Indian Economy, 5th edition (116 page)

The Income Tax relief against double taxation is provided in two ways:

(i)
Unilateral Relief:
Under
Section 91
, the Indian government can relieve an individual from double taxation irrespective of whether there is a DTAA between India and the other country concerned. Unilateral relief may be offered to a tax payer if:

(i)
The person or company has been a resident of India in the previous year.

(ii)
The same income must be accrued to and received by the tax payer outside India in the previous year.

(iii)
The income should have been taxed in India and in another country with which there is no tax treaty.

(iv)
The person or company has paid tax under the laws of the foreign country in question.

(ii)
Bilateral Relief:
Under
Section 90
, the Indian government offers protection against double taxation by entering into a DTAA with another country, based on mutually acceptable terms. Such relief may be offered under two methods:

(a)
Exemption method:
This ensures complete avoidance of tax overlapping.

(b)
Tax credit method:
This provides relief by giving the tax payer a deduction from the tax payable in India.

Apart from providing ways and means to avoid double taxation of same income, the agreements generally provide for other matters of common interest of the two countries
such as
: exchange of information; mutual assistance procedure for resolution of disputes; and for mutual assistance in effecting recovery of taxes. Treaties being international agreements, their consequences are determined according to the rules of
Vienna Convention on the Law of Treaties, 1969
. The Articles 31, 32 and 33 of the convention lay down the rules for interpretation of these treaties. The commentaries by OECD and UN based on respective models also provide material for interpretation of the treaties. The terms and expressions, if not defined in the treaties, take their meaning from respective domestic law in case they are defined there.

Q. 36 Write a short note on the impact of colonialism on the Indian industry in the pre-independence period.

Ans.

•
The first half of the 19
th
century saw a sudden and quick collapse of urban handicrafts – railways made it even faster.

•
The second half of 19
th
century saw the entry of modern industries but the pace was very slow – low technology and confined to
cotton
and
jute,
iron/steel, came up in 1907 while sugar, cement and paper industries and a few engineering firms came up in the 1930s – still by 1946, cotton and jute textiles accounted for nearly 30% per cent of all worker employed in factories [CEHI].
3

•
After 1918, modern industry developed quite fast but its growth rate was just 3.8 per cent and had little impact on overall economic situation as its share in the national income was at 7.5 per cent by July 1947 [A. Maddison] in 1913 it was 3.8 per cent [CEHI].

•
Modern industries barely compensated for the displacement of traditional handicrafts.

•
In 1939 only 2 million were employed in industries (population 389 m.)

•
A virtual absence of
capital
or
producers goods
industry – relying almost wholly on imported machinry and tools (89.8 per cent).

•
Banking and insurance grossly underdeveloped. Without simultaneous industrialisation, the growth of
railways
further colonised India and they served the British cause.

•
Till 1930s, foreign capital dominated after 1918 – giant MNCs entered (Unilever, Imperial Chemical Industries, Dunlop and GM).

Foreign capital did ‘drain’ capital from India in place of promoting investment, we may see the
three
chief features:

(i)
Contributed to ‘the guided underdevelopment of India by concentrating on the production and export of raw materials and food stuffs.

(ii)
Focused the sectors which catered to foreign markets and not to India’s home market.

(iii)
The ‘multiplier effects’ in terms of income, employment, capital, etc. were largely exported back to the developed countries.

Overall, industries were during encouraged the colonial rule but for the service to the colonial interests, not India – just a tool to drain out wealth, from India.

Q. 37 ‘Financial development facilitates real economic growth’. In the light of the statement discuss the situation of bond market in India.

Ans.
The
Economic Survey 2011-12
raises its concerns for weak ‘bond market’ in India with this statement of the Australian economist Schumpeter- the issue was raised by the last
Economic Survey
, too. And the latest
Economic Survey 2012-13
has also recommended for its strengthening. The Survey highlights the passages from the latest research which prove the idea that to propel economic growth it is necessary to put a strong financial market in place – its depth and diversity in the instruments of raising long-term money support inclusive growth.

Long-term financial needs of Indian firms are mainly met by the banks in India (17.8 per cent, 2011-12) and the bonds play a negligible role. Basically, the vacuum created by the bond market has been compensated by foreign borrowings (costly and secured) by Indian firms which rose sharply in the last decade.

There are some
reasons
why the bond market has not developed adequately:

(i)
One reason has to do with what economists call ‘multiple equilibria’. This is a situation when due to underdeveloped bond market, the instrument lacks liquidity – lesser number of interested buyers and sellers of the bonds.

(ii)
Underdeveloped
mechanism of information
about the corporate houses who could issue bonds- information is delayed, inadequate and insufficient.

(iii)
A general
erosion of faith
in the corporate world due to recent cases of scams and scandals which involved the politicians, bureaucracy and the corporate houses, too.

Low penetration of the ‘unsecured borrowing’ (Corporate bonds) provide less incentives to the entrepreneur and discourages investment and growth. Raising funds via bonds are not only easier but faster and safer in comparision to the ‘secured loans’ provided by the other segments of the organised finacial sector (banks, security market, debentures). Entrepreneurship needs free and quicker means of funds’ availability to flourish – India is a typical case of least explored economy on this count. As India decides to garner $500 billion investment from the private sector in the
12th Plan
period, this is the right time to strengthen the corporate bond market in the country.

Q. 38 Write a current note on the recent steps taken by the government in the area of agricultural extension services.

Ans.
Governments have always felt that India lacks a strong extension services in the agriculture sector. In recent years, the GoI has launched many effective programmes/schemes in this regard:

•
The Support to State Extension Programmes for Extension Reforms Scheme was launched in 2005-06, aiming at making the extension system ‘farmer driven’ as well as accountable to farmers by providing for new institutional arrangements for technology dissemination. This has been done through setting up of Agricultural Technology Management Agencies (ATMA) at district level to operationalise the extension reforms;

•
‘Mass media support’ to agriculture focusing on Doordarshan infrastructure and All India Radio (AIR) broadcasting agriculture-related informations;

•
Kisan Call Centres (KCC) to provide agricultural information to the farming community through toll free telephone lines;

•
Agri-clinic
and
agribusiness
centres by agriculture graduates to provide extension services to farmers on ‘payment basis’ through setting up of economically viable self–employment ventures, and information dissemination through
agri fairs
;

•
Extension Education Institutes
at
Nilokher
(Haryana),
Rajendra Nagar
(Andhra Pradesh),
Anand
(Gujarat), and
Jorhat
(Assam) are operating at ‘regional level’ to improve the ‘skills and professional’ competence of extension field functionaries of agriculture;

•
There are
model training courses
on thrust areas of agriculture, horticulture, animal husbandry, and fisheries with the objective of improving the professional competence, upgrading the knowledge and developing technical skills; and

•
MANAGE
,
Hyderabad, an apex Institute at the national level, provides training to middle and senior level officers of agriculture.

Q. 39 Write a contemporary note on the ‘changing dynamics’ of the global economy in reference to India.

Ans.
The global economy has gone for a big change in its dynamics over the ‘last two decades’ – and has every potential to go for further change in the coming decades. The shares of major economies in global GDP, manufacturing, and trade suggest that there has been a marked change in the configuration of the world economy – visible by the following points:

•
Sustained growth of a number of emerging economies, especially the BRICS economies, has resulted in an increase in their share in the global GDP.

•
The value addition in the world economy has been moving away from advanced countries towards what have been termed emerging economies. The decline in share is particularly marked in the case of the EU.

•
The shift towards Asia has been significant and, within Asia, away from Japan to China and India.

•
The
fivefold
increase in share of China in the global GDP has placed it as the second largest economy in the world. The increase in share of India, though less dramatic, is nevertheless of an order that places her as the
fourth
largest economy in PPP terms.

•
The reduction in share of advanced economies, particularly from 2005, has been accentuated by the slowdown that followed the ‘sub-prime crisis’ in the United States, the eurozone crisis in 2010, and the near stagnation in Japan for nearly two decades on the one side and the significantly higher rate of growth in low and middle income countries, particularly the large countries like India and China, on the other.

•
From the perspective of whether there has been a ‘catch up’ in per capita incomes across a larger set of countries, it is seen that the ‘per capita income’ (at PPP constant 2005 dollars) of 131 countries from 1980 to 2009 continued to increase for most of the period since the mid-1980s, except in the last two-three years.

The major changes in the
dynamics of the Indian economy
have been as given below:

•
India has achieved faster growth from the 1980s – not only was this growth higher compared to its own past, it was also much faster than that achieved by a large number of countries. Between 1980 and 2010, India achieved a growth of 6.2 per cent, while the world as a whole registered a growth rate of 3.3 per cent.

•
India’s share in global GDP, (measured in terms of constant 2005 PPP international dollars) more than doubled from 2.5 per cent in 1980 to 5.5 per cent in 2010. Consequently, India’s rank in per capita GDP showed an improvement from 117 in 1990 to 101 in 2000 and further to 94 in 2009, out of 131 countries ( China improved its rank from 127 to 74 during the same period).

Underlying the relative decrease in share of advanced economies in the global GDP, there has been a marked shift in the
location of manufacturing.
This process was on in the 1990s, but got accelerated in the current decade. Again, the rise in the share of China is particularly significant while other emerging economies, namely Brazil, India, Indonesia have also moved up in terms of their share in world manufacturing. Even with the change in distribution of global GDP and manufacturing across countries, it needs to be noted that the advanced countries still account for a large share of industrial output, apart from being the repositories of technology and value added in services. The changing dynamics of the global economy has provided a good opportunity to India to expand its econimic presence more strongly.

Q. 40 Write a brief note on the recent steps taken by the Indian government regarding financial inclusion and literacy.

Ans.
Financial inclusion plays a crucial role in inclusive development and sustainable prosperity as is being increasingly recognised and acknowledged globally. Large segments of population need to be part of formal payment system and financial markets. Financial inclusion would also broaden and deepen financial savings and lead to higher economic development.

Previous initiatives:
While financial sector policies in India have long been driven by the objective of increasing penetration and outreach, the goal of inclusion has eluded us. About 41 per cent of adult population remains unbanked and the number of loan accounts covers only 14 per cent of adult population. The previous initiatives included:

(i)
The expansion of network of co-operative banks to provide credit to agriculture and saving facilities in rural areas,

(ii)
Nationalisation of banks in 1969 and expansion of branches and