution concerned solely with development

problems of Asian countries it is alleged that the role and working of the ADB is greatly

infulenced by startegies and interest of the United States. This becomes clear from the fact

that majority of Asian countries that received financial assistance fromthe ADB areallies of

the United States.

(ii) It is alleged that the rate of interest charged by the ADB is high and the proportion

of concessional loans from the ADB has been generaly low and therefors, ADB has not been

in a position to provide substantial financial assistance to poorer Asian developing countries

which should have been the main objective of the ADB and therefore the LDCs from Asian

region are forced to borrow from some other inter international agencies than the ADB.

(iii) Generally ADB provides 'tied loans' and comples borrouling countries to use those

loans only for specified projects. Naturally this reduces scope or area for the development of

LDCs for which ADB was established in the first instance.

(iv) Generally ADB loans were given to private sector projects. The ADB has shown

very littel interest in the development of public sector which has been playing a major role

in the development of LDCs in Asian Countries.

There is thus need to re-examine the role and functioning of the ADB in the light of the

above criticism.

Questions :

1) Discuss the functions of Asian Development Bank.

2) Explain the objectives and working of the Asian Development Bank.

3) Discuss the capital and organization of the Asian Development Bank.

4) Criticism of the Role and functioning of the Asian Development Bank.

Objective Questions :

1) Which is the following institutions is called Asian Development Bank........

(a) IBRD (b) IMF (c) IDA(d) ADB

2) Asian Development Bank established in ...............

(a) 1963 (b) 1964 (c) 1974 (d) 1966

3) Asian Development Banks headquarters at .............

(a) Rom (b) London (c) New Delhi (d) Manila

56

4) Asian Development Bank opened its residential office in India at .............

(a) Mumbay (b) Kolkatta (c) Benglore (d) New Delhi

5) Asian Development Bank opened its residential office in India ...............

(a) 1983 (b) 1985 (c) 1991 (d) 1993

Reference Books :

1) S. S. M. Desai - International Economics,

Himalaya Publication House (1990)

2) N. K. Sinha - Money Banking and Finance, BSC Publishing Co-pvt. ltd.

Third Edition (2009), Reprint 2011.

3) M. L. Seth - Money Banking International Trade and Public Finance

Lakshmi Narain Agrawal - AGRA

EEE

57

B. A. Part-III : Economics Paper-7 (B) (Old) Paper-10 & 15 (B(New)

Bank and Financial Market



Unit-1.3 Importance

Commercial Banks declare their balance sheet after completion of the economic

year. It includes the information about transactions in the completed year. Theibalance

sheet is a very important document for banking sector, shareholders, depositors,

traders, Industrialists, business community and the central bank of country etc.

The importance of a balance sheet is explained as following ways.

1. Understanding the progress of a bank :-

The study of a balance sheet gives us the information about how the bank

collects its funds from various sources and uses the same. It includes numerical

information of past year. Thus, we can understand about the progress of a bank on

the basis of balance sheet.

2. Regulating and controlling banks :-

It is obligatory for all banks to prepare and publish balance sheet at the end

of every year. Central bank of the country evaluates these balance sheets and

suggests proper changes about the bank transactions, investments and other aspects.

3. Comparative study of banks :-

We can carry out comparative performance of the banks over a period of time

through a comparative study of the bank’s past balance sheets. We shall compare

the balance sheet of the current year with the preceding year and it gives a clear

picture about the progress of the bank.

4. Financial Position of the Bank :-

Balance sheet is a financial statement of a bank. It highlights the liquidity and

solvency position of the bank. It shows the assets and liabilities of a bank.

5. Important Conclusion :-

Balance sheet means a macro picture of emerging financial health of a unit

with the help of overall view of the entire banking sector in the country. We can

arrive at some important conclusions for future action and policy.

Thus, the study of balance sheet is very important.

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New Trends in Banking : Concept, Merits and Demerits

2.1 Electronic Banking (E Banking)

“E banking means doing banking electronically.”

It is a “Service of Bank to a customer or his order at his/her office or home

or at any place, even while travelling or viewing a programme in a theatre Or

seeing a match in a stadium, by using Electronic Technology, and it can be termed

as electronic banking.”

Many developments have taken place in technology area, applicable to banking.

Internate banking is a recent development at enables a customer to perform basic

banking transactions through PC, Laptop or Mobile located anywhere in the world.

Through the internet, customers accesses the banks, website, for viewing the account

details or performing the basic banking transactions.

Technological development and communication have made it possible to

apply electronic technology or each banking transactions, like cash receipts. Cash

payment of dividends and interest there by moving society towards electronic

banking.

‘E’ banking implies providing banking products and services through electronic

channels such as telephone, personal computer, television, internet, cellphone etc.

‘E’ banking means offering, supplying and delivering banking products and

services through various electronic delivery channels via electronic devices.

‘E’ Banking Products :-

The following products can be used to carry out various banking operations.

Such as cash payments, transfer of funds, payment of utility bills etc.

1. Automated Teller machine (ATM)

2. Personal Computer Banking (PCB)

3. Tele banking.

4. Mobile Banking.

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5. Internet Banking.

6. Online Banking.

7. Debit Cards.

8. Credit Cards.

9. Electronic Fund Transfer (EFT)

10. Electronic Data Interchange (EDI)

11. Shared Payments Network System.

‘E’ Banking Services :

The following operations can be performed through E-banking.

r Account balance enquiry.

r Download account transactions.

r Pay bills online.

r Cheque book request.

r Demand draft request.

r Fixed deposit enquiry.

r Tax deduction at source (TDS) enquiry.

r Stop payment request.

r Cheque status enquiry.

r Loan applications.

r Financial advice.

r Standing instructions.

r Investment transactions.

r Demat holding.

r Online trading.

r Insurance.

r Credit and Debit Cards.

r Customer Correspondence.

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Benefits of E-banking :

Can be stated as under :-

1. Anytime : Unlike the traditional banks, Online banking sites never close,

they are available 24 hours a day, 7 days a week and they are only a mouse click

any.

2. Any where : If a customer is out of a state or even out of country, he can

transact business through E-banking. Customer satisfaction is generated by offering

access to the bank.

3. Quick information : Online bank sites execute and confirm transactions

expeditiously. The customer can obtain the required information in second instead

of days or weeks.

4. Online transactions : There is no need to stand inquire for hours to

complete financial transactions. Customer can make transactions through his PC,

Laptop or cellphone from his office or home or even while travelling.

5. Online Payment : Online purchase of goods and services including online

payment for the same can be arranged for various purposes.

6. Paperless Transactions : ‘E’ banking enables the banks to provide improved

service by quicker order execution, reducing waiting costs and promoting paperless

transactions.

7. Better customer Relationships : ‘E’ Banking helps in better customer

relationship. ‘E’ retaining and attracting new customers. In fact it enables the banks

to develop global and local client base and expand their business.

8. Good business relations : ‘E’ banking brings about more transparences

in business transactions which in turn creates good business relations among nations

and promotes globalization of trade.

9. Cost and risk problem eliminated : All the cost and risk problems involved

in business transactions can be effectively eliminated through ‘E’ banking.

10. Lowers man power : ‘E’ banking enables quick settlement of bills, reduces

cost of transactions, eliminates middle man, lowers the manpower cost and expedites

transactions.

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2.2 Internet Banking / Online Banking :-

Internat banking involves internet to access the customers bank account and

to their banking transactions. In the initial days of internet banking, it was just a

web page to introduce banks products and services.

It accesses accounts, funds, transfer and buying financial product or services

online. This is called online banking.

Definition : “Internet banking or (online banking) is a term use for performing

transactions payments etc. over the internet through a bank.”

This allows customers to do their banking outside the bank, any hours,

anywhere, where internet access is available.

“Internet banking usually offers such as Bank statements, with the possibilities

to import data in a personal finance programme.

r Electronic bill payment.

r Fund transfer.

r Investment, purchase or sale.

r Loan application and transactions such as repayments.

r Account aggregation to allow the customers.

Advantages of Internet Banking :-

1. Round the clock Banking : Internet banking facilitates performing basic

banking transactions by customers round the clock globally. Infact there are no

restricted office hours for internet banking.

2. Convenient Banking : Customers can perform basic banking transactions

by simply sitting at their office or at home trough PC or Laptop. No personal visit

to the branch is required for routine basic transactions.

3. Low cost Banking : The operational cost have come down due to

technology adoption. The cost of transactions through internet banking is much less

than any other traditional mode.

4. Low Infrastructure : As the banks can have access to a greater number

of potential customers without the commitment costs & physically opening branches,

moreover requirements of staff at the banks get reduced to a greater extent.

5. Profitable Banking : The increased speed of response to customer

requirements can enhance customer satisfaction and consequently can lead to higher

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profit as a result of handling more number of customers accounts.

6. Quality Banking : Internet banking allows the possibility of improved quality

and an enlarged range of services being made available to customers.

7. Speed Banking : The increased speed of response to customer's

requirements will lead to greater customer satisfaction and handling a large number

at transactions at a lesser time. Thus it increases the customers convenience to

greater extent and facilitates better customer retention.

8. Service Banking : Banks can also offer many cash management products.

Instant credit, one day credit, immediate payment of utility bills, instant transfer of

funds etc. is possible under internet banking.

Demerits / Disadvantages :-

1. Start up cost : The initial startup cost for venturing into internet banking

is on the higher side and it includes the following :-

(a) Connection cost of the internet or any other mode of electronic

communication.

(b) Cost of maintenance of all equipments websites, skill level of employment.

(c) Cost of setting up organizational activities.

(d) Cost of sophisticated hardware, software and other related components.

2. Training and Maintenance : The introduction of Internet banking involves

24 hours supports environment, quality service to end users and other partners

which would required a well qualified and robust group of skilled people to meet

external and internal commitments. Hence the bank has to spend a lot on training.

3. Lack of skilled Personnel : It is well known fact that there is an acute

scarcity of web developers, content providers and knowledgeable professionals to

route banking transactions through internet.

4. Security : In paperless banking transactions, many problems of security

are involved. A security threat is defined as an event with potential to cause economic

hardship to data or network resources in the form of destruction, disclosure,

modification of data, denial of services, fraud, waste and abuse.

5. Legal Issues : Legal framework for recognizing the validity of banking

transactions conducted through the net is still being put in place through initial legal

framework has been divided for internet banking activities, it is uncertain as to what

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possible legal issues may pop up in future as banking on internet progresses.

6. Restricted Client : Technical Problems and time to log on to the site,

which means that the target clientele is restricted to those who have a home PC or

can access the ‘Net’ through the office or cybercafé. Moreover, technical constraints

due to telephone connectivity, modern connections etc; may cause constraints.

2.3 Core Banking (Jm^m ~±qH$J) :-

Core banking is a general term used to describe the services provided by a

group of networked bank branches. Bank customers may access their funds and

other simple transactions from any of the member branch offices.

CORE stand for “centralized online real-time environment.” This basically means

that all the banks, branches access applications from centralized data centers. This

means that the deposits made are reflected immediately on the banks servers and

the customers can withdraw the deposited money from any of the bank’s branches

throughout the world. These applications now also have the capability to address

the needs of corporate customers, providing a comprehensive banking solution.

Core banking solution are banking applications, providing a comprehensive

banking solution. Core banking is a general term used to describe the services

provided by a group of networked bank branches. Bank customers may access

their funds and other simple transactions, from any of the member branch offices.

Core banking solution are banking applications on a platform enabling a

phased, strategic approach this is intended to allow banks to improve operations,

reduce costs, and be prepared for growth.

Here computer software is developed to perform core operations of banking

like recording of transactions possible maintenance, interest’s calculations on loans

and deposits, customer records, balance & payments and withdrawals. This software

is installed at different branches of bank and the inter connected by means of

communication lines like telephones, satellite, internet etc. It allows the user to

operate accounts from any branch if it has installed core banking solutions.

Core banking is normally defined as the business conducted by a banking

institution with its retail and small business customers. Many banks treat the retail

customers as their core banking customers and have a separate line of business to

manage small business.

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Core Banking System :-

A core banking system is the software used to support a bank’s most common

transactions.

Business Benefits :-

1. Differentiated Product Spread : Finical core banking solution offers an

unlimited palette of features for banks to design and deploy products for varying

market segments. The product bundling capabilities of the solution after a wide

range of possibilities for banks create products with innovative features.

2. Agile Operations : This service oriented. Architecture (50A) enables the IT

team at the bank of effect change without touching the base code ensuring lesser

vendor dependency and faster adaptability to changing business conditions.

3. Increased Operational efficiencies and productivity : Finical core banking

solutions supports events automation and process orchestration, thus elimination a

manual tasks and reducing process time. The eliminations of error and data

redundancies also results increased branch productivity. Straight through processing

(STP) abilities enhance reduction in turn around and processing line. Increasing

output and enabling speedy completion of tasks.

2.4 Automated Teller Machine (ATM) :-

Also known as an automated banking machine (ABM) in Canada on most

modern ATMs, the customers is identified by inserting a plastic ATM card with a

magnetic stripe or a plastic smart card with a chip that contains a unique card

number and some security information such as an expiration date using an ATM

customers can access their bank accounts in order to make cash withdrawals, debit

card, cash advances and check their account balances as well as purchase prepaid

cell phone credit.

Automated Teller Machines or ATM are computer based service systems

: Any current account holder or saving account holder of a bank who maintains a

certain minimum balance can avail of the facility. The bank issues an ATM card to

such account holders. It is a plastic card which enables the card holder to withdraw

or deposit cash to transfer money order for a cheque book and get information

about his account round the clock, that is 24 hours a day. The Automated Teller

Machines are installed in a number of cities and big town at important places.

The plastic card issued to the customer is a small magnetic card which bears

his account number besides this account number, the customer is allotted a secret

code number through computers.

65

Advantages of ATM to the ATM card user :-

r Ability to draw cash even outside normal banking hours.

r Cheaper where bank charges are incurred and often quicker than using

normal cashier services.

r Does not just operate as a medium for obtaining cash.

r Amount up to a set limit per day is available.

r All Customers can apply for ATM. On joint account, two operative cards

can be issued.

r Although ATM are primarily located on bank sites yet some are available

elsewhere.

r Complete security as only the card holder knows the PIN.

r Issued free of charge.

r Where an incorrect PIN is used several time in succession (say where a

thief has stolen the card). The ATM will suck in and retain the card.

ATM are like mini banks at the company premises. In addition to cash

withdrawals we can deposit the money inquire balance, which reduces time and

gives immense satisfaction.

Disadvantages of ATM :

(a) Card Jamming,

(b) Card Skimming,

(c) Card Swapping,

(d) Website Spoofing,

(e) Physical Attack,

(f) Hacking & PIN no.

2.5 Credit Card

A Credit card is a small plastic card issued to users as a system of payments.

It allows its holder to buy goods and services based on the holder’s promise to pay

for these goods and services. The user of the card creates a revolving account and

grants a line of credit to the consumer (or the user) from which the user can borrow

money for payment to a merchant or as a cash advance to the user.

The modern credit card was the successor of a variety of merchant credit

schemes. It was first used in the 1920s in the United States specifically to sell fuel

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to a growing number of automobile owners. In 1938 several companies started to

accept each other’s card.

Since 1920 the credit cards are in use, across the globe. With the growing

interest of the consumers on plastic money. It has become more useful for a customer

because it replaces the hard money on creation fired limited amount and can be

make the cash and purchases. It encourages the customers to make more purchase.

Definitions :-

“Credit is a word derived from the Latin word credo meaning I believe and

usually defined as the ability to buy with a promise to pay or the ability to obtain title

to and receive goods for enjoyment.”

“Credit cards allow consumers to make purchases without paying cost

immediately in other words, establishing credit with individual stores.”

Benefits to Customers (Credit Card) :-

1. Convenience : As compared to debit cards and cheques, a credit card

allows small short term loans to be quickly made to a customer who need not

calculate a balance remaining before every transaction, provided the total charges

do not exceed the maximum credit line for the card.

2. Fraud protection : Credit card also provides more fraud protection than

debit cards.

3. Rewards and benefits : Many credit cards offer rewards and benefits

such as altering enhanced product warranties at no cost free loss / damage coverage

on new purchases.

4. Insurance Protection : Many banks provide various insurance protections,

for example, rental car insurance common carrier accident protection, travel medical

insurance.

5. Rewards points : Credit cards can also offer reward point which may be

redeemed for cash products or airline tickets.

Benefits to Merchants :-

1. Because of the ease and convenience of using credit cards the sales of

the retail outlets increase manifold.

2. No Risk : Credit card provides instantaneous validation verification of details

of the customers so the merchant is not subject to risk.

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3. The bad debts of the merchant are reduced as he gets payment from the

bank.

Benefits to Bank :-

Banks can increase their outreach without having to open more branches or

ATMs by encouraging customers to use Credit Cards.

Banks can sell other products like insurance alongwith credit cards and

generate additional income.

Demerits to customers (Credit Card) :-

1. High interest and bankruptcy : After 6 and 12 months higher rate is

charged. All credit cards charge fees and interests.

2. Levy a rate : Some credit cards often levy a rate of 20 to 30 percent after

a payment is missed. In other cases a fixed charge is levied without change to the

interest rate.

3. Universal default : In some cases universal default may apply. The high

default rate is applied to a card in good standing by missing a payment on an

unedited account from the same provider.

4. Inflated pricing for all consumers : Merchants that accept credit card

must play interchange fees and discount fees on all credit card transactions.

5. Weakens self regulation : Several studies have shown that consumers

are likely to spend more money when they pay by credit card.

6. Finance Charges : Usually if a customer is late paying the balance, finance

charges will be calculated and the grace period does not apply.

7. financial problems : Use of credit card encourages impulsive purchases.

This can lead to financial problems as consumers can easily be turned into the debt

trap if not careful.

8. Misuse of Card : There are chances of the card being misused if it falls

into the hands of wrong person.

2.6 Debit Cards

Definition :-

1. “A debit card (also known as a bank card or check card) is a plastic card

that provides the card holder electronic access to his or her bank accounts at a

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financial institution. Debit card appears similar to an ATM or a Credit Card.”

2. “It appears that plastic money seems to be the preferred mode of payment

for more and more people.”

3. “A Debit card works like a cheque book, giving the holder access to his

bank account at 11 hours. It makes sure the holder spends only the balance available

in his account and also tracks his purchases.”

The debit differs from the credit card. The debit card holder does not enjoy

any credit period as in the case of credit card. The moment a debit card holder

makes any purchase from the suppliers, the card holders bank account to the

supplier’s accounts as soon as the facility is availed by the card holder, his bank

account is automatically debited.

Advantages of Debit Cards :-

1. A consumer who is not credit worthy and may find it difficult or impossible

to obtain a credit card can more easily obtain a debit card, allowing him / her to

make plastic transactions. Legislation often prevents minors from taking out debt,

which includes the use of a credit card, but not on line debit card transactions.

2. For most transactions, a check, card can be used to avoid check writing

altogether. Check cards debit funds from the user’s account on the spot. Thereby,

finalizing the transactions at the time of purchase, and by passing the requirements

pay a credit card bill at a later date, or to write an insecure check containing the

account holders personal information.

3. Like credit card debit cards are accepted by merchants with less identification

and sorting than personal checks, thereby making transactions quicker and less

intrusive. Unlike personal checks, merchants generally do not believe that a payment

via a debit card may be later dishonored.

4. Unlike a credit card, which charges higher fees and interest rates when a

cash advance is obtained, a debit card may be used to obtain cash from on ATM

or PIN based transaction at no extra charges, other than a foreign ATM fee.

Disadvantages of Debit Cards :-

1. Use of debit card is not usually limited to the existing funds in the account

to which it is linked, most banks allow a certain threshed over the available bank

balance which can cause overdraft fees if the user’s transaction does not reflect

available balance.

2. Many banks are now charging over-limit fees or non sufficient funds fees

69

based upon pre authorizations, and even attempted but refused transactions by the

merchant.

3. Many merchants mistakenly believe that amounts owed can be “taken”

from a customer’s account after a debit card (or number) has been presented,

without agreements as to date, payee name, amount and currency. Thus, causing

penalty fees for overdrafts, over the limit, amounts not available causing further

rejections or overdrafts and rejected transactions by some banks.

4. Theft of the users PIN using skimming devices can be accomplished much

easier with a PIN input than with a signature based credit transaction.

5. In many places, laws protect the consumer from fraud much less than with

a credit card. Debit cards allow funds to be immediately transferred from an account

when making a purchase, the consumer also has a shorter time (usually just 2

days) to report such fraud to the bank in order to be eligible for such a waiver with

debit card and recovered without losing any credits a thief who obtains or clones a

debit card alongwith its PIN may be able to clean out the consumer’s bank account

and the consumer will have no recourse.

6. When a transaction is made using debit card the consumer has spent his

/ her own money and the bank has little if any motivation to collect the funds.

2.7 Kisan Credit Card

The Kisan Credit Card is a credit card that provides affordable credit for

farmers in India. It was started by the Government of India. RBI (Reserve Bank of

India) and NABARD (National Bank for Agriculture and Rural Development) in 1998-

99 to help farmers to have cash credit facilities without going through time-consuming

bank credit screening processes repeatedly. Repayment can be rescheduled if there

is a bad crop season, and extensions are offered for up to four years. The card is

valid for 3 years and subject to annual renewals withdrawals are made using slips,

cards, and a passbook.

KCC was introduced by all commercial banks to provide “hassle free” and

‘revolving credit’ to agriculturists. The scheme also provides for consumption needs

to the agriculturists apart from agricultural production needs in time. It is an innovative

product designed by the Govt. of India, in consultation with RBI / NABARD. This

product has been suitably improved from time to time based on the feedback received

from the ultimate users and the operational experience of the banks. The facility of

issue of cheque books to KCC borrowers is one of the important improvements.

This is in recognition of the growing needs and expectations of agriculturists, who

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are keeping pace with the chaging times. In fact, KCC has helped in empowering

farmers and instilling in them a sense of self confidence and self esteem.

All farmers / owner cultivators, tenant cultivators and share croppers, individual

farmer having agreement with institution are eligible for the card. Most banks in

India that offer agricultural finance offer the Kisan Credit Card.

Details of Kisan Credit Card Scheme :-

The card is valid for 5 years of which crop loan and working capital components

have to be renewed annually. Maximum Limit Rs. 50,000/- for Rabi crops, Rs.

50,000 for Kharif crops. Eligibility Individual / Society Repayment period Kharif 31

January, Rabi 31 July, 5 Collateral Security changes on land in case loan is above

Rs. 10,000 and two sureties if loan is below Rs. 10,000/-.

Definition :

“Kisan Credit Card scheme (KCC) aims at providing adequate and timely

support from the banking system to the farmers for their short term credit needs for

cultivation of crops. This mainly helps farmers for purchase of inputs etc. during the

cropping season.

Benefits of KCC Scheme :-

r Simplifies disbursement procedures.

r Removes rigidity regarding cash and kind.

r No need to apply for a loan for every crop.

r Assured availability of credit at any time enabling reduced interest burden

for the farmer.

r Helps buy seeds, fertilizers at farmers convenience and choice.

r Helps buy on cash avail discount from dealers.

r Credit facility for 3 years no need for seasonal appraisal.

r Maximum credit limit based on agriculture income.

r Any number of withdrawals subject to credit limit.

r Repayment only after harvest.

r Rate of interest as applicable to agriculture advance.

r Security, margin and documentation norms as applicable to agriculture

advance.

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How to get Kisan Credit Card :-

r Approach your nearest public sector bank and get the details.

r Eligible farmers will get a Kisan Credit Card and a passbook. It has the

name, address, particulars of land holding, borrowing limit, validity period

a passport size photograph of holder which may serve both as an identity

card and facilitate recording of transactions on an ongoing basis.

r Borrower is required to produce the card cum passbook whenever he /

she operates the account.

r ‘Personal Accident Insurance Package’ is provided to the KCC holders.

2.2 Retail Banking :-

What is Retail Banking :

1. Retail banking is a banking in which banking institutions execute transactions

directly with consumers, rather than corporation or other banks. Services offered

include; savings and transactional accounts, mortgages, personal loans, debit cards,

credit cards and so on.

2. Typical mass - market banking in which individual customers use local

branches of larger commercial banks. Services offered include savings and checking

accounts, mortgages, personal loans.

3. Retail banking services are also termed as personal Banking services.

Retail banking is however, quite broad in nature – it refers to the dealing of

commercial banks with individual customers, both on liabilities and assets sides of

the balance sheet.

Fixed, current / saving accounts on the liabilities side, and mortgages, loans

(e.g. personal, housing, auto and educational) on the assets side, are the more

important of the products offered by banks. Related ancillary services include credit

cards, or depository services.

The issue of retail banking is extremely important and or typical. Across the

globe, retail lending has been a spectacular innovation in the commercial banking

sector in recent years. The growth of retail lending, especially in emerging,

economics, is attributable to the rapid advances in information technology, the

evolving macroeconomic environment, financial market reform and several micro-

level demand and supply side factors.

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India too experienced a surgein retail banking. There are various pointers

towards this. Retail loan is estimated to have accounted for nearly one fifth of all

bank credit. Housing sector is experiencing a boom in its credit. The retail loan

market has decisively got transformed from a seller’s market to a buyer’s market.

Gone to the days where getting a retail loan was somewhat cumbersome. All these

emphasis the momentum that retail banking is experiencing in the Indian economy

in recent years.

Today retail banking sector is characterized by three basic characteristics.

l Multiple products (deposits) credits cards, insurance, investments and

securities.

l Multiple channels of distribution (call centre, branch, internet and Kiosk);

and,

l Multiple customer groups (consumer, small business and corporate)

Retail Banking / Commercial bank has two meanings :-

l Commercial bank is the term used for a normal bank to distinguish it

from an investment bank.

l Commercial bank can also refer to a bank or a division of a bank that

mostly deals with deposits and loans from corporations or large business,

as a opposed to normal individual members of the public (retail banking).

It is the most successful department of banking.

l Community development bank are regulated banks that provide financial

services and credit to underserved markets or populations.

l Private Banks manage the assets of high net worth individuals.

l Savings banks are associated with national postal systems.

Retail banking aims to be the one stop shop for as many financial services as

possible on behalf of retail clients. Some retail banks have been made a push into

investment services such as wealth management, brokerage accounts, private

banking and retirement planning. While some of these ancillary services are

outsourced to third parties.

Over recent years the retail banking market has changed dramatically, with

banks today facing growing competition.

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Retail Banking in India :-

Retail banking in India’s not a new phenomenon. It has always been prevalent

in India in various forms. For the last few years it has become synonymous with

mainstream banking for many banks. The typical products offered in the Indian

retail banking segment are housing loans, consumption loans for purchase of durable

auto loans. Credit cards and educational loans. The loans are marketed under

attractive brand names to differentiate the products offered by different banks.

Retail banking in India has been a dramatic change over the years. It has

evolved from a time when the mindset of a traditional middle class Indians used to

be debt averse. Which preferred managing under their thrifty means to the current

mindset which doesn’t hesitate in taking loans for spending. To keep in pace, the

retail banking environment today is changing fact.

ooo

74

Unit 4 : Reserve Bank of India

4.4 Asset Liability Management

Reserve Bank of India since its establishment, uses monetary policy for

controlling money-supply in India. In a developing country like India the role of

monetary and fiscal policy is very important in respect of economic growth and for

controlling inflation. Since 1991, India has accepted new economic reforms in banking

sector. The Narasimhan Committiee has also laid down some rules and norms for

reconstructing banking sector in a country. So Reserve Bank of India’s monetary

policy reflects on the various sectors of the economy. Here we will have to consider

the policy of asset liability management for overall development of Indian Economy.

H The concept of asset liability management :-

The concept of asset liability management is related to monetary policy of

Reserve Bank. There are two major objectives of monetary policy i.e. price stability

and economic growth. In this connection, Reserve Bank of India creates institutional

framework for credit requirement and its applications in a country.

The concept of asset liability management is the policy of Reserve Bank for

the proper utilization of asset available in a bank or in a country’s overall banks.

This term is also related to monetary policy which controls money-supply in the

country.

Generally, Reserve Bank of India controls over, the credit structure by

quantitative and qualitative weapons. Bank rate, open market operations, CRR and

SLR are the important tools used by RBI to control credit money. On the contrary,

selective credit control tools are used for the specific purposes. But since 1991, RBI

has focus on the two major objectives of price stability and economic growth through

proper implementation of monetary policy weapons. The problem of asset liability

management arises due to the change in the international economic situation. Indian

Economy the objectives of Indian economy with reference to monetary management

and economic growth also suffered. The position of stock market and banking





75

sector asset liquidity as well as liabilities of the various banks in India. So that RBI

has introduced liquidity adjustment facility in June, 2000. As per recommendation

made by M. Narasimhan committee, RBI has made the necessary changes in the

level of market development and technological advances in payment settlement

system. Here we must note that an interim liquidity adjustment facility (ILAF) was

also introduced in April 1999 as a mechanism for liquidity management through

repo operations. RBI also used export credit refiance facility, supported by open

market operations for the settlement of interest rates.

Apart from all these efforts, RBI has introduced market stabilization scheme

in April, 2004 as an additional instrument of liquidity management. This scheme is

an arrangement between Government of India and RBI to mop up the excess

liquidity generated on account of the accretion to the foreign exchange assets.

H Asset liabilities management policy of RBI :-

RBI has published a simple liquidity model which includes the asset liquidity

and liabilities position in the country. Secondly it also clears the liquidity management

policy of RBI every year. This policy shows whether the bank reserves have declined

or increased. The banks reveres in a country affects money supply, general price

level and after all overall growth rate of Indian Economy,

The RBI first quarterly report of 2012-13 (April to June 2012) shows us the

measures adopted by the bank in respect of asset liabilities management. These

measures are as follows :-

(a) RBI has reduced the repo rate under the liquidity adjustment facility (LAF)

from 8.5% to 8% with immediate effect.

(b) Reverse repo rate has also stands below the repo rate by 1% i.e. 7%

with immediate effect.

(c) The bank has raised the borrowing limit of schedule commercial banks

under the marginal standing facility (MSF) from 1% to 2% of their net

demand and time liabilities with immediate effect.

(d) RBI has adjusted the Bank Rate to 9% with immediate effect.

(e) Cash Reserve Ratio (CRR) of scheduled banks has been retained at

4.75% of their net demand and time liabilities.

In this way, RBI adopted the policy for asset liability management for decreasing

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ill effects of global economic fluactions. The measured adopted by the bank are

more useful for stabilizing price level and to maintain growth rate up to 6%. The

current inflation rate has come down up to 6.89% which was lowest since 2009.

RBI’s asset liquidity and liability management policy has become bonefishes for two

types of benefits i.e. internal price stabilization, and to set free from global crisis. So

that the economy can achieve the goal of steady economic growth with price stability.

4.7 Objective Questions

(A) Rewrite the following sentences by choosing correct alternatives.

1. Asset liability management policy is related to …………. .

(a) RBI (b) SBI (c) State Bank (d) Union Bank.

2. The full form of LAF is ……….. .

(a) Large amount facility (c) Liquidity adjustment facility.

(b) Lower adjustment function (d) Liquid adjustment functioning.

(B) Answers of the Objective questions.

1. Asset liability management policy is related to RBI.

2. The full form of LAF is liquidity adjustment facility.

(C) Write short notes on –

1. Asset liability management.

2. Measures for asset liability management.

4.8 Books for Further Readings.

1. Ahuja H. L. “Modern Economics” (2010) S. Chand & Company, New

Delhi-110055.

2. Misra S. K. / Puri V. K. “Indian Economy” (2011), Himalaya Publishing

House, Mumbai.

3. Dutt / Sundaram “Indian Economy” (2010) S. Chand & Company, New

Delhi-110055.

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77

Uni-2.3 ROLE OF SEBI

Introduction :

SEBI was established on April 12,1988 as per the suggestions of G. S. Patel,

committee on stock exchange reforms. SEBI aims at facilitating an environment for

mobilization of adequate resources through the securities market and also efficient

allocation. The principle of the fairness are observed while defining the rules and

regulations, interrelationship, instruments, practices etc. SEBI expects that the -

market should create trust in the minds of the investors. It responses to the

constituents elements of the market. viz. 1) Issuers of the securities, 2) The investors,

3) Intermediaries.

SEBI cannot remove the risks for the consequences of the risks in the market,

ROLE of SEBI

1. To create healthy atmosphere for raising money from the capital market.

2. To safeguard the interest of small investors.

3. To frame rules & regulations for trade practices, customs and relations

amongst the stakeholders.

4. To educate investors about their rights.

5. To create healthy investment climate so that the corporate sector raises

securities easily at affordable cost.

6. To develop proper infrastructure to facilitate market expansion and growth

of business.

7. To make the laws more effective related to industrial securities and mutual

funds etc.

8. To ensure fair and equal treatment to all the security holders in the case

of takeovers and mergers,

9. To frame laws in respect of ail the aspects of the security market.





78

10 To introduce the system of two stage disclosure at the time of initial

issue.

11. To make it mandatory for the companies to provide detailed information,

12. To work as authority to ensure that the intermediaries are financially and

professionally sound.

13. To ensure that the rules provide automatic and self regulatory growth,

14. To introduce effective inspection machinery.

15. To provide security compensation to the investors.

16. To prohibit the malpractice in the market.

Functions of SEBI

1. Redressing the grievances of the investors.

2. Providing guidance and protection of small investors.

3. Having effective control of the working of stock exchanges.

4. Registering and regulating the functioning of intermediaries.

5. Providing suitable training to intermediaries.

6. Registering and regulating the working of mutual funds.

7. Maintaining effective supervision on mutual funds and avoid its unfair

activities.

8. Encouraging the professional association of the intermediaries.

9. Regulating mergers, takeovers and acquisition of the companies, to protect

interest of the investors.

10. Issuing guidelines to the companies regarding capital issues.

11. Conducting research and publishing information useful to all the stake-

holders of the market.

12. Conducting inspection, inquiries and audit of stock exchanges.

13. Restricting insider trading activities.

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Unit - 3.2 Basel - III

Objectives

1. To know the concept of Basel III

2. To know the implications of Basel III

3. To know the Recommendation of Basel III

Introduction -

Basel is controlling mechanism for the banking sector. Basel I to III have been

formulated to develop, to monitor and to control the banking financial activities.

Basel III was introduced in December 2010. It deals with risk management aspects

of the banking sector. In short, Basel III is the Global Regulatory Standard which

has been agreed by the members of the Basel Committee on banking. Basel III

focuses on bank capital adequacy, stress testing and market liquidity risk etc. It is

a comprehensive set of reform measures. In short it is introduced to strengthen the

regulation , supervision and risk management of the banking sector.

Objectives of Basel III

A) To improve the banking sector’s ability to absorb shocks arising from

financial and economic stress.

B) To improve risk management and governance.

C) To strengthen bank’s transparency and disclosure.

D) To improve the efficiency of the bank by overcoming economic financial

stress.

E) To digest new guidelines regarding capital and liquidity in the baking

sector.

Pillars of Basel-III

Basal - III has set three basic pillars for financial supervision of the banks. In

the first pillar capital ,Risk coverage and containing leverage have been covered. In

80

the second pillar Risk management and supervision have been covered, and in the

third pillar Market discipline has been focused.

The basic intention of the Basal - III to give guide line to enhance the quality

of the bank’s capital by enlarging the equity capital requirement while strengthening.

The loss absorption capacity of different forms of capital.

Pillar - 1

A) Capital :-

1. Quality and level of capital :-

More emphasis is given for common equity. The minimum equity will be raised

to 4.5% of risk weighted asset after deductions.

2. Capital loss absorption at the point of non-viability :-

As per the agreed terms capital instruments cover a clause which permits and

write off or conversion of common shares in case the Bank is identified as non

viable.

This enhances the share of private sector is causing the future Banking

dangers.

3. Capital Conservation Buffer :-

It includes common equity capital of 2.50% of risk weight assets making

the total common equity capital standard to 7% in case banks fail to maintain the

buffer capital range, they have to face the restrictions on their discretionary

distributions.

4. Counter Cyclical Buffer :-

Counter by Cyclical buffer is restricted within a range of 0.25% which includes

common equity capital in case the regulators are of a view that credit growth is at

unacceptable level.

B) Risk coverage :-

1. Securitisations :-

It has long term benefit & banks have to obtain rating from external agencies

by securitization portfolio.

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2. Trading book :-

Banks have to maintain higher level of capital for trading and derivative

activities.

3. Counterparty Credit Risk :-

The strengthen the framework policies are adopted like more stringent

requirements for measuring exposure capital incentive provided to a bank and

higher capital norms for banks having sizeable exposure for inter financial sector

exposure.

4. Bank exposure to central counterparties (CCPS) :-

in respect of trade exposures to a qualifying CCPS while have 2% rise weight,

and default fund exposure will be capitalized according to risk based method.

C) Containing Leverage :-

Basel - III has suggested containing leverage for banking supervision. Here a

non - risk based leverage ratio that includes off - balance sheet exposures will

serve as a backstop to the risk based capital requirement. It also helps contain

system wide build up of leverage.

Pillar - 2

Risk Management and supervision -

Supplemental Pillar-2 requirements :-

It addresses issues like risk management capturing the risk of off balance

sheet exposures and securitizations activities. It also covers issues like concentration

of risks giving incentives to banks for better managing of risks, returns and long

term investments, good compensator practices, good according standards for financial

instruments, corporate governance etc.

Pillar - 3

A) Market Discipline :-

Revised Pillar-3 disclosure requirement it related to exposure under

securitization & sponsorship of off balance sheet vehicles. However, further details

on the compo cub of regulatory capital and their balancing to the reported accounts

will be necessary.

B) Liquidity :-

Basal - III, A committee on Banking supervision reforms has focused on Global

liquidity standard supervisory monitoring. It covers liquidity coverage ratio, net stable

82

funding ratio, principles for sound liquidity, risk management and supervision and

supervisory monitoring.

Conclusion -

Basel - III is a supervisory system for banking sector. The Basel - III has been

set for national and international banking supervision. It is the applicable to member

countries in the world. Basel - III rules pertain to assessing risk, banks’ capital

requirement in line with their risk profile and others. The Basel - III will be implemented

in the phased manner between 2013 and 2019. Basically 2008 economic crisis was

the trigger behind Basel - III. In this Basel - III norms capital adequacy ratio will be

from 8 % to 10.50 % .Counter cyclical buffer of up to 2.5 % etc.

Implication of Basel - III on Indian Bank -

The Basel - III has been introduced in Indian banking sector as per the

Reserve Bank of India guidelines. The Reserve Bank of India guideline have been

changed or modified from time to time as per the needs of the financial sector. The

RBI policies are supported to the policies laid by the government of India. It is

necessary to raise external capital of rupees 6,00,000 crores by 2020 in a phased

manner between 2013 and 2019. This capital raising will have impact on the return

on the equity of these banks specially public sector banks. Presently, Indian banks

have maintained their capital requirement within the norms.

References :-

1. Rajesh Goyal, all banking [email protected], PPP, Internet.

2. RBI draft guidelines on Basal - III capital needs, Page 1-3.

3. Basal - III A global regulatory framework for more resilient banks and

banking system, Bank for International settlements communications , CH

- 4002 Basal, Switzerland , December 2010. ( Revised June - 2011 ) ,

ISBN - web -92-9197 -859-0.

4. Basal - III Evolution and Implementation challenges by Ajaykumar

Choudhary, GM, Department of Banking of operation and development ,

RBI. Lecture notes.

5. Basal - III Norms : Where do Indian banks stands , by money control.com.

from Internet.

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83





Unit - 4.1 Capital Adequacy Ratio (CAR)

4.1 Capital Adequacy Ratio (CAR)

A. meaning :-

Capital Adequacy Ratio is abrivated as CAR, which also called as “Capital to

Risk (weighted) Assets Ratio (CRAR). In Short it is called as “Ratio of a banks"

capital to its risk”. National regulators ensure that it can absorb a reasonable amount

of loss and complies with statutory capital requirement.

B. Fromula :-

CAR = __________________________________

Tier 1 capital = (paid up capital + statutory reserves + disclosed free reserves

(Equity Instruments in subsidiary + Intangible Assets + Current and b/f losses)

Tier 2 capital =

(a) Undisclosed reserves

(b) General losses reserves

(c) Hybrid debt capital instruments and subordinated debts.

C. Use :-

Following is the use of CAR...

1. This ratio determines the bank’s capacity to meet the time liabilities and

other risks.

2. It is a cushion for potential losses, to protects the bank’s depositors and

other lenders.

3. To maintain confidence among the depositors.

4. It is the inverse of debt - to - equity leverage formulations.

5. To know the different levels of risk for assets.

ooo

Tier 1 capital + Tier 2 capital

Risk weighd Asset

84

B. A. Part-III : Economics Paper-8 (A) (Old) Paper-11 & 16 (A) (New)

Agri Business



Unit I : Introduction to Agriculture

and Agri-Business

1.4 Importance of Agri - Business :

Agri - Business has been defined by John H. Davis as all the activities concerned with

agriculture including Farming, Management, Financing, Processing, Marketing, growing of

seeds end the nursery stock, manufacture of fertilisers, chemicals, implements, processing

machinery and transportation equipment and the process of transportation itself.

It is thus the sum total of all the operations involved in the manufacture and the

distribution of the form supplies, production operations on the farm and the storage, processing

and distribution of the farm commodities and the items made farm them. The agri-Business,

though not developed to their full potential, have experienced some growth in recent years.

At present they have attained a fairly goods status in the overall back word industrial

scenario of the country.

Importance :

In the last four decades to the twentieth century the very face of agriculture turned from

traditional to commercial which got support with the advantage of green revolution in crop

production, white revolution in the livestock farming towords milk production and blue

revolution in fisheries. Further extended as yellow revolution and lastly rainbow revolution.

Agriculture has now bossomed into mature industry which includes.

a) Input supply system

b) Agricultural production system

c) Output marketing system.

All integrated in one system called, Agriculture, Each system is dependent on other two

for its development and growth.

The farmers eagerly adopted the new technologies, brought spectacular changes in the

recent period, manitesting large scale commercialisation and diversification in crop and

varieties, increase in area under cash crops, floriculture, horticulture and high tech agriculture

etc.

85

In response to new economic environment brought in by the process to liberalization,

privatization and globalization the Indian formers in particular will not only serve the

domestic market but will have access to the international market. All the agribusiness

enterprises in India have good economic potential due to relatively Favourable agro climatic

conditions.

The agribusiness aims to capture market and maximize profits, adds value in order to

convert rice into riches, vegetables of oilseeds into viable gold mines. Fruits and herbs into

flourishing enterprises. Then the country would flourush with milk and honey.

The recently drafted national Agricultural Policy has accorded priority for promoting

agribusiness activities at different levels for capitalating growth in agriculture.

Agribusiness today can be broken into three economically interdependent sectors i. e.

input sector, Farm Sector and Product Sector. It includes the total of input farm - product -

sector that supply farm inputs involved in productive and finally handie two processing

distributing wholesaling and retailing of the product to the final consumer. Thus our Modern

day definition of agribusiness involves a broader view of agribusiness that encompases for

total food production and distribution system. The macro view of agribusiness include both

the farm supply food processing and marketing sectors.

ooo

86


Agri Business



Unit 2.4 : Role of Commission For Agricultural

Costs and Prices (CACP)

2.4.0 Objectives

2.4.1 Introduction

2.4.2 Subject Description

2.4.2.1 Nature and the Organisation of CACP

2.4.2.2 The guidelines or the terms of reference for CACP

2.4.2.3 Functions of CACP

2.4.2.4 An adaptive policy analysis of CACP (in brief)

2.4.2.5 An Implication of CACP

2.4.3 Summary

2.4.4 Question for self study

2.4.5 Answers to questions for self study

2.4.6 Exercises

2.4.0 Objectives :

After studying this unit, we will able to-

1. Understand the nature and organisation of CACP.

2. Understand the terms of reference of CACP.

3. Understand the Functions of CACP.

4. Understand and explain an analysis of adaptive policy of CACP.

5. Understand and Implication of CACP.

87

2.4.1 Introduction :

Here we will discuss the role of commission for Agricultural costs and prices (CACP).

Post-Independence, while Indian agriculture has struggled, it achieved a lot as well. But

India's initial price policy could be characterized as serving the interests of the consumers.

Perticulary where food grains were concerned and most of all in regard to wheat. Food prices

were kept low to provide cheap food for urban consumers under the theory that a cheap and

easy supply of wage goods of which food grains formed the main component would inhibit

inflationary pressures on the economy. This policy increase the import of food grains for

kept prices at a low level during the late 1950s and early 1960s. But did not provide

incentives for Indian farmers to invest or increase production. So, when manufacturing

prices went up faster than agricultural prices as a result of government policy. Terms of trade

favored manufacturing and turned against the agricultural sector. This change led to a food

crisis in the mid 1960s when agricultural production fell.

From 1965, the need to guarantee remunerative prices to farmers was stressed to ensure

self-sufficiency in food-grain production as soon as possible. Thus the Agricultural prices

commission was set up in January, 1965 to advise the government on price policy of major

agricultural commodities. The objective was to give due regard to the interests of the

producer and the consumer, while keeping in perspective the overall needs of the economy.

Since March 1985, the commission has been known as commission for Agricultural Costs

and Prices (CACP).

2.4.2 Subject Description :

2.4.2.1 Nature and the Organisation of CACP :

In the context of agricultural price policy (APP), the price support policy was initiated

by the Government to provide protection to agricultural producers against any sharp drop in

farm prices. If there is a good harvest and market prices tend to dip, the government

guarantees an MSP (Minimum Support Price) or floor price to farmers, which covers not

only the cost of production, but also ensures a reasonable profit margin for the producers.

MSP is announced each year and fixed after taking into account the recommendations of the

CACP. Assurance of a remunerative and stable price environment is considered very important

for increasing agricultural production and productivity since the market place for agricultural

produce tends to be innently unstable. Which often inplict under losses on the growers even

when they adopt the best available technology package and produce efficiently.

The MSP instrument of agriculture price policy exhibited several features reminiscent

of adaptive policies and policy making one of the most prominent is CACP. The commission

is guided in recent years by the three fold objectives of,

(a) raising productivity through assured remunerative prices to farmers.

(b) procuring sufficient quantities of rice and wheat for running the public distribution

system, and

88

(c) promoting a desirable inter-crop balance.

While formulating recommendations on the basis of above objectives, the commission

analyses a wide spectrum of data, covering the costs of cultivation or production, trends and

spread of input use, production and productivity of the crop concerned, market prices, both

domestic and globle intercrop price parity, emerging supply and demand situation, procurement

and distribution, terms of trade between agriculture and non-agriculture sectors and so on.

Among these factors, the cost of production is the most significant one. A meaningful

support price policy should have minimum guaranted prices which would cover at least the

reasonable cost of production in a normal agricultural season obtained from efficient farming.

Since the price policy involves certain considerations of long-run consequences, the

commission also looks at the yield - raising research being conducted by the institutions like

ICAR (Indian council of Agricultural Research). The basic data are generally collected from

the Directorate of Economics and statistics, state government, central ministers and the nodal

agencies concerned with the implementation of agricultural price policy. Besides, the

commission undertakes field visits for close interaction with farmers in different of the

country and also have wider consultation with senior officers, researchers and managers of

relevant organizations.

The commission consists of a chairman, a member secretary, two official members and

three non-official members. The non-official members are representatives of the farming

community. They are usually, persons with considerable field experience and an active

association with the farming community.

2.4.2.2 The Guidelines or the terms of reference for CACP :

Following are the guidelines or the terms of references for working to CACP.

1) To advise on the price policy of paddy, rice, wheat, jowar, bajara, maize, ragi, barley,

gram, tur, moong, urad, sugarcane, groundnut, soyabean, sunflowerseed, rapeseed and mustard,

cotton, jute, tobacco and such other commodities as the Government may indicate from time

to time with a view to evolving a balanced and intergrated price structure in the perspective

of the overall needs of the economy and with due regard to the interests of the producer and

the consumer.

2) With the price policy, recommended by the commission, may keep in view the

following.

(a) The need to provide incentive to the producer for adopting improved technology

and for developing a production pattern broadly in the light of national requirements.

(b) The need to ensure rational utilization of land, water and other production resources.

(c) The likely effect of the price policy on the rest of the economy, particularly on the

cost of living, level of wages, industrial cost structure etc.

89

3) The commission may also suggest such non-price measures as would facilitate the

achievement of the objectives set out in 1 above.

4) To recommend from time to time, in respect of different agricultural commodities,

measures necessary to make the price policy effective.

5) To take into account the changes in terms of trade between agriculture and non-

agricultural sectors.

6) To examine, where necessary, the prevailing methods and cost of marketing of

agricultural commodities in different regions, suggest measures to reduce costs of marketing

and recommend fair price margins for different stages of marketing.

7) To keep under review the developing price situation and to make appropriate

recommendations, as and when necessary, within the framework of the overall price policy.

8) To undertake studies in respect of different crops as may be prescribed by Government

from time to time.

9) To keep under review studies relating to the price policy and arrangements for

collection of information regarding agricultural prices and other related data and suggest

improvements in the same and to organize research studies in the field of price policy.

10) To advice on any problems relating to agricultural prices and production that may

be referred to it by Government from time to time.

From time to time, the guidelines (the terms of reference) to the commission have been

modified and expanded to keep in step with the charges in agricultural scenario of the

country.

2.4.2.3 Functions of CACP :

Following are the two major functions led by the CACP as per guidelines to make

agricultural price policy.

1) Determination of minimum support prices and

2) To suggest the non-price measures for suitable agricultural price policy.

1) Determination of minimum support prices :

In formulating the recommendations in respect of the level of minimum support prices

and other nonprice measures. The commission takes into account apart from a comprehensive

view of the entire structure of the economy of a particular commodity or group of commodities.

The CACP while recommending prices takes into account all - important factors, viz.

i) Cost of production.

ii) Charges in Input prices.

iii) Inupt-output price parity.

iv) Trends in Market prices.

90

v) Inter-crop price parity.

vi) Demand and supply situation.

vii) Effect on Industrial cost structure.

viii) Effect on General price level.

ix) Effect on cost of living.

x) International Market price situation.

xi) Parity between prices paid and prices received by the farmers.

xii) Effect on Implications for subsidy.

Taking into consideration above all factors for determination of MSP, the commission

makes use of both micro-level data and aggregates at the level of district, state and the

country.

2) Non-price measures :

While recommending the price policy, the commission also suggests such non-price

measures as would facilitate achievement of the objectives of the policy. In this regard, the

commission has been emphasizing the following factors :

i) Established/ strengthning of agencies for implementation of declared price support

policy.

ii) Extenstion of provon technology to areas where it still needs to be adopted.

iii) Evolution of suitable technology for augmenting yield and production of crops.

iv) Reform of market regulations and setting up new markets in areas where agricultural

production and made sizeable improvement.

v) Improvement in grading of agricultural produce and expansion of proper storage

facilities.

vi) Arrengement for timely and speedy tranfortation of agricultural commodities from

surplus areas.

vii) Buffer stock operations to import stability to domastic price stabilization.

ix) Fiscal measures including adjustments in duties / taxes / levies.

x) Development of appropriate technology for processing of agricultural produce.

xi) Improving the data base for formulation of price policy.

2.4.2.4 An adaptive policy analysis of CACP (in brief) :

With a view to interacting with various interest groups, the commission follows the

sequence of steps indicated below :

i) The commission identifies the main issues of relevante for the ensuring season

(short, medium or long turn)

91

ii) The commission sends a questionnaire to central ministries, state Governments and

other organisations releted to trade, industry, processors and farmers both in the co-operative

and the private sector and seeks their views on certain issues and factual information on

related variables.

iii) Subsequent to step (ii), the commission holds separate discussions with the state

Government, central ministry / departments and other organisations. The commission also

interacts with research and academic institutions and keep track of relevant studies and their

findings.

iv) The commission visits certain areas for on the spot observationd and feed back from

local level organisations and farmers.

In fixing the support prices, CACP relies on the cost concept, which covers all items of

expenses of cultivation including the imputed value of input owned by farmers such as rental

value of owned land and interest on fixed capital. Some of the important cost concepts used

by CACP are the C2 and C3 costs.

C2 cost includes all actual expenses, in cash and kind, incurred during production by

the actual owner, plus rent paid for leased land, plus imputed value of family labour, plus

interest on value of owned capital assets (excluding land), plus rental value of owned land

(net of land revenue.)

C3 cost is defined as the C2 cost plus 10% of C2 cost, to account for managerial

remuneration to the farmer. Cost of production are calculated both, on a per quintal and per

hectare basis. Since cost variations are large over states, CACP recommends that MSP

should be considered on the basis of C2 cost. However, increases in MSP have been so

substantial in case of paddy and wheat that in most of the state MSPs are far greater than not

only the C2 cost but the C3 cost as well.

The regional segmentation of the markets resulted in a large gap between the cost of

production and the MSP. Market prices where often lower than MSPs, which led to the

unabated build-up of food grain stocks with FCI (food corporation of India). The excess

stocks, which were much higher than the actual buffer requirement, led to a significant

increase in the cost of carrying and also food subsidy.

2.4.2.5 An Implication of CACP :

Major 25 agricultural commodities are currently covered under the mandate given to

CACP for advising the government with regard to the price policy. From the year 1994-95

onwards, Niger seed and sasamum were induded under the minimum support price (MSP)

scheme of CACP. In addition to the edible oilseeds already covered by the commission.

Similarly, during 2001-2002, the government enhanced the terms of reference of the

commission by including one additional commodity, namely lentil (Masur). Thus the number

of crops covered by the MSP scheme have increased to 25.

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The basic framework for determining support prices for major cereals has been relatively

fair. The interests of both farmers and general consumers have been well protected. But there

are a number of distortions. One is the announcement of higher minimum prices by state

government to satisfy local interests. Another is that minimum support prices for course

grains, pulses and oilseeds are of a national nature and are not backed by an organised

system of official procurrement. However, there has also been a contrary view namely, that

the government should dismantle the present system of support prices and procurement and

give freedom to farmers.

Besides, still the Government of India successfully implemented the policy of support

procurement in many commodities.

2.4.3 Summary :

Despite rapid industrialisation after independence agricultural development has been

considered to be an indicator of the life at the grassroots level making it what may be called

peoples sector. In regard to the importance of agriculture in a broader socio-economic, sense,

all the three basic objectives of economic development of the country, namely output growth,

price stability and poverty alleviation are best served by growth of agriculture sector. Besides

many problems Indian agriculture achieved a lot as well. But there are not sutaible price

policy for agriculture sector till 1965. In this way, the Agricultural prices commission was set

up in January, 1965 to advise the Government on price policy of major agricultural

commodities with a view to the interests of the producer and the consumer. Since, March

1985, the commission has been known as Commission for Agricultural Costs and Prices

(CACP).

CACP was set up and it was assigned the task of announcing the minimum support and

procurement prices for the main agricultural crops, including food grains. CACP

recommendations on MSPs are based on a welldefined process considering a variety of

important factors. CACP's consultation process with the stakeholders increases the chance of

the success of the MSP policy. Thus CACP strengthens the adaptive nature of the MSP

policy.

2.4.4 Questions For Self-study :

(A) Answers the following questions in one sentence or two.

1) When the Agricultural prices commission was set up?

2) How many times minimum support price announced each year by CACP?

3) How many members are in the organisation of CACP?

4) How many agricultural commodities are currently covered under the MSP

scheme by CACP?

5) Which are the major two functions of CACP?

93

(B) Fill in the blanks.

1) Since March, 1985, the Agricultural prices commission has been known as

.................

2) ................. is an important input for forming the recommendation of MSP.

3) While recommending the price policy, the commission also suggests such price

and ................. measures.

4) C2 costs includes actual ................. in cash and kind.

5) C3 cost is defined as the C2 cost plus .................% of C2 cost, to account for

manegerial remuneration to farmer.

2.4.5 Answers to questions for self-study.

(A) Answers.

1) January, 1965.

2) One time.

3) seven members.

4) 25

5) Determination of Minimum support prices & to suggest non-price measures.

(B) Answers.

1) Commission for agricultural costs and prices

2) Cost of production

3) Non-price measures

4) Expenses

5) 10%.

2.4.6 Exercises :

1) Why the Agricultural price commission was set up in January, 1965?

2) Since March, 1985, why the Agricultural price commission has been known as CACP?

3) Explain the nature of CACP?

4) Explain the functions of CACP?

5) Explain an Implication of CACP?

2.4.7 References :

1. Indian Economy - R. Datt & K. P. M. Sundharam, S Chand, 57th Edition.

2. Adaptive Policy case study - agricultural price policy in India - 1/SD-TERI-IDRC-

Adaptive policy project - Sudip Mitra & Jagjeet Singh Sareen.

3. Commission's 1090 - http://cacp.dacentnic.in/r2inf/aboutcacp.com.

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94


Agri Business



Unit 3

3.4 Trends in terms of trade between

Agriculture and Industry since 1991


In any economic development process the relationship between agriculture and industry

is of vital importance. The entire process of development can be understood in the context

of the relationship between agriculture and industry and its evolution. This happens due to

the fact that agriculture and industry are usually the biggest and primary material production

sectors in the economy they provide physical goods for a society's survival and the foundation

for any further development. Also, both the sectors are interdependent, i.e., one sector cannot

develop properly without the other. The relationship between the two sectors is mainly

through product exchanges.

The inter-relationship between agriculture and industry has been a long debated issue

in the development literature. In the Indian context this issue has attracted attention and

importance since 1960s. Since then, the Indian economy has undergone a structural change

in its secteral composition. From a primary agro-based economy during the 1970s, the

economy has emerged as predominant in the service sector since the 1990s. The growing

integration with the rest of the world in the post-reform period has significant impact on the

linkages between the agriculture and industry. Hence, there has been an interesting change

in the trends in terms of trade between agriculture and industry since 1991. Before turning

our attention to the study of the trends in terms of trade between agriculture and industry, it

would be benefical to examine and understand certain aspects of terms of trade.

3.4.2 Meaning of Terms of Trade :

Before examining the trends of terms of trade between agriculture and industry, it is

important to understand the meaning of terms of trade.

Terms of trade, specifically, the terms of trade between agriculture and industry is the

ratio of agricultural prices to industrial prices, both measured as price indices. This ratio is

important because it determines the government policy in the agriculture sector. Before

nineties the government had turned the terms of trade against agricultures where as, it moved

it in favour of the sector in the nineties. This has resulted into increasing incomes to the

farmers.

95

The ratio of agricultural prices to industrial prices means agricultural prices divided by

industrial prices. A rise in the ratio means that the agricultural sector is better off in terms of

its purchasing power of industrial goods. For example suppose there are only two goods in

the economy namely bananas and pins and you produce and sell bananas. The price of both

initially is Rs. 10. If now both prices go up by 100 per cent, nothing happens to the terms of

trade and purchasing power remains unchanged. If in another situation banana prices go up

by 100 per cent and the prices of pins does not change. Then, as a banana manufacturer you

are better off since one banana can now buy two pins insted of one. Here, in this situation

the ratio or the terms of trade between bananas and pins has doubled. Now of we substitute

agriculture for bananas and industry for pins you can understand what a rise in agriculture's

terms of trade can do to a farmer.

3.4.3 Trends in Terms of trade since 1991 :

The structural reforms and stabilization policies introduced in India in 1991 initally

focused on industry, tax reforms, foreign trade and investment, banking and capital markets.

The economic reforms did not include any specific package specifically designed for

agriculture. It was thought that freeing agricultural markets and liberalising external trade in

agricultural commodities would provide price incentives leading to enhanced investment and

output in that sector, while broader trade liberalisation would shift intersectoral terms of

trade in favour of agriculture (Balakrishnan, 2000)

On the positive side, the terms of trade for agriculture have improved due to the

reforms. It has given rise to benefits form trade and specialization, widening choices in new

technology including bio-technology, increase in private investment in irrigation and marketing

infrastructure like storage and transport. It has been opinied that, till 1991, protection to

industry in the form of import substitution policies such as huge import controls and high

import duties have hurt the agriculture till 1991. Disprotection to industry since 1991 is

expected to increase or make terms of trade favourable for agriculture. "This would create a

potentially more profitable agriculture which would be able to bear the economic costs of

technological modernization and expansion." (Manmohan Sing, 1995).

During the post reform period the terms of trade seems to be favourable to agriculture

with fluctuations (Ref. Table No. 3.4.1). Agricultural growth was 3.7% per annum in the first

six years of the reform period (1991-97). The terms of trade improved during this period due

to disportection to industry, devaluation of rupee and increase in minimum support prices.

The terms of trade started deteriorating since mid 1990s. There has been an agricultural

growth of more than 4% during 2004-2008. There has been an improvement in Terms of

Trade during this period.

96

Table no. 3.4.1

Index of Terms of trade between Agriculture and non agriculture sector.

Year Combined Index Index of Agriculture's

of Prices Terms of

Prices Paid received Trade

1981-82 61.9 54.9 88.7

1982-83 66.0 60.3 91.4

1983-84 70.1 64.2 91.6

1984-85 72.4 68.0 93.9

1985-86 75.2 70.4 93.6

1986-87 80.2 76.7 95.7

1987-88 88.3 86.0 97.4

1988-89 91.8 90.3 98.3

1989-90 98.1 97.5 99.4

1990-91 110.2 112.3 101.9

1991-92 123.8 130.8 105.6

1992-93 133.5 138.7 103.9

1993-94 146.1 151.4 103.6

1994-95 160.5 171.1 106.6

1995-96 173.7 182.9 105.3

1996-97 184.8 190.6 103.1

1997-98 194.9 205.9 105.6

1998-99 209.9 220.8 105.2

1999-00 214.0 219.8 102.7

2000-01 223.3 225.0 100.9

2001-02 229.0 235.3 102.8

2002-03 239.3 247.9 103.6

2003-04 248.7 251.2 101.0

2004-05 257.5 258.2 100.3

2005-06 270.6 275.8 101.9

Source : Directorate of Economics & Statistics, Ministry of Agriculture.

Terms of trade for agriculture based on GDP implict price deflators show the increase

in terms of trade since 2004-05. Specifically, the terms of trade for agriculture increased

significantly in 2007-08 and 2008-09 and they are the highest in the last two decades.

97

Table no. 3.4.2

Agriculture Terms of Trade based GDP implicit price Deflaters (1999-00=100)

Year Term of Trade for Agriculture

1989-90 88.9

1990-91 89.8

1991-92 96.4

1992-93 93.3

1993-94 93.9

1994-95 95.8

1995-96 96.2

1996-97 97.6

1997-98 101.1

1998-99 101.0

1999-00 100.0

2000-01 97.1

2001-02 96.3

2002-03 97.3

2003-04 95.7

2004-05 93.4

2005-06 96.8

2006-07 97.7

2007-08 101.4

2008-09 103.4

Source : National Accounts Statistics, CSO.

3.4.4 Movements in Relative Prices :

Data on the comparative movement of the wholesale Price Index of Agricultural Sector

over the Manufacturing Sector is used to understand the terms of trade between these sectors

by many economists. During 1963-64 to 1970-71, prices of agricultural commodities as

percent of prices of manufactures were consistently more than 100 implying that during this

period, the terms of trade moved in favour of agriculture and against industry. During the

period 1971-72 to 1981-82, on the other hand prices of agricultural commodities as percent

of prices of manufactures were consistently less than 100 implying that the terms of trade

moved against agriculture and infavour of industry during this period.

For the period 1982-83 to 2009-10 agricultural price index as a percent of manufacturing

is greater than 100 for all years. This indicates that the terms of trade, defined in terms of

relative prices have consistently been in favour of agriculture since early 1980s. It has been

stated that, reduction in the protection to the manufacturing sector in the post economic

98

reform period, higher increases in minimum support prices in recent years, easing some

restrictions on agricultural trade etc. have created conditions to bring about a more favourable

trade regime for agricultural products.

Table no. 3.4.3

Index of Terms of Trade between Agriculture and non-agricultural sectors

(Base : Triennium ending 1990-91 = 100)

Year Index of Index of Prices Paid (IPP) for Combined Index

Prices Index of

received Final Intermidiate Capital (IPP) Terms

(IPR) Consumption Consumption formalion of Trade

1989-90 7.5 97.6 99.2 100.6 98.1 99.4

1990-91 112.3 112.1 104.0 108.5 110.2 101.9

1991-92 30.8 124.9 119.4 127.2 123.8 105.6

1992-93 38.7 131.5 139.5 137.5 133.5 103.9

1993-94 1.4 143.9 152.9 147.3 146.1 103.6

1994-95 71.1 159.0 166.1 158.4 160.5 106.6

1995 2.9 173.4 174.2 176.1 173.7 105.3

1996-97 90.6 185.6 181.5 188.8 184.8 103.1

1997-98 5.9 195.7 192.0 196.7 194.9 105.6

1998-99 20.8 213.8 197.1 206.7 209.9 105.2

1999-2000 19.8 217.1 203.9 212.6 214.0 102.7

2000-01 25.0 220.5 230.4 227.0 223.0 100.9

2001-02 235.3 226.4 235.2 240.4 229.0 102.8

2002-03 47.9 234.9 252.7 245.2 239.3 103.6

2003-04 51.2 245.2 259.1 255.7 248.7 101.0

2004-05 58.2 252.3 264.5 305.6 257.5 100.3

2005-06 5.8 266.0 277.1 310.5 270.6 101.9

2006-07 291.1 283.4 282.7 327.8 285.4 102.0

Source : Government of India, Ministry of Agriculture, Agriculture Statistics ot glance,

2010. Table 6.5, p. 211.

3.4.5 Task force's Calculation of Terms of Trade :

The government of India constituted a Task Force in March 1993 headed by A. S.

Kahlon to suggest suitable methodology for constructing the index of terms of trade.

The Task Force presented a suitable methology to compute an index of terms of trade

for India. The recommended intex is expressed as a precentage of the ratio of index of price

99

received for agricultural products to index of Price paid by the farm sector for final

consumption, farm inputs and capital investment in agriculture.

As per the table no. 3.4.3 since 1990-91 onwards the terms of trade moved in favour of

agriculture which is reflected in the fact that the index of terms of trade has been more than

100.

During the period since 1990-91, the index of terms of trade ranged between a high of

106.6 in 1994-95 and a low of 100.3 in 2004-05.

Self Learning Questions :

(A) Fill in the blanks.

1) The terms of trade have been ............. for agriculture since 1991.

a) unfavourable b) favourable

Answer : (b) favourable

(B) True or False.

1) The Task force was headed by A. S. Kahlon.

Answer : True

(C) Broad answer type question.

1) Explain the trends in terms of trade between agriculture and industry since

1991.

(D) Short Notes.

1) Task Force

2) Meaning of terms of trade.

Select Reference :

1. Misra, Puri (2011), Indian Economy, Himalays Publishing House, New Delhi.

2. S. Mahendra Dev, "Structural Reforms and Agriculture : Issues and Policies

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100


Agri Business



Unit II : Agro Business and Allied Activities

2.1 Growth of livestock Population

2.1.0 Objectives

2.1.1 Introduction

2.1.2 Subject Elucidation

2.1.2. I) Types of Livestock

II) Progress of Livestock in India

A. Number of livestock in India

B. Production of Milk, Eggs, Meat and wool in India

C. Production of Milk, Eggs, Meat and wool in Maharashtra

III) Importance of livestock in India

IV) Present condition and problems of livestock

V) Action - programme of Animal Husbandary / Remedy

VI) Animal Insurance

VII) Future point of view

2.1.3 Summary

2.1.4 Terminology

2.1.5 Question for self study

2.1.6 Self Study to practise

2.1.7 Answer of objective Question

2.1.8 Zonal functions

2.1.9 Reference.

101

2.1.0 Objectives :

We can imbibe knowledge regarding following facts from this relevant component.

1. We can realise, what is livestock ?

2. We come to know the types and progress of livestock.

3. We learn the present position of Indian livestock and their problems.

4. We can understand the actiion programme as well as the remidial measures of animal

husbandary.

5. We can be acquainted with, how should be the beast insurance and what should be

future viewpoint about them.


Since the man started farming in organized from animals were used for cultivation.

Domestication of animals started for cultivation, milk, meat and they were provided fodder,

feed and subordinate products. These by products which have no alternative use would have

been disposed of by burning, causing air pollution and global warming. The animal droppings/

dung is helpful in enriching the soil. In this way livestock and crops proved to be

complementary and assistant to each other.

Ownership of livestock has become an important component of the farming system

because, farming is integrated with the production of crops and livestock.Therefore, livestock

is considered as an asset, that could be used in the production process or exchanged for cash

or other productive assets (Bekele and Drake, 2003).

Livestock has made an important contribution to most economics, livestock produce

food, enchance, crop production, provide security, generate income for rural and urban

population, helps in transport and produce value added goods which can have multiplier

effects and creat a need for services. In addition, livestock diversify production and income,

provide year - round employment and spread risk.

By 2015 AD, India is likely to touch 1225 million human and 600 million livestock

population, necessitating 275 million tonnes of foodgrains, 100 MT of green fodder. Our

current supply is only 200 MT of foodgrains and 513 MT of green fodder.

Animal husbandry is an integral part of Indian agriculture today and it is relevant to

some cultural and religious as well as customs and traditions.

2.1.2 Subject elucidation :

When we are going to understand the concept of livestock, we have to study its

necessity, importance in economy, besides the problems and remedial measures there upon.

102

2.1.2 I) Types of livestock :

Livestock in India can be devided in following three divisions.

1) Livestock for use of work

2) Livestock giving milk (Milky)

3) Useless, futile livestock

1) Livestock for use of work : Livestock (Male and female together) only for use of

farming were 779 lakhs in 1961. Which reached to 1226.5 lakhs in 1991. Moreover there

were 29 lakhs animals / cattles for use of work and breeding. U. P. has highest number of

them, thereafter follow M. P. and Maharashtra livestock fighure depends upon cultivation,

sowing, threshing and water supply. Ordinarily, one pair of bullocks is used for 10 acres of

land. In this case Maharashtra, Pubjab, Rajastan are ahead of Kerala and this proportaion is

leat in Himachal Pradesh.

2) Livestock giving milk (Milky) or Dairy Cattle : Cattle above three years and able

for breeding are included in this group. These are only 6641 lakhs. This figure is half of the

total cattle above three years. The highest number of these cattle in U. P. followed by

Tamilnadu, M.P. and Rajestan.

3) Useless / Futile Cattle or Unserviceable livestock : Fully growon up cattle which

are used for any work are incorporated in this group. Their total figure is 164 lakhs. Mainly

in South India their position is very worse because of the fact that the people are the cattle

on sentimental grounds.

2.1.2 II) Progress of Livestock in India :

Livestock is an important source of income for nation. The share of livestock

production in the total agricultural output. In the same of the west European countries is

about 60 to 80 percent. However, in India the gross value of output from livestock sector

(animal husbandary and dairy development) is about 6.5 to 7 percent of India's GDP at

current rates.

During, 2004-05 the the value of output of livestock was Rs. 173,350 crores at current

prices. It was about 36 percent of the total value of output of agriculture and allied sectors.

The contribution of milk alone was Rs. 1,15,970 crores. At the time, price of peddy was Rs.

70,462 crores and price of sugarcane was Rs. 23,167 crores.

103

A) Number of livestock in India.

Table No. 1

Livestock population in India by species

(in million Numbers)

Last updated Feb, 29, 2012

Sr.No. Types 1951 1966 1977 1987 1997 2003 2007H

1. Cattle 155.3 176.2 180.0 199.7 198.9 185.2 199.1

B Matured female 54.4 51.8 54.6 62.1 64.4 64.5 73.0

Cattle

2. Buffaloes 43.4 53.0 62.0 76.0 89.9 97.9 105.3

Male & Female

B Grown up 21.0 25.4 31.3 39.1 46.8 51.0 54.5

Female buffaloes

3. Total Cattle like 198.7 229.2 242.0 275.7 288.8 283.1 304.4

livestock

4. Sheep, goat, horse 94.2 115.3 127.4 169.5 196.6 201.9 225.3

camel, donkey etc.

5. Total number of 292.9 344.5 369.4 445.2 485.4 485.0 529.7

live stock

6. Poultry-farming * 73.5 115.4 159.2 275.3 347.6 489.0 648.8

Note : H Provisional derived from village level totals.

* includes chicken, ducks, turkey and other birds.

Source : 1) Livestock censuses, Department of Animal Husbandry, Dairying and fisheries,

Ministry of Agriculture, GOI (Last updated Feb, 29, 2012)

2) www.nddb.org/statical/population/India.

From table No. 1. we come to know the progress of various types of animals (Livestock)

in the period 1951 to 2007.

In India, in 1951 total cows, buffaloes etc. livestock was 198.7 millions. It become

304.4 millions in 2007. It increased one and half times in 56 years. In the same period

grown-up female cattle increased from 54.4 millions to 73 millions and the number of

i

104

matured female buffaloes rose from 21.00 millions to 54.5 millions. This increase is about

one and a half times and two and a half times respectively. This progress of livestock is very

important because dairy production and breeding of new animals is entirely dependent upon

this group.

The number of total livestock including all the animals like sheep, goat, horse, donkey

etc. was 292.9 millions in 1951 and it increased to 529.7 millions in 2007.

With this, about poultry-farming, the number of total birds in 1951 was 73.5 millions;

which rose to 347.6 millions in 1997 and 648.8 millions in 2007. This increase is extraordinary

remarkable. It was more than four-fold in 1997 and about ninefold in 2007. It this rate of

increase is maintained, India would become a great nation in this world which has performed

a most important work in this field.

B) Production of Milk, Eggs, Meat and wool

Table No. 2

Production of milk, eggs, meat and wool in India

No. Year Milk Egg Meat Wool

(Million tonne) (Million No.) (M.T.) (Million kgs)

1. 1950-51 17.0 1862 NA 27.5

2. 1990-91 53.9 21101 NA 41.2

3. 2005-06 97.1 46235 2.3 44.9

4. 2008-09 108.5 55395 3.8 42.9

5. 2009-10 112.5 59844 4.0 43.2

6. 2010-11 116.2 61454 4.2 43.3

Source : 1) Data book 2005 ICAR.

2) Lekhi R. K. & Sing J, "Agricultural Economics (An India perspective)", Kalyani

Publications, Ludhiana, Page No. III - 425.

3) www.dahd.nic.in/dahd/statistics/animal husbandary/statistics -apx.

4) www.dehd.nic.in/dahd/upload/BAHS-2010 pdf.

Table 02, reveals that, production of milk in1950-51 was only 17.0 million tonnes. It

increased to 116.2 mt. in 2010-11, i. e. seven fold increase. Dairy-farming has become stable

and in it moving towards progress.

105

Likewise production of eggs in 1950-51 was 1832 lakhs which increased to 46235

lakhs in 2005-06 (over 25 fold) and in 2010-11, 61454 lakhs (over thirty three fold).

Previously, getting eggs was a part of household work but, now it has become a profession

therefore it increased tremenderusly. Productions of meat in 2005-06 was 2.3 million

tonnes. It increased to 4.2 MT. in 2010-11. Two fold increase in these five years. Volume

of production it less and the rate of increase is also slow. It may be because of aura of

mystery on the mind of society.

The wool production got from the bodies of sheep, Goat etc. animals was 27.5 million

kilograms in 1950-51. It increased to 44.9 million kgs in 2005-06. This increase was more

than one and a half times. Nevertheless, thereafter this production decreased and it remained

near about 43.0 million kgs. in 2010-11.

C) Production of Milk, Eggs, Meat and Wool in Maharashtra :

Table No. 03

Production of Milk, Eggs, Meat and Wool in Maharashtra

Sr. Year Milk Egg Meat Wool

No. (Million Tonnes) (MT) (000 tonnes) (000 kg.)

1. 2005-06 6769 35227 236 1640

2. 2008-09 7455 35502 536 1707

3. 2009-10 7679 38640 545 1726

Source : 1) Data book 2005 ICAR.

2) Lekhi R. K. & Sing J, "Agricultural Economics (An Indian perspective)", Kalyani

Publications, Ludhiana, Page No. III - 425.

3) www.dahd.nic.in/dahd/statistics/animal husbandary/statistics -apx.

4) www.dehd.nic.in/dahd/upload/BAHS-2010 pdf.

From table 03 we come to know that milk production in 2005-06 was 6769 million

tonnes, which incrased to 7679 MTS in 2009-10. Only 910 MTS increased in these four

years. In the same period production of eggs increased from 35227 MT to 38640 MT and

production of Wool increased from 1640 MT kgs. to 1726 MT kgs. Production of eggs 3413

MT and Wool production 86 MT kgs. increased. From the point of view of progress of all of

these it is better to have enhancements in the rate of increase.

The production of meat increased from 236 MTs to 545 MTs in the same period. This

growth is more than double.

106

2.1.2 III) Importance of livestock in India :

India was an emmensely rich nation which possesses natural blessings. Fertile land,

variety of plants and livestock etc. resources are sufficient for self-containment. But absence

of long-term vision and inconsistent policy led to undersirable condition.

The picture changed by the industrial revolution of eighteenth century took place in

England. The importance of machine production, commercial crops and money increased.

The so called development of cities occured. But the base of affluence of rural area sunk.

According to Prof. Haim Halperin, "The village is vanishing from the face of the earth and

there is no healthy growth of cities either."

The importance of livestock is unquestionable from the point of view of entire economy

not only of rural area. The use of livestock has been came down by mechanization nevertheless,

its importance cames into sight in many other respects.

1) Contribution in National Income : Denmark, Norway, Australia etc. nations, pay

attention seperately towards development of livestock and dairy-farming. In these nations

contribution of livestock in their national income is very large.

In 2000-01, in India addition in national income by livestock was 5.9 percent and the

share of livestock (with fishing industry) in agriculture and allied activities was 30 percent.

In 2008-09 this contribution decreased to 4.7 percent and 29.7 percent respectively.

2) Best Supplementary Occupation : There is no certainty in agricultural Farming

because of dependance on we experience it continuously when the changes occure in

environment. Merchants and servicemen get their payment every day or once in a month. But

farmer receive his income only once in a year. Moreover, he cannot decide the price of his

goods. The condition of farmer becomes awkward due to the occurrence that whatever

acquired in form, that is losed in market. In these circumstances, poultry - farming, dairy -

farming, maintence of sheep, goat, animals etc. these sidelines are done as supplementary

occupations. Out of this livestock is most important since long ago; because animals assist

in farming, give milk production and expenditure on their maintence is also less livestock is

useful to farmers for farm work and transportation.

3) Remedy over rural unemployment : Since agricultural nature is seasonal rural

unemployment is also seasonal disguised unemployment exists. Due to less opportunities of

alternative employment, in helplessness nillegens work in agriculture. Their capacity is not

used fully. In this strange situation occupation of animal husbandary can reduce unemployment.

Along side milk production, by processing it curds buttermilk, butter and ghee these substances

can be made. In this work involvement of ladies is more.

107

Help of ladies in agriculture is 35 percent, while in livestock it is 69 percent. In this

sense, employment capacity is big in animal keeping. Livestock provides as main occupation

to 110 lakh people and subsidiary occupationt to 90 lakh people.

4) Invaluable help to Agriculture : After green revoluation, the use of chemical

fertilizers and insecticids increased very much. It becomes dangerous to the productivity of

agriculture. Furthermore, continuous, increase in commercial crops proved to be detrimental

to agriculture. Previously, the productivity of land was naturally got preserved by the system

of changes in crops. The system is came to halt. That's why, now-a-days, insistence is on

organic agriculture, evergreen farming and continuous farming.

Agriculture receive during mannure by livestock. It has been proved that powdered

boons of dead animals are a best fertilizer. Productivity of land is naturally endured by the

use of these fertilizers and the expenditure of chemical fertilizers is saved. From a guesswork

in India we get 120 crore tonnes dung of animals. Out of this, a fertilizer only 18% (21.5

crore tonnes) and 33 percent as fuel (firewood) is used up and remaning all go to waste

(memoria page 312). To think deeply about energy this 33 percent dung (40 crores tonnes)

is equal to 4.6 crores coal. Besides, energy can be saved by operating dung gas plant where

input is dung.

5) Supply of Milk : For a child, milk of mother is the "Full food" after that milk of

cow. People satisfy their necessity of diet by the milk of cows and female buffaloes.

Table No. 04

Milk production in India and Per-capita Daily Availability

Year Production of milk Per-person-daily

(crores tonnes) availibity (grams)

1950-51 1.7 124

1990-91 5.39 176

2000-01 8.06 220

2005-06 9.71 241

2009-10 11.25 263

Source : Economic survey, 2010-11, page 204.

Production of milk is continuously increasing. In 1950-51, it was 1.7 crore tonnes,

which increased to 8.06 crore tonnes in 2000-01 and 11.25 crore tonnes in 2009-10 i. e. the

increase was 6.9 fold. Similarly, per capita daily availibility increased from 124 grams to 263

grams. The distinctive feature is that in this period increase in production of milk was about

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seven fold but daily per capita milk availibility was just a little more than two fold. It is

because of population growth.

6) Agricultural Operations (farming) and Transporation : From long ago livestock

is being used for farming and transportation. Bulls, male buffaloes and in some parts famale

buffaloes are used. They are used as a mean of hard work. The picture changed by

modernization of agriculture and use of tractor started for farming and transportation. But

total expenditure increased because of fuel charges and rent. In addition, it causes to pollution

dependence of farmers is increasing.

Purport, in the real sense livestock is wealth of rural India. Reasonable, modernization

with sufficent (quite full) use of livestock will be most helpful to uninterrupted development.

2.1.2 IV) Present Condition and Problems of livestock :

India stands first in the world in the number of livestock and it is 17 percent of the

world's livestock population. But per animal availibility of grazing land is least. Australiya,

Denmark and Some European countries have sufficient grazing land hence efficiency of

animals and their capacity to milk is more there. India's share in the total livestock number

of the world is as follows - buffalos (female) 50 percent, Cows and Bulls 20 percent sheeps

and goats 20 percent. In 2003, in India the number of animals was 48.5 crores which

increased to 52.97 crores in 2007 (18th livestock count).

Livestock gives significant contribution, as like as agriculture to the development of

rural economy. In most contries the share of livestock production in the income of agriculture

and allied activities is permanently, year after year on higher level (more than 50 percent).

It is 75 percent to 80 percent in the countries, like Denmark, Norwe, Sweedan which have

natural favourableness.

In India the share of livestock income is much less. The reasons of it and the problems

of livestock are given below.

1) Deficiency of feed : As humanbeing, animals also need nutritious and sufficient

feed. Deficiency in it results in malnutrition and shortcomings in nourishment. As a result,

the efficiency of animals which carry loads, declines and the milk production decreases

which receive from milky animals. In India available fodder is only 60 percent of the

requirement. Remaining part of agricultural production is fodder for animals. For example

straw of jowar, now straw of soyabean and leaves of sugarcane are used as fodder.

Previously, farmers intentionally cultivate good fodder for animals. But at present

because of commercial objectives maximum use of land is in cultivation of crops.

The grass grown in fallow lands and forests is a good fodder. The animal food which

can get from markets; is used primarily for the milky animals. Cotton seed lump is provided

very rarely because of dearness.

109

The majority of people leave animals loose for grazing in the wilds. The grass (feed)

of that place exists good in rainy season, but it becomes scare between december to July. In

the last 50 years increase in carrot grass was undoubtedly tremendous. It is useless for

animals, besides other proper grass falls short.

Being all these circumstances livestock do not get nutritious and sufficient feed and

therefore their competency decreases. The breeding from feeble animals is also feeble / weak

diseased and less power of resistance.

Summary, though India stands first in the number of livestock in the world, even then

the number of competent animals too less. Therefore, this livestock niether add enough in the

income of villagers nor give adequate contribution to the development of economy.

2) Inadequate care : Any occupation becomes successful if the management is good

enough. The people doing dairy farming seperately, take more care of animal. But the people

who rear animals as a joint occupation with farming do not care much, about animals. They

let the animals for grazing is the best example. They spend more power and time in

wandering but get less fodder. Sometimes determental things like polythenne goes in their

stomach.

Now - a - days, straw of jowar has become scarce and readymade animal feed is not

given sufficiently because of more process. Besides, villagers do not have scientific knowledge

about ordinary diseases. Animals dispensaries, their medicines and insurance are lacking in

villages. The negligence towards occupation, which surely adds in the income of farmers is

very serious.

3) Situation of procreation : Villagers are very short of veterinary facilities and

amenities. Healthy and strong bulls and buffaloes (Male) are essential for better reproduction

of Cattle. They are very less in number, therefore, whatever procreation is there, it is

generally not healthy. Consequently, number of cattle increases but in proportion their

contribution does not increase. Furthermore, rural area is deficient in cattle breeding centres,

that's why procreation by artificial insemination is also restricted.

4) Emergence of Diseases : The resistance power of under nourished cattle is less,

hence diseases invade them earlier. Often times they die. Meagre feed, heavy work, improper

care, shortage of veterinary facilities, uncleanness in cattle-enclosures etc. are the reasons

which spread many diseases. Diptheria, infectious abortion, disease of leg - hoof and mouth

- hoof, etc. diseases are very detrimental. In these diseases they become usless or die.

5) Problem of useless Cattle : Undernourishment accident, various diseases, increased

age etc. are the reasons for becoming useless. Already existance of insufficient feed and care,

in this situation useless animals are neglected very much. Sometimes they set loose. They

someshow survive in piteous situation until natural death.

110

Intent India has highest number of cattle, but their condition is not satisfactory, therefore

this important resource cannot give sufficient contribution. Since competent cattle are not

there, use of machines is increased, is not the answer. The expenditure of machines is more,

in addition the use of resources like fuel metal increases enormously, therefore, the real

remedy lies in the fact that the number of cattle should be restricted by proper breeding

system and maintenance of those limited animals with suitable nourshment and due care.

Serviceable animals work hard in their life time and give dung manure; After their death

skin, bones and fat are advantageous in serving various tasks. How does machine can their

position ?

Adoption of mechanization in agriculture is good in these nations where land holdings

are about hundred's of acres. But it is in vain in India's where land - holdings are small. The

useful pathway is animal use which are obtained from breeding based on scientific method,

for incessant agricultural and mechanization for large land holdings.

2.1.2 V) Action - Programme of Animal Husbandry / Remedy :

In India, in 60 years of planning period as much attention paid to the development of

modern departments that much rural development remained neglected. There was never

scarceness of rural development programmes. But the benefit of them did not reach sufficiently

to the last villager. Consequently, rural-urban division became prominent. In the period of

Industrialization, mechanization, the animal husbandry also was neglected with agriculture.

Dairy farming and poultry occupation came forward but no one paid required attention

towards their development as sidelines. The successful project - 'Amul co-operative milk and

milk processing project; is an exception.

1) The programmes commenced for milk occupation, rearing of animals and animal

husbandry, have given emphasis on production of milk. Therefore, "Operation flood"

considerably achieved.

2) Development of cow school : Cow school centers were started for increasing milk

production and to carry out proper animal breeding. These centres were 424 at that time.

These centres were provided improved breeding animals / bulls for breeding of serviceable

strong bulls. Thereby, it was expected to increase milk production and strong animals. The

exceptation was, this will get good response from society especially from charitable trust.

3) Cow-house plan : Cattle preservation and Development Committee had started

cow-house plan in 1948, for maintenance of helpless, stricken with accident, diseased and

old animals. The contruction of these houses was done in the interior of the wilds and waste

lands. We use animals when they were in order and to set loose or to send to slaughter-house

when they become useless/old is not good according to compassion towards creatures.

Hence, it is essential to increase cow-houses.

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4) Rich Animal Developmnet project : These projects was started to increase milk

production in 1964-65. Its appearance is like a package programme / comprehensive. They

are relevant to all aspects of animal husbandry. Improved procreation, development of

animal feed, verterinary facilities, competent management and marketing all these functions

are done. These projects keep their attention focused on all-round development of one lakh

cows; buffaloes (female) of their zone and on the other hand give market to milk producers

by keeping in contracts with milk projects.

Initially, of this kind 22 projects were started. Thereafter 19 centrally collecting centers,

105 regional centers of artifical insemination were established. In addition dairy-farming

expansion programme, castrating of stunted bulls and control on diseases these functions

were started in all projects by establishing 1152 stockmen centers - similarly, it is decided to

formulate a plan of supplying feed, for internal animals of the project should get balanced

feed.

5) Collective Resources Development Plan : This useful concept is prevalent from

eighth five year plan majority of farmers are small land holders therefore they have no land

to cultivate animal feed seperately. All land is used for crops because of commercialization.

Hence arrangement of cattle feed is not possible. As a matter of fact some resources are

collectively owned in every village and the on membership of them rests with all the society.

For example, grazing ground / pasture, waste land etc. The problems of cattle feed is sovable

if these are properly developed. In 1986-87. There was 14 crore hectares land of this kind

and it was decided to develop it.

6) Village Group Development Plan : This plan was started for increasing milking

capacity of Cows and femable Buffaoles in 1973-74 it was brought in to force in selected

621 village groups. Animal husbandry was motivated by controlled breeding, nutritions feed,

efficient administration, disease, control and preventure measures development of pasturres

and making arrangements of milk selling.

7) Key Village Scheme : State governments run the animal husbandry programme

through this plan. The function of control on procreation is done by center of artificial

insemination. The expert committee after second plan suggested following remedies. To

keep control over grazing in pastures, to take fodder crops on marginal land to take the crops

like pea, a kind of bean etc. with rice crop in rotation, to dig a hole storeing vegetables and

to stimulate farmers for growing grass of cattle feed.

2000 schemes of this kind were set up, up to the end of second plan. 84791 good

quality calfs were bred. Furthermore, 21 lakhs artificial inseminations and natural services

were executed by very favourable bulls. 5.7 lakhs bulls castrated and 83.4 lakhs contagious

disease - preventing vaccinated.

8) Other Schemes : Other than above programmes, following some programmes are

going on at central and state levels.

112

a) Animal breeding and development - Artificial insemination programme.

b) Supply of milky animals on grants to the needy people in society.

e) Grants on feed for animals giving milk.

d) Training to persons concerned about health of animals.

e) Enlightment of the rural youth about animal husbandry and self- employment.

f) Distribution scheme of seeds of fodder on 100 percent grants.

g) Supply of various verterinary services with nominal feed. (artificial insemination,

operation, castration, immunization etc.)

h) Creation of improvel caste of grass and fodder.

i) Establishment of fodder bank (useful in the period of fodder scaricity.)

j) Establishment of about 6000 hospitals and dispensaries for keeping effective control

on diseases of animals.

k) Production of vaccine has been increased which is useful as a remedy over contagious

diseases of animals.

Royal Commission on Agricultural made the first attempt to decide policies for livestock

development. (RCA 1928). It clearly recognized the role of drought animals. National

Commission on Agriculture (NCA 1976) made a comprehensive review of the livestock

sector. It deals with problems and prospects of animals husbandry.

The first few palns did not pay required attention to this from eighth plan onwards

animal diseases control started. The threst was on creative treatment rather than on prevention

and control.

Likewise Policy (July 2000) is a piece of National Agriculture policy. Agriculture and

joint occupations like dairy farming, poultry animal husbandry etc. general wealth and

employment in the agriculture sector. National livestock breading strategy tries to meet the

need of milk, eggs and meat.

Appropriate technologies are being used in animal production and productivity of

fodder crops and trees. Processing, marketting and transport facilities are being improved by

modernization.

The involvement of co-operatives is encouraged for development of animal husbandry

dairy and poultry. Incentive for group production is being given.

Above mentioned various programmes and policies lead to qualitative change in animals

husbandry. But this change occurs less where some sideline is accompained with farming.

113

According to economic survey (2010-11) adequate utilization of livestock did not took

place because lifeless breeding programme, imperfection of feed and less parchasing power,

deficiency in veterinary structure, obstacles in transportation, difficulties in process etc.

Moreover, various drawbacks in implementation mechanism is also a main reason.

Furthe, Central Government, State Government and Union Territories on the whole

provided Rs. 506 crores for expenditure on livestock in 2002-03, but out of it the actual

expenditure was only Rs. 371 crores likewise in 2005-06 the provision was Rs. 909 crores,

but the actual expenditure was only Rs. 821 crores. In 2009-10, Rs. 607 crores were provided

but only Rs.507 crores were expended. In all these years, the funds provided for livestock

were not utilized fully, this item, certainly is not right.

2.1.2 VI) Animal Insurence :

Importance of beast in Indian rural economy is unequestionable. Merely, their condition

is not satisfactory. They are weak, less efficient and diseased. Therefore, mortality rate

amongst them is more. Farmers suffer a great loss if some of their bull, cow or female

buffalo dies. For this reason, animal insurance scheme becomes essential.

This scheme is regular in Garmeny, France and Itali. But in India crop-insurance and

animal insurance scheme long time remanged neglected. Regarding this some recommedations

were put forward by Priyalkar Committee (1948). In 1993-94 Government of India had

started animal insurance scheme through general insurance corporation of India. Generally

1.9 to 2.0 crores cattles are insurved every year. The premium collection is about Rs. 131 to

Rs. 145 crores and amount payable is Rs. 72 to Rs. 95 crores. In 2005-06 prevalent scheme

was started in selected 100 districts within this, 20.63 lakhs cattles were insured in the period

2006-07 to 2010.

2.1.2 VII) Future Point of View :

For maintenance of animals, only adopation of new technique is not useful in that case,

crection of essential social institutions and organisations is required and a network of them

is to be weaved. Fodder Innovation project is making every efforat to solve the problem of

fodder scarcity. An experience is making institutional arrangements in communal resources

like pastures and waste lands, provides ample fodder and water (Rahul Chaturvedi and

Sanjay Joshi, P.26)

Modern production system neglects the local breeds. Local breeds are well consistant

with environment and the farmer's administration practices. The women livestock keepers,

find improvement of local breeds is a better alternative to the foregin breeds of livestock.

Livestock is determined as off enders of environmental degradation. Actually, the

texture of land is improved by the assistances of livestock. Similarly, livestock remains as a

livelihood for the majorty of poor in India.

114

Need for New Policy : Landless, small and marginal farmers are mostly dependent on

common properly resources. They often suffer by policies of forest department. In the

absence of pro-poor policies these common property resources are under degradation or

destroyed. According to convention on Biological Divestity, local communities are the real

custodians of these assets. They and farmers should be involved fully in the programmes.

If has been proved that unified collective efforts and people - centric process have

created a good impact on livelihoods. Therefore, efforts of such nature should continue in a

large way, in the years to come, is the right pathway.

2.1.3 Summary :

Livestock is useful for farming. Likewise milk, meat and wool etc. sidelines and supply

monitary occupations and development on livestock. Therefore, livestock is an integral part

of Indian agriculture.

Livestock in India is 17 percent of the total livestock of the world. The share of

livestock production in the Gross Domestic product of India is 6.5 to 7 percent. Hence, it is

essential to understand the problems as well as future progress of livestock.

2.1.4 Terminology :

GDP - Gross Demostic Product

2.1.5 Questions for self-study :

(A) Objective questions (selected proper alternative).

1) Livestock in India is ............. percent out of total livestock of the world.

a) 17 b) 18 c) 19 d) no one out of this.

2) In 2004-05, the share of livestock, in Gross Domestic product of India was

............. percent.

a) 7.2 b)1.2 c) 4.5 d) no one out of this.

3) Government appointed first of all in 1928 the ............. committee for

development of livestock in the nation.

a) Mehta Committee b) Bhansali Committee c) Royal Commission on

agricultural d) none out of this.

4) ............. Commission was appointed to study the present circumstance and

problems of livestock in 1976.

a) National Commission b) National Agricultural Commission c) Mehata

Commission d) none of this

5) ............. programme was started for the development of livestock in the nation.

a) Employment programme b) Indira Awas Plan c) Cow-school Development

d) non one of this.

115

State whether the following statements are True/False.

(B) Objective questions (right or wrong)

1) Livestock is the back bone of rural economy.

2) Livestock in India is seventeen percent of the total livestock in the world.

3) Livestock is a supplementary occupation to agriculture in India.

4) Occupation of maintenance of cattle can become a remedy over rural

unemployment.

5) Taking out insurance on animals is on large scale in India.

2.1.6 Self study of practice :

(A) Questions of prolonged answer.

1) Explain the importance of livestock in the economy of India.

2) Tell the present circumstance of livestock in India.

3) Give an explanation of progress of livestock in India.

4) Explain the problems and remedies of livestock in India.

5) What is livestock ? Explain the importance of livestock in the nation.

(B) Write short notes on the following.

1) Types of livestock

2) Importance of livestock

3) Problems of livestock

4) Measures to resolve the difficulties of livestock

5) Present condition of livestock in the nation.

2.1.7 Answers of objective questions :

(A) 1) a 2) a 3) c 4) b 5) c.

(B) State whether following statements are true / false.

1) right 2) right 3) right 4) right 5) wrong.

2.1.8 Zonal Functions :

Count out the livestock in your area and study its usefulness, problems and remedies

there upon.

2.1.9 Reference :

1. Bansil, P. C. : "Animal Husbondry and Dairying" Agricultural problems of India, PP

395-423.

2. Chennakrishnan P. : (2011), "Diary Industry and Rural India." Published in A Jornal

of Agricultural and Rural Development October 2011, vol. 38. No. 10, Edited by Dr.

N. Mahalingam.

116

3. Datt Ruddar and Sundharam K.P.M. : (2008) "Indian Economy", Fifty-seventh Edition,

Published by S. Chand and Company Ltd. Ramnagar, New Delhi - 110055.

4. Kathiravan, G. and Selvam S. : (2011), "Analysis of Construints to livestock production

in Tamilnadu", Published in Indian Journal of Animal Research, Vol. 45, No. 1, 2011,

Agricultural Research Communication Centre, March 2011, Edited by Ahlawat S.P.G.

5. H${d_§S>i {dO`, ""H¥$fr Am{U J«m_rU AW©emó'', lr. _§Joe àH$meZ, ZmJnya, n¥ð> Z§. 453-469.

6. Khatake D. R., "Economics of Sheep and Goat rearing in Maharashtra (unpublished

Ph.D. Thesis), Shivaji University, Kolhapur.

7. Koul, Divy Ninad, Omprakash, M. D. Shukla Gopal and Chakravarty Sumit : (2011),

"Improvement in livestock status through soil and water conservation : case of Two

semi - And Districts of Madhya Pradesh in India" Published in Indian Journal of

Animal Research, Vol 45, No. 2, 2011, June 2011.

8. Lekhi R.K and Singh Joginder : (2008), "Livestock Enterprises in India," in the book,

"Agricultural Economics (An Indian perspective) Sixth Revised Edition, Published

by Kalyani Publishers, Ludhiana, Rajinder Nugar, 141008.

9. Livestock for sustainable livelihoods, Lesia India, March 2010, PP 4-5.

10. Mamoria C. B. "Animal Husbandry Dairying and fisheries, in the book, Agricultural

problems of India, Published by Kitab Mahal, Allahabad, PP 318-353.

11. Planning Commission : (2011-12), 3-3 Disaggregated Public Sector Outlays /

Expenditure under Agriculture and Allied Activities", Statement 13, Expenditure

Budget Vol. 1, State Plan Division, P.C.

12. www.agri.coop.nicoin / Annual / report 2010-11 / Ar - pdf. "Agricultural Trade"

Ministry of Agriculture and Cooperation, Government of India.

13. www.agricultural department, Government of India, (2010-11), "Production of Milk,

Eggs, Meat and wool," Department of Animal Husbandry, Dairying and Fisheries.

14. www.nddb.org / statistical / population, india, (2012), "Livestock Population in India

by Species", last updated Feb, 29, 2012, Source : livestock censuses Department of

Animal Husbandry, Dairying and Fisheries, Ministry of Agricultural GOI.

15. www.agropedia,iitk.ac.in /? g = node / 7742.

16. www.commerce. nic.in / publications / annual report. pdf 2010-11 / Appendix / 20 /

202 pdf.

17. www.agri.coop.nic.in / SIA 111213312 pdf.

www.eands.dacent.nic.in / latest 2006.htm.

ooo

117


Agri Business



Unit 3

Inputs supplying Industry :

Progress, Problems and Prospects

3.3 Mechanical Instruments

3.3.0 Objectives

3.3.1 Introduction

3.3.2 Subject Interpretation

I) Scope of agricultural mechanization

a) Necessity of improved agricultural equipments

b) Criteria applied for improved means.

II) Meaning, defination and characteristics of mechanization of

agriculture

III) Types of agricultural mechanization

IV) Progress of agricultural mechanization

V) Agricultural machines and security

VI) Advantages of agricultural mechanization

VII) Reasons for slow mechanization of agriculture in India

VIII) Difficulties of agricultural mechanization in India

IX) Measures for increasing mechanization of agriculture

X) Correct Approach

3.3.3 Summary

3.3.4 Technical terms

3.3.5 Questions for self study

118

3.3.6 Study by oneself for prtice

3.3.7 Answers of questions of self study

3.3.8 Zonal work

3.3.9 References for additional reading

3.3.0 Objectives :

We will get the idea about following points after the study of this component.

1. We will realise the nature of Indian agricultural mechanization.

2. We will know the necessity of the mechanization in Indian agricultural.

3. We will understand the definition and the meaning of agricultural mechanization.

4. We will comprehend the types of agricultural mechanization.

5. We will grasp the obstacles, advantages and progress of mechanization in Indian

agriculture.


From ancient times farming is the main occupation of Indian people. 2/3 people of the

world are engaged in agriculture. In India, 68 percent of the population live in villages and

their chief occupation is farming. Agriculture is the primary sector in the economy and the

share of agriculture income in national income 18.55 percent. Mahatma Gandhi had declared,

"Indian agriculture is the soul of India because it is the source of livelihood of the Indian

people." Further, agriculture is the backbone of Indian economy.

The development of industries and services in India is dependent on agricultural sector

in the broad sense of the world. The progress of agriculture is essential for any plan of the

nation to be successful economically. A distincive peculiarity of agriculture in India is that,

where over 250 different crops are cultivated in its varied agro-climatic regions. Out of this

25 to 30 crops are grown in many developed countries of the world. Agriculture is an

important sector of the Indian economy which contributes about 15% of total export and

supports two-third of the total work force.

India has become the world's largest producer of various commodities and crops because

of its favorable agro-climatic conditions and rich natural resource base. For example, mango

coconut, banana, milk and milk-products, cashew -nuts, pulses, ginger and black pepper etc.

Besides, India is second largest producer of rice, wheat, sugar, fruits and vegetables.

India's food-grain production in 1951-52 was only 51 million tones. It increased to

217.28 MT in 2006-07 and 230 MT in 2008-09. We are self - sufficient today in production

119

of food grains. But the land holding is becoming very small because of higher density of

population and hereditary right in agriculture.

Indian agriculture is supposed to be conventional and the tools and implements used by

the Indian farmers are crude and antiquated.

The tools and implements, used by Indian farmers are few in number, smaller in size,

outmoded, crude, rough, simple and meaningless. For examples, the iron-shod wooden

plough driven by a pair of bullocks, the trowel and sickle for cutting the crops in harvest

time.

3.3.2 Subject elucidation :

In this component we are going to study mechanization in agriculture, its meaning,

definition, types and progress of agricultural mechaniation in India and the difficulties

encountered.

3.3.2.1 Scope of farm mechanization :

Farm mechanization becomes helpful to bring about improvement in agricultural

productivity. There are numerous factors that justify farm mechanization; we can obtain

optional yields from different crops by the timeliness of operations, which has been possible

by mechanization. For example, the sowing of wheat is done up to the first fortnight of

November. A delay beyond this period leads to about 1.5 quintals per acre decrease in the

yield by every one week. This is also true for other farm operations. Every farm work need

to performed at appropriate time otherwise the yield and the farm income is affacted adversely.

Likewise, the quality and accuracy of the operations are equally important. If all the

operation, from cultivation to threshing are done at proper time and of good quality, it results

in increasing the efficiency of the inputs and reduce the losses. For instance, sowing of the

seed at proper depth, due distance and in required proportion as well as uniform application

of given dose of fertilizer can be possible with the use of proper machine tools. But if these

operations are done by traditional methods, their efficiency is reduced.

Therefore, it becomes essential to increase mechanization in agriculture. wher farming

is mostly conventional as in India. The discussion about improved agricultural instruments

can be done in accordance with following.

a) Necessity of improved agricultural implements.

b) Criteria for improved implements.

a) Need for improved implements :

Agricultural cultivation and other operations do not take place properly and as good as

per requirment because of use of traditional instruments and tools. For instance, the indigenous

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plough does not penetrate deeply in to the soil and widely enough likewise; it takes about 10

days for ploughing one hectare land by wooden plough. Today the high yielding varieties in

general have a more critical time schedule for harvesting-threshing.

By introduction of high and intensive investment in agriculture and multiple cropping,

it has become essential to ensure the operations of satisfactory quality. It can only be

achieved by using efficient and well-adopted machinery and implements. Further, poor seed-

beads, lower cultivation; defects in sowing and paucity of fertilizers are the handicaps which

reduce the yield. The use of improved efficient and modern durable implements and tools

become necessary to overcome these handicaps. Consequential point is, during the past 40

years more efficient implements concerned are being produced in the country like tractors,

sprayers and trickle sprinkling appliances etc.

b) Criteria for improved implements :

Improved implements must satisfy following conditions.

I) Implement should be simple and handy, as illiterate farmers have to use it. (ii) The

prices of them should be within the means of average farmers (iii) The implements should

be strong and sturdy because they are handled by villagers under difficult circumstances. (iv)

The implements should be light for transportation in the villages and suitable for the animals

like bulls. (v) The design and arrangement should be such that they can be repaired in

villages and their spare parts available locally. (vi) They should be scientifically tested on a

fairly - use basis / experimentation.

II) Meaning, Definition and characteristics of mechanization in agriculture :

Farm mechanization means the use of mechanical power in farm operations. Farm

mechanization is the process of performing specific agricutural operations with the help of

suitabe machines. These were usually done either by animals or men or both. This

mechanization not only includes the use of machines for tillage operations, harvesting and

threshing, but also includes power lifts for irrigation, electric motors and oil engines, trucks

for transportation of farm produce tractors, proccessing machinery, oil processing, cotton

ginning, dairy appliances for cream separating etc.

Definition of mechanization of agriculture :

Definitions of agricultural mechanization are given a below.

1) "Agricultural mechanization or mechanical farming means use of machines in farming

operation wherever possible instead of human labour and livestock."

--- Dr. Bhattacharya.

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2) "Instead of conventional implements of agriculture (wooden plough, tools, bullock

cart, a big leather bag for drawing water from well, sickle-scythe etc.) for increasing total

agricultural production without human labour and livestock in farming maximum use of

machine power means mechanization of agriculture."

--- Dr. Gangadhar Kayande-Patil

Characteristics of agricultural mechanizaton :

1) The use of innovative implements (tractors, electric motors, harvesters etc.) instead

of traditional appliances in farming.

2) The use of machines, power and electric power increases in various processes of

agricultural production by mechanization.

3) The use of human labour and livestock power is restricted by mechanization.

4) Mechanization is useful in big and extensive landholdings.

5) The use of machines is limited because of inadequate capital with Indian farmers.

6) Mechanical farming is not possible in small land holdings...

III) Types of agricultural mechanization :

a) Mechanization of agriculture may be competitive or supplementary as per the

conditions prevailing in a country. In India, where abundant labour supply exists it might be

supplementary. While in a country having scarce labour force, the main objective of

mechanization is to compete with human labour.

Primarily, mechanization is of two types.

1) In perfect mechanization all the agricultural operation are done by the use of

machines and

2) Imperfect mechanization is that where some operations are done by machines and

other without them.

In India, China, South America and many countries of Asia and Africa continents

agricultural mechanization is limited. Because there exists abundant labour supply on one

hand and small land holdings, fuel scarcity and universal poverty on the other.

b) Agricultural machines mainly in use in India :

1) Tractor -- Farming can be done without wooden - plough, bulls, bullock-cart.

2) Seed sowing and manure pouring machine - machine with various different holes for

Sowing and manure pouring at the same time.

3) Crop cutting and threshing machine, crop cutting and thesting, both the processes

perpetrating machine.

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4) Spraying machine / spray - Spray of germicide and weeds destructive. In an extensive

area of the same crop spraying is done after dividation.

5) Electric Motor pump, oil engine - Machine which is useful to pull up water from

well river or canal.

6) Sugarcane cutting machine Sugarcane cutting and loading in truck / trailer machine.

7) Once again sowing of rice machine - rice plants uprooting and sowing elsewhere.

machine.

All these machines can be dividend into following two divisions.

a) Pulling (something) machines.

b) Study / constant machines.

Moreover, following improved implements are important in agricultural mechanization.

These are developed by various universities in which the role of Marathwada agriculture

University, Parbhani is most important. Therein Rubblish collecting machine, pod shell

machne, Multiple instruments carrier, manure and seeds sowing machine, Groundnut sowing

machine, Liquid manure providing machine, Groundnut drawing machine, Hand instrument

of uprooting grass and weeds, same hand instrument with wheels, plough, Instrument of

providing fertilizer to crop, Sickle, trowel, manure and seeds sowing machine, etc.

IV) Progress of agricultural mechanization :

a) Mechanization has become as one of the important elements of modernization of

agriculture all over the world. It is recognized that use of mechanical power and improved

agricultural implements achieve high levels of land productivity. The case of Punjab and

Haryana is the best example. Government of India conducted a Long-term Mechanization

strategy for each Agro - climatic Zone / State. The study confirms that in those states, where

agricultural mechanization has made good progress, its benefits are being shared by all

farmers, irrespective of the size of their operational holdings and whether they own equipments

like tractors and machinery or not. Nevetheless, the progress of mechanization is slow in

most of the states. The costly inputs like seeds, fertilizers, plant protection chemical and

water supply etc. are not reached to majority of farmer as per requirement.

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Tabe 01

Sr.No. Particulars 1956 1961 1970 1980 1986 2003

1. Tractors (lakhs) 0.21 0.31 1.00 4.73 8.88 9.12

2. How many tractors used N.A. 20 60 279 507 734

on the land of broad on

lakh hectares cultivated

area.

3. Oil pumps (lakhs) 1.23 2.30 N.A. 29 37.70 41.92

4. How many Oild pumps N.A. 151 N.A. 1957 2155 2412

used on the land of one

lakh hectares broad

cultivated area.

5. Electric pumps (lakhs) 0.47 2.00 13.45 40.00 60.00 76.00

6. How many pumps used N.A. 131 817 2286 3430 4240

on one lakh hectare

broad agricultural land

7. Electricity used for N.A. 5.5 23.0 71.0 140.0 183.0

agriculture for every

thousand hectares of

broad cultivated area.

Source : Dr. Kayandle Patil Gangadhar V. : (2004)

"Agricultural Economics - Theory and Policy", Chaitnya Publications, Nashik - 13, PP

3.27, 2.28

'Table 01 reveals the fact that mechanization of agriculture is increasing. However, use

of tractors on large scale is restricted by sub-division and fragmentation of land. The use of

diesel engines for pulling out water form wells has been increased. But from 1990 onwards

use of electric pumps increased and engines decreased. In 1961, there were only 13 : electric

pumps in 1 lakh hectares of land, it increased to 4240 in 2003. In the same period, in equall

land number of tractors increased from 0.31 to 9.52.

Since the demand of tractors increased, attention was concentrated on the production of

tractors. Central tractor organization was established for transferring waste land into cultivable

land. Likewise, State Farms Corporation of India was established for doing modern agriculture.

124

Besides, farmers are inspired by showing demonstrations of agricultural mechanization.

Agricultural Industries Corporations were set up in all the states for providing agricultural

equipments to farmers. Rural Electrification Corporation was set up in 1969. Educated youth

were motivated for setting up Agricultural Service Centres for providing agricultural technology

to farmers.

In 1956, 10,700 tractors were in use in agricultural occupation. While in 1996-97 the

use of them increased to 1,91,000 tractors and 10,000 power trailers. Similarly, use of

fertilizers was 2.9 lakh MT in 1960-61, it increased to 164.5 lakh MT in 1996-97.

We can study the status of agricultural equipments industries as following.

The Status of agricultural equipments industries in India.

In India, mechanization of agriculture is increasing. Therefore, status of agriculture

equipments industries has become prominent.

Tabe 02

Equipments Numbers of Industrialists

Agricultural tractors 13

Power tillers 02

Earth movers 03

Pumps 600

Sprinkler set 35

Drip irrigation system 35

Plant protection equipment 300

Combines 48

Reapers 60

Threshers 6000

Seed drills 2500

Plough, cultivators and harrows 5000

Tractors parts and accessories 546

Earth moving machinery and parts 188

Diesel Oil engines 200

Rice processing machinery 300

Sugarcane crusher 50

Chaff cutter 50

Dairy and Food industries 500

Village craftsmen 1 million

Source : 1. http://agricoop.nic.in/farm% 20 Mech.% 20 PDF/05024-09. Pdf Agricultural machinery industry in

India pp 166 accessed on 15-07-2009.

125

The appearance of agricultural equipments industries in India has been made clear in

table 02. In accordance with, it seems that following many industries occupations are

established and they became considerably useful to agricultural development. They are

equipments for cultivation, growth of crops water supply, electic power and engines, processing

of agricultural production etc. agricultural operation and various equipments required for

dairy farming and their spare parts. In addition, availability of skilled craftsmen is taking

place.

V) Agricultural machinery and safety :

For developing safe equipments and to follow measures for minimizing accidents in

agriculture, realistic data on these accidents is necessary. Hence, an agricultural accident

survey was carried out during 2004 to 2007 in many villages in seven states - Tamilnadu,

West Bengal etc. Accordingly, of the total accidents reported, 30.5% were due to farm

machines, 34% due to hand tools and 35.5% due to other reasons.

Some of the following safety gadgets were developed to minimize accidents in

agricultural activities.

1) Safety gadgets for chaff cutters and sugarcane crushers.

2) Safety cover for pedal operated paddy thresher.

3) Belt and chain type conveyor feeding system for high capacity thresher.

4) A tractor trailer with brakes and other safety features.

5) Lighting system with turning indicators for tractor trailers.

6) A safety covers for open / tube well.

VI) Advantages of mechanization of agriculture :

1) Large scale production in agriculture can be achieved.

2) Many types of crops can be taken in farm - land.

3) It helps to solve the problem of foodgrains by increasing total production.

4) Development of rural area takes place by agricultural mechanization.

5) It results in an increase in the speed of doing work as well as efficiency of farmer.

6) Total expenditure of farming decreases.

7) Farmers can save the time and unnecessary expenses.

8) Agricultral occupation becomes commercialized and total income of agricultural

occupation increase. Thereby, standard of living of farmers raises.

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9) Use of an animals in various operations of farming and related works decreases and

therefore the expenses thereupon are somewhat saved.

10) Natural responsibility concerned with agricultural occupation is lessened.

VII) Cases for slow progress of mechanization of agriculture in India.

In accordance with the study made by Verma Singh and Mittal the main obstacles of

farm mechanization are given below under three heads.

A) Research Development testing :

The equipments which are required to develop include :

1) Equipment for dry farming areas.

2) Equipment for small and marginal farmers for efficient seed-bed preparation, seeding

harvesting etc.

3) Efficient hand tools for weeding and hoeing.

4) Rotary tillage equipment such as rotavator and auger plough.

5) Till-plant machines, i.e. equipment which can prepare the seed-bed simultaneously.

6) Paddy transplanting equipment.

7) Efficient fertilizer broad-casters and applicator.

8) Harvesting equipment such as reapair, binders, combines etc.

9) Equipment for cotton mechanization, viz. planters, cotton picking devices, cotton

stick puller etc.

10) Machine for sugarcane mechanization, viz, sugarcane planter, stalk-shaker, sprayers

etc.

11) Multi-purpose seeding and planting machine.

12) Multi-crop threshers with capability to thresh wheat, paddy, maize and pulses

together with an optional bhusa making attachment.

13) Sprayers and dusters for tall crops like cotton, sugarcane as well as for orchard

spraying.

14) Equipment for vegetable and fruit mechanization like pit-hole digger, portable

chain saw, universal fruit grader, orchard tiller etc.

B) Manufacture, standardization and quality control :

There are about 300 firms engaged in fabrication and manufacture of farm equipments

in the state. Main problems regarding this indicated are :

1) Poor quality and durability of the equipment.

2) Lack of an organization for quality making.

127

3) Lack of incentive for adoption of standardized design.

4) Lack of legislative measures to ban firms manufacturing sub-standard and hazardous

equipment.

5) Non-employment of qualified engineers.

6) Lack of moderation of manufacturing processes and tooling.

C) Education and training of farm equipment :

1) Indequate training in facilities for farmers, skilled operators mechanics and rural

artisans.

2) Lack of adequate incentive for the small and marginal farmers to adopt improved

machinery by way of subsidized cost, low interest rates etc.

3) Inadequate repair and service facilities for tractors and farm equipment in rurual

areas.

4) Excessive excise duty and taxes especially on the tractors, diesel and lubricants.

5) Lack of cheap and quality equipments for the small farmers.

VIII) Constraints in mechanization of agriculture in India :

It is a matter of fact that farm mechanization raises agricultural production and

productivity in a short time. Thereby improves standard of living of cultivators, neverth less

in India it is preferable to have mechanization in respect of specific operations, instead of

universal mechanization. For example, any ordinary answer Yes or No, in respect of cultivation,

drawing of water, etc.will be unscientific and unsuitable guidance. Mechanization is an

alternative method of doing some work. Therein, power of machine is used instead of human

labour and animals.

The difficulties in agricultural mechanization are as follows.

1) Small size of land and scattered holdings of the farmers is the main obstacle in the

way of mechanization. In many places the land of a farmer is to be counted in Guntha's. Use

of tractor in those lands becomes impossible. Farm machinery generally remains underutilized.

2) Majority of small cultivations are poor. They are not in a position to purchase the

costly machinery like tractors, combine harvesters etc.

3) The farm machinery have large turning radius and therefore comparatively larger

farm is required for economic use. Thus, small land holder remains deprived of mechanization.

4) Mechanization may lead to structural change in agriculture and the farm labours

came out of land have to search for another employment.

5) Lack of proper knowledge of farmer to purchase farm machinery, operate and

maintain it properly leads to wrong choice, makes it uneconomical and risky too.

6) There is a great shortage of diesel in the country. Therefore to use so extensive oil

based farm machinery is not desirable.

128

7) Remote rural areas are lacking in repair and replacement facilities. It is a great

hindrance in efficient small farm mechanization.

8) Farm machinery remains idle for much of the time in the year due to seasonal nature

of agriculture. Thus, it means unnecessary high costs unless proper alternative use of such

machinery is made in the off-season.

9) In a developing country like India there is dearth of skilled and experienced machine

operators.

IX) Measures for increasing agriculture mechanization :

It is obvious from above interpretation that it is essential to study carefully the

mechanization of agriculture, on all the levels, i. e. government, producer, mechanic and

farmers. Mechanization in India agriculture is the need of time. But its use has to be viewed

from angles of unemployment problems of human and animal force and vast majority of

small and uneconomical farms. Inter-regional variability is very high in India, therefore it

becomes important to rationalize and improve the existing farm machinery for easy distribution.

There is no separate National policy on agricultural mechanization in India. However,

this aspect is covered under the agricultural policy of the control government. In accordance

with that mechanization is promoted to achieve the following goals. 1) Agri. Mechanization

should lead to a sustainable increase in yields and cropping intensity with the objective of

meeting the planned growth rate in agricultural production. 2) The income of agricultural

workers should increase to a satisfactory rate, so that the disparity between urban and rural

incomes is destroyed and they get opportunity to lead a dignified life. 3) The benefits of it

should apply to all types of farmers i. e. big, small and marginal farmers. 4) It should create

a friendly environment, especially for women workers by reducing hard labour, health

hazards and improve safety in production operations. 5) It should lead to a decrease in cost

of production and impart a price advantage while competing for export in the international

market and thereby increase the income of farmers.

Suggestions to promote farm mechanization / measures :

1) Suitable farm machinery and equipments for small and marginal farmers need to be

developed and should be supplied with less price to the farmers, by subsiding them.

2) Adequate loans for purchase of farm machinery and for repair should with less

interest rates be provided.

3) Technical know-how should be provided to the farmers with respect to appropriateness

of farm machinery for the situation and for its proper use.

4) A standardization and quality making cell for farm equipments should be established

in the states.

5) Regular supply of petrol, diesel, oil and grease should be ensured.

6) The farm machinery suitable for different types of soil and operations for important

crops should be developed.

129

7) The selected farm equipments should be imported to cut down expenditure and time

on research.

8) Polytechnical training centres should give more training relating to farm machinery

and equipment.

9) The equipments bearing certificate marking should be provided incentives.

10) The excise duty and other taxes on tractors and other machinery and equipments

should be reduced. Similar tax cut should be explored for petrol and diesel.

11) More and more service units should be encouraged and mobile service units should

be statred.

12) Emphasis should be given on safety of machines.

13) There should be control on subdivision and fragramentation of land.

14) Government policy should be conducive to machanization of agriculture.

15) It is essential to enlighten the farmers by giving training to them.

16) Cooperative farming societies should be given incentives so that the different

effects and economical use of farm machinery is made.

X) Correct Approach :

III - based arguments against farm machanization are not important. But there is no

dispute regarding the need to boost the agricultural production to stabilize the economy. It is

true that production cannot be enhanced with primitive and convential operations. It is clear

from the above interpretation that partial machanization is the need of the hour to raise the

agricultural production to meet the basic domestic food requirements. In other words,

considering the huge size of population, a policy of limited machanization will be most

suitable where the labour displacement effects will be minimum. Unrestricted machanization

of agriculture is not beneficial to our country. Because it will severely worsen the rural

unemployment problem. As such a policy of selected machanization is the best pathway.

3.3.3 Summary :

Agricultural production and income increases by machanization of agriculture.

Agricultural machanization in India is partial. Similarly, even today farming in India is done

by traditional methods, i. e. by the use of human labour and animals.

The progress of agricultural machanization in India is very slow.

3.3.4 Questions for self-study :

(A) Select proper alternative of the following.

1) In India agriculture there is ............. mechanization.

a) Partial b) completely c) in proportion d) not out of these

130

2) Farming done with the use of human labour and animals is called .............

farming.

a) Mechanical b) traditional c) in proportion d) not out of these

3) Cost of production in agriculture decreases by mechanization and it leads to

development of ................

a) Industry b) service setcor c) agriculture d) not out of these

4) ............... is restricted by the small size of land

a) Mechanization b) industry c) service sector d) not out of these

5) Economic weakness is the big obstacle in .................

a) Human being b) conventional farming c) mechanization d) not out of

these

(B) Objective questions (Answer the question right or worong).

1) Mechanization increases unemployment in agriculture.

2) Agricultural mechanization is on a large scale in India.

3) The speed of mechanization in Indian agriculture is slow.

4) Cost of production decreases by mechanization.

5) Human labour and livestock is used on large scale in mechanization.

3.3.5 Study by oneself for practice :

(A) Long - answer questions.

1) Briefly explain the mechanization of agriculture in India.

2) What is Mechanization? Clarify its merits and demerits.

3) Elucidate the type of mechanization in India.

4) Review the progress on agricultural mechanization in India.

5) What are the reasons of slow progress of agricultural mechanization in India.

6) Discuss the abstructions in agricultural mechanization in India.

(B) Short - answer questions.

1) Mechanization of agriculture.

2) Progress of agricultural mechanization in India.

3) Problems of agricultural mechanization in India.

4) Advantages of agricultural mechanization in India.

5) Meaning of agricultural mechanization.

131

3.3.6 Answers of objective questions :

(A) Select proper alternative of the following.

1) a 2) b 3) c 4) a 5) c.

(B) Answer the question right or wrong.

1) right 2) right 3) right 4) right 5) wrong.

3.3.7 Field work :

Obtain information about agricultural mechanization in your district with the help of

secondary resources and prepare a report.

3.3.8 Reference :

1. Alam, Anwar : "Future Requirements of Agricultural machines for mechanizing

agricultural." Dy. Director.

General [Agril. Eng.], Indian Council of Agricultural Research, New Delhi.

2. Bansil P. C. : (1981), "Agricultural Problems of India," fourth Revised and enlarged

Edition : Published by -

Mohan Primlani, Oxford and IBH publishing co. 66 Janpath, New Delhi - 1100010.

3. Department of Agricultural [8-11-2008], "Development of Agricultural and

Cooperation", frequently Asked Questions [FAQS], Agricultural Implements and

Machinery Division,"

http://agricoop.nic.in/faq/machinery.htm. Page 1 to 14

4. Dr. Desai R. G. (2001), "Agricultural Economics," Published by : Himalaya Publishing

House, Mumbai.

5. FICCI : "Agricultural Machinery sector in India", Federation of Indian chambers of

commerce and Industry, Federation House, Tansen Marg, New Delhi, India - 1100001,

[www.ficci.com]

6. INDO - ITALIAN Chamber : [April 2008], "Overview of the Agricultural Machinery

Sector in India."

Head Office : 502, Bengal, Chemicals Compond, Veer Savarkar Marg, Prabhadevi,

Mumbai 400025, India.

7) ITALIA [Italian Trade Commission] : (profile 2010)

"Agricultural Mechanization in India", [www.ice.gov.it/paesi/asia/India/upload/182/

agricultural %20 mechanization % 20 in % India % 20 profile 2010 pdf.]

8) H$m`Xo-nmQ>rb J§JmYa {d : (2004), ""eoVrMo AW©emó, H¥$fr AW©emñÌ, eoVrMo AW©emó - {gÕm§V

Am{U YmoaU'' M¡VÝ` npãbHo$eÝg, 1513, n§M_, gmdaH$a ZJa, J§Jmnya amoS>, Zm{eH$ - 13.

132

9) Kulkarni S. D., "Mechanization of Agriculture Engineering (CIAE), Bhopal - 412038,

[www.unapeaem.org/Activities % 20 files / Aa 90105 th Tc / PPT / in - doc.pdf.

10) Ledhi, R. K. and Sing Jogindar : (2008), "Agricultural Economics [An Indian

Perspective] Kalyani Publishers, Ludhiana - 411008.

11) Menoria C. B. : (1979), "Agricultural Problems of India," Ninth Edition, Published

by Kitabl Mahal, 15, Thornhill Road, Allahabad, India.

12) Mussaida, Praveen Kumar, "Increasing field Efficiency of farm Machinery Using

GPS." Agriculture Today, The National Agricultural Magazines, Auguest -2011,

Volume XIV, No.8.

13) Sadhu A. N. and Sing Amarjit : (1999), "Fundamentals of Agricultural Economics",

Published by , Mrs. Meena Pandey for, Himalaya Publishing House, Ramot, Dr.

Bholerao Marg, Girgaon, Mumbai -400004.

14) Sing Jogindar, "Scope, Progress and constraints of farm Mechanization in India",

professor- cum Head, Department of Economics, Punjab Agricultural University,

Ludhiana,

Source : www.agri.coop.nic.in/farm % 20 mech. % 20 pdf / 05024-03 pdf.

15) The fifth Session of the Technical Committee (TC) of UNAPCAEM and Export Group

meetig on Application of Agricultural Machinery for sustainable Agricultural in the

Asia - Pasific Region 14 - 16, October 2009, Los Banos, The Philippines.

[www.unapcaem.org/PPT/in2009 - 10 PI pdf]

16) Verma S. R. "Impact of Agricultural mechanization on production, productivity,

cropping Intensity, Income Generation and Employment of labour." Prof. [Agri.Engg.]

and Ex.Dean College of Agril.Engg. Pubjab, Agricultural University, Ludhiana.

[www.agri.coop.nic.in/ farm % 20 mech. % 20 pdf / 05024-08. pdf.]

17) Various website : gov.it / paesi / asia / India / upload / 182 / Agricultural % 20

mechanization %20 in % India % 20 profile 2010. pdf.

ooo

133

B. A. Part-III : Economics Paper-8 (B) (Old) Paper-11 & 16 (B) (New)

Tax and Tax Consultancy



Unit-2.4 Tax Administration in India

INTRODUCTION

Taxation is the biggest source of public revenue of the government. The

Department of Revenue functions under the overall direction and control of the

Secretary. It exercises control in respect of matters relating to all the Direct and

Indirect Union Taxes through two Statutory Boards namely, the Central Board of

Direct Taxes (CBDT) and the Central Board of Excise and Customs (CBEC). The two

Boards were constituted under the Central Board of Revenue Act, 1963. At present,

the CBDT and CBEC have six Members each. Each Board is headed by a Chairman

who is also ex-officio Special Secretary to the Government of India.

The Department of Revenue administers the various Acts (i.e. Income Tax Act.,

1961, Wealth Tax Act 1957, etc.) and looks after the matters through the subordinate

offices. An organisation Chart of Department of Revenue is given bellow :

134

135

CENTRAL BOARD OF DIRECT TAXES (CBDT)

The matters relating to the levy and collection of all Direct taxes are looked after

by the Central Board of Direct Taxes (CBDT). The, CBDT created by the Central

Boards of Revenue Act 1963, is the apex body entrusted with the responsibility of

administering direct tax laws in India. The CBDT consists of a Chairman and six

Members. It is the cadre controlling authority for the Income Tax Department. In its

functioning, the CBDT is assisted by the following Directorates:

(i) Directorate General of Income Tax (Administration)

(ii) Directorate General of Income Tax (Systems)

(iii) Directorate General of Business Process Reengineering (BPR)

(iv) Directorate General of Income Tax (Legal & Research)

(v) Directorate General of Income Tax(Training)

(vi) Directorate General of Income Tax(HRD)

(vii) Directorate General of Income Tax(Vigilance)

Various Chief Commissioners of Income Tax stationed all over the country

supervise collection of direct taxes and provide taxpayer services. Director General

of Income Tax (DGIT) supervise the investigation machinery, which is tasked to curb

tax evasion and unearned unaccounted money. DGIT(Exemptions) supervise the

work of exemption and DGIT. Director General of Income Tax are assisted by

Commissioners of Income Tax within their jurisdictions. Commissioners of Income

Tax also perform appellate functions, adjudicating disputes between taxpayers and

assessing officers.

The Income Tax department has presence in 530 cities and towns across India.

With a taxpayer base of around 3.5 crore, the Income Tax department interfaces with

almost every urban family in the country. However, in India, the poor state of tax

administration has been a major reason for low level of compliance and high compli-

ance cost. The Kelkar Committee Report stresses the expenditure on tax payer

service should be increased from 1 per cent to 5 per cent of total expenditure on tax

administration. This is a Statutory recommendation. The most important reform is in

tax administration (Tax administration is tax policy – 1990). Making a transition of

information based tax administration, online filing of tax returns, compiling and matching

information are extremely important.

With modern information technology as a key driver, the CBDT is implementing

a comprehensive computerization programme in the Income Tax Department, which

is aimed to establish a taxpayer friendly regime, increase the tax-base, improve

supervision and generate more revenue for the Government.

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CENTRAL BOARD OF EXCISE AND CUSTOMS (CBEC)

The matters relating to leavy and collection of Customs and Central Excise

duties, Service Tax and other Indirect taxes fall within the purview of the CBEC. The

Department is also facilitating taxation reforms in the indirect taxes sector for goods

and services in co-ordination with the States. These cover an extended ambit,

encompassing the switch-over from erstwhile State Sales tax to Value Added tax,

phasing-out of Central Sales tax, rationalization of Additional Excise duties on goods

of special importance, and eventual evolution of a frame work for dual Goods and

Service tax.

Reference Books.

M. Govind Rao, Tax System Reform in India : Achievements and Challenges Ahead,

National Institute of Public Finance and Policy, New Delhi.

Lekhi R. K., Public Finance, Kalyani Publishers, New Delhi, 2002.

www.finmin.nic.in

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Unit-3

Federal Finance in India

3.4 Problems of Federal Finance in India

Introduction :

In India we have adopted the federal system of Government. In federal system

there is a clear cut division of legislative, executive and financial powers between the

central and the states. In India there is a constitutional division of power between the

central government and various state governments. The constitution provides for the

appointment of the finance commission for every five years to determine the distri-

bution of certain union tax proceeds between the union and the states. However the

financial relations between center and states have not been satisfactory over the

years. In this unit we have focused on major problems of federal finances which are

related to the India.

Generally we can say following types of major problems in Indian federal sys-

tem.

A) Increasing Dependence on Centre : In Indian federal system the taxes

which are assigned to states are less elastic and very less productive. For example,

taxes on land, motor vehicles, agricultural income etc., which are assigned to states

are generally less elastic than central taxes. As a result that states have become

more and more dependent on centre financially. The demands of the states are very

high, and the capacity of the centre is very limited. There have been growing conflicts

between these two sets of Governments. The conflict is more severe where different

political parties are in power at the Centre and the States.

B) Elasticity of Centre’s and States Revenues : Though various finance

commissions have attempted to transfer larger and larger resources to the States,

the States have always complained of inadequacy of resources. There is a grain of

truth in these complaints. It is a naked fact that over the years, there has been a

buoyancy to the central revenues. Tax revenues of the Central Government is very

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elastic. On the other hand the revenue sources of the state do not yield much. On the

whole, the tax revenue of the states is very inelastic.

C) More Responsibilities on States : Looking to the expenditure said the

centre has a few, though important, heads of expenditure such as Defence, Foreign

Trade, Public sector enterprises, Banking, Railways, Economic Planning etc. Many

of these heads are also revenue yielding. But the picture of the States regarding their

responsibilities and heads of expenditure are entirely different. Besides maintaining

law and order, agriculture and rural development, irrigation development, power

supply, transport, education, health etc. Considering the importance and scope of

these functions, the revenue resources left to the states under the constitution of

India and by the planning commission appear to be inadequate. Our constitution has

been responsible for creating financially week states.

D) Improper Estimation of Resource Gap : In regard to grants in aid recom-

mended by financial commission to help states to reduce their budgetary deficits, the

major difficulty relates to scrutiny of budgetary forecast of the states. This requires a

proper reading of the legitimate tax effort and adequate economy in expenditure.

However, these are very difficult to be determined. Low per capita tax in a state does

not necessarily mean that the tax effort is poor. To determine it the taxable capacity

has to be measured properly. This is very difficult. Hence the whole exercise remains

vegue and in most cases major reliance has to be placed on the estimates of

forecast submitted by states. The States in most cases again have shown larger

deficits through over-estimated expenditure and under-estimated tax revenues in

order to reap larger grants.

E) Failure to Reduce Regional Imbalance : The mechanism of central re-

source transfer has failed to correct horizontal imbalance among states and the

disparity in per capita incomes had been increase. Since advanced States are

economically stronger, larger part of assistance to them should go in the form of

loan, while larger part to the weaker states should go in the form of grants. This

simple principle has not been followed in the case of resource transfer to States. In

many cases, richer states received larger amount of per capita grant than poorer

states.

F) Increasing Debt Burden of States : Our federal financing system is such

that the states cannot but look for finances towards the centre. Moreover, the

assistance comes in the form of loans and grants to the disadvantage of states. Of

the total financial assistance from centre, 70 percent comes as loan and only 30

percent comes as grants except in case of a few states like Jammu and Kashmir,

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Assam. Since government functions have been multiplied with passage of time and

since their own resources have remained limited, the inevitable result in increasing

debt burden of states.

G) Arbitrary in Resource Transfer : For most of the period of planning, the

transfer of resources by the planning commission was not bassed on any objective

criterion particulary on non-statutory account. Every thing depended on what the

center considered justified for an individual State. The states were required to get

plan assistance for certain schemes according to plan priorities. In practice however

the planning commission used to send schemes with per-determined grants and

loans. Since there were no objective criteria behind such central transfer of re-

sources, the decisions of central authority were highly arbitrary.

H) Eroded State Autonomy : The framer of Indian Constitution were guided by

the notion of “Strong Center and Weak States.” The interference of the center in the

functions of state governments has been encouraged by the concurrent list which

contain as many as 47 items vesting all residuary powers in the center. Central

interference in law and order, education, etc. has been common scene though they

are states subjects. In this way the continued financial dependence has increasingly

eroded the autonomy of states.

Conclusion

From the above discussion of the proper division of functions and resources

shows the problem of fiscal imbalance between center and states Governments. It is

clear that the financial relations between the states and center government in India

is not satisfactory. The demands of states are very high and the capacity of the

center is very limited. So the conflicts and tensions between these two sets are

increasing. To overcome the above problems it is essential to proper allocation of

financial resources between state and central government.

Quastions :

I) Broad Question.

Discuss the major problems of federal finances in India?

II) Short Notes

Problems of federal Finance.

III) Objective Types Questions.

1) The constitution provides for allocation of resources between center and

states is called as ……………..

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a) Planning Comission b) Finance Commission

c) Central Budget d) Non of above

2) As compair to states the revenue sources of center are ……………….

a) More inelastic b) less inelastic

c) More elastic d) Less elastic

Ans. 1) b 2) c

Reference Books

1) Bhatia H. L. : Public Finance, Vikas Publishing House, New Delhi 1996.

2) Mankar, Shrma : Public Finance, Himalaya Publishing House, Mumbai

2001.

3) Om Prakash : Public Economics, Vishal Publishing Co. Jalandhar, Delhi

2011.

4) R. K. Lekhi : Public Finance, Kalyani Publishers New Delhi 2007.

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Unit-1

Tax Consultancy Services

1.2.3 Return Forms – Filing of Returns, E-Filing

Return Forms -

Every person being a company or a firm whether there is any profit or loss or

being a person other than a Company or a Firm whose total income for the previous

year exceeds the non-taxable limit, has to file the return of his income on or before

the due date person who is not filing the return as stated above and who is residing

in such area as notified by the Board, and who, during the previous year incurs an

expenditure of Rs. 50,000 or more towards consumption of electricity, has also to file

return before due date.

Every person being an individual or a Hindu undivided family or association of

persons or an artificial juridical person, if his total income during the previous year,

whose income before giving effect to the provisions of Sec. 10A or 10B or 10BA or

deductions under chapter VI-A of the Act. (i.e. from sec. 80C to 80u) exceeded the

non-taxable limit, then such person has to file his return of income on or before due

date in the prescribed form.

Such return should be in the prescribed form and verified in the prescribed

manner. The following are due dates for different categories of assessees.

i) Where the assessee is a company or a person, Whose accounts are required

to be audited under this Act or any other law or the working partner of the firm

whose accounts are required to be audited under this Act -30th September of the

assessment year.

ii) In the case of any other person i.e. other than those mentioned in (i) above –

31st July of the assessment year.

Filing of Returns –

The forms for filing the returns are not uniform for all the assessees. In other

150

words, each category of assessees, has to file the return in the specific form.

Therefore, as usual the following return forms have been prepared and notified by

the Central Board of Direct Taxes for the assessment year 2012-13 as applicable to

the different category of assessees.

i) ITR-1 : This form of return of income is applicable to those Individuals who are

having income from salary or pension, income from house property or income

from other sources.

ii) ITR-2 : This form of return of income is applicable to those Individuals and Hindu

undivided families. (HUF)

iii) ITR-3 : This form of return of income is applicable to Individuals and Hindu

undivided families who are partners in firms and not carring on any proprietary

business or profession.

iv) ITR-4 : This form of return of income is applicable to Individuals and Hindu

undivided families who are carring out proprietory business or profession.

v) ITR-4 S : This form of return of income is applicable to Individuals and Hindu

undivided families who are deriving income from business which is computed in

accordance with the special provision referred to u/s 44AD and 44AF.

vi) ITR-5 : This form of return of income is applicable to Partnership Firms, association

of persons, body of individuals, artifical jurisdical persons, co-operative societies

and local authority.

vii) ITR-6 : This form is applicable to persons including companies who are required

to furnish the return.

Exemptions for filing income-tax return:

The Central Board of Direct Taxes has notified that the salaried person are

exempt from filing the return of Incomes for the assessment year 2012-13 subject to

the fulfillment of the following conditions:

a) The annual income of the employee should not exceed Rs. 5,00,000 through

salary including interest up to Rs. 10,000/-.

b) Such Salary Income is to be taken after allowable deductions which should be

received from a single employer and the interest should be on deposits in a

savings bank account.

c) The assessee should supply the information of interest from bank to his employer

and should pay the entire amount of tax by way of deduction at source.

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However, the above exemptions is not available where there is refund of tax, or

the assessee has received salary from more than one employer or the notice has

already been received by employee to file the return.

Annexure No-I has been attached for filing of Income tax return form (ITR-1)

Questions of self-learning

A) Answer in one sentence

1) Who maintains filing the return of his income.

2) Who is prepared and notified of the income tax return forms.

3) Which assessees ITR-1 is applicable.

B) Write the following statements whether true or False.

1) The forms for filling the returns are uniform for all the assessees.

2) ITR-5 is applicable to partnership firm.

3) Every person has to file his return of income after due date.

Answers for self-study

A) Answer in one sentence.

1) Every Person, Company, Firm whose total income for the previous year

exceeds the non-taxable limit.

2) The Central Board of Direct Taxes is prepared and notified of the Income

tax return Form.

3) ITR-1 is applicable to those individuals / who are having Income from

salary, from house property, Income from other source.

B) Short Notes

1) Return Forms

2) Types of Income Tax Return Form

3) Exemptions for filing ITR

Reference

Websites

1) http://www.incometaxindia.gov.in

2) www.Finmin.nic.in

3) www.indiataxes.com

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Books

1) Kadkol M. B., ‘Income Tax’ Renuka Prakashan, Hubli.

2) Bhargava R. N., Indian Public Finance.

3) Ahuja G. & Gupta R., Income Tax, Service and VAT, Bharat Law House, Pvt.

Ltd., New Delhi.

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Unit-2.4 Standard Deduction and Other Concessions

Introduction :

The Income Tax Act 1961, Chapter VI A provides deduction from Gross Total

Income which can be enjoyed by the assessee in computing taxable income. These

provisions are made under section 80 C to 80 U. The aggregated income from

different heads of income before making any deductions under different concessions

is called Gross Total Income.

These deductions can be classified as below.

2.4.1 Deduction under 80 C

Upto certain limit assessee having concession which is being individual or Hindu

Undivided Family from the Gross Total Income of previous financial year. These

payments are :

I) Life Insurance Premium :

The life insurance premium of the life assured of himself, spouse or children by

any public or private insurance company which approved by Insurance Regulatory

and Development Authority is deductible.

II) Provident Fund :

The amount contributed by employees from salary is deductible under 80 C.

III) Public Provident Fund :

PPF account in the name of Self, Spouse, and children considered for deduction.

IV) Government Saving Certificate :

Amount deposited to any such saving certificate which made under notified

Government, saving certificate is fully deductible within limits of 80c.

V) Unit Linked Insurance Plan :

The contribution in the name of self, spouse or children in approved ULIF

Scheme is iligible for deduction under 80 C.

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VI) Mutual Fund :

Amount invested in Mutual Fund those approved by Regulatory Board will be

deductible.

VII) Tuition Fees :

Amount paid for tuition fees of assesses children (Max. 2) for the purpose of full-

time education in India will be considered.

VIII) House Loan Principle :

Repayment of principle amount which borrowed by the assessee from athorised

banks or Housing Development, for the purpose of residencial construction is

deductible under 80 c.

2.4.2 Deduction under 80 CCC

The amount, deposited in annual plan of LIC of India such as Seevan Suraksha

allowed for deduction beyond limits of 80 CCC.

2.4.3 Deduction Under 80 D

The amount as a premium of medical insurance paid by assessee for health of

himself, spouse, or dependent parents and child which approved by IRDA is eligible

for deductions under 80 D.

2.4.4 Deduction Under 80 DD

Those assessee belongs residents of India incurred an expenditure on medical

treatment, training or rehabilitation of handicapped dependent, amount is deductible

upto certain limit.

2.4.5 Deduction Under 80 DDB

An individual assessee or HUF incurred expenses on the medical treatment of

specified disease or ailment for himself or dependent relative, amount considered for

deduction.

2.4.6 Deduction Under 80 E

Deduction in respect of interest on loan taken for higher education from approved

bank or financial institutions should be deductible.

2.4.7 Deduction Under 80 U

Deduction in case of blind or physically handicapped person is allowed a deduction

of Rs. 50,000/- to 75,000/- which depend upon percentage of disability.

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2.4.8 Deduction Under 80 G

Amount donated is deductible upto 100 p.c. inrespect of National Defence Fund,

Prime Minister’s National Relient Fund, etc while 60 P.C. amount deductible in

respect of Prime-Minister’s Drought Relief Fund, Jawaharlal Nehuru Memorial Fund,

etc.

The following table highlights the concession limits for assessment year 2011-12.

Sr.No. Section Items Amount

1. 80 C PF, PPF, ULIP, UC, Tution Fees, etc 1,00,000/-

2. 80 D Premium of Mediclaim 15,000/-

3. 80 D.D. Dependent Handicapped Lamp-sum-severe 50,000/-

Disability 1,00,000/-

4. 80 DDB Expenditure on specified Disease for 40,000/-

himself or relatives

Senior Citizen 60,000/-

5. 80 E Interest on loan taken for Higher Education Fully

6. 80 G Donations maximum 50 to 100%

7. 80 U Permanent Handicapped severe Disability 75,000/-

1. Multiple choice questions

a) Life insurance premium will deductible under ……………

i) 80 ii) 80 D iii) 80 C iv) 80 DD

b) Premium of Medical insurance considered for deduction under………….

i) 80 C ii) 80 D iii) 80 CC iv) 80 DD

c) Provision of 80 E in respect of ……………

i) UC primia ii) Handicapped iii) Housing Loan iv) Educational Loan

2. Write short notes on

a) Deduction under 80 C

b) Deduction under 80 D & 80 DD

c) Deduction under 80 U & G

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Reference

1. Income Tax (2011-12) Dr. Vinod Singhania, Dr. Monika Singhania, Taxmann

Publications, New Delhi.

2. Income Tax (2005-06) M. G. Patkar, Phadka Prakashan, Kolhapur.

3. Income Tax Act 1961 – Taxman Publication.

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Unit-3

Service Tax and Value Added Tax (VAT)

3.2.4 Filing procedures of service tax and VAT

A) Filing procedures of service tax

We have already understood the concept of service tax. In this point we discuss

on filing procedures of the service tax.

Section 70 (1) inter alia provides that every person liable to pay the service tax

shall himself assess the tax due on the services provided by him and shall furnish to

The Superintendent of Central Excise, a return in such from and in such manner and

at such frequency as may be prescribed.

Section 70 (2) provides that the person or class of persons notified under sub-

section (2) of section 69 shall furnish to the Superintendent of the Central Excise, a

return in such form and in such manner and at such frequency as may be prescribed.

a) Manner of filing return

1. Form of return Return revised return has to be furnished in form ST-3

2. Periodicity of filing Service tax return has to be filled on a half-yearly

return basis.

3. Details to be Returns must indicate inter alia, monthwise.

furnished i) the value of taxable services charged/billed.

ii) the value of taxable service realized

iii) the amount of service tax payable/paid

4. Enclosures to return Half-yearly return in Form ST-3 is required to be

accompanied by:

i) Photo copy of counter foil of GAR-7 Challen

ii) Memorandum in Form ST3A (Where the assessment

is provisional)

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b) Due date for filing return [Rule 7 (2)]:-

Returns have to be filed on half yearly basis by the 25th of the month following

the particular half year.

For the half year Return to be filed by

1st April to 30th Sept 25th October

1 Oct. to 31st March 25th April

c) E-Filing of returns [Provision to rule 7 (2)]

With effect from 1-4-2010 electronic filing of returns has been made mandatory

for the assessee who has paid total service tax of Rs. 10 lakh or more including the

amount of service tax paid by utilization of CENVAT Credit in the preceding Financial

year.

The facility of e-filing of returns was earlier optional for the assesses.

d) Required contents and documents of service tax return:

When we filing the returns of service tax various contents and documents are

required are as follows.

i) Value of taxable service charged.

ii) Value of services which are exempted

iii) Value of services which are exported

iv) Abatement claimed

v) Value of taxable service realised for services to services already rendered.

vi) Amount of service tax payable.

vii) Amount of education cess payable

viii) Details of CENVAT

Annexure No-I has been attached for filing the service tax.

‘B’ Filing Procedure of Value Added Tax (VAT)

Due to the lack of knowledge and unawareness, the traders are not well equipped

to understand the implications of the VAT system of taxation keeping these factors in

view the State Government in order to arrange their business affairs to fall in line with

the requirements of the state level VAT, calculate and discharge their exact tax

liability under the VAT law have incorporated audit provisions in VAT acts.

162

Every trader liable to pay a VAT with the help of From No. 210. When filing the

returns of VAT various contents are required are as follows:

i) VAT Number

ii) CSTRC Number

iii) Time Period

iv) Sellers Name and Address

v) Information about tax

vi) Sellers signature

vii) Others

Steps for filing of e-Return

i) Visit the Directorate’s Website

ii) Select appropriate type of Return Form.

iii) Download Return Preparation Software for Selected Return Form

iv) Fill your return offline and generate a XML file.

v) Register and create a user id/password

vi) Login and click on relevant form on left panel and select “submit Return.”

vii) Browse to select XML file and click on “Upload” button.

viii) Click on “Print” to generate printout of acknowledgement/ITR-V Form

ix) In case the return is digitally signed, on generation of ‘Acknowledgement’

the Return Filing process gets completed.

Annexure No. II has been attached for filing of the VAT.

Self-Learning Questions-

A) Answer in one sentence.

1) Which are the due dates of filing return of service tax.

2) Who is the control authority of service tax.

3) Which form is applicable for VAT

B) True or False

1) Return of service tax has to be filed only on yearly basis.

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2) VAT is easy to administer and transparent.

3) Sales tax converted in to VAT.

4) Haryana State introduced VAT First time in India.

Answers of Self-learning questions

A) Answer in one sentence

1) 25th Oct. and 25th April are the due dates of filing return of service tax.

2) The superintendent of Central Excise are the controlling authority of service

tax.

3) Form No. 210 is applicable for VAT.

True or False

1) False

2) True

3) True

4) True

Questions for Self study

A) Broad answer type questions

1) Explain Filing procedure of service tax.

2) Explain filing procedure of VAT.

3) Explain steps for filing of e-return.

B) Short Notes

1) E-Filing

2) Filing procedure of VAT

3) Filing procedure of Service Tax

References

Books

1) Datta & Sundaram, Indian Economy, S. Chand & Company, New Delhi,

2010.

2) Kadkol M. B., Income Tax, Renuka Prakashan, Hubli.

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3) Ahuja G. and Gupat R., Income Tax, Service & VAT, Bharat Law House Pvt.

Ltd., New Delhi.

Websites-

1) www.incometaxindia.gov.in

2) www.finmin.nic.in

3) www.indiataxes.com

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Unit-4

Other Taxes and Duties

Index

4.0 Objectives

4.1 Introduction

4.2 Presentation of Subject Matter

4.2.1 Professional Tax

4.2.2 Entertainment Tax

4.2.3 Excise Duty

4.2.4 Cess and Surcharge

4.3 Summary

4.4 Glossary

4.5 Questions for self study

4.6 Answers of self study

4.7 References

4.0 Objectives

The major objectives of this unit are as follows:

l To study the professional tax

l To understand the entertainment tax

l To explain Excise Duty

l To study the cess tax and surcharge

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4.1 Introduction

Public finance deals with the income and expenditure of public authorities. In

previous chapter we have studied federal finance in India, concept of taxes, Tax

Consultancy, service tax, VAT, etc. In this unit we will try to study about some

important other taxes and duties i.e. Professional tax, Entertainment tax, Excise duty

and Cess tax and Surcharge, etc.

4.2 Presentation of subject matter

This unit covers the other taxes and duties i.e. Professional tax, Entertainment

tax, Excise duty and Cess tax and Surcharge etc.

4.2.1 Professional tax

Professional tax is type of direct taxes which is composed by the state. The state

government have been collecting revenue from taxes on income in three forms.

a) Share of the income tax levied and collected by the Government of India.

b) the agricultural Income tax and

c) professional tax.

In India the professional tax is imposed at the state level. However not all the states

impose this tax. Business owners, working individuals; merchants, and people carrying

out various occupations, comes under this tax.

Before provincial autonomy there was no tax on trade, profession, callings and

employment, but a local tax on these bases was levied in a few provinces under

Government of India Act 1969. However, the professional-tax figures in entry 60 of

the states list and Article 276 of the constitution provides that its levy shall not be

invalid on the ground that it relates to a tax on income.

The states impose tax on profession, calling and occupation. According to

constitution it appears at No. 1 of the state list. The maximum amount that can be

levied on anyone person by any state or local authority is Rs. 250 per annum, It is

a tax on professions, employments and trades. This tax is not levied on the poor

people which is a good feature of the act. But if there are discriminations in favour

of men with unearned income such as pensioners, persons having income from

investments or house property or agricultural income of business, such as exemption

can hardly be Justified. The tax is charged at a flat rate from all people falling within

a particular class and therefore that burden of the tax falls more heavily on the poor.

Another unfair element of this tax is that it is imposed on lower and middle class and

167

it favours unduly rich people with unearned income. This tax has been in vague for

more than 20 years or so but it has not been a very successful Source of revenue

to the state governments. That is why the taxation Enquiry commission (1953-54)

recommended that this tax be reserved for the local bodies.

Profession tax is paid by every employee working in public and private

organization. The tax is deducted by the employer every month. It is mandatory like

income tax. Assessee can get income tax exemption for this paid contribution in the

manner of professional tax. The professional taxes are charged on the incomes of

individuals, profits of business or gains in vocation. The professional taxes are

classified under various tax slabs in India. Professional tax is kind of an income tax

collected by state governments in India. Different states have different rate and

methods of collection. The Indian states has not adopted same methods and rates

of professional tax.

The position of the professional tax was as given in table No. 4.1

Revenue from professional tax income Received by the States

Years 1951-52 1960-61 1970-71 1980-81 1996-97 2006-07

Rupees in crore 0.1 0.4 3.1 60.00 830 2700

The revenue from professional tax increased from Rs. 0.1 crore in 1951-52, to

Rs. 04 crore in 1960-61, Rs. 3.1 crore in 1970-71, Rs. 60 crore in 1980-81, Rs. 830

crore in 1996-97 and to Rs. 2700 crore in 2006-07 (Budget)

Professional Tax Rates in Maharashtra

As per Maharashtra professional tax Act of 1975. The purpose is to collect

revenue for the purpose of implementing employment guarantee scheme. The following

professional tax slab are shown in – Table No. 4.2

Income Monthly professional tax

Less than Rs. 2500 Nil

Between Rs. 2500-3500 Rs. 60

Between Rs. 3500-5000 Rs. 120

Between Rs. 5000-10000 Rs. 175

Above 10000 Rs. 200 (Rs. 2500 Yearly)

Source – http/business, Mapsofinance.com/India.tax-1structar/siar.html

168

4.2.2 Entertainment Tax

The entertainment tax was first introduced in Bengal in 1922. The State

Governments have been empowered to levy this tax under the Government of India

Acts of 1919 and 1935. The constitution of India 1950 under entry 62 of list II of the

7th schedule also empowers. State Government to levy this tax. This tax is very

simple and charged at prescribed rate on the value of the tickets to place of

entertainment, e.g. Race Courses, Theaters, Cinema Shows, Circus, Sports etc. The

tax is thus confined to entertainment of the people and where admission is by tickets,

are required to pay tax. The bulk of the revenue from this source is provided by the

cinemas.

The show tax is a tax each show conducted by the exhibitor and it falls on him.

While the burden of the entertainment tax is borne by the Cinema ghars. Tax is

collected either in cash or through special adhesive Stamps. However entertainment

offered for charitable or religious purposes or for educational or propaganda, purposes

or for development of agriculture, industry of public health, are exempted from this

tax. The organizers or proprietors of the entertainment shows are responsible for the

entertainment tax in India. In India movie tickets, large commercial shows and large

private festival celebrations may incure an entertainment tax. Basically entertainment

tax is divided in to following categories:

1) Tax on Cinema Theatres and multiplex.

2) Tax on entertainment betting

3) Tax for various invitee programs

4) Tax schemes designed for amusement parks

5) Tax on Direct to home service (DTH)

6) Tax on video parlours and parks

7) Tax on cable television networks

8) Other sources of entertainment including pools, circus, stage drama, horse

racing.

Problems of evasion arise in comparatively large magnitudes in respect of

entertainment tax. In a number of states the entertainment tax collected by the state

governments is passed on to the local bodies.

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The growth of revenue from entertainment tax is given as follows:

Table No. 4.3

Revenue From Entertainment Tax

Years 1951-52 1961-62 1970-71 1979-80 2004-05

Rs. In crores 6.4 9.8 57.5 200.07 969

The revenue from entertainment tax has increased from Rs. 6.4 crore in 1951-52 to

Rs. 9.8 crore in 1961-62, Rs. 57.5 crore in 1970-71, Rs. 200.07 crore in 1979-80 and

Rs. 969 crore in 2004-05.

The entertainment tax is a major source of revenue for the government. It also

has a great contribution towards the publicity of Indian arts that portrays ancient

culture and various sports. The entertainment tax in India is levied upon the organizers

or proprietors depending on the types of shows being organized. The entertainment

Industry in India is facing the challenge of double taxation on such transactions.

4.2.3 Excise Duties :

The commodity taxation is a source of Revenue to the Central and State

Governments. It consists of import duties, export duties and excise duties. The

excise duties/taxation means indirect taxation. The Commodity taxation is undesirable

on welfare grounds. Such taxes raise price and change the expenditure pattern of

the taxpayers. An excise duty is a type of tax charged on goods produced/within the

country. It is a tax on the production or sale of a good. There are two types of excise

duties one is central excise duties and second is state excise duties.

Defination

“An excise tax is described as an indirect tax levied and collected on the goods

manufactures in India.”

An excise duties main purposes are public safety and health, public morals,

environmental protection and National defence.

Types of excise duties:

1) Central Excise Duty :

The Central excise duties are also major source of tax revenue of the Government

of India. Soon after Independence, the Government felt the need for additional

revenue for purposes of economic development and it found in excise duties a very

good source of revenue. These duties are livied by the centre on commodities which

are produced within the country. But commodities on which state government impose

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excise duties like liquor and drugs, are exempted from the Central Excise duties.

Initially Sugar, Cotton mill cloth, tobacco, motor spirit, cement etc. were the goods

which yielded the maximum revenue by way of excise duties. In recent years excise

duties have covered a large number of goods and the duties already levied have

been increased.

Extension and Development of Excise Duties :

The Central excise duties levied in India have passed through the following four

distinct phases”

i) Reliance on taxation of relatively few products mostly in the nature of

finished consumer goods;

ii) Extension of tax net to inputs in preference to finished products.

iii) Taxation of widening range of consumer products but on a selective basis.

iv) Extension of a tax base to cover all industrial products except those

deliberately excluded.

Kinds of Excise Duties

There are three types of excise duties which are imposed by the Government.

i) Basic Excise Duties

Basic Excise duties are levied and collected under the Central Excise and Salt

Act, 1944 by the Central Government of India. At present Central Excise Tariff covers

139 commodities of these 7 commodities viz Maida, Greases, Coal, Readymade

Garments, Mosaic Tiles and Silver are completely exempted. The revenue receipts

of basic excise duties, as explained above are shared with State Governments under

Article 272 of Indian Constitution. It may also be noted that the entire net proceeds

of the Union duties of excise on electricity, other than attributable to union. Territories

were collected to be paid to the states on the recommendations of the finance

commission. This duty has been abolished with effect from 1st October 1984.

ii) Earmarked Cesses :

Earmarked Cesses are levied under special Acts and are earmarked for specific

purposes. The entire proceeds of earmarked cesses are assigned to the Central

Government of India.

iii) Additional Duties of Excise :

The additional duties of excise (Goods of special Importance) Act 1957, provides

for the levy and collection of additional duties on sugar, tobacco, cotton fabrics,

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wollen fabrics and man made fabrics. These duties are in addition to the basic duties

of excise and any other duty or cess.

Recent rates of Excise Duty :

Recent rates of Central excise duty as per budget 2011-12 are as follow:

H An excise duty of per cent without Cenvat Credit facility imposed on about

130 specified items, which were hitherto either fully exempt from excise

duty or chargeable to nil rate of excise duty.

H Merit rate of excise duty of 4% increased to 5%

H A mandatory excise duty of 10% imposed on ready-made garments and

textile made ups bearing a brand name or sold under a brand name.

H An excise duty of 5% was imposed on automatic 100 ms and projectile

100ms.

H Exemption from excise duty available to clearances upto 3500 metric tonnes

of paper manufactured from non-conventional material withdrawn.

H Sugar and textile items have been omitted from the schedule of the Additional

Duties of Excise Act 1957.

H Excise duty reduced from 10% to 5% on parts of specified textile machinery.

H Excise duty on sanitary napkins, baby and clinical diapers, and adult diapers

reduced from 10% to 1% with no CENVAT credit.

H Excise duty on greaseproof paper and glassine paper reduced from 10% to

5%.

H Excise duty of 1% imposed on branded jewellery and articles of precious

metals.

Table 4.4

Revenue from Excise Duties

Years 1950-51 1960-61 1971-72 1980-81 1990-91 2009-10

Rs. In crores 70.0 416.35 2061.10 6363.34 24541 102991

The Gross Revenue from Central Excise duties increased from Rs. 70 crores in

1950-51 to Rs. 416.35 crores in 1960-61, Rs. 2061.10 crores in 1971-72, Rs.

6363.34 crores in 1980-81, Rs. 24541 crores in 1990-91 and Rs. 102991 crores in

2009-10 (budget).

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2) State Excise Duties

State Excise Duties are the major source of revenue which are available to state

Government, are duties of excise on alcoholic liquors for human consumption. This

was the position under the Government of India Act 1919, it remains the same in the

Act of 1935 and under the constitution of India. These duties are imposed where

these articles enter the state’s boundaries or are produced in the State concerned.

The rates varies from state to state. The rate of excise duty on alcoholic liquors is the

highest in all the states. Where prohibition has not been adopted. Excise duties main

purpose is reduction in consumption of harmful goods like liquor, naracotics etc.

Excise taxes impose upon the manufacture of particular goods or groups of goods.

Duties of the excise on the following goods manufactured or produced in the

state and countervailing duties at the same or lower rates on similar goods

manufactured or produced elsewhere in India-

a) Alcoholic liquors for human consumption;

b) Opium, Indian hemp and other naracotic durgs and naracotics; but not

including medicinal and toilet preparations containing alcohol or any substance included

in sub pragarph (b) of this entry:

The state Government have right to impose excise duty on Tabacco, Wine Beer,

Mild liqurors, spirits, molasses etc. The Excise Revenue is primarily derived from the

duties and various types of fees, licence, permit, privilege, transport, export etc. On

Indian made foreign liquors, country Liquor, Distillery spirit, today Neera, Intoxicating

Drugs, opium, medicinal preparations, containing Alcohol or Narcotic Drugs; Toilet

preparations containing Alcohol etc.

Revenue From State Excise Duties

The revenue from state excise duties is repaidly increasing. The yield of revenue

from source is given as follow-

Table No. 4.5

Revenue From State Excise Duties

Years 1951-52 1960-61 1970-71 1980-81 2006-07

Rs. In crores 49.40 53.10 139.90 824.28 1,29,530

The yield of revenue from state excise duties increased from Rs. 49.40 crore in

1951-52, to Rs. 53.10 crore in 1960-61, Rs. 139.90 crore in 1970-71, Rs. 824.28

crore on 1980-81 and Rs. 1,29,530 crore in 2006-07 (budget).

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This indicates the importance of this source of revenue many states are having

second thoughts in respect of extension of prohibition. At a time when the development

and welfare activities of state are expending they can ill afford to lose Revenue from

this source. On the other hand a social and human aspect which cannot be completely

ignored. The state must however realize the importance of going slow in this matter

revenue losses must be carefully balanced against social and human gains before

decisions are taken excise duties are critieised mainly because-

1) They have the defect of placing a heavy burden on the great majority of

persons who use liquor, narcotics.

2) In considering a commodity really harmful on unnecessary a moral judgement

is involved. The use of morality basis of taxation can never be justified in economic

theory and is generally regarded flimsy.

3) The burden on the lower income group is very high and hence sumptuary

excise taxation is regressive.

Finally excise taxes become excessive and oppressive they lead to illicit production

of liquor bootlegging and smuggling.

4.2.4 Cess tax/surcharge

Cess is a British English and fliberno English term for tax. It is term formerly

more particularily applied to local taxation. In India it was applied with a qualifying

pretix to any taxation. Such as irrigation cess, educational cess, and the like. They

are collectively referred to as “cesses in government censuses, e.g. land revenue

and cesses”.

Defination :

Concept of cess tax is a different concept from other taxes. On any tax amount

which tax is imposed is called as cess tax. In short cess tax method means tax upon

tax. Cess or surcharge is an additional tax calculated on the normal tax liability. In

other words surcharge is assessed on the usual amount of tax due. An additional tax

levied on a tax base after a normal tax has been applied. Usually it is applied to

income above a certain level to achieve desired progressivity of the rate schedule for

example it normal corporate income tax is 30 percent of all net income and additional

surcharge of 2 percent may be imposed on all taxable incomes above a certain

amount (Rs. 500) Let’s understand it with an example, suppose, Any person income

tax amount is one thousand rupees. According to income tax Act on this amount 2%

(Rs. 20) for education cess and 10% (Rs. 10) for secondary and higher secondary

cess should be given to the government. If this time a person should be given Rs.

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1030 as income tax amount various categories such as 1000 Rs. Income tax + Rs.

20 education cess + Rs. 10 Secondary and higher secondary education cess tax etc.

Government imposed tax for special purpose is a cess tax. Collected amount

through this tax is used to achieve that special purpose. In India cess tax is imposed

on income tax, corporate tax, VAT and other taxes too. This amount is used for

development of the primary, secondary and higher secondary education. According

to income tax Act Economic years 2011-12, whose Annual income is more than 10

lac, they should give 2% primary education cess and 1% secondary and higher

secondary education cess. It is compulsory to them. This amount is collected by

Central Government. State Government also collects education cess tax. This amount

is used for state education development. Value Added tax is the main source of

education cess tax.

Cess is very inelastic source of revenue. In some states an additional tax such

as an educational tax library cess or a health cess is levied as a surcharge on

property tax. In some states there is a provision for a compulsory levy of property tax.

Land cesses are the principle sources of tax revenue of district boards. The cess

is usually collected by the state government and credited local board. Village

panchayats get in some places a share of land cess attributable to particular village.

In some states the panchayats leavy a district land cess of their own. In some state

a separate cess is levied to finance particular programmes. e.g. primary education.

In Uttar Pradesh the cess was merged in revenue after the abolition of zamindari

and the district boards now get compensatory grants in lieu of the cess. On the other

hand cess is levied usually on plantation crops to raise funds for research and

improvement schemes related to those crops (e.g. high-yielding variety of seeds). A

cess is different from a tax in that the proceeds of the former are used for the benefit

of industry on which it is levied.

Surcharges on Income tax :

Surcharges shall be charged with receipt to income accountable to tax for the

assessment year 2012-13 in the following cases:

1) In the case of an national having total income exceeding crore rupees the

amount of income tax calculated shall be increased by a surcharge for the purpose

of the union calculated rate of 5% of such income tax.

2) In the case of a company other than a domestic company having income

exceeding a crores rupees the amount of income tax computed shall be increased by

a surcharge for the purpose of the union calculated at the rate of 2% of such income

tax.

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Education cess :

For assessment year 2012-2013, an additional surcharge called the educational

cess on income tax shall continue to be levied at the rate of 2% and 1% respectively

on the amount of tax computed inclusive of surcharge in all cases and no marginal

relief shall be available. There is also a cess on certain commodities to enable the

government to raise funds for the safety and welfare of workers in the industrial

concerned. There are for example a rubber cess, a coconut cess and three different

coal and coke cesses for such purposes.

4.3 Summary

Professional tax, entertainment tax, excise duty and cess tax are important

sources of the government revenue in India. Professional tax is a state level tax in

India on professions, trades, callings and employments. This tax is paid by every

employee working in public and private organizations. The entertainment tax is also

State level tax in India. It is imposed on any exhibition performance, amusement or

horses racing to which persons and admitted on payment. The excise duty is a type

of tax charged on goods product within the country. It is a tax on the production or

sale of a good. Cess tax or surcharge is an additional tax calculated on the normal

tax liability. In other words surcharge is assessed on the usual amount of tax due.

4.4 Glossary

lllll Duties – Taxes

lllll Cess – surcharges, sub taxes.

lllll Revenue – Income, yield

lllll Mandatory - Compulsory

4.5 The Questions for self study

A) Fill in the blank with proper alternatives.

1) Professional tax is imposed by the …………….. Government

a) Central b) State c) Local d) All above

2) Different States have ……………… rate of professional tax in India.

a) Equal b) Different c) Low d) All above

3) ……………. Tax is imposed by the state government in India.

a) Income tax b) Entertainment tax

c) Import tax d) All above

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4) ………………. Is an additional tax on tax amount payable by the assessee

in India.

a) Excise duty b) VAT c) Cess Tax d) All above

5) The Entertainment tax was first introduced in Bengal in ……………

a) 1919 b) 1948 c) 1953 d) 1922

B) Write a short notes.

1) Central Excise duty

2) State Excise duty

3) Entertainment Tax

4) Cess

5) Profession Tax

C) Answer the following questions.

1) What is excise duty? Explain the Central excise duty.

2) Explain the Entertainment tax in India.

3) Explain the state excise duty in India.

4) Explain the professional tax in India.

5) What is cess tax? Explain the cess tax in India.

4.5 Answer of Self Study Questions

A) 1) State 2) Different 3) Entertainment tax 4) cess tax 5) 1922.

4.6 References

1) Tygi B. P. – Public Finance – Jai Prakash nath & Comp. meerut (UP) 1981-

82.

2) Hajela T. N. – Money, Banking and public finance- One Books Pvt. Ltd.,

Mumbai 2009.

3) Economic Survey – Oxford University press, Government of India, March

2012.

4) Tax & Tax Consultancy – Centre for Distance Education, Shivaji University,

Kolhapur, 2009.

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5) Datt Sundharam – Indian Economy – S. Chand & Company Ltd., Delhi,

2010.

6) Singh Sharawan kumar – Encyclopaedia of Economics and Commerce ,

New Century Publications, Delhi.

7) Sundharam – Andley- Public Finance, theory and practice, S. Chand &

Company Ltd., New Delhi.

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Methodology of Economic Research

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