ECON 164: The Indian Economy PROBLEM SET-3 Q1: Agricultural Policies In response to the food shortages in the early 1960's, the Govt. of India introduced several policies to boost food security in the country. These include the Minimum Support Price (MSP), the APMC (Agricultural Produce Market Committee) act, fertilizer subsidies, and the Public Distribution System (PDS). For each of these 4 policy interventions, describe the (a) purpose, (b) benefits, (c) costs, and (d) possible reforms to reduce the costs described in Part (c). Q2: Manufacturing Some of the key barriers to growth of labor-intensive manufacturing in India have included: (a) Reservation of labor-intensive sectors for small-scale industries (SSI); (b) lack of bankruptcy procedures; and (c) weak infrastructure and public goods Describe in a few sentences how each of these barriers contributed to slowing down the growth of labor-intensive manufacturing in India. Read the article below on automotive manufacturing in India and discuss how this case study illustrates India's potential to develop more manufacturing in India Q3: Software and ITES What have been the key success factors for the growth of the software industry in India? Describe the source of these success factors in 2-3 sentences each. Define progressive and regressive policies? Given your answers in the above table, do you think fertilizer subsidies as implemented above are progressive or regressive in nature? Q4. (Fertilizer Subsidy): There are four types of farmers in a country. Type of a farmer is defined by his average land holdings. A. Following information is given to you: Average land Number of Type of Farmer holding per farmer farmers in this Amount of fertilizer consumed per Fertilizer Fraction of total subsidy fertilizer subsidy received by received by each farmer category farmer Marginal Farmers 1 hectare 40 67 Small Farmers 3 hectares 18 Medium Farmers 7 hectares 14 Large-Farmers 30 hectares Total 1 100 each farmer Suppose on an average 100 kilograms (FYI: 1 kilogram = 2.2 pounds) of NPK (Nitrogen-Phosphate- Potassium) fertilizer is applied on each hectare of land, and that all farmers apply the average amount of fertilizer on their land. Suppose the market price of 1 kilogram of fertilizer is Rs. 12. The consumer pays only Rs.6 for each kilogram of fertilizer, the remaining Rs.6 is paid by govt. (subsidy). Calculate the per capita consumption of fertilizer for each type of farmer. Calculate the per capita fertilizer subsidy received by each type of farmer. What fraction of the total subsidy bill goes to each type of farmer? (Fill the above table) B. Now suppose the govt. is contemplating the following reform in fertilizer subsidy policy. The amount of fertilizer subsidy will be directly transferred into the beneficiaries account. Assuming 100 kilograms of fertilizer is applied per hectare. Therefore, the govt. will pay Rs 600 per hectare (Rs 6 * 100) to each farmer. However, there is a cap on the eligibility for subsidized fertilizer. The subsidy is to be given only up to 5 hectares of land. Calculate the amount of per capita subsidy for each category of farmer. How much does the subsidy bill go down in this case? Is the new policy more progressive or regressive than the one given in part A? C. In practice, implementing such a reform will be rather difficult politically. Why may this be the case? Q5. Human capital and signaling As shown in class, people with higher levels of education earn higher levels of income. a. How is this consistent with the "human capital" view of education b. How is this also consistent with "signaling" view of education c. Since both views are consistent with the fact that people with more education earn higher levels of income, why might we care about which of the two views is true (or at least "more true")? Q6. Synthesis of agriculture, manufacturing, and services Based on the lectures on agriculture, manufacturing, and services, answer the following questions in an integrated way: a. Why did India prioritize investment in higher education over primary education in the years after Independence? b. How have the nature of these investments shaped the structure of the Indian economy across manufacturing and services? Explain how it has contributed to both strengths and weaknesses of the Indian economy. c. As discussed in class, growth in manufacturing has been key to rapid development of countries for three reasons. What were these reasons? d. India's growth has been based on the export of skill-intensive manufacturing and services. Explain how this approach has two of the three benefits above, but not the third. e. Explain how this third weakness may have contributed to India's slow structural transformation