BECC-113 Solved Assignment

Title of Course: Indian Economy II

1. Explain the transformation of Indian agriculture from its traditional to the modern phase during the 1960s to 1990s.
2. Discuss the trend in the performance of India’s External Sector during the period 201920 .
   B. Medium Answer Questions (word limit – 250 words)
3. Outline the FDI policy pursued by India over different time periods.
4. Describe the changes in the SSI sector in the MSMED Act of 2006.
5. Present a profile of the important services exported by India.
   C. Short Answer Questions (word limit – 100 words)
6. Differentiate between:
   (a) FDI and FII.
   (b) COR and ICOR.
   (c) Primary, Secondary and Terminal Markets.
7. Write short notes on the following.
   (a) Exchange Rate Stability.
   (b) Export Led Growth.
   (c) Land Lease Market.

Expert Answer:

Explain the transformation of Indian agriculture from its traditional to the modern phase during the 1960s to 1990s.

Answer:

• High-Yielding Varieties: The development and adoption of HYVs led to significant increases in crop productivity. These varieties were more responsive to fertilizers and irrigation, which substantially boosted yields.
• Chemical Inputs: The use of chemical fertilizers and pesticides became widespread, enhancing soil fertility and controlling pests that previously caused substantial crop losses.
• Irrigation Infrastructure: Investment in irrigation facilities, such as dams and canals, helped reduce dependence on monsoon rains and allowed for multiple cropping cycles per year.
• Mechanization: The introduction of modern machinery, such as tractors and combine harvesters, improved efficiency in planting, harvesting, and processing crops.

• Economic Liberalization: The economic reforms of 1991, which included liberalization, privatization, and globalization, also impacted agriculture. The deregulation of agricultural markets allowed for greater participation of private players and improved market access for farmers.
• Diversification and Cash Crops: The focus shifted from merely increasing food grain production to diversifying agricultural activities. Efforts were made to promote the cultivation of cash crops like fruits, vegetables, and flowers, which provided higher returns and improved farmers’ incomes.
• Technology Transfer and Research: The government invested in agricultural research and development through institutions like the Indian Council of Agricultural Research (ICAR). This included the development of new technologies, improved crop varieties, and efficient farming practices.
• Rural Infrastructure Development: Investments in rural infrastructure, such as roads, storage facilities, and cold chains, improved market access and reduced post-harvest losses. These developments facilitated better integration of agriculture with the broader economy.
• Sustainability and Environmental Concerns: Recognizing the environmental challenges posed by intensive farming, there was a growing emphasis on sustainable practices. Programs aimed at soil conservation, water management, and organic farming gained traction during this period.

• Regional Disparities: The benefits of the Green Revolution were unevenly distributed, with regions like Punjab and Haryana reaping the most gains while others, particularly in eastern and southern India, lagged behind.
• Environmental Impact: The intensive use of chemical inputs and irrigation led to soil degradation, waterlogging, and depletion of groundwater resources. These issues raised concerns about the long-term sustainability of agricultural practices.
• Smallholder Farmers: Many farmers, especially smallholders, struggled to benefit from the modern practices due to limited access to resources, technology, and credit. This contributed to persistent inequalities in the sector.

Discuss the trend in the performance of India’s External Sector during the period 2019-20.

Answer:

• Exports: India’s merchandise exports faced challenges due to sluggish global demand and trade tensions. Key sectors such as petroleum products, gems and jewelry, and engineering goods witnessed a decline in exports. The global economic slowdown, coupled with trade disputes between major economies, particularly impacted India’s export growth. Nevertheless, there were some positive signals from sectors like pharmaceuticals and textiles, which showed resilience and growth in export volumes.
• Imports: India’s imports also saw a decline during this period, driven by reduced demand for crude oil and other commodities. Lower crude oil prices globally contributed to a reduction in the import bill, which helped in narrowing the trade deficit. However, imports of gold and electronic goods remained significant, reflecting continued consumer demand and investment in high-value items.

• Net Invisible Exports: The net invisible exports, which include services, income, and transfers, played a crucial role in the current account. The services sector, especially IT and business process outsourcing, continued to perform well, contributing positively to the current account balance.
• Remittances: Remittances from Indian expatriates remained strong, providing a steady source of foreign exchange and contributing to the current account surplus in the services and transfers segment.

• Inflows: India continued to attract substantial FDI inflows, driven by sectors such as technology, telecommunications, and retail. The government’s reforms aimed at easing regulations and enhancing the business environment contributed to maintaining investor confidence.
• Regulatory Environment: However, there were concerns about regulatory uncertainties and slow decision-making processes that impacted investor sentiment. Despite these issues, India remained one of the top destinations for FDI among emerging markets.

• Capital Flows: Strong capital inflows, including FDI and portfolio investments, bolstered the reserves. The foreign exchange reserves served as a buffer against external shocks and contributed to stabilizing the rupee’s value.
• Current Account Improvement: The improvement in the current account balance also played a role in increasing reserves. The government and the Reserve Bank of India (RBI) used the reserves to manage currency fluctuations and ensure financial stability.

• Rupee Depreciation: The rupee faced depreciation pressures due to global economic uncertainties, trade tensions, and domestic economic concerns. Despite intermittent volatility, the overall depreciation was managed through foreign exchange reserves and monetary policy interventions by the RBI.
• RBI Intervention: The RBI’s intervention in the forex market helped stabilize the rupee to some extent and prevent excessive volatility. The central bank’s policies aimed at ensuring orderly movement in the currency and maintaining investor confidence.

• Global Slowdown: The global economic slowdown, exacerbated by trade tensions between major economies, affected international trade volumes and commodity prices. This slowdown had repercussions on India’s export performance and external sector dynamics.
• Geopolitical Tensions: Geopolitical tensions and uncertainties also influenced capital flows and investment decisions, impacting FDI and portfolio investments.

• Trade Policy: The government focused on diversifying export markets and enhancing competitiveness through trade policy reforms. Initiatives to promote exports and support domestic industries were part of the strategy to address trade imbalances.
• Investment Climate: Efforts to improve the investment climate, including easing regulations and enhancing infrastructure, were aimed at attracting and retaining foreign investment.
• Economic Reforms: Broader economic reforms, including labor laws and ease of doing business measures, were introduced to strengthen the external sector and support economic growth.

B. Medium Answer Questions (word limit – 250 words)

Outline the FDI policy pursued by India over different time periods.

Answer:

• Foreign Investment Promotion Board (FIPB): Established to streamline the approval process for foreign investments.
• Relaxation of Equity Caps: Equity limits were eased, allowing foreign investors greater ownership stakes. The automatic route was introduced for many sectors, simplifying the process for FDI inflows.
• Sectoral Liberalization: Several sectors, including telecommunications and retail, were opened up for foreign investment, with revised norms to encourage inflows.

• Sectoral Reforms: FDI caps were further relaxed in sectors like civil aviation and insurance. The government introduced policies to attract investment in infrastructure and high technology.
• Ease of Doing Business: Reforms aimed at improving the business environment included simplification of approval processes and introduction of single-window clearance systems.
• Investment Promotion: Initiatives such as the Special Economic Zones (SEZs) were launched to attract foreign investment by offering tax benefits and infrastructure support.

• FDI Policy Updates: The automatic approval route has been expanded to more sectors, including defense and e-commerce, subject to certain conditions. Foreign investment in retail has been permitted with specific guidelines to protect small retailers.
• Focus on Strategic Sectors: The policy has increasingly targeted sectors such as technology, startups, and green energy, aligning with the government’s ‘Make in India’ initiative.
• Regulatory Improvements: Efforts to streamline and digitize the approval processes have been made, including the introduction of the National Investment and Infrastructure Fund (NIIF) and the overhaul of the FDI policy framework to provide clarity and ease of operations.

Describe the changes in the SSI sector in the MSMED Act of 2006.

Answer:

• Micro Enterprises: Investments up to ₹25 lakh in plant and machinery.
• Small Enterprises: Investments between ₹25 lakh and ₹5 crore.
• Medium Enterprises: Investments between ₹5 crore and ₹10 crore.

• Financial Assistance: Enhanced provisions for financial assistance from banks and financial institutions, including easier access to credit and reduced interest rates for micro and small enterprises.
• Infrastructure Development: Support for the creation of industrial estates and clusters to provide better infrastructure and facilities for small enterprises.

Present a profile of the important services exported by India.

Answer:

C. Short Answer Questions (word limit – 100 words)

Differentiate between FDI and FII.

Answer:

• FDI: Refers to investments made by foreign entities directly into the business operations of a company in another country. This usually involves acquiring a substantial ownership stake, establishing new business operations, or merging with existing companies. FDI signifies a long-term interest and often includes management control or influence. It directly impacts the economy by creating jobs, transferring technology, and fostering development.
• FII: Refers to investments by foreign institutional investors such as mutual funds, pension funds, or hedge funds in the financial markets of another country. FIIs invest in equity, debt, and other financial instruments but do not seek significant control over companies. Their investments are generally short-term and can be withdrawn quickly, affecting market volatility. FIIs primarily aim for financial returns rather than direct business management.

Differentiate between COR and ICOR.

Answer:

• Capital Output Ratio (COR): COR measures the amount of capital required to produce a given amount of output. It is calculated as the ratio of total capital investment to total output produced. A higher COR indicates less efficient use of capital, as more capital is needed to generate output. It provides a snapshot of the capital-output relationship at a given point in time.
• Incremental Capital Output Ratio (ICOR): ICOR evaluates the additional capital required to produce an additional unit of output. It is calculated by dividing the change in capital investment by the change in output over a specific period. ICOR helps in understanding how efficiently additional capital contributes to incremental output. A lower ICOR suggests that new investments are generating higher output, indicating improved efficiency.

Differentiate between Primary, Secondary and Terminal Markets.

Answer:

Write short notes on Exchange Rate Stability.

Answer:

• Importance: Stable exchange rates help businesses and investors by minimizing risks associated with currency fluctuations, which can affect profitability and investment decisions. It also fosters a predictable environment for international trade, encouraging cross-border business activities and foreign direct investment.
• Mechanisms: Governments and central banks often intervene in the foreign exchange market to stabilize their currency. This can involve using foreign exchange reserves to influence the currency’s value or implementing monetary policies to control inflation and interest rates, which indirectly affect exchange rates.
• Challenges: Achieving and maintaining stability can be challenging due to factors like economic shocks, speculative activities, and changes in global economic conditions.

Write short notes on Export Led Growth.

Answer:

• Concept: The idea is that by expanding export activities, a country can stimulate industrialization, create jobs, and enhance overall economic productivity. Export-led growth often involves improving the quality and competitiveness of goods and services to meet international standards.
• Benefits: It can lead to increased foreign exchange earnings, enhance capital inflows, and promote technological advancements. By integrating into global markets, countries can also benefit from economies of scale and resource optimization.
• Examples: Nations such as South Korea and Taiwan have successfully employed export-led growth strategies to transform their economies from low-income to high-income status.

Write short notes on Land Lease Market.

Answer:

• Concept: In the land lease market, landowners lease their property to tenants for specified periods, with terms agreed upon in a lease agreement. This arrangement provides landowners with rental income while allowing tenants access to land without purchasing it outright.
• Importance: The land lease market facilitates efficient land use and allocation. It supports agricultural production by allowing farmers to access land without high upfront costs and enables businesses to expand operations or establish new facilities.
• Challenges: Issues such as lease duration, renewal terms, and land valuation can impact the market. Legal disputes and regulatory changes also influence land leasing practices.