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Issues for IIM PI Process

'Essays for IIM' brings to you a holistic e-book on Current Essays/Notes with topics ranging from
Political, Economic to Business Affairs. Some sample essays can be read on the following pages. The
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complete package visit for more information or call us on 099532 45572

Make for India or Make in India – The debate begins!

With RBI governor Raghuram Rajan providing the strongest critique to the government’s Make in India strategy 

the fire to the debate has been kindled. It is a nuanced statement made by the RBI governor and his import 

can be understood clearly as below:‐ 

a) He has said that given the huge demand potential for India, make for India, albeit in India, may be a 
better strategy.  

b) Cautioned  against  an  export‐led  strategy  but  clarified  that  through  his  ‘Make  for  India’  he  is  not 
advocating ‘export pessimism’. 

a. A strategy for export‐led growth involves subsidizing exporters with cheap inputs as well as an 
undervalued exchange rate might not work simply because of current demand conditions 

i. Slow  global  economic  recovery,  especially  in  the  industrial  countries  is  expected 
atleast for next 5 years. 

ii. Other emerging markets certainly could absorb more, and a regional focus for exports 
will pay off.  

iii. Another question is if the world as a whole would be able to accommodate another 
export‐led China 

b. An  incentive driven approach  leads  to build‐up  inefficiencies  in  the  system and  is not self‐
sustaining as removal of incentives would make them uncompetitive once again. 

c. Moreover, not only are their costs to provide  incentives  in the form of subsidies, given the 
information age the buyers are aware of incentives and hence negotiate contracts taking into 

account the incentives. Hence, a part of the incentives flow to foreign nationals. 

c) Cautioned against  Import‐substitution strategy as  it may not work  in  the current global economic 
scenario as it as an era of Global Value Chains and we cannot be seen by the world as trying to curb 


a. An  import  substitution  strategy  creates  barriers  leads  to  reduced  domestic  competition, 
creating inefficient producers leading to increased costs to consumers.  

b. Instead we need to be more open and create an environment that makes our firms able to 
compete with  the  rest of  the world,  and encourages  foreign producers  to  come  and  take 

advantage of our environment to create jobs in India 

d) Cautioned  against  picking  a  particular  sector  such  as manufacturing  for  encouragement  simply 
because it has worked well for China. 

a. The main focus of the government should be on creation of a generic environment with a very 
high  ‘Ease  of  Doing  Business’. Which  sector  to  invest  in  and  focus  should  be  left  to  the 

entrepreneurs. We should focus on provide the public goods that are the requirement of each

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Issues for IIM PI Process

sector and provide  them at a  faster  renewed pace. For eg: MSMEs will benefit more  if we 

provide  multiple  product  quality  certification  agencies,  marketing  support  by  building 

platforms to sell and a finance platform to sell receivables. 

e) This means we have  to work on  creating  the  strongest  sustainable unified market we  can, which 
requires  a  reduction  in  the  transaction  costs  of  buying  and  selling  throughout  the  country, 

improvements in the physical transportation network, more efficient and competitive intermediaries 

in the supply chain from producer to the consumer. A well‐designed GST (goods and services tax) Bill, 

by reducing state border taxes, will have the important consequence of creating a truly national market 

for goods and services, which will be critical for our growth in years to come 

  China  US 



 As emissions rise it sets a target 
for emissions to peak in 2030 or 

earlier. First time China has set 

any deadline for stopping 


 Would increase the share of 
clean energy sources like wind 

and solar power to 20 percent by 

2030, about double what it is 



 Sets a goal to make its 2025 
emissions between 26 ‐28 % lower 

than they were in 2005 

 Would help the U.S. achieve its 
longer‐term goal of bringing 

emissions 80% lower than 2005 by 


 U.S. emissions peaked in 2007, but 
about half the reductions since 

have been due to the recession.  

Significance of 


 China is the biggest source of greenhouse gas pollution, with about a 
quarter of the world’s emissions. The U.S. is No. 2 with about 15% 

 The two countries are often adversaries at U.N. climate talks, and their 
unprecedented joint announcement sends an important signal that a 

deal is possible next year. 

 Last month, the European Union said that its 2030 emissions would be 
40 percent lower than in 1990.  

 With pledges from the top three emitters on the table a year ahead of 
the Paris climate summit, pressure now builds on other countries 

including India, Russia and Japan to present their own targets. 

Challenges  Coal still fuels about 80% of China’s 

electricity. Move away would need 

transformation in whole economy as 

heavy industries such as steel, 

A significant proportion of promised 

reductions hinge on cutting carbon 

pollution from coal‐fired plants. But

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Issues for IIM PI Process

(46.2), China (42.5), Sri Lanka (40.3), the Russian Federation (40.1), Thailand (40.0), Turkey (39.0), 

and Vietnam (35.6), as well as countries like the USA (40.8), Poland (34.1), and Switzerland (33.7) 

that have otherwise very high HDI ranking.  

o Not only is inequality lower in India than many other countries, it has also decreased as reflected 
in a 9.2 per cent fall in its Gini coefficient from 36.8 during 2010‐11 to 33.4 during 2011‐12.  

 The second indicator is the quintile income ratio, which is a ratio of the average income of the richest 20 
per cent of the population to that of poorest 20 per cent.  

o The quintile  income  ratio  for  India was 4.9  in 2011‐12. Countries  like  the United  States  (8.4), 
Switzerland (5.5), Turkey (7.9), Poland (5.5), the Russian Federation (7.3), Brazil (20.6), China (9.6), 

Malaysia (11.3), South Africa (25.3), Philippines (8.3), and Thailand (7.1) had higher ratios.  

o This implies that the inequality between the top and bottom quintiles in India was lower than in a 
large number of countries.  

 A related issue is the rural‐urban disparity.  
o One of the parameters used to estimate the rural‐urban gap is the monthly per capita expenditure 

(MPCE), which is defined as a value assigned to each household for measuring the level of living.  

o According  to  the  findings of  the NSS  68th  round  (2011‐12),  the  average MPCE  based on URP 
estimates at current prices is Rs. 1278.94 and Rs. 2399.24 respectively for rural and urban India 

indicating rural‐urban disparities . However, at constant prices (2004‐05), it is Rs.  703.42 and Rs. 


o The real MPCE at constant prices has grown over seven years (2004‐05 to 2011‐12) by 25.9 per 

cent in rural India and by a higher 28.6 per cent in urban India.  

The strategy to control inflation has to take into account the following factors: 

1. Move to market prices: It is important to be cognizant of the fact that deregulation of diesel prices, power–

sector  reforms,  and  generally  the move  from  administered  to market‐determined  prices will  release 

suppressed inflation in the short run. Nevertheless, the consequent reduction in subsidy and fiscal deficit 

will have the salutary effect of reducing inflation.  

2. Improving efficiency of public programmes and breaking the wage‐price spiral: The projects selected for 

schemes  like  the Mahatma Gandhi National Rural Employment Guarantee Scheme  (MGNREGS) do not 

improve  the productivity of  the agricultural  sector  commensurately. The  increasing wages under  such 

schemes have reportedly created shortage of labour in the agricultural sector as well as caused a wage‐

price spiral. The solution  lies  in selection of productivity enhancing projects  for ambitious public policy 

programmes like the MGNREGS.  

3. Rationalization of government support to farmers: If the policy of supporting farmers through MSP and 

procurement is to continue, the MSP should be scrupulously linked to the cost of production. Procurement 

should not be open‐ended, and the practice of some state governments of charging as high as 14‐15 per 

cent mandi fee/tax and paying high bonuses over and above the MSP must be discouraged. Experience has 

shown that the Food Corporation of India (FCI) has not been able to release enough stocks in the market

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Issues for IIM PI Process

to soften cereal prices while recovering its economic cost. While farmers can be incentivized by gradually 

removing restrictions on exports, the FCI can  learn to procure stocks from markets more efficiently and 

manage risks through the futures market.  

4. Role  of  APMC  Acts:  The  State  Agricultural  produce marketing  committee  (APMC)  Acts  have  created 

monopolies and distributional  inefficiencies. They constitute a major roadblock  in the way of creating a 

national market  for agricultural commodities. Apart  from breaking  the monopoly and dissuading  state 

governments from treating the APMCs as liberal sources of revenue, substantive efforts have to be made 

to create alternative trading platforms  in the private sector where  it  is possible to reduce the  layers of 

intermediation. Since this may take time, fruits and vegetables should be taken out of the purview of the 

APMC Acts immediately. A processor should be able to buy directly from farmers without having to pay 

any mandi fee/tax to the APMC.  

5. Role of public deficits: Fiscal deficit should be brought down by setting stringent time‐bound targets under 

the Fiscal Responsibility and Budget Management (FRBM) Act  

1. India has almost missed the 

manufacturing bus. India has failed to ride 

the manufacturing wave that helped so 

many countries in Asia emerge out of mass 

poverty. Prime Minister Narendra Modi’s 

exhortation to companies to “make in 

India” is one indication that he wants to 

replicate the Asian manufacturing success 

stories in India. One popular depiction is of 

China as the factory of the world while 

India is viewed as the global back office. 

The reasons for this are complex. Yet, the 

harsh fact is that India has failed to build 

enough factories to provide jobs for the 

millions who are leaving farms.

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Issues for IIM PI Process

legislative and executive branches. The source of the tension, however, lies in the vacuum created by the lapses
of both the legislative and executive branches.

 The judiciary is giving the impression of stepping in to fill the vacuum by often forcing the executive to take
action (against the privileged sons of politicians, as in the Jessica Lal case) or compelling Parliament to enact
laws (for example, to curb sexual harassment at workplaces). This has encouraged the Indian urban middle
class to repose its faith in the new-found concept of judicial activism, and to wish that the judiciary replaces the
corrupt legislature and bureaucracy as the benevolent authority. But there is a catch in this wishful belief. Barring
a few recent cases of judicial intervention, which have had some positive effect on governance, the Indian
judiciary on the whole has not displayed any spontaneous will to act on behalf of the common people.

 Even though this phenomenon has been welcomed by many, it has many negatives –
o It has overburdened the courts leading to delayed justice for normal cases
o It has blurred the line of distinction between the legislature on the one hand and the judiciary on the

o It has made the balance among the three organs of government very delicate. Democratic government

is based on each organ of government respecting the powers and jurisdiction of the others. Judicial
activism may be creating strains on this democratic principle.

 Even though Judicial review is essential to maintain the fundamental rights of citizens, the constitution
clearly defines the legislature as the law making body. Any aberration in either of these will be against the spirit
of the constitution. The two parts should try to work together without stepping into the jurisdiction of each
other for the benefit of the nation’s common man.

There are three important effects:

1. Some people had borrowed in dollars, and left it unhedged since they were speculating that the INR would
appreciate. They get hurt in the process. But this is fine as in a market economy, many people place bets about
future fluctuations of financial prices, and half the time the speculator loses money. (If the rupee had not
depreciated sharply, these speculators would have been gained).

2. When the rupee depreciates, imports become costlier and India's exports become more competitive. So
exports (X) gradually start going up and imports (M) gradually start going down. The net gain in X-M is
increased demand in the local economy. Hence, INR depreciation is good for aggregate demand (and
conversely INR appreciation pulls back demand). However, we have to bear in mind that these effects are
small and take place with long lags.

Many things in India are tradeable. It is important to focus on the things that are tradeable and not just on the
things that are imported. As an example, there are many transactions between a domestic producer of steel and a
domestic buyer of steel. The buyer and seller are both in India. But the price at which they transact is the world
price of steel (which is quoted in dollars) multiplied by the INR/USD exchange rate. This is called `import parity
pricing'. Through this, the domestic prices of tradeables goes up when the rupee depreciates.

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Issues for IIM PI Process

Inflation has an adverse impact on the real economy. The following points are worth noting

1. High and persistent inflation imposes significant socio-economic costs. Given that the burden of inflation is
disproportionately large on the poor, high inflation by itself can lead to distributional inequality. Therefore, for
a welfare-oriented public policy, low inflation becomes a critical element for ensuring balanced progress.

2. High inflation distorts economic incentives by diverting resources away from productive investment to
speculative activities.

3. Inflation reduces households saving as they try to maintain the real value of their consumption. Consequent
fall in overall investment in the economy reduces its potential growth.

4. As inflation rises and turns volatile, it raises the inflation risk premia in financial transactions. Hence, nominal
interest rates tend to be higher than they would have been under low and stable inflation.

5. If domestic inflation remains persistently higher than those of the trading partners, it affects external
competitiveness through appreciation of the real exchange rate.

6. As inflation rises beyond a threshold, it has an adverse impact on overall growth.
7. RBI's current assessment suggests that the threshold level of inflation for India is in the range of 4-6%. If

inflation persists beyond this level, it could lower economic growth over the medium-term.

Hence there is a need for a monetary policy response by the Central Bank to control inflation

'Essays for IIM' brings to you a holistic e-book on Current Essays/Notes with
topics ranging from Political, Economic to Business Affairs. For ordering the
complete package, visit

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