EXPLAIN THE CONCEPT OF EXCESS CAPACITY & WASTE IN MONOPOLISTIC COMPETITION

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EXPLAIN THE CONCEPT OF EXCESS CAPACITY & WASTE IN MONOPOLISTIC COMPETITION

§  DEFINATION OF WASTE.

§  EXAMPLE OF WASTE.

§  ACCORDING TO DIFFERENT PROFFSSORS.

§  CAUSES.

§  REASONS.

§  DIAGRAMS.

§  ANALYSIS.

DEFINATION OF WASTE

                                    “Waste means whatever extra quantity which is left over and unutilized by producer.”

EXAMPLE OF WASTE

                           Molasses left over after sugarcane is used.

                           Food left over after marriage function is over.

ACCORDING TO DIFFERENT PROFESSORS

1)      PROFESSOR MEADE

                                    “The term ‘waste’ refers to waste of monopolistic & not prefect competition. Because in perfect competition hardly any waste takes place”.

2)      PROFESSOR ROTHSCHILD

There are 7 kinds of waste in Monopolistic market

                                                                               I.      Expense on competitive advertisement.

                                                                            II.      Expense on cross transport.

                                                                         III.      Failure in specialization.

                                                                         IV.      Excess capacity.

                                                                            V.      Existence of inefficient forms.

                                                                         VI.      Higher price & less output.

                                                                      VII.      Unemployment.

CAUSES

1)       As demand curve is perfectly inelastic and average cost is decreasing, there is less use of resources.

2)      Present Firms who is get maximum short run profit, has to divide its profit with new entrance of firms. Thus, in long run, each firm will have to make less production, which leaders to excess capacity of production

EXM: T.V, clothes, etc…

REASONS FOR EXCESS CAPICITY

1)      In the perfect competition: under this competition, MC&AC are equal at equilibrium in long run. So, AC is at minimum. Therefore, resources are used at optimum manner.

2)      In Monopolistic Competition: there is AC more than AC at equilibrium in long-run. This means firm earns minimum Ac after equilibrium takes place. As a result, excess capacity takes place.

ANALYSIS

Ø  X-axis indicates output in units

Y-axis indicates revenue & cost.

Ø  In monopolistic competition, equilibrium takes place between OM and at equilibrium point.

Ø  MC cuts AR at B & cuts MR at E.

Ø  If a vertical line in drawn at E, then at firm earns MC equal to MR.

Ø  Hear, AR is equal to price curve but AC is higher than MC.

Ø  Here, AC of firm is Minimum at B point. Because at here AC interests MC& AC is minimum.

Ø  In perfect competition, AR & MR are equal, so no wastage is possible. But in monopolistic, firm get equilibrium at normal Profit, but MN capacity is still remain unutilized.

Ø  As factors production remains fully unutilized, at equilibrium point, full employment or max output cannot be achieved. Here, capacities of production remains excess & so products can be made at higher cost & there prices are kept quite high. Thus, wastage is created.

Ø  Prof. Hicks & Robertson believe that it is not a social waste because different classes of peoples get variety of products due to this. If there is excess capacity of production, in times of accidental rise in demand, supply of production can be increased without increasing proportion of fixed factors.

Ø  Here; at point A, cost is higher and profit is higher. But maximum utilization is not possible. So, it is not proper place for production for firm to produce goods at minimum cost & to earn maximum profit.

Ø  And at point B, Profit is not maximum and AC is at minimum, while resources are used at maximum. But if firm doesn’t get profit, how can a firm continue business or bear loss? So, its not proper point of production.

So, as per this, we can say:

                        “Excess capacity & wastage is seen in monopolistic competition.

Functions of World Bank

What are the Functions of World Bank?

World Bank performs the following functions:

(i) Granting reconstruction loans to war devastated countries.
(ii) Granting developmental loans to underdeveloped countries.
(iii) Providing loans to governments for agriculture, irrigation, power, transport, water supply, educations, health, etc
(iv) Providing loans to private concerns for specified projects.
(v) Promoting foreign investment by guaranteeing loans provided by other organisations.
(vi)Providing technical, economic and monetary advice to member countries for specific projects
(vii) Encouraging industrial development of underdeveloped countries by promoting eco­nomic reforms.

Important of SEZ

How SEZ’s should be modelled to Benefit India:

Size Does Matter: I was reading an article and found out the following fact, China’s SEZs are huge. Shenzhen, the most important SEZ, covers 32,000 hectares. In India, there are just two or three privately developed SEZ, exceeding 1,000 hectares. Most of the others approved are less than 100 hectares.  But it is heartening to realize that the government has decided to up the ante and have made guidelines to have a minimum of 1000 hectares of area for approving an SEZ. It hardly needs reiteration that only a large sized zone can generate economic activity on some reasonable scale. In a small zone, the requisite infrastructure and services cannot be provided nor can multiple economic activities be promoted.

TAX Benefits:  The incentive package in India is quite liberal and may even be a shade better than that for Chinese SEZs. In fact, it is more or less on a par with the package for the existing EPZs. Duty free import of capital goods and raw materials, reimbursements of Central Sales Tax, tax holiday for specified period, 100 per cent repatriation of profits for subcontracting facilities are allowed. The Government has done well by extending incentives for the infrastructure sector to zone developers and the units as well. This can attract foreign direct investment for providing internationally competitive infrastructure.

Labor Laws:  We can learn from china where initially labor laws where relaxed so that the companies could adopt Hire and Fire policy, once the Private and foreign players gained confidence in the Chinese workers’ productivity, this was replaced by the Contract system. India should take cue from this and understand that the import-export business is highly dependent on uncertain international market conditions, rejection of consignments etc. hence a flexible labor policy is the need of hour in the SEZ’s.

Domestic Tariff Areas: We got to understand that the reason for the Foreign investors to invest in Industrial, Manufacturing sector in India is not only to cut down on their costs because of cheaper and competitive products but they also see the vast Indian consumer markets, which has seen great income rise and standard of living. So apart from exports itself, the domestic market itself provides immense opportunity for sale of products. The companies in SEZ being levied a full import duty on sale in domestic areas does not seem a bright idea. In this case SEZ’s will only promote export driven industries which are highly dependent on import of raw materials. To further make use of full potential of SEZ’s Industries which are capable of indigenous generation of raw materials should be provided with tax holidays in terms of benefits to facilitate competitive pricing in the domestic tariff areas.

Thinking about the Future and Possible Fallacies: As evidence over the years has shown, this single-minded pursuit of growth has lowered the efficiency and effectiveness of economic policies, besides incurring huge resource and environmental costs. The Chinese experience offers a valuable lesson for India. Neither the international nor the Indian experience with SEZs has been particularly happy. Globally, only a handful of SEZs, of the hundreds that exist, have generated substantial exports, along with significant domestic spin-offs in demand or technology upgradation. For each successful Shannon (Ireland) or Shenzhen (China), there are 10 failures – in the Philippines, Malaysia, Brazil, Mexico, Colombia, Sri Lanka, Bangladesh, why, even India. A 1998 report by the Comptroller and Auditor General (CAG) on export processing zones (EPZs) says: “Customs duty amounting to Rs. 7,500 crores was forgone for achieving net foreign exchange earnings of Rs.4,700 crores.

The Reserve Bank of India says that large tax incentives can be justified only if SEZ units establish strong “backward and forward linkages with the domestic economy” which is a doubtful proposition. Even the International Monetary Fund’s (IMF) Chief Economist Raghuram Rajan has warned: “Not only will [the SEZs] make the government forgo revenue it can ill afford to lose, they also offer firms an incentive to shift existing production to the new zones at substantial cost to society.”

As much as 75 per cent of the SEZ area can be used for non-core activities, including development of residential or commercial properties, shopping malls and hospitals. Developers will surely use this to make money via the real estate route rather through export promotion. This represents a potentially humongous urban property racket of incalculable dimensions. India will see a multiplication of “Gurgaon-style” development, under the aegis of big builders such as DLF, Marathon, Rahejas, Unitech, City Parks and Dewan.

Conclusion: The SEZ’s could drastically improve the economic activity in the country, make the country’s export competitive and globally noticeable, be net foreign exchange earner and provide immense employment opportunity. But this should not be done at the cost of bringing down the agricultural activities, Land grabbing and real estate mafia should be properly regulated so that the common man is not the net sufferer to get the net foreign exchange earner up and running. As compared to china where majority of the SEZ’s were setup by the government, similar should be adopted in India, if not fully it should be a public-private partnership and regulatory bodies should be properly managed to weed out fallacies. To be economically viable SEZ’s should be approved over a particular land area (greater than 1000 acres) for rapid economic growth in the area and for it to be profitable and self sustainable. Relaxed Tax norms, Labor laws and DTA regulations will surely attract foreign investment and major industries to setup industries in the SEZ’s making it profitable and meeting its desired results!

What is SEZ

What is an SEZ? It is a geographical region that has economic laws that are more liberal than a country’s typical economic laws. An SEZ is a trade capacity development tool, with the goal to promote rapid economic growth by using tax and business incentives to attract foreign investment and technology. Today, there are approximately 3,000 SEZs operating in 120 countries, which account for over US$ 600 billion in exports and about 50 million jobs. By offering privileged terms, SEZs attract investment and foreign exchange, spur employment and boost the development of improved technologies and infrastructure.

Moreover SEZ’s provide a medium wherein it not only attracts foreign companies looking for cheaper and efficient location to setup their offshore business, but it also allows the local industries to improve their export through a proper channel and with the help of the new foreign partners to the outside world at a very competitive price. SEZ’s offer relaxed tax and tariff policies which is different from the other economic areas in the country. Duty free import of raw materials for production is one example. Moreover the Free trade zones attract big players who want to setup business without any license hassles and the long process involved in it. Most of the allotment is done through a single window system and which is highly transparent system.  The bottom-line therefore is increased export and FDI (Foreign Direct Investments) enabling increased Public-private partnership and ultimately resulting in a development of world class infrastructure, boost economic growth, exports and employment.

India and SEZ:

Overview: The SEZ policy was first introduced in India in April 2000, as a part of the Export-Import (“EXIM”) policy of India. Considering the need to enhance foreign investment and promote exports from the country and realizing the need that level playing field must be made available to the domestic enterprises and manufacturers to be competitive globally, the Government of India in April 2000 announced the introduction of Special Economic Zones policy in the country deemed to be foreign territory for the purposes of trade operations, duties and tariffs. To provide an internationally competitive and hassle free environment for exports, units were allowed be set up in SEZ for manufacture of goods and rendering of services. All the import/export operations of the SEZ units are on self-certification basis. The units in the Zone are required to be a net foreign exchange earner but they would not be subjected to any pre-determined value addition or minimum export performance requirements. Sales in the Domestic Tariff Area by SEZ units are subject to payment of full Custom Duty and as per import policy in force. Further Offshore banking units are being allowed to be set up in the SEZs.

Are SEZ’s New to India? India is one of the first countries in Asia to recognize the effectiveness of the Export Processing Zone (EPZ) model in promoting exports. Asia’s first EPZ was set up in Kandla in 1965. With a view to create an environment for achieving rapid growth in exports, a Special Economic Zone policy was announced in the Export and Import (EXIM) Policy 2000. Under this policy, one of the main features is that the designated duty free enclave to be treated as foreign territory only for trade operations and duties and tariffs. No license required for import. The manufacturing, trading or service activities are allowed.  While EPZs are industrial estates, SEZs are virtually industrial townships that provide supportive infrastructure such as housing, roads, ports and telecommunication. The scope of activities that can be undertaken in the SEZs is much wider and their linkages with the domestic economy are stronger. Resultantly they have a diversified industrial base. Their role is not transient like the EPZs, as they are intended to be instruments of regional development as well as export promotion. As such, SEZs can have tremendous impact on exports, inflow of foreign investment and employment generation.

SEZ Act 2005: To provide a stable economic environment for the promotion of Export-import of goods in a quick, efficient and hassle-free manner, Government of India enacted the SEZ Act, which received the assent of the President of India on June 23, 2005. The SEZ Act and the SEZ Rules, 2006 (“SEZ Rules”) were notified on February 10, 2006. The SEZ Act is expected to give a big thrust to exports and consequently to the foreign direct investment (“FDI”) inflows into India, and is considered to be one of the finest pieces of legislation that may well represent the future of the industrial development strategy in India. The new law is aimed at encouraging public-private partnership to develop world-class infrastructure and attract private investment (domestic and foreign), boosting economic growth, exports and employment.

The SEZs Rules, inter-alia, provide for drastic simplification of procedures and for single window clearance on matters relating to central as well as state governments. Investment of the order of Rs.100,000 crores over the next 3 years with an employment potential of over 5 lakh is expected from the new SEZs apart from indirect employment during the construction period of the SEZs. Heavy investments are expected in sectors like IT, Pharma, Bio-technology, Textiles, Petro-chemicals, Auto-components, etc. The SEZ Rules provides the simplification of procedures for development, operation, and maintenance of the Special Economic Zones and for setting up and conducting business in SEZs. This includes simplified compliance procedures and documentation with an emphasis on self-certification; single window clearance for setting up of an SEZ, setting up a unit in SEZs and clearance on matters relating to Central as well as State Governments; no requirement for providing bank guarantees; contract manufacturing for foreign principals with option to obtain sub-contracting permission at the initial approval stage; and Import-Export of all items through personal baggage.

With a view to augmenting infrastructure facilities for export production it has been decided to permit the setting up of Special Economic Zones (SEZs) in the public, private, joint sector or by the State Governments. The minimum size of the Special Economic Zone shall not be less than 1000 hectares. Minimum area requirement shall, however, not be applicable to product specific and port/airport based SEZ. This measure is expected to promote self-contained areas supported by world-class infrastructure oriented towards export production. Any private/public/joint sector or State Government or its agencies can set up Special Economic Zone (SEZ).

The objectives of SEZs

The objectives of SEZs can be clearly explained as the following:-

(a) Generation of additional economic activity;

(b) Promotion of exports of goods and services;

(c) Promotion of investment from domestic and foreign sources;

(d) Creation of employment opportunities;

(e) Development of infrastructure facilities.

The major incentives and facilities available to SEZ developers include:-

·         Exemption from customs/excise duties for development of SEZs for authorized operations approved by the BOA.

·         Income Tax exemption on income derived from the business of development of the SEZ in a block of 10 years in 15 years under Section 80-IAB of the Income Tax Act.

·         Exemption from minimum alternate tax under Section 115 JB of the Income Tax Act.

·         Exemption from dividend distribution tax under Section 115O of the Income Tax Act.

·         Exemption from Central Sales Tax (CST).

·         Exemption from Service Tax (Section 7, 26 and Second Schedule of the SEZ Act).

Currently, there are about 143 SEZs (as of June 2012) operating throughout India and an additional 634 SEZs (as of June 2012) that have been formally/principally approved by the Government of India.