Ibe=2

Industrial Policy:
IP is rules regulations principles
policies and procedures laid down by
government for regulating developing
and controlling industrial undertaking
in the country.
Also indicates large medium and
small scale sectors.

OBJECTIVES:
• Achieving socialistic pattern of society.
• Control on concentration of economic power.
• Achieving industrial development.
• Reducing disparity in regional development.
• Providing opportunities for employment.

OBJECTIVES:
• Achieving self-sustained economy.
• Alleviating poverty.
• Building up large cooperative sector.
• Updating technology and modernization of industries.
• Liberalization and Globalization of economy.

INDUSTRIAL POLICY:
• Industrial Policy Resolution of 1948.
• Industrial Policy Resolution of 1956

Case on Birla corporation:
• This company manufactures cement jute
products automobile components etc. By
2003-04 their sales short up by 10.6% to
Rs. 1243.18 crore from the previous year .
Profit after tax was rs.41.56 crore against
Rs. 4.19 crore in 2002-03. This was
achieved improved performance of
cement division and by a well planned
cost management.

Case on Birla corporation:
• The cement division division alone contributed for 88.75% of the
company’s sales in 2002-03 and in 2003-04 they achieved higher
capacity utilization. Total export increased to 48.19 corers in 2002-03.
• In 2003-04 jute export increased and the company had good
performance rate. the automobile sector had to face a decline. Their
calcium –carbide industry struggled much due to competition from low
priced markets from China and Romania and duty free imports from
Bhutan . Increase in power tariff also contributed much to their
struggle.
• Taking into advantage , Birla Corporation has decided to expand
capacity at its Durgapur Cement Plant by 1 million ton.
• They are also working hard to make the production capacity of
Chanderia Cement 3 lakh tons per annum.
• Project are underway to set up a power plant of 27 MW as new
industrial undertaking at M.P. and Rajasthan.
• Discuss the business activities of Birla Corporation on recent
developments.

Industrial Policy 1948:
• Government recognised the need for mixed economy .
• Reserved the national monopolies for Atomic Energy and Rail
and Road industry.
• Government had the right to initiate projects in 6 industries and
they are:
• Coal iron and steel aircraft manufacturing ship building
telephone and minerals.
• The government could regulate and license 18 other industries
of national importance.

Industrial Policy Resolution 1956:
• Parliament accepted ‘the socialistic pattern of
society’ as the basic aim of social and economic
policy.
• These important developments necessitated a fresh
statement of industrial policy of 1956.
• The resolution laid down 3 categories of industries.
• Schedule A:
• The state government was responsible for them.
• Schedule B:
• State owned companies.
• Private enterprises only supplement the efforts.

Schedule C:
All the remaining industries and their future development
would in general be left to the initiative and enterprise of the
private sector.
Other features of the resolution are:
Fair and non-discriminatory treatment for private sector.
Encouragement to village and small enterprises.
Removing regional disparity.
Development of ancillary industries in areas where large
industries were to be set up.

Industrial policy Statement 1977:
Due to some disparities there were certain problems like:
Unemployment was increasing rural urban disparity widened and
real investment stagnated.
The growth rate of industrial segment was not more than 3-4% per
annum.
The incidence of industrial sickness also became widespread.
The concept of District Industrial Centers was introduced for the
first time. Each district would have such a district centre which
would extent all support and services required by small
entrepreneurs.

Within the SSI sector , a new concept of the tiny sector was
introduced.
TINY SECTOR: Industrial unit with investment in machinery
and equipment of up to rs. One lakh and situated in a town
with population less than 50,000.
this concept was given by Karve Committee in 1967 with 47
products .

Industrial policy 1980:
Focused on the need for promoting competition in the domestic
market, technological upgradation and modernization.
Laid the foundation for increasingly competitive export base and
for encouraging foreign-investment in high- tech areas. The policy
suggested following measures:
Effective operational management of public sector.
Integrating industrial development in the private sector.
Regularization of unauthorized excess capacity installed in the
private sector.
Encouragement of Merger and Acquisition of sick units.
Drawback: it underplayed the employment objective as was
technology centric.

Industrial Policy 1991(july):
Announced at the time of Mr. P.V. Narsimha Rao .
The reforms in 1991 did make significant changes in industrial , trade
and public sector policies.
Significant changes are:
Abolished licensing for all projects except in 18 industries.
MRTP act amended to eliminate prior approval to large companies for
capacity expansion.
The requirement of Phased Manufacturing Programs discontinued for
all new projects.
Schedule A of industries reserved exclusively for state enterprises cut
down from 17 to 8 .
Schedule B of industries , where state enterprises were to acquire a
dominant positions, abolished.
Small scale enterprise allowed to offer up to 24% of share holdings of
large enterprises.

Major issues covered by Industrial policy 1991 are:
Foreign Direct Investment:
Limit on foreign equity holdings raised from 40% to 51% in a wide
range of industry.
Foreign equity proposals need not be accompanied by foreign
technology transfer agreement.
Technology imports liberalized by increasing royalty limits.
Public Sector Policy:
Disinvestment in selected public sector enterprises to raise finances
for development , bring in greater accountability and help create a new
culture in their working for improved efficiency.
Government equity ranging from 5% to 20% in 31 PSEs with ‘good
track record’ disinvested to public sector mutual funds and financial
institutions.

Trade policy:
Administered licensing of imports replaced by import entitlements
linked to export earnings. These entitlements called exim scrips made
freely tradable.
permission to import capital goods without ‘indigenous clearance’
provided import covered by foreign equity .
Scope of canalization narrowed.
A process which exists for some categories - which means these can
be imported only by designated agencies.
Current update:
A number of items like urea are canalized. This means they can be
imported only by designated agencies like MMTC and STC, the
government's trading arms. An item like gold, in bulk, can be imported
only by specified banks like SBI and some foreign banks or designated
agencies.

Environmental issues:
Government came up with environmental policy . The policies
are implemented through various acts such as Wildlife
protection act 1972.
water (Prevention and Control of Pollution) Act 1974 .

Industrial Licensing:
• Licensing is a written permission issued by
the central government to an industrial
undertaking stating details like location,
article to be manufactured , production
capacity , and other relevant particulars
including the validity period.

OBJECTIVES OF LICENSING
• To limit the capacity within the targets set by plans.
• To direct investments in industries according to plan
priorities.
To regulate the location of industrial units so as to secure a
balanced regional development.
• To prevent monopoly.

To protect small scale industries against undue competition
from large scale industries.
To foster technology and economic improvements in
industries by ensuring units of economic size and adopting.
To encourage new entrepreneurs to start industrial units.

Industrial Licensing Policy:
Industries (Development and Regulation) Act 1951:
provisions of the Act were:
No new industrial units could be established or substantial
extension to existing plants be made without a license from
central government.
Government could take under its own management undertaking
which failed to carry out its instructions in management and
policies.
This act also empowered the government to prescribe prices,
methods and volume of production and channels of distribution.
The act empowered the government to set up Development
council for groups of industries.

New Industrial Policy and Procedure, 1970:
In February 1970
government announced its new industrial licensing policy which consisted of
list of core industries in the economy (instructed by Industrial Licensing Policy
Inquiry Committee). The industries were.
Agriculture input Non-ferrous metal
petroleum Iron and Steel
coal
heavy industrial machinery
ship building
news print and electronics.

DISINVESTMENT in PUBLIC
SECTOR:
• Needs of public sector:
• To increase the growth of core-sectors in the
economy by creating a solid foundation in
industrial growth.
• To serve the financial and technological needs of important sectors
like Railways, telecommunication.
• To ensure easy availability of articles of mass-consumption
and to check production of unimportant luxury articles.

Failing of PSU:
In spite of monopoly in certain areas PSUs are never profitable.
Facts and figures:
1997-98: Public Manufacturing Enterprises showed
profitability of minus (-) 3.9%.
Reasons for failure of PSUs are
Low rate of return on investment, poor capacity utilization,
declining contribution to national savings , red tapism.

Disinvestment:
• The main objective of DISINVESTMENT is to put national resources
and assets to optimal use and in particular to unleash the
productive potential inherent in our PSEs.
• The policy of disinvestment aims at modernization of PSEs,
creation of new assets , generation of employment and retiring of
public debt.
• Privatization and Disinvestment:
Privatization leads to change in management with change in
ownership whereas change in ownership is not a necessary
condition in Disinvestment. It refers to dilution of the stakes of the
government to a level where there is no change in control .

Disinvestment Procedure:
1. Proposal for disinvestment in any PSU are placed for
consideration of Cabinet Committee on Disinvestment
(CCD).
2. An Advisor is appointed to invite Expression of
Interest (EOI) from parties.
3. The prospective bidders undertake due diligence of
the PSU.
4. Concurrently the task of valuation of the PSU is
undertaken.

5.Calculation of reserve price of PSU is done using any of the 3
methods.
Discounted cash flow method. Asset valuation method,
Balance sheet method.
6.Share purchase agreement is sent to prospective bidders
for inviting the final binding bids.
7.The bids received are placed before the CCD for final
approval. CCD then approves the final buyer.
After the transaction is complete the papers are forwarded to
the Controller and Auditor General of India (CAG) for
undertaking the evaluation of disinvestment, He place it in
the parliament and release it for public.

Merits of Disinvestment:
• To obtain release of large amount of public
resources locked up in non-strategic Public
sector units for re-employment in areas of
higher social priority.
• Facilitates transferring the commercial risk
to which the tax payer’s locked up in public
sector is exposed to the private sector
wherever they are willing to step in.
• More and more man-power is utilized which
was dumped in PSU.

Disinvestment would expose privatized companies to market
disciplines and help them to become self reliant.
Wider distribution of wealth by offering shares of privatized
companies to small investors and employees.
Beneficial for capital market. Increase in floating stock
would give market more liquidity, give investors early exit
options which will help raising of funds by privatized
companies for their projects .

Demerits of Disinvestment:
• The amount raised through disinvestment in the year 1991-2001
was only Rs.2051 cr which is very less amount.
• Only when the government ensures that the market system
regulates privatized firms take care of public’s interest
otherwise not.
• In most of the cases shares of disinvested PSU ‘s are by and
large in the hands of institutions of with little floating stock.
• No monopoly is good only fair and full competition can bring
relief to consumers.

Let us know…
• BALCO: Bharat Aluminium
Company Ltd (BALCO)
• It is a fully integrated aluminium producing company
set up in 1965 . The government of India had 100%
stake in BALCO prior to disinvestment. In 1998, the
disinvestment commission recommended 51%
disinvestment in favour of strategic buyer along with
transfer of management .Sterlite company acquired
stakes in march 2001 for Rs. 551.50 crs.

VSNL: Videsh Sanchar
Nigam Limited:
Govt. sold 25% of equity share holdings out of its total
holdings of 52.97% in VSNL in 2002 . The total paid-up
capital was rs. 285 crore ,the govt. holding being Rs.
151crs. Rs. 71.25 crs was sold to M/s Panatone (TATA
group) at a price of Rs. 1439 crs. The govt. received
approx Rs. 3689crs. Thus govt. sold its shares at a price
of Rs. 202 per share .

Some other privatized PSUs:
• Modern Food Industries Limited ( MFIL) : Hindustan Lever.
• Computer Maintenance Corporation (CMC) : Tatas.
• 9 Hotels of Indian Tourism Development Corporation (ITDC)
• Indian Petrochemical Complex Limited (IPCL) : Reliance.
• Maruti Udyog Limited (MUL) : Suzuki.
• Hindustan Zinc Limited (PPC) : Ruia.
• Paradeep and Phosphates Limited (PPC)
• Hotel Corporation of India Limited (HCL)

Disinvestment and FDI
• In India the success of disinvestment has depended on
domestic investment and foreign investors have kept away. On
the contrary privatization has failed to attract FDI in India.
• The main reasons for failure are:
• It took almost a decade to finalize disinvestment policy and
there is lack of transparency.
• Till 1991 the policy was harped on controlling power and
protecting workers.
• The disinvestment of 25% equity holdings of VSNL was
decided in 2001 but actual disinvestment took a year. Global
investors wont wait for long.
• Globally M and A have been a major source of FDI inflows. In
India regulatory laws make M and A’s low profile.

Modes of Disinvestment :
• Involving a change in ownership.
• Involving no change in ownership.
• No change:
• 1. disinvestment deferred.
• 2. no disinvestment.
• Closure of Assets.

In the budget 2000-01 , the main elements of the
disinvestment policy were enunciated , which are as follows:
Restructure and Revive potentially viable PSEs.
Closedown PSE’s which cannot be reviewed.
Bring down government equity in all non-strategic PSE’s to 26% or lower
if necessary.
Fully protect the interest of workers.
Use the entire receipt from disinvestment and privatization for meeting
expenditure in social sector .
Setting up Ministry of Disinvestment (Department of Disinvestment was
set up in December 1999 and is made a full fledged Ministry under
Government of India)
by:
Megha Mathur

International Trade Theories
Absolute Advantage Theory:
(Adam Smith) It is always advantageous for a country to specialize in
production of commodities in which it can produce efficiently
A country tends to specialize in production of commodities in which it has
absolute advantage.

Adam Smith said - each nation should
specialize in producing things it has an
"absolute advantage" . The theory of
"Absolute Advantage" seems to make
sense in situations where the
circumstances of the geographic and
economic environment are relatively
simple and straight forward - example: -
Switzerland and watches, Canada
and cereal grain.

An Example:
• India needs 30 man-hours to produce one quintal of rice whereas
Bangladesh needs 50-man hour. The cost of production of rice is much
more in Bangladesh as compared to India. India thus has an absolute
advantage in production of rice. In case of jute India needs 60 man
hours while Bangladesh needs 20- man hour to produce one quintal of
jute. Thus Bangladesh has an absolute advantage in jute production.
• Country Rice Jute
• India 30 60
• Bangladesh 50 20

Demerit of Absolute Advantage theory:
• There will be no ground of trade
between both the countries unless they
have absolute advantage or absolute
disadvantage in production of at least
one commodity.

Comparative Advantage
Given by Mr. Ricardo.
Suggests the possibility of gainful trade between 2
countries even if one has absolute advantage in the
production of both the commodities.
So long the countries have comparative advantage in
the production of commodities, specialization & trade
between them would always be possible &
advantageous to all of them.

In 1817, David Ricardo looked at Adam Smith's theory and
suggested that
"there may still be global efficiency gains from trade if a
country specializes in those products that it can produce
more efficiently than other products - regardless of
whether other countries can produce those same
products even more efficiently"

Example:
Country Rice Jute
India 30 60
Bangladesh 50 80
India can produce both the goods more efficiently i.e. at a lower cost
compared to Bangladesh . But her own relative efficiency is evidently greater
in rice production because of her cost of production is just half her cost of
jute.
India has competitive advantage in rice production because she needs only
60%(30/50) of her rice production in Bangladesh.

Gain from Foreign Trade in comparative advantage:
• Let us assume that there is no trade between India & Bangladesh.
Both countries produce both the goods –rice and jute and consume
their total produce.
• Country Rice Jute
India 30 60
Bangladesh 50 80
• The domestic exchange rate in India & Bangladesh will be as follows:
• India:
• 1 qtl of Rice: 30/60 = .5 qutl of jute
• 1 qtl of Jute: 60/30 = 2qutl of rice

In Bangladesh:
1 qtl of Rice: 50/80 = .625 qutl of jute
1 qtl of jute: 80/50 = 1.6 qutl of rice
internal exchange rate:
INDIA
Rice = Jute
1 = .5
2 = 1.0
BANGLADESH
Rice = Jute
1 = .625
1.6 = 1.0

Let us know suppose that India specializes in Rice production &
Bangladesh in Jute production & they trade their surplus trade
produce to one another. Which country will gain would depend on
the comparison of Internal & External exchange rates.
External rate is greater than Internal rate the countries will gain.
Distribution of gains:
the gainful exchange rate for India ranges between 500 kgs to 625
kgs of jute for 1 quintal of rice.
the gainful exchange rate for Bangladesh ranges between 1.6 to
2 quintals of rice for 1 quintal of jute.

Critical appraisal of the theory:
• Labor is not homogeneous: labor is not similar throughout the
world.it varies in skills & productivity. Due to a high degree of
specialization ,labor is not interchangeable, thus wage differential is
quite likely in short run.
• Labor is not the only factor: the factor combination varies from one
industry to other depending on the state of technology in the
country. Production may be capital intensive or it may be labor
intensive.
• Demand side ignored: this theory concentrates only on supply side.it
suggests that exchange rates based on comparative advantage
would be advantageous to the trading partners.

Factor Endowment Theory:
This theory explains how a country has a
competitive advantage .
A country should export products that use
extensively its relatively abundant factors, &
import products that use intensively its
scares factors.

The Theory of Factor Endowments suggested
you should trade in the products which you can
make from the production factors and resources
you naturally possess. So for Canada this
means we should trade in lumber and minerals
and grain since we naturally possess these
resources in large quantities. Following this
theory it would then make sense for Canada to
import citrus fruits since our climate does not
naturally give us weather to allow this food to
grow without expensive greenhouses. This
theory was espoused by Heckscher and Ohlin.

Heckscher and Ohlin Theorems:
Theorem I: A country tends to specialize in the export of a commodity
whose production requires intensive use of its abundant resources and
imports a commodity whose production requires intensive use of its
scares resources.
Theorem II: (Factor-pricing Equalization Theorem): The international
trade equalizes the factor prices between the trading nations. In the
absence of foreign trade it is quite likely that factor prices are different
in different countries.

The Heckscher and Ohlin theory assumes a model of two countries (A & B) two
commodities (X & Y) and two factors labour (L) & capital (K) with following
assumptions:
There is perfect competition in both product and factor markets in both the
countries.
Factors labour and capital are fully mobile between the industries X and Y
in the country but completely immobile between the countries.
Factors Labour and Capital in both the countries A & B are homogenous.
Factor supply is given & factors are fully employed.
Production technology for commodity X is labour-intensive and for Y it is
capital-intensive.
The demand conditions for goods X and Y are identical in countries A &
B.
There is no transportation cost, nor is there any trade barriers.

Factor abundance & Factor price ratio
criterion
• Two important aspects are:
• Factor abundance: (1) factor ratio criterion I.e. labor capital ratio or
capital labor ratio.(l/k or k/l) (2) factor price ratio criterion I.e.( Pl/Pk
ratio or Pk/Pl ratio).
• Comparing two countries A & B.
• A is labor abundant & B is capital abundant.
• A is labor abundant if:
• L L
A B
K
A K
B
Or when we include the price ratio criterion it becomes:
•PL PL
•PK
PK
A
A B
B

Criticisms of the theory
• It relies on the assumption that difference in relative factor
price reflects difference in relative factor endowment.
• Assumes that production techniques are same in two different
countries.
• Assumes constant returns to scale in both the countries.
• Assumption of no transportation cost is vague.

WORLD TRADE ORGANIZATION
• What is the WTO?
• The World Trade Organization (WTO) is
the only global international organization
dealing with the rules of trade between
nations. signed by the bulk of the world’s
trading nations. The goal is to help
producers of goods and services,
exporters, and importers conduct their
business.

The World Trade Organization (WTO) is the only
international organization dealing with the global rules of
trade between nations. Its main function is to ensure that
trade flows as smoothly, predictably and freely as possible.

Brief history:
• GATT led to the establishment of the World Trade Organization (WTO) on
January 1, 1995.
• After the conclusion of eighth GATT round of talks (1986-1993), known as
the Uruguay Round. India was a founder-member of GATT, which began
with just 23 members.
• Its successor, the WTO, has 151 member countries. That’s nearly the
whole world (Russia is among the few major economies left out).
• Functions of WTO:
• Administering & implementing the multilateral trade agreements which
together make up the WTO.
• Acting as a forum for multilateral trade negotiations.
• Overseeing national trade policies.
• Cooperating with other international institutions involved in global
economic policy-making.

Trade Negotiations Committee
Essentially, the WTO is a place where member
governments go, to try to sort out the trade problems
they face with each other.
At its heart are the WTO agreements, negotiated and
signed by the bulk of the world’s trading nations.

But the WTO is not just about liberalizing
trade, and in some circumstances its rules
support maintaining trade barriers — for
example to protect consumers, prevent the
spread of disease or protect the
environment.
WTO agreement consists of 29 legal texts –
covering everything from agriculture to
textiles & clothing , from services to
government procurement.

• WTO is the embodiment of the Uruguay
Round results & the successor to GATT.
• The main purpose of GATT & WTO is to
have trade without discrimination.
General Agreement on Trade & Tariffs

As per its article 1:
the famous “Most Favored nation” MFN clause, members are
bound to grant to the products of other members treatment no
less favourable than any other country.
A second form of non-discrimination known as ‘national
treatment’ , requires that once goods have entered a market, they
must be treated no less favourable than the equivalent
domestically produced goods.
Apart from the revised GATT (known as GATT 1994) several other
WTO agreements contain important provisions relating to MFN &
national treatment.
The GATS (General Agreement on Trade & Services) requires
members to offer MFN treatment to services & service suppliers of
other members.

‘Comparative Advantage’ – all countries which they
can employ to produce goods & services for their
domestic markets or to compete overseas.
WTO, Is not a free-trade institution . It permits tariffs &
other forms of protection but only in limited
circumstances.

Difference between GATT & WTO
• GATT
• A set of rules/agreement with no
institutional foundation, only a
small associated secretariat.
• Was on provisional basis.
• Was applied only to trade of
merchandise goods.
• Settlement system was not clear.
• WTO
• It is permanent institution with
its own secretariat.
On permanent basis.
Covers trade in services & trade
related aspects of intellectual
property.
Dispute settlement is fast & thus
less susceptible to blockages.

IMF
• The International Monetary Fund (IMF)
is an organization of 185 countries,
working to foster global monetary
cooperation, secure financial stability,
facilitate international trade, promote
high employment and sustainable
economic growth, and reduce poverty
around the world.

What does the International
Monetary Fund do?

The IMF is the world's central organization for international monetary
cooperation. It is an organization in which almost all countries in the
world work together to promote the common good.
The IMF's primary purpose is to ensure the stability of the international
monetary system—the system of exchange rates and international
payments that enables countries (and their citizens) to buy goods and
services from each other. This is essential for sustainable economic
growth and rising living standards.

To maintain stability and prevent crises in the international monetary system,
the IMF reviews national, regional, and global economic and financial
developments. It provides advice to its 184 member countries, encouraging
them to adopt policies that foster economic stability, reduce their vulnerability to
economic and financial crises, and raise living standards, and serves as a
forum where they can discuss the national, regional, and global consequences
of their policies.
The IMF also makes financing temporarily available to member countries to
help them address balance of payments problems—that is, when they find
themselves short of foreign exchange because their payments to other
countries exceed their foreign exchange earnings.
And it provides technical assistance and training to help countries build the
expertise and institutions they need for economic stability and growth.

Afghanistan, Algeria, Argentina, Australia, Austria, Belgium, Bolivia,
Brazil, Burma, Burundi, Cameroon, Canada, Central African Republic,
Ceylon, Chad, Chile, China, Colom bia, Congo, Congo (Brazzaville),
Costa Rica, Cyprus, Dahomey, Den mark,
Dominican Republic, Ecuador, El Salvador, Ethiopia, Finland, France,
Gabon, Gambia, West Ger many, Ghana, Greece, Guatemala, Guinea,
Guyana, Haiti, Honduras, Iceland
India, Indonesia, Iran, Iraq, Ire land, Israel, Italy, Ivory
Coast, Jamaica, Japan, Jordan, Kenya, South Korea,
Kuwait, Laos, Lebanon, Liberia, Libya, Luxembourg,
Malagasy Republic, Malawi, Malaysia, Mali, Mauritania,
Mexico, Morocco, Nepal, The Netherlands, New Zealand,
Nicaragua, Niger, Nigeria, Norway, Pakistan, Panama,

Portugal, Rwanda, Saudi Arabia, Senegal, Sierra Leone,
Singapore, Somali Republic, South Africa, Spain, Sudan, Sweden,
Syria, Tanzania, Thailand, Togo, Trinidad and Tobago, Tunisia,
Turkey, Uganda, United Arab Republic, United Kingdom, United
States, Upper Volta, Uruguay, Venezuela, South Viet Nam,
Yugoslavia, Zambia.

OBJECTIVES OF IMF
• Promote international monetary co-operation.
• Facilitates the expansion & balanced growth of international
trade.
• Promotes exchange stability.
• Assists in establishing a multilateral system of payments in
respect of current transactions among member countries.
• Assists in eliminating foreign exchange restrictions that
hamper the growth of world trade.
• Make available the resources on temporary basis to members.
• Shorten the duration & lessen the degree of disequilibrium in
the international balance of payments of members.

Organisation
• Board of Governors:
• Consists of 1 governor.
• He is usually the minister of finance or the central bank governor.
• Has delegated all its powers to executive board except few reserved
powers.
• The executive board:
• Consists of 24 members.
• Responsible for conducting the business of the IMF .
• The managing director serves as chairman.
• Managing director:
• Selected by executive board.
• Responsible for conducting the ordinary business of IMF.

Staff of international civil servants:
Consists of 24 IMF governors, ministers of other comparable rank.
Normally meets twice a year in April or may.
Responsible to guide the executive Board & to advice & report to the board on he
issues related to the management of international monetary & financial system.
The development committee:
Consists of 24 members of the comparable rank of finance ministers or other officials.
Meets at the same time as international monetary & reports to the Board of governors
of the world bank IMF on development issues.

Financing facility of IMF
• Regular lending facilities:
• stand-by arrangement: to resolve the
problem of balance of payment of a largely
cyclical nature.
• EFF(extend fund facility):designed to
correct BoP difficulties that stem largely
from structural problems & take longer
period to correct.

Special lending facility:
Supplemental reserve facility: to help member
countries experiencing exceptional BoP problem
created by long & short term financing need
resulting from sudden & disruptive loss of market
confidence.
Contingent credit Lines:
Intended to be a preventive measure . solely for
members concerned about their potential
vulnerability but facing crisis at the time of
commitment.
Compensatory financing facility:

Another finance facility of IMF:
• Concessional lending facility: Poverty
reduction & growth facilities programmes
are expected to be based on strategy
designed by the borrowing country to
reduce poverty.

World Bank
• Was established in
1945.
• Also called
International Bank for
Reconstruction &
Development (IBRD).
• Resources:
• Subscribed by member
countries.
• Retained earnings & flow
of repayments of loans.

Organisation:
Board of Governors.
Board of executive directors-21.
The Bank’s five directors are appointed by the
five members having largest number of shares ,
rest are elected by Governors representing
other member countries.

Objectives:
• To assist in the reconstruction & development of
territories of the members by facilitating the
investment of capital for productive purposes.
• To encourage the development of productive facility &
resources in less developed countries.
• To promote private foreign investment by means of
guarantees of participation in loans & other investment
made by private investors.
• To promote the long-range balanced growth of
international trade & maintenance of equilibrium in the
balance of payment.

Financing policy:
• Structure adjustment lending: designed
to achieve a more efficient use of
resources & contribute to a more
sustainable BoPs in maintenance of
growth in the face of sever constraints.

Special Action Programme:
1.The bank should properly assess the repayment
prospects of the loans. For the purpose, it should
consider the availability of natural
resources & existing productivity plant capacity to
exploit the resources , & open to the plant & the
country’s post-debt record.

2.The bank should lend only for specific projects which
are economically & tecnhnically sound & of a high –
priority nature.
3.The bank lends only to enable a country to meet the
foreign exchange context of any project cost . It normally
expects the borrowing country to mobilize in domestic
resources.

4. The bank does not accept the borrowing countries to
spend the loan in a particular country. In fact it encourages
the borrowers to procure machinery & goods for the bank’s
financial projects in the cheapest possible market consistent
with satisfactory performance.
5. The bank indirectly attaches special importance to the
promotion of local private enterprise.

6.It is the bank’s policy to maintain continuing relations with
borrowers with a view to check the progress of projects &
keep in touch with the financial & economic development in
borrowing countries . This also helps in the solution of any
problem , which might arise in the technical & administrative
fields.

WTO & INDIA
• Problems which are faced by India in WTO & its
Implementation:
There are several problems facing these Multilateral Trade
agreements:
• - Predominance of developed nations in negotiations extracting
more benefits from developing and least developed countries
• - Resource and skill limitations of smaller countries to understand
and negotiate under rules of various agreements under WTO
• - Incompatibility of developed and developing countries resource
sizes thereby causing distortions in implementing various decisions
• - Questionable effectiveness in implementation of agreements
reached in past and sincerity

-Non-tariff barriers being created by developed nations.
- Regional cooperation groups posing threat to utility of WTO agreement itself,
which is multilateral encompassing all member countries
- Poor implementation of Doha Development Agenda
- Agriculture seems to be bone of contention for all types of countries where
France, Japan and some countries are just not willing to budge downwards in
matter of domestic support and export assistance to farmers and exporters of
agriculture produce.
- Dismantling of MFA (Multi Fiber Agreement) and its likely impact on countries
like India
- Under TRIPS question of high cost of Technology transfer, Bio Diversity
protection, protection of Traditional Knowledge and Folk arts, protection of Bio
Diversities and geographical Indications of origin, for example Basmati, Mysore
Dosa or Champagne. The protection has been given so far in wines and spirits
that suit US and European countries.

Implications for India
It appears that India does not stand to gain much by shouting for agriculture reforms in
developed countries because the overall tariff is lower in those countries. India will have
to tart major reforms in agriculture sector in India to make Agriculture globally
competitive. Same way it is questionable if India will be major beneficiary in dismantling
of quotas, which were available under MFA for market access in US and some EU
countries. It is likely that China, Germany, North African countries, Mexico and such
others may reap benefit in textiles and Clothing areas unless India embarks upon major
reforms in modernization and up gradation of textile sector including apparels.
Some of Singapore issues are also important like Government procure, Trade and
Investment, Trade facilitation and market access mechanism.
In Pharma-sector there is need for major investments in R &D and mergers and
restructuring of companies to make them world class to take advantage. India has
already amended patent Act and both product and Process are now patented in India.
However, the large number of patents going off in USA recently, gives the Indian Drug
companies windfall opportunities, if tapped intelligently. Some companies in India have
organized themselves for this.

IMF & INDIA
• India needs to tighten its
monetary policy even though the
impact of surging oil and food
prices being felt globally is “not so
big” in the country.

If food prices rise further and oil prices stay the same,
some governments will no longer be able to feed their
people and at the same time maintain stability in their
economies.
The fact that it had a near doubling of oil prices over a
period of year is going to impact the current account, the
official said.
The impact of rising prices is most acute for import-
dependent poor and middle-income countries confronted
by balance of payments problems, higher inflation, and
worsening poverty, the IMF study warned.

From April through July, the first four
months of the current fiscal year,
merchandise exports grew 21 percent
from a year ago. In addition, India's
outsourcing revenue is growing at
about 30 percent as western firms
continue to shift more back-office
operations and software development
work to tap India's low-cost labor.

FDI & Economic Development
• Meaning of FDI:
• Foreign direct investment is that investment,
which is made to serve the business
interests of the investor in a company, which
is in a different nation distinct from the
investor's country of origin.

Foreign direct investment may be classified as Inward or
Outward.
Foreign direct investment, which is inward, is a typical form of
what is termed as 'inward investment'. Here, investment of foreign
capital occurs in local resources.
Foreign direct investment, which is outward, is also referred to as
“direct investment abroad”. In this case it is the local capital, which
is being invested in some foreign resource. Outward FDI may also
find use in the import and export dealings with a foreign country.
Outward FDI flourishes under government backed insurance at
risk coverage.

Economic Development
• A functioning business sector, access to good-
paying jobs and the availability of affordable
credit to spur entrepreneurship and
employment - all necessary ingredients to
building healthy, stable communities.
• Basic economic programs, range from building
roads to making of $60 million in loans,
alleviate poverty and give people the tools they
need to build sustainable economies.

FDI & Economic Development
• Foreign direct investment has a major role to play in the economic
development of the host country. Over the years, foreign direct
investment has helped the economies of the host countries to
obtain a launching pad from where they can make further
improvements.
This trend has manifested itself in the last twenty years. Any form of
foreign direct investment pumps in a lot of capital knowledge and
technological resources into the economy of a country.
This helps in taking the particular host economy ahead. The fact
that the foreign direct investors have been able to play an important
role vis-à-vis the economic development of the recipient countries
has been due to the fact that these countries have changed their
economic stances and have allowed the foreign direct investors to
come in and improve their economies.

It has often been observed that the economically
developing as well as underdeveloped countries are
dependent on the economically developed countries for
financial assistance that would help them to achieve some
amount of economical stability. The economically
developed countries, on their part, can help these countries
financially by investing in these countries. This financial
assistance can be channelized into various sectors of the
economy. The channelization is normally done on the basis
of the requirements of particular sectors.

It has been observed that the foreign direct
investment has been able to improve the
infrastructural condition of a country. There is
ample scope of technological development of a
country as well. The standard of living of the
general public of the host country could be
improved as a result of the foreign direct
investment made in a country.
The health sector of many a recipient country has
been benefited by the foreign direct investment.
Thus it may be said that foreign direct investment
plays an important role in the overall economic
and social development of a country.

It has been observed that the private sector companies are not always
interested in undertaking activities that help in improving the
infrastructure of the country.
This is because the gains form these infrastructural activities are
made only in the long term; there are no short term benefits as such.
This is where the foreign direct investment can come in handy. It can
also assist in helping economically underdeveloped countries build
their own research and development bases that can contribute to the
technological development of the country. This is a very crucial
contribution as most of these countries are not able to perform these
functions on their own. These assistances come in handy, especially
in the context of the manufacturing and services sector of the
particular country, that are able to enhance their productivity and
ultimately advance from an economic point of view.

At times foreign direct investment could be provided in form
of technology. Else, the money that comes in a country
through the foreign direct investment can be utilized to buy
or import technology from other countries.
This is an indirect way in which foreign direct investment
plays an important part in the context of economic
development. Foreign direct investment can also be helpful
in assisting the host countries to set up mass educational
programs that help them to educate the disadvantaged
sections of the society. Such assistance is often provided by
the non-governmental organizations in the form of
subsidies. The developing countries can also tackle a
number of healthcare issues with the help of the foreign
direct investment.

India & FDI
• Increase in total FDI: 46.8%
* Rise in foreign equity: 36%
* Reinvested foreign earnings and other
capital: $3.2 billion
* Total FDI earnings (inward) in Apr-Jan 2005-
06: $5.7 billion
* Total FDI earnings (outward) increase: 2000-
01: $757 million
2004-05: $2.4 billion

Types of FDI in INDIA
• There are two types of FDI:
* Greenfield investment: It is the direct investment in new
facilities or the expansion of existing facilities. It is the
principal mode of investing in developing countries like India.
• * Mergers and Acquisition: It occurs when a transfer of existing
assets from local firms takes place.
FDI is not permitted in the following industrial sectors:
* Arms and ammunition.
* Atomic Energy.
* Railway Transport.
* Coal and lignite.
* Mining of iron, manganese, chrome, gypsum, sulphur, gold,
diamonds, copper, zinc.

Almost a third share of the investment in India is by
NRI.
* According to the latest Reserve Bank of India
figures, outflows through various NRI deposits
schemes amounted to $903 million since May 2004,
as against net inflows of $1.2 billion in the
corresponding period last year.

FDI BOOM in INDIA
• India is now the third most favored destination for Foreign Direct
Investment (FDI), behind China and the USA, according to an AT
Kearney survey that tracked investor confidence among global
executives to decide their order of preferences.
* India's share of global FDI flows rose from 1.8 per cent in 1996 to 2.2
percent in 1997.
• FDI in India in 1997-98 was lower at U.S.$ 5,025 million compared to
U.S.$ 6,008 million in 1996-97 because of a decline in portfolio
investment. Although foreign direct investment (FDI) increased by 18.6
per cent from U.S.$ 2,696 million in 1996-97 to U.S.$ 3,197 million in
1997- 98
• International developments continue to attract capital flows into India
in 1998-99 as well.

Presented by:
Ms. Megha Mathur

The RBI was established by passing "transfer of
public ownership Act" in Sep-1948 .
The bank was passed into the hands of the
Government of India with effect from 1st January
1949.

Prior to 1993, the supervision and regulation of
commercial banks was handled by the
Department of Banking Operations &
Development (DBOD). In December 1993 the
Department of Supervision was carved out of the
DBOD with the objective of segregating the
supervisory role from the regulatory functions of
RBI.

FUNCTIONS OF RBI
The functions are classified into three
heads,viz.
A) Traditional functions
B) Promotional functions and
C) Supervisory functions.

A) Traditional functions
1.Monopoly of currency notes issue
2.Banker to the Government(both the central and state)
3.Agent and advisor to the Government
4.Banker to the bankers
5.Acts as the clearing house of the country
6.Lender of the last resort
7.Custodian of the foreign exchange reserves
8.Maintaining the external value of domestic currency
9.Controller of forex and credit
10.Ensures the internal value of the currency
11.Publishes the Economic statistical data
12.Fight against economic crisis and ensures stability of Indian
economy.

B) Promotional functions
1.Promotion of banking habit and expansion of banking
systems.
2.Provides refinance for export promotion
3.Expansion of the facilities for the provision of the
agricultural credit through NABARD
4.Extension of the facilities for the small scale
industries
5.Helping the Co-operative sectors.
6.Prescribe the minimum statutory requirement.
7.Innovating the new banking business transactions.

C) Supervisory functions
1.Granting license to Banks.
2.Inspects and makes enquiry or determine position in
respect of matters under various sections of RBI
and Banking regulations
3.Implements Deposit insurance scheme
4.Periodical review of the work of the commercial
banks
5.Giving directives to commercial banks
6.Control the non-banking finance corporation
7.Ensuring the health of financial system through on-
site and off-site verification.
These are all the functions which are protective to the
Indian Economy, that is why RBI is considered as the
head of all banks.
regards

Some important aspects of RBI
Supervisory Process
The major instrument of supervision of the financial sector is
inspection. The inspection process focuses mainly on aspects crucial
to the bank’s financial soundness with a recent shift in focus towards
risk management. Areas relating to internal control, credit
management, overseas branch operations, profitability, compliance
with prudential regulations, developmental aspects, proper valuation of
asset/ liability portfolio investment portfolio, and the bank’s role in social
lending are covered in the course of the inspection. The Department
undertakes statutory inspections of banks on the basis of an annual
programme, which is co-terminus with the financial year for public
sector banks.

After the inspection report is released to the bank, followed by a
‘supervisory letter’ based on the inspection findings to the bank, the
concerns of the inspections are discussed with the CEO of the bank and a
Monitorable Action Plan is given to the bank for rectification of those
deficiencies. The Department submits a memorandum covering
supervisory concerns brought out by the inspection to the Board for
Financial Supervision (BFS). Specific corrective directions of the BFS are
conveyed to the banks concerned for immediate compliance. The
Memoranda submitted by the departments for supervisory scrutiny and
consideration of BFS generally cover matters relating to supervisory
strategy and operational supervision of individual banks, financial
institutions and non-banking financial companies as also industry-wide
issues and sectoral performance reviews.

Closer supervision on the asset quality and fixing responsibility on the board
and accountability on top management of banks has had a perceptible impact
on the Non Performing Assets (NPAs) of public sector banks. The banks have
shown a declining trend in terms of percentage of NPAs to total advances
during the last four years. The percentage of gross NPAs to gross advances of
public sector banks declined from a high level of 19.45 at the end of March
1995 to 13.86 as on 31 March 2000. The net NPAs formed 8.07% of the net
advances as on 31st
March 2000.
The Capital to Risk-weighted Assets Ratio (CRAR) for banks initially fixed at
8% was increased to 9% from March 2000. The position of banks not achieving
the prescribed CRAR level since 1995 has come down from 42 banks (14
public sector) as on 31 March 1995 to 4 banks (1 public sector) as on 31 March
2000 due to constant monitoring and directions for improvement in this area at
quarterly intervals.

Board for Financial Supervision: Constitution
The Committee on Financial System set up by the Government of India had
suggested that the supervisory functions of RBI should be separated from
the more traditional central banking functions and that a separate agency,
which could pay undivided attention to supervision, should be set up under
the aegis of RBI. A complete severance of supervision from central banking
was not considered necessary or desirable in the Indian context. So, based
on this recommendation, the first Board for Financial Supervision (BFS) was
constituted on November 16, 1994 by the Governor as a committee of the
Central Board of Directors of the Reserve Bank of India (RBI). It functions
under the RBI (BFS) Regulations, 1994 exclusively framed for the purpose
in consultation with the Government of India. The Board is chaired by the
Governor and is constituted by co-opting four non-official Directors from the
Central Board as Members for a term of two years. The Deputy Governors
of the Bank are ex-officio Members. One of the Deputy Governors is
nominated as Vice-Chairman.

Supervision serves as the Secretariat for the BFS.
Shri S P Talwar, Deputy Governor holding charge of the Bank's regulation and
supervision function has been the Vice-Chairman of the BFS since its
inception. Dr. Y. Venugopal Reddy and Shri Jagdish Capoor, Deputy
Governors, are other ex-officio Members as on date. Shri Y H Malegam, Shri
E A Reddy, Dr. S S Johl, and Dr. (Ms) Amrita Patel, who were members on
the Central Board of Directors of the Reserve Bank, were the non-official
members of the first Board.
The Board has since been reconstituted for a term of two years in consultation
with the Central Board in its meeting held on 21 December 2000, with Dr.
Ashok S. Ganguly and Shri K. Madhava Rao nominated in the place of Dr. S.
S. Johl and Shri E. A. Reddy, who ceased to be members of the reconstituted

Central Board. Shri Y H Malegam and Dr. (Ms) Amrita Patel have been
nominated to continue as Members of the reconstituted BFS. Executive
Directors in-charge of Department of Banking Operations & Development,
Department of Banking Supervision and Department of Non-Banking
Supervision participate in the BFS meetings by invitation. In-charges of these
departments are also to be in attendance for the meetings.
The Chairman, Vice-Chairman and Members of the Board jointly and severally
exercise the powers of the Board. The Board is at present required to meet
ordinarily at least once a month. Three Members, of whom one shall be
Chairman or the Vice-Chairman, form the quorum for the meeting.

Corporate Governance and Management Guidance
The requirements of the corporate governance framework differ across
institutions because of the different ownership structures of the commercial
banks.
• Public Sector banks are largely owned by the Government. The majority
holding in State Bank of India is held by RBI and State Bank of India holds
majority shareholding in its seven associate banks. (These holdings are
gradually being divested).
• The old private sector banks have traditionally been owned and controlled
by communities, groups or regional interests.
• The new private sector banks are owned and managed by financial
institutions or major corporate though the shareholding pattern is
increasingly diversified with fresh issues of capital as part of start up
covenants.
• The foreign banks are in essence branches of overseas entities though a
Local Advisory Board provides general guidance.
• Even amongst financial institutions, there are both state owned and private
sector entities.

Transparency and Disclosure
RBI has always been committed to enhancing the element of
transparency and adequate disclosures in the financial
statements of banks. The formats of balance sheet and profit &
loss account have been prescribed in the Banking Regulation
Act, 1949, and banks have to strictly comply with this. The
accounts and balance sheets are required to be duly audited by
statutory auditors (including branch auditors) appointed with the
approval of RBI. While international accounting standards are
broadly followed, specific valuation standards have been
prescribed in respect of investments and foreign exchange
positions.

Internal controls and housekeeping in banks
(i) Internal Control Systems
Reconciliation of inter-branch accounts
Reconciliation of inter-bank accounts
Reconciliation of accounts, and
Status of balancing of books of accounts
Reconciliation of clearing differences
(ii) Reconciliation of inter-branch accounts
(iii) Balancing of books
Presented by:
Ms. Megha Mathur

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