Ilp - 2023 - Ncert Module (Economy) 1 Van

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ILP - 2023
Integrated Learning Programme
NCERT MODULE (ECONOMY)

VALUE ADD NOTES
IASbaba’s ILP 2023 – Value Add Notes (NCERT Economy)
NCERT ECONOMY MODULE 1 Notes
Topics: Sectors of Indian Economy and Human Capital Formation
Following are your sources for today:

• CLASS X (Understanding Economic Development) – Chapter 1
(Development) and Chapter 2 (Sectors of the Indian Economy)
• CLASS XI (Indian Economic Development) – Chapter 1 (Indian Economy
on the eve of Independence), Chapter 2 (Indian Economy 1950 - 1990),
Chapter 4 (Poverty) and Chapter 5 (Human Capital)
• Note- Human Capital (read the chapter from NCERT)- We will cover this
in Mains aspects of advance module because it is mostly interconnected
to current issues.
Previous Year Questions: If you have to solve these questions, proper

understanding of basic concepts is necessary. Questions are mostly inter-
related and comparative in nature. And hence you need to understand the
overall economic scenario and concepts.
Important Note- We assume that most of you are freshers and hence the
VANs cannot be compressed into bullet points all the time. Economy needs
detailed coverage and we cannot compensate it with lesser number of pages
skipping important topics.
Introduction
UPSC Syllabus for Mains-Economy:

• Indian Economy and issues relating to planning, mobilization of
resources, growth, development and employment.
• Inclusive growth and issues arising from it.
• Government Budgeting.
Note- Other parts of GS Paper 3, Mains- are also related to economic

development but more appropriately comes under Agriculture and other
subdivisions. Core economy has been mentioned in above topics.
Before we proceed, let us understand the demand and requirement as per

UPSC. As mentioned, many a times, kindly go through previous years Prelims
and Mains questions to understand, the kind of questions asked from this
section.
www.iasbaba.com 1|P A G E
You will come down to below inferences: Notes

• Questions are solely based on basic understanding of the subject in
relation to contemporary aspects.
• More than 90% of the questions are from day-to-day current affairs and
development.
• In Mains, questions are from current affairs only but a little background
and understanding is needed to answer them.
• Very Important: Do not focus on facts/figures in this module. Focus on
trends. You need to understand overall trends. Facts and figures keep
changing and under Babapedia (current affairs), those will be taken
care.
Some Previous Years Questions
Q.) India has experienced persistent and high food inflation in the recent past.
What could be the reasons?
1. Due to a gradual switchover to the cultivation of commercial crops, the
area under the cultivation of food grains has steadily decreased in the
last five years by about 30%.
2. As a consequence of increasing incomes, the consumption patterns of
the% people have undergone a significant change.
3. The food supply chain has structural constraints.
Which of the statements given above are correct?

a) 1 and 2 only
b) 2 and 3 only
c) 1 and 3 only
d) 1, 2 and 3
Q.) In terms of economy, the visit by foreign nationals to witness the XIX
Common Wealth Games in India amounted to
a) Export
b) Import
c) Production
d) Consumption
Q.) In India, in the overall Index of Industrial Production, the Indices of Eight
Core Industries have a combined weight of 37-90%. Which of the following
are among those Eight Core Industries?
1. Cement
2. Fertilizers
3. Natural gas
4. Refinery products Notes

5. Textiles
Select the correct answer using the codes given below:

a) 1 and 5 only
b) 2, 3 and 4 only
c) 1, 2, 3 and 4 only
d) 1, 2, 3, 4 and 5
Q.) Disguised unemployment generally means

a) large number of people remain unemployed
b) alternative employment is not available
c) marginal productivity of labour is zero
d) productivity of workers is low
Q.) Which one of the following best describes the term “Merchant Discount
Rate” sometimes seen in news?
a) The incentive given by a bank to a merchant for accepting payments
through debit cards pertaining to that bank.
b) The amount paid back by banks to their customers when they use debit
cards for financial transactions for purchasing goods or services.
c) The charge to a merchant by a bank for accepting payments from his
customers through the bank’s debit cards.
d) The incentive given by the Government, to merchants for promoting
digital payments by their customers through Point of Sale (PoS)
machines and debit cards.
Q.) With reference to the governance of public sector banking in India,

consider the following statements
1. Capital infusion into public sector banks by the Government of India has
steadily increased in the last decade.
2. To put the public sector banks in order, the merger of associate banks
with the parent State Bank of India has been affected.
Which of the statements given above is/are correct?

a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2
Q.) Consider the following statements: Human capital formation as a concept

is better explained in terms of a process, which enables:
1. Individuals of a country to accumulate more capital.
2. Increasing the knowledge, skill levels and capacities of the people of the Notes
country.
3. Accumulation of tangible wealth.
4. Accumulation of intangible wealth.
a) 1 and 2
b) 2 only
c) 2 and 4
d) 1, 3 and 4
Q.) Which one of the following is the correct sequence in the decreasing order
of contribution of different sectors to the Gross Domestic Product of India.?
a) Service-Industry-Agriculture
b) Service-Agriculture-Industry
c) Industry- Services-Agriculture
d) Industry-Agriculture-Services
Q.) A “closed economy’’ is an economy in which?

a) The money supply is fully controlled.
b) Deficit financing takes place.
c) Only exports take place.
d) Neither exports nor imports take place.
Q.) To obtain full benefits of demographic dividend, what should India do?
a) Promoting skill development
b) Introducing more social security schemes
c) Reducing infant mortality rate
d) Privatization of higher education
Mains
• How globalization has led to the reduction of employment in the formal

sector of the Indian economy? Is increased informalization detrimental
to the development of the country?
• Women empowerment in India needs gender budgeting. What are the
requirements and status of gender budgeting in the Indian context?
• Pradhan Mantri Jan Dhan Yojana (PMJDY) is necessary for bringing
unbanked to the institutional finance fold. Do you agree with this for
financial inclusion of the poor section of the Indian society? Give
arguments to justify your opinion.
• The nature of economic growth in India in recent times is often Notes

described as a jobless growth. Do you agree with this view? Give
arguments in favour of your answer.
• There is a clear acknowledgement that Special Economic Zones (SEZs)
are a tool of industrial development, manufacturing and exports.
Recognising this potential, the whole instrumentality of SEZs requires
augmentation. Discuss the issue plaguing the success of SEZs with
respect to taxation, governing laws and administration
• Among several factors for India’s potential growth, the savings rate is
the most effective one. Do you agree? What are the other factors
available for growth potential?
• Account for the failure of the manufacturing sector in achieving the goal
of labour-intensive exports rather than capital-intensive exports.
Suggest measures for more labour-intensive rather than capital-
intensive exports.
• Explain intra-generational and inter-generational issues of equity from
the perspective of Inclusive growth and sustainable development.
• What are the salient features of ‘Inclusive Growth’? Has India been
experiencing such a growth process? Analyze and suggest measures for
inclusive growth.
• Comment on the challenges for Inclusive Growth which include careless
and useless manpower in the Indian context. Suggest measures to be
taken for facing these challenges.
• Capitalism has guided the world economy to unprecedented prosperity.
However, it often encourages short-sightedness and contributes to
wide disparities between the rich and the poor. In this light, would it be
correct to believe and adopt capitalism for bringing Inclusive Growth in
India? Discuss.
Note: Refer to Previous Years Questions almost every day. Make it a habit to
refer and make a note of those concepts that you learn and are repeated in
PYQs.
What is Development? Notes
Development is a process that creates growth, progress, positive change or the

addition of physical, economic, environmental, social and demographic
components. The purpose of development is a rise in the level and quality of
life of the population, and the creation or expansion of local regional income
and employment opportunities, without damaging the resources of the
environment. Development is visible and useful, not necessarily immediately,
and includes an aspect of quality change and the creation of conditions for a
continuation of that change.
Is the meaning of development same for everyone?

• Development means different things to different people because every
person has unique hobbies, aspirations, and interests. The notion of
development also depends upon the situation of a person. This can be
considered by an example.
• In a rural area, there is a lack of all-weather roads, primary health care
centers, 24x7 electricity, etc. and the availability of these facilities
would constitute the definition of development for people belonging to
this area. Similarly, in urban areas, better transportation facilities,
flyovers, the internet would constitute development.
What is National Development?

• The term national development is very comprehensive. It includes all
aspects of the life of an individual and the nation.
• It is holistic in approach. It is a process of reconstruction and
development in various dimensions of a nation and development of
individuals.
• It includes full-growth and expansion of our industries, agriculture,
education, social, religious and cultural institutions. Moreover, national
development implies development of a nation as a whole. It can be best
defined as the all-round and balanced development of different aspects
and facets of the nation viz. political, economic, social, cultural,
scientific and material.
Notes
Political
Economic Scientific
National
Development
Social Cultural
Material
Facet of National Development
United Nations Decade Report has defined it as:

“National development is growth plus change. Change in turn is social and
cultural as well as economic and qualitative as well as quantitative”.
How to Compare Development?

• Comparison on the basis of income levels
• Comparison on the basis of level of human development
• Comparison on the basis of economic structure
• Comparison on the basis of unemployment
• Comparison on the basis of corruption
• Comparison on the basis of rule of law and governance
• Comparison on the basis of financial development
• Comparison on the basis of economic freedom
• Comparison on the basis of globalization
• Comparison on the basis of internal and external balances
• Comparison on the basis of infrastructure development
• Comparing on the basis of health and education
What is Sustainable Development
• "Sustainable development is development that meets the needs of the

present, without compromising the ability of future generations to
meet their own needs."
• The concept of sustainable development can be interpreted in many
different ways, but at its core is an approach to development that looks
to balance different, and often competing, needs against an awareness
of the environmental, social and economic limitations we face as a Notes

society.
Per Capita Income

• Per capita income is a measure of the amount of money earned per
person in a nation or geographic region. Per capita income can be used
to determine the average per-person income for an area and to
evaluate the standard of living and quality of life of the population. Per
capita income for a nation is calculated by dividing the country's
national income by its population.
• Per capita income counts each man, woman, and child, even newborn
babies, as a member of the population. This stands in contrast to other
common measurements of an area's prosperity, such as household
income, which counts all people residing under one roof as a household.
For comparison between countries, total income is not such a useful
measure.
• Goa has the highest per capita income among 33 Indian states and
union territories, followed by northeast state Sikkim. Capital Delhi,
Chandigarh, and Haryana complete the top five list.
• All five South Indian states have higher GDP per capita than India's
average. Bihar, Uttar Pradesh, Jharkhand, Manipur, and Assam are the
top five poorest states.
Types of Economic Systems- An Overview
Different countries in the world have different situations and aspirations,

depending on which different economic systems are adopted by them. Mainly
the four major types of market economies are the traditional, the market, the
command and the mixed economic system.
Traditional economic system is built around the ways of society: that is, the
livelihood of the people determines the products and services. The exchange
mainly depends upon the traditional barter system or the practices of the past.
For example, the tribal system of exchange. The financial activities are few and
may include fishing, hunting, food gathering, and agriculture.
Other systems: Notes

Capitalist or Market Command or Centrally Mixed Economy
Economy Planned Economy
Origin- Adam Smiths Origin- ideas of the Origin: modern concepts
Wealth of Nations German philosopher of welfare and economic
Karl Marx development.
Stress on ‘Division of Two versions—in A mixed economy is an
labour’, an environment erstwhile USSR (socialist economy organized with
of ‘laissez faire’ (non- economy- emphasised some free-market
interference by the the collective ownership elements and some
government). of the means of socialistic elements,
It proposed that the production [property between pure capitalism
‘invisible hand’ of the and assets] ascribing a and pure socialism. It is
‘market forces’ (price large role to the state in also known as Keynesian
mechanism) will bring running the economy) economic system or
an economic and in pre-1985 China dual economic system.
equilibrium with (communist economy-
competition as the main emphasised state
tool. ownership of all
properties including
even labour and
absolute power to state
in running the
economy).
If labour is cheaper than The government decides Mixed economies
capital, more labour- how goods are to be typically maintain
intensive methods of produced and how they private ownership and
production will be used should be distributed control of most of the
and vice- taking care of society as means of production,
versa. Produced goods a whole not individual. but often under
are distributed on the government regulation.
basis of purchasing Government is directly
power of people rather involved in deciding
than their needs. prices of commodities.
When demand is low, The government decides Mixed economic Notes

and quantity of goods is what goods are to be systems are not laissez-
high, there is a surplus produced in accordance faire systems, because
of excess products and with the needs of the government is
when demand is very society and not involved in planning the
high, and amount of purchasing power. use of some resources
goods is low there is and can exert control
a shortage of products. over businesses in the
private sector. The law
of demand and supply
determine the price
scheme.
The government owns Economic planning in
all the factors of the mixed economic
production (labour, system means that the
land, capital, government can impose
entrepreneurship). Karl some regulations. These
Marx referred to is as rules should be
“from each according to agreeable but should
its ability, to each ensure the private
according to its needs.” sector is free to operate.
Pros: Pros: Pros:
• Efficient • Govt. and society • Less income

• Attract investors work in tandem. inequality
• Innovation • mobilization of • Degree of freedom
• Variety of resources is for entrepreneurs.
consumer Goods effective. • Public and private
• social welfare sector both
Cons: participate in growth
Cons: of overall economy.
• overproduction of
goods • The freedom and Cons:
• over-exploitation of entrepreneurial • High taxes
workers spirit are restricted
• Fear of
• Unemployment • No competition nationalisation
• economic and social • No innovation • Low economic
inequality • Black markets due to growth
restrictions • Misuse of resources
www.iasbaba.com 10 | P A G E
SECTORS OF ECONOMY Notes
Classification of Economic Sectors
Nature of Job Working Condition Ownership

Primary, Secondary and Organised and Public and Private
Tertiary Unorganized
Primary Sector Secondary Sector Tertiary Sector

Produce goods with Use the goods that Provides services for
environmental resources. primary sector consumers or
businesses have businesses.
produced as raw
material and produce
the finished goods.
Based near the areas they Refine, manufacture or The service sector
take their goods from. construct goods. consists of the
Also called as Agriculture production of services
and Allied Activities. instead of end
products.
People engaged in People engaged in Service Sector job is also
primary activities are secondary activities are known as White collar
called red-collar called blue collar jobs
workers due to the workers.
outdoor nature of their
work.
EXAMPLE: Agriculture, EXAMPLE: Furniture, EXAMPLE: Catering,

Fishing, Mining, Forestry Kitchen cabinets, Hotels, Call Centres, IT
etc. Ornaments, Textile Industries etc.
Production etc.
The value of final goods and services produced in each sector during a
particular year provides the total production of the sector for that year. The
sum of production in the three sectors gives Gross Domestic Product (GDP) of
a country. GDP is the value of all final goods and services produced within a
country during a particular year. It shows how big the economy is. In India, the
task of measuring GDP is undertaken by a central government ministry. The
Central Statistics Office does this job. Ministry of Statistics and Programme Notes
Implementation is the concerned Ministry.
Gross Domestic Product (GDP) is the monetary value of all finished goods and
services made within a country during a specific period. GDP provides an
economic snapshot of a country, used to estimate the size of an economy and
growth rate. GDP can be calculated in three ways, using expenditures,
production, or incomes. It can be adjusted for inflation and population to
provide deeper insights. Though it has limitations, GDP is a key tool to guide
people in strategic decision-making.
GDP of Primary, Secondary and Tertiary Sectors
45.03 47.82 49.86

SHare in GDP
30.73 27.66 24.18
17.03 16.79 16.68
2010-11 2013-14 2019-20
Primary Seondary Tertiary
Note- Focus on the trend here.
The services sector is the largest sector of India.

• Gross Value Added (GVA) at current prices for the services sector is
estimated at 96.54 lakh crore INR in 2020-21.
• The services sector accounts for 53.89% of total India's GVA of 179.15
lakh crore Indian rupees.
• With GVA of Rs. 46.44 lakh crore, the industry sector contributes
25.92%. The industry and services sector's contribution is lower than
the world's average 30% for the Industry sector and 63% for the
Services sector.
• While Agriculture and allied sector share 20.19%. This contribution to
the Indian economy is much higher than the world's average, which is
6.4%.
• Share of primary (comprising agriculture, forestry, fishing, and mining Notes

& quarrying), secondary (comprising manufacturing, electricity, gas,
water supply & other utility services, and construction), and tertiary
(services) sectors have been estimated as 21.82 percent, 24.29 percent,
and 53.89 percent.
Year 2020-2021
Quaternary Activities and Quinary Activities

Growth of modern economy has led to the addition of two more industrial
sectors to which businesses belong. These are quaternary and quinary sectors.
• The highest level of decision makers or policy makers perform quinary
activities. These are subtly different from the knowledge-based
industries that the quaternary sector in general deals with.
• Quinary activities are services that focus on the creation, re-
arrangement and interpretation of new and existing ideas; data
interpretation and the use and evaluation of new technologies.
• Often referred to as ‘gold collar’ professions, they represent another
subdivision of the tertiary sector representing special and highly paid
skills of senior business executives, government officials, research
scientists, financial and legal consultants, etc. Their importance in the
structure of advanced economies far outweighs their numbers.
• New trends in quinary services include knowledge processing
outsourcing (KPO) and ‘home shoring’, the latter as an alternative to
outsourcing. The KPO industry is distinct from Business Process
Outsourcing (BPO) as it involves highly skilled workers. It is information
driven knowledge outsourcing. KPO enables companies to create Notes

additional business opportunities.
• This sector includes top executives or officials in such fields as
government, science, universities, non-profits, health care, culture, and
the media. It may also include police and fire departments, which are
public services as opposed to for-profit enterprises.
• Economists sometimes also include domestic activities (duties
performed in the home by a family member or dependent) in the
quinary sector. These activities, such as child care or housekeeping, are
typically not measured by monetary amounts but contribute to the
economy by providing services for free that would otherwise be paid
for.
• The quaternary sector, on the other hand, is the fourth sector of the
economy which consists of intellectual activities often associated with
technological innovation. It is sometimes called the knowledge
economy.
• Activities associated with this sector include government, culture,
libraries, scientific research, education, and information
technology. These intellectual services and activities are what drive
technological advancement, which can have a huge impact on short-
and long-term economic growth.
In the recent years, the tertiary sector emerged as the largest producing
sector in India, replacing the primary sector. The tertiary sector has become
important in India because of the following reasons:
• Services such as hospitals, educational institutions, post and telegraph
services, police stations, courts, village administrative offices, municipal
corporations, defence, transport, banks, insurance companies, etc. are
considered as basic services and are necessary for all people.
• The development of agriculture and industry leads to the development
of services such as transport, trade, storage, etc.
• With the rise in the income of people, they start demanding more
services like eating out, tourism, shopping, private hospitals, private
schools, professional training, etc.
• Over the past decade, certain new services based on information and
communication technology have become important and essential.
Share of Employment in Primary, Secondary and Tertiary Sectors Notes
27.53 29.66 32.28

SHare in Sectors
21.81
24.45
25.12
52.5 45.89 42.6
2010-11 2013-14 2019-20
Primary Seondary Tertiary
Primary Sector Secondary Sector Tertiary Sector

More than half of the workers in These sectors employ less than half
India are working in the primary the people as compared to the
sector, mainly in agriculture. primary sector.
It contributes to only a quarter of These sectors produce four-fifths of
the GDP. the product.
Thus, there is a mismatch between the share of sector in the GDP and the
employment ratio.
The Organised Sector is one that is incorporated with the appropriate

authority or government and follow its rules and regulations. On the contrary,
the Unorganised Sector can be understood as the sector, which is not
incorporated with the government and thus, no rules are required to be
followed.
Organised Sector Unorganised Sector

It is a sector where the employment The unorganised sector is
terms are fixed and regular, and the characterised by small and
employees get assured work. scattered units, which are largely
outside the control of the
government.
They are registered by the government There are rules and regulations
and have to follow its rules and but these are not followed since
regulations, which are given in various they are not registered with the
laws such as the Factories Act, government. Notes

Minimum Wages Act, Payment of
Gratuity Act, Shops and
Establishments Act, etc.
The job is regular and has fixed Jobs are low-paid and often not
working hours. If people work more, regular.
they get paid for the overtime by the
employer.
Workers enjoy the security of Employment is not secure. People
employment. can be asked to leave without any
reason.
People working in the organised sector There is no provision for overtime,
get several other benefits from the paid leave, holidays, leave due to
employers such as paid leave, sickness, etc.
payment during holidays, provident
fund, gratuity, etc.
People get medical benefits. The There are no such facilities in the
factory manager has to ensure unorganised sector.
facilities like drinking water and a safe
working environment. When they
retire, these workers get pensions as
well.
Examples of the organised sectors are Examples of the unorganised
Government employees, registered sectors are Shopkeeping, Farming,
industrial workers, Anganwadi Domestic works, Labouring,
workers, village health workers, etc. Rickshaw pulling, etc.
How to Protect Workers in Unorganised Sector?

There is a need for protection and support of the workers in the unorganised
sector. Here are a few points which will help in doing so.
• The government can fix the minimum wages rate and working hours.
• The government can provide cheap loans to self-employed people.
• Government can provide cheap and affordable basic services like
education, health, food to these workers.
• The government can frame new laws which can provide provision for
overtime, paid leave, leave due to sickness, etc.
Public Sector Private Sector Notes

Most of the assets owned by Owned and managed by the private
Government and part of Core individuals and corporations. Less
Economic Activity concerning the interference or control of government.
country.
Profit making is not the core motive. It Profit Making is the real motive. Direct
is driven by public welfare. Money is involvement of money for accessing the
raised through taxes and other services.
revenues.
Competition is missing due to In general, private sectors are
governmental control and monopoly. competitive and more productive.
Examples: Police, Army, Mining, Examples: Finance, Information
Health, Manufacturing, Electricity, Technology, Mining, Transport,
Education, Transport, Education, Telecommunication,
Telecommunication, Agriculture, Manufacturing, Banking, Construction,
Banking, Insurance, etc. Pharmaceuticals etc.
Central Public Sector Enterprises PPP (Public Private Partnership) is an
(CPSEs) are classified into 3 categories- arrangement between government and
Maharatna, Navratna and Miniratna. private sector for the provision of public
assets and/or public services.
MARKET AND TYPES OF MARKETS
MARKET is defined as the sum total of all the buyers and sellers in the area or
region under consideration. The value, cost and price of items traded are as per
forces of supply and demand in a market. The market may be a physical entity,
or may be virtual. It may be local or global, perfect and imperfect.
There are four basic types of markets:
Perfect Monopoly Monopolistic Oligopoly Notes

competition Competition
Pure or perfect A monopoly exists Monopolistic An oligopoly is
competition is a when there’s a competition is a dominated by a
market structure single firm that market structure few firms, resulting
defined by a controls the entire referring to a large in limited
large number of market. This firm is number of small competition. They
small firms the sole producer firms competing can collaborate
competing of a product, and against each with or compete
against each there are no close other. However, against each other
other. substitutes. firms in to use their
Because there are monopolistic collective market
no alternatives, the competition sell power to drive up
firm has the similar but highly prices and earn
highest level of differentiated more profit.
market power. products.
Supply and Entry or exit is The products are Entering into an
demand blocked in a pure remarkably oligopoly is
determine the monopoly. similar, but small difficult. The most
amount of goods differences powerful
and services become the basis companies have
produced, along for firms’ control over raw
with the market marketing and materials, patents
prices set by the advertising. and financial and
companies in the physical resources
market. that create barriers
for potential
entries. This is what
helps set high
prices.
Products are Public utilities are Producers freely Products may be
identical and considered natural enter the market homogenous or
there are no monopolies when profits are differentiated.
significant because they have attractive. There is Typically, there are
barriers to economies of scale easy entry and three to five
entering and — a firm receives exit in dominant firms,
exiting the certain cost monopolistic but this number
market. advantages due to competition. can vary depending
its size — in an on the market.
extreme way. New
firms cannot start Notes

up because it
would be
incredibly
expensive to reach
scale in a short
amount of time.
This is a Huge investments Monopolistic Firms can make a

theoretical are needed to getmarkets can cartel to keep their
model that is into the market. charge higher products
helpful when prices within a competitive like
looking at certain range as it OPEC.
industries with does not assume
similar lowest possible
characteristics. cost of
production.
The best Examples are Examples include Examples of
examples of railways, defence fast food oligopolies are the
pure equipment and IPL restaurants, automobile
competition etc. clothing stores, companies, airlines
market service and repair and petroleum
structures are markets etc industries.
stock,
agricultural and
craft markets.
CONCEPT OF MARGINAL UTILITY AND LAW OF DIMINISHING MARGINAL

UTILITY
Utility: measure of pleasure or satisfaction or consumer’s preference ordering

over a choice set.
Marginal Utility: measures the added satisfaction that a consumer gets from
consuming additional units of goods or services. Positive marginal utility occurs
when the consumption of an additional item increases the total utility, while
negative marginal utility occurs when the consumption of an additional item
decreases the total utility.
Notes
MU=CHANGE IN QTY/CHANGE IN TOTAL UTILITY
Marginal Utility Curve: Marginal utility decreases as consumption of good

increases. This illustrates the Law of Diminishing Marginal Utility which holds
that the additional utility decreases with each unit added. For example, eating
first Gulab Jamun has high utility and adding on many more (10th Gulab Jamun)
will slowly diminish the marginal utility of that Gulab Jamun.
Indian Economy-On the Eve of Independence
Focus area:
• If you are asked to do a comparison on the state of Indian Economy,
pre- and post-independence? You should be in a position to give major
points to substantiate.
• How did India perform just after independence?
• Assessment of India’s planning process etc.
State of India’s economy prior to the country’s independence

Before the advent of the British rule: India had an independent economy;
Well-known for
• Handicraft industries in the fields of cotton and silk textiles, metal and
precious stone works etc. besides agriculture
• Reputation of the fine quality of material used and the high standards
of craftsmanship
Purpose of the British colonial rule in India: To reduce the country to being a
feeder economy for Great Britain’s own rapidly expanding modern industrial
base
• Economic policies pursued- concerned more with the protection and Notes
promotion of the economic interests of their home country than with
the development of the Indian economy
• A fundamental change in the structure of the Indian economy was
brought about— India was transformed into a net supplier of raw
materials and consumer of finished industrial products from Britain
• No attempt to conduct proper estimation- The colonial government
never made any sincere attempt to estimate India’s national and per
capita income
• Notable estimators: Dadabhai Naoroji, William Digby, Findlay Shirras,
V.K.R.V. Rao and R.C. Desai
Rao: Estimates of the national and per capita incomes during the colonial
period by him were considered very significant
Rao’s Studies: Found that the country’s growth of aggregate real output during
the first half of the twentieth century was less than two per cent coupled with
a meagre half per cent growth in per capita output per year.
Agriculture Sector
India’s economy under the British: Fundamentally agrarian — about 85 per
cent of the country’s population lived mostly in villages and derived livelihood
directly or indirectly from agriculture
Stagnated agriculture scene: Agriculture as a sector had already been crowded

with involvement of maximum population, but ironically it kept experiencing
stagnation and deterioration leading to a very low agricultural productivity, in
absolute terms.
✓ Various systems of land settlement introduced by the colonial government
(the zamindari system which was implemented in the then Bengal
Presidency comprising parts of India’s present-day eastern states, the profit
accruing out of the agriculture sector went to the zamindars instead of the
cultivators with no zamindars initiating to strive for the development of
agriculture→ Misery & social tension
✓ Terms of the revenue settlement: Right from the practice of fixing dates
for depositing specified sums of revenue, failing which the zamindars were
to lose their rights worked in a very bad taste (Zamindar’s headache)
✓ Zero development of inputs involved: Low levels of technology, lack of
irrigation facilities and negligible use of fertilisers→ dismal level of
agricultural productivity
✓ Partition of the country: A sizeable portion of the undivided country’s Notes

highly irrigated and fertile land went to Pakistan leading to an adverse
impact upon India’s output from the agriculture sector (Jute industry-
whole of the area went away to East Pakistan—present day Bangladesh;
country had a monopoly)
Rare growth situation experienced-

▪ Due to the expansion of the aggregate area under cultivation
▪ Relatively higher yield of cash crops in certain areas of the country due to
commercialization of agriculture→ Did not help farmers in improving their
economic condition as, instead of producing food crops, now they were
producing cash crops which were to be ultimately used by British industries
back home
Industrial Sector
Manufacturing: India could not develop a sound industrial base even while
carrying the legacy of churning out the best handicraft stuff in the world—it
declined rapidly and no corresponding modern industrial base was allowed to
take its place
Primary motive of the colonial government behind using the policy of
systematic deindustrialisation—
▪ To reduce India to the status of a mere exporter of important raw materials
for the upcoming modern industries in Britain
▪ To turn India into a sprawling market for the finished products of those
industries so that their continued expansion could be ensured to the
maximum advantage of their home country — Britain
Decline of the indigenous handicraft industries:

▪ Created massive unemployment
▪ A new demand in the Indian consumer market, which was now deprived of
the supply of locally made goods→ to be profitably met by the increasing
imports of cheap manufactured goods from Britain
Second half of the nineteenth century→ Modern industry began to take root
in India but its progress remained very slow
Confined to the setting up of cotton and jute textile mills
▪ Cotton textile mills: In the western parts of the country- Maharashtra and
Gujarat (Indians)
▪ Jute mills: Dominated by the foreigners—mainly concentrated in Bengal.
Twentieth Century Notes

Iron and steel industries began coming up—The Tata Iron and Steel Company
(TISCO) was incorporated in 1907
Other industries: sugar, cement, paper etc. came up after the Second World
War.
Capital goods industry: Though necessary to help promote further
industrialization, this industry did not bloom.
Capital goods industry means industries which can produce machine tools
which are, in turn, used for producing articles for current consumption
Limited area of operation of the public sector—remained confined only to the
railways, power generation, communications, ports and some other
departmental undertakings.
Growth rate of the new industrial sector and its contribution to the Gross
Domestic Product (GDP) remained very small.
The industrial sector thus, was left out crying for modernisation,
diversification, capacity building and increased public investment.
Foreign Trade
Ancient times: India has been an important trading nation.
Colonial Government: Followed restrictive policies of commodity production,
trade and tariff→ adversely affected the structure, composition and volume of
India’s foreign trade
India: Became an exporter of primary products such as raw silk, cotton, wool,
sugar, indigo, jute etc. and an importer of finished consumer goods like cotton,
silk and woollen clothes and capital goods like light machinery produced in the
factories of Britain
India became a puppet in the hands of: Britain— maintained a monopoly
control over India’s exports and imports leading to more than half of India’s
foreign trade to be restricted to Britain while the rest was allowed with a few
other countries like China, Ceylon (Sri Lanka) and Persia (Iran). The opening of
the Suez Canal further intensified British control over India’s foreign trade
Generation of a large export surplus—Drain of Wealth— oriented to feed the
Industrial Revolution in Britain
• Several essential commodities—food grains, clothes, kerosene etc. —
suffered acute scarcity in the domestic market
• No generation of flow of gold or silver into India—used to make payments
for
▪ The expenses incurred by an office set up by the colonial government
in Britain
▪ Expenses on war fought by the British government
▪ The import of invisible items Notes
Demographic Trend
1st documentation of the population of British India: Through a census in
1881; every ten years such census operations were carried out. (Who was the
Governor General then?)
Revealed: The unevenness in India’s population growth
India’s stages of demographic transition:
1st stage: Before 1921
2nd stage: After 1921; neither the total population of India nor the rate of
population growth at this stage was very high and the various social
development indicators were also not quite encouraging
✓ Overall literacy level: less than 16 per cent; the female literacy level was at
a negligible low of about seven per cent
✓ Public health facilities: either unavailable to the larger population or, when
available, were highly inadequate
✓ Rampant occurrence of water and air-borne diseases taking a huge toll on
life—the overall mortality rate was very high and the infant mortality rate
was quite alarming—about 218 per thousand in contrast to the present
infant mortality rate of 38 per thousand (WB & UNICEF)
✓ Life expectancy was also very low—32 years (at the time of Independence)
✓ Extensive poverty prevailed in India during the colonial period which
contributed to the worsening profile of India’s population of the time.
Occupational Structure
Occupational structure: It means the distribution of working persons across
different industries and sectors
Colonial period: Very little signs of changes
Largest share of workforce: Witnessed in agriculture- remained at a high of 70-
75 per cent
Manufacturing and the services sectors: Accounted for only 10 and 15-20 per
cent
Growth in regional variation:
✓ Parts of the then Madras Presidency, Maharashtra and West Bengal
witnessed a decline in the dependence of the workforce on the agricultural
sector with a commensurate increase in the manufacturing and the services
sectors
✓ Increase in the share of workforce in agriculture during the same time-
Orissa, Rajasthan and Punjab
Madras Presidency: areas of the present-day states of Tamil Nadu, Andhra Notes
Pradesh, Kerala and Karnataka
Infrastructure
Colonial times: Development of basic infrastructure (railways, ports, water
transport, posts and telegraphs)
Why did this development happen— To sub-serve various colonial interests
(not to provide basic amenities to the people)
Roads:
✓ To mobilize the army within India
✓ To draw out raw materials from the countryside to the nearest railway
station or the port to send these too far away England or other lucrative
foreign destinations
✓ To reach out to the rural areas during the rainy season
Railways:
Introduction: In 1850 (one of their most important contributions)
✓ Affected the structure of the Indian economy in two important ways—
✓ Enabled people to undertake long distance travel thereby breaking
geographical and cultural barriers
✓ Fostered commercialisation of Indian agriculture which adversely affected
the comparative self-sufficiency of the village economies in India
✓ Volume of India’s export trade expanded with benefits rarely been accrued
to the Indian people
Social benefits outweighed the country’s huge economic loss with the
‘railways’ needing further upgradation, expansion and public orientation
Development of the inland trade and sea lanes: Mixed reaction to the
development of these as sometimes they proved uneconomical (Coast Canal
on the Orissa coast)
Electric telegraph: Served the purpose of maintaining law and order

Postal services: Was useful but remained inadequate.
Indian Economy- Post Independent Development and Planning Notes
Types of Economic Systems
A. Market economy or Capitalism:

• Production of those consumer goods which are in demand i.e., goods
that can be sold profitably either in the domestic or in the foreign
markets
• Goods produced are distributed among people not on the basis of what
people need but on the basis of what people can afford and are willing
to purchase
B. Socialist society:
• The government decides what goods are to be produced in accordance
with the needs of society—assumed that the government knows what
is good for the people of the country as well as how they should be
distributed.
• A socialist society has no private property since everything is owned by
the state.
C. Mixed Economy:
• Most economies are mixed economies, i.e., the government and the
market together answer the three questions of what to produce, how
to produce and how to distribute what is produced
• The market will provide whatever goods and services it can produce
well, and the government will provide essential goods and services
which the market fails to do.
Background: Deciding which type of economic system is suitable for India?

The leaders of independent India had the job of nation building and while
deciding the type of economic system most suitable for our nation, they were
of the opinion that our nation needs such a system which would promote the
welfare of all rather than a few.
There are different types of economic systems explained above and among
them, ‘Socialist Economy’ appealed to the then Prime Minister Jawaharlal
Nehru the most. However, he was not in favour of the kind of socialism
established in the former Soviet Union where all the means of production, i.e.,
all the factories and farms in the country, were owned by the government.
There was no private property. It is not possible in a democracy like India for
the government to change the ownership pattern of land and other properties
of its citizens in the way that it was done in the former Soviet Union.
What is a Plan? Notes

• A plan spells out how the resources of a nation should be put to use. It
contains some general goals as well as specific objectives which are to
be achieved within a specified period of time.
Five Year Plan and concept of ‘perspective plan’

• In India plans are of five years duration and are called five-year plans
(we borrowed this from the former Soviet Union, the pioneer in
national planning).
• Our plan documents not only specify the objectives to be attained in
the five years of a plan but also what is to be achieved over a period of
twenty years. This long-term plan is called ‘perspective plan’. The five-
year plans are supposed to provide the basis for the perspective plan.
Nehru, and many other leaders and thinkers of the newly independent India,
sought an alternative to the extreme versions of capitalism and socialism.
In this view, India would be a ‘socialist’ society with a strong public sector but
also with private property and democracy. I.e., the government would ‘plan’
for the economy with the private sector being encouraged to be part of the
plan effort. (Concept of Mixed Economy)
In 1950, the Planning Commission was set up with the Prime Minister as its
Chairperson and the era of five-year plans had begun.
Evolution of Planning in India and Origin of Five-Year Plans

Though the planned economic development in India began in 1951 with the
inception of First Five Year Plan, theoretical efforts had begun much earlier,
even prior to the independence.
• M. Visvesvarayya who was a civil engineer and Dewan of Mysore
published his book “Planned economy in India”. In this book he
presented a constructive draft of the development of India in 10 years.
He actually laid a plan to shift labour from agriculture to industries and
double up National income in 10 years.
• 1938 was the year that witnessed the first attempt to develop a national
plan for India when national planning Committee was set up. This
committee was set up by Subhash Chandra Bose and chaired by
Jawaharlal Nehru. However, the reports of the committee could not be
prepared and only for the first time in 1948 -49 some papers came out.
• In 1944 Eight Industrialists of Bombay including Mr. JRD Tata, GD Birla, Notes
Purshottamdas Thakurdas, Lala Shriram, Kasturbhai Lalbhai, AD Shroff,
Ardeshir Dalal, & John Mathai working together prepared “A Brief
Memorandum Outlining a Plan of Economic Development for India”
which was popularly known as Bombay Plan. This plan envisaged
doubling the per capita income in 15 years and tripling the national
income during this period. However, Nehru did not officially accept the
plan, yet many of the ideas of the plan were inculcated in other plans
which came later.
• In August 1944, The British India government set up “Planning and

Development Department” under the charge of Ardeshir Dalal. But this
department was abolished in 1946.
• A People’s Plan also came out during that era which was based upon
Marxist socialism and drafted by M N Roy on behalf of the Indian
federation of Lahore. It called for nationalization of all agricultural
production and distribution besides development of consumer goods
industries by the state only.
• Another plan called as Gandhian Plan was put forward by Sri Shriman
Narayan in 1944 who was principal of Wardha Commercial College. It
was a modest kind of plan.
• In 1950 Sarvodaya Plan came out which was drafted by Jaiprakash

Narayan inspired by Gandhian plan as well as Sarvodaya Idea of Vinoba
Bhave. Along with agriculture it emphasized on small and cotton
industries as well. It also suggested the freedom from foreign
technology and stressed upon land reforms and decentralized
participatory planning.
HISTORY OF PLANNING IN INDIA Notes

PLAN (with year) Important points
1. Visvesvarayya Plan (1934) First attempt to initiate economic
planning in India
2. National planning commission Set-up under the chairmanship of
(1938) Jawaharlal Nehru by the Indian National
Congress.
(World war 2 began and
recommendations were not
implemented as political situation
changed)
3. Bombay Plan (1944) Presented by 8 leading industrialists of
Bombay including JRD Tata, GD Birla and
others. It saw future progress based on
textile and consumer industries and saw
an important role for the state in post
independent India.
4. ‘Gandhian Plan’ by Shriman Narayan Emphasised decentralisation, agricultural
Agarwal (1944) development, cottage industries
5. Planning and Development Was set up under the chairmanship of Sir
Department (1944) Ardeshir Dalal
6. People’s Plan (1945) Given by MN Roy
7. Planning Advisory Board (1946) Set up by the Interim government
8. Economic Programme Committee Set up under the chairmanship of Pandit
(1947) Jawaharlal Nehru.
9. Sarvodaya Plan (1950) Given by Jai Prakash Narayan. A few

points of this plan were accepted by the
government.
10. The Planning Commission (1950) Set up after independence.
11. National Development Council NDC It’s one of the key organizations of the
(1952) planning system in India symbolizing the
federal approach to planning.
12. The National Planning Council An advisory body to the Planning
(1965) Commission.
13. The NITI Aayog replaced the Advisory think tank

Planning Commission (2015)
Notes
Post-Independence:
• In 1947, after our country got independent, Economic Programme

Committee (EPC) was formed by All India Congress Committee with
Nehru as its chairman. The aim of this committee was to make a plan
which could balance private and public partnership and urban and rural
economies. The EPC recommended in 1948 to form a permanent
Planning Commission.
• In March 1950 in pursuance of declared objectives of the Government
– to promote a rapid rise in the standard of living of the people by
efficient exploitation of the resources of the country, increasing
production and offering opportunities to all for employment in the
service of the community – the Planning Commission was set up by a
Resolution of the Government of India. (In fact, these objectives are the
topics of Mains GS III Indian Economy Syllabus)
• The Planning Commission was charged with the responsibility of making
assessment of all resources of the country, augmenting deficient
resources, formulating plans for the most effective and balanced
utilization of resources and determining priorities. Jawaharlal Nehru
was the first Chairman of the Planning Commission.
Advent of FIVE-YEAR Plan Notes
Economic Planning comes under List III (Concurrent List) of Seventh Schedule. It
means that laws can be made by the central Government as well as the State
Government for Planning.
The first Five-year Plan was launched in 1951 and two subsequent five-year
plans were formulated till 1965, when there was a break because of the Indo-
Pakistan Conflict. Two successive years of drought, devaluation of the currency,
a general rise in prices and erosion of resources disrupted the planning process
and after three Annual Plans between 1966 and 1969, the fourth Five-year plan
was started in 1969.
The Eighth Plan could not take off in 1990 due to the fast-changing political
situation at the Centre and the years 1990-91 and 1991-92 were treated as
Annual Plans. The Eighth Plan was finally launched in 1992 after the initiation
of structural adjustment policies.
Democratic Socialism: Nehru was greatly influenced by the achievements of

Soviet Planning; however, he also viewed democratic qualities of capitalism as
indispensable for complete economic and social growth. He wished to take
advantage of both and thus came out his vision of “Democratic Socialism” for
new India. The idea was to not only check the growth of monopolistic
tendencies of the private sector but also provide freedom to the private sector
to play for main objective of social gain rather than economic gain.
The Planning Commission played an integrative role in the development of a

holistic approach to the policy formulation in critical areas of human and
economic development.
Five-Year Plans were developed, executed, and monitored by the Planning
Commission (1951 - 2014).
Types of Economic Planning
(i) Directional Planning

Countries, which believe in socialism, followed the directional type of planning.
The targets of plans are pre-determined and executed with the help of the
government in power. In this form of planning all the important position and
decision are taken by the state. In this type of planning all things are under
control of state including, financial institutions, industrial sector, transport, and
infrastructure.
Faults of Planning by direction Notes

• It involves bureaucratic system, which is time consuming, and there is
lack of clarity.
• People are not allowed to job of their choice and are not even allowed
to spend and consume as per their wish.
• Markets are under controls of state.
• Planning by direction is very rigid process and there is very less flexibility
because of absence of accountability towards consumers and
producers.
• Planning by direction is goal oriented which state wants to achieve at
any cost due to which it becomes very tough and sometimes there is
exploitation of resources and manpower which can lead to unrest.
• Planning by direction can lead to standardization of process, which can
result into similar production capacities and processes which diminish
innovation.
(ii) Planning by inducement

Planning by inducement is independent planning. Process of production,
forming the enterprise and various patterns of consumption by the people are
regulated and controlled by the state. The government in power forms various
monetary and fiscal policies to effectively regulate the economy. If the
authority wants to promote any industry it can subsidy to that industry and its
ancillary industries. If authority finds that there is black marketing or scarcity
of a particular commodity in market, they can take measures to control price
and starting rationing of that commodity. For increase the capital it can take up
investment and encourage private investors. It can adopt a suitable monetary
policy and can fine tune taxation in the system to increase or decrease
consumption.
Faults in planning by Inducement

As in this type of planning market forces are free therefore situation of scarcity
of commodity arises and measures of rationing and price control taken by
authority.
Monetary and fiscal policies are insignificant to induce development of the
economy by raising the rate capital formation. In an under developed country
rate of capital formation is low due to level of income and saving.
(iii) Perspective Planning

Perspective planning contains plans for longer period of time 20 to 25 years. A
perspective plan is an outline of development to be undertaken over a longer
period in a phased manner. A perspective plan does not mean a single plan will
take place for entire period of 20 years. In this planning targets are framed for Notes
particular time period for example five years like five years plan in India they
are also known as short period plan. They can be further divided into annual
plans. These five-year plans generally maintain continuity. They can be further
bifurcated as regional plan which pertains to state and districts.
Faults of Perspective planning

• In perspective type of planning plans are made for long period so they
are quite rigid that it is very tough to do necessary adjustment for
advancement of the plan.
• Administrative problems are main concern for this kind of planning as
perspective planning highly efficient bureaucracy to implement the
plans.
(iv) Indicative Planning

Indicative planning is a flexible kind of planning. It is also known as soft planning
as it different from comprehensive or imperative planning. It works
decentralized principles in the completion target plans. There is minimum
rigidity in this structure of planning.
In Indicative planning the targets for public sector are mandatory while for
private sector they are only indicative. But it does not mean that government
cannot use its power to influence the private sector in desired direction. It was
initially used in countries like France and Japan.
Fault of Indicative Planning Notes

• As indicative planning can only influence the players involved economic
planning and if all player concerned are not performing as per the
expectations the Indicative can turned out to be disaster. As in this
planning there is not much of a authority some monopolistic players
can go for personal benefit without caring about overall system which
can cause inflation in the economy.
(v) Imperative Planning

Under imperative planning, the government in power directs and control all
the economic activities and resources in the economy. All resources are used
with high efficiency to complete set targets of the plan. In such planning
consumer get fixed amount of a commodity at fixed price. Rule regulation set
by government is followed in the production of a commodity so that supply of
the commodity can be kept on checked for surplus and scarcity in the market.
Since government decision and policymaking is very rigid, they are to be
followed by the players. This kind of planning is in use in countries like Russia
and China.
(vi) Democratic planning

In Democratic planning the basic ideology is to form the democratic form of
government. Plans are prepared according to the requirement and needs of
the people. A democratic plan is characterized by discussion with various
parties involved in the economy whether different government agencies,
private parties or enterprises. This discussion will take place at level of
preparation the plan. The plan will be debated at parliament of a country. Main
motive of democratic planning is eradicating inequalities of income and wealth.
People enjoy social, economic freedom.
(vii) Fixed Planning

In this planning plans are prepared for fixed period of time. The objectives and
targets of fixed plan are to be achieved with in the plan period. While finalizing
the budget outlay the physical targets should be keep in the mind. Physical
target and spending on these targets are often not changed except during an
emergency. They are used in India.
Faults of Fixed Planning

• There is no correlation between available resources and with planning.
The main aim is to complete financial targets by foreign aid, heavy
taxation, large borrowing irrespective of its ill effects on economy.
• This system of planning fails to take into account future changes in the Notes
world economy or any other natural calamity.
• This type of planning is not suitable for projects, which have long
execution time frame, which is more than the particular plan period as
they will spread into more than one plan the intensity of their execution
will also change.
(viii) Centralized Planning

Under centralized planning the centralized Authority plans and formulates all
planning activities in the country. The authority fixes target for all industries
and fix priorities for all sectors. It takes all the investment decisions according
to the goals and targets set in the plan. Central authority all aspect of the
economy. It fixes price for all products.
Faults of Centralized planning

• Centralized planning has authoritative and undemocratic characteristic,
which have bureaucratic control and regulation.
• The mistakes and shortcoming of the planning is not likely to be
rectified.
(ix) Decentralized Planning

In decentralized planning the plans are executed plan at grass root level. In this
scheme of planning plan is prepared by central authority with discussion all the
administrative units in the country whether at state level, district level. Plans
for industries are prepared with full discussion with all the major
representative stakeholders in the industries. But individual firm are free to
take decision on their investment and output prices. There is a freedom
production and consumption under decentralized planning.
Faults of Decentralized Planning
• Its reliance on the market mechanism leads to shortages or surpluses in
the production of goods and services.
• It required lot of adjustment from government for problem in supply
side.
• It is very tough to have coordination between planned & unplanned
sectors.
PERFORMANCE OF INDIA’s FIVE YEAR PLANS: FAST RECAP Notes
Plan Description
• It was based on Harrod-Domar Model.
First Plan (1951 - 56) • Influx of refugees, severe food shortage &
mounting inflation confronted the country at
Target Growth: 2.1 % the onset of the first five-year Plan.
Actual Growth 3.6 % • The Plan Focused on agriculture, price
stability, power and transport
• It was a successful plan primarily because of
good harvests in the last two years of the plan.
Objectives of rehabilitation of refugees, food
self-sufficiency & control of prices were more
or less achieved.
• Simple aggregative Harrod Domar Growth
Second Plan (1956 - 61) Model was again used for overall projections
and the strategy of resource allocation to
Target Growth: 4.5% broad sectors as agriculture & Industry was
Actual Growth: 4.3% based on two & four sector Model prepared
by Prof. P C Mahalanobis. (Plan is also called
Mahalanobis Plan).
• Second plan was conceived in an atmosphere
of economic stability. It was felt agriculture
could be accorded lower priority.
• The Plan focused on rapid industrialization-
heavy & basic industries. Advocated huge
imports through foreign loans.
• The Industrial Policy 1956 was based on
establishment of a socialistic pattern of
society as the goal of economic policy.
• Acute shortage of forex led to pruning of
development targets; price rise was also seen
(about 30%) vis a vis decline in the earlier Plan
& the 2nd FYP was only moderately
successful.
• At its conception, it was felt that Indian
Third Plan (1961 - 66) economy has entered a “takeoff stage”.
Therefore, its aim was to make India a 'self-
Target Growth: 5.6% reliant' and 'self-generating' economy.
Actual Growth: 2.8%
• Based on the experience of first two plans Notes

(agricultural production was seen as limiting
factor in India’s economic development),
agriculture was given top priority to support
the exports and industry.
• The Plan was thorough failure in reaching the
targets due to unforeseen events - Chinese
aggression (1962), Indo-Pak war (1965),
severe drought 1965-66. Due to conflicts the
approach during the later phase was shifted
from development to defence &
development.
• Failure of Third Plan that of the devaluation of
Three Annual Plans rupee (to boost exports) along with
(1966- 69) inflationary recession led to postponement of
Fourth FYP. Three Annual Plans were
euphemistically described as introduced instead. Prevailing crisis in
Plan holiday agriculture and serious food shortage
necessitated the emphasis on agriculture
during the Annual Plans.
• During these plans a whole new agricultural
strategy was implemented. It involving wide-
spread distribution of high-yielding varieties
of seeds, extensive use of fertilizers,
exploitation of irrigation potential and soil
conservation. (Green Revolution)
• During the Annual Plans, the economy
absorbed the shocks generated during the
Third Plan
• It paved the path for the planned growth
ahead.
• Refusal of supply of essential equipment and
Fourth Plan (1969 - 74) raw materials from the allies during Indo Pak
war resulted in twin objectives of “growth
Target Growth: 5.7% with stability and progressive achievement
Actual Growth: 3.3% of self-reliance” for the Fourth Plan.
• Main emphasis was on growth rate of
agriculture to enable other sectors to move
forward. First two years of the plan saw
record production. The last three years did
not measure up due to poor monsoon. Notes

Implementation of Family Planning
Programmes were amongst major targets of
the Plan.
• Influx of Bangladeshi refugees before and
after 1971 Indo-Pak war was an important
issue along with price situation deteriorating
to crisis proportions and the plan is
considered as big failure.
• Fourth Plan - The Plan period was 1969–74.
The Plan was based on the Gadgil strategy
with special focus to the Ideas of growth with
stability and progress towards Self-reliance.
• The final Draft of fifth plan was prepared and
Fifth Plan (1974-79) launched by D.P. Dhar in the backdrop of
economic crisis arising out of run-away
Target Growth: 4.4% inflation fuelled by hike in oil prices and failure
of the Govt. takeover of the wholesale trade
Actual Growth: 4.8% in wheat.
• It proposed to achieve two main objectives:
'removal of poverty' (Garibi Hatao) and
'attainment of self-reliance'
• Promotion of high rate of growth, better
distribution of income and significant growth
in the domestic rate of savings were seen as
key instruments
• 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. After promulgation of emergency in
1975, the emphasis shifted to the
implementation of Prime Ministers 20 Point
Programme.
• FYP was relegated to the background and
when Janta Party came to power in 1978, the
Plan was terminated.
• There were 2 Sixth Plans. Janta Govt. put
Rolling Plan (1978 - 80) forward a plan for 1978- 1983 emphasizing on
employment, in contrast to Nehru Model
which the Govt criticized for concentration of
power, widening inequality & for mounting Notes

poverty. However, the government lasted for
only 2 years. Congress Govt. returned to
power in 1980 and launched a different plan
aimed at directly attacking on the problem of
poverty by creating conditions of an
expanding economy.
• The Plan focused on Increase in national
Sixth Plan (1980 - 85) income, modernization of technology,
ensuring continuous decrease in poverty and
Target Growth: 5.2% unemployment through schemes for
transferring skills (TRYSEM) and sets (IRDP)
Actual Growth: 5.7% and providing slack season employment
(NREP), controlling population explosion etc.
• Broadly, the sixth Plan could be taken as a
success as most of the target were realised
even though during the last year (1984-85)
many parts of the country faced severe
famine conditions and agricultural output was
less than the record output of previous year.
• The Plan aimed at accelerating food grain
Seventh Plan (1985 - 90) production, increasing employment
opportunities & raising productivity with
Target Growth: 5.0% focus on ‘food, work & productivity’.
• The plan was very successful as the economy
Actual Growth: 6.0% recorded 6% growth rate against the targeted
5% with the decade of 80’s struggling out of
the ’Hindu Rate of Growth’.
• The eighth plan was postponed by two years
Eighth Plan (1992 - 97) because of political uncertainty at the Centre.
• Worsening Balance of Payment position,
Target Growth 5.6 % rising debt burden, widening budget deficits,
recession in industry and inflation were the
Actual Growth 6.8% key issues during the launch of the plan.
• The plan undertook drastic policy measures to
combat the bad economic situation and to
undertake an annual average growth of 5.6%
through introduction of fiscal & economic
reforms including liberalisation under the
Prime Minister ship of Shri P V Narasimha Rao.
• Some of the main economic outcomes during Notes

eighth plan period were 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. High growth rate
was achieved even though the share of public
sector in total investment had declined
considerably to about 34 %.
• The Plan prepared under United Front
Ninth Plan (1997- 2002) Government focused on “Growth With Social
Justice & Equality “Ninth Plan aimed to
Target Growth: 6.5% depend predominantly on the private sector –
Indian as well as foreign (FDI) & State was
Actual Growth: 5.4% envisaged to increasingly play the role of
facilitator & increasingly involve itself with
social sector viz education, health etc. and
infrastructure where private sector
participation was likely to be limited.
• It assigned priority to agriculture & rural
development with a view to generate
adequate productive employment and
eradicate poverty
• Recognising that economic growth can’t be
Tenth Plan (2002 - 2007) the only objective of national plan, Tenth Plan
had set ‘monitorable targets’ for few key
Target Growth 8 % indicators (11) of development besides 8 %
growth target.
Actual Growth 7.6 % • The targets included reduction in gender gaps
in literacy and wage rate, reduction in Infant
& maternal mortality rates, improvement in
literacy, access to potable drinking water
cleaning of major polluted rivers, etc.
Governance was considered as factor of
development & agriculture was declared as
prime moving force of the economy. States
role in planning was to be increased with
greater involvement of Panchayati Raj
Institutions. State wise break up of targets for
growth and social development sought to Notes

achieve balanced development of all states.
• Eleventh Plan was aimed “Towards Faster &
Eleventh Plan (2007 - 2012) More Inclusive Growth “after UPA rode back
to power on the plank of helping Aam Aadmi
Target Growth 9 % (common man).
• India had emerged as one of the fastest
Actual Growth 8% growing economies 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 etc.
• The broad vision for 11th Plan included
several inter related components like rapid
growth reducing poverty & creating
employment opportunities, access to
essential services in health & education,
especially for the poor, extension if
employment opportunities using National
Rural Employment Guarantee Programme,
environmental sustainability, reduction of
gender inequality etc.
• Accordingly various targets were laid down
like reduction in unemployment( to less than
5% among educated youth ) & headcount
ratio of poverty ( by 10%), reduction in
dropout rates, gender gap in literacy, infant
mortality, total fertility, malnutrition in age
group of 0-3 ( to half its present level),
improvement in sex ratio, forest & tree cover,
air quality in major cities, ensuring electricity
connection to all villages & BPL households
(by 2009) & reliable power by end of 11th
Plan, all weather road connection to Notes

habitations with population 1000& above
(500 in hilly areas) by 2009, connecting every
village by telephone & providing broad band
connectivity to all villages by 2012
• The Eleventh Plan started well with the first
year achieving a growth rate of 9.3 per cent;
however, the growth decelerated to 6.7 per
cent rate in 2008-09 following the global
financial crisis. The economy recovered
substantially to register growth rates of 8.6
per cent and 9.3 per cent in 2009-10 and
2010-11 respectively. However, the second
bout of global slowdown in 2011 due to the
sovereign debt crisis in Europe coupled with
domestic factors such as tight monetary policy
and supply side bottlenecks, resulted in
deceleration of growth to 6.2 per cent in
2011-12. Consequently, the average annual
growth rate of Gross Domestic Product (GDP)
achieved during the Eleventh Plan was 8 per
cent, which was lower than the target but
better than the Tenth Plan achievement.
• Since the period saw two global crises - one in
2008 and another in 2011 – the 8 per cent
growth may be termed as satisfactory. The
realized GDP growth rate for the agriculture,
industry and services sector during the 11th
Plan period is estimated at 3.7 per cent, 7.2
per cent and 9.7 per cent against the growth
target of 4 per cent, 10-11 per cent and 9-11
per cent respectively.
• The Eleventh Plan set a target of 34.8 per cent
for domestic savings and 36.7 per cent for
investment after experiencing a rising level of
domestic savings as well as investment and
especially after emergence of structural break
during the Tenth Plan period. However, the
domestic savings and investment averaged
33.5 per cent and 36.1 per cent of GDP at
market prices respectively in the Eleventh Notes

Plan which is below the target but not very far.
• 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. The rate of decline during the
period 2004-05 to 2009-10 is twice the rate of
decline witnessed during the period 1993-94
to 2004-05. Though the new poverty count
based on Tendulkar Formula has been subject
of controversy, it is believed by the
Committee that whether we use the old
method or the new, the decline in percentage
of population below poverty line is almost
same.
• On the fiscal front, the expansionary
measures taken by the government to
counter the effect of global slowdown led to
increase in key indicators through 2009-10
with some moderation thereafter.
• The issue of Price Stability remained
resonating for more than half of the Plan
period. Inability to pass on burden on costlier
imported oil prices might have constrained
the supply of investible funds in the
government’s hand causing the 11th Plan to
perform at the levels below its target.
Note: The growth targets for the first three Plans were set with respect to National
Income. In the Fourth Plan it was Net Domestic Product. In all the Plans thereafter,
Gross Domestic Product has been used. UPSC has been asking direct questions from
this section.
Notes
STRATEGIES OF PLANNING
Strategies of Planning Facts

1. Harrod Domar Strategy As per this strategy, rate of economic
growth is dependent on the level of savings
and capital output ratio. [y=s/k] where:
y=Rate of growth
S= Savings
K=Capital output ratio (change in capital
divided by change in output measures the
productivity of investment that takes
place)
It emphasises on the dual role of capital
accumulation:
1. Increasing the national income
(demand side role) and
2. Increasing the production capacity
(supply side role).
(1st five-year plan followed this strategy)
2. Nehru-Mahalanobis Strategy The strategy emphasised:

(Followed in 2nd,3rd,4th and 5th 1. Investment in heavy industry to
five-year plan) achieve industrialisation for rapid
economic development.
2. Two sector model (consumer
goods sector and capital goods
sector).
3. Self-reliant and overcome capital
constraint.
4. Larger role for public sector as
private Sector was not that mature
and economy with private sectors
in front will result in concentration
of wealth in private hands.
3. Gandhian Strategy It was introduced in 1944 ‘Gandhian Plan’. Notes

It emphasis on:
1. Basic standard of life.
2. Scientific development of
agriculture and rapid growth of
cottage and village industries.
3. Employment oriented planning
rather than production-oriented
planning of Nehru.
4. LPG Strategy Liberalisation, Privatisation and

(Aka planning by inducement as Globalisation (LPG) strategy by Dr
against imperative planning because Manmohan:
it changed the nature of planning 1. Ended the ‘’license-permit-raj’’ and
from centralised to ‘’indicative’’, opened for the public sector
wherein planning was to play a reserved areas to private sector.
facilitating role.) 2. It allowed for foreign direct
investment and followed an export
promotion policy to boost
economic growth.
Do You Know? Notes
Liberty Indicators
• 'Liberty indicators' are those indicators which represent the degree of
civil and political freedom to individuals in a country.
• They are also needed along with indicator of income, health and
education in the human development index. One such indicator has
actually been added as a measure of 'the external of democratic
participation in social and political decision-making' but it has not been
given any extra weight.
• Some other 'liberty indicators' are measures of 'the extent of
constitutional protection given to rights of citizens' or 'the extent of
constitutional protection of the Independence of the Judiciary and the
Rule of Law' which have not been introduced In HDI till now.
• Without including such indicators and giving them adequate weightage,
the construction of a human development index remains incomplete
and its usefulness remains limited, e.g., Government allows the labour,
capital and goods to move freely in the economic system.
Protectionism
• Protectionism means the use of tariff and non-tariff barriers to protect
the local industry against foreign competition.
Four Methods of Trade Protectionism

• Tariffs to tax the imports – this immediately raises the price of the
imported goods. They become less competitive when compared to local
goods. This will work best for countries with a lot of imports, such as
the United States.
• Subsidizes for local industries - this makes the products cheaper even
when shipped overseas. Subsidies work even better than tariffs. This
method works best for countries that rely mainly on exports.
• Quotas on imported goods - No matter how low a foreign country sets
the price through subsidies; it cannot ship more goods.
• Deliberate attempt by a country to lower its currency value - this would
make its exports cheaper and more competitive. This method can result
in retaliation and start a currency war.
The Sustainable Development Goal (SDG) India Index

• The third edition of the SDG India Index and Dashboard 2020–21 was
released by NITI Aayog in June 2021.
• The index documents the progress made by India’s States and Union Notes
Territories towards achieving the 2030 SDG targets.
• The third edition covers 16 Goals on 115 quantitative indicators, with a
qualitative assessment on Goal 17.
• The SDG India Index has been developed in collaboration with the
Ministry of Statistics and Programme Implementation (MoSPI), the
United Nations, and the Global Green Growth Institute.
Competition Commission of India (CCI)
• The Competition Act, 2002 was passed by the Parliament in the year
2002, to which the President accorded assent in January, 2003. It was
subsequently amended by the Competition (Amendment) Act, 2007.
• Competition Commission of India is a statutory body within the Ministry
of Corporate Affairs of the Government of India, responsible for
enforcing the Competition Act, 2002 throughout India and to prevent
activities that have an adverse effect on competition.
• The Commission consists of one Chairperson and six Members as per
the Competition Act who shall be appointed by the Central
Government.
• It is the duty of the Commission to eliminate practices having adverse
effect on competition, promote and sustain competition, protect the
interests of consumers and ensure freedom of trade in the markets of
India. The Commission is also required to give opinion on competition
issues on a reference received from a statutory authority established
under any law and to undertake competition advocacy, create public
awareness and impart training on competition issues.
Objectives of the Commission: Notes

• To prevent practices having adverse effect on competition.
• To promote and sustain competition in markets.
• To protect the interests of consumers.
• To ensure freedom of trade.
Global Human Capital Index

There is a difference between Global Human Capital Index of WEF and Human
Capital Index of World Bank.
• Global Human Capital Index is compiled by Geneva-based World
Economic Forum (WEF).
• It takes into account "the knowledge and skills people possess that
enable them to create value in the global economic system" to measure
the 'human capital' rank of a country.
• India ranked 103/130.
India ranked 116 in Human Capital Index released by World Bank.
World Development Report

• The World Development Report is an annual report published since
1978 by the International Bank for Reconstruction and Development or
World Bank. Each WDR provides in-depth analysis of a specific aspect
of economic development.
National Sample Survey Office (NSSO)

• In 2019, the Indian government passed the order to merge the NSSO
with the Central Statistics Office (CSO) to form the National Statistical
Office (NSO). The Government stated that the NSO will be headed by
the Ministry of Statistics and Programme Implementation (MOSPI).
• The National Sample Survey Office (NSSO), formerly called the National
Sample Survey Organisation was the largest organization in India
conducting socio-economic surveys. It is an organisation under the
Ministry of Statistics, Planning and Programme Implementation,
Government of India.
• The NSSO was set up in 1950 to conduct large-scale sample surveys
throughout India. The employees of the NSSO are from the Indian
Statistical Service (appointed through the UPSC) and the Subordinate
Statistical Service (appointed through the Staff Selection Commission).
P.C MAHALANOBIS Notes

• Mahalanobis was born in 1893 in Calcutta. He was educated at the
Presidency College in Calcutta and at Cambridge University in England.
• His contributions to the subject of statistics brought him international
fame. In 1946 he was made a Fellow (member) of Britain’s Royal
Society, one of the most prestigious organisations of scientists; only the
most outstanding scientists are made members of this Society.
• Mahalanobis established the Indian Statistical Institute (ISI) in Calcutta
and started a journal, Sankhya, which still serves as a respected forum
for statisticians to discuss their ideas. Both, the ISI and Sankhya, are
highly regarded by statisticians and economists all over the world to this
day.
• The Second Plan, a landmark contribution to development planning in
general, laid down the basic ideas regarding goals of Indian planning;
this plan was based on the ideas of Mahalanobis. In that sense, he can
be regarded as the architect of Indian planning.
Notes
Topics: Economic Reforms- Liberalization, Privatization and Globalization
Following are your source for today:

o CLASS XI (Indian Economic Development) – Chapter 2, 3
Previous Year Questions: If you have to solve these questions, proper

understanding of basic concepts is necessary. Questions are mostly inter-
related and comparative in nature. And hence you need to understand the
overall economic scenario and concepts.
Some Previous Years Questions from Economy
Mains Essay
• Near jobless growth in India: An anomaly or an outcome of economic
reforms. – (Essay 2016)
• Poverty anywhere is a threat to prosperity everywhere – (Essay 2018)
• There can be no social justice without economic prosperity but
economic prosperity without social justice is meaningless – (Essay 2020)
• Globalization would finish small-scale industries in India. - (Essay 2006)
Mains GS3
• Examine the impact of Liberalization on companies owned by Indians.
Are they competing with the MNCs satisfactorily? Discuss. – (GS3 Mains
2013)
• Liberalisation of the Indian economy since 1991 has led to excessive
consumerism and over-production of 'white goods'. Elucidate. - (GS3
Mains 2001)
• Discuss the Role of Public Sector during the post-reform period of Indian
economy. – (GS3 Mains 2006)
• Identify and analyse a few major management problems which the
Indian public enterprises are facing today. In the light of your analysis,
would you advocate "Privatisation" of some of our public enterprises? -
(GS3 Mains 1990)
• Examine the effects of globalisation on Poverty removal in India. - (GS3
Mains 2006)
• How is Poverty Level measured? Evaluate poverty eradication
programmes in India. - (GS3 Mains 2004)
• How Globalization has led to the reduction of Employment in the formal
sector of the Indian economy? Is increased informalization detrimental
to the development of the country? - (GS3 Mains 2016)
• The nature of economic growth in India in described as Jobless growth. Notes

Do you agree with this view? Give arguments in favour of your answer.
- (GS3 Mains 2015)
• What are the salient features of the National Food Security Act, 2013?
How has the Food Security Bill helped in eliminating hunger and
malnutrition in India? - (GS3 Mains 2021)
• Explain various types of revolutions, took place in Agriculture after
Independence in India. How these revolutions have helped in poverty
alleviation and Food Security in India? – (GS3 Mains 2017)
• Food Security Bill is expected to eliminate hunger and malnutrition in
India. Critically discuss various apprehensions in its effective
implementation along with the concerns it has generated in WTO. –
(GS3 Mains 2013)
Prelims
Q1). Consider the following statements: - (Prelims 2019)
As per the Industrial Employment (Standing Orders) Central (Amendment)
Rules, 2018
1. If rules for fixed-term employment are implemented, it becomes easier
for the firms/companies to lay-off workers.
2. No notice of termination of employment shall be necessary in the case
of temporary workman.
Which of the statements given above is / are correct?
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2
Q2). Consider the following in respect of 'National Career Service': - (Prelims

2017)
1. National Career Service is an initiative of the Department of Personnel
and Training, Government of India.
2. National Career Service has been launched in a Mission Mode to
improve the employment opportunities to uneducated youth of the
country.
Which of the above statements is/are correct?
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2
Q3). In a given year in India, official poverty lines are higher in some States than
in others because - (Prelims 2019)
a) Poverty rates vary from State to State
b) Price levels vary from State to State Notes

c) Gross State Product varies from State to State
d) Quality of public distribution varies from State to State
Q4). Disguised unemployment generally means - (Prelims 2013)

a) Large number of people remain unemployed
b) Alternative employment is not available
c) Marginal productivity of labour is zero
d) Productivity of workers is low
Q5). Why is the government of India disinvesting its equity in the central public
sector enterprises (CPSEs)? - (Prelims 2011)
1. The government intends to use the revenue earned from the
disinvestment mainly to pay back the external debt.
2. The government no longer intends to retain the management control
of the CPSEs.
Which the correct statements given above is/are correct?
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2
Q6). Economic liberalisation in India started with – (Prelims 2000)

a) substantial changes in industrial licensing policy
b) the convertibility of Indian rupee
c) doing away with procedural formalities for foreign direct investment
d) significant reduction in tax rates
Q7). India has experienced persistent and high food inflation in the recent past.
What could be the reasons? – (Prelims 2011)
1. Due to a gradual switchover to the cultivation of commercial crops, the
area under the cultivation of food grains has steadily decreased in the
last five years by about 30%.
2. As a consequence of increasing incomes, the consumption patterns of
the people have undergone a significant change.
3. The food supply chain has structural constraints.
a) 1 and 2 only
b) 2 and 3 only
c) 1 and 3 only
d) 1, 2 and 3
Q8). With reference to the provisions made under the National Food Security
Act, 2013 consider the following statements: - (Prelims 2018)
1. The families coming under the category of 'below poverty line (BPL)'
only are eligible to receive subsidised grains.
2. The eldest woman in a household, of age 18 years or above, shall be the Notes
head of the household for the purpose of issuance of a ration card.
3. Pregnant women and lactating mothers are entitled to a take-home
ration of 1600 calories per day during pregnancy and for six months
thereafter.
a) 1 and 2
b) 2 only
c) 1 and 3
d) 3 only
Note: Refer to Previous Years Questions almost every day. Make it a habit to
refer and make a note of those concepts that you learn and are repeated in
PYQs.
India’s Post-independence Effort-An Assessment
Reflections: The ‘Industrial Policy Resolution’ of 1948 + Directive Principles of

the Indian Constitution.
• 1950: The Planning Commission was set up (Prime Minister-its
chairperson)
• Led to: An era of five-year plans
• Plan: To spell out as to how the resources should be distributed in the
country
Goals of the five-year plans: Growth, Modernization, Self-reliance and Equity
Growth:
• Refers to increase in the country’s capacity to produce the output of
goods and services within the country.
• Good indicator of economic growth is the steady increase in the Gross
Domestic Product (GDP)—the market value of all the goods and services
produced in the country during a year.
• The GDP of a country is derived from the different sectors of the
economy—the contribution made by each of these sectors makes up
the structural composition of the economy.
Modernisation:
• Steps taken by a factory to increase output by using a new type of
machine and this adoption of new technology is called modernization.
• Also, refers to changes in social outlook (the recognition that women
should have the same rights as men)
Self-reliance: Notes
• The first seven five-year plans gave more importance to self-reliance
which means avoiding imports of those goods which could be produced
in India itself→ in order to reduce our dependence on foreign countries,
especially for food
• There was a fear that dependence on imported food supplies, foreign
technology and foreign capital may make India’s sovereignty vulnerable
to foreign interference in our policies.
Equity:
• Philosophy: To ensure that the benefits of economic prosperity reach
the poor sections as well instead of being enjoyed only by the rich—
every Indian should be able to meet his or her basic needs such as food,
a decent house, education and health care; and inequality in the
distribution of wealth should be reduced.
Addressing Agricultural Needs

Land Reforms
Intermediaries (variously called zamindars, jagirdars etc.) merely collected rent
from the actual tillers of the soil without contributing towards improvements
on the farm.
• The low productivity of the agricultural sector forced India to import
food from the United States of America (U.S.A.).
Equity in agriculture: Land reforms—change in the ownership of landholdings.
Steps were taken to abolish intermediaries and to make the tillers the owners
of land—ownership of land would give incentives to the tillers to invest in
making improvements provided sufficient capital was made available to them.
Land ceiling: Fixing the maximum size of land which could be owned by an
individual—to reduce the concentration of land ownership in a few hands
Around 200 lakh tenants came into direct contact with the government — they
were freed from being exploited by the zamindars→ incentive to increase
output→growth in agriculture
But there still were cases wherein

• The zamindars continued to own large areas of land (usage of loopholes
in the legislation)
• Tenants were evicted and the landowners claimed to be self-cultivators
(the actual tillers)
Hurdles faced by the land ceiling legislation
• The big landlords challenged the legislation in the courts→delayed its
implementation
• Used this delay to register their lands in the name of close relatives→to Notes
escape from the legislation
Success of Land reforms witnessed: Kerala and West Bengal; had governments
committed to the policy of land to the tiller.
The Green Revolution

During independence: About 75 per cent of the country’s
population→dependent on agriculture
Marred with low productivity→use of old technology + absence of required

infrastructure.
India’s agriculture→ dependent upon monsoon; and if the monsoon fell short
the farmers were in trouble (if no access to irrigation facilities)
Stagnation in agriculture shifted—Green Revolution

• The large increase in production of food grains resulting from the use
of high yielding variety (HYV) seeds especially for wheat and rice
• This also meant usage of fertiliser and pesticide in the correct quantities
as well as regular supply of water; the need for these inputs in correct
proportions is vital
Check-list for farmers: Reliable irrigation facilities as well as the financial
resources to purchase fertilizer and pesticide.
1st phase of the green revolution (approximately mid 1960s up to mid-1970s)
• The use of HYV seeds was restricted to the more affluent states such as
Punjab, Andhra Pradesh and Tamil Nadu.
• Use of HYV seeds proved beneficial for the wheat-growing regions only
nd
2 Phase of the green revolution (mid-1970s to mid-1980s):
• Spread of the HYV technology to a larger number of states and this
benefited more variety of crops thus, enabling India to achieve self-
sufficiency in food grains
• To increase growth in agricultural output & contribute to the country’s
economy—it is important to keep a substantial amount of agricultural
produce to be sold in the market (and not consumed by the farmers
himself)
The portion of agricultural produce which is sold in the market by the farmers
is called marketed surplus.
Observations of C.H. Hanumantha Rao Notes

• A good proportion of the rice and wheat produced during the green
revolution period (available as marketed surplus) was sold by the
farmers in the market→ decline in the price of food grains.
• Low-income groups- Benefited from this decline in relative prices
(spend a large percentage of their income on food).
• Enabled the government to procure sufficient amount of food grains to
build a stock which could be used in times of food shortage.
Risks involving technology:
• Possibility of increase in the disparities between small and big
farmers—since only the big farmers could afford the required inputs,
thereby reaping most of the benefits of the green revolution
• HYV crops were more prone to attack by pests
Fears remained ‘fears’— because of the steps taken by the government
• Provided loans at a low interest rate to small farmers
• Subsidised fertilisers so that small farmers could also have access to the
needed inputs; since the small farmers could obtain the required inputs,
the output on small farms equaled the output on large farms in the
course of time→ benefited the small as well as rich farmers
• Risks due to pest attack were minimised with the services rendered by
research institutes established by the government
Subsidies
• Why: necessary to use subsidies to provide an incentive for adoption of
the new HYV technology by small farmers in particular—to encourage
farmers to test the new technology.
Case against continuing subsidies—
• Once the technology is found profitable and is widely adopted,
subsidies should be phased out since their purpose has been served—
meant to benefit the farmers but a substantial amount of fertiliser
subsidy also benefits the fertiliser industry; and among farmers, the
subsidy largely benefits the farmers in the more prosperous regions
• Ends up not providing benefit to the target group and it is a huge burden
on the government’s finances
Need to continue with agricultural subsidies— Farming in India continues to be
a risky business as most of the farmers are very poor and they will not be able
to afford the required inputs without subsidies→will increase the inequality
between rich and poor farmers and violate the goal of equity
Correct way forward: Ensure that only the poor farmers enjoy the benefits.
• Observation: As a nation becomes more prosperous, the proportion of Notes

GDP contributed by agriculture as well as the proportion of population
working in the sector declines considerably
Between 1950 and 1990: The proportion of GDP contributed by agriculture
declined significantly but not the population depending on it (67.5 per cent in
1950 to 64.9 per cent by 1990)—the industrial sector and the service sector did
not absorb the people working in the agricultural sector.
Industry & Trade

Poor nations can progress only if they have a good industrial sector as industry
provides employment which is more stable than the employment in
agriculture; it promotes modernisation and overall prosperity→ more
emphasis on its growth in the FYPs.
Post-independence: Need to expand the industrial base with a variety of

industries if the economy was to grow
Market and State in Indian Industrial Development:

• At the time of independence— lack of capital to undertake investment
in industrial ventures required for the development of our economy;
small market being unable to encourage industrialists to undertake
major projects→ state had to play an extensive role in promoting the
industrial sector
• Development of the economy on socialist lines: Policy of the state
controlling the commanding heights of the economy—the state would
have complete control of those industries that were vital for the
economy
• Policies of the private sector needed to be complimentary to those of
the public sector, with the public sector leading the way.
Industrial Policy Resolution 1956 (IPR 1956)
Formed the basis of the Second Five Year Plan—to build the basis for a socialist
pattern of the society
Classification of Industries—three categories:

1st: industries which would be exclusively owned by the state.
2nd: industries in which the private sector could supplement the efforts of the
state sector, with the state taking the sole responsibility for starting new units.
3rd: the remaining industries which were to be in the private sector; was kept
under state control through a system of licenses.
• Only with the issuance of license could any industry be established—to
promote industry in backward regions→it was easier to obtain a license
if the industrial unit was established in an economically backward area.
• Were given certain concessions such as tax benefits and electricity at a Notes
lower tariff→ To promote regional equality.
• Even an existing industry had to obtain a license for expanding output
or for diversifying production (producing a new variety of goods)→to
ensure that the quantity of goods produced was not more than what
the economy required
• License to expand production was given only if the government was
convinced that the economy required the larger quantity of goods.
Small-scale Industry:
Karve Committee: In 1955→possibility of using small-scale industries for
promoting rural development
A ‘small-scale industry’ is defined with reference to the maximum investment
allowed on the assets of a unit
• More ‘labour intensive’ i.e., they use more labour than the large-scale
industries and, therefore, generate more employment
• Inability to compete with bigger firms— reservation of a certain number
of products for the small-scale industry; the criterion of reservation
being the ability of these units to manufacture the goods
• Were given concessions- lower excise duty and bank loans at lower
interest rates
Trade Policy—Import Substitution

The industrial policy that we adopted was closely related to the trade policy
1st seven FYPs: Trade was characterized by an inward-looking trade strategy→
Import substitution; aiming at replacing or substituting imports with domestic
production.
(‘Make in India’ should ring in your mind at the moment)
Protection from imports took two forms: Tariffs and Quotas.
Tariffs: Tax on imported goods; they make imported goods more expensive and
discourage their use.
Quotas: Specify the quantity of goods which can be imported.
Both restrict imports and, therefore, protect the domestic firms from foreign
competition.
Policy of protection:
• Based on the notion that industries of developing countries are not in a
position to compete against the goods produced by more developed
economies—assumed that if the domestic industries are protected,
they will learn to compete in the course of time
• Feared the possibility of foreign exchange being spent on import of
luxury goods if no restrictions were placed on imports
Until the mid-1980s: Hardly any promotion of exports until the mid-1980s.
Effect of Policies on Industrial Development
• Proportion of GDP contributed by the industrial sector increased in the Notes

period from 11.8 per cent in 1950-51 to 24.6 per cent in 1990-91
• Rise in the industry’s share of GDP—important indicator of
development
• Witnessed six per cent annual growth rate of the industrial sector
• Diversification of the Indian industries was ensured—
▪ Promotion of small-scale industries gave opportunities to those
people who did not have the capital to start large firms to get into
business
▪ Protection from foreign competition enabled the development of
indigenous industries in the areas of electronics and automobile
sectors
▪ Public sector enterprises sparked off debated among economists—
state enterprises continued to produce certain goods and services
(often monopolizing them)
▪ No distinction was made between what the public sector alone can
do and what the private sector can also do.
▪ Some scholars argued that state should get out of areas which the
private sector can manage and the government should concentrate
its resources on important services which the private sector cannot
provide.
▪ The marathon continues for public sector firms even after incurring
huge losses but they continue to function causing a drain on the
nation’s limited resources whereas a loss-making private firm will
not waste resources by being kept running despite the losses.
▪ Obtaining a license was a rigorous part of the process—being widely
misused by the industrial houses; a big industrialist would get a
license not for starting a new firm but to prevent competitors from
starting new firms→ Permit license raj— prevented certain firms
from becoming more efficient
▪ Restrictions on imports- proved to be a bane as the Indian
consumers had to purchase whatever the Indian producers
produced—no incentive to improve the quality of their goods.
▪ Public sector is not meant for earning profits but to promote the
welfare of the nation→ should be evaluated on the basis of the
extent to which they contribute to the welfare of people and not on
the profits they earn.
The above points of contention/arguments led the government to introduce
a new economic policy in 1991.
India’s Industrial Policies since Independence: Notes
Industrial Policy Points to remember Notes

Industrial Policy Resolution of 1948 Set forth the role of the State in
industrial development both as an
entrepreneur and authority. Classified
industries into four categories:
1. Strategic Industries (Public
Sector)
2. Basic/Key Industries (Public-
cum-Private Sector)
3. Important Industries
(Controlled Private Sector)
4. Other Industries (Private and
Cooperative Sector)
Industrial Policy Resolution of 1956 Was regarded as the “Economic

Constitution of India” or “The Bible of
State Capitalism”. Classified industries
into three categories:
1. schedule A (exclusive
responsibility of the State)
2. Schedule B (open to both the
private and public sectors but
“progressively State-owned”)
3. Schedule C- All the other
industries (open to the private
sector but “the State reserved
the right to undertake any type
of industrial production”)
**reduced the scope for the expansion
of the private sector significantly.
Industrial Policy Resolution of 1977 Promotion of cottage and small

industries was main thrust. Small
sector was classified into three
groups—cottage and household
sector, tiny sector and small-scale
industries.
Industrial Policy Resolution of 1980 Promote the concept of economic Notes

federation. raise the efficiency of the
public sector and to reverse the trend
of industrial production of the past
three years and reaffirmed its faith in
the Monopolies and Restrictive Trade
Practices (MRTP) Act and the Foreign
Exchange Regulation Act (FERA).
Industrial Policy Resolution of 1991 The 1991 policy made ‘Licence, Permit
and Quota Raj’ a thing of the past.
Features of New Industrial Policy:
▪ De-reservation of Public Sector: Sectors that were earlier exclusively

reserved for public sector were reduced. However, pre-eminent place of
public sector in 5 core areas like arms and ammunition, atomic energy,
mineral oils, rail transport and mining were continued.
o Presently, only two sectors- Atomic Energy and Railway

operations- are reserved exclusively for the public sector.
▪ De-licensing: Abolition of Industrial Licensing for all projects except for a
short list of industries.
o There are only 4 industries at present related to security, strategic
and environmental concerns, where an industrial license is currently
required-
• Electronic aerospace and defence equipment

• Specified hazardous chemicals
• Industrial explosives
• Cigars and cigarettes of tobacco and manufactured tobacco
substitutes
▪ Disinvestment of Public Sector: Government stakes in Public Sector
Enterprises were reduced to enhance their efficiency and
competitiveness.
▪ Liberalisation of Foreign Investment: This was the first Industrial policy in
which foreign companies were allowed to have majority stake in India. In
47 high priority industries, up to 51% FDI was allowed. For export trading
houses, FDI up to 74% was allowed.
o Today, there are numerous sectors in the economy where
government allows 100% FDI.
▪ Foreign Technology Agreement: Automatic approvals for technology Notes

related agreements.
▪ MRTP Act was amended to remove the threshold limits of assets in
respect of MRTP companies and dominant undertakings. MRTP Act was
replaced by the Competition Act 2002.
Outcomes of New Industrial Policies
▪ The 1991 policy made ‘License, Permit and Quota Raj’ a thing of the
past. It attempted to liberalise the economy by removing bureaucratic
hurdles in industrial growth.
▪ Limited role of Public Sector reduced the burden of the Government.
▪ The policy provided easier entry of multinational
companies, privatization, removal of asset limit on MRTP companies,
liberal licensing.
o All this resulted in increased competition, that led to lower prices in
many goods such as electronics prices. This brought domestic as well
as foreign investment in almost every sector opened to private
sector.
▪ The policy was followed by special efforts to increase exports. Concepts
like Export Oriented Units, Export Processing Zones, Agri-Export Zones,
Special Economic Zones and lately National Investment and
Manufacturing Zones emerged. All these have benefitted the export
sector of the country.
Limitations of Industrial Policies in India
▪ Stagnation of Manufacturing Sector: Industrial policies in India have failed

to push manufacturing sector whose contribution to GDP is stagnated at
about 16% since 1991.
▪ Distortions in industrial pattern owing to selective inflow of
investments: In the current phase of investment following liberalisation,
while substantial investments have been flowing into a few industries,
there is concern over the slow pace of investments in many basic and
strategic industries such as engineering, power, machine tools, etc.
▪ Displacement of labour: Restructuring and modernisation of industries as
a sequel to the new industrial policy led to displacement of labour.
▪ Absence of incentives for raising efficiency: Focussing attention on
internal liberalisation without adequate emphasis on trade policy reforms
resulted in ‘consumption-led growth’ rather than ‘investment’ or ‘export-
led growth’.
▪ Vaguely defined industrial location policy: The New Industrial Policy, while
emphasised the detrimental effects of damage to the environment, failed
to define a proper industrial location policy, which could ensure a Notes

pollution free development of industrial climate.
BACKGROUND (Reasons for economic crisis and need for new set of policy Notes
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? →

• Government borrows to finance the deficit from banks and also from
people within the country and from international financial institutions.
• Government 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.
• Government borrowed foreign exchange → Spent on meeting
consumption needs.
Government 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,

• Government expenditure began to exceed its revenue by such large
margins that meeting the expenditure through borrowings became
unsustainable.
• There was sharp rise in the prices of many essential goods.
• Imports grew at a very high rate without matching growth of exports.
• Foreign exchange reserves declined to a level that was not adequate to
finance imports for more than two weeks.
• No sufficient foreign exchange to pay the interest that needs to be paid
to international lenders.
India took a step…

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 Notes

• Removing trade restrictions
What did India do?

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;
• 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 restrictions 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 incurring losses over the years.
The government initiated a variety of policies which fall under three heads:
viz., liberalization, privatization and globalization.
Why India went for Economic reforms?

The following are the reasons for economic reforms:
1. Rise in Prices: Inflation surged from 6.7% to 16.7%. The rise in price is
mainly due to rapid increase money supply. It was mainly to cater deficit
financing. Deficit financing means borrowing from Reserve Bank of
India by Government to meet its deficit.
2. Rise in Fiscal Deficit: Due to increase in non- development expenditure
fiscal deficit of the Government had been increasing. Due to rise in
fiscal deficit there was rise in public debt and interest. In 1991 interest
liability became 36.4% of total govt. expenditure. The Govt. caught in
debt trap. So, Govt. had to resort to economic reforms.
3. Adverse Balance of Payments: BoP, of a country is the record of all
economic transactions between the residents of the country and the
rest of world in a particular period. When foreign exchange falls short
for payment otherwise total imports exceed total exports, problem of
adverse balance of payments arises.
In 1980-81 deficit in balance of payment was Rs. 2214 crore and rose in 1990-
91 to Rs. 17,367 crores. To cover this deficit large amount of foreign loans had
to be obtained. So, liability of loan and its interest payment goes on increasing. Notes
It made balance of payments adverse.
4. Iraq-Kuwait War: In 1990-91, war in Iraq broke, and this led to rise in
petrol prices. The flow of foreign currency (remittances) from Gulf
countries stopped and this further aggravated the problem.
5. Dismal performance of the main drivers of socialism (Public Sector
Undertakings): PSU’s are enterprises wholly owned by Government
have invested crores of Rs. in these enterprises. These are no
performing well due to political interference and became big liability for
Government.
6. Fall in Foreign Exchange Reserves: Indians foreign exchange reserve fell
to low ebb in 1990-91 and it was insufficient to pay for an import bill for
2 weeks. In 1986-87 foreign exchange reserves were Rs. 8151 crores ad
in 1989-90, it declined to Rs. 6252 crores.
The IMF conditions put forth for India were as follows:
• Devaluation of the rupee by 22 per cent.
• Drastic reduction in the peak import tariff from the prevailing level of
130 per cent to 30 per cent.
• Excise duties to be hiked by 20 per cent to neutralize the revenue short
falls due to the custom cut.
• All government expenditure to be cut down by 10 per cent, annually.
The economic reform programme, that India launched, consisted of two
categories of measures:
Liberalization
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 commercial 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 govt. 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 Notes
clutches of controls and obstacles.
Major economic activities are opened for private participation keeping only key
issues of welfare and other regulatory mechanism with the state. This opening
up of various sectors of the economy for private participation and allowing
them to manage the businesses for maximizing their profits will clearly
underline the freedom available for the private-players to have their own labor
participation practices and deployment of human resources.
In the context of Indian Economy liberalization includes.

• Removal of Industrial Licensing and Registration
• Reducing the quantitative restrictions on imports also reducing import
duties.
• Reduced control on foreign exchange management both in current and
capital accounts.
• Reforms in financial systems.
• Reduction in the level of both personal and corporate taxation.
• Liberalized rules for foreign direct investment (FDI) and foreign
portfolio investment (FPI).
• Opening of the public-sector domains like power, transport, banking
etc. to private players.
• Partial privatization of public sector units.
• Change in approach towards industrial sickness.
IMPORTANT MEASURES
1. 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 five industries
[alcohol, cigarettes, hazardous chemicals industrial explosives,
electronics, aerospace and drugs and pharmaceuticals], industrial
licensing requirements have been done away with.
• Reservations for Public sector: defence equipment, atomic energy
generation and railway transport.
• Deregulation of goods produced in small scale industries.
• Market mechanism to determine the prices.
2. Financial Sector Reforms: Notes

• Financial sector which includes financial institutions such as commercial
banks, investment banks, stock exchange 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 facilitator of financial sector. i.e., the financial
sector was allowed to take decisions on many matters without
consulting the RBI.
• For instance, the reform policies led to the establishment of private
sector banks, Indian as well as foreign.
3. 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 trade mark was permitted for sale of
goods.
•
4. Public Sector Reforms:
• Greater autonomy was given to the PSUs (Public Sector Units) through
the MOUs (Memorandum of Understanding) restricting interference of
the government officials and allowing their managements greater
freedom in decision-making.
5. 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 enterprises, expansion
of existing businesses, mergers and acquisitions etc. have been
abolished.
Effects of liberalization on Indian Economy Notes

Note- The data used is only for a comparative analysis post LPG. Do not mug
them. Understand the trends only.
GDP growth rate – India’s annual average growth rate from 1990 – 2017 has
been around 6.6 % which is almost double than pre-reforms era.
Industrial Growth Rate – The performance of industrial sector is dismal,

barring few years it barely performed well. Its share in GDP is still at 25%.
Foreign companies got free access to Indian markets and made domestic
products uncompetitive. They obviously had better access to technology and
larger economies of scale.
Service Sector – the de-facto Prime Mover

• India stands one of the leading economies because its growth has been
led by the Service sector. It’s a larger part of the Indian economy both
in terms of employment potential and its contribution to national
income.
• Demand and supply factors have led to this growth. In the demand side
high growth of services is the economy was mostly due to the factors
such as the increasing input usage of services by other sectors. In the
supply side is the increased trade in services following trade in
liberalization policies and other reforms of 1990s induced this growth.
• In the case of service sector liberalization has been boon for India. The
human resource required for service sector were much cheaper in India
compared to that of developed countries. Coupled with this was the IT
revolution which created the new base for economy and employment.
Why the service sector has been called as the economic engine?
India’s dominant service sector is called as economic engine due to following
reasons.
• The Services Sector accounted for about 54 percent of the economy and
Gross Value Added (GVA) growth, two-thirds of total FDI inflows into
India and about 38 percent of the total exports.
• Services sector in India is the most dynamic sector, growing at an
average annual rate of about 10 per cent, and exhibiting enough
resilience to nullify the negative repercussions of the global financial
crisis.
• The growth rate of agriculture has shown downward trend since 1980,
while the industrial and service sectors have continually shown upward
trend. The average growth rate of agriculture was below 3 per cent and Notes
that of industrial and service sectors, was 5.5 per cent and 7.5 per cent
respectively during the period 1950 to 2017.
• There has been rapid growth of service sector during the post-reform
period which has created substantial employment opportunities in the
country. The share of service sector in the employment has increased
from 20 per cent in 1990-91 to over 28 per cent in 2017-18. In urban
areas, 68.3% persons were employed in the service sector. Services like
trade, travel, tourism and hotels provide the highest employment
(9.4%) followed by transport, storage and communication services
(4.0%).
• The service sector has a substantial but untapped employment growth
potential particularly in IT and IT-enabled services, telecom services,
travel, tourism, healthcare, financial services, retail services, media and
entertainment services. There is still much scope for the development
of service sector due to low wages and highly educated and skilled
personnel.
• The service exports constitute 36.80% in overall exports of India.
India’s services exports are dominated by the software sector followed
by business, travel, transportation, and other services such as financial,
insurance and communication services.
• Service Sector accounted for 54 per cent of the total FDI inflows into
India. This was driven by strong inflows into sub-sectors such as
Information & Broadcasting, Air Transport, Telecommunications,
Consultancy Services and Hotel & Tourism.
• Transition to Knowledge based Economy: The economic liberalization
policy of the government has brought in rapid and drastic changes in
the service sector. As a result, there has been an increasing transition
of Indian economy from the agrarian economy to a knowledge-based
economy. India has a potential to become knowledge-based economy
due to fast development of service sector, growth of IT and software
sector, largest pool of skilled and highly educated English-speaking
people and increasing exports of IT based services.
What are the reasons for the huge growth of services vis-a-vis industry in the
country?
The possible reasons are as follows.
• India has immense human resources that are well-educated and fluent
in English acted as cheap labour. Thus, propelling the service sector.
• The license Raj, restrictions on foreign investment, lack of measures to
promote private industry, import of cheap manufactured goods all
contributed to the lack of substantial growth in the manufacturing Notes

sector.
• There are another two kinds of reasons adduced to explain why India is
experiencing this unusual (and supposedly virtuous) growth in service.
• Modern services like financial services, software and information
technology enabled services, communications services, business
services, education services and health services and productive services
like transport, storage and communications that account for the bulk of
the services sector. This is seen as rendering the privileging of
manufacturing over services unwarranted in India’s case.
• Second, India’s success in software and IT-enables serviced (ITeS)
exports, has made it a significant services exporter with its share in
world services exports rising from 0.6 per cent in 1990 to 3.3 per cent
in 2013. Since this India’s services growth has been led by software and
IT-enabled services, seen as knowledge and technology intensive
services, some have argued that services growth is expanding the
knowledge economy, and reflects a new kind of dynamism.
Privatization
• The policies through which the ‘roll back’ of the state was done included
deregulation, privatization and introduction of market reforms in public
services. Privatization at that time was used as a process under which
the state assets were transferred to the private sector.
• But during the period several connotations and meanings of the term
‘privatization’ have developed. We may see them as follows:
• Privatization in its purest sense and lexically means denationalization,
i.e., transfer of the state ownership of the assets to the private sector
to the tune of 100 per cent. India never ventured into such type of
privatization.
• Another type of privatization is disinvestment. This process includes
selling of the shares of the state-owned enterprises to the private
sector. Disinvestment is de-nationalization of less than 100 per cent
ownership transfer from the state to the private sector. If the sale of
shares of the state-owned assets has been to the tune of 51 per cent,
the ownership is really transferred to the private sector even then it is
termed as privatization.
• The third type, in which the term privatization has been used around
the world, is very wide. Basically, all the economic policies which
directly or indirectly seem to promote the expansion of the private
sector or the market (economy) have been termed by experts and the Notes
governments as the process of privatization. We may cite few examples
from India—de-licensing and de-reservation of the industries, even cuts
in the subsidies, permission to foreign investment, etc.
CONCEPT OF DISINVESTMENT
• Divestment or disinvestment means selling a stake in a company,
subsidiary or other investments. Businesses and governments resort to
divestment generally as a way to pare losses from a non-performing
asset, exit a particular industry, or raise money.
• The Indian government started divesting its stake in public-sector
companies in the wake of a change of stance in economic policy in the
early 1990s commonly known as 'Liberalisation, Privatisation,
Globalisation'.
E.g.; Hindustan Zinc, BALCO, Container Corp of India, VSNL, Air India etc.
• The Department of Disinvestment was set up as a separate department

in December, 1999 and was later renamed as Ministry of Disinvestment
in 2001.
• In 2004, the Department of Disinvestment was brought under the
Ministry of Finance.
• The Department of Disinvestment has been renamed as Department of
Investment and Public Asset Management (DIPAM) in 2016 which has
been made the nodal department for the strategic stake sale in the
Public Sector Undertakings (PSUs).
• National Investment Fund (NIF) was constituted in 2005, into which the
proceeds from disinvestment of Central Public Sector Enterprises were
to be channelized.
• 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.
Do you know?
• In the initial phase of development planning in India, more especially
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 Notes
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.
Why disinvestment of Indian PSU was undertaken?

• While evaluating the performances, it was noted that PSUs had shown
a very negative rate of return on capital employed.
• Inefficient PSUs had become and were continuing to be a drag on the
Government’s resources turning to be more of liabilities to the
Government than being assets.
• The national gross domestic product and gross national savings were
also getting adversely affected by low returns from PSUs. About 10 to
15 % of the total gross domestic savings were getting reduced on
account of low savings from PSUs.
Advantages and use of disinvestment proceeds:

• For financing the increasing fiscal deficit, Government can use the
proceeds from disinvestments to bring down fiscal deficit to more
manageable levels.
• Resource mobilization, the proceeds can be used to invest in other
growth sectors which can induce economic activity and generate better
returns for the government
• Financing large scale infrastructure through disinvestment. This creates
positive externality as it will facilitate more production and trade.
• Improve efficiency of the PSEs (Public Sector Enterprises), the
inefficient PSU’s will now be force to make better missions, achievable
targets and strategies to achieve them, this will increase the overall
efficiency.
• For social programmes like health and education, as government is
finding is difficult to meet the increasing demand from traditional tax
revenues alone.
The salient features of the Policy are: Notes

Disinvestment policy
(i) Public Sector Undertakings are the wealth of the Nation and to
ensure this wealth rests in the hands of the people, promote public
ownership of CPSEs;
(ii) While pursuing disinvestment through minority stake sale in listed

CPSEs, the Government will retain majority shareholding, i.e. at least
51 per cent of the shareholding and management control of the
Public Sector Undertakings;
(iii) Strategic disinvestment by way of sale of substantial portion of

Government shareholding in identified CPSEs up to 50 per cent or
more, along with transfer of management control.
Approach for Disinvestment:

(a) Disinvestment through minority stake sale
(i) Already listed profitable CPSEs (not meeting mandatory shareholding
of 10%, which stands revised to 25%) are to be made compliant
through ‘Offer for Sale’ (OFS) by Government or by the CPSEs through
issue of fresh shares or a combination of both.
(ii) Unlisted CPSEs with no accumulated losses and having earned net
profit in three preceding consecutive years are to be listed.
(iii) Follow-on public offers would be considered taking into

consideration the needs for capital investment of CPSE, on a case-by-
case basis, and Government could simultaneously or independently
offer a portion of its equity shareholding.
(iv) All cases of disinvestment are to be decided on a case-by-case basis
(v) The Department of Investment and Public Asset Management

(DIPAM) is to identify CPSEs in consultation with respective
administrative Ministries and submit proposal to Government in
cases requiring Offer for Sale of Government equity
(b) Strategic Disinvestment: Transfer of the ownership and control of a public

sector entity to a private entity. Here government retains minority stake only.
(i) To be undertaken through a consultation process among different

Ministries/Departments, including NITI Aayog.
(ii) NITI Aayog to identify CPSEs for strategic disinvestment and advice on Notes
the mode of sale, percentage of shares to be sold of the CPSE and
method for valuation of the CPSE.
(iii) The Core Group of Secretaries on Disinvestment (CGD) to consider the

recommendations of NITI Aayog to facilitate a decision by the Cabinet
Committee on Economic Affairs (CCEA) on strategic disinvestment and
to supervise/monitor the process of implementation.
(c) Comprehensive management of GoI’s investment in CPSEs
(i) The Government recognises its investment in CPSEs as an important

asset for accelerating economic growth and is committed to the
efficient use of these resources to achieve optimum return.
(ii) The Government will achieve these objectives by adopting a

comprehensive approach for addressing critical inter-linked issues
such as leveraging of assets to attract fresh investment, capital
restructuring, financial restructuring, etc.
(iii) Different options for optimal utilization of Government’s investment

in CPSEs will be assessed to adopt suitable investment management
strategies to improve investors’ confidence in the CPSEs and support
their market capitalization which is essential for raising fresh
investment from the capital market for their expansion and growth.
(iv) Efficient management of investment in CPSEs shall be ensured

through rationalization of decision-making process for all related
issues and seamless inter-departmental coordination in the matter.
Importance of Disinvestment:
• Development of social sector.

• To improve efficiency and performance of PSUs.
• Financing India’s increasing fiscal deficit.
• Financing large-scale infrastructure projects across the country.
• Increasing consumption and demand.
• Minimizing government debt – Almost 40-45% of the Centre’s revenue
receipts go towards repaying public debt or interest in the same.
• Implementing social programs in health and education sectors.
Negatives of Disinvestment: Notes

• Can lead to monopolisation of private sector.
• Some well performing PSUs were also privatized.
• Apprehensions of working class.
• Against socialist principles.
• Disinvestment cannot be only solution to correct loss-making PSUs.
Globalization
• Globalization is generally termed as ‘an increase in economic

integration among nations. The official meaning of globalization for the
WTO is movement of the economies of the world towards “unrestricted
cross border movements of goods and services, capital and the labour
force”.
Globalization means world economic integration through free movement

across national borders of:
• Financial capital represented by investment in capital markets and
money markets,
• Physical capital represented by plant and machinery,
• Technology, and
• Labour.
ELEMENTS OF GLOBALISATION:
The phenomenon of globalization caught momentum in India in 1990s with
reforms in all the sectors of the economy. The main elements of globalization
were:
1. 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
abolished. 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.
2. 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
themselves in Indian markets and were given a level playing field to Notes
compete with Indian enterprises.
3. Foreign Exchange Regulation Act (FERA) was liberalized in 1993 and

later Foreign Exchange Management Act (FEMA) 1999 was passed to
enable foreign currency transactions.
4. 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
(Agreement on Agriculture).
Effect of Globalization on Indian Economy:

• Globalization has both positive and negative effects on Indian economy.
These are as follow
• Note: Focus on trends, not the facts/figures.
Positive effects of globalization on Indian economy:

• Increase in Foreign Trade: - According to the Ministry of Commerce and
Industry, India’s overall exports between April 2021 and December
2021 were estimated at US$ 301.3 billion (a 49.6% YoY increase).
Whereas overall imports between April 2021 and December 2021 were
estimated at US$ 443.82 billion (a 68% YoY increase).
• Increase in Foreign Exchange Reserves: India's foreign exchange
reserves increased by $394 million to $631.92 billion in March 2022.
• Increase in Foreign Collaborations: - Globalization has promoted
collaboration of foreign companies with many Indian companies. These
collaboration agreements can be technical, financial or both.
• Expansion of Market: - globalization has expanded the size of market,
it has permitted Indian business unit to expand their business in the
whole world. Now multinational corporations, have no national
boundaries. Indian companies like Infosys, Tata consultancy, Wipro,
Tata Steel, reliance etc., are doing their business in many countries of
the world.
• Technological Development: - globalization has promoted the technical
collaboration of foreign companies. This collaboration enabled the
inflow of modern advanced and superior foreign technology in India.
Now Indian business units use this modern technology. It has resulted
technological development of Indian business units.
• Brand Development: - Globalization has promoted the use of branded
goods. Now not only durable goods are branded but products like
garments, Juices, Snacks, food grains etc. are also branded. Brand Notes
development has led to quality improvement.
• Development of Capital Market: - Globalization has helped in Indian
capital market development now many foreign investors invest in
Indian capital market recently there has been substantial increase in
inflow of foreign.
• Increase in Employment: - As a result of Globalization foreign
companies are establishing their production and trading units in India.
It has increased employment opportunities for Indian. E.g., many
Indians are employed in foreign insurance companies, mobile
companies etc.
• Reduction in brain Drain: - as a result of globalization, many
multinational corporations have set up their business units in India.
These MNCs provide attractive salary package and good working
conditions to efficient, Skilled Indian get good employment
opportunities in India. It has resulted in reduction in brain- drain.
Negative Effect of Globalization:

Following observation highlights the negative effect of globalization policy on
the Indian economy: -
• Loss of Domestic industries: - as a result of Globalization foreign
competition has increased in India. Because of better quality and low
cost of foreign goods, many Indian industrial units have failed to face
competition and have been closed.
• Problem of Unemployment: - as a result of globalization foreign
companies or even some Indian companies use capital intensive
technology. With the increasing use of capital-intensive technology, the
employment opportunities are reduced and increase the problem of
unemployment in Indian economy.
• Exploitation of Labour: - Globalization is exploiting unskilled workers by
giving lower wages, less job security long working hours and worse
working condition.
• Increase in Inequalities: - globalization has benefited MNCs and big
industrial units but small and cottage industries are adversely hit by it.
It has increased inequalities in India.
• Bad Effect on Culture and Value System: - Many global companies sell
such products as distort our culture and value system. The vulgar
advertisements shown by some MNCs pollute the thinking of young
generation in India.
•
ADVOCACY OF GLOBAISATION Notes

In support of the movement for globalisation, the following arguments are
put forth:
1. Globalisation promotes foreign direct investment and, thus, it enables
developing countries to raise capital without incurring international
indebtedness.
2. Globalisation helps developing countries to make use of and adapt
technologies developed by advanced countries without undertaking
heavy expenditures in Research and Development (R&D).
3. Globalisation widens the access of developing countries to export their
goods and services to developed countries. Similarly, globalisation
enables consumers in developing countries to acquire quality consumer
goods, especially consumer durables, at relatively much lower prices.
4. Globalisation implies faster diffusion of knowledge and, thus, it enables
developing countries to attain international standards of production
and productivity.
5. Globalisation by reducing tariffs and quantitative restriction increases
the share of foreign trade as a percentage of GDP.
In brief, the advocates of globalisation consider it as the engine of growth,

technological advancement, raising levels of productivity, enlarging
employment and bringing about poverty reduction with modernisation.
OVERALL ASSESSMENT OF LPG ON INDIAN ECONOMY
Following are some of the positive impacts of LPG Reforms on Indian

Economy
1. Increase in GDP Growth Rate
• During 1990-91, India’s GDP growth rate was only 1.1% but after 1991
reforms due LPG policy India’s GDP growth rate has increased year by
year.
• Because of the abolition of Industrial licensing, privatization, advanced
foreign technology and Reduction of taxes India’s GDP has increased
after 1991 reforms.
• Currently, the country is ranked SIXTH in the world in terms of nominal
GDP. In terms of PPP, India is third largest economy.
• India is tipped to be the second largest economy in the world by 2050.
• India Falls to 6th Spot in Global GDP Rankings: World Bank Report
Notes
2. Increase in Foreign Direct Investment (FDI):
• Foreign Direct Investment (FDI) equity inflows into India contracted

marginally by 1 per cent to $58.77 billion during 2021-22, according to
official data. The FDI equity inflows stood at $59.63 billion during 2020-
21, the data from the Department for Promotion of Industry and
Internal Trade (DPIIT).
• According to the Department for Promotion of Industry and Internal
Trade (DPIIT), FDI equity inflow in India stood at US$ 572.81 billion
between April 2000-December 2021, indicating that the government's
efforts to improve ease of doing business and relaxing FDI norms have
yielded results.
• Positive reforms, which made it for a favorable destination for foreign
investment, include the abolition of the Foreign Investment Promotion
Board (FIPB).
3. Increase in 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 areas total income by its total population.
• Between 1991 and 2016, per capita income rose from Rs 6,270 to Rs
93,293. This is a whopping jump.
• Per Capita income has 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 has increased.
Notes
4. Labor Force and Employment
• In 1991 unemployment rate was 4.3% but after India adopted new LPG
policy more employment has been generated. Because of globalization
many new foreign companies came in India and due to liberalization,
many new entrepreneurs have started new companies because of an
abolition of Industrial licensing / Permit Raj.
• India’s unemployment rate has reduced from 4.3% in 1991 to 3.6% in Notes
2014. However recent trends show an increase in unemployment rate.
5. Purchasing Power Parity
Purchasing power parity is defined as the number of units of a country’s

currency required to buy the same amount of goods and services in the
domestic market as one dollar would buy in the US. Recently, India became the
third largest economy in terms of PPP. China became the largest defeating the
US to the second position.
Share of agriculture, industry and services in GDP

The post-reform period shows the gradual decline in the agriculture sector’s
contribution to the Indian economy. India’s traditional occupation, agriculture
now contributes only about 15% to the GDP, down from 29 percent in 1991.
The services sector has taken the lead role in propelling the economy at the
global stage. The IT sector has been the torchbearer of the service sector in
India. Currently, it contributes around 50 percent to the national economy. In
the meanwhile, the industrial sector has undergone marginal growth in the last
25 years.
6. Power generation and consumption
Electricity consumption is a proxy for growth. As a country prospers

economically, its power consumption increases too. This has been the case
with developed countries such as the US. Post-reforms, per-capita power
consumption in India has increased each year. Cumulatively, there has been
about 162 percent growth between 1990-91 and 2012-13 – from 291.8 KWh to
765 KWh.
7. Disinvestment Notes
• Discussed above
8. Monopolistic Market to Competitive Market
• Till 1991, Indian market was dominated by monopolistic firms. This

Monopolistic character became more and more competitive in nature
after 1991 reforms. Wide range of consumer goods like Television,
Refrigerator, washing machine, air conditioners etc. were made
available at competitive rates.
9. Urban Concentration of Growth Process

• LPG policies have led the growth process concentrated on urban areas.
Impact of globalization and privatization can be seen in urban areas
mostly. We cannot find any multinational companies in rural areas as
these areas do not have conducive infrastructure facilities to attract
MNCs.
10. Informalization of work

Globalization has also resulted in various flexible labour systems in the
following ways.
• Organizational flexibility (more turnovers of firms, more use of sub-
contracting and production chains).
• Numerical flexibility (more use of external labour, such as contract
workers, out-workers, agency labour, temporary workers and tele-
workers)
• Functional flexibility (greater change in work tasks, job rotation and
skill)
• Job structure flexibility (more changes of restructuring jobs and
occupational structures in production)
• Working time flexibility (more continuous working, flexible hours)
• Wage system flexibility (a shift fixed to flexible wages, monetization of
remuneration, greater use of bonuses)
• Labour force flexibility (less attachment to sectors, companies or
occupational groups, erosion of 'collective labour', and a greater
tendency for workers to move in and out of the labour market and
labour force).
Why informalization of workforce took place? Notes

• Rigid and too many labor laws – which resulted in contract hiring in
order to circumvent rigid hiring and firing provisions.
• The service sector led growth which requires skilled workforce gave
employment only to miniscule section of society as vast majority of the
work force is unskilled.
• Lack of thrust to the manufacturing sector which is supposed to free
up labor from agriculture sector resulted in un-balanced occupational
structure.
• Market-mechanisms and competition led to the rise of capital-
intensive industries coupled with automation and closure of labour
intensive small and medium industries.
• Lack of exit mechanism such as insolvency and bankruptcy laws has
led to firms remaining small, and not scaling up. Such small firms are
exempted from mandatory registration from EPFO, etc. (We will learn
Insolvency and Bankruptcy Code recently in news in Banking Module)
• The global financial crisis, South East Asian crisis, Euro zone crisis
made a halt to corporate expansion plans and closure of industries
which further increased the unemployment and informalization.
LIMITATIONS OF LPG POLICY ON INDIAN ECONOMY
1. Low Growth of Agriculture Sector
• Agriculture has been and still remains the backbone of the Indian
economy. It plays a vital role not only in providing food and nutrition to
the people, but also in the supply of raw material to industries and to
export trade.
• In 1991, agriculture provided employment to 72 per cent of the
population and contributed 29.02 per cent of the gross domestic
product. However, in 2014 the share of agriculture in the GDP went
down drastically to 17.9 per cent and in 2017 to 16.8%. This has resulted
in a lowering the per capita income of the farmers and increasing the
rural indebtedness.
• It is estimated that India’s agriculture sector accounts only for around
20 percent of the country’s economy but for more than 45 percent of
total employment.
GDP compositions are as follows: Approximate figures (Focus on Trend)

• Agriculture (17%)
• Industry (29%)
• Services (54%) Notes
2. 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 a lot 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
activities. Hence, they are easily defeating Indian local companies. And
they have acquired many Indian companies as well.
• Because of financial constraints, lack of advanced technology and
production inefficiencies Indian companies are facing problem in the
globalized world.
3. Adverse Impact on Environment
• Globalization has also contributed to the destruction of the

environment through pollution and clearing of vegetation cover.
• With the construction of companies, the emissions from manufacturing
plants are causing environmental pollution which further affects the
health aspect of society.
• The construction also destroys the vegetation cover which is important
in the very survival of both humans and other animals.
4. Increase in Income disparity Notes
• Globalization leads to widening income gaps within the country.

Majorly the benefit of globalization has reached 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.
5. Growth and Employment
• Though the GDP growth rate has increased in the reform period,
scholars point out that the reform-led growth has not generated
sufficient employment opportunities in the country. This is shown in
the jobless growth scenario of India. (We will discuss Economic
Growth-related issues in future economy modules)
KINDLY NOTE- Do not focus on data as of now. Try to understand the overall
trends of Indian Economic Sectors post LPG reforms.
Topics: Poverty, Food Security, Unemployment etc. Notes

• CLASS IX (Economics) –
o Chapter 3 (Poverty as Challenge) and
o Chapter 4 (Food Security in India)
• CLASS XI (Indian Economic Development) –
o Chapter 4 (Poverty),
o Chapter 6 (Rural Development) and
o Chapter 7 (Employment: Growth, Informalization and Other Issues)
Important Note- Food Security, PDS, Agricultural Marketing etc., will be

covered again in detail under Mains GS 3 Topics. Here focus only on basics.
Poverty
http://iasbaba.com/wp-content/uploads/2015/04/Poverty-and-development-
Issues.jpg
What comes to your mind, when you listen to the word- ‘Poverty’? Check this
Mind Map and think a while!
• Poverty can be defined as a social phenomenon in which a section of
society is unable to fulfill even the basic necessities of life. When a
substantial section is deprived of minimum level of living and continues
with a bare subsistence level, that society is said to be plagued with
mass poverty.
• Poverty implies a condition in which a person is unable to maintain
living standard adequate for his/her physical and mental efficiency.
Poverty erodes self-esteem and opportunities to live life to the fullest. Notes
The cumulative effect is the wide gap between haves and have not’s.
• According to World Bank, Poverty is deprivation in well-being and is
multi-dimensional. It includes low incomes and inability to acquire the
basic goods and services necessary for survival with dignity.
Types of Poverty:
• Absolute poverty: The state in which people do not have the minimum
level of income deemed necessary for living in a civilized way.
• Relative poverty: Relative poverty is when some people’s way of life and
income is so much worse than the general standard of living in the
country or region in which they live that they struggle to live a normal
life and to participate in ordinary economic, social and cultural
activities.
• 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. E.g. casual workers
• Chronic poor: Always poor and usually poor together are categorized
under chronic poor.
• Churning poor: Those people who regularly move in and out of poverty.
E.g.: 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 categorized
under this.
• Non – Poor: Those who are never poor in their lifetime.
Learning Poverty is defined as being unable to read and understand a simple

text by age 10.
• The new data show that 53% of all children in low- and middle-income
countries suffer from learning poverty.
• This high rate of learning poverty and slow progress is an early warning
sign that all of the targets outlined in SDG4 are at risk – including the
target to increase the number of youth and adults who have relevant
skills for employment, decent jobs, and entrepreneurship.
• The World Bank has adopted a Learning Poverty Target that aims to cut
the global rate of learning poverty by at least 50% by 2030.
Poverty Estimation- History to Present Notes

The estimation of the poverty was done by the planning commission (now
being taken care by NITI Aayog) on the basis of large sample survey of the
consumer expenditure carried out by the National Sample Survey office
(NSSO).
Committees for poverty estimation:

• Dadabhai Naoroji -- pioneer in the pre-independent India to work on the
concept of Poverty Line.
• In 1962, the Planning Commission constituted a working group to estimate

poverty nationally, and it formulated separate poverty lines for rural and
urban areas – of Rs 20 and Rs 25 per capita per year respectively.
• VM Dandekar and N Rath made the first systematic assessment of poverty

in India in 1971, based on National Sample Survey (NSS) data from 1960-
61. 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. This generated debate on minimum calorie consumption norms
while estimating poverty and variations in these norms based on age and
sex.
• Alagh Committee (1979)

• Lakdawala Committee (1993)
• Tendulkar Committee (2009)
• Recommendations of N.C. Saxena Committee
• Dr. Arjun sengupta committee for poverty related to unorganised sector
(Rs. 20 per day criteria)
• Rangarajan Committee
• World Bank's “money metric” approach
Some of the Committees in detail

(Don’t mug, just know about them, less important)
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
requirements. As per the recommendations, poverty line was devised to be as
given below:
Area Calories Notes

Rural 2400
Urban 2100
Lakdawala Committee (1993): In 1993, an expert group constituted to review

methodology for poverty estimation, chaired by DT Lakdawala, made the
following suggestions:
• Consumption expenditure should be calculated based on calorie
consumption as earlier;
• 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;
• 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): In 2005, another expert group to review

methodology for poverty estimation, chaired by Suresh Tendulkar, was
constituted by the Planning Commission to address the following three
shortcomings of the previous methods:
• Consumption patterns were linked to the 1973-74 poverty line baskets
(PLBs) of goods and services, whereas there were significant changes in
the consumption patterns of the poor since that time, which were not
reflected in the poverty estimates;
• There were issues with the adjustment of prices for inflation, both
spatially (across regions) and temporally (across time);
• Earlier poverty lines assumed that health and education would be
provided by the State and formulated poverty lines accordingly.
It recommended four major changes:

• a shift away from calorie consumption-based poverty estimation;
• a uniform poverty line basket (PLB) across rural and urban India;
• a change in the price adjustment procedure to correct spatial and
temporal issues with price adjustment; and
• incorporation of private expenditure on health and education while
estimating poverty.
The Committee recommended using Mixed Reference Period (MRP) based Notes
estimates, as opposed to Uniform Reference Period (URP) based estimates that
were used in earlier methods for estimating poverty.
As per Tendulkar committee: Monthly per-capita expenditure for Rural is 816

and for Urban is 1000 rs.
The Tendulkar committee made the poverty line multidimensional, by

considering several other expenditures other than just food. An immediate
impact of this was that the poverty ratio for 2004-05, went up from 27.5
percent to 37.2 percent of the total population. From that level, the poverty
ratio has come down to 21.9 percent in 2011-12.
Criticism-Prima facie this sounds good. The trouble crops up when Rs 816/Rs
1000 per month is converted into expenditure per day. Assuming 30 days in a
month, this expenditure comes to Rs 27.5 per day for the rural areas and Rs
33.33 for urban areas. Hence, anyone whose expenditure per day is less than
these amounts is categorised as poor.
Rangarajan Committee: In 2012, the Planning Commission constituted a new

expert panel on poverty estimation, chaired by C Rangarajan with the following
key objectives: (i) to provide an alternate method to estimate poverty levels
and examine whether poverty lines should be fixed solely in terms of a
consumption basket or if other criteria are also relevant; (ii) to examine
divergence between the consumption estimates based on the NSSO
methodology and those emerging from the National Accounts aggregates; (iii)
to review international poverty estimation methods and indicate whether
based on these, a particular method for empirical poverty estimation can be
developed in India, and (iv) to recommend how these estimates of poverty can
be linked to eligibility and entitlements under the various schemes of the
Government of India.
As per Rangarajan Committee: Monthly expenditure of Family of Five: 4860

(RURAL); 7035(URBAN)
C Rangarajan has dismissed the Tendulkar Committee report on estimating

poverty and said that the number of poor in India was much higher in 2011-12
at 29.5 per cent of the population, which means that three out of 10 persons
are poor.
• As per the Rangarajan panel estimates, poverty stood at 38.2 per cent
in 2009-10 and slided to 29.5 per cent in 2011-12.
• This is at variance with the Tendulkar methodology under which Notes

poverty was estimated at 29.8 per cent in 2009-10 and declined to 21.9
per cent in 2011-12.
• As per Rangarajan panel estimates, a person spending less than Rs
1,407 a month (Rs 47/day) would be considered poor in cities, as against
the Tendulkar Committee's suggestion of Rs 1,000 a month (Rs 33/day).
• In villages, those spending less than Rs 972 a month (Rs 32/day) would
be considered poor. This is much higher than Rs 816 a month (Rs
27/day) recommended by Tendulkar Committee.
• In absolute terms, the number of poor in India stood at 36.3 crore in
2011-12, down from 45.4 crore in 2009-10.
Concept of Socio-Economic Caste Census (SECC)

The government released data from the Socio-Economic Caste Census (SECC)
in 2011. There has been comment that hereafter, we need not have
consumption-based poverty estimates using NSS (National Sample Surveys)
data. It is thought that SECC data will alone be enough to estimate poverty and
deprivation.
What is the difference between NSS and SECC?

• NSS consumption-based poverty estimates are still relevant.
• SECC-based estimates are important, but no substitutes for NSS-based
poverty ratios.
• Estimates based on SECC and NSS data have different purposes.
What is the present basis for poverty line?
• Based on the analysis presented in the expert group report, monthly
per capita consumption expenditure of Rs 972 in rural areas and Rs
1,407 in urban areas is treated as the poverty line at the all-India level.
• Assuming five members for a family, this will imply a monthly per
household expenditure of Rs 4,860 in rural areas and Rs 7,035 in urban
areas.
• The expert group estimates that 30.9 per cent of the rural population
and 26.4 per cent of the urban population were below the poverty line
in 2011-12.
• The all-India ratio was 29.5 per cent.
Think!
• Poverty estimates provide the proportion and size of the poor
population and their spread across states and broad regions.
• But they cannot be used for identification of the individual poor, which Notes
is necessary to ensure that the benefits of programmes and schemes
reach only the deserving and targeted group.
A case study for assessing present Poverty Line

• The World Bank defines a person as extremely poor if she is living on
less than 1.90 international dollars a day, which are adjusted for
inflation as well as price differences between countries.
• Researchers at Brookings Institution say Nigeria had 87 million people
living in extreme poverty in May 2018, compared to 73 million in India.
Means, India is not the poorest country in the World now but next to
Nigeria 
• Poverty has always been a debatable issue in India and there are voices
in favor (obviously ruling party) and in against (others) of reduction of
poverty levels in India. How real is the scenario? Has India won the
battle against the extreme poverty?
• Find out why China at the same time improved on its extreme poverty
level in comparison to India?
• Poverty is not an exclusive entity. It has various dimensions. A positive
growth in education, health, mortality and nutrition level surely impacts
the overall poverty line. India should have an upgraded estimation
system for defining poverty taking into account inflation, purchasing
power parity and social development etc.
• Indian political, policy and administrative systems have to adjust to the
new realities of the transition to a middle- income country (India is
now a middle-income country as per World Bank), in which poverty
does not mean living at the edge of hunger but, rather, lack of income
to take advantage of the opportunities thrown up by a growing
economy.
• The focus of government spending should be on the provision of public
goods rather than subsidies.
• Also, the rate at which economic growth translates into poverty
reduction depends on what happens to inequality, or how the growth
dividend is distributed.
CAUSES OF POVERTY Notes

Pre-independence:
Colonial Exploitation: Colonial rule in India is the main reason of poverty and
backwardness in India. 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.
• Zamindari system
• Sharp increase on rural taxes
• Export of food grains
• Famine
• De-industrialization in India – closing of Indian handloom and cottage
industries
• India turning into raw material exporter and importer of finished
goods
Post – independence:
• Poor planning
• Failure of trickledown theory
• Emphasis on economic growth and not on development
• Slow economic growth
• Unequal distribution of wealth
• Poor land reforms – fragmentation of land
• Green revolution - helping large land owners and not small farmers.
Causes of Rural Poverty:
Rural poverty is a multi-dimensional social problem. Its causes are varied. They
are as follows:
Climatic factors:
Climatic conditions constitute an important cause of poverty. The hot climate
of India reduces the capacity of people especially the ruralites to work for
which production severely suffers. Frequent flood, famine, earthquake and
cyclone cause heavy damage to agriculture. Moreover, absence of timely rain,
excessive or deficient rain affect severely country’s agricultural production.
Demographic factors:
The following demographic factors are accountable for poverty in India.
Rapid growth of population: Notes

• Rapid growth of population aggravates the poverty of the people. The
growth of population exceeds the rate of growth in national income.
Population growth not only creates difficulties in the removal of poverty
but also lowers the per capita income which tends to increase poverty.
The burden of this reduction in per capita income is borne heavily by
the poor people. Population growth at a faster rate increases labour
supply which tends to lower the wage rate.
Size of family:
• Size of the family has significant bearing on rural poverty. The larger the
size of family, the lower is the per capita income, and the lower is the
standard of living. The persistence of the joint family system has
contributed to the health and earning capacity of the ruralites.
Personal Causes:
Lack of motivation:
• Lack of motivation is an important cause of rural poverty. Some ruralites
do not have a motive to work hard or even to earn something. This
accounts for the poverty of the ruralites.
Economic Causes:
Low agricultural productivity:
• Poverty and real income are very much interrelated. Increase in real
income leads to reduction of the magnitude of poverty. So far as
agricultural sector is concerned, the farmers even today are following
the traditional method of cultivation. Hence there is low agricultural
productivity resulting in rural poverty.
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
from 4.8 per cent to below 2 per cent. About 60 per cent of the
population depends on agriculture, whereas the contribution of
agriculture to the GDP is below 18 per cent. The agricultural sector has
remained very unproductive. There is no modernization of agriculture
despite some mechanization in some regions of India.
Unequal distribution of land and other assets: Notes

• Land and other forms of assets constitute sources of income for the
ruralites. But unfortunately, there has been unequal distribution of land
and other assets in our economy. The size-wise distribution of
operational holdings indicates a very high degree of concentration in
the hands of a few farmers leading to poverty of many in the rural
sector.
Decline of village industries:

• At present consequent upon industrialization new factories and
industries are being set up in rural areas. Village industries fail to
compete with them in terms of quality and price. As a result, they are
closed down. The workers are thrown out of employment and lead a
life of poverty.
Immobility of labour:
• Immobility of labour also accounts, for rural poverty. Even if higher
wages are offered, labourers are not willing to leave their homes. The
joint family system makes people lethargic and stay-at-home.
• The ruralites are mostly illiterate, ignorant, conservative, superstitious
and fatalistic. Poverty is considered as God-given, something pre-
ordained. All these factors lead to abysmal poverty in rural India.
Lack of employment opportunities:
• Unemployment is the reflection of poverty. Because of lack of
employment opportunities, people remain either unemployed or
underemployed. Most of these unemployed and underemployed
workers are the small and marginal farmers and the landless
agricultural labourers.
Social Causes:
Education:
• Education is an agent of social change and egalitarianism. Poverty is also
said to be closely related to the levels of schooling and these two have
a circular relationship. The earning power is endowed in the individual
by investment in education and training. But this investment in people
takes away money and lack of human investment contributes to the low
earning capacity of individuals.
• In this way people are poor because they have little investment in
themselves and poor people do not have the funds for human capital
investment.
Caste System: Notes

• Caste system in India has always been responsible for rural poverty. The
subordination of the low caste people by the high caste people caused
the poverty of the former. Due to rigid caste system, the low caste
people could not participate in the game of economic progress.
• A Shudra was not allowed to become a trader and a Vaisya could earn
his bread only by trade.
• Birth would decide their occupation and their economic fate. K. V.
Verghese rightly observes, “Caste system acted as a springboard for
class exploitation with the result that the counterpart of the poverty of
the many is the opulence of the few. The second is the cause of the
first.”
Joint family system:

• The joint family system provides social security to its members. Some
people take undue advantage of it. They live upon the income of others.
They become idlers. Their normal routine of life consists in eating,
sleeping and begetting children.
• In this way poverty gets aggravated through joint family system.
Social customs:
• The ruralites spend a large percentage of annual earnings on social
ceremonies like marriage, death feast etc. As a result, they remain in
debt and poverty.
Growing indebtedness:
• In the rural sector most of the ruralites depend on borrowings from the
money-lenders and land-lords to meet even their consumption
expenses. Moneylenders, however, exploit the poor by charging
exorbitant rates of interest and by acquiring the mortgaged land in the
event of non-payment of loans.
• Indebted poor farmers cannot make themselves free from the clutches
of moneylenders. Their poverty is further accentuated because of
indebtedness.
Geographical Reason:
• Regional imbalances
• Heterogeneous availability of resources
• Poor exploitation of minerals
• Poor fertility of land
• Lack of irrigation facilities Notes

• Poor agricultural growth
• Poor technological intervention in agriculture
• Natural calamities like cyclone, hailstorm, flood and drought.
• Poor credit and insurance facilities for agriculture
• Monoculture
• Poor area specific planning of agriculture
• Lack of allied agricultural activities
• Environmental degradation
• Climate change
Socio-Economic Reasons:
• Unemployment and under – employment
• High inflation
• Poor capital formation
• Lack of infrastructure
• Lack of demand
• High population growth
• Lack of social/ welfare nets – poor implementation of existing
welfare schemes
• Poorly targeted poverty alleviation programs and high leakages
• High corruption
• White elephant approach
• Politicisation of policies
• Poor PDS system
• Malnutrition and hunger Notes

• Poor public health care facilities – increasing out of pocket
expenditure
• Poor education
• Lack of skills and vocational education
• Lack of basic services to poor
• Lack of community participation of poor
• Poor bargaining power
• Indebtedness/ debt trap
• Caste, religious and other discrimination
• Poor social mobility
• Social, economic and political inequality
Lack of Investment for the Poor: There is lack of investment for the
development of poorer section of the society. Over the past 70 years, India
decided to focus on creating world class educational institutions for the elite,
whilst neglecting basic literacy for the majority. This has denied the illiterate
population – 33 per cent of India – of even the possibility of escaping poverty.
Thus, there is no focus on creating permanent income generating assets for the
poor people.
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.
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 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 are very high in the agricultural sector of India. It is
the main cause of rural poverty in India.
Lack of Entrepreneurship: The industrial base of India has remained very

slender. The industrial sickness is very widespread. The whole industrial sector
suffers from capital deficiency and lack of entrepreneurial spirit.
Causes for Urban Poverty

The causes of urban poverty in India are:
• Migration of Rural Youth towards Cities
• Lack of Vocational Education / Training Notes

• Limited Job Opportunities of Employment in the Cities
• Rapid increase in Population
• Lack of Housing Facilities
• No proper Implementation of Public Distribution System
Consequences of Poverty:
• Poverty has far-reaching consequences on the society. People suffering
from poverty will generally have a low standard of living. They are not
able to afford education and lack access to health care and education.
This will lead to a low quality of human capital and thus compromise
economic growth.
• Poverty takes a toll on poor children’s development. For example,
poverty causes malnutrition which would affect the development of a
child’s mental thinking and healthy body.
• Poverty may also lead to political instability and lead to increased risk Notes
of war, mass emigration of population and terrorism.
Incidence of Poverty
Incidence of poverty varies widely across social groups.
• High incidence of poverty prevails among the scheduled tribe and
scheduled caste population, which have suffered from social and/or
economic exclusion for centuries in India.
• More than 45% of households among the ST group are poor while the
corresponding number is only 15% among the non-backward households
classified under the ‘others’ category.
• Data suggests that the ¾th of the rural poor belong to the category of
landless labourers and marginal farmers. The incidence of poverty is
highest among agricultural labour households (59%), labour households
(38.5%) and among Marginal Farmers (30%).
Factors responsible for poverty are unemployment or underemployment

among rural labourers:
• It has been established that incidence of unemployment is highest
among the casual labourers.
• Even when they are employed, their weak bargaining power results in
low wages being paid to them.
• The market forces are so strong that the minimum wage legislation is
observed more in breach than in compliance.
• Another cause of rural poverty is low asset base of the poor. According Notes
to data – worst 10 percent of rural population owns virtually nothing
and bottom 30 percent just own 2 percent of total assets.
• It may also be noted that large number of rural poor remain in poverty
not only because they have very few assets, but also because most of
these assets are in the form of durable consumer goods, rather than
assets such as land, implements, livestock etc. which can increase their
productive capacity.
• Another major cause is low educational attainment of the poor. These
educational differentials are one of the main factors for relatively lower
level of income among poor. Another popular myth for poverty is rapid
increase in population.
• Population growth puts pressure on the land base and as a
consequence the real per capita income fall.
• Semi-feudal agrarian relation is another important cause of poverty.
Land reforms initiated after independence has not brought about
substantial changes in agrarian relations.
VICIOUS CYCLE OF POVERTY
The vicious circle of poverty refers to the interconnectedness of different

factors that reinforce each other for generating poverty. According to Nurkse
and Kindleberger the reasons for this vicious circle of poverty can be classified
into three groups.
• Supply side factors
• Demand side factors
• Market imperfection
Supply Side Factors Notes

The supply side of the vicious circle indicates that in underdeveloped countries,
productivity is so low that it is not enough for capital formation.
• According to Samuelson, "The backward nations cannot get their heads
above water because their production is so low that they can spare
nothing for capital formation by which their standard of living could be
raised."
• According to Nurkse on the supply side there is small capacity to save,
resulting from low level of national income. The low real income is the
result of low productivity, which in turn, is largely due to the lack of
capital.
• The lack of capital is a result of the small capacity to save, and so, the
circle is vicious.
Thus, it becomes clear from the above diagram that the main reason of poverty
is the low level of saving. Consequently, investment is not possible in
production channels. A huge chunk of GDP is used for consumption purposes.
People cannot save. So, there is lack of investment and capital formation.
Although rich people can save, they spend their surplus on luxurious goods
instead of saving. They gave preference to high priced items and foreign
products. Thus, their demand does not enlarge the size of the market. The
developing countries, therefore, lack investment facilities.
Demand Side Factors

According to Nurkse, poverty is caused by several factors in the demand side.
In underdeveloped countries the inducement to invest is low because of the
low purchasing power of the people, which is due to their small real income.
The main reason for poverty in these countries is the low level of demand.
Consequently, the sizes of markets remain low. The small size of the market
becomes a hurdle in the path of inducement to invest.
Market Imperfections
According to Meier and Baldwin, the existence of market imperfections
prevents optimum allocation and utilization of natural resources, and the result
is underdevelopment, and this, in turn, leads to poverty. The development of
natural resources depends upon the character of human resources. But due to
lack of skill and low level of knowledge, natural resources remain unutilized,
underutilized and misused.
Notes
Poverty and Hunger Eradication Programs in India

Development is about removing the obstacles to the things that a person can
do in life, such as illiteracy, ill health, lack of access to resources, or lack of civil
and political freedoms. Therefore, the aim of poverty alleviation schemes
should be to improve human lives by expanding the range of things that a
person could be and could do, such as to be healthy and well-nourished, to be
knowledgeable and participate in the life of a community.
Governments approach towards poverty reduction has three dimensions.

1. Growth oriented approach
2. Specific poverty alleviation programs
3. Providing minimum basic amenities
Growth oriented approach refers to rapid industrialization, thrust to

manufacturing sector, transformation of agriculture like Green Revolution etc.
The basic principle here is trickle down. However, this approach has not been
very successful in India in upbringing the poor though they resulted in high
economic growth.
Providing minimum basic amenities refers to providing food grains at
subsidized rates, education, health, water supply, sanitation which would
enhance the living standard of poor people. The programs under this approach
are expected to supplement the consumption of the poor, create employment
opportunities and bring about improvement in health and education.
The second strategy, which is, specific poverty alleviation programs include Notes
several programs for employment generation and self-employment as well as
wage employment.
Some of the major policy interventions by Government of India towards

poverty alleviation are given below: Just for reference (all the relevant schemes
will be covered in Government Scheme VAN and timely in current affairs
section under Babapedia)
Rural Poverty-Alleviation Programmes

• Integrated Rural Development Programme (IRDP)
• Swarnajayanti Gram Swarozgar Yojana (SGSY)
• MAHATMA GANDHI NATIONAL RURAL EMPLOYMENT GUARANTEE ACT
(MGNREGA)
• MGNREGA 2.0 (AFTER MIHIR SHAH COMMITTEE)
• National Rural Livelihood Mission (NRLM) or Aajeevika
• Indira Awas Yojana (IAY)
• Integrated Watershed Management Programme (IWMP)
Urban poverty alleviation programmes

• Jawaharlal Nehru National Urban Renewal Mission (JNNURM)
• SWARNA JAYANTI SHAHARI ROZGAR YOJANA (SJSRY)
• National Urban Livelihood Mission (NULM)
• Rajiv Awas Yojana (RAY)
• Credit Risk Guarantee Fund Trust (CRGFT)
Key Requirements for Sustainable Poverty Reduction

Since independence, the country has registered a significant overall growth
rate, and there has been a progressive increase in the per capita income, yet
there has been deterioration in the living standards of a large section of the
population.
• The world’s ability to end extreme poverty by 2030–a key element of
the Sustainable Development Goals–SDG-Goal 1, hinges on India’s
ability to make strong and sustained inroads in reducing poverty.
• According to World Bank report India is home to 26% of the global
extreme poor. The poverty challenge in India remains broad, and
sometimes contradictory.
• The country is home to one of the largest numbers of poor people in
the world, as well as the largest number of people who have recently
escaped poverty. Despite an emerging economy, many of India’s people
are still vulnerable to falling back into poverty.
• India’s performance on key non-monetary indicators of well-being such Notes

as child nutrition and improved sanitation facilities lags behind
countries at similar stages of development, India’s middle-income peers
such as China, Vietnam, Brazil and Turkey.
• Nonetheless, the story of India’s transformation remains one of
optimism. Although the full potential of economic growth to reduce
poverty is yet to be unleashed, the links between growth and poverty
reduction have become stronger than in the previous decade. In
addition, the manner in which growth has impacted poverty in urban
and rural areas, as well as in different sectors, has changed significantly.
Lessons from the past
India has made tremendous progress in reducing absolute poverty in the past
two decades. Now, to sustain progress and bring about deeper changes for
sustainable poverty reduction and shared prosperity in India, following are the
key requirements:
1. Accelerating rural poverty reduction:
• With four out of every five of India’s poor people living in rural
areas, progress will need to focus on the rural poor.
• It’s not just about agricultural growth, which has long been considered
the key driver of poverty reduction. In fact, rural India is not
predominantly agricultural and shares many of the economic conditions
of smaller urban areas.
• Capitalizing on growing connectivity between rural and urban areas,
and between the agriculture, industry and services sectors, has been
effective in the past two decades and holds promise for the future.
2. Creating more and better jobs:
• The road out of poverty in India has been built on the performance of
the labor market, but also benefited from rising transfers and
remittances, and favorable demographics among other factors.
• Future efforts will need to address job creation in more productive
sectors, which has until now been lukewarm and has yielded few
salaried jobs that offer stability and security.
3. Focusing on women and Scheduled Tribes:

• The most worrying trends are the low participation of women in the
labor market and the slow progress among scheduled tribes.
• India’s women have been withdrawing from the labor force since Notes
2005 and less than one-third of working age women are now in the
labor force. As a result, India today ranks last among BRICS countries,
and close to the bottom in South Asia in female labor force
participation.
• Scheduled Tribes started with the highest poverty rates of all of India’s
social groups, and have progressed more slowly than the rest.
• Women and Scheduled Tribes are at risk of being locked out of India’s
growth and prosperity.
4. Creating more “good” locations:

• Where people live largely shapes their prospects in life. India’s states
continue to see large and growing differences in poverty levels and
basic opportunities.
• More and more of India’s poor are concentrated in the poorest states,
and even within relatively prosperous states, certain pockets of
deprivation persist where people are unable to share in the state’s
successes.
5. Improving human development outcomes for the poor:

• This is central to improving their quality of life and income earning
opportunities.
• The recent past shows that some problems, such as undernutrition and
open defecation, are endemic and not only confined to the poor but
others too, and have not improved with economic growth.
• Better health, sanitation and education will not only help raise the
productivity of millions, they will also empower the people to meet
their aspirations, and provide the country with new drivers of economic
growth.
The Indian economy is changing and so is the relationship between economic
growth and poverty reduction. The process of structural transformation of the
economy has intensified. As this process continues, the country can be
expected to increasingly turn to growth in its urban and non-agricultural
economy to drive future poverty reduction. What needs to be remembered is
that, elimination of poverty is not merely a question of economic upliftment
but is a social and a political issue. It related to the level of the politico-social
awareness of people which will help the country to sustain progress and bring
about deeper changes.
POVERTY TRAP Notes

• Poverty trap is a self-perpetuating condition where an economy, caught
in a vicious cycle, suffers from persistent underdevelopment.
• Poverty trap is a spiraling mechanism which forces people to remain
poor. It is so binding in itself that it doesn't allow the poor people to
escape it.
• Poverty trap generally happens in developing and under-developing
countries, and is caused by a lack of capital and credit to people.
The Number of Poor in India
The Head Count Ratio

measures the number of
poor as the proportion of
people below the poverty
line.
Trends of Poverty in India

• In 1973-74, the
number of people
below the poverty line
was more than 320
million and in terms of
proportion, it was 55% of the total population. In 2011-12, the absolute
number came down 270 million and by proportion, fell to 22%.
• More than 80% poor resided in rural areas in 1973-74 which remained
unchanged in 2011-12. More than three- fourth of the poor are from rural
areas.
• The absolute number of poor declined in rural areas but increased in urban
areas. The poverty ratio declined for both.
Notes
Year Rural Urban Total
1993-94 50.1 31.8 45.3
2004-05 41.8 25.7 37.2
2009-10 33.8 20.9 29.8
2011-12 25.7 13.7 21.9
State-level Trends in Poverty

• During 1973-2012, the proportion of poor fell from 55 to 22%.
• Six states – Tamil Nadu, Uttar Pradesh, Bihar, Madhya Pradesh, West
Bengal, and Orissa had a large section of poor. This was reduced
considerably during 1973-2012.
• Four states – Odisha, Madhya Pradesh, Bihar, and Uttar Pradesh are in
a better position compared to the national poverty rate.
Interstate disparities in Poverty levels

• Not every state in the country has the same proportion of poor people. The
success rate of poverty reduction since the early seventies generally varies
from state to state.
• The all-India headcount ratio is 21.9% in states like Madhya Pradesh, Uttar
Pradesh, Assam, Bihar & Orissa. This was also lower than the all-India
poverty levels in the year 2011-12. Till date Bihar and Orissa are the two of
the poorest states having poverty ratios of 33.7 and 32.6. However, there
has been a good decline of poverty in states of Maharashtra, Kerala, Andhra
Pradesh, Tamil Nadu, Gujarat & the West Bengal. States of Haryana and
Punjab have also succeeded in poverty reduction with the help of high
agricultural growth. Kerala has focused on human resource development.
• In West Bengal, the land reform measures had been undertaken which
helped in poverty reduction. Andhra Pradesh & Tamil Nadu had distributed
food grains amongst the public which reduced the poverty levels.
Extreme poverty is estimated to have declined 12.3 percentage points between

2011 to 2019 in India, as per a World Bank Policy Research Working Paper. The
extreme poverty count fell from 22.5% in 2011 to 10.2% in 2019 and the decline
in rural areas was much higher than in urban areas, estimates the study.
Notes
Q. In a given year in India, official poverty lines are higher in some states than
in others because (UPSC-PRELIMS 2019)
a) Poverty rates vary from State to State
b) Price levels vary from State to State
c) Gross State Product varies from State to State
d) Quality of public distribution varies from State to State
Unemployment
Unemployment is that indicator of economic health which occurs when a

person who is actively searching for employment is unable to find work.
Unemployment rate is the number of unemployed people divided by the
number of people in the labour force.
Who is a worker?
• A person who is involved in production activity contributing to the flow
of goods and services is the economy is called as worker.
Types of Workers:
• Self-Employed: Workers who own and operate a business for a living are
referred to as self-employed. Consider a farmer who is working on his own
farm. More than half of the workforce falls into this category.
• Hired Workers: Hired workers are persons who are hired by others and are
given wages and salaries in exchange for their services. The two types of
hired workers are:
o Casual Workers: Casual workers are those who are not engaged on
a regular/permanent basis by their companies, and are given wages
on an hourly/ day basis, and do not receive social security benefits.
o Regular Workers (Salaried): Regular salaried employees or regular
workers are those who are employed by someone or an
organization on a regular basis and are paid their salaries on a
regular basis.
Labour Force Notes

• All persons, who are working (have a job) and those who are not
working but are able and willing to work at the existing wage rate
constitute the labour force.
• Labour Force = Persons working + persons seeking and/or available for
work.
Labour Supply
• It refers to the number of workers who are willing to work,
corresponding to a particular wage rate.
Work Force
• The number of persons who are actually employed at a particular time are
known as the workforce.
• It encompasses all individuals who are actively engaged in productive
endeavours. This includes people between the age group of 15-60 years.
Work Force Participation Ratio (WPR)

• It is calculated as the ratio of a country's workforce to its entire population.
𝑇𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑤𝑜𝑟𝑘𝑒𝑟𝑠
WPR =
𝑃𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 𝑖𝑛 𝐼𝑛𝑑𝑖𝑎
• It aids in determining the percentage of a country's population that actively
participates in the creation of products and services.
• The rate of participation in metropolitan areas is around 35 percent.
• The rate of involvement in rural areas is around 41 percent.
• In metropolitan regions, men participate at a rate of 54.3 percent and
women at 13.8 percent.
• In rural areas, men participate at a rate of 54.7 percent and women at a
rate of 26.1 percent.
• The country's overall participation percentage is around 39.2 percent.
Jobless Growth
It is characterised as a condition in which the economy's growth outpaces job
prospects, resulting in unemployment.
• Casualisation of Employment
Casualisation is a term used to describe a situation in which the percentage
of workers hired on a temporary basis increase over time. People start
working as casual labourers due to a lack of chances in the organised sector.
Furthermore, the freedom in terms of working conditions, as well as the
lack of particular enforcement of labour laws, encourages businesses to
hire more casual workers.
• Informalisation of Employment Notes

Refers to a situation when people tend to find employment more in the
informal sector of the economy, and less in the formal sector of the
economy. Workers transitioning from permanent employment to casual
and fixed-term contracts, outsourcing, and employment through labour
brokers are all examples of informalisation. Many individuals who have
previously worked in a formal job will most likely re-enter the workforce as
an atypical employee.
Unemployment Rate
It is calculated as the percentage of the labour force who are unemployed, not
as a percentage of total population. It is calculated as:
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑒𝑟𝑠𝑜𝑛 𝑢𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
Unemployment Rate = x 100
𝑆𝑖𝑧𝑒 𝑜𝑓 𝑙𝑎𝑏𝑜𝑢𝑟
Types of Unemployment
• Rural unemployment: It is defined as unemployment that occurs in rural
areas. There are two types:
o Seasonal Employment: It describes a situation in which a large
number of people are unable to obtain work during a specific
season. Agriculture, ice cream factories, woollen mills, and other
industries are examples.
o Disguised Employment: When the marginal physical productivity of
labour is zero or negative, it is referred to as "disguised
employment."
• Urban Unemployment: It refers to the employment occurring in urban
areas. There are three types:
o Industrial Unemployment: This category includes illiterate people
who want to work in industries, mining, transportation, trading, and
construction, among other things.
o Educated Unemployment: Among the educated people, apart from
open unemployment, many are underemployed because their
qualification does not match the job. Faulty education system, mass
output, preference for white collar jobs, lack of employable skills
and dwindling formal salaried jobs are mainly responsible for
unemployment among educated youths in India.
o Technological Unemployment: As a result of technological
advancements, an economy may experience some structural
unemployment. Such unemployment may be described as
technological unemployment. Some workers are being replaced by
machines as a result of the introduction of new machinery,
improvements in manufacturing procedures, labor-saving Notes

technologies, and so on.
Q.) Disguised unemployment generally means – PRELIMS 2013 Notes

a) large number of people remain unemployed
b) alternative employment is not available
c) marginal productivity of labour is zero
d) productivity of workers is low
Slow
economic
growth
Rapid
Inadequate
population
employment
growth
Causes of Un-
employment
Shortage of Overuse of
financial foreign
resources technology
Government programmes for employment generation:

• Prime Minister’s Rozgar Yojana
• Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA)
• Swarna Jayanti Shahari Rozgar Yojana (SJSRY)
• Pradhan Mantri Jandhan Yojana
Government effort in employment generation:

• Direct Employment: In this case, the government hires employees for
administrative purposes in several departments. It also owns and operates
factories, hotels, and transportation companies, providing direct
employment to individuals.
• Indirect Employment: When the output of goods and services from
government enterprises increases then private enterprises which receive
raw materials from government enterprises will also raise their output and
as a result, the number of job opportunities in the economy will expand.
Rural Development Notes
• Rural development is the process of improving the quality of life and

economic well-being of people living in rural areas, often relatively isolated
and sparsely populated areas.
• Rural Development has traditionally centered on the exploitation of land-
intensive natural resources such as agriculture and forestry.
Objectives of Rural Development

• Increasing productivity of the agricultural sector.
• Generating alternative means of livelihood in the rural sector.
• Increasing access to education and health care in rural communities.
• Infrastructural development.
• Human resource development in rural areas.
• Poverty alleviation.
Key Initiatives in rural development:

• Crop diversification reduces production risks and encourages
commercialization of agriculture.
• Promotion of organic farming with a view to make crop cultivation
environmentally friendly as well as a sustainable process over a long period
of time.
• Human resource development.
• Healthcare improvement, addressing both cleanliness and public health.
• Diversification of production activities in order to identify alternatives to
crop-cultivation as a source of sustainable existence.
• A marketing mechanism that ensures the farmer receives a fair price for his
produce.
Rural Credit:
• Rural credit means credit for the farming communities. Farmers require
credit for various purposes like purchasing agricultural tools and
machines, digging wells and tube wells, purchasing seeds, fertilizers,
pesticides, etc. The time between seeding and harvesting is very long.
As a result, farmers have to borrow money to meet their demands at
this time.
Sources of Rural credit: Notes

The availability of rural credit can be divided into two categories:
• Non-institutional Sources: These are the traditional sources of agricultural
credit in India. They include money lenders, relatives, traders, commission
agents and landlords.
• Institutional Sources: Institutional sources include cooperative credit,
commercial banks, regional rural banks, the government, land
development banks, National Bank for Agriculture and Rural Development
(NABARD), self-help groups etc.
Agricultural Marketing System
Agricultural Marketing is the process of putting together, storing, processing,

transporting, packaging, grading, and distributing various agricultural
commodities throughout the country.
Transportin Distribu
Storing Processing Packaging Grading
g tion
Measures to improve Agricultural Marketing:

Following independence, the government has taken a number of steps to
enhance the country's agricultural marketing system. In order to regulate the
markets, it has enacted the following measures:
• Regulated Markets: The first measure was regulation of markets, to create
orderly and transparent marketing conditions. This is set up to safeguard
farmers from the misdeeds of sellers and brokers.
• Cooperative Marketing: Marketing societies are formed by farmers to sell
the output collectively and to take advantage of collective bargaining for
obtaining a better price. However, cooperatives have not been able to
function properly in the recent past due to inadequate coverage of farmer
members, inefficient management etc.
• Infrastructural facilities: Govt. had also provided infrastructural facilities
like roads. railways, warehousing. old storage and processing units in order
to develop the rural sector of India.
• Standardization and Grading: Grading and quality control helps farmers to
get good prices for quality products produced by them. Also, it simplifies
the task, and enhances the efficiency of their work by proper segregation
and bifurcation of output of different grades and standards.
• Policy Instruments:
o Minimum Support Price: It is the price set by the government of Notes

India in order to protect farmers' interests in terms of the prices of
their agricultural products like wheat, rice, maize, cotton,
sugarcane, pulses, and others. To help farmers recover their losses,
the government is willing to buy any amount of grains from them at
a price greater than the market price.
o Buffer Stock: Food Corporation of India holds stock of crops like
wheat and rice in order to balance the price differences due to
demand and supply, or face emergencies.
o Public Distribution System: PDS is used to distribute food grains and
sugar. These tools are designed to secure farmers' revenue while
also delivering food grains to the poor at a reduced price.
Problems in Agricultural Market in India:

The existing agricultural marketing system has a number of flaws. The following
are some of the flaws that cause the marketing system to be disorganized.
• Insufficient storage facilities: Lack of storage facilities for food grain
and crops has damaged the products either by rats or insects or due to
rain.
• Distress Sale: Most Indian farmers are poor and they have no capacity
to wait for a better price. They sell the commodities at whatever price
is available, and hence as a result, they have to sell their output at a low
price to village money lenders or traders in distress.
• Lack of transportation: As a result of inefficient transportation system,
farmers cannot reach the market to sell their produce at a fair price.
Hence, place utility cannot take place.
• Middlemen: Long chain of middlemen or intermediaries between the
cultivator and the consumer also reduces the profit of the producer,
with a major chunk being taken by the mediator himself.
• Other issues: There are also other defects like lack of institutional
finance, lack of guidance etc. which makes the Indian marketing system
disorganized.
Q.) What is/are the advantage/advantages of implementing the 'National Notes

Agriculture Market' Scheme? – PRELIMS 2018
1. It is a pan-India electronic trading portal for agricultural commodities.
2. It provides the farmers access to nationwide market, with prices
commensurate with the quality of their produce.
Select the correct answer using the code given below:
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2
Q.) In India, markets in agricultural products are regulated under the –

PRELIMS 2015
a) Essential Commodities Act, 1955
b) Agricultural Produce Market Committee Act enacted by States
c) Agricultural Produce (Grading and Marking) Act, 1937
d) Food Products Order, 1956 and Meat and Food Products Order, 1973
Organic Farming
• Organic farming is the natural way of growing food. Synthetic chemical
fertilisers and genetically engineered organisms are not used in this
procedure. It is both environmentally friendly and necessary for long-
term development. It has a zero impact on the environment.
Advantages of Organic
Farming:
• It replaces more
expensive agricultural
inputs like HYV seeds,
chemical fertilisers,
herbicides, and so on
with locally generated
organic inputs that are
less expensive and
offer good returns on
investment.
• It generates income
through export as the demand for organically grown crops is on the rise.
• It provides nutritious food since organically cultivated food has more
nutrients than food produced through chemical farming.
• It has the potential to create more jobs in India because it requires more Notes
labourers to grow organic crops than chemically generated commodities.
• Organic food is pesticide free and is produced in an environmentally
sustainable way, thus positively contributing towards the society.
Challenges in Organic Farming:

• Lack of awareness: Farmers are unaware and uneducated; hence they
aren’t aware much of this concept. Though, through raising farmer
awareness and willingness to adopt new methods, this situation could be
improved.
• Lack of infrastructure: There is no sufficient infrastructure or marketing
facilities available to support the growth of organic crops. Organic farming
should be supported by an adequate agriculture policy.
• Production costs: High production costs for growing organic crops, as well
as no subsidies in this sector also acts as a hindrance for the development
of this sector.
Food Security
Food security normally refers to the availability, accessibility & also
affordability of food for people at all times. The poor households are more
susceptible to the food insecurity in times of food production problems or the
problems with crop distribution. Public Distribution System (PDS) along with
the government vigilance usually responsible for ensuring food security for all
in the country.
What is Food Security?

• Food is essential for our daily survival. Food security has a deeper
meaning to it than just getting two square meals in a day.
Broader aspects of food security are-
• Availability- This includes production of crops within the country, previous
years produce which are present in the government granaries, and imports
from other countries.
• Accessibility- Every person in the country should also access to food.
• Affordability- This means that every person is able to financially meet their
dietary needs.
Why is there a need of Food Security? Notes

• The downtrodden section of our society is the most food insecure. The
population above the poverty line are also food insecure sometimes. This
happens when the country faces a natural disaster like an earthquake,
failure of crops, floods, famine, etc.
Ways in which food security can get affected by a calamity:

• During a natural calamity, production of crops is decreased which in turn
creates a shortage of food.
• Shortage of food causes prices
to hike.
• These high prices cannot be
afforded by some of the
sections of the society.
• If these calamities stretched
over a long period, it then
causes starvation which in turn
can take the shape of a famine.
• Famines are also associated
with a massive number of
deaths due to the starvation and & accompanied by epidemics caused by
contaminated water and food. The immune system is also due to starvation
which makes the body prone to many kinds of disease. The most
devastating famine of India was the famine of Bengal in 1943 which nearly
killed over 30 lakhs people in the region.
• Even till now places like Kalahandi and Kashipur (Orissa) are facing similar
famine-like conditions for many years. Deaths due to starvation have also
been stated from here. Baran district of Rajasthan & Palamau of Jharkhand
has also reported starvation deaths which is a concern.
Is everyone in the society food secured?

• The worst affected people from food and nutrition insecurity are landless
people. They are traditional artisans, and the destitute including the
beggars. They are mostly ill-paid. These workers are also engaged in
seasonal activities and are paid extremely low wages which do not even
properly insure their bare survival. The SCs, STs, and the OBCs who are the
poor are often prone to food insecurity. People who have migrated from
other areas in search of work are also many times food insecure. Population
affected by a natural disaster is also food insecure. Malnutrition is common
mostly among women and this remains a matter of grave concern as it Notes
increases the risk of new born child malnutrition manifold.
• Few states in the country have a large number of food insecure people.
These places may be tribal, remote, prone to any kind of natural disasters
or economically backward.
Food Security in India

• After Indian independence, the country has adopted a new strategy in
agriculture called the ‘Green Revolution’ for increasing production of wheat
and rice. Indira Gandhi
was then the prime
minister of the country.
She also released a
special stamp bill which
was entitled as ‘wheat
revolution’ in the year
1968. The success of
wheat revolution was
then used as a model for rice revolution. However, the increase in the food
grains was disproportionate.
• The highest growth was then achieved by the states of UP and Maharashtra
in terms of the wheat production while West Bengal & Uttar Pradesh
recorded significant production of rice.
• Since the green revolution which came in early 1970, the country has been
able to avoid famines & adverse weather conditions. India has also become
self-sufficient in crops during the last 30 years.
• Note- We will cover Agriculture, Food Security etc. in detail under Mains
Modules.
Buffer Stock
• Buffer stock is normally the stock of food, primarily rice and rice which is
procured centrally through the Food Corporation of India. FCI now
purchases the grains from the farmers of the states where it is grown in
surplus.
• The farmers, then in turn, get a price known as Minimum Support Price or
the MSP which the government decides in every financial year before the
commencement of the sowing season.
• The purchased food grains are then stored in the government granaries.
• The grains are usually distributed amongst financially weaker sections of Notes
the society at a much lower price than the market rate which popularly
known as the issue price.
• The buffer stock then also helps to resolve problems in periods of natural
calamities.
Public Distribution System
The food which Food Corporation of India (FCI) procures is distributed by

government by regulated ration shops. This is referred as the Public
Distribution System. Ration shops are also widely present in localities, towns,
villages and cities.
• Public Distribution Scheme (PDS) is administered by the Ministry of
Consumer Affairs, Food, and Public Distribution.
• There are nearly 5.5 lakh ration shops in the country. They are known as
Fair Price Shops. They usually keep stock of food grains, sugar & kerosene
at a much lower price than the market price. Any family which has a ration
card can also buy a stipulated amount of ration from the shops. There are
three different kinds of ration cards-
o Antyodaya cards for the poorest people.
o The BPL cards for the ones which are below the poverty line.
o The APL cards for every single citizen.
• Rationing was introduced in India in the year 1948 because of the Bengal
famine. It was done due to an acute food shortage during the 1960s which
was prior to Green Revolution. In wake of high poverty in the mid- 1970s,
the Public Distribution System for food was strengthened, and a new
Integrated Child Development Services were introduced in 1975 and Food
for Work was also introduced. Over the years several other new programs
were launched to restructure the already present administrative programs. Notes

At present, there are many poverty alleviation programmes run by
Government. Employment programmes have also resulted significantly to
food security by increasing the income of the poor.
Status of Public Distribution System
• In 2013, Parliament enacted the National Food Security Act, 2013. The Act
relies on Targeted Public Delivery System to deliver food grains as legal
entitlements to poor households. This marks a shift by making the right to
food a justiciable right.
• Initially the Public Distribution System was universal. There was no
discrimination b/w the poor & the non-poor but currently, the policy has
been revised to make it more efficient & targeted to provide benefits to the
remote and backward areas.
• It mainly targets poor in the country. In the year 2000 two schemes were
launched - The Antyodaya Anna Yojana & the Annapurna Scheme. The PDS
has been facing various criticism on several grounds in past years. There
were instances of hunger being prevalent in the country in spite of
overflowing granaries in godowns.
Do You Know?
Sen Index
• The Sen Index or Sen Poverty Index is a composite poverty measure,
which combines incidence and intensity of poverty risk with the
distribution of income among those at risk of poverty. Amartya Sen,
noted Nobel Laureate, has developed an index known as Sen Index.
There are other tools such as Poverty Gap Index and Squared Poverty
Gap.
Kudumbashree
• It is the poverty eradication and women empowerment programme
implemented by the State Poverty Eradication Mission (SPEM) of the
Government of Kerala.
• The name Kudumbashree in Malayalam language means ‘prosperity of
the family’.
• Kudumbashree was set up in 1997 following the recommendations of a
three-member Task Force appointed by the State government.
• Its formation was in the context of the devolution of powers to the Notes
Panchayat Raj Institutions (PRIs) in Kerala, and the Peoples’ Plan
Campaign, which attempted to draw up the Ninth Plan of the local
governments from below through the PRIs.
Indian Human Development Survey: Nearly half (47.9 per cent) the Indian
households that have more than five children are severely deprived of shelter,
water, sanitation, health and education as compared to 7.8 per cent of poor
families without children, according to the latest Indian Human Development
Survey.
Morbidity: Departure from a state of physical or psychological well-being,

resulting from disease, illness, injury, or sickness, specially, where the affected
individual is aware of his or her condition. According to the World Health
Organization (WHO), morbidity could be measured in terms of
• number of persons who were ill
• Illnesses these persons experienced
• The duration of these illnesses.
Opportunity Cost: In microeconomic theory, the opportunity cost, also known

as alternative cost, is the value (not a benefit) of the choice in terms of the best
alternative while making a decision. A choice needs to be made between
several mutually exclusive alternatives; assuming the best choice is made, it is
the "cost" incurred by not enjoying the benefit that would have been had by
taking the second-best available choice. The New Oxford American Dictionary
defines it as "the loss of potential gain from other alternatives when one
alternative is chosen." Opportunity cost is a key concept in economics, and has
been described as expressing "the basic relationship between scarcity and
choice."
The opportunity costs of negative environmental impacts are high because if
that money was not invested on nullifying the environmental impact, it would
have been positively used for economic development.
Human Capital and Human Development

• The two terms sound similar but there is a clear distinction between
them. Human capital considers education and health as a means to
increase labour productivity. Human development is based on the idea
that education and health are integral to human well-being because
only when people have the ability to read and write and the ability to
lead a long and healthy life, they will be able to make other choices Notes
which they value.
• Human capital treats human beings as a means to an end; the end
being the increase in productivity. In this view, any investment in
education and health is unproductive if it does not enhance output of
goods and services.
• In the human development perspective, human beings are ends in
themselves. Human welfare should be increased through investments
in education and health even if such investments do not result in higher
labour productivity. Therefore, basic education and basic health are
important in themselves, irrespective of their contribution to labour
productivity.
The Head Count Ratio (HCR) is the proportion of a population that exists, or
lives, below the poverty line.
• The Poverty headcount ratio at national poverty line (percentage of
population) in India was last reported at 21.9% in 2011-12.
• When the number of poor is estimated as the proportion of people
below the poverty line, it is known as 'head count ratio'.
Cyclical Unemployment is due to deficiency or fall in effective demand from

consumers which leads to fall in production and low demand for labour.
• Structural unemployment refers to a situation which arises due to
change in the structure of the economy. Example: An economy
transforms itself from a Labour-intensive economy to a Capital-
intensive economy.
• Involuntary unemployment refers to a situation where workers are
seeking work and are willing to work but are unable to get work.
• The minimum amount of unemployment that prevails in an economy
due to workers quitting their previous jobs and are searching for the
new jobs is called Frictional Unemployment.
• Voluntary unemployment refers to a situation where workers are
either not seeking for work or are in transition from one job to another
(quitting one job in search of another better job).
• Seasonal unemployment occurs during certain seasons of the year. In
some industries and occupations like agriculture, holiday resorts etc.,
production activities take place only in some seasons.
Poverty and Shared Prosperity Report Notes
• The Poverty and Shared Prosperity provides estimates on trends in

global poverty and shared prosperity.
• The 2018 edition, “Piecing Together the Poverty Puzzle”, broadens the
ways we define and measure poverty.
• It introduces a multi-dimensional poverty measure that is anchored on
household consumption and the international poverty line of $1.90 per
person per day.
• It is published by the World Bank.
Food Corporation of India

• The Food Corporation of India (FCI) is a statutory body.
• It is under the ownership of Ministry of Consumer Affairs, Food and
Public Distribution, Government of India formed by the enactment
of Food Corporation Act, 1964 by the Parliament of India.
• Headquartered at New Delhi.
Aim to implement the following objectives of the National Food Policy:

• Effective price support operations for safeguarding the interests of
the poor farmers.
• Distribution of foodgrains throughout the country for Public
Distribution System (PDS).
• Maintaining a satisfactory level of operational and buffer stocks of
foodgrains to ensure National Food Security.
• Regulate market price to provide foodgrains to consumers at a
reliable price.
Notes
Topics: Environment and Sustainable Development, Infrastructure,
Comparative Economy etc.

• CLASS X (Understanding Economic Development) – Chapter 4 (Globalisation
and The Indian Economy)
• CLASS XI (Indian Economic Development) – Chapter 8 (Infrastructure), 9
(Environment and Sustainable Development) and 10 (Comparative
Development Experiences of India and its neighbours)
• CLASS XII (Introductory Macroeconomics) – Chapter 6 (Open Economy
Microeconomics)
Note- Infrastructure and all other topics will be covered in detail under
advance modules. Here focus only on basics as per NCERT’s.
Let us go through few Previous Year Questions from Mains from these
topics:
Essay
1. Protection of ecology and environment is essential for sustained
economic development. – 2006
2. GDP (Gross Domestic Product) along with GDH (Gross Domestic
Happiness) would be the right indices for judging the wellbeing of a
country – 2013
3. If development is not engendered, it is endangered. – 2016
GS3 Mains
1. “Investment in Infrastructure is essential for more rapid and inclusive
economic growth.” Discuss in the light of India’s experience. – (GS3 Mains
2021)
2. Explain the purpose of the Green Grid Initiative launched at World
Leaders Summit of the COP26 UN Climate Change Conference in Glasgow
in November, 2021. When was this idea first floated in the International
Solar Alliance (ISA)? - (GS3 Mains 2021)
3. Define the concept of carrying capacity of an ecosystem as relevant to an
environment. Explain how understanding this concept is vital while
planning for Sustainable Development of a region. - (GS3 Mains 2019)
4. “Access to affordable, reliable, sustainable and modern Energy is the sine
qua non to achieve Sustainable Development Goals (SDGs)”. Comment on
the progress made in India in this regard. - (GS3 Mains 2018)
5. Explain how Private Public Partnership (PPP) arrangements, in long Notes

gestation Infrastructure projects, can transfer unsustainable liabilities to
the future. What arrangements need to be put in place to ensure that
successive generations' capacities are not compromised? - (GS3 Mains
2014)
6. Why is International Trade perceived to have failed to act as an "engine
of growth" in many developing countries including India? - (GS3 Mains
2012)
7. Explain the concepts “Environmental Sustainability” and “Sustainable
Development of People”. – (GS3 Mains 2012)
8. Discuss the importance of World Trade Organisation (WTO) to Indian
economy in the light of various opportunities and challenges at the global
level. – (GS3 Mains 2006)
9. What are the major provisions of Agreements on Agriculture in the
context of World Trade Organisation? - (GS3 Mains 2004)
10. Explain the term Balance on Current Account. - (GS3 Mains 2007)
11. Explain full Convertibility of Indian Rupee. - (GS3 Mains 2006)
12. What do you understand by 'Capital Account Convertibility of Rupee'? -
(GS3 Mains 2002)
Prelims
Q1). With reference to the international trade of India at present, which of the
following statements is/are correct? - (Prelims 2020)
1. India’s merchandise exports are less than its merchandise imports.
2. India’s imports of iron and steel, chemicals, fertilizers and machinery
have decreased in recent years.
3. India’s exports of services are more than its imports of services.
4. India suffers from an overall trade/current account deficit.
a) 1 and 2 only
b) 2 and 4 only
c) 3 only
d) 1, 3 and 4
Q2). Which one of the following is not a sub-index of the World Bank's 'Ease of
Doing Business Index'? – (Prelims 2019)
a) Maintenance of law and order
b) Paying taxes
c) Registering property
d) Dealing with construction permits
Q3). The Global Competitiveness Report is published by the - (Prelims 2019)

a) International Monetary Fund
b) United Nations Conference on Trade and Development Notes

c) World Economic Forum
d) World Bank

1. Coal sector was nationalized by the Government of India under Indira
Gandhi.
2. Now, coal blocks are allocated on lottery basis.
3. Till recently, India imported coal to meet the shortages of domestic
supply, but now India is self-sufficient in coal production.
a) 1 only
b) 2 and 3 only
c) 3 only
d) 1, 2 and 3
Q5). The Global Infrastructure Facility is a/an - (Prelims 2017)

a) ASEAN initiative to upgrade infrastructure in Asia and financed by
credit from the Asian Development Bank.
b) World Bank collaboration that facilitates the preparation and
structuring of complex infrastructure Public-Private Partnerships
(PPPs) to enable mobilization of private sector and institutional
investor capital.
c) (c) Collaboration among the major banks of the world working with
the OECD and focused on expanding the set of infrastructure projects
that have the potential to mobilize private investment.
d) UNCTAD funded initiative that seeks to finance and facilitate
infrastructure development in the world.

1. India has ratified the Trade Facilitation Agreement (TFA) of WTO.
2. TFA is a part of WTO's Bali Ministerial Package of 2013.
3. TFA came into force in January 2016.
a) 1 and 2 only
b) 1 and 3 only
c) 2 and 3 only
d) 1, 2 and 3
Q7). 'Global Financial Stability Report' is prepared by the - (Prelims 2016)

a) European Central Bank
b) International Monetary Fund
c) International Bank for Reconstruction and Development
d) Organization for Economic Cooperation and Development
Q8). Which of the following best describes the term 'import cover', sometimes Notes
seen in the news? - (Prelims 2016)
a) It is the ratio of value of imports to the Gross Domestic Product of a
country
b) It is the total value of imports of a country in a year
c) It is the ratio between the value of exports and that of imports
between two countries
d) It is the number of months of imports that could be paid for by a
country's international reserves
Q9). The terms 'Agreement on Agriculture', 'Agreement on the Application of

Sanitary and Phytosanitary Measures' and 'Peace Clause' appear in the news
frequently in the context of the affairs of the - (Prelims 2015)
a) Food and Agriculture Organization
b) United Nations Framework Conference on Climate Change
c) World Trade Organization
d) United Nations Environment Programme
Q10). Convertibility of rupee implies - (Prelims 2015)

a) being able to convert rupee notes into gold
b) allowing the value of rupee to be fixed by market forces
c) freely permitting the conversion of rupee to other currencies and
vice versa
d) developing an international market for currencies in India
Q11). With reference to Balance of Payments, which of the following

constitutes/constitute the Current Account? - (Prelims 2014)
1. Balance of trade
2. Foreign assets
3. Balance of invisibles
4. Special Drawing Rights
Select the correct answer using the code given below.
a) 1 only
b) 2 and 3
c) 1 and 3
d) 1, 2 and 4
Q12). The balance of payments of a country is a systematic record of - (Prelims

2013)
a) all import and transactions of a during a given period normally a
year
b) goods exported from a country during a year
c) economic transaction between the government of one country to
another
d) capital movements from one country to another
Q13). The national income of a country for a given period is equal to the - Notes
(Prelims 2013)
a) total value of goods and services produced by the nationals
b) sum of total consumption and investment expenditure
c) sum of personal income of all individuals
d) money value of final goods and services produced

The price of any currency in international market is decided by the
1. World Bank
2. demand for goods/services provided by the country concerned
3. stability of the government of the concerned country
4. economic potential of the country in question
a) 1, 2, 3 and 4
b) 2 and 3 only
c) 3 and 4 only
d) 1 and 4 only
Q15). A “closed economy’’ is an economy in which? - (Prelims 2011)

a) The money supply is fully controlled.
b) Deficit financing takes place.
c) Only exports take place.
d) Neither exports nor imports take place.
Q16). In the context of the affairs of which of the following is the phrase
"Special Safeguard Mechanisms" mentioned in the news frequently? - (Prelims
2010)
a) United Nations Environment Programme
b) World Trade Organization
c) ASEAN - India Free Trade Agreement
d) G - 20 Summits

Full convertibility of the rupee may mean
1. its free float with other international currencies.
2. its direct exchange with any other international currency at any
prescribed place inside and outside the country.
3. it acts just like any other international currency.
Which of these statements are correct?
a) 1 and 2
b) 1 and 3
c) 2 and 3
d) 1, 2 and 3
Q18). Indian Human Development Report does not give for each sample Notes
village - (Prelims 2000)
a) Infrastructure and Amenities Index
b) Education Related Index
c) Health Related Index
d) Unemployment Related Index
Mains
Q) Development is a multifaceted process. The Sustainable Development Goals

(SDGs) have captured the vital aspects of human life and set targets accordingly.
Does India’s developmental discourse resonate with the SDGs? Critically
examine.
Infrastructure
Infrastructure is the basic physical and organizational structures and facilities

(e.g., buildings, roads, power supplies) needed for the operation of a society or
enterprise.
Types of infrastructure
• Economic infrastructure: It is directly linked with the economic
development of a country or an organisation. It includes the basic
amenities and services that directly influence and benefit the
production process of economic distribution. A few examples of
economic infrastructures are power, transportation, irrigation,
communication, etc. It promotes economic growth, thus improving
people's living standards.
• Social infrastructure: It has the basic services that improve individual
productivity and achieve social objectives. Social infrastructure
contributes indirectly to the country’s economic development. For
instance, the education sector does not contribute directly to the
economic development of a country. However, it helps indirectly by
providing high-quality education to the students, therefore producing
doctors, scientists, engineers, and technologists. Few examples of social
infrastructure are water supply, sanitation, health, housing, etc. It
accelerates the human development process.
Economic v/s Social Infrastructure: Notes
Social Infrastructure Economic Infrastructure

It refers to basic services such as It refers to facilities, activities and
education and training. services which support operation
and development of other sectors.
Improves the quality of human Improves the quality of economic
resources. resources.
It includes health, sanitation, It includes power, transportation,
education, drinking water, housing, irrigation, communication, etc.
sewerage, etc.
They indirectly help the economic They directly help in economic
development of the country. development of the country.
The importance of infrastructure
Importance of
Infrastructure
Increase in Expand the Improve work Promote Build Link in

productivity market scale capacity Outsourcing Production
• Increase in productivity: Infrastructure plays an important role in

increasing productivity. Improving roads, warehouses, etc. Farmers can
easily sell their products in different markets.
• Expand the market scale: Infrastructure expands the market scale, because
mass production can occupy more markets.
• Improve work capacity: Social infrastructure improves the quality of life of
workers, thus increasing their efficiency. Health centers, educational
institutions, and other similar facilities have inherited skills that enhance
work capacity and efficiency.
• Promote outsourcing: India is becoming a global destination for all kinds of
outsourcing. For example, call centers, learning centers, etc.
• Build links in production: better transportation and education methods,
strong banking and financial systems produce better inter-industry
linkages.
State of India's infrastructure Notes
Spending to GDP ratio

6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Spending to GDP ratio
India's infrastructure investment accounts for about 3.9% of GDP (2021), which
is much lower than China (6.4%) and Indonesia (7.7%). In cooperation with the
government, the cooperation between the private sector and the public sector
also plays a very important role in the development of infrastructure. India
needs to develop its infrastructure, especially in the areas of rural energy,
water, basic services and sanitation needs.
Q.) Consider the following statements: Human capital formation as a concept

is better explained in terms of a process, which enables - 2018
1. individuals of a country to accumulate more capital.
2. increasing the knowledge, skill levels and capacities of the people of the
country.
3. accumulation of tangible wealth.
4. accumulation of intangible wealth.
a) 1 and 2
b) 2 only
c) 2 and 4
d) 1, 3 and 4
Q.) Among other things, which one of the following was the purpose for which
the Deepak Parekh Committee was constituted? - 2009
a) To study the current socio-economic conditions of certain minority
communities
b) To suggest measures for financing the development of infrastructure
c) To frame a policy on the production of genetically modified
organisms.
d) To suggest measures to reduce the fiscal deficit in the Union Budget.
Power is among the most critical components of infrastructure, crucial for the Notes
economic growth and welfare of nations. The existence and development of
adequate power infrastructure is essential for sustained growth of the Indian
economy.
• India's power sector is one of the most diversified in the world.
• Sources of power generation range from conventional sources such as
coal, lignite, natural gas, oil, hydro and nuclear power to viable non-
conventional sources such as wind, solar, and agricultural and domestic
waste.
• Electricity demand in the country has increased rapidly and is expected
to rise further in the years to come. In order to meet the increasing
demand for electricity in the country, massive addition to the installed
generating capacity is required.
• India is the only country among the G20 nations that is on track to
achieve the targets under the Paris Agreement.
Energy/Electricity
• Energy is the lifeline of all production activities. In fact, energy is
inseparable from any type of production activity.
• Electricity is a secondary form of energy produced from primary energy
resources including coal, hydrocarbons, hydro energy, nuclear energy,
renewable energy etc.
• The most obvious form of energy, usually considered to be the
advancement of modern civilization, is energy/electricity.
• As per India Energy Outlook 2021, published by International Energy
Agency (IEA), India has been ranked third largest primary energy consumer
in the world and third-largest consumer of electricity worldwide, with an
installed power capacity of 395.07 GW, as of January 2022.
• 100% FDI allowed in the power sector has boosted FDI inflow in this sector.
• Commercial primary energy consumption in India has grown by about 700%
in the last four decades. The current per capita commercial primary energy
consumption in India is about 350 kgoe/year which is well below that of
developed countries.
Note- The same trend is still relevant. Don’t focus on date, focus on trend. Notes
Note- The similar pattern in percentage trend is still relevant.
Sources of Energy:
• Conventional energy: These are energy sources that we know and have
been widely used for a long time. Examples include coal, oil, natural gas,
and electricity. They are of two types:
o Commercial sources: coal, oil and electricity.
o Non-commercial sources: agricultural waste from firewood and dry
manure.
• Unconventional energy: These are recently discovered or explored energy
sources, but have not yet been widely used.
Challenges Faced by the Power Industry in India

• India is an energy deficit country. Most of the energy requirement is
fulfilled by import of coal and crude oil. Coal is the most important and
abundant fossil fuel in India. It accounts for 55% of the country's energy
need.
• India’s installed power generation capacity is not enough to drive 9%
economic growth; currently, India's annual installed capacity is 448 GW
(March 2020). Even the installed capacity of has not been fully utilized.
• Due to transmission and distribution losses, incorrect electricity prices
and other inefficiencies, the power sector in India suffered more than
27,000 cr. loss in 2018-19. India's T&D losses have been over 20 per cent
of generation, which is more than twice the world average. The ideal
level of T&D losses ranges between six to eight per cent.
• Due to high electricity prices and prolonged blackouts in different areas Notes
of the country, the public is generally turbulent.
• Thermal power plants, the backbone of India's energy sector, face
shortage of raw materials and coal.
• Nuclear energy accounts for only 2 per cent of total energy
consumption, against a global average of 13 per cent.
• The growth rate of demand for power is generally higher than the GDP
growth rate. Studies point that in order to have 8 per cent GDP growth
per annum, power supply needs to grow around 12 per cent annually.
Q.) Consider the following statements: - Prelims 2019

1. Coal sector was nationalized by the Government of India under Indira
Gandhi.
2. Now, coal blocks are allocated on lottery basis.
3. Till recently, India imported coal to meet the shortages of domestic
supply, but now India is self-sufficient in coal production.
a) 1 only
b) 2 and 3 only
c) 3 only
d) 1, 2 and 3
Note- In this question, if you focus on 3rd statement and have a common sense
of ‘India being an energy deficit country relying mostly on coal energy’, you
can easily eliminate the 3rd statement and arrive at (a) as the correct answer.
Sometimes, you don’t need to focus on every statement and bog down. Even a
single fact can let you solve the question with 100% precision. That’s the beauty
of UPSC questions!
UJALA Scheme
• In May 2015, the Indian government introduced the UJALA (Unnat Jyoti
by Affordable LEDs for All) scheme, which is also known as the LED-
based Domestic Efficient Lighting Programme, to promote energy
efficiency in all households.
• The UJALA scheme works on a ‘demand aggregation-price crash model’,
which involves lowering costs by using economies of scale.
• In 2015, EESL invited manufacturers to submit open bids for a large-
scale LED lamp procurement and covered all upfront costs. Due to this
market aggregation, the retail prices of LED dramatically declined to as
low as Rs. 65 in 2016.
• The UJALA Scheme is a joint project of the Government of India's Public Notes
Sector Undertakings, the Union Ministry of Power's Energy Efficiency
Services Limited (EESL) and DISCOM.
Health
• It is a state of complete physical, mental and social well-being and not
just absence of diseases or infirmity.
• A person's ability to work largely depends on their health. It improves
quality of life.
Status of the Health Infrastructure in India:

Healthcare has become one of India’s largest sectors, both in terms of revenue
and employment.
• Healthcare comprises hospitals, medical devices, clinical trials,
outsourcing, telemedicine, medical tourism, health insurance and
medical equipment. The Indian healthcare sector is growing at a brisk
pace due to its strengthening coverage, services and increasing
expenditure by public as well private players.
• India’s healthcare delivery system is categorised into two major
components public and private. The government, i.e. public healthcare
system, comprises limited secondary and tertiary care institutions in
key cities and focuses on providing basic healthcare facilities in the form
of primary healthcare centres (PHCs) in rural areas. The private sector
provides majority of secondary, tertiary, and quaternary care
institutions with major concentration in metros and tier-I and tier-II
cities.
• India's competitive advantage lies in its large pool of well-trained
medical professionals. India is also cost competitive compared to its
peers in Asia and Western countries. The cost of surgery in India is
about one-tenth of that in the US or Western Europe.
• As of March 21, 2022, more than 181.52 crore COVID-19 vaccine doses
have been administered across the country.
• The public health system and facilities are inadequate to meet the
needs of the majority of the population.
• In terms of utilization of medical and health facilities, there is a large
gap between rich and poor between urban and rural areas.
• The health of women across the country has become a matter of great
concern, there are reports that female abortions and mortality rates are
increasing.
• Regulated private sector health services can improve the situation. At Notes
the same time, NGO and community involvement is very important in
health service delivery and health awareness.
• The recent Covid-19 pandemic showed the weak condition of India’s
health sector especially the government hospitals.
In the Economic Survey of 2022, India’s public expenditure on healthcare

stood at 2.1% of GDP in 2021-22 against 1.8% in 2020-21 and 1.3% in 2019-
20.
Global Burden of Diseases (GBD)

• The Global Burden of Disease (GBD) provides a tool to quantify health
loss from hundreds of diseases, injuries, and risk factors, so that health
systems can be improved and disparities can be eliminated.
• India’s GBD is high compared to other nations in Asia too.
• India has about 18 per cent of the world’s population but it bears a more
than 20 per cent of the global burden of diseases (GBD).
Some facts:
• India has one-of-the highest level of Out-Of-Pocket Expenditures
(OOPE) oh health contributing directly to the high incidence of
catastrophic expenditures and poverty as per the Economic Survey.
• Though 70 per cent of India’s population lives in rural areas, only one-
fifth of its hospitals (including private hospitals) are located in rural
areas. Rural India has only about half the number of dispensaries. Out
of about 6.3 lakh beds in government hospitals, roughly 30 per cent are
available in rural areas.
• The poorest 20 per cent of Indians living in both urban and rural areas
spend 12 per cent of their income on healthcare while the rich spend
only 2 per cent.
Note- Read the trend related facts given in NCERT’s sincerely.
National Family Health Survey (NFHS)

• The National Family Health Survey (NFHS) is a large-scale, multi-round
survey conducted in a representative sample of households throughout
India. It has been conducted in 1992-93, 1998-99, 2005-2006, 2015-16
and 2019-21.
• Each successive round of the NFHS has had two specific goals: a) to
provide essential data on health and family welfare needed by the
Ministry of Health and Family Welfare and other agencies for policy and Notes
programme purposes, and b) to provide information on important
emerging health and family welfare issues.
• The Ministry of Health and Family Welfare (MOHFW), Government of
India, designated the International Institute for Population Sciences
(IIPS) Mumbai, as the nodal agency, responsible for providing
coordination and technical guidance for the survey. IIPS collaborated
with a number of Field Organizations for survey implementation.
Indian Systems of Medicine and Homoeopathy (ISM&H)

• The Indian Systems of Medicine and Homoeopathy (ISM&H) consist of
Ayurveda, Siddha, Unani and Homoeopathy, and therapies such as Yoga
and Naturopathy. Some of these systems are indigenous and others
have over the years become a part of Indian tradition. There are over
six lakh ISM&H practitioners. The majority of the practitioners work in
the private sector, in remote rural areas/urban slums and are accepted
by the community.
• According to WHO data, 65 to 70 per cent of people in India use
traditional therapies at some stage in their lives. The turnover of the
AYUSH industry has gone up six times in the past eight years.
Paradoxically, however, there is a lot of misinformation about such
cures and their practitioners are vilified at times.
• The WHO’s Global Centre for Traditional Medicine (GCTM) inaugurated
by PM at Jamnagar in Gujarat.
Environment
The environment is the sum total of all the biotic elements like plants and
animals and abiotic elements like the air, water, soil, and minerals that make
up our surroundings and impact our existence and the quality of our life.
Functions of Environment
• Offers resources: The environment offers resources for production. It
includes physical resources like minerals, wood, water, soil, and others
which can be used as inputs for production. Normally, two types of
resources are provided by the environment, namely:
o Renewable resources: Renewable resources are those that can be
used indefinitely without getting depleted or exhausted. For
example, air, sunlight, etc.
o Non-Renewable resources: These are the resources that deplete Notes

over time as a result of extraction and use. For example, coal, fossil
fuels etc.
• Climate regime: It regulates the temperature, pressure, humidity and
moisture level in the environment and thereby regulates the climate.
• Reproduction: It is the basic factor for survival of the species.
• Recycle the nutrients: Through nutrient recycling environment plays an
important role in maximum utilization of resources.
• Environment sustains life: It includes resources like sun, soil, water, and air
which are essential for the sustenance of human life. The absence of these
elements implies no existence of life.
• Environment assimilates waste: Production and consumption generate
waste that the environment absorbs.
• Enhances the quality of life: The environment enhances the quality of life
through its aesthetic and scenic beauty.
Carrying Capacity
• Carrying capacity is measured as the maximum load of an environment.

• The physical features present in the environment act as limiting factors
(e.g., food, water, competition, etc.).
• Thus, the population limit can be expected to depend on these factors. In
essence, food availability is an important variable as it affects
the population size of the species.
• It does so in such a way that if food demand is not met over a given period Notes
of time the population size will eventually decrease until the resources
become adequate.
• By contrast, when food supply exceeds demand then the population size
will soon increase and will stop increasing when the source is consequently
depleted.
• Carrying capacity may also be defined as the population size at which the
population growth rate equals zero.
Carrying capacity implies two things:

• Resource extraction should remain below the rate of resource
regeneration.
• Generation of wastes should remain within the absorption capacity of the
environment.
o If these two conditions are not fulfilled, then environmental crisis
occurs.
Absorptive Capacity:
• It is the ability of the environment to absorb degradation and pollution.
Global Warming
• Global warming is the long-term heating of Earth’s climate system observed
since the pre-industrial period (between 1850 and 1900) due to human
activities, primarily fossil fuel burning, which increases heat-trapping
greenhouse gas levels in Earth’s atmosphere. The term is frequently used
interchangeably with the term climate change, though the latter refers to
both human- and naturally produced warming and the effects it has on our
planet. It is most commonly measured as the average increase in Earth’s
global surface temperature.
• Since the pre-industrial period, human activities are estimated to have
increased Earth’s global average temperature by about 1 degree Celsius
(1.8 degrees Fahrenheit), a number that is currently increasing by 0.2
degrees Celsius (0.36 degrees Fahrenheit) per decade. It is unequivocal that
human influence has warmed the atmosphere, ocean, and land.
Ozone Hole Notes
• The ozone hole is not technically a “hole” where no ozone is present, but is
actually a region of exceptionally depleted ozone in the stratosphere over
the Antarctic that happens at the beginning of Southern Hemisphere spring
(August–October).
• You must have studied that the ozone hole is caused by chemicals called
CFCs, short for chlorofluorocarbons. CFCs escape into the atmosphere from
refrigeration and propellant devices and processes. In the lower
atmosphere, they are so stable that they persist for years, even decades.
This long lifetime allows some of the CFCs to eventually reach the
stratosphere. In the stratosphere, ultraviolet light breaks the bond holding
chlorine atoms (Cl) to the CFC molecule. A free chlorine atom goes on to
participate in a series of chemical reactions that both destroy ozone and
return the free chlorine atom to the atmosphere unchanged, where it can
destroy more and more ozone molecules.
Notes
Q.) Consider the following statements: - Prelims 2012

Chlorofluorocarbons, known as ozone-depleting substances, are used
1. in the production of plastic foams
2. in the production of tubeless tyres
3. in cleaning certain electronic components
4. as pressurizing agents in aerosol cans
a) 1, 2 and 3 only
b) 4 only
c) 1, 3 and 4 only
d) 1, 2, 3 and 4
Montreal Protocol
• The Montreal Protocol on Substances that Deplete the Ozone Layer is
the landmark multilateral environmental agreement that regulates the
production and consumption of nearly 100 man-made chemicals
referred to as ozone depleting substances (ODS). Adopted on 15
September 1987, the Protocol is to date the only UN treaty ever that
has been ratified every country on Earth - all 198 UN Member States.
• The Montreal Protocol phases down the consumption and production
of the different ODS in a step-wise manner, with different timetables
for developed and developing countries (referred to as “Article 5
countries”). Developing and developed countries have equal but
differentiated responsibilities, but most importantly, both groups of
countries have binding, time-targeted and measurable commitments.
• The Meeting of the Parties is the governance body for the treaty, with
technical support provided by an Open-ended Working Group, both of
which meet on an annual basis. The Parties are assisted by the Ozone Notes
Secretariat, which is based at UN Environment Programme
headquarters in Nairobi, Kenya.
• Multilateral Fund for the Implementation of the Montreal Protocol was
established in 1991 under Article 10 of the treaty. The Fund's objective
is to provide financial and technical assistance to developing country
parties to Protocol whose annual per capita consumption and
production of ODS is less than 0.3 kg to comply with control measures
of the Protocol.
State of India’s Environment

• India is rich in natural resources and biodiversity. But the development
activities have led to increased pressure on limited natural resources.
• The major environment-related issues are
a. Land Degradation
b. Air Pollution
c. Biodiversity Loss
d. Management of Freshwater
e. Solid Waste Management.
a. Land degradation
Land degradation—the deterioration or loss of the productive capacity of the
soils for present and future—is a major challenge in India that affects everyone
through food insecurity, higher food prices, climate change, environmental
hazards, and the loss of biodiversity and ecosystem services. Globally, about 25
percent of the total land area has been degraded.
It occurs due to following reason:
• Excessive extraction of fuelwood and fodder.
• The practice of shifting cultivation.
• Forest land encroachment.
• Forest fires and overgrazing.
• Lack of implementation of soil conservation measures.
• No or improper crop rotation.
• Excessive use of agrochemicals like fertilizers and pesticides.
• Inefficient planning and management of irrigation systems.
• Excess extraction of groundwater.
Do You Know?
• The United Nations Convention to Combat Desertification (UNCCD),
adopted in 1994, is the sole legally binding international agreement
linking environment and development to sustainable land Notes

management. The Convention addresses specifically the arid, semi-arid,
and dry sub-humid areas, known as the drylands, where some of the
most vulnerable ecosystems and peoples can be found.
• Currently, 97.85 million hectares (mha) of land, an area 2.5 times the
size of India’s largest state Rajasthan, has already been degraded.
• Nearly 30% of India’s land area, as much as the area of Rajasthan,
Madhya Pradesh and Maharashtra put together, has been degraded
through deforestation, over-cultivation, soil erosion and depletion of
wetlands.
• Global conference (COP-14) on combating desertification was held in
India in September, 2019.
• India is a signatory to the United Nations Convention for Combating
Desertification (UNCCD).
• UNCCD Convention, is the only convention stemming from a direct
recommendation of the Rio Conference's Agenda 21.
b. Air pollution
Air pollution can be defined as the presence of toxic chemicals or compounds
(including those of biological origin) in the air, at levels that pose a health risk.
In an even broader sense, air pollution means the presence of chemicals or
compounds in the air which are usually not present and which lower the quality
of the air or cause detrimental changes to the quality of life
It occurs owing to the presence of pollutants in the air. These are contributed
by:
• Smoke is emitted by the industries, particularly those using coals as energy.
• Poisonous gases emitted in the process of chemical treatment of materials.
• The emission of gases by motor vehicles is assuming alarming proportions
due to the exponential rise in the number of vehicles.
c. Biodiversity loss
It refers to the decline, depletion or extinction of the living species of the world
due to reasons such as, climatic change, pollution, over-exploitation of natural
resources etc.
d. Management of Freshwater
Improper management of water resources, or water pollution is another issue
the environment is facing. The water pollution is caused due to:
• Industrial waste discharged in water resources that contaminates the water
owing to toxic chemicals and pollutants.
• Dumping household wastes in the water resources. Notes

• The use of chemicals and fertilizers by the farmers also adds to the water
pollution, as when it rains, the chemicals get mixed up with the rainwater,
which then flows to rivers etc.
• Doing household chores like washing clothes, bathing etc also impacts the
quality of water.
e. Solid Waste Management

Huge piles and dump of wastes in rural and urban areas leads to various
diseases and health problems. Improper segregation of household waste,
littering on the roads, etc pose a serious threat to the environment, hence
there is an urgent need of management of solid waste.
Some facts:
• India accounts for a meagre 2.4 percent of the world surface area yet it
supports and sustains a whopping 17.7 percent of the world population.
• Since Population of India is increasing with slower rate than the world,
its global share is decreasing. By 2100, 13.34% of the earth population
will be in India i.e. 4.42% less than the peak level of 17.76% in 2013.
• The total forest and tree cover of the country so estimated comes out
to be 778,229 km2 constituting 23.68 % of its geographic area against
757,010 km2 constituting 23.03% of geographic area in 2001
assessment.
• The per capita forest and tree cover in the country is 0.07 ha. Total
forest and tree cover of the country is 80.9 million hectare which is
24.62 percent of the geographical area.
• The Chipko movement or chipko andolan, was a forest conservation
movement in India. The movement originated in 1973 at the Garhwal
region of Uttarakhand and went on to become a rallying point for many
future environmental movements all over the world. It created a
precedent for starting nonviolent protest in India.
• The famous Chipko Andolan (Hug the Trees Movement) of Uttarakhand
in the Himalayas inspired the villagers of the Uttara Kannada district of
Karnataka to launch a similar movement to save their forests. In
September 1983, men, women and children of Salkani ‘hugged the
trees’ in Kalase forest. The local term for "hugging" in Kannada is
appiko.
• The Jungle Bachao Andolan took shape in the early 1980s when the
government proposed to replace the natural Sal Forest of Singhbhum
District, Bihar (now Jharkhand), with commercial teak plantations. The
movement, which spread to nearby states, has highlighted the gap Notes
between the Forest Department’s aims and the people.
Sustainable Development
"Sustainable development is development that meets the needs of the present,

without compromising the ability of future generations to meet their own
needs."
• The concept of sustainable development can be interpreted in many
different ways, but at its core is an approach to development that looks
to balance different, and often competing, needs against an awareness
of the environmental, social and economic limitations we face as a
society.
• Modern concept of sustainable development is derived mostly from the
1987 Brundtland Report.
• Our Common Future, also known as the Brundtland Report, was
published on October 1987 by the United Nations. The report defined
'sustainable development' as "Development that meets the needs of
the present without compromising the ability of future generations to
meet their own needs"
Strategies for Sustainable Development

• Use of Non-Conventional sources of energy
o The dependency on thermal and hydro energy has adverse effects
on the environment. Thermal power plants release a lot of carbon
dioxide into the environment and can also cause water pollution.
Hydroelectric projects damage the forests and natural flow of
water. Sources like wind power and solar rays are better sources of
energy for the environment.
• LPG, Gobar Gas in Rural Areas
o The use of wood, cow dung, or other biomass fuels encourages
deforestation, reduction in green cover, wastage of cattle dung, and
air pollution. Instead, the use of gobar gas and LPG is
recommended. The cattle dung is used to produce gobar gas which
is a cleaner fuel and the slurry is an excellent fertilizer. LPG, which
is also a clean fuel, reduces household pollution considerably.
• CNG in Urban Areas
o The use of Compressed Natural Gas (CNG) in public transport has
significantly reduced air pollution.
• Wind Power Notes

o In high wind areas, wind turbines are installed to move the wind to
generate electricity without any adverse effect on the environment.
Though the initial cost of setup is high, the benefits absorb the costs
in the long run.
• Solar Power through Photovoltaic Cells
o India is endowed with abundant sunlight which is a rich source of
energy. Solar energy and its conversion into electricity is an effective
answer not only to the problem of economic growth but also the
problem of sustainable development.
• Mini-Hydel Plants
o Streams in India can be used to generate energy by installing mini-
hydel plants. These streams can move turbines which generate
electricity. This power can be used to meet local requirements. They
are eco–friendly and do not alter the land use pattern.
• Traditional Knowledge and Practices
o India is a country where people have been closely connected to
their environment. All our traditional practices have been eco-
friendly. When we started to drift away from traditional systems
and heritage, we caused damage to our environment. Adopting
simple and traditional practices not only helps us lead a healthy life
but also protects us from the side effects of modern products and
services.
• Biocomposting
o Large-scale use of chemical fertilizers had adversely affected
productive land and water bodies. Compost made from organic
wastes of different types serve as excellent and eco-friendly
fertilizers.
• Bio pest Control
o Chemical pesticides showed negative effects on food products, soil,
water bodies, and groundwater. Plant-based pesticides like neem
trees are effective pest controlling agents. Awareness is also being
spread about a variety of birds and animals that help in pest control.
• Shift to organic farming
o Shifting from conventional farming to organic farming also helps in
sustaining the environment as through organic farming the
nutrients of the are restored back, which is not the case in
conventional farming.
Globalization and Indian Economy Notes
Large corporations, known as Multinational Corporations (MNCs), play a

significant role in trade.
• A multinational corporation (MNC) is one that owns or controls
production in more than one country.
• MNCs locate production headquarters and factories in areas where
labour and other resources are cheap. This is done to keep production
costs down and allow MNCs to make more money.
• MNCs locate production near markets, where skilled and unskilled
labour is readily available at low rates, and where the availability of
other production elements is ensured.
• Furthermore, MNCs may seek government measures that protect their
interests.
Interlinking Production Across Countries
Investment Manufacturing Market in

Design in U.K. India
from USA in China
• Investment: It refers to money spent on assets such as land, buildings,

machineries, and other equipment.
o MNC investment is referred to as foreign investment. Any
investment is made in the hopes of profiting from the assets.
o MNCs are spreading their production and interacting with local
producers in numerous nations throughout the world in a variety of
methods, as listed below:
• Joint Production: MNCs partner with an existing local company in joint
production or partnership. The investment enables local producers to
obtain new and improved assets as well as cutting-edge technologies.
• Acquisition of Local Companies: MNCs purchase large established local
enterprises with vast networks in order to grow their production.
• Controlled Production: MNCs source materials and make orders with local
companies who create goods, resulting in controlled production. The
MNC's brand name is used to market the products.
• MNCs collaborate with local businesses to set up production, which
benefits local businesses in the following ways:
o MNCs can give funds for extra investments, such as the purchase of
new machines to increase production speed.
o Multinational corporations may bring cutting-edge manufacturing Notes

technology with them.
Foreign Trade and Integration of Markets

• Foreign trade allows producers to expand their reach beyond their
home markets, i.e., markets within their own countries.
• Producers have the option of selling their products not only in domestic
markets, but also in marketplaces around the world.
• Similarly, importing items manufactured in another country is one way
for purchasers to increase their options beyond what is offered
domestically.
Thus, foreign trade leads to the connection or integration of markets in other
countries.
Note- Globalization already covered in previous VAN.
Comparative development experience of India with its Neighbours
Development path of India, Pakistan and China

• All three countries began their development journeys at the same time.
India and Pakistan gained independence in 1947, and China established the
People's Republic of China in 1949.
• All three countries had begun to plan their development strategies in a
similar manner. India unveiled its first Five Year Plan in 1951, Pakistan in
1956, and China in 1953.
• India and Pakistan pursued similar strategies, such as establishing a large
public sector and increasing government spending on social development.
• While India and Pakistan followed the ‘mixed economy' model, China
followed the ‘command economy' model of economic growth.
• Prior to the 1980s, all three countries had comparable growth rates and per
capita incomes.
• China implemented economic reforms in 1978, Pakistan in 1988, and India
in 1991.
Development Strategies of India

• A sound trade system: India was a country with a history of closed trade.
Because of this historical context, India faces a critical challenge in
developing a new policy that can support the new trade system. This new
trade reform has been implemented in the Indian economy and has
accelerated India's growth.
• Poverty reduction: To reduce poverty in India, several poverty alleviations Notes

programs have been implemented. This would aid in increasing per capita
income, improving nutrition, and reducing poverty in some states.
• Rural development: As a part of this strategy, India implemented a variety
of measures to develop areas that are lagging behind in the overall
development of the village economy.
• Employment generation: Several economic reforms have been initiated in
order to generate employment in the country, with the goal of providing
gainful self-employment and skilled wage employment opportunities.
Development Strategies of China

• Great Leap Forward: Launched in 1958, this campaign aimed at
massively industrializing the country. People were encouraged to
establish large-scale industries in their own backyards.
• Great Proletarian Cultural Revolution (1966-1976): In 1965, Mao Se
Tung launched a large-scale cultural revolution. During the revolution,
students and professionals were sent to the countryside to work and
learn.
• 1978 Reforms: Beginning in 1978, China began to implement many
reforms in stages. These reforms have been implemented in the
agricultural, foreign trade, and investment sectors. The goal of Chinese
economic reforms was to generate enough surplus to finance the
modernization of the Chinese economy on the mainland.
Development Strategies of Pakistan

• Mixed Economy: Pakistan has a mixed economy in which the public and
private sectors coexist.
• Import Substitution: In the late 1950s and early 1960s, Pakistan established
a regulatory framework for import industrialization. The policy combined
tariff protection for consumer goods manufacturing with direct import
controls on competing imports.
• Green Revolution: This was implemented to increase food productivity and
self-sufficiency, and increased food grain output. This had a significant
impact on the agrarian system.
Economic development strategy after independence

• Business activities were assigned to both the public and private sectors.
Coal, mining, steel, power, roads, and other activities were assigned to the
public sector. The private sector was given the authority to establish
industries that would be subject to legal control and regulations.
• The government gave a big push to the public sector. The highest revenue Notes
was invested in this sector, which increased from Rs. 81.1 crore in the First
Five-Year Plan (1951-56) to Rs 34,206 crores in the Ninth Five-Year Plan
(1992-97).
• The public sector was prioritized in order to eliminate poverty,
unemployment, and other social ills.
• The public sector aided in the industrialization of the economy. It also aided
the Indian economy in achieving a high level of self-sufficiency.
Comparation of India, Pakistan and China:

• Pakistan's population is very small, accounting for roughly one-tenth of that
of China and India.
• Despite being the largest country geographically, China has the lowest
population density of the three.
• Pakistan has the fastest population growth, followed by India and China.
The one-child policy, which was implemented in China in the late 1970s, is
the primary cause of low population growth. However, this measure
resulted in a decrease in the sex ratio, or the proportion of females per
1000 males.
• In all three countries, the sex ratio is low and biased against females. In all
of these countries, there is a strong preference for sons.
• The fertility rate in China is low, but it is very high in Pakistan.
• Both China and Pakistan have high levels of urbanisation, with India having
28 percent of its population living in cities.
Gross Domestic Product (GDP) and Sectors

Gross domestic product (GDP) is the total monetary or market value of all the
finished goods and services produced within a country’s borders in a specific
time period. As a broad measure of overall domestic production, it functions
as a comprehensive scorecard of a given country’s economic health.
• China had the world's second largest GDP (PPP) of 10.1 trillion in 2013,
followed by India's GDP (PPP) of 1.86 trillion and Pakistan's GDP (PPP) of
0.47 trillion.
GDP (PPP) 2013 2020

India 1.86 Tr 1.97 Tr
China 10.1 Tr 14.72 Tr
Pakistan 0.47 Tr 0.26 Tr
• On this path of development, China's average growth rate is approximately Notes

9.5 percent, while India's and Pakistan's average growth rates are
approximately 5.8 percent and 4.1 percent, respectively.
• In China in 2011, agriculture employed 37 percent of the workforce and
contributed 9 percent to GDP (approximately). In India and Pakistan, the
agricultural sector accounts for approximately 19% and 21% of GDP,
respectively. In India, approximately 56% of people work in agriculture,
whereas in Pakistan, approximately 45% work in agriculture.
2011 2020
% of % share of % of population % share of
population agriculture dependent on agriculture
dependent on in GDP agriculture in GDP
agriculture
India 56 19 50 20.2
China 37 9 35 7.6
Pakistan 45 21 42 19
• In China, manufacturing accounts for 47 percent of GDP, whereas in India

and Pakistan, the service sector accounts for the majority of GDP (more
than 50 percent of GDP).
• Unlike China, which followed the traditional development pattern of
shifting from agriculture to manufacturing and then to services, India and
Pakistan have moved directly from agriculture to the service sector.
• In the 1980s, the service sector employed 17, 12, and 27 percent of the
workforce in India, China, and Pakistan, respectively. In 2011, it was 25
percent, 33 percent, and 35 percent, respectively (approximately).
1980s 2011 2020
India 17 25 32
China 12 33 47
Pakistan 27 35 38
• The manufacturing sector is primarily responsible for China's growth,

whereas the service sector is emerging as a major player in development in
both India and Pakistan.
Human Development Indicators Notes
• Human development – or the human development approach 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
people and their opportunities and choices.
• China has outperformed India and Pakistan in most areas of human
development. This is true for many indicators, including per capita GDP and
the proportion of the population living in poverty, as well as health
indicators such as mortality rates, access to sanitation, literacy, life
expectancy, and malnourishment.
• Pakistan is ahead of India in terms of reducing the proportion of people
living in poverty, as well as its performance in shifting labor from the
agricultural to the industrial sectors and access to water.
• In contrast, India outperforms Pakistan in the education and health-care
sectors.
• India and Pakistan are ahead of China in terms of improved water sources.
• India performed moderately, as is clear from:
o Agriculture continues to be the primary source of income for the Notes

vast majority of its people.
o Infrastructural facilities are insufficient in many parts of the country.
o It has yet to improve the standard of living for more than 22 percent
of its population, which is below the poverty line.
• Pakistan has had a poor performance.
o The reasons for Pakistan's economy slowing growth and re-
emergence of poverty are as follows:
▪ Political insecurity.
▪ The agricultural sector's volatile performance.
▪ Excessive reliance on remittances.
▪ Increasing reliance on foreign loans on the one hand, and
increasing difficulty in repaying the loans on the other.
• China has performed comparatively the best, as is clear from:
o Achievement in raising the level of growth while also alleviating
poverty.
o It used the market mechanism to generate additional social and
economic opportunities without committing to any political action.
o By retaining collective land ownership and allowing individuals to
cultivate land, China has ensured rural social security.
o In China, public intervention in the provision of social infrastructure
has resulted in positive results in human development indicators.
Do You Know?
• ASEAN: The 10-member Association of Southeast Asian Nations,

ASEAN, is arguably the most durable and successful regional grouping
in the developing world. Established in 1967, it has contributed greatly
to regional harmony and prosperity.
o ASEAN is characterized by great internal diversity, generally high
economic growth, and a reluctance to establish a strong
supranational structure. India is not the member of ASEAN.
Headquarter is Jakarta, Indonesia.
o Established on 8 August 1967 in Bangkok, Thailand, with the
signing of the ASEAN Declaration (Bangkok Declaration) by the
Founding Fathers of ASEAN, namely Indonesia, Malaysia,
Philippines, Singapore and Thailand. Brunei, Vietnam, Lao PDR,
Myanmar, Cambodia joined later.
• The South Asian Association for Regional Cooperation (SAARC) is the
regional intergovernmental organization and geopolitical union of
states in South Asia.
o Its member states are Afghanistan, Bangladesh, Bhutan, India, Notes

Maldives, Nepal, Pakistan, and Sri Lanka. The organization
promotes development of economic and regional integration.
Headquarter is Kathmandu, Nepal.
• The European Union (EU) is a political and economic partnership that
represents a unique form of cooperation among sovereign countries.
The EU is the latest stage in a process of integration begun after World
War II, initially by six Western European countries, to foster
interdependence and make another war in Europe unthinkable.
o The EU currently consists of 27 member states, including most
of the countries of Central and Eastern Europe, and has helped
to promote peace, stability, and economic prosperity
throughout the European continent.
• The World Trade Organization (WTO) is the only global international
organization dealing with the rules of trade between nations. At its
heart are the WTO agreements, negotiated and signed by the bulk of
the world’s trading nations and ratified in their parliaments. The goal is
to ensure that trade flows as smoothly, predictably and freely as
possible.
o The WTO has many roles: it operates a global system of trade
rules, it acts as a forum for negotiating trade agreements, it
settles trade disputes between its members and it supports the
needs of developing countries. A number of simple,
fundamental principles form the foundation of the multilateral
trading system. The primary purpose of the WTO is to open
trade for the benefit of all.
o The WTO's top decision-making body is the Ministerial
Conference. Below this is the General Council and various other
councils and committees. Ministerial conferences usually take
place every two years. The General Council is the top day-to-day
decision-making body. It meets a number of times a year in
Geneva.
• The International Labour Organization (ILO) is a United Nations agency
whose mandate is to advance social and economic justice through
setting international labour standards. The ILO has 187 member states:
186 out of 193 UN member states plus the Cook Islands.
o Founded in October 1919 under the League of Nations, it is the
first and oldest specialised agency of the UN. It is headquartered
in Geneva, Switzerland, with around 40 field offices around the
world.
Topics: Micro-Macroeconomy & National Income Accounting Notes

• CLASS XII (Introductory Macroeconomics)
o Chapter 1 – Macroeconomics
o Chapter 2 – National Income Accounting
o Few Important Concepts from Micro is also taken care
Let us go through few Previous Year Questions from Mains from these
topics:
GS3 Mains
• Explain the difference between computing methodology of India’s
Gross Domestic Product (GDP) before the year 2015 and after the year
2015. - 2021
• Define Potential GDP and explain its determinants. What are the factors
that have been inhibiting India from realizing its potential GDP? - 2020
• Do you agree with the view that steady GDP growth and low inflation
have left the Indian economy in good shape? Give reasons in support of
your arguments. - 2019
• Do you agree with the view that steady GDP growth and Low inflation
have left the Indian economy in good shape? Give reasons in support of
your arguments. – 2019
• “Industrial growth rate has lagged behind in the overall growth of
Gross-Domestic-Product (GDP) in the post-reform period” Give reasons.
How far the recent changes are Industrial Policy are capable of
increasing the industrial growth rate? – 2017
MAINS
Q) Discuss the concept of tax to GDP ratio. What does a lower tax to GDP ratio
indicate? How does it affect a developing economy like India? What reform
measures are required to improve it? Discuss.
Macro Economics & Microeconomics Concepts Notes
• International Monetary Fund (IMF) defines macroeconomics as part of

economics concerned with how the overall economy works. It studies
such things as National Income, GDP, and inflation—the stuff of news
stories and government policy debates.
• On the other hand, microeconomics is concerned with how supply and
demand interact in individual markets for goods and services, it deals
with concepts like consumer behaviour, individual markets, supply-
demand of a good etc. Microeconomics is the logical starting point for
the study of economics.
• For an understanding if economics is a wagon, the macroeconomics
deals with the running of wagon (engine, motor etc.) and
microeconomics deals with the nuts and bolts keeping the wagon
intact.
• The differentiation between two concepts in economics started during
Great depression of early 1930s with publishing of John Maynard
Keynes’ book General theory of Employment, interest and money
(1936). J.M Keynes is considered as father of Macroeconomics.
Microeconomics Macroeconomics
✓ Deals with the individual ✓ It deals with the whole market
markets. as one like GDP.
✓ Supply and demand in ✓ Deals with big phenomena
individual markets. which economists call
✓ Individual labour markets e.g. aggregate variables.
wage determination etc. ✓ Supply and demand in
✓ Externalities arising out of aggregate markets.
the production and ✓ For comparing differences in
consumption of goods like economic growth rate of
pollution due to burning of different economies.
fuel. ✓ Aggregate demand and
✓ Price mechanisms depend aggregate supply determine
upon the demand and supply the macroeconomic
forces. phenomena like GDP, National
✓ Microeconomics can have an Income etc.
international component as ✓ Macroeconomics often
well. Single markets are not extends to the international
always confined to single sphere because domestic
countries. E.g. Global market markets are linked to foreign
for petroleum. markets through trade, Notes

investment and capital flows.
How to relate the concept? E.g. For the same issue
E.g. If we look at sales of computers macroeconomics will look at overall
in a market, microeconomics will income condition of people, total
deal with effect of increased demand amount of output produced in a
due to lower costs etc. country (GDP) and purchasing power
of the people to purchase computers.
Types of Goods:
Free Goods Common Goods Public Goods
• Goods with no • Goods with • Goods with no

opportunity cost. opportunity cost. excludability (once
• Goods with no • Goods with provided you can’t
excludability excludability (if stop anyone
• Goods with no goods sold to one consuming it)
rivalry person other • No rivalry
cannot consume • No extra cost for
the exactly same extra consumers.
good)
• Goods with rivalry
E.g.: Water E.g.: Pepsi E.g.: Public Roads
Points to Ponder:
• A good given away for free may not be a free good because there is an
opportunity cost (example healthcare paid for out of taxes).
• Not all goods provided by public sectors are public goods. Example:
Education is provided by public sector but it is a merit good, not a public
good.
• Opportunity cost is the “cost” incurred by not enjoying the benefit
associated with the best alternative choice on choosing the option.
DEMAND AND SUPPLY- CONCEPTS Notes

Demand and Supply analysis is the study of how a potential buyer interacts with
a potential seller determining quantities and prices.
DEMAND: It is the quantity of goods or service for which consumer is willing to

pay for, use and have the ability to purchase at various price at a given time.
“The demand for goods is schedule of the amounts that buyers would be willing
to purchase at all possible prices at any one instant of time”-Prof Mayers.
The demand schedule is a table that shows the relationship between the price
of the good and the quantity demanded. As prices increase the quantity
demanded will go down.
The degree of demand is determined by various factors like:

• Price of the goods or services (increase in price of tea will reduce its demand
if other things remain same).
• Price of other goods and services, alternatives and contingents (Increase in
price of tea will increase demand for its alternative coffee along with
decrease in tea demand)
• Level of income
• Income distribution
• population Size and composition
• Tastes and preferences
• Advertising
LAW OF DEMAND: All other factors being equal as the price of a good or
service increases, the quantity of goods or services demanded will decrease,
and vice versa.
Notes
The demand curve is a downward sloping curve because of the following

reasons:
• People buy more at low price until it reaches a satisfaction point (hence
this lead to Diminishing marginal utility).
• Income effect – when price of commodity decrease, consumer real
income or Purchasing power increase so consumer will buy more and
thus demand will Eventually rise.
• Arrival of new consumers-with decrease in price new consumers will
come thus Increasing demand.
Exceptions to the law of demand: Results in an upward-sloping demand curve,
contrary to the fundamental laws of demand which create a downward sloping
demand curve.
• Conspicuous goods: luxurious goods to display wealth. Example:

demand for latest i-phone will increase despite the increase in its price.
• Giffen good: non-substitutable, low income, non-luxury product.
Example: Demand for such goods (like bread) will rise with increase in
its price and vice versa.
• Veblen good: a good for which demand increases as the price increases,
because of its exclusive nature and appeal as a status symbol e.g. High-
end car.
• Inferior good: an economic term that describes a good whose demand
drops when people’s incomes rise e.g. public bus services.
SUPPLY: Supply refers to the willingness of a seller to sell a particular quantity
of a product at a particular price within a specific point of time.
Notes
Fig: The supply curve will move upward from left to right, which expresses
the law of supply.
The degree of supply is determined by various factors like:

• Price of a product
• Cost of production
• Government policies
• Technology
The demand and supply models are useful in explaining how price and quantity
traded are determined and how external influences affect the values of those
variables. Buyers’ behavior is captured in the demand function and its graphical
equivalent, the demand curve. This curve shows both the highest price buyers
are willing to pay for each quantity, and the highest quantity buyers are willing
and able to purchase at each price. Sellers’ behavior is captured in the supply
function and its graphical equivalent, the supply curve.
Notes
MARKET EQUILIBRIUM:
If, at a given quantity, the highest price that buyers are willing to pay is equal
to the lowest price that sellers are willing to accept, we say the market has
reached its equilibrium quantity. Alternatively, when the quantity that buyers
are willing and able to purchase at a given price is just equal to the quantity
that sellers are willing to offer at that same price, we say the market has
discovered the equilibrium price.
So, equilibrium price and quantity are achieved simultaneously, and as long as
neither the supply curve nor the demand curve shifts, there is no tendency for
either price or quantity to vary from their equilibrium values.
Elasticity of Demand: It is defined as the responsiveness of the quantity

demanded of a particular good to the changes in one of the variables on which
demand depends (price, quantity etc.) A change in price can lead to people
demanding lot more or lot less of the product. Demand for a good is “inelastic”
if a small change in prices causes people to make no change or almost no
change in how much they demand of that good.
Types of Elasticity of Demand include: Notes

Income elasticity of Price elasticity of Cross elasticity of demand
demand demand
Measures the Measures the Measures the responsiveness
responsiveness in quantity responsiveness of in the quantity demanded of
demanded for a certain consumers to a one good when the price for
good to a change in real change in a product’s another good changes.
income of consumers who cost.
buy this good, keeping all
other things constant.
Normal goods have If the price elasticity The Cross elasticity of
positive income elasticity of demand is greater demand for substitute goods
of demand; as incomes than 1, it is elastic (tea-coffee), is always
rise, more goods are (sensitive to an positive because the demand
demanded at each price increase in price). for one good (say tea)
level. Example: A price increases when the price for
Necessity goods (example: increase for mango the substitute good (say
sanitary napkin) are those ice-cream may make coffee) increases.
products and services that many customers
consumers will buy choose butterscotch
regardless of changes in flavour instead.
their income levels. Their
income elasticity of
demand is between zero
and one.
Inferior goods have a If the price elasticity The cross elasticity of
negative income elasticity of demand is less than demand for complementary
of demand; as consumers' 1, it is inelastic (does goods (bread-b utter) is
income rises, they buy not change negative because the
fewer inferior goods. A significantly after a demand for one good (say
typical example of such price increase). bread) decreases when the
type of product is low Example: a consumer price for the substitute good
quality of rice, which is either needs a packet (say butter) increases.
much cheaper than of salt or doesn't need
basmati. it. A price change will
have little or no effect
on demand
Notes
Elasticity of Supply: denotes the percentage change in quantity supplied with

respect to percentage change in its price. In response of rise in prices supply
will increase too, the degree of rise in supply will depend upon the elasticity of
the supply of that product.
ES = percentage change in quantity supplied/percentage change in price.
Determinants of Elasticity of supply:

• Nature of good
• Availability of substitutes
• Time period
• Production capacity
Types of Elasticity of Supply
Unitary Perfectly elastic Perfectly inelastic
Supply change in Supply change way too Supply not affected by
proportion to change in much with small change in price change.
price. price.
Example: 5 percent Example: fixed price of a Example: Monalisa
decrease in price of onion mac book at which infinite painting
may decrease supply by 5 number of mac books can be
percent. supplied. But even at a 5
percent lower price per mac
book not even one mac
book can be sold.
Here the change in supply Even slight change in price No matter how much the
is proportion to change in may change the demand price is increased or
price. way too much. (From decreased the supply
infinite supply to zero supply can’t change.
just by five percent decrease
in price).
Notes
Macro Economics
• The term macro is derived from the Greek word ‘makro’, which means
“large”. It is a branch of economics concerned with the description and
explanation of economic processes involving aggregates.
• An aggregate is a collection of economic subjects that have some
characteristics in common.
• Macroeconomics emerged after the publication of John Maynard Keynes'
book, ‘The Theory of Employment, Interest, and Money’ in 1936. This
branch investigates the economic relationships or issues that affect an
economy as a whole, such as saving and total consumption.
• It investigates the principles, problems, and policies associated with
attaining full employment and expanding production capacity.
• Adam Smith was a Scottish economist and philosopher who was a pioneer
of political economy and key figure during the Scottish Enlightenment. He
wrote two classic works, The Theory of Moral Sentiments (1759) and An
Inquiry into the Nature and Causes of the Wealth of Nations (1776). The
latter, often abbreviated as The Wealth of Nations, is considered his
magnum opus and the first modern work of economics.
• David Ricardo was a British political economist, one of the most influential
of the classical economists along with Thomas Malthus, Adam Smith and
James Mill. In his Theory of Profit, Ricardo stated that as real wages
increase, real profits decrease because the revenue from the sale of
manufactured goods is split between profits and wages. He also wrote
Essay on Profits.
• Thomas Robert Malthus was an English cleric, scholar and influential
economist in the fields of political economy and demography. In his 1798
book An Essay on the Principle of Population, Malthus observed that an
increase in a nation's food production improved the well-being of the
population, but the improvement was temporary because it led to
population growth, which in turn restored the original per capita
production level.
• John Stuart Mill was an English philosopher, political economist, Member
of Parliament (MP) and civil servant. He contributed widely to social theory,
political theory, and political economy. Dubbed "the most influential
English-speaking philosopher of the nineteenth century", he conceived of
liberty as justifying the freedom of the individual in opposition to unlimited
state and social control.
Economic Agents: Notes

• Individuals or institutions making economic decisions are referred to as
economic units or economic agents.
• They could be manufacturers or service providers who decide what and
how much to produce.
• They could be entities such as the government, corporations, or banks that
make economic decisions such as how much to spend, what interest rate
to charge on credit, how much to tax, and so on.
Great Depression:
• The Great Depression is widely regarded as the worst and longest economic
downturn or recession in modern history. It all started in the United States.
It then had a cascading effect on the world's economies.
• The Great Depression is said to have begun with the October 1929 stock
market crash in the United States. To be more specific, the stock market
crashed on October 24, 1929, which became known as Black Thursday in
American history.
• The stock market crash caused panic among Wall Street investors, causing
the stock market to lose nearly billions of dollars. This resulted in the failure
of major financial institutions, such as banks.
• The depression was caused by an overabundance of food grains in the
market, which resulted in a drop in agricultural prices.
• During the war, Canada, Australia, and the United States emerged as new
alternate wheat-producing centres. Stocks of finished goods began to pile
up because of underconsumption and excessive investment, resulting in
low prices and, as a result, low-profit margins.
• Money in the economy was converted into unsold finished goods, resulting
in a sharp drop in employment and, as a result, income levels fell drastically.
The economy's demand for goods was so low that production was reduced, Notes
resulting in unemployment.
• In the United States, the unemployment rate rose from 3% to 25%.
• The Great Depression has its own set of implications and significance in
economics since it leads to the collapse of the classical economic approach.
• Those who believed in the market dynamics of demand and supply, created
the ground for the Keynesian approach to emerge.
• This occurrence
supplied economists Low
Demand
with enough evidence
to identify
macroeconomics as a Low Income
Over
Investment
distinct field of
economics.
• This flow chart
summarizes the cause-
Low level of Low level of
and-effect relationship output employment
of the Great
Depression:
Low demand → Overinvestment → Low level of employment → Low level of

output → Low income → Low Demand
Capitalist Country/Economy
• In a capitalist country, capitalist enterprises perform a majority of the
production activity.
• A typical capitalist enterprise has one or more entrepreneurs. They may
provide the capital required to run the enterprise themselves or borrow it.
• According to Ralph Waldo Emerson – “Doing well is the result of doing
good. That's what capitalism is all about.”
• In this type of Notes

economy, the Types of economy
means of
production is
privately owned.
Capitalist Economy Mixed Economy Socialist Economy
• It is primarily
governed by the
Means of production
price mechanism, Means of production
controlled by both Means of production
is controlled by
Govt. and Private owned by Govt.
with no intervention private sector
sector
from the
government.
E.g., USA E.g., India E.g., Russia
• The government's
role is solely to
maintain law and order.
• Profit is the driving force behind these means of production.
• This economic structure is also referred to as a free-market economy or
laissez-faire.
• Capitalist economies include Hong Kong, Singapore, Canada, the United
Arab Emirates, Ireland, and others.
Important characteristics of the capitalist economy

• Private property
• No government interference
• Profit motive
• Freedom of enterprise
• Freedom of ownership
• Flexibility in labour markets
• Consumer sovereignty
• Price mechanism
Four Major Sectors of Economy from Macro Economic Point of View:
Notes
Household Firm/Market
Sector Sector
Major sectors
of economy
Government Foreign/ External

Sector Sector
• The Household Sector, the Business Sector, the Government Sector, and
the Foreign Sector are the four aggregate macroeconomic sectors that
serve as the framework for macroeconomic analysis.
• The Household Sector, the Business Sector, the Government Sector, and
the Foreign Sector are the four aggregate macroeconomic sectors that
serve as the foundation for macroeconomic analysis.
• These four functions oversee four expenditures on Gross Domestic Product
(GDP).
1. Household Sector: This sector covers everyone, consumers, individuals,
and every member of society. The household sector purchases products
and services for consumption while also supplying producing inputs
such as land, labour, capital, and entrepreneurs. This sector oversees
the consumption expenditures component of GDP.
▪ In a nutshell, a household is defined as a single or group of people
who make independent decisions about their economic activities,
such as consumption and production.
2. Firms: People in the household sector work as workers in firms and
make a living. Firms are economic units that produce goods and
services. They utilise and organise production factors and carry out
production processes for the purpose of profit.
▪ This comprises sole proprietorships, partnerships, and corporations.
This sector oversees the GDP's investment expenditure.
3. Government Sector: A government preserves law and order, promotes
growth and stability, and administers government services. This sector
is in charge of the government's purchase involvement in GDP.
▪ A government's primary goal is to levy taxes to fund development
projects such as dams, roads, and heavy industries, which typically
have extended gestation periods.
▪ The government also invests in education and health sectors and
delivers these services at a low cost. Examples include the
Department of Transportation and the Environmental Protection Notes

Agency.
4. Foreign/ External Sector: This sector deals with the export and import
of products and services. Export occurs when domestically produced
goods and services are sold to the rest of the world. When goods and
services are purchased from the rest of the world, this is referred to as
import.
▪ Apart from the export and import of goods, there can be an inflow
of goods, i.e., a country welcoming capital from other countries, and
an outflow of foreign capital, i.e., investing in foreign countries. Net
exports (Exports minus Imports) are the foreign sector's
expenditure on GDP.
National Income Accounting
Goods
• In economics, goods are products and resources that meet people's needs
and demands. A good can be a physical object, a man-made object, a
service, or a mix of the three that can command a market price.
Types of Goods:
Intermediate Consumption Final

Capital Goods
Goods Goods Goods
a) Consumption Goods:
• Consumption goods are items that are utilised directly to satisfy human
demands. Consumption goods support the core goal of an economy,
which is to sustain the consumption of the economy's entire
population.
• These are not used in the manufacturing of other goods.
• Consumption products, often known as final goods, are intended for
final consumption.
E.g., a television, a pen, or a pair of shoes.
b) Capital Goods:
• Capital goods are goods used by one business to assist another in the
production of consumer goods.
• Capital goods cannot be easily transformed into cash.
• They are long-lasting and do not degrade easily.
E.g., Equipment, machinery, buildings, computers, etc. Notes

c) Final Goods:
• Final goods are commodities produced by a corporation for subsequent
consumption by the consumer.
• These commodities satisfy a consumer's demands or desires.
d) Intermediate Goods:
• Intermediate goods are utilised in the production of finished goods or
consumer goods.
• They can also be considered to act as inputs in other commodities and
to comprise the final goods as ingredients.
Do You Know the difference between Inferior and Giffen goods?

Various types of goods are studied in economics, like normal goods, inferior
goods, luxury goods, Veblen goods, Giffen goods.
• Giffen goods refers to those goods whose demand goes up with the rise
in the prices. Inferior goods are goods whose demand falls down with
the rise in the consumer's income over a specified level.
• Giffen goods are described as goods that show direct price-demand
relationship, i.e., demand for good increases with an increase in the
price, violating the law of demand.
• When there is a fall in price, the overall price effect in the case of Giffen
goods will be negative. As against this for inferior goods, the price effect
would be positive, when there is a fall in prices.
• Veblen goods are typically high-quality goods that are made well, are
exclusive, and are a status symbol.
Investment
• An investment is an asset or object purchased with the intention of
earning income or increasing in value.
• When a person buys a good as an investment, the intention is not to
consume the good but rather to use it to build wealth in the future.
Gross Investment:
• A company's capital investment before depreciation is referred to as its
gross investment or gross capital investment.
• The absolute investment value made by the company in purchasing
assets each year is shown by gross investment.
Net investment: Notes

• It is defined as gross investment minus depreciation on existing capital.
Net investment, in a nutshell, is the increase in productive stock.
o Net investment = Gross Investment – Depreciation
Depreciation:
• Depreciation, in economic terms, is a way of dividing the cost of a
tangible or physical asset over its usable life or life expectancy.
Depreciation is a measurement of how much of the value of an asset
has been diminished.
Capital formation:
• Capital formation is the process of gradually increasing the stock of
capital over time.
Factor Cost:
• These are the earnings obtained by the owners of factors of production
in exchange for providing factor services to the producer.
Basic Prices:
• The basic price is the amount a producer receives from a purchaser for
a unit of a thing or service provided as output, less any tax due and any
subsidy due on that unit as a result of its production or sale.
o Basic price = Factor cost + Production taxes – Production subsidy
Market Prices:
• The market price of a commodity is the price at which it is sold on the
open market. It comprises the costs of production such as wages, rent,
interest, input prices, profit, and so on.
• It also includes government-imposed levies and government-provided
producer subsidies.
o Market price = Basic price + Product taxes – Product subsidy
Transfer Payments:
• Transfer payment refers to payment received without the provision of
any service or goods in exchange.
• These are one-time payments with no expectation of a return. These
are unearned incomes for recipients.
• These are given to you for free, with no need to make any current or
future payments in exchange.
• Transfer payments are essentially government welfare expenditures.
Stock Variable: Notes

• A stock variable is a variable that is measured at a certain point in time.
• Stock does not have a temporal dimension.
• It influences the flow.
E.g., wealth, capital, etc.
Flow Variable:
• A flow is a quantity that is measured over a specific timeframe.
• Flows are thus described in terms of a given period, such as hours, days,
weeks, months, or years.
• It has a time dimension to it.
Leakage:
• In the context of a circular flow of income model, leakage is an
economic term that characterizes capital or money that escapes an
economy or system.
• It lowers aggregate demand and income levels.
E.g., taxes, savings, and imports, etc.
Injection:
• When funds are added to an economy from sources other than people
and enterprises, this is referred to as an injection.
• It raises aggregate demand as well as income levels.
• Injections can come from a variety of sources, including government
spending, investment, and exports.
National Income Notes
There is no standard definition of National Income. It depends on how we

calculate it.
In one of the reports of United Nations, national income has been defined on
the basis of the systems of estimating national income, as net national product,
as addition to the shares of different factors, and as net national expenditure
in a country in a year’s time. In practice, while estimating national income, any
of these three definitions may be adopted, because the same national income
would be derived, if different items were correctly included in the estimate.
In general, the total amount of income accruing to a country from economic

activities in a year’s time is known as national income. It includes payments
made to all resources in the form of wages, interest, rent and profits.
Production Method or Value-Added Method

In this method, National income is calculated by aggregate annual value of
goods and services produced 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?
Try to find answer in below example.
See this 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 the company. Company added some more things in it, packed
it and sold in the market for 1500 rupees. This shirt produced by firm is not
entirely of its own contribution, it also has contribution of tailors, weavers, Notes
farmers etc. To calculate net contribution of firm we have to subtract the
contributions made by famers, weaver and tailors. 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 entrepreneurship.
So, wages + interest + profits + rent must be equal to value added of firm.
In short -
Flying machine
Farmer Weaver Tailor
firm
Total
500 300 200 1500
production
Intermediate
0 0 0 500
goods used
1500 – 500 =
Value added 500 300 200
1000
Here intermediate goods used by firm is of 500 rupees for cotton while 1000
rupees is value added, out of 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).
Gross Value Added and Net Value Added
A reduction in the value of an asset over time, due in particular to wear and
tear is called 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 wear parts to keep the value of capital constant.
This replacement investment is same as depreciation of capital. In other words, Notes

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 added + Depreciation.
If we deduct depreciation from Gross value added, then we get Net value
added. Net Value added = Gross value added – Depreciation
Inventory
Definition - The stock of unsold finished goods, or semi-finished goods, or raw

materials, which firms carry from one year to the next, is called inventory.
Example – Suppose BMW bought 500 airbags to use in manufacturing of cars.

Each car uses five airbags and company has planned to sell 100 cars in this year.
However, because of low demand they were able to sell only 50 cars. So, now
they have 50 cars and 250 airbags unsold stocks. These unsold stocks are called
as Inventory.
• Inventory is a stock variable i.e. measure at a particular point of time.
• Inventory increased means inventory’s value at the beginning of year
was lower and higher at the end of year.
• While inventory decreased is lower value of inventory at end of year
and higher at the beginning of the year. It is just like water stored in
tank.
Change of inventories of a firm during a year ≡ production of the firm during

the year – sale of the firm during the year.
Change of inventories of a firm during a year ≡ value added + intermediate

goods used by the firm – sale of the firm during a year.
Production of the firm ≡ value added + intermediate goods used by the firm.
For the above three statements consider Times of India newspaper inventory.
The change in its paper roll inventory will depend on how much newspaper it
prints and how much newspaper it sells or how much newspapers the
customers read.
Change in the inventory takes over a period of time i.e. newspaper roll will Notes
accumulate daily, weekly or monthly and so it is a flow variable.
Investment
Investment has 3 major categories –
o Investment expenditure
o Fixed business investment
o Residential investment
Investment expenditure
It is the expenditure incurred by either an individual or a firm or the
government for the creation of new capitals assets like machinery, building etc.
Fixed business investment
Remember it simply – investment in fixed capital.
Investment in fixed capital or to the replacement of depreciated fixed capital.

Thus, it is investment in physical assets such as machinery, building, land etc.
Residential investment- Investment on buying homes.
Gross Value Added

In economics, gross value added (GVA) is the measure of the value of goods
and services produced in an area, industry or sector of an economy. In national
accounts GVA is output minus intermediate consumption.
Gross value added by firm (GVA) ≡ value of sales by the firm + value of change
in inventories – value of intermediate goods used by firm. (Recall that net
contribution of firm does not include intermediate goods value)
Firm sales in not only domestic country but it also sales to other countries.
Net value added of firm (NVA) ≡ GVA – depreciation of the firm
GDP ≡ NVA + depreciation
GDP of the economy is the sum total of the net value added and depreciation
of all the firms of the economy.
NDP (Net Domestic Product) is summing up of net value added of all firms.
Income Method
The calculation of National Income by compiling income of factors of
production is called as Income method.
National income = Total wages + Total rent + Total interest + Total profits
Notes
In our country it is calculated by following formula (this formula sometimes

appears in economic survey) –
GDP = Compensation of employees + Consumption of fixed capital + (Other

taxes on Production – subsidies on production) + Gross operating surplus
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.
Tax on production - Tax imposed irrespective of production like license fees and
land tax.
Gross operating surplus – balance of value added after deducting the above 3
components. It goes to pay rent of land and interest of capital.
Expenditure Method
The GDP under this method is calculated by 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, Notes
which are equal to exports minus imports of goods and services.
GDP = C + I + G + X – M
• C – Consumption expenditure by consumers or by firms (in exception
case) on consumption goods.
• I – Investment expenditure by firms on capital goods.
• G – Expenditure by government on final goods and services produced
by firms.
• X - M – Net exports i.e., exports – imports.
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 defense.
• 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.
Consumption expenditure has been the major driver of GDP growth,

accounting for nearly 60% of the total GDP growth between 2012-13 and
2015-16. This contribution increased to over 95% in 2016-17, which is
attributed to higher growth of both Private Final Consumption Expenditure
(PFCE) and Government Final Consumption Expenditure (GFCE), particularly
the latter.
• Growth of GFCE was due to the payment of higher wages and salaries Notes
to the government staff that followed the implementation of the
recommendations of the Seventh Pay Commission.
Why GDP includes expenditure on investment but not the expenditure on

intermediate goods? Reason – Investment goods remain with the firm,
whereas intermediate goods are consumed in the process of production.
THINK
• India uses which of the above three methods to calculate national
income?
• What changes were made by India in calculating the GDP? Why they
have been made and what are their implications?
Q. If the interest rate is decreased in an economy, it will? (2014)

a) decrease the consumption expenditure in the economy
b) increase the tax collection of the Government
c) increase the investment expenditure in the economy
d) increase the total savings in the economy
Macroeconomic Indices
Measures of National Income
GDP GNP NNP NNPFC PI DP
GDP (Gross Domestic Product)

• The word “domestic” here refers to geographical area.
• Definition – It is the total value of all final goods and services produced
within the boundary of the country during a given period, generally one
year.
• It considers production by both resident citizens as well as foreign nationals
who reside within country.
• Formula → GDP = Q*P
o Where, Q is total quantity of final goods and services produced in
the country
o P is price of final goods and services.
• Example –
1. 125 crores Indian earns 100 crores in Indian Territory. Notes

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 that is earn in Indian
Territory).
Important points about GDP

• Central Statistics Office (CSO), Ministry of Statistics and Programme
Implementation releases the estimates of Gross Domestic Product
(GDP) at constant (2011-12) and current prices.
• The components of expenditure on Gross Domestic Product, namely,
consumption expenditure and capital formation, are normally
measured at market prices. India officially used to calculate its
national income at factor Cost. Since January 2015, the CSO has
switched over to calculating it at market price.
GDPMP → GDP at Market Price

Market value of all final goods and services taking place within the domestic
economy during a year or GDP at market price =Gross Value Added (GVA) at
basic price + Indirect tax- Subsidies
The GDP of a country is derived from the different sectors of the economy,
namely the agricultural sector, the industrial sector and the service sector.
GNP (Gross National Product)

The word “national” here refers to all the citizens of a country.
Definition – It is the total value of the total output or production of ﬁnal goods
and services produced by the nationals of a country during a given period,
generally one year.
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.
Formula → GNP = GDP + (X – M) or GNP = GDP + NFIA

• Where, GDP = Gross Domestic Product
• X (export) = remittances sent by non-resident citizens (working
in other country) to his country.
• M (import) = remittances sent by foreigners (working in foreign Notes

country’s geography) to his country.
• X – M = Net Factor Income from Abroad (NFIA).
Example – If we take the same example of GDP, then the GNP would be 120
crores.
How? According to formula the GNP would be 120 crores = 110 + (20 – 10)
crores.
Net National Product (NNPMP)
Definition – It is arrived after deducting depreciation from GNP. Why deduction

in depreciation? Because the part, which replaces the depreciated parts of the
product, already, produced, does not add value to current year’s total produce.
It is just keeping the already produced product intact.
Formula → NNP = GNP – Depreciation
The 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 subsidy of 200 rupees then the price of product came to
400 rupees. This is called as NNPMP i.e., NNP at market price.
NNP at factor cost (NNPFC) or National income
Definition - Adding of subsidies and deduction of indirect taxes from NNPMC is

called as NNPFC. This is done to find payments made to factors of production
(land, labor, capital, entrepreneurship)
Formula → NNPFC = NNPMC – Net Indirect Taxes
Net Indirect Taxes = Indirect taxes – Subsidies
National Income is term used for NNPFC.
Personal Income (PI)

Definition – sum of income of all the people of a country in one year.
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 included in national
income are added to the national income.
Formula → Notes
Personal income (PI) ≡ National Income – Undistributed profits – Net interest

payments made by households – Corporate tax + Transfer payments to the
households from the government and firms.
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 there disposable
personal income.
Formula → Personal Disposable Income (PDI) = PI – Personal tax payments –
Non-tax payments
Personal tax payments – example – income tax.
Non-tax payments – like fines.
Why do we need GDP at constant prices? Notes

• To compare the GDP figures of different countries.
• To compare the GDP figures of the same country at different points of
time.
Base year
• The national income is calculated with reference to a particular year.
That reference year is called as base year.
Constant Prices
• The price of goods and services in base year is called price of base year
or constant price.
Real GDP
• Real GDP is national income at constant price.
• National income at constant price = Q*P
• Where, Q is quantity of goods and services in a particular year
• P is price of the base year (constant price)
• Real gross domestic product (real GDP) is an inflation-adjusted estimate
of the value of all goods and services generated by an economy each
year. It is also known as "constant-price" or "inflation-corrected" or
"GDP at constant prices".
• It is exclusively affected by changes in physical output, not by changes
in the price level. It's referred to as a true indication of economic
advancement.
𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃
Real GDP = 𝐷𝑒𝑓𝑙𝑎𝑡𝑜𝑟
Nominal GDP
• Nominal GDP is national income at current price.
• National income at current price = Q*P
• Where, Q is quantity of goods and services in a particular year
o P is price of the goods and services in that particular year
(current price)
• The products and services produced by all producing units in a country's
domestic territory during an accounting year and valued at the current
year's prices or current prices are referred to as nominal GDP or GDP at
current prices.
• Changes in both physical output and the price level have an impact on
it. It is not regarded as a reliable indicator of economic advancement.
Nominal GDP = Real GDP x GDP Deflator
Conversion of Nominal GDP into Real GDP Notes

Real GDP = x 100
𝑃𝑟𝑖𝑐𝑒 𝐼𝑛𝑑𝑒𝑥
Nominal GDP is GDP calculated at the current market price while real GDP
adjusts for price changes due to inflation/deflation. For example, if real GDP
rises 2% during a year and the inflation rate is 1%, nominal GDP would be
2%+1%=3% for that year.
• Nominal GDP represents the current market price value of economic
output produced during the specified time period within a country
while real GDP represents the total economic output produced during
the time period within the country valued at a pre-determined base
market price.
• Nominal GDP does not take inflation/deflation of the country during the
specified time period into consideration while real GDP adjusts for price
changes in the country during the specified time period.
• Nominal GDP is easier to calculate while real GDP is much more complex
since it requires analysis of the base year market price of the current
year economic output for finding out the value
• Nominal GDP is more appropriate for comparisons across different Notes

quarters of a year while real GDP is more appropriate for comparison
of economic performance across years and across countries
• Economic growth of a country cannot be easily analyzed through
nominal GDP while assessment of economic growth is significantly and
comparatively easier through real GDP, hence real GDP growth is more
popular among economists and analysts.
Economists usually use a GDP price deflator which adjusts for this price change.
GDP deflator measures the price change in goods and services from the base
year used for comparison. Real GDP is derived by dividing nominal GDP by the
GDP deflator. As an example, if we consider that the price of an economy’s
goods and services have increased by 1% compared to the base year, the
deflator would be 1.01.
Real GDP= Nominal GDP/GDP deflator
GDP Deflator Notes

• GDP deflector is the ratio of Nominal GDP to Real GDP.
o Nominal GDP is measured at current prices and Real GDP is
measured at base year price.
• Thus, if GDP denotes nominal GDP and GDP denotes real GDP, then;
𝐺𝐷𝑃
Real Deflator = 𝑔𝑑𝑝
The deflator is also expressed in percentage terms. In this scenario,
𝐺𝐷𝑃
Real Deflator = 𝑥 100
𝑔𝑑𝑝
• It shows how much GDP of a country have increased on account of
increase in price than increase in output.
• Since it covers the entire range of goods and services produced in the
economy — as against the limited commodity baskets for the WPI and
CPI — it is seen as a more comprehensive measure of inflation.
GDP per capita of India

• India Gross Domestic Product (GDP) per Capita reached 2,318.368 USD
in March 2022, compared with 1,968.163 USD in Mar 2021.
GDP and Welfare

• Though GDP reflects the wealth of an economy, but it can’t be taken as
an index of greater well-being of the people of that country.
Why GDP can’t be taken as an index of greater well-being of the people of a

country?
• Because many factors that contribute to people's happiness are not
bought and sold, GDP is a limited tool for measuring standard of living.
• GDP does not account for leisure time. The US GDP per capita is larger
than the GDP per capita of Germany, but does this prove that the
standard of living in the United States is higher? Not necessarily since it
is also true that the average US worker works several hundred hours
more per year more than the average German worker. The calculation Notes
of GDP does not take German workers extra weeks of vacation into
account.
• GDP includes what is spent on environmental protection, healthcare,
and education, but it does not include actual levels of environmental
cleanliness, health, and learning. GDP includes the cost of buying
pollution-control equipment, but it does not address whether the air
and water are actually cleaner or dirtier. GDP includes spending on
medical care, but it does not address whether life expectancy or infant
mortality have risen or fallen. Similarly, GDP counts spending on
education, but it does not address directly how much of the population
can read, write, or do basic mathematics.
• GDP includes production that is exchanged in the market, but it does
not cover production that is not exchanged in the market. For
example, hiring someone to mow your lawn or clean your house is part
of GDP, but doing these tasks yourself is not part of GDP.
• GDP has nothing to say about the level of inequality in society. GDP
per capita is only an average. When GDP per capita rises by 5%, it could
mean that GDP for everyone in the society has risen by 5% or that the
GDP of some groups has risen by more while the GDP of others has risen
by less—or even declined. Relate it with income inequality. Rich getting
richer and poor getting poorer.
• GDP also has nothing in particular to say about the amount of variety
available. If family buys 100 loaves of bread in a year, GDP does not
care whether they are all white bread or whether the family can choose
from wheat, rye, pumpernickel, and many others—GDP just looks at
whether the total amount spent on bread is the same.
• Likewise, GDP has nothing much to say about which technology and
products are available. The standard of living in, for example, 1950 or
1900 was not affected only by how much money people had—it was
also affected by what they could buy. No matter how much money you
had in 1950, you could not buy an iPhone or a personal computer.
• In certain cases, it is not clear that a rise in GDP is even a good thing.
If a city is wrecked by a hurricane and then experiences a surge of
rebuilding construction activity, it would be peculiar to claim that the
hurricane was therefore economically beneficial. If people are led by a
rising fear of crime to pay for installation of bars and burglar alarms on
all their windows, it is hard to believe that this increase in GDP has made
them better off. In that same vein, some people would argue that sales
of certain goods, like pornography or extremely violent movies, do not Notes

represent a gain to society’s standard of living.
Do you know?
• In the revision of National Accounts statistics done by Central Statistical
Organization (CSO) in January 2015, it was decided that sector-wise
wise estimates of Gross Value Added (GVA) will now be given at basic
prices instead of factor cost. The Reserve Bank of India switched back
to the gross domestic product (GDP)-based measure to offer its growth
estimates from the gross value added (GVA) methodology, citing
global best practices. The government had started analysing growth
estimates using GVA methodology from January 2015 and had also
changed the base year to 2018 from January.
The relationship between GVA at Factor Cost and GVA at Basic Prices and GDP
at market prices and GVA at basic prices is shown below:
GVA at basic prices = GVA at factor cost + (Production taxes less Production
subsidies)
GDP at market prices = GVA at basic prices + Product taxes - Product subsidies
Elasticity, Engel Curve and Engel Law/Engel’s elasticity

What is A measure of the responsiveness of one variable to changes
Elasticity? in another. Economists have identified four main types.
1. PRICE ELASTICITY measures how much the quantity of
SUPPLY of a good, or DEMAND for it, changes if its PRICE
changes. If the percentage change in quantity is more than
the percentage change in price, the good is price elastic; if it
is less, the good is INELASTIC.
2. INCOME elasticity of demand measures how the quantity
demanded changes when income increases.
3. Cross-elasticity shows how the demand for one good (say,
coffee) changes when the price of another good (say, tea)
changes. If they are SUBSTITUTE GOODS (tea and coffee) the
cross-elasticity will be positive: an increase in the price of tea
will increase demand for coffee. If they are
COMPLEMENTARY GOODS (tea and teapots) the cross-
elasticity will be negative. If they are unrelated (tea and oil)
the cross-elasticity will be zero.
4. Elasticity of substitution describes how easily one input in Notes

the production process, such as LABOUR, can be substituted
for another, such as machinery.
What is Engel An Engel curve is the relationship between the amount of a
Curve? product that people are willing to buy and their income. An
Engel curve is shown below.
What is Engel's law is an observation in economics stating that,

Engel’s Law/ stating that the percentage of income allocated for food
Engel’s purchases decreases as income rises. As a household's
elasticity? income increases, the percentage of income spent on food
(UPSC 2007) decreases while the proportion spent on other goods (such
as luxury goods) increases.
In other words, the income elasticity of demand of food is
less than 1.
The law was named after the statistician Ernst Engel.
NOTE- Wait for Budget and Economic Survey 2022-23 for Facts/Figures to
solve below questions from UPSC on trends:
Q. With reference to Indian economy, consider the following statements:

(2015)
1. The rate of growth of Real Gross Domestic Product has steadily
increased in the last decade.
2. The Gross Domestic Product at market prices (in rupees) has
steadily increased in the last decade.
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2
Q. In the context of Indian economy, consider the following statements.
(2011)
1. The growth rate of GDP has steadily increased in the last five years
2. The growth rate in per capita income has steadily increased in the Notes
last five years
Which of the statements given is/are correct?
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2
Q. National product at factor cost is equal to?
a) Domestic product + Net factor income from abroad
b) National product at market prices - indirect taxes + subsidies
c) Gross domestic product - depreciation
d) National product at market prices + Indirect taxes + subsidies
Q. Which of the following statements is/are, correct?
1. If a country is experiencing increase in its per capita GDP, its GDP
must necessarily be growing.
2. 'If a country is experiencing negative inflation, its GDP must be
decreasing.
Select the correct answer using the code given below Code:
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2
What is Gross GVA is the measure of the value of goods and services
Value Added produced in an area, industry or sector of an economy.
(GVA)? Put simply, it is a measure of total output and income
in the economy.
It provides the rupee value for the amount of goods
and services produced in an economy after deducting
the cost of inputs and raw materials that have gone
into the production of those goods and services. It also
gives sector-specific picture like what is the growth in
an area, industry or sector of an economy.
How is it At the macro level, from national accounting
measured? perspective, it is the sum of a country’s GDP and net of
subsidies and taxes in the economy. When measured
from the production side, it is a balancing item of the
national accounts.
What is GDP? It gives the economic output from the consumers’ side.
Market value of all final goods and services taking Notes

place within the domestic economy during a year.
It is the sum of private consumption, gross investment
in the economy, government investment, government
spending and net foreign trade (difference between
exports and imports).
GDP = private consumption + gross investment +
government investment + government spending +
(exports - imports)
What is the While GVA gives a picture of the state of economic
difference activity from the producers’ side or supply side, the
between the two? GDP gives the picture from the consumers’ side or
GVA and GDP demand perspective.
Both measures need not match because of the
difference in treatment of net taxes.
Relationship to Gross value added = GDP + subsidies on products -
gross domestic taxes on products
product (or)
GDP = GVA + taxes on products - Subsidies on products
Thus, Gross Domestic Product (GDP) of any nation
represents the sum total of gross value added (GVA) in
all the sectors of that economy during the said year
after adjusting for taxes and subsidies.
Why did policy A sector-wise breakdown provided by the GVA
makers decide to measure can better help the policymakers to decide
also give weight to which sectors need incentives/stimulus or vice versa.
GVA? Some consider GVA as a better gauge of the economy
because a sharp increase in the output, only due to
higher tax collections which could be on account of
better compliance or coverage, may distort the real
output situation.
Which of the two A sector-wise breakdown provided by the GVA
measures is measure helps policymakers decide which sectors
considered more need incentives or stimulus and accordingly formulate
appropriate gauge sector specific policies.
of the economy? But GDP is a key measure when it comes to making
cross-country analysis and comparing the incomes of
different economies.
Tax-To-GDP Ratio Notes

• The tax-to-GDP ratio is a ratio of a nation's tax revenue relative to its
gross domestic product (GDP). Some countries aim to increase the tax-
to-GDP ratio to address deficiencies in their budgets.
• The tax-to-GDP ratio is used in conjunction with other metrics to
measure how much a nation's government controls its economic
resources. Tax revenue is the income collected by governments through
taxation. It includes revenues from taxes on income, social security
contributions, product sales tax, payroll taxes, and other items.
However, analysts exclude Social Security payments, fines, and
penalties when calculating the tax-to-GDP ratio.
What Does the Tax-to-GDP Ratio Mean?

• Policymakers and analysts use the tax-to-GDP ratio to compare tax
receipts from year to year. In most cases, because taxes are related to
economic activity, the ratio should stay relatively consistent.
Consequently, as the gross domestic product (GDP) grows, tax revenue
should increase as well.
• Economic downturns will result in lower rates of growth. During these
times, unemployment usually rises, and consumer spending decreases.
As a result, there are fewer property and consumption taxes collected.
During downturns, reduced consumption significantly and quickly
affects tax receipts, pushing the tax-to-GDP ratio downward.
Tax-to-GDP Ratio: Examples

• When a country's tax revenues grow at a slower rate than the GDP, the
tax-to-GDP ratio drops. As tax revenue grows quicker than the GDP, the
ratio will increase.
• For example, if a country has a $10 trillion GDP and tax revenue of $2
trillion, its tax-to-GDP ratio is 20% (2/10).
• If its GDP increases to $15 trillion and its tax revenue jumps to $3
trillion, it retains its 20% ratio.
• In contrast, if GDP rises to $18 trillion and taxes only increase to $3
trillion, the ratio will fall to 16.7%.
• Conversely, if tax revenue climbs to $4 trillion and the GDP rises to $12
trillion, the tax-to-GDP ratio grows to 33.3%.
• Higher the tax to GDP ratio the better financial position the country will
be in.
• The ratio represents that the government is able to finance its
expenditure.
• A higher tax to GDP ratio means that the government is able to cast its Notes
fiscal net wide. It reduces a government's dependence on borrowings.
• A higher tax to GDP ratio means that an economy's tax buoyancy is
strong as the share of tax revenue rises in sync with the rise in the
country's GDP.
• India, despite seeing higher growth rates, has struggled to widen the
tax base.
• Lower tax-to-GDP ratio constrains the government to spend on
infrastructure and puts pressure on the government to meet its fiscal
deficit targets.
Q. A decrease in tax to GDP ratio of a country indicates which of the

following? (2015)
1. Slowing economic growth rate
2. Less equitable distribution of national income
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2
Gross National Disposable Income

• Gross national disposable income measures the income available to the
nation for final consumption and saving.
• Gross national disposable income may be derived from gross national
income by adding all current transfers in cash (e.g. Remittances) or in-
kind receivable by resident from non-resident and subtracting all
current transfers in cash or in kind payable by resident to non-resident.
• Gross National Income (GNI) is often used as an indicator for a country’s
living standards. Yet, it does not record unilateral transfers and notably
remittances, which in the last decades have gained growing importance
as a source of income for developing countries.
• Gross National Disposable Income (GNDI), includes both income and
transfers and provides a much better account of people’s actually
available income.
ALTERNATIVES TO GDP:
• GDP fails to measure quality of life.
• GDP numbers misguide about general welfare indicators.
• Example of misguidance by GDP: destruction brought about by Notes

environment disaster leads to rise in GDP numbers by stimulating the
disaster management and rebuilding.
Accordingly, other measures of human wellbeing in a nation state have been

developed.
Physical Quality of Life Index (PQLI)

• Developed by Morris David Morris, it was first attempt towards providing
comprehensive measure of economic development.
• PQLI is the average of three values i.e. Life expectancy, basic literacy rate
and infant mortality rate. (Each value scaled on 1 to 100, where 1
represents the worst and 100 represents the best.)
• Essential components of human development are: equity, sustainability,
productivity and empowerment.
HUMAN DEVELOPMENT INDEX (HDI):

Developed in 1990 by Pakistani economist Mahboob-Ul Haq along with Indian
economist Amartya Sen, HDI emphasizes that people and their
capabilities should be the ultimate criteria for assessing the development of a
country, not economic growth alone and has been in use since 1993 by UNDP
in its annual report.
It measures average achievement in three basic dimensions of human

development:
a. A long and healthy life as a measure of life expectancy at birth.
b. Knowledge as measured by adult literacy rate.
c. Decent standard of living as GDP per capita;
Notes
Circular Flow of Income

• It is a cyclic interaction between different components of an economy
i.e., household, financial, government, production and external sector.
Types of circular flow of economy:
Vicious cycle Virtuous cycle
Associated with shrinking of Associated with expansion of

economy economy
There is production-consumption There is production-consumption

Discontinuity Continuity
NPA, fiscal deficit, increasing public Financial inclusion, fiscal Notes

debt, high inflation, etc. consolidation, moderate inflation,
inclusive development.
Do You Know?
Problem of Double Counting:
• When computing national income, the problem of double counting
arises. The national income estimates become muddled when double
accounting occurs in the calculation of national income.
• Methods to avoid the problem of double counting:
o Only the value of finished goods should be counted (final output
method).
o Only the value added that equals the value of output less
intermediary consumption should be counted (Value added
method).
Private Income:
• Private income is the estimated income of all factors and transfers to
the private sector, both within and outside the country.
• Private Income = Factor income from net domestic product accruing to
the private sector + National debt interest + Net factor income from
abroad + Current transfers from government + Other net transfers from
the rest of the world.
Green GDP:
▪ Green GDP is a term used for expressing GDP after adjusting the costs
of environmental damages and ecological degradations from the GDP.
The concept was first initiated through a System of National Accounts.
Notes
What is Substitution Effect?

• The substitution effect is the decrease in sales for a product that can be
attributed to consumers switching to cheaper alternatives when its
price rises. A product may lose market share for many reasons, but the
substitution effect is purely a reflection of frugality.
• When the price of a product or service increases but the buyer's income
stays the same, the substitution effect generally kicks in. The
substitution effect is strongest for products that are close substitutes.
An increase in consumer spending power can offset the substitution
effect.
Topic: Inflation Notes
Note- Though, Inflation is not mentioned in the NCERT syllabus but it is an

important aspect of economy to be covered. We are providing it now so that
once you move to advance modules, some foundational knowledge is already
there.
MAINS
What is ‘inflation targeting’? Discuss the tools that are used for inflation
targeting. How effective have they been in India? Discuss.
Let’s take an example first,
Let’s say IASBaba has a small agricultural land in his village and grows apples
there. All his apples are sold in a city store. In 2014, you bought an IASBaba’s
apple for Rs.20 per piece but in 2015, the same apple costs 2 rupees more.
Why was there a price increase at first place?
Let’s study two cases to see the cause of this price rise:
Case 1: The rise in price could be because of the increased supply costs like –
▪ increased labour charges,
▪ increased transportation costs or
▪ increased seeds/fertilizers costs
In general rise in costs of goods and services.

Case 2: Suppose the customers get more salary. And now they will have more
money to buy apples and hence demand more apples. But baba can’t increase
production anymore. Here more money was chasing too few goods and hence
there was a price increase.
In both the cases, you can also say that the price of the apple hasn’t increased; Notes
just
• the rupee value got decreased or
• Purchasing power of money was reduced.
With the same amount of money, you could buy lesser apples in 2015 than in
2014. This is Inflation.
Case 1 being an example of Cost push inflation (Price rise due to increase of
production costs) whereas Case 2 is an example of Demand-pull Inflation (Price
rise due to more money in economy creating more demand)
In layman terms - “Inflation can be defined as a sustained increase in the
general level of prices for goods and services”
Major Types of Inflation
Demand Pull Inflation:

This type of inflation occurs when demand exceeds supply primarily due to
increased money supply in the economy. As we have seen in case 2, Apples cost
was increased just because the customers started demanding more as the
money in their pockets have increased. This is Demand pull inflation.
Let’s look at few causes for this type of inflation

• Increase in money supply: When there is more money, people start to
demand more and prices rise up. This can happen by increased wages,
increased savings, more disposable income, etc.
• Increased Government spending: More money spent on people ->
increases money in economy -> increase in prices of goods. Ex: Pension
schemes, MGNREGA, etc.
• Increase in Black Money: Black money is the excess of money any
person possesses over their actual and legit income. When people
possess more black money, their spending on commodities increases
and hence demand increases pulling up the prices. Also, black money is
the only cause which cannot be tackled by monetary measures
• Increasing population: More the people, more the earnings, more the
money, more the demand for goods and thus, prices increase
• Foreign prices and growth: If foreign population increases, they start
demanding more products from other countries and hence demand
goes up. Again, if foreign goods prices go up, more of domestic goods
will be demanded and hence demand will rise pulling up the prices.
• Expectation of Inflation: This is a major factor where people expect Notes

inflation in future and hence start buying all goods at present increasing
the current demand and pulling up the prices.
Cost Push Inflation:

Simply it is the price rise due to increase in the production costs. As we have
seen in case 1, the apple prices were increased because of the cost of
production and transportation. This is Cost-push Inflation.
Some of the major causes of it are:
• Increase in wages: With increase in wages of labours due to labour
union or any other circumstance, the production costs increase,
increasing the prices of product
• Business monopoly: When a company has monopoly over a particular
product, it can decide the quantity and price of product, which can lead
to increase of prices
• Government regulation and taxes: Indirect taxes directly increase the
selling price of any product. Also, government regulations like imposing
a restriction on particular resource or increasing MSP can lead to
increase in the production costs of the product.
• Exchange rates: If there is a fall in exchange rates, importing raw
materials cost increase hence increase in the prices of products
• Rising production costs: Rise in any of the four factors of production
increases the cost of production.
Q. A rise in general level of prices may be caused by (2013)
1. an increase in the money supply
2. a decrease in the aggregate level of output
3. an increase in the effective demand
Select the correct answer using the codes given below:
a) 1 only
b) 1 and 2 only
c) 2 and 3 only
d) 1, 2 and 3
Q. Which of the following measures would result in an increase in the
money supply in the economy? (2012)
1. Purchase of government securities from the public by the Central
Bank
2. Deposit of currency in commercial banks by the public
3. Borrowing by the government from the Central Bank
4. Sale of government securities to the public by the Central Bank
Select the correct answer using the codes given below
a) 1 only Notes
b) 2 and 4 only
c) 1 and 3
d) 2, 3 and 4
Q. Which one of the following indices is now used by the Reserve Bank of
India to measure the rate of inflation in India?
a) NASDAQ Index
b) BSE Index
c) Consumer Price Index
d) Wholesale Price Index
Note:
• Inflation is divided based on the rate, but there are no clear lines of
demarcation and hence you can see them being used often
interchangeably.
• India's Consumer Price Index based-retail inflation climbed to an eight-
year high of 7.79 percent in April 2022 as per National Statistical Office
(NSO).
• In March 2022, the figure was 6.95 percent – making April 2022 the
fourth consecutive month in which the figure stayed well above the
Reserve Bank of India's (RBI) upper tolerance limit of 6 percent.
• An inflation rate is indicative of the rise in prices of commodities in an
economy. Retail inflation, specifically, is measured in consumer price
index (CPI), which is a weighted average of prices of a basket of
consumer goods and services. Therefore, retail inflation is also termed
CPI-based inflation.
• The CPI is the change in retail prices of goods and services which
households purchase for their daily consumption, such as food articles,
fuel, and services such as transportation and health care, among others.
• The Ministry of Statistics and Programme Implementation (MoSPI) is
responsible for compiling this data, which is measured by the rate of
change in CPI over a period of time.
• The Reserve Bank of India monitors this figure in view of sustaining a
balance in commodity prices in the economy.
Notes
Basics Terminologies:
Inflation Types
Creeping When prices rise at very slow rate, i.e. creeper’s speed,
Inflation: it is called ‘creeping inflation. Generally, 3% annual rise
in prices is considered as ‘creeping inflation’.
Walking or When inflation is in between 3% to 7%, it’s regarded as
Trotting Inflation: ‘walking or trotting inflation’. Some economists have
extended the boundary of this type of inflation up to
10% per annum. This type of inflation is considered as a
warning signal for the government to take some
measures to control the situation.
Running Inflation: This type of inflation comes into action when there’s a
rapid rise in prices and the range of this type lies in
between 10% to 20% per annum. This type of inflation
is controllable only by strong monetary and fiscal
measures, lest it will be turned into ‘hyperinflation’.
Galloping The rise of prices from 20% to 100 % per annum is
Inflation: regarded as ‘galloping inflation’. OR when price rises to
double- or triple-digit rate.
Hyperinflation is extremely fast or out-of-control
Hyperinflation: inflation. Hyperinflation occurs when price increases
are so wild that the concept of inflation is meaningless. Notes

Recent example “Inflation in Venezuela”.
Perhaps the best-known example of hyperinflation, is
that of Weimar Germany.
It’s hard to imagine daily life with an annual inflation
rate of 1,000,000%. At that rate, the price of a cup of
coffee doubles between your weekly pay checks. That
is what the citizens of Venezuela are facing, according
to a recent report from the IMF.
Demand Pull This type of inflation is results as an excess demand. In
Inflation: this case supply remains constant (couldn’t be
upgraded as per demand). So consequently, the prices
go up.
Cost Push When there’s increase in money-wages at speedier rate
Inflation: than that of the rise in the productivity of labor, it
results as increased cost of production which furthers
the increase in prices. This type of inflation is regarded
as cost push inflation.
Mixed Inflation: Majority of the economists hold that, inflation is neither
completely ‘demand pull’ nor completely ‘cost push’,
the actual inflationary process contains the elements of
both. Excess demand and increase in money wages
operate at the same time, but it’s not necessary that
they start at the same time.
Markup inflation: Garner Akley put forward the theory of ‘markup
inflation’. In simple words it is an advanced explanation
of ‘Mixed inflation’. According to Akley First comes
demand pull inflation, and it is led by cost push
inflation. Markup inflation comes to happen when
excess demand increases the prices, which stimulates
the production. The increasing production creates
excessive demand for the factors of production, and the
excessive demand for the factors of production further
raises the prices.
Stagflation: Stagflation is a situation, whereby economy faces
stagnation of output and unemployment along with a
high rate of inflation. This situation is also known as
‘inflationary recession’.
Disinflation Disinflation is a decrease in the rate of inflation. Being
how much prices are increasing per unit of time; it can
be expressed using the word disinflation: The slowing Notes

of the rate of inflation per unit of time. For example, in
one month the rate of inflation was 4.4% and in May
the rate of inflation was 4.0%. In this instance the price
of goods and services is still increasing; however, it is
increasing at a slower rate, 0.4% less, than a month
before. It should not be confused with deflation, which
is an overall decrease in prices. Disinflation is generally
considered to be a very positive state for the economy.
Over the last twenty years North America has seen
steady disinflation, and many credits this with the
strong growth during this period. While disinflation is
generally perceived as positive, it is not good for the
effect to go so far as deflation, which is generally
perceived to be a very negative state for an economy.
Deflation Deflation is a decrease in the general price level over a
period of time. Deflation is the opposite of inflation. For
economists especially, the term has been and is
sometimes used to refer to a decrease in the size of the
money supply (as a proximate cause of the decrease in
the general price level). The latter is now more often
referred to as a 'contraction' of the money supply.
During deflation the demand for liquidity goes up, in
preference to goods or interest. During deflation the
purchasing power of money increases. Deflation is
considered a problem in a modern economy because of
the potential of a deflationary spiral and its association
with the Great Depression, although not all episodes of
deflation correspond to periods of poor economic
growth historically.
Headline Consumer Price Index based inflation is called headline
Inflation: inflation
Core Inflation: Core inflation= headline inflation minus food and
energy items which are frequently subject to volatile
prices.
Reflation: This term is used to refer the situation where measures are taken to
curb deflation. Steps can be like fiscal policy (reducing taxes) or monetary policy
(increasing money supply or reducing interest rates)
Slowdown – Recession & Depression: These three terms are inter-linked. Notes
Generally, first slowdown occurs, then recession comes and finally depression
occurs
a) Slowdown: A decline in economy of a country – Link it with GDP, not
inflation
b) Recession: If slowdown occurs for 2 successive quarters i.e. GDP falls
for 2 successive quarters, it is known as recession. Common indicators
are fall in GDP and investments
c) Depression: Generally, if recession lasts long, it is said that the economy
is in depression. Main indicators are huge fall in demand of goods and
services with a sharp decline in GDP and investments. Ex: Great
Depression of 1930.
Now that you have seen inflation and its forms, you can now see that inflation
is not just about raising prices, there is a need to study the causes of inflation
which generally have some other root causes and sometimes concerns. These
vary a lot depending on situation and can be critical at many circumstances.
Base Effect
• The base effect is the distortion in a monthly inflation figure that results
from abnormally high or low levels of inflation in the year-ago month.
A base effect can make it difficult to accurately assess inflation levels
over time. It diminishes over time if inflation levels are relatively
constant.
Q. A rapid increase in the rate of inflation is sometimes attributed to the base

effect. What is base effect? (2011)
a) It is the impact of drastic deficiency in supply due to the impact of crops
b) It is the impact of the surge in demand due to rapid economic growth
c) It is the impact of the price levels of previous year on the calculation of
inflation rate.
d) None of the statements (a), (b) and (c) given above ids correct in this
context.
Q. Which of the following statements is an appropriate description of
deflation?
a) It is a sudden fall in the value of a currency against other currencies
b) It is a persistent recession in both the financial and real sectors of
economy
c) It is a persistent fall in the general price level of goods and services
d) It is a fall in the rate of inflation over a period of time
Q. Which reference to inflation in India, which of the following statements is Notes

correct?
a) Controlling the inflation in India is the responsibility of the Government
of India only
b) The Reserve Bank of India has no role in controlling the inflation
c) Decreased money circulation helps in controlling the inflation
d) Increased money circulation helps in controlling the inflation
Q. Consider the following statements:
1. When the inflation decreases, but still remains positive, it is deflation.
2. Deflation reduces the real value of money over time.
3. Historically not all episodes of deflation correspond with periods of poor
economic growth.
a) 1, 2 and 3
b) 1 and 3 only
c) 3 only
d) 2 only
Inflation – Bad or Good?
Now the question occurs whether inflation is really bad? Let’s try to answer it:
Deflation and very low inflation – is it harmful?

• Deflation as we have seen is simply fall in prices of goods and services.
Or in other words value of money just gets increased during deflation.
Is that necessarily bad? Not always!

• If the prices suddenly decrease, there will be more consumption as
prices have decreased and hence the demand will again increase,
increasing the prices of goods.
Notes
High Demand:
Increase in Price
More
Consumption
Decrease in Price
What happens if the deflation persists for few periods?

Will the consumption increase?
▪ If you know that you can buy the same product for a lower price tomorrow,
it will discourage you from spending right now.
▪ Also, if you are in debt, it increases your debt burden, because the same
amount which you have borrowed earlier now has far more value, which
makes it difficult to repay.
Hence, deflation can reduce the spending power of firms and consumers, more
especially in case they are in debts.
But now, you have certain doubts:

• When we can buy more things with the same money?
• What are we losing in deflation?
Well, when you have deflation, the following generally take place:
• lowering of prices
• lowering of wages and
• High unemployment.
So, although you could get cheaper products, your disposable income got
reduced because of lower wages and unemployment effect. There might be
some people who are better-off with deflation, but the problem is wider on a
macroscopic view.
So, prolonged deflation is always bad? Notes

No, there are few cases where it can be good but it can rarely be observed in
21st century.
Suppose if there occur continuous technological improvements: Most of the

goods could be produced at a lower cost every year and hence prices can fall.
This is definitely a good sign even though there would be a deflation. Also, like
how it happened with Japan, if most of the neighboring countries are having
inflation, then the country with deflation has better competitive advantage as
their goods obviously seem cheaper than other countries with inflation.
Think about “China’s Yuan Devaluation”
So, can we just sit at ‘0’ inflation?

Inflation often (but not always - think?) relates to growth.
When there is ‘0’ or very minute inflation, then:

• money in the economy remains almost constant
• Productions will be at constant and
• Demand will also be at constant.
So, it’s not good for growing economy. Growth be doomed!
Now we understood that having some inflation is good. So, can’t we keep it
high so that it will never come near ‘0’?
Okay, here we are talking about high Inflation. As you know, inflation makes
your money less valuable.
Let’s just look at few of the major consequences of having high inflation:
It erodes the purchasing power of money: As we have seen many times before,
inflation makes your monetary assets fall in value. Ex: The same 1000 rupees
with which could serve you 10 meals before can now serve you only 1 because
of inflation.
• Examples of High Inflation in Venezuela and Sudan.
Redistribution of Income among groups: People who know how to save their
assets from inflation gets protected but all others will lose the value of their
monetary assets creating inequality.
Ex: Borrowers are benefitted with inflation as they now need to pay a lower
value of money but lenders suffer. How? Suppose I have Rs.20. You wanted to
buy an apple now which costs Rs.20 but don’t have money. So, you lend it from Notes
me with 10 % interest. So, you will have to give me Rs.22 next year. So, I am
happy to give it to you as I can buy an apple and save 2 rupees next year. But
unfortunately, this year saw a high inflation of 20 % and hence apple cost is
now Rs.24. So, as a lender I lose 2 rupees in buying an apple instead of gaining
2 rupees but you as a borrower gained because the apple is worth more than
22 which you paid to me.
Loss of Business Confidence and fall in Investments: When the inflation is high,
the aggregate demand reduces (remember that demand increases inflation but
not the vice versa). Also, companies anticipate an increase in interest rates to
combat with inflation and hence will discourage them from investments. Also,
higher fluctuation leads to low confidence in investments. This is particularly
important to India’s “Make in India” initiative.
High /unpredictable inflation
Low /unpredicatable 'real' return for companies leading to unpredictable

profits/losses
No confidence in investing in India - Companies do not Invest
Dream of 'Make in India" lives forever likes a dream!!
Bad for Balance of Payments: Higher inflation will cause our exports to price
more and imports to cost less.
• Hence, there will be lesser exports and more imports worsening the
Balance of Payment.
• By looking at all the above, it is evident that both a high inflation and
low inflation are harmful to economy.
So how much should it be?

• Many countries have different desirable limits of inflation but all
countries hope for a low and predictable rate of inflation. Even in India
there are varied opinions on how much it should be, but some currently
say that 2 to 6 % of inflation is good to have. All these make inflation
the single most important macro-economic objective for most of the Notes
countries.
India and past Inflation
Were there spikes and dips in inflation of India in the past? Were those spikes
and dips really bad or were sometimes good?
Let’s look at various situations in the past and analyse the inflation history in
India.
1930’s & 1940’s:

Perhaps the most fluctuating decade in Indian history, where the rate of
inflation varied from -11 % (deflation) to a sharp rise of inflation which even
touched 150 %
Dancing Numbers:
Remember 1930? Yes, it was the Great Depression of 1930’s where India was
affected as well with cotton Industries being the worst hit. It is during this stage,
the prices started dropping with a peak deflation of nearly 11 %. Although the
RBI was set up in 1935, it could control the deflation only to some extent.
Okay, if the prices were going down, why did it shoot up so much suddenly?
It was obviously the World War II effect. Even before the war started, the
expectation of shortage itself spiked the inflation to nearly 40 % but once the
war started it went to an uncontrollable inflationary spiral and by the end of
war it was as high as 150 %. Indians suffered a lot during this period. This was
the only period in Indian history where the prices rose up very sharply for 3
consecutive years. One of the major causes of this is the unrestricted deficit
financing which lead to such an inflationary spiral.
So, how did we get out of it and how long it lasted?

With the introduction of partial rationing and stable budget deficits, we could
get back the inflation to a near single digit. But India had another challenge in
front of her – The partition and Independence!! - With many unrests, social
uprisings, massacres, printing of excess money and losing fertile lands to
Pakistan, the inflation again peaked to 22 % and there were heavy fluctuations
during this period. It was then in 1949, RBI was nationalized but it did not see
any success in controlling inflation.
Notes
World War
Effect
(Speculation
of Shortage)
Partition and
Independence INFLATION
Unrestricted
Deficit
Financing
1950’s & 1960’s:
Lots of fiscal measures were taken in 1949 to bring down the inflation along
with rupee devaluation. All these steps got the inflation to around 2 % by 1950.
But these 2 decades saw some peaks of 15%. These can be mainly accounted
to
• Wars with China & Pakistan,
• Famine in 1965 &
• Adaption of Nehru-Mahalonobis strategy which saw Huge Investments
+ Deficit Financing
But on a whole these two decades saw inflation in an acceptable rate. RBI was
a key performer during this period which took various monetary policy
measures. The end of 1969 saw nationalization of banks in India which was
indeed a major step taken by the government since Independence.
1970’s & 1980’s:

With last two decades going pleasantly, India could not sustain it in the
upcoming decades. It was in 1972-75, where first time after Independence,
three consecutive years saw high inflation with averages touching around 20%.
The major factors for this are
• the oil shock in 1973 and
• Failure of Kharif crops.
Government and RBI used all their tools but when they realized that it’s not Notes
enough to bring it down, it started their attacks on hoarders, black markets and
smugglers. Finally, from a high of 25%, it came down to -1% within a year.
Just when things were cooling down, another oil shock in 1980 pulled up the
inflation back to 9%. This stayed around 7 to 9% throughout the 1980’s but one
good thing about this period since the second oil shock is that the fluctuations
were very low during this period. But this decade closed with another hike of
inflation from 7 to 10 % with Gulf wars.
1990’s & 2000’s:

This decade can be started with the Balance of Payment crisis, which resulted
in the economic reforms of 1991. After the reforms were taken, for almost 5
years the inflation contained at around 10 % due to increased demand and
adjustments of exchange rate in 1991. After 5 years of high inflation rates, in
1996, it was brought down to almost half with average around 5 %.
The main factors which contributed to such a decrease were
• RBI containing money supply,
• Food prices inflation were reduced by half,
• Cooling of global inflation,
• Huge buffer stocks of grains &
• High foreign exchange reserves.
Since 1996, for almost 12 years the inflation was contained at an acceptable
rate and fluctuations were also minimal. There is only one major fluctuation in
2000-01 which can be accounted to the increase of petroleum prices, but was
brought back to control immediately.
The 2008 oil spike was a major event which took India’s inflation to a double
digit.
So, in the past 80 years ranging from 1930’s to 2010, India although have seen
many ups and downs in inflation, we can still say it’s been a good economy
without any major disasters like hyper-inflation. Even if we compare with Asian
countries, India is better off with many countries in terms of inflation. For
around half of the last 80 years, India could contain Inflation below 6 % which
is generally considered good.
Measuring Inflation Notes

Inflation target is set by the Govt. in consultation with RBI, once in every five
years.
• Inflation target is measured by the consumer price index-combined
(CPI-C)
• Inflation target is 4% (+/-) 2% for the period from August 5, 2016 to
March 31, 2021. In a notification on March 31, 2021, the Central
Government, in consultation with the RBI, retained the inflation target
at 4 per cent (with the upper tolerance level of 6 per cent and the lower
tolerance level of 2 per cent) for the 5-year period April 1, 2021 to
March 31, 2026.
• If the average inflation is more than the upper tolerance level of 4% +
2%, that is, 6%, or less than the lower tolerance level of 4%- 2%, that is
2%, for any 3 consecutive quarters, it would mean a failure to achieve
the inflation target.
• Where RBI fails to meet the inflation target, it shall set out a report to
the Central Government stating the reasons for failure to achieve the
inflation target; remedial actions proposed to be taken by RBI; and an
estimate of the time-period within which the inflation target shall be
achieved pursuant to timely implementation of proposed remedial
actions.
In India, we generally use two indices to measure Inflation – Consumer Price
Index (CPI) and Wholesale Price Index (WPI)
Wholesale Price Index (WPI):

• It measures the change in price of goods in wholesale market –
Currently 697 items (Producer-centric mainly)
Commodities & Weight in WPI

o Primary Articles (Weight 22.62%) (Items 117) (in Primary articles,
Food articles weight is highest)
o Fuel and Power (Weight 13.15%) (Items 16)
o Manufactured Products (Weight 64.23%) (Items 564)
• It is released by Office of Economic Advisor, Department of Industrial
Policy and Promotion on a monthly basis.
• Base year of WPI currently is 2011-12.
• Pan India approach- Does not fluctuate often; better at targeting supply
side constraints
• But gets affected by international prices (Manufacturing- higher
weightage)
• It doesn’t take services sector and unorganized manufacturing sector Notes

into account.
• Prices used for compilation do not include indirect taxes in order to
remove impact of fiscal policy.
• Provisional figures of Wholesale Price Index (WPI) are released on 14th
of every month (or next working day) with a time lag of two weeks of
the reference month and compiled with data received from institutional
sources and selected manufacturing units across the country.
• Wholesale Price Index (WPI) surged to a record high of 15.1 per cent in
April 2022. The high rate of inflation in April, 2022 was primarily due to
rise in prices of mineral oils, basic metals, crude petroleum & natural
gas, food articles, non-food articles, food products and chemicals &
chemical products etc. as compared to the corresponding month of the
previous year.
• This is the highest WPI print in the 2011-12 series. Annual WPI inflation
at the producer level has remained in double digits for 13 months in a
row, consistently edging upwards.
Consumer Price Index (CPI):

• It measures the change in price of goods and services of consumers.
• It’s released by The National Statistical Office (NSO), Ministry of
Statistics and Programme Implementation (MoSPI), on a monthly
basis.
• Base year of CPI- 2012.
• As the consumption diversity is high, India currently has 7 CPI indicators
• Imported Goods-included
• Issues: Lack of
▪ Competitive Integrated Market
▪ Proper Infrastructure
Consumer Price Index Consumer Price Indices (CPI) released at national level
are:
• CPI for Industrial Workers (IW)- Released and compiled by Labour
Bureau (Ministry of Labour and Employment on a monthly basis. Base
Year is 2001=100
• CPI for Agricultural Labourers (AL)/ Rural Labourers (RL)- Released and
compiled by Labour Bureau (Ministry of Labour and Employment on a
monthly basis. Base year is 1986-87= 100
• CPI (Rural/Urban/Combined)- Released and compiled by National
Statistical Office (NSO) in the Ministry of Statistics and Programme
Implementation on a monthly basis.
Notes
Differences
WPI- to have inflationary trend in the economy as a whole.
CPI- used for adjusting income and expenditure streams for changes in
the cost of living.
WPI -Wholesale prices for primary articles, administered prices for fuel
items and ex-factory prices for manufactured products.
CPI -Retail prices, which include all distribution costs and taxes.
WPI-Prices for WPI are collected on voluntary basis
CPI- Price data for CPI are collected by investigators by visiting markets.
WPI- Covers all goods including intermediate goods transacted in the
economy.
CPI- Covers only consumer goods and consumer services
WPI- Weights primarily based on national accounts and enterprise survey
data
CPI- Weights are derived from consumer expenditure survey data.
Q. Which of the following brings out the ‘Consumer Price Index Number for
Industrial Workers’? (2015)
a) The Reserve Bank of India
b) The Department of Economic Affairs
c) The Labour Bureau
d) The Department of Personnel and Training
Q. Consider the following items of wholesale price index:
1. Primary articles
2. Fuel, power, lights and lubricants
3. Manufacturing products
Arrange the above items in descending order in terms of their weightage in
calculating wholesale price index:
a) 1, 2, 3
b) 1, 3, 2
c) 3, 1, 2
d) 3, 2, 1
The difference between WPI food and CPI food shows us the supply side
issues.
Does RBI use WPI or CPI Inflation to manage monetary policy? Notes
While earlier the Reserve Bank of India used WPI inflation to manage monetary
policy expectations, it is now the CPI inflation which is largely taken into
account. The RBI highlights its inflation expectations based on the CPI inflation
data that comes in. For example, it sets targets on CPI Inflation and monitors it
accordingly. Many analysts for long had suggested that the RBI should move to
the CPI data vs the WPI data, which had now happened in the last couple of
years.
WPI Inflation vs. CPI Inflation: Which should you keep in mind?
For the common man it is always better to keep retail inflation which is the CPI
or the Consumer Price Inflation number in mind. It is a better measurement of
what is largely happening with consumer prices. WPI inflation on the other
hand is better known to individuals who track the wholesale prices and is of
better significance to them. In any case both are a measure of inflation.
Measures to control Inflation

Inflation is generally controlled by using monetary measures, fiscal measures
or few other measures.
Credit Control: Central bank (RBI in India) can control the money flow into
economy through various methods. Ex: Changing CRR, SLR, Repo Rate etc.
Demonetization of currency: It means to withdraw currency notes (generally

higher denomination) from the economy. This brings out black money and
helps control Inflation.
Issue of new currency: This is helpful to curb hyperinflation by exchanging old

notes with a new note. But this burdens the small depositors.
Increase in taxes: Increasing tax leads to less disposable income, which cuts
consumption and hence controls inflation. But increasing it to a very high-level
leads to low savings and investment which slowdowns economy. Instead, tax
benefits for investments and savings should be encouraged while using this
measure.
Reduction of unnecessary Government expenditure and surplus budgets:

Cutting down unnecessary spending and also giving up deficit financing helps
in reduction of money and controls inflation. Also, public debt repayment
should be stopped temporarily and more debt should be taken.
Increasing production: The main factor for inflation is not having enough Notes
supply for the increasing demand. There are various methods to increase
production from expansion to increasing productivity.
Rational Wage Policy: To prevent inflation spiral from happening, the wages
can be freeze-d or can be linked with productivity→ Helps control inflation.
Price Control and Rationing: By either controlling prices of essential goods or

distributing essential commodities, demand can be reduced and prices can be
in check.
GDP Deflator
GDP deflator, also called implicit price deflator, is a measure of inflation. It is
the ratio of the value of goods and services an economy produces in a particular
year at current prices to that of prices that prevailed during the base year.
• GDP deflator in % terms = *100
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃
• Similar to GDP deflator there is also GNP deflator.
This ratio helps show the extent to which the increase in gross domestic
product has happened on account of higher prices rather than increase in
output.
Since the deflator covers the entire range of goods and services produced in
the economy as against the limited commodity baskets for the wholesale or
consumer price indices it is seen as a more comprehensive measure of inflation.
Difference between CPI and GDP deflator

CPI GDP Deflator
Goods produced in Does not represent all Represents all such goods
country the goods
Imported goods Included Not included
Weightage to goods Constant for all goods Differ according to
production level of each
good
It shows to what extent an increase in GDP has happened on account of higher

prices, rather than increased output.
More comprehensive indicator of inflation: Because it covers the entire range

of goods and services produced in the economy as against the limited
commodity baskets for the wholesale or consumer price index
Some facts Notes

• Inflation provides benefits to debtors and loss to creditors/bond-
holders.
• Limited inflation is good for growth in developing country.
• Containing budgetary deficits and unproductive expenditure has
proved relatively effective in controlling the double-digit rate of
inflation in the Indian economy during recent years.
• During inflation the central bank sells government securities. As a
result, money supply in the economy falls causing prices to fall and
during deflation, the central bank will buy back the securities thus
causing money supply to rise which cures deficiency in demand.
• If budget deficit is financed by raising money, inflation may rise.
• General (Headline) inflation is more volatile than Core inflation- it
fluctuates more due to large changes in the relative prices of certain
food items vulnerable to supply shocks.
The Phillips Curve shows the inverse relationship between inflation and
unemployment: as unemployment decreases, inflation increases.
In economics, the Lorenz curve is a graphical representation of the

distribution of income or of wealth. It was developed by Max O. Lorenz in 1905
for representing inequality of the wealth distribution.
The J-curve effect/Curve is seen in economics when a country's trade balance
initially worsens following a devaluation or depreciation of its currency.
In economics, the Laffer curve is a representation of the relationship between Notes

rates of taxation and the resulting levels of government revenue.
Inflationary Gap
• An Inflationary Gap is a macroeconomic concept that describes the
difference between the current level of real gross domestic product
(GDP) and the anticipated GDP that would be experienced if an
economy is at full employment, also referred to as the potential GDP.
For the gap to be considered inflationary, the current real GDP must be
the higher of the two metrics.
• The inflationary gap exists when the demand for goods and services
exceeds production due to factors such as higher levels of overall
employment, increased trade activities or increased government
expenditure. This can lead to the real GDP exceeding the potential
GDP, resulting in an inflationary gap. The inflationary gap is so named
because the relative increase in real GDP causes an economy to
increase its consumption, which causes prices to rise in the long run.
Do You Know?
Inflation in India, in April 2022 (Retail Inflation at 7.8%), was at its highest in the
last 8 years, and almost twice the RBI's target. But How and Why?
• Inflation happened because of global factors like commodities (such as
agricultural produce) price rise, energy price rise and interest rate hikes
by the United States Federal Reserve, as well as supply side factors
caused by COVD-induced lockdowns.
• The war in Ukraine: Ukraine is one of the major sunflower oil producers
in the world and India imports a major portion of the commodity from
there. Ukraine is a key supplier of fertilizer to India.
• When prices of oil and fertilizer increase, there is bound to be a
cascading effect on all other prices which eventually the customer has
to pay for. The Ukraine-Russia war has also caused disruptions in the
supply chain.
The Indian central bank has a mandate to keep inflation between 2 percent and
6 percent. If the RBI fails to adhere to this target for three consecutive quarters,
it needs to explain the failure to Parliament in writing.
Negatives of High Inflation:

• Purchasing Power of people goes down.
• Demand will go down.
• Affects the exchange rate
• Value of Rupee will go down Notes

• Investors will not be encouraged to invest.
Standing Deposit Facility

• Reserve Bank of India (RBI) recently introduced the Standing Deposit
Facility (SDF), an additional tool for absorbing liquidity, at an interest
rate of 3.75 per cent.
• The main purpose of SDF is to reduce the excess liquidity of Rs 8.5 lakh
crore in the system, and control inflation.
o An additional tool for absorbing liquidity without any collateral.
o By removing the binding collateral constraint on the RBI, the SDF
strengthens the operating framework of monetary policy.
o The SDF is also a financial stability tool in addition to its role in
liquidity management.
Topics: Government Budgeting
Sources for today:

• Class XII- Introductory Macroeconmics- Chapter 5- Government Budget
and the Economy
MAINS
What is deficit financing? Is deficit financing always bad? Critically examine.
INTRODUCTION
• This is one of the very important topics for Prelims.
• You have to focus on various terminologies and concepts mostly from
Indian Budget Document.
• They are more or less present in news throughout the year hence to
understand the economy related news; one should be very well versed
with such concepts.
• Our focus through this document is to create dimensions and clear
concepts.
• In Babapedia, we are already covering current affairs part. Your focus
should be to consolidate them well before the examination.
• Also, do not mug the facts and figures given in the document. Notes
Facts/figures for examination to be taken care from 2022-23 Budget
and Economic Surveys only.
What is a Government Budget?

• A government budget is a statement of expected expenditure of the
government and the sources of financing the expenditure during a
financial year. Such an exercise is undertaken much before the financial
year starts. The statement details all expenditures to be incurred during
the coming financial year and the sources of meeting this expenditure.
In India, government budget is normally presented in the Parliament in the

month of February every year. The budget of a government is a summary of
the item-wise intended/expected revenues and anticipated expenditures of
the government during a fiscal year/financial year.
Budget is prepared, keeping in view the general policy of government
towards the welfare of people.
• Budget is presented before both the house of the Parliament on a date
fixed by President of India.
• The General Budget is presented in Lok Sabha by the Minister of
Finance. The ‘Annual Financial Statement’ is laid on the Table of Rajya
Sabha at the conclusion of the speech of the finance minister in Lok
Sabha.
• Responsibility of budget presentation is with President of India.
• The receipts and disbursements are shown under three parts in which
Government Accounts are kept viz., Consolidated Fund, Contingency
Fund and Public Account.
• The Annual Financial Statement distinguishes the expenditure on
revenue account from the expenditure on other accounts, as is
mandated in the Constitution of India. The Revenue and the Capital
sections together, therefore make the Union Budget.
Main Elements
• It is a statement of estimates of government receipts and expenditure.
• Budget estimates pertain to a fixed period, generally a year.
• Expenditure and sources of finance are planned in accordance with the
objectives of the government.
• It requires to be approved (passed) by Parliament or Assembly or some
other authority before its implementation.
Ministry of Finance consist of: Notes

• Department of Economic Affairs
• Department of Expenditure
• Department of Revenue
• Department of Investment and Public Asset Management (DIPAM)
• Department of Financial Services
Budget is prepared by Budget Division of Department of Economic Affairs.

The Budget documents presented to Parliament comprise, besides the Finance
Minister's Budge Speech, the following:
• Annual Financial Statement (AFS)
• Demands for Grants (DG)
• Finance Bill
• Statements mandated under Fiscal Responsibility and Budget
Management Act, 2003
o Macro-economic framework Statement
o Fiscal Policy Strategy Statement
o Medium Term Fiscal Policy Statement
• Expenditure Budget
• Receipts Budget
• Expenditure Profile
• Memorandum Explaining the Provisions in the Finance Bill
• Budget at a glance
• Outcome Budget
Financial Bill
• At the time of presentation of the Annual Financial Statement before
Parliament, a Finance Bill is also presented detailing the imposition,
abolition, remission, alteration or regulation of taxes proposed in the
Budget. A Finance Bill is a Money Bill as defined in Article 110 of the
Constitution.
Consolidated Fund of India (Article 266)

• Consolidated Fund of India is the most important of all government
accounts. Revenues received by the government and expenses made by
it, excluding the exceptional items, are part of the Consolidated Fund.
• This fund was constituted under Article 266 (1) of the Constitution of
India. All revenues received by the government by way of direct taxes
and indirect taxes, money borrowed and receipts from loans given by
the government flow into the Consolidated Fund of India.
• All government expenditure is made from this fund, except exceptional Notes
items which are met from the Contingency Fund or the Public Account.
No money can be withdrawn from this fund without the Parliament’s
approval.
Contingency Fund of India (Article 267)
• Contingency Fund is created as an imprest account to meet some
urgent or unforeseen expenditure of the government.
• This fund was constituted by the government under Article 267 of the
Constitution of India. This fund is at the disposal of the President.
• Any expenditure incurred from this fund requires a subsequent
approval from the Parliament and the amount withdrawn is returned
to the fund from the Consolidated Fund.
Public Account
• 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. It
accounts for flows for those transactions where the government is
merely acting as a banker.
• Examples of those are provident funds, small savings and so on. 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.
Demands for Grants (Article 113)
• Estimated expenditure from the Consolidated Fund of India included in
the Annual Financial Statement are submitted in the form of Demands
for Grants.
• Demands for Grants are presented to the Lok Sabha along with the
Annual Financial Statement and required to be voted by the Lok-Sabha
• Generally, one Demand for Grant is presented in respect of each
Ministry or Department. However, more than one Demand may be
presented for a Ministry or Department depending on the nature of
expenditure
• In regard to Union Territories without Legislature, a separate Demand
is presented for each of the Union Territories.
Objectives:
In a mixed economy like ours, the government plays a significant role along
with the private sector. The three major functions served by this presentation
of estimates.
• Allocation function: Public goods (national defense, roads, government Notes

administration, measures of lower air pollution, etc.) can’t be provided
by Market Mechanism (transaction between individuals).
• Distribution function: Government can alter income distribution by
making transfer payments and collecting taxes, therefore affecting
personal disposable income of households. Thus, through its tax and
expenditure policy government tries to achieve a fair income
distribution in society.
• Stabilization function: Fluctuations in economy may lead to inflation
and unemployment. Government policy measures to stabilize domestic
economy.
Components:
There is a constitutional requirement in India (Article 112) to present before
the Parliament a statement of estimated receipts and expenditures of the
government in respect of every financial year which runs from 1 April to 31
March. This ‘Annual Financial Statement’ constitutes the main budget
document. Further, the budget must distinguish expenditure on the revenue
account from other expenditures. Therefore, the budget comprises of the (a)
Revenue Budget and the (b) Capital Budget.
Components
of Budget
Revenue
Capital Budget
Budget
Revenue Revenue Capital Capital

Receipt Expenditure Receipt Expenditure
Receipt from Receipt from Recovery of Loans to

General
tax non-tax loans, states and UT,
services,
Economic and Market Economic and
Interest social services borrowings, social
Direct Tax Indirect Tax recepits, development,
Disinvestment
Profit and , Defence and
dividend, External loans others
Income Tax, GST, Fees and
Corporation Custom duty, fines,
Tax,
Excise duty
Wealth Tax
Note: Govt. did away with separate railway budget and planned and non- Notes
planned expenditure in 2017.
The Revenue Budget

The Revenue Budget shows the current receipts of the government and the
expenditure that can be met from these receipts.
Revenue Receipts: Revenue receipts are divided into tax and non-tax revenues.
Tax Revenue:
• Tax revenues consist of the proceeds of taxes and other duties levied
by the central government. Tax revenues, an important component of
revenue receipts, comprise of direct taxes – which fall directly on
individuals (personal income tax) and firms (corporation tax), and
indirect taxes like excise taxes (duties levied on goods produced within
the country), customs duties (taxes imposed on goods imported into
and exported out of India) and service tax.
• Excise taxes are the single largest revenue earner. Other direct taxes
like wealth tax, gift tax and estate duty (now abolished) have never
been of much significance in terms of revenue yield and have thus been
referred to as paper taxes.
Non-Tax Revenue:
• Non-Tax Revenue includes interest receipts on loans given by central
government, dividends or profits in investment of government, fees &
other receipts for services rendered by government. Also, cash grants-
in-aid received from foreign countries and international organizations.
Revenue Expenditure:
Expense other than creation of physical or financial assets of central
government, which means expenditure for normal functioning of government
departments (day to day working)
• Interest payments on debt taken by government
• Grants to state government and others (even for creation of assets).
Revenue Deficit:
• If the balance of total revenue receipts and total revenue expenditures
turns out to be negative it is known as revenue deficit, a new fiscal
terminology used since the fiscal 1997–98 in India.
• Revenue deficit= Revenue expenditure – Revenue receipts
Effective Revenue Deficit Notes

• Revenue expenditures include all the grants which the Union
Government gives to the state governments and the UTs—some of
which create assets (though these assets are not owned by the
Government of India but the concerned state governments and the
UTs).
• According to the Finance Ministry (Union Budget 2011–12), such
revenue expenditures contribute to the growth in the economy and
therefore, should not be treated as unproductive in nature like other
items in the revenue expenditures.
• And on this logic, a new methodology was introduced to capture the
‘effective revenue deficit’, which is the Revenue Deficit ‘excluding’
those revenue expenditures of the Government of India which were
done in the form of GoCA (grants for creation of capital assets).
• Effective Revenue Deficit= Difference between Revenue deficit and
Grants for creation of capital assets
Capital Budget of Government of India:

Assets and liabilities of central government. Changes occurring capital is
considered, shows capital requirements of government and pattern of their
financing.
Capital Receipts:
Capital receipts refer to incoming cash flows. They can be both non-debt and
debt receipts. Loan from the general public, foreign governments and RBI form
a major part of capital receipts.
Receipts creating liabilities and reducing financial assets. These are:

• Market Borrowings: Loans raised from public.
• Treasury Bills: Borrowings from RBI and other commercial banks and FIs
through treasury bills.
• Loans received from foreign government and international
organization.
• Recoveries of loans granted by central government.
• Small savings in PO savings account, National Saving Certificate, etc.
• Provident Fund
• PSU disinvestment (receipts from sale pf share in Public Sector
Undertakings).
Note- In the budget documents, the Union government usually lists non-debt Notes
capital receipts in two broad categories – recovery of loans and other receipts.
Other receipts basically mean disinvestment proceeds from the sale of the
government’s share in public sector companies. Over the years, this has
become a major source of the Union government’s non-debt capital receipts
Capital Expenditure:
Expense which results in creation of physical or financial asset. Reduction in

financial liabilities.
They are:
• Expenditure on Land acquisition, building machinery, equipment.
• Investment in shares
• Loans & advances by Central government to states and UTs, PSUs or
others.
Fiscal Deficit
• When balance of the government’s total receipts (i.e., revenue + capital
receipts) and total expenditures (i.e., revenue + capital expenditures)
turns out to be negative, it shows the situation of fiscal deficit, a
concept being used since the fiscal 1997–98 in India.
• The situation of fiscal deficit indicates that the government is spending
beyond its means. To be simpler, we may say that the government is
spending more than its income.
• Fiscal Deficit = Total expenditure – (Revenue receipts+ Non-debt
creating capital receipts)
• Fiscal deficit is targeted at 6.8% of GDP in 2021-22, down from the
revised estimate of 9.5% in 2020-21 (4.6% in 2019-20). The government
aims to steadily reduce fiscal deficit to 4.5% of GDP by 2025-26.
Primary Deficit
• The fiscal deficit excluding the interest liabilities for a year is the primary
deficit, a term India started using since the fiscal 1997–98. It shows the
fiscal deficit for the year in which the economy had not to fulfill any
interest payments on the different loans and liabilities which it is
obliged to, shown both in quantitative and percentage of GDP forms.
• A decrease in primary deficit shows progress towards fiscal health. The
deficit is also mentioned as a percentage of GDP. It is needed to get a
proper perspective and facilitate comparison. Note that the difference
between the primary deficit and fiscal deficit reflects the amount of Notes
interest payment on public debt generated in the past.
• Primary Deficit= Fiscal deficit – Interest payment
Monetized Deficit
• The part of the fiscal deficit which was provided by the RBI to the
government in a particular year is Monetized Deficit, this is a new term
adopted since 1997–98 in India.
BUDGET DEFICIT
• When a government spends more than it receives by the way of
revenue, it is known as the budget deficit.
• The difference between revenue expenditure and revenue receipts is
known as the revenue deficit.
• The difference between the government’s total expenditure and its
total receipts excluding borrowing is known as the fiscal deficit.
• The growth of revenue deficit as a percentage of fiscal deficit points to
a deterioration in the quality of government expenditure involving
lower capital formation.
• Government deficit can be reduced by an increase in taxes or/and
reduction in expenditure.
• Public debt is burdensome if it reduces the future growth in terms of
output.
• Budget deficit Total Expenditure - Total Receipts
Deficit Financing:
Deficit financing is the budgetary situation where expenditure is higher than

the revenue. It is a practice adopted for financing the excess expenditure with
outside resources. The expenditure revenue gap is financed by either printing
of currency or through borrowing.
Need of Deficit Financing

The idea and need of deficit financing, was felt in the late 1920s. Government
needs to spend more money than it was expected to earn or generate in a
particular period, to go for a desired level of growth and development. To
realize the socio-political goals as per the aspirations of the public policy. Once
the growth had taken place, the extra money spent above the income would
have been reimbursed or repaid.
Means of Deficit Financing Notes
1. External Aids are the best money as a means to fulfill a government’s deficit
requirements even if it is coming with soft interest. If they are coming without
interest nothing could be better.
External Grants are even better elements in this case (which comes free—
neither interest nor any repayments) but it either did not come to India (since
1975, the year of the first Pokhran testing’s) or India did not accept it (as
happened post-Tsunami, arguing grants/aids coming with a tag/condition).
2. External Borrowings are the next best way to manage fiscal deficit with the
condition that the external loans are comparatively cheaper and long-term.
External Borrowings are better than the internal borrowings due to two
reasons.
• External borrowing brings in foreign currency/hard currency which
gives extra edge to the government spending as by this the government
may fulfill its developmental requirements inside the country as well as
from outside the country.
• It is preferred over the internal borrowings due to ‘crowding out effect’.
If the government itself goes on borrowing from the banks of the
country, from where will others borrow for investment purposes?
3. Internal Borrowings come as the third preferred route of fiscal deficit

management. But going for it in a huge way hampers the investment prospects
of the public and the corporate sector.
4. Printing Currency is the last resort for the government in managing its
deficit. But it has the biggest handicap that with it the government cannot go
for the expenditures which are to be made in the foreign currency. Even if the
government is satisfied on this front, printing fresh currencies does have other
damaging effects on the economy:
• It increases inflation proportionally. (India regularly went for it since the
early 1970s and usually had to bear double digit inflations.)
• It brings in regular pressure and obligation on the government for
upward revision in wages and salaries of government employees-
ultimately increasing the government expenditures necessitating
further printing of currency and further inflation—a vicious cycle into
which economies entangle themselves.
Government deficit can be reduced by an increase in taxes or reduction in Notes

expenditure.
• In India, the government has been trying to increase tax revenue with
greater reliance on direct taxes (indirect taxes are regressive in nature,
they impact all income groups equally).
• Govt. is trying to raise money through the sale of shares in PSUs.
However, the major thrust has been towards reduction in government
expenditure.
• In case of a budget deficit, i.e., when Govt. cannot meet its expenses
from the tax revenue. So, it borrows money by selling treasury bills or
government securities to RBI, which issues currency to the government
in return. The government then pays for its expenses with this money.
The money thus ultimately comes into the hands of the general public.
If budget deficit is financed by raising money then, inflation may rise.
How deficit financing can be done?

• Borrowing from internal sources like general public, RBI, Govt. bonds
etc.
• Borrowing from external sources like developed countries or
international institutions like IMF, World Bank.
• Printing Currency.
Effects on Economy:
• Deficit financing is inherently inflationary.
• It has adverse effects on investments.
• Printing new currency notes increases the flow of money in the
economy. This leads to increase in inflationary pressures which leads to
rise of prices of goods and services in the country.
• Deficit financing raises aggregate expenditure and hence aggregate
demand.
Q. Which of the following is/are included in the capital budget of the Government of Notes
India?
1. Expenditure on acquisition of assets like roads, buildings, machinery, etc.
2. Loans received from foreign governments
3. Loans and advances granted to the States and Union Territories
a) 1 only
b) 2 and 3 only
c) 1 and 3 only
d) 1, 2 and 3
Q. Which one of the following is likely to be the most inflationary in its effect?
(a) Repayment of public debt
(b) Borrowing from the public to finance a budget deficit
(c) Borrowing from banks to finance a budget deficit
(d) Creating new money to finance a budget deficit
Q. Deficit financing means

a) An excess of governments’ current expenditure over its current revenue
b) An excess of government expenditures minus borrowings other than those
from the RBI
c) An excess of government’s total expenditure over its total revenue
d) An excess of government revenue over expenditure
Q. In India, deficit financing is used for raising resources for

a) economic development
b) redemption of public debt
c) adjusting the balance of payments
d) reducing the foreign debt
Q. The concept which tries to ascertain the actual deficit in the revenue account after
adjusting for expenditure of capital nature is termed as
a) revenue deficit
b) effective revenue deficit
c) fiscal deficit
d) primary deficit
Twin Deficit Notes

The twin deficit, or double deficit, occurs when a nation has both a current
account deficit and a budget deficit. This means the country's economy is
importing more than it is exporting, and the country's government is spending
more money than it is generating.
Twin deficit includes: Fiscal deficit and Current Account Deficit
Types of Budgeting
1. Performance Budgeting
• A performance budget reflects the goal/objectives of the organization
and spells out its performance targets.
• These targets are sought to be achieved through a strategy. Unit costs
are associated with the strategy and allocations are accordingly made
for achievement of the objectives.
• A Performance Budget gives an indication of how the funds spent are
expected to give outputs and ultimately the outcomes.
• However, performance budgeting has a limitation – it is not easy to
arrive at standard unit costs especially in social programmes, which
require a multi-pronged approach.
2. Zero-based Budgeting
• The basic purpose of ZBB is phasing out of programmes/activities,
which do not have relevance anymore. ZBB is done to overhaul the
functioning of the government departments and PSUs so that
productivity can be increased and wastage can be minimized. Scarce
government resources can be deployed efficiently. Therefore, Zero
Based Budgeting is followed for rationalization of expenditure.
• The concept of zero-based budgeting was introduced in the 1970s. As
the name suggests, in the process every budgeting cycle starts from
scratch.
• Unlike the earlier systems, where only incremental changes were made
in the allocation, under zero-based budgeting every activity is evaluated
each time a budget is made and only if it is established that the activity
is necessary, funds are allocated to it.
• Under the ZBB, a close and critical examination is made of the existing
government programmes, projects and other activities to ensure that
funds are made available to high priority items by eliminating outdated
programmes and reducing funds to the low priority items.
• Governmental programmes and projects are appraised every year as if Notes

they are new and funding for the existing items is not continued merely
because a part of the project cost has already been incurred.
3. Programme Budgeting
• Programme budgeting aimed at a system in which expenditure would
be planned and controlled by the objective. The basic building block of
the system was classification of expenditure into programmes, which
meant objective-oriented classification so that programmes with
common objectives are considered together.
4. Programme and Performance Budgeting System (PPBS)

• PPBS went much beyond the core elements of programme budgeting
and was much more than the budgeting system. It aimed at an
integrated expenditure management system, in which systematic policy
and expenditure planning would be developed and closely integrated
with the budget. Thus, it was too ambitious in scope.
• Neither was adequate preparation time given nor was a stage-by-stage
approach adopted. Therefore, this attempt to introduce PPBS in the
federal government in USA did not succeed, although the concept of
performance budgeting and programme budgeting endured.
• Many governments today use the “programme budgeting” label for
their performance budgeting system. As pointed out by Marc
Robertson, the contemporary influence of the basic programme
budgeting idea is much wider than the continuing use of the label. It is
defined in terms of its core elements as mentioned above. Programme
budgeting is an element of many contemporary budgeting systems
which aim at linking funding and results.
5. Outcome Budget
With effect from Financial Year 2007-08, the Performance Budget and the
Outcome Budget hitherto which were presented to Parliament separately by
Ministries/Departments, were merged and presented as a single document
titled "Outcome Budget" in respect of each Ministry/ Department.
From Financial Year 2017-18 onwards, Department of Expenditure in the

Ministry of Finance in collaboration with NITI Aayog is preparing the
consolidated Outcome Budget for all Ministries and Departments. The
Outcome Budget broadly indicates the outcomes of the financial budget of a
Ministry/Department, indicating actual deliverables linked with outlays Notes

targetted during the year and in the medium term.
• The Outcome Budget is a progress card on what various ministries and
departments have done with the outlay announced in the annual
budget.
• It is a performance measurement tool that helps in better service
delivery; decision-making; evaluating programme performance and
results; communicating programme goals; and improving programme
effectiveness.
• The Outcome Budget is likely to comprise scheme- or project-wise
outlays for all central ministries, departments and organizations during
2005-06 listed against corresponding outcomes (measurable physical
targets) to be achieved during the year.
• It measures the development outcomes of all government
programmes. The Outcome Budget, however, will not necessarily
include information of targets already achieved.
• This method of monitoring flow of funds, implementation of schemes
and the actual results of the usage of the money is followed by many
countries.
6. Gender Budgeting
• The 2005-06 Budget introduced a statement highlighting the gender
sensitivities of the budgetary allocations.
• Gender budgeting is an exercise to translate the stated gender
commitments of the government into budgetary commitments,
involving special initiatives for empowering women and examination of
the utilization of resources allocated for women and the impact of
public expenditure and policies of the government on women.
Balanced Budgeting
• A Balanced Budget is that budget in which Government receipts are
equal to Government expenditure.
Merits of the Balanced Budget

• The Government does not indulge in wasteful expenditure.
• Interference in economic functioning of the system is totally avoided by
the government generally.
• Financial stability is ensured with balanced budget.
• However, balanced budget is not an achievement of the government
when economy is in a state of depression for at that time, government
is expected to increase its expenditure with a view to increasing Notes

aggregate demand.
Demerits of a Balanced Budget

• Balanced budget does not offer any solution to the problem of
unemployment during depression.
• Balanced budget is not helpful to the growth and development
programmes of the less developed countries.
Unbalanced Budgeting
• An unbalanced budget is that budget in which receipts and expenditure
of the government are not equal.
• In this, two cases concerning surplus Budget and Deficit Budget arise.
• In Surplus Budget, Government receipts are greater than Government
expenditures. While in the case of Deficit Budget, Government
expenditures are greater than Government receipts.
Merits of a Deficit Budget

• It helps in addressing the problem of unemployment during
depressions.
• It is conducive for growth and development in less developed countries
• It works towards social welfare of the people.
Demerits of Deficit Budget

• It shows wasteful expenditure by the government.
• It shows less revenue realization in comparison with the expenditure.
• It increases debt burden of the government.
FISCAL POLICY
Fiscal policy has been defined as ‘the policy of the government with regard to
the level of government purchases, the level of transfers, and the tax
structure’.
• Fiscal policy is based on the theories of British economist John Maynard
Keynes. It is also known as Keynesian economics. Fiscal policy plays a
very important role in managing a country's economy.
• This theory basically states that governments can influence
macroeconomic productivity levels by increasing or decreasing tax
levels and public spending. This influence, in turn, curbs inflation,
increases employment, and maintains a healthy value of money.
• Fiscal policy is also defined as ‘changes in government expenditures and Notes

taxes that are designed to achieve macroeconomic policy goals’ (such
as growth, employment, investment, etc.). Therefore, we say that ‘fiscal
policy’ denotes the use of taxes and government expenditures.
Let us first discuss the taxes and their impact on the economy:
• Taxes have a direct bearing on people’s income affecting their levels of
disposable incomes, purchase of goods and services, consumption and
ultimately their standard of living;
• Taxes directly affect the savings of individuals, families and firms which
affect investment in the economy—as investment affects the output
(GDP) thereby influencing the per capita income;
• Taxes affect the prices of goods and services as factor cost (production
cost) is affected thereby affecting incentives and behavior of economic
activities, etc.
Government expenditures affect/influence the economy in two ways:
• There is some expenditure on government purchases of goods and
services, for example construction of roads, railways, ports, food grains,
etc., in the goods category and salary payments to government
employees in the services category; and
• There is some expenditure due to government’s income support, to the
poor, unemployed and old-age people (known as government transfer
payments).
Government’s fiscal policy has big role in stabilizing the economy during
business cycles. The two important phases of business cycles are boom and
recession.
Practically fiscal policy responses using taxation and expenditure can go in two
ways in response to the business cycle: Countercyclical and procyclical.
What is countercyclical fiscal policy?
• A counter-cyclical fiscal policy refers to strategy by the government to

counter boom or recession through fiscal measures. It works against the
ongoing boom or recession trend; thus, trying to stabilize the economy.
The Government of India has adopted “Counter Cyclical Fiscal Policy” in
order to decrease the Economic Slow Down in the country.
Countercyclical fiscal policy works in two different directions during these

two phases.
• Countercyclical fiscal policy during recession Notes

o Recession is a business cycle situation where there is slowing
demand and falling growth in the economy. Here, the
Government’s responsibility is to generate demand by fine-
tuning taxation and expenditure policies. Reducing taxes and
increasing expenditure will help to create demand and
producing upswing in the economy.
• Countercyclical fiscal policy during boom
o In the case of boom, economic activities will be on upswing.
Amplifying the boom is disastrous as it may create inflation and
debt crisis and the government’s responsibility here is to bring
down the pace of economic activities. Increasing taxes and
reducing public expenditure will make boom mild. Thus, slowing
down demand should be the nature of countercyclical fiscal
policy during boom.
Procyclical Fiscal Policy
• Procyclical is the opposite of countercyclical. Here, fiscal policy goes in

line with the current mood of the business cycle; amplifying them. For
example, during the time of boom, government makes high
expenditure and doesn’t hike taxes. Thus, boom grows further. Such a
policy is dangerous and brings instability in the economy.
• Boom: total government spending as a percentage of GDP goes up and
tax rates go down, increasing government deficit.
• Recession: total government spending as a percentage of GDP goes
down and tax rates go up, decreasing government deficit.
• So procyclical fiscal policy is undesirable for the economy.
• History shows that governments follow often procyclical fiscal policy
more during boom. Such a situation increases government debt and
creates inflationary pressure especially in developing countries.
The Economic Survey argues that boosting sluggish demand and consumer
sentiment should be a priority and so “counter-cyclical fiscal policy” in other
words, fiscal slippage is justified.
Taxes can be defined as a compulsory financial charge or some other type of

levy imposed upon a taxpayer by a governmental organization in lieu of
services offered. Taxes are the main source of government revenues. Direct
taxes are so named since they are charged upon and collected directly from the
person or organization that ultimately pays the tax e.g. personal tax, corporate Notes
tax, securities transaction tax etc.
Indirect taxes are charged and collected from persons other than those who
finally end up paying the tax. The legal responsibility of paying the tax to
government lies with the seller, but the tax is paid by the buyer, For example
Goods and Services tax (GST).
Note: All indirect taxes subsumed into GST (except customs, petroleum,
electricity, alcohol consumption etc.)
DIRECT TAXES
Personal Income Tax: a tax paid by people on the money they earn, as opposed
to a tax that a company pays on its profits. Divided into many slabs for different
income groups.
Corporate tax: Tax paid by domestic companies on net profit. This tax is also
payable by foreign corporations whose income arises or is deemed to arise in
India. Income earned as interest, royalties, dividends, technical services fees,
or gains through the sale of assets based in India is taxable.
Types:
• Minimum Alternate Tax (MAT): Levied on zero tax companies whose
accounts are prepared as per the guidelines of the Companies Act.
• Fringe Benefits Tax: Such direct tax is paid by companies on fringe
benefits (helpers, drivers, etc.) provided to employees.
• Dividend Distribution Tax (DDT): This tax is levied on any amounts that Notes
are declared, distributed, or paid by domestic entities as dividends to
the shareholders; foreign companies are exempt from DDT.
• Securities Transaction Tax (STT): This liability arises from income earned
through taxable securities transactions.
• Capital Gains Tax: This type of direct tax in India is payable on income
earned from the sale of investments or assets. Capital assets include
investments in homes, art, businesses, shares, bonds etc.
Indirect Taxes - Goods and Services Tax (GST)
The Kelkar Task Force on Fiscal Responsibility and Budget Management

(FRBM) recommended in 2005 introduction of a comprehensive tax on all
goods and service replacing Central level VAT and State level VATs.
It recommended replacing all indirect taxes except the customs duty with value
added tax on all goods and services with complete set off in all stages of making
of a product.
GST was introduced in the 16th Lok Sabha on 19.12.2014.
The Constitution Amendment Bill was passed by the Lok Sabha in May, 2015.
the bill was ratified by required number of States and received assent of the
President on 8th September, 2016 and has since been enacted as Constitution
(101st Amendment) Act, 2016 w.e.f. 16.09.2016.
TAX
STRUCTURE
GST(EXCEPT
DIRECT TAX
CUSTOMS)
INTRA- INTER-
STATE(CGST STATE(IGST INCOME TAX
CENTRAL) CENTRAL)
Highlights:
• GST is a single consumption tax that replaced existing taxes, including
Service Tax, Octroi, Sales Tax, Value added Tax, Excise Duty etc.
• Any business which ‘supply’ goods and/or services to any person or
entity in India has to pay GST.
• GST is a consumption-based tax. Notes

• There is no GST on exported Goods and Services because the place of
consumption is outside India.
• The taxes you pay on input goods/services/ capital goods can be used
as an Input Tax Credit (ITC) against liabilities for outward supplies.
The 122nd Constitution Amendment Act established a GST Council tasked with
optimizing tax collection for goods and services by the State and Centre.
The Council consists of the Union Finance Minister (as Chairman), the Union
Minister of State in charge of revenue or Finance, and the Minister in charge of
Finance or Taxation or any other, nominated by each State government.
The GST Council is the body that decides which taxes levied by the Centre,
States and local bodies will go into the GST; which goods and services will be
subjected to GST; and the basis and the rates at which GST will be applied.
Do You Know?
Debt: A quantity of the money borrowed by one entity, the borrower, from
another entity, the lenders, is referred to as debt. Governments borrow money
to cover their deficits, which allows them to fund regular operations as well as
large capital expenditures. This debt might be in the form of a loan or bond
issuance.
Measures to correct different deficits

• Government subsidy cuts will aid in reducing the deficit.
• Where assets are not being used efficiently, disinvestment should be
carried out.
• Increased emphasis on tax-based revenues, as well as necessary steps Notes

to prevent tax evasion.
• Borrowing from both domestic and international sources.
• A broader tax base could also aid in the reduction of the government's
deficit.
Implications of Fiscal Deficits are:

• A significant drawback or consequence of fiscal deficit is that it may
result in a debt trap.
• It causes inflationary pressures.
• It stifles future advancement.
• It increases reliance on foreign resources.
• It raises the government's obligation.
Implications of Revenue Deficit are:

• A significant revenue shortfall indicates budgetary indiscipline.
• It indicates that the government is dissaving, i.e., the government is
utilising savings from other sectors of the economy to pay its consumer
expenditure.
• It demonstrates the government's excessive expenditures on
administration.
• It lowers the government's assets owing to disinvestment.
• A significant revenue deficit sends a warning signal to the government
to either cut spending or boost revenue.
Current Account Deficit

The current account measures the flow of goods, services and investments
into and out of the country. We run into a deficit if the value of the goods and
services we import exceeds the value of those we export. The current account
includes net income, including interest and dividends, and transfers, like
foreign aid. Current Account is the sum of the balance of trade (exports minus
imports of goods and services), net factor income (such as interest and
dividends) and net transfer payments (such as foreign aid).
• India’s current account deficit (CAD) widened to $23 billion in the third
quarter ended December 2021 (Q3FY22), forming 2.7 per cent of the
country’s gross domestic product (GDP) and reflecting a rise in overseas
trade.
Balance of Payments (BOP) Notes

The balance of payments (BOP) is a statement of all transactions made
between entities in one country and the rest of the world over a defined
period of time, such as a quarter or a year.
• The current account includes the transaction of goods, services, primary
income, and secondary income between the residents and the rest of
the world. The current account balance is largely driven by the
movement of goods and services.
• The current account includes transactions in goods, services,
investment income, and current transfers. The capital account, broadly
defined, includes transactions in financial instruments and central bank
reserves. The current account is included in calculations of national
output, while the capital account is not.
• The capital account comprises credit and debit transactions under non-
produced non-financial assets and capital transfers between residents
and non-residents. Thus, acquisitions and disposals of non-produced
non-financial assets, such as land sold to embassies and sales of leases
and licenses, as well as transfers which are capital in nature, are
recorded under this account.
• RBI publishes the balance of payments data every quarter, in two
formats, an old format and a BPM6 format as recommended by the IMF.
• The overall balance of payment corresponds to the change in reserves.
The change in reserves are denoted by opposite signs in the RBI data,
i.e. increase in reserves is denoted by (-) sign and decrease in reserves
by (+) sign.
• The balance of payments (BOP) transactions consists of imports and
exports of goods, services, and capital, as well as transfer payments,
such as foreign aid and remittances. The balance of payments divides
transactions into two accounts – the current account and the capital
account.
• All trades conducted by both the private and public sectors are
accounted for in the BOP to determine how much money is going in and
out of a country. If a country has received money, this is known as a
credit, and if a country has paid or given money, the transaction is
counted as a debit. Theoretically, the BOP should be zero, meaning that
assets (credits) and liabilities (debits) should balance, but in practice,
this is rarely the case. Thus, the BOP can tell the observer if a country
has a deficit or a surplus.
Invisible balance Notes

The invisible balance or balance of trade on services is that part of the balance
of trade that refers to services and other products that do not result in the
transfer of physical objects.
• Examples include consulting services, shipping services, tourism, and
patent license revenues. This figure is usually generated by tertiary
industry. The term 'invisible balance' is especially common in the United
Kingdom.
• For countries that rely on service exports or on tourism, the invisible
balance is particularly important. For instance, the United Kingdom and
Saudi Arabia receive significant international income from financial
services, while Japan and Germany rely more on exports of
manufactured goods.
Types of Invisibles
• Invisibles are both international payments for services (as opposed to
goods), as well as movements of money without exchange for goods or
services.
• These invisibles are called 'transfer payments' or 'remittances' and may
include money sent from one country to another by an individual,
business, government or non-governmental organisations (NGO) –
often charities.
FOREX RESERVE
The forex are reserve assets held by a central bank in foreign currencies. It acts
as buffer to be used in challenging times and used to back liabilities on their
own issued currency as well as to influence monetary policy. Almost all
countries in world, regardless of size of their economy, hold significant foreign
exchange reserves.
The components of India’s FOREX Reserves include

• Foreign Currency Assets (FCAs)
• Gold Reserves
• Special Drawing Rights (SDRs) and
• RBI’s Reserve position with International Monetary Fund (IMF).
FCAs constitute largest component of Indian Forex Reserves and are expressed
in US dollar terms. Some central banks also hold reserves in British pounds,
euros, Chinese yuan, or the Japanese yen, in addition to their US dollar
reserves.
India’s forex reserves recently crossed the $500-billion mark for the first time Notes
in history due to higher foreign direct investment, foreign institutional
investment. Low oil prices also helped reduce outflows.
Why are the reserves so important?

• All international transactions are settled in US dollars and are therefore
needed to support our imports.
• They are needed to support, maintain confidence for central bank
action, whether monetary policy action or any exchange rate
intervention to support the domestic currency.
• Helps limit any vulnerability because of a sudden disruption in foreign
capital flows, which could happen during a crisis.
• Holding liquid forex provides a cushion against such effects and gives
the confidence that there would still be enough forex to support the
country’s crucial imports in case of external shocks.
The increase in reserves does give India adequate cushion to combat external
shocks. India is one of the few nations whose forex reserves are more than
forex debt. The increase in FDI signals faith in the future of the economy, rather
than a commentary on its present state. Lower imports are a result of lower
domestic demand, but currently, it is due to the lockdown too. It is, therefore,
difficult to consider the increase in reserves as a direct sign of a healthy
economy.
External Debt
• The RBI and the Ministry of Finance (MoF) jointly release the external
debt stock position of India. The Reserve Bank of India releases India's
external debt statistics for the quarters ending March and June with a
lag of one quarter and those for the quarters ending September and
December by the finance ministry.
• External debt, otherwise known as foreign debt, is the component of
total debt held by creditors of the foreign nations. Debt can be in the
form of money owed to banks (Asian Development Bank (ADB),
International Bank for Restructuring and Development (IBRD) outside
the domestic nation or borrowings from the global financial institutions
like the World Bank and International Monetary Fund (IMF).
The external debt in India is classified as long-term debt and short-term debt.
• The long-term debt consists of external commercial borrowings,
borrowings from global financial institutions like IMF (Multilateral
Debt), borrowings from private banks (Bilateral Debt), trade credit, NRI Notes
deposits, etc.
• On the other hand, short-term debt comprises of FII investments in
government T-bills, investment in T-bills by foreign central banks,
external debt liabilities of commercial banks and RBI.
External debt of the country continues to be dominated by long-term

borrowings. India continues to be among the less vulnerable nations with its
external debt indicators, comparing well with other indebted developing
countries.
• Among BRICS economies, India is in the fourth position after China,
Brazil, and Russia regarding the total debt stock and the third position
regarding the share of short-term debt to total debt. The prudent
external debt policy pursued by the government has helped in
maintaining foreign debt within manageable limits.
• A cross-country comparison based on International Debt Statistics
2017 of the World Bank shows that the ratio of India’s external debt
stock to gross national income (GNI) at 23.4% was the fifth lowest.
Regarding the cover provided by foreign exchange reserves to external
debt, India’s position was sixth highest at 69.7% in 2015.
FINANCE COMMISSION
The Finance Commission is a Constitutionally mandated body that is at the

centre of fiscal federalism. Set up under Article 280 of the Constitution, its core
responsibility is to evaluate the state of finances of the Union and State
Governments, recommend the sharing of taxes between them, lay down the
principles determining the distribution of these taxes among States.
Its working is characterized by extensive and intensive consultations with all
levels of governments, thus strengthening the principle of cooperative
federalism.
Its recommendations are also geared towards improving the quality of public
spending and promoting fiscal stability. The first Finance Commission was set
up in 1951 and there have been fifteen so far. Each of them has faced its own
unique set of challenges.
Functions of the Finance Commission: Notes

It is the duty of the Commission to make recommendations to the President as
to:
• the distribution between the Union and the States of the net proceeds
of taxes which are to be, or may be, divided between them and the
allocation between the States of the respective shares of such
proceeds;
• the principles which should govern the grants-in-aid of the revenues of
the States out of the Consolidated Fund of India;
• the measures needed to augment the Consolidated Fund of a State to
supplement the resources of the Panchayats and Municipalities in the
State on the basis of the recommendations made by the Finance
Commission of the State;
• any other matter referred to the Commission by the President in the
interests of sound finance.
The Commission determines its procedure and have such powers in the
performance of their functions as parliament may by law confer on them.
The 15th Finance Commission (Chair: Mr N. K. Singh) was required to submit

two reports.
(i) The first report, consisting of recommendations for the financial year 2020-
21, was tabled in Parliament on February 1, 2020.
(ii) The final report with recommendations for the 2021-26 period will be
submitted by October 30, 2020.
Key recommendations in the first report (2020-21 period) include:

• Devolution of taxes to states: The share of states in the centre’s taxes is
recommended to be decreased from 42% during the 2015-20 period to
41% for 2020-21.
• The 1% decrease is to provide for the newly formed union territories of
Jammu and Kashmir, and Ladakh from the resources of the central
government.
• The individual shares of states from the divisible pool of central taxes is
provided in Table 3 in the annexure.
Terms of Reference of Fifteenth Finance Commission: Notes

• To examine whether revenue deficit grants be provided at all
• To consider the impact of [the] fiscal situation of the Union government
of substantially enhanced devolution by the Fourteenth Finance
Commission, coupled with continuing imperative of the national
development programme including New India 2022.
• To look at the conditions that may be imposed by the Central
government while providing consent to states when they borrow under
Article 293(3).
• To propose measurable performance-based incentives to States in
respect of a number of areas such as the implementation of flagship
schemes, progress towards replacement rate of population growth, a
control or lack of it in incurring expenditure on populist measures
• Promoting ease of doing business
Criteria for devolution

Table 1 below shows the criteria used by the Commission to determine each
state’s share in central taxes, and the weight assigned to each criterion. We
explain some of the indicators below.
Table 1: Criteria for devolution (2020-21)

14th FC 15th FC
Criteria
2015-20 2020-21
Income Distance 50.0 45.0
Population (1971) 17.5 -
Population (2011) 10.0 15.0
Area 15.0 15.0
Forest Cover 7.5 -
Forest and Ecology - 10.0
Demographic
- 12.5
Performance
Tax Effort - 2.5
Total 100 100
Sources: Report for the year 2020-21, 15th Finance Commission; PRS.
Income distance: Income distance is the distance of the state’s income from Notes
the state with the highest income. The income of a state has been computed
as average per capita GSDP during the three-year period between 2015-16 and
2017-18. States with lower per capita income would be given a higher share to
maintain equity among states.
Demographic performance: The Terms of Reference (ToR) of the Commission

required it to use the population data of 2011 while making recommendations.
Accordingly, the Commission used only 2011 population data for its
recommendations.
The Demographic Performance criterion has been introduced to reward efforts

made by states in controlling their population. It will be computed by using
the reciprocal of the total fertility ratio of each state, scaled by 1971 population
data. States with a lower fertility ratio will be scored higher on this
criterion. The total fertility ratio in a specific year is defined as the total number
of children that would be born to each woman if she were to live to the end of
her child-bearing years and give birth to children in alignment with the
prevailing age-specific fertility rates.
Forest and Ecology: This criterion has been arrived at by calculating the share
of dense forest of each state in the aggregate dense forest of all the states.
Tax effort: This criterion has been used to reward states with higher tax
collection efficiency. It has been computed as the ratio of the average per
capita own tax revenue and the average per capita state GDP during the three-
year period between 2014-15 and 2016-17.
Grants-in-aid
In 2020-21, the following grants will be provided to states: (i) revenue deficit
grants, (ii) grants to local bodies, and (iii) disaster management grants. The
Commission has also proposed a framework for sector-specific and
performance-based grants. State-specific grants will be provided in the final
report.
Revenue deficit grants: In 2020-21, 14 states are estimated to have an

aggregate revenue deficit of Rs 74,340 crore post-devolution. The Commission
recommended revenue deficit grants for these states (see Table 4 in the
annexure)
Special grants: In case of three states, the sum of devolution and revenue
deficit grants is estimated to decline in 2020-21 as compared to 2019-
20. These states are Karnataka, Mizoram, and Telangana. The Commission has Notes
recommended special grants to these states aggregating to Rs 6,764 crore.
Sector-specific grants: The Commission has recommended a grant of Rs 7,375

crore for nutrition in 2020-21. Sector-specific grants for the following sectors
will be provided in the final report: (i) nutrition, (ii) health, (iii) pre-primary
education, (iv) judiciary, (v) rural connectivity, (vi) railways, (vii) police training,
and (viii) housing.
Performance-based grants: Guidelines for performance-based grants include:

(i) implementation of agricultural reforms, (ii) development of aspirational
districts and blocks, (iii) power sector reforms, (iv) enhancing trade including
exports, (v) incentives for education, and (vi) promotion of domestic and
international tourism. The grant amount will be provided in the final report.
Grants to local bodies: The total grants to local bodies for 2020-21 has been
fixed at Rs 90,000 crore, of which Rs 60,750 crore is recommended for rural
local bodies (67.5%) and Rs 29,250 crore for urban local bodies (32.5%). This
allocation is 4.31% of the divisible pool. This is an increase over the grants for
local bodies in 2019-20, which amounted to 3.54% of the divisible pool (Rs
87,352 crore). The grants will be divided between states based on population
and area in the ratio 90:10. The grants will be made available to all three tiers
of Panchayat- village, block, and district.
Disaster risk management: The Commission recommended setting

up National and State Disaster Management Funds (NDMF and SDMF) for the
promotion of local-level mitigation activities. The Commission has
recommended retaining the existing cost-sharing patterns between the centre
and states to fund the SDMF (new) and the SDRF (existing). The cost-sharing
pattern between centre and states is (i) 75:25 for all states, and (ii) 90:10 for
north-eastern and Himalayan states.
For 2020-21, State Disaster Risk Management Funds have been allocated Rs
28,983 crore, out of which the share of the union is Rs 22,184 crore. The
National Disaster Risk Management Funds has been allocated Rs 12,390 crore.
Table 2: Grants for disaster risk management (In Rs crore) Notes

Funding Windows National corpus States’ corpus
Mitigation (20%) 2,478 5,797
Response (80%) 9,912 23,186
(i) Response and Relief (40%) 4,956 11,593
(ii) Recovery and Reconstruction
3,717 8,695
(30%)
(iii) Capacity Building (10%) 1,239 2,998
Total 12,390 28,983
Sources: Report for the year 2020-21, 15th Finance Commission; PRS.
Recommendations on fiscal roadmap:
Fiscal deficit and debt levels: The Commission noted that recommending a
credible fiscal and debt trajectory roadmap remains problematic due to
uncertainty around the economy. It recommended that both central and state
governments should focus on debt consolidation and comply with the fiscal
deficit and debt levels as per their respective Fiscal Responsibility and Budget
Management (FRBM) Acts.
Off-budget borrowings: The Commission observed that financing capital

expenditure through off-budget borrowings detracts from compliance with the
FRBM Act. It recommended that both the central and state governments
should make full disclosure of extra-budgetary borrowings. The outstanding
extra-budgetary liabilities should be clearly identified and eliminated in a time-
bound manner.
Statutory framework for public financial management: The Commission

recommended forming an expert group to draft legislation to provide for a
statutory framework for sound public financial management system. It
observed that an overarching legal fiscal framework is required which will
provide for budgeting, accounting, and audit standards to be followed at all
levels of government.
Tax capacity: In 2018-19, the tax revenue of state governments and central
government together stood at around 17.5% of GDP. The Commission noted
that tax revenue is far below the estimated tax capacity of the
country. Further, India’s tax capacity has largely remained unchanged since the
early 1990s. In contrast, tax revenue has been rising in other emerging
markets. The Commission recommended: (i) broadening the tax base, (ii)
streamlining tax rates, (iii) and increasing capacity and expertise of tax Notes
administration in all tiers of the government.
GST implementation: The Commission highlighted some challenges with the

implementation of the Goods and Services Tax (GST). These include:
• large shortfall in collections as compared to original forecast,
• high volatility in collections,
• accumulation of large integrated GST credit,
• glitches in invoice and input tax matching, and
• delay in refunds.
The Commission observed that the continuing dependence of states on

compensation from the central government (21 states out of 29 states in 2018-
19) for making up for the shortfall in revenue is a concern. It suggested that
the structural implications of GST for low consumption states need to be
considered.
Other recommendations:
Financing of security-related expenditure: The ToR of the Commission required
it to examine whether a separate funding mechanism for defence and internal
security should be set up and if so, how it can be operationalised.
In this regard, the Commission intends to constitute an expert group
comprising representatives of the Ministries of Defence, Home Affairs, and
Finance.
The Commission noted that the Ministry of Defence proposed following

measures for this purpose:
• setting up of a non-lapsable fund,
• levy of a cess,
• monetisation of surplus land and other assets,
• tax-free defence bonds, and
• utilising proceeds of disinvestment of defence public sector
undertakings. The expert group is expected to examine these proposals
or alternative funding mechanisms.
Tax Haven Notes

A tax haven, or offshore financial center, is any country or jurisdiction that
offers minimal tax liability to foreign individuals and businesses. Tax havens do
not require businesses to operate out of their country or the individuals to
reside in their country to receive tax benefits. In 1998, the Organization for
Economic Cooperation and Development (OECD) gave a number of factors to
identify tax havens.
Some of the most common factors are given below:
• No, or nominal, tax on relevant income
• Lack of effective exchange of information
• Lack of transparency
• No substantial activities
IMPORTANT REPORTS, COMMITTEE, BODY AND INDICES
COMMITTEES
• Arvind Mayaram Committee is related to FDI liberalisation. Constituted
in 2013, it recommended increasing the FDI limits in 12 sectors.
• Capital Account Convertibility - Tarapore committee
• Inflation Targeting – Urijit Patel committee
• Fiscal Responsibility and Budget Management (FRBM) review – N K
Singh committee
Fiscal Performance Index

• Confederation of Indian Industry (CII) has launched a Fiscal
Performance Index (FPI) to assess state and central budgets.
• The Index incorporates qualitative assessments of revenue
expenditure, capital expenditure, revenues, fiscal prudence and the
level of public debt.
• The CII has used this index to analyse state and central budgets from
2004-05 to 2016-17.
• The study found that despite improvement a reduction in the fiscal
deficit between FY13 and FY18, the overall performance of the budget
has been remained steady with improvements only in FY16 and FY17.
National Indicator Framework (NIF):

• Ministry of Statistics and Programme Implementation (MoSPI) is
responsible for the development of National Indicator Framework (NIF)
for measuring the progress of the SDGs and associated targets at the Notes
national level.
• NIF will give appropriate direction to the policy makers and the
implementers of various schemes and programs.
Financial Development Index- IMF
The Future of Work: International Labour Organization

• The Future of Work Initiative was launched by ILO in 2015 in order to
understand and to respond effectively to the new challenges posed by
the changes that the world of work is undergoing.
Global Economic Prospects-World Bank
Global Competitiveness Index-WEF
Global GDP (Gross Domestic Product) Rankings- World Bank
Global Financial Development Report – World Bank
India’s Financial Stability Report-RBI

• ‘India Financial Stability Report’ published by the Reserve Bank of India
(March 2010), defines financial stability: “From a macro prudential
perspective, financial stability could be defined as a situation in which
the financial sector provides critical services to the real economy
without any discontinuity.”
• During the time of the global financial crisis, RBI has made many
unconventional measures to protect the banking system. Liquidity
support was provided abundantly so that no banks should face stress.
The RBI since 2010 is publishing India Financial Stability Report to assess
financial stability scenario in the country. Financial stability is now one
of the three important objectives of monetary policy besides price
stability and credit support.
• Financial stability means financial institutions individually and
collectively are being able to deliver their functions properly,
withstanding external shocks and avoiding internal weaknesses.
The Development Monitoring and Evaluation Office (DMEO) Notes

• The Development Monitoring and Evaluation Office (DMEO) was
constituted in September 2015 by merging the erstwhile Program
Evaluation Office (PEO) and the Independent Evaluation Office (IEO).
• It is an attached office under NITI Aayog, aimed at fulfilling the
organization’s monitoring and evaluation (M&E) mandate and building
the M&E ecosystem in India.
• As a part of NITI Aayog, DMEO has advisory powers across the Ministries
and Departments of the Union Government, and is one of few
institutions within the government to provide a cross- and inter-
ministerial perspective. Its mandate also expands to technical advisory
to States, under NITI Aayog’s mandate of cooperative and competitive
federalism
• DMEO’s vision is to improve sustainable outcomes and impacts of the
government. It aims to enable high-quality monitoring and evaluation
of government programs to improve effectiveness, efficiency, equity
and sustainability of service delivery, outcomes and impacts.
World Economic Outlook
• The International Monetary Fund (IMF) is an international organization

that promotes global economic growth and financial stability.
• The reports the IMF published on its monetary surveillance include the
"World Economic Outlook," the "Global Financial Stability Report," and
the Fiscal Monitor.
• The global economy is projected to grow 6.0 percent in 2021 and 4.9
percent in 2022.
Fiscal Responsibility and Budget Management (FRBM) Act
Objective: FRBMA intends to bring transparency and accountability in the

conduct of the fiscal and monetary actions of the government. The Act’s long-
term objective is for India to achieve fiscal stability and to give the Reserve Bank
of India (RBI) flexibility to deal with inflation in India.
Main Features:
• The FRBM Act made it mandatory for the government to place the
following along with the Union Budget documents in Parliament
annually-details of fiscal indicators such as fiscal, revenue and primary
deficit as a percentage of GDP, tax and non-tax revenues as a
percentage of GDP, and central government debt as a percentage of Notes

GDP.
• It requires the government to limit the fiscal deficit to 3% of the GDP by
31 March 2021 and the debt of the central government to 40% of the
GDP by 2024-25, among others.
• The Act provides room for deviation from the annual fiscal deficit target
under certain conditions.
• It mandated setting annual targets for the reduction of fiscal deficit and
revenue deficit, contingent liabilities and total liabilities.
Provided that exceeding annual fiscal deficit target due to ground or grounds
of national security, act of war, national calamity, collapse of agriculture
severely affecting farm output and incomes, structural reforms in the economy
with unanticipated fiscal implications, decline in real output growth of a
quarter by at least three per cent points below its average of the previous four
quarters, may be allowed for the purposes of this section.
Note: NK Singh committee, that was set up in 2016 to review the FRBM Act,
recommended that the government must target a fiscal deficit of 3% of the
GDP in the years up to March 31, 2020, subsequently cut it to 2.8% in 2020-21
and to 2.5% by 2023.
N K Singh Committee's recommendations were as follows:

• Targets: The committee suggested using debt as the primary target for
fiscal policy and that the target must be achieved by 2023.
• Fiscal Council: The committee proposed to create an autonomous Fiscal
Council with a chairperson and two members appointed by the Centre
(not employees of the government at the time of appointment)
• Deviations: The committee suggested that the grounds for the
government to deviate from the FRBM Act targets should be clearly
specified
• Borrowings: According to the suggestions of the committee, the
government must not borrow from the RBI, except when...
• The Centre has to meet a temporary shortfall in receipts
• RBI subscribes to government securities to finance any deviations
• RBI purchases government securities from the secondary market
In its report submitted in January 2017, titled, ‘The Committee in its

Responsible Growth: A Debt and Fiscal Framework for 21st Century India’, the
Committee suggested that a rule based fiscal policy by limiting government
debt, fiscal deficit and revenue deficits to certain targets is good for fiscal Notes
consolidation in India.
▪ Public debt to GDP ratio should be considered as a medium-term
anchor for fiscal policy in India. The combined debt-to-GDP ratio of the
centre and states should be brought down to 60 per cent by 2023
(comprising of 40 per cent for the Centre and 20% for states) as against
the existing 49.4 per cent, and 21per cent respectively.
▪ Fiscal deficit as the operating target: The Committee advocated fiscal
deficit as the operating target to bring down public debt. For fiscal
consolidation, the centre should reduce its fiscal deficit from the
current 3.5% (2017) to 2.5% by 2023.
▪ Revenue deficit target: The Committee also recommends that the
central government should reduce its revenue deficit steadily by 0.25
percentage (of GDP) points each year, to reach 0.8% by 2023.
What is escape clause?

The flexibility to adjust with cyclical fluctuations (boom/recession) is
incorporated under the “escape clause” (in the case of recession) where
temporary and moderate deviations can be made from the baseline fiscal path.
This can be permitted under exceptional circumstances and in reaction to
external shocks. To ensure that these “escape” clauses are not mis-used, the
Committee suggests several specific guidelines.
NEER and REER Notes

The indices of Nominal Effective Exchange Rate (NEER) and Real Effective
Exchange Rate (REER) are used as indicators of external competitiveness. NEER
is the weighted average of bilateral nominal exchange rates of the home
currency in terms of foreign currencies. Conceptually, the REER, defined as a
weighted average of nominal exchange rates adjusted for relative price
differential between the domestic and foreign countries, relates to the
purchasing power parity (PPP) hypothesis.
• NEER is a measure of the value of a currency against a weighted average
of several foreign currencies. An increase in NEER indicates an
appreciation of the local currency against the weighted basket of
currencies of its trading partners.
• REER is the real effective exchange rate (a measure of the value of a
currency against a weighted average of several foreign currencies)
divided by a price deflator or index of costs. An increase in REER implies
that exports become more expensive and imports become cheaper;
therefore, an increase indicates a loss in trade competitiveness.
• The NEER can be adjusted to compensate for the inflation rate in the
home country. That adjusted number is the REER. Therefore, greater
the relative inflation of home country, greater will be the divergence
between NEER & REER.
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NCERT MODULE (ECONOMY)

IASbaba’s ILP 2023 – Value Add Notes (NCERT Economy)

NCERT ECONOMY MODULE 1 Notes

Topics: Sectors of Indian Economy and Human Capital Formation

Following are your sources for today:

Previous Year Questions: If you have to solve these questions, proper

UPSC Syllabus for Mains-Economy:

Note- Other parts of GS Paper 3, Mains- are also related to economic

Before we proceed, let us understand the demand and requirement as per

IASbaba’s ILP 2023 – Value Add Notes (NCERT Economy)

You will come down to below inferences: Notes

Some Previous Years Questions

Which of the statements given above are correct?

IASbaba’s ILP 2023 – Value Add Notes (NCERT Economy)

4. Refinery products Notes

Select the correct answer using the codes given below:

Q.) Disguised unemployment generally means

Q.) With reference to the governance of public sector banking in India,

Which of the statements given above is/are correct?

Q.) Consider the following statements: Human capital formation as a concept

IASbaba’s ILP 2023 – Value Add Notes (NCERT Economy)

Q.) A “closed economy’’ is an economy in which?

• How globalization has led to the reduction of employment in the formal

IASbaba’s ILP 2023 – Value Add Notes (NCERT Economy)

• The nature of economic growth in India in recent times is often Notes

IASbaba’s ILP 2023 – Value Add Notes (NCERT Economy)

What is Development? Notes

Development is a process that creates growth, progress, positive change or the

Is the meaning of development same for everyone?

What is National Development?

IASbaba’s ILP 2023 – Value Add Notes (NCERT Economy)

Facet of National Development

United Nations Decade Report has defined it as:

How to Compare Development?

What is Sustainable Development

• "Sustainable development is development that meets the needs of the

IASbaba’s ILP 2023 – Value Add Notes (NCERT Economy)

of the environmental, social and economic limitations we face as a Notes

Per Capita Income

Types of Economic Systems- An Overview

Different countries in the world have different situations and aspirations,

IASbaba’s ILP 2023 – Value Add Notes (NCERT Economy)

Other systems: Notes

IASbaba’s ILP 2023 – Value Add Notes (NCERT Economy)

When demand is low, The government decides Mixed economic Notes

Pros: Pros: Pros:

• Efficient • Govt. and society • Less income

IASbaba’s ILP 2023 – Value Add Notes (NCERT Economy)

SECTORS OF ECONOMY Notes

Classification of Economic Sectors

Nature of Job Working Condition Ownership

Primary Sector Secondary Sector Tertiary Sector

EXAMPLE: Agriculture, EXAMPLE: Furniture, EXAMPLE: Catering,

IASbaba’s ILP 2023 – Value Add Notes (NCERT Economy)

GDP of Primary, Secondary and Tertiary Sectors

45.03 47.82 49.86

30.73 27.66 24.18

17.03 16.79 16.68