1. Planning ...........................................................................................................................................

11

1.1 Planning in India ................................................................................................................................... 11

1.2 Important Dates.................................................................................................................................... 11
1.3 Visvesvarayya Plan ............................................................................................................................... 11
1.4 FICCI Proposal ....................................................................................................................................... 12
1.5 Congress Plan........................................................................................................................................ 12
1.6 Important Developments .................................................................................................................... 12
1.7 Bombay Plan ......................................................................................................................................... 12
1.8 Gandhian Plan ....................................................................................................................................... 12
1.9 People’s Plan ......................................................................................................................................... 13
1.10 Sarvodaya Plan ..................................................................................................................................... 13
1.11 Planning Commission........................................................................................................................... 13
Functions ...................................................................................................................................................................................................... 14

1.12 Five Year Plans ...................................................................................................................................... 15

First Plan (1951-56) .................................................................................................................................................................................. 15

Second Plan (1956-61) ............................................................................................................................................................................ 16

Third Plan (1961-66) ................................................................................................................................................................................ 18

Three Annual Plans or Holiday Plan (1966-69) ............................................................................................................................. 19

Fourth Plan (1969-74) ............................................................................................................................................................................. 20

Fifth Plan (1974-79) .................................................................................................................................................................................. 21

Emergency years (1975-1977) ............................................................................................................................................................. 23

Rolling Plan (1978-80)............................................................................................................................................................................. 23

Sixth Plan (1980-85) ................................................................................................................................................................................. 23

Seventh Plan (1985-90) .......................................................................................................................................................................... 25

Two Annual Plans (1990-92) ................................................................................................................................................................. 26

Eighth Plan (1992-97) .............................................................................................................................................................................. 27

Ninth Plan (1997-2002) .......................................................................................................................................................................... 28

Tenth Plan (2002-07) ............................................................................................................................................................................... 31

Eleventh Plan (2007-12) ......................................................................................................................................................................... 32

Twelfth Five Year Plan (2012-2017) ................................................................................................................................................... 35

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Review of Five-Year Plans ...................................................................................................................................................................... 38

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1.13 Major challenges in the economy: ...................................................................................................... 42

1.14 Achievements of Planning: .................................................................................................................. 42
Failures of Planning: ................................................................................................................................................................................. 43

2. FROM PLANNING TO NITI AAYOG ............................................................................................... 43

 2.1 Functions and Mandates of NITI Ayog: .............................................................................................. 44
2.2 Structure of NITI: .................................................................................................................................. 44
2.3 VEHICLE OF GOOD GOVERNANCE ...................................................................................................... 46
2.4 Niti Aayog’s Vision for New India: ..................................................................................................... 46
Challenges ................................................................................................................................................................................................... 47

How to address the current challenges? ......................................................................................................................................... 47

Certain issues are ...................................................................................................................................................................................... 48

Guiding Principles ..................................................................................................................................................................................... 49

3. Money and Banking ........................................................................................................................ 49

3.1 Financial System: .................................................................................................................................. 49

3.2 Classification of financial system: ....................................................................................................... 50
Indian Financial System: ......................................................................................................................................................................... 50

Money Market: ........................................................................................................................................................................................... 50

3.3 Concept of Money Supply: .................................................................................................................. 51

3.4 Currency in Circulation: ....................................................................................................................... 52
3.5 Velocity of Circulation of Money: ....................................................................................................... 54
3.6 Quantity of Money: .............................................................................................................................. 54
3.7 Money Multiplier: ................................................................................................................................. 55
3.8 Stock of Money: .................................................................................................................................... 55
Reserve Money: ......................................................................................................................................................................................... 56
Narrow Money: .......................................................................................................................................................................................... 56

Near Money: ............................................................................................................................................................................................... 57

Hard Money: ............................................................................................................................................................................................... 57

Soft Money: ................................................................................................................................................................................................. 57

Fiat Money: .................................................................................................................................................................................................. 57

Hot Money: .................................................................................................................................................................................................. 58

3.9 Proportional Reserve System: ............................................................................................................. 58

3.10 Minimum Reserve System: .................................................................................................................. 58
3.11 Legal Tender:......................................................................................................................................... 58
3.12 Printing of Currency Notes: ................................................................................................................. 58
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3.13 Demonetisation: ................................................................................................................................... 59

3.14 Currency Notes (Bank Notes) .............................................................................................................. 59
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Rs. 2000 Note ............................................................................................................................................................................................. 60

Rs. 500 Note: ............................................................................................................................................................................................... 60

Rs. 100 Note: ............................................................................................................................................................................................... 61

Rs. 200 Note: ............................................................................................................................................................................................... 62

 Rs. 50 Note: ................................................................................................................................................................................................. 63
Rs. 20 Note: ................................................................................................................................................................................................. 63

Rs. 10 Note: ................................................................................................................................................................................................. 64

3.15 Reserve Currency: ................................................................................................................................. 65

3.16 Cryptocurrency: .................................................................................................................................... 65
3.17 National Payments Corporation of India (NPCI): .............................................................................. 65
3.18 Reserve Bank of India (RBI) : ............................................................................................................... 65
Functions of RBI: ........................................................................................................................................................................................ 67

3.19 Monetary Policy: ................................................................................................................................... 72

3.20 QUANTITATIVE INSTRUMENTS .......................................................................................................... 73
Bank Rate: .................................................................................................................................................................................................... 73

Repo Rate: .................................................................................................................................................................................................... 75

Reverse Repo Rate.................................................................................................................................................................................... 76

3.21 Open Market Operations: .................................................................................................................... 77

3.22 CRR and SLR .......................................................................................................................................... 78
Here comes the concept of Cash Reserve Ratio........................................................................................................................... 78

Why SLR: Statutory liquidity ratio? .................................................................................................................................................... 79

QUALITATIVE INSTRUMENTS ........................................................................................................................ 81

Margin Requirement: .............................................................................................................................................................................. 81

Consumer Credit Regulation: ............................................................................................................................................................... 81

Guidelines: ................................................................................................................................................................................................... 81

Rationing of Credit: .................................................................................................................................................................................. 81

Moral Suasion:............................................................................................................................................................................................ 82
Direct Action: .............................................................................................................................................................................................. 82

3.23 Monetary Policy Committee (MPC): ................................................................................................... 82

3.24 Monetary Policy Report (MPR): .......................................................................................................... 83
3.25 Organised Banking System: ................................................................................................................. 84
3.26 Evolution and Growth of Banking: ..................................................................................................... 84
3.27 Commercial banks: ............................................................................................................................... 85
Scheduled Banks: ...................................................................................................................................................................................... 85
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3.28 Regional Rural Banks: .......................................................................................................................... 87

3.29 Co-Operative Banks .............................................................................................................................. 88
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3.30 Development Banks in India: .............................................................................................................. 88

NABARD-National Bank for Agriculture and Rural Development: ........................................................................................ 89

Small Industries Development of India (SIDBI): ............................................................................................................................ 89

Industrial Finance Corporation of India (IFCI): ............................................................................................................................... 89
 Export-Import Bank (EXIM Bank): ....................................................................................................................................................... 90
National Housing Bank: .......................................................................................................................................................................... 90

Mudra Bank ................................................................................................................................................................................................. 91

3.31 Non-Banking Financial Companies (NBFCs) ...................................................................................... 91

3.32 Differentiated Banks ............................................................................................................................ 93
Small Finance Banks: ................................................................................................................................................................................ 93

Payments Banks: ........................................................................................................................................................................................ 94

3.33 Non-Performing Assets (NPA): ........................................................................................................... 94

3.34 Capital to Risk Weighted Assets Ratio (CRAR) .................................................................................. 95
3.35 Basel Accords: ....................................................................................................................................... 96
Basel I: ............................................................................................................................................................................................................ 96
Basel II: .......................................................................................................................................................................................................... 96

Basel III: ......................................................................................................................................................................................................... 96

3.36 Foreign Currency Non-Resident (Bank) Account [FCNR(B) Account]............................................. 97

3.37 Non-Resident External Account (NRE Account)................................................................................ 97
3.38 Non-Resident Ordinary Rupee Account (NRO Account) .................................................................. 98

4. Public Finance .................................................................................................................................. 98

4.1 Fiscal Policy: .......................................................................................................................................... 98

What is meant by Fiscal Policy in India? .......................................................................................................................................... 99

Main objectives of Fiscal Policy in India:....................................................................................................................................... 100

Importance of Fiscal Policy in India: ............................................................................................................................................... 100

4.2 Funds of government. of India: ........................................................................................................ 100

Consolidated Fund of India ............................................................................................................................................................... 101

Contingency Fund of India ................................................................................................................................................................. 101

Public Account of India:....................................................................................................................................................................... 102

4.3 Govt. Receipts ..................................................................................................................................... 102

Revenue Receipts: .................................................................................................................................................................................. 103
Tax Revenue: ............................................................................................................................................................................................ 104
Non-Tax Revenue: ................................................................................................................................................................................. 105
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4.4 DIRECT TAXES ..................................................................................................................................... 106

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Income Tax: .............................................................................................................................................................................................. 106

Corporation Tax: ..................................................................................................................................................................................... 106

Minimum Alternate Tax: ...................................................................................................................................................................... 106

Dividend Distribution Tax: .................................................................................................................................................................. 107
 Securities Transaction Tax (STT): ...................................................................................................................................................... 107

4.5 INDIRECT TAXES ................................................................................................................................. 107

Goods and Service Tax:........................................................................................................................................................................ 107

4.6 Govt. Expenditure: .............................................................................................................................. 110

Revenue Expenditure:........................................................................................................................................................................... 110

Capital Expenditure: .............................................................................................................................................................................. 111

4.7 Deficits: ................................................................................................................................................ 111

Budgetary Deficit: .................................................................................................................................................................................. 111
Revenue Deficit: ...................................................................................................................................................................................... 112

4.8 Deficit Financing: ................................................................................................................................ 114

4.9 Budget: ................................................................................................................................................ 115
Full Budget................................................................................................................................................................................................ 116

Vote on Account .................................................................................................................................................................................... 116

4.10 Zero-Base Budgeting: ........................................................................................................................ 117

4.11 Balanced Budget: ................................................................................................................................ 118
4.12 Gender Budgeting: ............................................................................................................................. 118
4.13 Revenue Budget:................................................................................................................................. 118
4.14 Capital Budget: ................................................................................................................................... 118
4.15 Outcome Budget:................................................................................................................................ 118
4.16 FRBM Act: ............................................................................................................................................ 118
4.17 FRBM Review Committee: ................................................................................................................. 119
4.18 Developmental Expenditure: ............................................................................................................. 120
4.19 Non-Developmental Expenditure: .................................................................................................... 120
4.20 Charged Expenditure:......................................................................................................................... 120
4.21 Golden Rule of Public Finance: ......................................................................................................... 120
4.22 14th Finance Commission: .................................................................................................................. 120
4.23 15th Finance Commission: .................................................................................................................. 121

5. National Income ............................................................................................................................ 122

5.1 What do you mean by “Economics” ................................................................................................. 122

5.2 What exactly is “Economics” in our daily life .................................................................................. 122
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5.3 Concept of Scarcity:............................................................................................................................ 123

5.4 Microeconomics:................................................................................................................................. 123
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5.5 Macro Economics: ............................................................................................................................... 123

5.6 What do you mean by “Economy” ................................................................................................... 124
5.7 Types of Economy .............................................................................................................................. 125
Traditional economy: ............................................................................................................................................................................ 125
 Free market economy: ......................................................................................................................................................................... 125
Command economy: ............................................................................................................................................................................ 125

Mixed economy: ..................................................................................................................................................................................... 125

Open economy: ...................................................................................................................................................................................... 126

Closed economy: .................................................................................................................................................................................... 126

Capitalist economy: ............................................................................................................................................................................... 126

Socialist economy: ................................................................................................................................................................................. 126

5.8 Salient Features of Indian Economy ................................................................................................. 127

Mixed Economy ...................................................................................................................................................................................... 127

Over-Population ..................................................................................................................................................................................... 128

Unbalanced Economic Development ............................................................................................................................................. 128

Low rate of capital formation ............................................................................................................................................................ 128

Lack of Infrastructure Facility ............................................................................................................................................................ 128

Poor Economic Organisation ............................................................................................................................................................ 128

5.9 Structure and Composition of Indian Economy .............................................................................. 129

5.10 National Income of India ................................................................................................................... 129
5.11 Concepts of National Income ............................................................................................................ 130
Per Capita Income: ................................................................................................................................................................................ 130

Gross National Product (GNP) .......................................................................................................................................................... 130

Gross Domestic Product (GDP) ........................................................................................................................................................ 132

Net National Product (NNP) .............................................................................................................................................................. 133

5.12 National Income ................................................................................................................................. 133

Personal Income ..................................................................................................................................................................................... 134

Personal Disposable Income ............................................................................................................................................................. 135

5.13 Methods of Measuring National Income: ........................................................................................ 136

Production Method ............................................................................................................................................................................... 136

Income Method ...................................................................................................................................................................................... 138

Consumption Method .......................................................................................................................................................................... 138

5.14 Estimates of National Income in India ............................................................................................. 139

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5.15 Indicators of Economic Development .............................................................................................. 140

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6. Human Development ................................................................................................................... 141

6.1 Terminology ........................................................................................................................................ 141

6.2 Definition of Human Development .................................................................................................. 141
6.3 Concept of Human Development ..................................................................................................... 143
THE FOUR PILLARS OF HUMAN DEVELOPMENT ...................................................................................................................... 143
 Approaches to Human Development ............................................................................................................................................ 144

6.4 Human Development Index .............................................................................................................. 145

Positive Aspects (Human Development Report): ...................................................................................................................... 148

6.5 Why is India not improving its rank in HDI ? .................................................................................. 151
6.6 Inequality-adjusted HDI (IHDI) ......................................................................................................... 152
6.7 Gender related Development Index (GDI) ....................................................................................... 153
6.8 Multidimensional Poverty Index (MPI) ............................................................................................ 153
6.9 Gender Inequality Index .................................................................................................................... 155

7. Poverty ........................................................................................................................................... 156

7.1 Concept of Poverty:............................................................................................................................ 156

Types of Poverty: .................................................................................................................................................................................... 156

7.2 How to measure Poverty ?? ............................................................................................................... 159

7.3 Dimensions of Poverty: ...................................................................................................................... 161
7.4 Poverty Line: ....................................................................................................................................... 162
How Poverty Line is Estimated in India? ....................................................................................................................................... 163

7.5 World Bank Approach for Calculating Poverty: .............................................................................. 168

7.6 Linkage between Poverty and Development:.................................................................................. 169
7.7 Causes of Poverty in India ................................................................................................................. 170
7.8 PROGRAMMES FOR POVERTY ALLEVIATION .................................................................................. 172
7.9 Why Poverty Alleviation Programmes have Failed in India? ......................................................... 174
Major reasons for failure of poverty alleviation programmes are:..................................................................................... 175

7.10 What Should be Done to Improve Poverty Alleviation Programmes? ......................................... 176
7.11 Inequality:............................................................................................................................................ 177
7.12 Lorenz Curve : ..................................................................................................................................... 177
7.13 Gini Coefficient : ................................................................................................................................. 177

8. Unemployment.............................................................................................................................. 178

8.1 Measure of Unemployment in India: ................................................................................................ 179

8.2 Types of Unemployment: .................................................................................................................. 180
8.3 Regional Unemployment: .................................................................................................................. 183
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8.4 Technological Unemployment: ......................................................................................................... 183

8.5 Cyclical Unemployment: .................................................................................................................... 184
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8.6 Chronic Unemployment: .................................................................................................................... 184

8.7 Under Employment: ........................................................................................................................... 184
8.8 Philips Curve: ...................................................................................................................................... 185
8.9 Lorenz Curve: ...................................................................................................................................... 185
 8.10 Gini Coefficient: .................................................................................................................................. 185
8.11 Kuznets Curve: .................................................................................................................................... 186
8.12 Sources of data on unemployment: ................................................................................................. 186
8.13 Labour Force: ...................................................................................................................................... 187
Measurement of Labour Force: ........................................................................................................................................................ 187

8.14 Labour force participation rate: ........................................................................................................ 188

9. Economic Reforms (LPG) .............................................................................................................. 188

9.1 BACKGROUND .................................................................................................................................... 188

9.2 REFORMS AND PROBLEMS DURING 1985-90 ................................................................................. 189
9.3 THE 1991 ECONOMIC CRISIS ............................................................................................................. 190
Background to the Crisis ..................................................................................................................................................................... 190

The Turnaround-The Reforms of 1991 .......................................................................................................................................... 191

THE NEW REFORM MEASURES ........................................................................................................................................................ 193

9.4 The New Industrial Policy 1991 ........................................................................................................ 195

9.5 IMPACT OF THE REFORMS ................................................................................................................ 197
9.6 Limitations of LPG .............................................................................................................................. 203
Broad Indicators ..................................................................................................................................................................................... 204
Sectoral Share in GDP .......................................................................................................................................................................... 204

Employment pattern in Sectors ........................................................................................................................................................ 205

Impact of Reforms on Poverty .......................................................................................................................................................... 207

9.7 Effects of Liberalisation and Globalisation ...................................................................................... 207

9.8 Focus Point .......................................................................................................................................... 209
Key Lines in examination point of view ......................................................................................................................................... 209

10. Agriculture ..................................................................................................................................... 212

10.1 Development of Agriculture under Five Year Plans: ....................................................................... 212

10.2 Agriculture and Green Revolution .................................................................................................... 213
10.3 LAND REFORMS AND CHANGES IN THE AGRARIAN SECTOR:...................................................... 214
PRE-GREEN REVOLUTION PHASE (1951-1968): ........................................................................................................................ 216

EARLY GREEN REVOLUTION PHASE (1968-1981): .................................................................................................................... 217

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LATER GREEN REVOLUTION PHASE (1981-1992): .................................................................................................................... 218

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10.4 Land Tenure Systems: ........................................................................................................................ 218

10.5 Major Land Reform Measures Taken after Independence ............................................................. 219
10.6 Basic Terms related to Land Use: ...................................................................................................... 219
10.7 Cropping Seasons: .............................................................................................................................. 220
10.8 Agricultural Inputs: ............................................................................................................................ 220
 10.9 Public Distribution System ................................................................................................................ 221
10.10 WTO and Agricultural Subsidies: ...................................................................................................... 221
10.11 NABARD-National bank for Agriculture and Rural Development: ............................................... 222
10.12 Infrastructure Factors Related To Agriculture: ................................................................................ 222
10.13 Cropping Pattern: ............................................................................................................................... 223
10.14 Terms related to Land Utilisation: .................................................................................................... 224
10.15 MSP ...................................................................................................................................................... 224
10.16 Commission for Agricultural Costs and Prices (CACP): .................................................................. 225
10.17 e-NAM ................................................................................................................................................. 225
10.18 APMC ................................................................................................................................................... 225
10.19 Operation Flood .................................................................................................................................. 226
10.20 Kisan Credit Card Scheme .................................................................................................................. 226
10.21 Operation Green: ................................................................................................................................ 226
10.22 Zero-Budget Natural Farming: .......................................................................................................... 227
10.23 Operational Holdings: ........................................................................................................................ 227
10.24 Contract Farming: ............................................................................................................................... 228
10.25 High yielding varieties (HYVs): ......................................................................................................... 228

11. Industry .......................................................................................................................................... 228

11.1 Industrial Development 1947-1990 .................................................................................................. 228

Industrial Policy Resolution 1948 (IPR 1948) .............................................................................................................................. 229

Industrial Policy Resolution 1956 (IPR 1956) .............................................................................................................................. 230

Industrial Policy Statement, 1977 .................................................................................................................................................... 232

Industrial Policy, 1980 .......................................................................................................................................................................... 232

New Industrial Policy 1991: ................................................................................................................................................................ 233

11.2 Role of Public Sector: ......................................................................................................................... 237

11.3 Industrial Licensing, Control Regime, and its Consequences ........................................................ 238
11.4 Location and Dispersal of Industries and Regional Balance .......................................................... 240

12. Inflation .......................................................................................................................................... 241

12.1 Major Problems: ................................................................................................................................. 241

12.2 Low inflation has many benefits ....................................................................................................... 242
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12.3 Methods to measure Inflation:.......................................................................................................... 242

12.4 Types of Inflation (Based on Causes): .............................................................................................. 244
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Cost push inflation ................................................................................................................................................................................ 244

Demand Pull Inflation .......................................................................................................................................................................... 244

Structural Inflation ................................................................................................................................................................................. 244

12.5 Key Terms related to Inflation .......................................................................................................... 245

 Creeping inflation .................................................................................................................................................................................. 245
Galloping inflation ................................................................................................................................................................................. 245

Hyperinflation .......................................................................................................................................................................................... 245

Headline inflation................................................................................................................................................................................... 245

Stagflation................................................................................................................................................................................................. 245

Walking Inflation .................................................................................................................................................................................... 245

12.6 Core Inflation ...................................................................................................................................... 245

12.7 Factors of Inflation: ............................................................................................................................ 246
12.8 How to reduce Inflation? ................................................................................................................... 247
Measures taken by RBI to control inflation: ................................................................................................................................ 248

12.9 Key Concepts related to Inflation: .................................................................................................... 248

Deflation: ................................................................................................................................................................................................... 248

Disinflation: ............................................................................................................................................................................................... 249

Stagflation:................................................................................................................................................................................................ 249

Reflation: ................................................................................................................................................................................................... 250

Skewflation: .............................................................................................................................................................................................. 250

CPI Inflation .............................................................................................................................................................................................. 250

Food Inflation .......................................................................................................................................................................................... 250

WPI Inflation ............................................................................................................................................................................................ 250

CPI Food Index: ....................................................................................................................................................................................... 250

13. Capital Market ............................................................................................................................... 250

13.1 Capital Market Instruments: .............................................................................................................. 251

Pure Instruments: ................................................................................................................................................................................... 251

Hybrid Instruments: .............................................................................................................................................................................. 251

Derivatives: ............................................................................................................................................................................................... 251

13.2 Major Financial Instruments in Capital Market: .............................................................................. 251

13.3 Primary Market ................................................................................................................................... 253
13.4 Secondary Market .............................................................................................................................. 253
13.5 Gilt-Edged Market .............................................................................................................................. 253
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13.6 Stock Exchange: .................................................................................................................................. 254

Bombay Stock Exchange: .................................................................................................................................................................... 254
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National Stock Exchange: ................................................................................................................................................................... 254

13.7 Securities and Exchange Board of India (SEBI): .............................................................................. 254

14. Money Market ............................................................................................................................... 255

 14.1 Money Market Instruments: .............................................................................................................. 255

1. Planning

 Economic planning is the making of major economic decisions what and how much is to be produced,
how, when and where it is to be produced, and to whom it is to be allocated by the comprehensive survey
of the economic system as whole. (H.D. Dickinsom)
 Planning was adopted for the first time in the world by Soviet Union

1.1 Planning in India

 Planning in India starts in 1930s.

 Even before independence, the colonial government had established a planning board that lasted from
1944 to 1946.
 Before independence private industrialists and economists published three development plans in 1944.
 India’s leaders adopted the principle of formal economic planning soon after independence as an effective
way to intervene in the economy of faster growth and social justice.

Four decades of planning show that India’s economy, a mix of public and private enterprise, is too large and
diverse to be wholly predictable or responsive to directions of the planning authorities.

1.2 Important Dates

 1934: M. Visvesvaryya, in his book ‘Planned Economy of India’, advocates the necessity of planning in
the country much before Independence.
 1944: Bombay Plan, published in January 1944, prepared by eight leading industrialist of Bombay.
 Gandhian Plan put forward by S.N. Agrawal (1944).
 1944: Planning Development Council was set up under the chairmanship of A. Dalal.
 Peoples Plan drafted by M.N. Roy (1945).
 1946: Interim Government sets up the Planning Advisory Board.
 1947: Economic Programme Committee was set up under the chairmanship of Jawaharlal Nehru.
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 1950: Planning Commission was set up.

 2015: Formation of Niti Aayog.
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1.3 Visvesvarayya Plan

• Proposed the first blueprint of Indian Planning

• Democratic capitalism with emphasis on industrialisation
• Simply, it’s a shift of labour from agri sector to industrial sector targeting double national income in a dec-
ade

1.4 FICCI Proposal

• 1934: FICCI recommended serious need of National Planning

• Reason: Laissez-Faire, Great Depression, New Deal in USA, Soviet Experiment in National Planning

1.5 Congress Plan

• National Planning Committee @ 1938 – initiative of Subash C.Bose

• Reason to start NPC: to work out concrete programmes for development encompassing all major areas of
economy
• NPC under the chairmanship of J.L.Nehru
• Final report of NPC was published in 1949

1.6 Important Developments

o Post-War reconstruction committee (1941) – To consider various plans for the reconstruction of the
economy
o Consultative committee of economists (1941) – setup under the chairmanship of Ramaswamy Mudaliar
to advise 4 Post-War reconstruction committees for executing the National Plan
o Planning and Development Dept (1944) – created under a separate member of Viceroy’s Executive coun-
cil for organising planning work in the country. Ardeshir Dalal (controller of Bombay Plan) was appointed as
acting member. Finally this dept was abolished in 1946

1.7 Bombay Plan

• Popular title of “A Plan of Economic Development for India”

• Prepared by Capitalists
• Published in 1944-45

Important Agreements between NPC and Bombay Plan Club

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1) Agrarian restructuring
2) Rapid industrialisation
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3) Development of essential consumer goods industries

4) Promoting medium scale, small scale and cottage industries
5) Social welfare

1.8 Gandhian Plan

• Sriman Narayan Agarwal formulated this plan in 1944
• More emphasis on agriculture
• Promote cottage and village level industries
• Articulated a “Decentralised Economic Structure” for India with self-contained villages

1.9 People’s Plan

• M N Roy formulated this plan in 1945

• Plan was based on Marxist Socialism
• Focused on the need for providing “basic necessities of life”
• Agricultural and industrial sectores ➔ equally highlighted
• “Economic reforms with the human face” – slogan of 1990s economic reforms has the resonance of Peo-
ple’s plan

1.10 Sarvodaya Plan

• Jayprakash Narayan formulated this plan in 1950

• Inspired from the Gandhian techniques of constructive works and Sarvodaya concept of Acharya Vinoba
Bave
• Major ideas of the plan were similar to Gandhian Plan
• Negative impact of Indian Planning process @ 1960s → Increasing centralising nature and dilution of peo-
ple’s participation in it
• Idea of democratic decentralisation was disliked by the rulers → led to the formation of Jayprakash Narayan
Committee @ 1961
• JPC pointed out planning and execution of plans wrt PRI
• Disregarding the advice of JPC , central schemes like SFDA, DPAP, ITDP, IADP were introduced → outside
the purview of Panchayats
• After 73rd and 74th amendments, role of local bodies and their importance in the process of planned devel-
opment was accepted

1.11 Planning Commission 13

 The Planning Commission was established in 1950, in accordance with Article 39 of the Directive Princi-
ples of the Constitution of India headed by Prime Minister.
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 The Commission is independent of the Cabinet.

 A staff drafts plans under the guidance of the Commission; the draft plans are presented for approval to
the National Development Council, which consists of members of the Planning Commission, the Chief
Ministers of the States and Administrators of UTs and All Union Ministers.
 The Council can make changes in the draft plan.
 After Council approval, the draft is presented to the Cabinet and subsequently to Parliament, whose ap-
proval makes the plan an operating document for Central and State governments.

Jawaharlal Nehru was the first chairman of the Planning Commission by virtue of his being the Prime
Minister of India.

Functions
1) Assessment of the material, capital and human resources of the country, including technical personnel and
formulation of proposals for the augmentation of such resources;
2) Formulation of plans for effective and balanced utilization of resources;
3) Defining stages in which the plan should be carried out;
4) Determination of the resources necessary for implementation of the plans;
5) Appraisal from time to time of the progress achieved;
6) Public co-operation in national development;
7) Perspective planning;

National Planning Council

 Advisory body attached to the Planning Commission

 It was established in 1965
 It includes experts representing a cross-section of the Indian economy.

Niti Aayog

 The government of India has replaced Planning Commission with a new institution named Niti Aayog (Na-
tional Institution for Transforming India).
 The institution will serve as ‘Think Tank’ of the Government - a directional and policy dynamo.
 Niti Aayog will provide Governments at the Central and State Levels with relevant strategic and technical
advice across the spectrum of key elements of policy, this includes matters of national and international
importance on the economic front, dissemination of best practices from within the country as well as from
other nations, the infusion of new policy ideas and specific issue-based support.

Composition

Niti Aayog will have

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 Prime Minister as its chairman

 1 Vice-Chairman cum chief-executive officer
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 5 fulltime members
 2 part time members
 4 central government ministers
1.12 Five Year Plans

• The development plans drawn up by the Planning Commission to establish India’s economy in five-year
phases are called
• Five-Year Plan : A five-year plan is an indicative plan of action reflecting largely the intent of the govern-
ment for that period at the national, regional, and sectorial level.

First Plan (1951-56)

Reasons

✓ Influx of refugees
✓ Severe food shortage
✓ Mounting inflation
✓ Heavy dependence on imports and foreign assistance
o As the economy was facing the problem of large scale food grains import (1951) and the pressure of price-
rise, the modest overall target of 2.1% was fixed

Major Objective

• Agriculture, Price Stability, Power & Transport.

• The first five year plan focused on to stimulate balanced economic development while correcting imbal-
ances caused by World War II and partition various objectives were.
• It was based on Harrod Domar Model.
• Its highest priority on agriculture, irrigation and power projects.

Goals

• Rate of investment was targeted at 7% of national income.

• Modest overall growth target of 2.1%

Outlay

1. 44.6% went in favour of public sector undertakings (PSUs)

• Under the first five year plan provision was made to spend a total of 2,378 crore during the plan period. But
15

the actual expenditure outcome to 1960 crore only.

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Achievements

• National income grew by 18% and per capita income by 11%.

• Actual Growth Rate – 3.6%
• Food production increased by 20%.
Negative Aspect

2. Development of public sector industries was neglected and only 6% fund was spent on this.

Positive Aspect

▪ The plan got beginner’s success with 3.6% annual growth rate, actually prices came down. Many multipur-
pose irrigation projects were conceived, and rural development initiative was taken up.

Outcome

➢ Successful plan primarily because of good harvests in the last 2 years of the plan
➢ Objectives of rehabilitation of refugees, food self-sufficiency and control of prices were more or less
achieved

Second Plan (1956-61)

Reasons

✓ Lack of purchasing power

✓ Unavailability of Infrastructure
✓ Unemployment

Major objective

• Rapid Industrialisation
• It was based on Mahalnobis Model
✓ The emphasis of Mahalanobis model was on achieving self-reliance and also to meet the needs of our do-
mestic economy
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Goals
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• Goal of establishing the socialistic pattern of society (Industrial Policy of 1956)

• Growth target of 4.5%
• It targeted a 25% increase in national income through rapid industrialisation
• Rate of investment planned to be raised from 7 % to 11% of national income.
• Rapid industrialization with particular emphasis on development of basic and heavy industries.
Outlay

✓ Public sector – 4800 cr

✓ Pvt sector – 3100 cr
✓ Actual outlay, however, amounted to Rs. 4,600 crores of which investment amounted to Rs. 3,650 crores
and the balance Rs. 950 crores was current developmental expenditure

Achievements

• Actual achievement was only 20%

• Achieved growth – 4.21%
• Per capita income rose by 8%.
• Large industries including steel plants (Durgapur, Bhilai and Rourkela) were set up.
• The locomotive factory at Chittaranjan and Coach factory at Perambur were other major projects of
this period.

Negative Aspect

o Due to the assumption of a closed economy, shortages of food and capital were felt during this plan

Positive Aspects

o Second plan was conceived in an atmosphere of economic stability

o This plan is known for a top-down industrialisation of the big industries creating a base for the growth of
medium and small scale industries and going down to village and cottage industries
o Gave birth to the concept of Public Sector of state run enterprises based on the Russian model of Industri-
alisation
o Most of the public sector in India was set up during this plan period and also known as the industrialisation
or the public sector plan

Outcome

✓ Acute shortage of foreign exchange led to pruning of development targets

✓ Price rise was also seen
✓ Plan was only moderately successful
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Third Plan (1961-66)

Reason

✓ At its conception, it was felt that Indian economy has entered a “takeoff stage”

Major Objective

• Self sustaining growth

• Based on John Sandy and S Chakravarthy model

Goals

3. Make India a 'self-reliant' and 'self-generating' economy

4. Growth target of 5.6%
5. Integrated growth of industry balanced with agriculture

Outlay

• Total proposed outlay → Rs. 11,600 crore [ Rs. 7,500 crore was for the public sector ]
• Actual public sector outlay → Rs. 8,576 crore

Achievements

• Growth rate of only 2.2% achieved as against a target of 5% per annum

Negative aspects

• Emphasis on basic industries continued but agriculture and allied sectors (irrigation and power) were
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allocated 35% of the outlay

• A series of crises - China war (1962), Nehru’s death (1964), Pakistan war (1965) and Shastri’s death (1966),
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major drought (1965-66) - marred the smooth implementation of the plan

• Inflation (36%) ate up much of the achievement; Rupee devaluation (1966)

Positive Aspects
✓ Due to conflicts the approach during the later phase was shifted from development to defence & devel-
opment
✓ Engineering industries like automobiles, cotton textile machinery, diesel engines, electric transformers and
machine tools, advanced according to set-targets
✓ FCI was established to store grains imported under USPL-480 programme and PDS was started for ration-
ing

Outcome

• Slowdown in industrial development

• Failure of monsoon and drought in many parts of the country
• Only 2% growth rate in foodgrain production
• Increase in inequality in income and wealth
• Challenging balance of payment situation
• Growth rate of per capita income was almost negligible
• It was a failed plan

Three Annual Plans or Holiday Plan (1966-69)

Major Objectives

✓ To overcome the ill-effects of two wars

✓ To solve the food problem
✓ To control inflation
✓ To prepare the base for the 4th plan
• Failure of Third Plan that of the devaluation of rupee (to boost exports) along with inflationary reces-
19

sion led to postponement of Fourth FYP, a plan holiday was declared for three years.

Outlay
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• Total → Rs. 6,625.4 cr

• Agriculture and irrigation → 25% of total investment
• 23% → Industrial Sector
• 18% each in power and transport

Positive aspects

• All available resources were mobilised for building a buffer stock and for stepping up food production
learning from the experience of near-famine years (1965-66).
• Favourable monsoons and technological break-through in wheat popularly known as ‘green revolution’
reduced the inflationary pressure.
• Nationalisation of banks was another major step during this period.
• Devaluation of currency in 1966

Negative aspect

✓ Failed to control unemployment and inflation

Outcome

o Annual growth rate touched 6.9 % per annum

o Production of food grains reached 95 million tons in the year 1967-68

Fourth Plan (1969-74)

Outlay → 15782 cr

Reason

✓ Refusal of supply of essential equipment and raw materials from the allies during Indo Pak war

Major objective
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• Growth with stability and progress towards self-reliance [Based on Gadgil Strategy]
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• Emphasis on growth with distributive justice.

Goals
✓ self-sufficiency in agriculture and industrial production. (In agriculture, growth rate of 5% per annum
and in industrial production growth rate of 8% to 10% per annum were targeted)
✓ A substantial increase in the outlay for family planning (278 crores from 25 crores in third plan)

Achievements

• Growth rate of only 3.3% achieved as against a target of 5.7% per annum
• National income grew by 3.3% per annum
• Per capita income by 1.2% per annum
• Agricultural production by 2.8%
• Industrial production by 3.9%

Negative Aspect

• Droughts and the Indo-Pak war of 1971-72 led the economy to capital diversions creating financial crunch
for the plan

Positive Aspect

• Nationalisation of 14 banks in 1969

Outcome

• Agriculture and Industrial sector growth rate was good in first two years but failed to continue momentum
in the last 3 yrs
• High rate of inflation
• Sub-optimal utilization of capacities in the industrial sector
• Slowdown in new capacity creation
• Labour unrest
• Irregular monsoon
• High unemployment rate
• Higher growth rate of population
• Oil crisis in 1972-73
• Problem of refugees after 1971 war with Pakistan
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• Growth rate of National Income was 3.2% (Actual Target --> 5.7%)
• Growth rate of per capita income was negligible
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Fifth Plan (1974-79)

Outlay → 39,426 cr

Reason
✓ Economic crisis arising out of run-away inflation fuelled by hike in oil prices and failure of the government.
takeover of the wholesale trade in wheat

Major objective

• Twin objectives of poverty eradication and attainment of self-reliance

• A National Programme for Minimum Needs including elementary education, safe drinking water, health
care, and shelter for landless.
• Adequate collection and distribution system in order to provide the commodities of necessary consump-
tion to the poor people on reasonable and stable prices.
• Stress on Export Promotion and Import Substitution

Achievements

• Growth rate of only 4.8% achieved as against a target of 4.4% per annum
• Agricultural production increased by 4.2% – the highest so far

Negative Aspects

• The plan was declared closed one year before the schedule but later on the decision was reversed by the
Congress government
• No improvement in unemployment situation
• Reduced targets for growth rate of national income as well as different sectors

Positive Aspects

• Moderate inflation of 2.1% per annum

Outcome

• Govt. Launched the Twenty-point programme

• Due to high inflation, cost calculations for the Plan proved to be completely wrong and the original public
sector outlay had to be revised upwards
• The plan period was badly disturbed by 1975 emergency and a change of government in the centre in 1977
• Havocs of inflation led the government to hand over a new function to RBI to stabilise inflation
22

• This plan saw an increase in the socio-economic and regional disparities

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Emergency years (1975-1977)
• The Janata Government terminated the Plan in 1978.

Rolling Plan (1978-80)

Reason

• Janata Party government ended the 5th plan one year before schedule and started 6th plan (1978-83)

Outlay → 12,177 cr

Positive Aspect

• Janata government launched this rolling plan emphasising on employment in contrast to Nehru model
which the government criticised for concentration of power, widening inequality and for mounting poverty

Negative Aspect

• Due to political instability and change in the government in the terminal year of the 5th plan, 6th plan could
not be started on April 1, 1979 and was postponed for one year

Outcome

✓ This plan could not be completed due to fall of ‘Janata Party’ government
✓ The year 1979-80 was declared as annual plan and 6th plan started from April 1, 1980

Sixth Plan (1980-85)

Reason
23

✓ In 1980, there was again a change of government at the centre with the return of the congress which
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abandoned the 6th plan of the Janata government in the year 1980 itself and launched a different plan
aimed at directly attacking on the problem of poverty by creating conditions of an expanding economy

Major objective
• Poverty Alleviation [Garibi Hatao] → it marked the transformation from allocating scarce resources in the
economy to welfare orientation

Goals

• To ensure faster rate of economic development

• Efficient utilization of resources
• Reduction in unemployment and poverty
• To encourage modernisation for achieving economic and technological self-sufficiency
• Rapid development and efficient utilisation of the energy sources
• To increase people’s participation through education
• To minimise regional disparity
• To minimise disparity of income and wealth
• Policies for controlling the population explosion

Outlay → 1,10,468 cr

Positive aspects

• Poverty alleviation gives the top priority

• Qualitative improvement in the living standards of people by means of Minimum Need Programme
(MNP)
• Schemes for transferring skills (TRYSEM) and assets (IRDP) and providing slack season employment
(NREP) → these were not new schemes, all different schemes were combined as one scheme and known as
Integrated Rural Development Programmes (IRDP)
• First plan to focus on gender issues, women empowerment and the growing inequalities amongst the
states and also intra-regional imbalances

Negative aspects

• Industrial growth rate was less than the targeted rate

Achievements

• Actual growth of national income was higher at 5.7% against a target of 5.2%
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• Increase of 16% per annum in real investment in fixed asset by private sector
• Poverty declined from 48.3% in 1977-78 to 37.4% in 1983-84
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Outcome

➢ Sixth Plan could be taken as a success as most of the targets were realised even though during the last year
(1984-85) many parts of the country faced severe famine conditions and agricultural output was less.
➢ “First six five-year plans were directed plans as there was a larger role of public sector and substantially
larger investment by the government or the government could ensure investment in specific areas as it was
the major investor.
➢ The major emphasis in these plans were towards industrialisation, setting-up of the public sector, self-
reliance and establishing India as a self-generating economy, to provide employment and meeting the
needs of the economy, rather than they being provided directly by the government.
➢ Towards 5th and 6th plans, poverty and welfare orientation of the plans became visible.”

Seventh Plan (1985-90)

Reason

• With the success of 6th FYP, government geared up towards long term perspective planning 1985-2000 with
special focus on energy sector

Major objective: Growth, Modernisation, Self-reliance and Social justice

Goals

• Establishment of a self-sufficient economy

• Progress towards a social system based on equality and justice
• To prepare firm base for technological development in agriculture and industrial sector
• Faster growth in energy sector with focus on domestic resources
• Ecological and environment protection
• Strong emphasis on creation of productive employment on farm as well as rural subsidiary occupations.
• Stress on increasing the production of food grains, oilseeds, sugar, textiles, domestic fuel and housing.
• Outward-looking strategy with exports receiving high priority.
25

“This plan had two very important areas, one that of larger agricultural sector orientation of increasing pro-
duction and productivity and the second pertains to a steady decline in the public sector investment implying a
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larger contribution of private sector ”

Negative Aspects

• Tempo of domestic and external liberalisation hastened

• There was a severe short fall in mining sector (5.6% against a target of 13%)
• Social sector performance fell far short of targets– especially in housing for the landless, elementary ed-
ucation and general poverty alleviation.
• By the end of the plan, India had a highly unfavourable balance of payment situation. It has experienced
for the first time, a problem of imports outstripping exports resulting in the balance of payment crisis re-
quiring India to seek loan from IMF.

Positive Aspects

• The Plan had a 15-year perspective (1985-2000) for removal of poverty, providing for basic needs,
achieving universal elementary education and total access to health facilities.
• Modernisation of various public sector units was taken up
• Promotion to sunrise industries especially food processing and electronics
• For the first time, share of public sector in total plan outlay was less than 50% → 47.8%
• Jawahar Rojgar Yojana (JRY) was launched in 1989 with the motive to create wage-employment for the
rural poor

Achievements

• Average annual growth rate during the plan period was 5.6% (target 5%).
• Agriculture grew at 4.1% against a target of 4%.
• Manufacturing industries achieved a growth rate of 8.8% (target 8%).

Outlay → 2,18,730 cr

Outcome

✓ The plan was very successful as the economy recorded 6% growth rate against the targeted 5% with the
decade of 80’s struggling out of the ’Hindu Rate of Growth’.

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Two Annual Plans (1990-92)

Reason
✓ Due to economic crisis and political instability at the centre, 8th plan could not be started in 1990

Outcome

• “New Industrial Policy” was announced and it is considered the beginning of large scale liberalisation in
the Indian Economy
• The two consecutive annual plans were formulated within the framework of the approach to the 8 th plan
with the basic thrust on maximisation of employment and social transformation

“Each successive plan after 7th plan has seen a phased reduction in public sector outlay and large levels of pri-
vate sector, changing planning from ‘directed to indirected’, which is indicating which sectors require invest-
ments in terms of priorities and private sector is accordingly expected to make investment in those sectors.”

Eighth Plan (1992-97)

Key issues during the launch of the plan:
✓ Worsening balance of payment situation
✓ Rising debt burden
✓ Widening budget deficit
✓ Recession in Industry
✓ Increasing inflation

Major objective: Human resource development

Goals

• Creation of sufficient employment opportunities and achieve full employment by the end of the century
• To control population explosion by people’s participation
• Modernisation and diversification of industries to make them more competitive
• Special emphasis on areas like primary education, drinking water, health
• Universalisation of primary education and 100% literacy in the age group 15-35 yrs
• Diversification in agriculture sector with the objective of self sufficieny and surplus for export

Outlay

• The level of national investment proposed was Rs. 7,98,000 crore and the public sector outlay, Rs. 4,
27

34,100 crore.
• Consistent with the expected resources, the size of the plan of the States and Union Territories was project-
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ed at Rs. 1,86,235 cr and of the central plan at Rs. 2, 47,865 crores.

Positive aspects
• The plan was launched in 1992 after the plan holiday during the economically and politically difficult
days of 1990-91 and 91-92
• It was Manmohan-Rao (F.M- P.M.) Era of economic liberalization
• Modernisation of industries was focused
• India became member of WTO to pace with world economics

Negative aspects

• Share of the public sector in total plan outlay was 34.3% much below the target of 45.2%
• Actual employment growth was only 2% against a target of 2.6%.

Achievements

• Per capita national output grew by 3.9% per annum. But, this growth masked considerable distortion in
the distribution front. From data regarding inflation and price indices, there is evidence that the poor be-
came poorer despite ‘the safety net’.
• Annual growth rate achieved in the Plan period is 6.8% against the target of 5.6 %.
• Agriculture sector growth rate was 3.6% higher than the target of 3.5%
• Industrial sector growth rate 8.5% higher than the the target of 8.1%

Outcome

• The Eighth Plan was to walk on ‘two legs’ - one leg of alleviating poverty and removing unemployment;
and the other ‘leg’ providing a ‘safety net’ for those who will be affected by the structural adjustment pro-
gramme. The plan had thus built in the ‘human face’ element of adjustment.
• Rapid economic growth (highest annual growth rate so far – 6.8 %)
• High growth of agriculture and allied sector, and manufacturing sector
• Growth in exports and imports
• Improvement in trade and current account deficit

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Ninth Plan (1997-2002)

Reason

• 8th plan period ended in 1997. Implementation of the 9th plan was to begin from the same year.
• But a series of political crises in the country delayed the formulation and approval of the plan by two
years.
• The NDC finally approved the plan in February 1999, envisaging a GDP growth rate of 6.5 percent per an-
num. Though delayed by two years in approval, the plan was to run its period through to 2002

Major objective: Equitable distribution and growth with equality

Goals

• To extend the achievements of 8th plan

• To create sufficient productive employment
• To give priority to the development of agriculture for eradication of poverty
• To keep the prices under control for faster economic development
• To ensure food and nutritional security to all, especially the vulnerable
• To control the population growth rate
• To provide the basic minimum services like clean drinking water, primary health care facility , universal pri-
mary education, housing etc.
• To encourage mass participation through institutions like Panchayati Raj institutions, cooperatives and vol-
untary organisations

Outlay:

The size of the plan was estimated to be Rs. 8,59,000 crore at 1996-97 prices. This included plans of the Cen-
tre, States and public sector undertakings. The gross budgetary support to the plan from the Centre was fixed
at Rs. 3,74,000 crore. Resources from public sector undertakings and states were estimated to be Rs. 2, 90,000
crore and Rs. 1, 95,000 crore respectively.

Positive Aspects:

• The development strategy emphasised the role of markets and the need for government to intervene to
promote a degree of competition through suitable legislation. Licence Raj was to be ended. The Plan em-
phasised cooperative federalism. It also stressed the importance of infrastructural development.
• Aimed to depend prominently on the private sector
• The Plan was indicative in nature, focusing on policies. It also provided a 15-year perspective.
29

• It aimed to achieve a growth rate of 8% per annum in the medium term and a rate of 6.5% during the plan
period (1997-2002).
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• It assigned priority to agriculture and rural development with a view to generate adequate productive em-
ployment and eradicate poverty
• Envisaged the creation of 52 million jobs as against the demand for job opportunities for 60.5 million
persons.
• The backlog of unemployment, which was 7.5 million at the close of the eighth Plan, was expected to be 6.6
million at the end of the Ninth Plan.

Negative aspects:

• The GDP grew only by 5.35% per annum during the plan period against the target of 6.5%. The shortfall
was due to poor performance by agricultural and industrial sectors, as explained in the table below.

• 9th plan was launched when there was an all round ‘slowdown’ in the economy by the South East Asian Fi-
nancial Crisis (1996-97)
• Some other development during the ninth plan, such as cyclone in Orissa, earthquake in Gujarat, Kargil war
etc. also resulted in diversion of resources from investment and consequent decline in the growth rates.

Outcome:

The issue of fiscal consolidation became a top priority of the governments for the first time, which had its focus
on the following related issues:

1. Sharp reduction in revenue deficit of government, including centre, states and PSUs through a combi-
nation of improved revenue collections and control of in-essential expenditures
2. Cutting down subsidies, collection of user charges on economic services (i.e. electricity, transportation,
etc.), cutting down interest, wages, pension, PF, etc;
3. Decentralisation of planning and implementation through greater reliance on states and the PRIs.

9th was developed in context of 4 important dimensions of the government policy:

✓ Improving the quality of the life
30

✓ Generation of Productive employment

✓ Creation of regional balances
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✓ Self-reliance
Tenth Plan (2002-07)

Reason:

• Taking note of the inabilities of the earlier Five Years Plans, especially that of the 9th Five Year Plan, gov-
ernment decided to take up a resolution for immediate implementation of all the policies formulated in the
past.
• Major objective: Growth with emphasis on human development

Goals:

• The Tenth Plan laid down an ambitious target of 8% annual growth rate for the economy, against
the prevailing rate of 5.5%.
• Its long-term vision was to double the per capita income in the next ten years, to reduce the decadal
population growth from 21.3% (1991-2001) to 16.2% by 2010-11 and to ensure that the growth in gainful
employment kept pace with the addition to the labour force.

Total outlay: Rs. 15,92,300 crore

Positive Aspects:

• Accepting that the higher growth rates are not the only objective – it should be translated into improving
the quality of life of the people
• For the first time the plan went to set the ‘monitorable targets’ for 11 select indicators of development for
the centre as well as for the states
31

• ‘Governance’ was considered a factor of the development

• Agriculture sector declared as the priming moving force (PMF) of the economy
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• Increased emphasis on the social sector i.e. education, health etc.

Negative Aspects:
• For too many people still lacked the basic requirements for a decent living in terms of nutritional standards,
access to education and basic health, and also many other public services such as water supply and sewage.
• The benefits did not reach fully some disadvantages sections like the Scheduled Castes and Tribes and mi-
norities.
• Regional imbalances - both across states and even within states - were also noticed.
• Against the ambitious target of 8%, the economy grew at the rate of 7.7% on an average during the 10th
Plan period.
• Evaluation by the Planning Commission noticed that while the rate of growth was impressive, it was lop-
sided and did not benefit all people alike.

Outcome:

✓ Poor performance of agriculture sector

✓ Critical areas like employment and social infrastructure were neglected
✓ Foreign exchange reserves have gone up from about $50 billion to more than $200 billion

Eleventh Plan (2007-12)

Reason:

10th plan reflected the concern that economic growth alone may not lead to the attainment of the long term
sustainability and of adequate improvement in social justice
Major objective: Faster and more Inclusive Growth

Goals:

• The Eleventh Plan targets to resolve the regional imbalance still prevailing in the country.
32

• The Plan document, sub-titled Inclusive Growth, outlines a strategy for making growth both faster and
more inclusive. Encouraged by the achievement of a rate of 7.7% on an average during the 10th Plan, itself
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a target of 9% growth during the Plan period, with acceleration during the period to reach 10% by the end
of the Plan.
• The target of 9% growth requires the average rate of investment to rise from 32% (during 10th Plan) to
37% in the current plan, reaching 39% at the end of the plan period.
• Private investment which has contributed 78% of the investment during the 10th Plan is expected to main-
tain its share.
• Public investment is expected to be maintained at the same level of 22% as in the 10th Plan.
• Planning Commission has framed a plan for achieving faster growth with greater inclusiveness which in-
volves the following interrelated components:
a) a continuation of the policy of economic reform which has created a competitive private sector capable
of benefiting from the opportunities provided by greater integration with the world;
b) more emphasis on agriculture,
c) improved access to essential services in health and education (including skill development);
d) special thrust on infrastructural development;
e) special attention to the needs of disadvantaged groups, and
f) good governance at all level, central, state and local.
• The broad targets fixed by the 11th Plan include a 4% per cent growth in Agriculture sector, 10% growth in
Industries and Minerals, and investment in infrastructure to grow from 5.43% of GDP in 06-07 to 9.43% by
the end of the 11th Plan.

Total public sector outlay in the Eleventh Plan (both Central and States and including the PSEs) is estimated
at 36,44,718 crore. Of this total, the share of the Centre (including the plans of Public Sector Enterprises (PSEs)
will amount to 21,56,571 crore, while that of the States and union territories (UTs) will be 14,88,147 crore.
27 National Targets under 11th Plan
The Plan has adopted 27 targets at the national level to ensure inclusive growth. These are related to:
(i) income and poverty
(ii) education
(iii) Health
(iv) women and children
(v) infrastructure
(vi) environment
a) Targeted growth of GDP at 9% per year.
b) To raise industrial growth rate from 9.2% in 10th Plan to 10% in 11th Plan.
c) To reduce unemployment among educated youth to less than 5%.
d) To reduce Infant Moraling Rate (IMR) to 28 and Material Morality Rate (MMR) to 1 per 1000 on live births
by the end of plan.
33

e) To increase sex-ratio to 935 by 2011-12 and 950 by 2016-17.

f) To ensure that all children enjoy a safe childhood, without any compulsion to work.
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g) To ensure electricity connection to all villages and BPL household by 2009 and 24-hour power supply by
the end of this plan.
h) To achive standards of air quality in all cities
i) To treat all urban waste water by 2011-12.
j) To increase forest and tree cover by 5%.

Negative Aspects:

• Restoring dynamism in agriculture

• Managing India’s water resources
• Problems in achieving power generation targets
• Issues pertaining to urbanisation
• Special problems of urban development
• Increase in the key deficit indicators
• Issue of price stability

Positive Aspects:

• It has brought out the need for neo-liberal policies given the changing political dynamics and a changed
face of the economy
• It gave thrust to Public Private Partnership (PPP) model for infrastructural development in the economy

Achievements:

• Growth rate of 8% achieved as against a target of 9% per annum

• The shortfall in achievement of (various growth targets) can be attributed both to internal and external fac-
tors viz. global slowdown, fluctuations in international prices, strong inflationary pressures and negative
growth in agriculture due to drought like situation
• Domestic savings and investment averaged 33.5 % and 36.1% of GDP at market prices respectively in the
Eleventh Plan which is below the target but not very far.

Outcome:

• India had emerged as one of the fastest growing economy by the end of the Tenth Plan
• The savings and investment rates had increased, industrial sector had responded well to face competition in
the global economy and foreign investors were keen to invest in India
• But the growth was not perceived as sufficiently inclusive for many groups, specially SCs, STs & minorities
as borne out by data on several dimensions like poverty, malnutrition, mortality, current daily employment
34

etc
• Since the period saw two global crises - one in 2008 and another in 2011 – the 8% growth may be termed
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as satisfactory.
• Based on the latest estimates of poverty released by the Planning Commission, poverty in the country has
declined by 1.5 percentage points per year between 2004-05 and 2009-10.
Eleventh Plan Achievements on Inclusive Growth:

 GDP growth in the Eleventh Plan 2007–08 to 2011–12 was 8 % compared with 7.6 % in the Tenth Plan
(2002–03 to 2006–07) and only 5.7 % in the Ninth Plan (1997–98 to 2001–02). The growth rate of 7.9 % in
the Eleventh Plan period is one of the highest of any country in that period which saw two global crises.
 Agricultural GDP growth accelerated in the Eleventh Plan, to an average rate of 3.7 %, compared with 2.4
% the Tenth Plan, and 2.5 % in the Ninth Plan.
 The percentage of the population below the poverty line declined at the rate of 1.5 percentage points
(ppt) per year in the period 2004–05 to 2009–10, twice the rate at which it declined in the previous period
1993–94 to 2004–05. (When the data for the latest NSSO survey for 2011–12 become available, it is likely
that the rate of decline may be close to 2 ppt per year.)
 The rate of growth of real consumption per capita in rural areas in the period 2004–05 to 2011–12 was 3.4
% per year which was four times the rate in the previous period 1993–94 to 2004–05.
 The rate of unemployment declined from 8.2 % in 2004–05 to 6.6 % in 2009–10 reversing the trend ob-
served in the earlier period when it had actually increased from 6.1 per cent in 1993 –94 to 8.2 per cent in
2004–05.
 Rural real wages increased 6.8 % per year in the Eleventh Plan (2007 –08 to 2011–12) compared to an av-
erage 1.1 % per year in the previous decade, led largely by the government’s rural policies and initiatives
 Complete immunization rate increased by 2.1 ppt per year between 2002–04 and 2007–08, compared to
a 1.7 ppt fall per year between 1998–99 and 2002–04. Similarly, institutional deliveries increased by 1.6 ppt
per year between 2002–04 and 2007–08 higher than the 1.3 ppt increase per year between 1998–99 and
2002–04.
 Net enrolment rate at the primary level rose to a near universal 98.3 % in 2009–10. Dropout rate (classes
I–VIII) also showed improvements, falling 1.7 ppt per year between 2003–04 and 2009–10, which was twice
35

the 0.8 ppt fall between 1998–99 and 2003–04.

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Twelfth Five Year Plan (2012-2017)

Reasons:

 Global economy was going through a second financial crisis, precipitated by the sovereign debt problems
of the Euro-zone
 The crisis affected all countries including India. Our growth slowed down to 6.2% in 2011-12.
 Domestic economy has also run up against several constraints. Macro-economic balances have surfaced
following the fiscal expansion undertaken after 2008 to give a fiscal stimulus to the economy. Inflationary
pressures have built up.

Major objective: Faster, Sustainable and More Indusive Growth

Planning Commission in its meeting held on April 2011, the Prime Minister, Dr. Manmohan Singh, addressed
the Planning Commission concerning the twelth Five Year Plan of India. The main point of the Twelfth Plan are:
Resource Allocation Priorities in 12th plan
• Health and Education received less than projected in Eleventh Plan. Allocations for these sectors will
have to be increased in 12th plan.
• Health, Education and Skill Development together in the Centre’s Plan will have to be increased by at least
1.2% point of GDP.
• Infrastructure,including irrigation and watershed management and urban infrastructure, will need additional
0.7 percentage point of GDP over the next 5 years.
• Since Centre’s GBS will rise by only 1.3 percentage points over 5 years, all other sectors will have a slower
growth in allocations.
• Decrease the number of Centrally Sponsored Schemes (CSS) to a few major schemes. For the rest, create
new flexi-fund which allow Ministries to experiment in other CSS areas.
• PPP model must be encouraged, including in the social sector, i.e. health and education. Efforts on this
front need to be intensified.
• Distinction between plan and non-plan being reviewed by Rangarajan Committee.

Broad Objectives of 12th Five Year Plan

• To reduce poverty
• To improve regional equality across states and within states
• To improve living conditions for SCs, STs, OBCs, Minorities
• To generate attractive employment opportunities for Indian youth
• To eliminate gender gaps

Monitorable Targets of the Plan:

25 core indicators listed below reflect the vision of rapid, sustainable and more inclusive growth of the twelfth
36

Plan:

Economic Growth
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1. Real GDP Growth Rate of 8.0 %

2. Agriculture Growth Rate of 4.0 %
3. Manufacturing Growth Rate of 10.0 %
4. Every State must have an average growth rate in the Twelfth Plan preferably higher than that achieved in
the Eleventh Plan.

Poverty and Employment

5. Head-count ratio of consumption poverty to be reduced by 10 percentage points over the preceding esti-
mates by the end of Twelfth FYP.
6. Generate 50 million new work opportunities in the non-farm sector and provide skill certification to equiva-
lent numbers during the Twelfth FYP.

Education

7. Mean Years of Schooling to increase to seven years by the end of Twelfth FYP.
8. Enhance access to higher education by creating two million additional seats for each age cohort aligned to
the skill needs of the economy.
9. Eliminate gender and social gap in school enrolment (that is, between girls and boys, and between SCs, STs,
Muslims and the rest of the population) by the end of Twelfth FYP.

Health

10. Reduce IMR to 25 and MMR to 1 per 1,000 live births, and improve Child Sex Ratio (0 –6 years) to 950 by
the end of the Twelfth FYP.
11. Reduce Total Fertility Rate to 2.1 by the end of Twelfth FYP.
12. Reduce under-nutrition among children aged 0–3 years to half of the NFHS-3 levels by the end of Twelfth
FYP.

Infrastructure, Including Rural Infrastructure

13. Increase investment in infrastructure as a percentage of GDP to 9 % by the end of Twelfth FYP.
14. Increase the Gross Irrigated Area from 90 million hectare to 103 million hectare by the end of Twelfth FYP.
15. Provide electricity to all villages and reduce AT&C losses to 20 % by the end of Twelfth FYP.
16. Connect all villages with all-weather roads by the end of Twelfth FYP.
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17. Upgrade national and state highways to the minimum two-lane standard by the end of Twelfth FYP.
18. Complete Eastern and Western Dedicated Freight Corridors by the end of Twelfth FYP.
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19. Increase rural tele-density to 70 % by the end of Twelfth FYP.

20. Ensure 50 % of rural population has access to 40 lpcd piped drinking water supply, and 50 % gram pancha-
yats achieve Nirmal Gram Status by the end of Twelfth FYP.
Environment and Sustainability

21. Increase green cover (as measured by satellite imagery) by 1 million hectare every year during the Twelfth
FYP.
22. Add 30,000 MW of renewable energy capacity in the Twelfth Plan
23. Reduce emission intensity of GDP in line with the target of 20 % to 25 % reduction over 2005 levels by
2020.

Service Delivery

24. Provide access to banking services to 90 per cent Indian households by the end of Twelfth FYP.
25. Major subsidies and welfare related beneficiary payments to be shifted to direct cash transfer by the end of
the Twelfth Plan, using the Aadhar platform with linked bank accounts.

 13th Finance Commission increased the devolution to the states from 30.5 %to 32 % of divisible pool and it
covers the period up to 2014-15, which includes the first three years of the twelfth Plan.
 The projections of resources for the Twelfth Plan have been made assuming 28.45 % of tax devolutions of
the Gross Tax revenue.
 This has been assumed by factoring in the surcharges being phased out and keeping the same ratio be-
yond 13th FC period till the terminal year of the Twelfth Plan.
 Recently 14th Finance Commission increased the devolution to the states from 32 %to 42 % of divisible pool
and it covers the period up to 2015-16

Review of Five-Year Plans

Sectorial Growth Rate in Different Five Years Plans
38
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The following interferences can be drawn from the above table

 The average growth during the period of 1st to 11th plan works out to be about 4.5%. This is quite a consid-
erable achievement compared to 1% growth during the pre-Independence period
 Agriculture has been growing at 2-3% during the plan periods as against 0.3% growth during the pre-
Independence period
 Spectacular industrial progress has been made during the plan periods. The industrial growth is recorded
at 6-8% which is nearly 3-4 times higher than the growth rate during the pre-Independence period
 The trend growth rate during the first 3 decades of the planning was extremely modest at the rate of 3.5%
per annum. In the later phase of 1981-2013, the growth rate was recorded at 5.9% per annum
 It is clear that there was a sharp acceleration in the rate of growth since 1980. It went almost unnoticed.
It came into limelight in the early 2000s. A majority of scholars opined that the structural break in the eco-
nomic performance of independent India occured around 1980. The growth was impressive, not only in
comparison with the part in India but also in comparison with the performance of most developed coun-
tries in the world.
 In developed countries, the industrial and service sectors contribute a major share in GDP with agriculture
accounting for a relatively lower share. During the progress of growth over the years, the Indian economy
39

too experienced an improvement in the shares of industry and services sector in overall GDP. However,
the share of agricultural sector in GDP has been continuously declining and it came down to 13.9% in 2013-
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14. It is a cause of worry as the Indian agriculture has been in crisis with crop holidays and farmers suicides
 A significant growth rate is noticed with regard to service sector. During 2008-09 to 2013-14, the con-
tribution of services to GDP growth was as high as 69.8%. It reflects the structural transformation of the
economy, as it moves to a somewhat higher level of development. However, one should think about the
sustainability of this pattern of growth. The real failure, throughout the second half of the 20th century, was
 India’s inability to tranform its growth into development, which would have brought about an improvement
in the living conditions of common people.

Self-Reliance:

 The 4th plan set before itself the two principal objectives of “growth with stability” and “progressive
achievement of self-reliance”
 Even in the subsequent plans, planned development enabled India to be self sufficient in most of the im-
portant sectors and productive activities
 It is no small achievement to note that India is the only country with self sufficiency to a considerable
extent among the 115 developing countries of the world
 In the field of self reliance, India has made two achievements. First, the country is now almost self-
sufficient in food. Second, with the growth of iron and steel; machine tools and heavy engineering indus-
tries, India made advancement towards self-reliance in capital equipment

Balanced regional development:

 Regional disparities in development have been a major concern throughout the plan period. The Planning
Commission has sought to tackle the problem of regional disparities in 3 ways:
1) The recognition of backwardness as a factor to be taken into account in the transfer of financial re-
sources from centre to states
2) Special area development programmes directed at development of backward areas
3) Measures to promote private investment in backward areas
 It is now well established that the inter-state disparities in the growth of GSDP have increased in the
post reform period beginning from early 90s when compared to 80s
 The general view is that the richer states have grown faster than the poorer states.
 The regional disparities in per capita GSDP growth is even greater because the poorer states in general
have experienced a faster growth in population
 The states whose pre-reform conditions were favourable in respect of infrastructure could benefit from the
opportunities opened up, especially in the service sector, by economic reforms and could register higher
growth rates in GSDP
 Naturally, the private investment has been flowing basically to the high income states where per capita
outlays have been higher and where infrastructure is well developed
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 More than half of the share in FDI and foreign technical collaborations were attracted by the advanced
states such as Maharashtra, Gujarat and Tamil Nadu
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Enhancement of employment opportunities:

➔ The extent of unemployment in the country at the start of the planning and its reduction over the years
shows how eradication of unemployment is being undertaken
➔ As per the 68th round of NSSO;unemployment rate according to Usual Principal Status (UPS) was 2.7% for
2011-12; while it was 3.7% according to Current Weekly Status (CWS) and 5.6% according to Current Daily
Status (CDS). It implies that high degree of intermittent unemployment is there in India
➔ Rural unemployment in the form of seasonal unemployment is higher than urban unemployment
➔ Over the years, government has introduced different employment generation programmes on permanent
basis sometimes and on majority of times

Reduction in Income Inequalities:

➔ During the plan period, income distribution in India has been skewed in favour of the top 20% of
people in the country
➔ In the mid 90s income disparity between the top and bottom levels of the population was nearly 5 times
➔ During the whole plan period, income inequalities have not been reduced in India
➔ In the post reform period, especially last one and half decades income inequalities have been further wid-
ening

Elimination of Poverty:

➔ During the plan period, various measures have been introduced by the government to reduce the problem
of poverty in the country.
➔ Provision of essential food items and kerosene through the PDS at subsidised prices, rural and urban em-
ployment programmes, free education, health and housing facilities are some key government programmes
in this direction
➔ The government has also proposed food security legislation according to which food at affordable prices
would be made available to the people below the poverty line
➔ All the estimates state that rural poverty is relatively more when compared to urban poverty

Modernisation:

➔ The term modernisation means a variety of structural and institutional changes in the economic activities
➔ India has given importance to science, technology and rationalization during the plan period to improve
productivities
➔ New agricultural strategy in the form of green revolution was introduced in the 3rd five year plan
41

➔ From the 7th plan onwards technological advances were given priority under modernization

Inclusiveness and sustainability of growth:

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➔ Inspite of relatively satisfactory performance in some of the macro economic variables, post-reform period
witnessed slow rate of reduction in poverty, low quality of employment of growth, increase in rural-urban
disparities, increase in income inequalities across the social groups and increase in the regional disparities.
➔ Agricultural growth was low in the last 10 yrs and farmer suicides are more evident in the post-reform
period.
➔ By keeping these imp issues in mind , 11th FYP introduced the objective of inclusiveness and sustainability
of growth
 Inclusive growth is a broader concept covering economic, social and cultural aspects of development.
 The major components of inclusive growth in India are
(i) Agriculture growth
(ii) Employment generation and poverty reduction
(iii) Reduction in regional and other disparities
(iv) Achieving an equitable growth
• The objective of inclusiveness is reflected in the adoption of monitorable targets in 12th FYP. Inclusiveness
primarily aims at providing economic benefits to hither to neglected marginalized sections so that econo-
my can move towards an equitable growth.

1.13 Major challenges in the economy:

 Delivering essential public services to the poor

 Regaining agricultural dynamism and improving the status of farmers with reference to performance of
human development particularly in health and education
 Increasing manufacturing competitiveness to face global competition
 Developing human resources
 Protecting the environment
 Improving governance
 Removing regional backwardness
 Bridging the gap between urban and rural India
 Inclusion of social and marginal groups, women, minorities and children in growth process
 Women empowerment

1.14 Achievements of Planning:

➔ There is a considerable rise in Net Domestic Product, savings and investment

42

➔ Per capita incomes have increased

➔ India has achieved self-sufficiency in almost all basic and capital goods industries and consumer goods in-
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dustries
➔ Self-sufficiency in foodgrains production is achieved and food security is assured
➔ There is a good deal of diversification in industrial structure
➔ The plans have created significant infrastructure particularly in the fields of transport, irrigation and tele-
communications
➔ There has been tremendous development of educational sector and there has been a significant growth in
trained scientific and technical manpower. India is one of the leading nations in IT and space exploration

Failures of Planning:
 Incidence of poverty is relatively high in rural areas
 Unemployment has risen. This is the basic reason for poverty in both urban and rural areas
 Inequalities of income have not been reduced. They have been widening in the post reform era
 There is unequal land ownership as land reforms are inadequately implemented
 Regional disparities still persist

2. FROM PLANNING TO NITI AAYOG

• NITI → National Institution for Transforming India

• Established by the government of India as a replacement for the Planning Commission
• It is formed on the basis of extensive consultations across the stake holders – state governments, relative
institutions, experts and the people at large
• India has undergone a paradigm shift over the past six decades - politically, economically, socially, techno-
logically as well as demographically. The role of Government in national development has seen a parallel
evolution.
• NITI has not come into existence all of a sudden. The document of 8th five yr plan, standing committee
on finance in its report on demand for grants (2011-12) and Manmohan Singh accepted in his farewell
address to the Planning Commission in 2014 have sought appropriate changes in the Planning Commission

8th Five Year Plan document:

➔ The very first plan after the liberalisation of 1991 - itself categorically stated that, as the role of Government
was reviewed and restructured, the role and functions of the Planning Commission too needed to be re-
thought.
➔ The Planning Commission needed to be reformed to keep up with changing trends; letting go of old prac-
tices and beliefs whose relevance had been lost, and adopting new ones based on the past experiences of
India as well as other nations.

Standing Committee on Finance of the 15th Lok Sabha

43

➔ Observed in its 35th Report on Demand for Grants (2011-12) that the Planning Commission "has to
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come to grips with the emerging social realities to re-invent itself to make itself more relevant and effective
for aligning the planning process with economic reforms and its consequences, particularly for the poor"

Mahatma Gandhi had said:

➔ "Constant development is the law of life, and a man who always tries to maintain his dogmas in order to
appear consistent drives himself into a false position". Keeping true to this principle our institutions of gov-
ernance and policy must evolve with the changing dynamics of the new India, while remaining true to the
founding principles of the Constitution of India, and rooted in our Bharatiyata or wisdom of our civilization-
al history and ethos.
• Keeping with these changing times, the Government of India has decided to set up Niti Aayog (National
Institution for Transforming India), in place of the erstwhile Planning Commission, as a means to better
serve the needs and aspirations of the people of India
• The new institution will be a catalyst to the developmental process; nurturing an overall enabling environ-
ment, through a holistic approach to development going beyond the limited sphere of the Public Sector
and Government of India
• At the core of Niti Aayog’s creation are two hubs – Team India Hub and the Knowledge and Innova-
tion Hub. The Team India Hub leads the engagement of states with the Central government, while the
Knowledge and Innovation Hub builds NITI’s think-tank capabilities. These hubs reflect the two key tasks of
the Aayog.

2.1 Functions and Mandates of NITI Ayog:

➔ Think tank for Government policy formulation.

➔ Find best practices from other countries, partner with other national and international bodies to help their
adoption in India.
➔ Cooperative Federalism: Involve state governments and even villages in planning process.
➔ Sustainable development
➔ Urban Development: to ensure cities can remain habitable and provide economic venues to everyone.
➔ Participatory Development: with help of private sector and citizens.
➔ Inclusive Development or Antyodaya: Ensure SC, ST and Women too enjoy the fruits of Development.
➔ Poverty elimination to ensure dignity and self-respect.
➔ Focus on 5 crore Small enterprises– to generate more employment for weaker sections.
➔ Monitoring and feedback. Midway course correction, if needed.
➔ Make policies to reap demographic dividend and social capital.
➔ Regional Councils will address specific “issues” for a group of states. Example: Regional Council for drought,
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Left-wing extremism, Tribal welfare and so on.

➔ Extract maximum benefit from NRI’s geo-economic and Geo-political strength for India’s Development.
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➔ Use Social media and ICT tools to ensure transparency, accountability and good governance.
➔ Help sorting inter-departmental conflicts.

2.2 Structure of NITI:

Niti Aayog will comprise:

• Chairperson: Prime Minister of India

• Governing Council: comprising the Chief Ministers of all States and Lt. Governors of Union Territories
• Regional Councils: will be formed to address specific issues and contingencies impacting more than one
state or region. Strategy and Planning in the Niti Aayog will be anchored from State-level; with Regional
Councils convened by the Prime Minister for identified priority domains, put under the joint leadership of
related sub-groups of States (grouped around commonalities which could be geographic, economic, social
or otherwise) and Central Ministries.
Regional Councils will
✓ Have specified tenures, with the mandate to evolve strategy and oversee implementation
✓ Be jointly headed by one of the group Chief Ministers (on a rotational basis or otherwise) and a
corresponding Central Minister.
✓ Include the sectoral Central Ministers and Secretaries concerned, as well as State Ministers and
Secretaries.
✓ Be linked with corresponding domain experts and academic institutions.
✓ Have a dedicated support cell in the Niti Aayog Secretariat
• Special Invitees: experts, specialists and practitioners with relevant domain knowledge as special invitees
nominated by the Prime Minister.

Chairperson - Prime Minister

Vice-Chairperson
Members: Full-time
(appointed by PM)

Max. 2 Max. 4 Chief Executive

Secretariat
Part time members Ex-officio members Officer

• Prime Minister as the Chairperson

• Vice-Chairperson: to be appointed by the Prime Minister
• Members: full-time
• Part-time Members: maximum of 2, from leading universities, research organisations and other relevant
45

institutions in an ex-officio capacity. Part time members will be on a rotational.

• Ex-Officio Members: maximum of 4 members of the Union Council of Ministers to be nominated by the
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Prime Minister.
• Chief Executive Officer: to be appointed by the Prime Minister for a fixed tenure, in the rank of Secretary
to the Government of India.
• Secretariat: as deemed necessary
Niti Aayog will aim to accomplish the following objectives and opportunities:

 An administration paradigm in which the Government is an "enabler" rather than a "provider of first and
last resort."
 Progress from "food security" to focus on a mix of agricultural production, as well as actual returns that
farmers get from their produce.
 Ensure that India is an active player in the debates and deliberations on the global commons.
 Ensure that the economically vibrant middle-class remains engaged, and its potential is fully realized.
 Leverage India's pool of entrepreneurial, scientific and intellectual human capital.
 Incorporate the significant geo-economic and geo-political strength of the Non-Resident Indian Communi-
ty.
 Use urbanization as an opportunity to create a wholesome and secure habitat through the use of modern
technology.
 Use technology to reduce opacity and potential for misadventures in governance.

The Niti Aayog aims to enable India to better face complex challenges, through the following:

Leveraging of India's demographic dividend, and realization of the potential of youth, men and women,
through education, skill development, elimination of gender bias, and employment
Elimination of poverty, and the chance for every Indian to live a life of dignity and self-respect
Redressal of inequalities based on gender bias, caste and economic disparities
Integrate villages institutionally into the development process
Policy support to more than 50 million small businesses, which are a major source of employment creation
Safeguarding of our environmental and ecological assets

2.3 VEHICLE OF GOOD GOVERNANCE

➢ Chanakya had mapped out centuries ago how good governance was at the root of a nation’s wealth, val-
ues, comfort and happiness.
➢ Niti Aayog will seek to facilitate and empower this critical requirement of good governance, which is peo-
ple-centric, participative, collaborative, transparent and policy-driven.
➢ It will provide critical directional and strategic input to the development process, focussing on deliverables
and outcomes.
46

➢ This, along with being as incubator and disseminator of fresh thought and ideas for development, will be
the core mission of Niti Aayog.
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2.4 Niti Aayog’s Vision for New India:

➢ With the aim to transform India, NITI Ayog has envisioned an ambitious agenda for the country to
be achieved by 2032. The five year plan will be replaced by a three year action plan which will be a part of
a seven year strategy that will in turn help to realise 15 year long term vision.
➢ The target set for next 15 years include 3 fold rise in GDP, Rs. 2 lakh increase in per capita GDP and facili-
ties such as housing with toilets, electricity and digital connectivity for all, a fully literate population with
unhindered access to health care and a clean India with clean air and water etc.
➢ What is the need of the hour ??
➢ Today, there is a need to identify and address the challenges faced because of global environment, con-
sistent poverty within India, regional inequalities etc.
➢ Indian economy will grow at a rapid pace provided certain preconditions are met. When there is matter of
planning and growth, the tendency is to look into investment, capital output ratio etc. but beyond that,
there is a need to look at investment in social capital, human capital which is badly neglected. There
is a need of social harmony in country when news such as recent killing of CRPF jawans in sukma, unrest in
Kashmir shows a warfare going on in certain parts of country. It is not possible to grow efficiently if there is
domestic discord and social non-harmony.

Challenges
➢ Employment- Today, India is seeing high economic rate with almost jobless growth. Indian workforce is
increasing every month by 1 million and the jobs getting created are in lakhs. Without large job creation
there isn’t going to be poverty reduction. The challenge to tackle job less growth and less employment op-
portunity is going to become worse even at 9% growth with technological changes.
➢ Education- higher literate population talks about good quality education for all, which means doubling
public investment in education, health care and social protection is required. Lack of public expenditure in
social capital will create long term problems.
➢ Agrarian crisis is visible almost everywhere but there is hardly any steps to protect farmers’ income and
building resilience for small rain fed farmers. Every year, knee-jerk or situation based actions are taken.
➢ Malnutrition is related to all other inequalities, condition of women, adolescent girls, lack of access to
clean water and sanitation, conditions of tribal population.

How to address the current challenges?

The focus has to be on
47

• 3 D- demand, demography and democracy which are inherent to India.

• Inclusiveness- need to focus on inclusiveness by providing health facilities, education for all and expendi-
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ture in infrastructure, agriculture etc.

• Resilience- the focus has to be on public institutions by strengthening them. Regulating environment,
banking system and management of natural resources important for resilience.
Funding the development

Earlier, lot of funds used to come to states from central government through two ways-

o Devolution as per finance commission’s recommendation which is 42% of revenue share of the centre.
o Through special schemes of various union ministries to which any eligible state can lay a claim and get
money.
➢ The NITI Ayog has a system of laying out outcomes to be achieved in healthcare, education and water
management which are thought out in detail.
➢ For this, secretaries of departments of state government, chief secretaries and occasionally CMs are con-
vened by the NITI Ayog to monitor, evaluate and incentivise.
➢ This is happening. But enough money is not going into it. In healthcare, India spends far less than any
other country, just 1% of GDP.
➢ There cannot be sustenance of social capacity that is required to generate the kind of growth expected for
15 years.

The positive impact of Niti Aayog can be seen as

 Cooperative Federalism : The centre and states have been brought on a single platform with state Chief
ministers heading certain committees. Eg. DBT on Kerosense in Andhra
 It has been able identify best practices of certain states and replicate them in others abandoning the previ-
ous top down approach eg. UP’s seed DBT replication, Yantradoot-Farm Machine rent scheme being repli-
cated
 Various indices such Agri marketing index, Health index have created competitive environment among
states to foster reforms
 The extra constitutional role of Planning commission which usurped the domain of finance commission has
been done away with

Certain issues are

• Its role has become that of think thank whose recommendations are advisory
• Centre’s domination and bias in the institution is still persistent as some states don’t attend center state
meetings 48

Niti Aayog ‘s vision, action and strategy reflects the new aspirational India as

o It has fostered the SETU and Atal Innovation Mission to boost startup ecosystem in India
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o Its 3 year and 15-year plans are in line with tangible short term and long term goals for the nation
o It is overseeing authority for SDG which seek to make India at par with developed nations
o Its reformative suggestions in the agriculture sector such as land leasing and land pooling have potential to
transform rural India
Though transformed role of Niti Aayog has been much appreciated it is accused of being urban centric organi-
sation with little focus for the rural youth who form the bulk of the young population of the country towards
which it needs to redirect its focus.

Guiding Principles
➢ In carrying out the functions, Niti Aayog will be guided by an overall vision of development which is inclu-
sive, equitable and sustainable. A strategy of empowerment built on human dignity and national self-
respect, which lives up to Swami Vivekananda’s idea of our duty to encourage everyone in his struggle to
live up to his own highest idea”.
➢ Antyodaya: Prioritize service and uplift of the poor, marginalized and downtrodden, as enunciated in Pan-
dit Deendayal Upadhyay’s idea of ‘Antyodaya’. Development is incomplete and meaningless, if it does not
reach the farthest individual. In the centuries old words of Tiruvalluvar, the sage-poet, nothing is more
dreadfully painful than poverty”.
➢ Inclusion: Empower vulnerable and marginalized sections, redressing identity-based inequalities of all
kinds gender, region, religion, caste or class. As Sankar Dev wrote decades ago: "to see every being as
equivalent to one’s own soul is the supreme means (of attaining deliverance)". Weaker sections must be
enabled to be masters of their own fate, having equal influence over the choices the nation makes
➢ Village: Integrate our villages into the development process, to draw on the vitality and energy of the bed-
rock of our ethos, culture and sustenance.
➢ Demographic dividend: Harness our greatest asset, the people of India; by focussing on their develop-
ment, through education and skilling, and their empowerment, through productive livelihood opportunities.
➢ People’s Participation: Transform the developmental process into a people-driven one, making an awak-
ened and participative citizenry the driver of good governance. This includes our extended Indian family of
the Non-Resident Indian community spread across the world, whose significant geo-economic and geo-
political strength must be harnessed.
➢ Governance: Nurture an open, transparent, accountable, pro-active and purposeful style of governance,
transitioning focus from Outlay to Output to Outcome.
➢ Sustainability: Maintain sustainability at the core of our planning and developmental process, building on
our ancient tradition of respect for the environment.

3. Money and Banking

49

3.1 Financial System:

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 A financial system is an institutional mechanism that intermediates between ultimate borrowers and
ultimate lenders.
3.2 Classification of financial system:

 Broadly, on the basis of purpose, the financial system can be classified into industrial finance, agricul-
tural finance, development finance and government finance.

Indian Financial System:

 The Indian Financial System consists of two markets: the Money Market and the Capital Market.

Money Market:
50

➢ Money market is a short term credit market for short term funds.
➢ Money market deals in financial securities whose period of maturity is in the range of one day to one
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year.
➢ In money market, the commercial banks are the major lenders of money.
➢ RBI is the controlling authority of the money market.
➢ The cluster of financial institutions that deal in short-term securities and loans, gold and foreign exchange
are termed as money market.

Unorganized money market:

➢ The unorganized money market consists of indigenous bankers, money lenders and unregulated non-
bank financial intermediaries such as finance companies, chit funds and nidhis.
➢ Farmers, artisans and other small time producers and traders borrow money from the unorganized money
market.

Organized Money Market:

➢ Organized money market is the formal market for money regulated by RBI with commercial banks being
the main players.
➢ Foreign banks, co-operative banks, Discount and Finance House of India, finance companies, provident
funds, Securities Trading Corporation of India, Public Sector Undertakings and mutual funds are the other
institutions which operate in the formal Indian money market.
➢ The Reserve Bank of India is the monetary authority controlling the formal money market.

Components of Money Market in India:

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3.3 Concept of Money Supply:

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➔ Money supply refers to the amount of money which is in circulation in an economy at any given time.
➔ It is the total stock of money held by the people consisting of individuals, firms, State and its constituent
bodies except the State treasury, Central Bank and Commercial Banks.
➔ Simply money supply is stock of money in circulation.
➔ The supply of money in a country depends upon the system of note issue adopted by the country. For in-
stance, India adopted the Minimum Reserve System in 1957. Under this system, the Reserve Bank of In-
dia has to maintain a minimum reserve of Rs.200 Crores consisting of gold and foreign securities.
Out of this, the value of gold should not be less than Rs.115 Crores.
➔ There are different forms of money supply – reserve money, narrow money, broad money etc. But the most
important indicator of all these is reserve money. It is also called as high powered money, base money
and central bank money.

NOTE: Bank money is considered as secondary money whereas cash money is known as high powered
money.

3.4 Currency in Circulation:

 Currency in circulation comprises currency with the public and cash in hand with banks.
 It includes notes in circulation, rupee coins and small coins.

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 The rupee coin is a token coin made of nickel and its face value is higher than its metallic value.
 Govt issues all coins upto Rs. 1000.
 All the paper currency of India except one rupee note bears the signature of RBI Governor as these
are issued by RBI, but the one rupee note bears the signature of the Finance Secretary.
 One Rupee Note doesn’t contain “I promise to pay bearer..”

 The volume of rupee coins and small coins as well as one-rupee notes in controlled by RBI.
53

 RBI can print and issue currency notes of different denominations from two rupee notes to ten thou-
sand rupee notes.
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 The symbol of Indian Rupee came into use on July 15th,2010. India is the 5th economy (after America,
Britain, Japan and Europe) to accept a new currency symbol.
 New currency symbol was designed by D Udaya Kumar. It is an amalgamation of Devangri ‘Ra’ and the
Roman ‘R’ without the stem.
3.5 Velocity of Circulation of Money:

• The average number of times a unit of money circulates amongst the people in a given year is known
as Velocity of Circulation of Money.

54

3.6 Quantity of Money:

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The quantity of money in existence in a country at a particular time or the supply of money in a spendable form
consists of 2 items.

1) Currency component consisting of coins and currency notes issued by RBI which are in circulation
 2) Deposit component consisting of deposits of general public with banks, which they can withdraw
through bank cheques and ATM cards.

3.7 Money Multiplier:

▪ It describes how an initial deposit leads to a greater final increase in the total money supply.
▪ It represents the largest degree to which the money supply is influenced by changes in the quantity of
deposits.

3.8 Stock of Money:

➢ In every economy it is necessary for the central bank to know the stock (amount/level) of money available
in the economy only then it can go for suitable kind of credit and monetary policy.
➢ Following the recommendations of the Second Working Group on Money Supply (SWG) in 1977, RBI
has been publishing four monetary aggregates (component of money)– M1, M2, M3 and M4 ( are ba-
sically short terms for the Money-1, Money-2, Money-3 and Money-4) besides the Reserve Money.

Monetary Aggregates:
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Reserve Money:
Reserve Money (M0) = Currency in Circulation + Bankers’ Deposits with RBI + ‘Other’ Deposits with RBI

➔ Reserve money holds the topmost position in the RBI’s monetary policy.
➔ RBI issues currency notes of rupees 2, 5, 10, 20, 50, 100, and 2000 denominations which RBI calls as the ‘Re-
serve Money’
➔ RBI issues currency of one rupee notes and coins including coins of smaller denominations on behalf
of the government of India which accounts for around 2% of the total high power money.

Gross amount of the following 6 segments of money at any point of time is known as Reserve Money (RM)

1) RBI’s net credit to the government

2) RBI’s net credit to the Banks
3) RBI’s net credit to the commercial banks
4) Net forex reserve with the RBI
5) Govt’s currency liabilities to the public
6) Net non-monetary liabilities of the RBI

Narrow Money:
▪ Narrow money is a category of money supply that includes all physical money like coins and currency
along with demand deposits and other liquid assets held by RBI.
▪ Narrow Money (M1) ➔ Currency + Bank Money held by the people
56

▪ Narrow money excludes time deposits of the public with the banking system on the ground that they
are income-earning assets and as such are not liquid.
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Near Money:
▪ Some financial assets may not be as liquid as the currency notes and chequable deposits. For example, the
time deposits, Bankers Acceptances, Bills of Exchanges, government and Private Bonds, Saving certif-
icates, Shares etc. though possess the power of money but are not able to immediately perform the
economic activities but still they are highly liquid and can be easily converted into money. Thus, these
are called “Near Money”.
▪ Examples of near money are: Savings account, Money funds, Bank time deposits (certificates of deposit),
government treasury securities (such as T-bills), Bonds near their redemption date, Foreign currencies, es-
pecially widely traded ones such as the US dollar, euro or yen.

Hard Money:
▪ Hard money is money issued with the backing of gold or other very credible assets.
▪ Hard money avoids the risks of inflation.

Soft Money:
▪ Soft money is just paper currency backed by government bonds. Here money is printed without keeping
adequate reserves like gold in proportion to the newly issued money.
57

▪ Element of inflation is higher under soft money.

Fiat Money:
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▪ Currency notes and coins are called fiat money.

▪ They do not have intrinsic value like a gold or silver coin.
▪ They are also called legal tenders as they cannot be refused by any citizen of the country for settlement of
any kind of transaction.
Hot Money:
▪ Funds which flow into a country to take advantage of the favourable rates of interest in that coun-
try.
▪ They influence the balance of payments and strengthen the exchange rate of the recipient country.

3.9 Proportional Reserve System:

▪ Originally, the assets of the Issue department were to consist of not less than 2/5th of the Gold or ster-
ling securities, provided Gold was NOT less than Rs. 40 Crores in value. Remaining 3/5th of the assets
might be rupee coins. This was called Proportional Reserve System.

3.10 Minimum Reserve System:

▪ Proportional Reserve System changed in 1956. Since then, RBI is required to maintain a Gold and For-
eign Exchange Reserves of Rs. 200 Crore of which at least Rs. 115 Crore should be in Gold. This is called
Minimum Reserve System.
▪ Under the minimum reserve system RBI is required to keep a certain minimum ‘reserve of gold and foreign
securities and is empowered to issue currency to any extent
▪ Sources of high power money supply ➔ RBI and government of India

3.11 Legal Tender:

➔ RBI Act of 1934 which gives RBI the sole right to issue bank notes, states that “Every bank note shall be
legal tender at any place in India in payment for the amount expressed therein.”
➔ Coins function as limited legal tender.
➔ Currency notes are unlimited legal tender.
➔ When fiat money is legally valid for all debts and transactions throughout the country, it is called as
legal tender.

3.12 Printing of Currency Notes:

▪ Currency Notes Press (Nasik Road): Since 1991 this press prints currency notes of 1,2,5,10,50 and 100
58

▪ Bank Notes Press (Dewas): Currency Notes of 20,50,100 and 500 are printed here
▪ Under Section 22 of the Reserve Bank of India Act, RBI issues currency notes.
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▪ Indian Currency Notes have 17 languages printed on them.

▪ The front side of the banknote contains only two languages (English and Hindi).
▪ In back side, there is a language panel on left side of the banknotes. There are 15 scheduled Indian lan-
guages written inside the panel excluding Hindi and English.
3.13 Demonetisation:

➔ Demonetisation is a situation where the Central Bank of the country (Reserve Bank in India) withdraws
the old currency notes of certain denomination as an official mode of payment.
➔ On 8th November 2016, the government of India announced the demonetisation of all 500 and 1,000
banknotes of the Mahatma Gandhi Series. It also announced the issuance of new 500 and 2,000 bank-
notes in exchange for the demonetised banknotes.
➔ Govt of India had demonetised banknotes on two prior occasions—once in 1946 and once in 1978—and
in both cases, the goal was to combat tax evasion via "black money" held outside the formal economic sys-
tem.
➔ In 1936, Rs 10,000, which was the highest denomination note, was introduced but was demonetised
in 1946. Though, it was re-introduced in 1954 but later, in 1978, the then Prime Minister Morarji Desai
in his intensive move to counter the black money, introduced The High Denomination Banks Act (De-
monetisation) and declared Rs 500 , Rs 1000 and Rs 10,000 notes illegal.

3.14 Currency Notes (Bank Notes)

➔ The number of languages on the language panel of a currency note is 15

➔ The front side of the banknote contains only two languages. The denomination is written in both official
languages English and Hindi.
➔ In back side, there is a language panel on left side of the banknotes. There are 15 scheduled Indian
languages written inside the panel excluding Hindi and English.
➔ Out of 22 languages have been accorded official language status as per the eighth schedule of the con-
stitution of India, gets places only 16 languages in the Indian currency notes.
59

➔ The another one language is additional official language English. Totally 17.
➔ However, the 6 scheduled languages are missing in Indian Currency notes.
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➔ As per RBI Act, 1934 Currency Notes can be issued upto the denomination of Rs. 10,000.
Rs. 2000 Note

➔ Colour: Magenta
➔ Release Date: 8th November 2016
➔ Size: 166mm X 66mm

Front:

✓ Image of Mahatma Gandhi

✓ 2000 written in Devanagari
✓ At 45 degree angle, you can see 2000 written in watermark

Back: 60

✓ Image of Mangalyaan
✓ Swachh Bharat Logo and slogan
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✓ Language panel

Rs. 500 Note:

➔ Colour: Stone Gray
➔ Release Date: 10th November 2016
 ➔ Size: 150mm X 66mm

Front ➔ Image of Mahatma Gandhi

Back

✓ Image of Red Fort

✓ Swachh Bharat Logo and slogan
✓ Language Panel

Rs. 100 Note:

➔ Color: Lavender
➔ Release Date: 19th July 2018
➔ Size: 142 mm × 66 mm
Front

 Image of Mahatma Gandhi in center

 100 written in Devanagari
Back

 Rani ki vav
61

 Swachh Bharat logo and slogan

 Language panel
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Rs. 200 Note:

➔ Colour: Bright Yellow

➔ Release Date: 25th August 2017
➔ Size: 146mm X 66mm
➔ Front – Image of Mahatma Gandhi in center
➔ Back – Image of the Sanchi Stupa

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Rs. 50 Note:
Colour: Fluorescent Blue
Release Date: 10th November 2017
Size: 135mm X 66mm
Front
 Image of Mahatma Gandhi in center
 50 written in Devanagari
Back
 Image of Hampi
 Swachh Bharat logo and slogan
 Language panel

Rs. 20 Note:
Colour: Greenish-Yellow
Release Date: 26th April 2019
Size: 129 mm × 63 mm
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Front
 Image of Mahatma Gandhi in center
 100 written in Devanagari
Back
 Ellora Caves
 Swachh Bharat logo and slogan
 Language panel

Rs. 10 Note:
Colour: Chocolate Brown
Release Date: 5th Jan 2018
Size: 123mm X 63mm
Front
 Image of Mahatma Gandhi in center
 10 written in Devanagari
Back
 Motif of the Konark Sun Temple
 Swachh Bharat logo and slogan
 Language panel
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3.15 Reserve Currency:

➔ A currency which government and international institutions are willing to hold in their gold and for-
eign exchange reserves and finance as significant proportion of international trade.
➔ Example – SDR by IMF

3.16 Cryptocurrency:

➔ It is a digital or virtual currency designed to work as a medium of exchange.

➔ It uses cryptography to secure and verify transactions as well as to control the creation of new units of a
particular cryptocurrency.
➔ It typically does not exist in physical form (like paper money) and is typically not issued by a central au-
thority
➔ Bitcoin, first released as open-source software in 2009, is generally considered the first decentralized cryp-
tocurrency
➔ Top Cryptocurrencies → Bitcoin, Ethereum, Ripple, NEO, Litecoin, Bitcoin Cash, Libra, Binance coin etc.

3.17 National Payments Corporation of India (NPCI):

➔ It is an umbrella organisation for operating retail payments and settlement systems in India.
➔ Founded in 2008
➔ NPCI is a not-for-profit organisation registered under section 8 of the Companies Act 2013
65

➔ Established by Reserve Bank of India & IBA

➔ NPCI was incorporated in December 2008 and the Certificate of Commencement of Business was issued in
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April 2009

3.18 Reserve Bank of India (RBI) :

➔ Reserve Bank of India (RBI) is India's central bank, which controls the issue and supply of the Indian ru-
pee.
➔ RBI is the regulator of entire Banking in India.
➔ RBI regulates commercial banks and non-banking finance companies working in India.
➔ It serves as the leader of the banking system and the money market.
➔ It regulates money supply and credit in the country.
➔ The RBI carries out India's monetary policy and exercises supervision and control over banks and non-
banking finance companies in India.
➔ RBI was set up on April 1, 1935 under the Reserve Bank of India Act,1934
➔ RBI was nationalised on January 1, 1949 under RBI (Transfer of Public Ownership) Act, 1948 and
thereafter it is fully owned by government of India.
➔ Headquarters ➔ Mumbai
➔ Reserve Bank of India has offices at 31 locations.
➔ Reserve Bank of India was conceptualized based on the guidelines presented by Dr. Ambedkar to the
"Royal Commission on Indian Currency & Finance” in 1925.
➔ RBI is a leading member of the Alliance for Financial Inclusion (AFI).
➔ RBI is also known as banker's bank and is often referred to by the name 'Mint Street'.
➔ The bank was set up based on the recommendations of the 1926 Royal Commission on Indian Currency
and Finance, also known as the Hilton–Young Commission.
➔ The original choice for the seal of RBI was the East India Company Double Mohur, with the sketch of
the Lion and Palm Tree. However, it was decided to replace the lion with the tiger, the national animal of
India.

66

➔ The Central Office of the RBI was established in Calcutta (now Kolkata) but was moved to Bombay
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(now Mumbai) in 1937.

➔ RBI has 4 regional representations: North in New Delhi, South in Chennai, East in Kolkata and West in
Mumbai.
➔ It has 2 training colleges for its officers, viz. Reserve Bank Staff College, Chennai and College of Agricul-
tural Banking, Pune.
➔ There are 3 autonomous institutions run by RBI namely National Institute of Bank Management (NIBM),
Indira Gandhi Institute of Development Research (IGIDR), Institute for Development and Research in Bank-
ing Technology (IDRBT).
➔ Tarapore committee was set up by the Reserve Bank of India under the chairmanship of former RBI depu-
ty governor S. S. Tarapore to "lay the road map" to capital account convertibility.
➔ Security Printing and Minting Corporation of India Limited (SPMCIL), a wholly owned company of the
government of India, has printing presses at Nashik, Maharashtra and Dewas, Madhya Pradesh.
➔ Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL), owned by the RBI, has printing facil-
ities in Mysore, Karnataka and Salboni, West Bengal.
➔ For the minting of coins, SPMCIL has four mints at Mumbai, Noida, Kolkata and Hyderabad for coin pro-
duction.
➔ As per Indian Coinage Act 1906, Coins can be issued upto the denomation of Rs. 1000
➔ Coins and Re.1 notes are issued by the government of India (GoI), the RBI works as an agent of GoI for
the distribution and handling of coins.
➔ New Rs. 500 and Rs. 2,000 notes were been issued on 8 November 2016. The old series of Rs. 1,000 and
Rs. 500 notes were demonetized from midnight on 8 November 2016.

NOTE: Under Section 22 of the Reserve Bank of India Act, RBI has sole right to issue currency notes of
various denominations except one rupee notes. The One Rupee note is issued by Ministry of Finance and
it bears the signatures of Finance Secretary, while other notes bear the signature of Governor RBI.

➔ First Governor of RBI : Sir Obsorne Smith (1935-1937)

➔ First Indian Governor of RBI : C.D.Deshmukh (1943-1949)
➔ Governor and Deputy Governors of RBI are nominated by government of India and have tenure not more
than 5 years.
➔ The Reserve Bank's affairs are governed by a central board of directors which comprises of 21 members.
The board is appointed by the government of India in keeping with the Reserve Bank of India Act. The di-
rectors are appointed/nominated for a period of 4 years.

Functions of RBI:

Issue Currency Notes: 67

• RBI has the sole authority to issue currency notes in India.

• Earlier all currency notes except one rupee note and coins of smaller denomination were issued by RBI.
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• One rupee note and the coins of all denominations are minted and issued by government of India,
but they are circulated through RBI.
• However, Reserve Bank of India in New Mahatma Gandhi series has issued notes in the denomina-
tions of Rs 10 and above.
• Reserve Bank of India has been given these exclusive powers under the provisions of section 22 of Reserve
Bank of India Act, 1934. This system of issuing currency notes is known as minimum reserve system.
• RBI adopted the minimum reserve system for note issue since 1957.
• The currency notes issued by RBI is a legal tender throughout the territory of India without any limitations.
It issues these currency notes against the security of gold bullion, gold coins, promissory notes, exchange
bills and government of India bonds etc.

Advantages:

1) Uniformity in issue of currency notes

2) Effective state supervision
3) Easy to control and credit in accordance with the requirements of the economy

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Banker, agent and financial advisor of the government

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Under section 20 of Reserve Bank of India act, it acts as the banker and agent to the government. Sec-
tion 21 and 21A gives powers to RBI to conduct transactions of Central and state governments.

• It has the duty to make payments, taxes, and deposits on behalf of the government
• It represents government of India at International levels like IMF and World Bank
• It gives financial advice to the government and maintains government accounts
• It has a responsibility to manage public debt and maintain the foreign exchange reserves
• It performs the functions of crediting loans to the government without any interest for short term
• It provides overdraft facilities to Central and State government
• It acts as a banking agent to Central and State government
• It buys and sells government. securities (G-Secs) on government’s behalf

Banker to other banks:

• Reserve Bank of India is the apex monetary body in the country and it controls the volume of bank
reserves.
• It helps and regulates other banks to create credit in the right proportion.
• It has obligatory powers to regulate, guide, help and direct other banks of the country, and hence it acts as
the guardian of commercial banks in India.
• Every commercial bank has to maintain a certain part of the Reserves with RBI.
• Reserve Bank of India acts as the lender of last resort and banks can approach RBI when they need funds.
• Under the Banking Regulation Act, 1949 RBI has extensive powers to supervise and control the banking
system of the country.
• RBI is the custodian of cash reserves of commercial banks.

69
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Exchange rate management and the custodian of Foreign Exchange Reserves:

• Reserve Bank of India has the responsibility to stabilize the external value of Indian currency.
• It keeps gold bullions and foreign currency reserves etc. against currency note issue and has the responsi-
bility to meet the adverse balance of payment with other nations.
• RBI has the responsibility to maintain exchange rate stability and for this, it has to bring demand and supply
of foreign currency (usually US Dollar) to similar levels.
• It maintains this stability through buying and selling of foreign currency etc.
• RBI is the custodian of country’s foreign currency reserves.

RBI as the bank of Central clearance, settlement, and transfer:

• RBI provides the facility of clearing house for settling banking transactions.
• This allows other banks to settle their interbank claims smoothly and economically.
• At places where RBI does not have its own office, this function is carried out in the premises of State Bank
of India.
70

• This facility is provided by Reserve Bank of India through a cell called as the National Clearing Cell.
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Credit control function:

• RBI tries to maintain price stability in the country which is essential for economic development.
• It regulates money supply in the economy according to the changing circumstances of the economy.
• It uses various measures such as qualitative and quantitative techniques to regulate credit in the economy.
• It uses quantitative controls such as bank rate policy, cash reserve ratio, open market operations etc. and
qualitative controls include selective credit control, rationing of credit etc.
• Credit is controlled by RBI in accordance with economic priorities of the government. 71

Lender of last resort:

• Lender of last resort (LoLR) is an exclusive function of RBI, where it lends money to support a financial insti-
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tution like a bank when the latter is facing severe liquidity problems.
• LoLR facility comes only at the time of financial stringency and this may help the bank to escape from a li-
quidity crisis.

Regulator of Banks and Non-Banking Financial Companies:

• Opening a Bank or NBFC requires a license from RBI.
• It ensures that financial interest of the depositors is not hampered.
• It also keeps checks that the banks and NBFCs adhere to capital adequacy norms etc.

In addition to the above roles, the following role has been made more prominent:

3.19 Monetary Policy:

➔ It is a macroeconomic policy.
➔ It is a policy related to money supply in the economy.
➔ In India, RBI manages money supply through Quantitative and Qualitative instruments.
➔ Quantitative instruments influence the total volume of credit [Money Supply]
➔ Qualitative instruments are used to influence availability of credit among various types of borrowers.
72

➔ While managing money supply, RBI keeps primarily inflation and economic growth in mind.
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REASON: In times of increase in money supply, Inflation Rate as well as Economic Growth increases.
3.20 QUANTITATIVE INSTRUMENTS
Bank Rate:

• When banks borrow long term funds from RBI, they have to pay this much interest rate to RBI
• Collateral: NIL (Bank can borrow money without pledging government securities to RBI)
• Simply bank rate refers to the official interest at which the RBI provides loans to the banking system.
• Such loans are given out either by lending or by rediscounting (buying back) the bills of commercial banks.
Thus, bank rate is also known as discount rate.
• Bank rate is also used as a signal by the RBI to communicate interest rate levels to commercial banks.
• Bank rate is also considered as benchmark interest rate of the economy.
• Bank rate is fixed by RBI at 0.25% above the repo rate.

What’s the use of Bank rate?

 Penal rates are linked with Bank rate. For example, If a bank doesn’t maintain CRR, SLR as per the pre-
scribed limit.
 Then RBI can impose penalty interest on such notorious bank.
 At present, Penalty rate = Bank rate + 3% (or 5% in some cases)
 Meaning if Bank rate = 7% then penalty rate=7+3=10%
73

What if RBI wants to fight inflation using bank rate as a “tool”?

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▪ Obviously, they should increase bank rate. That way it becomes harder (more expensive) for banks to bor-
row from RBI ➔ SBI increases its loan rates (to keep the profit margin same).
▪ Result?
▪ Less people get home loan, bike loan, business loans
 ▪ Less business expansion
▪ Less jobs
▪ Less income
▪ Less demand
▪ Ultimately shopkeeper will bring down the prices to attract people into buying more things.
▪ Thus inflation is reduced

Policy Dear Money Cheap Money

Tool To fight inflation To fight deflation
Reserve Ratio (CRR, Increase them Decrease them
SLR)
Open Market Operation RBI sells securities RBI buys securities
(OMO)
Bank Rate Increase Decrease

Significance of Bank Rate:

➔ Bank Rate is the interest rate charged by RBI for long term lending.
➔ It serves as benchmark rate or only as an indicative rate.
➔ Commercial banks do not prefer to borrow money from RBI for long term and rather prefer low interest
deposits from common people.
➔ Bank rate reflects the policy of RBI. When RBI increases bank rate, the cost of borrowing rises. Consequent-
ly, demand for credit also reduces, leading to reduction in money supply. Thus increase in bank rate reflects
tightening of monetary policy by RBI.

Liquidity Adjustment Facility:

➢ It is a tool used in monetary policy, primarily by the Reserve Bank of India (RBI), that allows banks to
borrow money through repurchase agreements (repos) or for banks to make loans to the RBI through re-
verse repo agreements.

Marginal Standing Facility (MSF):

74

• MSF is a new scheme announced by the RBI in its Monetary Policy, 2011–12 which came into effect
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from May, 2011

• Under this scheme, banks can borrow overnight upto 1% of their net demand and time liabilities
(NDTL) from the RBI, at the interest rate 1% (100 basis points) higher than the current repo rate
• MSF would be the last resort for banks once they exhaust all borrowing options including the liquidity ad-
justment facility by pledging through government securities, which has lower rate (i.e. repo rate) of interest
in comparison with the MSF
• MSF would be a penal rate for banks and the banks can borrow funds by pledging government securi-
ties within the limits of the statutory liquidity ratio
• The scheme has been introduced by RBI with the main aim of reducing volatility in the overnight lending
rates in the inter-bank market and to enable smooth monetary transmission in the financial system
• This window was created for commercial banks to borrow from RBI in certain emergency conditions when
inter-bank liquidity dries up completely and there is a volatility in the overnight interest rates.
• To curb this volatility, RBI allowed them to pledge government-securities and get more funds from RBI at a
rate higher than the repo rate.
• Thus, overall idea behind the MSF is to contain volatility in the overnight inter-bank rates.
• Although, the system of lending remains same just like under repo ➔ SBI sells Government security to RBI,
and promises to buy it back after sometime, at a higher rate. Difference in selling and purchase = interest
rate earned by RBI.
• Banks can borrow through MSF on all working days except Saturdays
• The minimum amount which can be accessed through MSF is Rs.1 crore and in multiples of Rs.1 crore
• MSF represents the upper band of the interest corridor and reverse repo as the lower band and the
repo rate in the middle
• To balance the liquidity, RBI would use the sole independent policy rate which is the repo rate and the MSF
rate automatically adjusts to 1% above the repo rate
• This facility is created to facilitate borrowing from RBI by banks who do not have extra government secu-
rities and pledging the existing securities will affect their SLR requirements of 23%
• Objective was to overcome liquidity crunch with banks i.e. shortage of funds

In short→

• Repo rate = reverse repo + 1%

• MSF rate= repo rate + 1%

Repo Rate:

• It is rate at which RBI lends to its clients generally against government securities
75

• Under repo, RBI lends money to commercial banks and commercial banks give government. bonds to RBI
with an agreement to purchase them back.
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• When SBI wants to borrow money from RBI for short term, SBI will have to pay this much interest rate.

Example:

 RBI has cash of Rs.100 lakhs.

 SBI has Government securities worth Rs.100 lakhs.
 SBI enters into Repo agreement with RBI.
 The agreement reads “I (SBI) am selling my Government securities worth Rs.100 lakh to RBI and I (SBI)
promise to buy back(repurchase) those securities from RBI after 6 months @Rs.107 lakhs.

Time: After 6 months

RBI’s investment: Rs.100 lakhs
After 6 months, RBI gets: Rs.107 lakhs from SBI
So profit of RBI (or interest earned by RBI or interest paid by SBI)=(107-100)/100 = 7%. This is Repo rate.
What is the difference between bank rate and repo rate??
➢ Bank Rate ➔RBI lends money to its clients for long term loans @this interest rate
➢ Repo Rate ➔RBI lends money to banks for short term loans @this interest rate

Objective of Repo:

 Commercial banks borrow money from RBI by the means of repo. Thus, repo is used to inject liquidity
(money supply) in the system.
 If RBI wants to reduce money supply, it increases the repo rate.
 If RBI wants to increase money supply, it decreases the repo rate.

Long Term Repo Operations:

 LTRO is a tool under which the RBI provides 1 year to 3 year money to banks at a prevailing repo rate, ac-
cepting government securities with matching or higher tenure as the collateral.
 LTRO supplies Banking system with liquidity for their 1- to 3-year needs.
 LTRO operations are also intended to prevent short-term interest rates in the market from drifting a long
way away from the policy rate (i.e. repo rate)
 LTRO will also help bring down the yields for shorter-term securities (in the 1-3-year tenor) in the bond
market.

Reverse Repo Rate

• Under the Reverse Repo or Reverse Repurchase Agreement, commercial banks park their excess funds at
fixed rate with RBI and RBI gives government. bonds to commercial banks with an agreement to purchase
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them back.
• It is the rate at which banks lend funds to RBI.
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• When SBI parks its surplus money in RBI for short term, SBI makes this much profit.

Example:

o RBI has Government securities worth Rs.100 lakhs.

o SBI has surplus Rs.100 lakhs and nobody is taking them as loans. But SBI is sure more people will come to
take loans before Makar Sankranti. So SBI just wants to park this surplus 100 lakhs somewhere for the
short-term.
o SBI enters into Reverse Repo agreement with RBI.
o The agreement reads “I (SBI) will give buy Government securities worth Rs.100 lakhs from the RBI, and RBI
promises to buy back those securities from me after 6 months @Rs.106 lakhs.

Time: After 6 months,

SBI’s investment: Rs.100 lakhs
After 6 months, SBI gets: Rs.106 lakhs
So profit of SBI (or interest earned by SBI or interest paid by RBI)=(106-100)/100 = 6%. This is reverse repo
rate.

Objective of Reverse Repo:

➔ Commercial banks park excess funds with RBI by means of Reverse Repo. Thus, reverse repo is used to suck
liquidity (money supply) from the system.
➔ If RBI wants to reduce money supply, it increases the reverse repo rate.
➔ If RBI wants to increase money supply, it reduces the reverse repo rate.
➔ If RBI increases the reverse repo rate, banks have more incentive to park their money with RBI and vice ver-
sa.

NOTE: Repo Rate is always HIGHER than Reverse Repo Rate

3.21 Open Market Operations:

➔ Open market operations is the sale and purchase of government. securities and treasury bills by RBI or
the central bank of the country.
➔ RBI by selling government. securities sucks liquidity from the system [reduces the money supply] to control
inflation.
➔ RBI buys back government. securities to infuse liquidity into the system [increases the money supply]
➔ The objective of OMO is to regulate the money supply in the economy.
➔ When the RBI wants to increase the money supply in the economy, it purchases the government secu-
77

rities from the market and it sells government securities to suck out liquidity from the system.
➔ RBI carries out the OMO through commercial banks and does not directly deal with the public.
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➔ OMO is one of the tools that RBI uses to smoothen the liquidity conditions through the year and minimise
its impact on the interest rate and inflation rate levels.
➔ OMO is a part of credit policy.
3.22 CRR and SLR

• Let’s assume there are only four people in India: 1) common man and 2) businessmen 3) Commercial banks
(like SBI) 4) Central Bank (RBI)
• Now the Question: How do commercial banks make money?
• Common man save their money in bank. Bank gives them say 4% interest rate on savings.
• Then Bank gives that money as loan to businessmen and charges 10% interest rate.
• So 10-4=6% is the profit of Bank. Although that’s technically incorrect, because we’ve not counted bank’s
input cost=staff salary, telephone-internet-electricity bill, office rent, xerox machine etc. So actual profit will
be less than 6%.

Example:

 SBI has only one branch in a small town. It was opened on Monday.
 On the very same day, Total 100 common men deposited 1 lakh each in their savings accounts here (=total
deposit is 1 crore)
 SBI offered them 4% interest rate per year on their savings

Here comes the concept of Cash Reserve Ratio

✓ On Tuesday, SBI Branch manager gives away entire 1 crore to a businessman as loan for 10% interest rate
for 5 years.
✓ From SBI’s point of view, sounds very good right? 10-4=6% profit!
✓ But we’ve not considered the fact that on Wednesday, some of those common men (account holders) will
need to take out some money from their banks savings account- to pay for gas, electricity, mobile bills, col-
lege fees, writing cheques and demand drafts etc.
✓ But SBI’s office doesn’t have a single paisa left! = problem, protest, rioting, suicides.
✓ So condition #1: Banks must not give away all of the deposit money to businessmen for loans. Banks
must keep some money with aside.
✓ Ok but who’ll decide how much minimum cash should a bank keep aside? Ans. RBI via CRR.(Cash reserve
ratio).
➢ So CRR is the certain minimum amount of deposit that the commercial banks have to hold as reserves with
the central bank. The percentage of cash required to be kept in reserves, vis-a-vis a bank’s total deposits, is
called the Cash Reserve Ratio.
78

➢ The cash reserve is either stored in the bank’s vault or is sent to the RBI. Banks do not get any interest on
the money that is with the RBI under the CRR requirements.
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Cash reserve ratio is:

 It is also referred to as the amount of funds which the banks have to keep with the Reserve Bank of
India (RBI).
 It’s a vice-versa process.
 If RBI increases CRR then the available amount with the banks decreases or comes down.
 The CRR is used by RBI to wipe out excessive money from the system.

There are two primary purposes of the Cash Reserve Ratio:

1) Since a part of the bank’s deposits is with the Reserve Bank of India, it ensures the security of the
amount. It makes it readily available when customers want their deposits back.
2) Also, CRR helps in keeping inflation under control. At the time of high inflation in the economy, RBI in-
creases the CRR, so that banks need to keep more money in reserves so that they have less money to
lend further.

How does Cash Reserve Ratio help in times of high inflation?

➢ At the time of high inflation, the government needs to ensure that excess money is not available in the
economy.
➢ To that extent, RBI increases the Cash Reserve Ratio, and the amount of money that is available with the
banks reduces. This curbs excess flow of money in the economy.
➢ When the government needs to pump funds into the system, it lowers the CRR rate, which in turn, helps the
banks provide loans to a large number of businesses and industries for investment purposes. Lower CRR al-
79

so boosts the growth rate of the economy.

Why SLR: Statutory liquidity ratio?

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• Continuing the same example. SBI got 1 crore on Monday.

• But suppose, RBI gave him order, “you must keep Rs.10 lakhs aside. (CRR)”
• Thus, SBI is left with only 1 crore – 10 lakhs = 90 lakh rupees.
• So SBI manager decides to get maximum profit out of remaining money. Suppose ongoing rate for busi-
ness loans is 10%.
• But there is one businessman Mr.Naidu.
• No bank is offering him loan, because his past track record is not good: his earlier business adventures
were epic fail.
• This Mr.Naidu comes to SBI
• After six months, Mr. Naidu’s new business project = BIG FAILURE
• He cannot pay back the EMIs.
• Although SBI can attach his assets and auction them to recover the money. But it’ll take lot of time.
• In the mean time, common-men also read this story in local newspapers and they panic that SBI will col-
lapse and bank manager will shut down the office and run away.
• So all the common men line up in front of bank and demand back their money. Recall that SBI still has 10
lakh left in CRR. But people want total 1 crore back!
• Again money of account holders (common men) is stuck =problem, protest, rioting, suicides.
• So, condition #2: Bank must not give away all its loans to risky loan takers. Banks must invest part of
its money in “safe and liquid” investment. So during emergency, bank can sell those “liquid” invest-
ments and take out the money.
• For example, Government securities, gold, corporate bonds of reputed companies like Infosys, reliance, TCS.
These are “safe” investments.
• These are also “liquid”, because you can sell them quickly whenever you want. (recall that SBI could also
auction Mr.Naidu’s properties, but it’ll take lot of time in paperwork, legal issues etc.)
• Ok so, bank should invest part of common-man’s money in “safe” investments like Government securities,
gold and corporate bonds of highly reputed companies.
• BUT who will decide how much money should be invested in this sector? Ans. RBI via SLR (Statutory liquidi-
ty ratio).
• Let’s assume RBI ordered SBI to keep Rs.25 lakhs under SLR.
• Thus, out of original Rs.1 crore that SBI had, 10 lakhs (CRR) + 25 lakhs (SLR) are gone.

So SLR is the percentage of NDTL(net deposit and time liability) that commercial bank have to keep with them-
selves. It can have cash, G-secs and gold.

 Range of SLR prescribed by RBI is from 0% to 40%

80

 Initially the rate of SLR fixed by RBI was quite high like 38.5% of NDTL in 1991-92. Based on the recommen-
dations of Narasimhan Committee on banking sector reforms, the rate of SLR was gradually reduced.
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 SLR can be seen as a mechanism used by Scheduled Commercial Banks to provide credit to government.
through purchase of government. securities.
 To reduce inflation, RBI increases SLR.
 To increase economic growth, RBI decreases SLR.
If the bank fails to maintain SLR, then it is liable to pay penal interest at 3% per annum above the bank rate, on
the shortfall amount. If the shortfall continues for next succeeding day, penal interest is to be paid at Bank Rate
+ 5%
Instrument To reduce Inflation To increase Economic
Growth
CRR Increase CRR Decrease CRR
SLR Increase SLR Decrease SLR
Repo Rate Increase RR Decrease RR
Reverse Repo Rate Increase RRR Decrease RRR
Bank Rate Increase BR Decrease BR
Open Market Opera- Sell government. securi- Buy government. Securities
tions ties

QUALITATIVE INSTRUMENTS

Margin Requirement:
➔ This refers to the difference between securities offered and the amount borrowed from the banks.
➔ In case the RBI mandates banks to demand higher margin requirements, the amount of credit given
on security reduces.

Consumer Credit Regulation:

➔ This refers to the issuing of rules regarding down-payments and maximum time period of instalment
credit for purchase of goods.

Guidelines:
➔ RBI issues oral, written statements, appeals, guidelines, and warnings to the banks.
➔ For instance, the RBI requests commercial banks to pass the benefits of decrease in interest rates to the fi-
nal consumers.

Rationing of Credit:
➔ RBI controls the credit allocated by commercial banks to various sectors.
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➔ For instance, the RBI mandates banks to issue 40% of their credit to the priority sector refers to those
sectors of the economy that may not get timely and adequate credit in the absence of this special dispen-
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sation but are important for overall growth of economy.

➔ Priority sector lending is an important role given by the RBI to the banks for providing a specified portion
of the bank lending to a few specific sectors such as agriculture and allied activities, micro and small enter-
prises, housing for poor people, education for students, social infrastructure, renewable energy, export
credit and other low-income groups and weaker sections.
Moral Suasion:
➔ A moral suasion is a persuasion tactic used by the RBI to influence and pressure, but not force, banks in ad-
hering to policy.
➔ Tactics used are closed door meetings with bank directors, increased severity of inspections, appeals to
community spirits, or vague threats.

Direct Action:
➔ This step is taken by the RBI against the banks that do fulfill conditions and requirements.
➔ RBI may refuse to rediscount their papers or change a penal rate of interest over and above the bank rate,
for credit demanded beyond a limit.

3.23 Monetary Policy Committee (MPC):

 RBI Act, 1934 was amended in 2016 to provide a statutory and institutionalised framework for the
creation of MPC
 Monetary Policy Committee (MPC) has the responsibility to take decisions on monetary policy matters to
meet inflation target as decided between the Central government and RBI.
 MPC replaced the earlier system where the RBI governor had complete control over monetary policy deci-
sions.
 As per Monetary Policy Framework Agreement, RBI is responsible to contain inflation at 4% (+ or –
2%)
 RBI is answerable to government. if inflation exceeds the range for 3 consecutive months. To target this in-
flation, Repo Rate is reviewed and changed periodically by RBI.
 A Committee-based approach for determining the Monetary Policy will add lot of value and transparency
to monetary policy decisions.

Composition:
6-member committee

➔ RBI Governor (Chairperson)

➔ RBI Deputy Governor in charge of monetary policy
➔ One official nominated by the RBI Board
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➔ 3 members representing the Government of India

These 3 members of the MPC are experts in the field of economics or banking or finance or monetary poli-
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cy and are appointed for a period of 4 years and shall not be eligible for re-appointment.
Decision Making:

➔ The committee meets 4 times a year. MPC decisions are taken on a majority basis and the chairman of the
committee will have casting vote only (and not veto power)

Implications of Setting up MPC:

➔ Earlier, decisions on monetary policy were taken solely by the RBI. With the establishment of the MPC, the
central government has equal say in deciding on monetary policy matters.

3.24 Monetary Policy Report (MPR):

➔ RBI publishes Monetary Policy Report after every 6 months to explain the sources and forecasts of in-
flation for the coming period of 6-8 months.

MCLR (Marginal Cost of funds based Lending Rate):

From 1st April 2016, RBI has introduced a new methodology for calculation of the Base Rates based on mar-
ginal cost of funds rather than average cost of funds.
Calculation is based on 4 factors:

1) Marginal cost of deposits/funds

2) Cost of maintaining CRR and SLR
3) Operational Costs of Banks
4) Tenor Premium (based on the time period for which loan is given) 83

Key difference between MCLR and Base Rate:

 Change of calculation of cost of deposits from average to marginal

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As per the new methodology of MCLR, the banks must link their lending rates with the margin-
al/additional cost of deposits i.e. the rate at which they are receiving the new deposits
So in this situation whenever RBI reduces the repo rate, banks reduce their deposit rate and since the
lending rate is linked to the new deposit rate, they reduce the lending rate also
 Hence, because of linking the lending rate with marginal cost of deposits, there will be fast transmission of
repo rate into lending rate (better monetary policy transmission). It will also help improve the transparency
in the methodology followed by banks for determining the lending rates
Every bank calculates its own MCLR rate based on the cost of deposits, operational costs, reserve require-
ments, and tenor premium. So MCLR is an internal benchmark.
RBI has made it mandatory for banks to link all new floating rate personal or retail loans, and floating rate
loans to MSMEs to an external benchmark from October 1, 2019.
Banks can choose one of the four external benchmarks– repo, 3-month treasury bill, 6-month treasury
bill yield or any other interest rate published by Financial Benchmarks India Private limited

3.25 Organised Banking System:

➢ The organized banking system is classified into three categories: the central bank known as the Reserve
bank of India which is the monetary authority or the apex bank, commercial and cooperative banks.

3.26 Evolution and Growth of Banking:

➔ Evolution of banking in India can be traced back to the 4th century BC in the 'Kautilya’s Arthashastra' ,
which contains references to creditors and lenders.
➔ Banking in India started in 1770 with the establishment of Bank of Hindustan.
➔ The real roots of commercial banking in India can be traced back to the early 18 th century with the estab-
lishment of the 3 presidency banks – Bank of Calcutta, Bank of Madras and Bank of Bombay.
➔ In the year 1806, Bank of Calcutta was founded; it was later renamed to Bank of Bengal. Following this, Bank
of Bombay and Bank of Madras were established in years 1840 and 1843 respectively. These three banks
84

were known as the presidency banks and were incorporated as joint-stock companies.
➔ The first bank which was exclusively set up by Indians was Allahabad Bank, followed by Punjab Na-
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tional Bank Ltd. set up in 1895 with headquarters at Lahore.

➔ The 3 presidency banks — Bank of Bengal, Bank of Bombay and Bank of Madras — were integrated to a
single large bank known as Imperial Bank of India in 1921.
➔ In 1922, Royal Commission on Indian Currency and Finance was established under the chairmanship of
Hilton Young. This commission recommended the operation of money management in 1926. Based on the
recommendations of this commission, RBI Act was passed in 1934.
➔ Later, in the year 1935 India’s central bank — Reserve Bank of India — was established under the Reserve
Bank of India act. Imperial Bank of India was transformed into State Bank of India in 1955 — 20 years after
the establishment of RBI.
➔ State Bank of India was constituted on July 1, 1955.

3.27 Commercial banks:

➢ According to the RBI Act of 1934, commercial banks are classified into scheduled and non-scheduled banks

Scheduled Banks:
➢ The scheduled banks are those which are entered in the Second Schedule of RBI Act 1934.
➢ Scheduled banks are regulated under the provisions of Banking Regulation Act, 1949.
➢ Benefits of Scheduled Banks : They can approach RBI for financial assistance at bank rate, repo rate, MSF
etc.

The banks included in this category should fulfil two conditions

85

1) Scheduled Banks should have paid-up capital and reserves not less than 5 lakhs
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2) Any activity of the bank will not adversely affect the interests of the depositors

Scheduled Banks in India are categorised in 5 different groups according to their ownership / nature of opera-
tion.

(i) State Bank of India

 (ii) Nationalised Banks
(iii) Regional Rural Banks
(iv) Foreign Banks
(v) Private Banks

Nationalisation of Commercial Banks in India (Historical Dimension):

➢ In 1950-51, there were 430 commercial banks in India. In order to strengthen the banking system, the RBI
adopted a policy of mergers and amalgamation. Accordingly, small banks were merged with big banks.
➢ Govt of India, with the enactment of the SBI Act, 1955 partially nationalised the 3 Imperial Banks (mainly
operating in the three past Presidencies with their 466 branches) and named them the State Bank of In-
dia—the first public sector bank emerged in India.
➢ RBI had purchased 92% of the shares in this partial nationalisation.
➢ On 19th July 1969, 14 major banks were nationalized by the government of India
➢ In 1980, the government of India took over another 6 commercial banks
14 banks with deposits were more than Rs. 50 crore of nationalised on July 19, 1969
6 banks with deposits were more than Rs. 200 crore of nationalised on April 15, 1980

➢ New Bank of India was merged with Punjab National Bank in 1993
➢ The nationalized banks are banks in which the central government is a major share holder
➢ Lead Bank Scheme which came into existence in the year 1969 also contributed to the banking develop-
ment and branch expansion effort
86

Reasons to nationalize 14 big commercial banks in July 1969:

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Commercial banks in India were not functioning according to the development requirements of the people
of India
The banks were controlled by a group of industrialists and business men who had used bank funds to build
their private industries
 Small industrial and business units were ignored in spite of the government of India’s policy to help the
small sector
Agricultural credit was non-existent

Progress after Nationalisation:

➔ Expansion of number of branches

➔ Priority Sector Lending increased
➔ Level of deposit mobilisation and bank lending increased
➔ Banks started financing schemes which promoted entrepreneurship

3.28 Regional Rural Banks:

 The Working Group on rural banks under the chairmanship of Mr. M Narasimham recommended the set-
ting up of regional rural banks as part of a multi-agency approach to rural credit
 It was found that the commercial banks and credit co-operative societies were not adequately catering to
the credit requirements of the small and marginal farmers, agricultural labourers and artisans in the rural
areas
 The small income groups required low cost credit
 Accordingly, in the year 1975, five RRBs were set up
 First set up on 2 October, 1975 with the formation of a Prathama Grameen Bank
 Legislative backing of Regional Rural Banks Act 1976
 RRBs are joint venture between Central government (50%), State government (15%) and a Commercial
Bank (35%)
 Every RRB was to be sponsored by a “Public Sector Bank”
 RRB concept was based upon the policy that they would lend only to the weaker sections of rural society,
charging lower interest rates, opening branches in remote and rural areas and keep a low cost profile.
 But the commercial motivation was absent
 The RRBs can be set up when a public sector bank sponsors them
 RRBs have played a significant role in mobilizing rural savings
 In 1991, the Narasimham Committee had recommended that RRB may be given a choice to maintain a sep-
arate identity or to get merged with the sponsor banks as rural subsidiaries
87

▪ General Bank of India was founded in 1786 (now defunct) was the first ever bank in India
▪ The oldest surviving bank in the country is State Bank of India (SBI), which was established as
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“The Bank of Bengal” in 1806

Progress of Commercial Banks in the Post Reforms period:

➢ By 1995, the liberalization policy of the government allowed private sector participation in banking industry.
This was followed by foreign direct investment (FDI) in banks.
➢ Reserve Bank of India (RBI) is India’s central bank and it is the ultimate authority for control of banking op-
erations.
➢ The performance of the banking system has substantially improved in the post-reforms period in India.
➢ Deregulation of interest rates, increased competition and greater accountability has improved the profita-
bility of commercial banks in spite of the fall in interest rates and resultant fall in interest spreads.
➢ The capital adequacy ratio or the capital to risk-weighted assets ratio (CRAR = Total capital/RWAs) reflects
financial soundness of banks.
➢ The ratio of non-performing assets (NPA) to total assets indicates the quality of assets of a commercial
bank. A lower ratio indicates better quality and vice-versa.

3.29 Co-Operative Banks

➔ Co-operative banks in India are registered under the States Cooperative Societies Act.
➔ Co-operative banks are also regulated by the Reserve Bank of India (RBI) and governed by Banking Regula-
tions Act 1949 and Banking Laws (Co-operative Societies) Act, 1955.
➔ They work under the "No Profit No Loss" model.
➔ They function with the rule of “One Member One Vote”.
➔ Co-operative banks mainly focus on agricultural and rural sector lending.
➔ Co-operative banks are the first government. sponsored, government. supported and government.
subsidised financial agency in India.

SHORT TERM CREDIT: Co-operative banks have a 3 tier structure —

1) Primary (agriculture or urban) credit societies

2) District central co-operative banks and at the apex level
3) State co-operative banks
LONG TERM CREDIT:
1) Land Development Banks
2) Cooperative and Rural Development Banks

3.30 Development Banks in India:

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NABARD-National Bank for Agriculture and Rural Development:
➔ It is an Apex Development Financial Institution in India
➔ Entrusted with "matters concerning Policy Planning and Operations in the field of credit for Agriculture and
other Economic activities in Rural areas in India".
➔ NABARD is active in developing Financial Inclusion policy.
➔ Established on the recommendations of B.Sivaramman Committee on July 12, 1982 to implement the
National Bank for Agriculture and Rural Development Act 1981.
➔ Replaced the Agricultural Credit Department (ACD) and Rural Planning and Credit Cell (RPCC) of Reserve
Bank of India, and Agricultural Refinance and Development Corporation (ARDC).
➔ NABARD is India's specialised bank for Agriculture and Rural Development in India.
➔ Initial Corpus – 100 cr
➔ NABARD is the most important institution in the country which looks after the development of the cottage
industry, small scale industry and village industry, and other rural industries.
➔ Headquarters : Mumbai
➔ NABARD is also known for its 'SHG Bank Linkage Programme' which encourages India's banks to lend to
self-help groups (SHGs).
➔ Largely because SHGs are composed mainly of poor women, this has evolved into an important Indian tool
for microfinance.
➔ In 2019, RBI sold its stake in NABARD to government. of India. Now NABARD is fully owned by government.
of India.

Small Industries Development of India (SIDBI):

➔ It was established on April 2, 1990 as an independent financial institution.
➔ SIDBI was designated as apex organisation in the field of Small Scale Finance.
89

➔ Aim: To aid the growth and development of micro, small and medium scale enterprises (MSMEs) in India.
➔ Headquarters: Lucknow, Uttar Pradesh
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➔ Though it was a wholly owned subsidiary of Industrial Development Bank of India, presently the ownership
is held by Government of India owned / controlled institutions.
➔ In order to promote and develop MSME sector, SIDBI adopted “Credit Approach”

Industrial Finance Corporation of India (IFCI):

➔ IFCI was established on 1st July, 1948 under the Industrial Finance Corporation Act of 1948.
➔ IFCI became a Public Limited Company in 1993.
➔ IFCI was the first specialized financial institution set up in India to provide term finance to large in-
dustries in India.
➔ It is also a Systematically Important Non-Deposit Taking Non Banking Financial Company.

Key functions of IFCI:

Granting long-term loans(25 years and above)

Guaranteeing rupee loans floated in open markets by industries
Underwriting of shares and debentures
Providing guarantees for industries

Export-Import Bank (EXIM Bank):

➔ Export-Import Bank of India is a wholly owned government. of India entity established in 1982.
➔ Its main aim is financing, facilitating and promoting foreign trade of India.
➔ EXIM Bank extends Line of Credit (LoC) to overseas financial institutions, regional development banks,
sovereign governments and other entities abroad.
➔ It is regulated by the Reserve Bank of India.
➔ HQ : New Delhi

Key functions of EXIM Bank:

Provides direct financial assistance to exporters of plant, machinery and related services in the form of me-
dium term credit.
It rediscounts the export bills for a period not exceeding 90 days against short-term export bills discounted
by Commercial Banks.
It facilitates in developing and financing export-oriented industries.

National Housing Bank:

➔ It was setup as a statutory organization in 1988 under National Housing Bank Act, 1987
➔ It is an apex financial institution for housing
➔ Objective: To operate as a principal agency to promote housing finance institutions both at local and re-
90

gional levels
➔ HQ: New Delhi
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➔ It registers, regulates and supervises Housing Finance Companies (HFCs)

➔ NHB is regulated by RBI
➔ RBI sold its stake in NHB in 2019 – NHB is now 100% owned by government. of India [On recommenda-
tions of Narasimham Panel]
Mudra Bank
▪ MUDRA stands for Micro Units Development and Refinance Agency
▪ It was setup in 2015 by government. of India to provide loans at low rates to Micro-Finance Institutions and
Non-Banking Financial Institutions which then provide credit to MSMEs
▪ It also provides refinance support to RRBs for enhancing their liquidity
▪ Eligible Borrowers ➔ Small Manufacturing Units, Shopkeepers, Artisans, Fruit and Vegetable Vendors

3.31 Non-Banking Financial Companies (NBFCs)

➔ It is a company which is engaged in the business of loans and advances, acquisition and selling of shares,
bonds, debentures etc.

➔ 2016: government allowed 100% FDI on ‘other financial services’ carried out by NBFCs
➔ As per the changed FDI policy 2017, under section 47 of the Foreign Exchange Management Act, 100
percent FDI through automatic route is permitted for NBFCs.
➔ NBFCs financial assets should constitute more than 50% of the total assets and income from financial assets
91

should constitute more than 50% of the gross income.

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➔ NBFCs cannot accept demand deposits from public.
➔ Liquid Debt Mutual Funds is a primary source of short-term funds to NBFC sector.

[Liquid Funds: Liquid funds belong to the debt category of mutual funds. They invest in very short-term mar-
ket instruments like treasury bills, government securities and call money. They are getting popular with retail
investors due to their higher than savings bank account returns and easy liquidity]
Classification of NBFCs based on liability structure:

 Deposit-taking NBFCs (NBFC-D)

 Non-deposit taking NBFCs (NBFC-ND)

NBFCs exempted from the regulatory control of the RBI:

 Venture capital fund, merchant bank, stock broking firms ➔ registered and regulated by SEBI
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 Insurance company ➔ registered and regulated by IRDA

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 Housing finance company ➔ regulated by National Housing Bank

 Nidhi company ➔ regulated by Ministry of Corporate Affairs under Companies Act, 1956
 Chit fund company ➔ by respective state government. under Chit Funds Act, 1982

Differences between Banks and NBFC:

3.32 Differentiated Banks

 There are two kinds of banking licences that are granted by the Reserve Bank of India – Universal Bank
Licence and Differentiated Bank Licence.
 The concept of differentiated banking was introduced by RBI, based on the recommendations of Na-
chiket Mor Committee in 2013.
 Differentiated Banks (niche banks) are banks that serve the needs of a certain demographic segment of
the population.
 Small Finance Banks and Payment Banks are examples of differentiated banks in India.

Small Finance Banks:

▪ The objectives of setting up of small finance banks will be to further financial inclusion by (1) provision of
savings vehicles (2) supply of credit to small business units; small and marginal farmers; micro and small in-
dustries; and other unorganised sector entities, through high technology-low cost operations.
▪ SFBs are private financial institutions established as a Public Limited Company under Companies Act,
2019.
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▪ SFBs are licensed under Banking Regulation Act, 1949 and are governed by RBI Act, 1934
▪ In 2019, RBI started “On Tap Facility” under which RBI can accept applications and grant license for SFBs
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throughout the year.

▪ Capital Small Finance Bank is the first SFB. It started in 2016.
▪ Minimum Paid Up Capital for SFBs shall be 100 cr.
▪ Small finance banks will be required to extend 75 per cent of its Adjusted Net Bank Credit (ANBC) to
the sectors eligible for classification as priority sector lending (PSL) by the Reserve Bank.
▪ Individuals/professions with 10 years of experience in finance, Non-Banking Financial Companies (NBFCs),
micro finance companies, local area banks are eligible to set up SFBs.
▪ SFBs can accept all types of deposits like a commercial bank (Current A/c, Savings A/c, Fixed Deposit etc.)
▪ Conditions: 25% branches in rural areas and 50% of the loans to be given to MSME sector.

Payments Banks:
▪ The objectives of setting up of payments banks will be to further financial inclusion by providing (1) small
savings accounts (2) payments/remittance services to migrant labour workforce, low-income households,
small businesses, other unorganised sector entities and other users.
▪ They will not lend to customers and will have to deploy their funds in government papers and bank de-
posits.
▪ Acceptance of demand deposits-Payments bank will initially be restricted to holding a maximum balance
of Rs. 100,000 per individual customer.
▪ Issuance of ATM/debit cards-Payments banks, however, cannot issue credit cards.
▪ Payments bank cannot undertake lending activities.
▪ Payments Bank can invest depositor’s money in government. Securities (G-Secs) only.

3.33 Non-Performing Assets (NPA):

➔ An asset becomes non-performing when it is not producing any income for the bank.
➔ Reserve Bank of India defines NPA as any advance or loan that is overdue for more than 90 days.
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Categories of NPA:
Sub-Standard Assets ➔ Age of NPA <= 12 Months
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o
o Doubtful Assets ➔ Age of NPA > 12 Months
o Loss Assets ➔ Identified as a loss by Bank, but it has not been written off
STRESSED ASSETS = NPAs + Restructured Loans + Written-off Assets
3.34 Capital to Risk Weighted Assets Ratio (CRAR)

▪ Also known as Capital Adequacy Ratio

▪ It is a measure of a bank’s ability to absorb losses
▪ Formula: value of its capital divided by the value of risk-weighted assets
▪ Simply CAR= bank’s capital / bank’s risky assets
▪ A low capital adequacy ratio (CAR) = bank has a limited ability to absorb losses (meaning bank is
more likely to collapse if people start defaulting on their loans
▪ High CAR= bank has good ability to absorb losses
▪ In public sector banks, government of India (GOI) has regularly infused capital to keep the CAR high
▪ RBI introduced CRAR system for the banks operating in India in 1992 in accordance with the standards
of the BIS—as part of the financial sector reforms

Technically, CAR= Total of the Tier 1 & Tier 2 capitals ÷ Risk Weighted Assets
Tier I Capital (Core Capital)
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 It includes pure equity capital

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 Equity means share thus it includes Share Capital (Paid up Capital)

 It also includes Undistributed Profits (Reserves)
 It includes Preference shares

Tier II Capital (Supplementary Capital)

  Mixture of equity & Debt Capita
 E.g. - subordinated debt

3.35 Basel Accords:

▪ Basel Accords (i.e. Basel I, II and now Basel III) ➔ Prescribed by Bank for International Settlements (BIS)
▪ Bank for International Settlements (BIS) as a set of global standards prescribes for assets to minimum capi-
tal requirements for commercial banks, foreign banks or even RRBs.
▪ BIS was established in 1930 and it is the world’s oldest international financial orgnanisation.
▪ Basel Accords is a Set of agreements set by the Basel Committee on Bank Supervision (BCBS), which
provides recommendations on banking regulations in regards to capital risk, market risk and operational
risk
▪ Purpose ➔ To ensure that financial institutions have enough capital on account to meet obligations and
absorb unexpected losses
▪ Bank for International Settlements (BIS) Accords were the outcome of a long-drawn-out initiative to strive
for greater international uniformity in prudential capital standards for banks’ credit risk

Basel I:
▪ First Basel Accord, known as Basel I, was issued in 1988
▪ Focused only on CREDIT RISK
▪ Categorises the assets of financial institution into five risk categories (0 per cent, 10 per cent, 20 per cent,
50 per cent, 100 per cent)
▪ Banks that operate internationally are required to have a risk weight of 8% or less
▪ India adopted Basel I norms in 1999
▪ RBI issued guidelines to maintain a CRAR or CAR of 9% by every SCB

Basel II:
▪ Published by BCBS in 2004
▪ The second Basel Accord, known as Basel II, is to be fully implemented by 2015.
▪ It focuses on 3 main areas, including minimum capital requirements, supervisory review and market disci-
pline, which are known as the three pillars.
▪ Minimum Capital requirement of 8% of risk assets
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▪ The focus of this accord is to strengthen international banking requirements as well as to supervise and
enforce these requirements
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▪ As per RBI, all SCBs were bound to comply with Basel-II norms

Basel III:
▪ Basel III is an internationally agreed set of measures developed by the BCBS in response to the financial
crisis of 2007-09.
▪ Operational from Jan 1, 2013
▪ Aim: To strengthen the regulation, supervision and risk management of the banking sector.
▪ Required to maintain Tier I capital ratio of 4.5%
▪ Maintain capital conservation buffer of 2.5%
▪ Counter cyclical buffer to be maintained in the range of 0% to 2.5% to prevent excess credit growth in the
banking sector
▪ Total CRAR proposed to be maintained in 9.5%
▪ Basel 3 measures are based on three pillars:
Pillar 1: Improve the banking sector's ability to absorb ups and downs arising from financial and
economic instability
Pillar 2: Improve risk management ability and governance of banking sector
Pillar 3: Strengthen banks' transparency and disclosures

3.36 Foreign Currency Non-Resident (Bank) Account [FCNR(B) Account] 97

 Can be opened by NRIs and Overseas Corporate Bodies (OCBs) with an authorised dealer
 Can be opened in the form of term deposits
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 Deposits of funds are allowed in Pound Sterling, US Dollar, Japanese Yen and Euro

3.37 Non-Resident External Account (NRE Account)

 Can be opened by NRIs and OCBs with authorised dealers and with banks authorised by RBI
 These can be in the form of savings, current, recurring or fixed deposit accounts
 Deposits are allowed in any permitted currency

3.38 Non-Resident Ordinary Rupee Account (NRO Account)

 Can be opened by any person resident outside India with an authorised dealer or an authorised bank for
collecting their funds from local bonafide transactions in Indian Rupees
 When a resident becomes an NRI, his existing Rupee accounts are designated as NRO.
 These accounts can be in the form of current, savings, recurring or fixed deposit accounts.
 Deposits in NRO accounts are included in India’s external debt.

4. Public Finance

 PUBLIC FINANCE → Public Money ➔ Money a government. gets, spends, borrows, lends, raises or prints
 Historical Reference ➔ Kautilya’s Arthasastra
 Budget ➔ Annual Financial Statement of Income and Expenditure

4.1 Fiscal Policy:

• Fiscal (Greek word) Meaning – BASKET ➔ It symbolizes Public Purse

• J. M. Keynes ➔ first economist who developed a theory linking fiscal policy and economic performance.
• It is the Policy of the government. with regard to the level of government. purchases, the level of trans-
fers, and the tax structure.
• Fiscal policy is the guiding force that helps the government. decide how much money it should spend to
support the economic activity, and how much revenue it must earn from the system, to keep the wheels of
the economy running smoothly.

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What is meant by Fiscal Policy in India?
➔ Through the fiscal policy, the government. controls the flow of tax revenues and public expenditure to
navigate the economy.
➔ If the government. receives more revenue than it spends, it runs a surplus, while if it spends more than the
tax and non-tax receipts, it runs a deficit.
➔ To meet additional expenditures, the government. needs to borrow domestically or from overseas.
Alternatively, the government. may also choose to draw upon its foreign exchange reserves or print addi-
tional money.

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Example:
➢ During an economic downturn, the government may decide to open up its coffers to spend more on build-
ing projects, welfare schemes, providing business incentives, etc.
➢ The aim is to help make more of productive money available to the people, free up some cash with the
people so that they can spend it elsewhere, and encourage businesses to make investments.
➢ At the same time, the government. may also decide to tax businesses and people a little less, thereby earn-
ing lesser revenue itself.

Main objectives of Fiscal Policy in India:

 Economic growth: Fiscal policy helps maintain the economy’s growth rate so that certain economic goals
can be achieved.
 Price stability: It controls the price level of the country so that when the inflation is too high, prices can be
regulated.
 Full employment: It aims to achieve full employment, or near full employment, as a tool to recover from
low economic activity.

Importance of Fiscal Policy in India:

✓ In a country like India, fiscal policy plays a key role in elevating the rate of capital formation both in the
public and private sectors.
✓ Through taxation, the fiscal policy helps mobilise considerable amount of resources for financing its nu-
merous projects.
✓ Fiscal policy also helps in providing stimulus to elevate the savings rate.
✓ The fiscal policy gives adequate incentives to the private sector to expand its activities.
✓ Fiscal policy aims to minimise the imbalance in the dispersal of income and wealth. 100

Components of Fiscal Policy:

 Govt. Receipts (Money received by government.)

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 Govt. Expenditure (Money spent by government.)

 Public Debt

4.2 Funds of government. of India:

➢ There are 3 types of funds of the Central government. – Consolidated Fund of India (Article 266), Contin-
gency Fund of India (Article 267) and Public Accounts of India (Article 266) mentioned in the Indian Consti-
tution. All the receipts and expenditure of government. is credited and debited from these 3 funds.

Consolidated Fund of India

➢ Article 266 of the Constitution of India mandates that Parliamentary approval is required to draw mon-
ey from the Consolidated Fund of India
➢ Besides, Article 114 (3) of the Constitution stipulates that no amount can be withdrawn from the Con-
solidated Fund without the enactment of a law (appropriation bill).
➢ Consolidated Fund of India is the most important of all government. accounts.
➢ All the Revenues, Borrowings, Receipts against loans and advances etc. are credited to Consolidated Fund
of India.
➢ All government. expenditure is made from this fund, except exceptional items which are met from the
Contingency Fund or the Public Account.

Contingency Fund of India

➢ This fund was constituted by the government. under Article 267 of the Constitution of India.
➢ Purpose: To meet any urgent or unforeseen emergency expenditure of the government.
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➢ Example: Contingency fund of India is used at a time when there is a crisis in the nation — a natural calam-
ity, for instance — and money is required to deal with it.
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➢ Corpus: Rs. 500 crores [In 2005, the amount of the fund was raised from Rs 5 crore to Rs 500 crore]
➢ The Secretary, Finance Ministry holds this fund on behalf of the President of India.
➢ Each state can have its own contingency fund.
➢ After the emergency has been dealt with, the fund is reimbursed to its full capacity of Rs 500 crore. This
required money comes from the Consolidated Fund of India.
Public Account of India:
➢ Public Account of India accounts for flows for those transactions where the government. is merely acting
as a banker.
➢ This fund was constituted under Article 266 (2) of the Constitution.
➢ Examples: Provident funds, Small savings
➢ These funds do not belong to the government.. They have to be paid back at some time to their rightful
owners. Because of this nature of the fund, expenditures from it are not required to be approved by the
Parliament.
➢ The audit of all the expenditure from the Public Account of India is taken up by the CAG.

Consolidated Contingency Public Account of India

Fund
Fund of India Fund of In-
dia

Income Taxes and Fixed corpus Public money other than those
non-tax reve- of Rs. 500 under consolidated fund
nue crore

Expenditure All expendi- Unforeseen Public money other than those

ture expenditure under consolidated fund

Parliamentary Required prior Required af- Not required

Authorisation to expenditure ter expendi-
ture

Articles of 266(1) 267(1) 266(2)

Constitution

4.3 Govt. Receipts

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Revenue Receipts:
➔ Revenue receipts can be defined as those receipts which neither create any liability nor cause any re-
duction in the assets of the government..
➔ They are regular and recurring in nature and the government. receives them in the normal course of ac-
tivities.
➔ Revenue receipts include the proceeds from taxes and other duties levied by the Centre; the interest and
dividend it receives on its investments; and the fees and charges the government. receives for its services.

Revenue receipts must satisfy 2 basic conditions:

➢ No liability: Revenue receipts do not create any liability for the government.. For example, taxes received
by the government., unlike borrowings, do not create any liabilities for it.
➢ No asset reduction: Revenue receipts do not lead to any reduction in the government.’s assets. So, the
government. cannot show its earnings from sale of stake in a public-sector undertaking as revenue receipts
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because the stake sale resulted in reduction of its assets.

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For the government., there are two sources of revenue receipts — tax revenues and non-tax revenues.

Tax Revenue:
• Taxes collected from both direct and indirect taxes are considered in Tax Revenue
• It gives a detailed report on revenue collected from different items like corporation tax, income tax, wealth
tax, customs, union excise, service, taxes on UTs like land revenue, stamp registration etc.

Direct and Indirect Taxes:

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Taxes levied and collected by Central government

➢ Income tax
➢ Customs duty
➢ Excise duty
➢ Service tax

Taxes levied by the central government but collected by the state government

 Central sales tax levied on inter-state movement of goods

Taxes levied and collected by the respective state government

 Sales tax
 Octroi
 Municipal taxes
 Road tax
 Entertainment tax
 Agriculture tax

Additional Taxes – Surcharge and Cess

➢ Surcharge: Imposed for additional revenue considerations by imposing an additional percentage on the
absolute amount of tax payable.
➢ Suppose surcharge on a tax is 5 per cent and the tax payable is Rs.100 then the total tax liability including
surcharge would be Rs.105

Cess:

 Similar in application as the surcharge except that the amount collected by way of cess is meant solely for
specific funding/cause like education cess, the amount collected would go for funding of education only.

Non-Tax Revenue:
 Money earned by the government. from sources other than taxes like
✓ Profits and Dividends from PSUs
✓ Interests received from loans through external and internal lending
✓ Fiscal services like currency printing, stamp printing, coinage and medals minting etc.
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✓ General services like power distribution, irrigation, banking, insurance, community services etc.
✓ Fees, penalties and fines
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✓ Grants

Capital Receipts:

 All non-revenue receipts of a government

Includes

✓ Loan Recovery ➔ Money lent to states, PSUs, UTs and abroad ➔ Interest received from these loans
✓ Internal Borrowings like RBI, Banks, Financial Institutions etc.
✓ External Borrowings like loans from World Bank, IMF, Foreign Banks etc.
✓ Long-term capital accruals through Provident Fund (PF), Postal Deposits, various small saving schemes
(SSSs) and government bonds sold to public (Kisan Vikas Patra, Market Stabilisation Bond, etc.)

4.4 DIRECT TAXES

Income Tax:
➔ Income Tax Act, 1961 imposes tax on the income of the individuals or Hindu undivided families or
firms or co-operative societies (other than companies) and trusts (identified as bodies of individuals as-
sociations of persons) or every artificial juridical person.
➔ The inclusion of a particular income in the total incomes of a person for income-tax in India is based on his
residential status.

Corporation Tax:
➔ The companies and business organizations in India are taxed on the income from their worldwide
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transactions under the provision of Income Tax Act, 1961.

➔ A corporation is deemed to be resident in India if it is incorporated in India or if it’s control and manage-
ment is situated entirely in India.
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➔ In case of non resident corporations, tax is levied on the income which is earned from their business trans-
actions in India or any other Indian sources depending on bilateral agreement of that country.

Minimum Alternate Tax:

➔ It was created to bring these ‘zero-tax paying companies’ within the ambit of income tax and make them
pay a minimum amount in tax to the government.
➔ It was introduced in the budget of 1986-87 when the applicable rate was 15.75 %
➔ Introduced by the Finance Act, 1987, MAT came into effect from assessment year 1988-89.
➔ Discontinued from 1990-91 and reintroduced in 1996-97 when the effective rate was 11.87%
➔ MAT credit is the difference between the tax the company pays under MAT and the regular tax.

Dividend Distribution Tax:

➔ The Dividend Distribution Tax is a tax levied on dividends that a company pays to its shareholders out of its
profits.
➔ Dividend Distribution Tax has been abolished from April 1, 2020.

Securities Transaction Tax (STT):

➔ STT is a tax being levied on all transactions done on the stock exchanges.
➔ STT is applicable on purchase or sale of equity shares, derivatives, equity oriented funds and equity orient-
ed Mutual Funds.
➔ It was introduced in 2004.
➔ Reason behind levying STT is to curb evasion of capital gains tax on profits earned by transacting in se-
curities.

4.5 INDIRECT TAXES

Goods and Service Tax:
➔ Launched on July 1, 2017
➔ It is applicable throughout India.
➔ It is a multi-stage, comprehensive, destination-based tax that is levied on every value addition.
➔ It is a consumption based tax → Taxes are paid to the State where the goods or services are consumed
(NOT the State in which goods or services are produced)
➔ Under GST, taxable event is supply of goods or services
➔ Introduced in the constitution as 101st Constitutional Amendment Act, following the passage of 122nd
Constitutional Amendment Bill. 107
➔ GST is governed by GST council.
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Provisions:

➢ Central GST to cover Excise duty, Service tax etc, State GST to cover VAT, luxury tax etc.
➢ Integrated GST to cover inter-state trade. IGST per se is not a tax but a system to co-ordinate state and un-
ion taxes.
➢ Article 246A – States have power to tax goods and services.
➢ Article 269A – In case of Inter-State trade where GST is levied and collected by the Union government. the
tax revenue proceeds to be apportioned by the Centre between Centre and States in a manner as may be
provided by Parliament by law on the recommendations of GST council.
➢ Article 279A - GST Council to be formed by The President to administer & govern GST. Its Chairman is Un-
ion Finance Minister of India with ministers nominated by the state governments as its members.
➢ In order to address the complex system in India, the Government introduced 3 types of GST which are giv-
en below.
108

1) CGST (Central Goods and Service Tax)

2) SGST( State Goods and Service Tax)
3) IGST(Integrated Goods and Services Tax)
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CGST (Central Goods and Service Tax):

CGST is applicable only on Intra-state trade of goods and services

Revenue under CGST is collected by the Central Government. CGST subsumes the below given central taxations
and levies.

▪ Central Excise Duty

▪ Services Tax
▪ Central Sales Tax
▪ Excise Duty
▪ Additional Excise Duties Countervailing Duty (CVD)

SGST (State Goods and Service Tax):

It is applicable only on Intra-state trade of goods and services.

Revenue under SGST is collected by the State Government. SGST subsumed the following state taxations.
▪ Luxury Tax
▪ State Sales Tax
▪ Entry tax
▪ Entertainment Tax
▪ Levies on Lottery

IGST (Integrated Goods and Services Tax):

➢ It is levied on Inter-state trade of goods and services.

➢ It is levied and collected by Central government. but the revenue is shared between centre and state.
➢ Import of goods or services also attracts IGST

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Input Tax Credit:

 It is the tax that a business pays on a purchase and that it can use to reduce its tax liability when it
makes a sale.
 In simple terms, input credit means at the time of paying tax on output, you can reduce the tax you have al-
ready paid on inputs and pay the balance amount.
 Exceptions: A business under composition scheme cannot avail of input tax credit. ITC cannot be claimed
for personal use or for goods that are exempt.

4.6 Govt. Expenditure:

 It is also referred as public expenditure.

 It is the expenditure incurred by Central government. or State government. on various welfare schemes and
economic development.
 It is classified into 2 types – Revenue Expenditure and Capital Expenditure

Revenue Expenditure:
➔ This expenditure basically refers to expenditure by government to maintain its assets.
➔ Broadly it encompasses expenditure made by government on salaries for employees, pensions, mainte-
nance of infrastructure, buying accessories of various equipment which are part of government asset , sub-
sidies on education, PDS, loan that has been repaid by government etc.
➔ This type of expenditure is recurring in nature.
➔ High revenue expenditure indicates poverty and backwardness of the economy.
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➔ Revenue expenditure does not impact the asset liability status of the government.

Revenue Expenditure includes

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✓ Interest Payments on external and internal loans

✓ Salaries, pension and PF
✓ Subsidies
✓ Defence Expenditure
 ✓ Postal Deficits
✓ Law and Order expenditures
✓ Expenditure on social services
✓ Grants given to states and foreign countries

Capital Expenditure:
➔ This expenditure basically associated with government’s asset creation activity.
➔ Example: Building roads, airports, or buying defence equipments, loans given by centre to state govern-
ment. etc.
➔ Capital expenditure impacts the asset liability status of the government.
➔ This type of expenditure is non-recurring in nature.
➔ High capital expenditure indicates lack of private investment in the economy.

Capital Expenditure Includes

✓ Internal loans to States, UTs, PSUs etc.

✓ External loans to World Bank, IMF, Foreign Banks etc.
✓ Internal or External loan repayments → only the capital part of the loan repayment as the element of inter-
est on loans are shown as a part of the revenue expenditure
✓ All the expenditures incurred by the government. to finance the planned development of India
✓ Central government. financial supports to the states for their plan requirements
✓ All kinds of capital expenses to maintain the defence forces
✓ General services like railways, postal dept. , water supply, education etc.
✓ Pension and PF liabilities

4.7 Deficits:
Budgetary Deficit:
➔ It is the difference between all receipts and expenses in both revenue and capital account of the government.
➔ It is the sum of revenue account deficit and capital account deficit.
➔ If revenue expenses of the government exceed revenue receipts, it results in revenue account deficit.
➔ Similarly, if the capital disbursements of the government exceed capital receipts, it leads to capital account
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deficit.
➔ Budgetary deficit is usually expressed as a percentage of GDP.
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➔ Budgetary Deficit = Budgeted Expenditure (Revenue + Capital) – Budgeted Receipts (Revenue + Capital)
Revenue Deficit:
 It is the difference between the revenue receipts (RR) and the revenue expenditure (RE)
 Revenue deficit arises when the government's actual net receipts is lower than the projected receipts.

Example:

 If a country expects a revenue receipt of Rs 100 and expenditure worth Rs 75, it can result in net reve-
nue of Rs 25.
 But the actual revenue of Rs 90 is realised and an expenditure is Rs 70. This translates into net revenue
of Rs 20, which is Rs 5 lesser than the budgeted net revenue and called as revenue deficit.

Effective Revenue Deficit:

• It is defined as the difference between the revenue deficit and creation of capital assets.
• Effective Revenue Deficit excludes those revenue expenditures which were done in the form of grants
for the creation of capital assets.
• There are several grants which the Union Government gives to the state / UTs and some of which do create
some assets, which are not owned by union government. but by the state government.

Example:

➢ Under the MGNREGA programme, some capital assets such as roads, ponds etc. are created thus the grants
for such expenditure will not strictly fall in the revenue expenditure

Primary Deficit: 112

• It is the difference between fiscal deficit and interest payments
• Primary deficit is measured to know the amount of borrowing that the government can utilize, exclud-
ing the interest payments.
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• The total government expenditure constitutes of (the need for government borrowings) as follows:
Purchase of goods and services for public consumption
Public investment
Income transfer payments (pensions, social benefits)
 Capital transfer payments
National defence
Infrastructure
Health and welfare benefits
Example:
1. Revenue Receipts = Rs. 3,00,000
2. Capital Receipts = Rs. 1,60,000
a) Loan recoveries + other receipts = Rs. 10,000
b) Borrowings & Other liabilities = Rs. 1,50,000
3. Total Receipts (1 +2) = Rs. 4,60,000
4. Revenue Expenditure = Rs.3,50,000
5. Capital Expenditure = Rs. 1,10,000
6. Total Expenditure (4+5) = Rs. 4,60,000
7. Budget Deficit (3-6) =NIL
8. Fiscal Deficit [1+2(a) - 6 =3- 2(b)-6=7 + 2 (b)]= Rs. 1,50,000
Simply
 If government expenditure is more than it collects then deficit occurs and its known as fiscal deficit and to
finance the deficit it borrows money .
 If it borrows the amount equals to fiscal deficit ,then the budget deficit becomes zero and if it borrows less
than the fiscal deficit amount, then budget deficit occurs.
Primary deficit = Fiscal deficit- Interest payments
Interest payment is a part of Revenue expenditure. In the above example suppose out of total revenue ex-
penditure is Rs.3,50,000 and interest payment is Rs. 1,20,000.
Then Primary deficit = 8 - Interest Payment part of 4 = Rs.1,50,000 – Rs.1,20,000= Rs.30,000

Fiscal Deficit:

• Fiscal deficit is the difference of government expenditure and government revenue.(assume that gov-
ernment expenditure is more than revenue).
• More fiscal deficit means government has no money, he has to borrow money from central bank or
through some bond/scheme.
If government is borrowing from RBI, in other words RBI has to print more money, so it will increase
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•
the liquidity of money in the market. So people will have more money in their hand, but we have limited
resources. For example, before there was 5 car buyers for 1 car, now there is 10 car buyer for 1 car. So de-
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mand for car will increase and it will increase the price of car. So price of everything will go up. Ultimately
Inflation will go up.
• If government is borrowing money from people as bond or some scheme through, government has
to pay high interest after some year. So people will invest their money in government schemes, so
 liquidity of the money will come down. Before we have 5 car buyer for 1 car, now we have 2 car buyer for
1 car, so car price will go down. Price of everything will go down, people will buy less things. It will slow
down the industrial growth and it will be deflation in the country. It will make economic growth sluggish.
And in the situation of the deflation, Government has to pay high interest to the people.
• Third case, government has to borrow money from world bank or from some other country. Because
of that Government has to devalue it’s currency.
• As government has no money, government can’t bring any new development scheme. It will become diffi-
cult to tackle any crisis over country.

What is meant by “Govt to target fiscal deficit at 3% of GDP”?

• Fiscal deficit is the difference between the government’s expenditures and its revenues (excluding the
money it’s borrowed)
• A country’s fiscal deficit is usually communicated as a percentage of its gross domestic product (GDP).
• If a country's income is 100 rupees and expenses are 104 rupees ,then fiscal deficit is 4.
• Let's say GDP of the nation is 400 rupees : total value of goods and services produced in the country in an
year .Then the deficit of the nation is 1%.[F.D. → 1% of 400 = 4]

Same way in this case the deficit is 3% of the GDP

• More fiscal deficit means more borrowing.

• When the government earns more than it spends, it's called fiscal surplus.
• When the government spends more than it earns, it's called fiscal deficit.

Monetised deficit:

➢ Borrowings made from RBI through printing fresh currency

➢ The printed money is called high power money
➢ FRBM act disallow RBI to do this under normal conditions
➢ It increases the level of inflation in the economy due to increased money supply in the economy.

4.8 Deficit Financing:

 Financing/supporting a deficit budget

114

 Total Expenditure > Total Receipts → government. enacts financial policies to sustain the burden of defi-
cits
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 Period of deficit financing: 1970-1991

Resources of Deficit Financing

✓ External aids
 ✓ External grants
✓ External borrowings
✓ Internal borrowings
✓ Printing currency

Govt. may cover the deficit in the following ways:

➔ By running down its accumulated cash reserves from RBI
➔ Issue of new currency by the government. itself
➔ Borrowing from the RBI and RBI gives the loans to the government. by printing more currency notes
Objectives:
▪ To act as a remedy for depression
▪ For granting subsidies
▪ To increase aggregate demand
▪ For payment of interest
▪ To overcome the losses of public sector enterprises
▪ For implementing anti-poverty programmes

Effects:

 Leads to inflation
 Adverse effect on savings and investment
 Rise in level of inequality
 Deficit in balance of payments
 Increases the cost of production

4.9 Budget:

➔ Budget comes from the old French bougette, meaning 'little bag'
➔ Budget Circular is issued in the month of September during the Budget cycle. It marks the beginning
of the Budget process.
➔ Made through a consultative process involving Ministry of Finance, Niti Aayog and spending Minis-
tries 115

➔ Prepared by the Budget Division Department of Economic Affairs of the Ministry of Finance annual-
ly. The Finance Minister is the head of the budget making committee.
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➔ Nodal body responsible for producing the Budget ➔ Budget Division of the Department of Eco-
nomic Affairs
➔ The printing process of the Union Budget papers is marked by the customer 'Halwa Ceremony' held at
North Block in Delhi
 ➔ Before presentation of the Budget, President's recommendation is obtained under Article 117(1) and
117(3) for introduction and consideration in the lower house of Parliament.
➔ Presented by Finance Minister
➔ According to Article 112 of the Constitution of India, the Union Budget of a year is a statement of the
estimated receipts and expenditure of the government. for that particular year.

Full Budget
 A Full Budget is not just the presentation of annual finances of the government but an occasion to change
existing tax slabs, announce new schemes and sops for different sectors of the economy.
 A Full Budget includes the passage of a finance bill to get Parliament's approval for any tax related
changes.
 In an election year, the outgoing government doesn't tinker with the taxes or announce new schemes
and sops as these are left at the disposal of the new government.
 In order to manage it its expenditure for the interim period till a new government takes over and
announces the Budget, the outgoing government presents what is called a vote on account or an in-
terim budget to get the Parliament's approval for expenditure to be incurred for the next few months

Vote on Account
➢ In the absence of presentation of a Full Budget, the outgoing government seeks a vote on account
from the Parliament for proposed expenditure to be incurred in the next few months till the new gov-
ernment takes over.
➢ There are no major announcements related to any new schemes or sops during a vote on account as the
new government's stance could differ from that of the outgoing government.

Important Articles:

➢ Article 266 of the Constitution of India mandates that Parliamentary approval is required to draw mon-
ey from the Consolidated Fund of India
➢ Besides, Article 114 (3) of the Constitution stipulates that no amount can be withdrawn from the Con-
solidated Fund without the enactment of a law (appropriation bill).
116
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 117

4.10 Zero-Base Budgeting:

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 First proposed by Peter Phyrr

 First to introduce → Jimmy Carter
 Starts from the zero base
 Every function of the government. is analysed for its needs and cost
 All expenses are evaluated each time a Budget is made and expenses must be justified for each new period

4.11 Balanced Budget:

 When total public-sector spending equals total government. income (revenue receipts) during the
same period from taxes and charges for public services
 Budget with zero revenue deficit is balanced budget

4.12 Gender Budgeting:

 A general budget by the government which allocates funds and reponsibilities on the basis of gender
 It is done in an economy where socio-economic disparities are chronic and clearly visible on a sex basis

4.13 Revenue Budget:

 Deals with the income and expenditure of revenue by the government.

 Presents the annual financial statement of the total revenue receipts and the total revenue expendi-
ture
 If the balance emerges to be positive it is a revenue surplus budget, and if it comes out to be negative, it
is a revenue deficit budget

4.14 Capital Budget:

 Deals with the receipts and expenditures of the capital by the government.
 It shows the means by which the capital is managed and the areas where capital is spent

4.15 Outcome Budget:

 Introduced in 2005
 Analyses the progress of each ministry and department and what the respected ministry has done with
its Budget outlay
 Measures the development outcomes of all government. programs
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4.16 FRBM Act:

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 Set targets for the Government of India to establish financial discipline, improve the management of public
funds, strengthen fiscal prudence and reduce its fiscal deficits
 First introduced in the parliament of India in the year 2000 by Vajpayee Government
 Passed in the year 2003
 Legal step to ensure fiscal discipline and fiscal consolidation in India
 In 2016, N.K.Singh Committee was constituted to review the implementation of FRBM Act

Features:
Following things must be placed along with the Budget documents annually in the Parliament

1) Macroeconomic Framework Statement

2) Medium Term Fiscal Policy Statement
3) Fiscal Policy Strategy Statement

4 Fiscal Indicators:
To be projected in the medium-term fiscal policy statement viz.

1) Revenue deficit as a percentage of GDP

2) Fiscal deficit as a percentage of GDP
3) Tax revenue as a percentage of GDP
4) Total outstanding liabilities as a percentage of GDP
Objectives:
✓ Impose fiscal discipline on government
✓ To institutionalise fiscal discipline
✓ Reduce Fiscal Deficit
✓ Improve Macroeconomic Management
✓ The law aims at promoting Fiscal Stability for the country on a long-term basis
✓ It emphasises a Transparent Fiscal Management System and a more equitable distribution of debts over the
years
FRBM Act of 2003 had mandated that, apart from limiting the fiscal deficit to 3% of the nominal GDP,
the revenue deficit should be brought down to 0%
Revenue deficit and fiscal deficit may exceed the targets specified in the rules only on grounds of na-
tional security, calamity etc.
As per the Union Budget 2016-17, the government. constituted a Committee to review the implementa-
tion of the FRBM Act

4.17 FRBM Review Committee:

119

 5 member committee
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Recommendations @ Union Budget 2017-18:

 Sustainable debt path must be the principal macro-economic anchor

 Favoured Debt to GDP of 60 % for the General government. by 2023— consisting of 40% for Central
Government and 20 % for State Governments
 3 % fiscal deficit for the next three years
 Escape Clauses, for deviations upto 0.5% of GDP, from the stipulated fiscal deficit target

4.18 Developmental Expenditure:

 Expenditures of productive nature ➔ INVESTMENTS

 Example: New factories, dams, bridges, roads, railways

4.19 Non-Developmental Expenditure:

 Expenditures of consumptive nature

 Do not involve any production
 Example: paying salaries, pensions, interest payments, subsidies, defence expenses

NOTE: Since 1987-88 developmental and non-developmental expenditure were replaced by plan and non-plan
expenditure ➔ Suggested by SUKHOMOY CHAKRAVARTHI COMMITTEE

“Output” and “Outcome Budgeting” ➔ Introduced in 2005-06 Budget

Ministry of Finance is responsible for fiscal consolidation, containing the fiscal deficit and abiding to FRBM
act

4.20 Charged Expenditure:

 Public expenditure which is beyond the voting power of the Parliament

 Directly withdrawn from Consolidated Fund of India
 Example: Emoluments of President, Speaker and Deputy Speaker of Lok Sabha etc.

4.21 Golden Rule of Public Finance:

 The proposition that a government should borrow only to invest (plan expenditure) and not to finance
current spending (revenue expenditure)

4.22 14th Finance Commission: 120

➔ Constituted on January 2, 2013

➔ The commission's chairman was former Reserve Bank of India governor Y. V. Reddy
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➔ Members were Sushma Nath, M. Govinda Rao, Abhijit Sen, Sudipto Mundle, and AN Jha
➔ Recommendations of the commission entered force on April 2015
➔ Govt. of India on February 24, 2015 accepted the recommendations of the 14 th finance commission for in-
creasing share of states in central taxes to 42% ,the single largest increase ever recommended. This is
10% more compared to 32% target set by 13th finance commission.
➔ The Commission recommended that distribution of grants shall be given to the States using 2011 population
data with weight of 90 % and area with weight of 10 %

➔ The commission followed the method adopted by the 12th commission and put the floor limit at 2 % for
smaller States and assigned 15 % weight.
➔ The commission assigned 50% weight to income distance as it is the only measure of fiscal capacity. It is
the distance of actual per capita income of a state from the state with the highest per capita. The commis-
sion calculated the income distance following the method used the 12th commission.
➔ Income distance has been computed by taking the distance from the state having highest per capita
GSDP. Goa had the highest, followed by Sikkim. Since these two are very small states, income distance had
been computed from the third, Haryana. Goa, Sikkim and Haryana are assigned the same distance as ob-
tained for Haryana.

4.23 15th Finance Commission:

➔ Article 280 of the Constitution of India provides for a quasi-judicial body, the Finance Commission.
121

➔ It is constituted by the President of India every 5th year or at such earlier time as he considers necessary.
➔ 15th Finance commission makes recommendations for the period of 2020-2025 (5 years)
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➔ Recommended a one percentage point reduction in the vertical split of the divisible pool of tax reve-
nues accruing to States to 41%.
 5. National Income

5.1 What do you mean by “Economics”

• The word ‘Economics’ originates from the Greek word ‘Oikonomikos’; Oikos (means ‘Home’) + Nomos
(means ‘Management’)’means Home management.

Let’s make it simple

Study of human activity ➔ satisfy needs and wants
122

5.2 What exactly is “Economics” in our daily life

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• Economics is the study of how people and society end up choosing, with or without the use of money,
to employ scarce productive resources that could have alternative uses to produce various commodities
over time and distributing them for consumption, now or in the future, among various persons or groups in
society.
• It analyses costs and benefits of improving patterns of resource allocation.

For better understanding of economics ➔ need to understand "THE CONCEPT OF SCARCITY" and "MI-
CRO AND MACRO ECONOMICS"

5.3 Concept of Scarcity:

• Scarcity- tension b/n limited resources and individual's unlimited wants and needs
• Individual - resources ➔ time, money and skill
• Country- resources ➔ natural resources, capital labour forces and technology

5.4 Microeconomics: 123

• Supply and demand interaction in individual markets for goods and services
• Examines the economic behaviour of individual actors → consumers, business-man, households in the
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face of scarcity and what effects they have

5.5 Macro Economics:

• How the overall economy works

• Studies - employment, GDP, inflation , government policy debates
• Studies economy as a whole and its features like national income, Employment, poverty, balance of pay-
ments and inflation

124

5.6 What do you mean by “Economy”

• The term Economy means the state of country or region in terms of the production and consumption of
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goods and services and the supply of money.

5.7 Types of Economy
Traditional economy:
• Very little government involvement
• Allocation of resources based on rituals, habits or customs
• Economic roles → family and people work together for the common good
• Very little individual choice in this system
• Ex: tribes in Amazon, Aborigines in Australia etc

Free market economy:

• Very little government control
• Economic decisions based on market principles
• Lot of competition between firms >> many choices to consumers
• Resources for production are under private ownership and they make their decisions with the desire to
maximise profits.
• There are no pure free market economies, United States and Australia come close to this type 125

Command economy:
• Resources of production are completely under government control
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• These economies are run based on central planning

• Due to lack of competition, resource allocation is inefficient and consumers have very little choices
• Ex: Former Soviet Union, Cuba, North Korea etc.

Mixed economy:
• Combination of public sector and private sector units
• Govt is the decision maker for the public sector
• Individuals and businesses for private sector
• Basically incorporates governmental involvement in a market based economy
• Ex: India, Russia and UK

Open economy:
• Trade with other economies
• Market is mostly free from trade barriers >> exports and imports form of a large percentage of the GDP
• The degrees of the openness of an economy determines government's freedom to pursue economic poli-
cies of its choice and the susceptibility of the country to international economic cycles

Closed economy:
• No trade or trade area with other economies
• Consumer get everything within the economic borders and government act as the arbitrator, articulator
and facilitator

Capitalist economy:
• Capitalism - basic economic system based on private or corporate ownership of production and distribu-
tion of goods.
• Capitalists favour a system of free enterprise which means the government does not interfere in the
economy that the laws of supply and demand will make sure that the economy runs most efficiently in
meeting people's needs.
• Capitalism is characterised by competition in which there is rivalry in supplying or getting an economic
service or good

Socialist economy:
• Socialism is an economic theory or idea that states the government or the state should be in-charge of
economic planning , production and distribution of goods
• Socialism tends to favour cooperation whereas capitalism is characterised by competitions
• Communism advocates class struggle and revolution to establish a society of cooperation with strong gov-
126

ernment control
• Communism predominated in the former Soviet Union and much of eastern Europe at one time.
Today it predominates in China and Cuba, but its influence has lessened
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•
5.8 Salient Features of Indian Economy
Mixed Economy
• India is a mixed economy.
• In a mixed economy, public sector (government-owned) business enterprises exist alongside the pri-
vate sector to achieve a welfare state with socialistic pattern of society.
127

• Ever since independence, India’s economic development has been guided by the twin objectives of devel-
oping:
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(a) a rapidly and technologically progressive economy by democratic means; and

(b) a social order based on justice, offering equal opportunity to every citizen of the country.
Dominance of Agriculture and Heavy Population Pressure on Agriculture
➢ In India, almost 60-70% of the total population still resides in rural areas and hence they depend on agricul-
ture for their livelihood.

Over-Population
• India is over populated.
• In every decade Indian population gets increased by about 20%
• During 2001- 11, population increased by 17.6%. With this high growth rate of population about 1.7 crore
new persons are added to Indian population every year.
• According to 2011 census, the total Indian population stands at a high level of 121.02 crore which is 17.5%
of the world’s total population which is second largest population of the world.
• To maintain this 17.5% of world population India holds only 2.42% of total land area of the world.

Unbalanced Economic Development

➢ India has not yet achieved the goal of balanced economic development. According to latest data available
about 64% of total labour force is dependent on agriculture, 16% on industries and the rest about 20% on
trade, transport and other services.

Low rate of capital formation

➢ Another basic characteristic of the Indian economy is the existence of capital deficiency which is reflected in
two ways –
➢ firstly, the amount of capital per head available is low; and secondly, the current rate of capital formation is
also low.

Lack of Infrastructure Facility

➢ There is a lack of physical infrastructure (i.e. road electricity, banking, transportation, insurance, energy) and
social infrastructure(i.e. education, health, housing, drinking water, sanitation) that hinders the development
process of a country.

Poor Economic Organisation

• Another important feature of the Indian economy is poor economic organisation.
• Certain institutions necessary for economic development are not adequately developed.
• For instance, to mobilise savings and more especially the savings of the rural sector, the creation and de- 128

velopment of financial institutions is essential.

• India suffers from inadequacy of financial institutions in rural areas.
• Similarly, India being a country of a large number of small farmers, the development of certain agencies of
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credit for granting loans to farmers on easy terms is needed.

• Likewise, to provide medium and long-term loans to industries for the development of industrial finance
corporation is quite necessary.
• There is a great scarcity of skilled and efficient administrators and managers.
5.9 Structure and Composition of Indian Economy

✓ There are 3 major sectors of Indian economy- primary sector, secondary and the tertiary sector.

Manufactured goods used as Inputs

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5.10 National Income of India

• National income measures the net value of goods and services produced in a country during a year
and it also includes net earned foreign income.
• In other words, a total of national income measures the flow of goods and services in an economy.
National income is a flow not a stock.
• As contrasted with national wealth which measures the stock of commodities held by the nationals of a
country at a point of time, national income measures the productive power of an economy in a given
period to turn out goods and services for final consumption.

5.11 Concepts of National Income

The various concepts of national income are as follows:

Per Capita Income:

It is a measure of the amount of money that is being earned per person in a certain area.
PCI = National Income / Population

130

Gross National Product (GNP)

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• The word “national” here refers to all the citizens of a country

• Gross National Product refers to the money value of total output or production of final goods and ser-
vices produced by the nationals of a country during a given period of time, generally a year.
• In the calculation of GNP, we include the money value of goods and services produced by nationals out-
side the country.
• Hence, income produced and received by nationals of a country within the boundaries of foreign countries
should be added in Gross Domestic Product (GDP) of the country.
• Similarly, income received by foreign nationals within the boundary of the country should be exclud-
ed from GDP.. let’s make it simple
It considers income of both resident and non -resident citizens of a country while the income of
foreigners who reside within the geographical boundary of the country is excluded

In equation form: GNP = GDP + X – M, or GNP = GDP + NFIA

Where➔
X = Income earned and received by nationals within the boundaries of foreign countries
M = Income received by foreign nationals within the country
If X = M, then GNP = GDP
Similarly, in a closed economy
X=M=0
then also GNP = GDP
In equation form : GNP = GDP + NFIA
Where ➔
NFIA = Net Factor Income from abroad
also NFIA = Factor incomes received from abroad — Factor income paid to abroad.
It is to be noted here that in a closed economy which does not deal with outside world, has no NFIA, i.e.
its NFIA is equal to Zero. Hence, for such countries, GDP = GNP
Example – 131
1. 125 crores Indian earns 100 crores in Indian Territory.
2. Five crore foreigners (USA) earn 10 crores in Indian Territory and send their money to USA.
3. Five crore Indians earn 20 crores in Saudi Arabia and send their earnings to India.
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According to formula the GNP would be 120 crores = 110 + (20 – 10) crores = 120 cr
Gross Domestic Product (GDP)
• It is the total money value of all final goods and services produced within the geographical boundaries
of the country during a given period of time.
• Domestic product emphasis the total output which is raised within the geographical boundaries of the
country
• National product focuses not only on the domestic product but also on goods and services produced out-
side the boundaries of a nation.
• Simply, It considers production by both resident citizens as well as foreign nationals who reside within
country.
• National Statistical Office (NSO), Ministry of Statistics and Programme Implementation releases the esti-
mates of Gross Domestic Product(GDP) at constant (2011-12) and current prices.
• The components of expenditure on Gross Domestic Product, namely, consumption expenditure and capi-
tal formation, are normally measured at market prices
GDP (FC) = GDP (MP) – Indirect taxes - Subsidies

132
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In equation form GDP = Q*P

• Q is total quantity of final goods and services produced in the country
• P is price of final goods and services
Example –
1. 125 crores Indian earns 100 crores in Indian Territory.
2. Five crore foreigners (USA) earn 10 crores in Indian Territory and send their
money to USA.
3. Five crore Indians earn 20 crores in Saudi Arabia and send their earnings to India.
So, now GDP of India will be 100+10 = 110 crores only (why not 130 crores? Because we have to include only
those earnings or income which had been earn in Indian Territory)

Net National Product (NNP)

➢ NNP is obtained by subtracting depreciation value (i.e. capital stock consumption) from GNP.

In equation form : NNP = GNP – Depreciation

Question arises why we have deducted depreciation?

➢ Because the part, which replaces the depreciated parts of the product, already, produced, does not add val-
ue to current year’s total produce. It is just keeping the already produced product intact
➢ NNP with market prices includes indirect taxes and excludes subsidies, which are given to produce
goods and services.
➢ Example - The cost of production of LPG gas is 600 rupees for 15 kg but after government provides subsi-
dy of 200 rupees then the price of product came to 400 rupees. This is called as NNP-MP i.e. NNP at market
price

5.12 National Income 133

GNP is based on market prices of produced goods which includes indirect taxes and subsidies. NNP can be
calculated in two ways-
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(i) at market prices of goods and services

(ii) at factor cost
• When NNP is obtained at factor cost, it is known as National Income.
• National Income is calculated by subtracting net indirect taxes (i.e. total indirect tax subsidy) from
NNP at market prices.
 Adding of subsidies and deduction of indirect taxes from NNP-MP is called as
NNP-FC. This is done to find payments made to factors of production (land, labour, capital, en-
trepreneurship)
• The obtained value is known as NNP at factor cost or National income. So,
• NNP at factor cost or National Income

= NNP at market price – (Indirect Taxes – Subsidy)

= NNP(mp) – Indirect Tax + Subsidy

Personal Income
• Personal income is that income which is actually obtained by nationals.
• Sometime part of national income is not available to individuals and sometimes payments made to some
individuals are not included in national income.
• So, while calculating national income- parts of national income that are not available to individuals of the
country is deducted from the national income. The monetary payments made to individuals but not includ-
ed in national income are added to the national income
• Personal income is obtained by subtracting corporate taxes and payments made for social securities provi-
sion from national income and adding to it government transfer payments, business transfer payments and
net interest paid by the government. So,
• Personal Income = National income – undistributed profits of corporation – payments for social security
provisions – corporate tax + government transfer payments + Business transfer payments + Net interest
paid by government. 134
• It should always be kept in mind that personal income is a flow concept.
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Undistributed profits - A portion of corporates profit which is for future expenditure and
expansion and it is not share with shareholders and factors of production.
Corporate Tax - It is imposed on the earnings made by the firms
Net interests paid by the households - The households do receive interest payments from
private firms or the government on past loans advanced by them. Households may have to
pay interests to the firms and the government as well, in case they had borrowed money
from either
Transfer payments - The households receive transfer payments from government and firms
(pensions, scholarship, prizes, for example).

Personal Disposable Income

• Definition – Income available to individuals that can be spent at their will
• Example – suppose your father’s income is 50000 rupees per month. After paying direct tax payments and
fines, the remaining income is disposable personal income.

When personal direct taxes are subtracted from personal income, the obtained value is called disposable per-
sonal income (DPI).
So,
Disposable personal income DPI = [Personal income] – [Direct Taxes] or
Personal Disposable Income (PDI) = PI – Personal tax payments – Non-tax payments
Personal tax payments : example – income tax
Non-tax payments : like fines
135
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Graphical Representation of relationship between various measures

5.13 Methods of Measuring National Income:

National Income of a country is calculated by following three methods :

Production Method
136

• In this method net value of final goods and services produced in a country during a year is obtained and
the total obtained value is called total final product. This represents Gross Domestic Product (GDP) (OR )
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• In this method, National income is calculated by aggregate annual value of goods and services pro-
duced in a country in one year.
• Now question arises do we calculate aggregate of all goods and services produced by all the firms such as
Reliance, Vodafone, Maruti, HP etc. in an economy?
• Example – Suppose Flying machine company buys some cotton from farmer and give it to weaver who
weaves the cotton into cloth and return it to company.
• Now company gives this cloth to tailor to stitch a shirt. Tailor stitches it and return it to company. Company
added some more things in it, package it and sold in market for 1500 rupees.
• This shirt produced by firm is not entirely of its own contribution, it also has contribution of tailors, weavers,
farmers etc.
• To calculate net contribution of firm we have to subtract the contributions made by famers, weaver and tai-
lors. If we do not do that then it will lead to double counting.

✓ The net contribution made by firm is called its value added

✓ Value added of a firm = value of production of the firm – value of intermediate goods used by firm
✓ Value added by firm is distributed among factors of production i.e. land, labor, capital and entrepreneur-
ship
✓ So, wages + interest + profits + rent must be equal to value added of firm

Let’s understand this with an example

Farmer Weaver Tailor Flying Machine
Total Produc- 500 300 200 1500
tion
Intermediate 0 0 0 500
Goods used
137

Value Added 500 300 200 1500-500=1000

• Here intermediate goods used by firm is of 500 rupees for cotton while 1000 rupees is value added, out of
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which 500 is paid to weaver and tailor as wages.

• Value added is a flow variable i.e. measured over a period of time (weekly, monthly, annually)
✓ Net income earned in foreign boundaries by nationals is added and depreciation is subtracted from GDP.

Gross Value Added and Net Value Added

• Here we have to understand about “Depreciation”
• It is also known as “Consumption of fixed capital”. But why is it called so?
• Capital goods gradually undergo wear and tear and so producer has to invest in repair or replacing of
weared parts to keep the value of capital constant
• This replacement investment is same as depreciation of capital. In other words, it is same as using up of
capital
• If we add depreciation into value added, then we get Gross value added. Gross value added = value add-
ed + Depreciation
• If we deduct depreciation from Gross value added, then we get Net value added.
Net Value added = Gross value added – Depreciation

Income Method
• The calculation of National Income by compiling income of factors of production is called as Income
method.
• In this method, a total of net incomes earned by working people in different sectors and commercial
enterprises is obtained.

Symbolically : National Income = Total Rent + Total Wages + Total Interest + Total Profit
In our country it is calculated by following formula (this formula sometimes appear in
economic survey) –

Compensation of employees – Salaries paid in cash and other benefits to employees. In simple words –
‘wage’
Consumption of fixed capital – Wear and tear of machinery. These are replaced with new parts or machinery.
It adds to income of the machinery and spare parts producers.
Net tax production = other taxes on Production – subsidies on production
Other taxes on Production – There is a difference between Tax on product and Tax on
production.
 Tax on product – It includes taxes like Sales tax and Excise duty. It is the tax imposed as it was produced
and sold.
138

 Tax on production - Tax imposed irrespective of production like license fees and land tax
Gross operating surplus – balance of value added after deducting above 3 components. It goes to pay
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rent of land and interest of capital. Roughly analogous to profit.

Consumption Method
• It is also called expenditure method.
• Income is either spent on consumption or saved.
• Hence national income is the addition of total consumption and total savings. [summing up all of the
expenditures made on final goods and services]
• There are four main aggregate expenditures that go into calculating GDP: consumption by households,
investment by businesses, government spending on goods and services, and net exports, which are equal
to exports minus imports of goods and services.
• In India a combination of production method and income method is used for estimating national in-
come.

Symbolically : N.I = C + I + G + (X – M)
Where, C= Total consumption expenditure
I = Total Investment Expenditure
G = Total government. Expenditure
X = Export; M = Import

Main components under Expenditure method

Consumer spending
 Most dominant component in calculation of GDP under expenditure method.
 It accounts for the majority of India’s GDP.
 It is about 59% and consumption expenditure is the reason that our economy is less affected by up and
downs in global world. The economies, which export a lot, are affected by global winds.
 It includes purchasing of durable goods, non-durable goods and services.
Government spending
• It is the spending by central, state and local governments on basic services (like education, health care etc.)
and defence.
• Dominant after consumer spending

Business investment
• Most volatile component
• It includes capital expenditure by firms on capital goods.

Net exports
• It represents the effect of foreign trade of goods and services on the economy
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5.14 Estimates of National Income in India

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• In 1868, the first attempt was made by Dada Bhai Naoroji. He, in his book ‘Poverty and Un-British
Rule in India’ estimated Indian per capita annual income at a level of Rs. 20.
• Some other economists followed it and gave various estimates of Indian national income, some of these
estimates are as follows :
 ➢ Findlay Shirras ( 1911) - Rs. 49
➢ Wadia & Joshi ( 1913-14) – Rs. 44.30
➢ Dr. V.K.R.V. Rao (1925-29) – Rs. 76
• After Independence, the Government of India appointed the National Income Committee in August 1949
under the chairmanship of Prof. P.C. Mahalanobis, to compile authoritative estimates of national in-
come.
• For further estimation of national income, the government established National Statistical Office (CSO)
which now regularly publishes national income data.

CSO & NSSO Merged :

The government merged Central Statistical Organisation (CSO) and National Sample Survey Organisation
(NSSO) for promoting statistical network in the country. The newly merged unit was named as National Sta-
tistical Office (NSO). The head of the organisation will be designated as ‘Chief of Statistician of India’ and will
be having the rank of Chief Secretary.

5.15 Indicators of Economic Development

The major indicators to increase the levels of development are :

Net National Product (NNP)
• It is defined as the total output produced by a country in one financial year.
• It can be computed by subtracting depreciation from GNP.
• NNP is also called as National Income.

Per Capita Income

• A high per capita income indicates a better standard of living and thus, economic development on the
whole.
• Further, a rise in per capita income will always mean a rise in aggregate real output.

Quality of Life Index (QLI) :

➢ The Index of Quality of life depends upon mainly three factors, i.e. life expected, Basic Literacy ad Infant
Mortality Rate. Most of the countries with low per capita GNP tends to have to QLI and vice-a-versa.

Human Development Index (HDI): 140

➢ It is one of the most recent and significant indicator of economic development of a country.
➢ It is a composite of three indicators, i.e. Life Expectancy Index (LEI); Education Attainment Index
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(EAI) and Standard of Living Index. (HDI) ranks countries in relations to each other.
➢ It can be computed by using following formula:
 6. Human Development

6.1 Terminology

 Infants exclusively breastfed: Percentage of children ages 0–5 months who are fed exclusively with breast
milk in the 24 hours prior to the survey
 Infants lacking immunization against DPT: Percentage of surviving infants who have not received their
first dose of diphtheria, pertussis and tetanus vaccine.
 Infants lacking immunization against measles: Percentage of surviving infants who have not received the
first dose of measles vaccine.
 Child malnutrition (stunting moderate or severe): Percentage of children ages 0–59 months who are
more than two standard deveiations below the median height-for-age of the World Health Organization
Child Growth Standards.
 Infant mortality rate: Probability of dying between birth and exactly age 1, expressed per 1,000 live births
 Under-five mortality rate: Probability of dying between birth and exactly age 5, expressed per 1,000 live
births.
 Adult mortality rate: Probability that a 15-year-old will die before reaching age 60, expressed per 1,000
people
 Deaths due to malaria: Number of deaths due to malaria from confirmed and probable cases, expressed
per 100,000 people.
 Deaths due to tuberculosis: Number of deaths due to tuberculosis from confirmed and probable cases,
expressed per 100,000 people.
 HIV prevalence, adult: Percentage of the population ages 15–49 that is living with HIV.
 Life expectancy at age 60: Additional number of years that a 60-year-old could expect to live if prevailing
patterns of age-specific mortality rates stay the same throughout the rest of his or her life.
 Physicians: Number of medical doctors (physicians), both generalists and specialists, expressed per 10,000
people
 Public health expenditure: Current and capital spending on health from government (central and local)
budgets, external borrowing and grants (including donations from international agencies and nongovern-
mental organizations) and social (or compulsory) health insurance funds, expressed as a percentage of GDP. 141

6.2 Definition of Human Development

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➢ Human development is defined as the process of enlarging people’s freedoms and opportunities
and improving their well-being.
➢ Human development is about the real freedom ordinary people have to decide who to be, what to
do, and how to live.
➢ Human development grew out of global discussions on the links between economic growth and develop-
ment during the second half of the 20th Century.
➢ By the early 1960s there were increasingly loud calls to “dethrone” GDP: economic growth had emerged as
both a leading objective, and indicator, of national progress in many countries
➢ Even though GDP was never intended to be used as a measure of wellbeing; in the 1970s and 80s devel-
opment debate considered using alternative focuses to go beyond GDP, including putting greater empha-
sis on employment, followed by redistribution with growth, and then whether people had their basic needs
met.
➢ These ideas helped pave the way for the human development approach, which is about expanding the
richness of human life, rather than simply the richness of the economy in which human beings live.
➢ It is an approach that is focused on creating fair opportunities and choices for all people. So how do
these ideas come together in the human development approach?

People:

✓ The human development approach focuses on improving the lives people lead rather than assuming that
economic growth will lead, automatically, to greater opportunities for all.
✓ Income growth is an important means to development, rather than an end in itself.

Opportunities:

o Human development is about giving people more freedom and opportunities to live lives they value.
o In effect this means developing people’s abilities and giving them a chance to use them.
o For example, educating a girl would build her skills, but it is of little use if she is denied access to jobs, or
does not have the skills for the local labour market 142

Choices:

• Human development is, fundamentally, about more choice.

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• It is about providing people with opportunities, not insisting that they make use of them.
• No one can guarantee human happiness, and the choices people make are their own concern.
• The process of development – human development - should atleast create an environment for people,
individually and collectively, to develop to their full potential and to have a reasonable chance of leading
productive and creative lives that they value.

6.3 Concept of Human Development

➔ The concept of human development was introduced by Dr Mahbub-ul-Haq.

➔ Dr Haq has described human development as development that enlarges people’s choices and im-
proves their lives. People are central to all development under this concept.
➔ These choices are not fixed but keep on changing. The basic goal of development is to create conditions
where people can live meaningful lives.
➔ A meaningful life is not just a long one. It must be a life with some purpose.
➔ This means that people must be healthy, be able to develop their talents, participate in society and be free
to achieve their goals.
 Dr Mahbub-ul-Haq and Prof Amartya Sen worked together under the leadership of Dr Haq to bring out
the initial Human Development Reports. Both these South Asian economists have been able to provide an
alternative view of development.
 Dr Mahbub-ul-Haq created the Human Development Index in 1990. According to him, development is
all about enlarging people’s choices in order to lead long, healthy lives with dignity. The United Nations
Development Programme has used his concept of human development to publish the Human Develop-
ment Report annually since 1990.
 Nobel Laureate Prof Amartya Sen saw an increase in freedom (or decrease in unfreedom) as the
main objective of development. Interestingly, increasing freedoms is also one of the most effective ways
of bringing about development. His work explores the role of social and political institutions and processes
in increasing freedom.
✓ Leading a long and healthy life, being able to gain knowledge and having enough means to be able to
live a decent life are the most important aspects of human development
✓ Therefore, access to resources, health and education are the key areas in human development

THE FOUR PILLARS OF HUMAN DEVELOPMENT

Idea of human development is supported by the concepts of
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1) Equity
2) Sustainability
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3) Productivity
4) Empowerment

Equity :
o Equity refers to making equal access to opportunities available to everybody.
o The opportunities available to people must be equal irrespective of their gender, race, income and in the
Indian case, caste

Example: In any country, it is interesting to see which group the most of the school dropouts belong to. This
should then lead to an understanding of the reasons for such behaviour. In India, a large number of women
and persons belonging to socially and economically backward groups drop out of school. This shows how the
choices of these groups get limited by not having access to knowledge
Sustainability:

▪ Sustainability means continuity in the availability of opportunities.

▪ To have sustainable human development, each generation must have the same opportunities.
▪ All environmental, financial and human resources must be used keeping in mind the future.
▪ Misuse of any of these resources will lead to fewer opportunities for future generations.

Example: Importance of sending girls to school ➔ If a community does not stress the importance of sending
its girl children to school, many opportunities will be lost to these young women when they grow up. Their ca-
reer choices will be severely curtailed and this would affect other aspects of their lives. So each generation
must ensure the availability of choices and opportunities to its future generations.
Productivity:

✓ Productivity here means human labour productivity or productivity in terms of human work.
✓ Such productivity must be constantly enriched by building capabilities in people.
✓ Ultimately, it is people who are the real wealth of nations. Therefore, efforts to increase their knowledge, or
provide better health facilities ultimately leads to better work efficiency

Empowerment:

➢ Empowerment means to have the power to make choices.

➢ Such power comes from increasing freedom and capability.
➢ Good governance and people-oriented policies are required to empower people.
➢ The empowerment of socially and economically disadvantaged groups is of special importance

Approaches to Human Development

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a) Income approach
b) Welfare approach
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c) Minimum needs approach

d) Capabilities approach

Income approach:
• This is one of the oldest approaches to human development.
• Human development is seen as being linked to income.
• The idea is that the level of income reflects the level of freedom an individual enjoys.
• Higher the level of income, the higher is the level of human development.

Welfare approach:

• This approach looks at human beings as beneficiaries or targets of all development activities.
• The approach argues for higher government expenditure on education, health, social secondary and ameni-
ties.
• People are not participants in development but only passive recipients.
• The government is responsible for increasing levels of human development by maximising expenditure on
welfare.

Minimum needs approach:

• This approach was initially proposed by the International Labour Organisation (ILO).
• Six basic needs i.e.: health, education, food, water supply, sanitation, and housing were identified.
• The question of human choices is ignored and the emphasis is on the provision of basic needs of defined
sections.

Capabilities approach:

• This approach is associated with Prof. Amartya Sen.

• Building human capabilities in the areas of health, education and access to resources is the key to increas-
ing human development.

6.4 Human Development Index

➔ The HDI was created to emphasize that people and their capabilities should be the ultimate criteria for
assessing the development of a country, not economic growth alone.
➔ The HDI can also be used to question national policy choices, asking how two countries with the same level
of GNI per capita can end up with different human development outcomes.
➔ These contrasts can stimulate debate about government policy priorities.
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➔ The Human Development Index (HDI) is a summary measure of average achievement in key dimensions
of human development: a long and healthy life, being knowledgeable and have a decent standard of
living.
➔ The HDI is the geometric mean of normalized indices for each of the three dimensions.
➔ The health dimension is assessed by life expectancy at birth, the education dimension is measured by
mean of years of schooling for adults aged 25 years and more and expected years of schooling for children
of school entering age.
➔ The standard of living dimension is measured by gross national income per capita.
➔ The HDI uses the logarithm of income, to reflect the diminishing importance of income with increasing
GNI.
➔ The scores for the three HDI dimension indices are then aggregated into a composite index using geomet-
ric mean.
➔ The HDI simplifies and captures only part of what human development entails. It does not reflect on ine-
qualities, poverty, human security, empowerment, etc.
➔ A fuller picture of a country's level of human development requires analysis of other indicators and infor-
mation presented in the statistical annex of the report.

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 Human Development Index (HDI) is a summary measure of achievements in three key dimensions of
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human development: a long and healthy life, access to knowledge and a decent standard of living.
 The HDI is the geometric mean of normalized indices for each of the three dimensions.

Steps to calculate the Human Development Index

Step 1: Creating the dimension indices
Minimum and maximum values (goalposts) are set in order to transform the indicators expressed in different
units into indices on a scale of 0 to 1.

 Life expectancy at 20 years is based on historical evidence that no country in the 20th century had a life
expectancy of less than 20 years
 Societies can subsist without formal education, justifying the education minimum of 0 years
 The maximum for expected years of schooling, 18, is equivalent to achieving a master’s degree in most
countries. The maximum for mean years of schooling, 15,is the projected maximum of this indicator for
2025
 The low minimum value for gross national income (GNI) per capita, $100, is justified by the considera-
ble amount of unmeasured subsistence and nonmarket production in economies close to the minimum
 The maximum is set at $75,000 per capita. Kahneman and Deaton (2010) have shown that there is virtu-
ally no gain in human development and well-being from income per capita above $75,000.
 Currently, only four countries (Kuwait, Liechtenstein, Qatar and Singapore) exceed the $75,000 in-
come per capita ceiling

Having defined the minimum and maximum values, the dimension indices are calculated as

For the education dimension, this equation is first applied to each of the two indicators, and then the
arithmetic mean of the two resulting indices is taken.
Step 2: Aggregating the dimensional indices to produce the Human Development Index
HDI is the geometric mean of the three dimension indices:

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Country Groupings:

Positive Aspects (Human Development Report):

➔ In India, between 1990 and 2015, life expectancy has improved by 10.4 years.
➔ Child malnutrition declined by 10% points from 2015.
➔ There were some modest gain in infant and under-five mortality rates.
➔ The report praised India’s reservation policy, saying even though it has not remedied caste-based exclu-
sions, it has had substantial positive effects.
➔ It also hailed the MGNREGA, Right to Information, National Food Security, and Right to Education Acts.
➔ It commended the Indian grassroots group Mazdoor Kisan Shakti Sanghatan for popularising social audits
of government schemes.

What needs to be done?

After 1990, the rise in incomes that came with a more open economy has not translated into a higher quali-
ty of life for many Indians.
Significant inequalities persist, particularly between States and regions, which act as major barriers to im-
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provement.
A central focus on social indicators is necessary for India to break free from its position as an underachiever.
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More should be done to eliminate subsidies for the richest quintile.

The rise in revenues should go towards making public education of high standards accessible to all and de-
livering on the promised higher budgetary outlay for health care.
One crucial metric that gets insufficient attention in the measurement of development is the state of de-
mocracy, reflected among other things in access to justice.
 It is relevant to point out that India has not ratified UN conventions on torture, rights of migrant workers
and their families, and protection against enforced disappearance.
Sustaining and improving the quality of life will depend on policies crafted to handle major emerging chal-
lenges such as urbanisation, the housing deficit, access to power, water, education and health care.

What does the Human Development Index tell us?

o The Human Development Index (HDI) was created to emphasize that expanding human choices should be
the ultimate criteria for assessing development results.
o Economic growth is a mean to that process, but is not an end by itself.
o The HDI can also be used to question national policy choices, asking how two countries with the same level
of Gross National Income (GNI) per capita can end up with different human development outcomes.
o For example, Malaysia has GNI per capita higher than Chile, but in Malaysia, life expectancy at birth is about
7 years shorter and expected years of schooling is 3 years shorter than in Chile, resulting in Chile having a
much higher HDI value than Malaysia.
o These striking contrasts can stimulate debate about government policy priorities.

What are the criteria for a country to be included in the HDI?

o The Human Development Report Office strives to include as many UN member countries as possible in the
HDI.
o To include a country in the HDI they need recent, reliable and comparable data for all three dimensions of
the Index.
o For a country to be included, statistics should ideally be available from the national statistical authority
through relevant international data agencies.

Why is it important to express GNI per capita in purchasing power parity (PPP) international dollars?

o The HDI attempts to make an assessment of 188 diverse countries and territories, with very different price
levels.
o To compare economic statistics across countries, the data must first be converted into a common currency.
o Unlike market exchange rates, PPP rates of exchange allow this conversion to take account of price differ-
ences between countries.
In that way GNI per capita (PPP $) better reflects people's living standards uniformly.
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o
o In theory, 1 PPP dollar (or international dollar) has the same purchasing power in the domestic economy of
a country as US$1 has in the US economy.
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o The current PPP conversion rates have been introduced in May 2014 they were based on the 2011 Interna-
tional Comparison Programme (ICP) Surveys, which covered 199 economies from all geographical regions
and from the OECD.

Can GNI per capita be used to measure human development instead of the HDI?
o No. Income is a means to human development, and not the end.
o The GNI per capita only reflects average national income.
o It does not reveal how that income is spent, nor whether it translates to better health, education and other
human development outcomes.
o In fact, comparing the GNI per capita rankings and the HDI rankings of countries can reveal much about the
results of national policy choices.

Can the HDI alone measure a country’s level of human development?

o No. The concept of human development is much broader than what can be captured by the HDI, or by any
other composite index in the Human Development Report (Inequality-adjusted HDI, Gender development
index, Gender Inequality Index or Multidimensional Poverty Index).
o The composite indices are a focused measure of human development, zooming in on a few selected areas.
o A comprehensive assessment of human development requires analysis of other human development indi-
cators and information presented in the statistical annex of the report

Can the HDI indicators be adapted to compute the HDI at the country level?

o Yes, the HDI indicators can be adapted to country-specific indicators provided they meet other aspects of
statistical quality.
o For example, some countries have used under-5 mortality rates at sub-national levels instead of life expec-
tancies and some have used average disposable income per capita instead of GNI per capita.
o The HDI can also be disaggregated at sub-national level to compare levels and disparities among different
subpopulations within a country, provided that appropriate data at the level of disaggregation are available
or can be estimated using sound statistical methodology.
o The highlighting of internal disparities using HDI methodology has prompted constructive policy debates in
many countries.

Why is geometric mean used for the HDI rather than the arithmetic mean?

o In 2010, the geometric mean was introduced to compute the HDI.

o Poor performance in any dimension is directly reflected in the geometric mean. That is to say, a low
achievement in one dimension is not anymore linearly compensated for by high achievement in another
dimension.
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o The geometric mean reduces the level of substitutability between dimensions and at the same time ensures
that a 1 percent decline in index of, say, life expectancy has the same impact on the HDI as a 1 percent de-
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cline in education or income index.

o Thus, as a basis for comparisons of achievements, this method is also more respectful of the intrinsic differ-
ences across the dimensions than a simple average.

What is the effect of fixing the maximum of GNI per capita at $75,000?
o Income is instrumental to human development, but the contribution diminishes as incomes rise.
o Also a high income without being translated into other human development outcomes is of less relevance
for human development.
o Fixing the maximum at $75,000 means that for countries with GNI per capita greater than $75,000, only the
first $75,000 contributes to human development.
o In this way the higher income is prevented from dominating the HDI value. Currently only 4 countries with
GNI pc above the cap – Liechtenstein, Kuwait, Qatar and Singapore. The projections based on fairly realistic
growth rates have shown that by 2018 not more than five countries will exceed the limit.

Are the HDI dimensions weighted equally?

o The HDI assigns equal weight to all three dimension indices; the two education sub-indices are also
weighted equally.
o The choice of weights is based on the normative assumption that all human beings value three dimensions
equally.
o The choice of minima and maxima for transformation of component indicators into indices gives more
equal ranges of variation of dimension indices - implying that the effective weights are more equal than it
was before.

Why does the HDI not include dimensions of participation, gender and equality?

o As a simple summary index, the HDI is designed to reflect average achievements in three basic aspects of
human development – leading a long and healthy life, being knowledgeable and enjoying a decent stand-
ard of living.
o Participation and other aspects of well-being are measured using a range of objective and subjective indi-
cators and are discussed in the Report.
o Measurement issues related to these aspects of human development demonstrate the conceptual and
methodological challenges that need to be further addressed.

6.5 Why is India not improving its rank in HDI ?

 1.5 billion people worldwide still live in multidimensional poverty, 54% of them concentrated in South Asia.
While poverty fell significantly from 1990 to 2015, inequalities sharpened in the region. India shares major
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portion of this population

 Due to lesser spending on health , India shares a huge burden of NCDs & other diseases. Out of pocket ex-
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penditure , lack of awareness , focus on curative rather than preventive low insurance penetration all these
causes high IMR & MMR . Thus India scored poorly in life expectancy
 Prevalent discrimination in society holds the women, disabled & other marginalised sections to enroll in
schools & colleges. People opt for informal employments earlier in the life due to poverty thus resulting in
exodus from schools & colleges.
 Huge population is a burden on India . Though Economic reforms, distributive policies of government have
resulted in increase in Per capita income, though the increase in insignificant due to huge population. Un-
employment, lack of infrastructure, skills. Rising NPAs catch the growth, thus there is a reduction in per cap-
ita income.
 The success of national development programs like Skill India, Digital India, Make in India and Beti Bachao
Beti Padhao, aimed at bridging gaps in human development, will be crucial in ensuring the success of
Agenda 2030.
 Human development is crucial in order to be benefitted from demographic dividend hence work on im-
proving it must be done on war footing level.

6.6 Inequality-adjusted HDI (IHDI)

• The Inequality-adjusted Human Development Index (IHDI) adjusts the Human Development Index (HDI)
for inequality in distribution of each dimension across the population.
• The IHDI accounts for inequalities in HDI dimensions by “discounting” each dimension’s average value
according to its level of inequality.
• If there is no inequality across people, HDI is equal to IHDI. However, in case of inequalities, the value of
IHDI is always less than HDI. This implies that the IHDI is the actual level of human development (ac-
counting for this inequality), while the HDI can be viewed as an index of “potential” human develop-
ment (or the maximum level of HDI) that could be achieved if there was no inequality.
• The “loss” in potential human development due to inequality is given by the difference between the HDI
and the IHDI and can be expressed as a percentage.

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6.7 Gender related Development Index (GDI)

The Gender related Development Index (GDI) measures gender inequalities in achievement in three basic
dimensions of human development as follows:

✓ Health, which is measured by female and male life expectancy at birth

✓ Education, which is measured by female and male expected years of schooling for children and female and
male mean years of schooling for adults ages 25 and older
✓ Command over economic resources, measured by female and male estimated earned income
✓ The index shows the loss in human development due to inequality between female and male
achievements in these dimensions. It ranges from 0, which indicates that women and men fare equally, to
1, which indicates that women fare as poorly in comparison to their male counterparts as possible in all
measured dimensions.
✓ In order to address shortcomings of the GDI, a new index Gender Inequality Index (GII) was proposed. This
index measures three dimensions viz. Reproductive Health, Empowerment, and Labor Market Participation.

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6.8 Multidimensional Poverty Index (MPI)

➔ Multidimensional Poverty Index (MPI) identifies multiple deprivations at the individual level in health,
education and standard of living.
➔ It uses micro data from household surveys, as basis of deprivation of Cooking fuel, Toilet, Water, Electricity,
Floor, Assets.
➔ Each person in a given household is classified as poor or non-poor depending on the number of depriva-
tions his or her household experiences.
➔ These data are then aggregated into the national measure of poverty.
➔ The indicator thresholds for households to be considered deprived are as follows:

Education

✓ School attainment: no household member has completed at least six years of schooling.
✓ School attendance: a school-age child (up to grade 8) is not attending school.

Health

✓ Nutrition: a household member (for whom there is nutrition information) is malnourished, as measured by
the body mass index for adults (women ages 15–49 in most of the surveys) and by the height-for-age z
score calculated using World Health Organization standards for children under age 5.
✓ Child mortality: a child has died in the household within the five years prior to the survey.

Standard of living

✓ Electricity: not having access to electricity.

✓ Drinking water: not having access to clean drinking water or if the source of clean drinking water is locat-
ed more than 30 minutes away by walking.
✓ Sanitation: not having access to improved sanitation or if improved, it is shared.
✓ Cooking fuel: using ‘dirty’ cooking fuel (dung, wood or charcoal).
✓ Having a home with a dirt, sand or dung floor.
✓ Assets: not having at least one asset related to access to information (radio, TV, telephone) and not having
at least one asset related to mobility (bike, motorbike, car, truck, animal cart, motorboat) or at least one as-
set related to livelihood (refrigerator, arable land, livestock).

Computation of the Multi-Dimensional Poverty Index (MDPI) reveals that, despite recent progress in poverty
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reduction, more than 2.2 billion people are either near or living in multidimensional poverty.
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6.9 Gender Inequality Index

✓ Gender inequality remains a major barrier to human development.

✓ Girls and women have made major strides since 1990, but they have not yet gained gender equity.
✓ The disadvantages facing women and girls are a major source of inequality.
✓ Women and girls are discriminated against in health, education, political representation, labour market,
etc.—with negative consequences for development of their capabilities and their freedom of choice.
 The GII is an inequality index. It measures gender inequalities in three important aspects of human de-
velopment
1) Reproductive health, measured by maternal mortality ratio
2) Adolescent birth rates; empowerment, measured by proportion of parliamentary seats occupied by
females and proportion of adult females and males aged 25 years and older with at least some sec-
ondary education;
3) Economic status, expressed as labour market participation and measured by labour force participation
rate of female and male populations aged 15 years and older.
 The GII is built on the same framework as the IHDI—to better expose differences in the distribution of
achievements between women and men. It measures the human development costs of gender inequality.
Thus the higher the GII value the more disparities between females and males and the more loss to human
development.
 The GII sheds new light on the position of women in 159 countries; it yields insights in gender gaps in
major areas of human development. The component indicators highlight areas in need of critical policy in-
tervention and it stimulates proactive thinking and public policy to overcome systematic disadvantages of
women. 155
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 7. Poverty

7.1 Concept of Poverty:

 Poverty can be defined as a social phenomenon in which a section of the society is unable to fulfill
even its basic necessities of life
 When a substantial segment of a society is deprived of minimum level of living and continues at a bare
subsistence level, that society is plagued with mass poverty
 The countries of the third world exhibit invariably the existence of mass poverty.
 Attempts have been made in all societies to define poverty, but all of them are conditioned by the vision of
minimum or good life obtaining in society
 The UN Human Rights Council has defined poverty as “A human condition characterized by the sustained
or chronic deprivation of the resources, capabilities, choices, security and power necessary for the enjoy-
ment of an adequate standard of living and other civil, cultural, economic, political and social rights”.

Three percepts are often used to define poverty

I. The amount of money required by a person to subsist

II. The life below a ‘minimum sub­sistence level’ and ‘living standard’ prevalent at a given time in a given place
III. The comparative state of well-being of a few and the deprivation and destitution of the majority in society
➔ social concept in terms of the share of the total national income received by those at the bottom 156

Types of Poverty:
Absolute Poverty:
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➔ In the absolute standard, minimum physical quantities of cereals, pulses, milk, butter etc. are determined
for a subsistence level and then the price quotations are converted monetary terms for the physical quan-
tities
➔ Aggregating all the quantities included, a figure expressing per capita consumer expenditure is deter-
mined
➔ The population whose level of income or expenditure is below the figure is considered to be the absolute
poverty of a person whose income or consumption expenditure is so meagre that he lives below the min-
imum subsistence level is called absolute poverty
➔ As per ICMR, these physical quantities should lead to the provision of 2,400 calories per capita for the
rural areas and 2,100 calories per capita in urban areas on daily basis

Relative Poverty:

 According to the relative standard, income distribution of the population in different fractile groups is
estimated and a comparison of the levels of living of the top 5 to 10% with bottom 5 to 10% of the
population is called relative poverty or those who are in the lower income groups receive less than those in
the higher income groups
 The people with lower income groups receive less than those in the higher income groups
 The people with lower income groups are relatively poor compared with higher incomes, even though they
may be living above the minimum level of subsistence and hence it is known as relative poverty
 It is the absolute poverty with which we are concerned when we talk of the problem of poverty in India
 Advanced countries such as USA, UK have succeeded in removing absolute poverty for their people, but
relative poverty prevails even in these countries because of uneven distribution of income

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Behaviouristic concept of poverty:

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➔ Along with absolute and relative poverty, a behaviouristic concept of poverty has been attracted with great
interest of the academicians in recent years.
➔ The first studies of household show that, more income was spent on consumption of food which is rather
known as Engle's Law
➔ Poverty can be defined objectively as well as poverty is because of lack of resources to obtain diet, lack of
participation in activities by the poor and the negligence of economic resource like capital assets, fringe
benefits, public social services, income in kind etc.

Always poor:

 These people are never having income above poverty line in their lifetime

Usually poor:

 Those people who are generally poor but who may sometimes have a little more money. ex: casual workers

Chronic poor:

 Always poor and usually poor together are categorised under chronic poor.

Churning poor:

 Those people who regularly move in and out of poverty. ex: small farmers and seasonal workers

Occasionally poor:

 Those who are rich most of the time but may sometimes have a patch of bad luck.

Transient poor:

 Churning poor and occasionally poor are categorised under this.

Non – Poor: 158

 Those who are never poor in their lifetime
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7.2 How to measure Poverty ??

✓ Head count ratio (HCR) is the proportion of a population that exists, or lives, below the poverty
line
✓ Poverty headcount ratio at national poverty line (percentage of population) in India was last reported
at 21.9% in 2011-12
✓ Definition:-When the number of poor is estimated as the proportion of people below the poverty line,
it is known as 'head count ratio'.

Poverty gap index:

✓ Poverty gap is the difference between the poor’s expenditure or income and the pre-determined pov-
erty line
✓ Poverty gap index is a measure of the intensity of poverty
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✓ Defined as the average poverty gap in the population as a proportion of the poverty line
✓ Poverty gap index is an improvement over the poverty measure headcount ratio which simply counts all
the people below a poverty line, in a given population, and considers them equally poor
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✓ Poverty gap index estimates the depth of poverty by considering how far, on the average, the poor are
from that poverty line
✓ The most common method of measuring and reporting poverty is the headcount ratio, given as the
percentage of population that is below the poverty line.
✓ One of the undesirable features of the headcount ratio is that it ignores the depth of poverty; if the poor
become poorer, the headcount index does not change
✓ Poverty gap index provides a clearer perspective on the depth of poverty. It enables poverty comparisons. It
also helps provide an overall assessment of a region's progress in poverty alleviation and the evalua-
tion of specific public policies or private initiatives

Squared Poverty Gap Index:

✓ Weighted PGI is squared poverty gap index

✓ Here more weight is given to the poorest among the poor
✓ Squared Poverty Gap Index determines the degree of poverty for a given area.
✓ This method squares the poverty gap for each individual/household, and thus puts more emphasis on ob-
servations that fall far short of the poverty line rather than those that are closer.
✓ This measure is a member of the FGT (Foster, Greer, Thorbecke) family of poverty measures
✓ Squared Poverty Gap Index is very similar to the Poverty Gap Index because it also weights the poor
based on how poor they are.
✓ The difference between them is that the shortfalls of people below the poverty line are squared giving the 160
very poor much more weight than those falling only a few cents short of the poverty line
✓ Squared Poverty Gap Index is more beneficial to the poor who are further away from the poverty
because they will not receive the same amount of aid from the government.
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7.3 Dimensions of Poverty:

▪ Although household expenditure levels remain the main measure of living standard by which incidence of
poverty is measured, and the Human Consumption Rate has become the main indicator of poverty.
▪ But the UN Human Development Index (HDI) captures the multidimensional nature of deprivation in living
standards. Income should be regarded as a means to improve human welfare, not as an end in itself.
▪ Further Human and gender development indicators have been used successfully for advocacy, for ranking
of geographical spaces and to capture improvements in human well-being more reliably than per capita in-
come.
▪ The HDI is a simple average of three dimension indices, which measure average achievements in a coun-
try with regard to ‘a long and healthy life’, ‘knowledge’ and ‘a decent standard of living’

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▪ Related to this only the Ministry of Women and Child Development uses the
infant mortality rate (IMR) and life expectancy at age 1 to estimate a long and healthy life
7+ literacy rate and mean years of education for the 15+ age group to estimate knowledge
estimated earned income per capita per year to capture a decent standard of living.
▪ Alkire and Santos in 2010 presented the Multidimensional Poverty Index (MPI), which reflects the
deprivations that a poor person faces simultaneously with respect to education, health and living standards.
This reflects the same three dimensions of welfare as the HDI but the indicators are different in each case
and are linked to the MDGs.
▪ The components of MPI are:
1. Education(each indicator is weighted equally at 1/6)
➢ Years of Schooling: deprived if no household member has completed five years of schooling
➢ Child Enrolment: deprived if any school aged child is not attending school in yrs 1 to 8
2. Health(each indicator is weighted equally at 1/6)
➢ Child Mortality: deprived if any child has died in the family
➢ Nutrition: deprived if any adult or child for whom there is nutritional information, is malnourished
3. Standard of Living(each indicator is weighted equally at 1/18)
➢ Electricity: deprived if the household has no electricity.
➢ Drinking water: deprived if the household does not have access to drinking water or clean water is
more than 30 minutes walk from home
➢ Sanitation: deprived if they do not have an improved toilet or if their toilet is shared
➢ Flooring: deprived if the household has dirt, sand or dung floor
➢ Cooking Fuel: deprived if they cook with wood, charcoal and dung
➢ Assets: deprived if the household does not own more than one of: radio, TV, telephone, bike and
do not own a car or tractor
• Hence poverty is determined with regard to not only income or expenditure but also access to a number of
other necessities. Based on this measure 55% of India’s population in 2005 was classified as poor

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7.4 Poverty Line:

 Niti Aayog (earlier planning commission) estimates poverty using NSSO data
Every 5 years, NSSO conducts surveys to collect household consumption expenditure
Monthly per capita consumption expenditure is used to determine poverty line
Poverty line estimates vary depending on the methodologies developed by various expert panels
Ministry of Rural Development conducts BPL census

How Poverty Line is Estimated in India?

• The history of counting the poor in India can be dated back to the 19th century.
• The earliest effort to estimate the poor was Dadabhai Naoroji’s “Poverty and Un-British Rule in India”
in which he estimated a subsistence-based poverty line at 1867-68 prices.
• Using the diet prescribed to “supply the necessary ingredients for the emigrant coolies during their voyage
living in a state of quietude”, which includes “rice or flour, dhal, mutton, vegetables, ghee, vegetable oil and
salt”, he came up with a subsistence cost based poverty line, ranging from Rs. 16 to Rs. 35 per capita per
year in various regions of India.
• Next, in 1938, the National Planning Committee (NPC) estimated a poverty line ranging from Rs 15
to Rs 20 per capita per month. Like the earlier method, the NPC also formulated its poverty line based on
‘a minimum standard of living perspective in which nutritional requirements are implicit’.
• In 1944, the authors of the ‘Bombay Plan’ (Thakurdas et al 1944) suggested a poverty line of Rs 75 per
capita per year.
• Whereas after independence the Planning Commission has been estimating the number of people below
the poverty line (BPL) at both the state and national level based on consumer expenditure information
collected as part of the National Sample Survey Organization (NSSO) since the Sixth Five Year Plan.
• In 1962, the Planning Commission constituted a working group to estimate poverty nationally, and it for-
mulated separate poverty lines for rural and urban areas – of Rs 20 and Rs 25 per capita per year re-
spectively.
• The estimation of the poverty is done by the planning commission on the basis of large sample survey of
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the consumer expenditure carried out by the National Sample Survey office (NSSO) carried out after an in-
terval of 5 years.
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• The Ministry of Rural development conducts the Below Poverty Line(BPL) Census with the objective of
identifying the BPL households in rural areas, who could be assisted under various programmes of the min-
istry.

The recommendations of different committees for estimation of poverty:

VM Dandekar and N Rath
o Made the first systematic assessment of poverty in India in 1971, based on National Sample Survey
(NSS) data from 1960-61.
o They argued that the poverty line must be derived from the expenditure that was adequate to provide 2250
calories per day in both rural and urban areas.
o This generated debate on minimum calorie consumption norms while estimating poverty and variations in
these norms based on age and sex

Lakdawala Committee (1993)

✓ The Lakdawala Committee defined the poverty line based on per capita consumption expenditure as the
criterion to determine the persons living below poverty line.
✓ The per capita consumption norm was fixed at Rs.49.09 per month in the rural areas and Rs.56.64 per
month in the urban areas at 1973-74 prices at national level, corresponding to a basket of goods and
services anchored in a norm of per capita daily calorie intake of 2400 kcal in the rural areas and 2100
kcal in the urban areas.

Suggestions:

1) Consumption expenditure should be calculated based on calorie consumption as earlier

2) State specific poverty lines should be constructed and these should be updated using the Consumer Price
Index of Industrial Workers (CPI-IW) in urban areas and Consumer Price Index of Agricultural Labour (CPI-
AL) in rural areas
3) Discontinuation of ‘scaling’ of poverty estimates based on National Accounts Statistics. This assumes
that the basket of goods and services used to calculate CPI-IW and CPI-AL reflect the consumption patterns
of the poor.

Tendulkar Committee (2009) Report to Review the Methodology for Estimation of Poverty

▪ The Planning Commission constituted an Expert Group in December 2005 under the Chairmanship of
Professor Suresh D. Tendulkar to review the methodology for estimation of poverty.
▪ The Expert Group submitted its report in December 2009.
▪ While acknowledging the multidimensional nature of poverty, the Expert Group recommended moving
away from anchoring poverty lines to the calorie - intake norm to adopting MRP based estimates of
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consumption expenditure as the basis for future poverty lines and MRP equivalent of the urban pov-
erty line basket (PLB) corresponding to 25.7 % urban headcount ratio as the new reference PLB for ru-
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ral areas.
▪ On the basis of the above methodology, the all-India rural poverty headcount ratio for 2004-05 was esti-
mated at 41.8 %, urban at 25.7 %, and all- India at 37.2 %
Saxena Committee Report to Review the Methodology for Conducting BPL Census in Rural Areas

▪ An Expert Group headed by Dr N.C. Saxena was constituted by the Ministry of Rural Development to rec-
ommend a suitable methodology for identification of BPL families in rural areas.
▪ The Expert Group submitted its report in August 2009 and recommended doing away with score-based
ranking of rural households followed for the BPL census 2002.
▪ The Committee recommended automatic exclusion of some privileged sections and automatic inclu-
sion of certain deprived and vulnerable sections of society, and a survey for the remaining population
to rank them on a scale of 10.

Other Imp committees:

o Alagh Committee (1979)

o Dr. Arjun sengupta committee for poverty related to unorganised sector (Rs. 20 per day
criteria)
o Rangarajan Committee
o World Bank's “money metric” approach

Alagh Committee (1979):

• In 1979, a task force constituted by the Planning Commission for the purpose of poverty estimation, chaired
by YK Alagh, constructed a poverty line for rural and urban areas on the basis of nutritional require-
ments.
• As per the recommendations poverty line was devised to be 2400 calories for rural and 2100 calories
for urban

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Automatic Exclusion
Households that fulfil any of the following conditions will not be surveyed for BPL census:

1. Families who own double the land of the district average of agricultural land per agricultural household if
partially or wholly irrigated (three times if completely unirrigated).
2. Families that have three or four wheeled motorized vehicles, such as, jeeps and SUVs.
3. Families that have at least one mechanized farm equipment, such as, tractors, power tillers, threshers, and
harvesters.
4. Families that have any person who is drawing a salary of over Rs. 10,000 per month in a non-government/
private organization or is employed in government on a regular basis with pensionary or equivalent bene-
fits.
5. Income taxpayers
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Automatic Inclusion
The following would be compulsorily included in the BPL list:
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1) Designated primitive tribal groups.

2) Designated most discriminated against SC groups, called Maha Dalit groups.
3) Single women-headed households.
4) Households with a disabled person as breadwinner.
5) Households headed by a minor.
6) Destitute households which are dependent predominantly on alms for survival.
7) Homeless households.
8) Households that have a bonded labourer as member.
• Poverty Line Basket (PLB) is a socially acceptable minimal basket of inter-dependent basic human needs
that are satisfied through the market purchases.
• The all India rural and urban PLB are derived separately for urban and rural areas based on per capita calo-
rie norms of 2400 (rural) & 2100 (urban). It is specified in terms of required per capita total household
consumer expenditure to achieve this level of calorie intake.
• The amount required for this has to be determined and those who earn less than this level is considered to
be living below poverty line. The first stage to identify the poor is to fix the poverty line.
• This is an imaginary line. The usual procedure in India is to decide the poverty line keeping that as the yard-
stick.
• On the basis of this, in 2004-2005, it was decided that a person earning less than Rs. 356.30 in rural areas
and Rs.538.60 in urban areas, in a month, falls below the poverty line.
• Poverty ratio can be found out by dividing the number of poor by the total population.
• Poverty ratio shows the percentage of people living below the poverty line.
➔ It is important to understand that a poverty line is essentially a monetary value.
➔ The idea is to collect data on people’s consumption expenditure, and to ascertain how many people
surveyed fall below that poverty line.
➔ In India, there were two main ways of collecting data: Uniform Reference Period (URP) and Mixed
Reference Period (MRP)
➔ Up until 1993-94, the poverty line was based on URP data. This involved asking people about their
consumption expenditure across a 30-day recall period. In other words, the information was based on
the recall of consumption expenditure over the last month alone.
➔ Since 1999-2000, however, data are being collected according to MRP. Under this method, data on
five less-frequently used items are collected over a one-year period, while sticking to the 30-day re-
call for the rest of the items. The low-frequency items include expenditure on health, education, clothing,
durables etc.
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➔ Currently, all poverty line data are compiled using the MRP method. These include the most recent es-
timates by the Suresh Tendulkar and Rangarajan Committees.
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✓ World Bank has used a new method for collecting data, called the modified mixed reference period,
or MMRP for estimating 2011-12 poverty rates
✓ In this method, for some food items, instead of a 30-day recall, only a 7-day recall is collected. Also,
for some low-frequency items, instead of a 30-day recall, a 1-year recall is collected. This is believed
to provide a more accurate reflection of consumption expenditures.
✓ When such data was collected, consumption expenditures for people in both urban and rural areas went up
by 10 % to 12 %
✓ This happened essentially because people could better recall their food expenditure over a shorter, 7-day
period than what they might have done over the longer 30-day period. The higher expenditures, combined
with the high population density around the poverty line, essentially meant that the poverty rate for India
(for 2011-12) came down sharply.
✓ MMRP method was first used in 2009-10, alongside MRP
MMRP was used by Rangarajan Committee for the first time in India to estimate poverty
Mixed Reference Period (MRP) → reference period for 5 non-food items (education, institutional
medical expenses, clothing, footwear and durable goods) changed to 1 year
Uniform Reference Period (URP) → used by Niti Aayog to estimate poverty line

7.5 World Bank Approach for Calculating Poverty:

 The World Bank uses the “money metric” approach, whereby it converts the “one dollar per day” interna-
tional poverty line into local currencies using “purchasing power parity” conversion factors.
 It then uses national household surveys to identify the number of persons whose local income is lower
than the national poverty lines.
 Both the dollar a day and $1.25 measures indicate that India has made steady progress against poverty
since the 1980s, with the poverty rate declining at a little under one percentage point per year.
 This means that the number of very poor people who lived below a dollar a day in 2005 has come
down from 296 million in 1981 to 267 million in 2005.
 However, the number of poor people living under $1.25 a day has increased from 421 million in 1981 to
456 million in 2005.
 This indicates that there are a large number of people living just above this line of deprivation (a dollar a
day) and their numbers are not falling.

There have been many criticisms against the World Bank’s approach to measuring poverty.

✓ Firstly, the Bank’s method is unreliable because its results are excessively dependent on the chosen PPP
base year. The Bank compares the consumption expenditure of a person in one country and year with that
of another person from another country and year, by using national CPIs that deflate or inflate the two na-
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tional currency amounts into “equivalent” amounts of a common base year, and then using PPPs for this
base year to compare the resulting national- currency amounts. PPPs of different base years and the CPIs of
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different countries each weigh prices of underlying commodities differently, as they reflect distinct global
and national consumption patterns. As a result, comparisons over space and time together are path de-
pendent: if they are undertaken in different ways they may lead to different results.
✓ Secondly, consumption patterns vary from country to country for reasons of tastes, as actual consump-
tion patterns are strongly influenced by prices and by the existing income distribution.
✓ Thirdly, the Bank’s estimates of global poverty involve errors due to measurement problems associat-
ed with the data used under the Bank’s preferred approach.

7.6 Linkage between Poverty and Development:

• Economic growth is the most powerful instrument for reducing poverty and improving the quality of
life in developing countries.
• Thus Poverty is inter-related to problems of underdevelopment.
• In rural and urban communities, poverty can be very different. In urban areas people often have access to
health and education but many of the problems caused by poverty are made worse by things like over-
crowding, unhygienic conditions, pollution, unsafe houses, etc.
• In rural areas there is often poor access to education, health and many other services but people usually
live in healthier and safer environments.
• Growth can generate virtuous circles of prosperity and opportunity.
• Strong growth and employment opportunities improve incentives for parents to invest in their children’s
education by sending them to school.
• This may lead to the emergence of a strong and growing group of entrepreneurs, which should generate
pressure for improved governance.
• Strong economic growth therefore advances human development, which, in turn, promotes economic
growth.
• A typical estimate from cross-country studies reveal that a 10 % increase in a country’s average income will
reduce the poverty rate by between 20% and 30 %.

Some examples:

1. China alone has lifted over 450 million people out of poverty since 1979. Evidence shows that rapid eco-
nomic growth between 1985 and 2001 was crucial to this enormous reduction in poverty.
2. India has seen significant falls in poverty since the 1980s. This has been strongly related to India’s impres-
sive growth record over this period.
3. Mozambique illustrates the rapid reduction in poverty associated with growth over a shorter period. Be-
tween 1996 and 2002, the economy grew by 62 per cent and the proportion of people living in poverty de-
clined from 69 % to 54 %
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 A successful strategy of poverty reduction must have at its core measures to promote rapid and sustained
economic growth.
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 The challenge for policy is to combine growth promoting policies with policies that allow the poor to
participate fully in the opportunities unleashed and so contribute to that growth.
 This includes policies to make labour markets work better, remove gender inequalities and increase finan-
cial inclusion.
 Thus, India’s most recent development plan has the main objective of raising economic growth and making
growth more inclusive.

Sustainable development in the developing countries should include the following:

o Increases in real income especially for the ‘wretched of the earth’. This implies poverty alleviation
o Improvements in health and nutritional status especially children and young mothers who are vulnerable to
most preventable diseases
o Education achievement
o Access to resources
o A fairer equitable distribution of income. The basic salary of the least paid worker should be adequate to
maintain his nuclear family
o Increases in basic freedoms and guaranteed security of all citizens; respect and responsible relationship
with ecosystem

7.7 Causes of Poverty in India

All types of poverty and deprivation in India are caused by the following factors.
Colonial Exploitation:

• Colonial rule in India is the main reason of poverty and backwardness in India.
• The Mughal era ended about 1800.
• The Indian economy was purposely and severely de-industrialized through colonial privatizations.
• British rule replaced the wasteful warlord aristocracy by a bureaucratic- military establishment.
• However, colonial exploitation caused backwardness in India. In 1830, India accounted for 17.6 % of
global industrial production against Britain's 9.5%, but, by 1900, India's share was down to 1.7 % against
Britain's 18.5 %.
• This view claims that British policies in India, exacerbated by the weather conditions led to mass famines,
roughly 30 to 60 million deaths from starvation in the Indian colonies.
• Community grain banks were forcibly disabled, land was converted from food crops for local consumption
to cotton, opium, tea, and grain for export, largely for animal feed.

Lack of Investment for the Poor:

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➢ There is lack of investment for the development of poorer section of the society.
➢ Over the past 60 years, India decided to focus on creating world class educational institutions for the elite,
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whilst neglecting basic literacy for the majority.

➢ This has denied the illiterate population - 33 % of India - of even the possibility of escaping poverty.
➢ There is no focus on creating permanent income-generating assets for the poor. Studies on China (2004)
also indicated that since universal and free healthcare was discontinued in 1981, approximately 45 million
(5 per cent of its 900 million rural population) took on healthcare-related debts that they could not repay in
their lifetimes.
➢ Since then, the government has reintroduced universal health care for the population.
➢ Given India's greater reliance on private healthcare spending, healthcare costs are a significant contributor
to poverty in India.

Social System in India:

• The social system is another cause of poverty in India.

• The social subsystems are so strongly interlocked that the poor are incapable of overcoming the obstacles.
• A disproportionally large number of poor people are lower caste Hindus.
• According to S. M. Michael, Dalits constitute the bulk of poor and unemployed.
• Many see Hinduism and its structure, called the caste system, as a system of exploitation of poor, low rank-
ing groups by more prosperous, high ranking groups.
• In many parts of India, land is largely held by high ranking property owners of the dominant castes that
economically exploit low ranking landless labourers and poor artisans, all the while degrading them with
ritual emphasis on their so-called, God-given inferior status.

Over-reliance on Agriculture:

• In India there is high level of dependence on primitive methods of agriculture.

• There is a surplus of labour in agriculture.
• Farmers are a large vote bank and use their votes to resist reallocation of land for higher-income industrial
projects.
• While services and industry have grown at double digit figures, the agriculture growth rate has dropped to
single digit.
• About 60 % of the population depends on agriculture, whereas the contribution of agriculture to the GDP is
minimal.
• The agricultural sector has remained very unproductive.
• There is no modernization of agriculture despite some mechanization in some regions of India.
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Heavy Population Pressures:

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• Although demographers generally agree that high population growth rate is a symptom rather than cause
of poverty and add to poverty.
• Mahmood Mamdani aptly remarked "people are not poor because they have large families. Quite contrary,
they have large families because they are poor".
• However this is a general argument in developing countries that population growth is a major obstacle to
development and cause of poverty.

High Unemployment:

• There is high degree of underutilization of resources.

• The whole country suffers from a high degree of unemployment.
• India is marching with jobless economic growth.
• Employment is not growing, neither in the private sector, nor in the public sector.
• The IT sector has become elitist, which does not improve the poverty situation in the country.
• Disguised unemployment and seasonal unemployment is very high in the agricultural sector of India. It is
the main cause of rural poverty in India.

7.8 PROGRAMMES FOR POVERTY ALLEVIATION

MGNREGA

 This flagship programme of the Government of India aims at enhancing livelihood security of house-
holds in rural areas of the country by providing at least 100 days of guaranteed wage employment in
a financial year to every household whose adult members volunteer to do unskilled manual work.
 It also mandates 1/3rd participation for women.
 The primary objective of the scheme is to augment wage employment.
 This is to be done, while also focusing on strengthening natural resource management through works that
address causes of chronic poverty like drought, deforestation, soil erosion and thus encourage sustainable
development.

Deendayal Upadhyay Antyodaya Yojana (DAY)

 To reduce poverty and vulnerability of the urban poor households by enabling them to access gainful
self-employment and skilled wage employment opportunities, resulting in an appreciable improvement in
their livelihoods on a sustainable basis, through building strong grassroots level institutions of the poor.
 NULM aims at universal coverage of the urban poor for skill development and credit facilities
 The mission would aim at providing shelters equipped with essential services to the urban homeless in a 172
phased manner.
 It focuses on organizing urban poor in their strong grassroots level institutions, creating opportunities for
skill development and helping them to set up self-employment venture by ensuring easy access to credit
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 In addition, the mission would also address livelihood concerns of the urban street vendors by facilitating
access to suitable spaces, Institutional credit, social security and skills to the urban street vendors for ac-
cessing emerging market opportunities.
 Funding will be shared between the Centre and the States in the ratio of 75:25. For North Eastern and Spe-
cial Category - the ratio will be 90:10

National Health Mission

 The National Health Mission (NHM)with its two Sub-Missions, namely the National Urban Health Mission
(NUHM) and National Rural Health Mission (NRHM) covering both the rural and urban areas came into ef-
fect with Cabinet approval of 1st May,2013.
 The main programmatic components of NHM include Health System Strengthening in both rural and ur-
ban areas, Reproductive-Maternal- Neonatal-Child and Adolescent Health (RMNCH+A) interventions, and
control of Communicable and Non-Communicable Diseases.

Pradhan Mantri Suraksha Bima Yojna

 Pradhan Mantri Suraksha Bima Yojana is available to people between 18 and 70 years of age with bank ac-
counts.
 It has an annual premium of Rs. 12 excluding service tax, which is about 14% of the premium. The
amount will be automatically debited from the account.
 In case of accidental death or full disability, the payment to the nominee will be Rs.2 lakh (US$3,000)
and in case of partial Permanent disability Rs.1 lakh (US$1,500).
 Full disability has been defined as loss of use in both eyes, hands or feet. Partial Permanent disability has
been defined as loss of use in one eye, hand or foot.
 This scheme will be linked to the bank accounts opened under the Pradhan Mantri Jan Dhan Yojana
scheme.
 Most of these accounts had zero balance initially.
 The government aims to reduce the number of such zero balance accounts by using this and related
schemes

Atal Pension Yojana

 Under the Atal Pension Yojna Scheme (APY), the subscribers, under the age of 40, would receive the
fixed monthly pension of Rs. 1000 to Rs. 5000 at the age of 60 years, depending on their contributions.
 To make the pension scheme more attractive, government would co-contribute 50% of a subscriber’s
contribution or Rs. 1,000 per annum, whichever is lower to each eligible subscriber account for a period
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of 5 years from 2015-16 to 2019-20.

 The benefit of government’s co-contribution can be availed by those who subscribe to the scheme before
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December 31, 2015.

Pradhan Mantri Jeevan Jyoti Bima Yojana

 Pradhan Mantri Jeevan Jyoti Bima Yojana is low cost life insurance policy provided by government of
India.
 Maximum sum offered under this scheme is Rs. 2 Lakh Premium payable for this insurance scheme is
Rs. 330 per year or less than 1 rupee per day.
 It is Available to people in the age group of 18 to 50 and having a bank account.
 People who join the scheme before completing 50 years can, however, continue to have the risk of life cov-
er up to the age of 55 years subject to payment of premium.

Pradhan Matri Awaas Yojana

The Mission will be implemented during 2015-2022 and will provide central assistance to Urban Local Bodies
(ULBs) and other implementing agencies through States/UTs for:

✓ In-situ Rehabilitation of existing slum dwellers using land as a resource through private participation
✓ Credit Linked Subsidy
✓ Affordable Housing in Partnership
✓ Subsidy for Beneficiary-led individual house construction/enhancement.

Credit linked subsidy component will be implemented as a Central Sector Scheme while other three compo-
nents will be implemented as Centrally Sponsored Scheme (CSS).

Jawaharlal Nehru National Urban Renewal Mission (JNNURM)

➔ It aims at integrated development of slums through projects for providing shelter, basic services and
other related civic amenities with a view to providing utilities to the urban poor.
➔ It has two components - Basic Services for Urban poor (BSUP) and Integrated Housing and Slum Develop-
ment Programme (IHSDP).
➔ Cities identified based on urban population (Census 2001), cultural and tourist importance was covered
under BSUP and the remaining cities were covered under IHSDP.
Reforms taken under JNNURM

1. Earmarking of 25% of municipal budget for the urban poor for provision of basic services including
2. affordable housing to the urban poor.
3. Implementation of 7- Point Charter, namely provision of land tenure, affordable housing, water, sanita-
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tion, education, health, and social security to the poor in a time -bound manner ensuring convergence with
other programmes.
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4. Reservation of 25% of developed land in all housing projects, public or private, critical for slum im-
provement.

7.9 Why Poverty Alleviation Programmes have Failed in India?

▪ The government. of India has many schemes for the poor and for their welfare.
▪ Overall assessment of the CAG and other governing bodies has found, the scheme that has been imple-
mented by the Indian Government has many loopholes where the executives and operatives take the bene-
fit.
▪ Govts, international agencies and donors have spent billions of dollars to address poverty.
▪ For example, in rural India, the government spends significant funds on subsidies (for electricity, fertilizer,
fuels, etc.), food rations, price supports, land allocation/distribution, job training and financial assistance for
initiatives in agriculture and small businesses.
▪ Loans from the World Bank and other international agencies and bilateral aid supplement domestic gov-
ernment resources.
▪ But who has benefited from all these programmes and assistance? The beneficiaries are usually corrupt of-
ficials who manage and distribute funds, and landlords and powerbrokers who directly or indirectly extract
benefits for themselves. In India, over 90% of the agricultural land is owned and partly cultivated by less
than 10% of the rural population who are termed farmers; others are mostly labourers.
▪ Govts allocate land to the poor, but they are unable to utilize it because of limited water resources, bad soil
conditions, and/or the inability to secure credit.
▪ Larger subsidies benefit bigger farmers, but the poor do not gain much directly from any government pro-
grams.
▪ The presumption that with more money, corrupt and inefficient governments and bureaucratic institutions
will utilize funds efficiently and improve the deplorable conditions of the poor is an illusion.
▪ There are too many impediments to poverty reduction: bribery, political influence in the allocation of land
and/or credit, diffused focus and priorities, poor execution, a shortage of rural infrastructure, and social in-
equality, among other factors.
▪ Corruption and misallocation of development funds are ultimately the result of failed governance

Major reasons for failure of poverty alleviation programmes are:

Planning process is faulty:

o Identifying the ‘poor’

o Defining ‘poor’
o Processing of the identification involves too many stages.
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o Lack of technology upgradation.

o Ideally the programme should be broad based. (benefitting the large number of people)
Disjointed programmes- not integrated.
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Implementation of programmes:

o Corrupt officials/ staffs.

o Lack of involvement of people
o Local politics. (selection of beneficiaries)
o Improper follow up of programmes/ review or revision.

Lack of support from the credit and marketing system:

o Role of local money lenders and banks.

o Inability to sustain income generated from the asset credited.

7.10 What Should be Done to Improve Poverty Alleviation Programmes?

▪ Poverty alleviation programmes have been designed to address different facets of rural poverty.
▪ Micro credit-linked programmes provide a package of services, including credit and subsidy to set up micro
enterprises.
▪ Wage employment programmes address the issue of transient poverty.
▪ Besides, schemes for infrastructure development and provision of basic services contribute to the wellbeing
of the rural people.
▪ Thus, successful implementation of these programmes requires appropriate policy framework, adequate
funds, and effective delivery mechanism.
The success of these programmes ultimately depends on the capability of the delivery system to absorb
and utilise the funds in a cost-effective manner.
An effective and responsive district level field machinery with a high degree of commitment, motivation,
professional competence and, above all, integrity has been recognized as one of the prerequisites for suc-
cessful implementation of an anti poverty strategy.
An effective governance system has to ensure people’s participation at various stages of formulation and
implementation of the programmes, transparency in the operation of the schemes and adequate monitor-
ing.
International experience shows that greater functional and financial devolution to local governments results
in higher allocation of resources for social sectors which are accompanied by efficiency gains in resource
use. Such trends in social spending have been witnessed in many Indian States as well.
Panchayati Raj Institutions (PRIs) have been given a constitutional role in the governance of the country.
Functional responsibilities for subjects that are central to the well being of the communities have been de-
volved on the PRIs by the Constitution.
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Truly empowered PRIs can play an important role in improving the efficiency and effectiveness of the
schemes and reducing leakages.
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The Non Governmental Organisations (NGOs) and Community Based Organizations (CBOs) have been play-
ing an active role in building up people’s awareness and providing support to the governmental agencies
and the Panchayati Raj Institutions in executing projects for development in rural areas.
The NGOs can play an important role in capacity building, access to information, organisation of rural poor
in self help groups and increasing their awareness and capabilities.
 All these initiatives have good governance as their ultimate goal. It is expected that through the accelerat-
ing convergence of all these favourable factors it will be possible for the country to achieve the goals of in-
clusive growth as envisaged in XIIth FYP

7.11 Inequality:

• Inequality is observed both in urban and rural areas and because of inequality population is experiencing
the poverty.
• The study of inequality did not determine the level of poverty line.
• Therefore, it is difficult to measure the poverty only on the basis of analysing the inequality in income.
• Some mathematical and statistical techniques have been used to measure the inequality

7.12 Lorenz Curve :

 The Lorenz curve shows the percentage of income received by the bottom x % of the population with x
varying from 0 to 100.
 In Lorenz Curve, the size of items and the frequencies are both cumulated and taking the total as 100
percentages are calculated for the various cumulated values.
 If there is proportionately equal distribution of the frequencies over various values of a variate, the points
would lie in a straight line.
 If the distribution of items is not proportionately equal, it indicates variability and the curve would be away
from the line of equal distribution
 Lorenz curve just explains the inequality but it does not give the numerical value of the extent of ine-
quality. It merely gives a picture of the extent to which a series pulled away from an actual line of equality.

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7.13 Gini Coefficient :

 The Gini Coefficient means a welfare function.
 In this weighted average of the different people's income level with the weights being determined by the
rank order position of the person in the ranking by income levels.
 The higher value of Gini coefficient (G) shows greater inequality, which leads to less welfare
 Gini Coefficients are aggregate inequality measure vary anywhere from 0 to 1

8. Unemployment

• A state of unemployment appears when a labourer does not obtain employment opportunity despite
his willingness to work on existing wage rate.
• India is a developing economy where the nature of unemployment is different from that of developed na-
tions
• J.M.Keynes diagnosed unemployment in developed economies to be the result of a deficiency in effec-
tive demand
• International Labour Organization ➔ Unemployment occurs when people are without jobs but are will-
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ing and able to work for pay and have actively searched for work
• The most frequent measure of unemployment is unemployment rate.
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• The unemployment rate is defined as a number of unemployed people divided by the number of people
in the labour force.
• Labour Force: Persons who are either working (or employed) or seeking or available for work (or unem-
ployed) during the reference period together constitute the labour force.
8.1 Measure of Unemployment in India:

Usual Status Approach: [Unemployed for majority of the year]

✓ Usual Status approach records only those persons as unemployed who had no gainful work for a major
time during the 365 days preceding the date of survey and are seeking or are available for work.
✓ The status of activity on which a person has spent the relatively long time of the preceding 365 days prior
to the date of survey is considered to be the usual principal activity status of the person
✓ The Usual Status captures long-term unemployment in the economy.
✓ The Usual Principal Activity status (UPS), written as Usual Status (PS), is determined using the majority time
criterion and refers to the activity status on which he/she spent longer part of the year.
✓ Principal usual activity status is further used to classify him in/out the labour force.
✓ For instance, if an individual was ‘working’ and/or was ‘seeking or available for work’ for a major part of the
year preceding the date of the survey then h/she is considered as being part of the ‘Labour Force’.
✓ For example, if an individual reports as having worked and sought/available for work for seven months dur-
ing the year or having sought or available for work for seven months then he/she is classified as being in
the Labour Force.

Weekly Status Approach:

• The weekly status approach records only those persons as unemployed who had no gainful work for a
major time during the seven days preceding the date of survey.
• The weekly status approach captures both the long-term open chronic unemployment and the seasonal
unemployment.
• A person is considered to be employed if he or she pursues any one or more of the gainful activities for at
least one-hour on any day of the reference week. On the other hand, if a person does not pursue any gain-
ful activity, but has been seeking or available for work, the person is considered as unemployed.

Daily Status Approach:

▪ In the Daily status approach, current activity status of the person with regard to whether employed or
unemployed or outside labour force is recorded for each day in the reference week. The measure
adopts half day as a unit of measurement for estimating employment or unemployment.
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▪ The approach is most inclusive than the other two. Since it also captures the days of unemployment of
those who are recorded as employed on the weekly status approach.
A person who works for 4 hours or more but up to 8 hours on a day is recorded as employed for the
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▪
full day.
▪ A person who works for 1 hour or more but less than 4 hours is recorded as employed for the half day.
▪ Accordingly, a person having no gainful work even for 1 hour in a day is described as unemployed for a
full day.
8.2 Types of Unemployment:

Structural Unemployment:

o This type of unemployment is associated with economic structure of the country

o Demand for labour falls short to the supply of labour due to rapidly growing population and their immo-
bility
o This type of structural unemployment is of long run nature
o Indian Unemployment is basically related to Structural Unemployment
o Due to growing population, rate of capital formation limits the employment opportunities
o “According to Nurks surplus labour can be withdrawn from agriculture and utilized for capital formation
activities like road building , irrigation projects, railway construction, building of houses , factories etc.” →
Nurks recognized disguised unemployment as a saving potential.
o That is in Nurks’s view there is a hidden saving in disguised unemployment which can be used for capi-
tal formation in the under- developed countries

Lets make it simple

✓ Occurs due to structural changes in the economy

✓ Structural changes ➔ change in technology or change in pattern of demand

Example: An economy transforms itself from a Labour intensive economy to a Capital intensive economy.

✓ Occurs when a labour market is unable to provide jobs for every person who wants one because there is a
mismatch between the skills of the unemployed workers and the skills needed for the available jobs

Example: Due to advance technological progress, the production of cars is done through robotic machines
rather than traditional Machines. As a result, those workers who do know how to operate the new and ad-
vanced machines will be removed.

✓ Arises when the qualification of a person is not sufficient to meet his job responsibilities
✓ In India structural employment exists in rural and urban areas

From an individual perspective, structural unemployment can be due to:

➢ Inability to afford or decision not to pursue further education or job training
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➢ Choice of a field of study which did not produce marketable job skills
➢ Inability to afford relocation
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➢ Decision not to relocate, in order to stay with a spouse, family, friends

 Technological Advancement, Robotics, Artificial Intelligence, Mechanisation and Automation are the
main causes of Structural unemployment.
Voluntary Unemployment:
➢ In every economy, there are some people who are unwilling to work at the prevailing wage rate.
➢ Jobs are available to them but they do not accept them.
➢ Voluntary unemployment is attributed to the individual's decisions, but involuntary unemployment
exists because of the socio-economic environment (including the market structure, government interven-
tion, and the level of aggregate demand) in which individuals operate.
➢ Voluntary unemployment includes workers who reject low-wage jobs, but involuntary unemployment
includes workers fired because of an economic crisis, industrial decline, company bankruptcy, or or-
ganizational restructuring.
Reasons for Voluntary Unemployment:
✓ Generous unemployment benefits, which make accepting a job less attractive.
✓ High marginal tax rates, which reduce effective take home pay.
✓ Unemployed hoping to find a job more suited to skills/qualifications.
✓ Some jobs are seen as ‘demeaning’ or too tedious. Example: Security guard
Open Unemployment:
➢ Open unemployment is a situation in which people have no work to do.
➢ They are able and willing to work, but there is no job for them in the country.
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Frictional Unemployment:
➢ Frictional unemployment occurs when workers lose their current job and are in the process of finding
another one.
➢ It is also called search unemployment.
➢ It is time spent between jobs when a worker is searching for a job or transferring from one job to another

Casual Unemployment:
➢ Casual Unemployment is when the worker is employed on a day-to-day basis for a contractual job and
has to leave it once the contract terminates.

Seasonal Unemployment:
➢ Seasonal Unemployment exists because certain industries or sectors only produce or distribute their
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products only at certain times of the year.

➢ Seasonal Unemployment is common in agriculture and tourism.
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Disguised Unemployment:
➢ Disguised Unemployment occurs when marginal productivity of labour becomes zero or negative.
➢ More workers are employed on a single piece of work than actually required.
➢ Simply, the persons who are employed and remains unproductive throughout the work is said to be
disguisedly unemployed.

Classical Unemployment:
➢ Classical Unemployment is caused when wages are too high.
➢ It is also called as real wage unemployment.
➢ For example, if a company is willing to pay 24 lakhs per year for a job but potential employees will not ac-
cept less than 50 lakhs, the job will go unfilled.

8.3 Regional Unemployment:

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➢ When structural unemployment affects local areas of an economy, it is called regional unemployment.
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8.4 Technological Unemployment:

➢ Technological Unemployment is the loss of jobs caused by technological change in the economy
8.5 Cyclical Unemployment:

➢ Cyclical Unemployment exists when individuals lose their jobs as a result of a down turn in aggregate de-
mand.
➢ It is called either demand deficient or Keynesian unemployment.
➢ Demand for most goods and services falls, less production is needed and consequently fewer workers are
needed, wages are sticky and do not fall to meet the equilibrium level, and unemployment results.

➢ One suggested intervention involves deficit spending to boost employment and goods demand. An-
other intervention involves an expansionary monetary policy to increase the supply of money, which should
reduce interest rates, which, in turn, should lead to an increase in non-governmental spending.

8.6 Chronic Unemployment:

➢ Chronic Unemployment is caused due to long term unemployment persisting in the economy.

8.7 Under Employment:

➢ It is a situation in which someone or something is not used as much as they should be.
Types of Under Employment:
1) Visible Under Employment: It is when people get work for less than the normal hours of work like 2 hours
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a day
2) Invisible Under Employment: It is the situation in which people work full time, but their income is very low
or they work in jobs, in which they cannot make full use of their ability like MBA person working as a driver
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Reasons why India’s economic growth has not increased employment in the country:
Secondary sector neglected structural transformation
Jobless growth
Less focus on MSMEs
 Stringent labour laws
Delay in official paper works
Slow infrastructural development
Import oriented economy than export dominated

8.8 Philips Curve:

➢ Philips Curve shows the inverse relationship between unemployment and inflation in an economy

8.9 Lorenz Curve:

➢ Lorenz Curve maps the relationship between percentage of income or wealth earned or appropriated
and percentage of people earned that particular percentage of income or wealth

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8.10 Gini Coefficient:

➢ Gini Coefficient measures the inequality using Lorenz curve

➢ It is the ratio between area above the Lorenz Curve and area below the Lorenz Curve

8.11 Kuznets Curve:

➢ Kuznets Curve says that in a developing economy initially the inequality will increase and with in-
crease in growth the inequality will come down

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8.12 Sources of data on unemployment:

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 Reports of Census of India

 National Sample Survey Organisation’s Reports of Employment and Unemployment Situation
 Directorate General of Employment and Training Data of Registration with Employment Exchanges
8.13 Labour Force:

➢ It includes all people in the working age group (15-59 yrs) who are able and willing to work
➢ Labour force equals the workforce plus the number of unemployment people
➢ So, unemployment refers to only involuntary unemployment

Measurement of Labour Force:

Usual Principal Status (UPS) Approach:
➢ The major time criterion based on the 365 days is used to determine the activity pursued by a person un-
der the Usual Principal Status (UPS) Approach
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➢ Accordingly, the major time spent by a person (183 days or more) is used to determine whether the per-
son is in the labour force or out of labour force
➢ A person found unemployed under this approach reflects the chronic unemployment
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Usual Principal and Subsidiary Status (UPSS) Approach:

➢ The other important approach to measure the labour force parameters is the Usual Principal and Subsidiary
Status (UPSS) Approach
➢ This approach is a hybrid one which takes into consideration both the major criterion and shorter time
period (30 days or more in any economic activity)
➢ Thus a person who has worked even for 30 days or more in any economic activity during the reference pe-
riod of last 12 months is considered as employed under this approach
➢ In this approach, the reference period is same as taken in the Usual Principal Status (UPS) Approach

8.14 Labour force participation rate:

➢ The labour force participation rate is the measure to evaluate working-age population in an economy.
➢ The participation rate refers to the total number of people or individuals who are currently employed
or in search of a job.
➢ People who are not looking for a job such as full-time students, homemakers, individuals above the
age of 64 etc. will not be a part of the data set.
➢ This is an important metric when the economy is not growing or is in the phase of recession.
➢ It is that time when people look at the unemployment data.
➢ At the time of recession, it is generally seen that the labour force participation rate goes down. This
is because, at the time of recession, the economic activity is very low which results in fewer jobs across the
country.
➢ When there are fewer jobs, people are discouraged to focus on employment which eventually leads to low-
er participation rate.
➢ The participation rate is also important in understanding the unemployment rate in the economy.
➢ Analysing consistently the unemployment rate in the economy is very important.

9. Economic Reforms (LPG)

9.1 BACKGROUND

• From all accounts, 1991 was one of the most significant turning points for the Indian economy.
• The nation charted a new path moving towards a liberalized and market-driven economy and greater
integration with the global economy. The country was then on the brink of a deep crisis on many fronts.
• The balance of payments position was precarious and international confidence in our economy had erod-
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ed considerably.
• Despite large external borrowings, there was sharp reduction in foreign exchange reserves and there
were strong inflationary pressure. Before examining the various aspects of the critical position in which
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the country found itself and the measures taken to tackle them, it is necessary to look at its genesis and the
factors which led to the crisis.

Reasons for economic crisis and need for new set of policy measures
The origin of the financial crisis can be traced from the inefficient management of the Indian economy in
the 1980s. Government’s expenditure was more than its income.
What happens when expenditure is more than income?
 Govt borrows to finance the deficit from banks and also from people within the country and from interna-
tional financial institutions.
 Govt had to overshoot its revenue to meet problems like unemployment, poverty and population explosion
(revenues were very low; no chance of generating immediate returns)
 No generation of additional revenue even via taxation.
 Income from public sector undertakings was not very high to meet the growing expenditure.
 Govt borrowed foreign exchange and spent the money on meeting consumption needs.
Govt neither made any attempt to reduce such profligate spending nor sufficient attention was given to
boost exports to pay for the growing imports.
In the late 1980s
o Government expenditure began to exceed its revenue by such large margins that meeting the expendi-
ture through borrowings became unsustainable
o There was sharp rise in the prices of many essential goods
o Imports grew at a very high rate without matching growth of exports
o Foreign exchange reserves declined to a level that was not adequate to finance imports for more than
two weeks
o No sufficient foreign exchange to pay the interest that needs to be paid to international lenders.

9.2 REFORMS AND PROBLEMS DURING 1985-90

• The decade starting from 1980 was relatively better for the economy. While the annual rate of growth of
GDP for the preceding 30 years (1950 to 1980) was only 3.52% while is cynically referred to as The Hin-
du rate of growth during the decade 1980-81 to 1989-90, the annual rate of growth was 5.13 %. Also,
while the per capita GDP increased at an annual rate of 1.37 % during 1950-51 to 1980-90, the same
increased during the period 1980-81 to 1989-90 at an annual rate of 3.09 %.
• Food grains production which stood at 50.8 million tones (MT) in 1950-51 had reached 129.5 MT by
1980-81 and 145.5 MT by 1984-85. In the 1980’s, the industrial sector was impressive compared to the 70’s.
The annual growth rate of manufacturing sector was 7% and of registered manufacturing 8.1 %. Against
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such benign growth environment, the Seventh Plan (1985-90) started on an optimistic note.
• The government under Rajiv Gandhi (1984-89) initiated several reform measures. These included reduc-
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ing state control and regulation of the private sector, greater freedom to import even capital goods,
liberalization in the application of FERA, and the operation of companies under MRTP Act. In short, it
aimed at replacing government control by market forces.
• But there were also many ominous signs on the fiscal front which became visible during this period. Pru-
dent fiscal management required that revenue receipts not only meet revenue expenditure, but also gener-
 ate surplus the finance the Plan and other capital and development outlays. But all through the 1980’s, the
government revenues fell short of expenditure. The gross fiscal deficit as a proportion of GDP in-
creased from 5.4 % in 1981-82 to 8.0 % in 1989-90. The fiscal imbalance persisted and worsened during
the 1980’s, as the gross fiscal deficit, on an average, rose from 6.3 %in the Sixth Plan Period (1980-85) to 8.2
%in the Seventh Plan Period (1985-90).
• Another distributing trend was that almost throughout the 1980s, non development expenditure in-
creased faster than development outlays. While the non development expenditure in 1990-91 was
about 5.5 times the 1980-81 level, development outlays increased only 4.4 times. It indicates that long-
term development of the country received less priority.
• Another adverse factor was that the relative share of direct taxes in the total tax revenue continued to
decline while the share of indirect taxes, the burden of which falls mostly on the masses, showed in-
crease.

9.3 THE 1991 ECONOMIC CRISIS

Background to the Crisis
• The process to reform the economy had begun from the mid-eighties under the Rajiv Gandhi government
(1984-89) whose vision was to take India to the 21th Century.
• With a view to modernize the economy, boost investment, and achieve rapid industrial growth, many con-
trols and restrictions were removed, industrial licensing policy was revamped, and greater role was accord-
ed to the private corporate sector.
• Import controls were relaxed to upgrade industrial technology and improve capacity utilization and
productivity.
• However, towards the late 1980s, macroeconomic imbalances began to emerge.
• The fiscal deficit of the Central Government, which is a measure of the difference between revenue re-
ceipts and total expenditure, was over 8 % of the GDP in 1990-91 as compared with 6 % at the beginning
of 1980s and 4 % in mid-1970s.
• This deficit had to be about 55 % of GDP. By 1990, the deficit of the Central Government had mounted
to Rs. 13,000 crore as a result of revenue shortfalls and expenditure overruns.
• Productivity of investment was low and there were poor rates of return on past investments.
• On the foreign exchange front, the balance of payments position came under severe stress.
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• During the eighties, India’s imports were more than what could be covered by the exports and normal aid
on concessional terms.
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• The current account deficits had to be financed by borrowing from abroad on commercial terms both
from the capital market and non-resident Indians (NRI’s).
• External debt which was $22.8 billion in 1983-84 had risen to $69.3 billion in 1990-91.
• The burden of servicing the accumulated internal and external debt became onerous.
• This was further exacerbated by the steep increase in oil prices and disruptions caused by the Iraqi in-
vasion of Kuwait in August 1990.
• With the disintegration of Soviet Union in December 1991, India lost a major trading partner.
• The persistent fiscal imbalances accentuated inflationary pressures.
• That inflation was concentrated in essential commodities, despite good monsoons and good harvests in the
three preceding years, was of greater concern as it hurt the poorer sections the most.
• Besides all these, there was political instability at home-there were two changes in the Government at the
Centre between December 1989 and June 1991.
• All these led to considerable erosion of international confidence in our economy. Despite large bor-
rowings from the International Monetary Fund (IMF) in July 1990 and January 1991, the foreign ex-
change reserves had touched rock bottom, and it was barely enough to meet the needs of two weeks of
imports.
• Foreign commercial banks had stopped lending to India and NRI’s were withdrawing their deposits. Short-
age of foreign exchange forced massive import squeeze which further impeded the industrial growth.
• Due to the combined effect of all these, the nation was on the brinks of a major crisis which called for dras-
tic remedial measures.

The Turnaround-The Reforms of 1991

• It was against this grim background that a newly elected Government headed by P.V. Narasimha Rao took
over in June 1991.
• He at once set about the task of pulling the economy back from the brink, and appointed Manmohan
Singh as the Finance Minister.
• The new Government initiated a number of radical measures to bring about macroeconomic stability and
address the balance of payments crisis through fiscal consolidation and tax reforms.
• Urgent steps were taken to avert default in international debt obligations and to control inflation.
• A decision taken earlier to use part if the gold held by the Reserve Bank of India to mobilize temporary
liquidity abroad was implemented, but as planned the gold was redeemed as soon as the foreign ex-
change position stabilized.
• The situation also called for credible fiscal adjustment followed by fiscal consolidation.
• This involved progressively reduction the fiscal and revenue deficits of the Central Government and reduc-
tion of current account deficit in the balance of payments.
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• The aim was to contain the unfettered rise in internal and external debt and thus limit the burden of debt
servicing.
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• Efforts were made to raise more resources internally without burdening the poor.
• The steps taken by the new government to tackle the balance of payments crisis involved both short-term
and long-term measures.
• Devaluation of the Rupee by about 18 % was effected in two steps on July 1 and 3, 1991.
• International Monetary Fund (IMF) and the World Bank which had to be approached for a major loan had
stipulated that economic reforms be undertaken to revive the economy.
• As a result of short-term measures proposed to be put in place, the country was able to raise funds from
the IMF and other aid agencies.
• It helped to tide over the crisis and restore international confidence in the country’s economic manage-
ment.
• At this juncture, concerns had been expressed whether the country implemented these reform measures at
the dictates of IMF and the World Bank who were approached for financial assistance to tide over the crisis.
• The Government had clarified that the discussion held with the lending institutions were only on the
amount and type of assistance and the valid down and accepted for the assistance was sought.
• The conditions laid down and accepted for the assistance were only in consonance with the reform pro-
gramme already envisaged and drawn up by the Government, and which formed part of the party’s election
manifesto.
• Thus, it was contended that the country’s national interests or sovereignty had in no way been compro-
mised.

India’s strategy to tackle BOP crisis:

✓ India approached the International Bank for Reconstruction and Development (IBRD)—World Bank and the
International Monetary Fund (IMF) and received $7 billion as loan to manage the crisis

How to avail the loan?

International agencies expected India to liberalize and open up the economy by

➢ Removing restrictions on the private sector

➢ Reducing the role of the government in many areas
➢ Removing trade restrictions

Here comes the move towards New Economic Policy:

India agreed to the conditionality’s of World Bank and IMF —announced the New Economic Policy (NEP) which
consisted of wide-ranging economic reforms, such as:

✓ Creating a more competitive environment in the economy by removing the barriers to entry and growth of
firms
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✓ Introduced liberalization with a view to integrate the Indian economy with the world economy
✓ To remove restrictions on direct foreign investment as also to free the domestic entrepreneur from the re-
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strictions of Monopolies and Restrictive Trade Practices (MRTP) Act

✓ To unshackle the Indian industrial economy from the cobwebs of unnecessary bureaucratic controls
✓ To shed the load of public sector enterprises which have shown a very low rate of return or which were in-
curring losses over the years
THE NEW REFORM MEASURES

New Trade Policy

• As part of the reform measures, a new Trade Policy was drawn up in 1991.
• It marked a radical shift from the Import Substitution policy which India had relied on far the last four
decades.
• While it may have been necessary in the very early stages of development to protect our nascent industries
from foreign competition, in the long-term it provided to be neither efficient nor one that helped the in-
dustry for its robust growth.
• In fact, in contrast, the East Asian economics which took to the path of ‘Export Promotion’ strategy in
1970’s forged far ahead of India in development.
• It was, therefore, realized rather quite belatedly, that the time had come to open up the economy and ex-
pose Indian industry to competition from abroad in a phased manner.
• With this in view, the Government introduced changes in Import-Export policy, liberalized import licens-
ing, optimally reduced imports, and aimed at vigorous export promotion.
• The two-step devaluation of the Rupee effected in July 1991, referred to above, and easing of the re-
plenishment licence system were two major steps in Trade Policy reform.
• It involved a transition from a regime of Quantitative restrictions (QR’s) to one of price-based mecha-
nism.

Measures to Promote Exports

• The trade policy was further revamped in 1992.

• A system of partial convertibility of the Rupee on the Current Account was introduced.
• Under this system, all foreign exchange earned through exports of goods or services, or remittances, could
be converted into rupees.
• 40 % of the foreign exchange could be converted at the official exchange rate while the remaining 60 %
was to be converted at a market-determined rate.
• The foreign exchange surrendered at official exchange rate could be used to meet the foreign exchange
requirements of essential imports like petroleum, oil products, fertilizers, defense, and life-saving drugs.
• Imports of raw materials and capital goods were made freely importable on Open General Licence (OGL)
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but the foreign exchange required for these had to be obtained from the market.
• There was only a specified ‘negative list of raw materials and capital goods which available also to Indian
workers working abroad who were making considerable number of remittances and thus making valuable
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contribution to India’s foreign exchange earnings.

• Earlier, to provide incentive for exports, a complex scheme of import replenishment was in vogue under
which an exporter was allowed to import certain raw materials and components equal to the actual import
content of exports.
• Also, there was a components cash support scheme to compensate for taxes not refunded under a du-
ty drawback scheme (i.e., refunds of indirect taxes including import duties on inputs used in exports) and
losses incurred on exports when domestic demand was inadequate to use installed capacity fully.
• By eliminating import licensing and introducing partial convertibility of the Rupee, the reforms got rid
of these complex webs of incentives with varying rates for different commodities which prevailed under the
import replenishment and compensatory cash support schemes.

Removal of Import Controls

• These reforms removed import controls which had earlier resulted in inefficiency, bureaucratic delays, and
left scope for corrupt practices.
• Trade policies were further modified and refined in subsequent years. Import licences were further modified
and refined in subsequent years. Import licences were eliminated on most items of capital goods, raw
materials, and components.
• These items became freely importable against foreign exchange purchased in the market.
• The system had worked fairly well and the market exchange rate had remained remarkably stable.
• It created an environment in which Indian entrepreneur had the flexibility needed to compete with other
developing countries in the world markets.
• However, the existence of a dual rate hurt exporters and other foreign exchange earners who had to sur-
render 40 % of their earnings at the official rate and getting the benefit of higher market rate on only 60 %.
• Exporters represented that this amounted to a tax on exporters at a time when they needed full support.
• The Government considered this and finding that the balance of payments could be reasonably managed
with a unified exchange rate, the dual rate arrangement was dispended with.
• All exporters as well as foreign exchange earners like Indian workers abroad were allowed to convert
100 % of their earnings at the market rate.
• All imports were also liable to be paid for the market rate.

Other Important Measures

• Several other steps were also taken in 1993-94 to promote exports various restrictions on items of export
were removed.
• Reserve bank of India took steps to ensure availability of adequate credit for export.
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• Banks were asked to see that credits given for exports amounted to at least 10 percent of their total ad-
vances. The interest rate on rupee export credit was reduced by one percentage point.
• Further, banks were exempted from levying interest tax on export credit provided by them.
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• In order to promote new investment in industry, the customs duty levied on capital goods and import
items for projects such as general machinery was progressively reduced from 1993-94.
• These duties were quite high compared to what was prevailing in competitive countries.
• This was to benefit critical sectors like power, coal mining, and petroleum refining.
• At the same time, to ensure that the lower duties on imported machinery did not hurt the domestic capital
goods industry, import duty on components were also lowered to enable our domestic manufactures to
compete effectively.
• Duties on many other capital goods, metals, and chemicals were also reduced and rationalized to help do-
mestic industries.
• To promote the electronics industry which was a major provider of employment and with much potential
for export, and to make it world class, rates of duty for project imports, raw materials, and components
were brought down.

9.4 The New Industrial Policy 1991

Introduction

• Another major plank of the structural reform was opening up the industrial sector to infuse new dyna-
mism into the economy.
• It was felt that the industrial sector faced many constraints and there was much scope for upgradation of
technology, improving quality standards and reduction in costs which would increase the efficiency and
competitiveness of the Indian industry and benefit both the producers and the consumers
• Restrictive policies like barriers to entry and limits on the size of firms had shackled industry and led to a
degree of monopoly in the sector by facilitating foreign investment and infusing foreign technology to in-
crease productivity.

Main Characteristics:

Delicensing

• Industrial licensing was abolished for all industries except for a short list of 18 industries involving secu-
rity and strategic factors, social considerations, hazardous and environmental aspects and those producing
items of elitist consumption.
• Later, more industries were delicensed and presently compulsory licensing applies only to 6 indus-
tries. Coal and lignite have also been removed from the list of industries reserved for the public sector.
PRELIMS: Only 6 industries were kept under licensing scheme
• Industries reserved for the small scale sector continued to be so reserved.
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• The removal of licensing was to benefit particularly the many dynamic small and medium entrepreneurs
who had been hampered by the licensing system.
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• Also, this was to make industry more competitive, more efficient and modern, and take its rightful place in
the world not to apply to the small-scale units taking up the manufacture of any of the items reserved for
exclusive manufacture in the small-scale sector.

Promotion of foreign investment

• For promoting foreign investments in high priority industries, requiring large investments and ad-
vanced technology, direct foreign investment up to 51 % foreign equity in such industries was allowed.
• Also, foreign equity up to 51% was allowed for trading companies primarily engaged in export activi-
ties.
• Foreign investment would facilitate technology transfer, help to enhance productivity, nurture better man-
agement practices, and provide greater access to world markets.
• High priority industries could get automatic approval for entering into technology agreements and were
allowed to negotiate the terms of technology transfer directly with their foreign counterparts according to
their own commercial judgement.

Promotion of exports

• For promoting exports of Indian products, which required interaction with some of the world’s largest in-
ternational manufacturing and marketing firms, services of foreign trading companies were to be availed to
assist us in the export activities.

MRTP Act

• The Monopolies and restrictive Trade Practices Act (MRTP Act) which came into force in 1970 had over
the years hampered industrial growth and expansion.
• To foster healthy competition, achieve economies of scale, and enhance productivity, it was imperative to
remove interference by the Government, through the provisions of this Act, in decisions of large companies
regarding investment, capacity addition, etc. the legal provisions for getting prior government approval for
expansion of existing undertaking and setting up new ones was removed.
• The accent was to be only on controlling unfair and restrictive business practice and the MRTP Commission
was empowered to investigate and act on such practices.
• The MRTP Act was later repealed and replaced by the Competition Act, 2002.

Strengthening the Public Sector

• The Industrial Policy Resolution of 1956 had given the public sector a strategic role in the economy.
• Public sector enterprises have been set up in key sectors such as steel, power, heavy engineering and heavy
electrical, telecom, defence, aircraft manufacture, etc. massive investments were made over the past four
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decades to expand the public sector which has come to occupy a commanding role in the economy.
• However, while some of the public sector units have played a notable role in the country’s development
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process, many of them face a plethora of problems such as lagging productivity, lack of R & D and techno-
logical upgradation, low returns on capital invested, and HR and labour issues which have retarded their
progress.
• Many of them were also considered sick units which called for some drastic measures. The government
considered the need to reinvigorate them and hence took certain steps under the Industrial Policy of 1991.
• Specified sectors of the economy were reserved for the public sector. These were:
1) Essential infrastructure goods and services;
2) Exploration and exploitation of oil and mineral resources;
3) Technology development and building of manufacturing capabilities in areas crucial for the long-term
development of the economy and where private sector investment is inadequate; and,
4) Manufacture of products where strategic considerations predominate such as defence equipment.
• Government would strengthen those public enterprises which fall in the reserved or high priority areas that
have successfully expanded production, built up technical competence, or are generating profits.
• Such enterprises would be given much greater degree of autonomy. Competition will also be induced in
these areas by allowing private sector to participate.
• And in the case of enterprises which have been chronically sick and incurring heavy losses, part of Govern-
ment holding in their equity share capital would be disinvested in order to provide market discipline to
their performance.

Disinvestment:

• Disinvestment was carried out in many public sector enterprises

Liberalisation of Foreign Policy:

• The limit of foreign equity was raised to 100% in many activities i.e. NRI and foreign investors were
permitted to invest in Indian Companies

Liberalisation in Technical Area:

• Automatic permission was given to Indian companies for signing technology agreements with foreign
companies

Setting up of Foreign Investment Promotion Board:

• This board was setup to promote and bring foreign investment in India
➔ Due to economic reforms of 1991, India witnessed a wide and tremendous changes across the country in
every sector specially in industrial sector.
➔ The foreigners got more autonomy on their investment, which gradually helped India to recover its eco-
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nomic crisis.
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9.5 IMPACT OF THE REFORMS

The impact of economic reforms can be categorised in 3 major components → Liberalisation, Privatisation
and Globalisation
LIBERALISATION
• The term “liberalization” in this context implies economic liberalization.
• The essence of this policy is that greater freedom is to be given to the entrepreneur of any industry,
trade or business and that governmental control on the same be reduced to the minimum
• Rules and laws which were aimed at regulating the economic activities became major hindrances in growth
and development.
• Hence, Liberalisation was introduced to put an end to these restrictions and open up various sectors of
the economy.
• The main purpose of the process to economic liberalization is to set business free and to run on com-
mercial lines. The underlying belief is that commerce and business are not matter to be contained to fixed
national boundaries; they are global phenomena.
• Here, artificial government. restrictions which hinder economic and commercial activities and flow of goods
and services were removed.
• The liberalization intended to liberalize commerce and business and trade from the clutches of controls and
obstacles.
KEY FEATURES OF THE POLICY OF LIBERALISATION:
 Lessened Government control and freelance to private Enterprises.
 Capital Markets opened for private Entrepreneurs
 Simplification of Licensing policy
 Opportunity to purchase foreign exchange at market prices
 Right To Take Independent Decisions Regarding The Market
 Better opportunity for completion
 Widened Liberty in the Realm of Business and Trade
Important Measures :
Removal of Industrial Licensing:
▪ All industrial licensing was abolished except a shortlist of 18 industries related to security and strategic
concerns, social reasons, hazardous chemicals and over-riding environmental reasons and items of elitist
consumption industries reserved for the small scale sector which were to continue under the reservation
list.
▪ Subsequently, all industries except for a small group of 5 industries [alcohol, cigarettes, hazardous
chemicals industrial explosives, electronics, aerospace and drugs and pharmaceuticals], industrial licensing
requirements have been done away with.
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▪ Reservations for Public sector: defence equipment, atomic energy generation and railway transport.
▪ Deregulation of goods produced in small scale industries.
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▪ Market mechanism to determine the prices.

Financial Sector Reforms:
▪ Financial sector which includes financial institutions such as commercial banks, investment banks, stock ex-
change operations and foreign exchange market - are regulated by the Reserve Bank of India (RBI)
▪ All the banks and other financial institutions in India are regulated through various norms and regulations
of the RBI. RBI decided the amount of money that the banks can keep with themselves, fixed interest rates,
nature of lending to various sectors etc.
▪ One of the major aims of financial sector reforms is to reduce the role of RBI from regulator to facilita-
tor of financial sector i.e., the financial sector was allowed to take decisions on many matters without con-
sulting the RBI.
▪ For instance, the reform policies led to the establishment of private sector banks, Indian as well as foreign.
Liberalization of Foreign Investment:
▪ While earlier prior approval was required by foreign companies, now automatic approvals were given for
Foreign Direct Investment (FDI) to flow into the country.
▪ A list of high-priority and investment-intensive industries were de-licensed and could invite up to
100% FDI including sectors such as hotel and tourism, infrastructure, software development etc.
▪ Use of foreign brand name or trademark was permitted for sale of goods
Public Sector Reforms:
▪ Greater autonomy was given to the PSUs (Public Sector Units) through the MOUs (Memorandum of Un-
derstanding) restricting interference of the government officials and allowing their managements greater
freedom in decision-making
MRTP Act :
▪ The Industrial Policy 1991 restructured the Monopolies and Restrictive Trade Practices Act.
▪ Regulations relating to concentration of economic power, pre-entry restrictions for setting up new enter-
prises, expansion of existing businesses, mergers and acquisitions etc. have been abolished.
In a NUTSHELL:
➔ Liberalisation refers to end of license, quota and many more restrcitions and controls which were put
on industries before 1991.
➔ Indian companies got liberalisation in the following way:
a) Abolition of license except in few
b) No restriction on expansion or contraction of buisness activities
c) Freedom in fixing prices
d) Liberalisation in import and export
e) Easy and simplifying the procedure to attract foreign capital in India
f) Freedom in movement of goods and services
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g) Freedom in fixing the prices of goods and services

PRIVATISATION
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Privatisation has to be viewed in two ways:

• In a narrow sense, it implies the induction of private ownership in a public sector undertaking.
• In a broader sense, it implies the enlargement of the scope of the private sector in the growth of the econ-
omy.
o Privatization is closely associated with the phenomena of globalization and liberalization.
o Privatization is the transfer of control of ownership of economic resources from the public sector to
the private sector. It means a decline in the role of the public sector as there is a shift in the property
rights from the state to private ownership.
o The public sector had been experiencing various problems, since planning, such as low efficiency and prof-
itability, mounting losses, excessive political interference, lack of autonomy, labour problems and delays in
completion of projects. Hence to remedy this situation with Introduction of National Industrial Policy 1991
privatization was also initiated into the Indian economy
CONCEPT OF DISINVESTMENT:
✓ Another term for privatization is Disinvestment.
✓ The objectives of disinvestment were to raise resources through sale of PSUs to be directed towards
social welfare expenditures, raising efficiency of PSUs through increased competition, increasing consumer
satisfaction with better quality goods and services, upgrading technology and most importantly removing
political interference.
Prelims:
 In the initial phase of development planning in India, more especia lly after the Industrial Policy of 1956, the
socialisation of the economy was measured by the size of the public sector in the national economy. The
greater the share of the public sector, the greater was the degree of socialisation of the economy.
 Under economic reforms after 1991, the main thrust is that the private sector is considered as the engine of
growth. By placing restrictions on the public sector and by reducing its role in several areas where it earlier
enjoyed a monopolistic position, the new environment assigned an increasing role for the private sector.
Key Objectives of Privatisation:
• The process of Privatization has been triggered with the main intention of improving industrial efficiency
and to facilitate the inflow of foreign investments.
• It also wants to make the public sector undertakings strong able efficient companies.
• It recommends a change in the role of the government from that of the “owner manager” to that of a
mere “controller” or “regular”.
• It also intends to ensure efficient utilization of all types of resources including human resources.
• Privatization insists on the government to concentrate on the area such as education administration and
infrastructure and to give up the responsibility of looking after business and running industries.
• It is expected to strengthen the capital market by following appropriate trade policies.
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Main Aspects:
Autonomy to Public sector:
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o Greater autonomy was granted to nine PSUs referred to as ‘navaratnas’ (ONGC, HPCL, BPCL, VSNL, BHEL) to
take their own decisions
De-reservation of Public Sector
o The numbers of industries reserved for the public sector were reduced in a phased manner from 17 to 8
and then to only 3 including Railways, Atomic energy, specified minerals
o This has opened more areas of investment for the private sector and increased competition for the public
sector forcing greater accountability and efficiency
Disinvestment Policies
o Till 1999-2000 disinvestment was done basically through sale of minority shares but since then the gov-
ernment has undertaken strategic sale of its equity to the private sector handing over complete manage-
ment control such as in the case of VSNL , BALCO etc
Joint Venture
o This implies partial induction of private ownership from 25 to 50 %or even more in a public sector enter-
prise, depending upon the nature of the enterprise and state policy in this regard.
Three kinds of proposals have been put forward:
1) 26 % ownership by the private sector (banks, mutual funds, corporations, or individuals) and workers also to
be included to the extent of 5 % equity to be transferred to them. However, in this situation, veto power
remains with the public sector against the private sector.
2) Government retains 51 % equity and sells 49 % equity to the private sector. Although the basic character of
the enterprise remains unaltered and it continues to be a public sector unit, it introduces a big share for the
private sector.
3) 74% of the equity is transferred to the private sector and the Government retains 26 % with the added pro-
vision of Government veto power and minority control over major corporate decisions.
• These three variants of privatization indicate different degrees of ownership by the private sector in the
joint venture. The basic aim of the transfer of ownership is that it will enable the joint venture to im-
prove productivity of assets and convert them into profitable concerns.
ARGUMENTS IN FAVOUR OF PRIVATIZATION
• Privatization is Necessary to Revitalize the State-Owned Enterprises
• Privatization is Necessary to Face Global Competition
• Privatization is Needed to Create More Employment Opportunities in Future
• Helpful for Mobilizing and Investing Resources
• Recognition of Talents and Good Performance of work
ARGUMENT AGAINST PRIVATIZATION
• Profitability Alone Should Not Become the Sole Yardstick to Measure Efficiency
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• Role of Public Sector Undertaking From the socio-Economic Angle Also Cannot be ignored
• Protection of the Interests of the Weaker Section
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• Price –fixing Policy Here is Not Profit- Oriented

• Argument that the Private Sector Is More Efficient than the Public Sector is Not Right
In a NUTSHELL
Privatisation refers to giving greater role to private sector and reducing the role of public sector.
To execute the policy of pivatisastion government. took the following steps:
a) Disinvestment of public sector i.e. transfer of public sector enterprise to private sector
b) Setting up of board of Industrial and Financial Reconstruction (BIFR)→ This board was setup to re-
vive sick units in public sector enterprises suffering loss
c) Dilution of stake of the government → If in the process of disinvestment private sector acquires more
than 51% shares then it results in transfer of ownership and management to the private sector
GLOBALISATION:
• Globalization essentially means integration of the national economy with the world economy.
• It implies a free flow of information, ideas, technology, goods and services, capital and even people across
different countries and societies.
• It increases connectivity between different markets in the form of trade, investments and cultural exchanges
Key elements:
 To open the domestic markets for inflow of foreign goods, India reduced customs duties on imports. The
general customs duty on most goods was reduced to only 10% and import licensing has been almost abol-
ished. Tariff barriers have also been slashed significantly to encourage trade volume to rise in keeping with
the World trade Organization (WTO) order under (GATT) General Agreement on Tariff and Trade.
 The amount of foreign capital in a country is a good indicator of globalization and growth. The FDI
policy of the GOI encouraged the inflow of fresh foreign capital by allowing 100 % foreign equity in certain
projects under the automatic route. NRIs and OCBs (Overseas Corporate Bodies) may invest up to 100 %
capital with repatriability in high priority industries. MNCs and TNCs were encouraged to establish them-
selves in Indian markets and were given a level playing field to compete with Indian enterprises.
 Foreign Exchange Regulation Act (FERA) was liberalized in 1993 and later Foreign Exchange Manage-
ment Act (FEMA) 1999 was passed to enable foreign currency transactions
 India signed many agreements with the WTO affirming its commitment to liberalize trade such as TRIPs
(Trade Related Intellectual Property Rights), TRIMs (Trade Related Investment Measures) and AOA (Agree-
ment on Agriculture)
Advantages of Globalization:
✓ There is a decline in the number of people living below the poverty line in developing countries due to in-
creased investments, trade and rising employment opportunities.
✓ There is an improvement in various economic indicators of the LDCs (Less Developed Countries) such as
employment, life expectancy, literacy rates, per capita consumption etc.
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✓ Free flow of capital and technology enables developing countries to speed up the process of industrializa-
tion and lay the path for faster economic progress.
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✓ Products of superior quality are available in the market due to increased competition, efficiency and
productivity of the businesses and this leads to increased consumer satisfaction.
✓ Free flow of finance enable the banking and financial institutions in a country to fulfill fin ancial require-
ments through internet and electronic transfers easily and help businesses to flourish.
✓ MNCs bring with them foreign capital, technology, know-how, machines, technical and managerial skills
which can be used for the development of the host nation
Disadvantages of Globalisation:
o Domestic companies are unable to withstand competition from efficient MNCs which have flooded Indian
markets since their liberalized entry. It may lead to shut down of operations, pink slips and downsizing.
o Moreover skilled and efficient labours get absorbed by these MNCs that offer higher pay and incentives
leaving unskilled labour for employment in the domestic industries. Thus there may be unemployment and
underemployment.
o Payment of dividends, royalties and repatriation has in fact led to a rise in the outflow of foreign capital.
o With increased dependence on foreign technology, development of indigenous technology has taken a
backseat and domestic R and D development has suffered.
o Globalization poses certain risks for any country in the form of business cycles, fluctuations in international
prices, specialization in few export tables and so on.
o It increases the disparities in the incomes of the rich and poor, developed nations and LDCs. It leads com-
mercial imperialism as the richer nations tend to exploit the resources of the poor nations.
o Globalization leads to fusion of cultures and inter-mingling of societies to such an extent that there may be
a loss of identities and traditional values. It gives rise to mindless aping of western lifestyles and manner-
isms however ill-suited they may be.
o It leads to overcrowding of cities and puts pressure on the amenities and facilities available in urban areas
In a NUTSHELL
Globalization refers to integration of various economies of the world. Till 1991 Indian government was follow-
ing strict policy in regard to import and foreign investment with regard to licensing of imports, tariff, re-
strictions etc. but after new policy government adopted globalization by following measures:
(i) Import liberlisation → government removed many restrcitions from import of capital goods
(ii) Foreign Exchange Regulation Act (FERA) was replaced by Foreign Exchange Management Act(FEMA)
(iii) Rationalisation of tariff structure
(iv) Abolition of export duty
(v) Reduction if import duty

9.6 Limitations of LPG 203

Low Growth of Agriculture Sector

 Agriculture has been and still remains the backbone of the Indian economy.
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 It plays a vital role not only in providing food and nutrition to the people, but also in the supply of raw ma-
terial to industries and to export trade
 In 1991, agriculture provided employment to 72% of the population and contributed 29.02 % of the
gross domestic product.
 However, in 2014 the share of agriculture in the GDP went down drastically to17.9 per cent.
 This has resulted in a lowering the per capita income of the farmers and increasing the rural indebtedness
Threat from foreign competition
 Due to opening up of the Indian economy to foreign competition through Liberalization and FDI policy
more MNC’s are attracted towards India after 1991 reforms and they are competing local businesses
and companies
 Since, these MNC’s have lots of financial capacity or those are big organizations with advanced foreign
technology so, they have large production capacity and huge money for promotion and other research ac-
tivities they are easily defeating our Indian local companies.
 And they had acquired many Indian companies as well.
 Because of financial constraints, lack of advanced technology and production inefficiencies our Indian com-
panies are facing problem in this globalization period
Adverse Impact on Environment
 Globalization has also contributed to the destruction of the environment through pollution and clear-
ing of vegetation cover.
 With the construction of companies, the emissions from manufacturing plants are causing environmental
pollution which further affects the health of many peoples.
 The construction also destroys the vegetation cover which is important in the very survival of both humans
and other animals
Increase in Income disparity
 Globalization leads to widening income gaps within the country. Globalization benefits only to those
who have the skills and the technology in the country.
 The higher growth rate achieved by an economy can be at the expense of declining incomes of people who
may be rendered redundant.
 Globalization has widened the gap between the rich and poor, rises inequalities
Growth and Employment:
 Though the GDP growth rate has increased in the reform period, scholars point out that the reformed
growth has not generated sufficient employment opportunities in the country

Broad Indicators
• Some of the indicators of the progress of the economy are the growth rate of Gross Domestic Product
(GDP), the changing sectoral composition of the GDP, and the standards of living of the people as re-
204

flected in the quality of life.

• The growth rate of the economy had fallen to less than one %in the crisis year 1991-92 but rebounded to 5
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%per annum in 1992-93 and 1993-94. It further accelerated to 6.3 %in 1994-95.
• While the annual average growth rate during the decade 1980-81 to 1989-90, the pre-reform period, was
5.18 per cent, the average rate for the period 1993-94 was 6.8 %based on the new series of GDP

Sectoral Share in GDP

• The sectoral share in GDP of the three sectors – primary which includes agriculture, fisheries, and forestry,
secondary which includes industry, manufacturing, and mining and tertiary which includes all services such
as banking, insurance, transport and communications, constructions and real estate, hotels, trade, etc is an
indication of the progress of the economy.
• Between 1980-81 and 1990-91 (pre-reform period), share of primary sector declined from 38.1 %to 34.0
per cent, that of secondary declined marginally from 25.9 %to 24.9 per cent, while the tertiary sector
showed perceptible increase.
• While the share of agriculture has been steadily declined and that of services rising consistently, the share
of industry had been sluggish and fluctuating which had fallen below one %in 1991-92 to 2000-01).
• Industrial growth which had fallen below one %in 1991-92, showed broad based recovery by 1994 and
rose to 8.7 per cent.
• Manufacturing sector grew even faster at 9.2 %in 1991-92 and at 10.6 %in 1996-97.
• The growth rate of agriculture and allied sector was 3.6 %in the Eleventh Plan (2007-12) as against 2.5 %
and 2.4 %respectively in the Ninth Plan (1997-2002) and Tenth Plan (2002-07).
• As for the industrial growth rate, after a decline of 0.8 %in 1991-92, it rose to 2.2 %in 1992-93, 8.6 %in
1994-95, and 10.6 %in 1996-97.
• During the Ninth Plan, industrial growth declined to 4.3 %but recovered to touch 9.4 %in the Tenth Plan.
• And again, it recorded only 7.9 %in the Eleventh Plan.
• The deceleration and fluctuation in industry is due to structural and cyclical factors affecting business,
lack of domestic demand in case of failure of monsoon which adversely affects the rural sector, which is a
major source of demand for manufactured items, and lack of demand for items of exports.
• But it can be said that the New Industrial Policy has helped to reinvigorate and energize the industrial sec-
tor.
• The services sector has shown steady growth both in regard to its share in GDP as well as rate of growth.
• Its share in GDP which was 48.5 %in 2000-01 has risen to an estimated 59 %in 2013-14.
• It recorded a growth rate of 7.9 %in the Ninth Plan, 9.3 %in the Tenth Plan, and 10.1 %in the Eleventh Plan.
• India’s GDP growth rate increased.
• During 1990 -91 India’s GDP growth rate was only 1.1% but after 1991 reforms due LPG policy India’s GDP
growth rate is increased year by year → Because of the Abolition of Industrial licensing, privatisation, ad-
vanced foreign technology and Reduction of taxes India’s GDP is increased after 1991 reforms 205

Employment pattern in Sectors

• From the above account, it will be seen that there have been significant changes in the sectoral composi-
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tion of GDP which is a positive indication of economic development.

• Though a vital sector in the economy, the share of agriculture has steadily come down and the contribu-
tion of industry and services to GDP has been going up.
• However, the declining share of agriculture in the national income has not been accompanied by corre-
sponding decline in the workforce has still not removed to non-agricultural occupations and the pressure
of population on land continues.
• It also indicates that there is disguised and under-employment in the sector resulting in low productivity
per person engaged.
• In 1991 unemployment rate was 4.3% but after India adopted new LPG policy more employment is gen-
erated
• The percentage share of agriculture in total workforce declined only marginally from 72 % in 1951 to 69.8
% in 1971, 66.7 % in 1981, and 64.75 % in 1993-94.
• Though it has further declined, it still provides employment to about 55 % of the workforce in the country.
Employment in industry has also been hovering from 12.43 % in 1993-94 to 12.1 % in 1999-2000.
• In 2012-13, it stood at 11.9 %.
• Whereas it is the services sector which has provided more additional employment the shares of the services
(including construction sector) in employment increased from 22.82 % in 1993-94 to 34.90 % in 2009-10.
• Though employment levels have gone up, it has not kept pace with the increase in the labour force re-
sulting in creeping unemployment.
• Also, the qualitative nature of jobs in the unorganized sector where labour laws and working conditions
may be lax.
• All this part, a major challenge confronting the country is the huge number of youth entering the la-
bour force.
• An estimated 12 million persons will be entering the job market each year an average of one million every
month for the next ten years who have to be provided employment.
• This is a major challenge for the present and future governments.

Foreign Direct Investment (FDI)

▪ India has already marked its presence as one of the fastest growing economies of the world.
▪ It has been ranked among the top 3 attractive destinations for inbound investments.
▪ Since 1991, the regulatory environment in terms of foreign investment has been consistently eased to make
it investor friendly.
▪ India has also firmly established itself as a lucrative foreign investment destination.
▪ Foreign direct investment inflows hit an all-time high of $60.1 billion in 2016-17.
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▪ India’s forex reserves have been rising with a total accretion of $4.389 billion to the kitty since 14 July 2017.
▪ It had touched a record high of $393.448 billion after it rose by $581.1 million in the week to 4 August
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2017.
▪ India has allowed 100% FDI in medical services, Telecom sector, and single brand retail etc.
Per capita income
▪ Per capita income or average income measures the average income earned per person in a given area (city,
region, country, etc.).
▪ It is calculated by dividing the area's total income by its total population.
▪ In 1991 India’s Per capita Income was Rs. 11,235 but in 2014-15 Per Capita Income is reached to Rs.
85,533.
▪ Per Capita income is increased due to Increase in Employment, due to new economy policy of globalization
and privatization many job opportunities are created so, and people’s income was increased.

Impact of Reforms on Poverty

• One of the primary aims of India’s economic policy right after Independence has been to achieve growth
with equity and social justice.
• This was natural considering the all pervasive poverty and widespread inequality which persisted in the
country.
• Though several measures such as rural development and anti-poverty schemes have been implemented to
remedy this, both poverty and inequality continue to be a challenge.
• There have been different studies and surveys on ascertaining number of people who live below the ‘pov-
erty line’.
• According to data released by National Sample Survey Organization (NSSO) and erstwhile Planning Com-
mission, the percentage of population below the poverty line was increasing day by day.
• Economic reforms measures coupled with poverty alleviation programmes like Mahatma Gandhi Rural
Employment Guarantee Scheme (MNREGS) have helped to lift a significant section of the population above
the poverty line.
• The extent and spread of it, however, has not been uniform.
• As a result of much of the reform measures being directed at the organized sector, its effects are felt first
on the urban organized sector, next on the urban informal sector, and then on the rural sector.
• The rural sector is influenced more by the anti-poverty schemes which make a direct impact on the in-
come and living conditions of the rural poor.
• Another significant factor impacting the rural population is the state of agriculture which again is largely
dependent on the monsoon and various other factors.
• There is also concern that following the implementation of reforms, inequality between different segments
of society has widened.
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• This can be remedied only through a vigorous process of growth with equity, more investments in the
social sector education, public health, and housing directed to benefit particularly the lower sections of
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the population, and redistributive measures through fiscal policies.

9.7 Effects of Liberalisation and Globalisation

Increasing Competition:
• After the new policy, Indian companies had to face all round competition which means competition from
the internal market and the competition from the MNCs
• The companies which could adopt latest technology and which were having large number of resources
could only survive and face the competition
• Many companies could not face the competition and had to leave the market

More demanding customers:

• Prior to new economic policy there are very few industries or production units
• As a result, there was shortage of product, in every sector
• Because of this shortage the market was producer-oriented i.e. producers became key persons in the mar-
ket
• Nut after new economic policy, many more businessmen joined the production line and various foreign
companies also established their production units in India
• As a result, there was surplus of products in every sector. This shift from shortage to surplus brought an-
other shift in the market i.e. producer market to buyer market

Rapidly changing technological environment:

• Prior to new economic policy there was a small internal competition only
• But after the new economic policy the world class competition started and to stand this global competition
the companies need to adopt world class technology
• To adopt and implement world class technology the investment in R & D dept has to increase

Necessity for change:

• Prior to 1991 business enterprises could follow stable policies for a long period of time but after 1991 the
business enterprises have to modify their policies and operations from time to time

Need for developing Human resources:

• Before 1991 Indian enterprises were managed by inadequately trained personnel’s

• New market conditions require people with higher competence skill and training

Market orientation:
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• Earlier firms were following selling concept i.e. produce first and then go to market but now companies fol-
low marketing concept i.e. planning production on the basis of market research, need and want of custom-
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er

Loss of Budgetary support to Public Sector:

• Prior to 1991 all the losses of public sector were used to be made good by government by sanctioning spe-
cial funds from budgets
• But today the public sectors have to survive and grow by utilising their resources efficiently otherwise these
enterprises have to face disinvestment
• On a whole LPG brought positive impacts on Indian business and industry

Export a matter of survival:

• Indian businessman was facing global competition and the new trade policy made the external trade very
liberal
• As a result to earn more foreign exchange many Indian companies joined the export business and got lot of
success in that
• Many companies increased their turnover more than double by starting export division

9.8 Focus Point

• To sum up, the result of 1991 reforms has been a mixed one. While it has certainly opened up the economy
after decade of keeping India as a ‘protected and virtually closed economy’ on the plank of Import Sub-
stitution policy, and has helped to integrate it with the global economy, India has not been able to realize
the full potential.
• This is despite having a large technically skilled workforce and opportunities of building a robust manufac-
turing base as China did over the last two decades.
• In hindsight, precious time and ground has been lost and now India has to compete with other developing
countries in East Asia and Latin America.
• There is urgent need to push for another round of major reforms which the present government has em-
barked upon.
• But in the democratic framework in which the country is placed, there are many legislative and political
roadblocks which are already playing out and due to delays caused by them, the country may be forced to
pay a heavy price.

Key Lines in examination point of view

➢ In 1991 was a major turning point for Indian economy; precarious balance of payments position and infla-
209

tionary pressures.
➢ New Industrial Policy, 1991 was announced on July 24, 1991
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➢ 1980s started on a good note – higher GDP growth rate, comfortable food position and industrial sector
looking up; liberalization measures undertaken by Rajiv Gandhi government.
➢ But problems were building up; considerable increase in gross fiscal deficit and worsening fiscal imbalance
persisted; increase in non developmental expenditure added to the problems.
➢ Factors which led to the 1991 economic crisis higher fiscal deficit and unsustainable internal public debt;
foreign exchange position became critical resulting in erosion of international confidence; inflation was
hurting the poorer sections.
➢ Radical reforms were initiated in 1991 by the government under Narasimha Rao to achieve macroeconomic
stability; measures included containing fiscal deficit, improving balance of payments position; rupee was
devalued in two steps and funds raised the IMF and other sources.
➢ New trade policy drawn up replacing the ‘import substitution’ policy followed hitherto; imports were liber-
alized and several measures were taken to vigorously promote exports; the economy was steadily opened
up.
➢ New Industrial Policy was introduced which included industrial delicensing, except in strategic sectors; for-
eign investment was promoted to help industries upgrade technology and enhance their competitiveness;
the MRTP Act was repealed and Competition Act of 2002 enacted; public sector units performing well were
to be strengthened while sick units were to be subjected to disinvestment.
➢ Growth rate of the economy improved by 1992-93 and again in 1994-95; there were fluctuations in indus-
trial growth due to cyclical factors, but overall, industry benefited from the new policy; services sector also
made steady advances with its share in GDP touching 48.5 %in 2000-01.
➢ Significant changes were taking place in sectoral shares in GDP; share of agriculture was declining and that
of industry and services were going up; but these changes were not reflected in a commensurate way in
their shares in employment; agriculture continued to support 55 %of the work force while employment in
the services sector showed substantial increases; that in industry was rather stagnant.
➢ Providing employment to the huge numbers of youth joining the labour force, a major challenge.
➢ Impact of reforms on poverty; despite many rural development and antipoverty programmes launched,
poverty continues to persist through the number of those below the poverty lines has been coming down;
there is also concern about widening inequities in society following the reform measures.
➢ While India did integrate with the global economy, she has not been able to realize the full potential from it
unlike Chain could do over the last two decades; India lost precious time in the process and has now to
compete with other emerging nations; India’s legislative and political roadblocks also hamper rapid devel-
opment.

Important One Liners:

➢ In the Industrial Policy 1991, except 18 industries, all others were exempted from compulsory licensing
210

➢ In 1993, government announced the exemption of 3 more industries – automobiles, white goods, leather
and leather products
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➢ In December 1996, electronic goods were exempted

➢ In July 1997, 5 more industries were exempted
➢ In the budget 1998-99, coal and petroleum were exempted from compulsory licensing → after this only 6
industries are under compulsory licensing
 1) Alcohol
2) Tobacco
3) Hazardous chemicals
4) Electronic Aerospace and Defence equipments
5) Industrial explosives
6) Drugs and Pharmaceuticals
➢ In 1956 industrial policy, 17 industries were reserved for the public sector. In 1991, this number was re-
duced to 8 industries
1) Arms and ammunition
2) Atomic energy
3) Atomic minerals
4) Coal and lignite
5) Mineral oils
6) Mining of iron ore, manganese ore, chrome ore, gypsum, sulphur, gold and diamond
7) Mining of copper, lead, zinc, tin, molybdenum
8) Mining of wolafarm
➢ In 1993, 3 industries were de-reserved
I. Atomic energy
II. Atomic minerals
III. Rail transport
➢ FDI upto 51% foreign equity in high priority industries requiring large investments and advanced technolo-
gy was permitted
➢ With a view to inject technological dynamism in the Indian Industry, government provided automatic ap-
proval for technological agreements related to high priority industries and eased procedures for hiring of
foreign technical expertise
➢ Policy of Disinvestment → In order to raise resources and ensure wider public participation of PSUs, it was
decided to offer is shareholding stake to mutual funds, financial institutions, general public and workers
➢ Policy of MoU → In order to revive and rehabilitate chronically sick PSUs, it was decided to refer them to
the Board for Industrial and Financial Reconstruction. The policy also provided for greater managerial au-
tonomy to the Boards of PSUs
➢ Realizing the increased import competition with the removal of quantitative restrictions since April 2001,
211

the government has adopted a policy of dereservation and has pruned the list of items reserved for Small
Scale Industries Sector gradually
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➢ FDI upto 100% has been allowed under automatic route for most manufacturing activities in SEZs.
➢ In 2004, the FDI limits were raised in the private banking sector (upto 74%), oil exploration (upto 100%), pe-
troleum product marketing (upto 100%), petroleum product pipelines (upto 100%), natural gas and LNG
 pipelines (upto 100%) and printing of scientific and technical magazines, periodicals and journals (upto
100%)
➢ In February 2005, FDI ceiling in telecom sector in certain services were increased from 49% to 74%
➢ Equity participation upto 24% of the total shareholding in small scale units by other industrial undertakings
has been allowed → enable small sector to access the capital market and encourage modernization, tech-
nological upgradation etc.
➢ Foreign equity participation upto 100% has been allowed in construction and maintenance of roads and
bridges.

10. Agriculture

➔ The history of Agriculture in India dates back to Indus Valley Civilization and in some parts of Southern
India, it was found to be practised even before the Harappans.
➔ Today agriculture is the backbone of Indian Economy and nearly 50% of the population dependent on it
for livelihood.
➔ Agriculture has the highest share in employment.
➔ It is the largest unorganised sector of India.

10.1 Development of Agriculture under Five Year Plans:

Major Features
Five year
Plan
1st (1951- • Launch of the Community Development Programme, abolition of Zamindari system, cam-
56) paigns for growth in food and other related areas like fisheries, forestry, animal husbandry,
soil conservation, etc. were the major features.
• Growth in agriculture was 2.71%.
2nd (1956- • Industrial sector was given more importance in this plan.
61) • Agricultural Expenditure was only 20% of the actual plan expenditure.
• The agricultural growth, however, was high at 3.15%.
3rd (1961- • Achieving self- sufficiency in foodgrains and increase in agricultural production was one of
66) the main aims of this plan.
212

• Higher priority was given to agriculture and allied areas as compared to industrial develop-
ment.
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• However, the plan did not achieve its goals and agricultural growth fell to 0.73%.
• Land reforms, Land ceiling and Green Revolution were some of the major initiatives in this
plan.
Annual • Priority was given to minor irrigation projects and High Yielding Variety of seeds was pre-
Plans ferred so as to increase agricultural productivity.
(1966-69) • Agricultural growth was high at 4.16%.

4th (1969- • The results of the introduction of Green revolution and HYV seeds were good.
74) • Expenditure on agriculture was 22% of annual expenditure.
• Agricultural growth was 2.57%.
5th (1974- • Emphasis was laid on spread of HYV seeds, use of fertilizers, pesticides and insecticides to
79) increase production.
• Expenditure on agriculture was around 21% of annual expenditure.
• Agricultural growth was 3.28%.
6th (1980- • It was realised by this plan that growth of Indian economy depends on rural and agricultural
85) development.
• The growth rate in agricultural production was a high 4.3% against a target of 3.8%.
• Overall growth in agricultural sector was 2.52%.
• It was realised by this plan that growth of Indian economy depends on rural and agricultural
development.
• The growth rate in agricultural production was a high 4.3% against a target of 3.8%.
• Overall growth in agricultural sector was 2.52%.
7th (1985- • Expenditure on agriculture was 22% of annual expenditure.
90) • Growth in agriculture was 3.47%
8th (1992- • The growth target was 4.1% but the agricultural sector showcased an impressive growth of
97) 4.68%. 9th (1997-2002)
• This plan was a failure in the agricultural sector, and it registered an agricultural growth rate
of 2.44%.
th
10 (2002- • Against a target of 4%, the average agricultural growth rate was only 2.3%.
07)
• The major emphasis was on increasing agricultural productivity and profitability by making
11th (2007- available affordable institutional credit, farm mechanisation, biotechnology, cold storages,
12) and marketing.
• Growth in agriculture was 3.5%.
12th
213
(2012- • This plan, like its predecessors, has a target of 4% agricultural growth rate, with growth in
17) food-grains at 2% and non- food grains at 5.6%.
• The plan puts an emphasis on improvement in technology, use of public- private partner-
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ship, greater road connectivity, development of horticulture, dairying, and other related ag-
ricultural fields.

10.2 Agriculture and Green Revolution

• At the time of Independence in 1947, India was predominantly an agrarian economy with over 80 percent
of the population living in rural areas and about 70 percent of the population living in rural areas and about
70 percent of the workforce engaged in agriculture.
• In 1950-51, the share of agriculture in national income was 56.5 percent. Yet, productivity and yields
were very low.
• It was realized that rapid progress in the agricultural sector was imperative for eradication of widespread
poverty and malnutrition prevalent in the country, and for ameliorating the living standards of the people.
• The developments in Indian agriculture from the beginning of the First Five-Year Plan (1951) to the early
1990s can be studies in three distinct phases:
1. Pre-Green Revolution phase (1951-68)
2. Early Green revolution phase (1968-81)
3. Later Green Revolution phase (1987-92)

• In the initial phase from 1950 to ’67, firm foundations were laid through various steps initiated in the first
three Five-Year Plans (1951-1966) which enabled kickstarting the agricultural sector in subsequent decades.
• This was attempted mainly through institutional changes by way of land reforms and various strategies to
boost production.

10.3 LAND REFORMS AND CHANGES IN THE AGRARIAN SECTOR:

▪ In 1947, India inherited a highly iniquitous system of land tenure with bulk of the cultivable land held by
a relatively small section if the population and the rest forming a large segment of small peasants and
landless labour.
▪ One of the first tasks undertaken by the government after independence was to implement land reforms.
Considering the highly skewed and unequal distribution of agriculture land perpetuated over centuries, ef-
fecting land reforms was the urgent need of the hour.
▪ This lop-sided system was perpetuated by the colonial rulers. It had adverse consequences on agriculture
in colonial rulers. It had adverse consequences on agriculture in colonial India.
▪ Insecurity of tenure and indeterminable rights over land impacted on agricultural operations and output.
▪ Land records were not maintained systematically which made mortgaging of land to raise funds difficult
for the farmer who had to depend on usurious moneylenders.
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▪ All these placed crushing burdens on the peasantry and sporadic riots and peasant uprisings broke out in
different parts of India, particularly Bengal, Andhra and Malabar
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Key Features of Land Reforms:

 The land reform was to be achieved by eliminating or reducing exploration of small and marginal
farmers, affording security of tenure to sharecroppers and tenants, and providing land to the landless
through redistribution of land.
 It involved abolition if intermediaries and allotting surplus land among the tillers and the landless.
 The Indian government was committed to land reforms and consequently laws were passed by all the State
Governments in 1950’s touching upon the following aspects:

1. Abolition of intermediaries.
2. Tenancy reforms to regulate fair rent and provide security of tenure to cultivators.
3. Ceiling on holding and distribution of surplus land among the landless.
4. Consolidation of fragmented landholding and prevention if their further fragmentation,
5. Development of co-operative framing.

 The land reforms had to be implemented by the states.

 The legislative initiatives for land reforms met with resistance from vested interests in many states.
 It was argued that tenancy changes and putting ceilings on landholding would come in conflict with con-
stitutional guarantees.
 Another argument was that reducing the size of holdings and distributing land among many small cultiva-
tors would affect the efficiency of operations and adversely impact agricultural output.
 It would also prevent the adoption if modern methods of farming and mechanization of agriculture.
 The fact that redistribution of land resulting in smaller holdings would affect productivity has been contest-
ed and some studies have shown that even if such redistribution does not increase the gross produce, it
does not result in a decrease in the produce.
 It is further argued that redistribution of land cannot be seen merely from the economic benefits it may
confer, but also on considerations if social justice in view of the wide disparities and inequities prevalent in
the rural sector
Abolition of Intermediaries:
 Abolition of intermediaries was one significant step. The intermediaries were abolished within a few years
after the independence covering about 40 percent of the cultivated area.
 About 20 million, who were hitherto tenants, became owners of the land and were brought in direct
relationship with the State
 This acted as an incentive for investment and progress of agriculture. Also, considerable areas of culti-
vable wastelands and private forests came under the management of government.
 As to the other major objective of imposing ceilings on landholdings and distributing the surplus land
among the landless, there were two rounds of legislation, one in 1950’s and another in the early 70’s.
215

 The state legislatures passed the radical laws imposing ceiling in landholdings.
 However, the land reforms were implemented in a half-hearted manner and due to various factors such as
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pressure exerted by vested interests, exemptions granted in many cases, and division of large holdings by
families into smaller holdings among the family members to circumvented land ceiling laws, the reform
measures fell short of the avowed objectives.
 Especially, it did not meet where erstwhile landlords continued to hold on to large holdings.
Payment of Compensation:
• While abolishing the intermediaries, the government decided to pay them compensation but as the basis
and rate of compensation was not clearly spelt out, the Zamindari Abolition Acts were contested by the
landowners in High Courts and finally in the Supreme Court.
• The Court, while upholding the rights of the State to acquire lands for public purpose, ruled that just and
reasonable compensation be paid to those divested of their lands.
• As a result, the rates and ceiling of compensation and methods of determining them were revised, and
landlords greatly benefitted by the higher compensation paid.
• The compensation was paid in cash to small landowners while big landowners were paid in bonds.
• Also, as a result of the tenancy reforms, tenant-farmers were able to get security of tenure, have their rents
reduced, or buy up the land from the landlords at less than market price.
• If they did not buy the land, they could continue perpetually as tenants on that property.
• Thus, security of tenure was guaranteed.
• However, this was also achieved uniformly all over the country and absentee ownership of land and inse-
cure tenancy reform were mainly achieved in Kerala, West Bengal, Maharashtra, Karnataka, Himachal Pra-
desh, Gujarat, and Assam.

PRE-GREEN REVOLUTION PHASE (1951-1968):

➔ One of the major objectives in the initial years of planning was to augment agricultural production, more
specifically the output of food grains, to meet the needs of the growing population.
➔ A major challenge to this was the existence of a large number of small and uneconomic holdings.
➔ Though some farm studies had shown an inverse relationship between the size of the holding and the
yields under traditional agriculture, this could not be generalized, as yield of crops depended on a variety of
factors other than the size of the farm.
➔ A contrary view held by some economists in the context of land reforms was that reducing large holdings
into smaller units would hamper production and yields which again was open to debate.
➔ In the light of these different perspectives, the government conceived a policy of consolidation if holding
by trying to group small farms and promoting co-operative farming.
➔ Though government attempted this in all earnestness backed by an intensive Community Development
programme in the first three Plans, the idea of co-operative farming was not a success and did not
take off. One of the rights to land which they got following the land reforms.
Steps to Boost Output:
216

▪ Nonetheless, the Government accorded priority to agriculture and undertook several other measures in the
first three Plans (1951-66) to enhance production.
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▪ These included implementing large and small irrigation projects, steps for soil conservation, dry farming
and land reclamation, supply of fertilizers and manures, distribution of improved seeds, measures for plant
protection, use of improved ploughs and agricultural implements, and adoption if scientific agricultural
practices.
▪ The gross area under food grains crops (cereals and pulses) increased from 101.19 million (mn.) hec-
tares (ha) in 1950-51 to 124.91 mn. Ha. In 1970-71.
▪ These steps did not yield results and food grains output increased steadily during the first two decade of
planning.
▪ Despite all these favourable trends, the years through 1950’s and the 60s were very challenging for Indian
agriculture.
▪ Due to acute shortage of food in some years, India had to depend on food imports from other countries
including the U.S. under the PL 480 programme.
▪ These imports helped to meet the shortages and prevent the incidents of runaway food-price inflation.
▪ Two back-to-back droughts in 1965-66 and 1966-67 made matters even more difficult.
▪ Food grains output dipped to 72.3 mn. tones in 1965-66 and 74.2 mn. tones in 1966-67 but again recov-
ered to 95.1 mn. Tones in 1967-68.
▪ During this period, there was considerable pressure from the U.S. government on India, during the Presi-
dency of Lyndon B. Johnson, by discouraging dependence on the U.S. for food aid, and goading India to
take effective steps to adopt scientific.
▪ As mentioned earlier, India had already been taking various steps under the three Plans to increase food
output. A new strategy was initiated from the Third Plan beginning in 1961, and an institutional credit.
▪ They took to the improved farm practices readily and positively, and these initiatives were gradually ex-
panded to cover more parts of the country.
▪ In fact, it may be said that the seeds for the Green revolution, which was to occur in the coming years, were
sown in the early sixties.

EARLY GREEN REVOLUTION PHASE (1968-1981):

▪ The breakthrough came in the mid-sixties with the adoption of New Agricultural Strategy (NAS).
▪ The main elements of this strategy were the adoption of new technology in the form of high yielding vari-
ety (HYV) seeds for wheat, rice, and coarse cereals, better application of fertilizers, and increased use of
modern inputs such as pump sets and tractors.
▪ Public and private investment in agriculture was steeped up resulting in higher capital formation.
▪ The irrigation facilities were augmented and the net and gross area under irrigation expanded significantly
between 1960-61 and 1980-81.
▪ The area under high-yielding varieties for rice and wheat cultivation also increased steadily from the mid-
217

sixties until the end of the nineties.

▪ Use of hybrid seeds, which had been initiated as early as 1960, began to be widely adopted by 1963.
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▪ For wheat and rice cultivation, HYV seeds were tried experimentally to began with and were introduced
over fairly large areas as a full-fledged programme from 1966 onwards.
▪ It may be noted that the yields per hectare did increase between 1950-51 and 1960-61 which covers the
first phase of the Green revolution, fell short of the growth rate of 3.1 per cent recorded during the
per-Green revolution period.
▪ This shortfall was made up by a strong recovery during the later phase of the Green revolution in the eight-
ies. It is also to be noted to wheat than rice.
▪ As these new varieties matured quicker and could be harvested at shorter interval, farmers could do double
cropping in a year and thus put the land to more intensive use.
▪ With higher yields per hectare and more output, there was greater incentive and profitability for the farm-
ers.

LATER GREEN REVOLUTION PHASE (1981-1992):

▪ In the second phase of the Green revolution, the focus shifted from intensification of Green revolution
in the best areas to its spread to new areas.
▪ Food grains production continued to rise during this phase.
▪ As stated earlier, the growth rate of output at 3.4 percent during the second phase of the Green revolu-
tion was higher than the rate of 2.3 per cent recorded in the earlier phase.
▪ During the earlier phase, breakthrough in crop production was achieved in the north-west India and parts
of the southern region.
▪ However, the eastern region, comprising Madhya Pradesh, Bihar, Orissa, West Bengal, and Assam, were not
impacted much during this phase.
▪ But during the second phase, i.e., the eighties, the eastern and western regions showed greater pro-
gress than the north and the south.

Impact of Green Revolution

▪ The Green Revolution has resulted in phenomenal increase in the production of ‘wheat’ gain maximum
benefit from green Revolution.
▪ This revolution led to prosperity of farmers, especially those who were having more than 10 hectares of
land.
▪ Increased production of food grains resulted in reduction in imports. Also, sometimes India exported food-
grains.
▪ This revolution increased farmer’s income and farmer’s invested surplus income to increase agriculture
productivity.

10.4 Land Tenure Systems: 218

1) Zamindari System
2) Mahalwari System
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3) Ryotwari System

Zamindari System or Landlord-Tenant System:

✓ In this system ownership of land is separated from the managerial and labouring function.
✓ Here the landlord acts as an intermediary between the State and the actual tiller, and is responsible for the
payment of land revenue to the State.
✓ As long as the zamindar assured the remittance of the settled revenue to the government he was free to fix
and extort any revenue from the tenant. This led to gross abuses and exploitation and spread of rural pov-
erty in Bengal and Bihar.

Mahalwari System or Communal System of Farming:

✓ Under this system the ownership of land is maintained by a collective body usually the village serves as a
unit of management, land is distributed among individual peasants, revenue is collected from them and
paid to the government by the body.
✓ Simply the village community was jointly responsible for payment of rent.

Ryotwari System or Owner-Cultivator System:

✓ Under this system, the bulk of the rights of use and control of land are held by the family which provides
the primary labour force on the farm.
✓ The owner-cultivator is directly responsible for the State and pays land revenue.
✓ Simply the cultivator paid the revenues directly to the state without an intermediary.

10.5 Major Land Reform Measures Taken after Independence

Several important land reform measures were brought about by the government after Independence, like.
▪ Abolition of intermediaries like zamindars, jagirdars, etc. - It resulted led in several states promulgating
laws for putting an end to ‘absentee landlordism’.
▪ As a result, about 30 lakh tenants acquired land ownership over an area of 62 lakh acres throughout the
country.
▪ Imposition of ceiling laws - It laid down the maximum land that can be owned by a land holder (which
was subsequently amended to ‘holding’ by a family with effect from 1972).
▪ The excess land was to be surrendered to the government.
▪ Consolidation of holding - It was introduced as a measure of improving farming efficiency. It made con-
siderable progress in Punjab, Haryana and Western U.P.
▪ However, it did not have much effect in the southern and eastern states.
▪ The land reforms are included in the Ninth Schedule of the Constitution, thereby making these laws immune
to judicial challenge.
▪ However, implementation of these laws requires far stronger political will than is required in including them 219
in the Ninth Schedule.

10.6 Basic Terms related to Land Use:

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➔ Agricultural land - It refers to the share of land area that is arable, under permanent crops, or under per-
manent pastures
➔ Arable land – It includes land defined by the FAO as land under temporary crops (double-cropped areas
are counted once), temporary meadows for mowing or for pasture, land under market or kitchen gardens,
and land temporarily fallow. Land abandoned as a result of shifting cultivation is excluded.
➔ Land under permanent crops – It is land cultivated with crops that occupy the land for long periods and
need not be replanted after each harvest, such as cocoa, coffee, and rubber. This category includes land
under flowering shrubs, fruit trees, nut trees, and vines, but excludes land under trees grown for wood or
timber. Permanent pasture is land used for five or more years for forage, including natural and cultivated
crops.
➔ Irrigated land – It refers to areas purposely provided with water, including land irrigated by controlled
flooding.
➔ Cropland – It refers to arable land and permanent cropland.
➔ Land under cereal production – It refers to harvested areas, although some countries report only sown or
cultivated area.

10.7 Cropping Seasons:

10.8 Agricultural Inputs:

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10.9 Public Distribution System

Objectives of Public Distribution System

➔ To protect the low income groups by guaranteeing the supply of certain minimum quantity of food grains
at affordable price.
➔ To ensure equitable distribution of food grains.
➔ To control price fluctuation of essential commodities in the open market.
Features
➔ PDS is a system of distribution of selected essential commodities through ‘fair price shops’ which are oper-
ated by private dealers.
➔ Items which are distributed through PDS are rice, wheat, Sugar, edible oil and kerosene
➔ The purpose of PDS is to offer basic minimum quantity of essential commodities at lowest price to poorer
sections of society.
➔ The required commodities are acquired by the government through procurement or import and a buffer
stock is maintained.
➔ Public Distribution System (PDS) was conceived as a primary social welfare and poverty alleviation pro-
gramme of the government to ensure price stabilisation in the grain market.

10.10 WTO and Agricultural Subsidies:

• WTO Agreement on Agriculture (AoA), 1995 permitted the developed countries to continue to provide farm
subsidies, but under certain restrictions.
• In WTO terminology, agricultural subsidies have been segregated into various ‘boxes’:

Green Box subsidies

▪ It includes amounts spent on research, disease control, infrastructure and food security.
▪ These also include direct payments made to farmers such as income support that do not stimulate produc-
tion.
▪ These are not considered trade distorting and are encouraged.

Blue Box subsidies

▪ It includes direct payments to farmers to limit production and certain government assistance to encourage
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agriculture and rural development in developing countries.

▪ Blue Box subsidies are seen as being trade distorting.
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Amber Box subsidies

▪ It includes all agricultural subsidies that do not fall into either blue or green boxes.
▪ These include government policies of Minimum support Prices (MSP) for agricultural products or any help
directly related to production quantities (e.g. power, fertiliser, seeds, pesticides, irrigation, etc.).
▪ These are subject to reduction commitment to the de-minimus level of agricultural outputs- to 5% for de-
veloped and 10% for developing countries.

10.11 NABARD-National bank for Agriculture and Rural Development:

➔ It is an Apex Development Financial Institution in India

➔ Entrusted with "matters concerning Policy Planning and Operations in the field of credit for Agriculture and
other Economic activities in Rural areas in India".
➔ NABARD is active in developing Financial Inclusion policy.
➔ Established on the recommendations of B.Sivaramman Committee on July 12, 1982 to implement the
National Bank for Agriculture and Rural Development Act 1981.
➔ Replaced the Agricultural Credit Department (ACD) and Rural Planning and Credit Cell (RPCC) of Reserve
Bank of India, and Agricultural Refinance and Development Corporation (ARDC).
➔ NABARD is India's specialised bank for Agriculture and Rural Development in India.
➔ Initial Corpus – 100 cr
➔ NABARD is the most important institution in the country which looks after the development of the cottage
industry, small scale industry and village industry, and other rural industries.
➔ Headquarters : Mumbai
➔ NABARD is also known for its 'SHG Bank Linkage Programme' which encourages India's banks to lend to
self-help groups (SHGs).
➔ Largely because SHGs are composed mainly of poor women, this has evolved into an important Indian tool
for microfinance.

10.12 Infrastructure Factors Related To Agriculture:

Seed:

 Seed is a fertilized matured ovule together covered with seed coat.

 Hybrid seeds are obtained by cross pollination of different varieties of related plants.
 Genetically Modified seeds, are the ones in which the genetic material (DNA) has been altered in such a
way as to get the required quality.
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Fertilizers:

 Fertilizers are chemical compounds applied to promote plant and fruit growth.
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 Organic fertilizers are fertilizers derived from animal matter, human excreta or vegetable matter. (e.g. com-
post, manure).
 Naturally occurring organic fertilizers include animal wastes from meat processing, peat, manure, slurry, and
guano.
 Inorganic fertilizers contain simple inorganic chemicals. Some of the common nutrients present in fertilizers
are nitrogen, phosphorus and potassium (NKP).
 They also contain secondary plant nutrients such as calcium, sulphur and magnesium.

Irrigation:

 Irrigation is an artificial application of water to the soil. It is usually used to assist in growing crops in dry
areas and during periods of inadequate rainfall.
 Additionally, irrigation also has a few other uses in crop production, which include protecting plants against
frost, suppressing weed growing in rice fields and helping in preventing soil consolidation.
 There are large reserves of underground water in the alluvial plains of north India. Digging and constructing
wells and tube-wells is easy and cost of their construction is also comparatively less. Therefore irrigation by
wells and tube-wells here is popular.
 An irrigation canal is a waterway, often man-made or enhanced, built for the purpose of carrying water
from a source such as a lake, river, or stream, to soil used for farming or landscaping.
 A tank consists of water storage which has been developed by constructing a small bund of earth or stones
built across a stream. The water impounded by the bund is used for irrigation or other purposes.
 Localized irrigation is a system where water is distributed under low pressure through a piped network, in a
pre-determined pattern, and applied as a small discharge to each plant or adjacent to it. Drip irrigation,
spray or micro-sprinkler irrigation and bubbler irrigation belong to this category of irrigation methods.

10.13 Cropping Pattern:

Cropping pattern refers to the proportion of land under cultivation of different crops at different points
of time. This indicates the time and arrangement of crops in a particular land area.
Mono-Cropping or Single Cropping:

➔ It refers to growing only one crop on a particular land year after year.
➔ Monocropping reduces soil fertility and destroys the structure of the soil.
➔ Chemical fertilizers are required to upgrade production.
➔ This practice allows the spread of pests and diseases.

Multi-Cropping or Poly-Cropping:
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➔ In this system, 2 or more than 2 crops are grown annually on the same piece of land using high inputs,
without affecting the basic fertility of the soil.
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➔ For example, growing wheat and gram on the same land at the same time is mixed cropping.
➔ This practice minimizes the risk of failure of one of the crops and insures against crop failure due to ab-
normal weather conditions.

Ratoon Cropping:
➔ Under this method, the root or lower part of the crop is left uncut at the time of harvest.
➔ The crop regrows out of the root.
➔ In this pattern, the productivity decreases after every cycle.

Crop Rotation:

➔ In this pattern, different crops are grown on the same land in pre-planned succession.
➔ The crops are classified as one-year rotation, two-year rotation, and three-year rotation, depending upon
their duration.

Jhum:

➔ It is also known as slash and burn agriculture.

➔ It is the process of growing crops by first clearing the land having trees and vegetation and burning them
thereafter.

10.14 Terms related to Land Utilisation:

 Net Sown Area – It is the area sown with crops but is counted only once
 Gross Cropped Area – It is the total area sown once, as well as more than once in a particular year.
When the crop is sown on a piece of land for twice, the area is counted twice in GCA.
 Current Fallow Lands - This represents cropped area which is kept fallow (unsown) during the current
year
 Forest Area - This includes all land classified either as forest under any legal enactment, or administered as
forest, whether State-owned or private, and whether wooded or maintained as potential forest land.
 Land put non-agricultural uses : This includes all land occupied by buildings, roads and railways or
under water, e.g. rivers and canals, and other land put to uses other than agriculture
 Barren and uncultivable land: This includes all land covered by mountains, deserts, etc. Land which
cannot be brought under cultivation except at an exorbitant cost is classified as uncultivable whether such
land is in isolated blocks or within cultivated holdings
 Fallow land: This includes all land which was taken up for cultivation but is temporarily out of cultivation
for a period of not less than one year and not more than five years
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10.15 MSP

▪ A Minimum Support Price (MSP) is a form of market intervention by the Government of India to insure ag-
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ricultural producers against any sharp fall in farm prices.

▪ The minimum support prices are announced by the government of India at the beginning of the sow-
ing season for certain crops on the basis of the recommendations of the Commission for Agricultural
Costs and Prices (CACP).
▪ MSP is price fixed by Government of India to protect the producer - farmers - against excessive fall in
price during bumper production years.
▪ The minimum support prices are a guarantee price for their produce from the Government.
▪ The major objectives are to support the farmers from distress sales and to procure food grains for
public distribution.
▪ In case the market price for the commodity falls below the announced minimum price due to bumper pro-
duction and glut in the market, government agencies purchase the entire quantity offered by the farmers at
the announced minimum price.

10.16 Commission for Agricultural Costs and Prices (CACP):

➔ It is a decentralized agency of the Government of India.

➔ It was established in 1965 as the Agricultural Prices Commission, and was given its present name in
1985.
➔ It is an attached office of the Ministry of Agriculture & Farmers Welfare, Government of India.
➔ The commission was established to recommend Minimum Support Prices (MSPs), to motivate cultivators
and farmers to adopt the latest technology in order to optimise the use of resources and increase produc-
tivity.

10.17 e-NAM

▪ Department of Agriculture & Cooperation formulated a Central Sector scheme for Promotion of Nation-
al Agriculture Market through Agri-Tech Infrastructure Fund (ATIF) through provision of the common e-
platform.
▪ Electronic National Agriculture Market (e-NAM) platform seeks to create a common national market, for
enhancing farmer’s access to buyers
▪ NAM is an online platform with a physical market or mandi at the backend
▪ It will make price discovery and trading transparent.
▪ It seeks to leverage the physical infrastructure of mandis through an online trading portal, enabling buyers
situated even outside the state to participate in trading at the local level

10.18 APMC
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▪ Agricultural Produce Market Committee (APMC)

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▪ Statutory market committee constituted by a State Government in respect of trade in certain notified
agricultural or horticultural or livestock products, under the Agricultural Produce Market Committee Act is-
sued by that state government
▪ One main function of which is basically to provide a platform for farmers to sell their produce
▪ In simple terms, the APMC (Agricultural Produce Market Committees) is a relic of the past that forces the
farmers to sell their produce only to middlemen approved by the government in authorized Mandis
(markets)
▪ If you are a vegetable producer and I’m a supermarket, I cannot directly buy from you. Both of us need to
go through a broker. This increases prices for the end buyer and unnecessarily adds redtape.

10.19 Operation Flood

▪ Launched in 1966
▪ Project of National Dairy Development Board (NDDB)
▪ World's biggest dairy development program
▪ Transformed India from a milk-deficient nation into the world's largest milk producer, surpassing the USA
in 1998
▪ It was launched to help farmers direct their own development, placing control of the resources they create
in their own hands.
▪ Anand pattern experiment at Amul, a single, cooperative dairy, was the engine behind the success of the
program.
▪ Operation Flood is the program behind "the white revolution"

10.20 Kisan Credit Card Scheme

▪ Kisan Credit Card (KCC) scheme was introduced in August 1998 by NABARD and RBI
▪ This model scheme was prepared by the National Bank for Agriculture and Rural Development (NABARD)
on the recommendations of R.V.GUPTA to provide term loans and agricultural needs.
▪ Credit delivery mechanism that is aimed at enabling farmers to have quick and timely access to affordable
credit
▪ The scheme aims to reduce farmer dependence on the informal banking sector for credit – which can be
very expensive and suck them into a debt spiral.
▪ The card is offered by cooperative banks, regional rural banks and public sector banks.

10.21 Operation Green: 226

➔ Tomato, onion and potato are basic vegetables consumed throughout the year.
➔ Seasonal and regional production of these perishable commodities pose a challenge in connecting farmers
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and consumers in a manner that satisfies both.

➔ To reduce the fluctuation in pricing of Onion, Tomatoes and Potatoes the scheme has been launched.
➔ ‘‘Operation Greens’’ on the lines of ‘‘Operation Flood’’
➔ The operation aims to aid farmers and help control and limit the erratic fluctuations in the prices of onions,
potatoes and tomatoes.
➔ ‘‘Operation Greens’’ shall promote Farmer Producers Organizations (FPOs), agri-logistics, processing facili-
ties and professional management.
➔ The idea behind Operation Greens is to double the income of farmers by the end of 2022.
➔ Operation is essentially a price fixation scheme that aims to ensure farmers are given the right price for
their produce.

10.22 Zero-Budget Natural Farming:

➔ It is a method of farming where the cost of growing and harvesting plants is zero.
➔ This means that farmers need not purchase fertilizers and pesticides in order to ensure the healthy
growth of crops.
➔ It was originally promoted by Maharashtrian agriculturist and Padma Shri recipient Subhash Palekar,
who developed it in the mid-1990s as an alternative to the Green Revolution’s methods driven by chemical
fertilizers and pesticides and intensive irrigation.

10.23 Operational Holdings:

➔ All land which is used wholly or partly for agricultural production and is operated as one technical
unit by one person alone or with others without regard to the title, legal form, size or location is known as
operational holding.
➔ Operational holdings are also classified in three social groups, viz., Scheduled Castes, Scheduled Tribes
and Others
➔ In agriculture Census, the operational holdings are categorised in five size classes as follows:

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10.24 Contract Farming:

➔ Contract farming is an arrangement between the farmer producer and agri-business firms to sell the
produce at a pre-fixed Price or Quantity or Time or All Three.
➔ The farmer undertakes to supply agreed quantities of a crop or livestock product, based on the quality
standards and delivery requirements of the purchaser.
➔ In return, the buyer, usually a company, agrees to buy the product, often at a price that is established in
advance.
➔ The company often also agrees to support the farmer through, e.g., supplying inputs, assisting with land
preparation, providing production advice and transporting produce to its premises.
➔ The term "outgrower scheme" is sometimes used synonymously with contract farming, most commonly in
Eastern and Southern Africa.

10.25 High yielding varieties (HYVs):

➔ Green Revolution in the late 1960s introduced the Indian farmer to cultivation of wheat and rice using
high yielding varieties (HYVs) of seeds.
➔ Compared to the traditional seeds, the HYV seeds promised to produce much greater amounts of grain
on a single plant.
➔ As a result, the same piece of land would now produce far larger quantities of foodgrains than was possible
earlier.
➔ HYV seeds needed plenty of water and also chemical fertilizers and pesticides to produce best results.
➔ Higher yields were possible only from a combination of HYV seeds, irrigation, chemical fertilisers, pes-
ticides etc.

11. Industry

11.1 Industrial Development 1947-1990

• After being under the British rule for over 200 years and having suffered utter neglect in regard to industrial
development, India, on attainment of independence in 1947, didn’t do any delay in embarking on industri-
228

alization.
• Even prior to Independence, India had planned and initiated steps for developing industries.
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• The Statement of Industrial Policy issued in 1945 has stressed the need to set up basic and heavy indus-
tries such as iron and steel, heavy engineering, machine tools, and chemical industries.
• The idea of industrial licensing and establishing key industries under government control found mention in
the statement.
• After Independence, further thrust was given when the Industrial Policy resolution was issued in 1948 fol-
lowed by the passing of the Industrial (Development and regulation) Act of 1951.
• The 1948 resolution emphasized the responsibility of Government in promoting, assisting, and regulating
the development of industries in the national interest and it envisaged an increase in production and its eq-
uitable distribution and laid down a certain demarcation of fields for the public and private sectors in the
industrial sphere.

Industrial Policy Resolution 1948 (IPR 1948)

• IPR 1948 provided for the setting up of a mixed economy. It had outlined the respective rate of the public
and the private sectors. IPR 1948 divided industries into 4 broad categories.
a) The first category was considered to be the Exclusive Monopoly of the Central government. It
covered the manufacturing of arms and ammunitions, the production and control of atomic energy and
the ownership & management of rail transport
b) The second category was the mixed sector. It included 6 industries viz. coal, mineral oils, iron and
steel, manufacture of aircraft, ship building and manufacture of telephone, telegraph and wireless appa-
ratus. The state was to have exclusive right to set up new undertakings in this category. All the existing
private sector enterprises in this category were permitted to develop for a period of 10 years, after
which the government would review the situation and take further decisions regarding acquiring any of
the undertaking by paying compensation on a "fair and equitable basis".
c) The third category covered industries of basic importance and the central government would regu-
late them if found necessary to do so. The government. did not take responsibility of developing such
industries. The third category covered 18 industries such as salt, automobiles, heavy chemicals, fertiliz-
ers, power, cotton and woolen textile, cement, sugar, paper, newsprint, minerals etc.
d) The fourth category included remaining industries, was left open to private enterprise, industrial as
well as co-operative

Other major aspects of IPR-1948 were:

a) Cottage and Small Scale Industries were given importance as they were best suited for vil-
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lage enterprises, utilization of local resources and employment generation.

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b) The need for foreign capital and enterprise was recognized in the industrial development of
the economy for technological advancement but at the same time retaining the native control.
The IPR-1948 made it clear by saying ―as a rule, the major interest in ownership, and effective
control should always be in Indian Land

c) For the purpose of labour welfare, the IPR-1948, insisted on better working conditions,
 payment of wages and labour participation in management.

Industrial Policy Resolution 1956 (IPR 1956)

• The 1948 Resolution was further reviewed with the experience gained during the First Plan (1951-56) and a
new Industrial Policy Resolution was issued in 1956.
• The 1956 resolution was an important statement of industrial policy to be followed.
• While the State would play a dominant role in industrialization, the resolution recognized the importance
of the private sector and outlined steps to facilitate their healthy development.
• Financial institutions would provide the necessary resources to the private sector. It also laid stress on pro-
moting small-scale and cottage industries and on ensuring balanced development of all regions to re-
duce regional disparities and imbalances.
• While welcoming foreign capital and collaboration for industrialization, it enjoyed that ownership and
control of industries would rest with Indian hands.
• 1948 policy remained in vogue for full 8 years and determined the nature and pattern of industrial de-
velopment in the country. Significant development took place in the country during First Five Year Plan
(1951-56).
• Industries (Development and Regulations) Act, was passed in 1951 and gave the government. the nec-
essary experience and expertise in regulating and controlling industries in the private sector.
• Government accepted "The Socialist Pattern of Society" as the objectives of socio economic policy.
• Because of these developments, a new declaration of industrial policy seemed essential. This came in the
form of Industrial Policy resolution of 1956.

Key objectives:

1. To accelerate the rate of economic growth and to speed up industrialisation

2. To expand the public sector to develop strategically important industries
3. To increase employment opportunities
4. To prevent monopolies and concentration of economic power
5. To reduce inequalities of income
230

6. To encourage private sector

7. To expand the cottage, village and small scale industries
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8. To attain balanced industrial development

Other important features of IPR-1956 were:

1. The State would provide fair and non-discriminatory treatment to the private sector by
 providing infrastructural facilities.
2. Village and Small Scale Industries would be encouraged through various concessions and sub-
sidies to improve their competitive strength.
3. Balanced Regional development was focused to spread the benefits of industrial-
ization all over the country.
4. Labour welfare was given importance (improvement in working conditions and standard of liv-
ing of workers)
In the 1956 IPR, Industries were classified into 3 categories:

Schedule A:
The first category included industries of 'basic' and 'strategic' importance. There were 17 such industries. These
industries can be grouped into following 5 classes
1) Defense industries
2) Heavy industries
3) Minerals
4) Transport and Communication
5) Power of these four industries - arms and communication, atomic energy, railways and air transport were to
be the government. monopolies
• In the remaining 13 industries, all new units were to be established by the state. However, existing units in
the private sector were allowed to subsist and expand. The state could also elicit the co-operation of pri-
vate sector in establishing new units in these industries 'when the national interest so required'
Schedule B:
The second group of 12 industries was listed in Schedule B.
1) All other minerals (except minor minerals)
2) Road transport, Sea Transport
3) Machine tools, ferro alloys and tool steels
4) Basic and Intermediate products required by chemical industries such as manufacture of drugs
5) Dyestuffs & plastics
6) Antibiotics and other essential drugs
7) Fertilizers
8) Synthetic rubber
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9) Chemical pulp
10) Carbonization of coal
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11) Aluminum
12) Other non-ferrous metals not included in the first category
• In these industries, state would increasingly establish new units and increase its participation but would not
deny the private sector opportunities to set up units or expand existing units
Schedule C:
• It included all the remaining industries, and their future development was left to the initiative and enter-
prise of the private. government. could also start any industry in which it was interested.
• However, the main role of the State in the category was to provide facilities to the private sector to develop
itself.

Industrial Policy Statement, 1977

• When the Janata Government came to power, it issued an Industrial Policy Statement in 1977 which em-
phasized the development of the small-scale sector which had potential for creating employment oppor-
tunities on a large scale.
• It also assigned a wider role for the public sector not only as a producer of strategic items, but also as a fa-
cilitator expertise to the small-scale and cottage industries.
• It also sought to encourage medium size enterprises even in capital-intensive sectors with a view to
ensure that there would be no concentration of economic power in the hands of large, dominant business
houses.
• Large business houses were required to raise resources internally, and not depend on banks or financial in-
stitutions, for starting new units or expanding their existing units.
• Some of the provisions of this statement like priority for the small-scale sector and measures for its growth,
an expanded role for the public sector participation of workers in the management and ownership of en-
terprises, and steps to check the dominance of large business houses were considered as redeeming fea-
tures of this policy.

Industrial Policy, 1980

• This policy, framed by the newly elected Congress government, was primarily based on the 1956 Resolu-
tion with suitable modifications to suit the changed circumstances.
• It sought to remove a misconception and an artificial barrier seen to have been created between large en-
terprises and the small-scale sector by the 1977 Policy.
• It recognized the vital role played by both these sectors and emphasized the need for integrated industrial
development to achieve the maximum potential.
232

• To promote small-scale units, the permissible maximum limits of investment in these units were raised.
• It regularized the excess capacity created over and above what was licensed and also permitted automatic
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expansion capacity. This was done with a view to make full use of the existing and potential capacity and
maximize industrial production.
• In this context, the observations of the Planning Commission while preparing the strategy for the Sixth Plan
(1980-85) are relevant.
The Commission observed :

• In addition to the conventional strategies of aiming at optimum utilization of existing capacities and im-
provement of productivity, certain other elements of policy would be necessary in the medium term per-
spective. These would encompass the following:-
1) Substantial enhancement of manufacturing capacities in public/private sector covering a wide range
of industries for providing not only consumer goods and consumer durables, but also for supporting agri-
cultural and industrial growth through supply of intermediate and capital goods. The pace of industrial in-
vestment will need to be speeded up so that manufacturing capacities are in position well ahead of de-
mand to permit competitive market forces to operate and to avoid possibilities of shortages with attendant
adverse effects on the economy.
2) The capital goods industry in general, and the electronics industry in particular, will need special atten-
tions as these supports the growth if a wide range of economic activity. The proper development of these
industries in terms if competitive costs and high quality would be essential to ensure that the projects
based on domestic capital goods do not become very costly. Similarly, other selected industries would
need to be identified (such as machine tools and commercial vehicles) for accelerated development for
supporting not only the domestic requirements but also for exploiting the export potential in a larger
measure than hitherto.” (Sixth Plan document).

New Industrial Policy 1991:

• With the introduction of Industrial Policy Resolution 1956, the public sector became dominant sector and
driver of economic growth.
• However, in the course of time it was realized that excessive controls & restrictions have led to red-tapism,
corruption and inefficiency in the public sector.
• During 1980s the government slowly started liberalizing the industrial policy along with its foreign trade
policy.
• Liberalization took further steps under the Congress Government headed by Rajiv Gandhi.
• In 1991, when Congress government came to power the country was in an economic crisis particularly the
balance of payment situation was precarious.
233

• In a changing world economic scenario the Government realized the need for liberalization to overcome
the damage done by the so called ―License-Permit Raj system.
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• Accordingly, the New Industrial Policy was announced on July 24, 1991 as a part of the economic reform
programmes. It was a radical departure from the earlier industrial policies.
• It substantially deregulated the industrial sector. It aimed at removing the distortions of the past and in-
creasing the gains already made, improving productivity and gainful employment and also increasing the
competitiveness of Indian Industries.
• The policy was announced in two parts. The first one was concerned with medium and large industries;
the second one was concerned with development of Small Scale Industries (SSI)
• While the earlier industrial policies emphasized the role of the public sector, the new industrial policy as-
signed a priority role to the private sector.
• It also envisaged the use of market mechanism to achieve the various objectives.

Objectives of New Industrial Policy, 1991:

1) Full utilization of indigenous capabilities of entrepreneurs and thereby employment generation.

2) Improvement in efficiency & productivity.
3) Self-reliance.
4) Greater investment in Research & Development and bring new technology to attain in-
ternational standards.
5) Removing existing government regulations and restrictions on industry.
6) Encouraging competition.
7) Development of backward areas and the small-scale sector.
8) Improving efficiency of the public sector.
9) Open the economy to the global market.

Highlights of New Industrial Policy (NIP) 1991 Abolition of Industrial Licensing:

• The licensing policy was introduced by the Government through the Industrial (Development and Regula-
tion) Act 1951, with the objective of regulating the industrial sector and bringing about proper economic
development.
• In reality however, it had resulted in delays in decision-making, corruption, red-tapism, efficiency etc.
• The NIP, 1991 abolished all industrial licensing, irrespective of the level of investment, except for 18 in-
dustries related to security & strategic concerns, social reasons, over riding environment reasons, hazardous
chemical items of elitist consumption.
• Delicensed industries do not need government approval anymore, but entrepreneurs are required to sub-
mit an Industrial Entrepreneur Memorandum (IFM) to the Secretariat of Industrial Approval.
• The 18 industries for which licensing was kept necessary were as under coal and lignite; petroleum ( 234

other than rude) and its distillation products; distillation, and brewing of alcoholic drinks; sugar; animal fats
and oils; cigars and cigarettes; asbestos and asbestos-based products; plywood & other wood based prod-
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ucts; raw hides, skins and leather; tanned or dressed fur skins; motor cars; paper & newsprint; electronic
aerospace & defense equipments; industrial explosives; hazardous chemicals; drugs and pharmaceuticals;
entertainment electronics; and white goods (domestic refrigerators, washing machines, air conditioners,
etc).
• With the passage of time, most of these industries have also been delicensed. Now, only five industries re-
quire licensing. These are alcohol, cigarettes, hazardous, chemicals, electronics aerospace and defense
equipment & industrial explosives.

Public Sector’s Role Diluted: The 1956 Policy Resolution had reserved 17 industries for the public sector.
1991 (NEP), reduced this number to 8

1) arms & ammunition

2) atomic energy
3) coal & lignite
4) mineral oils
5) mining of iron ore, manganese are, chrome are, gypsum, sulphur, gold & diamond
6) mining of copper, lead, zinc, fin, molybdenum and wolfram
7) mineral specified in the schedule to the atomic energy
8) rail transport
• NIP, 1991 also announced a greater degree of autonomy to PSUs through the system of Memorandum of
Understanding (MOUs).
• The sick public sector units had to be rehabilitated and reconstructed after getting the advice from the
Board for Industrial & Financial Reconstruction (BIFR).
• The intention of the government to offer a part of its equity in PSUs to the public, financial institutions, and
workers etc. also announced in this policy.
• A beginning in this direction was made in 1991-92 itself by divesting part of equities of selected PSUs.

Abolition of MRTP Limit:

• The government enacted the Monopolies and Restrictive Trade Practices (MRTP) Bill in 1969 w.e.f. from
1970.
• The MRTP firms were originally defined as enterprises or interconnected firmsthat had assets of Rs. 20 crore
or more or a dominant market share (33% or more). 235

• In 1984, the dominant share was reduced to 25% and in 1985, the asset limit was raised to Rs.100 crores
such firms were not allowed to expand their activities or appoint director without the Government‘s permis-
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sion.
• There were several restrictions on mergers and amalgamation and takeovers in case of such firms. All this
restricted the growth, productive expansion and efficiency of firms.
• Thus, the NIP, 1991 scrapped the threshold limit of assets in respect would now be on par with other
firms.
• They would also not require prior approved from the Government for investments in delicensed industries.
• The new Act aims at protecting the welfare of consumers by preventing and restricting unfair trade practic-
es.

Significant Role of Foreign Investment and Technology

• The NIP, 1991, widened the scope of foreign capital in Indian Industries.
• This was done with the objective of improving the balance of payments position, making advanced
technology available to domestic industries, modernizing industries, and improving their competitiveness.
• The policy specified a list of high technology, high investment priorities industries wherein automatic ap-
proval was to be given for direct foreign investment up to 51% of foreign equity.
• It consisted of industries like capital goods, entertainment electronics, food processing etc.
• The Foreign Investment Promotion Board has been constituted with the primary objective of speeding
up the approval process for in India.
• Similarly, the use of foreign brand name or trademark for sale of goods in India permitted.
• Foreign equity upto 100% is particularly encouraged in export-oriented units (EOUs), power sector, elec-
tronics & software technology parks.
• Moreover, foreign equity up to 24 % permitted in small scale enterprises.
• Foreign capital invested in India is allowed to be repatriated with capital appreciation after payment of tax-
es.
• No permission would be required for hiring foreign technicians and foreign testing of indigenously devel-
oped technologies.
• Remittances for technical services fees, subject to RBI approval can be made by companies.

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11.2 Role of Public Sector:

• The adoption of the socialist pattern of society in 1954 as the national objective, as well as the need for
planned and rapid development, also required that all industries of basic and strategic importance, or in the
nature if public utility services, should be in the public sector.
• Thus many important industries like Hindustan Aircraft, Sindri Fertilizers, a unit at Chittaranjan for manufac-
ture of locomotives, the Integral Coach factory for manufacture of rail coaches, Hindustan Machine Tools,
Indian Telephone Industries, Hindustan Cables, and a Penicillin manufacturing unit came to be set up in the
public sector. By the end of the First Plan, firm foundation had been laid for future industrial growth.
• The state was to extend financial aid to private sector and for this purpose set up financial institutions
such as the Industrial Finance Corporation (IFC), the National Industrial Development Corporation (NIDC),
and the Industrial Credit and Investment Corporation (ICIC). Industries like textiles, rayon and staple fibre,
chemicals, pharmaceuticals, dyestuffs and plastics, cement, paper and paper board, sugar, jute textiles, etc.
were those in which private sector mostly set up units.
• Second Five-Year Plan (1956-61) was drafted with a view to give major thrust to industrialization. Three
major steel plants were set up during this Plan-at Bhilai in Madhya Pradesh (now in Chhattisgarh) with
Russian collaboration, at Rourkela in Orissa (Odisha) with German co-operation, and at Durgapur in West
Bengal with the aid from United Kingdom.
• The expansion of the iron and steel industry received the highest priority as the levels of production of
steel and allied items determine the tempo of progress of the economy as a whole, and it would accelerate
the development of many other intermediate and consumer goods industries.
• As the private sector would be guided largely by considerations of locational advantages such as proximity
to raw material sources, the public sector had to play a greater role in ensuring that development extended
to other regions to basic and heavy industries like steel, heavy engineering and heavy electrical, oil, and
power generation which involve heavy investments with long gestation periods, and which the private sec-
tor may not able to undertake.
• These factors explain the dominant role given to the public sector in the initial years of planning and
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the ‘commanding heights’ of the economy which it came to occupy.

• However, with the passage of time, this policy was overstretched, and the public sector intruded into many
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areas like light goods and consumer goods industries which could have been left for the private sector.
• This approach has come to be questioned later, especially because many of the public sector undertaking
(PSUs) did not function optimally and efficiently, went into losses, and have turned sick.
• This has led to a rethink of the policy and forced the government to go in for disinvestment of such loss-
making and unproductive units.
• Due to the thrust given to the industrial sector from the Second Plan onwards, there was perceptible pro-
gress in the field of industry and manufacturing.
• Production in mining, metallurgy, and other industrial products witnessed considerable increase.
• Also, the share of industry in GDP increased substantially between 1950-51 and 1990-91.
• The public sector was, however, beset with several constraints.
• As observed by the Planning Commission, “the internal resource generated by the public sectors undertak-
ing for financing the Plan have comparatively meagre.
• The major factors responsible for these are :
1) Low return on investment on account of price constraints imposed on some public sector undertak-
ings;
2) Considerable number of private sector sick units (particularly in the textile and engineering industries)
which a Central Government had to take over in the interest of maintaining employment and produc-
tion; and
3) The technological complexity of the industries which had to be promoted in the public sector where a
longer gestation period and slower learning curve are inevitable.” (Sixth Plan document).

11.3 Industrial Licensing, Control Regime, and its Consequences

• India adopted a system of industrial licensing from the beginning. The primary and ostensible purpose of
control and licensing was to ensure proper allocation and utilization of scarce resources.
• The Industries (development and Regulation) Act, 1951 stipulated licensing of industries and setting up
of Development Councils for individual industries to ensure industrial development in conformity with the
objectives set out in the Plans.
• The Act was amended in 1953 with a view to bringing additional industries within the schedule.
• The Licensing Committee set up in accordance with the provisions of the Act functioned as an advisory 238
body to the Ministry of Commerce and Industry for the scrutiny of applications for new units and expan-
sions of capacity in the scheduled industries.
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• Under this system, an entrepreneur required approval from the Industry Ministry at every stage.
• A part from licence to start an industry, approvals were required for import of any capital goods, compo-
nents, or raw materials required for the unit or for any foreign collaboration or foreign technology.
• If funds had to be raised from the capital market, it required separate sanction from the Finance Ministry.
• Many sectors were reserved exclusively for the public sector and a large number of items were reserved
for the small-scale industries to promote that sector.
• All these inhibited the growth of private enterprise that the system of licensing and controls acted as an
inhibiting force in industrial growth became evident even during the 1960s and the ‘70s, it did not result in
proper regional dispersal of industries or wider distribution of entrepreneurship for preventing the
concentration of economic power.
• That the system of licensing and controls acted as an inhibiting force in industrial growth became evident
even during the 1960s and the ‘70s, it did not result in proper regional dispersal of industries or wider dis-
tribution of entrepreneurship for preventing the concentration of economic power.
• There were periods of stagnation and slowdown in industrial activity caused by low productivity, rising
costs, and lack of technology upgradation.
• Vested political interests, rigid bureaucratic control, and the influence of multinationals that supplies tech-
nology and capital all added to the impediments.
• This phase of Indian economy is referred to as the ‘License Permit Raj’ which acted as a major stumbling
block in industrial growth.
• Various Committees like the Swaminathan Committee (1964), the Hazari Committee (1967), and the Dutt
Committee (1964), were appointed to study these problems.
• The reports of all these Committees pointed to the deficiencies of the ‘licence and control’ regime which
were hampering industrial growth and recommended the need to bring about radical changes.
• Despite all these, the government took no worthwhile steps to change the course, and it took nearly a dec-
ade more to do some serious thinking on the issue.
• Stagnation in industry persisted from the mid-1960s and through 1970s.
• It was realized that Indian industry was handicapped by technological, qualitative, and cost disadvantages
compared to foreign competitions.
• Against this background, the government set up, during the eighties, more experts committies to examine
the problems plaguing the industrial sector.
• These were the Arjun Sengupta Committee on Public Enterprises (1984), the Abid Hussain Committee on
239

Trade policy (1984), the Abid Hussain Committee on Trade policy (1984), and the Narasimhan Committee
on the shift from physical to fiscal control measures (1985).
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• These committees recommended liberalizing the regime in their respective area of study, i.e., trade policy,
substitution of physical and quantitative controls by fiscal and other means of macro-economic manage-
ment, and providing greater autonomy to the public sector in taking managerial and business decisions,
and to enhance their productive efficiency and modernization process.
• As a result of these measures, there was some progress in the process of deregulation during the 1980s.
thirty-two groups of industries were delicensed without any investment limit. And in 1988, all industries
were exempted from licensing except for a specified negative list of twenty-six industries. But this exemp-
tion was subject to investment and location conditions and thus again became rather restrictive.
• In regard to trade policy, a major change was that exporters were given greater access to inputs at interna-
tional prices.
• But traffic protection to industries increased substantially in 1980’s as compared to previous decade. Thus
the policy needed further reform measures which came to be taken from 1991.

11.4 Location and Dispersal of Industries and Regional Balance

• Location of industries tends to be near areas where raw materials are available. This is done to minimize
the need for their transportation over long distance and thus kept down production costs.
• Availability of good infrastructure such as roads, railheads, proximity to ports, water, and power are other
critical factors which industries consider while deciding on their location.
• Besides, availability of skilled manpower needed for a particular type of industry could also influence loca-
tion of industries.
• Keeping the above aspects in view, the 1956 Industrial Resolution recognized the need to ensure the bal-
anced growth of all regional to avert disparities between various regions.
• A fair and even spread of industries was essential to provide employment in a satisfactory manner and
bring about al-round improvement in the standards of living in all regions.
• As stated earlier, since the private sector would be largely guided by considerations of locational ad-
vantages in setting up industries, the public sector had to step in to ensure balanced development of all re-
gions.
• Also, one of the objectives of national planning was to ensure that the various infrastructural facilities were
steadily made available in areas which were lagging behind industrially.
• During the formulation of the Fourth Plan (1969-74), the Planning Commission observed thus: “Measures 240
are proposed to be taken for the development of industries in the backward areas.
• The normal economic forces governing the location of industries are at present so overwhelmingly in fa-
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vour of the developed areas that the problem of dispersal of industries to backward levels.
• The problem is so widespread that during the 4th Plan it would be possible to make only a beginning.
• It is through a continuing programme of economic development supported by measures to attract indus-
tries to backward region that the present imbalance can be rectifies over a period of time.”
• In pursuance of such a policy, the government set up more steel plants at locations away from the sources
of main raw materials.
• Three more steel plants were set up in south India.
• These were the Salem Steel Plant in Tamil Nadu, the Vizag Steel Plant at Visakhapatnam (Andhra Pradesh),
and the Vijayanagar Steel Plant at Hospet (Karanataka).
• Apart from these major plants, there are many smaller units located in different parts of the country. The
Central Government also extended subsidy for the establishment of industrial units in backward areas.

12. Inflation

 Inflation is defined as a situation where there is sustained, unchecked increase in the general price level
and a fall in the purchasing power of money. Thus, inflation is a condition of price rise.
 The reason for price rise can be classified under two main heads : Increase in demand and Reduced supply

241
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12.1 Major Problems:

 It hurts the poor more as a greater proportion of their incomes are needed to pay for their consumption.
 Increasing uncertainty may discourage investment and saving. The saving pattern is affected thus: With the
declining value of money, people would be more inclined to spend than save anticipating that their money
can buy even less in the future.
 Dampens investment
 People on a fixed income (e.g. pensioners, students) will be worse off in real terms due to higher prices and
equal income as before; this (will lead to a reduction in the purchasing power of then income)
 Inflation discourages exports as domestic sales are attractive and BPO problems can be caused. Inflation
may erode the external competitiveness of domestic products if it leads to higher production costs such as
wages increase, higher interest rate and currency deprecation
 Leads to depreciation of currency thus making imports costlier
 Inflation tax happens. When a government borrows and spends, the cash held by people erodes in value
due to inflation.
 It will redistribution income from those on fixed income; such as pensioners, and shifts it to those who draw
an inflation-linked income and business.
 Strikes can take place for higher wages which can cause a wage spiral. Also if strikes occur in an important
industry which has a comparative advantage the nation may see a decrease in productivity, exports and
growth.

12.2 Low inflation has many benefits

• When inflation is low, consumers and businesses are better able to make long-range plans because
they know that the purchasing power of their money will hold and will not be steadily eroded year after
year.
• Low inflation also means lower nominal and real (inflation-adjusted) interest rates. Lower real interest
rates reduce the cost of borrowing.
• This encourages households to buy durable goods, such as houses and autos. It also encourages business-
es to invest in order to improve productivity so that they can stay competitive and prosper without steadily
having to raise prices.
• Sustained low inflation is self-reinforcing. If businesses and individuals are confident that inflation is un-
der long-term control, they do not react as quickly to short-term price pressures by seeking to raise prices
and wages. This helps to keep inflation low.
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12.3 Methods to measure Inflation:

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Wholesale Price Index (WPI)

➢ Price of a representative basket of wholesale goods
➢ Focuses on the price of goods traded between corporations, rather than the goods bought by consum-
ers, which is measured by the Consumer Price Index
➢ Purpose of the WPI ➔ To monitor price movements that reflect supply and demand in industry, manufac-
turing and construction
➢ Helps in analyzing both macroeconomic and microeconomic conditions
➢ Published by Office of Economic Adviser, Ministry of Commerce and Industry
➢ Base year of All-India WPI ➔ revised from 2004-05 to 2011-12 in 2017

Consumer Price Index CPI

➢ Measures changes in the price level of a weighted average market basket of consumer goods and ser-
vices purchased by households.
➢ It measures changes over time in the level of retail prices of selected goods and services on which con-
sumers of a defined group spend their incomes.
➢ Base Year for CPI ➔ 2012

Of these, the first three are compiled by the Labour Bureau in the Ministry of Labour and Employment.
Fourth is compiled by the Central Statistical Organization (CSO) in the Ministry of Statistics and Pro-
gramme Implementation.
Difference between CPI and WPI
➢ WPI, tracks inflation at the producer level and CPI captures changes in prices levels at the consumer level.
➢ Both baskets measure inflationary trends (the movement of price signals) within the broader economy, the
two indices differ in which weightages are assigned to food, fuel and manufactured items.
➢ WPI does not capture changes in the prices of services, which CPI does.
➢ In April 2014, the RBI had adopted the CPI as its key measure of inflation.

CPI Rural, CPI Urban and CPI (Combined):

• For computing Dearness Allowance (DA), CPI is used

• For inflation targeting, RBI and government. of India uses CPI (Combined) for policy making 243
• Headline Inflation is based on CPI (Combined)

GDP Deflator:
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➢ It is the Ratio between GDP at current prices and GDP at constant prices
➢ It is a better measure of price behaviour as it covers all goods and services produced in the country
➢ If GDP deflator is 1, it implies no change in general price levels
➢ If GDP deflator is >1, it implies increase in general price levels
➢ It is broader than the CPI and the WPI
➢ Calculated using variety of primary price indices
➢ It is used to deflate individual components of the GDP valued at current prices (either from the production
or the demand side estimates) to obtain volume estimates

12.4 Types of Inflation (Based on Causes):

Cost push inflation
➢ Caused by an increase in prices of inputs like labour, raw material, etc.
➢ Increased price of the factors of production leads to a decreased supply of these goods.
➢ While the demand remains constant, the prices of commodities increase causing a rise in the overall
price level. This is in essence cost push inflation.

Demand Pull Inflation

➢ Due to increase in Aggregate demand
➢ Increase in Aggregate demand mainly comes from either increase in Government Expenditure (Expansion-
ary Fiscal Policy) or by an increase in expenditure from Households and Firms.
➢ Root cause of demand pull inflation: Aggregate demand > Aggregate Supply. This simply means that
244

the firms in the economy are not capable of producing the goods and services demanded by the house-
holds in the present time period.
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➢ The shortages of goods and services due to increase in demand fuels inflation.

Structural Inflation
➢ Inflation persists for a longer period due to deficiencies existing in the economy like poor productivity in
agricultural sector, inefficient distribution and storage facilities.
➢ These deficiencies lead to food shortages, which in turn causes inflation.
➢ It is also called as bottleneck inflation.

12.5 Key Terms related to Inflation

Creeping inflation
➢ Inflation of a nation increases gradually, but continually, over time.
➢ The relatively small effect of creeping inflation, when viewed long-term, actually adds up to a pretty signifi-
cant increase in the cost of living.

Galloping inflation
➢ ‘Very high inflation’ running in the range of double digit or triple digit (i.e., 20 per cent, 100 per cent or
200 per cent in a year)

Hyperinflation
➢ This form of inflation is ‘large and accelerating’ which might have the annual rates in million or even tril-
lion.
➢ In such inflation not only the range of increase is very large, but the increase takes place in a very short
span of time, prices shoot up overnight.

Headline inflation
➢ A measure of the total inflation within an economy, including commodities such as food and energy
prices (e.g., oil and gas), which tend to be much more volatile and prone to inflationary spikes.
➢ RAW Inflation figure

Stagflation
➢ Situation in which the inflation rate is high, the economic growth rate slows, and unemployment re-
mains steadily high.
➢ It presents a dilemma for economic policy, since actions intended to lower inflation may exacerbate unem-
ployment.

Walking Inflation
➢ Also called as trolling inflation.
245

➢ When the rate of rising prices is more than creeping inflation like 3% to 10%, it is called as walking inflation.
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12.6 Core Inflation

➢ Inflation measure which excludes transitory or temporary price volatility as in the case of some com-
modities such as food items, energy products etc.
➢ Reflects the inflation trend in an economy.
➢ Change in the costs of goods and services but does not include those from the food and energy sectors.
➢ Excludes these items because their prices are much more volatile.
➢ Most often calculated using the consumer price index (CPI), which is a measure of prices for goods and
services.

12.7 Factors of Inflation:

It is divided into 2 categories – Demand Side and Supply Side

1) Demand Side factors: Due to rise in non-developmental government. expenditure and due to increase in
deficit financing
2) Supply Side factors: Due to erratic agricultural production, Hoarding of essential commodities by big
farmers, Higher MSPs announced by government. year after year

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Positive Impact of Inflation:

✓ Benefits borrower (debtors)

✓ Big farmers and big businesses usually gain as they get better profits
✓ Benefits exporters as exchange rate may depreciate
✓ Employment may increase in short term

Negative Impact of Inflation:

✓ Bond holder tends to lose due to rise in inflation

✓ Purchasing power falls drastically
✓ Marginal Propensity to Save (MPS) decreases
✓ Changes the saving pattern in favour of unproductive assets like gold
✓ Rise in Inequality
✓ Rise in Fiscal Deficit

12.8 How to reduce Inflation?

➢ Reduce Private Spending

➢ Decrease Non-developmental government. Expenditure
247

➢ Avoid Deficit Financing

➢ Prevention of black marketing
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➢ Prevention of hoarding
➢ Banning export of constrained materials
➢ Suspending future trading
➢ Facilitating supply of goods and services in case of demand pull inflation
Measures taken by RBI to control inflation:
➔ Selling government. securities through Open Market Operations (OMO)
➔ Increasing Cash Reserve Ratio (CRR)
➔ Increasing Statutory Liquidity Ratio (SLR)
➔ Increasing Bank Rate
➔ Increasing Repo Rate
➔ Increasing Reverse Repo Rate

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12.9 Key Concepts related to Inflation:

Deflation:
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➢ It is a decrease in general price levels of goods and services throughout an economy.

➢ If there is a higher supply of goods and services but not enough money supply to combat the situation de-
flation can occur.
Disinflation:
➢ It shows the rate of change of inflation over time.
➢ Here inflation rate declines over time, but it remains positive.

Stagflation:
➢ Stagflation emerges when both stagnation (zero economic growth) and inflation occurs simultaneously
➢ Slow economy with high inflation and high unemployment
➢ High unemployment + stagnant demand
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➢ Stagnation occurs when the production of goods and services in an economy slows down or even starts to
decline
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Reflation:
➢ It is a phenomenon when inflation returns after a spell of deflation
➢ It is a clear indication that economic growth is back in the economy

Skewflation:
➢ It occurs when there is inflation in some commodities and deflation in others
➢ Example : Rise in cost of living (inflation) coupled with falling asset prices, such as housing (deflation)

CPI Inflation
o Comprehensive measure used for estimation of price changes in a basket of goods and services repre-
sentative of consumption expenditure in an economy is called consumer price index.
o Inflation is measured using CPI.
o The percentage change in this index over a period of time gives the amount of inflation over that specific
period, i.e. the increase in prices of a representative basket of goods consumed.

Food Inflation
o Food inflation refers to the condition whereby there exist increase in wholesale price index of essential
food items (defined as food basket) relative to the general inflation or the consumer price index

WPI Inflation
o WPI index reflects average price changes of goods that are bought and sold in the wholesale market.
o Some countries (like the Philippines) use WPI changes as a central measure of inflation.

CPI Food Index: 250

• Released by CSO
• It is computed on point to point monthly basis with same base year as used in case of CPI.
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• ‘Cereals and Products’ carry the highest weight in the computation of CPI Food Index.

13. Capital Market

➔ Capital market is a market where buyers and sellers engage in trade of financial securities like bonds,
stocks, etc. The buying/selling is undertaken by participants such as individuals and institutions.
➔ Capital market consists of primary markets and secondary markets.
➔ Primary markets deal with trade of new issues of stocks and other securities, whereas secondary market
deals with the exchange of existing or previously-issued securities.
➔ Another important division in the capital market is made on the basis of the nature of security traded, i.e.
stock market and bond market.

13.1 Capital Market Instruments:

Pure Instruments:
• Pure instruments are those instruments which are issued with their basic features.
• It is unadulterated and is devoid of any feature of other classes of financial instruments.
• Example: Equity Shares, Preference Shares, debentures and bonds.

Hybrid Instruments:
• There are instruments which combine features of both debt and equity obligations.
• Example: Convertible Preference Shares. Cumulative convertible preference share, Partly Convertible deben-
tures, Optionally Convertible Debentures, etc.

Derivatives:
• Derivative instruments are financial assets whose value is derived from an underlying asset such as equity,
stock market index, interest rate, fixed-income security, etc. Hence it is called derivatives.

13.2 Major Financial Instruments in Capital Market:

Shares:

 The capital of a company is divided into shares.

 “Share” refers to a part of capital of a company which is divided among a number of people.
 People who purchase the shares of a company are known as the shareholders and are also considered as
the owners of a company.
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 The shareholders receive dividends as return from the company. On the other side, shareholders may enjoy
or suffer capital gain/loss at the time of sale of shares.
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Debentures:

 A company raises its capital by means of issue of shares. But the funds raised by the issue of shares are sel-
dom adequate to meet their long term financial needs of a company.
 Hence, most companies turn to raising long-term funds also through debentures which are issued either
through the route of private placement or by offering the same to the public.
 The finances raised through debentures are also known as long-term debt.
 So debentures are debt instruments with a fixed rate of interest issued by a company and generally unse-
cured.
 Many investors prefer debentures because it offers higher rate of interest than fixed deposits.

Bonds:

 Bond is also an instrument of acknowledgement of debt.

 Traditionally, the Government issued bonds, but these days, bonds are also being issued by semi-
government and non-governmental organisations.

Mutual Funds:

 These are funds operated by an investment company which raises money from the public and invests in a
group of assets (shares, debentures etc.), in accordance with a stated set of objectives.
 It is a substitute for those who are unable to invest directly in equities or debt because of resource, time or
knowledge constraints.
 Benefits include professional money management, buying in small amounts and diversification.
 Mutual fund units are issued and redeemed by the Fund Management Company based on the fund’s net
asset value (NAV), which is determined at the end of each trading session.
 NAV is calculated as the value of all the shares held by the fund, minus expenses, divided by the number of
units issued.
 Mutual Funds are usually long term investment vehicle though there some categories of mutual funds, such
as money market mutual funds which are short term instruments.

The structure and components of the market can be understood in the following way:
Financial Institutions:

• This segment of the capital market was developed by the Government of India to fulfil the capital require-
ments of the upcoming industries in the country better known as the business of project financing.
• In the due process of time we see emergence of four categories of Financial Institutions (FIs) in India:
1) All India Financial Institutions (AIFIs) such as the IFCI, ICICI, IDBI, SIDBI and IIBI, etc
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2) Specialised Financial Institutions (SFIs) such as the RCTC and TFCI

3) Investment Institutions (IIs) such as the LIC, GIC and the UTI
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4) State Level Financial Institutions (SLFIs) with its two variants, the SFCs and the SIDCs

Banking Industry:
• With the passage of time, there developed a number of government and privately owned banks in the
country and became the mainstay of the capital market by the 1980s.

Security Market:

• After the government’s attempts to formally organise the security and stock market of India, the segment
has seen accelerated expansion.
• Today, it is counted among the most vibrant share markets of the world and has challenged the monopoly
of the banks in the capital market of the country

13.3 Primary Market

➢ It issues security for the first time. Example- Initial public offer and follow on public offer
➢ Here new stock or bonds are sold to the investors
➢ Firms issue shares to public
➢ Price is fixed by the firms
➢ Firms raise money for long-term investment
➢ There is no specific geographical location.
➢ SEBI is the regulator for this market

13.4 Secondary Market

➢ Existing securities are bought and sold

➢ One investor sells it to another investor
➢ Price is fixed on the basis of demand and supply
➢ Companies benefit from the secondary markets
➢ There is no specific geographical location
➢ SEBI is the regulator for this market as well

13.5 Gilt-Edged Market

➢ Gilt-edged market refers to the market for government and semi government securities, backed by the RBI.
➢ The term gilt-edged means 'of the best quality'
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➢ It is known so because the government securities do not suffer from the risk of default and are highly liq-
uid.
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➢ RBI is the sole supplier of such securities.

➢ These are demanded by commercial banks, insurance companies, provident funds and mutual funds.
➢ The gilt-edged market may be divided into two parts- the Treasury bill market and the government bond
market.
➢ Treasury bills are issued to meet short-term needs for funds of the government, while government bonds
are issued to finance long-term developmental expenditure.

13.6 Stock Exchange:

➢ It is an organisation which facilitates buying and selling of shares of listed companies.

➢ Listed companies are those companies which are registered with stock exchange.
➢ Only old shares are bought and sold because it is a secondary market.
➢ Price is based on demand and supply.
➢ Shares are auctioned.
➢ Demand and supply of shares are constructed on the bidding of people.
➢ Demands are created by buyers.

Bombay Stock Exchange:

➔ Located at Dalal Street, Mumbai
➔ Established in 1875
➔ Asia's oldest stock exchange
➔ On August 31, 1957, the BSE became the first stock exchange to be recognized by the Indian Govern-
ment under the Securities Contracts Regulation Act
➔ BSE established India INX on 30 December 2016
➔ India INX is the first international exchange of India

National Stock Exchange:

➢ Established in 1992
➢ India’s first fully automated electronic exchange witch a nationwide presence
➢ India’s first dematerialised stock exchange
➢ Largest exchange in the country in terms of trading volumes
➢ HQ: Mumbai

13.7 Securities and Exchange Board of India (SEBI):

➔ It is the regulator of the securities and commodity market in India owned by the Government of India.
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➔ It was established on April 12, 1988 and given Statutory Powers on 30 January 1992 through the SEBI
Act, 1992
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➔ It became an autonomous body on 12 April 1992

➔ Headquarters: Mumbai
➔ Northern Regional Office – New Delhi
➔ Eastern Regional Office – Kolkata
➔ Southern Regional Office - Chennai
➔ Western Regional Office - Ahmedabad
➔ SEBI has to be responsive to the needs of three groups, which constitute the market:

issuers of securities
investors
market intermediaries

14. Money Market

➔ The money market is a market for short term funds which deals in monetary assets whose period of
maturity is upto one year. These assets are close substitutes for money.
➔ It is a market where low risk, unsecured and short term debt instruments that are highly liquid are is-
sued and actively traded everyday.
➔ It has no physical location, but is an activity conducted over the telephone and through the internet.
➔ It enables the raising of short-term funds for meeting the temporary shortages of cash and obligations
and the temporary deployment of excess funds for earning returns.
➔ The major participants in the market are the Reserve Bank of India (RBI), Commercial Banks, Non Banking
Finance Companies, State Governments, Large Corporate Houses and Mutual Funds.

14.1 Money Market Instruments:

Treasury Bills:
➢ They are promissory notes issued by the RBI on behalf of the government as a short term liability and
sold to banks and to the public.
➢ The maturity period ranges from 14 to 364 days.
➢ They are the negotiable instruments, i.e. they are freely transferable.
➢ No interest is paid on such bills but they are issued at a discount on their face value.

Commercial Bills:
➢ They are also called Trade Bills or Bills of Exchange.
➢ Commercial bills are drawn by one business firm to another in lieu of credit transaction.
➢ It is a written acknowledgement of debt by the maker directing to pay a specified sum of money to a par-
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ticular person.
➢ They are short-term instruments generally issued for a period of 90 days.
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➢ These are freely marketable.

➢ Banks provide working capital finance to firms by purchasing the commercial bills at a discount; this is
called 'discounting of bills'.

Commercial Paper (CP):

➢ CP was introduced in 1990 on the recommendation of the Vaghul Committee.
➢ A commercial paper is an unsecured promissory note issued by corporate with net worth of atleast Rs 5
crore to the banks for short term loans.
➢ These are issued at discount on face value for a period of 14 days to 12 months.
➢ These are issued in multiples of Rs 1 lakh subject to a minimum of Rs 25 lakh.

Certificate of Deposit (CD):

➢ CD was introduced in 1989 on the recommendation of the Vaghul Committee.
➢ These are issued by banks against deposits kept by individuals and institutions for a period of 15 days
to 3 years.
➢ These are similar to Fixed Deposits but are negotiable and tradable.
➢ These are issued in multiples of Rs. 1 lakh subject to a minimum of Rs 25 lakh.

Call Money Market (CMM):

➢ This is basically an inter-bank money market where funds are borrowed and lent for one day.
➢ Also known as over-night borrowing (called as money at call) and for a period upto 14 days (called short
notice).
➢ No collateral is required to borrow from this market.
➢ Funds are usually raised from this market upto three days—the higher the interest, the longer the period
for which the funds have been borrowed.

Cash Management Bill (CMB):

➢ The Government of India, in consultation with the Reserve Bank of India, decided to issue a new short-term
instrument, known as Cash Management Bills, since August 2009 to meet the temporary cash flow mis-
matches of the Government.
➢ The Cash Management Bills are non-standard and discounted instruments issued for maturities less
than 91 days.
➢ The Cash Management Bills have the generic character of Treasury Bills (issued at discount to the face val-
ue); are tradable and qualify for ready forward facility; investment in it is considered as an eligible invest-
ment in Government Securities by banks for SLR.
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