ECONOMICS

Economic Development and

Poliy in India - I
B.A Program Semester 5th
Important Questions
with Answer

NOTES
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Economic Development & policy in India – I

INDEX

UNIT 1: Economic Growth, Economic Development and

Sustainability

UNIT 2: Factors in Development

UNIT 3: Population and Economic Development

UNIT 4: Employment

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Q- Distinguish between economic growth and economic development. What are

the various determinants of economic development?

Or

Distinguish between the concepts of economic growth and economic

development. Discuss the features that help to characterize an economy as a
developing or a developed economy.

Ans: The concepts of economic growth and economic development:

Economic Growth:

Economic Growth refers to the rise in the value of everything produced in the economy.

It implies the yearly increase in the country’s GDP or GNP, in percentage terms. It alludes

to a considerable rise in the per-capita national product, over a period, i.e. the growth
rate of increase in total output, must be greater than the population growth rate.

Determinants of Economic Growth

Economic growth can be expressed in terms of gross domestic product (GDP) and gross

national product (GNP), which helps in measuring the size of the economy. It lets us

compare in absolute and percentage change, i.e. how much an economy has progressed

since last year. It is an outcome of the increase in the quality and quantity of resources
and advancement of technology.

Economic Development:

Economic Development is defined as the process of increase in volume of production

along with the improvement in technology, a rise in the level of living, institutional
changes, etc. In short, it is the progress in the socio-economic structure of the economy.

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Human Development Index (HDI) is the appropriate tool to gauge the development in

the economy. Based on the development, the HDI statistics rank countries. It considers

the overall development in an economy regarding the standard of living, GDP, living
conditions, technological advancement, and improvement in self-esteem needs, the

creation of opportunities, per capita income, infrastructural and industrial development,

and much more.

 Difference between Economic Development and Economic Growth:

A developed country (or industrialized country, high-income country, more

economically developed country (MEDC), advanced country is a sovereign state that has

a high quality of life, developed economy and advanced technological infrastructure

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relative to other less industrialized nations. A point of reference of US$20,000 in 2021

USD nominal GDP per capita for the International Monetary Fund (IMF) is a good point
of departure, it is a similar level of development to the United States in 1960.

The United States was the richest developed country on Earth in 2020, with a total GDP

of $20.95 trillion. China was the richest developing country on Earth in 2020, with a total
GDP of $14.72 trillion.

A developing country is a sovereign state with a lesser developed industrial base and a

lower Human Development Index (HDI) relative to other countries. However, this
definition is not universally agreed upon. There is also no clear agreement on which

countries fit this category. The World Bank classifies the world's economies into four

groups, based on gross national income per capita: high, upper-middle, lower-middle,

and low income countries. Least developed countries, landlocked developing countries
and Small Island developing states are all sub-groupings of developing countries.

An example of a developing nation is Thailand. In recent years, Thailand's GDP has

increased substantially and the country has moved from a lower income to an upper
income country.

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Q- What are the principals of federal finance? Discuss the problem of federal
finance in India.

Ans: In the case of a federal system of finance, the following main principles must be
applied:

1. Principle of Independence:

• Under the system of federal finance, a Government should be autonomous and free
about the internal financial matters concerned.

• It means each Government should have separate sources of revenue, authority to levy
taxes, to borrow money, and to meet the expenditure.

• The Government should normally enjoy autonomy in fiscal matters.

2. Principle of Equity:

• From the point of view of equity, the resources should be distributed among the
different states so that each state receives a fair share of the revenue.

3. Principle of Uniformity:

• In a federal system, each state should contribute equal tax payments for federal
finance.

4. Principle of Adequacy of Resources:

• The principle of adequacy means that the resources of each Government i.e. Central
and State should be adequate to carry out its functions effectively.

• Here adequacy must be decided with reference to both currents as well as future
needs.

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• Besides, the resources should be elastic in order to meet the growing needs and
unforeseen expenditures like war, floods, etc.

5. Principle of Fiscal Access:

• In a federal system, there should be the possibility for the Central and State
Governments to develop new sources of revenue within their prescribed fields to meet
the growing financial needs.

• In a nutshell, the resources should grow with the increase in the responsibilities of the
Government.

6. Principle of Integration and coordination:

• The financial system as a whole should be well integrated.

• There should be perfect coordination among different layers of the financial system of
the country.

• Then only the federal system will survive.

• This should be done in such a way as to promote the overall economic development of
the country.

7. Principle of Efficiency:

• The financial system should be well organized and efficiently administered.

• Double taxation should be avoided.

8. Principle of Administrative Economy:

• The economy is an important criterion of any federal financial system.

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• That is, the cost of collection should be at the minimum level and the major portion of

revenue should be made available for the other expenditure outlays of the
Governments.

9. Principle of Accountability:

• Each Government should be accountable to its own legislature for its financial
decisions i.e. the Central to the Parliament and the State to the Assembly.

 Some problems of federal finance in India are:

1. Mounting Vertical Imbalance:

Vertical imbalance emerges because of disproportionate alignment of revenue sources

in relation to increasing expenditure obligations by level of government. There is a

situation of growing expenditure requirements and poor yield of revenue source for
states in India.

The process of assigning highly elastic revenue to the center and inelastic taxes to the

states, led to a high degree of concentration in revenue collection. For example in India

the centre collects 59% of total revenue whereas state and local bodies collect 41 %
only. Lack of accountability and implementation of populist policies are the major cause
for imbalance in state budgets.

2. Horizontal Imbalance:

Various regions and states in India differ in resources endowment, level of development

and per capital income. Therefore horizontal imbalance occurs between different units
of government at the same level of government in Indian federation.

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The resources transfer affected through planning commission and Finance Commission

has miserably failed in correcting the horizontal imbalance. As a result disparities in per-
capita income are increasing.

3. Excessive Dependence on Centre:

This situation mainly emerges owing to the existence of vertical im-balance in resources

source and transfer. Very often in Indian fed-eration the taxes which are assigned to
states are generally less elastic and less productive.

As a result, with the passage of time states in India have become more and more

dependent on cen-tre for financial help. The matter sometimes becomes worse for
states ruled by a particular political party different from the one in the centre.

4. Eroded State Autonomy:

It is usually argued that the framers of our constitution were guided by the mistaken
notion of “strong centre and weak states”. The single party rule at the centre for the
early decades of independence hard-ened this notion.

In a federation a strong centre without strong states is not feasible. The growing
influence of regional partners and there active participation in central government

coupled with the introduction of structural adjustment programmers, since 1990, has

changed the situation. At present we can find quali-tative change in the concept of state
autonomy.

5. Overlapping of Functions:

A study report of R. Venkataraman shows that a dualism in the cen-tral assistance has

developed and there has been certain overlap-ping of functions of finance commission
and the planning commis-sion.

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The revenue gap grant is to be made by the finance commis-sion, the plan assistance by

planning commission and relief grants by the central government. This in practice

revealed that the plan-ning commission encroached in the area of the others in regard
to grants.

6. Increasing Debt Burden of States:

Our federal financial system has developed a situation in which the states cannot survive

without the central assistance. The use of loans and grants by the state has resulted in

financial dependency and indiscipline on the part of the states. This also led to a
situation of inevitable debt burden on the part of states.

7. Failure to Reduce Regional Imbalance

The mechanism of central resource transfer has failed to correct horizontal imbalance

among states. The disparity in per-capita in-come has been on an increase. The major

part of the central transfer of resources, owing to irrational criteria of devolution, went
to richer states.

Irrespective of concrete efforts by central government, the regional economic disparity

among states could not be removed and inequality of income as between individuals
could not be reduced to a significant extend.

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Q- What are the main causes behind the rapid growth of population in India?

What measures have been taken by the government to control population growth
in India?

Ans: Population of India is quite large and rapidly increasing. One percent growth rate

means an addition of 1 crore people every year but actually speaking 2 crore persons
are being adding every year. So, effective population control measures are the need of
the hour. We know that birth rate is mainly responsible for rapid population growth.

Some of the most important causes of population growth in India are as follows:

1. Widening Gap between Birth and Death Rates:

The average annual birth rate in India which was 42 per thousand populations in 1951-

61 came down to 28.7 per thousand in 1993. The death rate also came down from over

27 per thousand populations in 1951-61 to 9.3 in 1993 (The Hindustan Times, July 11,

1995). Thus, since birth rate has shown a small decline and the death rate has gone
down rather sharply, the widening gap has increased our population rapidly. The total

fertility rate (average number of children born per woman) came down from about six in

the fifties to 3.5 in 1992-93. Yet, for the past ten years, the average family size has
stayed out at 4.2 children.

2. Low Age at Marriage:

Child marriages have been very common in our country. According to the 1931 census,
72 per cent marriages in India were performed before 15 years of age and 34 per cent

before ten years of age. Since then, there has been a continuous increase in the mean

age of marriage among both males and females. The mean age at marriage of females

increased from 13.1 in 1901 to 13.2 in 1911, 13.1 in 1921, 13.7 in 1931, 14.7 in 1941, 15.6
in 1951, 16.1 in 1961, 17.2 in 1971, 17.6 in 1981 and 18.4 in 1991.

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If we relate fertility rates (average number of children born per woman) with age groups,

we find that as the age group increases, the fertility rate decreases. If population growth

is to be controlled, marriage of females (in rural and urban areas) is to be preferred in

21-23 or 23-25 age groups than in 15-18 or 18-21 age groups.

3. High Illiteracy:

Family planning has a direct link with female education, and female edu-cation is

directly associated with age at marriage, general status of women, their fertility and

infant mortality rate and so forth. According to the 1991 census, the overall literacy
percentage in India is 52.11 as com-pared to 43.56 ten years ago. The male literacy
percentage is 63.86 while the female literacy percentage is 39.42 (India, 1992:9).

Education makes a person liberal, broad-minded, open to new ideas, and rational. If
both men and women are educated, they will easily understand the logic of planning

their family, but if either of them or both of them are illiterate, they would be more
orthodox, illogical and religious-minded.

4. Religious Attitude towards Family Planning:

The religiously orthodox and conservative people are against the use of family planning
measures. There are women who disfavour family plan-ning on the plea that they

cannot go against the wishes of God. There are some women who argue that the
purpose of a woman’s life is to bear children. Other women adopt a passive attitude.

According to a survey conducted among the Muslims by the Operations Research

Group in 1978, although a majority of both male and female respondents were aware of

modern family plan-ning methods, they were either against using them on religious
grounds or they lacked clear and adequate knowledge about them.

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5. Other Causes:

Some of the other causes responsible for the increase in population are: joint family

system and lack of responsibility of young couples in these families to bring up their

children, lack of recreational facilities, and lack of information or wrong information

about the adverse effects of vasec-tomy, tubectomy and the loop.

Many poor parents produce children not because they are ignorant but because they

need them. This is evident from the fact that there are some 35 million child workers in

our country. If families stop those chil-dren from working, their family funds will be
ruined. Producing more children by the poor people illustrates the paradox of

population-poverty interrelationship. Poverty is both the cause and ef-fect of the

population growth.

Hence measures which can reduce the birth rate should be adopted. These measures
can be classified into 3 heads:

Measure of Population Control:

A. Social Measure:

Population explosion is a social problem and it is deeply rooted in the society. So efforts
must be done to remove the social evils in the country.

1. Minimum age of Marriage:

As fertility depends on the age of marriage. So the minimum age of marriage should be

raised. In India minimum age for marriage is 21 years for men and 18 years for women
has been fixed by law. This law should be firmly implemented and people should also be
made aware of this through publicity.

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2. Raising the Status of Women:

There is still discrimination to the women. They are confined to four walls of house. They

are still confined to rearing and bearing of children. So women should be given

opportunities to develop socially and economically. Free education should be given to

them.

3. Spread of Education:

The spread of education changes the outlook of people. The educated men prefer to
delay marriage and adopt small family norms. Educated women are health conscious
and avoid frequent pregnancies and thus help in lowering birth rate.

4. Adoption:

Some parents do not have any child, despite costly medical treatment. It is advisable

that they should adopt orphan children. It will be beneficial to orphan children and
children couples.

5. Change in Social Outlook:

Social outlook of the people should undergo a change. Marriage should no longer be
considered a social binding. Issueless women should not be looked down upon.

6. Social Security:

More and more people should be covered under-social security schemes. So that they

do not depend upon others in the event of old age, sickness, unemployment etc. with
these facilities they will have no desire for more children.

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B. Economic Measures:

The following are the economic measures:

1. More employment opportunities:

The first and foremost measure is to raise, the employment avenues in rural as well as

urban areas. Generally in rural areas there is disguised unemployment. So efforts should

be made to migrate unemployed persons from rural side to urban side. This step can
check the population growth.

2. Development of Agriculture and Industry:

If agriculture and industry are properly developed, large number of people will get

employment. When their income is increased they would improve their standard of
living and adopt small family norms.

3. Standard of Living:

Improved standard of living acts as a deterrent to large family norm. In order to

maintain their higher standard of living people prefer to have a small family. According

to A.K. Das Gupta those who earn less than Rs. 100 per month have on the average a

reproduction rate of 3.4 children and those who earn more than Rs. 300 per month have
a reproduction rate of 2.8 children.

4. Urbanisation:

It is on record that people in urban areas have low birth rate than those living in rural
areas. Urbanisation should therefore be encouraged.

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C. Other Measures:

The following are the other measures:

1. Late Marriage:

As far as possible, marriage should be solemnized at the age of 30 years. This will

reduce the period of reproduction among the females bringing down the birth rate. The
govt. has fixed the minimum marriage age at 21 yrs. for males and 18 yrs. for females.

2. Self Control:

According to some experts, self control is one of the powerful methods to control the
population. It is an ideal and healthy approach and people should be provided to follow.
It helps in reducing birth rate.

3. Family Planning:

This method implies family by choice and not by chance. By applying preventive

measures, people can regulate birth rate. This method is being used extensively; success
of this method depends on the availability of cheap contraceptive devices for birth

control. According to Chander Shekher, “Hurry for the first child, Delay the second child
and avoid the third.”

4. Recreational Facilities:

Birth rate will likely to fall if there are different recreational facilities like cinema; theatre,
sports and dance etc. are available to the people.

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5. Publicity:

The communication media like T.V., radio and newspaper are the good means to

propagate the benefits of the planned family to the uneducated and illiterate persons
especially in the rural and backward areas of country.

6. Incentives:

The govt. can give various types of incentives to the people to adopt birth control

measures. Monetary incentives and other facilities like leave and promotion can be
extended to the working class which adopts small family norms.

7. Employment to Woman:

Another method to check the population is to provide employment to women. Women

should be given incentive to give services in different fields. Women are taking active

part in competitive examinations. As a result their number in teaching, medical and

banking etc. is increasing rapidly.

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Q- Examine the nature and causes of unemployment in India. What steps have
been taken by the government to solve the problem?

Ans: A person having no gainful work even for one hour in a day is described as

unemployed for that day. Weekly Status Approach: This approach highlights the record

of those persons who did not have gainful work or were unemployed even for an hour
on any day of the week preceding the date of the survey.

The nature of unemployment in under-developed countries is quite different; it is of

chronic and long-term nature. It is now almost universally recognized that the chronic
unemployment and under-employment in less developed countries are not due to the

lack of aggregate effective demand which, according to J.M. Keynes, was responsible for
unemployment in developed countries in times of depression.

Rather it is stated to be due to the lack of land, capital and other complementary
resources in relation to the total population and labor force.

Causes of Unemployment in India:

The Caste System

a) The caste system, a structure of social stratification that can potentially pervade

virtually every aspect of life in India is a major factor in generating

unemployment.

b) In some locations, certain kinds of work are prohibited for members of particular
castes. This also leads to the result that work is often given to members of a

certain community, rather than to those who truly deserve the job those who

have the right skills.

c) The result is higher levels of unemployment.

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Inadequate Economic Growth

a) Indian economy is underdeveloped and role of economic growth is inadequate.

b) This slow growth fails to provide enough unemployment opportunities to the

increasing population.

c) This means that as the population increases, the economy cannot keep up with
demands for employment and an increasing share of people are unable to find
work. The result is insufficient levels of employment nationwide.

Increase in Population

a) India’s population is predicted to exceed China’s by the year 2024; it will,

furthermore, probably be the most populous country for the entirety of the 21st

century.
b) As the country’s economic growth cannot keep up with population growth, this
leads to a larger share of the society being unemployed.

Agriculture is a Seasonal Occupation

a) Agriculture offers unemployment for a large segment of the population, but only

for several months out of the year.

b) The result is that for a considerable portion of the year, many agricultural workers
lack needed employment and income.

Loss of Small-Scale/Cottage Industries

a) Industrial development has made cottage and small-scale industries considerably

less economically attractive, as they do not offer the economies of scale

generated by large-scale mass production of goods.

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b) Oftentimes the demand for cheap, mass-produced goods outweighs the desire

for goods that are handcrafted by those with very specific skill and expertise.

c) The result is that the cottage and small-scale industry have significantly declined,
and artisans have become unemployed as a result.

Low Rates of Saving and Investment

a) India lacks sufficient capital across the board. Likewise, savings are low and the

result is that investment—which depends on savings—is also low.

b) Were there higher rates of investment, new jobs would be created and the
economy would have kick started.

Ineffective (or absent) Economic Planning

a) Problematically, there have been no nationwide plans to account for the

significant gap between labor supply (which is abundant) and labor demand

(which is notably lower).

b) It is crucial that the supply and demand of labor are in balance, to ensure that

those who need jobs are able to get them; otherwise, many individuals will
compete for one job.

Labor Immobility

a) Culturally, attachment and maintenance of proximity to family is a major priority

for many Indian citizens. The result is that people avoid traveling long distances
from their families in pursuit of employment.

b) Additionally, language, religion, and climate can also contribute to low mobility

of labor.

c) As one might expect, when many of those who might otherwise be suited to jobs
are unable to travel to reach them, unemployment is magnified.

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Job Specialization

Jobs in the capitalist world have become highly specialised, but India’s education system

does not provide the right training and specialisation needed for these jobs. Thus many
people who are willing to work become unemployable due to lack of skills.

Lack of essential skilling

a) A study reveals that 33% of educated youth in India are unemployed due to a

lack of future skills.

b) Millions of students in our country even after finishing schooling remain devoid

of hands-on learning and robust practical knowledge.

 Some steps have been taken by the government to solve the unemployment in
India:

(i) Opening schools in villages: Opening vocational and elementary schools in villages
create employment opportunities for people living these. Earlier people were involved in

the primary sector only but now they have better employment opportunities in other

sectors also.

(ii) Small scale manufacturing: Opening opportunities of self-employment in the form

of small scale manufacturing units like basket weaving, etc. adds to the employment

opportunities and removes disguised and seasonal unemployment away from people.

(iii) Introduction to modern farming methods: Use of modern farming methods gave
the surplus members of the family to get involved in other employment opportunities.

(iv) Proper health facilities: Improvement in health facilities in urban and rural areas

improved the quality of human resources which in turn work more efficiently and

contributed to national income.

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(v) NREGA 2005: According to this Act the NREGA was launched in February 2006. The

scheme guaranteed 100 days of wage employment in a year to every household in 200

districts.

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Q- Explain the internal and external sources of finance in India’s five year plan.

Ans: The most difficult problem faced by the government has been to mobilize

adequate resources to finance the development programmes of the public sector.

Understandably the government makes all possible efforts to raise resources from both

domestic and external sources. Estimates of financial resources likely to be available

over the plan period are prepared on the basis of (a) the rate of increase in national

income envisaged under the plan and (b) planned outputs of state enterprises

materializing and being disposed of on assumptions as to prices provided in the plan

frame.

There are broadly two concepts of public expenditure. According to one concept,

government expenditure is distinguished as plan expenditures and non-plan

expenditures. The plan does not include expenditures on the continued maintenance of
institutions and services which may have already come into existence at its

commencement. Expenditures on these are called non-plan expenditures. Non-plan

expenditures are estimated and only the balance of the resources available (at existing
level of taxation) is taken into account in relation to the finance of the plan.

A second concept that is employed is to distinguish plan expenditures which constitute

'investment' and those termed as current outlays'. 'Investment' is defined as expenditure

on the creation of physical assets e.g. building, plant and equipment including
expenditure on personnel required for putting up these assets. The expression 'current

outlays' corresponds broadly to expenditure on revenue accounts on plan schemes.

These are expenditures other than those classified as 'investment. Resources expected
to be available to the government are estimated under the following main heads:

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1. Balance from current revenues which mean revenue receipts (mainly tax yields) at

existing rates minus non-plan revenue expenditures of the center and the states, which

may even be a negative figure plus additional resource mobilization (ARM). Till the
Fourth Five Year Plan ARM included mostly additional taxation. Since the Fifth Plan

Share of additional taxation in additional resource mobilization is going down and that

of 'reduction in subsidies' and 'internal resources of public sector enterprises' is going

up.

2. Surpluses of public enterprises: (a) Contribution of railways, (b) Surplus of other public
enterprises.

3. Capital receipts include: (a) Market loans (net), (b) Small savings (net), (c) Annuity

deposits, (d) Provident funds (net), (e) Steel equalization fund (net), 6) Balance of
miscellaneous capital receipts over non-plan disbursements.

4. Budgetary receipts corresponding to external assistance. It includes all sorts of foreign

assistance whether it is in the form of loans or grants.

5. Deficit financing (that is, net credit by the Reserve Bank of India to the government). It

is actually the balancing factor which shows the shortfall of all the Sources, and,
therefore, has a special place in total resources.

Huge amounts of financial resources - domestic and foreign are needed for

Implementation of the economic plans in India. An analysis of these sources does not

show any regular trend in the pattern of financing economic plans. The contribution of
various sources to total financial resources has been varying plan to plan. From the
observations it is seen that -

(1) For most of the plans the internal financing has been close to 90 per com was so in
the case of the First Plan (90.4%), the Fourth Plan (87.1%), the Fifth PL (87.2%), the Sixth

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Plan (92.3%), the Seventh Plan (90.9%), the Eighth Plan (95 and the Ninth Plan (93%).

However, in the Second and Third Plans into financing constituted 77.5 percent and 71.7
percent of the total plan financial outlay respectively.

(ii) Resources coming from external sources do not exhibit uniform pattern The shares of

external resources in the total financial resources in the various plans up to the Ninth
Plan, including the Annual Plans (1966-69) and Annual Plan (197980) were 9.6%, 22.5%,

28.3%, 36.4%, 12.9%, 12.8%, 8.6%, 7.7%, 9.1%,5.1% and 6.9% respectively. We find that

the dependence on external resources was increasing from the First Plan to the three
annual plans and then it was on the decrease till the Sixth Plan.

In the Seventh Plan it again rose to 9.2% from 7.7% in the Sixth Plan In the Eighth Plan it

again came down to 5.1% and in the Ninth Plan it again rose to 7.0%. In the Second and

Third Plans there was a great need for imports of machines and equipment for the
establishment of heavy industries. While this need persisted throughout all the plans,

there were also imports of maintenance goods, intermediaries, etc. in large scale during
these two plans.

(iii) Surplus of the public sector enterprises which should have been an important

contributor exhibited very poor performance. Its contribution ranged between 3.6 per

cent in the Second Plan and 39.6 percent in the Ninth Plan. Surplus from public

enterprises as percentage of aggregate resources was very insignificant in First, Second

and Third Plans being only 5.9%, 3.6% and 5.1% respectively. It increased to 8.8% in the
Fourth Plan and then it decreased to 6.3% in the Fifth Plan.

Since the Annual Plan 1979-80 the percentage share of surpluses of public sector
enterprises has significantly increased.

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(iv)The trend in respect of 'current revenue balance' (i.e. revenue surplus on the basis of

existing tax rates) is very unhappy. The 'additional resource mobilization' (mainly tax

efforts over and above the existing tax revenues) as percentage of total outlays has not
been on the rising trend. "Among the tax revenues, while the indirect tax revenue

exceeded the LTFP (long term fiscal Policy) projections, direct tax revenue has fallen

short of the projection by a wide margin. The share of direct taxes in the gross tax

revenue of the Centre has come down from 43 per cent in 1950-51 to just 16 per cent in
1988-89. The shift in favour of indirect taxes though inflationary and regressive in nature
is continuing unabated".

(v) 'Deficit financing' being an unwelcome feature of the pattern of financing had

exceeded tire planned targets in almost all the plans, except for the Second Plan. It is
seen that deficit financing has been kept at zero level in the Ninth Five Year Plan.

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 27

Q- Discuss the main objectives of the planning process in India. What factors have
impeded the achievement of the objective of poverty alleviation?

Ans: The major objectives can be divided into following groups:

(a) Economic Growth:

Attainment of higher rate of economic growth received topmost priority in almost all

the Five Year Plans of the country. As the economy of the country was suffering from

acute poverty thus by attaining a higher rate of economic growth eradication of poverty
is possible and the standard of living of our people can be improved.

(b) Attaining Economic Equality and Social Justice:

Reduction of economic inequalities and eradication of poverty are the second group of

objective of almost all the Five Year Plans of our country particularly since the Fourth

Plan. Due to the faulty approach followed in the initial part of our planning, economic
inequality widened and poverty became acute.

Thus to achieve the target, various poverty alleviation programmes like the National

Rural Employment Programme (NREP), Composite Rural Training and Technology

Centre (CRTTC), Crash Scheme for Rural Employment Programme (CSREP), Rural

Landless Employment Guarantee Programme (RLEGP) etc. were introduced. But the
performance of these programmes is not up to the satisfaction.

(c) Achieving Full Employment:

Five Year Plans of India gave importance on the subject to employment generation since
the Third Plan. The generation of more employment opportunities was considered as an

objective of both the Third and Fourth Plan of our country. But up to the Fourth Plan
employment generation never received its due priority.

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To achieve this target the major programmes which were introduced during this Plan

were Integrated Rural Development Programme (IRDP), the National Rural Employment

Programme (NREP), the Operation Flood II Dairy Development Project, schemes in the
villages and small industries sector the national Scheme of Training Rural Youth for Self

Employment (TRYSEM) and various other components of the Minimum Needs

Programme.

(d) Attaining Economic Self-Reliance:

One of the very important objectives of Indian Planning is to attain economic self-
reliance. But this objective attained its importance only since the Fourth Plan, when the

plan aimed at elimination of the import of food-grains under PL480. The Fifth Plan also
laid much importance on the attainment of self-reliance.

Thus this plan aimed at achieving self-sufficiency in the production of food-grains, raw

materials and other essential consumption goods. The Fifth Plan also emphasized the
need for import substitution and export promotion for attaining economic self- reliance.

(e) Modernisation of Various Sectors:

Another very important objective of Five Year Plans of our country was the
modernisation of various sectors and more specifically the modernisation of agricultural

and industrial sectors. The Fourth Plan laid much emphasis on the modernisation of

agricultural sector and undertook a vigorous scheme for modernisation of agriculture in

the name of Green Revolution. The successive plans also continued their efforts in the
same direction but at a reduced rate.

It requires setting up of various types of industries and advancement of technology. In

the mean time some sort of modernisation always gone against employment generation

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thus the country is facing a conflict between the objective of modernisation and the
objective of removal of unemployment and poverty.

(f) Redressing Imbalances in the Economy:

Regional disparities and imbalances in the economy have become so acute in India that
it needed special attention in our Five Year Plans. Thus by regional development we

mean economic development of all the regions by exploiting various natural and human
resources and by increasing their per capita income and living standards.

 Poverty Alleviation Programmes:

1. Integrated Rural Development Programme (IRDP): It's a flagship programme. It

aims at an all-round development of the 'target group' to lift it above the poverty line.

Subsidies are provided to identify families so as to enable them to acquire an income-

earning asset. Progress of IRDP has been shown due to administrative difficulties in
implementation and high administrative costs.

2. Training of Rural Youth for Self-employment (TRYSEM): It was launched on 15th

August, 1979. The aim is to provide technical and entrepreneurial skills to rural youths

from families below poverty line to enable them to take up self employment in
agriculture, allied activities, industries, services and business (ISB) activities.

3. Jawahar Rozgar Yojana (JRY): It was launched in 1989. It was formulated by

merging two programmes NREP and RLEGP. The target group of the JRY to those below
poverty line. It aims to provide wage employment to at least one member of each family
for 50-100 days a year, at a workplace near his residence.

4. Nehru Rozgar Yojana (NRY): It is the urban counterpart of JRY. It aims at providing
1 million jobs annually. Target group is urban poor living below the poverty line. It
consists of the following schemes:

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 30

(a) Scheme of Urban Wage Employment (SUWE);

(b) Scheme of Housing and Shelter Upgradation (SHASU);

(c) Scheme of Urban Micro Enterprises (SUME).

5. Employment Assurance Scheme (EAS): It aims at providing at least 10 days of

unskilled manual work for each of two members of the family seeking it. It is targeted at

the poor during the lean agricultural season in rural areas. Part of the wages may be
paid in the form of grains.

6. Prime Minister's Rozgar Yojana: It was launched on 2nd October, 1993. It will

provide sustained employment to about 10 lakhs educated unemployed youth in micro

enterprises, manufacturing service and business ventures.

7. Prime Minister's Integrated Urban Poverty Eradication Programme (PMIUPEP):

It was launched in November, 1995 with the aim to attack the root cause of urban
poverty so as to eradicate it from the urban areas by the turn of the century. It provides

self-employment through skills development. It has been merged with the new scheme
called the Golden Jubilee Urban Employment Scheme.

8. National Social Assistance Programme (NSAP): It covers three schemes: Mid-day

Meal Scheme, Rural Group Life Insurance Scheme and National Maternity Benefit

Scheme. It aims to provide subsidy and technical assistance to individuals as well as

groups of beneficiaries for developing assured irrigation.

9. Swarn Jayanti Shahri Rozgar Yojana: It came into effect from December, 1997 by
integrating three PAP's, JRY, Urban Basic Services for the poor and the PMIUPEP.

10. Swarn Jayanti Gram Swarozgar Yojana: It comprises the following PAP's, IRDP,
DWCRA, TRYSEM, Ganga Kalyan Yojana and million wells scheme.

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11. Jawahar Gram Samridhi Yojana: It was launched on 23rd June 1999. It aims to
create demand-driven community village infrastructure including durable assets.

12. Pradhan Mantri Gramodaya Yojana (PMGY): The aim is to force on village level

development in 5 areas je drinking water primary education, health, nous and rural
roads and improving the quality of life there.

13. Jai Prakash Rojgar Guarantee Yojana (JPRG17): Its aim is to provide employment
guarantee to the unemployed in the distressed districts of the country.

14. District Rural Industries Project (DRIP): Its aim is to strengthen the untapped
potential for employment generation.

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Q- What are the conditions that warranted the need of Indian economic reforms of
1991? Discuss the main features of the new Economic Policy of 1991.

Ans: On July 24, 1991, India instituted a series of ongoing economic reforms, which is
now known as the Economic Liberalization of 1991.

Economic liberalization, in general, refers to a government applying a series of

deregulation measures, reducing the amount of government control, allowing foreign

capital in, allowing greater privatization, lowering taxes (and other economic barriers),

etc to allow room for private players to enter its market. · Hence the word
“liberalization”.

In countries like India and China, the term is used mainly in the context of opening up

the economy to foreign investments, capital, service providers, etc and allow room for
international players to enter its economy.

Pre-liberalization India (Nehru's socialist growth rate): The Indian economy was in a
deep hole by 1985. We suffered a Balance of Payment (payments for export and import

of goods, services and capital) crisis. We were unable to pay off essential imports, ran a

high deficit, borrowed from external sources to finance those deficits and inflation was

on the rise. Since her independence, India had only been able to maintain a growth rate

of 3-3.5%; our capital growth rate was even worse, at around 1.3%. There were a lot of
reasons for this, starting with the financial burden of the partition. Since the partition,

India drove a centralized economic planning model (inspired by the Soviet Union), in
place of distributing out controls.

A natural outcome of this was to give rise to extensive bureaucracy, red tape,

unnecessary regulations and trade barriers. India's protectionist policies, Nehru's five

year plans, several failed reform policies like Indira Gandhi's “GaribiHatao" program,

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 33

License Raj driven economic planning and a failure to open up our markets to foreign
investments, all contributed to our economy stagnating at dismal growth rates.

Although these socialist reform measures were instigated to alleviate poverty, the

opposite became true. India faced food shortages and there was mass starvation in

states like Bihar. Farmers in India struggled to meet her agricultural production needs
and industrialists suffered from the death-grip of License Raj. The state intervened with

industrialization, businesses, labour and financial markets, leading to a *huge* public

sector.

India also relied on foreign imports for several essential imports, like oil. The “Oil Shock”

of 1979, combined with agricultural subsidies and a consumption based strategy pushed

the fiscal deficit up even higher. In addition to this, there were several other economic

drains like the Indo-Pakistani wars (1965, 1971), the Sino-Indian war (1962), etc, which
not only drove up our defence spending, but also alienated India from the foreign aid of
certain countries.

The current account deficit averaged 2.2% of GDP from 1985-1990.

India dealt with this in the worst possible way - borrow from external sources to finance

the deficit. From 1980-1985, half of our external financing needs were met with outside

assistance. External debt grew to as much as 38.7% of the GDP in 1991-1992. Finally, we
reached a Balance of Payments crisis and Prime Minister Chandra Sekhar pawned gold
(airlifted to London), as collateral for IMF bailouts.

Liberalization of India in 1991: After the assassination of Rajeev Gandhi in 1991, India

(still persisting with a Fixed Exchange rate) delved deeper into the crisis, when massive
investor confidence decline caused India to be on the verge of economic bankruptcy.

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 34

With just three weeks left until completely depleting the last loan from the IMF, PV

Narasimha Rao took over as India's Prime Minister and announced India's liberalization.

The goal of his visionary policy was to remove unnecessary bureaucratic controls, take
careful measures to integrate India with the world's economy, remove restrictions on

foreign investments and crack down on public sector enterprises that yielded very low
returns. ·

Rao's ability to steer tough reform measures through the Parliament enabled India to

move quickly through the financial crisis. Although people give credit to Manmohan

Singh for India's economic reforms, it is actually Rao's political statesmanship that
helped bring about massive reform.

The following steps were taken: In a brilliant move, he instituted Dr Manmohan Singh

(an economist rather than a politician) as Finance Minister, and began India's Economic
Reforms (New India) by first devaluing the Rupee.

• Industrial de-licensing followed shortly afterward. Industrialists could finally breathe

free of the License Raj. Narasimha Rao announced the de-licensing on the same day
that Manmohan Singh presented his budget.

Before anyone knew it, industrial licensing was abolished.

• The MRTP Act (that protected businesses from monopolies) was reformed and India
could finally be on the path to producing competitive and productive industries.

• Gradual reduction of import duties followed, allowing foreign investments to slowly

start flowing in. More clearance was given to capital goods.

• Slowly, taxes were lowered (income and corporate taxes) and Foreign Technology
Agreements started getting signed.

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• In cities where the population was less than a million, they didn't even need
Government permits for industries.

• The threats of massive layoffs were avoided by legislating judiciously and exercising
regulations carefully.

Role of Narasimha Rao and Manmohan Singh: The result of all this was that Licensing

slowly became the exception rather than the rule. Every industry (except two) was

opened to private sectors. Foreign technology was accepted liberally and foreign

investment was allowed in a large number of industries. The monopoly laws were
revised and there were no more restrictions on companies wanting to grow big.

Narasimha Rao and Manmohan Singh basically braked with careful deregulation and
accelerated by reducing bottlenecks.

They had to continually assure every worker striking (from the banking sector to

farmers, from opposition Yatras led by the BJP to the trade unions) that there wouldn't
be layoffs and that workers would be protected. These reforms were both revolutionary
and incremental.

The result of this was that the Indian economy grew to 7.5% of GDP (from USD 130
million in 1992, to USD 5 billion, in 1996).

Cities started to grow and became centres of post-liberalization industrialization. Atal

Bihari Vajpayee continued with Manmohan Singh's economic reforms and India
welcomed IT and BPOs. Manmohan Singh's government in 2004 again continued with
market liberalization and a larger role for enterprises.

India's capital markets found exponential growth. The number of listed companies grew
and resulted in a healthy trend of development in India. Even though there are serious

environmental impacts to India's growth story, India found a unique brand of capitalism

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 36

(a form of laissez-faire capitalism very different from the free-form capitalism in the USA
or China).

The main features of the New Economic Policy of 1991 are as follows:

1. Dereservation of the industrial sector: The industrial sector of the economy has
been opened up to the private sector after the New Industrial Policy 1991. Previously,

the public sector has given reservation especially in the capital goods and key industries.

Other operators-private sector and foreign investors were not allowed in these critical

industries. Deregulation of the industrial sector allowed private sector operation in most
of these sectors except in eight selected areas including atomic energy, mining and
railways.

2. Industrial delicensing policy: The most important part of the new industrial policy of
1991 was the end of the industrial licensing or the license raj or red tapism. Under the

previous industrial licensing policies, private sector firms have to secure licenses to start

an industry. This has created long delays in the start-up of industries. The industrial

policy of 1991 has almost abandoned the industrial licensing system. It has reduced
industrial licensing to fifteen sectors.

3. Opening up of the economy to foreign competition: Another major feature of the

economic reform measure was that it has given welcome to foreign investment and
foreign technology. Opening up of the economy to foreign competition started a new

era in India's economic policy with permission to FDI up to 51 per cent in selected
sectors.

4. Financial Sector Reforms: On the financial sector the government is introducing

numerous measures for the deregulation as well as liberalisation of the sector. Different

banking sector reforms including removal of control on interest rate and branch

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 37

licensing policy liberalisation were launched. Capital market reforms and money reforms
were extensive after 1994.

5. Reforms related to the Public-sector enterprises: Reforms in the public sector were

aimed at enhancing efficiency and competitiveness of the sector. The public sector will

be concentrating in key and strategic sectors. Government has adopted a disinvestment

policy for restructuring of the public sector in the country along with several other
policies.

6. Abolition of MRTP Act: The New Industrial Policy of 1991 has abolished the
Monopoly and Restrictive Trade Practices Act. In 2010, the Competition Commission
emerged as the watchdog in monitoring competitive practices in the economy.

The economic reforms were started in 1991, and they are still continuing. A major
feature of economic reforms was that it was implemented in a gradual manner. The

reforms were comprehensive and extensive as it covered all sectors trade, investment,

industrial sector, financial sector, public sector, fascial sector etc. The new industrial
policy introduced in 1991 is the central point of the economic reforms

Over the last twenty-five years, as a result of the launch of the new economic policy and

its continuation, the Indian economy has undergone significant improvement and now

is one of the fastest growing economies in the world. The famous BRIC report predicts
that India will grow as the second largest economy by 2050. At present, India is

categorized as an Emerging Market Economy (EME) along with China, Brazil, and Russia

etc. Even in the current crisis phase of the global economy, India's macroeconomics
performance is comparatively better.

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 38

Q- What are the causes of poverty? Why have anti-poverty programmes not been
able to achieve desired results in India?

Ans: Poverty is a state or condition in which a person or community lacks the financial

resources and essentials for a minimum standard of living. Poverty means that the

income level from employment is so low that basic human needs can't be met. Poverty-
stricken people and families might go without proper housing, clean water, healthy
food, and medical attention.

(i) Heavy pressure of population:

Population has been rising in India at a rapid speed. This rise is mainly due to fall in
death rate and more birth rate.

India’s population was 84.63 crores in 1991 and became 102.87 crores in 2001. This
pressure of population proves hindrance in the way of economic development.

(ii) Unemployment and under employment:

Due to continuous rise in population, there is chronic unemployment and under

employment in India. There is educated unemployment and disguised unemployment.

Poverty is just the reflection of unemployment.

(iii) Capital Deficiency:

Capital is needed for setting up industry, transport and other projects. Shortage of
capital creates hurdles in development.

(iv) Under-developed economy:

The Indian economy is under developed due to low rate of growth. It is the main cause
of poverty.

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 39

(v) Increase in Price:

The steep rise in prices has affected the poor badly. They have become poorer.

(vi) Net National Income:

The net national income is quite low as compared to size of population. Low per capita

income proves its poverty. The per capita income in 2003-04 was Rs. 20989 which
proves India is one of the poorest nations.

(vii) Rural Economy:

Indian economy is rural economy. Indian agriculture is backward. It has great pressure of
population. Income in agriculture is low and disguised unemployment is more in
agriculture.

(viii) Lack of Skilled Labour:

In India, unskilled labour is in abundant supply but skilled labour is less due to
insufficient industrial education and training.

(ix) Deficiency of efficient Entrepreneurs:

For industrial development, able and efficient entrepreneurs are needed. In India, there
is shortage of efficient entrepreneurs. Less industrial development is a major cause of
poverty.

(x) Lack of proper Industrialisation:

Industrially, India is a backward state. 3% of total working population is engaged in

industry. So, industrial backwardness is major cause of poverty.

(xi) Low rate of growth:

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 40

The growth rate of the economy has been 3.7% and growth rate of population has been

1.8%. So compared to population, per capita growth rate of economy has been very low.
It is the main cause of poverty.

Despite rapid growth and development, an unacceptably high proportion of our

population continues to suffer from severe and multidimensional deprivation. It is not as

if we are not mindful of this massive development challenge. The need to “end poverty,

ignorance, disease and inequality of opportunity” was stressed in speeches during the

Constituent Assembly meetings. It was recognised that “free India would be judged by

the way it served the interests of the common people in terms of food, clothing, shelter
and social services”. The day we attained Independence, Rajendra Prasad, the country’s

first president, asked for a commitment “to create the conditions to enable each

individual to develop and rise to their fullest stature, such that poverty, squalor,

ignorance and ill-health would vanish, along with any distinction between high and low
and between rich and poor”.

Concerns and commitments on reducing, ameliorating and eliminating poverty have

been expressed repeatedly at the highest level. For instance, former Prime Minister
Manmohan Singh made a commitment to ensure that the “struggle for the removal of
chronic poverty, ignorance and disease will register major gains in the Eleventh (five

year) Plan”. More recently, a cabinet secretariat press note regarding constitution of the

niti Aayog stated: “Poverty elimination remains one of the most important metrics by
which alone we should measure our success as a nation.”

At the turn of the century, the Millennium Development Goals sought to “eliminate

extreme poverty and hunger”. Today, the Sustainable Development Goals aim to “end
poverty in all its forms everywhere”. Clearly, there is recognition at national and global

levels of the importance of reducing or eliminating poverty. Yet, our report card on
poverty remains dismal.

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 41

Q- Explain the poverty line. Discuss the various anti-poverty programmes

undertaken by the Government of India.

Ans: Poverty line is the level of income to meet the minimum living conditions. Poverty

line is the amount of money needed for a person to meet his basic needs. It is defined

as the money value of the goods and services needed to provide basic welfare to an
individual.

Poverty line changes from one country to another. In developed countries, where there

is advanced standard of living and welfare concepts, poverty line is high as basic
standard to live include higher consumption requirements and accessibility to many
goods and services.

On the other hand, in many less developed countries, the basic requirements will be low
and contains mostly essential consumption items needed to sustain life. This means that
poverty line is set by the welfare standard in a particular society (economy).

Removal of poverty has been the biggest challenge in India. The Indian government is

dealing the same with two methods – by promoting economic growth and by anti-
poverty programmes.

The major anti-poverty programmes suggested by the Govt. of India are as

follows:

1. Integrated Rural Development Programme:

It was introduced in the year 1978-79 and universalized from 2nd October, 1980. The

main aim is to provide support to the rural poor in the form of subsidy and bank credit
for productive work opportunities through successive plan periods.

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 42

2. Jawahar Rozgar Yojana /Jawahar Gram Samriddhi Yojana (JGSY):

Two new schemes, namely, National Rural Employment Programme (NREP) and Rural

Landless Employment Guarantee Programme (RLEGP) were merged in the year1989,

under Jawahar Rozgar Yojana (JRY). The purpose was to generate good work prospects

for the unemployed in rural areas by creating economic infrastructure, community and
social assets. From the year 1999, this old scheme started again with a new name as

Jawahar Gram Samriddhi Yojana (JGSY), mainly for rural economic infrastructure
programme with the purpose of employ¬ment generation.

3. Employment Assurance Scheme:

This scheme was launched in the year 1993. It mainly covers drought-prone, desert,

tribal and hill area blocks. In the year1997-98, it extended to several other blocks.

Employment assurance scheme was planned for creating employment opportunity in

the form of manual work when there is no agricultural season. It was expected to lead to

the creation of robust economic and social infrastruc¬ture and address the needs of
people.

4. Food for Work Programme:

In the year 2000, the Food for Work Programme was started as a component of EAS. It

started with some major drought-affected states, namely Maharashtra, Rajasthan, Orrisa,

Gujarat, Himachal Pradesh, Madhya Pradesh, Uttaranchal and Chhattisgarh. The main
aim is to enhance food security through wage employment.

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 43

5. Sampoorna Gramin Rozgar Yojana:

The new Sampoorna Gramin Rozgar Yojana (SGRY) Scheme started in 2001 was the mix

of old JGSY, EAS and Food for Work Programme. The primary aim of the scheme was

the generation of wage employment, creation of good economic infrastructure in rural

areas as well as food provision and nutrition security for the underdeveloped.

6. Rural Housing – Pradhan Mantri Gramin Awaas Yojana (PMGAY):

PMGAY is a government flagship programme, created for providing housing for the

Indian rural poor. A similar scheme for urban poor was launched in 2015 as Housing for
All. For BPL population, similar program was launched by late PM Rajiv Gandhi, known
as Indira Awaas Yojana which was one of the major flagship programs.

7. National Old Age Pension Scheme (NOAPS):

NOAPS came into effect from the year 1995. Providing pension to old people above

now 60, who does not have any means of subsistence is the main aim of this project. It

is provided by the central government. Implementation of this scheme in places is given

to Panchayats and municipalities.

8. National Family Benefit Scheme (NFBS):

NFBS was started in the year 1995 and is sponsored state governments, under

community and rural department. They provide certain amount to a member of family
who becomes the head of the family after the death of its primary breadwinner.

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 44

9. National Maternity Benefit Scheme:

NMBS provides certain amount grant mother in three installments. The women must be

older than 19 years. It is normally provided eighth to twelfth weeks before the birth of
child. And in case of the death of the child, the women can still avail it.

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 45

Q- Explain the objectives of monetary policy. Also, discuss the tools and
limitations of using a monetary policy, with special reference to India.

Ans: Monetary policy is an economic policy that manages the size and growth rate of

the money supply in an economy. It is a powerful tool to regulate macroeconomic

variables such as inflation and unemployment.

These policies are implemented through different tools, including the adjustment of the

interest rates, purchase or sale of government securities, and changing the amount of

cash circulating in the economy. The central bank or a similar regulatory organization is
responsible for formulating these policies.

Objectives of Monetary Policy:

The primary objectives of monetary policies are the management of inflation or

unemployment and maintenance of currency exchange rates.

1. Inflation

Monetary policies can target inflation levels. A low level of inflation is considered to be

healthy for the economy. If inflation is high, a contractionary policy can address this
issue.

2. Unemployment

Monetary policies can influence the level of unemployment in the economy. For

example, an expansionary monetary policy generally decreases unemployment because

the higher money supply stimulates business activities that lead to the expansion of the
job market.

3. Currency exchange rates

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Using its fiscal authority, a central bank can regulate the exchange rates between

domestic and foreign currencies. For example, the central bank may increase the money

supply by issuing more currency. In such a case, the domestic currency becomes
cheaper relative to its foreign counterparts.

Tools of Monetary Policy:

Central banks use various tools to implement monetary policies. The widely utilized
policy tools include:

1. Interest rate adjustment

A central bank can influence interest rates by changing the discount rate. The discount

rate (base rate) is an interest rate charged by a central bank to banks for short-term

loans. For example, if a central bank increases the discount rate, the cost of borrowing
for the banks increases. Subsequently, the banks will increase the interest rate they

charge their customers. Thus, the cost of borrowing in the economy will increase, and
the money supply will decrease.

2. Change reserve requirements

Central banks usually set up the minimum amount of reserves that must be held by a

commercial bank. By changing the required amount, the central bank can influence the
money supply in the economy. If monetary authorities increase the required reserve

amount, commercial banks find less money available to lend to their clients, and thus,
money supply decreases.

Commercial banks can’t use the reserves to make loans or fund investments into new

businesses. Since it constitutes a lost opportunity for the commercial banks, central

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banks pay them interest on the reserves. The interest is known as IOR or IORR (interest
on reserves or interest on required reserves).

3. Open market operations

The central bank can either purchase or sell securities issued by the government to
affect the money supply. For example, central banks can purchase government bonds.

As a result, banks will obtain more money to increase the lending and money supply in
the economy.

 The following are the main limitations of the monetary policy adopted by the
Reserve Bank:

1. Restricted Scope of Monetary Policy in Economic Development:

In reality the monetary policy has been assigned only a minor role in the process of

economic development. The monetary policy is not given any predominant role in the
process of economic development.

The role assigned to the Reserve Bank is minor indeed. The Reserve Bank in expected to

see that the process of economic development should not be hindered for want of
availability of adequate funds.

2. Limited Role in Controlling Prices:

The monetary policy of Reserve bank has played only a limited role in controlling the
inflationary pressure. It has not succeeded in achieving the objective of growth with
stability.

The former Governor of Reserve Bank, I.G. Patel states,’ the role of monetary policy in
combating inflation is strictly limited and that monetary policy can be effective only if it

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is a part of an overall framework of policy which includes not only fiscal and foreign

exchange policy but also what is described as an income policy’. In India, however, the

monetary policy of the Reserve Bank is not appropriately integrated with fiscal, foreign
exchange and income policies.

3. Unfavourable Banking Habits:

An important limitation of the monetary policy is unfavourable banking habits of Indian

masses. People in India prefer to make use of cash rather than cheque. This means that

a major portion of the cash generally continues to circulate in the economy without
returning to the banks in the form of deposits. This reduces the credit creation capacity
of the banks.

Moreover in India there is predominance of currency in the money supply. This hampers
the credit creating capacity of the banks. Due to high proportion of currency in money

supply, banks have to face the problem of large withdrawals of currency every time they

create credit. Fortunately, the recent trend is increasing deposit ratio in money supply. It
is expected to make money policy more effective.

4. Underdeveloped Money Market:

Another limitation of monetary policy in India is underdeveloped money market. The

weak money market limits the coverage, as also the efficient working of the monetary
policy.

The money market comprises of the parts, the organised money market and

unorganised money market. The money policy works only in organised money market. It
fails to achieve the desired results in unorganised money market.

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5. Existence of Black Money:

The existence of black money in the economy limits the working of the monetary policy.

The black money is not recorded since the borrowers and lenders keep their

transactions secret. Consequently the supply and demand of money also not remain as

desired by the monetary policy. In the words of V. Pandit, ‘Black money is rightly
regarded as a threat to the official money credit policy mechanism to manage demand
and price in several sectors of the economy.

6. Conflicting Objectives:

An important limitation of monetary policy arises from its conflicting objectives. To

achieve the objective of economic development the monetary policy is to be

expansionary but contrary to it to achieve the objective of price stability a curb on

inflation can be realised by contracting the money supply. The monetary policy
generally fails to achieve a proper coordination between these two objectives.

7. Influence of Non-Monetary Factors:

An important limitation of monetary policy is its ignorance of non-monetary factors. The

monetary policy can never be the primary factor in controlling inflation originating in
real factors, deficit financing and foreign exchange resources.

The Reserve Bank has no control over deficit financing. It cannot regulate the deficit
financing, which affects money supply considerably.

8. Limitations of Monetary Instruments:

An important limitation of monetary policy is related to the inherent limitations in the

various instruments of credit control. There are limitations regarding frequent and sharp

changes in the bank rate, as these are supposed to conflict with the development

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objectives. Most bank rates are virtually fixed and mutually unrelated so that the scope
for adjustment is very limited.

The margin requirements have tended to be so high for most of time due to prolonged

inflation, that the scope for further increase in them is limited. The CRR and SLR have

also been fixed very high locking most of the funds in low yielding assets. These
limitations of monetary instruments hamper the smooth working of monetary policy.

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Q- Write short notes on the following:

a) Urbanization

b) Relationship between occupational structure and economic development

c) Income inequality in India

d) Centre-state financial relationships in India

e) Sustainable Development

f) Deficit financing

g) Reasons for low rates of capital formation in India

h) Privatization in India
i) Fiscal policy in India

Ans:

(a) Urbanization is the norm of the modern era. Read here to know the causes, effects,
and significance of it on the world.

Urbanization is the movement of people from rural to urban regions, expanding cities

and towns. It is the process through which cities grow as higher percentages of the
population come to live in the city.

Urbanization involves a complex set of economic, demographic, social, cultural,

technological, and environmental processes that increase the proportion of the

population of a territory that lives in towns and cities.

Urbanization is often discussed in countries that are currently in the process of

industrializing and urbanizing, but all industrialized nations have experienced

urbanization at some point in their history. Moreover, urbanization is on the rise all over
the globe.

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Following leads to urbanization:

Industrialization: Industrialization has improved job prospects by allowing individuals

to work in contemporary sectors in occupations that contribute to economic progress.

Because of better job possibilities, more individuals have been drawn to relocate from
rural to urban regions since the industrial revolution.

Commerce: Commercialization and commerce are associated with the belief that towns
and cities provide better business possibilities and returns than rural regions.

Facilities: There are several social advantages to living in a city or town. Better

educational facilities, higher living standards, improved sanitation and housing,

improved health care, improved recreation facilities, and improved social life are only a
few examples.

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(b) Colin Clark in his book “Conditions of Economic Progress” is of the view that there is

a close relationship between economic development and occupational structure of a

country. According to him, a higher per capita income is always associated with a higher
proportion of the working population employed in tertiary industries while a low per

capita income is always associated with a low proportion of working force employed in
tertiary sector.

Otherwise speaking if the per capita real income of a country is low, the proportion of

working population engaged in agriculture is high. For instance in the U.S.A. the per

capita income was 2500 dollar in 1960. While 7% population was engaged in agriculture,
36% in industry and 57% in service sector.

According to the World Development Report 2002, while the per capita income of the

U.S.A increased to 36240 dollar, the percentage of work force engaged in agriculture
declined to 2 percent. In the same year 26% and 72% of the work force were engaged in

industrial and service sector respectively. In other developed countries like the U.K.,

Germany, and Japan etc. We find the same relationship, between the occupational
structure and economic development.

In less developed countries like India, more or less same trend is observed. For instance

the per capita income of India was 60 dollar in 1960 and out of total work force 74% was
engaged in agriculture 11% in industry and 15% in service sector.

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In 2000, the per capita income rise to 460 dollar and people employed in agriculture

decreased to 61 percent. The following table shows comparative picture regarding

structural change and change in the occupational pattern of some selected countries.

The above table shows the structural changes including change in occupational
structure of both the developed and the under developed countries.

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(c) Income inequality is at an all-time high and is growing unabated. Rising inequality
and unemployment are creating ruptures in the fragile fabric of our society.

In the global level where 82% of the wealth generated last year worldwide went to the

1%, while 3.7 billion people that account for the poorest half of the population saw no

increase in their wealth, the survey said. Also, Billionaire wealth has risen by an average
of 13% a year since 2010 – six times faster than the wages of ordinary workers, which
have increased by a yearly average of just 2%.

India’s richest 1% acquired 73% of the total wealth created in the country in 2017, as per
a new survey by international rights group Oxfam.

Reasons for Income Inequality

 There a many reasons for the rise in income equality in India some of them are as

follows:

 The rise of a rentier class that seeks to maximize its leverage in fixed assets such as
lands and property to extract as much as income as possible

 With a 2019 study by the Reserve Bank confirming that housing affordability has

significantly deteriorated over the last four years, it is unsurprising how millennial

now choose to rent rather than bear the increasingly unaffordable burden of high

EMIs.
 Unemployment is also a major reason for the low productivity of labour which can

push many into poverty. It is a fact that inequality, poverty and unemployment are

related to each other. The lack of sufficient employment not being created in time is

the reason why there is an income gap today between classes.

 During inflation, less profit is made and wage earners are the ones who bear the

losses. While profits are on the rise, the wages have remained more or less the same.

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Also, while money income rises, real income falls, leading to a decrease in the overall

standard of living.

 High tax rates are re-sponsible for inequality in the distribution of in-come and
wealth. This is due to undue concentra-tion of incomes in a few hands caused by
large- scale tax evasion.

Consequences of Income Inequality

 This goes against constitutional ideas of equality of status and opportunity and

the equitable distribution of wealth.

 Regional imbalances will pose a serious threat to cooperative federalism.

 The government must promote inclusive growth by promoting measures like

land reform, social security pensions, scholarships and skill training for vulnerable

communities.
 It must also explore introducing inheritance tax for the super-rich.

 Private sector investment is also a necessity and that has to be encouraged by

improving the business environment, discouraging tax-terrorism, and promoting

pro-enterprise policies.
 According to Oxfam erosion of workers’ rights; excessive influence of big
business over government policymaking and the relentless corporate drive to

minimize costs to maximize returns to shareholders are major causes of income

inequality.

Way Forward

 Government has to ensure that its policies address these causes and ensure the
creation of a free and fair market.

 Quality of public services like health and education is also a great leveler and the

government must also focus in this regard.

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 The Central government and NITI Aayog should evolve policies to correct

inequalities between states and bring out cooperative federalism in its true form.

 A comprehensive plan to promote inclusive growth is the only solution to

address the income inequality problem in India.

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(d) Generally, in a typical federation along with the distribution of legislative and

administrative powers, the financial resources of the country are also so distributed to

ensure the financial independence of the units. However, the Indian Constitution does
not make a clear cut distribution of the financial resources and leaves much to be

decided by the Central Government from time to time. The financial resources which

have been placed at the disposal of the state are so meager that they have to look up to

the Union Government for subsidies and contributions. This article throws light on the
distribution of financial resources in India.

Taxes Exclusively Assigned to the Union

Income from certain subjects like customs and export duties, income tax, excise duty on

tobacco, jute,’ cotton, etc., corporation tax, taxes on the capital value of assets of

individuals and companies; Estate duty and succession duty in respect of the property
and other than agricultural land; and income from the earning departments like the

railways and postal departments have been exclusively assigned to the Union
Government by the Constitution.

Taxes Exclusively Assigned to States

Income from land revenue, stamp duty except on documents included in the Union List;

succession duty and Estate duty in respect of agricultural land; income tax on
agricultural lands; taxes on goods and passengers carried by road or inland water; taxes

on vehicles used on roads, animals, boats, taxes on the consumption or sale of

electricity, tolls, taxes on lands and buildings; taxes on professions, traders, calling and

employment; duties on alcoholic liquors for human consumption, opium, Indian hemp,
and other narcotic drugs, taxes on the entry of goods into local areas, taxes on luxuries,

entertainments, amusements, betting and gambling, etc. has been assigned to the
States.

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Taxes Levied by Union but Collected and Appropriated by the State:

The taxes on the following items are levied by the Union Government but the actual
revenue from them is collected and appropriated by the States;

(i) Stamp duties on bills of exchange, cheques, promissory notes, bills of landing, letters
of credit, policies of insurance, transfer of shares, etc.;

(ii) Excise duties on medicinal toilet preparation containing alcohol or opium or Indian
hemp or other narcotic drugs.

Taxes Levied and Collected by the Union but assigned to States:

The taxes in this category are levied and collected by the Union Government although

they are subsequently handed over to the states wherefrom they have been collected.

Such taxes included duties in respect of succession to property other than agricultural

land; state duty in respect of property other than agricultural land terminal taxes on
goods or passengers carried by railways, sea or air, taxes on railway freights and fares;

taxes other than stamp duties on transactions in stock exchanges and futures markets;

taxes on the sale or purchase of newspapers and advertisements published therein;

taxes on purchase or sale of goods other than newspapers where such sale or purchases
take place in the course of interstate trade or commerce.

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(e) "Sustainable development is development that meets the needs of the present,
without compromising the ability of future generations to meet their own needs."

The concept of sustainable development can be interpreted in many different ways, but

at its core is an approach to development that looks to balance different, and often

competing, needs against an awareness of the environmental, social and economic

limitations we face as a society.

All too often, development is driven by one particular need, without fully considering

the wider or future impacts. We are already seeing the damage this kind of approach
can cause, from large-scale financial crises caused by irresponsible banking, to changes

in global climate resulting from our dependence on fossil fuel-based energy sources.

The longer we pursue unsustainable development, the more frequent and severe its
consequences are likely to become, which is why we need to take action now.

But the focus of sustainable development is far broader than just the environment. It's

also about ensuring a strong, healthy and just society. This means meeting the diverse

needs of all people in existing and future communities, promoting personal wellbeing,
social cohesion and inclusion, and creating equal opportunity.

Sustainable development is about finding better ways of doing things, both for the

future and the present. We might need to change the way we work and live now, but
this doesn't mean our quality of life will be reduced.

A sustainable development approach can bring many benefits in the short to medium
term, for example:

Savings - As a result of SDC scrutiny, government has saved over £60m by improving
efficiency across its estate.

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Health & Transport - Instead of driving, switches to walking or cycling for short

journeys will save you money, improve your health and is often just as quick and
convenient.

The way we approach development affects everyone. The impacts of our decisions as a

society have very real consequences for people's lives. Poor planning of communities,
for example, reduces the quality of life for the people who live in them. (Relying on
imports rather than growing food locally puts the UK at risk of food shortages).

Sustainable development provides an approach to making better decisions on the issues

that affect all of our lives. By incorporating health plans into the planning of new

communities, for instance, we can ensure that residents have easy access to healthcare

and leisure facilities. (By encouraging more sustainable food supply chains, we can
ensure the UK has enough food for the long-term future).

We all have a part to play. Small actions, taken collectively, can add up to real change.

However, to achieve sustainability in the UK, we believe the Government needs to take

the lead. The SDC's job is to help make this happen, and we do it through a mixture of
scrutiny, advice and building organisational capacity for sustainable development.

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(f) When the revenue of the government is shorter than its expenditure then this

situation is dealt by printing more currency, buying from public and foreign institution.
This temporary arrangement of the money is known as the deficit financing.

Meaning of Deficit Financing:

Former Planning Commission of India has defined deficit financing as; "The direct

addition to gross national expenditure through budget deficits, whether the deficits are
on capital or on revenue account.”

So whenever the expenditure of the government exceeds its revenue then government

envisage the process of deficit financing. So the temporary arrangement of the funds
through various methods is known as deficit financing.

Sources of Deficit Financing:

The deficit financing is done in three ways;

1. Printing new currency notes

2. Borrowing from internal sources (RBI, General Public, Ad-hoc Treasury Bills &
government bonds etc.)

3. Borrowing from External Sources (like borrowing from developed countries and
International institutions like World Bank, IMF, etc).

Deficit Financing in India

In India, when the total income of the government (revenue account + capital account)
falls below its total expenditure, then;

1. Government withdraws money from its cash deposited in the Reserve Bank or

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2. Borrows loan from the central bank and commercial banks and even state
governments through Ad-hoc Treasury Bills.

3. Borrows from the general public in the form of Bonds and other securities or

4. Orders the RBI to print new currency notes.

Purposes of Deficit Financing:

1. To overcome the problem of lack of funds for speeding up the country's

development.

2. Promote additional investment in the country to side away the adverse impacts of
depression period of the country.

3. To arrange fund for ensuring the holistic development of the country.

4. To arrange fund for the unforeseen events and arrange resources for wartime
expenditure.

5. To upgrade the infrastructure of the country so that the taxpayers of the country are
convinced that the tax paid by them is spent on the right things.

Impacts of the Deficit financing on the country:

1. Increase in inflation due to the increase in the supply of money in the economy.

2. Decrease in average consumption level due to higher inflation.

3. Increase in income disparities, because rich get more opportunities due to higher
supply of money in the economy.

4. Adverse Impact on saving: - Deficit financing leads to inflation and inflation affects
the habit of voluntary saving adversely.

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In fact it is not possible for the people to maintain the previous rate of saving due to
rising prices.

5. Adverse Impact on Investment: - Deficit financing effects investment adversely.

When there is inflation in the economy trade unions/employees demand higher wages
to survive.

If their demands are accepted it increases the cost of production which de-motivates
the investors.

Famous economist Keynes was the strong supporter of the deficit financing in the

developing countries so that these countries can be pulled out from the vicious circle of
poverty, unemployment and under production.

In essence it can be said that the deficit in the country is not as bad as it looks like.

Perhaps this is the reason that the deficit finance system is used in every rich country of
the world.

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(g) The lack of real capital is so characteristic a feature of all under-developed

economies that they are often called “capital-poor economies”.

Low productivity, in under-developed countries, is mainly due to the small amount of

capital per head of population.

Not only is the existing stock of capital very small, but the current rate of capital

formation is also very low. In most under-developed countries, investment is only 5% to

8% of the national income, whereas in the United States, Western European countries

and in Japan, it generally varies from 15% to 20% of the national income and even
higher.

The low rate of capital formation in under-developed countries is due to the following
reasons:

(a) Low Level of Domestic Savings:

In under-developed countries, the level of savings is very low. In other words, these

countries save a very small proportion of their current national income. In most of the

underdeveloped countries the rate of savings is between 5% and 10% in India, the level

of domestic savings has in- Teased to about 20% of the national income in recent years,
only because of the sti-mulus provided by the planned development under the Five-
Year Plans.

The level of savings in underdeveloped countries is very small mainly because their level
of national income or per capital income is very low. As a result much of the income is

consumed and little is left for investment purposes. Under-developed countries are, in

fact, caught up in the vicious circle of poverty Low income—small savings—low

investment—less capital—less productivity, ending in low income.

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Apart from the low level of absolute income, the low relative level of real income in

under-developed countries as compared with the advanced and rich countries also

reduces their capacity to save. There are great and growing inequalities between the
income levels and, therefore, living standards of different countries. Increasing

awareness of these inequalities have pushed tip the general propensity to consume of
the under-developed countries.

This has reduced their capacity to save. This tendency of the people of under-developed

countries to copy the higher levels of consumption prevailing in the advanced countries
has been called “international demonstration effect”.

Generally, there exist glaring inequalities in the distribution of income in an under-

developed country. This should have resulted in a greater volume of savings available

for capital formation. But the people, who get large incomes, generally use much of
their income for conspicuous consumption, investment in land and real estate,

speculative transactions, inventory accumulation and hoarding of gold and jewellery

rather than using it for productive investment.

(b) Lack of Entrepreneurship:

Another factor responsible for the low rate of investment in under-developed countries

is the lack of good entrepreneurs who can invest the savings and carry out innovations.
Schumpeter, an economist of repute, attached great importance to the role of good and
daring entrepreneurs in the process of economic development.

The entrepreneurs in under-developed countries are interested in quick returns and are

not daring enough to bear large risks involved in making capital goods. If then

investment is to be stepped up in under-developed countries, the government must

assume an active entrepren-eurial role.

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(c) Weak Inducement to Invest:

Another reason why investment and capital formation are low has been advanced by

Nurkse. He argues that just as division of labour is limited by the size of the market,

similarly inducement to invest is also limited by the size of the market. The size of the

market in under-developed countries is very small due to the low incomes of the
people. The incomes of the people are meager because there is limited use of capital in
production process in underdeveloped countries.

The use of capital equipment in the’ production of goods and services for the domestic
market is discouraged by the small size of the market. Thus a vicious circle also operates

on the demand side of capital formation. “The inducement to invest may be low

because of the small buying power of the people, which is due to their small real

income, which, again is due to low productivity. The low level of productivity, however, is
a result of the small amount of capital used in production, which in its turn may be
caused at least partly by the small inducement to invest.”

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(h) Post-independence India had adopted a very conservative economy that was

practically shut to the outside world. But as time went by, Indian leaders and economists

recognized the need to merge with the global economy. So in 1991, India went through
some very major economic reforms.

Privatization in India

In 1991 India made some major policy changes in their economic ideologies. There were
stagnation and slow growth in the economy.

To tackle these problems the, then Finance Minister Dr. Manmohan Singh introduced

some major economic reforms. Now, we call it the liberalization of the Indian Economy
and the LPG reforms.

Privatization has a very broad meaning in economics. Everything that ranges from the

introduction of private capital to selling government-owned assets to transitioning to a

private economy.

As the definition of privatization is so very diverse, the three main features of

privatization:

 Ownership Measures: The ownership of all public enterprises ultimately shifts to

private owners. The denationalization can be complete or partial.

 Organizational Measures: This is where we limit the control of the state in public

companies. Some methods include holding company structuring, leasing,

restructuring of the enterprises etc.

 Operational Measures: Public organizations and companies were running into huge
losses. So the efficiency of these companies was to be increased.

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Conceptualization of Privatization in India:

1] Delegation: Here via a contract or franchise or lease or grant etc. the government
keeps the ownership and the responsibility of an enterprise.

But the private company will handle the daily activities and deliver the product or
service. The state will remain an active participant in this process.

2] Divestment: The government will sell a majority stake of the enterprise to one or

more private companies. It may keep some ownership but will be a minority stakeholder
in the enterprise.

3] Displacement: The first step here will be deregulation. This will allow private players
to enter the market. And slowly and gradually the private company will displace the
public enterprise.

Here the private sector will compete with public companies and ultimately outperform
them, causing the public enterprise to be displaced.

4] Disinvestment: Directly selling a portion or whole of a public enterprise to private

parties.

Advantages of Privatization:

 Private companies always have a better incentive than public companies. The

managers and officials of a private company have skin in the game, i.e. their

income is related to the performance of the company. In public companies, such

an incentive is not present. So privatization usually leads to higher efficiency in

the company.

 In a public company, there is a lot of political interference. This may dissuade the

company from taking economically beneficial decisions. However, a private

company will not let political factors affect their performance.

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 In public companies, at times the government can only think about the upcoming

elections. So all their goals may be short-term in the process of trying to gain

favours of the voting public. But a private company does not have such
restrictions. They have long-term goals and ambitions and steer the company in

the right direction.

 Privatization will also increase competition in the market. Consequently, this has

proved to be very beneficial to consumers. Healthy competitiveness in an

economy will push efficiency and performances.

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(i) Fiscal policy in India is the guiding force that helps the government decide how

much money it should spend to support the economic activity, and how much revenue

it must earn from the system, to keep the wheels of the economy running smoothly. In
recent times, the importance of fiscal policy has been increasing to achieve economic

growth swiftly, both in India and across the world. Attaining rapid economic growth is

one of the key goals of fiscal policy formulated by the Government of India. Fiscal policy,
along with monetary policy, plays a crucial role in managing a country’s economy.

Through the fiscal policy, the government of a country controls the flow of tax revenues

and public expenditure to navigate the economy. If the government receives more
revenue than it spends, it runs a surplus, while if it spends more than the tax and non-

tax receipts, it runs a deficit. To meet additional expenditures, the government needs to

borrow domestically or from overseas. Alternatively, the government may also choose to
draw upon its foreign exchange reserves or print additional money.

For example, during an economic downturn, the government may decide to open up its

coffers to spend more on building projects, welfare schemes, providing business

incentives, etc. The aim is to help make more of productive money available to the
people, free up some cash with the people so that they can spend it elsewhere, and
encourage businesses to make investments. At the same time, the government may also
decide to tax businesses and people a little less, thereby earning lesser revenue itself.

Main objectives of Fiscal Policy in India:

Economic growth: Fiscal policy helps maintain the economy’s growth rate so that
certain economic goals can be achieved.

Price stability: It controls the price level of the country so that when the inflation is too
high, prices can be regulated.

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Full employment: It aims to achieve full employment, or near full employment, as a

tool to recover from low economic activity.

Importance of Fiscal Policy in India:

 In a country like India, fiscal policy plays a key role in elevating the rate of capital
formation both in the public and private sectors.

 Through taxation, the fiscal policy helps mobilise considerable amount of resources

for financing its numerous projects.

 Fiscal policy also helps in providing stimulus to elevate the savings rate.
 The fiscal policy gives adequate incentives to the private sector to expand its

activities.
 Fiscal policy aims to minimise the imbalance in the dispersal of income and wealth.

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