A Must for Civil Services (Pre) Examination,

State PCS & Other Competitive Exams

INDIAN
ECONOMY
Coverage of Important Facts
from NCERT Books (Class 6-12)
A Must for Civil Services (Pre) Examination,
State PCS & Other Competitive Exams

INDIAN
ECONOMY
Coverage of Important Facts
from NCERT Books (Class 6-12)

Authored By
Rakesh Kumar Roshan
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1. Introduction to Economics 1-4 MCX-SX (MCX Stock Exchange Limited)
Meaning of Economics Over The Counter Exchange of India (OTCEI)
Types of Economies Other Investment Agents
Sectors of an Economy Banking in India
Other Sectors of Economy Reserve Bank of India (RBI)
Methods of Credit Control
2. National Income 5-9 Scheduled Commercial Banks
National Income State Bank of India
Real National Income (RNI) Private Banks
Calculating National Income Foreign Banks
Gross Fixed Capital Formation (GFCF) Regional Rural Banks
Indian Organisations Related to National Scheduled Co-operative Banks
Income Accounts Types of Banking System
National Income's Trend in Growth and Structure Inter-Bank Transfer
Banking Sector Reforms
3. Economic Growth and Development 10-16 Basel Norms
Economic Growth Banking Ombudsman
Economic Development Development Financial Institutions
Measurement of Economic Development Insurance Companies
Physical Quality of Life Index (PQLI)
Millennium Development Goals (MDGs) 6. Inflation 48-52
Different Levels of Economic Development Types of Inflation
Economy and Environment Causes of Inflation
Environmental Taxes Effects of Inflation
12th Five Year Plan and Sustainability Measures of Inflation
Change in Reporting of Inflation
4. Economic Planning in India 17-25 Measures to Check Inflation
Meaning of Economic Planning
Strategies of Planning 7. Public Finance 53-64
History of Planning in India Public Revenue
National Institution for Transforming India (NITI) Aayog Types of Tax
Planning Commission Direct Tax Code (DTC)
National Development Council (NDC) Sources of Revenue
Five Year Plans in India Debt Management Strategy
Twelfth Five Year Plan (2012-2017) Finance Commission
Three Year Action Agenda (2017-18 to 2019-20) Fiscal Policy
India Vision 2020 Fiscal Responsibility and Budget Management Act,
(FRBM) 2003
5. Money and Banking 26-47 Union Budget
Money Deficit
Measures of Money Supply in India
Financial Sector 8. India’s Balance of Payments 65-71
Financial Markets Balance of Payments (BoP)
Regulatory Framework Foreign Capital
Reforms in Capital Market of India Foreign Exchange
Qualified Foreign Investor (QFI) Capital Account Convertibility in India
Stock Exchanges in India India’s External Debt
National Stock Exchange (NSE) NRI Deposits
Bombay Stock Exchange (BSE)
 9. India’s Foreign Trade 72-76 14. Infrastructure 124-134
Foreign Trade Policy (FTP), 2015-20 Definition of Infrastructure
India's Trading Infrastructure in 12th Plan
Trade Composition Transport System in India
Import Cover Major Schemes
Export Promotion
General Agreement on Tariffs and Trade 15. Poverty and Unemployment 135-144
Poverty
10. Demographic Profile of India 77-83 Poverty in India
Demography
Human Poverty Index (HPI)
Birth and Death Rates
Density of Population Expert Groups for Estimating Poverty
Literacy Inequality
Aadhar Employment and Unemployment
Poverty Eradication and
11. Agriculture 84-99 Employment Related Programme
Agricultural Sector Mahatma Gandi National Rural Employment
Five Year Plan and Agriculture
Guarantee Scheme (MGNREGS)
Second Green Revolution in India
Evergreen Revolution 16. Government Schemes and Programmes 145-162
National Commission on Farmers Social Welfare Schemes
Agricultural Inputs
Skill Development and Employment Scheme
Food Security
Rural Infrastructure and Development
Food Processing Industry
Land Reforms Housing and Sanitation Scheme
Agricultural Finance and Credit Facilities Education
Agricultural Marketing and Extension Services Financial Inclusion Mission
Agriculture Insurance Health
Major Schemes of Agriculture Women Empowerment Programmes
Animal Husbandry, Dairying and Fisheries Social Defence
Mobile Apps for Farmers Other Social Protection Programmes

12. Indian Industry 100-117 17. International Financial and Economic

Industries in Indian Economy Organisation 163-172
Industrial Policy International Organisations
An Evaluation of Industrial Policy Before 1991
International Monetary Fund (IMF)
Companies Act, 2013
IMF Quota
Public Sector
Special Drawing Rights (SDRs)
Policy of Navratnas
Disinvestment IMF Reforms
The Micro, Small and Medium Enterprises (MSMEs) World Bank Groups
Schemes/Programmes for Small Industries The United Nations Conference on Trade and
Industrial Sickness Development (UNCTAD)
Revival of Sick Units World Trade Organisation (WTO)
Economic Census Other Important International Organisations
India’s Manufacturing Sector Organisation of Petroleum Exporting Countries (OPEC)
Some Large-Scale Industries Organisation for Economic Co-operation and
Economic Reforms Development (OECD)
Make in India Eurasian Economic Union (EEU)
Digital India Regional Financial Institutions
Startup India - Standup India
Economic Survey 2020-21 173-176
13. Services Sector 118-123
Union Budget 2021-22 177-181
Current Scenario
Composition of Service Sector Practice Sets (1-5) 182-202
Services Sectors of India Previous Year’s Solved Papers (Set-1) 203-221
Some Major Services of India
Previous Year’s Solved Papers (Set-2) 222-230
Challenges of Service Sector
TOPICS FOCUS &
TREND OF QUESTIONS

INTRODUCTION AND NATIONAL INCOME

This chapter provides an overview of various important sectors of Indian economy and its specific
features. Important ceoncepts of this chapter are GDP, GNP, GDP deflator and other such
statistical tools as a measure of economic growth. The changed pattern of UPSC demands a
deeper understanding of their meaning and importance as well as how they are calculated and
their trends in recent years, which has also been asked in previous exams.

INFLATION
Important topics from examination point of view are causes of supply side and demand side
inflation, role of Monetary Policy and Fiscal Policy in inflation management, its ill effects on
economy and other related concepts such as deflation, hyper-inflation and stagflation. Questions
asked in previous year exams include causes of inflation, effect of liquidity on inflation, impact of
inflation on bond yield and debtors etc.

ECONOMIC GROWTH AND DEVELOPMENT

This chapter covers the important and relevant concepts and issues of growth and development.
Other important topics dealt here are difference between growth and development, various
measures of development, human development and HDI, sustainable development, MDGs etc.
Most of the questions asked in previous exams from this section are regarding factors
contributing to economic growth, constituents of HDI etc. Trends in savings and investment,
capital-output ratio, etc.

ECONOMIC PLANNING IN INDIA

This chapter discusses meaning, evolution and strategies of planning. From examination
perspective, the important focus areas are role of Planning Commission and NDC, objectives and
achievements of various Five Year Plans and planning in liberalised economy. Previous years’
questions asked in examination includes topics such as mobilisation of resources, approach of
planning in India, structure and functions of NDC and Planning Commission.

DEMOGRAPHIC PROFILE
This chapter assumes greater significance in the background of demographic dividend in India.
Key concepts such as demographic transition theory, birth and death rates, age structure,
population density, sex ratio and literacy are pertinent from examination point of view. Further
questions can also be asked from census data, Population Policy and family welfare programmes.
Earlier questions asked in competitive exams include how demographic dividend can be reaped,
age structure-composition of India etc.
MONEY AND BANKING
This is the most important chapter in economy section. The revised pattern of examination has
asked analytical type of questions from topics such as money and capital market and reforms
measure therein, banking in India, Monetary Policy and RBI, interest rates and money supply,
insurance and pension sector. Most questions asked in the exams are about RBI’s regulatory role,
repo and reverse repo rate, money supply and corrosponding order of liquidity, priority sector
lending, lead bank schemes and measures of financial inclusion.

INDIAN PUBLIC FINANCE

Most essential topics of this chapter are Fiscal Policy, public revenue and expenditure and trends
therein, taxation system, GST, fiscal consolidation, FRBM Act, Finance Commission and various
types of budgets like gender budgeting outcome and performance budgeting etc. Questions
asked in examination test the conceptual understanding of the above topics such as what is the
impact of deficit financing, what are various ways to achieve fiscal consolidation constituents of
GST, VAT, CENVAT and related concepts, fiscal federalism etc.

INDIA’S BOP
This chapter deals with India’s external sector and important topics here are meaning and
constituents of BoP, current and capital account convertibility, FDI and FII, value of rupee in forex
market,

INTERNATIONAL FINANCIAL ORGANISATION

This chapter offers an in-depth understanding of structures, functions, and way of lending of
important international financial organisations such as IMF, World Bank group, WTO, ADB etc.
Questions have been asked about lending programme of IMF, Agreement on Agriculture and
NAMA of WTO , TRIPS, TRIMS and DOHA sound of WTO, agencies of World Bank and terms of
lending, SDRs and Quota reforms etc.

AGRICULTURE
It is the most important sector of Indian economy. Essential topics to be read in this chapter are
crops and cropping pattern, Second Green Revolution, Agricultural Price Policy , finance and
marketing, extension services, farm credit, problems in productivity and land reforms, food
processing and related schemes. Questions asked in previous years’ exams include production
trends and patterns, various agricultural institutions and their functions, government schemes
related to agriculture, issues and trends in agricultral credit, objectives of Mega food Parks and
related food processing schemes etc.
INDUSTRIAL SECTOR
From an examination perspective, important topics are New Industrial Policy, MSMEs, PSEs,
industrial sickness, Disinvestment Policy, role of CCI, National Manufacturing Policy, NIMZs, and
recent trends in industrial growth. Questions have been asked in previous exams regarding skill
development, labour laws and reforms, measures to promote MSMEs, Index of Industrial
Production, core sectors of manufacturing etc.

SERVICES SECTOR
Significant topics in this chapter are performance and trends of various services sectors such as IT
and ITeS, real estate, communications, construction, tourism sectors etc, issue of FDI and
liberalisation of services sector and services employment in India. East years examination have
focused on Contitution and performance of services sector in economic growth.

INFRASTRUCTURE
Important topics in this chapter are classification and significance of infrastructure, problems in
infrastructure development, issue of investment and financing, PPPs and their advantages,
performance of energy sector and reforms therein, urban infrastructure and transport, critical
infrastructure.

NATURAL RESOURCES
This chapter deals with minerals, water, land and forest resources. Essential topics in this chapter
are concerned with mineral resource’s distribution, use, conservation and management. Pertinent
to this is issue of environment management and climate change. Trends of previous Years exams
suggests questions about watershed management, land use policy, national mining policy, social
and agro forestry, application of S and T in conservation and management climate change
negotiations etc.

POVERTY AND UNEMPLOYMENT

Important topics in this chapter are concepts of absolute and relative poverty, methodology of
poverty calculation, various committees and their recommendations, poverty alleviation
schemes, types of unemployment and methodology of calculating unemployment, MNREGA and
other employment generation schemes.

INCLUSIVE DEVELOPMENT
This chapter is a recent addition in economy section and significant weightage has been given in
the examination. The important topics are related to concept, need and strategies of inclusive
growth. Important government policies and schemes relating to health and sanitation, education,
skill development, rural development, women and child development etc are important from
examination point of view.
Chapter one
Introduction to Economics

Meaning of Economics
“Economics is a social — The term ‘economics’ comes from the Greek term Oikonomos, which is composed of
oikos (house) and nomos (custom or law), meaning Rules of the Household.
science, which tries to
Economics is the social science that studies economic activities to gain an
study how to achieve the understanding of the processes that govern the production, distribution and
maximum benefits using consumption of goods and services in an economy.
limited resources. — Initially, the study of economics concentrated mainly on wealth by concentrating on
factors of production and consumption. This emphasis on wealth excluded from its
Understanding
study, those who were not directly connected with the formal economic system. Thus,
economics is important the needs of poor, senior citizens, children etc. were neglected. It was corrected with
to provide for the the emergence of welfare economics, which focused on welfare needs of the whole
maximum welfare of society instead of just the production of wealth.

society using the Branches of Economics

resources available.” Traditionally, economics has been divided into the two main branches :

Micro Economics
— It examines the economic behaviour of individual actor at the level of the individual
economic entity — the individual firm, the individual consumer and the individual
worker.
— It is concerned with how supply and demand interact in individual market and how
these interactions determine the price level of goods and services.

Macro Economics
— It studies the economy as a whole and its features like national income, employment,
poverty, balance of payments and inflation.
— It is concerned with how the overall economy works. It studies such things as
employment, Gross Domestic Product (GDP) and inflation.

Some Other Branches of Economics

Development Economics
— It is a branch of economics, which deals with the economic aspects of the
development process in low income countries.
— The goal of development economics is to determine how poor countries can be
transformed into prosperous ones.

Behavioral Economics
— This branch studies the effects of social, cognitive and emotional factors on the
economic decisions of individuals and their consequences for market prices, returns
and resource allocation.
2 Magbook ~ Indian Economy

— It is mainly exploring why people sometimes make irrational Command Economy

decisions and why and how their behaviour does not follow — Here, the resources of production are completely under
the predictions of economic models. government control. The functioning of these economies
Environmental Economics is based on control planning. Due to lack of competition,
resource allocation is inefficient and consumers have very
— This branch studies the economic impact of environmental
little choices. Examples of this type are the former Soviet
policies. Its goal is to balance the economic activity and the
Union, Cuba, North Korea etc.
environmental impacts, by taking into account all the costs
and benefits. Mixed Economy
— This type of economy consists of a combination of public
International Economics sector and private sector units. Here, the government is
— It is a branch of economics, which studies economic inter- the decision-maker for the public sector and individuals,
actions among different countries, including foreign trade, and businessmen make decisions for the private sector.
foreign exchange, balance of payments and balance of trade. — It basically incorporates governmental involvement in a
— The guiding principle in the study of international economics is market based economy. Examples of this type are India,
comparative advantage, which indicates that every country, no Russia and UK etc.
matter what their level of development, can find something that
it can produce cheaper than others. Open Economy
— An economy is said to be open, if it has trade with other
Information Economics economies. In this economy, market is mostly free from
— It is a branch, which studies how information and information trade barriers and where exports and imports form a large
technology influence the economy. percentage of the GDP.
Information economics has certain characteristics, like: — The degrees of the openness of an economy determines
(i) It is easy to create, but hard to trust. government’s freedom to pursue economic policies of its
(ii) It is easy to spread, but hard to control. choice and the susceptibility of the country to
international economic cycles.
Demographic Economics
Closed Economy
— Demographic economics or Population economics is the
application of economics to demography; the study of human — An economy is said to be closed, if it has no trade or
population, including size, growth, density, distribution and vital trade area with other economies. In this economy, the
statistics. consumer get everything within the economic borders
and government act as the arbitrator, articulator and
facilitator.
Types of Economies
— Typically, economies are divided into different types based on Capitalist Economy
the extent of government involvement in economic — Capitalism is the economic system based on private or
decision-making. corporate ownership, production and distribution of
Based on the above criteria, the following are the major types of goods. Capitalists favour a system of free enterprise which
economies: means the government does not interfere in the economy
that the laws of supply and demand will make sure that
Traditional Economy the economy runs most efficiently in meeting people’s
— In this type of economy, there is very little government needs. Capitalism is characterised by competition in
involvement. Allocation of resources here is based on rituals, which there is rivalry in supplying or getting an economic
habits or customs. service or goods.
— Economic roles are defined by the family and people work Socialist Economy
together for the common good. There is also very little individual — Socialism is an economic system in which the means of
choice in this system. Examples of this type exist in tribes in production are socially owned and used to meet human
Amazon, Aborigines in Australia etc. needs instead of to create profits.
Free Market Economy — Socialism tends to favour cooperation whereas capitalism
— This type of economy also has very little governmental is characterised by competitions. A form of socialism
interference or control. Economic decisions here are made called communism sprang up based on the writings of
based on market principles. There is a lot of competition Karl Marx and Friedrich Engels.
between firms, which provides many choices to consumers. — Communism advocates class struggle and revolution to
— Resources for production are under private ownership and they establish a society of cooperation with strong government
make their decisions with the desire to maximise profits. control. Communism predominated in the former Soviet
Although, there are no pure free market economies. United Union and much of Eastern Europe at one time. Today, it
States and Australia come close to this type. predominates in China and Cuba, but its influence has
lessened.
Magbook ~ Introduction to Economics 3

Sectors of an Economy Other Sectors of Economy

— A nation’s economy can be broadly divided into various Quaternary Sector
sectors to define the proportion of people engaged in a — This sector consists of the intellectual and knowledge based
particular sector. This categorisation is generally seen as a
activities. Examples of activities associated with this sector
continuum of the distance from the natural environment.
are research and development, culture, information
— Traditionally, economies are divided into the following three
technology, consulting, financial planning, education etc.
sectors :
Quinary Sector
(i) Primary Sector
— This sector consists of the highest levels of decision-making
— This sector is involved in the extraction or harvesting of
in a country. This includes the top officials of government,
products from the Earth. It includes the production of raw
media, universities etc.
materials and basic foods. Some of the activities included in
this sector are agriculture, mining, forestry, fishing, quarrying
etc. Classification of Countries
— The packaging and processing of raw materials is also by the World Bank
considered as a part of this sector. As an economy develops The World Bank prepares the World Development Report (WDR).
the share of primary sector in total production and
The WDR as on 1st July, 2021, classified the different countries on
employment goes down.
the basis of their per capita income.
(ii) Secondary Sector Categories Based on Per Capita Income
— The secondary sector of the economy is involved in the ◆
High income countries — $ 12,695 and above
production of finished goods. All manufacturing, processing
and construction activities lie in this sector (in India,
◆
Upper middle income countries — Above $ 4,096 to $ 12,695
construction sometimes considered as part of the services or ◆
Lower middle income countries — Above $ 1,046 to $ 4,096
tertiary sector). ◆
Low income countries — $ 1,046 and less.
— Some of the activities in this sector are metal working, Source World Bank Report, 2021
automobile manufacturing, textile, production, shipbuilding
etc. Most economies in their process of development go
through the middle phase, where the secondary sector Classification of Countries Based
becomes the largest sector of the economy in terms of
production and employment with the reduction in importance on Economical Activities
of the primary sector. Developed Country
— India is an exception, where we have directly moved to — It refers to a country with a relatively high level of economic
services sector development, without first improving the
growth and security. A country’s degree of development is
manufacturing capabilities.
evaluated on the basis of per capita income or GDP, level of
(iii) Tertiary Sector industrialisation, general standard of living and the amount
— The tertiary sector of the economy is also called as the of widespread infrastructure.
services sector. This sector provides services to the general Developing Country
population and to business. Some of the activities which are — It is also called a less developed country with lower living
part of this sector are retail, transportation, entertainment, standard, underdeveloped industrial base and low Human
tourism and banking etc. In the advanced developed Development Index (HDI).
economies, the tertiary sector is the largest in terms of
production and employment. Least Developed Country
— Sometimes, two more sectors, i.e. quaternary and quinary are
— According to the United Nations, countries having lowest
defined separately, even though these can also be considered indicator of socio-economic development with the lowest
as part of the services sector itself. HDI ratings are called as least developed countries.
 Self Check
Build Your Confidence
1. A ‘closed economy’ is an economy, in which [UPSC 2011] 6. Which one of the following statements regarding
(a) the money supply is fully controlled socialist economy is not correct?
(b) deficit financing takes place (a) In this system, means of production is socially
(c) only export takes place owned
(d) neither export nor import take place (b) Socialist economy favours cooperative society
(c) It predominates in USA and Cuba
2. Mixed economy means an economy where [UPSC 2009]
(d) It emphasised on meeting human needs instead of
(a) both agriculture and industry are equally promoted by the state to create profits
(b) there is co-existence of private sector alongwith the public
sector 7. Consider the following statements regarding
(c) there is importance of small scale industries alongwith heavy macro economics
industries 1. It is concerned with the overall economy works.
(d) economy is controlled by military as well as civilian rules 2. It studies employments, gross domestic product
3. Consider the following statements regarding secondary and inflation.
sector Which of the statement(s) given above is/are correct?
(a) Only 1 (b) Only 2
1. Most economies in their process of development go through the
(c) Both 1 and 2 (d) Neither 1 nor 2
middle phase, where the secondary sector becomes the largest
sector of the economy. 8. In which of the following types of economy, the
2. India is an exception, where we have directly moved to service resources of production are completely under
sector development without first improving the manufacturing control?
capabilities. (a) Mixed economy
Which of the statement(s) given above is/are correct? (b) Open economy
(a) Only 1 (c) Closed economy
(b) Only 2 (d) Command economy
(c) Both 1 and 2
9. In which type of economy, resources for
(d) Neither 1 nor 2
production are under private ownership and they
4. Consider the following statements regarding tertiary sector make their decisions with the desire to maximise
1. In the advanced developed economies, the tertiary sector is the profits?
largest in terms of production and employment. (a) Command economy (b) Capitalist economy
2. Quaternary and quinary are not a parts of service sector. (c) Free Market economy (d) Mixed economy
Which of the statement(s) given above is/are correct? 10. In which type of economy, the consumers get
(a) Only 1 everything within the economic borders and
(b) Only 2 government acts as the arbitrator?
(c) Both 1 and 2 (a) Closed economy (b) Open economy
(d) Neither 1 nor 2 (c) Capitalist economy (d) Mixed economy
5. Which one of the following statements regarding capitalist 11. An economy is said to be open economy if
economy is not true? (a) it has trade with other economies.
(a) Capitalism is the economic system based on private or (b) it has no trade area with other economies.
corporate ownership (c) it has basically incorporates governmental
(b) Capitalists favour the government interference in the economy involvement.
(c) Capitalism is characterised by competition in the market (d) None of these
(d) In capitalist economy, market is free

1. (d) 2. (b) 3. (c) 4. (a) 5. (b) 6. (c) 7. (c) 8. (d) 9. (c) 10. (a)
11. (a)
Magbook ~ National Income 5

Chapter two
National Income

National Income Market Price

National Income is defined as the total
— Market price is the price that customers
National Income is an —
actually pay. It includes the component
net earnings from the production of
uncertain term which is goods and services in a country over a of indirect taxes and of subsidies.
used interchangeably with period of time, usually one year and Accordingly, when indirect taxes are
consisting essentially of wages, salaries, deducted and subside added to the
national dividend, national market price, we get values of National
rent, profits and interest.
output and national Income at factor cost
National Income = C + I + G + (X − M)
expenditure. On this basis, MP = FC + Indirect taxes – Subsidies
national income National income is considered as NNP at Or MP = FC + Net indirect taxes
factor cost.
accounting records the
Where,
GDP (Gross Domestic Product)
level of activity in accounts
C = Total Consumption Expenditure — It is the monetary value of all final goods
such as total revenues
I = Total Investment Expenditure and services produced with a country’s
earned by domestic G = Total Government Expenditure border in a specific time.
corporation, wages paid to X = Export —GDP = C + I + G + NX
foreign works and amount M = Import Where C = Consumption
spend on sales and — It can be measured by Gross National I = Investment
Product (GNP), Gross Domestic G = Government expenditure
income taxes by Product (GDP), Gross National Income NX = Net Export
corporations and (GNI), Net National Product (NNP), Net
GDP at FC and MP
individuals outsiding in the National Income (NNI) and Per-Capita
Income (PCI). GDPMP = GNPMP − (X −M)
country.
GDPFC = GNPFC − (X − M)
National Income and Where, X is the export and M is import of a
country.
its Related Aggregates
— Various National Income aggregates are
Nominal GDP
estimated either at factor cost or at — It is the market value (money-value) of all
market price. final goods and services produced within
the country.
Factor Cost
— Factor cost refers to cost of factors of
Real GDP
production viz., rent of land, interest of — The adjustment transforms the nominal
land, interest of capital wages for GDP into an index for quantity of total
compensation of employees for labour output. It is a measurement of the value
and profit for entrepreneurship of output economy, adjusted for price
FC = MP − Indirect taxes + Subsidies changes.
6 Magbook ~ Indian Economy

India Changes Base Year for GDP Calculation Disposable Income (DI)
— Choosing a base year is the first step while counting the real GDP. — It is the income of individuals at their disposal after
— For the revised GDP calculations the Indian statisticians have paying direct tax liabilities.
changed the base year from 2004-05 to 2011-12. Disposable income = Personal income
— The change in base year is not an unusual phenomena as base – Direct taxes (e.g. Income tax)
year is regularly updated after every five year.
— The government has proposed the new base year for GDP and
Green Economy
IIP (Index of Industrial Production) as 2017-18 while for CPI it — In this economy, which deals with the
will be 2018. environmental risks and ecological scarcity and
also an economy that aims for sustainable
GNP (Gross National Product) development without degrading the environment.

— It is the market value of all products and services produced in Green GDP
one year of a country (i.e. by labour and property). — It is the calculation of net natural consumption (i.e.
GNP = GDP + X − M . resource depletion, environmental degradation,
protective and restorative environmental initiatives).

Difference Between GDP and GNP Green GNP

— GNP means that there has to be an adjustment for
In GDP, goods and services produced in a country is
the depletion of the country’s physical assets.
added, whether it is produced by residents of the
country or foreigners. In GNP, the production of Calculating National Income
foreigners in the country is not included, while the
production of nationals outside the country is included. According to Simon Kuznets, National Income can be
calculated by three method are as follows:
Net National Product (NNP) (i) Product Method In this method, net value of final
goods and services produced in a country, during
— It is the value of GNP after deducting depreciation of plant and
a year is obtained, which is called Total Final
machinery.
Product.
NNP = GNP – Depreciation
(ii) Income Method In this method, a total of net
National Income (NI) = NNP − Indirect taxes + Subsidies income earned by working people in different
sector and commercial enterprises is obtained. By
Real National Income (RNI) this method, NI is obtained by adding receipts as
total rent, total wages, total interest and total profit.
— It is the value of National Income adjusted for inflation and
(iii) Consumption Method It is also called Expenditure
calculated from some reference point (base year).
Method. Income is either spent on consumption
Real National Income = NNP at current prices × 100/Price index
or saved. Hence, NI is the additional of total
Per-Capita Income (PCI) consumption and total saving.
It is the measure of the amount of money that is being earned
—
per person in a certain area.
Problems in Calculating of
— Per-Capita Income of a Country National Income
National Income Black Money Illegal activities like smuggling and
= —
Population of the Country unreported income due to tax evasion and
corruption are keeping outside the GDP estimates.
Personal Income (PI) Thus, parallel economy poses a serious hurdle to
— It is the income of the residents (individuals) of a country. To accurate GDP estimates. It also causes loss of
calculate personal income, transfer payments to individuals are revenues to the state exchequer due to tax evasion.
added to National Income, while social security contributions, — Non-Monetisation In most of rural economy
corporate tax and undistributed profits are subtracted. considerable portion of transaction occurs
Personal Income = National Income informally and, they are called as Non-Monetised
+ Transfer payments Economy. This keeps the GDP estimates at lower
level than the actual.
– Social security contributions
— Growing Service Sector Many services like BPO,
– Corporate tax
value addition in legal consultancy, health services,
– Undistributed profits financial and business services and service sector
Magbook ~ National Income 7

as a whole is not based on accurate reporting and — Challenges like difficulties in getting information, especially
hence, national income is underestimated. those related to underground economy.
— Double Counting It is also a hurdle to accurate GDP
estimates. Though, there are some corrective measures, Gross Fixed Capital Formation
but it is difficult to eliminate it. (GFCF)
Estimation of National — It refers to net additions of capital stock such as
equipment, buildings and other intermediate goods.
Income in India — The term fixed signifies that only fixed capital is counted
— The first attempt to calculate National Income of India and financial assets, stocks of inventories etc are excluded.
was made by Dadabhai Naoroji in 1867-68, who GFCF also excludes land sales and purchases.
estimated Per-Capita Income to be ` 20.
Incremental Capital Output Ratio (ICOR)
— The first scientific method was made by Professor VKRV
Rao in 1931-32, but was not very satisfactory. — ICOR is used to assess a country’s level of production
efficiency. ICOR equals Annual Investment or Annual
— The first official attempt was made by National Income
Increase in GDP. Higher levels of ICOR means that capital
Committee headed by Professor PC Mahalanobis in
is not being used efficiently to increase production.
1949.
Generally, for most countries ICOR is at around 3.
— According to the National Income Committee Report
(1954), National Income of India was ` 8710 crore and Indian Organisations Related to
Per-Capita Income was ` 225 in 1948-49.
— In India, the National Statistical Office (NSO) under
National Income Accounts
Ministry of Statistics and Programme Implementation is Ministry of Statistics and Programme
responsible for estimation and publication of National Implementation
Income.
The Ministry of Statistics and Programme Implementation
Limitations in the Measurement (MOSPI) is a ministry of Government of India concerned with
of National Incomes coverage and quality aspects of statistics released. The surveys
conducted by the Ministry are based on scientific sampling
— Whilst measuring National Income, we need to be aware methods. The Ministry of Statistics and Programme
of some of the following limitations, challenges, problems
Implementation (MOSPI) came into existence as an Independent
which are discussed below
Ministry on 15th October, 1999 after the merger of the
— National Income measures domestic economic
performance, not social welfare, but there should be a Department of Statistics and the Department of Programme
strong positive correlation. Implementation.
— National Income understates social welfare, non-market
transactions like home-makers service and do-it-yourself
National Statistical Office
projects are not counted. The government has merged the Central Statistical Office (CSO)
— National Income does not measure an increase in leisure or and National Sample Survey Office (NSSO) under the Ministry of
work satisfaction changes in product quality.
Statistics and Programme Implementation (MOSPI) into a single
— National Income does not accurately reflect changes in
entity on 23rd May, 2019. The new merged entity has been
environment like oil spills clean-up is measured as positive
output, but increased in pollution is not measured as named the National Statistical Office (NSO) and will continue to
negative. be headed by the secretary of MOSPI.
— Per-Capital Income is a more meaningful measure of living
standards than total National Income. The National Statistical Office (NSO) headed by a Director
— Problem of double counting, however, problem of double General is responsible for conduct of large scale sample surveys
counting could be avoided by utilising the value added in diverse fields on All India basis.
approach.
The NSO has four divisions :
— Problems of depreciation estimation.
— Survey Design and Research Division (SDRD) : This division,
— Different methods of calculating or estimating depreciation.
— Arbitrary definition.
located at Kolkata is responsible for technical planning of
surveys, formulation of concepts and definitions, sampling
— Inclusion or exclusion of certain items in National Income
accounting can cause confusion. design, designing in inquiry schedules, drawing up of
tabulation plan, analysis and presentation of survey results.
8 Magbook ~ Indian Economy

— Field Operations Division (FOD) : The division, with its — The NSSO undertakes the fieldwork of Annual Survey of
headquarters of Delhi/Faridabad and a network of six Zonal Industries in the whole country except Jammu and
Offices, 52 Regional Offices and 117 Sub-Regional Offices Kashmir.
spread throughout the country, is responsible for the — All India household consumer expenditure survey, which
collection of primary data for the surveys undertaken is the main source of data on the level of living of the
by NSO. Indian population is also carried out by NSSO.
— Data Processing Division (DPD) : The division, with its — NSSO data on socio-economic surveys are regularly
headquarters at Kolkata and 5 other Data Processing released through the quarterly publication ‘Sarvekshana’
Centers at various places, is responsible for sample issued by the Department of Statistics.
selection, software development, processing, validation and
tabulation of the data collected through surveys. Price and National Income’s Trend in
Wages in Rural India collected through schedule 3.01 (R) is
being processed at DPC Giridih. In addition, DPD is also Growth and Structure
processing the data of Periodic Labour Force Survey — Real GDP (Gross Domestic Product) at constant
(PLFS). Industrial Statistics Wing (IS Wing), DPD, NSO, (2011-12) prices in the year 2021-22 is now estimated
Kolkata is responsible for sample selection, data processing, to attain a level of ` 135.13 lakh crore. The National
validation and tabulation of the Annual Survey of Industries Statistics Office (NSO), Ministry of Statistics and
(ASI) data collected through a dedicated web portal. Programme Implementation has released the revised
— Survey Coordination Division (SCD) : The division, located GDP numbers on 29th May, 2021. As per new series of
at New Delhi, coordinates all the activities of different base year (2011-12), the GDP of India, at constant
divisions of NSO. It also brings out the bi-annual journal of price, for the year of 2020-21 was −7.2%.
NSO, titled “Sarvekshana”, and organises National — The per capita income in real terms (at 2011-12 prices)
Seminars on the results of various Socio-economic surveys during 2020-21 is estimated to attain a level of ` 85,929
undertaken by NSO. as compared to ` 94,556 for the year 2019-20.
National Statistical Commission The per capita income at current prices during 2020-21
is estimated to be ` 127,768, showing a decline of
The Government of India through a resolution dated 1st June, 4.8 per cent, as compared to ` 134,186 during 2019-20.
2005 set up the National Statistical Commission (NSC). The — As industrialisation spreads, there is an improvement in
setting up of the NSC followed the decision of the Cabinet to the share of industry and services. However, the evident
accept the recommendations of the Rangarajan Commission, change in Indian economy is slow, because of the slow
which reviewed the Indian Statistical System in 2001. The NSC rate of growth of manufacturing.
was constituted with effect from 12th July, 2006 with a mandate
to evolve policies, priorities and standards in statistical matters. Growth (in GVA) 2020-21 in Major Sectors
The NSC has four members besides a Chairperson, each having (in percentage)(at 2011-12 prices)
specialisation and experience in specified statistical fields. Sector 2019-20 2020-21
Central Statistical Office (CSO) Agriculture, forestry and 4.3 3.6
— Central Statistical Office (CSO), was set-up on 2nd May, fishing
1951. It is one of the two wings of the National Statistical
Mining and quarrying −2.5 − 8.5
Organisation (NSO), along with National Sample Survey
Office (NSSO), responsible for coordination of statistical Manufacturing 2.4 -7.2
activities in the country and for evolving and maintaining
statistical standards. Electricity, gas, water supply, 2.1 1.9
etc.
— Its activities include compilation of national accounts;
conduct of annual survey of industries and economic Construction 1.0 -8.6
censuses, compilation of index of industrial production, as Trade, hotels, transport and 6.4 -18.2
well as consumer price indices. communication and service
— It also deals with various social statistics, training, related to broadcasting
international cooperation, industrial classification etc. Financing, real estate, 7.3 -1.5
National Sample Survey Office (NSSO) professional services, etc

— The NSSO was set-up in 1950, for conducting large scale Public administration, defence 8.3 -4.6
sample surveys to meet the data needs of the country, for and other services
the estimation of National Income and other aggregates.
GVA at constant basic prices 4.1 -6.2
— It was recognised in 1970, by bringing together all aspects
of survey work under a single agency known as NSSO. (Based on the data from the NSO)
 Self Check
Build Your Confidence
1. The term National Income represents [IAS 2001] 7. Which one of the following sectors is the major
(a) Gross National Product (GNP) at market prices minus contribution towards the Gross Domestic Saving in
depreciation India in recent time?
(b) Gross National Product (GNP) at market prices minus (a) Public Sector (b) Private Sector
depreciation plus net factor income from abroad (c) Corporate Sector (d) Household Sector
(c) Gross National Product (GNP) at market prices minus
8. Which one of the following the most appropriate method
depreciation and indirect taxes plus subsidies
to measure the economic growth of a country?
(d) Gross National Product (GNP) at market prices minus net
factor income from abroad (a) National Income
(b) Net National Product
2. Consider the following statements (c) Gross Capital Formation
1. GDP is a better measure of national income than GNP. (d) Gross Domestic Product
2. GNP is always higher than GDP.
9. Consider the following statements with reference to
Which of the statement(s) given above is/are correct? Indian economy. [UPSC 2015]
(a) Only 1 (b) Only 2
1. The rate of growth of Real Gross Domestic Product has
(c) Both 1 and 2 (d) Neither 1 nor 2
steadily increased in the last decade.
3. Which of the following is not included in the estimates 2. The Gross Domestic Product at Market Price (in rupees)
of National Income? has steadily increased in the last decade.
(a) Sale of collector’s item
Which of the statement(s) given above is/are correct?
(b) Addition to inventory, but not sale of the company’s
(a) Only 1
products
(b) Both 1 and 2
(c) Market rent of self owned house
(c) Only 2
(d) Cost of government services
(d) Neither 1 nor 2
4. Consider the following statements with reference to
10. The National Income of a country for a given period is
Indian economy. [IAS 2010]
equal to the [UPSC 2013]
1. The GDP has increased by four times in the last 10 years. (a) total value of goods and services produced by the
2. The percentage share of public sector in GDP has nationals
declined in last 10 years. (b) sum of the total consumption and investment
Which of the statement(s) given above is/are correct? expenditure
(a) Only 1 (b) Only 2 (c) sum of personal income of all individuals
(c) Both 1 and 2 (d) Neither 1 nor 2 (d) money value of final goods and services produced
5. Consider the following statements 11. In which of the following sectors, growth in GDP
1. National Income is same as Net National Product at continuously decreasing from 2013-14?
factor price. (a) Agriculture, forestry and fishing
2. The National Income of India is estimated mainly through (b) Industry
production and income methods. (c) Manufacturing
Which of the statement (s) given above is/are correct? (d) Financing, real estate, professional services etc.
(a) Only 1 (b) Only 2 12. The government has merged the CSO and NSSO under
(c) Both 1 and 2 (d) Neither 1 nor 2 the MOSPI into a single entity from May, 2019. The new
6. Which one of the following institution prepares the merged entity has been named
National Income estimates in India? [UPPCS 2006] (a) National Statistical Office
(a) Planning Commission (b) Survey Design Office
(b) Reserve Bank of India (c) National Sample Office
(c) Central Statistical Organisation (d) National Statistical Office.
(d) India Statistics Institute

1. (c) 2. (d) 3. (a) 4. (b) 5. (c) 6. (c) 7. (d) 8. (d) 9. (b) 10. (d)
11. (a) 12. (a)
Chapter three
Economic Growth and
Development
Economic Growth
Economic growth is — Economic growth is an increased economic capacity to produce goods and services,
an indicator of wealth, compared from one period of time to another which is conventionally measured by
increased in a country’s GDP (Gross Domestic Product) or GNP (Gross National Product)
reflecting the quantity or per capita Net Domestic Product (NDP). Per capita NDP is the most appropriate
of resources available measure of economic growth.
to a society. But it — Economic growth comes in two forms:

provides no (i) An economy can either grow extensively by using more resources (i.e. physical, human or
natural capital).
information about the
(ii) Intensively by using the same amount of resources more efficiently (productively).
allocation of these
resources. Economic
development is a
Economic Development
— According to Michael Todaro ‘‘Economic development is an increase in living standards
normative concept. It improvement in self-esteem needs and freedom from oppression as well as a greater choice.’’
applies in the context — It is referred to as the quantitative and qualitative changes in economy such as

of people’s sense of development of human capital, critical infrastructure, regional competitiveness,

environmental sustainability, social inclusion, health, safety, literacy etc.
morality.
— Human Development Index (HDI) is the most appropriate measure of economic
development.
Economic development in all societies must have atleast the following objectives:
— To increase the availability and widen the distribution of basic life sustaining goods.
— To raise levels of living by ensuring higher incomes, more jobs and greater attention to culture.
— To expand the range of economic and social choices available to both individuals and nations.

Difference Between Economic Growth and Economic Development

Economic Growth Economic Development
Economic growth refers to an increase Economic development implies an upward movement
over time in a country’s real output of of the entire social system in terms of income,
goods and services (GNP). savings and investment alongwith progressive
changes in socio-economic structure of country.
Growth relates to a gradual increase in Development relates to growth of human capital
one of the components of GDP : index, a decrease in inequality figures and structural
consumption, government spending changes that improve the general population’s quality
investment, net exports. of life.
It is qualitative in nature and measured It is qualitative and measured through HDI, GDI, HPI
through increase in real GDP. etc.
It is concerned with increase in the It is concerned with structural changes in the
economy’s output. economy.
Magbook ~ Economic Growth and Development 11

Measurement of Economic Human Development Index

(HDI)
Development — The United Nations Development Programme
— To measure economic development is a complex process. (UNDP) introduced the HDI in its first Human
Economists have used various yardsticks for measuring economic Development Report (HDR) prepared under the
development. stewardship of Mahbub-ul-Haq in 1990.
Life Expectancy Index (LEI) Educational
National Income and Per Capita —
Attainment Index (EAI) and Standard of Living
Income Index (SLI) are the indicators of HDI.
— This is the traditional approach to measure economic — Life expectancy refers to life expectancy at birth,
development. World Bank uses the concept of per capita Gross not at age 1.
National Income (GNI) as a measure for comparing and classifying — Educational Attainment Index (EAI) is a
countries based on their stage of economic development. combination of adult literacy rate and combined
— World Development Report (WDR), 2015 (sub-titled Gender enrolment ratio.
Equality and Development) classifies countries category wise — Standard of Living Index (SLI) is represented
based on per capita GNI. here by the concept of Purchasing Power Parity
— Since official exchange rate is used in the international comparison (PPP). Per capita income is converted into PPP
of GNI, therefore, they do not give a correct picture for two reasons in terms of US dollar.
They are :
(i) Purchasing power capacity of a country ignored. Human Development Report
(ii) Official exchange rate does not reflect the value of non-traded (HDR), 2020
goods. — The United Nation’s Human Development Report,
— In order to overcome this problem, following the work of IB Kravis was released in December 2020 with the theme
and others ‘‘International comparisons of real product and ‘Human Development and the Anthropocene’.
purchasing power’’ (1978), the UN International Comparison — In the 2020 report, India with a score of 0.645
Programme gave the Purchasing Power Parity (PPP) method. has been ranked 131 out of 189 countries in
terms of HDI. In 2019 report, India was ranked
Purchasing Power Parity (PPP) 129 out of 189 countries.
PPP approach was given by economist Gustav Casell in 1918. The — HDR report is a composite indices covering five
concept is based on the law of one price, wherein the absence of trade sub-indexes including Human Development,
and non-trade barriers, identical goods will have same price in different Inequality Adjusted Human Development, Gender
countries, when the prices are expressed in the same currency. PPP Development, Gender Inequality and
exchange rates are calculated by comparing the prices of the same basket Multidimensional Poverty Index.
of goods are services indifferent countries. Human Development Group
PPP was first used by International Monetary fund (IMF) in 1988 for
measuring standard of living in different countries. Indian Economy is the Group Index Value
third largest economy in term of PPP. Very high human development 0.800 and above
High human development 0.700 and 0.799
The PPP is defined as the number of units of a country’s currency required
Medium human development 0.550 and 0.699
to buy the same amount of goods and services in the domestic market as
Low human development 0.352 and 0.549
$ 1 would buy in the United States. e.g. if we have to spend ` 30 for
purchasing the same amount of goods and services as are purchased in
spending $ 1 in USA, then the exchange rate in PPP approach is $1= ` 30. Inequality-Adjusted Human
Development Index (IHDI)
Physical Quality of Life Index (PQLI) — IHDI adjusts the Human Development Index
(HDI) for inequality in distribution of each
— PQLI was the first attempt towards providing comprehensive dimension across the population. The IHDI
measure of economic development. It was developed by Morris accounts for inequalities in HDI dimensions by
David Morris in the mid-1970s. ‘discounting’ each dimension’s average value
— PQLI is the average of three values, viz, life expectancy, basic literacy according to its level of inequality.
rate and infant mortality rate. Each value was scaled on 1 to 100,
where 1 represents the worst and 100 represents the best.
12 Magbook ~ Indian Economy

— The IHDI equals the HDI, when there is no inequality across — Each dimension and each indicator within a
people, but is less than the HDI as inequality rises. In this sense, dimension is equally weighted.
the IHDI is the actual level of human development (accounting for — The lower and the index value of lesser the
this inequality), while the HDI can be viewed as an index of multidimensional poverty.
potential human development (or the maximum level of HDI) that
could be achieved, if there was no inequality. Gross National Happiness
— The loss in potential human development due to inequality is given (GNH)
by the difference between the HDI and the IHDI and can be
expressed as a percentage. India’s HDI value after discounting the — The term ‘Gross National Happiness’ was coined
IHDI is 0.477. in 1972, by Bhutan’s then King Jigme Singye
Wangchuck.
Gender Inequality Index (GII) — GNH was designed in on attempt to define an
— GII reflects women’s disadvantage in three dimensions: indicator that measures quality of life or social
reproductive health, empowerment and the labour market for as progress in more holistic and psychological
many countries as data of reasonable quality allow. terms than the economic indicator of GDP. It is
— The index shows the loss in human development due to inequality not measured directly, but only by the factors,
between female and male achievements in these dimensions. It which are believed to lead to it.
ranges from 0, which indicates that women and men fare equal to — A second-generation GNH concept, treating

1, which indicates that women fare as poorly as possible in all happiness as a socio- economic development
measured dimensions. metric was proposed in 2006, by Med Jones.
GNH value is proposed to be an index function of
Gender Development Index (GDI) the total average per capita of the following
— The new GDI measures gender gap in human development measures:
achievements in three basic dimensions of human development — Economic wellness — Environmental
health, measured by male and female life expectancy at birth, Wellness
education and command over economic resources. — Physical wellness — Mental wellness
— Workplace wellness — Social wellness
Multidimensional Poverty Index (MPI) — Political wellness

— MPI was developed in 2010, by Oxford Poverty and Human Genuine Progress Indicator
Development Initiative and UNDP and different factors to determine
poverty beyond income based list were used.
(GPI)
— The MPI is an index of acute multidimensional poverty. It shows the — The GPI is a concept in green economics and
number of the people, who are multidimensionally poor (suffering welfare economics. A GPI attempts to measure
deprivation in 33% of weighted indicators) and the number of whether or not a country’s increased production
deprivation with which poor households typically contend. It reflects of goods and expanding services have actually
deprivation in very rudimentary services and core human resulted in the improvement of welfare of the
functioning for people across 104 countries. The index uses same people of the country. Genuine Progress
three dimensions as the Human Development Index such as Indicator refers to the concept of a quantitative
health, education and standard of living. measurement of well-being and happiness.
— These are measured using 10 indicators: — The two measures of GPI and GNH are both
motivated by the notion that subjective measures
Dimensions and their 10 Indicators like well-being, are more relevant and important
Dimensions Indicators than more objective measures like consumption.
Health 1. Child mortality
2. Nutrition
Global Hunger Index (GHI)
Education 3. Years of schooling — GHI is designed to measure and track hunger
4. Children enrolled globally and by country and region. It is
Living Standards 5. Cooking fuel calculated each year by the International Food
6. Toilet Policy Research Institute (IFPRI).
7. Water
8. Electricity — The Global Hunger Index (GHI) was first
9. Floor released by IFPRI in 2006.
10. Assets
Magbook ~ Economic Growth and Development 13

(ii) Improvement in the quality of life.

GHI Index, 2021 (iii) Use of cultural heritage based on a value system in each
GHI 2020 was published in October 2021. It comprehensively area of life.
measures and track hunger at the global, regional and country Former President APJ Abdul Kalam said that the country’s
level. It was prepared jointly by global NGOs namely, Concern economic growth should always be guided by ‘National
Worldwide (Ireland) and Welt Hunger Hilfe (Germany). Prosperity Index’ that includes components like improvement
In order to reflect the multi-dimensional nature of the hunger, the of quality of life and adoption of a value system derived from
GHI 2021 combines the following four components/indicators our ancient civilisation besides GDP. SAARC prosperity Index
into one index. idea is given by Abdul Kalam on the basis of NPI.
1. Undernourishment (Insufficient calorie intake)
2. Child wasting (Low weight for their height) Human Capital Index Report 2020
3. Child stunting (Low height for their age) World Bank released the report titled “The Human Capital
Index 2020 Update: Human Capital in the Time of COVID-19” in
4. Child mortality (Under the age of five)
September, 2020. The Human Capital Index (HCI) 2020 is a
India with a score of 27.5 in this index ranked 101 out of 107 collaboration between the Human Development Practice Group
countries. Hunger level in India has been characterised as and the Development Economics Group of the World Bank.
serious’. India has been ranked at the 116th position among 174
countries in the Human Capital Index 2020. Last year India was
Green Gross Domestic Product (Green GDP) ranked 115 out of 157 countries. The country of Singapore
— Green GDP is an index of economic growth with the topped the score with 0.88 followed by Hong Kong and Japan
environmental consequences of that growth factored in. in this index of 2020.
— Green GDP monetises the loss of biodiversity and accounts
for costs caused by climate change. Some environmental Millennium Development
experts prefer physical indicators (such as waste per capita
or carbon dioxide emissions per year), which may be
Goals (MDGs)
aggregated to indices such as the Sustainable MDGs were eventuated at the UNs Millennium Summit,
Development Index. 2000, where the world leaders of 189 UN Member States
(193 currently) agreed on a set of quantifiable and
Sustainable Development monitorable goals for development and poverty eradication to
be achieved by 2015.
Index (SDI)
— The sustainable development is defined as the MDGs Report, 2015
development to achieve the needs of present generation UN released the Global Report on MDGs. NITI Aayog
without compromising future generations need. released the Asia-Pacific MDGs Report, 2015. India has
— Sustainable development ensures the well-being of individual managed to reduce its extreme poverty incidence to a half
by integrating social development, economic development from 49.4% in 1994 to 24.7% in 2011. The report set the
and environmental conservation and protection. limit for extreme poverty as those living on $ 1.25 or less a
— The challenges of sustainable development are population, day.
poverty, inequality, the shortage of drinking water, human New Global Goals
health, consumption of energy, deforestation and petrol
The United Nations General Assembly (UNGA) formally
consumption.
adopted the 2030 Agenda for sustainable development on
26th September, 2015, along with a set of bold new Global
Human Sustainable Development Goals. The 193 members GA adopted the new framework,
Index (HSDI) ‘‘Transforming Our World: the 2030 Agenda for Sustainable
— HSDI was developed in 2010, by independent economists. Development,’’ composed of 17Goals and 169 targets to wipe
HSDI attempts to measure the overall quality of life by out poverty, fight inequality and tackle climate change over
factoring in a fourth parameter-per capita carbon emission the next 15 years. Ambitious 17 goals are–no poverty, zero
to the existing HDI. According to HSDI, the top five hunger, good health and well-being, quality education,
countries are Norway, followed by New Zealand, Sweden, gender equality, clean water and sanitation, affordable and
Switzerland and France. clean energy, decent work and economic growth, industry,
innovation and infrastructure, reduced inequality.
National Prosperity Index (NPI) Sustainable cities and communities, responsible
consumption and production, climate action, life below
NPI is a standard measure of social and economic water, life on land, peace, justice and strong institution and
development. Its three components are as follows partnership for the goals.
(i) GDP growth rate
14 Magbook ~ Indian Economy

human and environmental) over time and providing a

Different Levels of Economic social safety net to meet the basic needs of the poor.
Development — Sustainable development, therefore, attempts to
Developing Country accelerate development in an environmentally responsible
manner keeping in mind the intergenerational equity
— A developing country is a country, that has not reached
requirements.
the Western style standard of democratic government, free
market economy, industrialisation, social programmes’ — The spirit of the conference was captured by the
and human rights guarantees for their citizens. expression Harmony with Nature, brought into the fore
with the first principle of the Rio Declaration: ‘Human
Newly Industrialised Countries (NIC) beings are at the centre of concerns for sustainable
— The word NIC is used for those countries, which have development. They are entitled to a healthy and
more advanced economy than other developing nations, productive life in harmony with nature.’
but which have not yet fully demonstrated the signs of a — In 1993, UNCED instituted the Commission on
developed country. Sustainable Development (CSD) to follow-up on the
implementation of Agenda 21.
Emerging Markets
— In 2002, 10 years after the Rio Declaration, a follow-up
— These are countries with social or business activity in the conference, the World Summit on Sustainable
process of rapid growth and industrialisation. Many of the Development (WSSD) was convened in Johannesburg, to
countries like India and China, earlier considered to be renew the global commitment to sustainable development.
emerging are now said to have emerged and the term is The conference agreed on the Johannesburg Plan of
considered to be outdated by many. Implementation (JPoI) and further tasked the CSD to
follow-up on the implementation of sustainable
Economy and Environment development.
— Natural and environmental resources have three — In December, 2009, the UN General Assembly adopted a
economic roles: waste disposal services related to the resolution agreeing to hold the United Nations Conference
environment’s assimilative capacity, natural resource on Sustainable Development (UNCSD), also referred to as
inputs into production and directly consumed life ‘Rio+20 or Rio 20’.
support services and aesthetic amenities. — In 2012, the member States have agreed on the following
— The natural and environmental resource input function is two themes for the conference : Green economy within
central to understanding the relationship between the context of sustainable development and poverty
economic growth and environment. eradication and Institutional framework for sustainable
development.
Sustainable Development * Strong Sustainability Rule is a rule, which
requires a separate preservation of each category of
— Economic development without environmental
critical asset, assuming these to be complements
considerations can cause serious environmental
rather than substitutes.
damage, in turn, impairing the quality of life of present
and future generations. Sustainable development
* Weak Sustainability Rule is a rule, which seeks to
maintain the aggregate monetary value of the total
attempts to strike a balance between the demands of
stock of assets, assuming a high degree of
the economic development and the need for protection
substitutability among the various asset types.
of the environment.
— It seeks to combine the elements of economic efficiency, Measuring India’s Environmental
intergenerational equity, social concerns and
environmental protection. Although, the term ‘sustainable
Performance
development’ has many interpretations, it generally refers — In a ranking of Environmental Performance Index EPI
to non-declining human wellbeing over time. 2020 was placed 168th out of 180 countries.
— Sustainable development was defined by the — The EPI exercise is nevertheless, useful in flagging
Brundtland Commission (1987) as the meeting of the some areas of concern. India should do better on
needs of the present without compromising the ability public health and environmentally preventable child
of future generations to meet their own needs.’ mortality, as has Bangladesh.
— India was at second position after Pakistan on climate
Need of Sustainable Development change among South-Asia countries. India’s performance
— The concept of sustainable development aims at in air quality is disappointing. Delhi is always in the news
maximising the net benefits of economic activities, subject for its poor air quality. India’s total forest cover has
to maintaining the stock of productive assets (physical, registered a 0.2% increase between 2015 and 2017.
Magbook ~ Economic Growth and Development 15

Environmental Taxes 12th Five Year Plan and

— As against the command and control approach to Sustainability
management of the environment, the economic or
— The 12th Five Year Plan was the first time Five Year Plan has
Market Based Instruments (MBIs) approach sends
sustainability as a prominent focus and appreciates its
economic signals to the polluters to modify their
emphasis on low carbon growth strategies.
behaviour.
— The approach normally involves financial transfers Monitorable Targets
between polluters and the community and affects
relative prices. But the polluters have freedom to for the 12th Plan
respond and adjust, in the manner they want. They — To increase forest and free cover by 5% points.
can, thus, choose the least cost option to meet the — To improve forest production and maintain biodiversity.
requirements.
— To clean all critically polluted rivers by 2020.
— Hence, it is considered to be an efficient approach
— To reduce 20-25% energy use per unit of GDP by 2020.
compared to the approach based on standards and
regulations. The MBIs, therefore, have the benefit of — To reclaim wetlands/island lakes/ponds by 2017.
being flexible and cost effective providing incentives
for dynamic efficiency and resource transfer 12th
Five Year Plan and sustainability.
Green Accounting
Green accounting is focused on addressing deficiencies in
Carbon Tax conventional accounts with respect to the environment.
Integrated environment and economic (green) accounting,
— India has cut subsidies and increased taxes on fossil
therefore, attempts at accounting for both socio-economic
fuels (Petrol and Diesel) turning a carbon subsidy
performance and its environmental effects and integrating
regime into one of carbon taxation. This has
environmental concerns into mainstream economic planning
significantly increased petrol and diesel price while
and policies.
reducing annual CO2 emissions. Excise duties on
petrol or diesel also act as an implicit carbon tax by Such integrated accounts can be useful in assessing the
putting an effecting price on emissions. The sustainability of economic growth and also the structural
Government of India revised its coal cess from ` 50 distortion of the economy by environmentally unsound
per ton to ` 100 per ton. production and consumption patterns.
 Self Check
Build Your Confidence
1. Consider the following statements 6. Consider the following statements
1. Economic development is a broader and normative 1. The term ‘Trickle Down Effect’ was coined by Ronald
concept. It concerns with structural change in economy. Regan.
2. Economic growth is a narrow concept. It concerns with 2. Kyznets Curve shows relations between inequality and
increase in the economy’s output. capita income.
Which of the statement(s) given above is/are correct? Which of the statement(s) given above is/are correct?
(a) Only 1 (b) Only 2 (a) Only 1 (b) Only 2
(c) Both 1 and 2 (d) None of these (c) Both 1 and 2 (d) None of these

2. Consider the following statements about Human 7. Consider the following statements
Development Index 1. More than one-third of world population lives in low
1. World Bank introduced the Human Development Index. income countries.
2. India is a medium human development country. 2. More than three quarters of the Gross National Income of
3. Among the BRICS countries, Russia stands first in the the world is accounted for by the high income economy
HDI rank. countries.
Which of the statement(s) given above is/are correct? Which of the statement(s) given above is/are correct?
(a) Only 1 (b) 1 and 2 (a) Only 1 (b) Only 2
(c) 2 and 3 (d) All of these (c) Both 1 and 2 (d) Neither 1 nor 2

3. Which of the following could to have prevented the 8. Human Poverty Index (HPI) developed by UNDP is based
‘trickle down’ effects in Indian economy? on which of the following deprivations?
1. Increased dependence of agriculture on purchased inputs 1. Income deprivation 2. Literacy deprivation
and privately managed irrigation. 3. Social services deprivation 4. Employment deprivation
2. More employment of labour by larger landholding Select the correct answer using the codes given below
farmers. (a) 2 and 3 (b) 1, 3 and 4
3. Lowered participation women in agricultural workforce (c) 1, 2 and 4 (d) All of these
due to new technology.
9. Consider the following statements
4. The failure of the Green Revolution.
1. The term ‘Gross National Happiness’ (GNH) was coined in
Select the correct answer using the codes given below 1972, by Bhutan’s then King Jigme Singye Wangchuck.
(a) 1 and 2 (b) 2 and 3
2. A second-generation GNH concept, treating happiness as
(c) 1 and 3 (d) 2 and 4
a socio-economic development metric was proposed in
4. Consider the following statements 2006, by Med Jones.
1. Gender Inequality Index contains three dimensions Which of the statement(s) given above is/are correct?
reproductive health, empowerment and labour market. (a) Only 1 (b) Only 2
2. It reflects women’s disadvantage in health, (c) 1 and 2 (d) None of these
empowerment and labour market. 10. Which one of the following indicators is not used in the
Which of the statement(s) given above is/are correct? determination of Gender Development Index (GDI) in the
(a) Only 1 (b) Only 2 Human Development Report (HDR)? [UPPCS 2008]
(c) Both 1 and 2 (d) None of these (a) Life expectancy of female
5. Consider the following statements (b) Female adult literacy and gross enrollment
1. Global Peace Index is a brain child of Steve Kilelea. (c) Female political empowerment
(d) Female per capita income
2. Gross National Happiness is a brain child of Jigme Singye
Wangchuck. 11. Economic growth in country X will necessarily have to
Which of the statement(s) given above is/are correct? occur if [UPSC 2013]
(a) Only 1 (a) there is technical progress in the world economy
(b) Only 2 (b) there is population growth in X
(c) Both 1 and 2 (c) there is capital formation in X
(d) None of the above (d) the volume of trade grows in the world economy

1. (c) 2. (c) 3. (c) 4. (c) 5. (c) 6. (c) 7. (c) 8. (b) 9. (c) 10. (c)
11. (c)
Chapter four
Economic Planning
in India
Meaning of Strategies of
Economic Planning Planning
Planning involves — Economic planning refers to the path Harrod Domar Strategy
of actions in terms of policy measures The first Five Year Plan (1951-56) was
acceptance of a clearly to be followed in future, in pursuance
—
based on this strategy. This strategy
defined set of objectives in of pre-determined objectives. emphasised the role of capital
terms of which to frame — Planning Commission (now NITI accumulation’s dual character, which on
overall policies, formulation Aayog) defines economic planning as the one hand, increases the national
the utilisation of country’s resources income (demand side role) and on the
of a strategy for promoting
for developmental activities in other hand, increases the production
the realisation of the ends accordance with national priorities. It is capacity (supply side role).
defined and working out a a consciously and judiciously carried — According to this growth model, the rate
rational solution to out process for optimum utilisation of of economic growth in an economy is
problems—an attempt to existing resources in order to fulfil dependent on the level of savings and
some well defined objectives. capital output ratio.
coordinate means
and ends.
Objectives of Nehru-Mahalanobis
Planning Strategy
The broad objectives of Five Year Plans in — This strategy was a two sector model,
that is, consumer good sector and capital
India are as follows:
good sector. The strategy emphasised
— A high rate of growth with a view to investment in heavy industry to achieve
improvement in standard of living. industrialisation for rapid economic
— Modernisation of economy in terms of development. It was based on the
adoption of new technologies and Russian experience.
social outlook. — The objective was to become self-reliant
— Economic self-reliance meaning and overcome capital constraint. This
avoiding import which can be strategy was adopted in the Second Five
produced in India. Year Plan (1956-61) and with minor
— Equity implying equitable distribution modifications, up to the Fifth Plan. It was
of wealth with social justice. a long-term strategy.
— Economic stability, which means — It is also referred as planning by
controlling inflation and inducement as against imperative
unemployment. planning.
18 Magbook ~ Indian Economy

In 1945, People’s Plan was given by MN Roy.

Gandhian Strategy —

— In 1950, Sarvodaya plan was given by Jai Prakash

— It was enunciated by Acharya Shriman Narayan Agarwal in
Narayan. A few recommendations of this plan were
his ‘Gandhian Plan’ in 1944. The basic objective of the
accepted by the government.
Gandhian Model is to raise the material as well as cultural
level of the masses so as to provide a basic standard of life.
National Institution for
— It laid emphasis on scientific development of agriculture Transforming India (NITI)
and rapid growth of cottage and village industries.
Moreover, Gandhian strategy emphasised on employment
Aayog
oriented planning rather than production oriented planning — National Institution for Transforming India (NITI) Aayog is a
of Nehru. policy ‘think-tank’ of government that replaces Planning
commission and aims to involve states in economic
LPG Strategy policy-making. It will be providing strategic and technical
advice to the Central and the State Governments. Prime
— Liberalisation, Privatisation and Globalisation (LPG) strategy
Minister heads the Aayog as its Chairman.
of planning was introduced by the Finance Minister,
Dr Manmohan Singh under Narasimha Rao government in — It was formed via a resolution of the Union Cabinet on
1991. 1st January 2015 for providing directional and policy
inputs, designing strategic and long term policies,
— The strategy ended the ‘license-permit-raj’ and opened
programmes, advising Centre, States and Union
the hitherto areas reserved for the public sector to
Territories on technical aspect. It acts as the
private sector. It allowed for foreign direct investment and
quintessential platform of the Government of India to
followed an export promotion policy to boost economic
bring the states to act together in national interests and
growth. In all, it changed the nature of planning from
thereby fosters cooperative federalism.
centralised to ‘indicative’, wherein planning was to play a
facilitating role.
— It is also referred to as planning by inducement as against
NITI Aayog-Composition
imperative planning. — NITI Aayog is headed by the Prime Minister and it
consists of a governing council, comprising Chief
Ministers of states and Heads of all Union Territories.
History of Planning in India The Governing council replaces the earlier National
— First attempt to initiate economic planning in India was Development council.
made by M Visvesvaraya, a noted engineer and politician, in — In addition, there will also be a regional council
1934, through his book, Planned Economy for India. comprising of Chief Ministers and Lieutenant Governors
— In 1938, National Planning commission was set-up under of Union Territories, which will be mandated to develop
the Chairmanship of Jawaharlal Nehru by the Indian plans that are region specific.
National Congress. — The Aayog have 7-8 full time members and two
— Its recommendations could not be implemented because of well-known and accomplished part-time members,
the beginning of the World War II and changes in the Indian drawn from leading research organisations and major
political situation. universities. Four Union Ministers, nominated by the
— It stated that the objective of planning was to ensure an Prime Minister, are also be included in ex-officio
adequate standard of living for the masses. It emphasised capacity.
heavy industry and land reforms. — On the PM’s invitation, specialists across domains, will
— In 1944, Bombay plan was presented by 8 leading be invited to share knowledge and add value to the
industrialists of Bombay including JRD Tata, GD Birla and planning process, making extensive use of technology in
others. developing sustainable plans and programme
implementation. The Prime Minister shall appoint a full
— It saw future progress based on textile and consumer
time Chief Executive Officer with a fixed tenure and may
industries and saw an important role for the state in post
sanction a dedicated secretariat, if deemed necessary.
independent India.
Magbook ~ Economic Planning in India 19

vision. The long vision document (Perspective plan) will

Planning Commission comprise three year mass economic framework.
— After independence in 1950, the Planning commission was — 2017-18 to 2032-33 Vision Document
set-up under the Chairmanship of Pt Jawaharlal Nehru. It — 2017-18 to 2024-25 National Development Agenda
was to formulate plans for the economic development of the
— 2017-18 to 2019-20 Three Year Action Agenda (to be
country on the basis of the available physical, capital and
repeated after every three year)
human resources.
— The Planning commission was essentially a non-political
and non-constitutional advisory body, which makes National Development
recommendations to the government. It was set-up through Council (NDC)
an executive order of the Union Government on
— The National Development Council (NDC) is neither a
15th March, 1950.
constitutional body nor a statutory body. Union Cabinet
Differences between NITI set-up NDC in 1952, through an executive order.
Aayog and Planning Commission — National Development Council (NDC) is mainly
Parameter NITI Aayog Planning Commission concerned with approval of Five Year Plans. The NDC is
headed by the Prime Minister and consists of the Central
Financial To be an advisory body or a Enjoyed the powers to
Clout think-tank. The powers to allocate funds to
Ministers, Chief Ministers of the State and Lt Governors,
allocate funds might be ministries and State Administrators of Union Territories and Members of the
vested in the Finance Governments. Planning commission.
ministry. — The Secretary of the Planning commission acts as the
Full-time The number of full-time The last commission had Secretary of the Council. From a strictly legal point of
Members members could be fewer eight full-time members. view, NDC is essentially an advisory body.
than Planning commission.
States Role State Government are
expected to play a more
States role was limited to
the National Development
Five Year Plans in India
significant role than they did council and annual — After independence, India launched a programme of
in the Planning commission. interaction during plan Five Year Plans to make the optimum use of country’s
meetings. available resources and to achieve rapid economic
Member To be known at the CEO and Secretaries or Member development.
Secretary to be appointed by the Secretaries were — In India, development plans were formulated and
Prime Minister. appointed through the carried out within the framework of the mixed economy.
usual process.
— In India, Economic planning was adopted in the form of
Part-time To have a number of Full Planning commission
Members part-time members, had no provision for Five Year Plans and was seen as a development tool on
depending on the need from part-time members. account of various reasons.
time- to- time. These are:
—Limitations of market mechanism in view of the existing

15 Years Vision Document in economic backwardness of India at the time of

independence.
Place of Five Year Plan —The need for social justice as experience of the past five
and-a-half decades suggests that in a free enterprise
— The newly elected NDA government in 2014 decided to economy, economic gains do not necessarily trickle down.
discontinue the Five Year Plan and replace it with 15 Year —Judicious mobilisation and allocation of resources in the
Vision Document. The first 15 Year Vision Document will context of overall development programme in the light of the
come into effect from 2017-18 after the end of the 12th resource constraint in India.
Five Year Plan. It will be formulated with central objective of — So far, Twelfth Five Year plans have been formulated since,
eradication of poverty. It will come alongwith a 7 year the year 1951. Twelfth Five Year Plan (2012-2017), came
National Development Agenda which will lay down the into force once it was approved by the NDC on 27th
programmes, schemes and strategies to achieve a long term December, 2012.
20 Magbook ~ Indian Economy

Formulation of Five Year Plan

— The preparation of a Five Year Plan starts with the formulation of an Approach Paper, outlining the macroeconomic
dimensions, strategies and objectives of the plan.
— The Approach Paper is prepared by the Planning Commission (NITI Aayog) after intensive consultations with individuals.
— The Approach paper then presented to the National Development Council (NDC).
— Thus, based on the parameters postulated in the NDC approved Approach Paper, the Central Ministries and the states
prepare their respective plans, with the help of a large number of Steering committees or Working groups.
— Based on the reports of these Steering committees and Working groups, the States and the Central Ministries were come
with their proposals of detailed plans and programmes.

Implementation of Five Year Plan

— The Five Year Plan is implemented through Annual plans, which is a detailed description of the allocation of resources
between centre and states and for different sectoral activities in the government.
— In particular, it involves allocation of budgetary resources and detailed consideration of public sector projects, programmes
or schemes.
— The sanction of government expenditure is affected through Annual Budget, which is passed by the Parliament every year.

Brief Description of Five Year Plan

Plans Objectives Facts Assessments
First Plan ˜ Highest priority accorded to agriculture in view of ˜ Agriculture production increased dramatically.
(1951-56) large-import of foodgrain and inflation. ˜ National income went up by 18% and Per- Capita income
(Harrod ˜ Increasing the rate of investment from 5% to 7%. by 11%.
Domar Model) ˜ 31% of total plan outlay on agriculture followed by ˜ Targeted growth rate was 2.1% and First Plan achieved
transport and communication, social services, power 3.6%.
and industry. ˜ Price level was stable.
˜ Economist KN Raj was the architect.
Second Plan ˜ Rapid industrialisation with particular emphasis on ˜ Moderately successful, targeted growth rate was 4.5% but
(1956-61) the development of basic and heavy industry, also achieved 4.1%.
called Nehru Mahalanobis plan. ˜ Durgapur (UK), Bhillai (USSR) and Rourkela.
˜ To promote a socialistic pattern of society as (W Germany) Steel plants set-up with foreign help.
envisaged at Avadi Summit of Indian National ˜ Atomic Energy commission came into being and TIFR was
Congress in 1955. set–up.
˜ To increase National income by 25%, expansion of ˜ Inflation and low agricultural production and Suez crisis.
employment and reduction of inequality.
˜ To increase the rate of investment from 7% to 11%
of GDP.
˜ There was a thrust towards substitution of basic and
capital good industries in this plan.
Third Plan ˜ Indian economy entered take off stage (WW Rostow). ˜ A failure because of worst famine (1965-66), in 100
(1961-66) ˜ Self-reliant and self-generating economy was the goal. years.
(Gadgil ˜ Priority to agriculture and development of basic ˜ Indo-China (1962) and Indo-Pakistan (1965), conflict
Yojana) industries. Tried to balance industry and agriculture. diverted the resources from development to defence.
˜ To increase the National Income by 30% and Per ˜ Postponement of fourth Plan by 3 years.
Capita Income by 17%. ˜ Targeted growth 5.6% achieved growth 2.8%.
˜ The situation created by Indo-Pakistan Conflict (1965),
two successive years of severe drought, devaluation of
currency by 57% general rise in prices and erosion of
resources for plan delayed.
˜ Fourth Plan delayed because between 1966 to 1969 three
Annual Plans were formulated.
Magbook ~ Economic Planning in India 21

Plans Objectives Facts Assessments

Annual Plan ˜ Due to the unfortunate failure of the Third Plan, the production in various sectors of the economy became stagnant.
(1966-69) In 1966, the Government of India declared the devaluation of rupee, with a view to increase the exports of the
country. So, the Fourth Plan was postponed and 3 Annual Plans were implemented. Some of the economists called
this period, i.e. from 1966 to 1969, Plan Holiday.
Fourth Plan ˜ Objective was growth with stability and progressive ˜ First 2 years of the plan were successful with record
(1969-74) achievement of self-reliance. foodgrain production on account of Green Revolution.
˜ Laid special emphasis on improving the condition of ˜ Adoption of import-substitution policy and
under privileged and weaker sections. export-promotion policy widened the industrial base.
˜ Food security in gold was also one of its main goal. ˜ Targeted growth 5.7% however, achieved growth 3.3%.
˜ The objective is of correcting the earlier trend of ˜ The plan was failure on account of runaway inflation (due
increased concentration of wealth and economic to 1972 oil crisis or supply shock); huge influx of refugees
power. from Bangladesh post 1972 Indo-Pak War.

Fifth Plan ˜ Original approach to plan prepared by ˜ Targeted growth 4.4% and achieved growth 4.8%.
(1974-79) C Subramaniam, who proposed economic growth ˜ Fifth Plan cost calculations based on 1971-72, prices
alongwith direct attack on poverty. proved to be wrong.
˜ However, final draft prepared by DP Dhar with ˜ Fifth Plan terminated 1 year before the plan period in
objectives of removal of poverty (Garibi Hatao) and March, 1978.
attainment of self-reliance. ˜ Brought to the fore problem associated with coalition
˜ To step-up domestic rate of saving. government making a mockery of formulation of Five Year
˜ Introduction of minimum needs programme. Plan.

Rolling Plan Rolling plan (Gunnar Myrdal) was brought out by Janata Party Government under Morarji Desai in 1978. The focus of
(1978-80) the plan was enlargement of the employment potential in agriculture and allied activities to raise the income of the
lowest income classes through minimum needs programme. Annual Plan period was 1979-80.

Sixth Plan ˜ Removal of poverty through strengthening of ˜ Indian economy made an all round progress and most of
(1980-85) infrastructure for both agriculture and industry. the targets fixed by the plan was achieved.
˜ The emphasis was laid on greater management, ˜ Targeted growth 5.2%.
efficiency and monitoring of various schemes. ˜ Achieved growth 5.4%.
˜ Involvement of people in formulating schemes of
development at local level.
Seventh Plan ˜ To accelerate foodgrains production. ˜ Foodgrain production grew by 3.23% as compared to a
(1985-90) ˜ To increase employment opportunities. long-term growth rate of 2.68% between 1967-68 and
˜ To raise productivity. 1988-89.
˜ Outward looking strategy with gradual liberalisation
˜ The Indian economy finally crossed the barrier of the
over of economy. Hindu rate of growth of 3% given by Professor Raj
Krishna.
˜ Average annual growth rate was 6.0% as against the
targeted 5.0% and average of 3.5 % in the previous plans.
˜ It saw the beginning of liberalisation of Indian economy.
Annual Plan The Eighth Plan could not take off due to fast changing political situations at the centre. Therefore, from 1990-92,
(1990-92) Annual plans were formulated.
Eighth Plan ˜ Process of fiscal reforms and economic reforms ˜ Higher economic growth rate of 6.8% achieved as against
(1992-97) initiated by Narasimha Rao Government to prevent the targeted 5.6%.
another major economic crisis. ˜ Improvement in trade and current account deficit.
˜ To increase the average industrial growth rate to ˜ Significant reduction in fiscal deficit.
7.5%. ˜ Agriculture growth and industrial growth increased.
˜ To provide a new dynamism of the economy and ˜ Unshackled private sector and foreign investment control
improve the quality of life of the common man. was the prime reason for high growth.
˜ Also called as Rao-Manmohan Singh model. ˜ Overall socio-economic development indicators low.
˜ First indicative plan. ˜ The growth became jobless and fruitless.
22 Magbook ~ Indian Economy

Plans Objectives Facts Assessments

Ninth Plan ˜ Growth with social justice and equality. ˜ Global economic slowdown and other factors led to
Emphasis on Seven Basic Minimum Services (BMSs), revision of targeted growth rate from 7% to 6.5%,
(1997-02) ˜

which included safe drinking water universalisation of which too was not achieved.
primary education, streamlining PDS among others. ˜ The economy grew at 5.4% only.
˜ Pursued the policy of fiscal consolidation. ˜ Agriculture grew by 2.1% as against the target of
˜ Decentralisation of planning with greater reliance on 4.2% per annum.
states.
˜ Ensuring food and nutritional security to all.
˜ Empowerment of women, SC/STs/OBCs.

Tenth Plan ˜ The Tenth Plan aimed at achieving 8.1% GDP growth ˜ Increase in GDP growth to 7.6% compared to 5.5%
assuming that ICOR (Incremental Capital Output compared to 5.5% in the Ninth Plan. The lower than
(2002-07)
Ratio) will decline from 4.53% to 3.58%. targeted growth rate of 8% was due to low growth of
˜ It aimed at increasing domestic saving rate from 3% in the first year of Tenth Plan.
23.52% to 29.4% of GDP and gross capital ˜ Increase in gross domestic saving and investment.
formation to 32.2% from 24.4% of GDP. ˜ Reduction in ICOR to 4.2% though higher than
˜ To improve the overall framework of governance. targeted, but less than Ninth Plan’s ICOR of 4.53%.
˜ Agriculture was the core element. ˜ Increase in foreign exchange reserves to US $ 287
billion.
˜ However, Tenth Plan fared worst on socio-economic
indicators and the agricultural growth rate was meagre
2.1%.
Eleventh Plan ˜ Average GDP growth of 8.1% per year. ˜ The growth rate during the Eleventh Plan period was
(2007-12) ˜ Agricultural GDP growth of 4% per year. Generation about 7.9%, which is higher than the 7.8% growth
of 58 million employment opportunities. rate achieved in the Tenth Plan.
˜ Sex ratio for age group 0-6 years to be raised to 935 ˜ As against the target of 4% growth in the agriculture
by 2011-12 and to 950 by 2016-17. sector, the plan could register a growth of only 3%
during 2007-12 period.
˜ The services sector continued to register a growth rate
of more than 10%. However, the industrial growth rate
showed at 7.9%.

Reducing Infant Mortality Rate (IMR) to 25, Maternal

Twelfth Five Year Plan (2012-17) —

Mortality Rate (MMR) to 100 and Total Fertility Rate (TFR)

— 12th Five year plan of the Government of India was India's to 2.1.
last five year plan. It is prepared and launched by D. P. Dhar. — Increasing infrastructure investment to 9% of GDP.
— The Finance Ministry has extended the time period for — Improving child sex ratio (0-6) to 950.
12th plan schemes ending on 31st March by six months
— Provide access to banking services to 90% Indian
(i.e., September, 2017)
households by the end of twelfth five year plan.
— The Approach Paper of the Twelfth Five Year Plan is
concerned with the faster, sustainable and more inclusive Achievement of 12th Five Year
growth. In it, the challenge of urbanisation has been
identified as one of the key focus area.
Plan
— The total plan size of Twelfth Plan is ` 47.7 lakh crore, — GDP growth rate achieved of financial year (FY) of
13.5% more than the Eleventh Plan. 2012-13, 2013-14, 2014-15, 2015-16 and 2016-17 are
5.6, 6.6, 7.5, 8.0 and 6.6 percent respectively.
Twelfth Five Year Plan’s Goals — Base line of IMR was 44. Achievement was 37 (in 2015)
12th five year plan main goals are as follows as per appraisal document of 12th plan of NITI Aayog.
— Base line of TFR was 2.4 and achievement was 2.3 (in
— It aims at average GDP growth rate of 8%.
2015) as per appraisal document of 12th five year plan of
— It seeks to achieve 4% growth in agricultural sector. NITI Aayog.
— It aims at reducing head-count poverty by 10%.
Magbook ~ Economic Planning in India 23
— Base line of child sex ratio in the 0-6 year age group was 914 and — Annual GVA growth in tertiary sector of FY
achievement was 919 (2015-16) as per NITI Aayog. 2012-13 to 2016-17 were 8.3% (2012-13), 7.7%
(2013-14), 9.8% (2014-15), 9.4% (2015-16) and
Annual Growth Rate of GVA by Economic 8.5% (2016-17).
Activity at constant (2011-12) Basic Prices of FY 2012-13 to
— Share of primary sector in GVA at current prices
2016-17
from FY 2012-13 to FY 2016-17 were 21.3%,
Sl. Item 2012-13 2013-14 2014-15 2015-16 2016-17 21.4%, 20.9% 20.1% and 20.4% respectively.
No. — Share of secondary sector in GVA at current
1. Agriculture, 1.5 4.2 -0.2 0.8 6.3 prices from FY 2013-13 to FY 2016-17 were
forestry and 28.7%, 27.9%, 27.3%, 27.6% and 27%
fishing respectively.
2. Mining and -0.5 3.0 10.8 12.3 13.0
— Share of Tertiary sector in GVA at current prices
quarrying
from FY 2012-13 to FY 2016-17 were 50%,
3. Manufacturing 6.0 5.6 5.5 10.6 7.9
50.6%, 51.8%, 52.3% and 52.6% respectively.
4. Electricity, gas 2.8 4.7 8.0 5.1 9.2
& water supply,
& other utility Three Year Action
services
5. Construction 0.6 4.6 4.4 2.8 1.3 Agenda (2017-18 to 2019-20)
6. Trade, hotels, 9.7 7.8 9.8 10.7 7.2 — The first Three Year Action Agenda, a NITI Aayog
transports, document, is based on extensive discussions with
communication and inputs from the Central ministries and State
and services governments on 23rd April 2017.
related to
broadcasting — The Agenda is a part of a longer-term 15-year
7. Financial 9.5 10.1 10.6 10.8 6.0 Vision and 7-year Strategy outlined in a separate
services, real document. The Action Agenda proposes a path to
estate, achieve all-round development of India and its
ownership of people. The objective of eliminating poverty in all
dwellings and its dimensions such that every citizen has access
professional to a minimum standard of food, education,
services
health, clothing, shelter, transportation and
8. Public 4.1 4.5 10.7 6.9 10.7
energy has been at the heart of India’s
administration
and defence and development efforts since Independence.
other services — Farmers make up nearly half of India’ workforce.
Total GVA at 5.4 6.1 7.2 8.1 7.1 Therefore, for India to flourish, its farmers and
Basic Prices the farm economy must prosper. It is against this
Industry (2-5) 3.6 5.0 5.9 7.4 7.5 background that the Prime Minister has called for
Services (6-8) 8.1 7.8 10.3 8.9 8.4 doubling farmer’s income by 2022.
— Water demand for irrigation, drinking and
industrial use has been increasing with growth in
Sector Wise Growth and Share in 12th incomes and population under this agenda.
Five Year Plan — Digital connectively has become an important
— Annual GVA growth data in all sectors of 12th five year plan i.e. driver of economic growth. The Action Agenda
2012-13 to 2016-17 were based upon 2011-12 prices at constant discusses the Digital India campaign and the
prices. actions related to enhancing digital connectivity.
— Annual GVA growth during Financial Year (FY) 2012-13 to 2016-17 — Important aim of the Action Agenda is education,
in Primary Sector were 1.4% (2012-13), 4.8% (2013-14), 1.2% skill development, health and reducing issues
(2014-15), 2.6% (2015-16) and 7.4% (2016-17) respectively. facing specific groups such as Scheduled Castes,
— In secondary sector; Annual GVA growth during FY 2012-13 to Scheduled Tribes, women, children, differently
2016-17 were 3.6% (2011-12), 4.2% (2013-14), 6.7% (2014-15), abled and senior citizens.
9.4% (2015-16) and 7.5% (2016-17) respectively.
24 Magbook ~ Indian Economy

Forecasting under Three year

Hindu Growth Rate
Agenda The concept of Hindu Growth rate was given by Professor Raj
GDP at market price for 2017-18, 2018-19 and 2019-20 Krishna to refer to the stagnant growth rate of India till 1970s. The
forecast in this agenda is ` 170.2 lakh crore, ` 191.11 lakh word ‘Hindu’ in the term was used by some early economists to
crore and ` 215.9 lakh crore respectively. imply that the Hindu outlook of fatalism and contentedness was
The fiscal deficit targets are set on the basis of the fiscal responsible for the slow growth. The argument was shattered in
consolidation roadmap announced in Budget 2017-18, which the 1990s, when India achieved a growth rate of 6%+, in the
commits the Union Government to reduce its fiscal deficit to context of the economic reforms brought by Dr Manmohan Singh
(then Finance Minister). Thus, this new growth trajectory was
3.2% of GDP in 2017-18 and 3% of GDP thereafter.
termed as the Sardar Growth rate.
The Expenditure targets are set for 2017-18, 2018-19 and
2019-20 in this agenda is ` 2,182,240 crore, ` 2,435,256
crore and ` 2,793,593 crore respectively.
Magbook ~ Economic Planning in India 25

Self Check
Build Your Confidence

1. Consider the following statements 7. Consider the following statements

1. NITI Aayog is structured to promote cooperative 1. NITI Aayog or National Institution for transforming India
federalism. Aayog is policy think-tank of government, that replaces
2. NITI Aayog is to centralise the planning process in Planning commission.
response to scarcity of resources. 2. NITI Aayog will provide strategic and technical advice to
Which of the statement(s) given above is/are correct? the State Government.
(a) Only 1 (b) Only 2 Which of the statement(s) given above is/are correct?
(c) Both 1 and 2 (d) Neither 1 nor 2 (a) Only 1 (b) Only 2
(c) Both 1 and 2 (d) Neither 1 nor 2
2. The main objective of the Twelfth Five Year Plan is
(a) inclusive growth and poverty reduction [UPSC 2014] 8. The term ‘Hindu rate of growth’ refers to the 3.70% per
(b) inclusive and sustainable growth annum growth rate achieved by the Indian economy over
(c) sustainable and inclusive growth to reduce unemployment the First Six Five Year Plans’. The term was coined by
(d) faster, sustainable and more inclusive growth (a) JN Bhagwati (b) KN Raj
(c) Raj Krishna (d) Sukhamoy Chakravarty
3. Consider the following statements
1. First Five Year Plan was based on Harrod Domar strategy. 9. Which one among the following Five Year Plan of India
2. Second Five Year Plan was based on Nehru-Mahalanobis economy diversified the planning shifting focus from
strategy. heary and basic industries to new sunrise industries like
telecommunication, computers, electronic?
Which of the statement(s) given above is/are correct?
(a) Only 1 (b) Only 2 (a) Second Five Year Plan (b) Fourth Five Year Plan
(c) Both 1 and 2 (d) Neither 1 nor 2 (c) Seventh Five Year Plan (d) Ninth Five Year Plan

4. In recent plans, certain words/phrases were used in the 10. Match the following
title of the plan along with ‘Growth’. They are List I List II
1. Inclusive, 2. Faster, (Plan Model) (Proposer)
3. More Inclusive, 4. Sustainable, A. Bombay plan 1. Jai Prakash Narayan
5. More sustainable. B. Gandhian plan 2. MN Roy
Which combination is true of the Twelfth Five Year plan? C. People’s plan 3. Sriman Narayana
(a) 1, 2 and 3 (b) 1, 4 and 5 D. Sarvodaya plan 4. Birla and Tata Group
(c) 2, 3 and 4 (d) 1, 2 and 4
Codes
5. Inclusive growth as enunciated in the Eleventh Five Year
A B C D A B C D
Plan does not include which one of the following? (a) 4 3 2 1 (b) 1 2 3 4
(a) Reduction of poverty (c) 3 2 4 1 (d) 1 4 2 3
(b) Extension of employment opportunities
(c) Reduction of gender inequality 11. The Rolling Plan concept in Nation planning was
(d) Strengthening of capital market introduced by [BPSC 2008]
(a) Indira Gandhi government
6. Consider the following statements (b) The National government
1. In the Eleventh Five Year Plan, the agriculture sector (c) The Janata Party government
contributed more than 25% in the overall GDP of the India. (d) Rajiv Gandhi government
2. In the Twelfth Five Year Plan the growth rate of the
agriculture sector was above 4%.
12. The Government of India has established NITI Aayog to
replace the [UPSC 2015]
Which of the statement(s) given above is/are correct?
(a) Human Rights Commission
(a) Only 1
(b) Finance Commission
(b) Only 2
(c) Law Commission
(c) Both 1 and 2
(d) Planning Commission
(d) Neither 1 nor 2

1. (a) 2. (d) 3. (c) 4. (c) 5. (a) 6. (d) 7. (a) 8. (c) 9. (c) 10. (a)
11. (c) 12. (d)
Chapter five
Money and Banking
M1 = Currency with the public +
Money —
Demand deposits with the Banking
Financial market — Fiat money, derives its value by being declared System + Other deposits with the
provides channels for by a government to be legal tender; i.e. it must RBI.
be accepted as a form of payment within the — M2 = M1 + Saving deposits of Post
allocation of saving to boundaries of the country, for all debts, public Office Savings Banks.
investment. The financial and private. — M3 = M1 + Time deposits with the
market thus, contribute — The money supply of a country consists Banking System.
to economic currency (bank notes and coins) and bank — M4 = M3 + Office Savings of Banks.
development to the money (the balance hold in checking accounts — The decreasing order of liquidity of
and savings accounts). these monetary aggregates is
extent that latter
— Bank money, which consists only of records M0 > M1 > M2 > M3 . The decline in
depends on the rates of (mostly computerised in modern banking), liquidity indicates the shifting of
saving investment. forms by far the largest part of the money ‘medium of exchange ‘to’ store of
supply in developed nations. value’.
— Demand deposits are those deposits
Measures of Money Supply payable by the bank on demand by
in India a customer like current and savings
account.
— Money supply is the stock of liquid assets held
by the public which can be freely exchanged
for goods and services. Indian Currency
— RBI calculates four concepts of money supply. Symbol ( `)
These are known as measures of monetary ◆
The symbol of Indian rupee ` came
aggregates or money stock measures. into use on 15th July, 2010. India is
— The working group under the Chairmanship of the fifth economy (after America,
Dr YB Reddy, then Deputy Governor of RBI Britain, Japan and European Union to
(now Former Governor of RBI) has suggested accept a unique currency symbol.
four new monetary measures. ◆
The new symbol designed by
(M0 , M1, M2 , M3 ) and three liquidity measures D Udaya Kumar, a post graduate
(L, L 2 , L 3 ). Besides, the group also of IIT Mumbai was finally selected by
recommended the publishing of Financial the Union Cabinet on 15th July,
Sector Survey ‘A Monetary Aggregates’, every 3 2010.
months. ◆
The new symbol, is an amalgamation
— M0 = Currency in circulation + Banker’s deposit of Devanagari ‘Ra’ and the
with RBI + Other deposit with RBI. Roman ‘R’ without the stem.
Magbook ~ Money and Banking 27

Liquidity Aggregates — It is a market for short-term funds with maturity ranging

from overnight to 1 year and includes financial
— L 1 = M 3 + All Deposits with the Post Office Savings
instruments that are deemed to be close substitutes of
Banks (excluding National Savings Certificates).
money.
— L 2 = L 1 + Term Deposits with Term Lending Institutions
and Refinancing Institutions (FIs) + Term Borrowing Functions of Money Market
by FIs + Certificates of Deposit issued by FIs; and The money market performs three broad functions are as
— L 3 = L 2 + Public Deposits of Non-Banking follows
Financial Companies. (i) It provides an equilibrating mechanism for demand and
supply of short-term funds.
Financial Sector (ii) It enables borrowers and lenders of short-term funds to
fulfil their borrowing and investment requirements at an
— Financial Sector of a country is one of the important
efficient market clearing price.
determining factors of the level of economic development.
(iii) It provides an avenue for Central Bank intervention in
Sound financial system induces the level of savings and
influencing both quantum and cost of liquidity in the
investment, thus, working as a stimulant for the
financial system, thereby transmitting monetary policy
development variables.
impulses to the real economy.
— Weak financial structure certainly hinders the tempo of
development process by discouraging the developmental — Efficient functioning of the money market is important for
variables. Thus, rapid economic development requires a the effectiveness of monetary policy.
sound financial system with adequate availability of finance
Regulation of Indian Money Market
and a strong system of associated financial and investment
institutions. — Indian money market is broadly divided into two
parts-organised and unorganised.
Financial sector in India comprises of Financial Intermediaries or
Financial Institutions are as follows: — The RBI is the Apex Organisation in the Indian Money
—Financial Institutions are the institutions, which are primarily Market. It carries out regulation and development of the
engaged in the collection and mobilisation of savings and Indian money market through instruments such as call ,
convert into investment. Financial institutions include all banks notice or term money market, repo market, certificate of
and non-banking financial institutions. deposit, commercial paper and Collateralised Borrowing
—Financial Markets are the markets, which are engaged in the and Lending Obligation (CBLO).
collection of savings from the surplus units of the economy and
lending to the deficit units of the economy for the investment Organised Money Market
and other purposes. Financial market consists of money market
and capital market. Call Money Market
—Financial Assets include unit shares, debentures, certificate of — The call or notice money market forms an important
deposits, life insurance policies etc. These are the instruments segment of the Indian money market.
traded in the financial markets through financial intermediaries. — Call or notice money is an amount borrowed or lent on
demand for a very short period. If the period is greater
Financial Markets than 1 day and up to 14 days, it is called the notice
— Financial market is an important part of financial sector. money; otherwise the amount is known as call money.
Financial market is that market, where financial transactions No collateral security is needed to cover these
take place. On the basis of short-term and long-term transactions.
transactions, such markets are classified as into money —The call market enables the banks and institutions to even
market and capital market. out their day-to-day deficits and surpluses of money.
Cooperative Banks, Commercial Banks and primary
Money Market dealers are allowed to borrow and lend in this market for
— The cluster of financial institutions that deal in short-term adjusting their cash reserve requirements.
securities and loans, gold and foreign exchange are termed as —This is a completely inter-bank market. Interest rates are
money market. Money has a time value and therefore, the use market determined. In view of the short tenure of these
transactions, both borrowers and lenders are required to
of it, is bought and sold against payment of interest.
have current accounts with Reserve Bank of India.
Short-term money is bought and sold on the money market
and long-term money on the capital market. Banker’s Acceptance Market
— Neither the money market nor the capital market exists in — A Banker’s Acceptance (BA) is a short-term credit

one physical location. The money market is a key investment created by a non-financial firm and
component of the financial system, as it is the function of guaranteed by a bank to make a payment. Acceptances
monetary operations conducted by the Central Bank in its are traded at discounts from face value in the secondary
pursuit of monetary policy objectives. market.
28 Magbook ~ Indian Economy

— One advantage of a banker’s acceptance is that it — These bills are called trade bills. These trade bills are called
does not need to be held until maturity and can be commercial bills, when they are accepted by Commercial
sold off in the secondary markets, where investors Banks. If the bill is payable at a future date and the seller needs
and institutions constantly trade BAs. money during the currency of the bill, the seller may approach
the bank for discounting the bill.
Collateral Loan Market
— The banks discount this bill by keeping a certain margin and
— In this market, loan is often secured against collateral
credits the proceeds. Banks, when in need of money, can also
security. Security may be in any form viz pledge,
get such bills rediscounted by financial institutions such as LIC,
mortgages etc. Thus, the market for loans secured by
UTI, GIC, ICICI and IRBI.
collateral security is called the collateral loan market.
The maturity period of the bills varies from 30 days, 60 days or
Treasury Bill Market 90 days, depending on the credit extended in the industry.
— Treasury bills are money market instruments to
finance the short-term requirements of the
Government of India. These are discounted securities
and thus, are issued at a discount to face value. The
return of the investor is the difference between the
maturity value and issue price.
— The market that deals with treasury bills is called
treasury bill market. These are the lowest risk
category instruments for the short-term. RBI issues
treasury bills [T-bills] at a prefixed day and for a fixed
amount. Organisation of Indian Money Market

— There are four types of Treasury Bills: Certificates of Deposits Market

(i) 14 Days T-Bill It was introduced in 1997, by the — After treasury bills, the next lowest risk category investment
RBI. Maturity is in 14 days, it is auctioned on every option is Certificate of Deposit (CD) issued by banks and
Friday of every week and the notified amount for Financial Institution (FI).
auction is ` 100 crore. — Allowed in 1989, CDs were one of RBI’s measures to
(ii) 91Days T-Bill Maturity is in 91 days, it is auctioned
deregulate the cost of funds for banks and FIs.
on every Friday of every week and the notified amount A (CD) is a negotiable promissory note, secure and short-term,
for auction is ` 100 crore. of upto a year, in nature.

(iii) 182 Days T-Bill Maturity is in 182 days, it is Repo Market

auctioned on every alternate Wednesday, which is not — Repo is a money market instrument which helps in
a reporting week and the notified amount for auction collateralised short-term borrowing and lending through sale or
is ` 100 crore. It was introduced on the purchase operations in debt instruments.
recommendations by Vaghul Working Group. — Initially repos were allowed in Central Government treasury bills
and dated securities created by converting some of the
(iv) 364 Days T-Bill Maturity is 364 days, it is auctioned
treasury bills, RBI gradually allowed repo transactions in all
on every alternate Wednesday, which is a reporting government securities and T-bills of all maturities and now
week and the notified amount for the auction is ` 500 State Government Securities, PSU’s bonds, private corporate
crore. It was also recommended by Vaghul Working securities have also been made eligible for repos to broaden
Group. the repo market.
— These are bought by the Reserve Bank, Commercial Money Market Mutual Funds (MMMFs)
Banks, non-banking financial intermediaries, LIC, UTI — The scheme was introduced by RBI in April, 1992 with the
and GIC. Treasury bills are most liquid, because
objective of providing an additional short-term avenue to the
Reserve Bank is always ready to buy and discount
individual investors. They have now been brought under the
them.
purview of SEBI since March, 2000.
Commercial Bill Market
Commercial Paper Market
— It is the market that deals in commercial bills. — Commercial Papers (CPs) are negotiable short-term unsecured
Commercial bills of exchange are negotiable promissory notes with fixed maturities, issued by well-rated
instruments drawn by the seller or drawer of the organisations. These are generally sold on discount basis.
goods on the buyer or drawer of the good for the value
— Organisations can issue CPs either directly or through banks or
of the goods delivered.
merchant banks (called as dealers).
Magbook ~ Money and Banking 29

Unorganised Money Market Besides helping diversify funding sources, the cost of
borrowing could also turn out to be lower than domestic
— The sector consists of unregulated non-bank financial
markets. In 2013, the first masala bonds were issued
intermediaries such as money lenders Chit funds, Nidhis etc.
by the International Finance Corporation (IFC), an arm
— Chit funds are savings institutions. They are of various types
of the World Bank. IFC then named them Masala bonds
and don’t have any standardised form. Chit funds have
to give a local flavour by calling to mind Indian culture
regular members, who make periodic contributions.
and cuisine.
— At periodic intervals funds are given to a member based on — Masala bond will help the Indian corporates to reduce
a pre determined criterion, usually on the basis of bids or
its interest cost burden on the debt amount on its
draw of lots. All members are assured of their turn before
balance sheet. The more of foreign funds can be used
the round ends.
for infrastructural development in the country. Overall,
— Chit funds are prevalent in almost all states, but Kerala and the development of a Masala bond market would be
Tamil Nadu account for the major part. They exist in both positive for Indian firms, opening up potentially
organised and unorganised form. significant new sources of funding over External
— Organised Chit funds are regulated by registrar of Chit funds Commercial Borrowings (ECBs).
and the relevant legislation in this regard is the Chit Funds
Act, 1982. There is however, regulatory confusion since Capital Market
Collective Investment Schemes (CIS) are to be registered — It is one of the most important segments of the Indian
and regulated by SEBI. Many Chit funds take advantage of financial system. It is the market available to the
the regulatory loopholes. companies for meeting their requirements of the
— Nidhis are a kind of mutual benefit funds. Their dealings are long-term funds. These are markets for buying and
restricted to members only and they operate in the selling equity and debt instruments.
unregulated credit market. — The market consists of a number of individuals and
— Deposits mobilised by them are not much. Their principal institutions (including the government) that channelise
source of funds is from the members and they provide loans the supply and demand for long -term capital and
to members at relatively reasonable rates and are secured. claims on it.
— Money lenders and loan companies are present all across — The demand for long-term capital comes predominantly
the country. They generally give loans to wholesale traders, from private sector manufacturing industries,
artisans and other self-employed persons. They charge high agriculture sector, trade and the government agencies,
rates of interest from 26% to 48% and 50 people who while the supply of funds for the capital market comes
approach them are generally unable to get loans from largely from individual and corporate savings, banks,
Commercial Banks. insurance companies, specialised financing agencies
Promissory Note and the surplus of governments. The Indian capital
market is broadly divided into the Industrial Securities
— It is a legal document between a lender and a borrower,
Market and Gilt-edged Market.
whereby the latter agrees to certain conditions for the
repayment of the sum of money borrowed.
(i) Industrial Securities Market
— Promissory note is signed when one borrows from a
— The industrial securities market refers to the market,
Commercial Bank.
which deals in equities and debentures of the
— Particular forms of promissory notes, known as commercial corporates. It is further divided into primary market and
paper, can be bought and sold. secondary market.
Dated Government Securities Primary Market
— These are securities issued by the Government of India and — Primary market (new issue market) deals with new
State Governments. The date of maturity is specified in the securities, i.e. securities, which were not previously
securities, therefore, they are known as dated securities. available and are offered to the investing public for the
Masala Bond first time. It is the market for raising fresh capital in the
form of shares and debentures.
— Masala bonds are rupee denominated overseas bonds.
Masala bonds will help to internationalise the Indian rupee — It provides the issuing company with additional funds
and also deepen the Indian financial system( Public and for starting a new enterprise or for either expansion or
Private Sector). By issuing bonds in rupees, an Indian diversification of an existing one and thus, its
company is shielded against the risk of currency fluctuation, contribution to company financing is direct. The new
typically associated with borrowing in foreign currency. offerings by the companies are made either as an Initial
Public Offering (IPO) or rights issue.
30 Magbook ~ Indian Economy

Secondary Market/Stock Market — In particular, it is responsible for

— Secondary Market or Stock Market (old issues market or —institutional reforms in the securities markets.
stock exchange) is the market for buying and selling —building regulatory and market institutions.
securities of the existing companies. Under this, securities —strengthening investor protection mechanism and
are traded after being initially offered to the public in the —providing efficient legislative framework for securities markets,
such as Securities and Exchange Board of India Act, 1992
primary market and listed on the stock exchange.
(SEBI Act, 1992); Securities Contracts (Regulation) Act, 1956
— The stock exchanges are the exclusive centres for trading and the Depositories Act, 1996.
of securities. It is a sensitive barometer and reflects the
trends in the economy through fluctuations in the prices Securities and Exchange Board of
of various securities. India (SEBI)
(ii) Gilt-Edged Market — It is the regulatory authority established under the
SEBI Act, 1992, in order to protect the interests of the
— The gilt-edged market refers to the market for
investors in securities as well as promote the development
government and semi-government securities, backed by
of the capital market.
the Reserve Bank of India (RBI). Government securities
— It involves regulating the business in stock exchanges
are tradeable debt instruments issued by the government
supervising the working of stock brokers, share transfer
for meeting its financial requirements.
agents, merchant bankers, underwriters etc as well
— The term gilt-edged means ‘of the best quality’. This is as prohibiting unfair trade practices in the securities market.
because the government securities do not suffer from risk
— The main functions of SEBI are as follows:
of default and are highly liquid (as they can be easily sold
—To regulate the business of the stock market and other
in the market at their current price). The open market
securities market.
operations of the RBI are also conducted in such —To promote and regulate the self-regulatory organisations.
securities. —To prohibit fraudulent and unfair trade practices in securities
market.
Other Instruments of Capital Market —To promote awareness among investors and training of
intermediaries about safety of market.
◆
Derivatives the term derivative indicate that it has no
—To prohibit insider trading in securities market.
independent value i.e. its value is entirely derived from an
—To regulate huge acquisition of shares and takeover of
underlying asset. The underlying asset can be securities,
companies.
commodities, currency etc. Derivative is a forward future
option or any other hybrid contract of fixed duration, linked
for the purpose of contact fulfillment to the value of an asset. Reforms in Capital Market
◆
Futures Contract means a legally binding agreement to buy or of India
sell the underlying security on a future date. — The capital market has witnessed major reforms in the
◆
Options Contract is a type of derivatives contract which gives 1990s and thereafter. It is on the average of growth. Thus,
the buyer or holder of the contract the right (but not the the Government of India and SEBI have taken a number of
obligation) to buy or sell the underlying asset at a measures in order to improve the working of the Indian
pre-determined price within or at the end of a specified Stock Exchanges and to make it more progressive and
period ‘call’ and ‘put’ are the two types of options contract. vibrant.
◆
Forwards Contract is also an agreement to buy or sell an asset The major reforms undertaken include are as follows:
on a future date. However, unlike a futures contract it is —Credit Rating Agencies Three credit rating agencies viz the
between two private parties and there is no guarantee of Credit Rating Information Services of India Limited
fulfillment of the contract. (CRISIL-1988), the Investment Information and Credit Rating
Agency of India Limited (ICRA - 1991) and Credit Analysis and
Research Limited (CARL) were set-up in order to assess the
Regulatory Framework financial health of different financial institutions and agencies
related to the stock market activities.
— In India, the capital market is regulated by the Capital
Markets Division of the Department of Economic Affairs, —Merchant Banking Activities Many Indian and foreign
Commercial Banks have set-up their merchant banking
Ministry of Finance.
divisions in the last few years. It has proved as a helping hand
— The division is responsible for formulating the policies for the factors related to the capital market.
related to the orderly growth and development of the —Growth of Electronic Transactions Due to technological
securities markets (i.e. share, debts and derivatives) as development in the last few years, the physical transaction
well as protecting the interests of the investors. with more paper work is reduced. It saves money, time and
energy of investors.
Magbook ~ Money and Banking 31
—Growing Mutual Fund Industry The growing of mutual funds in India Secondary Market
has certainly helped the capital market to grow. A big diversification in
— Rajiv Gandhi Equity Savings Scheme On 23rd
terms of schemes, maturity etc has taken place in mutual funds in
India. It has given a wide choice for the common investors to enter the November, 2012, the government notified a new
capital market. tax saving scheme called the Rajiv Gandhi Equity
—Growing Stock Exchanges Initially, the BSE was the main exchange, but Savings Scheme (RGESS) exclusively for first-time
now after the setting up of the NSE and the OTCEI, stock exchanges retail investors in the securities market.
have spread across the country. Recently, a new Inter-connected Stock — The scheme provides a 50% deduction of
Exchange of India has joined the existing stock exchanges. amount invested during the year, upto a
—Investor’s Protection Under the purview of the SEBI, the Central maximum investment of ` 50,000 per financial
Government of India has set-up the Investors Education and Protection year, from his/her taxable income for that year, for
Fund (IEPF) in 2001. It works in educating and guiding investors and to three consecutive assesment years.
protect the interest of the small investors from frauds and also
malpractices in the capital market.
—Growth of Derivative Transactions Since, June 2000, the NSE has Qualified Foreign
introduced the derivatives trading in the equities. These
innovative products have given various options for investment leading to
Investor (QFI)
the expansion of the capital market. — QFIs shall mean a person who fulfills the following
criteria are as follows:
New Law of SEBI Resident in a country that is a member of the
— In August 2014, the Securities Laws (Amendment) Act, 2014, gave Financial Action Task Force (FATF) or a country
SEBI additional powers, including to order the arrest of violators that is a member of a group which is a member
and seek call data records of individuals under investigation. of FATF.
— The new law gave SEBI the powers to search and obtain — Resident in a country that is a signatory to
information, including call records, about any suspected entity IOSCOs MoU (Appendix a Signatories) or a
from within or outside the firm. signatory of a bilateral MoU with Securities and
Exchange Board of India (SEBI). A QFI should
Merger of Forward Markets Commission with SEBI
neither be a person resident in India nor should
— The government notified on 1st September, 2015 the merger of be registered with the SEBI as a Foreign
commodities market regulator Forward Markets Commission (FMC) Institutional Investor sub-account or Foreign
with SEBI with effect 28th September, 2015. Venture Capital Investor. A QFI should be set-up
— As a result, of this notification Foreign Contribution Regulation Act, with a SEBI registered Qualified Depository
1952 will get repealed and regulation of commodity derivatives Participant (QDP) to commence activities. The
market will shift to the Securities and Exchange Board of India QDP shall provide inter alia custody services.
(SEBI) under Securities Contracts Regulation Act (SCRA) 1956
Recent Initiatives for Further Development of
with effect from 28th September, 2015.
Corporate Bond Markets
— The commission allows commodity trading in 22 exchange in
— To permit banks to take limited membership in
India, of which 6 are national. Currently, there are three national
SEBI-approved stock exchanges for the purpose
and six regional bourses for commodity futures in the country.
of undertaking proprietary transactions in the
corporate bond markets.
New Policy Initiatives — To enhance liquidity in the corporate bond
— In the overall context of the evolving macro-economic situation in markets the Insurance Regulatory and
the country and global financial developments, the government in Development Authority of India (IRDAI) has
close collaboration with the RBI and SEBI has recently taken a permitted insurance companies to participate in
number of initiatives to meet the growing capital needs of the Indian the repo market. The IRDAI has also permitted
economy. insurance companies to become users of Credit
Some of the initiatives are as follows: Default Swap (CDS).
Primary Market — Mutual funds have been permitted to participate
in CDS in corporate debt securities, as users.
— SEBI (Alternative Investment Funds) Regulations, 2012 With a
view to extending the reach of regulation to unregulated funds, — Revised guidelines on CDS for corporate bonds
ensuring systemic stability, increasing market efficiency, by the RBI provide that in addition to listed
encouraging new capital formation and providing investor corporate bonds, CDS shall also be permitted on
protection, SEBI has notified new regulations covering Alternate unlisted, but rated corporate bonds even for
Investment Funds (AIFs). issues other than infrastructure companies.
32 Magbook ~ Indian Economy

— CDS shall be permitted on securities with original maturity up ◆

Metropolitan Stock Exchange of India Ltd, Mumbai*
to one year like CPs, certificates of deposit and ◆
India INX, Gandhi Nagar*
non-convertible debentures with original maturity less than ◆
Saurashtra Kutch Stock Exchange, Gujarat
1 year as reference or deliverable obligations. ◆
Mangalore Stock Exchange, Mangalore
◆
Guwahati Stock Exchange, Guwahati
Stock Exchanges in India ◆
Hyderabad Stock Exchange, Hyderabad
— Bombay Stock Exchange (BSE), the oldest stock exchange in ◆
Jaipur Stock Exchange, Jaipur
Asia, was established in 1875. It is synonymous with Dalal ◆
Ludhiana Stock Exchange, Ludhiana
Street.
◆
Madras Stock Exchange, Chennai
— BSE was corporatised and renamed BSE Limited in 2005. In
◆
MP Stock Exchange, Indore
1894, the Ahmedabad Stock Exchange was started to
facilitate dealing in the shares of textile mills.
◆
Pune Stock Exchange, Pune
— In 1908, Calcutta Stock Exchange was started to facilitate
◆
Interconnected State Exchange of India Limited, Mumbai
market for shares of plantations and jute mills. At present, * Active Exchange
there are 22 stock exchanges in the country. Two types of
Commodity Exchanges
transaction take place in stock exchanges. These are as
follows :
◆
Multi Commodity Exchange of India Limited (MCX)
—Investment Transaction Sale or purchase of securities
◆
National Commodity and Derivatives Exchange Limited
undertaken with the long-term prospect relating to their yield and (NCDEX)
price. ◆
Indian National Multi-Commodity Exchange (NMCE)
—Speculative Transaction Sale or purchase of securities ◆
Indian Commodity Exchange Limited (ICEX)
undertaken with short-term gain from differences in yield and
price. In this, delivery of securities or the payment of full price is
rare. National Stock Exchange (NSE)
— Speculative transaction of different types are as follows: — NSE was promoted by leading financial institutions at
—Spot Transaction involves delivery of and payment for securities the behest of the Government of India and was
on the same day. incorporated in November, 1992, as a tax-paying
—Cash Transaction are ready delivery transaction, wherein delivery company unlike other stock exchanges in the country.
of and payment for securities is completed within a period of one — On the basis of the recommendations of high powered
to 7 days. Pherwani Committee, the National Stock Exchange was
—Forward Transaction involves delivery of and payment for incorporated in November, 1992. In April 1993, it was
securities will be made on certain fixed settlement days, coming recognised as a stock exchange and commenced
once in 15 or 30 days. operations in 1994. In October 1995, NSE became
—On the recommendation of the Narasimham Committee, SEBI largest stock exchange in the country.
was given the power to control and regulate the new issues
— Trading at NSE can be classified under two broad
market as well as stock exchange through Amendment of the
Capital Issues Control Act, 1947. categories:
(i) Wholesale debt categories
Approved Stock Exchanges in India (ii) Capital market
◆
UP Stock Exchange, Kanpur — Wholesale debt market operations are similar to money
◆
Vadodara Stock Exchange, Vadodara market operations, where institutions and corporate
◆
Coimbatore Stock Exchange, Coimbatore bodies enter into high value transactions in financial
◆
Bombay Stock Exchange, Mumbai* instruments such as government securities, treasury
◆
Over the Counter Exchange of India, Mumbai bills, public sector unit bonds, commercial paper,
certificate of deposit etc.
◆
National Stock Exchange, Mumbai*
— NSE has several advantages over the traditional trading
◆
Ahmedabad Stock Exchange, Ahmedabad
exchanges.
◆
Bangalore Stock Exchange, Bengaluru
They are as follows:
◆
Bhubaneswar Stock Exchange, Bhubaneswar
—NSE brings an integrated stock market trading network
◆
Calcutta Stock Exchange, Kolkata* across the nation.
◆
Cochin Stock Exchange, Cochin —Investors can trade at the same price from anywhere in the
◆
Delhi Stock Exchange, Delhi country since inter-market operations are streamlined
coupled with the countrywide access to the securities.
◆
NSE IFSC Ltd, Gandhi Nagar*
Magbook ~ Money and Banking 33

—Delays in communication, late payments and the

malpractices prevailing in the traditional trading mechanism Stock Market Indices
can be done away with greater operational efficiency and A Stock Market Index is created by selecting a group of stock that
informational transparency in the stock market operations
are representative of the whole market of a specified sector or
with the support of total computerised network.
segment of the market. An index is calculated with reference to a
base period and a base index value. An index is used to give
Bombay Stock Exchange (BSE) information about the price movements of products in the financial
— Established in 1875, BSE Limited (formerly known as commodities or any other markets. Financial indexes are
Bombay Stock Exchange Limited), is Asia’s first stock constructed to measure price movements of stocks, bonds, T-bills
exchange and one of India’s leading exchange groups. and other forms of investments. Stock market indexes are meant to
Over the past 137 years, BSE has facilitated the growth capture the overall behaviour of equity markets. Stock market
of the Indian corporate sector by providing it an efficient indices are useful for a variety of reasons. Some of them are
capital raising platform.
They provide a historical comparison of returns on money invested
— Some indices of BSE are given below: in the stock market against other forms of investments such as gold
—SENSEX —MIDCAP or debt.
—SMLCAP —BSE-100 ◆
They can be used as a standard, against which to compare the
—BSE-200 —BSE-500 performance of an equity fund.
— Around 5000 companies are listed on BSE making it ◆
It is a lead indicator to the performance of the overall economy or
world’s number one exchange in terms of listed members. a sector of the economy.
BSE limited is world’s 5th most active exchange in terms ◆
Stock indexes reflect highly up to date information.
of number of transactions handled through its electronic ◆
Modern financial applications such as Index funds, index futures,
trading system. It is also one of the world’s leading
index options play an important role in financial investment and
exchange (5th largest in May, 2012) for Index options
risk management.
trading (Source-World Federation of Exchanges).
BSE is the first exchange in India and second in the
—
world to obtain an ISO 9001:2000 certification.
SENSEX
— BSE’s popular equity index the SENSEX is India’s most
(The Barometer of Indian Capital Market)
widely tracked stock market benchmark index. It is traded — BSE sensitive index also referred to as BSE-30 is a free float
internationally on the EUREX as well as leading market capitalisation-weighted stock market index of 30
exchanges of the BRCS nations (Brazil, Russia, China and well established and financially sound companies listed in
South Africa). Bombay Stock Exchange.
— The Bombay Stock Exchange launched BSE Carbonex, — The free float market capitalisation of a company is
the first carbon based thematic index in the country. determined by multiplying, the price of its stocks by the
Which takes a strategic view of organisational number of shares issued by a company, which is readily
commitment to climate change mitigation. This index available for trading on the stock exchange.
has been launched with the aim of creating a — The base year or period of SENSEX was 1978 − 79 = 100.
benchmark and increasing awareness about the risks The calculation of SENSEX involves dividing the free float
posed by climate change. market capitalisation of 30 companies in the index by a
number called the index divisor.
— It will enable investors to track performance of the
constituent companies of BSE-100 index regarding their
commitment to greenhouse gases emission reduction. Over The Counter Exchange of
India (OTCEI)
MCX-SX — Traditionally, trading in stock exchanges in India followed a
(MCX Stock Exchange Limited) conventional style, where people used to gather at the
exchange offices and bids and offers were made by open
— It is a private stock exchange headquartered in Mumbai,
outcry. This old-age trading mechanism in the Indian Stock
which was founded in 2008. It offers currency futures
Markets used to create many functional inefficiencies.
contracts for US Dollar-Rupee, Euro-Rupee, British
Pound-Rupee, Japanese Yen-Rupee.
— Lack of liquidity and transparency, long settlement periods
and benami transactions are a few examples that adversely
— It offers electronic trading platform in currency futures
affected investors. In order to overcome these inefficiencies,
contracts. The exchange received permissions to deal in
OTCEI was incorporated in 1990, under the Companies Act,
interest rate derivatives, equity, futures and options on
1956. OTCEI is the first screen based Nationwide Stock
equity and wholesale debt segment, video SEBI’s letter
Exchange in India. It is no longer a functional exchange from
dated 10th July, 2012.
March 2015.
34 Magbook ~ Indian Economy

Reference Rates-MIID, MIBOR Other Investment Agents

◆
A reference rate is an accurate measure of the market price. In — Venture Capital Fund Its a type of fund, which provides
the fixed income market, it is an interest rate that the market early stage, high risk, high potential growth start-up
respects and closely watches. It plays a useful role in a variety companies, their funding requirements. The funding is
of situations. based on the hope that a successful venture will provide
◆
NSE had developed MIBID (Mumbai Inter Bank Bid Rate) super-normal returns. The funding is usually made after
and MIBOR (Mumbai Inter Bank Offer Rate) for the overnight the ‘seed funding’ round and in the ‘growth funding
market. It was launched in 1998. They are the reference rates. round’, that is at the stage, in which companies just starts
Then, NSE launched the 14 days MIBID or MIBOR and then the 1 to grow, but after it has created a certain base.
month and the 3 months MIBOR and MIBID. Thus, all the — Angel Investor It is an individual with large financial
four categories of MIBOR and MIBID are now available. resources, who provides capital to a business start-up in
◆
It is the simple average of the quotes by the various exchange of equity or convertible debt. They provide the
participants in the market-banks, PDs, institutions polled on a initial seed money or ongoing support to the company to
daily basis. carry it through difficult times. They are more interested
◆
LIBOR (London Inter-Bank Offered Rate) It is the average of in helping the business succeed than making
interest rates provided by leading banks in London that they super-profits and in this sense, they are different from
would be charged if borrowing from other banks. It is used as a venture capital. Usually, Angel Investors belong to the
global benchmark interest rate by many banks around the world. entrepreneur family or friends.
— Hedge Fund It is an aggressively managed portfolio of
investments that uses advanced investment strategies
Commodity Futures Market such as long, short, leveraged and derivative positions in
— Commodities traded on the commodity futures market both domestic and international markets to generate high
during 2009, included a variety of agricultural commodities, returns. Hedge funds are typically not open for
bullion, crude oil, energy and metal products. Agricultural investment to the general public and only accept
commodities, bullion and energy products accounted for a investments from a small group of people, who can
large share of the commodities traded in the commodities provide very large initial minimum investment.
future market. — Bank Sathi It enables the beneficiaries in rural areas to
— The Central Government has announced a decision to make deposits and withdrawals. This facility is available
merge the commodities market regulator, Forward Markets in branchless areas of Bank.
Commission (FMC), with the capital markets regulator, — Participatory Notes are financial instruments used by
Securities and Exchange Board of India (SEBI). wealthy investo to diversify their investments. These are
not regulated and usually forms part of Hedge Funds.
National Multi-Commodity — Sovereign Wealth Fund (SWF) is a pool of money derived
Exchange from a country’s financial resources. For the purpose of
investing in areas, which will benefit the country’s
National Multi Commodity Exchange (NMCE) will merge with
economy and people in the future. e.g. India could start
Indian Commodity Exchange (ICEX) creating the country’s third
a SWF to invest in energy resources abroad, so as to
biggest commodity exchange. The ICEX will hold a 62.8% stake
in the merged entity, while NMCE shareholders will own the rest safeguard our energy security for the future.
(37.2%). — Mutual Funds It is an investment, vehicle, which is made
The merger has been approved by the boards of both up of a pool of funds collected from many investors for
exchanges and is expected to be completed by December, the purpose of investing in securities such as stocks,
subject to regulatory approvals. This is the first merger deal in bonds, money market instruments and similar assets.
the commodity exchange space in India. Mutual funds are managed by professional fund managers.
The NMCE was launched on November 26, 2002 as India’s
first online, demutualised commodity exchange by a group of
Portfolio Investment
Indian commodity-based corporations and public agencies.
The NMCE is India’s third-largest commodity exchange offering In investment terminology, portfolio refers to a collection of
contracts on oils and oil seeds, coffee, rubber and spices. financial assets such as stocks, bonds, cash etc with any
The exchange is ranked behind the Multi-Commodity Exchange individual investor, hedge fund, bank etc. Portfolios are
(MCX) and the National Commodity & Derivative Exchange designed to serve the objectives of investors such as relating to
(NCDEX). ICEX Limited is a screen based on-line derivatives risk, rate of return on investment etc. Based on these
exchange for commodities and has been established on August objectives, the portfolio can have different ratios of cash, stock,
28, 2015. bond etc.
Magbook ~ Money and Banking 35
i.e. playing a leading role in developing a sound financial
Banking in India system so that it can discharge its regulatory function
efficiently.
— History of Indian banking goes back to 19th century it
—Ensuring that credit allocation by the financial system
failed. First successful bank in India was Bank of Bengal
broadly reflect the national economic priorities and societal
set-up in 1806. First Commercial Bank in country was concerns.
Awadh Commercial Bank established in 1881.
—Regulating the overall volume of money and credit in the
— In 1921, Imperial Bank, of limited liability of India was economy with a view to ensuring a reasonable degree of
set-up. There were two important steps in the banking sector price stability.
after independence in 1949. Nationalisation of Reserve Bank
of India and the Banking Regulation Act, which empowered
Role of the RBI
RBI to regulate banking sector in country. RBI plays the following roles in the Indian banking and
— The Punjab National Bank, established in Lahore in 1895, financial system are as follows:
has survived to the present and is now one of the largest Note Issuing Authority
banks in India. — RBI has had the sole authoring to issue currency notes
— The largest bank-Imperial Bank of India was nationalised in other than ` 1 notes or coins and coins of smaller
1955 and renamed as State Bank of India followed by denominations since, its inception. ` 1 notes or coins and
formation of its 7 associates in 1959. coins of smaller denomination are issued by the Central
— The step toward social banking was taken with the Government, but are put into circulation through the
nationalisation of 14 Commercial Banks on 19th July, RBI.
1969. Six more Commercial Banks were nationalised on — RBI can issue notes against the securing of coins or
15th August, 1980. bullion, foreign securities, rupee coins, Government of
— Banking crisis during 1913-1917 and failure of 588 banks in India securities as such bills of exchange (promissory
various parts of the country during the decade ended 1949 notes as are eligible for purchase by it. The Reserve
underlined the need for regulating and controlling Bank has adopted Minimum Reserve System for the note
Commercial Banks. The Banking Companies Act was passed issue. Since 1957, it maintains gold and foreign
in February, 1949, which was subsequently amended to read exchange reserves of ` 200 crore of which atleast ` 115
as Banking Regulation Act, 1949. This Act provided the legal crore should by in gold.
framework for regulation of the banking system in India.
Printing of Securities and Minting in India
— Now, the Indian Banks have overseas presence in the form
of physical branches, representative offices, joint ventures Security Press Station Related by
and subsidiaries. Currency Notes Press (1928) Nasik Bank notes from
` 1 to 100
Security Paper (Established Hoshangabad Banks and
Reserve Bank of India (RBI) 1967-68) currency notes
— The RBI was set-up on the basis of Hilton Young paper
Commission recommendation in April, 1935, with the Bank Notes Press (1974) Dewas Bank notes of
enactment of RBI Act, 1934. ` 20, 50, 200,
100, 500 and
— The RBI continued to serve as the Central Bank to Burma
2000
(Myanmar), until Japanese occupation of Myanmar in
Security Notes Printing Hyderabad Union excise duty
April, 1947.
Press (Established 1982) stamps
— The RBI also continued to serve as Central Bank to
India Security Press(1992) Nasik Postal material
Pakistan, until June, 1948.
postal stamps etc
— The RBI was nationalised in 1949 and its First Indian Modernised Currency Notes Mysore (Karnataka)
Governor was CD Deshmukh. Press (1995) Sarbani (West Bengal)
— Main functions of RBI are as follows: Coins are minted at four places viz, Mumbai, Kolkata,
—Maintaining monetary stability so that business and economic life Hyderabad and Noida.
can deliver welfare gains of a properly functioning mixed
economy. ` 1 note released after 20 years
—Maintaining financial stability and ensuring sound financial — In November 1994, printing of ` 1 note was stopped
institutions so that monetary policy can be safely pursued and mainly due to highest cost and for freeing capacity to
economic units can conduct their business with confidence.
print currency notes of higher denomination.
—Maintaining a stable payments system so that financial
— Printing of ` 2 and 5 notes were discontinued in 1995.
transaction can be safely and efficiently executed.
—Promoting the development of financial infrastructure in terms
— Notes of ` 1 to be issued would be legal tender as
of markets and systems and to enable it to operate efficiently, provided in the Coinage Act, 2011.
36 Magbook ~ Indian Economy

Banker to the Government — To boost the economy by facilitating the flow of adequate
— RBI has the obligation to transact the banking business volume of bank credit to different sectors.
of the Union and State Governments. In this capacity, it — Stability in exchange rate and money market of the country.
accepts , money on account of these governments
makes payments on their behalf and carries out their Monetary Policy Committee
exchange and remittance operations. Banker to Banks
Government recently approves a six member Monetary Policy
— RBI has a special relationship with the banks. It controls
Committee, that will set policy interest rates. Out of the six
the amount of their reserves (SLR and CRR) and holds all
members, three members are from RBI including the governors,
or part of their reserves. Banks borrow from the RBI in who would have a casting vote.
times of need and RBI is in effect the lender of last resort.
The other three external members in the committee would be
RBI is the ultimate source of money and credit in India.
appointed by the government. Besides, the six members, a finance
Regulator and Supervisor ministry nominee would also take part in the deliberations of the
— In this role, RBI provides the broad parameters within committee to convey the government’s view on policy, but he won’t
which the banking and financial system of India
have a voting right.
functions. Its regulatory powers are provided by the RBI
Act and the Banking Regulation Act. RBI also regulates
many types of Non-Banking Financial Companies Methods of Credit Control
(NBFCs). Some of the regulatory powers of RBI are as
There are two types of methods of credit control are as follows:
follow finance:
—Issuing licenses for new banks. Quantitative/Credit Control
—Prescribing minimum requirements related to paid-up
capital, reserves etc. — Quantitative or credit control is used to control the volume of
—Inspecting the working of banks with regard to credit and indirectly to control the inflationary and deflationary
organisational set-up, branch expansion etc. pressures caused by expansion and contraction of credit.
—Conducting investigations into complaints of fraud, — The quantitative or credit control consists of:
irregularities etc in respect of banks. —Bank Rate It is also called the rediscount rate. It is the rate, at
—Approving or forcing amalgamations, reconstruction or which the RBI allows finance to Commercial Banks. It is currently
liquidation of banks. at 9%.
—Controlling appointments or termination of Chairman and —Cash Reserve Requirement (CRR) Since, 1962, the RBI has
Chief Executive Officers of private sector banks. been empowered to vary the CRR requirement between 3% and
15% of the total demand and time deposits. The RBI (Amendment)
Custodian of Foreign Reserves Bill, 2006, empowers RBI to prescribe CRR cash that banks
— As the custodian of foreign reserves, RBI is responsible deposit with the RBI without any floor rate or ceiling rate.
for managing the investment and utilisation of the —Statutory Liquidity Ratio (SLR) It is the ratio of liquid asset,
country’s foreign reserves in the best possible manner. which all commercial banks have to keep in the form of cash, gold
With the introduction of floating exchange rate system and unencumbered approved securities equal to not more than
40% of their total demand and time deposits liabilities.
and convertibility of the rupee, RBI also has act to
—Open Market Operations (OMOs) It role as a credit control
stabilise the foreign exchange market.
instrument emerged after economic reforms of 1991, when
— RBI’s function in this role is to develop and regulate the Indian economy was flushed with excessive inflow of foreign
foreign exchange market and to facilitate external trade funds. Under OMOs, when the RBI sells G-secs in the market,
and payment. it withdraws money or liquidity from the market and thus,
reduces volume of credit leading to control of inflation.
Credit Control —Repo Rate It was introduced in December, 1992, by RBI. It is
— It is an important tool used by RBI, a major weapon of the rate, at which RBI lends short-term money to the banks
the monetary policy used to control the demand and against securities. When the repo rate increases (Dearer Money
Policy) borrowing from the RBI becomes more expensive and
supply of money (liquidity) in the economy. Central
when the repo rate decreases, (Cheaper Money Policy)
Bank administers control over the credit that the borrowing becomes cheaper. Repo rate injects liquidity in the
Commercial Banks grant. Such a method is used by market.
RBI to bring economic development with stability. —Reverse Repo Rate It was introduced in November, 1996. It is
the rate, at which banks park short-term excess liquidity with the
Need for Credit Control
RBI. An increase in the reverse repo rate means that the RBI is
— To encourage the overall growth of the priority sector. ready to borrow money from the banks at higher rate of interest .
— To keep a check over the channelisation of credit. As a result, banks would prefer to keep more and more surplus
— To achieve the objective of controlling inflation as well as funds with the RBI. Reverse repo rate withdraws liquidity from
the market.
deflation.
Magbook ~ Money and Banking 37
—Other banking operation activities are Marginal Standing
Facility Rate (MSFR), Net Demand and Time Liabilities etc.
Market Stabilisation Scheme
— It is used by the RBI in times of volatility in exchange rate.
Marginal Standing Facility (MSF) — Here, RBI right release or buy foreign exchange in the
market to stabilise the exchange rate.
◆
MSF scheme came into effect in 2011. It is a very short-term
borrowing scheme for Scheduled Commercial Banks. MSF
— Under MSS, RBI issues bonds on behalf of the government.
rate is the rate at which these banks can borrow funds
overnight from RBI against government securities. Qualitative Credit Control
◆
Banks can use MSF during severe cash shortage or acute — Qualitative credit control is used by RBI for the selective
shortage of liquidity. MSF reduces volatility in the overnight purposes, some of which are as follows:
lending rates in the inter-bank market and enables smooth —Margin Requirements This refers to difference between the
transmission of monetary policy. Under MSF, Banks can securities offered and amount borrowed by the banks.
borrow upto 2% of the Net Demand and Time Liabilities —Consumer Credit Regulations This refers to issuing rules
(NDTL). regarding down payments and maximum maturities of
instalment credit for purchase of goods.
—RBI Guidelines RBI issues oral or written statements, appeals,
MCLR guidelines, warnings etc to the banks.
—Rationing of Credit The RBI controls the credit granted or
— The Reserve Bank of India has brought a new
allocated by Commercial Banks.
methodology of setting lending rate by commercial banks
— Moral suasion an application of pressure, but not force to
under the name Marginal Cost of Funds based Lending
get members to adhere to a policy RBI gives advices and
Rate (MCLR). It has modified the existing base rate system
suggestions to the bankers to follow the instructions given
from April 2016 onwards.
by it.
— As per the new guidelines by the RBI, banks have to
prepare Marginal Cost of Funds based Lending Rate RBI Controls, Inflation and Growth
(MCLR) which will be the internal benchmark lending — RBI can influence inflation and growth in the economy to a
rates. large extent through its instruments of control. If RBI
— Based upon this MCLR, interest rate for different types of squeeses out liquidity from the economy by selling
customers should be fixed in accordance with their securities, increasing repo rates, increasing CRR etc, then
riskiness. The base rate will be now determined on the the demand in the economy is reduced and inflation is
basis of the MCLR calculation. The MCLR should be brought under control.
revised monthly by considering some new factors — However, in case inflation is due to supply side shortages,
including the repo rate and other borrowing rates. RBI controls have less influence. Similarly, increasing
— Specifically the repo rate and other borrowing rates that liquidity in economy means that households have more
were not explicitly considered under the base rate money to consume, industries have more money to invest
system. in plant and machinery etc, all of which lead to increase in
economic activity. Thus, it can be seen that measures
Quantitative Easing taken by RBI, which control inflation can hurt growth and
— It refers to an extreme form of monetary easing through measures which boost growth, can cause inflation.
which the Central Bank floods the financial system with RBI Guideline for Small Banking
liquidity.
— The RBI issued draft guidelines for those sealing a license to
— It is done to induce bank lending to productive sectors of set-up a payments banks or small banks, as a part of its efforts
the economy and thus, promote growth during times to expand banking services to more businesses and poor
when banks are overcautious to lend the money due to household.
prevailing situation of recession or depression.
— The minimum paid capital required for both categories of
bank licenses would have to contributes atleast 40% initially.
Liquidity Adjustment Facility (LAF)
— Repo rate and reverse Repo rate are the parts of Liquidity
Adjustment Facility (LAF) of RBI.
Scheduled Commercial Banks
— LAF allows the RBI to manage market liquiding on a daily
— All banks which are mentioned in the Second Schedule of
RBI Act, 1934 are known as Scheduled Banks.
basis and to send interest rate signals to the market.
— These banks comprise Scheduled Commercial Banks and
— LAF operates through repo and reverse repo auctions.
Scheduled Cooperative Banks. Advances, deposits, money
It has now becomes the principal operating instrument of
at call, short notice etc. are included in the assets of
monetary policy. commercial Bank of India. Scheduled Commercial Banks
38 Magbook ~ Indian Economy
in India are categorised into five different groups Merging of SBI and Mahila Bank
according to their ownership or nature of operation.
— SBI, merged its associate bank and BMB with itself on 1
— These bank groups are as follows:
April, 2017. With this merger, SBI becomes one of top 50
—State Bank of India and its associates —Nationalised Banks
global banks.
—Private Sector Banks —Foreign Banks and
—Regional Rural Banks — The Union Cabinet, on 15th June, 2016, approved the
merger of 5 associate banks as well as BMB with State
Public Sector Banks Bank of India.
— After 1969 Commercial Banks are broadly classified into
Nationalised or Public Sector Banks and Private Sector Merging of Nationalised Bank
Banks. The State Bank of India and its five Associate Banks (2019 and 2020)
alongwith Nationalised Banks are the Public Sector Banks.
— Vijaya Bank and Dena Bank merged with Bank of Baroda
(BoB) on 1st April, 2019. This merge has created BoB as
Nationalised Banks of India the 3rd largest public sector in India.
— From 1st February, 1969, the government imposed social — Government has merged Indian Bank with Allahabad Bank,
control on banks by introducing certain provisions in the Oriental Bank of Commerce (OBC) and United Bank of
Banking Regulation Act, 1949. It imposed severe restrictions India with Punjab National Bank, Syndicate Bank with
on the composition of the Board of Directors and internal
Canara Bank and Andhra Bank with Union Bank of India
management and administration of banking companies.
on 1st April, 2020. After merger, there will be 12 Public
— It also introduced restrictions on advances by banking
Sector Banks of India.
companies. These were intended to ensure that the bank
advances were not confined to large-scale industries and
big business houses, but were also directed, in due Private Banks
proportion to other important sectors like agriculture, — All those banks where creator parts of stake or equity are
small-scale industries and exports. held by the private shareholders are called as private
— On 15th April, 1980, six more banks having demand and sector banks. In India, private sector banks are known
time liabilities of not less than ` 200 crores were with two names; old private sector banks and new private
nationalised. The undertakings of these banks are taken sector banks.
over and vest in six corresponding new banks under the
banking companies (Acquisition and Transfer of
Old Private Sector Bank
Undertakings) Act, 1980. — The banks which were not nationalised at the time
— Later on, in the year 1993, the government merged New of nationalisation of banks that took place during 1969
Bank of India with Punjab National Bank. It was the only and 1980 are known as the old private sector banks. These
were not nationalised, because of their small size and
merger between Nationalised Banks and resulted in the
regional focus.
reduction of the number of Nationalised Banks from 20 to 19.
— In the group wise classification, since 31st December, 2007 New Private Sector Bank
IDBI Bank Limited has been included in Nationalised — The banks, which came in operation after 1991, with the
Banks. RBI again clarified dated 14th March, 2019 that introduction of economic reforms and financial sector
IDBI Bank stands re-categorised as a Private Sector Bank. reforms are known as new private sector banks. Banking
Regulation Act was then amended in 1993, which
State Bank of India permitted the entry of new private sector banks in the
Indian banking sector.
— State Bank of India (SBI) was previously called Imperial
Bank of India in 1921, which was created by amalgamation Licence to New Private Banks
of 3 Presidency Banks viz, Bank of Bengal, Bank of
IDFC First Bank
Bombay and Bank of Madras. It was nationalised in 1955.
— Prime Minister Narendra Modi on October 19, 2015
Bharatiya Mahila Bank inaugurated the IDFC Bank in New Delhi. IDFC Bank
Limited, which started its operations on October 1, 2015,
— Former Prime Minister Dr Manmohan Singh and UPA
is an Indian Banking company with headquarters in
Chairperson, Sonia Gandhi jointly inaugurated India’s first
Mumbai that forms a part of IDFC, an integrated
all women bank, Bharatiya Mahila Bank in Mumbai on
infrastructure finance company.
19th November, 2013, on the birth anniversary of former
Prime Minister Indira Gandhi.
Magbook ~ Money and Banking 39
— IDFC Bank was granted a universal banking license in — A Regional Rural Bank seeking permission of the Reserve
July, 2015 by the Reserve Bank of India (RBI). It was Bank for opening branches has to obtain the
selected along with micro-lender Bandhan in the last recommendation of NABARD.
round of award of licenses. — RRB (Amendment) Bill, 2014 this amendment to raise
Bandhan Bank the authorised capital of the RRBs from ` 5 crore to
` 2000 crore. The bill also provides that the authorised
— Bandhan Bank Limited appointed its Chairman and Board
capital of any RRB shall not be reduced below ` 1 crore.
of Directors on July 9, 2015. The bank started its
operations in India from August 23, 2015. It is the first Lead Bank Scheme
bank established in Eastern India post Independence. — Lead Bank Scheme based on area approach was
— Former Chief Economic Adviser to the Indian government launched in 1969, on the recommendation of Dr Gadgil
Ashok Kumar Lahiri has been appointed as the Chairman. Committee and Narasimham Committee. Under the LBS,
Chandra Shekhar Ghosh, founder of Bandhan Financial all the 12 Nationalised Banks and a few Private Sector
Services Limited, was appointed as the Managing Director Banks were allotted specific districts and were asked to
and Chief Executive Officer (MD & CEO) of the bank. They play the lead role in coordinating credit deployment. The
both will be in the board of directors as well. services area approach was implemented under the
purview of lead Bank scheme.
Foreign Banks
— Foreign Banks are allowed to operate in India through Scheduled Co-operative Banks
branches and representative offices. A new Foreign Bank — Co-operative Banks have also played a limited, but important
desirous of opening a branch in India is required to apply role in the banking system of the country. Scheduled
Reserve Bank of India giving relevant information about its Co-operative Banks consist of Scheduled State Co-operative
shareholders, financial position and the dealings with Banks and Scheduled Urban Co-operative Banks.
Indian parties.
— The request is examined keeping in view the financial State Co-operative Banks (SCBs)
soundness of the bank, international and home country — State Co-operative Bank means the Principal co-operative
ranking, international presence, economic and trade society in a state, the primary object of which is the
relations between the two countries and supervisory financing of other co-operative societies in the state.
standards in the home country etc. — The Banking Ombudsman Scheme, 1995 notified by RBI
on 14th June, 1995 was in terms of powers conferred on
Regional Rural Banks the bank by Section 35A of the Banking Regulation Act,
1949 (10 of 1949) to provide for a system of redressal of
— In 1976, the Parliament enacted the Regional Rural
grievances against banks.
Banks Act, 1976 to provide for the incorporation,
regulation and winding up of Regional Rural Banks. The Urban Co-operative Banks (UCBs)
Act has been made effective from the 26th September,
1975. — The UCBs are registered under the Co-operative Societies
Acts of the respective State Governments. UCBs having a
— The equity of the RRBs is contributed by the Central
Government, concerned State Government and the multi-state presence are registered under the Multi-state
sponsor bank in the proportion of 50:15:35. There are 43 Co-operative Societies Act and regulated by the Central
RRBs in India (March, 2020). Government.
— The objective of the RRBs is to develop the rural economy — Besides, the Reserve Bank also has regulatory and
by providing; for the purpose of development of supervisory authority for bank related operations under
agriculture, trade, commerce, industry and other certain provisions of the Banking Regulation Act, 1949 (as
productive activities in the rural areas, credit and other applicable to Co-operative Societies).
facilities, particularly to the small and marginal farmers,
agricultural labourers, artisans and small entrepreneurs
Banking Regulation (Amendment)
and for matters connected there with and incidental there Bill, 2020
to. The bill proposes amendments to the Banking Regulation Act,
— Besides, the Reserve Bank which is the regulatory 1949 and will replace the Banking Regulation (Amendment)
authority for the RRBs in accordance with the provisions Ordinance, 2020. The bill aims to bring co-operative banks
of the Banking Regulations Act, 1949, the Banking under the supervision of the Reserve Bank of India (RBI). The
Regulations Act empowers NABARD (National Bank for bill will also permit the RBI to initiate a scheme for
Agriculture and Rural Development) to undertake the reconstruction or amalgamation of a stressed lender without
inspection of RRBs. imposing a moratorium.
40 Magbook ~ Indian Economy
The Bimal Jalan Committee recommended the name of
Payment Banks the two entities, from among the list of several entities,
— The Reserve Bank of India (RBI) granted ‘in-principle’ approval like Indian post, Anil Ambani Group, Aditya Birla Group,
to 11 entities, including Reliance Industries, Aditya Birla Nuvo, Bajaj Finance, Muthoot Finance, Religare Enterprise
Vodafone and Airtel, to set-up payments banks and proposed etc.
such licenses ‘on tap’ in future on August 18, 2015. — However, the committee has put forth certain conditions
— The other entities which have been given ‘in-principle’ before the entities, in order to get the banking license.
approval are—Department of Posts, Cholamandalam Within a period of 18 months these two entities are
Distribution Services, Tech Mahindra, National Securities required to
Depository Limited (NSDL), Fino PayTech, Sun Pharma’s —get a net worth of ` 1000 crore or more;
Dilip Shantilal Sanghvi and PayTM’s Vijay Shekhar Sharma. —open at least 25% branches in unbanked rural areas.
— The ‘in-principle’ approval granted will be valid for a period
of 18 months, during which time the applicants have to
comply with the requirements under the guidelines and fulfil
Types of Banking System
the other conditions as may be stipulated by the RBI. There are three types of banking are as follows:

Small Finance Banks Core Banking

— The Reserve Bank of India (RBI) has granted ‘in-principle’ — Core banking is often associated with retail banking and
approval to set-up small finance banks under the many banks treat the retail customers as their core
“Guidelines for Licensing of Small Finance Banks in the banking customers. Business is usually managed via
Private Sector” (Guidelines) on September 16, 2015. the Corporate banking division of the institution. Core
banking covers basic depositing and lending of money.
— The ‘in-principle’ approval granted will be valid for
18 months to enable the applicants to comply with the — Normal core banking functions will include transaction
requirements under the Guidelines and fulfil other conditions accounts, loans, mortgages and payments. Banks make
as may be stipulated by the RBI. these services available across multiple channels like
— On being satisfied that the applicants have complied with the ATMs.
requisite conditions laid down by it as part of ‘in-principle’ — It is also known as Core Banking solution.
approval, the RBI would consider granting them a licence for
commencement of banking business under Section-22(1) of Retail Banking
the Banking Regulation Act, 1949. Until a regular licence is
— When a bank executes transactions directly with
issued, the applicants cannot undertake any banking
consumers, rather than corporations or other banks,
business.
then it is called Retail Banking.
— Names of selected applicants
—Au Financiers (India) Limited (Jaipur) Narrow Banking
—Capital Local Area Bank Limited (Jalandhar)
— It restricts banks to hold liquid and safe government
—Disha Microfin Private Limited (Ahmedabad)
bonds.
—Equitas Holdings Private Limited (Chennai)
—ESAF Microfinance and Investments Private Limited (Chennai)
— It is also called as safe bank.
—Janalakshmi Financial Services Private Limited (Bengaluru)
—RGVN (North-East) Microfinance Limited (Guwahati) Inter-Bank Transfer
—Suryoday Micro Finance Private Limited (Navi Mumbai) — It is a special service that allows you to transfer funds
—Ujjivan Financial Services Private Limited (Bengaluru) electronically to accounts in other banks in India
—Utkarsh Micro Finance Private Limited (Varanasi) through.
NEFT The acronym ‘NEFT’ stands for National
Bimal Jalan Committee/ —

Electronic Funds Transfer. Funds are transferred to the

New Bank Licenses, 2014 credit account with the other participating bank using
— A committee, under the Chairmanship of former RBI Governor RBI’s NEFT service. RBI Acts as the service provider
Bimal Jalan, was constituted to scrutinise the application for and transfers the credit to the other bank’s account.
new banks in India. The committee submitted its report in — RTGS The acronym ‘RTGS’ stands for Real Time Gross
February 2014. Recommending for the ‘in-principal approval’ Settlement. The RTGS system facilitates transfer of
of banking licenses to Bandhan Microfinance and IDFC funds from accounts in one bank to another on a ‘real
(Infrastructure Development and Finance Corporation). time’ and on ‘gross settlement’ basis. The RTGS system
— The RBI had issued guidelines for new banks in February, is the fastest possible inter bank money transfer facility
2013 and invited applications from the various stakeholders. available through secure banking channels in India.
Magbook ~ Money and Banking 41
— Minimum or Maximum account for RTGS or NEFT. Transactions (RBI) after the Finance Ministry wanted the Central
under Retail and Corporate Internet Banking. Bank to follow global best practices and transfer more
surplus to the government. In the past, the issue of
Types Retails Corporate
the ideal size of the Reserve Bank of India reserves
Minimum Maximum Minimum Maximum was examined by the three committees- V
RTGS ` 2 Lakhs ` 10 Lakhs Saral ` 10 Lakhs Saral ` 10 Lakhs Subrahmanyam in 1997, Usha Thorat in 2004 and
Vyapaar ` 50 Lakhs Vyaapar – No limit Y H Malegam in 2013.
Vistaar ` 2000 Crore Vistaar – No limit
VG Kannan Committee
NEFT No Minimum ` 10 Lakhs Saral ` 10 Lakhs Saral ` 10 Lakhs
The RBI has set up a six-member committee in 2019,
Vyaapar ` 50 Lakhs Vyaapar – No limit
headed by VG Kannan, Chief Executive, Indian
Vistaar ` 2000 Crore Vistaar – No limit
Banks’ Association, to review the ATM interchange
fee structure. It aims for giving a fillip to ATM
Banking Sector Reforms deployment in unbanked areas.

Narasimham Committee
Swabhiman
Recommendation ◆
A major financial inclusion initiative was formally
— Deregulation of interest rate. launched as ‘Swabhiman’ on 10th February, 2011,
— Reduction in reserve requirement. which aims at providing branchless banking through
— Prudential norms. the use of technology. Banks will provide basic
— Supervision of Commercial Banks. services like deposits, withdrawal and remittances
— Measures to improve the competitive efficiency in banking sector. using the services of Business Correspondents.
◆
The initiative enables government subsidies and
Narasimham-I social security benefits to be directly credited to the
accounts of the beneficiaries, enabling them to draw
— The purpose of the Narasimham-I Committee was to study all
the money from the business correspondents in their
aspects relating to the structure, organisation, functions and
village itself.
procedures of the financial systems and to recommend
improvements in their efficiency and productivity.
— The committee submitted its report to the Finance Minister in Khandelwal Committee Report
November, 1991. — Government constituted a Committee on Human
Resources issues of Public Sector Banks (PSBs)
Narasimham-II under the Chairmanship of Dr AK Khandelwal,
— The Narasimham-II Committee was tasked with the progress who has submitted its report.
review of the implementation of the banking reforms since, 1992 — The committee made 105 recommendations on
with the aim of further strengthening the financial institutions of matters related to Manpower and Recruitment
India. Planning, Training, Career Planning, Performance
Management, Reward Management, Succession
— It focussed on issues like size of banks and capital adequacy ratio
Planning and Leadership Development,
among other things. M Narasimham, Chairman, submitted the
Motivation, Professionalisation of HR, Wages,
report of the committee in April, 1998.
Service Conditions and Welfare etc.
As 49 recommendations required further
Damodaran Committee —
deliberations, the remaining 56 recommendations
— The committee, headed by former SEBI Chairman M Damodaran, were forwarded to PSBs with the request that an
was set-up by the Central Bank to look into the issues of customer HR Plan for each bank be prepared and got
services and evaluate the existing system of grievance redressal approved by the respective Board of Directors.
mechanism prevalent in banks, its structure and efficacy and
recommend measures for expeditious resolution of complaints. Nachiket Mor Committee
Recommendations — The RBI appointed committee on comprehensive
— Bank should offer no-frill savings accounts with certain basic financial services for small business and low income
facilities such as cheque book and ATM card without prescribing under the Chairmanship of Sri Nachiket Mor.
any minimum balance. Recommendation of committee are as follows:
—Every adult (above 18 years) of over country should
Bimal Jalan Committee have a bank account by 1st January, 2016. This
The Bimal Jalan Committee constituted in 2019 to review the account will be known as Universal Electronic Bank
Economic Capital Framework (ECF) for the Reserve Bank of India Account (UEBA).
42 Magbook ~ Indian Economy
—Every resident should be issued an account at a time of Banks) and will consist of professionals with two
receiving Aadhaar number (UIDAI) by a bank itself. government representative viz Secretary of Financial
—It recommends abolition of interest subsidies and loan waivers. Services and Public Enterprises.
—It recommends raising priority sector lending cap for bank to — Vinod Rai appointed as the First Chairman of the Banks
50% from the current 40%.
Board Bureau. He was the former Comptroller and Auditor
—It also proposed for creation of a payment bank to provide
General (CAG) of India.
payment services including credit, insurance and risk
management products. — The government has maintained the BBB as a holding
company for state run banks, an idea first mooted at the
Payment Bank maiden banking conclave Gyan Sangam in January, 2015.
On 23rd September, 2013, Committee on Comprehensive
Financial Services for Small Business and Low Income Indradhanush to Revamp PSU Banks
Households headed by Nachiket Mor, was formed by the ◆
To revive the fortunes of public sector banks, the government
RBI. On 7th January, 2014, the Nachiket Mor Committee unveiled a seven-point plan ‘Indradhanush’ encompassing
submitted its final report. Among its various ` 20000 crore immediate fund infusion, creation of a single
recommendations, it recommended the formation of a new holding company and minimising political interference on
category of bank called Payment Bank. On 17th July, 2014, August 14, 2015. The seven Key reforms of Indradhanush mission
the RBI released the draft guidelines for Payment Banks, include appointments, de-stressing capitalisation, empowerment,
seeking comments for interested entities and the general frame work of accountability and governance reforms.
public. On 27th November, RBI released the final guidelines
for Payment Banks.
The key aspirants to payment banking business include Basel Norms
telecom firms, prepaid payment instruments / payment — It was in 1988 that the central banking bodies of the
solution providers retail chains, large business developed economies agreed upon the provision of Capital
correspondents and business conglomerates. Out of them, Adequacy Ratio (CAR), also known as the Basel Accord. The
telecom firms have an advantage over others mainly because accord was agreed upon at Basel, Switzerland, at a meeting
they already have a distribution network in rural areas. Most of the Bank of International Settlements (BIS). This accord
of the prepaid payment instruments / payment solution provides recommendations on banking, regulations with
providers are tech sauuy and already working in the field of regard to capital risk, market risk and operational risk. It’s
mobile payments. objective was to ensure that financial institutions have enough
Scope of activities of Payment Banks capital to meet obligations and absorb unexpected losses.
Payment Banks can accept demand deposits. This
—

implies that customers can open savings accounts as well

Basel I
— The Basel Committee on Bank Supervision (BCBS)
as current accounts; but NO time deposits (such as FDs).
published a set of minimal capital requirements for banks,
— An account balance cannot exceed ` 1 lakh for an
to maintain a certain amount of free capital (ratio) to their
individual customer. Payment Banks can issue ATM/
assets, as a cushion against probable losses in investment
debit cards but not credit cards.
and loans. Basel I primarily, focus on credit risk. In 1988,
— Payment Banks can not give loans. Payments and
this ratio capital was decided to be 8%. The CAR is the
remittance services through various channels.
percentage of the total capital to the total weighted assets.
— A Payment Bank can become Banking Correspondent
— CAR = (Total of Tier-I and Tier-II capital)/ Risk weighted
(BC) of another bank and offer all products / services
assets.
which a BC can offer.
— Thus, CAR is also known as Capital to Risk-Weighted
— Payment Banks can distribute non-risk sharing financial
Assets Ratio (CRAR). It is used to protect the depositors
products like mutual fund units and insurance products,
and promote the stability and efficiency of the financial
etc.
system.
— The revenue of these banks would come mainly from the
transaction fees. Basel II
Banks Board Bureau — It attempts to integrate Basel I capital standards with
national regulations, by setting the minimum capital
— Prime Minister Narendra Modi has approved the requirement of financial institutions with the goal of ensuring
guidelines of Banks Board Bureau (BBB) on 28th institution liquidity. It aims securing at international
February, 2016. BBB starts its work from 1st April, 2016. convergence on regulations governing the CAR.
— BBB will work as Search Committe or appointments —Minimum capital requirements
board, appointment of Chairman of PSBs (Public Sector —Supervisory review —Market discipline
Magbook ~ Money and Banking 43
These institutions have been playing a crucial role in
Basel III —
channelising credit to the needy sectors and
— It seek to strengthen the existing capital requirements and addressing the challenges or issues faced by them.
introduce a global liquidity standard to enable the banks to — The four financial institutions - EXIM Bank, National
weather financial storms. It mandates the banks to increase the
Bank for Agriculture and Rural Development
loss absorbing capital from 2% to 4.5% by January, 2015. Also,
(NABARD), National Housing Bank (NHB) and Small
banks will be required to hold a capital conservation buffer of 2.5%
Industries Development Bank of India (SIDBI) are under
of withstand future period of stress.
full-fledged regulation and supervision of the Reserve
Bank.
Basel III Guidelines, 2015 — As in the case of Commercial Banks, prudential norms
— The Reserve Bank of India (RBI) released on 28th May, relating to income recognition, asset classification and
2015, the draft guidelines on the Net Stable Funding Ratio provisioning and capital adequacy ratio are applicable
(NSFR) under Basel III framework on liquidity standards of to these financial institutions as well. These institutions
banks. also are subject to on-site inspection as well as off-site
— The NFSR is defined as the amount of available stable surveillance.
funding relative to the amount of required stable funding. — Since, all the banks are directly or indirectly
— In draft guidelines released, the Central Bank said that banks contributing to the development works in the country,
will have to maintain Net Stable Funding Ratio (NSFR) from thus, all are development financial institutions.
March 2019, but in the view of the corona virus, the — National Investment and Infrastructure Fund (NIIF),
implementation of Basel-III norms for banking services has established in 2015 is the first Sovereign Wealth Fund
been deferred by 1 January, 2023. of India. It manages three separate funds, namely
— Basel III norms define the capital of the banks in different Master Fund, Fund of Funds and strategic Fund. They
ways. It consider common equity and retained earnings as primarily aimed for investing in infra-related projects of
the predominant component of capital, but restrict the the country through formation of capital from both
inclusion of items such as-deferred tax assets, mortgage domestic and international investors.
service rights and investments in financial institutions to no — The Union Government through the Budget 2021
more than 15% of the common equity component. announced creation of Development Financial
Institution with an initial capital infusion of ` 20,000
Banking Ombudsman crores. The government expects to rope in marquee
pension funds, sovereign funds to come in through
— Banking Ombudsman Scheme was introduced by the RBI in DFI to fund infrastructure projects in the country.
1995 under the Banking Regulation Act, 1949. It is a senior
official appointed by the RBI to redress customer complaints Financial Stability and
against deficiency in certain banking services. Development Council (FSDC)
— Decision of Banking Ombudsman can be appealed against to — Financial Stability and Development Council is an
the appellate authority (vested in a Deputy Governor of RBI).
apex-level body constituted by the Government of
— Banking Ombudsman can award compensation to the India. The idea to create such a super regulatory body
complainant. In this, it takes into account the loss of the was first mooted by the Raghuram Rajan Committee in
complainant’s time, expenses incurred and the harassment 2008. Finally in 2010, the then Finance Minister of
and mental anguish suffered. India, Pranab Mukherjee, decided to set-up such an
— It has jurisdiction over all Commercial Banks, RRBs, autonomous body dealing with macroprudential and
Scheduled primary co-operative banks, NBFCs etc. It deals financial regularities in the entire financial sector of
with matters less than or equal to ` 10 lakh. India. The council is headed by the Finance Minister
and has the Reserve Bank of India (RBI) Governor and
Development Financial chairpersons of the Securities and Exchange Board of
India, Insurance Regulatory and Development
Institutions (DFI) Authority and Pension Fund Regulatory and
Development Authority as other members alongwith
— Financial institutions are an important part of the Indian
finance ministry officials.
financial system as they provide medium to long-term finance
to different sectors of the economy. FSDC will perform following roles
— The institutions have been set-up to meet the growing — To engage in macroprudential supervision of the
demands of particular segments, such as export, rural housing economy, including the functioning of large financial
and small industries. conglomerates and address inter-regulatory
coordination issues.
44 Magbook ~ Indian Economy
— To focus on financial literacy and financial inclusion. Industrial Finance Corporation of
To periodically look into issue relating to financial
—
India Limited (IFCI)
development.
— It was the first development finance institution set-up in
National Housing Bank (NHB) 1948 under the IFCI Act in order to provide long-term
institutional credit to medium and large industries. It aims
— National Housing Bank was set-up on 9th, July, 1988
to provide financial assistance to industry by way of rupee
under the National Housing Bank Act, 1987 as a
and foreign currency loans, underwrites or subscribes the
wholly-owned subsidiary of the Reserve Bank to act as
issue of stocks, shares, bonds and debentures of industrial
an apex level institution for housing.
concerns etc.
— The Finance Act, 2019 has amended National Housing
— It has also diversified its activities in the field of merchant
Bank Act, 1987. The amendment confers the powers of
banking, syndication of loans, formulation of rehabilitation
regulation of housing finance companies to RBI.
programmes, assignments relating to amalgamations and
— The Union Government in April 2019 purchased mergers etc.
complete stake of NHB for ` 1,450 crore from RBI. The
decision has been taken to end the cross-holding in the Industrial Development Bank of
regulatory institutions. It also follows Narasimham-II
recommendations of prohibiting Central bank holding in
India (IDBI)
the entities that are regulated by it. — It was established in July, 1964, as an apex financial
— NHB has been established to achieve, among other institution for industrial development in the country. It
things, the following objectives: caters to the diversified needs of medium and large-scale
—To provide a sound, healthy, viable and cost effective housing
industries in the form of financial assistance, both direct
finance system to all segments of the population and to and indirect. Direct assistance is provided by way of project
integrate the housing finance system with the overall financial loans, underwriting of and direct subscription to industrial
system. securities, soft loans, technical refund loans, etc. While,
—To promote a network of dedicated housing finance indirect assistance is in the form of refinance facilities to
institutions to adequately serve various regions and different industrial concerns.
income groups.
—To augment resources for the sector and channelise them for Small Industries Development
housing. Bank of India (SIDBI)
—To make housing credit more affordable.
— It was set-up by the Government of India in April, 1990, as
—To regulate the activities of housing finance companies
a wholly owned subsidiary of IDBI. It is the principal
based on regulatory and supervisory authority derived under
the act. financial institution for promotion, financing and
—To encourage augmentation of supply of buildable land and development of small-scale industries in the economy. It
also building materials for housing and to upgrade the housing aims to empower the Micro, Small and Medium Enterprises
stock in the country. (MSME) sector with a view to contributing to the process of
—To encourage public agencies to emerge as facilitators and economic growth, employment generation and balanced
suppliers of serviced land for housing. regional development.

National Bank for Agriculture MUDRA Bank

and Rural Development (NABARD) — Micro Units Development and Refinance Agency Bank (or
— National Bank of Agriculture and Rural Development MUDRA Bank) was launched by Prime Minister Narendra
(NABARD) is one of the subsidiaries where the majority Modi on 8th April, 2015 with a corpus of ` 20,000 crore
stake is held by the Reserve Bank. NABARD is an Apex and a credit guarantee corpus of ` 3,000 crore.
Development Bank with a mandate for facilitating credit — It is a public sector financial institution in India. It provides
flow for promotion and development of agriculture, loans at low rates to small entrepreneurs. MUDRA Bank
small-scale industries, cottage and village industries, will be set-up through a statutory enactment.
handicrafts and other rural crafts. — It will be responsible for developing and refinancing all
— It also has the mandate to support all other allied economic Micro-Finance Institutions (MFIs) which are in the business
activities in rural areas, promote integrated and sustainable of lending to micro and small business entities engaged in
rural development and secure prosperity of rural areas. After manufacturing, trading and service activities. The formation
disinvestment of entire stake of NABARD by RBI to of the agency was initially announced in the 2015 Union
Government of India in April 2015, it has become fully own Budget of India in February 2015.
subsidiary to government.
Magbook ~ Money and Banking 45
Formation of MUDRA Bank — So, MUDRA can be seen as an initiative to reach the last
mile for underfinanced small scale units that could not
— The MUDRA banks will be set-up under the Pradhan
benefit from insitutional sources of finance.
Mantri MUDRA Yojana Scheme. The bank will intially
function as a non-banking financial company and a
subsidiary of the Small Industries Development Bank of
Industrial Investment Bank of
India. Later, it will be made into a separate company. India Limited (IIBI)
— It will also serve as a regulator for other Micro-Finance — It was set-up in 1985 under the Industrial Reconstruction
Institutions (MFIs) and provide them refinancing Bank of India Act, 1984, as the principal credit and
servies. It will provide guidelines for MFIs and give reconstruction agency for sick industrial units. It was
them ratings. converted into IIBI on 17th March, 1997, as a full-fledged
— The bank would partner with state level/regional level development financial institution. It assists industry mainly in
co-ordinators to provide finance to Last Mile Financer medium and large sector through wide ranging products and
of small/micro business enterprises. services. Besides project finance, IIBI also provides short
duration non-project asset-backed financing in the form of
Objectives of MUDRA Bank underwriting or direct subscription, deferred payment
The objectives of the MUDRA Bank are as follows: guarantees and working capital or other short-term loans to
— Regulate the lender and the borrower of microfinance companies to meet their fund requirements.
and brings stability to the microfinance system through
regulation and inclusive participation.
Export-Import (EXIM) Bank
— Extend finance and credit support to Microfinance ◆
Recognising the important role of exports in maintaining the
Institutions (MFI) and agencies that lend money to
viability of external sector and in generating employment, the
small businesses, retailers, self-help groups and
Reserve Bank had sought to ensure adequate availability of
individuals.
Concessional Bank credit to exporters. It took the lead role in
— Register all MFIs and introduce a system of setting up the Export Import Bank of India (EXIM Bank) in
performance rating and accreditation for the first time. January, 1982.
— This will help last mile borrowers of finance to evaluate ◆
In recent years, with the liberalisation of real and financial
and approach the MFI that meets their requirement sectors of the economy, interest rates on export credit have been
best and whose past record is most satisfactory. This rationalised within the overall monetary and credit policy
will also introduce an element of competitiveness framework.
among the MFIs. The ultimate beneficiary will be the ◆
In order to provide adequate credit to exporters on a priority
borrower. basis, the Reserve Bank has also prescribed a minimum
Differences Between SIDBI and proportion of banks’ adjusted net bank credit to be lent to
exporters by Foreign Banks.
MUDRA Bank
It is very important to understand certain
things/context/facts and differences between SIDBI and New Gold Investment Schemes
MUDRA.
The Government had launched Sovereign Gold Bonds and Gold
Difference between SIDBI and MUDRA bank are as Monetisation Schemes on 5th November, 2015. The main
follows: objective of the schemes is to reduce the demand for physical
— SIDBI is an apex small units development bank where gold and shift a part of the gold imported every year for
MUDRA will initially be started as a department of investment purposes into financial savings.
SIDBI.
Sovereign Gold Bonds
— The role of SIDBI remains to promote and finance the
small scale sector, implement government plans and — These are issued by the RBI on behalf of the Government of
co-ordinate with other organisations while the role of India in rupees and denominated in grams of gold and
MUDRA has been conceived more in the context of restricted for sale to the resident Indian entities only both in
present state of microfinance sector. demat and paper form.
— Over a period of time, MUDRA, replacing RBI, may — The minimum investment in this scheme is one gram with a
emerge as a regulatory body for Microfinance sector maximum limit of subscription of 4 kg for individual, 4 kg for
housed by emerging NBFC-MFIs. (This is vehemently HUFS and 20 kg for trusts and similar entities notified by the
protested by MFIs who wish to function under government from time to time per fiscal year from April to
regulatory powers of RBI.) March. The rate of interest for the year 2020-21 is 2.50%
per annum, payable on a half yearly basis.
— MUDRA may refinance other MFIs to finance SHGs
(Self Helf Groups) to promote micro entrepreneurship.
46 Magbook ~ Indian Economy
— The tenure of the Bond is for a period of 8 years with exit — The reason for the establishment was to safeguard the
option from fifth year onwards. KYC norms are the same as interest of the policy holders and for the upgradation of
that for gold. Exemption from capital gains tax is also available. the entire insurance sector.
— Redemption is made in the rupee value equivalent to the — The Insurance Regulatory and Development Authority of
price of gold at the time of maturity. In the first two India has been authorised to register the new insurance
tranches of SGB, total subscription of 3788 kg of gold companies in India.
amounting to ` 993 crore were received from about 3.90
lakh applications.
Insurance Companies
Gold Monetisation Scheme — Insurance industry includes two sectors; Life Insurance
— Bureau of Indian Standards (BIS) certified Collection, Purity and General Insurance. Life Insurance in India was
Testing Centres (CPTC) to collect the gold from the introduced by Britishers. A British firm in 1818
customer on behalf of the banks. established the Oriental Life Insurance Company at
— The minimum quantity of gold (bullion or jewellery) which Calcutta (now Kolkata).
can be deposited is 30 grams and there is no limit for — Since, the opening up, the number of participants in the
maximum deposit. insurance industry has gone up from 7 insurers
— Gold Saving Account can be opened with any of the (including LIC, four public sector general insurers, one
designated bank and denomination in grams of gold for specialised insurer and the GIC as the national
short-term period of 1-3 years, a medium-term period of re-insurer) in 2000 to 49 insurers as on 30th
5-7 years and a long-term period of 12-15 years . September, 2011.
— The CPTCs transfer the gold to the refiners. The banks will — Insurance Companies in India The insurance companies
have a tripartite / bipartite Legal Agreement with refiners offer protection against losses. They deal in life
and CPTCs. insurance, marine insurance, vehicle insurance and
so on.
— For the year 2020-21, interest rates has been fixed as
2.25% and 2.5% for the medium and long term — The insurance companies collect the little savings of the
respectively. Redemption is made in cash/gold for investors and then reinvest those savings in the market.
short-term and in cash for medium and long-term deposits. The indigenous insurance companies are collaborating
As of January, 2021 Government has been successful in with different foreign insurance companies after the
mobilising gold worth ` 31,290 crore since 2015-16. liberalisation process. This step has been incorporated to
expand the Indian insurance market and make it
Non-Banking Financial Companies competitive.
(NBFCs) Types of Non-Banking Financial Institutions
— NBFCs are essentially banks, since, they perform the basic Institution Principle Business
twin functions of attracting deposit from the public and
NBFCs Receiving deposits under any
making loans. However, unlike Commercial Banks, they are scheme and lending.
not incorporated as a bank and are not governed by the Equipment Leasing Equipment leasing and financing.
provision of the Banking Regulation Act, 1949. Company
—With the Enactment of RBI (Amendment) Act, 1997, the RBI Hire Purchase Finance Hire purchase transaction.
now control the functioning of NBFCs. Company
—NBFCs as a whole account for 11.2% of assets of the total Invest Company Buying or selling of securities.
financial system. Loan Company Making loan or advances for an
—Two broad categories of NBFCs are as follows : activity other than its own.
(i) Deposit taking NBFCs (NBFCs-D). Residuary Non-Banking Business same as NBFCs, but does
(ii) Non-deposit taking NBFCs (NBFCs -ND). Companies (RNBCs) not belong to any of the categories
—Capital to Risk-weighted Assets Ratio (CRAR) norms were made under NBFCs.
applicable to NBFCs-D in 1998. The CRAR norm for NBFC-D is Mutual Benefit Financial Any company notified by the
12% (15% in case of unrated NBFCs-D). Company (MBFC) Central Government as a Nidhi
Company under Companies Act,
Insurance Regulatory and 1956.
Miscellaneous Called Asset Finance Companies,
Development Authority of India Non-Banking Companies which manages, conducts and
(IRDAI) (MNBCs) supervises Chit Funds.
— The Insurance Regulatory and Development Authority of
India was established in the year 1999 by the Government
of India.
Magbook ~ Money and Banking 47

Self Check
Build Your Confidence
1. Consider the following statements Which of the statement(s) given above is/are
1. Indian depository receipt is an instrument denominated in Indian correct?
Rupees in the form of a depository receipt created by the (a) Only 1 (b) Only 2
custodian of securities registered with the Securities and (c) Both 1 and 2 (d) Neither 1 nor 2
Exchange Board of India against the underlying equity of issuing 7. What is ‘NIKKEI’? [BPSC 2000]
company. (a) Share Price Index of Tokyo Share Market
2. Standard Chartered PLC became the first global company to file for (b) Name of Japanese Central Bank
an issue of Indian depository receipts in India. (c) Japanese Name of Country’s Planning
Which of the statement(s) given above is/are correct? Commission
(a) Only 1 (b) Only 2 (d) Foreign Exchange Market of Japan
(c) Both 1 and 2 (d) Neither 1 nor 2
8. The minimum and maximum investment limits
2. ‘Basel III Accord’ after seen in the news, seeks to [UPSC 2015] under sovereign gold bonds are  gm and 
(a) Develop national strategies for the conservation of biological gm of gold per person per fiscal year
diversity respectively.
(b) Improve banking Sector’s ability to deal with financial risk (a) 5 and 200 (b) 2 and 500
management (c) 15 and 700 (d) 50 and 800
(c) reduce the green house gas emisssions
(d) Transfer technology from developed countries to poor countries
9. Consider the following statements [IAS 2004]
1. The National Housing Bank (NHB), the apex
3. With reference to Indian Capital market, consider the following institution of housing finance in India, was set-up
statements as a wholly-owned subsidiary of the RBI.
1. CRISIL was set-up in the 8th Five Year Plan. 2. The Small Industrial Development Bank of
2. CRISIL rates the debt instruments of the public sectors. India (SIDBI) was established as a wholly-owned
Which of the statement(s) given above is/are correct? subsidiary of the Industrial Development Bank of
(a) Only 1 (b) Only 2 India (IDBI).
(c) Both 1 and 2 (d) Neither 1 nor 2 Which of the statement(s) given above is/are
correct?
4. Which one of the following Companies is eligible for the (a) Only 1 (b) Only 2
financial assistance and loans from the Industrial Finance
(c) Both 1 and 2 (d) Neither 1 nor 2
Corporation of India (IFCI)?
(a) Limited Public Companies (b) Public Co-operatives 10. A rise in SENSEX means [IAS 2000]
(c) Private Limited Companies (d) All of these (a) a rise in prices of shares of all companies
registered with Bombay Stock Exchange
5. Consider the following statements
(b) a rise in prices of shares of all companies
1. A committee, under the chairmanship of former RBI Governor registered with National Stock Exchange
Bimal Jalan, was constituted to scrutinise the application for new (c) a rise in prices of shares of all companies
Banks in India. belonging to group of companies registered
2. The committee recommended to give banking licenses to with Bombay Stock Exchange
Bandhan Micro Finance and Infrastructure Development and (d) None of the above
Finance Corporation (IDFC).
Which of the statement(s) given above is/are correct?
11. Consider the following with policy reference to
Indian Economy [UPSC 2015]
(a) Only 1 (b) Only 2
(c) Both 1 and 2 (d) Neither 1 nor 2 1. Policy rate
2. Open market operations
6. Consider the following statements about the Indian Capital
3. Public debt
Market
4. Public reverse
1. The Security Exchange Board of India (SEBI) was set-up in the 7th
Which of the policies given above is/are components
Five Year Plan.
of monetary policy are correct?
2. The Capital Issue (Control) Act, 1947 was repealed and replaced
(a) Only 1 (b) 2, 3 and 4
by the SEBI.
(c) 1 and 2 (d) 1, 3 and 4

1. (c) 2. (b) 3. (b) 4. (d) 5. (c) 6. (c) 7. (a) 8. (b) 9. (c) 10. (c)
11. (c)
Chapter six
Inflation
general price level in the country over a period
Inflation of time. Inflation could be monetary or price Causes of Inflation
— Inflation refers to the inflation. During periods of inflation, there is an — Inflation is caused due to a mismatch
persistent rise in increase of the money supply. between demand and supply, i.e. when
— When you have inflation more money is being demand exceeds supply. Thus, inflation
India has restored can occur due to changes in the
circulated, which causes the currency to lose its
macroeconomic and purchasing power, which leads to an increase in demand side or the supply side or
financial stability, but the price of goods and services. Over the course both.
structural of many years, economic cycles go through
impediments to periods of inflation, deflation and stagflation. Demand Side Inflation
— Each one of these, has a specific effect on the — It is also known as demand pull
growth and inflation. Increase in demand can
overall economy as a whole and sometimes can
persistently high lead to long periods of recessions or occur due to many reasons, such as:
inflation remain key depressions in the economy. —Increase in public expenditure,
especially by the government operating
concerns policies large fiscal deficits.
meant to reduce Types of Inflation —Loose Monetary Policy of the Central
inflation often lead to Bank, which leads to low interest rates
Low Inflation/Creeping and thus, higher consumption.
lower growth and
Inflation —Rapid GDP growth, which leads to
thus, reduction in more employment, higher wages.
— It is an inflation that is slow and on predictable
employment while lines.
—Increase in population.
policies meant to —Depreciation of exchange rate, which
— This inflation takes place in a longer run and reduces imports, increases exports and
increase growth and the range is generally in a single digit. thus, pulls up demand.
employment are —Reduction in direct taxes, which puts
accompanied by high Galloping Inflation more money in the hands of
households.
inflation. — It is a very high inflation running in the range of
—Speculation in commodities market etc.
double digits or triple digits.
— It is also known as hoping inflation, jumping Supply Side Inflation
inflation or running inflation.
— It is also known as cost push inflation.
Hyper Inflation Factors influencing inflation from the
supply side can also be many, such
— It is an inflation, which is large and accelerating,
as:
which might have annual rates in millions.
—Backward agricultural sector, which is
— Germany after World War I experienced such not able to produce enough food.
inflation; while Bolivia experienced it in —Inefficient storage, transportation and
mid-1985. marketing infrastructure, which leads
to wastage and reduction in supplies.
Bottleneck Inflation —Hoarding by traders of essential items,
artificially reduces supply and causes
— It takes place when the supply falls drastically inflation.
and the demand remains at the same level.
Magbook ~ Inflation 49
—Rise in the prices of crude oil, fertilizers etc.
—Rise in labour costs.
—Higher costs of imported materials.
Other Inflation Related Concepts
—Higher costs of capital due to squeezing of credit by the Deflation A general decline in prices, often caused by a
Central Bank. reduction in the supply of money or credit. Deflation can be
—Cartelisation by a few big suppliers to fix prices arbitrarily to also caused by a decrease in government, personal or
make undue profits. investment spending. The opposite of inflation, deflation has
—Monopoly of a single supplier in the market, enabling him to the side effect of increased unemployment since, there is a
set arbitrary prices. lower level of demand in the economy, which can lead to an
—Pushing up of profits by the management of a company by economic depression.
increasing the prices also leads to inflation. Stagflation When you have a slow economy with high inflation
—It has to be understood that it is not always easy to rates and unemployment, stagflation is usually the result.
differentiate between demand and supply side inflation and an When the economy does not grow and prices continue to rise
example from the demand side can also be explained from the
you have a stagflation cycle in the economy.
supply side and vice-versa.
Disinflation This is a reduction in the rate of inflation over time,
even though inflation itself may be positive.
Effects of Inflation Reflation It is an attempt to bring back inflation in an economy,
— The effect of inflation is different on different communities. which is in deflation so as to induce growth.
When price rises or the value of money falls, some groups
of the society gain, some lose and some stand in between.
Let us discuss the effects of inflation on distribution of
income and wealth, production on the society as a whole Measures of Inflation
Inflation refers to the changes in general price level in the
On Business Community —
country over a period of time. There are three standard
— Inflation is welcomed by entrepreneurs and businessmen measures of inflation, viz
because they stand to profit by rising prices. (i) Wholesale Price Index (WPI)
— They find that the value of their inventories and stock of (ii) Consumer Price Index (CPI)
goods is rising in money terms. They also find that prices (iii) GDP deflator.
are rising faster than the costs of production, so that their — In India, to measure the price level, the Wholesale Price
profit is greatly enhanced. Index (WPI) and the Consumer Price Index (CPI) are used.

On Fixed Income Groups Wholesale Price Index (WPI)

— Inflation hits wage-earners and salaried people very hard. — It measures the change in wholesale prices on weekly
Although wage-earners, by the grace of trade unions, can basis. On the basis of weekly indices, average annual WPI
chase galloping prices, they seldom win the race. is worked out. Average annual wholesale prices of the
— Since, wages do not rise at the same rate and at the same current year are related to average annual wholesale
time as the general price level, the cost of living index prices of the base year (assumed as 100).
rises and the real income of the wage earner decreases. New Series WPI
On Farmers The new series of the WPI has 697 items as compared to 676
items in old series. New vegetables and fruits such as radish,
— Farmers usually gain during inflation, because they can carrot, cucumber, bitter gourd, mosambi (sweet lime),
get better prices for their harvest during inflation. pomegranate, jackfruit and pear have been added to the list
of primary articles. In the mineral group, items like copper
On Investors concentrate, lead concentrate and garnet have been added
— Those, who invest in debentures and fixed-interest bearing and other items like copper concentrate, lead, dolomite and
magnesite have been removed.
securities, bonds etc lose during inflation. However,
investors in equities benefit because more dividend is Natural gas has been added as a new item. In the
manufacturing items list, around 173 new items including
yielded on account of high profit made by joint-stock
conveyer belt, rubber tread, steel cables, tissues paper and
companies during inflation.
wooden splint have been added, while 135 items like
— Inflation will lead to deterioration of gross domestic savings khandsari (unrefind raw white sugar), poppadom and video
and less capital formation in the economy and less CD players have been removed. 2011-12 is chosen as the
long-term economic growth rate of the economy. base year for WPI.
50 Magbook ~ Indian Economy
and CPI (Rural). The new CPIs once compiled will go a
Producer Price Index long way in filling a major data gap in price statistics.
The PPI covers price changes faced by the producers on primary, — The Central Statisticals Office (CSO), Ministry of Statistics
intermediate and finished goods and services ready for the and Programme Implementation, has revised the base
market. year of the CPI from 2010 to 2012.
The primary difference between the WPI and the PPI is, in
Introduction of CPI (Urban) and CPI (Rural)
addition to the coverage, that the WPI reflects changes in the
average cost of production including mark-ups and taxes, while — The Central Statistical Organisation (CSO) has taken up a
the PPI measures price changes of transacted goods at the gate new initiative of compilation of CPI (Urban) and CPI
excluding taxes. (Rural) and CPI (rural+urban) for all States or UTs and all
The purpose of the PPI is to provide a measure of prices received India by considering all sections of the urban and rural
by producers of commodities. The PPI usually covers the industrial population.
(manufacturing) sector as well as public utilities (electricity, gas — In urban areas, all cities or towns having population
and communications). Some countries also include agriculture, (2001 Population Census) more than 9 lakh and all State
mining, transportation and business services. or Union Territory capitals not covered therein were
Reflation It is an attempt to bring back inflation in an economy, selected purposively. In all 310 towns have been selected
which is in deflation so as to induce growth. either on purposive or random basis, from which 1114
quotations (price scheduled) are canvassed every month.
— In rural areas, with a view to having a manageable
Consumer Price Index (CPI) workload and considering that the CPI (Rural) would
— It measures the change in retail prices on monthly basis. provide the price changes for the entire rural population
On the basis of monthly indices, average annual CPI is of the country, a total of 1183 villages have been selected
worked out. Average annual retail prices for the current at all India level.
year are related to the average annual retail prices of the — The CSO has also decided to bring out a national CPI by
base year (assumed as 100). Like Wholesale Price Index, merging CPI (Urban) and CPI (Rural) with appropriate
different goods are accorded weights depending on their weights, as derived from NSSO 61st round of Consumer
relative significance. Expenditure Survey (2004-05) data.
— It needs to be emphasised that while WPI includes goods — Besides these two (CPI-Rural-Urban Combined and
only, CPI includes both goods as well as services. Another CPI-IW), two separate indexes i.e. CPI for Agricultural
important feature of CPI is that it focuses on a labourer and CPI for Rural labourer is also calculated.
homogeneous group of consumers. With the base year of 2012, these two are compiled by
— CPI reflects cost of living of the concerned category of National Stastical Office (NSO) in the Ministry of Statistics
consumers. CPI for the industrial workers is a widely used and Programme Implementation.
index in India. It is also used to determine the dearness
allowances of government employees.
CPI Industrial Worker CPI (IW)
— Besides, CPI of agricultural labourers, CPI for urban
non-manual employees are also calculated by the This index is used for determining Dearness Allowance (DA) to
government employees and workers in Industrial sector besides
economists for some specific purposes.
measuring inflation in retail prices and in revision of minimum
New Consumer Price Indices wages in Scheduled employment. The government in
— At the retail level, CPI is meant to reflect the cost of living October, 2020 has decided to revise its base year to 2016. It is
conditions and is computed on the basis of the changes in compiled and maintained by the Labour Bureau, an attached
the level of retail prices of selected goods and services, on office of the Ministry of Labour and Employment.
which consumers spend the major part of their income.
— Therefore, a broad-based CPI for the country as a whole, GDP Deflator
including both services and manufacturing products, has
greater relevance for Monetary Policy formulation. — It refers to the ratio between GDP at current prices and
GDP at constant prices. If GDP at Current Prices = GDP at
— In India, however, data on CPI relates to different
Constant Prices, GDP deflator = 1, implying no change in
segments of the population rather than the entire
price level. If GDP deflator is found to be 2, it implies rise
population. With a view to addressing this issue, the
in price level by a factor of 2 and if GDP deflator is found
Reserve Bank has taken the initiative and prepared an
to be 4 , it implies a rise in price level by a factor of 4.
approach paper on CPI (Urban) and CPI (Rural).
— GDP deflator is acclaimed as a better measure of price
— Subsequently, the Central Statistical Organisation (CSO)
behaviour because it covers all goods and services
has taken up the work for generating data on CPI (Urban)
produced in the country.
Magbook ~ Inflation 51

Core Inflation Measures to Check Inflation

— Another way to analyse inflation data is by looking at core — The handling of India’s inflation challenge consists of a
inflation, which is generally a chosen measure of inflation careful combination of effort on the part of the RBI and
that excludes the more volatile categories like food and government, including the Ministry of Finance and several
energy prices. The main argument, here is that the other ministries, alongwith advisory support by the
Central Bank should effectively be responding to the Inter-Ministerial Group (IMG) on inflation.
movements in permanent component of the price level
— The IMG on inflation recommended several steps for
rather than temporary deviations. It is, therefore, a
improving supply chains from the farmer to the consumer.
preferred tool for framing long-term policy.
It recommended amending the Agricultural Produce
Difference between WPI and CPI Marketing Committee (APMC) Acts in order to cut down
on the large middleman price margin. It also
Parameters for WPI CPI
recommended that one way to improve the supply chain
comparison
and benefit farmers is to allow FDI in multi-brand retail.
Targeted group Whole sellers and Retail users and
Businesses general public — The IMG argued that if this was permitted within a
Publishing agency Office of Economic National Statistics carefully crafted regulatory framework, there could be
Advisor (Ministry of Office (Ministry of large gains for farmers and also for ordinary consumers.
Commerce and Statistics and — The fiscal measure, the administrative measure and the
Industry) Programme
Implementation and monetary measure are the three different ways to contain
Labour Bureau) inflation.
Weightage of food 18.8% 50% — Keeping these issues in mind, government in 2020
Number of indices One Four separate brought three Legislations empowering farmers to sell
categories agricultural produce directly in the market and establish
Measures prices of Goods only Goods and services
contract farming agreements with the private players. The
both
Base year 2011-12 2012 and 2016
essential Commodities Act, 1955 was amended to increase
(CPI-IW) the private sector participation in food processing sector.
Utility For producers CPI (Combined) is
used as measure for Fiscal Measures
inflation by RBI since
— Fiscal policy can be effectively employed to check
2014
inflation. Manipulation of public expenditure, taxation and
public debt can be used for this purpose.
Change in Reporting of — Government can spend more money in the developmental
Inflation sphere to increase supply by improving productivity. Tax
incentives can also be used to improve the supply
— At present, the WPI for all commodities including
situation.
manufactured products is released only on a monthly
basis. However, until recently WPI for primary articles and
the fuel group was also being released on a weekly basis.
Administrative Measures
But, it was observed over a period of time that, there was — The authority to take decisions on this front is with the
a tendency for upward revisions in the indices reported executive branch of the government. Under this measure,
once the final numbers were later released. they:
— The higher frequency weekly reporting was thus, prone to —remove levy obligations in respect of imported materials.
more statistical noise and sometimes provided a —ban export of constrained materials.
misleading picture, so the trade-off was between the more —maintain the central issue price, particularly for rice and
wheat.
frequent and less reliable data and less frequent, but
—suspend future trading.
more reliable data. International practice for reporting CPI
—allot rice and wheat under Open Market Sale Scheme (OMSS)
inflation is also on a monthly basis.
and many more.
— In view of this, the Cabinet Committee on Economic
Affairs (CCEA) in its meeting held on 24th January, 2011, Monetary Measures
agreed to discontinue the weekly release of WPI for the
commodities. Items under the groups primary articles and
— Monetary measures come under the purview of Reserve
fuel and power with immediate effect. WPI shall, Bank of India (RBI). Through, the Monetary Policy review,
henceforth, be released on a monthly basis only. RBI tries to control price rise and maintain economic
growth and financial stability.
 Self Check
Build Your Confidence

1. Consider the following statements 7. In India, inflation measured by the [ RPSC 2013]
1. Headline inflation is a measure of the total inflation (a) Wholesale Price index number
within an economy. (b) Consumer Price index for urban non-manual worker
2. Headline inflation is affected by areas of the market (c) Consumer Price index for agriculture labours
which may experience sudden inflationary spikes such (d) national income defaultor
as food, vegetables or energy. 8. Which one of the following is likely to be the most
Which of the statement (s) given above is/are correct? inflationary, in its effect? [IAS 2013]
(a) Only 1 (b) Only 2 (a) Repayment of public debt
(c) Both 1 and 2 (d) Neither 1 nor 2 (b) Borrowing from the public to finance a budget deficit
2. Economic growth is usually coupled with [IAS 2011] (c) Borrowing from banks to finance a budget deficit
(a) deflation (d) Creating new money to finance a budget deficit
(b) inflation 9. Which one of the following measures is generally used by
(c) stagflation the government to contain the recession of the economy?
(d) hyper inflation [UPPCS 2009]
(a) Increasing money supply
3. The rate of inflation in India is measured in respect (b) Increasing government spending
(a) Consumer Price index (c) Decreasing taxation
(b) Wholesale Price index (d) All of the above
(c) money supply
(d) cost of living index for industrial worker 10. Consider the following statements regarding the
determination of inflation in India.
4. Which of the following is likely to be the most
1. Food Price index consists of two sub-components, namely
inflationary in its effect? (IAS 2021)
primary food articles and manufactured food products.
(a) Repayment of public debt
2. The weight of the primary food articles is less than the
(b) Borrowing from the public to finance a budget deficit
manufactured food products.
(c) Borrowing from banks to finance a budget deficit
(d) Creating new money to finance a budget deficit Which of the statement (s) given above is/are correct?
(a) Only 1 (b) Only 2
5. A rise in general level of prices may be caused by (c) Both 1 and 2 (d) Neither 1 nor 2
1. an increase in the money supply.
11. Consider the following statements
2. a decrease in the aggregate level of output.
1. CPI measures price change in both goods and services.
3. an increase in the effective demand.
2. WPI does not measure price change in services.
Which of the statement(s) given above is/are correct?
Which of the statement(s) given above is/are correct?
(a) Only 1 (b) 1 and 2
(a) Only 1 (b) Only 2
(c) 2 and 3 (d) All of these
(c) Both 1 and 2 (d) Neither 1 nor 2
6. Consider the following statements
12. With reference to inflation in India, which of the following
1. Inflation benefits the debtors. statements is correct? [UPSC 2015]
2. Inflation benefits the bond holders. (a) Controlling the inflation in India is the responsibility of the
Which of the statement (s) given above is/are correct? Government of India only
(a) Only 1 (b) The Reserve Bank of India has no role in controlling the
(b) Only 2 inflation
(c) Both 1 and 2 (c) Decreased money circulation helps in controlling the inflation
(d) Neither 1 nor 2 (d) Increased money circulation helps in controlling the inflation

1. (c) 2. (b) 3. (a) 4. (d) 5. (a) 6. (a) 7. (a) 8. (d) 9. (d) 10. (a)
11. (c) 12. (c)
Chapter seven
Public Finance
without any contractual obligations to
Public Finance the payee. It includes taxes, fines and
Public finance is the — The study of government’s revenue and forfeitures, special assessment levies,
expenditure is called as public finance. escheats, gifts and grants etc.
study of the financial
The boundary of public finance in modern Sources of public revenue can also be
health of State time is not limited to ways and means of classified into Tax and Non-Tax
Government and local government income and expenditure only, revenue.
bodies in India. Public but it also studies public debt, financial
Tax Revenue
administration and Fiscal policy of the
finance assesses the Tax is a compulsory payment by the
economy. So, we can say that public —
government revenue finance studies revenue and expenditure citizens to the government to meet the
and government of government of an economy and all the public expenditure. It is legally imposed
activities related to it. Public finance can by the government on the taxpayer and
expenditure of the in no case taxpayer can deny to pay
be divided into five sections which are as
public authorities and follows : taxes to the government.
one or the other to (i) Public revenue Types of Tax
achieve desirable effects (ii) Public expenditure — Tax can be direct or indirect : income
and avoid undesirable (iii) Public debt tax, wealth tax, gift tax etc are the
ones. (iv) Fiscal policy and examples of direct taxes and sales taxes,
(v) Financial administration excise duty, customs duty etc are the
examples of indirect taxes.
Public Revenue Direct Tax
— Public revenue, an indispensable organ of — A direct tax is that, which is borne by
public finance operation, includes all the person on whom it is levied. A direct
income and receipts of the government tax cannot be shifted to other person.
through various sources. Different means — Direct as well as indirect money burden
of revenue to the government are called of the direct tax is on the person on
sources of public revenue. Sources of whom the tax is imposed. Impact of the
public revenue can be broadly divided into tax as well as incidence of the tax is on
two categories such as : the same person.
(i) Earned Revenue is the kind of revenue, — As a proportion of gross tax revenue,
which is received from certain assured direct taxes have been accounting for
sources kept under the complete over a half of total tax revenue since
disposal of governmental ownership. It 2007-08.
includes public domain like rent, Some of the direct taxes are as follows :
royalties, sales of forest products etc — Personal Income Tax It is the tax levied
and commercial revenues like profits of directly on the income of individuals by
public sector enterprises, public utility the Central Government. Income sources
services etc. is added for taxation.
(ii) Unearned Revenue is that revenue, — Corporate Tax It is levied on the profit of
which is mobilised by the government the companies or corporations. Now, the
54 Magbook ~ Indian Economy

As of June, 2021 corporate tax for the companies with — Value added = Total sales − Cost of intermediate
turnover upto ` 250 crore is 25%. While it is 30% for the consumption.
companies with the turnover above 250 crore. To prevent
companies from avoiding taxes a Minimum Alternate Tax
Central Value Added Tax (CENVAT)
(MAT) at 15% of book profit is levied. It is one of the largest — The basic purpose of CENVAT is to eliminate the
source of revenue of the Central Government, covering about cascading effects of the taxes by Tax Credit system.
18% of the total revenue. — Under the CENVAT scheme, a manufactures of final
— Wealth Tax This tax was levied on the net wealth of the product or provider of taxable service shall be allowed
individuals, Hindu undivided family and joint stock to take credit of duty of excise as well as service tax
companies. To assess net wealth, net obligations are paid on input received.
deducted from its market value. It is a minor source of
Custom Duties
revenue of the government, primarily imposed to reduce
concentration of wealth in the society. — These duties are imposed on commodities, which are
to be imported or exported from India. In other words,
— Gift Tax This tax is imposed by the Central Government on
when a goods cross the political boundary of a country
all donations and gifts over and above the prescribed limits
or come from other countries, custom duties are
to the family members. However, donation given by the imposed. Like excise duties, customs duties also
charitable institutions and companies is not covered under contribute largely to the government revenue.
gift tax. This tax is basically imposed to check the evasion of
estate duty and wealth tax. Service Tax
— Interest Tax This tax is imposed on the interest income of — Comparatively a new concept in India, service tax is a
the commercial banks on their gross loans and advances. tax imposed on the person, who avails any specified
Now, it is not in force in India. service. Its importance as a source of revenue has
— Recent Initiatives for Direct Taxes Alternate Minimum Tax been increasing in recent years.
(AMT) has been extended to non-company assets. This — The government is receiving more and more revenue
move has been taken to widen the tax base. In order to bring from service tax. Because of this after year, more and
about greater certainty and to reduce litigation in matters more services are being covered under the service
related to transfer, pricing and international taxation, the tax net.
Advance Pricing Agreement (APA) scheme has been — This tax was introduced in India in 1994-95. With
notified. economic growth and expansion of service sector in the
Indirect Tax economy, revenue from service tax has been increasing
over the years. From Budget 2014-15, the negative list
— Indirect taxes are those taxes, which have their primary
concept in service tax has been reformed and a
burden or impact on one person, but that person succeeds
number of services have been brought under the ambit
in shifting his burden on to others.
of the service tax. However, some of the components
— Consequently, the final or the real burden of the taxes or the
under the negative list have been kept intact.
incidence has to be borne by a third person. In India, sales
— Surplus budget is the revenue of the financial year are
tax, excise duty, custom duty etc are the examples of indirect
greater than anticipated expenditures.
taxes.
Some of the indirect taxes are as follows :
Central Excise Duties Ways and Means Advances (WMA)
◆
Ways and means advances are provided by the RBI to the
— Central excise duties are imposed by the Central Government
states, banking with it, to help them to tide over temporary
on the goods produced within the country except certain
mismatches in the cash flow of their receipts and
goods on which State Governments are empowered to
impose tax. These goods include liquor, drugs etc.
payments.
◆
Such advances are under the RBI Act, 1934, repayable in
Value Added Tax (VAT) each case not later than 3 months from the date of making
— VAT is a multi point sales tax with set-off for tax paid on that advance.
purchases of inputs. There is no cascading (tax on tax) effect ◆
These are two types of WMA is normal and special.
as there is credit mechanism for tax paid on inputs. The tax
is levied on the value of the product and consumption only. Goods and Services Tax (GST)
Total burden of the tax is borne by the consumer only.
— VAT is simply a new name for the sales tax of states, in which
— Government of India implemented GST from 1st July,
a number of other indirect taxes have been merged. Haryana 2017. It converts the country into unified market,
was the first state to introduce VAT from 1st April, 2003. Now, replacing most indirect taxes with one tax. It is levied
most states have introduced VAT. both on goods (manufacturing) and services.
Magbook ~ Public Finance 55

— It is an integrated scheme of taxation that does not GST, (IGST) levied on international commodities and
discriminate between goods and services and is a part of services. It is imposed and recovered by the Central
the proposed tax reforms that centre on evolving an Government.
efficient and harmonised consumption tax system in the The amount of taxes received under this tax is distributed
country. Key features of the GST are as follows : to the state for the loss of revenue generated to the States.
(i) Two components one levied by the centre (referred to as — Union Territory GST (UTGST) Arrangement or provision
Central GST) and the other levied by the states (referred under the UTGST and Tax system is for the Union
to as State GST), rates for which would be prescribed Territory where they do not have their own Legislative
appropriately. Assemblies, such as Andaman and Nicobar Islands,
(ii) The Central GST and the State GST would be applicable Dadra and Nagar Haveli and Daman and Diu (DNHDD)
to all transactions of goods and services except the and Ladakh etc. These Union Territories have the
exempted goods and services. provision to and collect taxes by the Central Government.
(iii) The Empowered committee has decided to adopt a Taxes Out of GST
two-rate structure a lower rate for necessary items and
goods of basic importance and a standard rate for goods
◆
Taxes that are not included in any of the provision of the GST,
in general. There will also be a special rate for precious they contain alcohol, real estate, crude oil, petrol, natural gas
metals and a list of exempted items. and the fuel for turbine. All these items will be out of GST
provision and the current taxation system will be applicable on
(iv) The GST will be levied on import of goods and services
them.
into the country.
(v) The administration of the Central GST to the Centre and Direct Tax Code (DTC)
for State GST to the states would be given.
— DTC was proposed by the United Progressive Alliance
(vi) Central Taxes replaced by GST Central Excise Duty,
(UPA) Government to consolidate the law relating to the
Additional Duties of Excise and Customs, Special
direct taxes. The bill seek to replace the Income Tax Act,
Additional Duty of Customs (SAD), Service Tax and
1961 and Wealth Tax Act, 1957. The bill, in its original
Cesses and Surcharges on supply of goods and
form, widened the tax slabs and lowers corporate tax
services.
rates. It also removed a number of exemptions and grant
(vii) State Taxes Subsumed in the GST VAT, Central Sales for some other. DTC provision introduced in the Budget
Tax, Purchase Tax, Luxury Tax, Entry Tax, 2012-13 are as follows :
Entertainment Tax, Taxes on advertisements, lotteries, —General Anti- Avoidance Rule (GAAR).
betting, gambling and State Cesses and Surcharges. —Advance Pricing Agreement (APA).
Types of GST —Income tax exemption limit rose to ` 2 lakh.
Under the GST form, four types of GST are —Upper limit of 20% tax slab rose to ` 10 lakh.
— Central GST (CGST) Under the CGST, there is a provision —20% cut in Securities Transaction Tax (STT).
to impose tax on the supply of goods and services by the
Central government. Earlier, Central Excise, Excise (Drugs GAAR
and Toilet construction), Excise duties on the taxes — The General Anti-Avoidance Rule (GAAR) was proposed in
imposed by the Central Government, (Goods of special mid-March as a hart of budget for fiscal year 2013.
importance), additional duty of custom duty (known under — GAAR was scheduled to come into effect from 1st April,
CVD), Special Duty of Custom Duty (SAD), Service tax and 2013. In the Budget 2013-14, it was announced that a
gratuity surcharge related to the supply of goods or modified version of GAAR provisions will come into effect
services were separate taxes. All these included in CGST. from April, 2016.
— State GST (SGST) Taxes imposed and collected by the
— GAAR aims to target tax evaders partly by stopping Indian
State government on goods and services are levied under companies and investors from routing investment to
State GST system. Earlier, State governments pay VAT Mauritius or other tax heavens for sole purpose of
under State taxes, purchase tax, entry tax, entertainment avoiding tax.
tax, advertisement tax including State excise and
— GAAR was scheduled to come into effect from 1st April,
surcharge related to State sub-tax and imposition, lottery
2013. In the Budget 2013-14, it was announced that a
taxes, tax on speculation and gambling. All these taxes
modified version of General Anti-Avoidance Rule (GAAR)
now included in SGST.
provisions will come into effect from April, 2016. A
— Integrated GST (IGST, State Indemnification) The
number of representation were received against GAAR
proposed Goods and Services tax provides an integrated provisions introduced in the last budget.
56 Magbook ~ Indian Economy

Non-Tax Revenue — Lotteries organised by the Government of India or the

Government’s State.
— Non-tax revenue are those receipts, which are received — Post office savings bank.
from sources other than taxes like fees, fines etc. Some of
— Post and telegraphs, telephones, wireless, broadcasting
the non-tax revenue are as follows :
and other like forms of communication.
—Fee, License and Permit One of the main sources of non-tax
revenue of the government are fee, license and permit.
— Property of the union.
—Fee A fee is a payment to the government for the services that — Public debt of the union.
it renders to the people. Examples of fees are: land registration — Railways.
fee, birth and death registration fee, passport fee, court fee etc. — Rates of stamps duty in respect of bills to exchanges,
—License and Permit The amount that the government charges cheques, promissory notes etc.
for allowing the people to perform a given job, is called license or — Reserve Bank of India.
permit fee. “License fees are charged to give permission for — Taxes on income other than agricultural income.
something by the government.” e.g. driving license, import
license. There is a difference between fees and license fees.
— Taxes on the capital value of the assets, exclusive of
License fees are paid, when a person is permitted to do some agricultural land of individuals and companies.
specific job by the government. No service is provided to the — Taxes other than stamp duties on transactions in stock
license holder. exchanges and future markets.
—Escheat Escheat refers to that income of the state, which arises — Taxes on the sale or purchase of newspapers and on
out of the property that comes to it for want to a legal heir. Such advertisements published therein.
a property has no claimant. State alone has the legal right over — Terminal taxes on goods or passengers, carried by
it. railways, sea or air.
—Special Assessment It is yet another source of non-tax revenue
of the government. Special assessment is that payment, which State Sources
is made by the owners of those properties, whose value has
appreciated due to developmental activities of the government. — Capitation tax.
— Fines and Penalties Fines and penalties are those — Duties in respect of succession to agricultural land.
payments, which are made by the law breakers to the — Duties of excise on certain goods produced or
government by way of economic punishment. The aim is manufactured in the state, such as alcoholic liquids
not to earn revenue. Its actual aim is to force the people to opium etc.
be law abiding (follow the rules and regulations). — Estate duty in respect of agricultural land.
— It is determined by the government in an arbitrary manner — Fees in respect of any matters in the State list, but not
and not on the basis of administrative cost. including fees taken in any court.
— Land revenue.
— Income from Public Enterprises Several public enterprises
are owned by the government. For instance, Indian
— Rates of stamps duty in respect of documents other than
Railways, Nangal Fertilizer Factory, Indian Oil, Bhilai Steel those specified in the Union List.
Plant etc. — Taxes on agricultural income.
— Profit from sale proceeds of the products of these — Taxes on land and buildings.
enterprises constitutes the income of the government. — Taxes on mineral rights, subject to limitations imposed by
Parliament relating to mineral development.
Sources of Revenue —

—
Taxes on the consumption or sale of electricity.
Taxes on the entry of goods into a local area for
— The following list will show the respective sources of consumption, use or sale therein.
revenue for the Union and the States. — Taxes on the sale and purchase of goods other than
newspapers.
Union Sources — Taxes on advertisements other than those published in
— Corporation tax. newspapers.
— Currency, coinage and legal tender, foreign exchange. — Taxes on goods and passengers carried by road or on
— Duties of excise on tobacco and certain goods inland waterways.
manufactured or produced in India. — Taxes on vehicles.
— Estate duty in respect of property other than agricultural — Taxes on animals and boats.
land. — Taxes on professions, trades callings and employments.
— Fees in respect of any matters in the Union list, but not — Taxes on luxuries, including taxes on entertainments,
including any fees taken in any court. amusements, betting and gambling.
— Foreign loans. — Tolls.
Magbook ~ Public Finance 57

Duties Levied by the Union, but Collected and — Transfer Pricing It is the price at which divisions of a company
Appropriated by the States (Article 268) transact with each other. Transactions may include trade of
— Stamp duties and duties of excise on medicinal and supplies or labour. It is used when individual entities of a larger
toilet preparations (those mentioned in the Union firm are treated as separately run entities.
list) shall be levied by the Government of India but — Specific Duty Tax is levied based on weight or quantity.
shall be collected. — Ad Valorem Tax is levied based on value and not an weight or
—In the case, where such duties are leviable within any quantity.
Union Territory, by the Government of India. — Withholding Tax It means withholding tax of certain payments
—In other cases, by the States within which such duties such as salary to employees, payments to contractors, interest
are respectively leviable.
etc. It is the same as Tax Deducted at Source (TDS).
Taxes Levied and Collected by the Union, but Assigned — Capital Gains Tax It is the tax on gains made from buying and
to the States (Article 269) selling assets such as land, shares etc. Gain made on assets
— Duties in respect of succession to property other held for over three years (one year for shares) is called
than agricultural land. long-term capital gain.
— Estate duty in respect of property other than — Base Erosion and Profit Shifting (BEPS) It is of major
agricultural land. significance for developing countries due to their heavy reliance
— Taxes on railway fares and freights. on corporate income tax, particularly from multinational
— Taxes other than stamps duties on transactions in enterprises. BEPS refers to tax planning strategies that exploit
stock exchanges and future markets. gaps and mismatches in tax rules to artificially shift profits to low
or no-tax locations where there is little or no economic activity.
— Taxes on the sale or purchase of newspapers and
on advertisements published therein.
Tax Related Primary Concepts
— Terminal taxes on goods or passengers carried by
railways, sea or air. — Tax Evasion It is the illegal evasion of taxes by individuals,
— Taxes on the sale or purchase of goods other than
corporations and trusts. Tax evasion often entails taxpayers
deliberately misrepresenting the true state of their affairs to the
newspapers where such sale or purchase takes
tax authorities to reduce their tax liability and includes dishonest
place in the course of inter-state trade or commerce.
tax reporting, such as declaring less income, profits or gains
Taxes which are Levied and Collected by the Union, than the amounts actually earned or overstating deductions.
but which may be distributed between the Union and — Tax Shifting Transferring some or all of a tax burden of an entity
the States (Articles 270 and 272) (such as a subsidiary) to another (such as the parent firm) is tax
—Taxes on income other than agricultural income. shifting. Tax shift or tax swap is a change in taxation that
—Union duties of excise other than duties and taxes eliminates or reduces one or several taxes and establishes or
referred to in Articles 268, 268A and 269. increases others while keeping the overall revenue unchange.
— Taxes on income does not include corporation tax. — Tax Avoidance It is the legal usage of tax regime to one’s own
The distribution of income tax proceeds between the advantage to reduce the amount of tax that is payable by means
union and the states is made on the basis of the that are within the law. Tax shattering is very similar term and
recommendations of the Finance commission. tax havens are jurisdictions which facilitate reduced taxes. The
term tax mitigation is sometimes used, its original use was by
Important Terms Related to tax advisers as an alternative to the pejorative term tax
Taxation avoidance.
— Tax Haven It is a country or territory where certain — Fiscal Space It is a relatively new term that refers to the
taxes are levied at a low rate or not at all. Tax haven flexibility of a government in its spending choices and more
lead to loss of revenue for governments, money generally, to the financial well-being of a government. Peter
laundering etc. Cayman islands, Gibraltar, Haller (2005) defined it ‘‘as room in a government’s budget that
Liechtenstein etc are some of the tax havens. allows it to provide resources for a desired purpose without
jeopardising the sustainability of its financial position or the
— Pigouvian Tax It is a tax, which is imposed on
stability of the economy.’’
bodies having negative externalities. An example of
pigouvian tax is the carbon tax levied in some
* Higher fiscal deficits usually lead to rising public debt.
countries for causing pollution. India’s Central Government liabilities GDP ratio has
infact come down since 2002-03.
— Tobin Tax It is a tax levied on foreign exchange
* The government appointed a committee headed by
transactions both when foreign capital enters a
Dr Vijay Kelkar to check out a roadmap for fiscal
country and when it leaves. It is meant to check
consolidation.
speculative flows.
58 Magbook ~ Indian Economy

Public Expenditure Internal Debt

— Before independence, the activities of the Government in — Includes market borrowings, money raised by issuing
India were influenced by classical thinking. Classical bonds treasury bills, special securities issued to the RBI
economists opposed the idea of entrusting too many etc.
functions to the government and thus, public expenditure
remained limited. External Debt
— After independence, the government decided to interference — Includes borrowings from foreign countries and
directly in the economy of the country. It was realised that international financial institutions.
economic growth and welfare of the people cannot be — Non-government external debt includes NRI deposits,
increased without government playing a major role.
trade credit, external commercial borrowings etc.
— Centralised planning and the public sector were to play a — India’s external debt is held in multiple currencies, the
major role in this. Thus, the scope of public expenditure largest of which is the United States dollar (48.2%).
increased rapidly after independence.
Necessity of Public Debt
Sources of Government
— Public debt is considered necessary for the following
Expenditure reasons :
There are some sources of Government expenditure given belows : —Smoothening out tax rates. Borrowing means that tax rates
— Subsidies.
need not be increased or decreased sharply.
—In times of recession economy can be pump-primed by
— Purchase and provision of goods and services.
spending money through borrowing.
— Investments and money transfer.
—Financing war or other emergency expenditure.
— Creation and maintenance of the military police emergency
—To finance expenditure on social sector for human capital
and five fighting organisation. formation.
—Towards capital formation to boost economic activities in
Debt Management Strategy the country.
— Despite these benefits public debt is also criticised when
— In a more aimed at a focused targeting of subsidies for the
it reaches a high level. Reasons for its criticism are as
country’s debt management. The Nilekani Task force was
follows :
set-up to come up with a mechanism improve intro strategy
—It creates a burden of interest which has to be paid out of
for kerosene. The main recommendations are as follows :
the current revenue.
—Set-up a strong, robust IT infrastructure backbone to reform the
functioning of PDS, which would be an incentive based system —It often does not lead to direct or indirect returns which
for all stakeholders. makes its repayment difficult.
—End to end computerisation of PDS across the country. —It reduces availability of funds to the private sector.
—PDS Network (PDSN), as the National Information Utility (NIU) to —It can increase inflationary tendencies in the economy by
be the common software platform for all states, to implement and increasing the money supply.
operate the IT infrastructure for PDS.
—Aadhar (UIN) to be used in PDS to simplify ration card registration, Debt to GDP Ratio
cleaning up the beneficiary database. — It is the ratio of a country’s national debt to its Gross
—Set-up a Core Subsidy Management System (CSMS) for direct Domestic Product (GDP). By comparing what a country
transfer of subsidies on kerosene, LPG and fertilizer through owes to what it produces the debt-to-GDP ratio
Aadhar Enabled Bank Account (AEBA) to facilitate robust
indicates the country’s ability to pay back it’s debt.
identification of the beneficiary.
—Fertilizers movement and sale at market price with * In Fiscal year 2020-21, India’s debt to GDP
reimbursement of subsidy directly to the beneficiary. ratio was 60.5%. The external debt to GDP ratio
increased to 21.1 per cent in March 2021 from
Public Debt 20.6% in March 2020.
* The higher the debt to GDP ratio, the less likely
— Public debt in the Indian context refers to the borrowings of
country will be to pay its debt back and higher
the Central and State Governments. Public debt of Central
the risk of its default.
Government consists of internal and external debt and other
liabilities.
Magbook ~ Public Finance 59

The other members of the commission, which is

Finance Commission —
required to submit its report by October 2019, are
— According to Article 280 of Constitution, the President former economic affairs secretary Shaktikanta Das and
appoints a Finance commission after every 5 years. This former chief economic adviser Ashok Lahiri, NITI
Aayog member Ramesh Chand and Georgetown
provision is also a Fundamental feature of Indian Constitution,
University professor Anoop Singh.
which is not found in any other Constitution. The Finance
— The commission will review the current status of the
commission was appointed 2 years after the implementation
finance, deficit, debt levels, cash balances and fiscal
of the Constitution and every 5 years thereafter. discipline efforts of the union and the states.
— The President has the power to appoint a new Finance — Union Government extended the term of proposal of
commission even before the expiry of 5 years, if he deems it 15th Finance Commission by 11 months to 30th
necessary. In other words, the appointment of the Finance October, 2020.
commission is a continuous process according to our — The duration of the 15th finance commission was
Constitution. supposed to be from 1st April, 2020 to 31st March,
— Finance commission, generally, presents its recommendations 2025 but it is 2021-26 for the full set of
regarding the allocation of revenue between the centre and recommendation.
the state, so that, there is no discord between the centre and
the states. Recommendations of 15th Finance
— Main objective of the Finance commission is to assess the Commission
financial requirements of the states to determine amount of — The commission has reduced the vertical devolution-
grants- in-aid to be given to various states and to strengthen the share of tax revenues that the central shares with
the federal financial system. the states from 42% to 41%.
Objectives of Finance Commission — The 1% decrease is to provide for the newly formed
union territories of Jammu and Kashmir and Ladakh
— To determine the basis for the allocation of funds collected from the resources of the central government.
from the taxes, which are divisible between the centre and the — The previous FC used both the 1971 and the 2011
states.
populations to calculate the state’s shares, giving
— To formulate the principles regarding the grants to the states greater weight to the 1971 population (17.5%) as
from the centre. compared to the 2011 population (10%).
— To continue the agreements made between the Government of
India and the states or to recommend changes in them.
— Tax effort has been used to reward states with higher
tax collection efficiency. It has been computed as the
— To consider any other financial matter in the interest of the
ratio of the average per capita own tax revenue and
country, on being notified by the President to do so.
the average per capital state GDP during the
— On the basis of this arrangement, 15th Finance Commissions three-year period between 2014-15 and 2016-17.
have been set-up so far : — The commission highlighted some challenges with the
Finance Finance implementation of the Goods and Services Tax (GST).
Chairman Chairman
Commission Commission
14th Finance Commission
1st (1951) Mr KC Neogy 9th (1987) Mr NKP Salve
— The 14th Finance commission, headed by former RBI
2nd (1956) Mr K Santhanam 10th (1992) Shri KC Pant
Governor YV Reddy, has endorsed the compensation
3rd (1960) Mr AK Chanda 11th (1998) Prof AM Khusro road map for the goods and services tax finalised by
4th (1964) Mr R V Rajamannar 12th (2002) Dr C Rangarajan the Centre, but has called for an autonomous and
5th (1968) Mr Mahaveer Tyagi 13th (2007) Dr Vijay L Kelkar independent GST compensation fund.
6th (1972) Mr Brahmananda Reddy 14th (2013) YV Reddy — Members of the 14th Finance Commission YV Reddy,
Abhijit Sen, M Govinda Rao, Sushama Nath and
7th (1977) Mr JM Shelat 15th (2017) N K Singh
Sudipto Mundle. The Government of India on 24th
8th (1983) Mr YB Chavan February, 2015 accepted recommendations of the
14th Finance commission for increasing share of
15th Finance Commission states in central taxes to 42%.
— Former Planning Commission member N K Singh was — The commission recommended increase in the share
appointed as the chairman of the 15th Finance Commission, of states in the centre’s tax revenue from the current
which has been asked to look into the impact of the Goods 32% to 42%, the single largest increase ever
and Services Tax (GST) on finances of both the centre and the recommended.
states.
60 Magbook ~ Indian Economy

Recommendations of 14th Finance —Influencing Efficiency of Resource Allocation This is done by an

Commissions efficient and rational allocation of resources to maximise the rate of
growth.
— The 14th Finance commission is of the view that tax
— Fiscal policy also tries to achieve social justice through various
devolution should be the primary route for transfer of
measures :
resources to the states. In understanding the states
—Relying more on direct taxes than indirect taxes.
needs, it has ignored the plan and non-plan
distinctions. —Increasing taxes on the rich and expenditure on luxury goods while
lowering them on the poor and goods of common use.
— In recommending an horizontal distribution, it has
—Spending on welfare and development projects.
used broad parameters population (1971), changes
in population since then, income distance, forest
cover and area, among others.
Fiscal Imbalance and Deficit
— It has recommended distribution of grants to states Financing
for local bodies using 2011 population data with — Fiscal imbalance is a situation, in which there is a gap between
weight of 90% and area with weight of 10%. revenue and expenditure. Deficit financing is a method of filling
— Grants to states are divided into two. One, grant to this gap which in India means borrowing from the RBI against
duly constituted Gram Panchayats. Two grant to duly the issue of Treasury Bills and running down of accumulated
constituted municipal bodies. cash balances. This amounts to creation of money.
— It has divided grants into two parts. A basic grant — The need for deficit financing arises when the government fails
and a performance one for Gram panchayats and to mobilise enough resources to fund its plans. Since, cutting
Municipal, bodies. down plan expenditure would hurt growth, the government
instead resorts to deficit financing.
— The ratio of basic to performance grant is 90 : 10 for
panchayats and 80 : 20 for municipalities. Consequences of Deficit Financing
— During a recession deficit financing can have positive effects. It
7th Pay Commission leads to an increase in Aggregate demand, which puts the
— The 900-page report of the 7th Pay Commission hitherto idle machinery and capital equipment into operation
headed by Justice AK Mathur was presented to thus, leading to an increase in production and the general
former Finance Minister Arun Jaitley on economic activity.
November 19, 2015 with a recommendation that the — There is a time lag between the increase in demand due to
new scales be implemented from January 1, 2016. deficit financing and the increase in supply of goods and
— The panel recommended a 14.27% increase in basic services. This leads to high inflation during this period.
pay, the lowest in 70 years. The previous 6th Pay — The level of inflation depends on how much of the resources
Commission had recommended a 20% hike which are spent on producing consumer goods and how much on
the government doubled while implementing it capital equipment. Production of consumer goods leads to
in 2008. increased supply and thus, lower inflation.

Fiscal Policy Kelkar Committee Report on

— Fiscal policy is that part of government policy, which Fiscal Consolidation
is concerned with raising revenue through taxation
and with deciding on the amount and purpose of The Vijay Kelkar committee, which was given the task of preparing a
government spending. The idea of using fiscal policy fiscal consolidation plan has suggested number of steps, which are
to combat recessions was introduced by John given below:
Maynard Keynes in the 1930s. ◆
Immediate increase in the price of diesel by ` 4 litre that of
kerosene by
Objectives of Fiscal Policy ` 2 litre and cooking gas by ` 50 per cylinder.
— Fiscal policy in India has two major objectives : ◆
Instead of subsidies provision for diesel, kerosene, gas move to
(i) Improving the growth performance of the economy. system of market based price by March, 2014.
(ii) Ensuring social justice to the people.
◆
Implement of goods and service tax.
◆
Reduce excise and ST rates to 8%.
— Fiscal policy influences the growth performance in
the following manner :
◆
A 360° profile of all tax paying individual and institution should be
created to help decrease tax evasion and tax fraud.
—Influencing Resource Mobilisation India has done well in
this area as reflected in the tax GDP ratio which
◆
The proposed Food Security Bill should be appropriately phased
increased from 6.3% in 1950-51 to 16.2% in 2011-12. taking into account the present difficult fiscal challenge.
Magbook ~ Public Finance 61

Fiscal Responsibility and Budget Union Budget

Management Act, (FRBM) 2003 — The budget is an extensive account of the
government’s finances, in which revenues
— FRBM Act, 2003 was passed by the Union Government to provide a
from all sources and expenses of all activities
legislative control over the fiscal situation of the country, which had
undertaken are aggregated.
deteriorated earlier. It was meant to bring fiscal discipline, increase
plan expenditure, leave the RBI with autonomy as far as money — Union budget is an expression of the Fiscal
creation was concerned, meet the consumption expenditure of the Policy of the Government.
government from its own resources etc. — The Finance Minister presents the Union
— The Fiscal Responsibility and Budget Management Act, 2003 (FRBM budget every year in the Parliament that
Act) has been amended as part of the Finance Bill, 2012. It has contains the Government of India’s revenue
introduced two concepts to reform the expenditure aspect of the fiscal and expenditure for 1 fiscal year, which runs
policy. from 1st April to 31st March.
These are :
—Effective Revenue Deficit It excludes from the conventional revenue deficit,
Historical Preview
grants for the creation of capital assets. This is an important development — The term budget is actually derived from a
for the reason that while the revenue deficit of the consolidated general French word Bougette, which means a sack
government fully reflects total capital expenditure incurred, in the accounts or pouch. It was first used in France in 1803.
of the centre, these transfers are shown as reserve expenditure. In the Constitution of India, the term budget is
Therefore, the mandate of eliminating the conventional revenue deficit of nowhere used.
the centre becomes problematic. With this amendment, the endeavour of
— It is rather mentioned as Annual Financial
the government under the FRBM Act, 2003 would be to eliminate the
effective revenue deficit.
statement under Article 112 comprising the
Revenue budget, Capital budget and also the
—Medium-term Expenditure Framework Statement It will set forth a
estimates for the next fiscal year called
three-year rolling target for expenditure indicators. It would help in
undertaking a de-novo exercise for allocating resources for prioritised
budgeted estimates.
schemes and weeding out others that have outlived their utility. — As per the British legacy, the Union Budget of
India used to be presented on the evening of
NK Singh Committee last working day of the month of February to
follow the British budget.
— The FRBM Review Committee headed by former Revenue Secretary,
— During the NDA regime, then Finance Minister
NK Singh was appointed by the government to review the
Yashwant Sinha was the first to present the
implementation of FRBM. In its report submitted in January 2017,
budget on 28th February, 2001 at 11 am.
titled, ‘The Committee suggested that a rule based fiscal policy by
(The budget has to be passed by the Lok
limiting government debt, fiscal deficit and revenue deficits to certain
Sabha before it can come into effect on
targets is good for fiscal consolidation in India.
1st April.)
— Its members included RBI Governor Urjit Patel, Chief Economic
Advisor Arvind Subramanian, former Finance Secretary Sumit Bose, Preparation of Budget
and National Institute of Public Finance and Policy Director
Rathin Roy. — The budget is prepared by the budget division
— Review Committee Report has recommended a debt to GDP ratio of of Department of Economic affairs in the
60% for the general (combined) government by 2023, comprising Ministry of Finance (MoF), after consulting
40% for the Central Government and 20% for the State Governments. with other ministries and the Planning
As per the Constitution of India, it is mandatory for a State to take the Commission.
Central Government’s consent for raising any loan if the former owes — The process majorly includes following steps
any outstanding liabilities to the latter. which may be sequential or overlapping too.
Overall Budget
Financial Administration — Overall budget are available for more than 1
— All financial activities involving issues of financial administration fiscal year but are not distributed to individual
including public budget, its passing, auditing and similar other fiscal year. It is a hierarchical and structure
matters. Without a extensive study of relevant dimensions of financial containing budget structure elements (budget
administration the subject of public finance remains incomplete. hierarchy).
62 Magbook ~ Indian Economy

Passing of Finance Bill cash through the firm‘s capitalisation structure (debt, equity
(Under Rule 219 of the Lok Sabha) or retained earnings).
— Capital budget includes capital receipts and payments of
Classification of the Budget
the government. Loans from public, foreign governments
— Budget of the Union Government is classified into revenue and RBl form a major part of the government’s capital
account and capital account. receipts. Capital expenditure is the expenditure on
Revenue Account development of machinery, equipment, building, health
facilities, education, etc.
— Consists of all those receipts or expenditure or that do not
entail sale or creation of assets or increase or decrease of Outcome Budget
liabilities.
— An Outcome budget measures the development outcomes
— Capital account consists of receipts or expenditure from of all government programmes. For instance, it will tell a
liquidation or creation of assets or increase or decrease of
citizen if money has been allocated for building a primary
liabilities. Expenditure is also divided into two expenditure:
health centre has it indeed come up. In other words, it is
(i) Plan Expenditure Consists of money going to annual a mean to develop a linkage between the money spent by
plans of the Union and State Governments. a government and the results which follow.
(ii) Non-Plan Expenditure It is the expenditure not falling — Outcome budgeting in India was introduced by the
under the annual plans. It has a small capital Finance Minister P Chidambaram from Budget 2005-06. It
component whose largest chunk is on defense. Both is based on the idea that financial outlays in the budget do
plan and non-plan expenditure are divided into revenue not necessarily lead to outcomes, while the people of the
and capital account as usual. country are concerned with the outcomes.
Stages in Budget Enactment * The first such mini-budget was presented by TT
Krishnamachari on 30th November, 1956, in form of
The budget goes through the following six stages in the fresh taxation proposals through Finance Bills,
Parliament : demanded by the prevailing domestic and
(i) Presentation of the budget on the floor of the House International Economic Situation.
before the Lok Sabha. * John Mathai proposed the first Budget of Republic
(ii) General discussion on the budget. of India in 1950 and also the creation of Planning
(iii) Vote of account. commission.
(iv) Scrutiny by departmentally related Standing
* Finance Minister Morarji Desai has given Budget
committees. for the maximum number of times (10), followed by
P Chidambaram, who has given 9 Budgets.
(v) Voting on demands for grants.
(vi) Passing of Appropriation Bill (Article 114 of the
* CD Deshmukh was the first Indian Governor of
RBI to have presented the Interim budget for the
Constitution of India).
year 1951-52.
* Ms Indira Gandhi is the first woman to hold the
Types of Budgeting post of the Finance Minister and to have presented
Zero-Based Budgeting the budget in her capacity as the Prime Minister of
India in 1978.
— It is a method of budgeting, in which all budgetary
* Plan expenditure was for the first time presented
allocations are set to nil at the beginning of a financial year.
separately in the budget for 1959-60.
Gender Budgeting
— It came into being in 2004-05. To contribute towards the Deficit
women empowerment and removal of inequality based on
A deficit is the amount by which a sum falls short of some
gender, role of budgeting has been accepted through this
reference amount. The meaning of deficit differs from that of
step. debt which is an accumulation of yearly deficits.
Capital Budgeting
— Capital budgeting or investment appraisal is the planning Types of Deficits
process used to determine whether an organisation‘s — Revenue Deficit It is the difference between the revenue
long-term investments such as new machinery, receipt on tax and non-tax side and the revenue
replacement of machinery, new plants, new products, and expenditure. Revenue expenditure is synonymous with
research development projects are worth the funding of consumption and non-development.
Magbook ~ Public Finance 63

— Fiscal Deficit It is the difference between what the — Government budget deficit that is deficit spending.
government earns and its total expenditure. — Primary deficit, the pure deficit derived after deducting
◆
Fiscal Deficit = Difference between country’s expenditures and the interest payments and structural and cyclical deficit
earnings. part of the public sector deficit.
◆
Fiscal Deficit = Revenue Receipts (Net tax revenue + Non-tax — Income deficit (the difference between family income and
revenue) + Capital Receipts (only recoveries of loans and other the poverty threshold).
receipts) – Total expenditure (Plan and Non-plan) — Trade deficit ( when the value of imports exceed the value
of exports).
— Budget Deficit It considers only the difference between
the total budgeted receipt and the expenditure. It was — Introduction of new schemes would entail more spending
abolished in 1997. and it goes just opposite to what we are trying to do, i.e.
reduce deficit. Import duty is a tax collected on imports
— Monetised Deficit It is the borrowing made from the RBI,
and some exports by the customs authorities of a country.
through printing fresh currency. It is resorted to, when
It is usually based on the value of the goods that are
government cannot borrow from market.
imported. There are two distinct goals to import duties :
— Gross Fiscal Deficit The Gross Fiscal Deficit (GFD) of to raise income for Local Government, and to give a
government is the excess of its total expenditure, current market advantage to locally grown or produced goods that
and capital, including loans net of recovery, over revenue are not subject to import duties.
receipts (including external grants) and non-debt capital
receipts.
—Gross Fiscal Deficit = Total Expenditure – (Revenue Receipts Financial Stability and
+ Non-debt Creating Capital Receipts). Development Council
— Net Fiscal Deficit The Net Fiscal Deficit (NFD) is the gross
It is an apex-level body constituted by Government of
fiscal deficit reduced by net lending by government.
India, which was first mooted by Raghuram Rajan
— Primary Deficit Amount by which a Government’s total
committee in 2008. It envisages to strengthen and
expenditure exceeds, its total revenue, excluding interest
institutionalise the mechanism of maintaining financial
payments on its debt.
stability, financial sector development, inter-regulatory
—Primary deficit = Fiscal deficit – Interest payments.
coordination alongwith monitoring macro-prudential
— Gross Primary Deficit The Gross Primary (GFD) Deficit
regulation of economy.
(GPD) is the Gross Fiscal Deficit less interest payment
while the primary revenue deficit is the revenue deficit Financial Sector Legislative Reform
less interest payments. Commission
Action of the Government to It is a body set-up of Ministry of Finance by Government
of India to review and rewrite the legal-institutional
Reduce the Deficit architecture of the Indian financial sector, which is
A deficit is the amount by which a sum falls short of some chaired by a former judge of the Supreme Court of India
reference amount. In economics, a deficit is an excess of and have an electric mixer of expert members drawn
expenditures over revenue in a given time period. In more from the fields of finance, economics, public
specific cases, it may refer to administration, law etc.
— Balance of Payments (BOP) deficit, when the Balance of
Payments is negative.
 Self Check
Build Your Confidence
1. Consider the following taxes 8. Consider the following statements
1. Sales Tax 2. VAT 3. Property Tax 1. 14th Finance commission has recommended to
Which of the tax given above are Ad-valorem taxes? increase in the shave of states in the centre’s tax
(a) 1 and 2 (b) 2 and 3 (c) 1 and 3 (d) All of these revenue from the current 32% to 42%, the single largest
increase even recommended.
2. Consider the following statements
2. The 14th Finance commission, headed by former RBI
1. Gift tax for the first time was imposed in 1958. Governor YV Reddy did not endorse the compensation
2. Gift tax was imposed as a complement of the estate duty. road map for the goods and services tax finalised by
Which of the statement(s) given above is/are correct? the centre and also denied for an autonomous and
(a) Only 1 (b) Only 2 independent GST Compensation Fund.
(c) Both 1 and 2 (d) Neither 1 nor 2 Which of the statement(s) given above is/are correct?
3. Consider the following statements (a) Only 1 (b) Only 2
1. Personal income tax 2. Import duty 3. Service tax (c) Both 1 and 2 (d) Neither 1 nor 2
Which of the taxes given above is/are indirect tax? 9. The Union government extended the term of 15th
(a) 1 and 2 (b) 2 and 3 Finance Commission that is headed by N.K. Singh to
(c) 1 and 3 (d) All of these provide for the presentation of the final report
covering ............. by 30th October, 2020.
4. Consider the following statements [UPPCS 2009]
(a) 2019-20 to 2024-25
1. Service tax was introduced in 1994-95. (b) 2020-21 to 2025-26
2. There are 119 services in 2013-14 on which service tax is (c) 2021-22 to 2025-26
imposed. (d) 2021-22 to 2026-27
Which of the statement(s) given above is/are correct?
10. Consider the following taxes [IAS 2001]
(a) Only 1 (b) Only 2
(c) Both 1 and 2 (d) Neither 1 nor 2 1. Corporation tax 2. Customs duty
3. Wealth tax 4. Excise duty
5. Value added tax is [UPPCS 2009]
Which of the statement(s) given above is/are indirect taxes?
(a) an ad-valorem tax on domestic final consumption collected at
(a) Only 1 (b) 2 and 4 (c) 1 and 3 (d) 2 and 3
all stages between production and point of final sale
(b) an ad-valorem tax on final consumption collected at the 11. These has been a persistent deficit budget after year.
manufacturing level Which of the following actions can be taken by the
(c) tax on final consumption collected at the consumption rate government to reduce the deficit? [UPSC 2015]
(d) special tax levied by the states on products from other states 1. Reducing revenue expenditure
6. Fiscal deficit implies 2. Introducing new welfare schemes
(a) total expenditure-(revenue receipt+recovery of loan 3. Rationalising subsidies
+ receipts from disinvestment) 4. Expanding industries
(b) total expenditure-total receipt Select the correct answer using the codes given below
(c) total expenditure-(Revenue receipt+receipt from (a) 1 and 3 (b) Only 1
disinvestment) (c) 2 and 3 (d) All of these
(d) total expenditure-Disinvestment receipt
12. A decrease in tax to GDP ratio of a country indicates,
7. Fiscal deficit in the Union budget means [IAS 1994] which of the following statements?
(a) difference between current expenditure and current revenue 1. Slowing economic growth rate income.
(b) net increase in Union Government’s borrowings from the 2. Less equitable distribution of National income.
Reserve Bank of India Select the correct answer using the codes given below
(c) the sum of budgetary deficit and net increase in internal and (a) Only 1 (b) Only 2
external borrowing (c) Both 1 and 2 (d) Neither 1 nor 2
(d) the sum of monetised deficit and budgetary deficit

1. (d) 2. (c) 3. (b) 4. (a) 5. (a) 6. (a) 7. (c) 8. (a) 9. (c) 10. (b)
11. (a) 12. (b)
Chapter eight
India’s Balance of
Payments
Components of Capital Account
Balance of There are the principle forms of capital account
India’s balance of
Payments (BoP) transactions :
— When the difference in the value of —Foreign Investment It has two sub-components
payments has been which are as follows:
imports and exports of all the three
under increasing items i.e. visible, invisible and (i) Foreign Direct Investment (FDI) referring to
stress recently. Exports capital transfers, is taken into the purchase of assets in the rest of the
account, it is called Balance of world, which allows control over that assets.
have declined while e.g. purchase of a firm by TATA in the rest of
Payments (BoP).
imports have not the world.
— Thus, an overall record of all
fallen significantly, (ii) Portfolio Investment referring to purchase of
economic transactions of a country
resulting in increasing an asset in the rest of the world, without any
in a given period, with rest of the
control over that asset. Portfolio investment
trade and current world. into India also consists of Foreign Institutional
account deficits. — Balance of Payments (BoP) account Investment (FII).
India’s growing broadly comprises of the following e.g. purchase of the some shares of a
components: company by TATA in the rest of the world.
external exposures
— Current Account of Balance of —Loans It has two sub-components which are as follows:
can also be attributed Payments consist of all transactions (i) Commercial Borrowings referring to
to the increasing relating to goods, services and borrowing by a country (including
integration of India’s income. It is functionally classified government and the private sector) from the
into merchandise or visible and international money market. This involves
economy with the rest
invisibles. Current account deficit is market rate of interest without considerations
of the world. the situation where payments on of any concession.
the current account out of the (ii) Borrowings as External Assistance referring
country are more than the to borrowing by a country with considerations
payments into the country. In of assistance. It involves lower rate of interest
current account surplus, there is a compared to that prevailing in the open market.
net inward payment into the —Banking Capital Transactions referring to transactions
country on the current account. of external financial assets and liabilities of
Commercial Banks and Cooperative Banks operating
— Capital account is that account
as authorised dealers in foreign exchange. These
which records all such transactions include NRI deposits.
transactions between residents of
—Reserve Account The official reserve account records
a country and rest of the world, the change in stock of reserve assets (also known as
which causes a change in the foreign exchange reserves) at the country’s monetary
asset or liability status of the authority.
residents of a country or its —Net Errors and Omissions This is the last component
government. Investments (FDI and of the Balance of Payments and principally exists to
FII) and Borrowings External correct any possible errors made in accounting for the
Commercial Borrowing (ECB) are three other accounts. They are often referred to as
part of the capital account. balancing items.
66 Magbook ~ Indian Economy

Slow Rise in Export Earnings Export earnings rose,

BoP Trends —

however, they were not sufficient enough to meet the

India had faced pressure on Balance of Payments (BoP), since, rising imports. Thus, rise in exports has neither been
planning period due to either internal or external factors.
substantial nor continuous. The growth in exports has
Period I (1956-57 to 1975-76) not been sufficient enough to finance the rising
The period comprising the 2nd, 3rd and 4th Plans and first 2 imports.
years of 5th Plan saw heavy deficit in Balance of Payments (BoP) — Debt Service The Balance of Payments (BoP)
and extremely tight payment position. This period witnessed three problem has also aggravated due to the rising
wars, several droughts and the first oil shock in 1973, though the obligation of amortising payments in 2011-12, debt
government resorted to serve import controls and foreign service ratio was 6% with the ever increasing imports
exchange regulation etc. and slow pace of exports, the most effective solution
Period II (1976-77 to 1979-80) for India’s Balance of Payments (BoP) problem is cost
reduction and competitiveness in global market.
It was relatively short period and was a golden period as far as
BoP is concerned. In this period, India had a small current — Appreciation The recent appreciation of the rupee
account surplus of 0.6% of the GDP and also possessed foreign has made exports costlier and imports cheaper. It may
exchange reserves equivalent to about seven months imports. also add to the Balance of Payments (BoP) problem.
Period III (1980-81 to 1990-91)
This period broadly corresponds to the period of 6th and 7th Foreign Capital
Plans and was marked by severe BoP difficulties. The reasons for — Foreign capital inflow to the country can be either in
severe difficulties are as follows: Widening trade deficits, Gradual the form of concessional assistance or
decline in net receipts from invisibles, Reductions inflows of non-concessional flow.
concessional assistance to India principally from World Bank — Non-concessional flows include mainly External
group, The third oil shock during 1990-91, During 1990s,
Commercial Borrowings (ECBs), loans on market
domestic political developments affected confidence abroad in
terms, NRI deposits and foreign investment.
Indian economy etc, International rating agencies downgraded
India, Substantial outflow of deposits held by Non-Resident — Foreign investment can be categorised into Foreign
Indians (NRIs), Reserves declined to a low of $ 0.9 billion in January Direct Investment (FDI) and Foreign Institutional
1991. Investment (FII).

Period IV (1991-92 Onwards) Foreign Direct Investment (FDI)

The reforms of 1990’s have facilitated India to move away from — It refers to direct investment in the productive
closed economy framework towards a more open and liberal
capacities of a country by someone from outside the
economy. Foreign exchange reserves were built to very
country. Such an investment can be in the form of
comfortable positions and the difficulties of BoP came under
setting up a new plant or through purchase of shares
control and the reasons for the same are as follows:
of a company, where the shareholding gives the
—Trade balance has always been in deficit since, imports have
always exceeded exports. foreign entity control over the business of the
—When current account deficits are larger than capital account company.
surpluses, foreign exchange reserves are also used to cover these — A foreign company can set-up its business in India
deficits. from two ways, by setting up a company under the
The important reasons for deficit in India’s BoP position can be Companies Act or by setting-up an unincorporated
cited as follows: entity like Liaison office, project office or branch office.
— Irreversible Trade Deficit Our imperative imports of oil and — The government of India has amended FDI inflow in
coal and India’s passion for gold. 2021, the government increased foreign investment
— Rise in Imports The reasons for rapid rise in imports are limit from 49% to 74% in insurance sector. It also
building industrial base (in the early stages), increase in export launched Make in India intiative in September 2014
related imports (gems, jewellery, capital goods) increase in under which FDI policy for 25 sectors was liberalised
imports of industrial raw materials, rise in the price and further.
imports of Petroleum, Oil and Lubricants (POL) products etc. — FDI into India reached $ 81.7 billion in 2020-21. It
— Devaluation and Depreciation of the Rupee The devaluation was $74.4 billion in 2019-20. Singapore followed by
and depreciation of the rupee have led to an increase in the United States. Meanwhile, the World Investment
price of imports. Exports have become cheaper, the low price Report 2021, released on June 21 by UNCTAD, states
and income elasticities of demand for exports have resulted in that India was the fifth largest recipient of FDI in the
slow increase in exports. world.
Magbook ~ India’s Balance of Payments 67
Sectors which are Open to FDI FIPB is Abolished
— Most sectors are at least partially open to FDI, subject to a cap and The Union Cabinet has approved the abolition of 25
year old FIPB. Henceforth, concerned ministries will
specific conditions. There are two entry routes for FDI in India.
be responsible for direct approval of foreign
In sectors where FDI is allowed up to 100%, FDI enters under the
investment proposals. The decision falls in line with
automatic route, subject to sectoral regulations and other
Finance Minister Arun Jaitley’s proposal to scrap
conditions.
FIPB 2016-2017 Union Budget. FIPB was
— In this instance, no approval is required from the Reserve Bank of constituted in the mid-nineties under the Prime
India (RBI) or the government however, the investment must be Minister’s office following economic liberalisation.
notified to the RBI’s regional office within 30 days. Rationale behind this move is that over 90% of the
— In sectors, where FDI is allowed under the government route, prior FDI inflows in value terms enters through automatic
approval from the Foreign Investment Promotion Board (FIPB) was route. The government expects that scrapping of
required. FIPB would help in ease of doing business.

Key Changes in FDI Limits Foreign Institutional

Sector/Activity % of Entry Route
Investment (FII)
FDI/Equity — A foreign institutional investor is one which is
Defense Sector 100% (Automatic route increased from registered in a country outside of the one, in
49% to 74%) which it is investing. In India, it is used to refer to
Telecom Services 100% Automatic upto 49% government companies which invest in the country’s financial
route beyond 49% markets.
Tea Plantation 100% Automatic upto 49% government — In 2013, India accepted the internationally, laid
route beyond 49%
down definition of FII to remove the ambiguity
Asset Reconstruction 100% Automatic upto 49% government
between FII and FDI. Now, when an investor has
Company route beyond 49%
a stake of less than 10% in a company, it will be
Petroleum and Natural 100% Automatic route
Gas (Exploration) treated as FII and where and investor has a stake
Petroleum and Natural 49% Automatic
of more than 10%, it will be treated as FDI.
Gas (PSUs) — FIIs may invest in securities in both the primary
Commodity Exchange 49% Automatic route and secondary market in shares, debentures and
Power Exchanges 49% Automatic route warrants of listed or unlisted companies.
Pension sector 49% Automatic route — Some of the entities eligible to be treated as FII
Stock Exchanges/Clearing 49% Automatic route in India are pension funds, mutual funds, banks,
Corporations investment trusts, sovereign wealth funds,
Credit Information 100% Automatic route Foreign Central Banks etc.
Companies — FIIs can invest in securities in the primary and
Courier Services 100% Automatic route
secondary markets dated government securities,
Single Brand Product 100% Automatic upto 49% government commercial paper, derivatives, units of schemes
Retail Trading route beyond 49%
floated by domestic mutual funds (including UTI),
Insurance Sector 74% Automatic route
Indian depository receipts and security receipts.
Pharmaceuticals 100% Automatic route
Animal Husbandry 100% Automatic route Means of FII Investment
Food item 100% Automatic route — FIIs can invest through a registered broker on
e-Commerce 100% Automatic route recognised Indian stock exchanges. They can
purchase shares or convertible debentures
Sectors where FDI is prohibited
either through private placement or through offer
— Atomic energy generation for sale.
— Investments in Chit Funds — FIIs can also invest through a sub-account (a
— Cigars, cigarettes, or any related tobacco Industry person outside India on whose behalf
— Gambling or Betting businesses investments are proposed to be made).
— Housing and Real estate (except townships, commercial projects etc.) — FIIs can also issue Offshore Derivative
— Lotteries (online, private, government, etc) Instruments (ODIs) to persons who are regulated
by an appropriate foreign regulatory authority and
— Trading in Transferable Development Rights (TDRs)
after compliance with KYC norms.
— Railway operations (other than permitted activities)
68 Magbook ~ Indian Economy
— Large amount of FII investment into India comes through the Indian stock markets for issuing equity to Indian
participatory notes. investors.
— Spot exchange rates, at which different currencies are
FDI vs FII
trades for immediate exchange.
FDI inflows are preferred over FII inflows for the following reasons:
— The rise in the value of one currency relative to another
— FDI is considered to be long-term and stable investment
currency is called appreciation.
whereas FII is considered as hot money i.e. it can move out
quickly during adverse circumstances leading to instability
and volatility in the exchange rate and the stock market.
Foreign Exchange
— Since, FDI represents ownership, it leads to the inflow of
— Foreign exchange reserves are an important component
better technology management practices etc while FII is of the BoP and an essential element in the analysis of an
generally only interested in short-term gains. economy’s external position.
— While the above arguments are true to a certain extent, — India’s foreign exchange reserves comprise Foreign
FII’s have also been influencing the incorporation of better Currency Assets (FCAs), gold, Special Drawing Rights
technology and management in the companies where they (SDRs) and Reserve Tranche Position (RTP) in the
hold shares. International Monetary Fund (IMF).

Participatory Notes (P-Notes) Exchange Rate

— Exchange rate is the rate, at which Indian rupee will be
— These are financial instruments used by investors or hedge
exchanged vis-a-vis other international currencies, say
funds, that are not registered with the Securities and
US dollar, in the foreign exchange market.
Exchange Board of India to invest in Indian securities.
— The rupee was historically linked to the British pound
— Indian based brokerages buy India-based securities and
sterling till 1946. After independence, India had to fix
then issue participatory notes to foreign investors. Any
and maintain the external value of the rupee in terms of
dividends or capital gains collected from the underlying
gold or the US dollar as required under IMF rules.
securities go back to the investors.
Therefore, India fixed the value of rupee at ` 3.30 per US
— P. Notes are overseas Derivative Instruments that have
dollar. This was the official rate of exchange and RBI
Indian stocks as their underlying assets. They allow foreign
would buy and sell foreign currencies at this rate.
investors to buy stocks listed on Indian exchanges through
FIIs without being registered. — The 1994-95, budget announced full convertibility of the
rupee on current account i.e. freedom to buy or sell
Qualified Foreign Investor (QFI) foreign exchange in connection with the current account
— QFI is a person, who fulfills the following criteria: transactions under Article VIII of the IMF.
—Resident in a country or group which is a member of Financial
Action Task Force (FATF).
NEER and REER
—Resident in a country that is signatory to 1OSCO’s MoU or a — The Nominal Effective Exchange Rate (NEER) and Real
signatory of a bilateral MoU with SEBI. Effective Exchange Rate (REER) indices are used as
—Such person should not be resident in India or registered with indicators of external competitiveness of the country over
SEBI as an FII or a sub-account of FII. a period of time.
—QFIs are distinct from FIIs and non-resident Indians. They are
allowed to invest directly into mutual funds and stocks of Indian — NEER is the weighted average of bilateral nominal
companies. It was felt that foreign investors had been kept at exchange rates of the home currency in terms of foreign
bay owing to concerns relating to money laundering and due currencies, while REER is defined as a weighted average
diligence by the government and regulators. of nominal exchange rates, adjusted for home and
—For this reason, the new scheme of QFI was started to ensure foreign country relative price differentials.
more foreign capital inflows, reduce market volatility and
— Nominal rupee depreciation, while having some adverse
deepen the markets.
effects such as greater imported inflation, is also useful
— Global Depository Receipts (GDRs) These are equity
over time in offsetting higher domestic inflation and
instruments issued in international markets like London,
ensuring Indian exports remain competitive.
Luxemburg etc. Indian companies use GDRs to raise capital
from abroad. GDRs are designated in dollars, euros etc.
— REER captures movements in cross currency exchange
rates as well as inflation differentials between India and
— American Depository Receipts (ADRs) These are the equity
its major trading partner and reflects the degree of
instruments issued to American retail and institutional
external competitiveness of Indian products.
investors. They are listed in New York, either on Nasdaq or
New York Stock Exchange.
— The RBI has been constructing 6 currency (US dollar,
euro for euro zone, pound sterling, Japanese Yen,
— Indian Depository Receipts (IDRs) These are similar to
Chinese renminbi and Hong Kong dollar) and 36
ADR or GDR. They are used by non-Indian companies in
currency indices of NEER and REER.
Magbook ~ India’s Balance of Payments 69

The foreign Exchange Regulation Act (FERA) was

Present Exchange Rate Policy —
legislation passed by the Indian Parliament in 1973 and
— India has transited from fixed exchange rate policy to a come into force on 1st January, 1974.
market determined exchange rate. It is broadly a floating — FERA imposed stringent regulation on certain kinds of
rate regime with the central intervening only for reducing
payments. It deals with foreign exchange and securities
excess volatility, preventing the emergence of destabilising
and the transactions which had an impact on the foreign
speculative activities, maintaining adequate reserves and
exchange and import and export of currency.
developing on orderly foreign exchange market.
— The Foreign Exchange Management Act (FEMA) was an
— At present, the exchange rate policy is guided by the
act passed in the winter session of parliament in 1999
broad principles of careful monitoring and management
which replaced foreign exchange Regulation Act.
of exchange rates with flexibility, while allowing the
— FEMA has brought a new management regime of foreign
underlying demand and supply conditions to determine
exchange consistent with the emerging frame work of the
exchange rate movements over a period in an orderly
World Trade Organisation (WTO).
manner.

Policy Options with RBI to Manage Main Features of FEMA

Exchange Rate — Activities such as payments made to any person outside
India or receipts from them, alongwith the deals in foreign
— Using Policy Rates RBI can use policy rates (repo, CRR,
security is restricted. It is FEMA that gives the Central
SLR etc) to manage the exchange rate. By lowering
Government the power to impose the restrictions.
interest rates, supply of rupee’s increased in the market
leading to depreciation of the currency. Increasing — Restrictions are imposed on people living in India, who
interest rates on the other hand, takes out rupee from the carry out transactions in foreign exchange, foreign security
system leading to shortage of rupee supply and thus, or who own or hold immovable properties abroad.
appreciation of the rupee. — Without general or specific permission of the Reserve
— Using Forex Reserves RBI can sell forex reserves and Bank of India, FEMA restricts the transactions involving
buy Indian rupees leading to demand for rupee. Based on foreign exchange or foreign security and payments from
weekly forex reserves data, RBI seems to be selling forex outside the country to India the transactions should be by
reserves selectively to support rupee. Its intervention has an authorised person.
been limited as liquidity in money markets has remained — Deals in foreign exchange under the current account by an
tight and further intervention only tightens liquidity authorised person can be restricted by the Central
further. Government, based on public interest. Although, selling or
drawing of foreign exchange is done through an authorised
— Easing Capital Controls Capital controls could be eased to
person, the RBI is empowered by this act to subject the
allow more capital inflows. “Resisting currency
capital transactions to a number of restrictions.
depreciation is best done by increasing the supply of
foreign currency by expanding market participation.” This — People living in India will be permitted to carry out
in essence, has been RBI’s response to depreciating transactions in foreign exchange, foreign security or to own
rupee. or hold immovable property abroad, if the currency,
security or property was owned or acquired, when he or
FERA and FEMA she was living outside India or when it was inherited to
— FERA, (Foreign Exchange Regulation Act) in place since, him or her by someone living outside India.
1974 did not succeed in restricting activities such as the — Exporters are needed to furnish their export details to RBI.
expansion of Trans National Corporations (TNCs). After To ensure that the transactions are carried out properly,
the Amendment of FERA in 1993, it was decided that the RBI may ask the exporters to comply to its necessary
act would become the FEMA (Foreign Exchange requirements.
Management Act).
— This was done in order to relax the controls on foreign Capital Account
exchange in India, as a result of economic liberalisation. Convertibility in India
FEMA served to make transactions for external trade — Capital Account Convertibility (CAC) for Indian Economy
(exports and imports) easier. Involving current account for refers to the abolition of all limitations with respect to the
external trade no longer required RBI’s permission. movement of capital from India to different countries across
— The deals in foreign exchange were to be ‘managed’ the globe. According to the Tarapore Committee, Capital
instead of ‘regulated’. The switch to FEMA shows the Account Convertibility refers to the freedom to convert local
change on the part of the government in terms of foreign financial assets into foreign financial assets and vice-versa
capital. at market determined rates of exchange.
70 Magbook ~ Indian Economy

— It is associated with changes of ownership in foreign or — During good economic and fiscal position, domestic
domestic financial assets and liabilities and embodies the borrowers could enjoy triple benefits of
creation and liquidation of claims on or by the rest of the —Lower interest rates,
world. —Longer maturity and
— RBI appointed the Second Tarapore Committee to set out —Capital gains due to domestic currency appreciation. This
the framework for fuller capital account convertibility. would happen, when the local currency is appreciating due
to surge in capital flows and the debt service liability is
falling in domestic currency terms. The opposite would
India’s External Debt happen, when the domestic currency is depreciating due to
reversal of capital flows during crisis situations, as
— India’s external debt has increased over time and India is happened during the 2008, global crisis.
one of the highest indebted country of the world in terms of
— A sharp depreciation in local currency would mean
total debt outstanding.
corresponding increase in debt service liability, as more
— Gross external debt is defined, at a point of time, as ‘‘The domestic currency would be required to buy the same
outstanding amount of those actual current and not amount of foreign exchange for debt service payments.
contingent liabilities that require payments of principal and
— This would lead to erosion in profit margin and have
interest by the debtor at same points in the future and that
market-to-market implications for the corporate.
are owed to non-residents by residents of an economy.’’
There would also be debt overhang problem, as the
— At end-March 2021, India’s external debt was placed at volume of debt would rise in local currency terms.
$ 570 billion recording an increase of $ 11.5 billion over its
— Together, these could create corporate distress,
level at end-March 2020. The external debt to GDP ratio
especially because the rupee tends to depreciate
was 21.1%. Commercial borrowing comprised the largest
precisely, when the Indian economy is also under stress
component of external debt, with a share of 37.4 per cent,
and corporate revenues and margins are under
followed by non-resident deposits at 24.9 per cent and
pressure.
short term trade credit at 17.1 per cent.
The maturity profile of India’s external debt indicates the
NRI Deposits
—
dominance of long-term borrowings. Long-term external
debt accounted for 82.26% of the total external debt, while — Non-Resident Indian (NRI), deposits are of three types:
the remaining 17.74% was short-term debt. (i) Non-Resident (External) Rupee Account (NRE
Account) Deposits were introduced in 1970. Any NRI
Concepts of External Debt can open an NRE account with funds remitted to India
Sovereign (Government) and Non-Sovereign through a bank abroad. The amount held in these
(Non-Government) Debt deposits together with the interest accrued can be
repatriated.
— Sovereign debt includes:
(ii) Foreign Currency Non-Resident (Banks) [Deposits
—External debt outstanding on account of loans received by
(FCNR-B)] were introduced with effect from 15th May,
Government of India, under the external assistance programme
and civilian component of rupee debt. 1993. These are term deposits maintained only in
—Other government debt comprising borrowings from IMF,
pound sterling, US dollar, Japanese yen, euro,
defence debt component of rupee debt as well as foreign Canadian dollar and Australian dollar. The minimum
currency defence debt. maturity period of these deposits was raised from 6
—FII in Government Securities. Non-sovereign includes the months to 1 year effective October, 1999. From
remaining components of external debt. All other debt is 26th July, 2005, banks have been allowed to accept
non-sovereign debt. FCNR (B) deposits up to a maximum maturity period
of 5 years against the earlier maximum limit of 3 years.
External Commercial Borrowings (ECBs) (iii) Non-Resident Ordinary Rupee (NRO) Accounts Any
— The definition of commercial borrowing includes loans from person, resident outside India may open and maintain
Commercial Banks, other commercial financial institutions, NRO account with an authorised dealer or in
money raised through issue of securitised instruments like authorised bank for the purpose of putting through
bonds including India Development Bonds (IDBs) and bonafide transactions denominated in Indian rupee.
Resurgent India Bonds (RIBs), Floating Rate Notes (FRN) etc. NRO Accounts may be opened or maintained in the
— It also includes borrowings through buyers’ credit and form of current, saving, recurring or fixed deposits.
supplier credit mechanism of the concerned countries NRI or Persons of Indian Origin (PIO), may remit an
International Finance Corporation, Washington [IFC(W)], amount not exceeding USD 1 million per financial year,
Nordic Investment Bank and private sector borrowings from out of the balances held in NRO accounts.
Asian Development Bank (ADB).
 Self Check
Build Your Confidence

1. BOP (Balance of Payment) refers to than 10% of the post issue paid up equity capital of a
(a) transactions in the flow of capital. company shall be treated as FPI.
(b) transactions relating to receipts and payment of invisible. (d) On NRI investors, the committee recommended treating
(c) transactions relating only to exports and imports. non-repartriable investment as FDI.
(d) systematic record of all its economic transaction with the 6. Which one of the following countries is the largest
rest of the world. source of the Foreign Direct Investment in the Indian
2. Which of the following does not form part of current Economy?
account of Balance of Payments? (a) United States (b) Switzerland
(a) Export and import of goods (c) Singapore (d) Mauritius
(b) Export and import of services 7. Which of the following is/are not FDI policy changes
(c) Income receipts and payments after 2010? [NDA 2016]
(d) Capital receipts and payments
1. Permission of 100% FDI in automotive sector.
3. Which one of the following is the investment in 2. Permitting foreign airlines to make FDI upto 49%.
securities that is intended for financial gain only and 3. Permission of upto 51% FDI under the government
does not create a lasting interest in or effective approval route in multi-brand retailing, subject to
management control over an enterprise? specified conditions.
(a) Foreign Direct Investment 4. Amendment of policy on FDI in single-brand product
(b) Portfolio Investment retail trading for aligning with global practices.
(c) Equity Direct Investment Select the correct answer using the code given below
(d) Both ‘a’ and ‘c’ (a) Only 1 (b) 2 and 4
4. In which of the following years was the trade balance (c) 1 and 2 (d) 1, 2 and 3
favourable to India? [BPSC 2015] 8. Which one of the following factors is taken account to
(a) 1970-71 and 1974-75 calculate the Balance of Payment (BOP) of a country?
(b) 1972-73 and 1976-77 (a) Current Account
(c) 1972-73 and 1975-76 (b) Changes in the Foreign Exchange Reserves
(d) 1971-72 and 1976-77 (c) Error and Omissions
(d) All of the above
5. Which of the following is not the recommendation of
the Arvind Mayaram Committee on rationalising the 9. Which one of the following is not correct in the context of
FDI/FPI definition (June, 2014)? balance of payments of India during 2013-14?
(a) Foreign investment of 10% or more in a listed company (a) India’s exports were less than its imports
will be treated as Foreign Direct Investment. (b) Trade balance was negative
(b) In a particular company, an investor can hold the (c) Net invisibles were positive
investments either under the FPI route or under the FDI (d) Capital account balance was negative
route, but not both.
(c) Any investment by way of equity shares, compulsorily
convertible preference shares/debentures which is less

1. (d) 2. (b) 3. (b) 4. (b) 5. (d) 6. (c) 7. (a) 8. (d) 9. (d)

Chapter nine
India’s Foreign Trade
— Foreign trade plays a significant role March, 2021. It was later extended for
The patterns of India’s in the economy of each country. 6 months.
foreign trade have Foreign trade helps a country to — The government is pitching india as a friendly
changed considerably utilise its natural resources and to destination for manufacturing and exporting
export its surplus production. It can goods some key features of the new foreign
since the early 1990s. import technical know-how. tradepolicy are
From the financial — A country can industrialise itself by —India to be made a significant participant in world
year 1990-91 to the importing necessary capital, trade by 2020.
one of 2019-20 the machines and raw materials from —Merchandise exports from India Scheme (MEIS) to
more advanced and industrialised promote specific services for specific markets
total value of goods foreign trade policy.
nations. By proper control of foreign
exports increased more trade, employment, output, prices, —FTP would reduce export obligation by 25% and
than 16 times (from given boost to domestic manufacturing.
industrialisation and economic
—Industrial products to be supported in major
$18 billion to over development of the country can be
markets rates ranging from 2% to 3%.
$300 billion). During influenced favourably.
—Branding companies planned to promote exports
— According to Economic Survey in sectors where India has traditional strength.
the same time span,
2020-21, among India’s trading
goods imports partners, the top five export New Schemes in FTP 2015-20
increased almost destinations are USA, China, UAE, — FTP 2015-20 introduces two new schemes,
20 times. Singapore and Bangladesh. The top namely ‘‘Merchandise Exports from India
five import destinations are China, Scheme (MEIS’’ for export of specified goods to
USA, UAE, Switzerland and Saudi specified markets and Services Exports from
Arabia. With a bilateral trade of India Scheme (SEIS) for increasing exports of
$ 86.4 billion in fiscal 2021, China notified services, in place of a plethora of
has emerged as India’s largest trading schemes earlier, with different conditions for
partner. eligibiltiy and usage.

Foreign Trade Policy Merchadise Exports from India

(FTP), 2015-20 Scheme (MEIS)
— Now 5 different earlier schemes (Focus Product
— The new five years foreign Trade
Scheme, Market Linked Focus Product
policy 2015-20 provides a framework
Scheme, Focus Market Scheme, Agri
for increasing exports of goods and
Infrastructure Incentive Scheme and VKGUY)
services as well as generation of
have been merged into a single scheme,
employment and increasing value
namely Merchandise Export from India Scheme
addition in the country in keeping
(MEIS). Incentives under this scheme are
with the ‘Make in India’ vision. The
available on exports of notified goods to notified
focus of the new policy is to support
markets at notified rates. In order to avail this
both the manufacturing and services
benefit, all exporters are advised to declare on
sectors, with special emphasis on
all shipping bills from 1st June, 2015 onwards
improving case of doing business. In
mandatorily as ‘‘their intent to claim rewards
April, 2020, Government extended
under MEIS’’.
FTP for one more year, upto 31st
Magbook ~ India’s Foreign Trade 73

Service Exports from India Scheme Top Export Destinations (2019-20 in % Share)
(SEIS) United States 16.95%
— Served from India Scheme (SFIS) has been United Arab Emirates 9.21%
replaced with Service Exports from India Scheme China 5.3%
(SEIS). Now, all service providers located in India Hong Kong 3.5%
and earning foreign exchange, regardless of the Singapore 2.85%
Constitution or profile of the service provider, who is UK 2.8 %
exporting notified services, would be eligible for the Netherlands 2.67%
benefits at the rate of 3% or 5% of net foreign Germany 2.65%
exchange earnings. Bangladesh 2.62%
— The reward issued as Duty Credit Scrip under this Nepal 2.29 %
scheme and goods imported by using this scrip will
Indian Imports
be freely transferable and usable for all types of
goods/services for payment of custom duty, excise — An import is any good or service brought into one country from
duty and service tax. Incentives (MEIS and SEIS) another country in a legitimate fashion, typically for use in trade.
now are available to units located in SEZs also. Import goods or services are provided to domestic consumers by
foreign producers.
India’s Foreign Trade Position — An import in the receiving country is an export to the sending
India’s participation in foreign trade was continuously country. Import of goods normally requires involvement of the
declining till 1980. Since 2001, it has continually custom authorities in both the country of import and the country
improved. As per the current ranking (2018), India is of export and is often subject to import quotas, tariffs and trade
the 16th largest exporter and 11th largest importer of agreements.
foreign trade. — Imports in India are reported by the Directorate General of
According to Economic Survey 2020-21, among India’s Commerce. Among the major items of import, the value of
trading partners, the top 5 countries with which India Petroleum, Oil and Lubricants (POL) grew in the financial year of
has negative bilateral trade balance are China, 2019-20. The other major items of import are gold, pearl/stones,
Switzertand, Saudi Arabia, Iraq and South Korea while petroleum products, coal/coke, telecom instruments, iron and
the top 5 countries with which it has surplus trade steel in the financial year of 2019-20. Capital goods is the other
balance are USA, UAE, Bangladesh, Nepal and UK. major import category.
India has the highest trade deficit with China. — In 2020-21, Indian imports were valued at $ 388.92 billion, an
18% drop from 2019-20, when the country imported goods and
India’s Trading services worth $ 474.71 billion.
India’s overall exports (Merchandise and Services Top Import Destinations (2019-20 in % Share)
Combined) in 2019-20 are estimated to be USD$ China 13.7%
528.45 billion. Overall imports in April, 2019-March United States 7.5%
2020 are estimated to be USD$ 598.61 billion. United Arab Emirates 6.3%
Saudi Arabia 5.6%
Indian Exports Iraq 5%
Exports measure the amount of goods or services that Hong Kong 3.5%
domestic producers provide to foreign consumers. It is Switzerland 3.5%
good that is sent to another country for sale. In the past, South Korea 3.3%
export of commercial quantities of goods normally Indonesia 3.1%
required involvement of the custom authorities in both Singapore 3.1%
the country of export and the country of import.
More recently, with the advent of small trades over the Trade Composition
internet such as through Amazon and E-bay, exports Export Composition
have largely by passed the involvement of customs in
— The commodity composition of India’s trade has undergone
many countries due to the low individual values of these
many changes since liberalisation and has been driven by trade
trades. Nonetheless, these small exports are still
subject to legal restrictions applied by the country of policy, movements in international prices, and the changing
export. pattern of domestic demand.
Indian exports averaged 246.76 INR billion from 1978 Trade Composition Exports
until 2013. India is also one of Asia’s largest refined — The merchandise export stood at US$ 314.31 billion in
product exporters with petroleum accounting for around
2019-20. The estimated value of services export for 2019-20
18% of total exports.
stood at US$ 214.14 billion. Petroleum products, precious
74 Magbook ~ Indian Economy

stones, drug formulations & biologicals, gold and other — With two of its top trading countries i.e., USA and United
precious metals continue to be top exported commodities, Arab Emirates, India has consistently run trade surplus
with fastest growth seen in drug formulations & biologicals since 2014-15. On the other hand, India has trade deficit
in 2019-20 (April to November). continuously since 2014-15 with respect to other major
— Based on statistics from the International Monetary Fund’s trading partners i.e., China PRP, Saudi Arabia,
World Economic Outlook Database, India’s total Gross Iraq, Germany, Korea RP, Indonesia and Switzerland.
Domestic Product amounted to $ 8.721 trillon as of India had trade surplus with Hong Kong and Singapore till
October 2016. Therefore, exports accounted for about 3% 2017-18, before it changed to trade deficit in 2018-19.
of total Indian economic output. The bilateral imbalances have remained stable in most
cases.
India’s Top 10 Exports
List of top 10 export product categories according to Import Cover
Department of Commerce, Government of India (FY 2019-20) — The stock of foreign exchange reserves in terms of months
— Petroleum Products 13.18% of retrained imports of goods as at end of year. It measures
— Pearl, Precious, Semi-precious Stones 6.6% the number of months of money available in the national
— Drug Formulations, Biologicals 5.09% bank to cover the cost of imports. It is an operational
— Gold and other Precious Metal Jewellery 4.39% definition of import cover. An import coverage ratio is the
— Iron and Steel 2.96%
share (or percentage) of a country’s own imports that is
subject to a particular non-tariff barrier or anyone of a
— Electric Machinery and Equipment 2.86%
specified group of non-tariff barriers.
— RMG Cotton including Accessories 2.76%
— They are calculated by attaching actual values to bilateral
— Organic Chemicals 2.66% trade flows between various exporters and the importing
— Motor Vehicles/Cars 2.5% country. Import cover is an important indicator of the
— Marine Products 2.24% stability of the currency. During the currency crisis of
2013, when foreign exchange reserves fell to around $275
Imports billion, import cover dipped to around seven months.
— The merchandise import stood at US$ 467.19 billion in According to currency explits, eight to ten months of
2019-20. The estimated value of services import for import cover is essential for the stability of the currency.
2019-20 stood at US$ 131.41 billion. Crude petroleum,
gold, petroleum products, coal, coke and briquittes Export Promotion
constitute top import items, with fastest growth seen in
electronics in 2019-20 (April to November). India’s top five
— The main thrust of India’s Foreign Trade Policy has been to
promote exportable goods and produce importable goods
trading partners continue to be USA, China, UAE, Saudi
in the country to meet the domestic demand for foreign
Arabia and Hong Kong.
goods. A brief account of these major policy thrust are as
— India’s top 10 imports accounted for almost three-quarters follows:
(74.3%) of the overall value of its product purchases from
—Export promotion refers to policies and measures of the
other countries. government designed to encourage exports with a view to
improving forex reserves and correcting the BoP deficit. The
India’s Top Imports Products significance of export promotion (as a strategy to combat BoP
The following product groups represent the highest dollar deficit), has come into greater focus after imports have been
value in India’s import purchases during 2019-20. liberalised in accordance with the emerging trend towards
— Petroleum Crude 21.6% — Gold 5.9% globalisation. The government is trying to encourage exports
— Petroleum Products 5.8%
through various kinds of cash incentives, subsidies as well as
concessions.
— Coal, Coke and Briquittes, etc. 4.7%

— Pearl, Precious, Semi-precious Stones 4.7% Measures for Export Promotion

— Electronics Components 3.4% — Several committees have been appointed to offer
— Telecom Instruments 3% — Organic Chemicals 2.5% suggestions for the promotion of exports, viz Gorewala
— Industrial Machinery 2.5% Committee 1950, De Souza Committee 1957, Import and
— Electric Machinery and Equipment 2.3% Export Policy Committee 1962, Alexander Committee
1979, Tondon Committee 1980, Abid Hussain Committee
Overall Trade Balance 1984 and Rangarajan Committee 1991.
— The Balance of Payments (BoP) position of India improved — It is the recommendation of these committees that several
from accumulated foreign reserves of US$ 304.2 billion at steps have been initiated for the promotion of exports.
end of 2013-14 to US$ 412.9 billion at end of 2018-19.
Magbook ~ India’s Foreign Trade 75

The central government has sanctianed 60 AEZs

Export Processing Zone (EPZ) —
comprising about 40 agricultural cammodities. AEZs is
— A Free Trade Zone (FTZ) or Export Processing Zone (EPZ), spread across 20 states in the country.
also called foreign-trade zone, formerly free port, is an — His objective of setting up AEZs is to coverage the efforts
area within which goods may be landed, handled, made hitherto by various central and state government
manufactured or reconfigured and re-exported without the departments for increasing exports of agricultural
intervention of the customs authorities. commodities from India.
— Only when the goods are moved to consumers within the
country, in which the zone is located do they become
subject to the prevailing customs duties.
General Agreement on
— Free-trade zones are organised around major seaports,
Tariffs and Trade
international airports and national frontiers-areas with many — The General Agreement of Tariffs and Trade (GATT) was a
geographic advantages for trade. It is a region where a multilateral agreement regulations international trade.
group of countries has agreed to reduce or eliminate trade According to its preamble, its purpose was the
barriers. Free trade zones can be defined as labour intensive “Substantial reduction of tariffs and other trade barriers
manufacturing centres that involve the import of raw and the elimination of preferences, on a reciprocal and
materials or components and the export of factory products. mutually advantageous basis.”
— It was negotiated during the United Nations Conference
Special Economic Zone (SEZ) on Trade and Employment and was the outcome of the
— Asia’s first Export Processing Zone (EPZ), was set-up in failure of negotiating governments to create the
Kandla, India in 1965. The first SEZ Policy was announced International Trade Organisation (ITO).
in April 2000, which inter-alia provided for to make SEZ an — GATT was signed in 1947 and lasted until 1994, when it
engine of growth supported by quality infrastructure was replaced by the World Trade Organisation in 1995.
backed up by attractive fiscal package. The original GATT text (GATT 1947) is still in effect under
— To import stability to the SEZ regime, SEZ Act, 2005 the WTO framework, subject to the modifications of GATT
was enacted and which came into effect from 10th 1994.
February, 2006. As per the provisions of the SEZ Act,
2005 100% FDI is allowed in SEZs through the automatic GATT and the World Trade
route. Incentives The act offers a highly attractive fiscal Organisation (Uruguay Round)
incentive package, which ensures — In 1993, the GATT was updated (GATT 1994) to include
—Exemption from custom duties, central excise duties, service new obligations upon its signatories. One of the most
tax, central sales taxes and securities transaction tax to both
significant changes was the creation of the World Trade
the developers and the units.
Organisation (WTO).
—Tax holidays for 15 years (currently the units enjoy a 7 years
tax holiday), i.e. 100% tax exemption for 5 years, 50% for the — The 75 existing GATT members and the European
next 5 years and 50% for the ploughed back export profits for Communities became the founding members of the WTO
the next 5 years. on 1st January, 1995.
—100% income tax exemption for 10 years in a block period of
— The other GATT members rejoined the WTO in the
15 years for SEZ developers.
following 2 years (the last being Congo in 1997). Since,
— Infrastructure Provisions have been made for
the founding of the WTO, 21 new non-GATT members
—The establishment of free trade and warehousing zones to
have joined and 29 are currently negotiating membership.
create world class trade-related infrastructure to facilitate
import and export of goods aimed at making India a global — There are total of 164 member countries in the WTO.
trading hub. The setting up of offshore banking units and units Afghanistan became the new member as on 29th July,
in an International Financial Service Centre in SEZs. 2016. Russia and Vanuatu became members in 2012 but
—The public private participation in infrastructure development. Syria and SFR Yugoslavia have not rejoined the WTO.
— The setting up of a ‘SEZ authority’ in each Central
Government SEZ for developing new infrastructure and Black Money
strengthening the existing one. — Black money is unaccounted for and untaxed cash
generated by dealings in black economy. Black money
Agri Export Zones (AEZ) proceeds are usually received in cash from underground
— With the prime objective of boosting agricultural exports economic activity and, as such, is not taxed.
from India in March 2001, Government of India — Recipients of black money hide it, spend it only in the
announced a policy of setting up the Agri Export Zones underground economy, or attempt to give it the
(AEZs) across the country. appearance of legitimacy through money laundering.
 Self Check
Build Your Confidence

1. Name of the countries which India has negative bilateral 6. Free traders maintain that an open economy is
trade balance. advantageous in that it provides all the following except
1. China (a) Increased competition for world producers.
2. Switzerland (b) A wider selection of products for consumers.
3 South Korea (c) Relatively high wage levels for all domestic workers.
Codes (d) The utilisation of the most efficient production methods.
(a) Only 2 7. Terms of trade between two countries refer to a ratio
(b) 1 and 2 of ..........
(c) Only 3 (a) Export prices to import prices.
(d) 1, 2 and 3 (b) Currency values.
2. Which one of the following items has gained the highest (c) Export to import.
growth rate in the import composition of the Indian (d) Balance of trade to Balance of payments.
Economy in the last decade? 8. Consider the following
(a) Project good 1. Edible oil
(b) Iron and steel 2. Sugar
(c) Petroleum Products
3. Medicinal and Pharma-products
(d) Cotton Accessories
4. Fertilisers
3. Measures to reduce imports will 5. Petroleum crude and product
(a) Boost injections into an economy. Which of the items given above are the components of the bulk
(b) Reduce withdrawals from an economy. import in the Indian economy?
(c) Decrease injections into an economy. (a) 1, 3, 4, 5
(d) Increase withdrawals from an economy. (b) 1, 2, 4, 5
4. Five different earlier schemes have been merged into a (c) 2, 3, 4, 5
single scheme, namely (d) All of the above
(a) Service Exports from India Scheme. 9. Which one of the following percentages is the share of
(b) Merchandise Exports from India Scheme. the Indian Export in the International Trade?
(c) Pradhan Mantri Swasthya Suraksha Yojana. (a) Less than 1%
(d) National Urban Health Mission. (b) More than 1 but less than 4%
5. International Trade is most likely to generate short-term (c) More than 4 but less than 5%
unemployment in (d) More than 5 but less than 7%
(a) Industries in which there are neither imports nor exports. 10. Which of the following countries has the largest trade
(b) Import-competing industries. surplus in 2020-21?
(c) Industries that sell to domestic and foreign buyers. (a) China (b) United States
(d) Industries that sell to only foreign buyers. (c) UAE (d) Singapore

1. (d) 2. (c) 3. (b) 4. (b) 5. (b) 6. (c) 7. (a) 8. (b) 9. (b) 10. (b)
Chapter ten
Demographic Profile of India
These four stages have been described below:
Demography
India comes next only to — Demography is a statistical study of First Stage
China as regards to the human population. It studies a variety of — Stage of high birth rate and high death
size of its population, but variables related to population like size, rate.
growth, distribution, density, composition Birth and death rates are both high,
is seventh in the world —
and their spatial and temporal variations. population growth is slow and fluctuating.
as regards to the area. — A broader study of demography also
Thus, on 2.4% of world’s includes the relationship between the Second Stage
area and with 1.8% of aforementioned variables and the (Early Expanding)
world’s income, India is economic, social, cultural and other
— Stage of high birth rate and low death rate:
factors.
maintaining 18% of —Birth rate remains high death rate falls.
— Demographics are the quantifiable Population begins to rise rapidly.
world's population. It statistics of the given population based
clearly indicates that on the study of demography. Third Stage (Late Expanding)
there is excessive burden — Stage of declining birth rate and low death
of population Theory of Demographic rate:
in India. Transition —This stage is characterised by decline in birth
— The Demographic Transition theory is a rate, low death rate and low population
generalised description of the changing growth (growth rate of population declines).
pattern of mortality fertility and growth —Birth rate starts to fall; death rate continues
to fall. Population continues to rise.
rates as societies move from one
demographic regime to another.
— Theory of Demographic Transition is
Fourth Stage (Low Fluctuating)
— Stage of low birth rate and low death rate:
credited to Frank W Notestein, who
—In the fourth stage of demographic transition,
gave his theory in 1945. This theory
a low birth rate and low death rate lead to a
was based on the data from Western stationary or declining population.
countries, which experienced a —It is called a stage of stationary population.
transition in demography from the stage —Birth and death rates both are low.
of high birth rates and high mortality to Population is steady or declining as in many
a stage of low birth rates and low Western European nations at present.
mortality with a consequent declining
population.
— According to this theory, all
Optimum Theory of
countries pass through stages of Population
demographic transition, which is — This theory states that in every country,
accompanied by industrialisation and there is an optimum level of population.
economic development. While Notestein “The optimum population is that, which
gave three stages of demographic gives the maximum income per head.” If
transition, later demographers the population exceeds the optimum level,
expanded it into four stages. there is the problem of over population.
78 Magbook ~ Indian Economy

—1961-1971 This period witnessed an increase in population

Population Theory of Malthus by 10 crore 90 lakhs. Growth rate was 24.8%.
— Thomas Robert Malthus was the first economist to propose —1971-1981 During this period, population in India rose to
a systematic theory of population. He gave his ideas 68 crore 33 lakhs. Thus, 13 crore 51 lakhs persons were
regarding population in his book Essay on the Principle of added to the total size of India’s population.
Population. He argued that while food production could
only increase in arithmetic progression, human populations (iv) Period of High Growth with Definite
grow exponentially. Thus, he predicted a future when Signs of Slowing Down (1981 to Present)
humans would have no resources to survive on. — 1981-1991 In this period, population went up to 84 crore
— He supported ‘preventive’ and ‘positive’ checks on 63 lakhs making addition of 16 crore in 10 years.
population growth such as late marriage. He was however, — 1991-2001 In 2001, the population of India went up to
against birth control after marriage. 102.90 crore. Thus, between the period 1991-2001, the
— Most modern economists disagree with Malthus since, he population of India increased 18.07 crore.
neglects the possibilities from technology and the fact that — 2001-2011 In 2011, the population of India, was 121.08
a larger population increases the chances of someone crores. This represents an increase of 18.14 crore in the
achieving breakthroughs in technology. previous decade. It was the first time since, census began
that the decadal population growth was lower than the
Size and Growth of India’s previous decade.
Population
— India’s population increased rapidly in the post
independence period. Between 1951-61, it increased by
Birth and Death Rates
more than 7.82 crore or by nearly 21.6%, which — Birth and death rates in India, are high compared to most
exceeded its growth rate of the previous 40 years. This countries in the world. Birth rate refers to number of
excessive rise in population is called population explosion. children born per thousand persons in a year. Death rate
refers to number of people dying per thousand persons
— Since 1951, population has been increasing constantly.
in a year. When it is said that birth rate in India is 23, it
Between 1971-81, growth rate of population was 24.8%
means every year 23 children are born per thousand
and between 1981-91, it was 23.8%.
persons on an average.
— India’s population growth rate, has decelerated to 17.64%
— It is clear that birth rate in India, is still very high in
in the decade 2001-2011, the slowest rate to growth in
comparison to birth rate of developed nations like Japan,
this past century. Study of the growth of India’s population
can be divided into four periods of time: Germany, Canada and UK.
— If, we compare the birth rates of India and China, we find
(i) Period of Stable Population (1891 to 1921) that birth rate in India is double the birth rate in China.
— Between 1891 and 1921, rate of growth of population in However, death rate in India is almost same in
India, was low. In these 30 years, population increased by comparison to the death rates of other countries.
1.26 crore.
It was so because in these years, calamities and
—
epidemics, like famines, plague, malaria etc took a heavy
Density of Population
toll of human lives. The epidemic in 1918, took a toll of — Density of population refers to average number of people
140 lakh human lives. living per square kilometre. Density of population in a
country is measured by dividing its total population by
(ii) Period of Growth of Population
total land area.
(1921 to 1951)
— In 2011, India’s total population was 121 crore that used
— Since 1921, population has been increasing at a rapid
to live over an area of 32.80 lakh sq km. According to
rate. The trend of growth of population in India, since
Census 2011, density of population in India was 382 per
1921, has been consistently on the rise. That is why,
sq km.
Census Commissioner has referred the year 1921 as Year
of Great Divide. This increase was higher than that of the Real Population Density
previous 30 years. — Instead of measuring population density for the entire
(iii) Period of Population Explosion area of the country, some parts of which might not be
(1951 to 1981) liveable, a more accurate measure is considered to be
— In this period, population increased at a very fast rate. (real population density) or physiological density, which
This period is called period of population explosion. measures the population per sq km of arable land
—1951-1961 In this period, growth rate was recorded to be available in a country. This measure signifies the feeding
21.6%, which was highest for any decade before that. potential of the country to its citizens.
Magbook ~ Demographic Profile of India 79
— India’s physiological density is much lower compared to Two Main causes of rise in urban population in India are
many other countries due to the availability of large arable as follows:
land.
Migration Effect
— Rural life in India, suffers from many difficulties, such as
Census 2011 less opportunities of employment, low level of income,
◆
The Census 2011 is the 15th National Census survey lack of educational and training facilities, lack of health
conducted by the Census Organisation of India. and medical facilities etc. In order to get rid of these
◆
Mr C Chandramouli is the Commissioner and Registrar difficulties, rural people migrate to urban areas.
General of the Indian 2011 Census. — Industrialisation Effect The industrial revolution brought
◆
The 2011, Indian National census has been conducted in about new production techniques. By this manufacturing
2 phases – house listing and population. has created more jobs opportunities in urban areas.
◆
The National Census survey covered all the 28 States of
the country and 7 Union Territories including 640 Age Structure/Composition
districts, 497 cities, 5767 Tehsils and over 6 lakh — Age structure of the population of a country indicates the
villages. extent, to which the population of that country is productive
from the economic point of view.
Rural-Urban Population — Population in the age group of 15-60 years is known as
— Ratio of urban population to the total population of a working population. Population in the age group of 0-14
country is an index of the level of industrialisation of that years and above 60 years is known as non-working or
country. As industries gather momentum in a country, ratio dependent population. Higher proportion of working
of urban population goes on rising. population is beneficial for the economic development of
the country.
— India is an agricultural country, so ratio of urban
population is less than the rural population. — In India, percentage of population in the age group of
0-14 years is still high. In India, percentage of population
Important Facts Related to Rural/Urban above 60 years is increasing. That indicates higher life
Population (2011 Census) expectancy and reduction in death rate.
— In the decade from 2001 to 2011, rural population
increased by 90.47 million, while urban population Demographic Dividend
increased by 91 million. For the first time, increase in — It refers to an opportunity before a country with a high
urban population has outpaced the growth in rural share of population between the ages of 15 and 64, to
population. In percentage terms, the increase in rural and boost economic growth. This stage is reached when the
urban population was 12.18% and 31.80% respectively. country experiences lower fertility rates, which means that
the dependent population below the age of 15 years is low.
— Himachal Pradesh (89.96%) has the largest proportion of
rural population, while Delhi (97.5%) has the highest — The population above 64 years of age is also low due to
proportion of urban population. the lower life expectancies of the older generations. On
the other hand, the population between 15-64 is high,
— Sex ratio in the country improved by 7 points, from 933 in
due to the higher birth rates in the previous generation.
2001 to 940 in 2011. The improvement in rural areas was
This reduces the dependency ratio (share of population
of one point from 946 to 947, while in urban areas, it
not engaged in productive employment and dependent on
improved by 26 points from 900 to 926. Kerala has the
others) and thus, boosts the economic growth.
highest sex ratio in total (1084), rural (1077) and urban
(1091) population. — A larger working population also means that the domestic
savings rate is high (since, the dependent population
— Child sex ratio (0-6 age group) has dropped in the country
does not increase savings, but reduces them) and thus,
by 13 points between 2001 and 2011 (927 to 914). In
investment and economic growth is higher. Many East
rural areas, the fell was higher at 15 points (934-919),
Asian countries were able to achieve high economic
while in urban areas, it fell by 4 points (906-902).
growth rates by utilising their demographic dividend.
Andaman and Nicobar Islands has the highest child sex
ratio in rural areas (975), while Nagaland has the highest — Demographic dividend can only be useful, if it is
in urban areas (979). accompanied by supportive national policies, which
improve literacy, provide employment, health care etc.
— Literacy rate for the country as a whole was 74.04% and
High share of young population in a country can also
was 68.91% in rural areas and 84.98% in urban areas.
have negative consequences like social unrest, crime and
The increase in literacy rates was 9.21 points (total), 10.17
high divorce rates etc.
points (rural) and 5.06 points (urban).
80 Magbook ~ Indian Economy

Demographic Dividend: India Male rate of literacy was 82.14% and female rate of
literacy was 65.46%.
Population
1961 1971 1981 1991 2001 2011 — The highest literacy rate was in Kerala. It was 93.91%.
Group/Year
— In Bihar, the literacy rate was just 63.82%.
0-14 41 41.2 39.5 37.7 34.3 30.2
— The female literacy rate of Kerala was 91.98%, which is
15-64 56 55.5 57 58.4 61.4 64.8
also the highest in India.
65 and above 3 3.3 3.5 3.9 4.3 5
— The lowest female literacy rate was in Rajasthan, it was
Number shows the share of population as a percentage of total only 52.66%. In Punjab, the female literacy rate was
population. 71.34%. In Haryana, it was 66.77% and in Himachal
Source World Bank Pradesh, it was 76.6%. In Jharkhand, it was only 56.21%.
— It may be noted that all the States and Union Territories
Population Pyramid have shown increase in literacy rate during 2001-2011.
— Population pyramid is a graphical illustration of the
different age groups in a population along with the male National Population Policy
and female population. The horizontal axis represents the — Population policy refers to all those legal, administrative
absolute numbers of population, with one side programmes and other government efforts, which aim at
representing the male population and the other side reducing birth rate and improving the quality of life.
representing the female population.
— After independence, the Government of India adopted a
— The vertical axis is divided into equal divisions national policy on population with the objective to check
representing different age groups such that it the increase in birth rate and improve the standard of
encompasses the entire population of the country or living of people. This policy has been revised from time to
region. time and its scope has been widened. It has been very
effective in initiating measures for population control.
Life Expectancy
— Expectation of life refers to the average life of the New National Population Policy (2000)
people of a country. In India, expectation of life of — The Government of India announced its New
the people is very short. It has improved as a result of National Population Policy on 15th February, 2000. The
planned efforts. National Population Policy (NPP) affirms the commitment
Average life expectancy is shown in the table below : of government towards voluntary consent of citizens, while
availing of reproductive healthcare services.
Expectation of Life (in years) — The New National Population Policy (NPP) provides a
Years Life Expectancy Years Life Expectancy policy framework to meet the reproductive and child
health needs of the people of India for the next 10 years.
1921 19.4 1971 52.0
1931 26.9 1981 54.0 Objective of NPP, 2000
1941 32.0 1991 59.0 — The immediate objective of the NPP 2000 is to address
the unmet needs for centra caption, healthcare,
1951 33.0 2001 64.0
infrastructure and health personnel and to provide
1961 41.0 2011 69.89 integrated service delivery for basic reproductive and child
— In other countries of the world, expectation of life is much healthcare.
longer than ours. For instance, in Australia it is 79 years,
in Japan 82 years, in England 77 years, in America 78 Twelfth Plan and Family Welfare
years, in Sweden and in Canada it is 80 years. Programmes
— The main targets of twelfth Plan regarding family welfare
Sex Ratio are given below:
— All over the world, males out number the females. Sex ratio in
the world is 986 females to 1000 males. According to 2011 Particular Target (2016-17)
Census, sex ratio in India was 940 females to 1000 males. Infant Mortality Rate (IMR) 25 per 1000

Literacy Maternal Mortality Rate (MMR) 100 per 100000

— Any person above the age of 7 years, who can read and Total Fertility Rate 2.1
write in any language is treated as literate. According to
Sex Ratio for 0-6 years age group from 914 to 950
the Census 2011, the rate of literacy in India was 74.04%.
Magbook ~ Demographic Profile of India 81

Socio-Economic and Caste Census (SECC) Percentage of Elderly Persons to

— The first post-independence, socio-economic and caste Total Population (India)
census was carried out by the Government in 2011. It will Total Population % of Elderly
be carried out by the State Governments with the financial Years
(in million) Persons
and technical support of the Government of India.
2001 70.69 6.90
— The census will identify poor households based on certain
2006 83.58 7.50
automatic inclusion criterias, automatic exclusion criterias
2011 98.47 8.30
and deprivation indicators.
2016 118.10 9.30
Census, 2011 Old Age People 2021 143.24 10.70
— India has the second largest population of older (60+) 2026 84.62 12.40
persons in the world. The number of older persons in the
population is expected to increase from 71 million in 2001 Religion Based Census Report
to 173 million in 2026. — The Census 2011 data on Population by Religious
— A majority (80%) of the elderly population in India is in the Communities, released by the Registrar General of India
rural areas, thus, making service delivery to them a on August 25, 2015. It showed that the percentage of
challenge and there are a large number of 80+ persons in Hindus dipped by 0.7 Percentage Points (PP) in the
the country. decade 2001 to 2011, pulling it for the first time
below 80%.
National Population Register (NPR)
— The distribution is total population by six major religious
— The Government of India has decided to create a National
communities namely, Hindu, Muslim, Christian, Sikh,
Population Register (NPR) for the country.
Buddhist, Jain besides ‘Other Religions and Persuasions’
— NPR will be a register of the usual residents of the and ‘Religion not stated’.
country. It is compulsory for every citizen of the country to
register in a National Register of Indian Citizens (NRIC). Population by Religious Communities
NRIC will be prepared from NPR after verification of based on Census 2011
citizenship. Religion Population
— The data collected from NPR will be sent to UIDAI, for
Hindus 96.63 crore (79.8%)
de-duplication and issue of Aadhar number. A person,
who has already registered with UIDAI will have to enrol Muslims 17.22 crore (14.2%)
again in the NPR. Christians 2.78 crore (2.3%)
Sikhs 2.08 crore (1.7%)
Aadhar Buddhists 0.84 crore (0.7%)
— Aadhar is a 12 digit unique number, which the Unique
Jains 0.45 crore (0.4%)
Identification Authority of India (UIDAI) will issue to
residents of India on a voluntary basis. Other Religions & Persuasions 0.79 crore (0.7%)
— The number will be generated randomly and will not be Religion Not Stated 0.29 crore (0.2%)
based on any classification. The numbers will be linked to
the basic biometric information of the person, including Population by Religious Communities in India
photograph, iris and fingerprints.
Religious Community Person Male Female
UIDAI All Religious
1028610328 532156772 496453556
(Unique Identification Authority of India) Communities
— UIDAI is an attached office under the Planning Commission Hindus 827578868 428678554 398900314
of India, which was set-up in January, 2009, to issue unique Muslims 138188240 71374134 66814106
identify numbers to people in the country and own and
Christians 24080016 11984663 12095353
operate the Aadhar number database on an on-going
basis.The agency will issue only the number and not the Sikhs 19215730 10152298 9063432
smart cards. Buddhists 7955207 4074155 3881052
— The agency is headed by a chairman, who holds a cabinet Jains 4225053 2177398 2047655
rank. The first Chairman of UIDAI is Nandan Nilekani, Other Communities 6639626 3332551 3307075
former co-chairman of Infosys technologies.
82 Magbook ~ Indian Economy

State-Wise Sex Ratio in 2001 and 2011

Sex Ratio Population Density Decadal Rate Literacy Rate
State/Union Territory Total Population
(per 1000 females) (per km) (growth rate) (in %)
Total India 1210569573 943 382 17.7 74.04
Jammu and Kashmir 1,25,41,302 889 124 23.6 67.2
Himachal Pradesh 68,64,602 972 123 12.9 82.8
Punjab 2,77,43,338 895 551 13.9 75.8
Uttarakhand 1,00,86,292 963 189 18.8 78.8
Haryana 2,53,51,462 879 573 19.9 75.6
Rajasthan 6,85,48,437 928 200 21.9 66.1
Uttar Pradesh 19,98,12,341 912 829 20.2 67.7
Bihar 10,40,99,452 918 1106 25.4 61.8
Sikkim 6,10,577 890 86 12.9 81.4
Arunachal Pradesh 13,83,727 938 17 26.0 65.4
Nagaland 19,78,502 931 119 − 0.6 79.6
Manipur 25,70,340 985 128 24.5 79.2
Mizoram 10,97,206 976 52 23.5 91.3
Tripura 36,73,917 960 350 14.8 87.2
Meghalaya 29,66,889 989 132 27.9 74.4
Assam 3,12,05,576 958 398 17.1 72.2
West Bengal 9,12,76,115 950 1028 13.8 76.3
Jharkhand 3,29,88,134 949 414 22.4 66.4
Odisha 4,19,74,218 979 270 14.0 72.9
Chhattisgarh 2,55,45,198 991 189 22.6 70.3
Madhya Pradesh 7,26,26,809 931 236 20.3 69.3
Gujarat 6,04,39,629 919 308 19.3 78.0
Maharashtra 11,23,74,333 929 365 16.0 82.3
Uttar Pradesh 8,45,80,777 993 308 11.0 67.0
Telangana 3,52,86,757 988 307 17.87 66.4
Karnataka 6,10,95,297 973 317 15.67 75.4
Goa 14,58,545 973 394 8.2 88.7
Kerala 3,34,06,061 1084 860 4.9 94.0
Tamil Nadu 7,21,47,030 996 555 15.6 80.1
Delhi 1,67,87,941 868 11320 21.2 86.2
Chandigarh 11,55,450 818 9258 17.2 86.0
Dadra and Nagar Haveli 2,43,247 618 2191 53.8 87.1
Daman and Diu 3,43,709 774 700 55.9 76.2
Lakshadweep 64,473 947 2149 6.3 91.8
Puducherry 12,47,953 1037 2547 28.1 85.8
Andaman and Nicobar 3,80,581 876 46 6.9 86.6
Magbook ~ Demographic Profile of India 83

Self Check
Build Your Confidence
1. The present demographic transition of India is Codes
indicative of (a) 1, 2, 3 (b) 1, 3, 2
(a) high population growth potential but low actual growth. (c) 3, 1, 2 (d) 2, 1, 3
(b) high population growth potential and high actual growth.
7. Which of the following statements is/are correct?
(c) Partial industrialised economy.
(d) typically increasing urbanisation.
1. As per the 2011 census, the population of India has more
than tripled since independence.
2. Arrange the following states in decreasing order of their 2. India’s 2011 census showed that the country’s population
respective literacy rates. had grown by 181 million people in the prior decade.
1. Goa 2. Mizoram Which of the statement(s) given below is/are correct?
3. Kerala 4. Lakshadweep (a) Only 1
(a) 3, 1, 2, 4 (b) 3, 2, 1, 4 (b) Only 2
(c) 4, 3, 1, 2 (d) 3, 4, 2, 1 (c) Both 1 and 2
(d) Neither 1 nor 2
3. Consider the following statements regarding census of
India. 8. Which of the following statement deals with the benefit
1. Census is held all places in India simultaneously. of National Population Register?
2. Census, 2011 shows decline in population for the first (a) Strengthen security of the country and improve planning
time in history of India. and prevent indentity theft
Which of the statement(s) given above is/are correct? (b) Gives the basic biometric information
(a) Only 1 (b) Only 2 (c) Estimated the community based population
(c) Both 1 and 2 (d) None of these (d) Provision for population education in educational
institution
4. Which of the following causes are major hurdle in
tapping demographic dividend in India? 9. What percentage of the total population of the world
1. Appropriate labour policy of India. resides in India, as estimated in 2011? [UPPCS 2012]
2. Less female practice pation in workforce. (a)15 (b) 17.5
(c) 20 (d) 22.5
3. Migration.
4. Low inclusiveness and less employment generation. 10. During which decade did the population record a
Which of the following statements is/are correct? negative growth rate in India? [UPPCS 2012]
(a) 1 and 2 (b) 2 and 3 (a) 1921-1931 (b) 1911-1921
(c) 1, 2 and 4 (d) All of these (c) 1941-1951 (d) 1941

5. Factors affecting population change are 11. Which of the following statements is/are correct?
(a) Births, migration and deaths. 1. Share of population of 0 to 14 years is low in 2011 but
(b) Births and deaths only. high in 1961, as a percentage of total population.
(c) Births, deaths and marriage. 2. According to 2011 census, sex ratio in India was 940
(d) Births, deaths and life expectancy. females to 1000 males.
6. Which arrangement of following would show the correct 3. Child sex ratio (0-6 age group) has dropped in the country
sequence of demographic transition as typically by 13 points between 2001 and 2011.
associated with economic development? [UPSC 2013] Which of the statement(s) given below is/are correct?
1. High birth rate with high death rate. (a) Only 2
(b) 1 and 2
2. Low birth rate with low death rate.
(c) 1, 2 and 3
3. High birth rate with low death rate.
(d) 2 and 3

1. (d) 2. (d) 3. (a) 4. (d) 5. (a) 6. (b) 7. (c) 8. (a) 9. (b) 10. (b)
11. (c)
Chapter eleven
Agriculture
Agricultural Sector — Development of Tertiary Sector Tertiary sector
provides helpful services to the industries and
The Indian — Agriculture is the primary industry in India. agriculture like banking, warehousing etc.
The agriculture sector of India has — Internal Trade is mostly done in agricultural
economy continues occupied almost 43% of India’s produce. e.g. various means of transport get
to be geographical area and over 58% of the bulk of their business by the movement of
predominantly an rural households depend on agriculture as agricultural goods.
Agricultural their principal means of livelihood. — Contribution in Foreign Trade Agriculture plays
— As per the NSSO, in 2011-12, the share of an important role in the international trade.
Economy in terms
agriculture in employment was 48.9%. Jute, tea, coffee and spices are the country’s
of employment of — Agriculture and allied sector was the sole well known conventional exports.
labour force and as bright spot of Indian economy which saw — Fertilizers, harvesters and thrashers are the
a source of contraction (-7% of GDP) in 2020-21. It notable import items meant exclusively for
subsistence for the recorded a positive growth of 3.4% despite agriculture sector of the economy.
the COVID- pandemic. International Importance India is the largest
millions in the —
— The share of agriculture in GDP increased producer of coconuts, mangoes, bananas, milk
countryside. It is an to 19.9% in 2020-21 from 17.8% in and dairy products, cashew nuts, pulses,
undisputed fact that 2019-20. ginger, turmeric and black pepper. It is also
the dream of — This is the biggest unorganised sector of the the 2nd largest producer of rice, wheat, sugar,
economy accounting for more than 90% cotton, fruits and vegetables.
‘Inclusive growth’
share in total unorganised labour force.
will remain a far-cry,
if the growth plans
Five Year Plan and
Agriculture Export Policy, 2018 aims to double
fail to account for agricultural exports from present US $ 30 Agriculture
the significance of billion to 60 billion by 2022 and reach 100
— 1st Plan (1951-56) The 1st Plan aimed at
billion in the next few years.
agriculture. To solving food crisis, hence, highest priority to
quote Professor agriculture with allocation of more than 14% of
Gunnar Myrdal, “It is Features of Indian the total plan outlay.The growth in agriculture
Agriculture Sector remained 2.71%.
in the agriculture — 2nd Plan (1956-61) This plan saw significant
sector that the — Largest Employment Providing Sector
reduction in agricultural outlay. It was 11.7%
Agriculture in India, is the most important
battle for long-term of the total plan outlay.This plan witnessed a
source of employment.
growth of 3.15% in agricultural sector.
economic — Basis for Industrial Development Agriculture
— 3rd Plan (1961-66) 2nd Plan experience and
development of offers raw materials including (cotton,
recognition that agricultural production is the
India will be won or sugarcane and oilseeds) for industries like
limiting factor, the 3rd Plan fixed ambitious
textiles, sugar and oil-processing etc.
lost.” Besides, it also offers market for the
targets of production for all agricultural crops.
This plan also saw the introduction of Intensive
expanding industrial sector of the economy.
Agricultural District Programme (IADP),
— Industries producing capital goods (like followed by High Yielding Variety Programme
tractors, thrashers and harvesters) are (HYVP). Agricultural growth fell to a low of
directly dependent upon agricultural sector. 0.73%.
Magbook ~ Agriculture 85

— 4th Plan (1969-74) This plan aimed at systematic

application of science and technology to improve
Green Revolution in India
agricultural practices. The allocation to agriculture sector — The introduction of high-yielding varieties of seeds after
was 15% of the total plan outlay. Agricultural growth 1965 and the increased use of fertilizers and irrigation are
reached a level of 4.16% during this plan. known collectively as the Green Revolution, which
— 5th Plan (1974-79) The 5th Plan was the only period, provided the increase in production needed to make India
when the actual foodgrain production exceeded the self-sufficient in foodgrains.
targeted production.The agricultural growth under this — The term ‘Green Revolution’ is a general one that is
plan was 3.28%. applied to successful agricultural experiments in many
— 6th Plan (1980-85) Agriculture growth rate in this plan third world countries. It is not specific to India, but it was
was 4.3% as against the targeted 3.8% . The year most successful in India.
1983-84, of the plan is hailed as the Second Green — There were three basic elements in the method of the
Revolution. Agricultural sector during this plan made a Green Revolution:
growth of 2.52%. It was the result of expansion in (i) Continued expansion of farming areas.
supplies of inputs and services to farmers, agricultural (ii) Double-cropping existing farmland.
extension and better management. (iii) Using seeds with improved yields.
— 7th Plan (1985-90) Total plan outlay on agriculture was
6% and except cotton, none of the targets fixed for Drawbacks of First Green
various sectors was achieved. During this plan agricultural
growth was 3.47%.
Revolution
— While the first Green Revolution achieved many
— 8th Plan (1992-97) Agriculture growth rate in this plan
successes, there were also many flaws in its strategy,
was 2.44% on account of weather and climate conditions
which were not envisaged at that time. These flaws
being favourable.The agricultural sector registered an
include, negative impact on environment and health due
impressive growth rate of 4.68%.
to excessive use of fertilizers and pesticides; depletion of
— 9th Plan (1997-2002) Agriculture growth rate in this plan
soil nutrients; depletion of water resources including
was 2.44%. All the set targets were not achieved and ground water; higher costs of input etc.
hence, 9th Plan was a failure on agriculture front. In this
plan, the agricultural growth fell to 2.02%.
Bringing Green Revolution in
— 10th Plan (2002-07) This plan adopted the prescription of
the National Agricultural Policy (NAP), 2000 and
Eastern India Programme (BGREI)
therefore, envisaged better management of resources, soil The BGREI was launched in 2010-11, as a part of the Rashtriya
and water, so as to promote sustainable and inclusive Krishi Vikas Yojana. It was implemented in the Eastern region of
agricultural growth. The agricultural sector grow at 2.3%. the country. It focused on resource allocation and utilisation. It
— 11th Plan (2007–12) This Plan witnessed an average has resulted in a robust increase in foodgrain production,
annual growth of 3.6% in the Gross Domestic Product growth rate being estimated at 11.9% during 2011-12 as
(GDP) from agricultural and allied sector against a target against the overall growth rate of 2.2% of the country as a
of 4.0%. While it may appear that the performance of the whole. The Indian state of West Bengal, Assam, Bihar,
agriculture and allied sector has fallen short of the target, Chattisgarh, Jharkhand, Odisha and Eastern Utter Pradesh are
production has improved remarkably, growing twice as getting the benefits of BGREI. Based on the past experiences
fast as population. and performance of 12th Five Year Plan, it has been decided to
continue the centrally sponsored scheme of BGREI beyond 12th
Agriculture in the 12th Plan (2012-17) Plan i.e. 2015-16 to 2019-20.
— As against the 12th Five Year Plan (2012-17) target 4%
growth for the agriculture and allied sectors, the growth — Certain other conditions have also emerged after the first
registered was 1.5% in 2012-13, 4.2% in 2013-14, -0.2% Green Revolution, which are having a negative impact on
in 2014-15 1.2% in 2015-16, and 4.9% in 2016-17. agriculture like, land constraints due to diversion of land
— Some of the challenges faced by agriculture during the to other economic areas; climate change; diversion of
12th Plan include a shrinking land base, dwindling water crops to bio-diesel; fragmentation of land holdings making
resources, adverse impact of climate change, shortage of farming unviable.
farm labour and increasing costs and uncertainties — For these reasons and to ensure the food security of the
associated with volatility in international markets. The 12th country, there is a need for a Second Green Revolution in
Plan targeted an average annual growth of 4% in the country, which would address all the problems.
agriculture.
86 Magbook ~ Indian Economy

This phrase has three components these are as follows:

Second Green Revolution (i) Saffron Energy Revolution for promotion and better
in India utilisation of solar energy.
(ii) White Revolution to ensure cattle welfare and further the
— Second Green Revolution will consist of a number of
goals of White Revolution.
different programmes working towards the same goals.
(iii) Blue Revolution for fishermen’s welfare, cleansing rivers
Some of the initiatives, which will help in this direction are
and sea and conserving water.
as follows:
—Increasing crop yields in Eastern states. Operation Green
—Organic farming and contract farming.
— The former Finance Minister Arun Jaitley has announced
—Amending the Agricultural Produce Marketing Committee
(APMC) Acts.
Operation Green on the lines of Operation Flood for
—Investing in research to drought proof crops as well as to enhancing the production of tomato, onion and potatoes in
tackle climate change. budget 2018-19. A sum of ` 500 crore has been allocated
—Investing in supply chain and cold chains. for this new measure. It may help in doubling the income
—Encouraging private investments through tax law amendments. of farmers by the end of 2022. In the Budget 2021, it was
—Use of plant breeding and biotechnology. expanded to include 22 perishable commodities.
—Rain water harvesting and watershed development.
—Improving credit availability. National Commission on Farmers
—Refocusing on land reforms. — It was appointed in 2004, under the chairmanship of
—Improving soil quality and reclaiming degraded land. Dr MS Swaminathan.
— The commission suggested an Agricultural Renewal Plan,
Major Agricultural Revolutions which has five components
Green Revolution : Cereals, wheat and (i) Soil health enhancement with special focus on dry farming.
leguminous plants. (ii) Irrigation water supply augmentation and demand
White Revolution : Milk and dairy products management.
(iii) Credit and insurance facilities like creation of agriculture
Silver Revolution : Egg and poultry
risk fund.
Yellow Revolution : Edible oil
(iv) Technological reforms in the form of proper integration
Blue Revolution : Fishery of production and post-harvest technologies,
Pink Revolution : Prawns/Meat processing development of a cadre of rural farm science managers
Golden Revolution : Honey and lab-to-land demonstrations.
Golden Fibre Revolution : Jute (v) Assured and remunerative marketing.
Silver Fibre Revolution : Cotton — The commission also suggested a Risk Stabilisation Fund
and a farmer centric Minimum Support Price and Market
Intervention Scheme (MIS) and creation of Pani
Evergreen Revolution Panchayats.
— The concept was given by renowned agricultural scientist
Dr MS Swaminathan. Evergreen Revolution emphasises
on organic agriculture and green agriculture with the help
Agricultural Inputs
of integrated pest management, integrated nutrient supply — It play a crucial role in determining yield levels and in turn
and integrated natural resource management. The core of augmentation of level of production in the long run.
the Evergreen Revolution is sustainability. Improvement in yield depends on application of
technology, use of quality seeds, fertilizers, pesticides,
Rainbow Revolution micro-nutrients and irrigation.
— In July 2000, the Central Government of India had
announced the first-ever National Agriculture Policy. The Seeds (National Seeds Policy, 2002)
policy aimed at achieving a growth rate of over 4% per — Seeds are a critical input for long-term sustained growth of
annum by introducing Rainbow Revolution in the next two agriculture. In India, more than four-fifths of farmers rely
decades so that the total GDP growth can be sustained on farm saved seeds leading to a low seed replacement
at 6.5%. rate. Hence, the Central Government has been addressing
this issue through various programmes/schemes.
Tricolour Revolution —Indian Seed Programme involving the participation of Central
— The reference to a Tricolour Revolution was made by and State Governments, the Indian Council of Agricultural
Prime Minister Narendra Modi. Research (ICAR), state agricultural universities, co-operatives
and the private sector and farmers and plant breeders.
Magbook ~ Agriculture 87

—The Protection of Plant Varieties and Farmers’ Rights (PPV and — The total irrigation potential in the country has
FRs) authority established in November 2005, at New Delhi, has increased from 81.1 million hectare in 1991-92 to
been mandated to implement provisions of the PPV and FR Act, about 139.9 million hectare in 2018-19.
2001.
—PPV and FR Act has been passed within the context of Sui Initiation of the Accelerated Irrigation
Generis System of the WTO, so as to effectively block the efforts Benefit Programme (AIBP)
of MNCs to capture the seed market by getting patents in their
favour and gradually buying out small seed growers in the
— From 1996-97, to extend assistance for the completion
country. of incomplete irrigation schemes. Under this
programme, projects approved by the Planning
Sui Generis System Commission (Now NITI Aayog) are eligible for
— TRIPS Agreement offers three options for plant varieties and assistance. Monitoring of the projects covered under
their protection, viz, Patent System, Sui Generis Systems and the AIBP is periodically done by the Central Water
combination of two. Commission.
— Under Sui Generis System, farmer has the right to save, use, National Mission on Micro Irrigation
exchange share or sell the farm produce including seeds. (NMMI)
However, farmer cannot sell the branded seeds. — Irrigation consumes more than 80% of the water
Seed Bank resources of the country. Availability of adequate
quantity and quality of water is the key to achieve
— A scheme for the establishment and maintenance of a seed
higher productivity levels.
bank has been in operation since, 1999-2000.
— This mission will result in 2.85 million hectare to be
— The basic objective of the scheme is to make available seeds
brought under micro irrigation; savings in use of
for meeting contingent requirements and also develop
irrigation water, fertilizer and electricity; increase in
infrastructure for production and distribution of seeds.
production and productivity of crops; convergence with
— The scheme is being implemented through National Seed other on going schemes of Department of Agriculture
Corporation of India and 12 State Seeds Corporations of and Cooperation (DAC) and other ministries on creation
various states. of water harvesting structures and linking the same with
Micro Irrigation System for higher water use efficiency
Fertilizers and enhanced return to the farmers.
— India is meeting 85% of its urea requirement through
indigenous production, but depends heavily on imports for its
Pradhan Mantri Krishi Sinchai Yojana
phosphatic and potash (P and K) fertilizer requirements. (PMKSY)
Fertilizer Subsidy
— With an eye on improving farm productivity, the
government has decided to spend ` 50,000 crore over
— Fertilizer subsidy is borne by the Union Government. The two the next 5 years under the Pradhan Mantri Krishi
objectives of providing fertilizer subsidy are as follows: Sinchai Yojana (PMKSY) launched in 2015.
(i) Making fertilizers available to the farmers at affordable — The major objective of the PMKSY is to achieve
prices so as to encourage intensive cultivation. convergence of investments in irrigation at the field
(ii) Attracting more investment to the domestic fertilizer level expand cultivable area under assured irrigation
industry. improve on farm water use efficiency to reduce
— Since 2010, government is implementing a Nutrient Based wastage of water, enhance adoption of precision
Subsidy Scheme (NBS) in which a fixed subsidy is irrigation and other water saving technologies.
announced on per kg of nutrient annually. Additional subsidy
is given to micro-nutrients. The prices of urea however,
Neeranchal Watershed Yojana
remain under statutory price control. — The project is implemented by the Union Ministry of
Rural Development over a six-year period (2016-21) to
Irrigation achieve objectives of PMKSY on 7th October, 2015. It
will support the Pradhan Mantri Krishi Sinchayee
— It is one of the most important inputs for enhancing
Yojana (PMKSY) in hydrology and water management,
productivity and is required at different critical stages of plant
agricultural production systems, capacity building and
growth of various crops. The Government of India has taken
monitoring, and evaluation. It seeks to ensure access to
up irrigation potential creation through public funding and is
irrigation to every farmland (Har Khet Ko Pani) and for
assisting farmers to create potential on their own farms.
efficient use of water (Per Drop More Crop).
88 Magbook ~ Indian Economy
—Less revenue available for investment in irrigation and other large
Sprinkler Irrigation scale projects.
Under sprinkler irrigation, water is sprinkled under —Over exploitation of ground water resources by farmers.
pressure on to the crop through a set of nozzles attached —Inefficient use of irrigation water leading to water logging and
to a network of pipes in the form of rainfall. This system is salinity.
suitable for high density horticultural crops. The sprinkler
system sets, unlike drip system are moveable. Hence, one
sprinkler set could cover more than one hectare by shifting
Food Security
from one place to another. — The World Food Summit of 1996 defined food security as a
condition existing when “All people, at all times, have
Drip Irrigation physical, social and economic access to sufficient, safe and
It is also known as trickle irrigation or micro irrigation, it is nutritious food to meet their dietary needs and food
an irrigation method that saves water and fertilizer by preferences for an active and healthy life.”
allowing water to drip slowly to the roots of plants, either — India’s food security programme tries to tackle some of these
on to the soil surface or directly on to the root zone, problems through various intervention. The main
through a network of valves, pipes, tubing and emitters. It interventions can be said to be the public distribution
is done through emitters fitted on a network of pipes system and the National Food Security Act, 2013.
(mains, sub-mains and laterals). The emitting devices
could be drippers, micro sprinklers, mini sprinklers, micro
jets, misters, fan jets, micro sprayers and forgers.
Public Distribution System (PDS)
— Presently, PDS is operated under the joint responsibility of
the Central and the State Governments. The Central
Rainfed Area Development Programme Government, through FCI, has assumed the responsibility for
— Given the importance of rainfed agriculture in India, the procurement, storage, transportation and bulk allocation of
Rainfed Area Development Programme (RADP) was foodgrains to the State Governments.
launched by the government as a pilot scheme in — The operational responsibility including allocation within
2011-12 under the RKVY focusing on small and states, identification of families below the poverty line, issue
marginal farmers and farming systems. of ration cards and supervision of the functioning of fair
— It adopted a holistic ‘end–to–end approach’ covering price shops, rest with the State Governments.
integrated farming, on farm water management, storage — Under the PDS, presently, the commodities namely wheat,
marketing and value addition of farm produce in order rice, sugar and kerosene are being allocated to the
to enhance farmers’ income in rainfed areas. states/UTs for distribution. Some states/UTs also distribute
National Rainfed Area Authority (NRAA) additional/items of mass consumption including oils, iodised
salt, spices etc.
— The government has set-up National Rainfed Area
— There are about 4.99 lakh Fair Price Shops (FPS) across India.
Authority (NRAA), an expert body to provide the much
needed knowledge inputs regarding systematic — The Targeted Public Distribution System (TPDS) was
upgradation and management of country’s dry land and introduced with effect from June 1997.
rainfed agriculture. An order for setting up the authority
was issued on 3rd November, 2006. Revamped Public Distribution
— The NRAA has a two tier structure. The 1st tier is the System (RPDS)
governing board that provides necessary leadership and
— The Revamped Public Distribution System (RPDS) was
appropriate coordination in implementation of
programmes. launched in June, 1992, with a view to strengthen and
streamline the PDS as well as to improve its reach in the
— The 2nd tier is the Executive Committee consisting of
far-flung, hilly, remote and inaccessible areas, where a
technical experts and representatives from stakeholder
substantial section of the poor live.
ministries.
— Foodgrains for distribution in RPDS areas were issued to the
Power and Irrigation Subsidies states at 50 paise below the Central Issue Price. The scale
— Since water and electricity fall within the state domain, of issue was upto 20 kg per card.
power and irrigation subsidies are provided by the State — The RPDS included area approach for ensuring effective
Governments. reach of the PDS commodities, their delivery by State
— Irrigation subsidies are incurred on account of the Governments at the doorstep of FPSs in the identified areas,
pricing of irrigation water provided to the farmers by the additional ration cards to the left out families, infrastructure
Sate Governments. requirements like additional Fair Price Shops, storage
— Consequences of power and irrigation subsidies. capacity etc and additional commodities such as tea, salt,
—Increased fiscal burden. pulses, soap etc for distribution through PDS outlets.
Magbook ~ Agriculture 89

Targeted Public Distribution States may choose to provide additional subsidy to the
beneficiaries by reducing prices below CIP.
System (TPDS) — Price support through MSP and procurement prices is
— The TPDS as it operated earlier had been widely criticised extended only for specific crops. This has led to a change
for its failure to serve the population below the poverty in cropping pattern in the country towards certain specific
line. Therefore, on the basis of the recommendations of crops such as rice and wheat whose MSP has increased a
the Chief Ministers Conference held in July, 1996, an lot. It has also benefitted farmers in those states where
effort was made to streamline the PDS, through the such crops are produced in a larger number.
introduction of the Targeted Public Distribution System
(TPDS) in June, 1997. Decentralised Procurement Scheme
— This system follows a 2 tier subsidised pricing structure — In view of a this, a decentralised procurement scheme
for families, Below Poverty Line (BPL) and for those Above was started in 1997, under which State Governments
Poverty Line (APL). themselves procure and distribute foodgrains. The
— The identification of poor under the scheme is done by difference between the economic cost fixed for the State
the states as per the state-wise poverty estimates of and the Central Issue Price (CIP) is passed on to the
Planning Commission. states as subsidy.
— In order to make the TPDS more focused and targeted — The objectives of this scheme are to cover more farmers
towards the poor, the Antyodaya Anna Yojana was under MSP operations, improving efficiency of PDS,
launched in December 2000. providing foodgrains suited to local tastes and reducing
transportation costs.
— The scheme contemplates identification of 10 million poor
families and providing them with 25 kg of foodgrains per
family per month at a low price of ` 2 per kg for wheat
National Food Security Act 2013,
and ` 3 per kg for rice. (NFSA)
— NFSA is the biggest intervention of its kind in the world in
Agricultural Prices and the realm of food security. If implemented property this
Procurement law can improve the lives of millions in this country.
— The Government of India undertakes an agricultural — Some of the highlights of this act are as follows:
pricing policy and procurement programme to provide —It extends to the whole of India.
reasonable returns to the farmers and instil certainty and —Priority households are entitled to 5 kgs of food grains per
confidence in them. person per month and Antyodaya households to 35 kgs per
household per month.
— The procurement programme is also essential to the
—Combined coverage of priority and Antyodaya households will
functioning of the Public Distribution System (PDS). extend to 75% of the rural population and 50% of the urban
Price Fixation population.
—PDS issue prices will be 3/2/11 per kg for rice/wheat/millets.
— Another method of intervention in the market mechanism These may be revised after 3 years.
has been the announcement of different administered —For children in the age group 6 months to 6 years, an age-
prices viz minimum support prices statutory minimum appropriate meal will be provided through the local Anganwadi.
prices procurement prices issue prices. —For children aged 6-14 years, one free mid-day meal in all
— These prices are announced for different agricultural government and government aided schools up to class VII.
crops by the Government of India on the —For children below 6 months ‘exclusive breast feeding will be
recommendations of Commission for Agricultural Costs promoted’.
and Prices (CACP). —Every pregnant and lactating mother is entitled to a free meal
— Minimum Supports Prices (MSP) These are in the nature at the local Anganwadi (during pregnancy and 6 months after)
and maternity benefits of ` 6000 t o b e p a i d i n i n s t a l l m e n t s .
of a guarantee to the producers in that prices paid to the
farmers cannot be lower than the MSP. —The act does not specify criteria for identification of eligible
households. Central Government will determine state-wise
— Procurement Prices These are higher than the MSP and coverage and states will then identify the beneficiaries.
are the prices at which government buys from farmers. In —State food commissions will be created to monitor
recent years, government has been announcing endless implementation of the act.
procurement so, that farmers have been selling to the —Grievance Redressal System consists of the district.
government at procurement prices. Grievance Redressal officer and the State Food Commission.
— Central Issues Prices (CIP) It indicate the prices at which —Transparency provisions include placing PDS records in the
government supplies produce to the fair price shops and public domain, conducting periodic social audits, use of
ration depots. Wheat and rice are issued to the State information and communication technology and setting up of
Governments/UTs at CIP for distribution through the PDS. vigilance committees.
90 Magbook ~ Indian Economy

—The act also states that the Central and State Governments
will endeavour to undertake PDS reforms. Land Reforms
— With the twin objectives of achieving social equity and
International Fund for ensuring economic growth the land reforms programme was
Agricultural Development built around three major issues as follows:
IFAD is an International Financial Institution and a (i) Abolition of intermediaries.
specialised UN agency based in Rome – the UN’s food and (ii) Settlement and regulation of tenancy.
agricultural hub. It is a unique partnership of 165 members (iii) Regulation of size of holdings.
from the Organisation of the Petroleum Exporting Countries — After independence, the government has undertaken many
(OPEC), other developing countries and the Organisation for land reform measures e.g.
Economic Cooperation and Development (OECD). —Zamindari System has been abolished. The actual cultivator has
FAD provides a strong global platform for discussing rural been given either the ownership right or the right of occupancy
policy issues – and for increasing awareness about why tenant.
investment in agriculture and rural development is critical to —Tenancy System has been reformed by enacting various
reducing poverty and improving food security. legislative measures in different states.
—Ceiling on landholdings has been fixed.
—By 2004, about 1633 lakh hectare of holdings have been
Storage Capacity and consolidated.
Constraints —Co-operative Farming has also been developed.
—In order to improve the conditions of landless farmers, Acharya
— There are three agencies in the public sector, which are
Vinoba Bhave launched Bhoodan Movement in the country.
engaged in building large scale storage/warehousing
capacity namely; Food Corporation of India (FCI),
Central Warehousing Corporation (CWC) and 17 States National Land Records
Warehousing Corporations (SWCs). Modernisation Programme (NLRMP)
— While the capacity available with FCI is used mainly for — The Government of India decided to implement the
storage of foodgrains that with CWC and SWCs is used centrally-sponsored scheme in the shape of the National
for storage of foodgrains as well as certain other items. Land Records Modernisation Programme (NLRMP) by
merging two existing centrally-Sponsored Schemes of
Food Processing Industry Computerisation of Land Records (CLR) and Strengthening
of Revenue Administration and Updating of Land Records
— India is the 3rd largest producer of food crops in the (SRA and ULR) in 2008.
world, after China and the US. — The integrated programme seeks to achieve the following -
— It contributes nearly 8.83% and 10.66% of Gross Value modernise management of land records, minimise scope of
Added (GVA) in manufacturing and agriculture sector land/property disputes enhance transparency in the land
respectively in 2017-18 at 2011-12 prices. It also records maintenance system and facilitate moving eventually,
provides employment to 7 million peoples with a share towards guaranteed conclusive titles to immovable properties
of 32% in India’s food market and 10.4% in India’s in the country.
total export. The output of food processing sector in —A single window to handle land records.
India is expected to reach $ 535 billion by 2025-26.
—The mirror principle, which refers to the fact that cadastral
— The industry is segmented into sectors namely, milk records mirror the ground reality.
and allied products (dairy), meat and poultry, seafood, —The curtain principle, which indicates that the record of title is a
bakery and confectionery, fruit and vegetables, grain, true depiction of the ownership status.
pulses and oilseeds (staple) products, alcoholic and —Title insurance, which guarantees the title for its correctness and
non-alcoholic products (beverages) and packaged identifies the title holder against loss arising on account of any
foods. The classification is not distinct as many defect therein.
processed products overlap different segments.

Food Corporation of India (FCI) Agricultural Finance and

FCI was set-up in 1965 with the primary duty to undertake the Credit Facilities
purchase, storage, movement, transport, distribution and sale — Agricultural credit is disbursed through a multi-agency
of foodgrains and other foodstuffs. network comprising of Commercial Banks (CBs), Regional
It has also been entrusted with maintaining buffer stocks of Rural Banks (RRBs) and co-operatives. With their vast
foodgrains on behalf of the government. It is the sole network (covering almost all villages in the country), wide
repository of foodgrains meant for the PDS. coverage and outreach extending to the remotest parts of the
Magbook ~ Agriculture 91

country, the Co-operative Credit Institutions, both in short Banking Regulations Act, 1949, the Banking
and long-term structure, are the main institutional agencies Regulations Act empowers NABARD (National Bank for
for the dispensation of agricultural credit. Agriculture and Rural Development) to undertake the
— After nationalisation, Commercial Banks have also started inspection of RRBs.
giving loans for farming operations. Regional Rural Banks — Area of RRBs is limited to a specified region comprising
and farmer service societies also strengthen the rural credit one or more districts of a state. They grant direct loans
programmes. and advances only to small and marginal farmers, rural
— National Bank for Agriculture and Rural Development artisans, agricultural labourers and others of small
(NABARD) has been established as an apex agricultural means for productive purposes. Lending rates of RRBs
finance institution. cannot be higher than those of co-operative societies in
any particular state.
Co-operative Credit Societies RRB (Amendment) Act, 2015
— Rural co-operative credit institutions in India have been
organised into short-term and long-term structures. — The Regional Rural Banks (Amendment) Act seeks to
amend the existing Act so as to increase the authorised
— The short-term co-operative credit structure consists of
capital of each Regional Rural Bank (RRB) from ` 5
three-tiers–Primary Agricultural Credit Societies (PACS) at the
crore to ` 2000 crore divided into ` 200 crore of fully
village level, District Central Co-operative Banks (DCCB) at
paid shares of ` 10 each.
the district level and State Co-operative Banks (SCB)
organised at the state level. — The bill also provides that the authorised capital of any
Regional Rural Bank shall not be reduced below `
— For long-term credit requirements of the farmers long-term
1crore and shares in all cases to be fully paid up
credit co-operatives have been set-up. These are organised
shares of ` 10 each. It also provides that the issued
at two levels and differ from state to state. Generally they are
capital of each rural bank shall not be less than
of four types which are as follows
` 1crore.
(i) Unitary structure in which State Co-operative Agricultural
— At present, there are 43 RRBs and they are doing well.
and Rural Development Banks (SCARDBs) operate at state
The amendment to raise the authorised capital of the
level through their branches and have direct membership
RRBs from ` 5 crore to ` 2000 crore, will strengthen
of individuals.
these institutions and further deepen financial inclusion.
(ii) Federal structure in which Primary Co-operative
Agricultural and Rural Development Banks (PCARDBs) Kisan Credit Card (KCC) Scheme
operate as independent units at the primary level and — Kisan Credit Cards were started by the Government of
federate themselves into SCARDS at the state level. India, Reserve Bank of India (RBI) and National Bank
(iii) Mix of federal and unitary types. for Agricultural and Rural Development (NABARD) in
(iv) No separate banks exist and long-term credit is provided August 1998, to help the farmers access timely and
by the long-term section of State Co-operative Banks adequate credit. Since 1998, about 10.78 crore KCCs
(SCBs) co-operatives accounted for 17.2% of institutional had been issued up to October 2011.
agricultural credit in 2011-12. — The scheme includes reasonable components of
consumption credit and investment credit within the
Commercial Banks and Rural overall credit limit sanctioned to the borrowers, to
Credit provide adequate and timely credit support to the
Share of commercial banks in rural credit was meagre just after farmers for their cultivation needs. Budget 2012-13,
independence. has expanded the scope of KCCs as now they can be
used as smart cards and ATMs. The card is valid for 3
Regional Rural Banks (RRBs) years and subject to annual renewals.
— RRBs were set-up to supplement the efforts of co-operatives
and commercial banks. NABARD : An Overview
— In 1976, the Parliament enacted the Regional Rural Banks — NABARD was set-up by the Government of India as a
Act, 1976 to provide for the incorporation, regulation and development bank with the mandate of facilitating
winding up of Regional Rural Banks. The Act has been made credit flow for promotion and development of
effective from the 26th September, 1975. agriculture and integrated rural development.
— The equity of the RRBs is contributed by the Central — The mandate also covers supporting all other allied
Government, concerned State Government and the sponsor economic activities in rural areas, promoting
bank in the proportion of 50:15:35. sustainable rural development and ushering in
— Besides the Reserve Bank, which is the regulatory authority prosperity in the rural areas.
for the RRBs in accordance with the provisions of the
92 Magbook ~ Indian Economy

It is an apex institution handling matters concerning

—
policy, planning and operations in the field of credit for
Agricultural Marketing and
agriculture and for other economic and developmental Extension Services
activities in rural areas.
— Organised marketing of agricultural commodities is being
— Essentially, it is a refinancing agency for financial
promoted in the country through a network of regulated
institutions offering production and investment credits for
markets. Most of the states and Union Territories have
promoting agricultural and developmental activities in
enacted legislations (the Agriculture Produce Marketing
rural areas.
Committee [APMC] Act) to provide for regulation of
NAFED agricultural produce markets.
— National Agricultural Co-operative Marketing Federation — Seventeen states or UTs have amended their APMC Act
of India Limited (NAFED) is the Apex Co-operative and the remaining are in the process of doing so.
Organisation at the national level. — India has 2,477 principal regulated primary agricultural
— It deals in procurement distribution export and import of markets in the country. These markets are governed by
selected agricultural commodities. It was established in APMC Acts and administered by a separate Agricultural
1958. Produce Marketing Committee (APMC) which has its own
marketing regulations. This set up hinders the free flow of
TRIFED agricultural commodities from one market to another.
— Tribal Co-operative Marketing Development Federation of
India Limited (TRIFED) came into existence in 1987 and National Agriculture Market (NAM)
got registered under the Multi-State Co-operative — On 14th April, 2016, Prime Minister launched National
Societies Act, 1984. Now, the Multi -State Co-operative Agriculture Market (NAM) as a pan-India electronic trading
Societies Act, 2002. portal for farm produce which creates a unified national
Recommendations of Task Force on market for agricultural commodities by integrating the
Credit Related Issues of Farmers existing Agriculture Produce Market Committee (APMC)
(Chairman Umesh Chandra Sarangi) markets.
— This portal provides a single window service for all APMC
— The task force looked into the issue of large number of
related services and information, such as commodity
farmers, who had taken loans from private moneylenders,
arrivals and prices, provision for responding to the trade
not being covered under the loan waiver scheme.
offers, buy and sell trade offers, among other services.
— Financial literacy and counselling campaigns be
undertaken to increase awareness among farmers on the National Agricultural Market
KCC.
— Banks be encouraged to educate their rural branch staff
Yojana
about the KCC. — The purpose behind NAM is the creation of a common
national market for agricultural commodities through an
— Banks use farmers co-operatives and SHG federations as
e-platform network.
banking correspondents to increase out reach.
— As a part of National Agricultural Market (NAM), Prime
— The KCC be technology-enabled, including the
Minister Narendra Modi launched the national e-agriculture
conversion to a smart card with withdrawals and
market on 21st April, 2016. These e-mandis (markets) will
remittances enabled at Automated Teller Machines
integrate the various vegetable markets across country.
(ATMs), Points of Sale (PoS) and through hand held
machines; banks need to have Core Banking Solutions — The Kisan Call Centre Scheme was launched in 2004, to
(CBSs) in place at the earliest, to enable technology to provide agricultural information to the farming community
benefit the farmer. through toll-free telephone lines. A country-wide common 11
— The KCC limit be fixed for five years, based on the digit number —1800-180-1551has been allocated for KCCs.
banker’s assessment of total credit needs of the farmer — The Agri-clinic and Agri-business Centres Scheme was
for a full year and that the limit be operated by the launched in 2002, to provide extension services to farmers
borrower as and when needed, with no sublimits for on payment basis through setting up of economically viable
kharif and rabi or for different stages of cultivation. self employment ventures. NABARD monitors the credit
— There should be automatic renewal and annual increase support to Agri-clinics through Commercial banks.
in credit limit linked to inflation rate.
Magbook ~ Agriculture 93

Agriculture Insurance — In 2015 FMC was merged with Securities and Exchange
Board of India (SEBI) which became single regulator of
— There are various major crop insurance schemes under stock and commodity market in India.
implementation in the country:

National Agricultural Insurance Scheme

Major Schemes of Agriculture
(NAIS) — There are various major scheme related to agriculture,
which is given below:
— The NAIS was a government sponsored central sector crop
insurance scheme being implemented in the country since Pradhan Mantri Kisan Maan Dhan Yojana
1999-2000, season with the objective of providing financial The Pradhan Mantri Kisan Maan Dhan Yojana (PM-KMY) was
support to farmers in the event of failure of crops as a result launched at Ranchi, Jharkhand by the Prime Minister
of natural calamities, pests and diseases. The Agriculture Narendra Modi on 12th September 2019. PM-KMY Scheme
Insurance Company of India Limited is the implementing in India is a central sector scheme for the farmers aged
agency for the scheme. between 18 to 40 years.
— The beneficiary can become a member of the PM-KMY
Modified NAIS (MNAIS) Scheme by registering under the Pension Fund managed
— With the aim of further improving crop insurance schemes, by the Life Insurance Corporation of India (LIC). The
the MNAIS is under implementation on pilot basis in 50 members are thus required to make a monthly
districts in the country from rabi 2010-11 season. Both the contribution to the Pension Fund between ` 55/- to
Agri-insurance scheme NAIS and modified NAIS have been ` 200/-, depending on their age with the provision of
replaced with a unified and comprehensive scheme; equal contribution by the Central Government. This
Pradhan Mantri Fasal Bima Yojana. scheme is applicable for all the small and marginal
farmers.
Agriculture Insurance Company of India
Limited PM Kisan Samman Nidhi Yojana
— AICIL was incorporated under the Companies Act, 1956 — The Government with a view to augment the income of
in 2002 as a specialised participation from General the farm families is implementing a Central Sector
Insurance Company four public sector GICs and NABARD. Scheme, namely Pradhan Mantri Kisan Samman Nidhi
Yojana. PM Kisan Nidhi Yojana is for small and marginal
Pilot Weather Based Crop Insurance farmers for helping in financial condition for purchase of
Scheme (PWBCIS) seed, fertilizers etc.
— Similarly, the WBCIS is also being implemented as a — This scheme was started on 24th February, 2019 from
central-sector scheme from kharif 2007 season. The Gorakhpur (UP). Under this scheme total amount of
scheme is intended to provide insurance protection to ` 6000 is transferred to bank accounts of farmer in
farmers against adverse weather incidence such as deficit 3 equal installments in every four months. The scheme is
and excess rainfall, high or low temperature and humidity expected to cover around 14.5 crore farmers for year
that are deemed to adversely impact crop production. 2019-20. All landholding farmer’s families, which have
cultivable landholding in their names are eligible to get
benefit under the scheme upto 2 hectares.
Commodity Futures Market
— The commodity futures market facilitates the price KUSUM Scheme
discovery process and provides a platform for price risk — The Union Government has announced ` 1.4 lakh crore
management in commodities. Currently, 113 commodities Kisan Urja Suraksha evam Utthaan Mahaabhiyan
are notified for futures trading of which 51 are actively (KUSUM) scheme for promoting solar farming i.e.
traded in 5 national and 16 regional commodity specific decentralised solar power production of upto 28,250 MW
exchanges. to help farmers. The Union Budget 2018-19 has allocated
Forward Markets Commission ` 48,000 crore for the scheme for the ten-year period.
— The Forward Markets Commission (FMC) was the — Government will provide 60% subsidy on solar pumps to
regulator for commodity futures trading, which it regulates farmers. It will be shared between Centre and States while
under the provisions of the Forward Contracts (Regulation) 30% will be provided through bank loans. The balance
Act, 1952. cost will be borne by farmers.
94 Magbook ~ Indian Economy

Green Revolution-Krishonnati Yojana Highlights of the Scheme

— Cabinet Committee on Economic Affairs (CCEA) has — There will be a uniform premium of only 2% to be paid
approved continuation of Umbrella Scheme, Green by farmers for all Kharif crops and 1.5% for all Rabi
Revolution—Krishonnati Yojana in agriculture sector beyond crops. In case of annual commercial and horticultural
12th Five Year Plan from 2017-18 to 2019-20. The Umbrella crops, the premium to be paid by farmers will be
scheme comprises of 11 schemes and missions. These only 5%.
schemes will continue for three financial years, i.e., — The premium rates to be paid by farmers are very low
2017-18, 2018-19 and 2019-20 with an expenditure of ` and balance premium will be paid by the government to
33,269 crore. Schemes which are part of Green provide full insured amount to the farmers against crop
Revolution-Krishonnati Yojana are loss on account of natural calamities.
—Mission for Intergrated Development of Horticulture (MIDH) — There is no upper limit on government subsidy. Even if
—National Food Security Mission (NFSM) balance premium is 90%, it will be borne by the
—National Mission for Sustainable Agriculture (NMSA) government.
—Submission on Agriculture Extension (SMAE) — Earlier, there was a provision of capping the premium
—Submission on Seeds and Planting Material (SMSP) rate which resulted in low claims being paid to farmers.
—Submission on Agricultural Mechanisation (SMAM) This capping was done to limit government outgo on
—Submission on Plant Protection and Plan Quarantine (SMPPQ) the premium subsidy. This capping has now been
—Integrated Scheme on Agriculture Census, Economics and removed and farmers will get claim against full sum
Statistics (ISACES) insured without any reduction.
—Integrated Scheme on Agriculture Cooperation (ISAC) — The use of technology will be encouraged to a great
—Integrated Scheme on Agriculture Marketing (ISAM)
extent. Smart phones will be used to capture and
—National e-Governance Plan (NeGP-A)
upload data of crop cutting to reduce the delays in
Aajeevika Grameen Express Yojana claim payment to farmers. Remote sensing will be used
to reduce the number of crop cutting experiments.
— The Government of India has launched Aajeevika Grameen
Express Yojana (AGEY) in August 2017, to provide an
alternative source of livelihood to members of Self Help
‘Soil Health Card’ Scheme
Groups (SHGs). This scheme has been launched under — Narendra Modi, Prime Minister of India launched the
Deen Dayal Antyodaya Yojana - National Rural Livelihood Union government’s nationwide ‘Soil Health Card’
Mission (DAY-NRLM). The main objective of AGEY is to Scheme (SHCS) from Suratgarh, Rajasthan on February
provide an alternative source of livelihood to members of 19, 2015 where he described agriculture as the key to
SHGs under DAY-NRLM by facilitating them to operate public poverty eradication.
transport services in backward rural areas. — The SHCS is an attempt to check deteriorating soil
— This will provide safe, affordable and community- monitored quality and spruce up farm productivity and will provide
rural transport services like e-rickshaws, three and four all 145 million farm owners in the country with a SHC in
wheeler motorised transport vehicles to connect remote the next three years. In this way, the Ministry has been
villages with key services and amenities including access to sanctioned ` 568 crore for the next three years.
markets, education and health for the overall economic — This ambitious scheme was announced when finance
development of the area. The sub-scheme will be minister Arun Jaitley presented it in the first budget in
implemented in 250 blocks in the country on a pilot basis for July, 2014. The budget allotted ` 100 crore for issuing
a period of three years from 2017-18 to 2019-20. cards and an additional ` 56 crore to set-up 100
mobile soil testing laboratories across the country.
Pradhan Mantri Fasal Bima Yojana
— This is the new crop damage insurance scheme that has been Mega Food Park Scheme (MFPS)
approved by the Union Cabinet in January 2016. It replaced — The 10th Plan scheme of Food Parks was renamed as
the existing 2 insurance schemes NAIS and Modified NAIS. the Mega Food Park Scheme (MFPS) in 2008. The
— The theme of the Scheme is One Nation–One Scheme. In scheme has been launched with the objective of
this, all shortcomings and weaknesses of all previous implementing the express objectives of the Vision 2015,
schemes were removed and incorporated with the best document through creation of excellent infrastructure.
features of all schemes.
Magbook ~ Agriculture 95

— As of 1st August, 2021, there are 22 Mega Food Parks (iv) NFSM-Coarse cereals and (v) NFSM-Commercial
functioning in the country. crops.
— Objectives of the Mega Food Park Scheme are as follows:
National Horticulture Mission (NHM)
—To provide state of the art infrastructure for food processing in
the country on a pre-identified cluster basis. — It was launched in 2005-06 for the holistic development of
—To ensure value addition of agricultural commodities. the horticulture sector through ensuring forward and
—To establish a sustainable raw material supply chain for each backward linkages and with the active participation of all
cluster. To facilitate induction of latest technology. the stakeholders.
—Quality assurance through better process control and capacity — 18 States and the 3 Union territories of Andaman and
building. Nicobar Islands Lakshadweep and Puducherry are
covered under the mission and the mission covers 372
National Mission on Food districts.
Processing (NMFP) National Bamboo Mission (NBM)
— NMFP has been launched under the 12th Plan for a
decentralised implementation of various schemes under — The NBM is a Centrally Sponsored Scheme which was
the ministry of food processing with the help of State launched in 2006 -07 for harnessing the potential of the
Governments. bamboo crop in the country. At present, it is being
— It consists of the following main schemes technology up implemented in 27 States with a total outlay of ` 568.23
gradation of food processing industries, cold chain crore. ` 1200 crore have been allotted for this mission in
facilities for non-horticultural produces, modernisation of the budget of 2018-19.
abattoirs, primary processing centres/collection centres in
rural areas, upgradation of quality of street food etc. Horticulture Mission for North-East and
Himalayan States (HMNEH)
National Food Processing — The technology mission for North-Eastern states including
Development Council (NFPDC) Sikkim, aimed at the holistic development of all the
horticulture crops, has now been renamed as HMNEH.
NFPDC has been set-up to provide guidance to all schemes of
the ministry of food processing including NMFP. It will comprise — The main objective of the mission is to set-up nurseries
the Agriculture Minister as Chairman, representatives of State for production and distribution of quality planting
Government, industry associations and related government materials.
officials.
Rashtriya Krishi Vikas Yojana (RKVY)
The RKVY was launched in 2007-08, with an outlay of
National Food Security Mission —

` 25000 crore in the 11th Plan for incentivising states to

(NFSM) enhance public investment to achieve a 9% growth rate in
— It was launched in rabi 2007-08. The mission aims to agriculture and allied sectors.
increase production through area expansion and
— The RKVY permits taking up national priorities as
productivity; create employment opportunities and
sub-schemes allowing flexibility in project selection and
enhance the farm level economy to restore confidence of
implementation.
farmers.
— The sub-scheme under RKVY are as follows:
— To intensify the pulses production programme, since
2010-11, two additional programmes have been adopted —Bringing Green Revolution to Eastern region - Uttar Pradesh,
Jharkhand, Bihar, West Bengal, Assam, Odisha and
under NFSM. These are as follows:
Chhattisgarh introduced in 2010-11.
—Merging of the pulse component of the Integrated Scheme of —Integrated development of 60000 pulses and oilseeds villages
Oilseeds, Pulses, Oil Palm and Maize (ISOPOM) with the in rainfed areas introduced in 2010-11.
NFSM. Jharkhand and Assam have also been included under —Promotion of Oil Palm.
the programme. —Initiative on village clusters.
—Accelerated Pulse Production Programme (APPP) was —Nutri-cereals.
initiated to boost the production of pulses by active promotion —National Mission for protein supplements.
of technologies in 1000 clusters of 100 hectare each. —Accelerated Fodder Development Programme.
— The National Food Security Mission (NFSM) during the —Rainfed Area Development Programme and
12th Five Year plan will have 5 components —National Mission on saffron-economic revival of Jammu and
Kashmir saffron introduced in 2010-11.
(i) NFSM-Rice (ii) NFSM-Wheat (iii) NFSM-Pules
96 Magbook ~ Indian Economy

Precision Farming Indian Council of Agricultural

Also known as satellite farming, it uses satellite technology, Research (ICAR)
information technology and GIS Systems to improve Crop — ICAR is an autonomous organisation, under the
management. It is based on observing and responding to Department of Agricultural Research and Education,
intra-fields variations. It helps in matching farming practices with Ministry of Agriculture, Government of India. The council
crop needs, reducing ecological footprint and boosting is the apex body for coordinating, guiding and managing
competitiveness through more efficient practices like improved research and education in agriculture including
management of fertilizer usage etc. horticulture, fisheries and animal sciences in the entire
country. It was established in 16th July, 1929.

National Mission for Sustainable Animal Husbandry,

Agriculture (NMSA)
— NMSA is one of the 8 plans, under the National Action Plan
Dairying and Fisheries
on Climate Change (NAPCC) and will be implemented — The 11th Five Year Plan envisaged overall growth of
during the 12th Five Year Plan. It seeks to transform 4.8% per annum, for the sector. In 2018-19, this sector
agriculture into an ecologically sustainable climate resilient contributed 187.7 million tonnes of milk, 103318 million
production system, while at the same time, exploiting its numbers eggs, 44.73 million kg wool and 5.51 million
fullest potential and thereby ensuring food security, tonnes of meat. Livestock sector has growth at a
equitable access to food resources, enhancing livelihood compound annual growth rate of 7.9% during last five
opportunities and contributing to economic stability at the year (as per Economic Survey 2019-20). Government
national level. has launched a new central scheme. ‘National Animal
Disease Control Programme (NADCP)’ for control of Foot
Objectives of NMSA
and Mouth Disease and Brucellosis in five year from
— The objectives of NMSA are as follows 2019 to 2024. Complete control of FHD by 2025.
—To devise strategic plans at the agro-climatic zone level.
—To enhance agricultural productivity through customised Dairy Sector
interventions such as use of biotechnology.
— India ranks first in the world in milk production with 20%
—To facilitate access to information and institutional support by
expanding automatic weather station networks to the Panchayat of world production. It also has the largest bovine
level and linking them to existing insurance mechanisms. production in the world.
—To promote ‘laboratory to land’ research by creating model — The Ministry of Agriculture is implementing important
villages and model farm units in rainfed and dryland areas. schemes, namely the Intensive Dairy Development
—To strategise long-term interventions for emission reduction Programme, Strengthening infrastructure for quality and
from energy and non-energy uses by way of introduction of clean milk production and Assistance to Cooperative and
suitable crop varieties and farm practices, livestock and
Dairy Entrepreneurship Development Scheme, in the
manure management.
dairy sector. A major programme for genetic
—To realise the enormous potential of growth in dryland farming.
improvement called the National Project for Cattle and
Organic Farming Buffalo Breeding (NPCBB) was also launched in 2000.
The government in Budget 2020 announced its aim to
— It is a form of agriculture that relies on techniques such as
double the milk processing capacity from 53.5 million
crop rotation, green manure compost and biological pest
tonnes to 108 million tonnes.
control.
— The main objectives of National Project on Organic Farming National Dairy Plan
include: — It is a strategic plan prepared by NDDB for achievement
—Capacity building through service providers. of 180 million tonnes of milk production by 2021-22.
—Financial and technical support for setting up of organic input Under the plan, districts are separated into 324 high
production unit such as fruits and vegetable market, waste potential districts for intensive development and 282 low
compost, bio-fertilizers and bio-pesticides and vermiculture
potential districts for further expansion. The plan
hatcheries.
envisages breed improvement through artificial
—Human resource development through training and
Insemination and through natural service, setting up
demonstrations.
plants to augment cattle feed, by-pass protein and
—Awareness creation and market development.
mineral mixture and expanding or strengthening milk
—Quality control of organic inputs.
processing infrastructure.
—Biological assessment of soil health.
Magbook ~ Agriculture 97

Livestock Insurance — Generation of additional 55 lakhs direct and indirect

gainful employment opportunities in the fisheries sector
— A centrally sponsored scheme for livestock insurance is and allied activities.
being implemented in all the states with the twin
objectives of providing protection mechanism to farmers National Fisheries Policy, 2020
and cattle bearers against any eventual loss of their
animals due to death and to demonstrate the benefit of
— In order to accelerate development of fisheries sector, the
the insurance of livestock and popularise it with the government will formulate fisheries management and
ultimate goal of attaining qualitative improvement in fisheries spatial plan.
livestock and its products. — To provide overall guideliness for the implementation of
the policy and to review its objectives and progress a
— The scheme benefits farmers and cattle bearer with
National Fisheries Development Council will be
indigenous/cross-breed milch cattle and buffaloes in 300
established.
selected districts. The benefit of subsidy is to be restricted
to two animals per beneficiary per household. — To increase the fishermen’s income and boost exports, a
clustered approach for development of aquaculture will be
Poultry followed.
— Four regional Central Poultry Development Organisations India’s Position in World Agriculture Production
located at Chandigarh, Bhubaneshwar, Mumbai and
Hessarghatta are focusing on production of stocks suitable Produce Global Rank (2020)
for backyard rearing, training to the farmers to upgrade Wheat 2nd
their technical skills. Rice/Paddy 2nd
— The Poultry Development Scheme comprising three Total Pulses 1st
components, namely Assistance to State Poultry Farms,
Rural Backyard Poultry Development and Poultry Estates is Groundnut (in shell) 2nd
being implemented. Vegetables (with melons) 2nd
Fruits (excluding melons) 2nd
Fisheries
Sugarcane 2nd
— Fish is an important source of and also an important
source of livelihood, production of fish, both marines and Tea 3rd
inland , has gone up from 5.6 million tonnes in 2000-01 Jute and Jute like fibres 1st
to 13.7 million tonnes in 2018-19. The marine exports Cotton (lint) 2nd
stand at about 5% of total exports of India and constitutes
19.23% of Agri-exports. India is second largest producer Total Milk 1st
in fishery sector. Total Eggs 3rd
Total Meat 5th
Pradhan Mantri Matsya Sampada
Yojana
On 10th September, 2020 Prime Minister Narendra Modi has Mobile Apps for Farmers
officially launched the Pradhan Mantri Matsya Sampada
— Union Agriculture and Farmers Wealth Minister, Shri
Yojana through video conferencing. During the period
Radha Mohan Singh launched two mobile apps for the
2020-2021 to 2024-2025, estimated investment of ` 20,050
farmers on 23rd December, 2015.
crore are going to be done by the Government for this
scheme. Out of this, ` 12,340 crore is proposed for
beneficiary-oriented actvities in marine, inland fisheries and Mobile app ‘Crop Insurance’
aquaculture and about ` 7,710 crore for fisheries — It will help the farmers not only to find out complete
infrastructure. The major aim of the government behind the details about insurance cover available in their area, but
scheme is also to calculate the insurance premium for notified crops,
— Enhancing fish production by an additional 70 lakh tonne coverage amount and loan amount in case of a loaned
till 2024-25. farmer.
— Increasing fisheries export earnings to ` 1,00,000 crore.

— Doubling of incomes of fishers and fish.

Mobile app ‘Agrimarket Mobile’
— This app automatically captures the location of person
— Reducing post-harvest losses from 20-25% to about 10%.
using mobile GPS and fetches the market prices of crops
in those markets which fall within the range of 50 km.
98 Magbook ~ Indian Economy

There is another option to get price of any market and any The Farmers Agreement Ordinance creates a framework for
crop in case person does not want to use GPS location. contract farming through an agreement between a farmer
and a buyer prior to the production or rearing of any farm
New Agriculture Act 2020 produce. It provides for a three-level dispute settlement
Three Bills on agriculture reforms were introduced in the mechanism i.e. the Conciliation Board, Sub-Divisional
Parliament and passed in September, 2020 to replace the Magistrate and Appellate Authority.
ordinances issued during the lockdown. These are: The Essential Commodities (Amendment) Ordinance, 2020
(i) The Farmer’s Produce Trade and Commerce (Promotion allows the central government to remove cereals, pulses,
and Facilitation) Bill, 2020 oilseeds, edible oils, onion and potatoes from the list of
essential commodities. The amendment will deregulate the
(ii) The Farmers (Empowerment and Protection) Agreement of production, storage, movement and distribution of these
Price Assurance and Farm Services Bill, 2020 food commodities. The Central government is allowed
(iii) The Essential Commodities (Amendment) Bill, 2020 regulation of supply during war, famine, extraordinary price
The Farmer’s Produce Trade and Commerce (Promotion and rise and natural calamity, while providing exemptions for
Facilitation) Ordinance, 2020 allows intra-state and inter-state exporters and processors at such times as well. Imposition
trade of farmers’ produce beyond the physical premises of of any stock limit on agricultural produce must be based on
APMC markets. State governments are prohibited from levying price rise.
any market fee, cess or levy outside APMC areas.
 Self Check
Build Your Confidence

1. The Government of India fixes the Minimum Support 7. Consider the following statements
Prices after taking into account the recommendations 1. Agriculture and allied sectors contribute more than 15% of
of which among the following bodies? Gross Domestic Product of India.
(a) Ministry of Consumer Affairs, Food and Public Distribution 2. Share in total employment by agriculture as high as
(b) Cabinet Committee of Economic Affairs 48.9%.
(c) Planning Commission Which of the statement(s) given above is/are correct?
(d) Commission for Agricultural Costs and Prices (a) Only 1 (b) Only 2
2. Consider the following statements. (c) Both 1 and 2 (d) Neither 1 nor 2
1. The concept Evergreen Revolution was given by 8. Consider the following statements.
renowned agricultural scientist Norman Borlaug. 1. The accelerated Irrigation Benefits Programme was
2. Evergreen Revolution emphasises on organic agriculture launched during 1996-97 to provide loan assistance to
and green agriculture with the help of integrated post poor farmers.
management, integrated nutrient supply and integrated 2. The Command Area Development Programmes was
natural resource management. launched in 1974-75 for the development of water use
Which of the statement(s) given above is/are correct? efficiency.
(a) Only 1 (b) Only 2 Which of the statement (s) given above is /are correct?
(c) Both 1 and 2 (d) Neither 1 nor 2 (a) Only 1 (b) Only 2
3. Government of India established TRIFED in August (c) Both 1 and 2 (d) Neither 1 nor 2
1987, with an objective to save tribals from exploitation 9. National Horticulture Mission was launched in which of
by private traders. Which among the following is the the following Five Year Plans?
precise full form of TRIFED?
(a) Ninth Five Year Plan (b) Tenth Five Year Plan
(a) Tribal Federation of India Limited (c) Eleventh Five Year Plan (d) None of these
(b) Tribal Marketing Development Federation of India Limited
(c) Tribal Co-operative Marketing Development Federation of
10. The National Food Security Mission (NFSM) aims to
India Limited
enhance the production of
(d) Tribal Co-operative Federation of India Limited 1. Rice 2. Wheat
3. Pulses 4. Coarse Cereals
4. The importance of agriculture in Indian economy is
indicated by its contribution to which of the following? 5. vegetables.
Select the correct answer using the codes given below
(a) National income and employment [UPPCS 2006]
(a) 1, 2 and 3 (b) 1, 2 and 5
(b) Industrial development and international trade
(c) 2, 3 and 4 (d) 1, 2, 3 and 4
(c) Supply of foodgrains
(d) All of the above 11. Bringing Green Revolution to Eastern India in a sub
5. The Green Revolution in India has contributed to scheme of
(a) inter-regional inequality [WBPCS 2007]
(a) National Mission on Agriculture Extension and Technology
(b) inter-class inequality
(b) National Mission for Sustainable Agriculture
(c) inter-crop inequality
(c) Rashtriya Krishi Vikas Yojana
(d) All of the above
(d) It is not a sub-scheme.

6. The price at which the government purchases foodgrains 12. Consider the following statements about the National
for maintaining the Public Distribution System and for Agricultural Insurance Scheme (NAIS).
building up buffer Stocks are known as [IAS 2001] 1. The Scheme has been implemented from Rabi 1999-2000
(a) Minimum Support Prices
season.
(b) Procurement Prices 2. The scheme is available non-loanee farmers only.
(c) Issue Prices Which of the statement(s) given above is/are correct?
(d) Ceiling Prices (a) Only 1 (b) Only 2
(c) Both 1 and 2 (d) Neither 1 nor 2

1. (d) 2. (b) 3. (c) 4. (d) 5. (d) 6. (b) 7. (b) 8. (c) 9. (b) 10. (d)
11. (d) 12. (c)
Chapter twelve
Indian Industry
—Meeting High Income Demand Beyond
Industries in Indian certain limits, the demands of the people

Before independenc
Economy are usually for industrial products alone.
—Absorbing Surplus Labour (Employment
— Industry refers to an economic activity Generation) underdeveloped countries like
e, Industrial Policy concerned with the processing of raw materials India are characterised by surplus labour
of the Government and manufacture of goods in factories. and rapidly growing population. Industries
was characterised Industries are often classified based on their are expected to create employment
principle product e.g. steel industry, opportunities and facilitate economic
by Laissez-Faire i.e.
automobile industry, textile industry etc. development.
non-interference — The Indian Government has been trying to —Bringing Technological Progress Research
policy in the affairs promote rapid industrial growth since, and Development. It is associated with the
process of industrialisation, which further
of industries. independence. As a result of the various
leeds to development.
Industrial efforts, the industrial sector in India has grown
in multifarious dimensions.
development was Industrial Policy
left to the exclusive Role of Industry — The Department of Industrial Policy
care of private Promotion (DIPP) has been renamed as
— Rapid growth of national income is possible
sector. However, the Department for Promotion of Industry
only through industrialisation as growth in
and Internal Trade (DPIIT) under the
in the agriculture is limited by factors including
Ministry of Commerce and Industry. It is
natural factors. Industrial growth in 8th Five
post-independence responsible for the entire industrial policy.
Year Plan was 7.29%, in 9th Plan 4.29%, in
era, government 10th Plan (2002-07), 9.17% and in 11th Plan
— An industrial policy provides guidelines for
has been taking an the effective co-ordination of the activities
(approx) 10%. Some of the broad goals and
of various sectors of the economy. The
active interest in objectives of industrial development in India
evolution of industrial policy in India may
are as follows:
the development of be studied in the background to see, how
—Industries can provide better quality and more
industries in India. far it has worked as a potent tool to realise
employment than the agriculture sector. The
the goal of planned development.
So far, government share of industry in total employment increased
from 16.2% in 1999-2000 to 21.9% in 2009-10. — When India achieved independence in
has formulated five
—Value addition in the industrial sector can earn 1947, the national consensus was in
industrial policies more foreign exchange than simply exporting raw favour of rapid industrialisation of the
i.e. Industrial Policy materials. economy, which was seen not only as the
—The industrial sector provides goods for the key to economic development, but also to
1948, 1956, 1977, development of basic infrastructure of the country economic sovereignty.
1980 and 1991 like power, telecom etc which then provides the — In the subsequent years, India’s Industrial
respectively. basis for the growth of other sectors like
Policy evolved through successive
agriculture and services.
Industrial Policy Resolutions and Industrial
—National security requires that products for
Policy Statements. Specific priorities for
defence and other strategic sectors be produced
within the country itself so as to guard against industrial development were also laid down
adverse eventualities like sanctions, wars etc. in the successive Five Year Plans.
Magbook ~ Indian Industry 101
The main aims of the industrial licensing policy were the
Industrial Policy Resolution, —
development and control of industrial investment and
1948 (IPR) production as per national priorities, checking the concentration
— The 1st Industrial Policy was announced in April 1948, by of industries and ensuring balanced regional development.
then Industrial Minister, Late SP Mukherjee. Its historic — However, from time-to-time, many deficiencies in the
importance lies in the fact that it ushered in the system of licensing system came to light. The government set-up
‘Mixed Economy’ in the country i.e. it entrusted the task of several committees for the study of the licensing system and
industrial development on both private and public sectors. giving suggestions for its improvement.
Salient Features of IPR, 1948 — Such committees included RK Hazari Committee, 1964 and
Dr Subimal Dutt Committee, 1967. On the basis of Subimal
— Development of mixed economy.
Dutt Committee recommendation, government enacted the
— State programmes for the development of industries. Monopolies and Restrictive Trade Practises (MRTP) Act, 1969.
— Promotion of small-scale and cottage industries.
— Foreign investment was allowed, but effective control Monopolies and Restrictive Trade
should be with Indians. Practises Act, 1969 (MRTP)
— Industries classified into four categories: ◆
MRTP Act was enacted in 1969 and MRTP Commission was
(i) Public Sector
constituted in 1970, to prevent the concentration of economic
(ii) Mixed Sector power and to prohibit restrictive or unfair trade practices.
(iii) Controlled Private Sector ◆
Under the act, companies having assets beyond the threshold limit
(iv) Private and Co-operative Sector
(i.e. ` 20 crores in 1985) were placed under the purview of the act.
Certain restrictions are imposed on such companies like prior
Industrial Policy Resolution,
◆

approval of the MRTP. Commission for establishment of new

1956 undertakings, expansion of undertakings, mergers and
— IPR, 1956 was the most comprehensive industrial policy, acquisitions.
which was formulated in the backdrop of the adoption of
the Constitution and the socio-economic goals. Industrial Policy Statement, 1977
— The policy may be described as the ‘Economic — The thrust of the policy was on decentralisation of the
Constitution’ of India, as it is not only outlined the basic
industries and the promotion of small-scale and cottage
framework of the future industrial policies (especially upto
industries. It introduced the concept of tiny sector within the
1991), but also of the general economic policies.
small-scale sector.
— Its main objectives were to accelerate the rate of
economic growth and to speed up industrialisation for Industrial Policy Statement, 1980
achieving a socialistic pattern of society.
— The policy emphasised the optimum utilisation of installed
Salient Features (IPR 1956) capacity, technological upgradation and modernisation.
— The policy industries divided into three categories: — The policy selectively liberalised the industrial sector i.e.
(i) Schedule A (Public Sector) Seventeen industries MRTP Act was liberalised, scope of licensing was reduced,
were exclusively reserved for the public sector. simplified the procedure for regularisation of unauthorised
(ii) Schedule B (Mixed Sector) Twelve industries were excess capacity etc.
placed in the mixed sector of public and private
enterprise. These were to be progressively An Evaluation of Industrial
state-owned and in which state would generally
set-up new units. Policy Before 1991
(iii) Schedule C (Private Sector) All the remaining — Several official committees as well as other experts bring to
industries and their future development would, in light the major deficiencies of the industrial policies before
general be left to the initiative and enterprise of the 1991. Some of the important criticism are as follows:
private sector. —The objective of the licensing policy was to ensure capacity
creation according to the priorities decided in the Five Year Plan.
Industrial Licensing But due to inherent demerits of the licensing system, in some
— The Industries (Development and Regulation) Act, 1951, areas excess capacity was created and there was under
empowered the government to issue licenses for the utilisation of capacity while at same time, despite availability of
setting-up of new industries, expansion of existing ones licenses, private players deliberately under produced goods,
and for diversification of products. which helped develop monopoly and monopolistic conditions in
the economy.
102 Magbook ~ Indian Economy

—Targets were not fixed for private sectors and they invested — In case of cities with population of one million or above,
only assured profit and avoided risk. excepting non-pollutant industries, all other units will be
—The objective of licensing policy was to check monopoly in the set-up at a distance of 25 km from the city limits.
economy, but it infact led to development of monopoly in the — MRTP Limit Scrapped The threshold limit of ` 100 crore
economy. Big industrial houses succeeded in getting the worth of assets for classification of a company as MRTP
licenses, while others failed.
company was removed, such companies were to be
—Due to licensing policy, developed states gained, more units recognised on case-by-case evaluation basis.
were set-up in already developed states, while poor and under
— Mandatory Convertibility Clause was Abolished It is the
developed states lagged.
condition imposed by the financial institutions on private
—Rigidity and complex nature of licensing caused delay in
companies that a part of their lending would be converted
permission and there was problem of delay in projects, which
slowed down the growth rate.
into equity at some future date.
— New Small Enterprise Policy A separate policy was
New Industrial Policy, 1991 (NIP) announced by the government in August 1991, for the
promotion of small-scale industries.
— The Government of India announced the New Industrial
Policy on 24th July, 1991. The main objective of this — Like the private enterprises, sick PSUs were also placed
policy is to unshackle the Indian industrial economy from under the purview of the Board for Industrial and
administrative and legal controls. Financial Reconstruction (BIFR).
— Its main aim is to raise industrial efficiency to the — Disinvestment of the shares of PSUs was initiated.
international level through substantial deregulation of the
industrial sector of the country. Competition Act, 2002
— The Competition Act was enacted by the government in
2002, on the recommendation of the SVS Raghavan
Industries Requiring Compulsory Committee. It repealed the MRTP Act and the MRTP
Licensing Commission was replaced by the Competition Commission
◆
Distillation and brewing of alcoholic drinks. of India (CCI).
◆
Cigars and cigarettes of tobacco and manufactured tobacco — The objectives of the act are to encourage competition,
substitutes. prevent abuse of dominance (rather than dominance as
◆
Electronic aerospace and defence equipment all types. such) and to ensure a level playing field for all the
◆
Industrial explosives including match boxes. enterprises in the Indian economy.
◆
Specific hazardous chemicals viz Hydrocyanic acid, Phosgene,
Isocyanates and diisocyanates of hydrocarbon. Companies Act, 2013
— This act introduces significant changes in the provisions
Main Features of NIP, 1991 related to governance, e-management, compliance and
— Delicensing The industrial licensing was abolished enforcement, disclosure norms, auditors and mergers and
irrespective of the level of investment, except for acquisitions. Also, new concepts such as one-person
18 specified industries like defence, atomic energy etc. company, small companies, dormant company, class
Since then, most of these industries were delicensed and action suits, registered valuers and corporate social
now only three industries fall under the purview of responsibility have been included. The changes in the Act
industrial licensing. 2013 has far reaching implications that are set to
— Foreign Investment Foreign capital investment limit was significantly changes the manner, in which corporates
raised from 40% to 51% in high technology and high operate in India. The Act 2013 has introduced several
investment priority industries. new concepts and has also tried to streamine many of the
— Foreign Technology Automatic approval was granted for requirements by introducing new definitions.
foreign technology agreements upto the limit of ` 200 crore — One Person Company The Act 2013 introduces a new type
subject to 5% royalty on domestic sales and 8% on exports. of entity to the existing list i.e. apart from forming a public
— Foreign Investment Promotion Board (FIPB) It was or private limited company, the Act 2013 enables the
established to expeditiously clear foreign investment formation of a new entity a ‘One Person Company’ (OPC).
proposals. It serves as a single window clearing agency for — Small Company A small company has been defined as a
the FDI proposals. company, other than a public company.
— Industrial Location Policy Excepting the big cities with —Paid-up share capital of which does not exceed 50 lakh INR.
population of one million, in other cities, industrial —Turnover of which as per its last profit and loss account does
licensing will not be required, but for those industries, not exceed 2 crore. INR or such higher amount as may be
where licensing is compulsory. prescribed which shall not be more than 20 crore INR.
Magbook ~ Indian Industry 103
— Dormant Company The Act 2013 states that a company development in the public sector became imperative.
can be classified as dormant when it is formed and — The expansion of public sector in the field of industries
registered under this Act 2013 for a future project or to took place in a big way with the launching of the Second
hold an asset or intellectual property and has no Plan (1956-61), which gave top priority to the industrial
significant accounting transaction. growth of the country.
— National Financial Reporting Authority (NFRA) The Act
2013 requires the Constitution of NFRA, which has been Objectives of the Public Sector
bestowed with significant powers not only in issuing the ◆
To capture commanding heights of the economy i.e. to take up
authoritative pronouncements, but also in regulating the strategic role in the industrialisation of the country.
audit profession. ◆
To accelerate the rate of economic growth through creation of
— Serious Fraud Investigation Office (SFIO) The Act 2013 basic infrastructure.
has bestowed legal status to SFIO. ◆
To generate employment.
— Corporate Social Responsibility The Act 2013 makes an ◆
To promote balanced regional development.
effort to introduce the culture of Corporate Social ◆
To generate surplus resources for development.
Responsibility (CSR). In Indian corporates by requiring ◆
To promote exports and to develop import substitution industries.
companies to formulate a corporate social responsibility
policy and atleast incur a given minimum expenditure on
◆
To check concentration of economic power.
social activities.
Expansion of Public Sector
The Companies (Amed.) Act, 2015 — There were only five Central Public Sector Enterprises
(CPSEs) in 1951, with investment of ` 29 crore. The
and 2019 number of CPSEs (excluding financial institutions) has
Important point related to Companies Act, 2015 are as increased to 348 by March, 2019.
follows: — There were over 800 state level public enterprises with
— Omitting requirement for minimum paid-up share capital total investment in public sector in the entire country (i.e.
and consequential changes. The minimum paid-up share Centre + States) stood at over ` 6 lakh crore.
capital requirement of INR 1,00,000 (in case of a private
company) and INR 5,00,000 (in case of a public company) Contribution of Public Sector
under the Company Act, 2013 has been done away with. — The public sector was instrumental in the creation of
— Making common seal optional and consequential changes infrastructure and the development of basic industrial
for authorisation for execution of documents. structure of the country.
— Doing away with the requirement for filling a declaration — PSUs did a commendable job in the promotion of strategic
by a company before commencement of business or and key industries like atomic energy, armaments and
exercising its borrowing powers. ammunition, aircrafts, heavy machinery, iron and steel, coal,
— Prohibiting public inspection of board resolutions field in drugs, fertilizers etc.
the registry. — The public sector provided employment to about 70% of
— Empowering Audit Committee to give omnibus approvals the workers employed in the organised sector. Presently,
for related party transaction on annual basis. public sector contributes about 24% to the GDP and
accounts for over 20% of the Gross Domestic Capital
— Replacing ‘special resolution with resolution’ for approval
Formation (investment).
of related party transactions by non-related shareholders.
— Further, Amendment to this Act in 2019, enlarged the Problems of the Public Sector
scope of issuance of dematerialised shares to certain — The return on capital invested in PSUs has been deplorably
classes of unlisted companies and provided provisions for
low due to low profitability and losses of some PSUs.
transfer of any unspent annual CSR fund to PM Relief Fund.
— Problems related with the Price Policy i.e. Administered
Prices of the products of PSUs were deliberately kept
Public Sector lower than the market prices.
— At the time of independence, the country was — Lack of autonomy to the management of the PSUs due to
predominantly agrarian and lacked basic industries and excessive political interference.
infrastructure facilities. The economy needed a big push. — Low efficiency due to lack of incentives for better
— The push could not come from the Indian private sector, performance.
which was starved of funds and lacked technical and — Excessive overheads especially in providing housing and
managerial abilities. Further, it was incapable of taking risk other amenities to the employees e.g. townships.
involved in long gestation investments. So, the — Over staffing inflated the wage bills.
104 Magbook ~ Indian Economy
— Inappropriate investment decisions like inappropriate —An average annual net profit after tax of more than ` 5000
location, technology, product mix etc. crore during the last 3 years.
— Indiscriminate expansion of the public sector in almost all —Significant global presence or international operations.
areas. — The coveted status empowers the boards of these firms
to take investment decisions up to ` 5000 crore as
Public Sector Reforms against the present ` 1000 crore limit for Navratnas
— To improve the performance of the PSUs, the government without seeking government approval.
has adopted the following measures, especially in the post — The Maharatna firms would now be free to decide on
reform (1991 onwards) era. investments up to 15% of their net worth in a project,
— Memorandum of Understanding the concept of Memorandum limited to an absolute ceiling of ` 5000 crore.
of Understanding (MoU) was introduced in 1987, on the Maharatna CPSEs
recommendation of the ‘Committee to Review the Policy for — Oil and Natural Gas Corporation Limited (ONGC)
the Public Enterprises’ headed by Mr Arjun Sengupta.
— Indian Oil Corporation Limited (IOCL)
— MoU refers to the agreement between the concerned ministry — Steel Authority of India Limited (SAIL)
and the management of a PSUs in which the latter is provided a
— NTPC Limited
reasonable degree of autonomy and simultaneously held
— Coal India Limited (CIL)
accountable for the performance of the PSUs.
— Bharat Heavy Electricals Limited (BHEL)
— New Industrial Policy, 1991 The policy contained the
— Gas Authority of India Limited (GAIL)
following reformative measures for PSUs; dereservation,
disinvestment, professionalisation of management, reference — Bharat Petroleum Corporation Limited
of sick PSUs to the BIFR and expanding the scope of — Hindustan Petroleum Corporation Limited
MoUs. — Power Grid Corporation of India Limited
— Voluntary Retirement Scheme (VRS) The VRS (or Golden — Power Finance Corporation Limited (PFCL)
Handshake Scheme) was launched in 1988, for the
rationalisation of manpower in the central PSUs. The
scheme enabled the PSUs to shed their excess staff by
Policy of Navratnas
offering attractive compensation package to the workers, — Navratna was the title given originally to nine Public
who seek voluntary retirement. Sector Enterprises (PSEs), identified by the
Government of India in 1997, as its most prestigious,
— Dismantling of Administered Price Mechanism (APM) The
which allowed them greater autonomy to compete in
government has initiated steps for dismantling of price
the global market.
controls in respect of a number of products of PSUs. e.g. it
removed the price and distribution controls on iron, steel
and cement. The government also decontrolled the prices of
Criteria for Navratna Status for
most of the fertilizers and petro-products. PSUs
— It should have a schedule ‘A’ and Miniratna category—
Policy of Maharatnas 1 status.
— Maharatna Scheme was introduced for Central Public Sector — It should have atleast three ‘excellent’ or ‘very good’
Enterprises (CPSEs), with effect from 19th May, 2010, in Memorandum of Understanding (MoU) ratings during
order to empower mega CPSEs to expand their operations the last 5 years.
and emerge as global giants. — It should have a composite score of 60 out of 100
— The objective of the scheme is to delegate enhanced powers marks based on its performance during the last 3 years
to the boards of identified large-sized Navratna CPSEs, so as on these 6 criterias-net profit to net worth, manpower
to facilitate expansion of their operations, both in domestic cost-to-cost of production or services, gross margin as
as well as global markets. capital employed, gross profit as turnover, earnings per
— CPSEs fulfiling the following criteria are eligible to be share, inter-sectoral comparison based on net profit to
considered for grant of Maharatna status: net worth.
—Having Navratna status. — The company should also have four independent
—Listed on the Indian Stock Exchange, with a minimum directors on its board.
prescribed public shareholding under SEBI regulations. — Navratna status empowers the PSUs to invest up
—An average annual turnover of more than ` 25000 crore during to ` 1000 crore or 15% of their net worth on a single
the last 3 years. project without seeking government approval. The
—An average annual net worth of more than ` 15000 crore during overall ceiling on such investments in all projects put
the last 3 years. together is 30% of the net worth of the company.
Magbook ~ Indian Industry 105
Navratna CPSEs Objectives of Disinvestment
— Bharat Electronics Limited
— To transfer the resources from non-strategic sector to the
— Hindustan Aeronautics Limited
strategic sector, which is much higher on social priority such as
— Mahanagar Telephone Nigam Limited basic health, family welfare, primary education etc.
— National Aluminium Company Limited — To raise funds to cover up the fiscal deficit of the government.
— NMDC Limited — To improve efficiency of the public sector by inducing private
— Oil India Limited initiative and competition.
— Container Corporation of India Limited — To enhance accountability of the PSUs by exposing them to
— Engineers India Limited the capital market. To reduce political interference by
— National Buildings Construction Corporation Limited imparting market orientation to the enterprise.
— Rashtriya Ispat Nigam Limited — Bring down government equity in all non- strategic PSUs to
— Rural Electrification Corporation Limited 26% or lower, if necessary.
— Shipping Corporation of India Limited — Restructure and revive potentially viable PSUs.
— Neyveli Lignite Corporation Limited
— Close down PSUs, which can not be revived.
— Fully protect the interest of workers.

Policy of Miniratnas Disinvestment vs Privatisation

— The government has also accorded the status of
Miniratna to some profit making PSEs. There are two Disinvestment refers to selling of equity of a PSU to a private
types of Miniratnas — organisation or to general public. Privatisation refers to providing for
Category I and Category II. larger role for private capital and enterprise in the functioning of an
economy. Privatisation is a wider term than disinvestment.
Category-I Miniratna Disinvestment is one of the means for achieving privatisation.
— These are companies, which have made a profit in Privatisation may result from any of the following
each of last 3 years and earned a profit of ` 30 crore ◆
Disinvestment
in atleast one of the 3 years. ◆
Denationalisation (i.e. complete sell off of a PSUs)
— They are allowed to incur capital expenditure without
◆
Transfer of management and control of a PSUs to the private sector
government approval upto ` 500 crore or equal to their ◆
Dereservation of areas reserved for the public sector etc.
net worth whichever is lower. There are 62 Miniratnas
of this category at present {June 2020}. The Disinvestment Process
Category-II Miniratna — In 1992, government constituted a committee on the
— These are companies, which have made profits for the disinvestment of shares in PSE’s headed by Dr C Rangarajan
last 3 years continuously and have a positive net to recommend on the policy of disinvestment. The committee
worth. They can incur capital expenditure upto ` 300 recommended that upto 49% equity of the PSUs under the
crores or 50% of their net worth whichever is lower. exclusive participation of the state could be disinvested but for
— There are presently (June 2020) 12 such category-II rest of the industries disinvestment can be allowed upto 74%.
Miniratnas. — Further, the government constituted a 5 member
Disinvestment Commission, under the chairmanship of Shri GV
Disinvestment Ramakrishnan in August, 1996, to draw up a comprehensive
policy for the long-term disinvestment programme.
— The New Industrial Policy, 1991, envisaged — The commission was mandated to advise the government on
disinvestment of a part of government shareholdings in the extent, methodology, strategy and timing of disinvestment.
selected PSUs as an important element of public sector
— In May 2004, the government adopted National Common
reforms. In pursuit of this, the process of disinvestment
Minimum Programme, which outlined the policy of the
began in 1991-92, with the sale of minority stakes in
government with respect to the public sector as follows:
some PSUs.
—In general, profit making PSU’s will not be privatised.
— The primary aim of disinvestment in this phase was to
—In case of privatisation of profitable PSU’s, government will retain
raise non-inflationary finance to plug budgetary deficit.
at least 51% of the equity and the management control of the
But the focus of disinvestment shifted to strategic sale enterprise.
since 1999, in which substantial chunk of government
—Navratnas PSUs will be retained under the public sector.
equity is sold to private sector enterprises with an
—Chronically, loss-making companies will be either sold-off or
objective to improve the performance of the PSUs and closed, after all workers get their legitimate dues and
to reorient public investment. compensation.
106 Magbook ~ Indian Economy

—All privatisations will be considered on a transparent and

consultative case-by-case basis. The Micro, Small and Medium
—A Board for Reconstruction of Public Sector Enterprises
(BRPSEs) to be constituted.
Enterprises (MSMEs)
— Over the last five decades, the Small-Scale Industries
—A National Investment Fund will be established.
(SSIs) sector has acquired place of prominence in the
— On 25th November, 2005, the government decided, in
economy of the country. It has contributed significantly to
principle, to list large, profitable CPSEs on Domestic
Stock Exchanges and to selectively sell small portions the growth of the GDP, employment generation and exports.
of equity in listed, profitable CPSEs (other than — The sector now includes not only SSI units but also
Navratnas). Small-Scale Service and Business Enterprises (SSSBEs) and
— On 17 May, 2020, as part of a stimulus package the is thus, referred to as the small enterprises sector.
Finance Minister Nirmala Sitharaman announced that — In India, Small-Scale Industries (SSIs) can be differentiated
the Government will privatize all Public Sector from the large-scale industries on the basis of three criteria
enterprises in non-strategic sector. viz volume of investment in the unit, annual turnover and
number of workers employed.
National Investment Fund — In accordance with the provision of Micro, Small and Medium
— In pursuance of the policy laid down in NCMP, the Enterprises Development (MSMED) Act, the Micro, Small and
Central Government set-up National Investment Fund Medium Enterprises (MSMEs) are classified on 1st June,
in November 2005. The proceeds from disinvestment 2020 in two classes:
of CPSUs will be channelised into NIF, which is to be (i) Manufacturing Enterprises The enterprises engaged in the
maintained outside the Consolidated Fund of India. manufacture or production of goods pertaining to any
— NIF will be professionally managed to provide industry specified in the 1st Schedule to the Industries
sustainable returns to the government, without (Development and Regulation) Act, 1951. The
depleting the corpus. Selected Public Sector Mutual manufacturing enterprise are defined in terms of
Funds will be entrusted with the management of the investment in plant and machinery.
corpus of NIF. 75% of the Annual Income of NIF will
Enterprises Manufacturing Sector
be used to finance selected social sector schemes,
which promote education, health and employment. Investment in Plant and Machineries

— The residual 25% of the annual income of the fund Micro Enterprises Does not exceed ` 1 crore.
will be used to meet the capital investment Small Enterprises More than ` 10 crore.
requirements of profitable and revivable CPSUs that Medium Enterprises More than ` 20 crore.
yield adequate returns or in order to enlarge their
capital base to finance expansion diversification. (ii) Service Enterprises The enterprises engaged in providing
— The following Public Sector Mutual Funds have been or rendering of services and are defined in terms of
appointed initially as Fund Managers, to manage the investment in equipment.
funds of NIF.
Enterprises Service Sector
—UTI Assets Management Company Limited
—SBI Funds Management Company (Private) Limited Investment in Equipments
—Life Insurance Corporation, Asset Management Company Micro Enterprises Does not exceed ` 5 crore.
Limited Small Enterprises Does not exceed ` 50 crore.
Medium Enterprises Does not exceed ` 100 crore.
National Monetisation Pipeline
The Union Government in August 2021 launched the National
Finance Minister N, Sitharaman announced the new amendment
Monetisation Pipeline to unlock the value of investments in
definitions of MSME in May, 2020 which are as follows :
Brownfield public sector assets by tapping institutional and
long-term capital. This four year pipeline will unlock value in New Definition of Enterprises
Brownfield projects by engaging the private sector and
Types of Enterprises Investment Turn over
transferring to them the rights but not the ownership in
projects. It is indicatively valued at `6.0 lakh crore for 4 years Micro ` 1 crore ` 5 crore
with largest values coming in from monetisation of assets in Small ` 10 crore ` 50 crore
Roads, Railways and Power transmission sector. Medium ` 50 crore ` 250 crore
Magbook ~ Indian Industry 107

Small industry sector has performed exceedingly well and

Cottage and Village Industries —
enabled the country to achieve a wide measure of
Cottage Industries industrial growth and diversification.
— This type of industry is run by family members on full or
part time basis. It has negligible capital investment. Problems of Small-Scale
There is hand made production using own tools and Industries
materials.
— These industries are not able to get raw material of
Village Industries adequate quality. The raw material they get, is also high
— The industries established in rural area having population in price.
below 10000 and having less than 15000 as fixed capital — They are not able to get regular power supply.
investment per worker are termed as village industries. — They are not able to get loans, since, they cannot offer
good security.
Differences Between Cottage and
Small-Scale Industries — Due to old methods of production, the goods are many
times of poor quality. They lack marketing support due to
— Cottage industries are mostly in rural areas, while small
lack of funds.
industries are mostly in urban areas.
— Their cost of production is high due to expensive raw
— Cottage industries are run by family members, while small
material.
industries have hired labourers.
— They have mostly focussed on producing artistic goods,
— Cottage industries have very little capital investment, while
whose demand is limited and so production cannot be
small industries can have upto ` 5 crore invested.
increased beyond a point.
— Cottage industries produce mostly traditional goods, while
— They have to compete with large-scale industries in many
small industries produce many modern goods also.
areas. Large industries are able to achieve low costs of
— Cottage industries are located in the homes of workers,
production due to economies of scale.
while small industries are not located in homes.

Contribution of Small-Scale Government Measures to

Industries in Indian Economy Promote Small-Scale Industries
— Government initiated several measures for the promotion
— The small-Scale sector accounts for over 80% of the
of small-scale and cottage industries immediately after
manufacturing sector’s employment. Total 120 million
independence. The importance of these industries was
people employed in this sector.
recognised in the very first Industrial Policy Resolution of
— It contributed significantly towards the economic growth of 1948 and reiterated in all future industrial policy
the nation, with over 39% of the industrial production. statements.
— The small-scale accounts for over 34% of the total exports — Steps taken by the government for the development of
and about 45% of the manufacturing exports. Further, over these industries can be categorised as organisational,
90% of exports of the SSls consists of non-traditional items financial, fiscal, technical etc.
like sports goods, readymade garments, processed foods,
chemicals etc. Organisational Measures
— SSIs are conducive for the economic development of — Establishment of Boards Government constituted
underdeveloped countries like India. Such industries are several boards at all India level to provide an
relatively labour intensive, so they make economical use of organisational structure, through which the promotional
the scarce capital. efforts were to be carried out. These boards include
Cottage Industries Board, Handloom Board, Handicraft
— Small-scale industries are instrumental in reducing the
Board, Khadi and Village Industries Board etc.
inequalities in wealth. In these industries, capital is widely
distributed in small quantities and the surplus of these
— Industrial Estates The policy of setting-up Industrial
Estates was initiated in 1955, for the construction of
industries is distributed among large number of people.
factory premises and to provide basic facilities like power,
— Small-scale industries brings about regional dispersal of water, roads etc.
industries and alleviates regional imbalances.
— District Industries Centre (DIC) The concept of DIC was
— Small-scale industries, make use of local resources introduced in the Industrial Policy Statement of 1977.
including the capital and entrepreneurial skills, which This programme was initiated in 1979, to cater to all the
would have remained unused for want of such industries. requirements of small-scale and village industries, under
one roof.
108 Magbook ~ Indian Economy

Financial Measures — Udyami Mitras are expected to assist the new

— Small Industries Development Fund (SIDF) It was set-up entrepreneurs in the establishment and successful running
in 1986, to provide refinance (i.e. finance to the financial of the enterprise for the first-sixth months.
institutions in lieu of their-lending to SSIs) assistance for — The scheme is beneficial to all potential first generation
development, expansion, modernisation, rehabilitation of entrepreneurs, in all towns as well as rural areas, by
SSIs. encouraging establishment of new enterprises and
— National Equity Fund (NEF) It was set-up in 1987, to thereby creating new job opportunities locally.
provide initial capital for setting-up of new projects in — A Udyami Helpline (a Call Centre for MSMEs) with
small-scale sector in the form of equity (i.e. shares). toll-free number 1800-180-6763 is in operation to provide
— Single Window Scheme (SWS) It was introduced in information, support, guidance and assistance to first
1988, to provide short-term as well as long-term financial generation entrepreneurs as well as other existing
assistance to SSIs. entrepreneurs.
— Small Industries Development Bank of India (SIDBI) It
was established in October 1989, by amalgamation of Credit Rating Scheme for Micro and
Small Industries Development Fund (SIDF) and Natural Small Enterprises
Equity Fund (NEF). SIDBI is the apex financial institution — National Small Industries Corporation (NSIC) in
for small enterprises sector. It provides finance to SSI, consultation with credit rating agencies and Indian Bank’s
refinance assistance and coordinates the activities of other Association has formulated a Performance and Credit
financial institutions for the provision of credit to SSIs. Rating Scheme for Micro and Small Enterprises.
Fiscal Measures — NSIC is the nodal agency for the implementation of the
— Small-scale enterprises having turnover, upto ` 1 crore are scheme. NSIC empanelled the leading credit rating
fully exempted from the excise duty. agencies like CARE, CRISIL, Dun and Bradstreet, FITCH,
ICRA, ONICRA and SME Rating Agency of India Limited
— Concessional rate of custom duties are levied on import of
(SMERA) to conduct the rating of interested Micro and
certain kind of raw materials and components used by SSIs.
Small Enterprises under the scheme.
— Price and purchase preference is granted to products
manufactured in the small-scale sector in government
purchase programme.
National Manufacturing
Competitiveness Programme
Technical Measures
— The National Manufacturing Competitiveness Programme
— Small-Scale Industries Development Organisation (SIDO) It
(NMCP) for the MSMEs aims at enhancing the
was established in 1954. SIDO provides technical,
competitiveness of enterprise in this sector. There are 10
managerial, economic and marketing assistance to SSls
components of the NMCP, which have been approved
through its network of extension centres and service
and are available for MSMEs. These are as follows:
institutes.
—Lean Manufacturing Competitiveness Scheme (LMCS) for
— Council for Advancement of Rural Technology (CART) It MSMEs.
was established in 1982, to provide technical assistance to
—Design Clinics Scheme for design expertise to MSMEs
rural industries. manufacturing sector.
— Technology Development and Modernisation Fund (TDMF) —Marketing Assistance and Technology Upgradation Scheme
It was set-up for the technological upgradation and for MSMEs.
modernisation of the export oriented units. —Enabling manufacturing sector to be competitive through
Quality Management Standards (QMS) and Quality
Schemes/Programmes for Technology Tools QTT.
—Technology of Quality upgradation support for MSMEs.
Small Industries —Promotion of Information and Communication Technology
Rajiv Gandhi Udyami Mitra Yojana (ICT) in MSME sector.
—Setting-up Mini Tool Room and Training Centres under PPP
— Under this scheme, the selected lead agencies i.e. Udyami Mode.
Mitras are providing guidance and assistance to the
—Marketing Assistance or Support to MSEs (Bar Code).
potential entrepreneurs registered with them, in
—Building Awareness on Intellectual Rights for MSMEs.
preparation of project report, arranging finance, selection
—Scheme for Providing Support for ‘‘Entrepreneurial and
of technology, plant and machinery, marketing tie-ups with
Managerial Developments of SMEs through Incubators’’.
buyers, as well as obtaining various approvals, clearances
and NOCs etc.
Magbook ~ Indian Industry 109
The detailed recommendations cover 6 major thematic
Procurement Policy —
areas, namely credit, marketing, labour, rehabilitation
— Government has approved a public procurement policy for and exit policy, infrastructure, technology and skill
Micro and Small Enterprises , which mandates that Central development and taxation as also special measures for
Ministries, Departments or PSUs have to procure minimum the North-Eastern region and Jammu and Kashmir.
20% of their total annual purchases from MSEs. Out of this
20%, a share of 4% has to be earmarked for the MSEs owned Abid Hussain Committee
by SC/ST entrepreneurs.
— Central Ministries, Departments or PSUs will prepare their
Report
annual plan for setting of goal of 20% procurement and will — The Abid Hussain Committee is appointed by the
mention in their annual reports. The policy will help to Government of India to suggest measures to improve
promote MSEs by improving their market access and the performance of small-scale industries. The
competitiveness through increased participation by MSEs in committee submitted its report in January 1997.
government purchases and encouraging linkages between
MSEs and large enterprises. Industrial Sickness
The government defined the industrial sickness for the
Credit Linked Capital Subsidy —
first time in the Sick Industrial Companies (Special
Scheme for Micro and Small Provisions) Act, 1985. According to this act, a
Enterprises medium or large (i.e. non-SSI) company was defined
as sick if
— The scheme aims at facilitating technology up-gradation of
Micro and Small Enterprises (MSEs) by providing 15% capital —It was registered for atleast 7 years (later reduced to 5
years).
subsidy (limited to maximum ` 15 lakhs) for purchase of Plant
—It incurred cash losses in the current year and the preceding
and Machinery.
year.

Reservation of Items for SSIs —Its entire net worth (i.e. paid-up capital and reserves)
was eroded.
— The policy to reserve certain items for the small-scale sector — A company is regarded, as weak or incipiently sick on
was introduced in 1967. It aims to promote the SSIs by the erosion of 50% of its peak net worth during any of
protecting them from competition with the large-scale units. preceding five financial years. Industrial sickness has
— In April 1967, there were only 47 items in the reserved category, been covered in the Companies (Second Amendment)
which were increased in several phases to 873 in 1984. Act, 2002 and Companies Act, 2012.
New Small Enterprise Policy, 1991
Causes of Industrial Sickness
— Government announced a separate industrial policy for the — The causes of industries sickness can be classified
small enterprise sector on 6th August, 1991. It was titled as, into two categories i.e. internal and external causes.
“Policy Measures for Promoting and Strengthening Small, Tiny
and Village Enterprises”. Internal Causes
Salient Features — Originate within the unit, so they can be controlled by
the unit. These include
— The ceiling of investment for the ‘tiny sector’ was raised from
—faults at planning and construction stage
` 2 lakh to ` 5 lakh.
—inappropriate plant and machinery
— Large units including foreign firms were allowed to purchase —management problems
upto 24% equity (shares) of the small-scale industries. Scope —entrepreneurial problems
of tiny sector was enlarged to include all industry related —labour problems
service and business enterprises. —financial problems etc
— Introduction of a new legal form of business organisation,
limited partnership. In this form, the liability of atleast one
External Causes
partner is unlimited whereas other partners have their liability — Supposed to originate outside the unit, so are not
limited to the invested capital. under the control of the unit.
Such factors include
Current Policy on SSIs —erratic supply of inputs
— The report of the Task Force on micro, small and medium —power cuts
enterprises, presented to the Honorable PM on 30th —demand and credit constraints
January, 2010, provides a roadmap for the development and —changes in government policies etc
promotion of MSMEs.
110 Magbook ~ Indian Economy

Since then, six such EC’s have been conducted so far,

Revival of Sick Units —
during the years 1977, 1980, 1990, 1998, 2005 and
Government under take the following measures to revive the 2013. The Economic Census data, over the years, have
sick industrial units: provided a base for under taking follow-up surveys by
NSSO and other governmental and non-governmental
Industrial Investment Bank of India (IIBI)
agencies to study the structure and composition of the
— The government established the Industrial Reconstruction
various industrial sectors and their contribution.
Corporation of India (IRCI) in 1971, as a company
registered under the Companies Act. Its objective was to Sixth Economic Census
revive and rehabilitate the sick units by providing
financial, managerial and technical assistance. — Central statistics office in the Ministry of Statistics and
Programme Implementation (MoSPI) conducted the Sixth
— In 1985, IRCI was renamed as Industrial Reconstruction
Economic Census during January 2013 to April 2014 in
Bank of India (IRBI) and was converted into a statutory
collaboration with directorates of economics and statistics
corporation. Further in 1997, the IRBI was transformed
in all the States and Union Territories.
into a full-fledged development financial institution and
rechristened as Industrial Investment Bank of India (IIBI). — The Sixth Economic Census had also the same coverage
as that of Fifth Economic Census. However,
Board for Industrial and Financial establishments engaged in public administration, defence
Reconstruction (BIFR) and compulsory social security activities have been
— The government set-up BIFR in 1987, under the Sick excluded as data pertaining to them are available with the
Industrial Companies (Special Provisions) Act (SICA), government through administrative records and also due
1985. The BIFR is an autonomous quasi-judicial body to to the difficulties faced in collecting information from sue’s
take final decision regarding revival and rehabilitation or establishments during the Fifth Economic Census.
winding up of the sick units. — The Sixth Economic Census separately identified
— It is mandatory for a sick or weak unit to refer itself to the handicrafts handloom establishments for the first time.
BIFR. On receipt of such reference, the board ascertains — Further, Enumeration Blocks (EBs) of Population Census,
whether the company is indeed sick. 2011 have been used as the primary geographical units
— If sickness is confirmed, the board may allow the company for collection of data.
sometime to make its net worth positive on its own, prepare
revival and rehabilitation package or wind-up the unit. Corporate Social Responsibility (CSR)
* High interest rates and slower growth in household — According to the provision for Corporate Social
or retail credit resulted in slower growth in Responsibility (CSR), every company having net worth of
consumer durables. ` 500 crore or more or turnover of ` 1000 crore or more or
* Industry is creating jobs, which have been relatively a net profit of ` 5 crore or more during any financial year
low-productivity jobs. As a result, per capita income is required to constitute a Corporate Social Responsibility
in India has not benefited as much from Committee.
inter-sectoral migration of workers out of agriculture — The Corporate Social Responsibility Committee will
as other Asian countries have. formulate a Corporate Social Responsibility Policy.
— Such a company is required to spend atleast 2% of the
Economic Census average net profits of the company made during the three
— The Central Sector Scheme on Economic Census (EC) immediately preceding financial years, in pursuance of its
and follow-up surveys was for the first-time formulated by Corporate Social Responsibility Policy.
the then Central Statistical Organisation (CSO) way back
in 1976 with the following two main objectives: Index of Industrial Production (IIP)
(i) To provide a frame (list) of all establishments in the — IIP is an index for measuring the level of industrial
country, from which samples could be drawn for activity in the country. All India IIP is a composite
collecting detailed information on operational and indicator that measures the short-term changes in the
economic variables for any specific industry. volume of production of a basket of industrial products
(ii) To compile information on these variable or during a given period with respect to that in a chosen
parameters of all the establishments of the country base period.
including their distribution at All India, State or — It is complied and published monthly by the Central
District etc levels for comprehensive analysis of the Statistics Office (CSO) with the time lag of 6 weeks from
structure of the economy. the reference month.
Magbook ~ Indian Industry 111
— The Index of Industrial Production (IIP) with 2004-05 as India, compared with 34% in China and 40% in Thailand.
base is the leading indicator for industrial performance in — The slow pace of growth in the manufacturing sector
the country. Compiled on a monthly basis, the current IIP at this stage of India’s development is not an
series based on 399 products or product groups is acceptable outcome. Manufacturing must provide a
aggregated into three broad groups of mining, large portion of the additional employment
manufacturing and electricity. The IIP as an index shows opportunities as opposed to agriculture, for India’s
both the level of production and growth. increasing number of youth.
— The Central Statistics Office (CSO) of the Ministry of — The challenges to developing and implementing a
Statistics and Programme Implementation (MoSPI) cohesive manufacturing strategy :
released the new series of the IIP with 2004-05, as its new —There is a multiplicity of ministries dealing with different aspects
base on 10th June, 2011, replacing the IIP series with of industry e.g. commerce, labour, environment, science,
1993-94 as base. finance etc. The states have a major role in facilitating the
growth of manufacturing in terms of provision of infrastructure,
Core Sector management of various local regulations and managing labour
◆
The Core Sector consists of eight core industries in the related laws.
economy having a weightage of 40.27% in the IIP. These —Industry associations lobbying for their members’
eight sectors are Coal, Crude Oil, Natural Gas, Petroleum (often conflicting) interests are important stakeholders.
Refinery Products, Fertilizers, Steel, Cement and Electricity. —Other stakeholder groups, who must be involved in the
consultations in a more systematic and productive way are
The weightage of Core Industries as follows
unions, land owners etc.
◆
Natural Gas (8.98%). —There are many over-sight bodies and committees, perhaps
◆
Fertilizers (2.63%). too many. There is need to sharpen their roles and improve
◆
Steel (17.92%). co-ordination amongst them.
◆
Crude Oil (6.88%).
National Manufacturing Plan as
◆
Coal (10.33%). Suggested by the 12th Plan
◆
Refinery Products (28.04%).
— India’s strategic objectives for the manufacturing sector
◆
Cement (5.37%). in the next 15 years should be to bring about a
◆
Electricity (19.85%) quantitative and qualitative change through a set of
policies and plans with the following five objectives.
Purchasing Managers Index (PMI) (i) Increase manufacturing sector growth to 12-14%,
— The PMI is a composite index of 5 ‘sub-indicators’, which over the medium term to make it the engine of
are extracted though surveys of purchasing managers form growth for the economy.
around the country, chosen for their geographic and (ii) The 2-4% differential over the medium term growth
industry diversification benefits. rate of the overall economy will enable manufacturing
— In India, the most widely followed PMI is the one prepared to contribute at least 25% of GDP by 2025.
by HSBC called the India Manufacturing PMI. (iii) Increase the rate of job creation in manufacturing
to create 100 million additional jobs by the year
— The five sub-indexes in this system and their weightage are
2025. Emphasis should be given to creation of
as follows:
appropriate skill sets among the rural migrant and
(i) New orders-0.3, (ii) output-0.25, (iii) employment 0.2, (iv) urban poor to make growth inclusive.
suppliers delivery times 00.15, (v) stock of items (iv) Increase domestic value addition and technological
purchased 00.1. ‘depth’ in manufacturing.
A PMI of more than 50, represents expansion of the (v) Enhance global competitiveness of Indian
manufacturing sector, compared to the previous manufacturing through appropriate policy support.
month. A reading under 50, represents a contraction,
— Ensure sustainability of growth, particularly with regard to
while a reading at 50 indicates no change.
the environment.

India’s Manufacturing Sector National Manufacturing Policy,

— The 11th Plan had targeted growth in manufacturing at 2011 (NMP)
10-11%, but actual performance was only about 7.7%. It is a
The major objectives of the National Manufacturing Policy
matter of concern that the manufacturing sector has not
are as follows:
shared in the dynamism of the economy not just in the
—to increase the sectoral share of manufacturing in GDP to
11th Plan, but even in preceding plan periods. As a result, atleast 25% by the year 2022;
the share of the manufacturing sector in GDP is only 15% in
112 Magbook ~ Indian Economy

—to increase the rate of job creation, so as to create — Environmental clearances will continue to be given as per
100 million additional jobs by the year 2022; existing rules and regulations, but the Environment Ministry
—to enhance global competitiveness, domestic value addition, has agreed to give priority in processing cases from the
technological depth and environmental sustainability of growth; manufacturing zones.
—to provide a productive environment to persons transitioning — The Environment Ministry will also designate officials from
from the primary to the secondary and tertiary sectors
the State Pollution Control Board to ensure speedy clearances.
through the creation of large integrated industrial townships
called National Investment and Manufacturing Zones NIMZs
(NIMZs) with state-of-the-art infrastructure; land use on the — The NMP provides for the development of NIMZs as
basis of zoning; clean and energy efficient technologies;
integrated industrial townships with state-of-the-art
—to ensure compliance of labour and environmental laws,
infrastructure and land use on the basis of zoning;
while introducing procedural simplifications and
clean and energy-efficient technology; necessary social
rationalisation, so that the regulatory burden on industry is
reduced;
infrastructure and skill development facilities to
provide a productive environment to persons transiting
—to provide an enabling environment for tapping the potential
of the private sector and the entrepreneurial skills of the
from the primary sector to the secondary and tertiary
younger population. sectors.

Delhi-Mumbai Industrial Corridor Project

Highlights of the National (DMIC)
Manufacturing Policy — The DMIC is proposed to be developed on side along
— It will set-up National Investment and Manufacturing the alignment of the 1483 km long Western Dedicated
Zones (NIMZs). The minimum land area of each NIMZ or Rail Freight Corridor between Dadri (Uttar Pradesh) and
greenfield integrated industrial townships with the Jawaharlal Nehru Port Trust ( JNPT), Navi Mumbai. The
modern infrastructure is to be 5000 hectares. project seeks to create a strong economic base with a
— The first phase of the NIMZ will be established along the globally competitive environment and state-of-the-art
Delhi-Mumbai Industrial Corridor. infrastructure to activate local commerce, enhance
— The National Investment and Manufacturing Zone (NIMZ) investments and attain sustainable development.
proposed under the National Manufacturing Policy will be — A model industrial corridor of international standards is
managed by a Special Purpose Vehicle (SPV), headed by proposed to be developed with emphasis on expanding the
a government official and have experts, including those manufacturing and services base and creating a ‘Global
on environment. Manufacturing and Trading Hub’. The DMIC runs across the
— The industrial townships will be self-governing and 6 states of Uttar Pradesh, Haryana, Madhya Pradesh,
autonomous bodies. Single window clearance will be Rajasthan, Gujarat and Maharashtra and majority of projects
provided to improve the regulatory environment. in DMIC are envisaged to be implemented through public
— The Central Government will create the enabling policy private partnership.
framework, provide incentives for infrastructure — The DMIC Development Corporation (DMICDC) was
development on a private-public partnership basis incorporated in January 2008, for project development,
through appropriate financing instruments, while State coordination and implementation of the numerous projects
Governments will identify suitable land and be equity in the DMIC.
holders in the NIMZs. — 6 investment regions and 6 industrial areas are approved to
— The special purpose vehicle, which will administer the be developed in Phase I of the project.
NIMZ will set-up skill development centres on a build
own and operate basis.
— Private sector will be given standards deduction of 150%
Some Large-Scale Industries
of expenditure for skill development institutes. Iron and Steel Industry
— With a view to protect the interests of labour in cases of — ‘Steel was a symbol of strength and a portent of the glory of
closure of units, the policy has a mechanism of fund to
India of the future’—Jawaharlal Nehru.
insure the workers against such loss.
— The first public-owned steel plant was Rourkela Integrated
— The focus will also be on green manufacturing. In this
Steel Plant was set-up in 1954 with the help of German
regard, a Technology Acquisition Fund will be set-up to
Collaboration.
acquire global technologies and build a patent pool
especially for equipment manufacturing that seeks to
— Steel Authority of India Limited (SAIL) was set-up in 1974
reduce energy consumption. and was responsible for the development of the steel
industry and for major inputs for the industry.
Magbook ~ Indian Industry 113

— India is the fourth largest producer of the Crude Steel Commission for Agricultural Costs and Prices (CACP) and after
in the world after China, Japan and the USA in 2010. consulting the State Governments, Association of Sugar
In 2019, India was ranked 2nd. India is the largest Industry and cane growers.
producer of Sponge Iron since, 2002. — Dual price mechanism with partial control is applied to sugar
industry. Under this, the government fixes the ratio levy and
Cotton and Synthetic Textile free sale sugar quota in the ratio 28 : 72. The levy sugar is
Industry sold to consumers through fair price shops at lower price and
free sale sugar quota is sold by sugar factories at higher
— It is the largest industry in India, accounting for about
prices in the open market.
20% of industrial output, provides employment to
20 million persons and contributes 33% to total export
Cement Industry
earnings.
— The foundation of stable Indian Cement Industry was laid in
— The Indian Textile Industry is predominantly cotton based
1914, when the Indian Cement Company Limited started
with 65%.
manufacturing of cement at Porbandar in Gujarat.
— The organised Textile Industry comprises of (i) spinning — India is the second largest producer of cement in the world.
mills; (ii) coarse and medium composite mills and (iii) — The per capita consumption of cement in India is just 68 kg.
fine and superfine composite mills.
— Average per capita consumption of cloth has increased Petrochemical Industry
steadily since eighties. It stood at 39 m in 2008-09. — The real thrust to this industry came with the establishment
— Textile Export Promotion Council (TEXPROCIL) was of Indian Petrochemical Corporation Limited at Baroda.
established by the government to strengthen and — Petrochemical industry mainly, comprises synthetic fibres,
facilitate the textiles exports. polymers, elastomers, synthetic detergents and performance
— The Scheme for Integrated Textile Park (SITP) was plastics. The main source of feedstock and fuel to this
launched in July 2005, merging two schemes, i.e. Apparel industry are natural gas and naptha.
Parks for Export Scheme (APES) and Textile Centre — National Policy on Petrochemicals was announced in 2007 with
Infrastructure Development Scheme (TCIDS). the objective of increasing investment, demand and achieve
environmentally sustainable growth.
— In Global Textiles Exports (2019), India now stands at
2nd position. Fertilizer Industry
— India’s share in Global Textiles has increased by 25% — The first fertilizer industry was set-up in 1906 in Ranipat near
in the year 2019. Chennai.
— India meets 85% of its requirement through indigenous
Jute Industry production, but is largely import dependent for meeting the
— Jute industry was started in 1885 and India is the phosphorus and potassium fertilizer.
largest producer and second largest exporter of jute in — India is the second largest producer of fertilizer after China
the world. and second largest consumer after China.
— Jute Technology Mission was launched on 2nd June, — NPK (Nitrogen, Phosphorus, Potassium) consumption ratio in
2006. 2008-09 was 4.6:2:1. The ideal ratio is 4:2:1.
— The revival package of National Jute Manufactures — Urea is the only fertilizer under statutory price control.
Corporation (NJMC) envisages operationalisation of — With effect from 1st April, 2010, Nutrients Based Subsidy
three jute mills viz. Kinnison and Khardah in West
(NBS) Policy is implemented. The nutrients covered are NPK
Bengal and Rai Bahadur Hadrut Mill, Katihar (Bihar).
and Sulphur.
Government has enacted Jute Packaging Materials
(compulsory use in packing commodities) Act, 1997 to
broaden the usage of jute.
Automotive Industry
— India is the 2nd largest manufacturer of motorcycle and fifth
Sugar Industry largest manufacturer of commercial vehicles in the world.
— India is the largest producer of sugar in the world with
— In 2009, India was the forth largest exporter of passenger
a 22% share. cars after Japan, South Korea and Thailand.
— It is the second largest agro-based industry in the
— Automotive industry was delicensed in July 1991, however,
country. Statutory Minimum Price (SMP) of sugar is passenger cars industry was delicensed in 1993. India is the
fixed by the government on the recommendation of largest manufactures of tractor in the world.
114 Magbook ~ Indian Economy

— India is the 9th largest car manufacturer in the world. measures include reforms in (a) Industrial Policy, (b)
Trade Policy, (c) Public Sector Policy, (d) Price Policy,
Industrial Growth (e) Tariff Policy etc.
— It contributes close to 30% of total Gross Value Added (GVA). — It may be noted that while macroeconomic stabilisers are
— As per recently released national accounts data with 2011-12 short-term measures to correct overall imbalances in the
as the base year, industrial growth rate of Gross Capital system, microeconomic adjustments are long-term
formation was much better in 2015-16 at 11.1%. measures aiming at improving the level of efficiency and
productivity in different sectors of the economy.
— Growth rate, at the base rate 2011-12, in the year of
2017-18 and 2018-19 was 5.9% and 6.9% (up to January, Major Structural Adjustment
2020) respectively. Programme (SAP) in India
— Industrial deregulation, public sector reforms, industrial
Economic Reforms delicensing, removal of restrictions on industrial
expansion etc.
— Economic reforms refer to all those programmes and
— Public private partnership in infrastructure development and
policies, which were introduced by the government as a
financial sector reforms.
package of New Economic Policy (NEP) to restore the
growth process, which by 1991, was scraping the bottom. — Removal of restraints on inter-state movement of
There are two parameters of economic reforms foodgrains, the restructuring of the Public Distribution
macroeconomic Stabilisation Policy and Microeconomic System (PDS), relaxation of restrictions under the
Structural Adjustment Programmes. Essential Commodities Act, introduction of forward
trading in most agricultural commodities and removal of
Macroeconomic some marketing restrictions on crop produce.
Stabilisation Policy Components of New Economic
— Macroeconomic stabilisation measures refer to those set of Policy/Economic Reforms
measures, which affect the entire economy and are
therefore, pervasive in nature (spreading across all sectors of
— New Economic Policy was announced in July 1991.
the economy). Main components of new economic policy are
Liberalisation, Privatisation and Globalisation (LPG) of
— These measures include review of: (a) Monetary Policy, (b)
the economy.
Fiscal Policy and (c) Exchange Rate Policy.
— The focus of these measures was to cope with the crises of Reasons for Economic Reforms
confidence relating to ability of the government to manage — Mounting Fiscal Deficit
the country’s dwindling Balance of Payment (BoP) status, — Adverse Balance of Payments
particularly its ability to repay the loans taken from the rest of — Fall in Foreign Exchange Reserves
the world. — Rise in Prices
— International Pressures
Major Stabilisation Measures in India
— Poor Performances of Public Sector Enterprises
— Devaluation of the Indian currency in 1991.
— Move of the exchange rate regime from that of a crawling Liberalisation
peg towards a market determined one, though somewhat — Liberalisation of the economy means freedom of the
managed. producing units from direct or physical controls by the
— Removal of quantitative restrictions on imports. government.
— Rationalisation of the tariff structure; reduction in the number Measures Taken for Liberalisation
of tariff rates and the peak rate of tariff has been reduced from — With the exception of 5 industries, industrial
around 400% to 12.5% for non-agriculture products. licensing has been abolished for all other industries.
— Current account convertibility with limited capital account In 2002, MRTP Act has been abolished and in its
convertibility. place a much Liberal Competition Act, 2002 has
been enacted.
Microeconomic Structural — Under the policy of liberalisation, industries (which are
not covered under industrial licensing) are free to
Adjustment Programmes expand and produce. They need no prior official
— These refer to those measures by the government, which approval.
focus on structural changes in the economy and which had — Investment limit of the small industries has been
specific bearing on different sectors of the economy. These raised to ` 5 crore so as to enable them to introduce
Magbook ~ Indian Industry 115

modernisation. Investment limit of tiny industries or micro Measures Adopted for Globalisation
enterprises has also been increased to ` 25 lakh. — Under economic reforms, limit of foreign capital
— Under the policy of liberalisation, Indian industries will be free investment has been raised. In many industries,
to buy machines and raw materials from abroad in order to foreign direct investment to the extent of 100% has
expand and modernise themselves. been allowed without any restriction and red-tapism.
— Earlier, for regulating foreign exchange transactions, — To achieve the objective of globalisation, partial
government had enacted Foreign Exchange Regulation convertibility of Indian rupee was allowed. It was in
Act—FERA. This act was very restrictive in nature. It involved conformity with economic reforms.
various checks and controls on transactions involving foreign — This convertibility is valid for the following transactions
exchange. —import and export of goods and services;
Privatisation —payment of interest or dividend on investment;
— “Privatisation is the general process of involving the private —remittances to meet family expenses.
sector in the ownership or operation of a state owned — It is called partial convertibility because It does not
enterprise.” It implies parting with government ownership or cover capital transactions.
management of the public sector enterprises. — All restrictions and controls on foreign trade have been
— It may happen in two ways: removed. Open competition has been encouraged.
(i) outright sale of the government enterprises to the private Administrative controls have also been minimised.
entrepreneurs or. — Custom duties and tariffs imposed on imports and
(ii) withdrawal of the government ownership and exports are being reduced gradually.
management from the mixed enterprises (the
enterprises jointly owned and managed by the
government and the private entrepreneurs).
Make in India
— Make in India compaign aims at reviving the job
Measures Adopted for Privatisation creating manufacturing sector, which is being seen as
— Number of industries reserved for the public sector has been the key to taking the Indian economy on a sustainable
reduced from 17 to 3 only. high growth path. It is being seen as the key to taking
— Public sector industrial units are treated in the same way as the Indian Economy on a sustainable high path. It
sick industries of private sector. In this respect, Sick Industrial aims to take manufacturing growth to 10% on a
Companies Act, 1985, has been amended in December sustainable basis.
1991. — Some of the important features of make in India are as
— With a view to improve the working of public sector follows:
enterprises, a system of MoU has been introduced. Under it, —It aims to attract foreign companies to set-up factories in
management of public sector enterprises will be given more India and invest in the country’s infrastructure.
freedom and they will be accountable for the results. —It aims to transform the economy from the services-driven
— National Renewal Fund was established for protecting the growth model to labour-intensive manufacturing-drive
interest of employees on account of privatisation. The growth. This is expected to create over 10 million new
jobs annually.
employees were offered Voluntary Retirement under this
scheme. Upto March 2009, more than 6 lakh employees —25 key sectors have been identified, in which India has
the potential of becoming a world leader. These include
had sought voluntary retirement from public sector units.
automobiles, chemicals, IT, pharmaceuticals, textiles,
This fund is even used for providing social security
ports, aviation, leather, tourism and hospitality, wellness,
measures to retrenched employees of PSUs. railways etc.
Globalisation —A dedicated new portal (www.makeinindia. com )has been
especially created to answer queries from business
— Globalisation means integrating the economy of a country with
entities.
the economies of other countries in an environment of free flow
—Top executives from 3000 top companies and
of goods and services across the borders.
corporations world wide were invited to be part of the
— It is a process, associated with increasing openness, campaign.
growing economic inter-dependence and deepening —Indian embassies around the world also became part of
economic integration with the world economy. this global campaign.
— Owing to globalisation, it was expected that capital and —The Department of Industrial Policy and Promotion (DIPP)
technology will flow from developed countries of the world into constituted an eight-member expert panel to redress
India. Accordingly, India would have access to the fruits of grievances and queries and handle queries of global and
global growth. domestic investors within 24 hours.
116 Magbook ~ Indian Economy

Start-up India Mission

Digital India — Start-up India campaign is based on an action plan
— Digital India aimed at transforming the country into 4 aimed at promoting bank financing for start-up
digitally empowered social and knowledge economy, as well ventures to boost entrepreneurship and encourage
as to revive the State of Governance in the country. start ups with jobs creation.
— It is an ‘umbrella programme’ weaving together many existing — The campaign was first announced by Prime Minister
schemes under multiple ministries and departments to Narendra Modi in his 15th August, 2015 address from
ensure that it’s services are available to citizens electronically. the Red Fort. The mission was launched on 16th
— In order to achieve to above objective, several projects January, 2016.
products were already launched by the Government and — It is focused on to restrict role of states in policy
Public Sector Enterprises or ready to be launched as domain and to get rid of ‘license raj’ and hindrances
indicated below. like in land permissions, foreign investment proposal,
— Digital Locker System aims to minimise the usage of physical environmental clearances. It was organised by
documents and enable sharing of e-documents across Department of Industrial Policy and Promotion (DIPP).
agencies. — The key points of Start-up India Mission are as follows
— Swachh Bharat Mission (SBM) mobile app would be used by —Single Window Clearance even with the help of a mobile
people and government organisations for achieving the goals application
of Swachh Bharat Mission. —` 10,000 crore fund of funds
— e-Sign framework would allow citizens to digitally sign a —80% reduction in patent registration fee
document online using Aadhaar authentication. The Online —Modified and more friendly Bankruptcy Code to ensure 90
Registration System (ORS) under the e-Hospital application days exit window
has been introduced. —Freedom from mystifying inspections for 3 years
— Digitise India Platform (DIP) for large-scale digitisation of —Freedom from Capital Gain Tax for 3 years
records in the country that would facilitate efficient delivery of —Freedom from tax in profits for 3 years
services to the citizens. Bharat Net, a high speed digital —Starting with 5 lakh schools to target 10 lakh children for
highway to connect all 2.5 lakh Gram Panchayats of country. innovation programme
— Centre of Excellence on Internet on Things (IoT) is a joint
Stand-up India Scheme
initiative of Department of Electronics and Information
— Stand-up India scheme facilitates loans between ` 10
Technology (Deity), ERNET and NASSCOM.
lakh and ` 1 crore to at least one Scheduled Caste or
— The BSNL has introduced Next Generation Network (NGN) to Scheduled Tribe borrower and at least one woman
replace 30 years old exchanges. borrower per bank branch for setting up a Greenfield
enterprise. This enterprise may be in manufacturing,
Startup India - Standup India services or trading.
— Startup India compaign has been launched on 16th January, — In case of non-enterprise individual, at least services
2016 by the honourable Prime Minister of India, Narendra or trading and in case of non-enterprise individual, at
Modi. The Startup India, Standup India initiative and unveil least 51% of share holding and controlling stake
the government’s actions plans to support early stage should be held by either an SC/ST or women
startups. entrepreneur. Prime Minister launched the ‘Stand-up
— Startup India, Standup India celebrates the entrepreneurship India Scheme’ and a web portal for the scheme on 6th
spirit of country's youth and those that are using technology January, 2016 at sector 62, Noida.
to change the way we solve problems in India across — The key points of Stand-up India Scheme are as
industries, from medicine and sports to education and the follows
environment. —Composite loan between ` 10 lakh and ` 1 crore, inclusive
of working capital component for setting up any
Aim of Scheme enterprise. Debit Card (Rupay) for drawal of working
capital.
— Organised by Department of Industrial Policy and Promotion —Credit history of borrower to be developed. Refinance
(DIPP), along with other key Indian startup ecosystem window through Small Industries Development Bank of
players, the Startup India, Standup India initiative aims to India (SIDBI) with an initial amount of ` 10,000 crore.
celebrate the country's entrepreneurial spirit, and create a Creation of a corpus of ` 5,000 crore for credit guarantee
strong ecosystem for fostering innovation and startups in through National Credit Guarantee Trustee Company
India. (NCGTC).
 Self Check
Build Your Confidence
1. Which one of the following committees recommended 7. Consider the following statements
the abolition of reservation of item of small-scale sector 1. Startup India initiative aims to celebrate the country’s
in industry? [UPPCS 2006] entrepreneurial spirit.
(a) Abid Hussain Committee 2. Income tax has been exempted for 3 years in Startup
(b) Narsimhan Committee India Scheme.
(c) Nayak Committee Which of the statement(s) given above is/are correct?
(d) Rakesh Mohan Committee (a) Only 1 (b) Only 2
(c) Both 1 and 2 (d) Neither 1 nor 2
2. Which one of the following Industrial Policies has
abolished (with a few exception) the Industrial 8. Consider the following statements
Licensing? 1. World Investment Report is published by World Bank.
(a) Industrial Policy, 1970 (b) Industrial Policy, 1980
2. Bokaro Steel Limited was established with the assistance
(c) Industrial Policy, 1991 (d) Industrial Policy, 1985
of Soviet Union.
3. A labour intensive industry is one that [UPPCS 2006] Which of the statement given above is/are correct?
(a) require hard manual labour (a) Only 1 (b) Only 2
(b) pay adequate wages to the labour (c) Both 1 and 2 (d) Neither 1 nor 2
(c) employs more hands 9. Consider the following statements
(d) provide facilities to labour
1. The first cement industry in India was the Indian Cement
4. Why is Government of India disinvesting its equity in the Company Limited.
central public sector enterprises? 2. The per capita consumption of cement in India is one of
1. The government intends to use the revenue earned from the highest in world.
the disinvestment mainly to pay back the external debt. Which of the statement(s) given above is/are correct?
2. The government no longer intends to retain the (a) Only 1 (b) Only 2
management control of the CPSEs. (c) Both 1 and 2 (d) Neither 1 nor 2
Select the correct answer using the codes given below 10. Consider the following statements
(a) Only 1 (b) Only 2
1. India had no iron and steel industry at independence.
(c) Both 1 and 2 (d) Neither 1 nor 2
2. The first iron and steel industry in independent India was
5. What is/are the recent policy initiatives of Government set-up in Raurkela.
of India to promote the growth of manufacturing sector? Which of the statement(s) given above is/are correct?
1. Setting-up National Investment and Manufacturing (a) Only 1 (b) Only 2
Zones. (c) Both 1 and 2 (d) Neither 1 nor 2
2. Providing benefits of single window clearance. 11. The Companies Act, 2013 introduces a new type of
3. Establishing the Technology Acquisition and entity to existing list i.e. apart from forming a public or
Development Fund. private limited company. The 2013 Act enables the
Select the correct answer using the codes given below formation of a new entity is
(a) 2 and 3 (b) 1 and 3 (a) one person company
(c) 1 and 2 (d) All of these (b) two person company
6. Consider the following statements (c) more than five person company
(d) None of the above
1. Privatisation of public sector units occurs, when
government sells 5% of its share. 12. In the ‘Index of Core Industries’, which one of the
2. Abid Hussain Committee recommended the abolition of following is given the highest weight overlapping?
reservation of items of small-scale sector in industry. (a) Coal Production [UPSC 2015]
Which of the statement(s) given above is/are correct? (b) Electricity Generation
(a) Only 1 (b) Only 2 (c) Fertilizers Production
(c) Both 1 and 2 (d) Neither 1 nor 2 (d) Steel Production

1. (a) 2. (c) 3. (c) 4. (d) 5. (d) 6. (b) 7. (c) 8. (b) 9. (c) 10. (a)
11. (a) 12. (b)
Chapter thirteen
Services Sector
Among the top 15 nations in the period of
Current Scenario —
2001 to 2013, the maximum services share
— The services sector is not only the to GVA was recorded by Spain (9.7%
dominant sector in India’s GDP, but also points), followed by India (7.8% points) and
‘‘The phenomenal China (6.8% points). In 2017, India, USA
has attracted significant foreign
expansion of services investment and contribute significantly to ranked 1st in GDP of services.
worldwide led to the export and employment generation. In the
fiscal year 2020-21, it contributed 54% of
Share of Services in Income and
services being Employment
total Gross Value Addition (GVA) in India.
regarded as an engine It attracted cumulative foreign direct — While the share of services in employment
of growth and even as investment worth US $ 87.06 billion for many developed countries is very high
between April 2000 and March 2021 and and in many cases higher than the share of
a necessary
ranked first in FDI inflow as per data services in income, the gap between these
concomitant of released by the Department for Promotion shares is relatively less. Except China and
economic growth.’’ of Industry and Internal Trade (DPIIT). India, all the other BRICS countries also
According to RBI, in June 2021 have a similar pattern.
India’s service exports stood at US $ — In the Indian and Chinese cases, there is a
19.72 billion while imports stood at wide gap between the two, with gap being
US $ 11.14 billion. wider for India. China’s share of services in
both income and employment is relatively
Composition of low due to the domination of the industrial
sector, but the gap is also narrower than that
Service Sector of India.
— Of the 15 countries, in the last 13-years
— India’s services sector covers a wide
period between 2001 and 2014, China had
variety of activities such as trade, hotel
the highest increase in the share of services
and restaurants, transport, storage and
employment (34.4% points) followed by
communication, financing, insurance, real
Brazil (17.2% points) and Spain (14.3%
estate, business services, community,
points). For India, the increase was by only
social and personal services, and services
4.7% points.
associated with construction.

International Services Sectors of

Comparison India
— In world GDP of US$ 142 trillion in 2019, — India’s services sectors has emerged as a
the share of services was 66%, more or prominent sector in terms of its contribution
less the same as in 2007. In the last 13 to national and states incomes, trade flows,
years, the share of service in world GDP FDI inflows and employment.
has declined by 2.7% points. — The years, India’s overall and services
— Among the top 15 countries with highest growth rates have outpaced those of the
overall GDP in 2019, India ranked 5th in world.
overall GDP and 8th in terms of services
GDP in 2020-21 (Provisional).
Magbook ~ Services Sector 119
This sector has been pulling up the growth of the Indian
—
economy with a great amount of stability.
Tourism
— India ranked 22nd in the world in terms of international
— As per the new method of India’s National Accounts tourist arrivals in 2018, improving from the 26th position
statistics, the service sector accounting for 55.3% of in 2017. India now accounts for 1.24% of world’s
India’s Gross Value Added (GVA) at basic prices (current international tourist arrivals and 5 per cent of Asia and
prices) in 2019-20. Pacific’s international tourist arrivals. India ranks 13th in
the world and 7th in Asia and Pacific in terms of tourism
Growth of India’s Services Sector foreign exchange earnings, accounting for close to 2 per
(GVA at Basic Price) cent of the world’s tourism foreign exchange earnings.
2019-20 2020-21 — Looking at tourism trends at the state level, the top five
states attracting domestic tourists are Tamil Nadu, Uttar
Total Services 6.9 8.8%
Pradesh, Karnataka, Andhra Pradesh and Maharashtra,
Trade, hotels, transport 5.9 21.4% accounting for nearly 65 per cent of the total domestic
and communication tourist visits in the country in 2018. The top five states
Financial Services 6.4 3.68% attracting foreign tourists are Tamil Nadu, Maharashtra,
Uttar Pradesh, Delhi and Rajasthan, accounting for about
Construction 1.3 12.6%
67 per cent of the total foreign tourist visits in the country
Total GVA/GFC in 2018.
Various initiatives have been taken by the government to
FDI in India’s Services Sector promote tourism include
— the introduction of the e-Visa facility under three
— Though there is ambiguity in the classification of FDI in
categories of Tourist,
services, it is the combined FDI share of the top 10
service sectors such as financial and non-financial
— Medical and Business for the citizens of 163 countries;
services falling under the Department of Industrial Policy — launch of Global Media Campaign on various Channels;
and Promotion (DIPP)’s services sectors definition; as well — launch of ‘The Heritage trails to promote the World
as telecommunications; trading; computer hardware and Heritage Sites in India;
software; construction; hotels and tourism; hospital and — launch of International Media Campaign on various
diagnostic centres; consultancy services; sea transport; international TV channels;
and infromation and broadcasting that can be taken as the — Celebration of ‘Paryatan Parv’ having 3 components
best estimate of services FDI. FDI inflows into the services namely ‘Dekho Apna Desh’ to encourage Indians to visit
sector increased by 34 per cent year on year during their own country,
April-September 2020 to reach US $ 23.61 billion. — ‘Tourism for All’ with tourism events at sites across all
states in the country, and
Two Phases of Growth Rate — ‘Tourism and Governance’ with interactive sessions and
of Exports of Services — workshops with stakeholders on varied themes.
The growth rates exports services of India and the world show Hotels and Restaurants
two distinct phases, the first till 1996, when the two growths
had a scissor-like movement and the second phase after 1996,
— Tourism is a major engine of economic growth, an
important source of foreign exchange earnings and a
when the growth of India’s services exports was higher than that
generator of employment of diverse kinds in many
of the world in almost all the years except 2009. In this second
countries including India.
phase, the former was much above the latter in upswings, but
almost converged with the latter during downswings. — According to the World Travel and Tourism Council
(WTTC), the total contribution of travel and tourism to
world GDP was US $ 8.9 trillion (10.3% of GDP) in 2019.
Some Major Services of India — The latest World Tourism Barometer of the United
Nation's World Tourism Organisation (UNWTO) also shows
— The service sector is a vital cog in the wheel of Indian
that international tourist arrivals reached 1.2 billion in
economy. The sector accounting for 55.2% of the GVA. The
2015, a 4.4% increase over the previous year, and for
government has taken many initiatives in the different
2016 the forecast is a 3.5-4.5% increase.
services which include digitisation, e-visas, infrastructure
status to Logistics, Start-up India, Schemes for the housing
— India’s share in ITAs is a paltry 0.7% compared to 7.4% of
sector, etc. which could give a further fillip to the Services France, 6.6% of the USA, 5.7% of Spain and 4.9% of China.
Sector. Major Services’ Sector-wise performance and some — According to Indian Tourist Statistics released by Ministry
recent government policies to boost the growth of the sector of Tourism in October 2020, Uttar Pradesh attracted
are as follows: maximum number of domestic tourists followed by
Tamil Nadu and Andhra Pradesh.
120 Magbook ~ Indian Economy

E-commerce market is estimated at US$ 33bn, with a

Transport Related Services —
19.1% growth in 2016-17. To further promote this sector,
Some transport related services are as follows: many initiatives have been taken, which include
— the establishment of BPO Promotion and Common
Shipping
Services Centres to help create digital inclusion and
— India has a 0.9 % share in world fleet as on January equitable growth and provide employment to 1.45 lakh
2019. India has 13 major ports and about 200 non-major persons, mostly in the small towns;
ports. The total cargo capacity of Indian ports stood at
— setting up a separate Northeast BPO Promotion Scheme
1,452.64 Million Tonnes Per Annum (MTPA) at the end of
with 5000 seats and having employment potential of
March 2019, more than doubling from 628.03 MTPA at
15000 persons;
the end of March 2010. Ports such as Paradip, Chennai,
Visakhapatnam, Deendayal (Kandla) and JNPT had the — preparing the draft Open Data Protection Policy law;
highest cargo capacities as of March 2019. The total — besides long-term initiatives like Digital India, Make in
numbers of ships owned by Indian companies stood at India, Smart Citites, e-Governance, push for digital talent
1,414 as of August 2019, up from 1,040 in 2010. through skill India, drive towards a cashless economy and
— The Shipping turnaround time at ports has almost halved efforts to kindle innovation through Start-up India.
from 4.67 days in 2010-11 to 2.62 days in 2019-20. It is
lowest at the Cochin, New Mangalore, V. O. Real Estate
Chidambaranar and Chennai ports, and the highest at the — Real Estate is one of the significant sector in terms of
Kolkata port. As per the latest UNCTAD data, the median employment generation. Driven by increasing
ship turnaround time globally is 0.97 days, suggesting that
transparency and returns there’s a surge in private
India has room to further improve upon the efficiency at
investment in sector. Indian real estate attracted US $ 5
ports.
billion institutional investment in 2020, equivalent to 93%
Port Services of transactions recorded in the previous year.
— Port services are closely connected to shipping services — The Pradhan Mantri Awas Yojana (PMAY) with the
and merchandise trade. The performance of the latter two government sanctioning over 3.1 million houses for the
is also dependent on the efficiency of ports. affordable housing segment in urban regions. Of this,
— The Maritime Agenda 2010-20, covers some of these about 1.6 million houses have been grounded and are at
issues like full mechanisation of cargo handling and various stages of construction, and about 0.4 million
movements, having draft of not less than 14 m in major houses have built under the mission.
ports and 17 m in hub ports and shifting of transshipment — PPP policy for affordable housing was also announced on
of Indian containers from foreign ports to Indian ports. 21st September, 2017 for affordable housing segment to
— The outlay for shipping sector in 12th Plan includes provide further impetus to the ambitious ‘Housing for all
` 6960 crore as global budgetary scheme and ` 21990 by 2022’ mission.
crore as Internal and Extra Budgetary Resources (IEBR). — Credit Linked Subsidy Scheme (CLSS) under PMAY was
Business Services extended to the Middle Income Group (MIG) segment,
which got included in the scheme from 1st January, 2017.
— Business services include services like computer- related — With the enactment of Real Estate (Regulation and
services, research and development, accounting services
Development) Act, 2016, it is anticipated that
and legal services and renting of machinery in order of
accountability would lead to higher growth across the real
importance (shares) as per India’s National Accounts.
estate value chain, while compulsory disclosures and
registrations would ensure transparency.
IT-BPM
— The Indian IT-BPM Industry has been the flag-bearer of Research and Development
India's exports for the past two decades, with industry size — The professional Scientific and Technical activities which
reaching about US$ 177 billion in March 2019. The sector
include R & D services grew by 17.5% and 41.1 in
contributes significantly to the economy through
2014-15 and 2015-16 respectively. India-based R&D
employment growth and value addition. IT services
services companies, which account for almost 22% of the
constituted 51 per cent of the IT-BPM sector in 2018-19,
global market, grew at 12.7%. However, India’s gross
followed by Software & Engineering Services (20.6 per
expenditure on R & D has been at around 1% of GDP.
cent share) and BPM Services (19.7 per cent share)
India has climbed 2 spots and has been ranked 46th by
(Figure 4). Within the IT-BPM sector, IT services remained
the World Intellectual Property Organisation in the Global
the dominant segment with about US$ 97 billion in
Innovation Index 2021 ranking.
revenues in 2019-20.
Magbook ~ Services Sector 121
— Buoyed by the government’s support which includes the US and other countries and encouraging setting up of
important schemes of different Ministries/Departments, back offices of foreign firms in India. Tie-ups of domestic
the R&D sector in India is all set to witness robust growth firms with foreign firms can help to gain expertise and
in the coming years. According to a study, engineering markets, which would otherwise not be individually
R&D market in India is estimated to grow at a CAGR of available for small domestic accountancy firms.
14% to reach US$ 42 billion by 2020. India is also — This would also need relaxation in some domestic
expected to witness strong growth in its agriculture and regulations and obtaining due recognition to Indian
pharmaceutical sectors as the government is investing qualifications through Mutual Recognition Agreements
large sums to set up dedicated research centres for R&D (MRAs). As with legal services, FDI in accounting services
in these sectors. will help to improve the competitiveness of the Indian
market and link it better to global markets.
Space
— India spent about US$ 1.8 billion on space programmes Communication Services
in 2019-20. However, India's government space Telecom and Related Services
expenditure still lags behind that of the major players in
— Telecom services is another sunrise sector, in which India
the space sector, such as USA,which spent about 10
has made a mark with the second largest telephone
times more than India in the space sector in 2019-20.
network in the world, after only China.
China, which has become a key player in the space sector
in the recent years, also spent about six times more than — 12th Plan targets for the telecommunication sector–
India in 2018. Provision of 1200 million connections by 2017, Broad
band connection of 175 million by 2017, Mobile access to
— India has launched around 5-7 satellites per year in the
all villages and increase rural teledensity to 70% by 2017,
recent years with no failures, barring one in 2017. On the
To increase domestic manufactured products in telecom
other hand, Russia, USA and China dominate the satellite
network to the extent of 60% with value addition of 45%
launching services with 20, 31 and 39 satellites
by 2017.
respectively in 2018. The global space economy for 2018
tallied about US$ 360 billion, which includes space Postal Services
systems manufacturing and space-based services. — India Post is the largest postal network in the world and
provides access to affordable postal services to all citizens
Legal Services in the country through its vast network. Out of 1.55 lakh
— Legal services have been growing at a steady rate of 8.2% post.offices, 1.39 lakh are in rural areas and the
in each of the years from 2005-06 to 2011-12. The Indian remaining 15736 in urban areas.
legal profession today consists of approximately 1.2 million — The Department of Posts plays a crucial role in disbursing
registered advocates. wages to Mahatma Gandhi National Rural Employment
— Though, India’s rankings are better than most of the South Guarantee Scheme (MGNREGS) beneficiaries. Nearly 6.92
Asian and some South-East Asian countries in all the three crore MGNREGS accounts have been opened in post
parameters, there is a need for further improvement offices up to December, 2015.
particularly in speeding up disposal of cases. — Towards financial inclusion, the number of Post Office
— The National Legal Services Authority (NALSA) has been Savings Bank (POSB) accounts has increased from 30.86
constituted under the Legal Services Authorities Act, 1987, to crore to 33.97 crore and total deposits in POSB accounts
monitor and evaluate implementation of legal aid and cash certificates to ` 6.53 lakh crore in the last one
programmes and to lay down policies and principles for year.
making legal services available under the act. — More than 80 lakh Sukanya Samriddhi Yojana accounts
have been opened with a cumulative investment of more
than
Accounting and Audit Services ` 2900 crore since the launch of the scheme on 22nd
— The accountancy service providers in India are January, 2015.
self-regulated through a combination of statutory bodies — More than 1.84 crore Kisan Vikas Patras have been sold,
like the Institute of Chartered Accountants of India (ICAI), attracting an investment of more than ` 16,429 crore
the Institute of Cost and Work Accountants of India and since launch on 18th November, 2014.
the Institute of Company Secretaries of India (ICSI). — The Pradhan Mantri Suraksha Bima Yojana, Pradhan
— Tapping the outsourcing market of the US and other Mantri Jeewan Jyoti Yojana and Atal Pension Yojana were
developing countries in niche areas like actuarial and rolled out for POSB account holders in Core Banking
accountancy services would depend on the availability of Solution (CBS) post offices. So, far more than 1,35,000
high quality experts in tax, insurance and pension laws of policies have been sold to POSB customers.
122 Magbook ~ Indian Economy

line in the next 3 years (till the year 2019). Main objectives
India’s Service Trade of this policy are
— India’s share in global exports of commercial services —Free LPG gas connection in the name of the female member. It
increased to 3.2% in 2013 from 1.2% in 2000. Its will be a cylinder and regulator.
ranking among the leading exporters in 2013 was 6th. —The scheme will include the rural and urban BPL family.
— In the 2016, trade of services grew by 11.39%. In the ` 1600 will be sent to Pradhan Mantri Jan Dhan Yojana bank
wake of the COVID-19 pandemic, most of the sub-sectors as subsidies.
of the services sector witnessed a contraction in growth
Power Tex India Scheme
during 2020-21.
— The Union Ministry of Textiles has launched Power Tex
India on 3 April 2017, a 3-year comprehensive scheme for
Challenges of Service Sector Powerloom Sector Development. The Power Tex India
Scheme aims to boost common infrastructure and
— The immediate challenge for the services sector covering
modernisation of the powerloom sector in the country.
myriad activities and areas is growth revival. India’s growth
Power Tex India scheme comprises new research and
has been basically a services led growth pulling up overall
development in powerloom textiles, new markets, branding,
growth of the economy.
subsidies and welfare schemes for the workers.
— While this could be through a business as usual — Components of the scheme are
approach, a more targeted approach with focus on
—Pradhan Mantri Credit Scheme (PMCS) for powerloom weavers.
big-ticket services could lead to exponential gains for the
—Solar energy Scheme (SEC) for powerlooms.
economy. While software and telecom services have led
by example, there are some other important services like —In-situ Upgradation of Plain Powerlooms.
tourism including medical tourism and shipping and —Group Workshed Scheme (GSW).
logistics. —Yarn Bank Scheme.
— With world tourist arrivals expected to increase by —Common Facility Centre (CFC).
43 million every year on an average from 2010 to 2030 —Facilitation, IT, Awareness, Market Development and Publicity
and FTAs in emerging countries expected to grow faster for Powerloom Schemes,
than in advanced economies, a goldmine of opportunity —Tex Venture Capital Fund.
in tourism is waiting for India, which at present has a —Grant-in-Aid and Modernisation. Upgradation of Powerloom
paltry share of 0.64% in world tourist arrivals. Service Centres (PSCs).

Major Schemes Saubhagya Yojana

Central Government has launched Saubhagya – Pradhan Mantri
Pradhan Mantri Ujjwal Yojana
Sahaj Bijli Har Ghar Yojana on 27 September, 2017 for
— Prime Minister Narendra Modi has launched Pradhan
electrifying all the households in rural and urban areas which are
Mantri Ujjwal Yojana on 1st May, 2016 (Labour Day) at
still living without power. The main purpose of Pradhan Mantri
Ballia (UP) by providing cooking gas connections to 10
women. Sahaj Bijli Har Ghar Yojana – Saubhagya is the electrification of a
— The objective of the scheme is to provide cooking gas large number of rural households which will help in the
connections to 5 million beneficiaries below the poverty manufacturing sector, growth of social and economic dividends
by pushing the demand for power.
 Self Check
Build Your Confidence

1. Which one of the following sub-sector of the services 6. Which one of the following services is included in the
sector in India has contributed the highest per cent in services sector of Indian Economy? [UPPCS 2008]
the annual growth rate of the GDP? [MPPCS 2000] (a) Transport, storage and communication
(a) Real estate, ownership of dwellings and business (b) Financing, insurance, real estate and business services
services (c) Community, social and personal services
(b) Community, social and personal services (d) All of the above
(c) Transport, storage and communication
(d) Trade, hotels and restaurants
7. Consider the following statements
1. In last decade, India is to China, in developing countries in
2. Consider the following statements the terms of Compounded Annual Growth Rate (CAGR) in
1. Software is one sector, in which India has achieved a services sector.
remarkable global brand identity. 2. In the last decade, Russia had higher Compounded Annual
2. The contribution of the services sector to the national Growth Rate (CAGR) in services sector than India.
economy both in terms of value addition and Which of the statement(s) given above is/are correct?
employment generation is growing over the year. (a) Only 1 (b) Only 2
Which of the statement(s) given above is/are correct? (c) Both 1 and 2 (d) Neither 1 nor 2
(a) Only 1 (b) Only 2
(c) Both 1 and 2 (d) Neither 1 nor 2
8. Which one of the following percentage of Foreign Direct
Investment (FDI) is allowed in the Indian entities
3. Consider the following statements publishing newspapers and periodicals dealing with news
1. When a country progresses further the manufacturing and current affairs? [IAS 2005]
sector takes a back seat and give a way to service (a) 26% (b) 49%
sector in terms of both output and employment. (c) 74% (d) 100%
2. When a country progresses further manufacturing
9. Which one of the following service of the Indian Economy
sector become increasingly service sector.
has the highest percentage of share in the services sector
Which of the statement(s) given above is/are correct? export?
(a) Only 1 (b) Only 2
(a) Computer software (b) Financial and non-financial
(c) Both 1 and 2 (d) Neither 1 nor 2
(c) Computer hardware (d) Legal consultancy
4. Consider the following statements
10. Consider the following statements regarding IT sector of
1. Computer software has the highest percentage of India.
share in service sector export in India.
1. India has achieved brand identity in this sector.
2. Communication services has highest growth rate in
2. Besides it’s impact on growth, it is also a provider of skill
service sector in 11th Five Year Plan.
employment both in India and abroad.
Which of the statement(s) given above is/are correct?
Which of the statement (s) given above is/are correct?
(a) Only 1 (b) Only 2
(a) Only 1
(c) Both 1 and 2 (d) Neither 1 nor 2
(b) Only 2
5. Various initiatives have been taken by the (c) Both 1 and 2
government to promote tourism include (d) Neither 1 nor 2
1. the introduction of e-visa facility under three 11. In the Index of Eight Core Industries, which one of the
categories of tourism. following is has the highest weight?
2. Medical and business for the citizens of 163 countries. (a) Coal production
Which of the statement(s) given above is/are correct? (b) Electricity generation
(a) Only 1 (b) Only 2 (c) Fertilizer production
(c) Both 1 and 2 (d) Neither 1 nor 2 (d) Steel production

1. (d) 2. (c) 3. (c) 4. (c) 5. (c) 6. (d) 7. (a) 8. (a) 9. (a) 10. (c)
11. (d)
Chapter fourteen
Infrastructure
Definition of Infrastructure in 12th
Infrastructure Plan
— The Rakesh Mohan Committee on — The total investment in the infrastructure
Infrastructure refers to infrastructure titled ‘The India sector during the 12th Five Year Plan,
such core elements of Infrastructure Report’ 1996, listed estimated at ` 56.3 lakh crore (approx,
electricity, gas, water supply, telecom, US $ 1 trillion), will be nearly double that
economic and social
roads, industrial parks, railways, ports, made during the 11th Five Year Plan.
change, which serve as a airports, urban infrastructure and storage This step up in investment will be feasible
support system to the as infrastructure sector. primarily because of enlarged private
production activity in — A clear understanding of what is covered sector participation that is envisaged.
the economy. under the rubric of infrastructure is — Unbundling of infrastructure projects,
necessary for policy formulation, setting Public Private Partnership (PPP) and
Infrastructure is broadly
of targets and monitoring projects to more transparent regulatory mechanisms
categorised as economic ensure consistency and comparability in have induced private investors to increase
infrastructure and social the data collected and reported by their participation in infrastructure
infrastructure. various agencies. sectors, their share in infrastructure
investment increased from 22% in 10th
Development of
Economic Infrastructure Five Year Plan to 35% in the 11th Plan
infrastructure is a — It refers to all such elements of economic and is expected to be about 48% during
sine-qua non of changes (like power, transport and the 12th Five Year Plan, more than half of
economic development. communication), which serve as a the resources required for infrastructure
foundation for the process of economic would need to come from the public
If proper attention is not
growth. sector, from the government and their
paid to the development portals. This would require not only the
— In the absence of economic
of infrastructure, it is infrastructure, any efficient system of creation of the fiscal space, but also use
likely to act as a severe economic growth would remain a distant of a rational pricing policy.
constraint on the possibility.
Infrastructure Targets
economic development
Social Infrastructure in the 12th Plan
process of the country.
— It refers to the core elements of social — Increase investment in infrastructure as a
changes (like schools, colleges, hospitals percentage of GDP to 9% by the end of
and nursing homes), which serve as a 12th Five Year Plan.
foundation for the process of social — Increase the Gross Irrigated Area from 90
development of a country. Social million hectare to 103 million hectare by
development focuses on human resource the end of 12th Five Year Plan.
development, implying the development — Provide electricity to all villages and
of skilled personnel as well as healthy reduce AT and C (Aggregate Technical
and efficient human beings. and Commercial) losses to 20% by the
end of 12th Five Year Plan.
Magbook ~ Infrastructure 125
— Connect all villages with all weather roads by the end of * India Infrastructure Project Development Fund
12th Five Year Plan. Upgrade National and State Highways (IIPDF) was announced in Budget, 2007-08. The
to the minimum two-lane standard by the end of 12th Five IIPD fund will contribute up to 75% of the
Year Plan. preparatory expenditure in the form of interest free
— Complete Eastern and Western dedicated Freight corridors loans that will be recovered from the successful
bidder. It has been set-up in Department of
by the end of 12th Five Year Plan.
Economic Affairs.
— Increase rural teledensity to 70% by the end of 12th Five
Year Plan. Ensure 50% of rural population has access to Infrastructure Debt Funds (IDFs)
55 LPCD (litres per capita per day) piped drinking water — Infrastructure Debt Fund was launched on 5th March,
supply and 50% of Gram Panchayats achieve the Nirmal
2012 by the government, though the announcement for it
Gram Status by the end of 12th Five Year Plan.
was made in the Union Budget 2011-12. It is a $ 2
billion fund to catalyse long-term lending to core sectors.
Funding of Infrastructure — IDFs are investment vehicles which can be sponsored by
Public Private Partnerships in commercial banks and NBFCs in India, in which
Infrastructure domestic/offshon institutional investors, specially
— The Planning Commission of India (now NITI Aayog) has insurance and pension fund can invest, through units
defined PPP in a generic term ‘‘the PPP is a mode of and bonds issued by the IDFs.
implementing government programmes/schemes in — The fund would seek to raise debt capital from domestic
partnership with the private sector. It provides an and foreign resources in the form of long-term pension,
opportunity for private sector participation in financing, insurance funds and sovereign wealth funds.
designing, construction, operation and maintenance of
public sector programme and projects’’. Transport System in India
— PPPs are expected to augment resource availability as well
as improve efficiency of infrastructure service delivery. Time — Modes of transport include air, rail, road and water.
and cost over run in construction of PPP projects are also Transportation in India is a large and varied sector of the
expected to be lower compared to traditional public economy.
procurement. The government has also been emphasising
the need to explore the scope for PPPs in the development Road Transport
of the social sectors like health and education. — India has the second largest road network in the world.
— Some of the major PPP projects undertaken, thus so far The road network comprises of National Highways (NHs),
are Delhi, Mumbai, Hyderabad and Bengaluru airports; 4 State Highways, major/other district roads and
ultra-mega power projects, container terminals at Mumbai, village/rural roads.
Chennai and Tuticorin ports. — The share of road traffic in total traffic has grown from
12% freight and 31.6% passenger traffic in 1950-51, to
Viability Gap Funding Scheme an estimated 60% freight and 87% passenger traffic
during the 10th Five Year Plan period.
— With a view to support the infrastructure projects, the
viability Gap Funding Scheme for support to PPPs in
infrastructure announced in 2004 and the modalities to National Highways
operationalise it put is place by 2005. — National Highways comprise only 2% of the total length
— It provides financial support in the form of grants, one time of roads, but they carry over 40% of the total traffic
or deferred to infrastructure project undertaken through across the country.
public private partnership with a view to make them — Development and maintenance work of NHs is carried
commercially viable. out through 3 agencies, viz National Highways Authority
— VGF Scheme provides total viability gap funding up to 20% of India (NHAI), State Public Works Departments (PWDs)
of the total project cost. and Border Road Organisation (BRO).
— The government or statutory entity that owns the project National Highway Development Project (NHDP)
may, if it so decides, provide additional grants out of its — It is the largest highway project undertaken in the country
budget up to further 20% of the total project cost. and is being implemented by NHAI in Phase I to VII. It is
* On 24th July, 2007, India’s first infrastructure a project to upgrade, rehabilitate and widen major
index series FTSE-IDFC launched. The series is highways in India to a higher standard.
aimed at bringing broad range of investors — Phase I and II of NHDP Comprises Golden quadrilateral;
including retail investors into listed companies
North-South corridor and East-West corridor.
involved in the business of infrastructure.
126 Magbook ~ Indian Economy
— Golden Quadrilateral Connecting four metropolitan Roads for LWE Districts
cities-Delhi, Mumbai, Chennai and Kolkata having an — A programme for development of around 1202 km of
aggregate length of 5846 km. National Highways and 4362 km of State roads in Left Wing
— The NSEW corridor comprises a length of 7142 km and Extremism (LWE) affected areas has been taken up. It is
connects Srinagar (North) to Kanyakumari (South) and stated for completion by March 2015.
Silchar (East) to Porbandar (West).
Setu Bharatam Programme
— NHDP is being implemented in all phases except Phase
— This programme was launched by Prime Minister Narendra
VI at present.
Modi on 4th March, 2016 at a budget of ` 102 billion
Bharatmala Pariyojana (US$1.5billion), with an aim to make all national highways
— It is an umbrella programme for highways sector, free of railway crossings by 2019.
launched in 2015 to bridge the critical infrastructure gap — Under the project as may as 208 rail over and under
in India by development of economic corridors, inter bridges (ROBs/RUBs) would be constructed at unmanned
corridors and feeder routes, coastal and port connectivity railway crossings on national highways and more than
roads etc. 1,500 British-era bridges would be widened, rehabilitated
— A total of around 24,800 are being considered in Phase I or replaced in a phased manner at a cost ` 208 billion
of Bharatmala. It also includes 10,000 kms of balance (US$3.1 billion) and ` 300 billion (US$4.5 billion),
road works under NHDP, taking the total of 34,800 kms respectively. ` 50,000 crore are to be spent to build bridges
at an estimated cost of ` 5,35,000 crore. for safe and seamless travel on national highways.
— Besides focussing on improving the quality of roads, this National Infrastructure Pipeline (NIP)
scheme will also focus on providing all weather — NIP was announced by the Prime Minister in 2019 during
connectivity to border areas as well as ports and the Independence Day speech. It is a roadmap for an
economic hubs. investment of over ` 100 lakh crore in infrastructure over
Special Accelerated Road Development the next five years (2020-25).
Programme for North-Eastern (SARDP-NE) — The main objective of NIP is to create jobs, improve ease of
Region living and provide equitable access to infrastructure for all.
— The total project capital expenditure in infrastructure
— The SARDP-NE aims at improving the road connectivity
sectors in India during the fiscals 2020 to 2025 is projected
to state capitals, district headquarters and remote places
at ` 102 Lakh crore. Sectors such as energy (24%), urban
of the North-East region. This will ensure connectivity of
(16%), railways (13%) and roads (19%) accounted for
88 district headquarters in the North-Eastern states to
70% of the projected infrastructure.
two-lane NHs/two lane state roads.

State Highways Green Highways Policy 2015

— The State Highways account for nearly 154.5 thousand
Union government unveiled its Green Highways policy on
km or 3.8% of the total length of roads. These roads September 29, 2015. Under it, bushes and trees will be grown
connect the principal cities and resource centres of the along all the highways in a phased manner.
states with the NHs.
The purpose of this policy is to promote the greening of highway
Pradhan Mantri Gram Sadak Yojana (PMGSY) corridors with the participation of the local community, including
local contractors and the local Forest Department.
— The PMGSY was launched on 25th December, 2000, to
provide single all weather connectivity to eligible Thus, the manifest objective of this policy is plantation and the latent
unconnected habitations having population of objective was to generate employment. The investment in the
project would be ` 1000 crore this year, calculated as 1% of the
500 persons and above in plain areas and 250 persons
` 100000 crore investment in national highway projects in the year.
and above in hill states, the tribal (Schedule V) areas,
The policy aims at planting trees along all highways. Private and
desert areas and LWE affected districts as identified by the
government companies along with Non-governmental
Ministry of Home Affairs. It is a 100% centrally sponsored
organisations are participated. The project will be awarded to
scheme. contractors in small stretches of 8 to 10 km as pilot scheme.
Pradhan Mantri Bharat Jodo Pariyojana (PMBJP)
— The ` 40000 crore project connecting all the major cities, Railways
not covered by National Highway Development
Programme, by four-lane highways, named Pradhan — First rail steamed off in 1853 between Bombay and Thane
Mantri Bharat Jodo Pariyojana or ‘PM-BJP’, involves for a distance of 34 km.
four-laning of 10000 km of road stretches. It tries to link — Indian Railways is the country’s biggest nationalised
up major cities to the NHDP highways. enterprise.
Magbook ~ Infrastructure 127
— In terms of route length, Indian Railway system is the (vi) Mumbai Rail Vikas Nigam Limited (MRVNL)
4th largest after USA, Russia and China. (vii) Indian Railway Catering and Tourism Corporation
— Of the two main segments, freights and passengers of the Limited (IRCTC)
Indian Railways, the freight segment accounts for roughly (viii) Railtel Corporation of Indian Limited (Rail Tel)
two-third of revenues. (ix) Rail Vikas Nigam Limited (RVNL)
— Railway Budget was separated from the Union Budget in (x) Dedicated Freight Corridor Corporation of India Limited
the year 1921, on the recommendation of Acworth (DFCCIL)
Committee. However, the government in 2016 decided to (xi) Bharat Wagon and Engineering Corporation of India
merge them on the recommendations of Shankar Limited (BWEL)
Acharaya Committee. (xii) Burn Standard Company Limited (BSCL)
— The railway network is divided into 17 zones. Divisions are (xiii) Braithwaite and Company Limited (BCL)
the basic operating units.
Rolling Stock and their Places
The 17 zones and their respective headquarters are as under:
Rolling Stock Places
Zonal Railway Headquarters Zonal Railway Headquarters
Diesel Locomotive Works Varanasi
Central Mumbai North-Western Jaipur
Chittaranjan Locomotive Works Chittaranjan
Eastern Kolkata Southern Chennai
East-Coast Bhubaneshwar South-Central Secunderabad Rail Coach Factory Kapurthala
East-Central Hajipur South-Eastern Kolkata Integral Coach Factory Perambudur (Chennai)
Northern New Delhi South-East Bilaspur Rail Wheel Factory Bengaluru
Central Diesel Loco Modernisation Works Patiala
North-Central Allahabad South-Western Hubli Research, Design and Standard Organisation Lucknow
North-Eastern Gorakhpur Western Mumbai
North-Frontier Maligaon, West-Central Jabalpur Rail Coach Factory (RCF), rolled out the first proto type air
Guwahati conditioned Double Decker Coach in March, 2010.
Metro Railway Kolkata Dedicated Freight Corridor (DFC)
— With the present growth rate in GDP of over 8%, the
Types of Railway Lines Indian railways expects to carry 85 million tonnes of
— There are four gauges in India. These are as follows: incremental traffic per year and about 1100 million tonnes
(i) Broad Gauge (1676 mm) This is the widest gauge in revenue earning freight traffic by the end of 11th Five Year
regular use. It is wider than the 1435 mm standard Plan. It has, thus, become necessary to augment the
gauge and also called Indian Gauge. freight carrying capacity of the railways.
(ii) Metre Gauge (1000 mm) It is one metre broad. About Railways and the 12th Plan
14500 route km of railway lines are metre gauge in
— The 12th Five Year Plan (2012-17) has envisaged an
2009. The metre gauge network is especially dense in
integrated approach for the transport sector as a whole.
the West.
The vision for transport is to be guided by a modal mix
(iii) Narrow Gauge (762 mm). The rationale for the narrow
that will lead to an efficient, sustainable, economic, safe,
gauges was economy in building the lines. It considered
reliable, environment friendly and regionally balanced
that narrow gauge lines would act as feeder lines to the
transport system, in line with the objectives of the plan.
broad and metre gauges. The most well known line is
probably the Kalka-Shimla route. — Indian Railway aims at developing a strategy to build up
(iv) Narrow Gauge (610 mm) A few places in India have even the rail network to be part of an effective multi-modal
narrow 2-feet (610 mm) gauge e.g. New Jalpaiguri, transport system.
Darjeeling, Neral Matheran and the Gwalior branch lines. 5-digit Train Numbers
The Public Undertakings of the Railways — It came into effect from 20th December, 2010.
Accordingly, all the Superfast, Mail/Express Rajdhani,
— There are thirteen undertakings under the administrative
Garib Rath passenger trains and others have now uniform
control of the Ministry of Railways:
5 digit numbers, i.e. digit 1 has been prefixed to the
(i) Rail India Technical and Economic Services Limited,
existing 4 digit numbers.
(RITES)
(ii) Indian Railway Construction (IRCON) International Limited Railway Vision 2020 Highlights
(iii) Indian Railway Finance Corporation Limited (IRFC) — It envisages increasing the railway sector’s share in the
(iv) Container Corporation of India Limited (CONCOR) GDP from the existing level of 1% to about 3% and its
(v) Konkan Railway Corporation Limited (KRCL) revenue to grow by 10% annually over the next 10 years.
128 Magbook ~ Indian Economy

— Laying of 25000 km of new lines. — Till December 2012, LHB coaches has been inducted in
— Quadrupling of the 6000 km network with segregation of about 14 Rajdhani, 12 Shatabdi and 11 AC Duranto
passenger and freight lines. services.
— Electrification of 14000 km rail route. — LHB coaches have higher carrying capacity, better riding
— Completion of gauge conversion. comfort, higher speed potential, longer life, upgraded
— Upgradation of speed to 160-200 kmph for passenger amenities, provision of control discharge toilet system,
train. lower maintenance requirement, enhanced safety
— Construction of 2000 km of high speed rail lines. features and aesthetic interiors.
— Indian Railways alongwith the Defence Research and
Luxury Trains in India Development Organisation (DRDO) has developed
environment-friendly bio-toilets for its passenger
The Buddha Luxury Train in Uttar Pradesh will be started on the coaches.
lines of Palace on Wheels.
Some luxury trains in India. Upgradation of Passenger Amenities
◆
Deccan Odyssey ◆
Golden Chariot — Adarsh Stations are being developed with basic facilities
such as drinking water, adequate toilets, catering
◆
Fairy Queen ◆
Royal Rajasthan on Wheels
services etc.
◆
Maharaja’s Express ◆
Indian Maharaja
— SIMRAN (Satellite Imaging for Rail Navigation) is being
carried out. The SIMRAN used real time train tracking
New Initiatives by Indian Railways through GPS and mobile GSM technologies.
— Kisan Rail Train Services It has been started by Indian — Passenger Reservation System (PRS), is the largest
Railways in 2020 to transport perishables and passenger network in the world and is thoroughly
agri-products, including milk, meat and fish. It enables computerised.
movement of perishables from production or surplus — Freight Operations Information System (FOIS), gives an
regions to consumption or deficient regions. The first Kisan account of all demands, number of loads /rakes / trains
Rail train was flagged off on 07-08-2020 between Devlali and their pipeline, etc. FOIS is being implemented in two
(Maharashtra) and Danapur (Bihar). As of June 2021, 60 phases. Phase I (Rake Management System) and Phase
routes have been operationalised. II (Terminal Management System).
— Kisan Vision Project It is to encourage setting up of cold
Green Initiatives Taken in the Railways
storage and temperature-controlled perishable cargo
centres through PPP model. Logistics based PSUs — The year 2011-12, has been declared as the Year of
including the Container Corporation of India Limited, Green Energy’ by the railways. Some of the green
Central Warehousing Corporation and Central Rail-side initiatives taken by the railways are as follows:
Warehouse Company Limited have been asked to provide —Free supply of 14 lakh CFLs to railway households and
infrastructure at six Indian Railways locations under a pilot phasing out of incandescent lamps.
project-the Kisan Vision Project. —Regenerative breaking in Mumbai EMUs.
—Windmill at Integral Coach Factory, Chennai.
— Private Participation in Railways The Government of India
—Production of locos with ‘hotel land converter’.
in accordance with the recommendation of Bibek Debroy
—Use of bio-diesel, CNG and LNG in locos, workshops etc.
Committee has invited private participation for operation of
passenger train services over 109 origin destination pairs of
routes, using ISI modern trains on existing rail Dedicated Freight Corridor (DFC)
infrastructure. The main objective behind this step is to DFC is a high speed and high-capacity railway corridor
introduce modern technology, reduce maintenance cost dedicated exclusively for movement of goods and
and reduce demand supply deficit in the passenger services. In 2006, the Government established a
transport sector. dedicated body, the Dedicated Freight Corridor
— Indian railways is adopting a multi-pronged strategy to Corporation of India (DFCCIL) to develop two corridors i.e.
provide safer, faster, cleaner and more comfortable Western Dedicated Freight Corridor (WDFC) and Eastern
passenger trains. Seven corridors have been identified for Dedicated Freight Corridor (EDFC). In 2010, four more
conducting pre-feasibility studies for running high-speed freight corridors were announced i.e.-East West Corridor
trains at speeds above 350 km/h. These trains are (Kolkata-Mumbai), North-South Corridor (Delhi-Chennai),
popularly known as Bullet trains. East Coast Corridor (Kharagpur- Vijaywada) and Southern
— Link Holfmann Busch (LHB) Coaches are being inducted Corridor (Chennai-Goa).
in train services including certain important Rajdhani and
Mail-express trains.
Magbook ~ Infrastructure 129

High Level Safety Review Committee — The first line of the metro in Chennai is opened in June,
(Railways) 2015. In the North, a metro in Jaipur also started in
June 2015. The long awaited first phase of Mumbai’s
— The committee under Dr Anil Kakodkar recently presented
metro launched to the public in 2014.
its report. The total financial implication of the
recommendations over 5 years would be `100000 crore. Its — In 2015, a new line for Bengaluru’s Metro was launched.
key recommendations and observations are as follows: Metros in Kochi in Kerala and in Hyderabad is opened in
—Indian Railways is at the brink of collapse unless some concrete 2017.
measures are taken. — There are also metro systems planned for many other
—There is need for independent mechanism for safety regulation. cities like Ahmedabad in Gujarat, Pune in Maharashtra,
A statutory Railway Safety Authority needs to be created. Kanpur in Uttar Pradesh, Patna in Bihar etc.
—A Railway Research and Development Council needs to be
set-up. Rapid Rail
—An advanced signaling system should be adopted for the entire — National Capital Region Planning Board (NCRPB)
route length within 5 years. created a spearate entity – National Capital Region
—All level crossing (manned and unmanned) should be Transport Company (NCRTC) in 2013. Aim of this entity
eliminated over 5 years. to provide fast, safe and comfortable rapid transit in
—Switch over from ICF design coaches to LHB design coaches. NCR. It is possible by Regional Rapid Transit System
(RRTS). The RRTS are expected to have design speed of
Some Other Committees on 180 kmph with high acceleration and deceleration.
Railway Safety Bullet Train
◆
Shahnawaj Committee (1954) — Bullet train project is an initiative by Indian Government
◆
Kunjaru Committee (1962) to build a high speed bullet train that would connect
◆
Wanchu Committee (1968) Mumbai to Ahmedabad. This project expected to nearly
◆
Sikari Committee (1978) 18.6 billion dollars and should be operational in about
◆
Khanna Committee (1998) seven years.

Water Transport
Metro Rail Projects — There are two kinds of water transport inland water
— The metro railway system and service are operational in 10 transport or river transport and shipping which includes
cities in India. These are Kolkata, Delhi, Bengaluru, coastal shipping and overseas shipping.
Gurugram, Mumbai, Chennai, Jaipur, Kochi, Hyderabad
and Lucknow. The Kolkata Metro rail is the oldest (1984) Inland Water Transport (IWT)
metro service in the country. — India has over 14500 km of navigable waterways. Inland
— The Delhi metro is rapid transit system serving Delhi, Water Transport (IWT), has certain inherent advantages
Gurgaon, Noida and Ghaziabad in the NCR. The network namely: fuel efficiency, environment friendliness, cost
consist of Eight lanes with a total length of 296 Kilometres effectiveness and decongestion of road etc.
with 214 stations. —Inland Waterways Authority of India (IWAI), was set-up in
— Delhi metro is being built and operated by the Delhi Metro 1986, for regulation and development of inland waterways
for the purpose of shipping and navigation.
Rail Corporation (DMRC), which is a joint company of
—Out of total transport IWT accounts for 32% in Bangladesh,
Government of India and the Government of Delhi. After the
20% in Germany, 14% in the US, 9% in China and only
Phase IV total length of Delhi metro will be 413 km. It is the 0.15% in India.
second oldest metro in India after the Kolkata metro. —IWT is best suited for the movement of bulk cargo,
— Metro Railways Amendment Act, 2010, with effect from overdivisional cargo and hazardous goods. It is also an
September, 2009, provides an umbrella ‘statutory’ safety environmentally friendly made.
cover for metro rail work in all the metro cities of India.
Shipping
— The act was extended to National Capital Region,
— Shipping plays an important role in the transport sector
Bengaluru, Mumbai and Chennai metropolitan areas with
of India’s economy. Approximately, 95% of the country’s
effect from 16th October, 2009.
trade volume (68% in terms of value) is moved by the
— Metro rail projects have also been taken up on PPP basis in sea.
Mumbai for Versova-Andheri-Ghatkopar (11.07 km), —India has one of the largest merchant shipping fleet among
Charkhup to Mankhurd via Bandra (31.87 km) and the developing countries and ranks 16th amongst the
Hyderabad metro (71.16 km) with viability gap funding countries with the largest cargo carrying fleet.
support from the Government of India.
130 Magbook ~ Indian Economy
—The salient features of India’s shipping policy are the promotion — Air transport is also used in spraying pesticides in
of national shipping to increase self-reliance in the carriage of agricultural fields. India has many favourable features for
the country’s overseas trade and protection of stakeholder’s the development of air transport, e.g. vast plains
interest in EXIM trade.
facilitating landing and take-off operations, vast size of
—Government nationalised the fiscal regime for Indian shipping
the country, appropriate climate etc. However, it is a very
by introducing Tonnage Tax System from the financial year
2004-05, in order to provide Indian Shipping Industry a level expensive means of transport.
playing field vis-a-vis international shipping companies and also — India has around 486 airports of which 34 are
facilitate the growth of Indian tonnage. India has allowed 100% designated as international airports. 11 international
FDI in the shipping sector. airports are managed by AAI while 6 are in private
—India has a long coastline studded with 13 major ports and 200 hands. Passenger terminal capacity in all airports put
non-major ports providing congenial and favourable conditions
together is around 230-240 million.
for the development of this alternate mode of transport.
—Major ports are the direct responsibility of the Central Recent Initiatives to Promote the
Government while non-major ports are managed and Aviation Industry
administered by the State Governments.
— 100% FDI is permitted for greenfield airport project
—India has the 17th largest coastline in the world.
under the automatic route.
Categories of Shipping — Up to 74% FDI is permitted for existing airport projects
Shipping is divided into two categories under the automatic route, above 74% and up to 100%
(i) Coastal (ii) Overseas. permitted under government approval route.
Coastal Shipping — 49% FDI is allowed in Scheduled Air Transport
— This includes shipping within the country along the coastline. Services/Domestic Scheduled Passenger Airline under
Due to India’s long coastline, coastal shipping provides an automatic route. But 100% for NRIs.
excellent opportunity for an energy efficient, cheap mode of —Air India and Indian Airlines were merged to make them
more efficient.
transport, especially for large and bulky goods.
—Greenfield Airports at Bengaluru and Hyderabad were
Cruise Shipping completed and Delhi and Mumbai airports were restructured.
— To promote the growth of shipping, an Inter-Ministerial
Steering Committee with Secretary (Shipping) as Chairman, National Civil Aviation
was constituted in June, 2010. The Steering Committee Policy (NCAP) 2015
has identified five ports namely, Mumbai, Goa, Chennai, Minister of Civil Aviation P. Ashok Gajapathi Raju released the
Managalore and Cochin for development of cruise tourism. Revised Draft National Civil Aviation Policy (NCAP 2015) in New
— Tariff Authority for Major Ports (TAMP) was established in Delhi on October 30, 2015.
1997 to determine tariffs for major ports and to specify the
conditionality governing these tariffs. Non-major ports Aims of the Policy
however, are free to determine their tariffs as these are ◆
To provide a conducive environment and a level playing field
deregulated. to various aviation sub-sectors, i.e Airlines, Airports, Cargo,
Maintenance Repairs and Overhaul services, General
Sagarmala Project Aviation, Aerospace manufacturing, Skill Development, etc.
◆
To create an ecosystem to enable 30 crore domestic ticketing
This initiative was launched in 2015 to strengthen the port
by 2022 and 50 crore by 2027. Similarly, international
infrastructure and operational efficiencies of the ports. It also
ticketing to increase to 20 crore by 2027.
aims to set up new mega ports, modernising India’s existing
ports, developing 14 Coastal Economic Zones (CEZs) and
constructing new multi-modal logistics parks. The project also Power/Energy Sector
seeks to lower the logistics cost of domestic cargo and improve — Energy is the most important component of economic
the living standard of Coastal communities. infrastructure. Even agriculture needs energy to run
tubewells, tractors and thrashers. In fact, energy has
become the lifeline of human existence.
Air Transport (Civil Aviation) Commercial and Non-Commercial Energies
— Air transport is the speediest of all means of transport. It is — Energy is broadly classified as commercial and
particularly useful for transporting costly and light weight non-commercial energy. Firewood, agricultural waste
consignments. Air transport has its special significance at (straw etc) and animal waste (cowdung) are the
the time of war and for providing help in natural calamities. important components of non-commercial energy.
Magbook ~ Infrastructure 131

Coal, petroleum products, natural gas and electricity

—
are the important components of commercial energy.
Major Schemes
These goods are largely used for commercial purposes UDAY Scheme
in the factories and farms. They command a price and — The Union Cabinet chaired by Prime Minister Narendra Modi
have an established market of sale and purchase. approved the Ujwal Discom Assurance Yojana (UDAY)
scheme on November 5, 2015 that aimed at bailing out debt
Conventional and Non-Conventional
ridden State-run power distribution companies (discoms).
Sources of Energy
— The financial restructuring package is launched to financially
— Conventional sources of energy are those, which are
turn around discoms that have been severely indebted and
known as to us and which are popularly in use since a
make them strong.
very long time. Examples are coal, petroleum, natural
gas and electricity. Non-conventional sources of — According to the package, States can take over by March,
energy are those sources, which have been discovered 2016, 75% of the discoms’ debts up to September, 2015, by
or explored only in the recent past and which are yet issuing special bonds at a price determined by the Reserve
to gain popularity for their use. Examples are solar Bank at G-Sec rates plus 5%.
energy, wind energy, biomass etc. Share of different UJALA YOJANA
sources in Total Energy Production (Supply) (in
— It was launched by Union Minister for State (IC) for Power,
percentage)
Coal and Renewable Energy Piyush Goyal in Bhopal Madhya
Pradesh on 30th April, 2016.
Electricity
— The UJALA scheme is being implemented by Energy
— Electricity is the most useful and convenient source of Efficiency Services Limited (EESL), a joint venture of PSUs
energy in India. Three main sources of electricity in India under the Union Ministry of Power.
are as follows:
— The scheme will help to reduce electricity bills of consumers,
(i) Thermal Power Stations Generation of electricity by contribute to the energy security of India and also help in
using coal is known as Thermoelectricity. It is an environment protection. The main motive of this policy is
important source of electricity in India, generating energy efficiency in the country. Consumers can buy the
nearly two third of the total electricity. Now, there are
bulbs from distributor by showing any identification card.
more than 318 thermal power plants in India.
(ii) Hydroelectricity Stations Generation of electricity Urban Flagship Programme
using water is known as Hydroelectricity. Whatever, — Government’s flagship Pradhan Mantri Awas Yojana (PMAY)
water is available in India for generation of electricity, housing scheme, alongwith its long-planned Smart Cities
we are not able to utilise 50% of it. The share of Mission and the Atal Mission for Rejuvenation and Urban
hydroelectricity is only one-fourth of the total Transformation (AMRUT) is an urban renewal initiative
electricity generated. Some important hydroelectric started on 25th June, 2015.
power stations are Koyna, Bhakra Nangal, Beas,
Hirakud, Kosi, Nagarjuna Sagar, Malaprabha etc. AMRUT for 500 Cities
(iii) Atomic Power Stations In the modern times, atomic — The Narendra Modi Government has renewed the 10 years
energy or nuclear energy is used all over the world as old Jawaharlal Nehru National Urban Renewal Mission
a source of energy. Its sources are uranium and (JNNURM) and named it after the first BJP Prime Minister.
thorium. It is a new and cheap source of energy. The renewed scheme is known as Atal Mission for
Atomic Energy Commission of India is engaged in the Rejuvenation and Urban Transformation (AMRUT). AMRUT
research of atomic energy. for 500 Tier 2 and Tier 3 cities will also be launched
— In India, first atomic power station was established at alongwith smart city project.
Tarapur in Bombay in 1969. Subsequently, many — For AMRUT as well, states have been asked to recommend
nuclear power plants were established in India cities which can be included under this scheme. Uttar
including Kalpakkam in Tamil Nadu, Narora in Uttar Pradesh leads the pack, as it can nominate 64 cities under
Pradesh, Surat in Gujarat etc. this project. Here is the breakdown for different states
— The nuclear power generation has been increasing in —Tamil Nadu (33) —Maharashtra (37)
India. But, the safety parameters of atomic power —Gujarat (31) —Karnataka (21)
plants has, now to be re-devised considering the —Andhra Pradesh (31) —Rajasthan (30)
Fukushima episode. This is why, people are now more —West Bengal (28) —Bihar (27)
worried regarding proposed Jaitapur Power Plant in —Odisha (19) —Haryana (19)
Maharashtra. —Kerala (18) —Punjab (17)
—Telangana (15) —Chhattisgarh (10)
132 Magbook ~ Indian Economy

Under this scheme, Central Government will provide 30% of (iv) Subsidy for Individual Beneficiary-led Construction or
the overall cost, if the city has a population of more than 10 Enhancement of Houses Under this, a Central
lakh; and 50% if under 10 lakh. assistance of ` 1.50 lakh would be provided to each
eligible urban poor beneficiary to enable him build his
100 Smart Cities own house or undertake improvements to existing
Government of India has announced an ambitious 100 Smart houses.
Cities programme. Based on the population and area, a fix Heritage City Development and
number has been allocated for each state. Hence, Uttar Augmentation Yojana (HRIDAY)
Pradesh, the most populated state, will get 13 smart cities,
meanwhile Tamil Nadu will receive 12 smart cities. — Union Government has launched a Heritage City
Development and Augmentation Yojana (HRIDAY) scheme
Maharashtra will get 10 cities, while Karnataka and Gujarat
to preserve and rejuvenate the rich cultural heritage of the
will get 6 each. West Bengal and Rajasthan has been allocated
country. Union Governments ambitious ` 500 crore
4 smart cities; Bihar, Andhra Pradesh and Punjab 3 each and
HRIDAY project was launched by Urban Development
Odisha, Haryana, Telangana and Chhattisgarh will get 2 smart
Minister Venkaiah Naidu in New Delhi. In the initial phase,
cities each. Jammu and Kashmir, Kerala, Jharkhand, Assam,
Himachal Pradesh, Goa, Arunachal Padesh and Chandigarh, 12 heritage cities have been identified which will be
along with National Capital New Delhi will get one smart city rejuvenated and developed under HRIDAY. The 12 cities
each. are—Amritsar, Varanasi, Gaya, Puri, Ajmer, Mathura,
Dwarka, Badami, Velankanni, Kanchipuram, Warangal and
Amaravati.
Pradhan Mantri Awas Yojana
The aims of HRIDAY are as follows:
‘Housing for All by 2022’ —It aims to bring urban planning, economic growth and
— A new integrated national housing mission launched by heritage conservation together for heritage cities.
merging UPA flagship scheme and Rajiv Awas Yojana. —It also seeks beautification in an inclusive and integrated
— The third project is the ‘Housing for All by 2022’ scheme, manner with focus on cleanliness, livelihoods, skills, safety,
wherein more than 2 crore homes would be build across security, accessibility and faster service delivery of heritage
cities.
all the urban locations in the next 7 years.
—Heritage Management Plan (HMP) will be prepared for the
— The Cabinet, headed by Prime Minister, accepted the
identified cities which will outline heritage resources and
recommendations of an Inter-Ministerial Committee to develop policies to guide their conservation, restoration, future
approve a substantial increase in interest relief on loan for use and development.
the urban poor to promote affordable homes. —It will seek to improve last-mile connectivity heritage sites by
— The committee recommended to increase interest documentation, conservation of areas, providing more facilities
subvention to 6.50% on housing loan for economically for women, senior citizens and differently abled citizens.
weaker sections of society. Women, SC/STs and people —HRIDAY will be dovetailed with the Tourism Ministry’s
from Economically Weaker Section (EWS) would be the Pilgrimage Rejuvenation and Spiritual Augmentation Drive
main beneficiaries of this urban housing project. (PRASAD) scheme which has an outlay of ` 100 crore for
augmentation of infrastructure at pilgrimage sites across the
There are four components to the National Urban country.
Housing Mission
(i) Redevelopment Plan of Slums Under this, with the UDAN Scheme
participation of private developers using land as a — The UDAN RCS (Regional Connectivity Scheme) was
resource component, every beneficiary would be launched in October, 2016. The PM Narendra Modi has
provided a Central grant of ` 1 lakh on an average. launched the ‘Ude Desh ka Aam Nagrik’ (UDAN) Scheme
(ii) Affordable Housing through Credit-linked Subsidy from Jubbarhatti, an airport on the outskirts of Shimla on
Scheme Under this, an interest subsidy of 6.50% on 27 April, 2017.
each housing loan to Economically Weaker Section — As per the modalities of the scheme, airfare for a
(EWS) and Low Income Groups (LIG) beneficiaries one-hour journey of 500 km has been capped at an
would be provided by the Central Government. all-inclusive charge of ` 2500.
(iii) Affordable Housing in Partnership with Private and — The scheme has been launched to provide connectivity to
Public Sectors Under this, the Central assistance of un-served and under-served airports of the country
` 1.50 lakh to each beneficiary would be provided to
through revival of existing air-served airports of the country
promote housing stock for urban poor with the
through revival of existing air-strips and airports.
involvement of private and public sectors. Provided 35%
of houses of the projects are proposed to be earmarked — First flight under this scheme was on the route of Shimla
for EWS category. to Delhi.
 Self Check
Build Your Confidence

1. Among other things which one of the following was the 6. With what purpose is the Government of India promoting
purpose for which Deepak Parekh Committee was the concept of ‘Mega Food Park'? [UPSC 2011]
constituted? [IAS 2009] 1. To provide good infrastructure facilities for the food
(a) To study the current socio-economic conditions of processing industry.
certain minority communities 2. To increase the processing of perishable items and
(b) To suggest measures for financing the development of reduce wastage.
infrastructure
3. To provide emerging and eco-friendly food processing
(c) To frame a policy on the genetically modified organisms
technologies to entrepreneurs.
(d) To suggest measures to reduce the fiscal deficit in the
Union budget Select the correct answer using the codes given below
(a) Only 1 (b) 1 and 2
2. There has been a persistent deficit budget year after (c) 2 and 3 (d) All of these
year. Which of the following actions can be taken by the
government to reduce the deficit? 7. Name the scheme under which accidental death
1. Reducing revenue expenditure insurance cover for up to ` 2 lakh will be provided to the
2. Introducing new welfare schemes people of age group of 18-70 years?
3. Rationalising subsidies (a) Atal Jeevan Bima Yojana
(b) Pradhan Mantri Suraksha Bima Yojana
4. Expanding industries
(c) Pradhan Mantri Jeevan Jyoti Bima Yojana
Select the correct answer using the codes given below:
(d) Atal Pension Yojana
(a) 1 and 3
(b) 2 and 3 8. Consider the following statements
(c) Only 1 1. Golden Quadrilateral is a National Highway Development
(d) 1, 2, 3 and 4 Project connecting Delhi, Pune, Chennai and Kolkata.
3. Consider the following components 2. North-South Corridor which comprises 4-laning of
1. Bring an additional one crore hectares under assured National Highways connecting-Salem.
irrigation. Which of the statement(s) given above is/are correct?
2. To provide road connectivity to all villages that has a (a) Only 1 (b) Only 2
population of 2000. (c) Both 1 and 2 (d) Neither 1 nor 2
3. To give telephone connectivity to the remaining villages. 9. Which kind of the power accounts for the largest share
Which of the component(s) given above is/are included in the of power generation in India? [UPPCS 2008]
in the Bharat Nirman Scheme? (a) Nuclear
(a) 1, 2 and 3 (b) 1 and 3 (b) Hydro-electricity
(c) 2 and 3 (d) Only 2 (c) Thermal
4. Which one of the following is not a nuclear power (d) Solar
centre? 10. Which one of the following statement is correct?
(a) Narora (b) Kakrapara [UPPCS 2008]
(c) Chamera (d) Kota (a) Singrsauli mines are located in Andhra Pradesh
(b) In India, majority of domestic coal supply comes from
5. Ten year old JNNURM Scheme named as
open cost mines
(a) AMRUT
(c) Reliance is the only private sector refinery in India
(b) Housing for all
(d) None of the above
(c) HRIDAY
(d) UDAN Scheme
134 Magbook ~ Indian Economy

11. Oil shale is obtained from 13. Ude Desh ke Aam Nagrik (UDAN) is a regional connectivity
(a) coal bed methane scheme launched in
(b) metamorphic rocks containing clathrate hydrates (a) 2014
(c) sedimentary rocks containing kerogen (b) 2015
(d) coastal regions (c) 2016
(d) 2017
12. Ujala Scheme launched for
(a) Power 14. Component(s) of the National Urban Housing Mission is/are
(b) Coal (a) Affordable Housing through Credit Linked Susidy Scheme
(c) Renewable energy (b) Redevelopment plan of slums
(d) All of the above (c) Affordable housing in partnership with private and public sector
(d) All of the above

1. (b) 2. (d) 3. (b) 4. (c) 5. (a) 6. (a) 7. (b) 8. (b) 9. (c) 10. (b)
11. (c) 12. (d) 13. (d) 14. (d)
Chapter fifteen
Poverty and Unemployment
—Calorie Criteria The energy that an individual gets from
Poverty the food that he eats everyday is measured in terms
of calories. In India, Planning Commission was
— Poverty is a social phenomenon,
“Goal of sustained of the opinion that an individual in rural area
wherein a section of society is unable to must get 2400 Kilo calories and in urban area,
poverty reduction cannot fulfill even its basic necessities of life. 2100 calories per day.
be achieved unless — The UN Human Rights Council has —Minimum Consumption Expenditure Criteria
equality of opportunity defined poverty as a human condition An Expert Committee was appointed in
characterised by the sustained or 1962, by the Planning Commission to
and access to basic determine poverty line, by adopting
chronic deprivation of the resources,
services is ensured. Goal Minimum Consumption Expenditure
capabilities, choices, security and power
Criteria. As per this committee, those
of reducing inequality necessary for the enjoyment of an people will be treated as living below the
adequate standard of living and other poverty line, whose per-capita consumption
must be explicitly
civil, cultural, economic, political and expenditure at 2004, prices is below
incorporated in policies social rights. ` 368 per month in rural areas and below
and programmes aimed ` 559 per month in urban areas.
— Global poverty had dropped at the rate
at poverty reduction.” of around 1 per cent point per year Relative Poverty
between 1990 and 2015. The World — Relative poverty refers to poverty on the
Bank had developed $ 1.90 per day as basis of comparison of per-capita income
criteria for deciding International of different countries. The country, whose
Poverty Line. per-capita income is quite less in
— According to UNDP’s Multidimensional comparison to other countries is treated
as relatively poor nation.
Poverty Index 2019, India was able to
lift 271 million people out of poverty — In poor nations, that part of population,
between 2006 to 2016. However, still which is living at the bottom (whose
365.55 million poor people resides in income is less), is unable to fulfill the basic
requirements of life. In addition to the
the country.
$ 1.90 per-day international poverty line,
the World Bank measures poverty lines
Types of Poverty of $ 3.20 and $ 5,50, reflecting national
The poverty has two aspects: poverty lines in lower-middle income and
upper-middle income countries.
Absolute Poverty
— It is a situation, in which the
consumption or income level of people
Poverty in India
— There is substantial decline in poverty
is less than some minimum level ratios in India from about 45% in
necessary to meet basic needs as per 1993-94 to about 21.9% in 2011-12.
the national standards. It is expressed India lifted 271 million people out of
in terms of a poverty line. poverty between 2006 and 2016. If the
— Economists have given many definitions trend continues, people below poverty line
of poverty in this regard, but in a large may come down to less than 20% in the
number of countries poverty has been next few years.
defined in the context of per capita — In a given year in India, official poverty
intake of calories and minimum level of lines finds higher in some states than in
per capita consumption expenditure. others because price levels vary from
state to state.
136 Magbook ~ Indian Economy
It is expressed as:
Categories of Poor in India
S = H [ I + (1 − I) G ]
— Although poverty is a relative concept, but where there is an
absolute poverty, we can categorise the poor people by Where, S = Sen index of poverty
defining the poverty line. H = Head count index
— Some are always poor, some are occasionally poor and some I = Poverty gap index and
are never poor. G = Gini co-efficient.
— We can categorise poor people in three categories;
semicolon chronic poor, trausient poor and non-poor.
Multi-Dimensional Poverty Index (MPI)
— It was developed in 2010, by Oxford Poverty and
Poverty Line Human Development Initiative and the United Nations
Development Programme. It uses different factors to
— It is the line, which indicates the level of purchasing power determine poverty beyond income-based lists. It uses a
required to satisfy the minimum needs of a person. range of deprivations that afflict an individual’s life.
— This line divides the population in two groups, one of those, — The measure assesses the nature and intensity of
who have this purchasing power or more and the other poverty at the individual level in education, health
group of those people, who do not have this much of outcomes and standard of living. The MPI is calculated
purchasing power. as follows:
— The former group is regarded as living ‘Above the Poverty MPI = H × A
Line (APL)’. These people are not regarded as poor. The
latter group is considered as living ‘Below the Poverty Line Where, H = Percentage of people, who are MPI poor
(BPL)’. These people are called poor. (incidence of poverty).
— Asian Development Bank has defined a new poverty line A = Average intensity of MPI poverty across
taking base of expenditure of US $ 1.35 per day. the poor (%).
— According to the Tendulkar Committee Report, which gives
state wise poverty estimates, Odisha with 57.2% of BPL Human Poverty Index (HPI)
people is the poorest state followed by Bihar, Madhya — Earlier UNDP set HPI as parameter to measure poverty in
Pradesh and Chhattisgarh. its Human Development Reports but 2010 onwards it
switched over to a new parameter,
Measures of Poverty namely–Multidimensional Poverty Index (MPI).
— The extent of poverty is depicted by the following measures: — The measure assesses the nature and intensity of
poverty at the individual level in education. Health out
Head Count Ratio or Poverty Ratio
comes and standards of living.
— It is calculated by dividing the number of people below
poverty line by the total population. It measures the Fisher Price Index (FPI)
proportion of poor in the total population. — It updates the poverty line on the basis of actual
consumption data. This index gives just 60% weightage
Poverty Gap Index (PGI)
to food articles.
— It is the difference between the poverty line and the average — The reason why Tendulkar’s method show higher
income of all households living Below Poverty Line (BPL),
poverty level is primarily that he has moved away from
expressed as a percentage of poverty line. It indicates the
the traditional practice of bench marking poverty by
depth and severity of poverty.
certain caloric consumption levels.
Poverty Line − Average Income of BPL
PGI =
Poverty Line
Conditional Cash Transfers (CCTs)
Squared Poverty Gap Index ◆
It is an important mechanism to fight poverty around the
— It is the mean of the squared individual poverty gaps relative world. Here, the government transfers cash to the
to the poverty line. It indicates the severity of poverty as well beneficiaries conditional upon certain action by the
as the inequality among the poor. receiver. These actions could include enrolling children into
Sen Index of Poverty school, regular check-up with doctor, institutional delivery,
receiving vaccination etc.
— It was developed by Professor Amartya Sen. It is based on
◆
It helps to reduce poverty not only by providing cash to the
the head count ratio, poverty gap index and the Gini
needy households, but also inducing positive behaviour in
co-efficient. It takes into account the extent and severity of the people through the conditions.
poverty as well as inequality.
Magbook ~ Poverty and Unemployment 137

Two methods of poverty estimation on the basis of

Expert Groups for consumption:
Estimating Poverty Uniform Recall Period (URP)
Here, consumption data is asked for a 30 days recall period
Lakdawala Committee —
for all items. The updated poverty estimates of the Tendulkar
— It was constituted in 1989 by the Planning Commission to Committee have lowered the poverty line from ` 32 a day to
consider methodological and computational aspects of ` 28.
estimation of proportion and number of poor in India.
— The report of this committee was submitted in July, 1993.
Mixed Recall Period (MRP)
— It suggested that the consumption expenditure should be — Here, consumption expenditure is asked for five
calculated based on caloric consumption as earlier. frequently used items clothing, footwear durable goods,
— It also suggested that state specific poverty lines should be education and institutional medical expenses for a 365
constructed and these should be updated using CPI – days recall period and other items are asked for a 30
Industrial workers in urban areas and CPI–Agricultural days recall period.
labour in rural areas.
NC Saxena Committee
Tendulkar Committee Report (For BPL Families in Rural Areas)
— Tendulkar Committee headed by Prime Minister’s Economic — To review the Methodology for conducting BPL Census in
Advisor, Mr Suresh Tendulkar was set-up in March, 2009 to Rural Areas. An expert group headed by Dr NC Saxena
look into the methodology of estimating poverty in India. was constituted by the Ministry of Rural Development to
Tendulkar Committee submitted its report in recommend a suitable methodology for identification of
December, 2009 to the Planning Commission. BPL families in rural areas.
— In its findings, this committee has moved away from just — The expert group submitted its report in August, 2009
calorie criterion definition to a broader definition of poverty and recommended doing away with score-based ranking
that also includes expenditure on health, education, of rural households followed for the BPL Census, 2002.
clothing in addition to food. — The committee has recommended automatic exclusion
— Using this approach, new poverty line for the year of some privileged sections and automatic inclusion of
2004-05, has been raised from ` 356 percapita per certain deprived and vulnerable sections of society and a
month to ` 447 percapita per month in rural areas and survey for the remaining population to rank them on a
from ` 539 per capita per month to ` 579 percapita per scale of 10.
month in urban areas. In daily terms, poverty line has — Based on the above methodology, the committee
been raised from ` 12 to `15 percapita per day in rural estimated the population below the poverty line at 50%
areas and from ` 18 percapita per day to ` 19 percapita of the total population.
per day in urban areas.
— As per Tendulkar Committee Report, 37.2% of Indian SR Hashim Committee
population is living below poverty line using ‘uniform
(For BPL Families in Urban Areas)
recall period consumption’ in the year 2004-05, against
the official estimate of 27.5%. According to this report, — On the methodology for identification of BPL families in
41.8% population in rural areas and 25.7% population in urban areas, according to the expert group headed by
urban areas is living below poverty line. renowned economist.
— The new, updated data released by the commission based — SR Hashim to suggest methodology for identifying urban
on the price indices computed from the 66th Round NSS poor, households having three of the four items like
(2009-10) data on Household Consumer Expenditure refrigerator, motorised two-wheelers, landline telephone
Survey, say anyone who has ` 28 to spend daily is out of or washing machines should not be treated as poor.
poverty. — The panel has suggested that the government should
— It has estimated the poverty lines at all India level as MPCE use three-stage approach-automatic exclusion, automatic
(Monthly Per-Capita Consumption Expenditure) of ` 673 for inclusion and scoring index to identify urban poor.
rural areas and ` 860 for urban areas in 2009-10. — Planning Commission had constituted the expert group
— Based on these cut-offs, the percentage of people living to recommend the detailed methodology for the
below the poverty line in the country has declined from identification of families living below poverty line in the
37.2% in 2004-05 to 21.92 in 2011-12. urban areas on 13th May, 2010.
138 Magbook ~ Indian Economy

— Under the automatic inclusion step, homeless families facing States 2004-05 2011-12 Decrease
social and occupation deprivations should be included in the
BPL list. As per the report, a family be defined as poor if any Maharashtra 38.1 17.4 20.7
of its member (including children) is a beggar or rag picker, Manipur 38 36.9 1.1
domestic worker and sweeper or sanitation worker or mali. Meghalaya 16.1 11.9 4.2
The family would also be poor if all its earning adult
Mizoram 15.3 20.4 –5.1
members are either daily wagers or workers with irregular
wages. Nagaland 9 18.9 –9.9
— In the third and final stage, the remaining households should Odisha 57.2 32.6 24.6
be assigned scores from 0 to 12 based on various indicators Puducherry 14.1 9.7 4.4
of residential, social and occupational vulnerabilities. Those Punjab 20.9 8.3 12.6
households with scores from 1 to 12 should be considered
Rajasthan 34.4 14.7 19.7
eligible for inclusion in the BPL list in the increasing order of
the intensity of their deprivations meaning thereby that those Sikkim 31.1 8.2 22.9
with higher scores are more deprived, the report suggested. Tamil Nadu 28.9 11.3 17.6
Tripura 40.6 14.1 26.5
Rangarajan Committee on Poverty Uttar Pradesh 40.9 29.4 11.5
— Planning Commission constituted an expert group headed by Uttarakhand 32.7 11.3 21.4
C Rangarajan to review the Tendulkar Committee
West Bengal 34.3 20 14.3
methodology for estimating poverty in May, 2012.
Perspective of people about poverty has changed, therefore, All India 37.2 21.9 15.3
commission needs to take a fresh look into the methodology
Source: Review Expert Group to Review the Methodology
for estimation of poverty in the country. The committee
for Estimation of Poverty NITI Aayog, Government of India.
submitted its report on 6th July, 2014 to the Planning
Commission.
UN Report on Indian Poverty
— The report observed that the population, living below poverty
line, has decreased from 38.2% in 2009-10 to 29.5% in — In the Millennium Development Report, 2010, it has
2011-12. This report, thus, contested the facts given by the been mentioned that the poverty rate in India was 51%
Tendulkar Committee. The Rangarajan report also revised the in 1990. However, it is expected to fall to a level of
poverty line by increasing it to ` 972/month (or ` 32/day), as 24% by 2015. According to the UNDP, the 8 poorest
against the ` 816/ month suggested by the Tendulkar Indian States— Bihar, Chhattisgarh, Jharkhand,
Committee. For the urban areas, the Rangarajan Committee Madhya Pradesh, Odisha, Rajasthan, Uttar Pradesh
revised the poverty line to ` 1407/month (` 47/day), as and West Bengal have more number of poor, than the
against ` 1000/month of the Tendulkar Committee. 26 poorest African nations.

Statewise Poverty Estimates (% below poverty line) Measurement of Poverty by UNDP

States 2004-05 2011-12 Decrease
— As per UNDP, poverty is a multi-dimensional problem.
Apart from income, it also includes factors like-health
Andhra Pradesh 29.9 9.2 20.7 and nutrition. World Bank has established 2 parameters
Arunachal Pradesh 31.1 34.7 –3.6 to measure poverty at the international level
Assam 34.4 32 2.4 —Those earning less than 1.25 US $ of per day, such
Bihar 54.4 33.7 20.7 persons are referred as suffering from extreme poverty.

Chhattisgarh 49.4 39.9 9.5 —Those spending less than 2 US $ per day. These sections
are referred to as poor.
Delhi 13.1 9.9 3.2
Goa 25 5.1 19.9
— Besides these parameters, Lorenz Curve and Gini
Co-efficient are also used to observed poverty in a
Gujarat 31.8 16.6 15.2
state. The Asian Development Bank (ADB) has set the
Haryana 24.1 11.2 12.9 parameter of US $ 1.35; while Indian Government has
Himachal Pradesh 22.9 8.1 14.8 set this parameter at US $ 1.02.
Jammu and Kashmir 13.2 10.4 2.8
State of Poverty (World Bank Report)
Jharkhand 45.3 37 8.3
— World Bank, on 18th April, 2013, in its report entitled,
Karnataka 33.4 20.9 12.5 where are the poor and most poor, observed that
Kerala 19.7 7.1 12.6 —one-third of the global poor in India.
Madhya Pradesh 48.6 31.7 16.9 —the poor in the India live on less than US$ 1.25 a day.
Magbook ~ Poverty and Unemployment 139

—there are around 120 crore extremely poor persons in Lorenz Curve of Income Distribution
the world today.

Cumulative income share (%)

—between 1981-2010, the developing countries have 100
witnessed a decline in poverty rate from 50% to 21%. 90
80
—despite development in Africa, poverty is still
70
widespread.
60
50 A
Inequality 40
30 B
— Inequality often refers to the income gap between 20
the rich and poor of society. The greater the gap the 10
greater the inequality. It essentially refers to 0
10 20 30 40 50 60 70 80 90100
disparities in the distribution of economic assets and
Cumulative population share (%)
income among individuals and groups within a
nation and nations.
— It may result from the operation of the economic Inequality in India
system, access to assets, education and skills,
— Both overall GDP and per capita GDP have increased rapidly in
social factors like caste and gender etc.
the economic reform period. The number of poor as the
percentage of population have also come down. However,
Adverse Impacts of Inequality inequality in the reform period has increased.
— Growing inequalities can dampen growth due to — According to Inequality Virus Report, 2021 released by Oxfam,
potential instability; weaken social cohesion. the wealth of Indian billionaries increased by 35% during the
— Urban-dominated growth in India has caused social lockdown, while millions lost their job and saw reduction in their
friction as a result of the high levels of migration to income level in 2020.
cities and a shortage of foreign investment in more — Gini co-efficient increased from 0.27 to 0.28 in rural areas and
isolated areas. from 0.35 to 0.39 in urban areas between 2004-05 and
— In societies, where wealth is concentrated in the 2009-10. The Gini co-efficient of wealth in India in 2017 is at
hands of a few, there is danger of policy levers 0.83, which puts India among the highest inequality countries.
being captured by the rich for their own benefit and Top 10% wage earners make 12 times more than the bottom
a weakening of the institutional foundations of the 10% compared to 6 times 20 years ago.
growth process. * Trickle Down theory says that let business flourish, since
their profits ultimately trickle down to lower income
Gini Co-efficient individuals and the ease of the economy.
— The Gini co-efficient (also known as the Gini index * Typically, India used the Consumer Price Index for
or Gini ratio) is a measure of statistical dispersion Agricultural Labour (CPIAL) and CPIIW for industrial
developed by the Italian statistician and sociologist labour.
Corrado Gini, it measures the inequality among
values of a frequency distribution (e.g. levels of Employment and Unemployment
income).
— Gini co-efficient is commonly used as a measure of Employment
inequality of income or wealth. A Gini co-efficient of — Employment refers to the capacity in which a worker pursues
zero expresses perfect equality, where all values are
gainful activity during the referece period. According to their
the same (e.g. where everyone has an exactly equal
status of employment, there are three types of employed
income).
workers, self employed workers, casual wage and regular wage
— A Gini co-efficient of one (100 on the percentile employees.
scale) expresses maximal inequality among values
(e.g. where only one person has all the income). Unemployment
— The Gini co-efficient is usually defined
— Unemployment refers to a situation, when a person is able and
mathematically based on the Lorenz curve, which
willing to work at the prevailing wage rate, but does not get the
plots the proportion of the total income of the opportunity to work. The term unemployment is directly related
population (y axis) that is cumulatively earned by with the concept of labour force, because the people, who are
the bottom x% of the population (see diagram). The not included in labour force cannot be regarded as unemployed.
line at 45 degrees Gini, thus, represents perfect
— Labour force includes all people in the working age group
equality of incomes.
(15-59 years), who are able and willing to work. Labour force