Indian Economy, 5th edition (73 page)

After the recomendations of the S.S. Tarapore Committee (1997) on the Capital Account Convertibility, India has been moving in the direction of allowing full convertibility in this account but with required precautions. India is still a country of partial convertibility (40:60) in the capital account but inside this overall policy, enough reforms have been made and to certain levels of foreign exchange requirements, it is an economy allowing full capital account convertibility—

i.
Indian Corporates are allowed full convertibility in the automatic route upto $ 500 million overseas ventures (investment by Ltd. companies in foreign countries allowed).

ii.
Indian Corporates are allowed to prepay their external commercial borrowings (ECBs) via automatic route if the loan is above $ 500 million (now done $ 20,000)

iii.
Individuals are allowed to invest in foreign assets, shares, etc. upto the level of $ 2,00,000 per annum.

iv.
Unlimited amount of gold is allowed to be imported (this is equal to allowing full convertibility in capital account via current account route but not feasible for everybody) and is not allowed now.

The Second Committee on the Capital Account Convertibility (CAC)—again chaired by S.S. Tarapore—handed over its report in September 2006 on which the RBI/the Government is having consultations.

LERMS

India announced the Liberalised Exchange Rate Mechanism System (LERMS) in the Union Budget 1992–93 and in March 1993 it was operationalised. India delinked its currency from the fixed currency system and moved into the era of floating exchange-rate system under it.

Indian form of exchange rate is known as the ‘dual exchange rate’, one exchange rate of rupee is official and the other is market-driven.
16
The market-driven exchange rate shows the actual tendencies of the foreign currency demand and supply in the economy vis-a-vis the domestic currency. It is the market-driven exchange rate which affects the official rate and not the other way round.

NEER

The Nominal Effective Exchange Rate (NEER) of the rupee is a weighted average of exchange rates before the currencies of India’s major trading partners.

REER

When the weight of inflation is adjusted with the NEER, we get the Real Effective Exchange Rate (REER) of the rupee. Since inflation has been on the higher side in recent months, the REER of the rupee has been more against it than the NEER.

EFF

The Extended
f
und Facility (EFF) is a service provided by the IMF to its member countries which authorises them to raise any amount of foreign exchange from it to fulfill their BoP crisis, but on the conditions of structural reforms in the economy put by the body. It is the first agreement of its kind. India had signed this agreement with the IMF in the financial year 1981–82.

IMF Conditions on India

The BoP crisis of early 1990s made India borrow from the IMF which came on some conditions. The medium term loan to India was given for the restructuring of the economy on the following conditions—

i.
Devaluation of rupee by 22 per cent (done in two consecutive fortnights—rupee fell from ‘21 to ‘27 against every US Dollar).

ii.
Drastic custom cut to a peak duty of 30 per cent from the erstwhile level of 130 per cent for all goods.

iii.
Excise duty to be increased by 20 per cent to neutralise the loss of revenue due to custom cut.

iv.
Government expenditure to be cut by 10 per cent per annum (the burden of salaries, pensions, subsidies, etc.).

The above-given conditions to which India was obliged were vehemently opposed by the Indian corporate sector, opposition in the parliament and majority of Indians. But by the end of 1999–2000, when India saw every logic in strengthening its BoP position there was no ideological opposition to the idea. It should always be kept in mind that the nature of structural reforms India went through were guided and decided by these pre-conditions of the IMF.

t
his is how the direction of structural reforms of an economy are regulated by the IMF in the process of strengthening the BoP position of the crisis-driven economy. The purpose has been served in the Indian case. India has not only fulfilled these conditions but it has also moved ahead.

Hard Currency

It is the international currency in which the highest faith is shown and is needed by every economy. The strongest currency of the world is one which has a high level of liquidity. Basically, the economy with the highest as well as highly diversified exports that are compulsive imports for other countries (as of high level technology, defence products, life saving medicines and petroleum products) will also create high demand for its currency in the world and become the hard currency. It is always scarce.

Upto the
s
econd
w
orld
w
ar, the best hard currency was the Pound Sterling (£) of the UK but soon it was replaced by the US$—at present some experts believe that the Euroland’s currency (€) might replace it, too. Some of the best hard currencies of the world today are the US dollar, the Euro(€), Japanese Yen (¥) and the UK Sterling Pound (£).

Soft Currency

A term used in the foreign exchange market which denotes the currency that is easily available in any economy in its forex market. For example, rupee is a soft currency in the Indian forex market. It is basically the opposite term for the hard currency.

Hot Currency

A term of the forex market and is a temporary name for any hard currency. Due to certain reasons, if a hard currency is exiting an economy at a fast pace for the time, the
hard
currency is known to be
hot
. As in the case of the SE Asian crisis, the US dollar had become hot.

Heated Currency

A term used in forex market to denote the domestic currency which is under enough pressure (heat) of depreciation due to a hard currency’s high tendency of exiting the economy (since it has become hot). It is also known as
currency under heat
or
under hammering.

Cheap currency

A term first used by the economist J. M. Keynes (1930s). If a government starts re-purchasing its bonds before their maturities (at full-maturity prices) the money which flows into the economy is known as the cheap currency, also called cheap money.

In banking industry, it means a period of comparatively lower/softer interest rates regime.

Dear Currency

This term was popularised by the other economists in early 1930s to show the opposite of the cheap currency.
w
hen a goverment issues bonds, the money which flows from the public to the government or the money in the economy in general is called dear currency, also called as
dear money.

In the banking industry, it means a period of comparatively higher/costlier interest rates regime.

SPECIAL ECONOMIC ZONE
17

How does a country of over a billion people take on the challenge of providing a better life to its citizens? The question would naturally elicit a million different responses having their roots in several social, economic and political measures. No one today, however, doubts the efficacy of faster and broad-based economic development as a primary tool for providing the average Indian a better deal. The country needs massive investments in manufacturing, infrastructure development and in its productive capacities. We also need to aggressively promote exports of goods and services in an ever so highly competitive global marketplace. This alone would lead to a strong edifice for sustained growth and creation of productive employment. These were the very aims for which the Government of India mooted the Special Economic Zone (SEZ) Policy in April 2000 which was further concretised through the SEZ Act 2005 and the SEZ Rules 2006 policy.

The concept of SEZ is not a new one and it is an improvement to the concept of Export Processing Zones. India was
one of the first
in Asia to recognize the effectiveness of the Export Processing Zone (EPZ) model in promoting exports, with
Asia’s first
EPZ set up in Kandla in 1965 – seven more EPZs were set up thereafter. However, the EPZs were not able to emerge as effective instruments for export promotion on account of multiplicity of controls and clearances, absence of world-class infra-structure, and an unstable fiscal regime. In order to overcome these shortcomings and attract larger foreign investments in India, the SEZ Policy was announced in April 2000. This policy was intended to make
SEZs an engine for economic growth
supported by quality infrastructure complemented by an attractive fiscal package, both at the Centre and the State level, with the minimum possible regulations.

What is SEZ?

SEZ, or Special Economic Zone, is essentially an industrial cluster meant largely for exports. An SEZ is governed by a special set of rules aimed at attracting direct investment for export-oriented production. SEZs, earlier known as Export Processing Zones or Free Trade Zones, are
duty free enclaves
which are treated as
foreign territory
only for trade operations, duties, tariffs and typically marked by the best infrastructure and least red tape. Other salient features of SEZs are:

•
manufacturing or service activities are allowed;

•
full freedom for sub-contracting;

•
no routine examination by customs authorities of export/import cargo;

•
units in SEZs have to become net foreign exchange earners within three years; and

•
domestic sales from them are subject to full customs duty and the import policy in force.

The SEZ concept recognises the issues related to economic development and provides for developing self-sustaining Industrial Townships so that the increased economic activity does not create pressure on the existing infrastructure. This issue is addressed in the SEZ policy by specifying a non-processing area for creation of support infrastructure. Every SEZ is divided into a processing area where alone the SEZ units would come up and the non-processing area where the supporting infrastructure is to be created. The SEZ developer would be responsible for all civic amenities and infrastructure including roads, sewerage, open spaces, green spaces, education facilities, power, water supply and housing etc.

Land Acquisition Issue & SEZ

While the benefits of SEZs are visible and evident, one major issue that has been often raised pertains to the acquisition of agricultural land for setting up SEZs. Acquisition of land is a matter that comes under the purview of the State Governments since land/ land usage is a State subject. While there is a
Central Land Acquisition Act
of 1894 extensively amended in 1971, the States have made modifications to the same and have their own compensation and relief & rehabilitation measures depending upon their requirements and necessities.

The need of the hour is to formulate a working Land Reforms and Land Acquisition Law which could address the emerging new realities (like agitations by farmers after the land has already been acquired and compensation paid to them) related to the issue of land acquisition. The second thing is an active and willing co-operation/participation coming from the state governments. Involving the PRIs will provide a more durable and effective way out to this issue.

Meanwhile
, on the proposed and revised
Land Acquisition Bill, 2013
, a political concensus has been reached
(on April 18, 2013)
– which paved the way for the Bill to get introduced in the current Session of the Parliament – it will replace India’s existing
Land Acquisition Act, 1894.
The Bill is more careful, realistic and futuristic about the contemporary and emerging challenges of land acquisition in the country – the major highlights of the Bill are as follows:

(i)
For the first time, resettlement and rehabilitation both have been emphasised on the same footing;

(ii)
Scrutiny of all private purchase of land between 2011 and 2013 (there has been a concern among many that the land mafias have grabbed cheap land from the farmers before the proposed Bill has been passed by the Government);

(iii)
A provision to enable state legislation on leasing in place of acquisition of land;

(iv)
Instead of acquisition, land to be leased to developers, so that the ownership remains with farmers and provides them a regular income – the government to amend the
Land Acquisition, Rehabilitation and Resettlement Bill, 2011
, to provide for an enabling provision to states for enacting laws in this regard (leasing of land is a state subject under the Constitution).

Experts, together with the GoI, beleive that once the new Act is implemented, the issue of land acquisition in the country will become more smooth and will be able to avoid the controversies which we saw in the recent times.

Performance of SEZs

As per the
Economic Survey 2012-13
, the performance of SEZs today is as given below –

•
Since the Special Economic Zones Act and Rules were notified in February 2006, formal approvals have been granted for setting up of 579 SEZs, of which 384 have been notified.

•
Of the total
employment
provided to 9,45,990 persons in SEZs as a whole, that to 8,11,286 persons is incremental employment generated after February 2006 when the SEZ Act came into force. This is apart from the million mandays of employment created by the developer for infrastructure activities.

•
While in 2010-11, physical
exports
from SEZs were worth Rs. 3,15,867.85 crore, in 2011-12 the figure had gone up to Rs. 3,64,477.73 crore showing a
growth of 15.4 per cent
. The total physical exports from SEZs in the first half of the current financial year have been to the tune of app. Rs. 2,39,628 crore, registering a
growth of 36 per cent
over the last year.