CBSE Class–12 Economics

Macro Economics
Chapter 2 – National Income Accounting
Revision Notes

Goods: In economics a goods is defined as any physical object, man made, that could command a price in
the market and these are the materials that satisfy human wants and provide utility

Consumption Goods: Those final goods which satisfy human wants directly.
E.g.: ice-cream and milk used by the households.

Capital Goods: Those final goods which help in production. These goods are used for generating
income. These goods are fixed assets of the producers. Ex- plant and machinery.

Final Goods are those goods which are used either for final consumption or for investment.

Intermediate Goods refers to those goods and services which are used as a raw material for further
production or for resale in the same year.

These goods do not fulfil needs of mankind directly.

Investment: Addition made to the physical stock of capital during a period of time is called investment. It
is also called capital formation.

Capital formation: - Change in the stock of capital is also called capital formation.

Depreciation: It means fall in value of fixed capital goods due to normal wear and tear and expected
obsolescence. It is also called consumption of fixed capital.

Gross Investment: Total addition made to physical stock of capital during a period of time. It includes
depreciation. OR Net Investment + Depreciation

Net Investment: Net addition made to the real stock of capital during a period of time. It excludes
depreciation.
Net Investment = Gross investment – Depreciation
Stocks: Variables whose magnitude is measured at a particular point of time are called stock variables. E.g.
National Wealth, Inventory etc.

Flows: Variables whose magnitude is measured over a period of time are called flow variable. E.g.
National income, change in stock etc.

Circular flow of income: It refers to continuous flow of goods and services and money income among
different sectors in the economy. It is circular in nature. It has neither any end and nor any beginning
point. It helps to know the functioning of the economy.

Leakage: It is the amount of money which is withdrawn from circular flow of income. For e.g. Taxes,
Savings and Import. It reduces aggregate demand and the level of income.
Injection: It is the amount of money which is added to the circular flow of income. For e.g. Govt. Exp.,
investment and exports. It increases the aggregate demand and the level of income.

Economic Territory: Economic (or domestic) Territory is the geographical territory administrated by a
Government within which persons, goods, and capital circulate freely.

Scope of Economic Territory:

(a) Political frontiers including territorial waters and airspace.

(b) Embassies, consulates, military bases etc. located abroad.
(c) Ships and aircraft operated by the residents between two or more countries.
(d) Fishing vessels, oil and natural gas rigs operated by residents in the international waters.

Normal Resident of a country: is a person or an institution who normally resides in a country and
whose Centre of economic interest lies in that country.

Exceptions: -

(a) Diplomats and officials of foreign embassy.

(b) Commercial travellers, tourist’s students etc.
(c) People working in international organizations like WHO, IMF, UNESCO etc. are treated as normal
residents of the country to which they belong.
The related aggregates of national income are:-
(i) Gross Domestic Product at Market price (GDP MP)
(ii) Gross Domestic Product at Factor Cost (GDPFC)
(iii) Net Domestic Product at Market Price (NDPMP)
(iv) Net Domestic Product at FC or (NDPFC)
(v) Net National Product at FC or National Income (NNP FC)
(vi) Gross National Product at FC (GNPFC)
(vii) Net National. Product at MP (NNPMP)
(viii) Gross National Product at MP (GNPMP)

(i) Gross Domestic Product at Market Price: It is the money value of all the final goods and services
produced within the domestic territory of a country during an accounting year.

GDPMP = Net domestic product at FC (NDPFC) + Depreciation + Net Indirect tax.

(ii) Gross Domestic Product at FC: It is the value of all final goods and services produced within domestic
territory of a country which does not include net indirect tax.

GDPFC = GDPMP – Indirect tax + Subsidy or GDPFC =

GDPMP – NIT

(iii) Net Domestic Product at Market Price: It is the money value of all final goods and services
produced within domestic territory of a country during an accounting year and does not include
depreciation.

NDPMP = GDPMP – Depreciation

(iv) Net Domestic Product at FC: It is the value of all final goods and services which does not include
depreciation charges and net indirect tax. Thus it is equal to the sum of all factor incomes (compensation
of employees, rent, interest, profit and mixed income of self-employed) generated in the domestic territory
of the country.

NDPFC = GDPMP – Depreciation – Indirect tax + Subsidy

(v) Net National Product at FC (National Income) : It is the sum total of factor incomes
(compensation of employees + rent + interest + profit) earned by normal residents of a country in
an accounting year

or

NNPFC = NDPFC + Factor income earned by normal residents from abroad - factor
payments made to abroad.

(vi) Gross National Product at FC: It is the sum total of factor incomes earned by normal
residents of a country along with depreciation, during an accounting year.

GNPFC = NNPFC + Depreciation OR

GNPFC = GDPFC + NFIA

(vii) Net National Product at MP: It is the sum total of factor incomes earned by the normal
residents of a country during an accounting year including net indirect taxes.

NNPMP = NNPFC + Indirect tax – Subsidy

(viii) Gross National Product at MP: It is the sum total of factor incomes earned by normal
residents of a country during an accounting year including depreciation and net indirect taxes.

GNPMP = NNPFC + Dep + NIT

Domestic Aggregates

Gross domestic Product at Market Price GDPMP is the market value of all the final goods and services
produced by all producing units located in the domestic territory of a country during an accounting year. It
includes the value of depreciation or consumption of fixed capital.

Net Domestic Product at Market Price ( NDPMP ):NDPMP =GDPMP -Depreciation (consumption of Fixed

capital). It is the market value of final goods and services produced within the domestic territory of the
country during a year exclusive of depreciation.

Domestic Income ( NDPFC ) : It is the factor income accruing to owners of factors of production for suppling
factor services with in domestic territory during an accounting year.

NATIONAL AGGREGATES

Gross National Product at Market Price ( GNPMP ) is the market value of all the final goods and services

produced by normal residents (in the domestic territory and abroad) of a country during an accounting year.
GDPMP + NFIA = GNPMP ( MNPFC )

National Income NNPFC It is the sum total of all factors incomes which are earned by normal

residents of a country in the form of wages. Rent, interest and profit during an accounting year.
NNPFC = NDPFC + NFIA = National Income

National Income at Current Prices: It is also called nominal National income. When goods and services
produced by normal residents within and outside of a country in a year valued at current year’s prices i.e.
current prices is called national income at current prices.

Y=QxP

Y = National income at current prices

Q = Quantity of goods and services produced during an accounting year

P = Prices of goods and services prevailing during the current accounting year

National Income at Constant Prices: It is also called as real national income. When goods and services
produced by normal residents within and outside of a country in a year valued at constant price i.e. base
year's price is called National Income at Constant Prices.

Y' = Q x P'

Y' = National income at constant prices

Q = Quantity of goods and services produced during an accounting year

P' = Prices of goods and services prevailing during the base year
Value of Output: Market value of all goods and services produced by an enterprise during an accounting
year.

Value added: It is the difference between value of output of a firm and value of inputs bought from
the other firms during a particular period of time.

Problem of Double Counting: Counting the value of a commodity more than once while estimating
national income is called double counting. It leads to overestimation of national income. So, it is called
problem of double counting.

Ways to solve the problem of double counting.

• By taking the value of only final goods.

• By value added method.

Private Income: Private income is estimated income of factor and transfer incomes from all sources to
private sector within and outside the country.

Personal Income: It refers to income received by house hold from all sources. It includes factor income
and transfer income.

Personal Disposable Income: It is that part of Personal income which is available to the households
for disposal as they like.

GDP and Welfare:

In general GDP and Welfare are directly related with each other. A higher GDP implies that more production
of goods and services. It means more availability of goods and services. But more goods and services may
not necessarily indicate that the people were better off during the year.
In other words, a higher GDP may not necessarily mean higher welfare of the people. There are two types of
GDP:

Real GDP: When the goods and services are produced by all producing units in the domestic territory of a
country during a/c. year and valued these at base year’s prices or constant price, it is called real GDP or GDP
at constant prices. It changes only by change in physical output not by change price level. It is called a true
indicator of economic development.

Nominal GDP: When the goods and services are produced by all producing units in the domestic territory
of a country during an a/c. year and valued these at current year’s prices or current prices, it is called
Nominal GDP or GDP at current prices. It is influenced by change in both physical output and price level.
It does not consider a true indicator of economic development.
Conversion of Nominal GDP into Real GDP
Nominal GDP
Real GDP = ×100
Price index
Price index plays the role of deflator deflating current price estimates into constant price estimates. In
this way it may be called GDP deflator.

Welfare mean material wellbeing of the people. It depends on many economic factors like national income,
consumption level quality of goods etc. and non-economic factor like environmental pollution, law and order
etc. the welfare which depends on economic factors is called economic welfare and the welfare which
depends on non-economic factor is called non-economic welfare. The sum total of economic and non-
economic welfare is called social welfare. Conclusion thus GDP and welfare directly related with each other
but this relation is incomplete because of the following reasons.

Limitation of per capita real GDP/GDP as an indicator of Economic welfare:

• Non-monetary exchange
• Externalities not taken into GDP but it affects welfare.
• Distribution of GDP.
• All product may not contribute equally to economic welfare.
• Contribution of some products may be negative.
• Inflation may give falls impression.
 CBSE Class–12 Economics
Macro Economics
Chapter 3 – Money and Banking
Revision Notes

Money: Money may be defined as anything which is generally acceptable as a medium of

exchange and at the same time acts as a measure, store of value and standard of deferred
payment.

Functions of Money:

1. Primary Functions
a. Medium of exchange
b. Common measure of value or unit of value

2. Secondary Functions
a. Standard of deferred payment
b. Store of value
c. Transfer of value

3. Contingent Functions
a. Basis of credit
b. Liquidity
c. Basis of price mechanism
d. Maximum profit to the producers
e. Maximum satisfaction to the consumers
f. Basis of distribution of income

Barter Exchange: It implies the direct exchange of goods for goods without the use
of money.
Difficulties involved in the Barter Exchange:

1. Lack of a common measure of value.

2. Lack of double coincidence of wants
3. Lacks of standard of deferred payments.
4. Lack of store of value.
5. Lack of divisibility.
6. Difficulty in exchange of services

Supply of Money: Total stock of money (currency notes, coins and demand deposit of
banks) in circulation are held by the public at a given point of time.
Supply of money does not include cash balance held by central and state govt. and stock of
money held by banking system of country as they are not in actual circulation of the country.
Measures of Money Supply = Currency held by Public + Net Demand Deposits held by
commercial banks
M1 = C + DD + OD
C = Currency and coins with the public
DD = Demand deposits of the public with the banks
OD = Other deposits

M2 = M1+ Post office savings deposits

M3 = M1+ Time deposits of commercial banks
M4= M3+ Total deposits with the post office saving organisation excluding the deposits
on NSC

Banks and Banking System:-

Commercial Banks: Commercial Banks are financial institution who accepts deposits
from the public and provide loans facilities for investment with the aim of earning profit.

Functions of Commercial Banks:-

1. Primary functions:-
(a) Accepting deposits
(b) Advancing loans
(c) Discounting bill of exchange.

2. Secondary functions:-
(i) Agency function
(a) Transfer of fund
(b) Collection of funds
(c) Purchase and sale of shares and securities on behalf of the customers
(d) Collection of dividend and interest
(e) Payment of bills and insurance premium on behalf of customers
(f) Acting as executor and trustee of will
(g) Acting as correspondent and representative of customer and provide letter of credit to
the customer.

(ii) General utility function

(a) Purchase and sell of foreign exchange.
(b) Issuance of traveller’s cheque.
(c) Safe custody of valuable goods in lockers.
(d) Underwriting of securities.

Central Banks: The central Bank is the apex institution of monetary and financial system of
a country. It makes monetary policy of the country in public interest. It manages, supervises
and facilitates the banking system of the country.

Functions of Central Banks

1. Bank of Issue
2. Banker to the Government
3. Banker’s Bank and Supervisor.
4. Controller of credit.
5. Lender of last resort
6. Custodian of foreign exchange reserves

MONEY CREATION OR CREDIT CREATION BY COMMERCIAL BANKS

CREDIT is defined as finance made available by one party to another party on a certain rate
of exchange.
The capacity of banks to create money or credit depends on (i) Amount of primary deposits
and (ii) Legal reserve ratio (LRR).
Legal Reserve Ratio (LRR):- is fixed by the central bank of a country and it is the
minimum ratio of deposit legally required to be kept as cash by banks.
Cash Reserve Ratio (CRR):- It is a part of LRR which is to be kept with the central bank.
Statutory Liquidity Ratio (SLR):- It is a part of LRR which is to be kept with the
bank themselves.
Commercial bank’s demand deposits are a part of money supply. Commercial banks lend
money to the borrowers by opening demand deposit account in their names. The borrowers
are free to use this money by writing cheques. According to definition demand deposits are a
part of money supply.
Therefore, by creating additional demand deposits bank create money. Money creation
depends upon two factor:
Primary deposits and Legal Reserve Ratio (LRR).
Deposit Multiplier = 1/LRR Total Deposit creation = Initial deposit X 1/LRR.

Repo rate: Repo rate is the rate at which the central bank of a country (Reserve Bank
of India in case of India) lends money to commercial banks in the event of any shortfall
of funds. Repo rate is used by monetary authorities to control inflation.
Description: In the event of inflation, central banks increase repo rate as this acts as a
disincentive for banks to borrow from the central bank. This ultimately reduces the money
supply in the economy and thus helps in arresting inflation.

Reverse repo rate: Reverse repo rate is the rate at which the central bank of a country
(Reserve Bank of India in case of India) borrows money from commercial banks within the
country. It is a monetary policy instrument which can be used to control the money supply in
the country.

Description: An increase in the reverse repo rate will decrease the money supply and vice-
versa, other things remaining constant. An increase in reverse repo rate means that
commercial banks will get more incentives to park their funds with the RBI, thereby
decreasing the supply of money in the market.

Fiat Money: - Fiat money is currency that a government has declared to be legal tender, but
it is not backed by a physical commodity. The value of fiat money is derived from the
relationship between supply and demand rather than the value of the material from which
the money is made.

Fiduciary Money: - Money that depends for its value on confidence that it is an accepted
medium of exchange. It originated as a paper certificate that was a promise to pay a certain
amount of gold or silver to the bearer. From the Latin fiducia meaning confidence or trust.

High Powered Money: - This is the monetary aggregate that the Federal Reserve has control
over through its monetary policy. Also called High Powered Money because the effect of
changes in monetary base on money supply is magnified by money multiplier.
 CBSE Class–12 Economics
Macro Economics
Chapter 4 – Income Determination
Revision Notes

Aggregate Demand refers to total value of all final goods and services that are planned to
buy by all the sectors of the economy at a given level of income during a period of time.
AD represents the total expenditure on goods and services in an economy during a period
of time.

Components of Aggregate demand are:

(i) Household consumption expenditure (C).

(ii) Investment expenditure (I).
(iii) Govt. consumption expenditure (G).
(iv) Net export (X – M).
Thus, AD = C + I + G + (X – M)
In two sector economy AD = C + I

Aggregate Supply is the money value of all final goods and services available for purchase
by an economy during a given period. It is the flow of goods and services in the economy.
Since, money value of final goods and services is equal to net value added, AS is nothing
but the national income.

AS = C + S
Aggregate supply represents the national income of the country.
AS = Y (National Income)

Consumption function shows functional relationship between consumption and Income.

C = f(Y)
Where C = Consumption
Y = Income
f= Functional relationship.
Equation of Consumption Function
C = C + MPC * Y
C = Consumption
C = Autonomous consumption.
MPC(b)= Marginal Propensity to consume
C does not changed/affected by change in income. It is minimum level of consumption,
even when income is zero. Consumption expenditure at zero level of income is called
autonomous consumption. It is income inelastic.
Induced consumption is the expenditure which is affected by change in income. It is indicated
by MPC × Y. Induced consumption is the portion of consumption that varies with
disposable income.

Average Propensity to consume: - It is a schedule that shows consumption expenditure at

different levels of income in an economy.

Consumption function (propensity to consume) is of two types:

(a) Average propensity to consume (APC)
(b) Marginal propensity to consume (MPC)

Average propensity to Consume (APC): It refers to the ratio between total consumption
(C) and total income (Y) at given level of income in the economy.
Consumption ( C) C
APC= =
Income ( Y ) Y

Important Points about APC

(i) APC is more than 1: as long as consumption is more than national income before
the break-even point, APC > 1.
(ii) APC = 1, at the break-even point, consumption is equal to national income.
(iii) APC is less than 1: beyond the break-even point. Consumption is less than
national income.
(iv) APC falls with increase in income.
(v) APC can never be zero: because even at zero level of national income,
there is autonomous consumption.

Marginal Propensity to Consume (MPC): Marginal propensity to consume refers to

the ratio of change in consumption expenditure to change in income.
Change in Consumption ΔC
MPC = =
Change in Income ΔY

Important Points about MPC

(1) Value of MPC varies between O and 1: If the entire additional income is consumed,
then ΔC = ΔY, making MPC = 1. However, if entire additional income is saved, than ΔC = 0,
making MPC = 0
(2) MPC is the slope of consumption curve and remain constant throughout in the short run.
(3) Value of APC > MPC

Saving function refers to the functional relationship between saving and national income.
S = f (y)

Equation of Saving function

S = −C + MPS.
where S = saving
Y = National Income
f = Functional relationship.

Saving function (Propensity to Save) is of two types.

(i) Average Propensity to Save (APS)

(ii) Marginal propensity to Save (MPS)

Average Propensity to Save (APS): Average propensity to save refers to the ratio of savings
to the corresponding level of income
Savings S
APS= =
Income Y
Important Point about APS

(1) APS can never be 1 or more than 1 :As saving can never be equal to or more
than income.
(2) APS can be zero: At break even point C = Y, hence S = 0
(3) APS can be negative: At income levels which are lower than the break-even point,
APS can be negative when consumption exceeds income.
(4) APS rises with increase in income.

Marginal Propensity to Save (MPS): Marginal propensity to save refers to the ratio
of change in savings to change in total income.
Change in Savings ΔS
MPS= =
Change in Income ΔY

MPS varies between 0 and 1

(i) MPS = 1 if the entire additional income is saved. In such a case, ΔS = ΔY, then MPS = 1
(ii) MPS = 0 If the entire additional income is consumed. In such a case, ΔS = 0, then
MPS = 0
(iii) Mps is the slope of saving curve.
(iv) MPS remains constant throughout in short run.

Relationship between APC and APS

The sum of APC and APS is equal to one. It can be proved as under we
know: APC + APS = 1
Y=C+S
Dividing both sides by Y, we get
Y C S
= +
Y Y Y
 C
 APC = Y 
1 = APC + APS  
 APS = S 
 Y 
APC + APS = 1
Because income is either used for consumption or for saving.
MPC + MPS = 1 because total increment in income is either used for consumption or
for saving.

Investment refers to the expenditure incurred on creation of new capital assets.

The investment expenditure is classified under two heads:

(i) Induced investment

(ii) Autonomous investment.

Induced Investment: Induced investment refers to the investment which depends on the
profit expectations and is directly influenced by income level (only for reference).

Autonomous Investment: Autonomous investment refers to the investment which is not

affected by changes in the Level of income and is not induced solely by profit motive. It
is income inelastic.

Ex-Ante Savings: Ex-ante saving refers to amount of savings which all the household
intended to save at different levels of income in the economy at the beginning of period. It is
also known as planned savings.

Ex-Ante Investment: Ex-ante investments refers to amount of investment which all the
firms plan to invest at different level of income in the economy at the beginning of the
period. It is also known as planned investment.

Ex-Post Saving: Ex-post savings refer to the actual or realised savings in an economy during
a financial year at end of the period.

Ex-Post Investment: Ex-post investment refers to the actual or realised investment in an

economy during a financial year at the end of the period.

Equilibrium level of income is determined only at the point where AD = AS or S = I, .i.e.

the flow of goods and services in the economy is equal to the demand for goods and services
But it cannot always be at full employment level also as it can be at less than full
employment.

Full employment is a situation when all those who are able and willing to work
at prevailing wage rate, get the opportunity to work.

Voluntary unemployment is a situation where person is able to work but not willing
to work at prevailing wage rate.

Involuntary unemployment is a situation where worker is able and willing to work at

prevailing wage rate but does not get work.

Under employment is a situation where all those who are able to work at existing wage
rates, are not getting jobs. It refers to that situation in the economy where AS = AD or S =
I, but without fuller utilisation of labour force.

Investment multiplier (K) is the ratio of change in income (ΔY) due to change in
investment ΔI.
Y 1 1
K= or K = or K =
I 1 − MPC MPS
Value of investment multiplier lies b/w 1 to infinitive.

Excess demand refers to a situation when aggregate demand exceeds aggregate supply
corresponding to full employment.

Inflationary gap is the gap by which actual aggregate demand exceeds the level of aggregate
demand required to establish full employment.
It measures the extent of excess demand.

Deficient Demand: When AD falls short of AS at full employment it is called

deficient demand. In other words, AD < AS at the level of full employment. It is
called deficient demand.

Deflationary gap is the gap by which actual aggregate demand is less than the level
of aggregate demand required to establish full employment.
It measures the extent of deficient demand.

Methods to control excess demand or deficient demand:

1. Fiscal Measures or Fiscal Policy

a. Change in Tax
b. Change in Public expenditure
c. Change in Public borrowing
d. Deficit financing (Printing new notes)

2. Monetary Measures or Monetary Policy

a. Quantitative measures
i. Bank rate
ii. Cash Reserve Ratio
iii. Statutory Liquidity Ratio
iv. Open Market operation

b. Qualitative/Selective measures
i. Marginal requirement
ii. Rationing of credit
iii. Direct Action
iv. Moral Suasion
 CBSE Class–12 Economics
Macro Economics
Chapter 5 – The Government: Functions & Scope
Revision Notes

Budget is a financial statement showing the expected receipt and expenditure of Govt. for the coming fiscal
or financial year.

Main objectives of budget are:

(i) Reallocation of resources.

(ii) Redistribution of income and wealth
(iii) Economic Stability
(iv) Management of public enterprises.
(v) Economic Growth
(vi) Generation of employment

There are two components of budget:

(a) Revenue budget

(b) Capital budget

Revenue Budget consists of revenue receipts of govt. and expenditure met from such revenue.

Capital budget consists of capital receipts and capital expenditure.

BUDGET RECEIPTS:

1. Revenue Receipts
• Tax
a. Direct Tax
i. Income tax
ii. Corporate Tax
iii. Wealth and Property Tax

b. Indirect Tax
i. Value added Tax
ii. Service Tax
iii. Excise Duty
iv. Custom Duty
v. Entertainment Tax

• Non-Tax
a. Commercial Revenue
b. Interest
c. Dividend, Profits
d. External Grants
e. Administrative Revenues
f. Fees
g. License Fee
h. Fines, Penalties
i. Cash grants-in-aid from foreign countries and international org.

2. Capital Receipts
A. Borrowing and Other liabilities
B. Recovery of Loans
C. Other receipts (Disinvestments)

Direct Tax: A direct tax is one whose burden cannot be shifted to others I.e. the impact and incidence of the
tax is on the same person.ex- income tax, wealth tax, gift tax.

Indirect Tax: An indirect tax is one whose burden can be shifted to others or the impact and incidence of an
indirect tax falls on different people. ex- excise duty, VAT, service tax.

Revenue Receipts:
(i) Neither creates liabilities for Govt.
(ii) Nor causes any reduction in assets.

Capital Receipts:
(i) It creates liabilities or
(ii) It reduces financial assets.
BUDGET EXPENDITURE:

1. Revenue Expenditure
(i) Neither creates assets
(ii) Nor reduces liabilities.
e.g., Interest Payment, subsidies etc.

Capital Expenditure:
(i) It creates assets
(ii) It reduces liabilities.
e.g., Construction of school building Repayment of loans etc.

Budget Deficit:- It refers to a situation when budget expenditure of a govt. are greater than the govt. receipts.
Budgetary Deficit: Total Expenditure > Total Receipts.
Revenue deficit: It is the excess of govt. revenue expenditure over revenue receipts.
Revenue Deficit: Total revenue expenditure > Total revenue receipts
Implications of Revenue Deficit are:

• A high revenue deficit shows fiscal indiscipline.

• It shows wasteful expenditures of Govt. on administration.
• It implies that government is dissaving, i.e. government is using up savings of other sectors of the
economy to finance its consumption expenditure.
• It reduces the assets of the govt. due to disinvestment.
• A high revenue deficit gives a warning signal to the government to either curtail its expenditure or
increase its revenue.

Fiscal Deficit: When total expenditure exceeds total receipts excluding borrowing.
Fiscal Deficit: Total expenditures > Total Receipts excluding borrowing.
Implications of Fiscal Deficits are:
(i) It leads to inflationary pressure.
(ii) A country has to face debt trap.
(iii) It reduces future growth and development.
(iv) It increases liability of the government.
(v) It increases foreign dependence.

Primary Deficit: By deducting Interest payment from fiscal deficit we get primary deficit.
Primary Deficit: Fiscal deficit – Interest payments.
Implications of Primary Deficits are:
It indicates, how much of the government borrowings are going to meet expenses other than the interest
payments.

Measures to correct different deficits:-

(i) Monetary expansion or deficit financing.
(ii) Borrowing from public.
(iii) Disinvestment
(iv) Borrowing from international monetary institution and other countries.
(v) Lowering govt. expenditure.
(vi) Increasing govt. revenue.
 CBSE Class–12 Economics
Macro Economics
Chapter 6 – Open Economy Macroeconomics
Revision Notes

The balance of payment is a comprehensive and systematic records of all economic

transaction between normal residents of a country and rest of the world during an
accounting year.

Accounts of Balance of Payments:

1. Current Account: The current account records export and import of goods and services
and unilateral transfers.

2. Capital Account: It records of all such transactions between normal residents of a country and
rest of the world which relates to sale and purchase of foreign assets and liabilities during an
accounting year.
Components of Current Account Components of Capital Account
1. Visible items (import and export of 1. Foreign Direct investment.
goods)
2. Invisible items (import and export 2. Loans
of services).
3. Unillateral transfers. 3. Portfolio investment.
4. Income receipts and payments from 4. Banking capital transactions.
and to abroad.
5. These are the transactions which do 5. These are the transactions which
not affect the assets or liabilities affect the assets or liabilities position
position of the country. of the country.
6. It is a flow concept. 6. It is a stock concept.

Balance of trade is the net difference of Import and export of all visible items between the
normal residents of a country and rest of the world.
Autonomous items are those items of balance of payment which is related to such transaction
as are determined by the motive of profit maximisation and not to maintain equilibrium in
balance of payments. These items are recorded as a first items before calculating deficit or
surplus in balance of payment a/c.
These items are generally called ‘Above the Line items’ in balance of payment.
Accommodating item refers to transactions that take place because of other activity in
Balance of Payment. These transactions are meant to restore the Balance of Payment identity.
These items are generally called ‘Below the Line items’.

Deficit of Bop Account: When total inflows of foreign exchange on account of autonomous
transactions are less than total outflows on account such transaction then there is a deficit in Bop.
Foreign exchange rate refers to the rate at which one unit of currency of a country can be
exchanged for the number of units of currency of another country. In simple words, we can say that
the price of one currency in terms of other currency is known as foreign exchange rate or exchange
rate.

SYSTEM OF EXCHANGE RATE:

1. Fixed exchange rate

2. Flexible exchange rate.
In fixed exchange rate system, the rate of exchange is officially fixed or determined by
Government or Monetary Authority of the country.

Merits of Fixed Exchange Rate

(i) Stability in exchange rate

(ii) Promotes capital movement and international trade.
(iii) No scope for speculation
(iv) It forces the govt. to keep inflation in check.
(v) Attracts foreign capital.

Demerits of Fixed Exchange Rate

(i) Need to hold foreign exchange reserves.

(ii) No automatic adjustment in the ‘Balance of payments.’
(iii) It may result in undervaluation or overvaluation of currency.
(iv) It discourages the objective of having free markets.
In a system of flexible exchange rate (also known as floating exchange rates), the exchange rate is
determined by the forces of market demand and supply of foreign exchange.
The demand of foreign exchange have the inverse relation with flexible exchange rate. If flexible
exchange rate rise the demand of foreign exchange falls. Vice versa.
Sources of Demand for Foreign Exchange
(a) To purchase goods and services from the rest of world.
(b) To purchase financial assets (i.e.., to invest in bonds and equity shares) in a foreign
country.
(c) To invest directly in shops, factories, buildings in foreign countries.
(d) To send gifts and grants to abroad.
(e) To speculate on the value of foreign currency.
(f) To undertake foreign tours.
The supply of foreign exchange have the positive relation with foreign exchange rate. If foreign
exchange rate rises the supply of foreign exchange also rises and vice versa.
Sources of Supply of Foreign Exchange
(i) Direct purchase by foreigners in domestic market.
(ii) Direct investment by foreigners in domestic market.
(iii) Remittances by non-residents living abroad.
(iv) Flow of foreign exchange due to speculative purchases by N.R.I.
(v) Exports of goods and services.
(vi) Foreign direct investment as well as portfolio investment from rest of the world.

Merits of Flexible Exchange Rate

(i) No need to hold foreign exchange reserves

(ii) Leads to automatic adjustment in the ‘balances of payments’.
(iii) To enhances efficiency in resources allocation.
(iv) To remove obstacles in the transfer of capital and trade.
(v) It eliminates the problem of undervaluation or overvaluation of currency.
(vi) It promotes venture capital in the form of foreign exchange.

Demerits of Flexible Exchange Rate

(i) Fluctuations in future exchange rate.

(ii) Encourages speculation.
(iii) Discourages international trade and investment.
(iv) It creates a situation of market instability.

Determination of Equilibrium Foreign Exchange Rate: Equilibrium FER is the rate at which
demand for and supply of foreign exchange is equal. Under free market situation, it is determined by
market forces i.e., demand for and supply of foreign exchange. There is inverse relation between
demand for foreign exchange and exchange rate. There is direct relationship b/w supply of foreign
exchange and exchange rate. Due to above reasons demand curve downward sloping and supply
curve is upward sloping curve graphically intersection of demand Curve and supply curve
determines the equilibrium foreign exchange rate.

Devaluation of a currency: When government or monetary authority of a country officially lowers

the external value of its domestic currency (in respect of all other foreign currency) is called
devaluation of a currency. It takes place by government order under fixed exchange rate system.

Revaluation of a currency: When government or monetary authority of a country officially raises

the external value of its domestic currency is called revaluation. It takes place by government order
under fixed exchange rates system.

In currency depreciation there is a fall in the value of domestic currency, in term of foreign
currency due to change in demand and supply of the currency under flexible exchange rate system.

In currency appreciation, there is a rise in the value of domestic currency in terms of

foreign currency due to change in demand and supply of the currency under flexible
exchange rate system.

Managed floating system is a system in which the central bank allows the exchange rate to be
determined by market forces but intervenes at times to influence the rate. When central bank finds
the rate is too high, it starts selling foreign exchange from its reserve to bring down it. When it finds
the rate is too low. It starts buying to raise the rate.
 CHAPTER 1

INDIAN ECONOMY ON THE EVE OF INDEPENDENCE

 The British rule in India lasted for almost two centuries till 15 August 1947 when India got
its independence.
 The focus of the economic policies pursued by the colonial government in India was to
make our country a mere supplier of Britain’s own flourishing industrial base.

 Low Level of Economic Development under Colonial Rule

 Indian economy grew at even less than two percent per annum during 1900-50.
 The per capita output grew by 0.5% during 1900-1950.
 The reasons for India’s low economic growth rate were:

1. Low Agricultural Performance and Productivity due to Zamindari system.

2. The Pursuance of Discriminatory Tariff Policy.
3. Using agriculture merely as a cheap source of raw materials without any
investments and infrastructures such as irrigation facilities.
4. Forced Commercialisation of Indian agriculture- forced cultivation of cash
crops such as, indigo, jute, etc.
5. High dependence on the vagaries of monsoon along with frequent famines
hampered agricultural growth prospects.
6. Bleak industrial growth due to lack of investments and initiatives.
7. Ruin of handicrafts and cottage industries due to stiff competition from
mechanised British products.
8. Restricted foreign trade policy between India and Britain, narrowed the
scope for Indian exports to other countries.
9. Drain of India’s wealth to Britain trapped India under the vicious circle of
poverty and inequalities.

 Estimates of India’s Per Capita Income During Colonial Rule

Notable economists who estimated India’s per capita income are Dadabhai Naroji, William
Digbay, Findlay Shirras, V.K.R.V Rao (considered to be the most significant research) and
R.C. Desai.

 Agriculture Sector on the Eve of Independence

 About 85% of the population relied on the agricultural sector for their livelihood
directly or indirectly.
 The growth of agricultural sector was meagre and remained stagnant during the
colonial period.
 The two main reasons responsible for the backwardness of agricultural sector were
Land Settlement System and forceful commercialisation.
 The three main Land Settlement Systems prevailed during the colonial rule were
Zamindari system, Mahalwari system, Ryotwari system.
 Zamindari System: Under this system, the zamindars (owners of land) used to
collect high taxes (lagaan) from the peasants (landless labourers) to pay to the
British government.
 As the zamindars were mainly interested in extracting high revenues from the
peasants, so they never took any steps to improve the land productivity,
consequently, agricultural sector remained backward.
  Commercialisation of Indian Agriculture: In order to feed British industries with
cheap raw materials, the Indian peasants were forced to grow cash crops (such as,
indigo, cotton, etc.) instead of food crops (such as, rice and wheat).
 This not only increased the burden of high revenues on the poor peasants but also
made India vulnerable to face famines (due to shortage of food grains).

 Industrial Sector on the eve of independence

 The two-fold motive of British rule behind the systematic de-industrialisation of
India are:
1. to make India a mere supplier of cheap raw materials to feed British growing
industrial base.
2. to develop India as a virgin market for Britain’s finished products

 The traditional handicrafts industries were ruined under the British rule due to:
 Discriminatory Tariff Policy that imposed heavy tariffs on India’s export of
handicraft products, while allowing free export of India’s raw materials to
Britain and free import of British products into India.
 The stiff competition from machine-made products that were comparatively
cheaper narrowed the domestic demand for Indian handicraft products.
 Emergence of new class (consisting mainly of zamindars) in India
encouraged the demand for the British products at the cost of domestic
products.
 The disapperearance of Princely States (who used to protect and patronise
Indian handicrafts) deteriorated the importance of the Indian handicrafts.
 The lack of investment, initiatives and the unfavourable tariff structure
constrained industrial sector.

 Foreign Trade under British Rule

 British owned monopoly over India’s foreign trade by pursuing a discriminatory
tariff policy.
 The tariff policy made Indian exports costlier and its international demand fell
drastically.
 The export and import transactions were restricted only to India and Britain.
 India’s export basket during the colonial rule comprised mainly primary products like
sugar, jute, silk, etc. and the imports comprised finished consumer goods like cotton,
woollen clothes, etc, from Britain.
 The opening up of Suez Canal further intensified the monopoly of the British over
India’s foreign trade.
 The surplus generated from the foreign trade was used in administrative and war
purposes by Britain to spread their colonial power leading to the drain of Indian
wealth to Britain.

 Demographic Condition
 The first census was collected in the year 1881 that revealed the unevenness in
India’s population growth.
 Till 1921, India witnessed a stagnant growth rate
 India was in the first phase of demographic transition till 1921 featured by high birth
rate and high death rate.

2
  The overall mortality rate was very high, and the infant mortality rate was quite
alarming i.e. 2 per thousand in comparison to 63 per thousand.
 The Life Expectancy Rate was as low as 32 years.

 Occupational Structure
 The occupational structure refers to the distribution of population engaged in
different occupations such as, agriculture, industries and service sector.
 The occupational structure throughout the British rule showed almost no variations.
 Agriculture (the main occupation) engaged 70-75%.
 Manufacturing sector engaged 10%.
 Tertiary sector engaged 15-20% of India’s workforce.
 States such as, Tamil Nadu, Andhra Pradesh, Bombay experienced fall in the work
force engaged in the agricultural sector.
 States such as, Orissa, Rajasthan and Punjab experienced an increase in agricultural
workforce.

 Infrastructure
 The bonafide motive of the infrastructure development by the British in India was
limited to serve their own colonial and administrative interests.
 The sectors such as, transport and communication experienced infrastructural
development.
 Roads and Railways were developed to facilitate transportation of raw materials and
intensify the British colonial welfare.
 Ports were developed to make the export to Britain and import from Britain possible.
 Post and telegraphs were developed to enhance the efficiency and effectiveness of
the British administration.

 Positive contributions made by British

 The introduction of railways opened up the cultural and geographical barriers and
facilitated the commercialization of Indian agriculture.
 The introduction of commercialisation of Indian agriculture transformed the nature
of India’s agriculture from subsistence to market-oriented.
 The introduction of free trade to India was on the same track as that of the
globalisation concept prevailing today.
 British developed infrastructure such as, telegram, postal services and canals like,
The Ganges Canal.
 The colonial rule promoted western culture in India. The promotion of English as a
language promoted advance westernised form of education.
 The way and the technique of British administration acts as a role model for the
Indian politicians and planners to govern the country in a efficient and effective
manner.
 Various social reforms such as, The Hindu Widows’ Remarriage Act of 1856, etc. led
to the foundation to break the shackles of traditional and primitive society.

3
 CHAPTER 2

INDIAN ECONOMY 1950-1990

 India opted for socialism being inspired from the extraordinary success results of planning of
Soviet Unions.
 Capitalist Economy is an economic system in which the means of production are privately owned
for profit motive, for example, Britain during the Industrial Revolution. The economic decisions
are governed by the market forces- demand and supply. It is also known as market economy.
 Socialist Economy is an economic system in which the means of production are owned by the
government, for example, USSR. The main motive for carrying out economic activities is to
enhance welfare and service motive.
 Mixed Economy is an economic system in which the ownership of means of production is held
both by the government as well as by the private individuals, for example, India is a mixed
economy.
 An economic plan is a proposed list of goals that an economy wants to achieve within a specific
record of time. It suggests the optimum ways to utilise the scarce available resources to achieve
the enlisted goals.
 In India, planning is done for a period of five years; therefore, it is called Five Year Plans.
 The Planning Commission was set up in the year 1950 to conduct Five Year Plans with the Prime
Minister as its chairman.

 General Goals of Five Year Plans

 Economic Growth refers to the increase in the country’s GDP over a period of time.
 Modernisation is defined as greater acceptability and adoption of modern techniques and
technology in order to increase the overall productivity and total volume of production of
goods and services.
 Achieving the Status of Self Reliance- It implies promoting economic growth by using a
country’s own resources. This reduces the economic dependence on the foreign countries
and the country becomes self-reliable and self-sufficient.
 Equity refers to equitable distribution of GDP so that the benefits due to higher economic
growth are shared by all the sections of population. Equity implies egalitarian society with
social justice.

 Need for Land Reforms

 At the time of independence, Indian agricultural sector was featured with a very low
productivity.
 This was due to the prevalence of Land Settlement System namely, Zamindari system that
exerted excessive pressure on the cultivators in the form of high taxes.
 Moreover, the land holdings were small in size and scattered. This obstructed the use of
modern farm techniques.
 There were acute inequalities in land holdings.
 Agriculture was basically of subsistence nature, i.e. primarily for self consumption and to
earn livelihood.

 Land ceiling means legislated fixed (maximum) amount of land that an individual may hold. The
two motives behind land ceilings were:
 to promote equality of ownership of land holdings
 to mitigate the concentration of land holdings in fewer hands.
 Due to introduction of use of HYV seeds, modern techniques and inputs such as, fertilisers,
irrigation facilities, and subsidised credit by the government, the production of food grains
increased nearly by 25% in the year 1967-68 . This substantial increase of food grains is known as
‘Green Revolution’.

 Marketable surplus refers to the difference between the total output produced by the farmer and
his own-farm consumption. That is, the amount of the farm production that can be offered for sale
in the market.

Marketable surplus = Total farm output produced by farmer – Own consumption of farm
output

 Subsidy means availing some important inputs to farmers at a concessional rate that is much
lower than its actual market rate.

 Arguments in favour of Subsidy

 Very important for marginal and landless farmers
 Convinces farmers to adopt modern techniques
 Helps in reducing rural inequalities
 Facilitates farmers to undertake risks

 Arguments against Subsidy

 Can be enjoyed by the potential farmers, thereby resulting in misallocation of resources
 Manipulates the market price, for example, electricity is supplied at concessional rate to
farmers that may lead to wastage of scarce resources.
 Should be provided initially, but should be stopped at a later stage after assessing the
performance.
 Favours fertiliser industries, which need not to worry about their market share, and so, no
attempts are taken to improve the quality of fertilisers.

 Industrial Policy Resolution 1956 was a declaration of the government that was initiated with the
purpose of rapid industrialisation to achieve high economic growth with social justice. The
resolution formed the basis of second five year plan and a foundation stone to develop the socialist
pattern of the society.
The principal elements of IPR 1956 are:

 Industries were classified into three categories:

Category 1: industries established and developed exclusively owned by the state.

Category 2: industries established both by private sector and public sector.
Category 3: remaining industries were left to the private sector.

 Industries in the private sector could be established only after obtaining license from the
government.

 Government offered various types of industrial concessions for establishing industries in

the backward areas in order to promote industrialisation and to eradicate regional disparity.

2
 Small Scale Industries (SSIs) are the small industrial units that can have investment up to five
lakh rupees. The features of SSIs are:
 These serve as means to promote rural development and to reduce regional disparity- as
recommended by Karve Committee.
 As SSIs employ labour intensive techniques, so they can generate newer employment
opportunities.
 SSIs cannot compete with large firms; so they require protection by the government.
 SSIs are given concessions in the form of lower excise duties and easy and cheaper loans.

 Trade Policy: Import Substitution Industrialisation

 It refers to an inward looking trade strategy that aimed at substituting imports with the
goods that can be produced domestically.
 Importance of Import Substitution Industrialisation
 Insulated domestic industries from facing stiff competition from the foreign industries.
 Provided domestic industries a protected environment to grow.
 Helped to conserve scarce foreign exchange.
 Provided enough scope to initiate industrialisation process in India.
 Facilitated India to attain self-sufficiency and self-reliance, thereby reducing foreign
dependence.

 Tariffs refer to the taxes imposed on the imported goods. Imposition of tariffs make imports
relatively expensive than the domestic goods, thereby discouraging imports indirectly. Therefore,
they help in reducing excessive burden on the scarce foreign exchange reserves.

 Quantitative Restrictions (QRs) refer to the restrictions in the form of limits or quotas on the
amount of commodities that can either be imported or exported. QRs usually on imports (refers to
non-tariff measures) that are imposed to discourage imports of foreign goods and to reduce
Balance of Payment (BOP) deficits.

 Quotas are defined as the maximum quantity of goods that can be imported or exported by the
domestic producers.

 Achievements of Goals of Planning

 There has been increase in the national income by 4.1 % per annum during the period of
planning.
 Per capita income has risen at the rate of 2 % per annum after the initiation of planning process.
 The rate of capital formation (that depends on the rate of saving and investment) has
significantly increased.
 The initiation of land reforms and substantial technological improvement are the two significant
achievements of planning in the agricultural sector.

 Failures of planning
 Significant Poverty- Despite the regular and consistent efforts by the government, still a
significant number of people (approximately 21.8 % of India’s population) are still living
below poverty line.
 Unemployment- Achievement of jobless economic growth confirms the failure of the plans
to generate sufficient employment opportunities for the growing population. India, despite
being a labour abundant country, employed capital intensive techniques to achieve
economic growth.

3
 High Inflation Rates- Due to the failure of plans to control inflation rates, the high rates of
inflation has exaggerated the economic and income inequality between the rich and poor,
further worsening the conditions of the poor.
 Inadequate Infrastructure- The infrastructure continues to be inadequate to achieve high
economic growth rates. Further, the quality of infrastructure, along with its inadequacy, has
made it difficult to penetrate the benefits of economic growth to the majority of
population.

4
 CHAPTER 3

LIBERALISATION, PRIVATISATION AND

GLOBALISATION: AN APPRAISAL
 In order to overcome crises of 1990’s, the Government of India initiated multi-dimensional
economic reforms, which are collectively known as New Economic Policy (NEP).

 The New Economic Policy replaces liberalisation in place of licensing (L), privatisation in
place of Quotas (Q) and globalisation in place of Permits (P) for exports and imports.

 Need for Economic Reforms

 Huge Fiscal Deficit: Gross fiscal deficit (excess of government expenditure over
government revenues) rose from 5.7% to 6.6% of GDP during 1980-81 to 1990-91.
 Weak BOP Situation: India was not able to earn enough foreign exchange through
exports to finance its imports. The comparatively high demand for imports than
exports resulted in BOP deficit.
 High Level of Inflation: The rate of inflation rose from 6.7% p.a. to 10.3% p.a.
during 1980s to 1990-91 depicting the failure of government policies to control
inflation.
 Falling Value of Rupee: The need to mend the value of currency (value fell due to
continuous devaluation) and to encourage the credit worthiness of India, reforms
became necessary.
 Sick PSUs: The failure of PSUs to perform its roles efficiently and effectively made
economic reforms inevitable.

 The three elements of New Economic Policy (NEP) are Liberalisation, Privatisation and
Globalisation.

 Liberalisation refers to the freedom of the economy from direct or physical controls (such
as, industrial licensing, price control, import license) imposed by the government. It implies
greater dependence on the market for making various economic decisions.

 Economic Reforms under Liberalisation

 Industrial Sector Reforms
 Liberalisation implies de-regulation of industrial sector of the economy.
 Abolishment of license requirements, except licenses for alcohol, industrial
explosives etc.
 Encouragement and impetus to the private sector via liberal tax laws, tax
holidays, abolishment of quotas, etc.
 Large scale industries were allowed to produce goods and services that were
initially reserved only for small scale industries.
 Financial Reforms- Reforms in Commercial Banks, Stock Exchange, Investment
Banks
 It refers to the process of liberalising the working of financial markets by
eliminating various controls.
 The role of RBI shifted from a regulator to a facilitator. The need for financial
reforms was felt to encourage competition in the banking sector.
 Foreign Institutional Investors (FII) such as merchant bankers, mutual funds,
pension funds were encouraged to invest in India.
  Fiscal Policy Reforms
 The reforms that relate to revenue and expenditure of the government are
referred to fiscal policy reforms. The principal component of fiscal reforms
is tax reforms.
 Tax reforms involved- lowering tax rates and broadening tax base.
 Corporation tax rates were lowered.
 Reforms in indirect taxes for establishing an integrated national market.
 The tax system has been simplified, which was earlier very complicated.

 External Sector Reforms

It includes foreign exchange reforms and foreign trade policy reforms.
 Abolishment of import licensing and QRs on the imports of capital goods
and intermediate goods.
 Switch over to flexible exchange rate regime (exchange rate determined by
the demand and supply of the foreign exchange) from fixed exchange rate
regime (exchange rate fixed by the government).

 Devaluation
 It implies deliberate official lowering of the value of the country’s currency with
respect to foreign currency. That is, the value of domestic currency falls in terms of
foreign currency.
 This encourages exports and discourages imports. Devaluation prevails under the
fixed exchange regime. For example,
1 U S$ = R s45 
 I
n di
a nR up eeha s d eva l
ue d
1 U S$ = R s50 

 Privatisation is the process of involvement of private sector in the ownership or operation

of a state owned enterprise.

 Disinvestment refers to a situation when the government sells off a part of its share capital
of PSUs (Public Sector Undertakings) to the private investors.

 Navaratnas Policy
In 1966, in order to improve efficiency, to infuse professionalism and to enable PSUs to
compete effectively in the market, government awarded the status of ‘Navaratnas’ to the
following nine PSUs. These are
 Indian Oil Corporation Ltd (IOCL)
 Bharat Petroleum Corporation Ltd (BPCL)
 Hindustan Petroleum Corporation Ltd (HPCL)
 Oil and Natural Gas Corporation Ltd (ONGC)
 Steel Authority of India Ltd (SAIL)
 India Petro-chemicals Corporations Ltd (IPCL)
 Bharat Heavy Electricals Ltd (BHEL)
 National Thermal Power Corporation (NTPC)
 Videsh Sanchar Nigam Ltd (VSNL)

 Globalisation may be defined as a process associated with increasing openness, growing

economic independence and promoting economic integration in the world economy. It is an
extension of liberalisation and privatisation.
2
 Outsourcing refers to a system of hiring business services from the outside world to
penetrate in the local market.

 India is emerging as an important destination of outsourcing

 Easy Availability of Cheap Labour- Wage rates in India are comparatively lower
than those in developed countries.
 Indians have fairly reasonable degree of skills and techniques.
 India has a fair international worthiness and credibility.
 India has a virgin market for finished goods and services.
 The democratic political environment in India provides a stable and secure
environment.
 Easy and abundant availability of raw materials.

 World Trade Organisation (WTO) is an organisation that has been set up to promote free
trade in the international market.

 Benefits to be a Member of WTO- India’s Experiences

 Opened up new avenues for Indian exports.
 Greater volume of Indian exports due to the end of quota restrictions imposed by the
developed countries.
 India experienced a rise in export of agricultural products due to the agreed reduction
in agricultural subsidies in developed countries.
 India got equal opportunity as other developing countries did. Simultaneously, India
experienced a stronger bargaining power collectively along with other developing
countries.

 Reasons for Poor Performance of Agricultural Sector in Post Reform Period

 Reduction of public investment such as irrigation facilities, electricity, information
system, agricultural R & D, market linkages and roads.
 Removal of subsidies pushed up the cost of production of agriculture which
adversely affected poor and marginal farmers.
 Liberalisation forced the poor and marginal farmers to compete with their foreign
counterparts in the international markets.
 Shift towards cash crops led to the reduced availability of food grains, which
consequently led to lower nutritional values thereby reducing farmers’ productivity.
 Inflationary pressures on food grains due to the shift towards cash crops
production along with the removal of subsidies.

 Reasons for Poor Performance of Industrial Sector in Post Reform Period

 Availability of cheaper imports (due to the removal of import tariffs) led to the fall
in the demand of domestic goods.
 Inadequate infrastructures and facilities (including power supply) impaired the
domestic firms to compete with foreign counterparts in terms of cost of production
and quality of goods.
 High non-tariffs barriers by the developed countries further obstructed the growth
prospects of Indian industries.
 At the time of liberalisation, the Indian industries were vulnerable and infant
depending on the traditional and cost inefficient technologies, lacking quality and
hence failed to compete with foreign industries.

3
 Strategic Sale refers to the sale of 51% or more stakes of a PSU to the private sector, (the
highest bidder for sale). It implies the transfer of ownership to the private hands.

 Minority Sale refers to the sale of less than 49% stake of a PSU to the private sector. The
ownership remains in the hands of the public sector.

 Bilateral trade is a trade agreement between two countries, providing equal opportunities to
both of them.

 Multilateral trade is a trade agreement among more than two countries providing equal
opportunities to all the member countries.

 Tariff Barriers refer to the tax imposed such as custom duties, export-import duties on the
imports by the country to protect its domestic industries. Tariffs discourage imports by
making them relatively expensive.

 Non-tariff Barriers refer to the restrictions other than taxes such as quota and licenses, on
the imports by the country.

 Quantitative Restrictions (QRs) refer to the restrictions in the form of limits or quotas on
the amount of commodities that can either be imported or exported. QRs usually on imports
(refer to non-tariff measures) that are imposed to discourage imports of foreign goods and to
reduce Balance of Payment (BOP) deficits.

 Direct taxes are those taxes in which the burden falls on that person only on whom tax is
imposed such as income tax, wealth tax.

 Indirect taxes denote those taxes in which the burden can be shifted onto others such as
sales tax, service tax etc.

 Positive impact of LPG policies

 Increase in the GDP Growth Rate- Growth rate increased from 5.8 % in 1985-90
(seventh five year plan) to 9.0 in 2007-12 (eleventh five year plan).
 A Safety Check on Fiscal Deficit- Fiscal deficit reduced from 8.5% in 1985-90 to
5.1% in 2010-11.
 Stimulating Industrial Production- Industrial production increased from nearly 8%
in 1990-91 to 16.1% in Feb. 2010.
 Substantial Rise in the Foreign Exchange Reserves- Introduction of LPG has
given strength to the economy and raised the morale of global investors in the Indian
markets.
 Shift from Monopoly (due to License Raj) to Competitive Market (involving
more engagement of private sector)
 Rise in exports from Rs 44041.8 crores in 1991-92 to Rs 1157474.6 crores in 2010-
11.
 Foreign Direct Investments (FII) increased significantly from US $ 100 million in
1990-91 to US$ 150 billion in 2003-04.

4
 CHAPTER 5

HUMAN CAPITAL FORMATION IN INDIA

 Human Capital is a stock of skill and expertise of a nation’s population at a particular point
of time.

 Physical Capital refers to the stock of produced means of production such as machines,
production plants, tools and equipments, etc.

 Financial Capital refers to the financial claims against the assets of the companies. In other
words, it implies stocks or shares of the companies. It comprises of equity shares, preference
shares, debentures, term loans, etc.

 Human Development

 It refers to the holistic development and well being of a nation’s human capital.
 It emphasises the investment in education and health sector to increase the general
well being and standard of living of human capital.
 It protects every individual’s right to receive education and lead a healthy life.
 Human development is a broader term as compared to human capital.

 Sources of Human Capital Formation

 Investment in Education Sector
 Investment in Health Sector
 On-the-Job Training
 Migration-It refers to the movement of people to developed countries in search of
better jobs and economic opportunities
 Investment in Information System catering to the informational needs regarding
various jobs vacancies, salaries, eligibility criterion, various medical information,
vaccination, awareness, etc.

 Role of Human Capital Formation in Economic Growth

 Increase in the productivity of physical capital by its optimum and efficient
utilisation.
 Innovation of techniques- A skilled person has more potential to innovate new
techniques than unskilled one.
 Skilled and healthy workforce increases the people participation rate in the
economic growth process, thereby promoting social and economic equality.
 Quality human capital lays conducive environment for economic growth.

 Indicators of Educational Achievement

 Adult Literacy Rate indicates the percentage of the literate adult population who are
aged 15 years and above. It denotes the stock of literate population within the youth
population.
 Youth Literacy Rate indicates the percentage of literate people between age of 15-
24 who can read and write. It provides a measure of the stock of literate persons
within the adult population.
  Primary Education Completion Rate indicates the percentage of students
completing the last year of primary school. It measures the literacy rate between age
group of 6-14 years (in the class group 1 to 8).

 Various Organisations of the Government to regulate education sector.

 NCERT (National Council of Education Research and Training) is responsible

for designing the textbooks up to standard 12th.
 UGC (University Grants Commission) is the prime funding authority for university
education.
 AICTE (All India Council for Technical Education) enforces rules and regulations
regarding technical engineering education in the country.
 ICMR (Indian Council for Medical Research) formulates rules and regulations
relating to education and research in health sector.
 National Institute of Health and Family Welfare is responsible for promotion of
health and family welfare programmes.

 Education and Health- A Vital Input for the Economic Development

 Impart technical skills, knowledge and quality health.

 Develop mental abilities and productivity of workforce, thereby enabling people to
make their choice rationally and intellectually and churning out good citizens by
inculcating values in them.
 Greater acceptability of modernisation and modern techniques.
 Eradicate skewed income distribution and promote egalitarian society.
 Raise standard and quality of living.
 Increase the people participation rate in the economic growth and development
process.
 Higher life expectancy rate and greater per capita contribution to the economic
growth.
 Help in eradicating various other macroeconomic problems such as, poverty, income
inequalities, population, investment bottlenecks, under utilisation of productive
resources, etc.

 Problems faced by Human Capital formation in India

 Shortage of resources due to rising population

 Brain Drain i.e. economic loss due to migration of quality human capital from the
LDCs to the developed countries
 Improper Manpower Planning- Absence of any major efforts to maintain the
demand-supply balance of the rising labour force led to the wastage and
misallocation of human skills
 Low Academic Standards- Mushroom growth in the number of educational
institutions resulted in their deficiency of quality and standard. This in turn led to
deficiency in the production and efficiency.
 Secondary and higher education have been assigned comparative higher priority
than the free and compulsory primary education. Consequently, India is experiencing
high rate of primary school drop-outs.

2
  Rural-urban Migration- People migrates from the rural areas to the urban areas in
search of better job opportunities. The failure of the urban industries to absorb the
excess labour compels such migrants to engage themselves in informal sectors.
Hence, poverty, high illiteracy and poor access to medical facilities come into the
scene.

 Importance of Women Education

 Important to improve the economic independence and economic feasibility of
women.
 Essential in order to raise the social and moral status of the women.
 Plays a significant role in maintaining favourable fertility rate.
 Educated women infuse good moral values and impart quality education to her
children.
 More educated and well-aware are the women, higher will be the health status of a
nation.

 Need for Government Intervention in Education and Health Sectors

 Private institutions are guided by the profit motive and demand-supply relation.
Consequently, the cost of education and health facilities is comparatively higher.
 Majority of people cannot afford to avail services rendered by the private
institutions due to their economic inability.
 The interests of underprivileged sections of population such as, ST, SC, OBC, etc.
can only be protected by the interference of the government.
 People do not have complete information about the quality of services and various
relevant costs; consequently, government interference becomes necessary.
 Private institutions lack access to remote and rural areas due to economic
feasibility of such areas.
 Government should make people aware of regarding the benefits of the quality
education and better health standards.
 Education and health sectors have long gestation periods and their benefits are far
reaching. Therefore, government cannot rely completely on the private sector to
develop these important sectors.

 Education- What more needs to be done?

 High Illiteracy Rate: Still a significant proportion of population is illiterate.
 Need to impart more technical, vocational and job-oriented educational courses.
 Access to education is gender biased. Males have greater access to higher and
secondary education than their female counterparts.
 Need for more public investment in the education sector in order to safeguard the
social and economic interests of the underprivileged sections and poverty-trodden
section of population.
 More emphasis to increase female literacy rate and improve their economic and
social status.
 Need for government interference in regulating fees structure and operations of
private institutions.
 Greater penetration in the remote and rural areas.
 Spread of awareness regarding the benefits of education and need for special
programmes and projects to check the growing difference between the Gross
Enrolment Ratio and School Drop-out Rate.
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Rural Development

CHAPTER 6
RURAL DEVELOPMENT

 Rural development refers to the actions and initiatives taken for the social and
economic development of the rural and backward areas.

 Key Issues of Rural Development

 Initiation of land reforms (along with the technical reforms) enables
economic viability of the land and large scale production.
 Development of infrastructure (such as bank, credit, electricity, means of
transport, means of irrigation, development of markets, agricultural research
facilities, etc.)
 Development of the productive resources responsible for generating newer
employment opportunities.
 Development of human resources (Human capital formation) by investing
in education, imparting technical skills by on-the-job training, health care.
 Generating newer employment opportunities → generates income →
reduces rural poverty → raises living standards → makes rural people self-
sufficient → promotes rural development.

 Importance of Credit in Rural Development

 Acts as a helping hand for the farmers.
 Facilitates commercialisation of agriculture
 Supports farmers for meeting their initial requirements of inputs such as,
seeds, fertilisers, etc.
 Protects farmers from the vicious circle of poverty.

 Sources of Rural Credit

 NABARD (National Bank for Agricultural and Rural Development) is an apex

body set up in 1982.

 Coordinates the activities of all the institutions involved in providing rural finance.
 Acts a regulatory body to regulate the operations of rural banks.
Rural Development

 Takes appropriate steps to improve the credit delivery system.

 Provides short-term credit to State Co-operative Banks for agricultural
operations (such as, crop loan, distribution of fertilisers, working capital
requirements, etc.)
 Maintains R & D fund to conduct agricultural research and promotes rural
development.

 Agricultural Marketing refers to all those processes between harvesting and final
sales of the produce by the farmers. These processes include assembling, storage,
transportation, packaging, grading, distribution, etc.

 Steps taken by the government in developing rural markets

 Developing Regulated Markets: The sale and purchase of the agricultural
products are monitored by the Market Committee via regulated market,
thereby promoting transparency.
 Developing Co-operative Agricultural Marketing Societies that helps
farmers to get fair prices.
 Pursuing Minimum Support Price Policy (i.e. a minimum legislated price
that a farmer should get in exchange for his products) insulates the farmers in
case of acute price fluctuations.
 Development of Rural Infrastructures such as cold storages and
warehouses enable farmers to sell their product when the price is attractive.
Also, railways offer subsidised transport facilities to the farmers.

 Diversification in Rural Development includes

 Diversification of Crop Production- Refers to the act of producing diverse
variety of crops instead of one specialised crop. It implies a shift from single-
cropping to multi-cropping pattern.
 Diversification of Employment- Refers to a shift from the farm employment
to non-farm areas of production. Diversification of employment leads to:
 raised rural income,
 reduced rural poverty
 reduced disguised unemployment and excessive burden on agriculture.

 Non-farm Areas of Production Activity

 Animal Husbandry/Livestock Farming
 Horticulture
 Fisheries
 Cottage and Household Industries

 Animal husbandry is an important non-farm area of employment in India.

 Poultry, cattle and goats/sheep are the important components of livestock
farming.
Rural Development

 Provides extra income to the farmers.

 Provides sustainable livelihood in the semi-arid and the arid regions where
farming can’t be performed well.
 It is an important source of employment for the women.
 Provides employment to nearly 7 lakh small and marginal farmers.

 Operation Flood is a system of Milk Co-operatives launched in 1966. The farmers

used to pool their milk produce for collective sale in the urban markets. This act
assured the farmers fair price. The best example of success story of Milk Co-
operatives is Gujarat.

 Horticulture
 Horticultural crops include fruits, vegetables, medicinal and aromatic plants,
spices and flowers.
 The increase in the demand for the horticultural crops has led to a substantial
rise in the income of the farmers engaged in horticultural production.
 Shifting to the horticultural production lowered the vulnerability of small and
marginal farmers.
 Provides a gateway of opportunities for employment for women.
 Accounts for 20 % of the total rural employment.

 Golden Revolution- The rapid growth in the production of the horticultural crops
during the period 1991-2003 is known as Golden Revolution.

 Fisheries
 It is an important source of livelihood in the coastal states such as, Kerala,
Maharashtra, Gujarat and Tamil Nadu.
 Includes both inland sources (such as, lakes, ponds and streams) as well as
marine sources of fishing (such as, seas and oceans).
 It contributes 2% to India’s GDP.

 Cottage and Household Industry

 It is one of the primitive industries.
 Provides employment opportunities in various processes such as, spinning,
weaving, dyeing and bleaching.
 The emergence of new household activities such as, doll making, bee-
keeping, soap manufacturing, etc. opened up new avenues for income
generation.
 These household activities are guarded by various Farm Women’s Groups,
which promote the upliftment of working women class.

 Information Technology (IT)

 It plays a very significant role in achieving sustainable development.
Rural Development
 Helps in achieving food security by weather forecasting.
 Helps in disseminating information regarding emerging technologies, weather
and soil conditions for growing different crops, etc.
 Acts as a tool for identifying the creative potential and knowledge rooted in
people.
 Generates employment opportunities in the backward areas via developing
‘info kiosk’ in the rural areas.

 Organic farming refers to a system of farming that sustains and enhances the
ecological balance by employing organic inputs for cultivations. This type of
farming is practiced to produce poison and chemical-free food for the consumers
while simultaneously maintaining the fertility of the soil.

 Advantages of Organic Farming

 Discards use of expensive chemicals fertilisers.
 Promotes use of organic and cheaper inputs such as manure, cow-dung, etc.
 Helps in sustaining soil fertility.
 Produces healthier and high nutritional value food.
 Employs inexpensive technology for small and marginal farmers
 Helps in generating high income from the exports due to the high demand for
organic crops in the international markets.
 Promotes sustainable development.

 Limitations of Organic Farming

 The farmers are not fully aware of the organic farming.
 Inadequate infrastructure does not support organic farming.
 The problem of marketing of the organic products is also a major concern.
 The organic farming cannot be initiated by the small and marginal
workers.
 As organic farming offers lesser yield than conventional farming,
therefore, it is not cost efficient and cannot be initiated by small and
marginal workers.
 CHAPTER 7

EMPLOYMENT: GROWTH, INFORMALISATION AND

OTHER ISSUES

 Workers refer to those who are involved in the production activity and contribute to the
generation of GDP.

 Types of Workers

 Self employed workers are those who are engaged in their own business or own profession,
for example, a farmer working on his own field.

 Regular workers are permanently employed workers by the employers. They get social
security benefits, for example, an engineer working in a construction company.

 Hired workers are those who work for others by means of rendering services to others and
getting paid in return, for example, a teacher working in a school.

 Casual workers are those who work on daily wages. They are not hired by their employers
on regular basis.

 Labour supply (supply of labour corresponding to different wage rates) is the amount of
labour that the workers are willing to offer corresponding to a particular wage rate.

 Labour force refers to the number of workers actually working or willing to work at a
particular wage rate.

 Work force refers to those who are actually working and does not include those who are
willing to work.

 Worker Population Ratio is defined as the proportion of population that is actively

contributing to the production of goods and services.
Total Workforce
Worker-Population Ratio = × 100
Total Population

 Jobless economic growth refers to a situation when the level of output in the economy rises
(due to technological improvement) without proportionate rise in the employment
opportunities. This is because the technological improvement substitutes labour for
machines. Therefore, unemployment continues to exist, even when there is a rise in GDP.
 Formal sector (organised sector of the economy) includes all the government departments,
public enterprises and private enterprises that hire 10 or more workers.

 Informal sector (unorganised sector of the economy) includes all private enterprises that
hire less than 10 workers, besides farming and self-employment ventures.

 A situation of decline in the percentage of workforce in the formal sector along with
simultaneous rise in informal sector’s workforce is known as Informalisation of
Workforce.

 When the percentage of casually hired workers in the total work force tends to rise overtime
with simultaneous decline in the self employment and regular salaried workforce, then such
a situation is referred to as Casualisation of Workforce.

 An individual who is ready and willing to work at existing wage rate but does not get work
is considered as unemployed.

 Two Types of Unemployment

 Disguised Unemployment- The kind of unemployment that arises when the number
of workers engaged is more than what is actually required in a job is called disguised
unemployment. For example, if a piece of land can be cultivated by five people
efficiently, but eight people are engaged, then three people are disguisedly
unemployed.
 Seasonal Unemployment- The kind of unemployment that arises when people are
not able to find jobs during some months of the year is called seasonal
unemployment. For example, farmers are seasonally unemployed for few months
before harvesting crops.

 Causes Responsible for Increasing Unemployment in India

 Slow Economic Growth failed to generate newer employment opportunities for the
growing population.
 Population is rising at a much higher rate than the rate of increase in the
employment opportunities.
 Farmers remain unemployed for three to four months in a year as agriculture is a
seasonal occupation.
 Neglecting small scale industries has made a significant proportion of population
unemployed. Also the stiff competition from large firms and lack of easy and cheap
credit facilities made the cottage and small firms more vulnerable.
 Lack of infrastructure impedes the growth of the industries that in turn obstructs
employment generation.
 Due to staunch beliefs in the traditional and cultural values, the decisions
regarding females taking up jobs are still governed by her family members (a major
cause of low female participation in workforce).
 Lack of investments in education and health sectors leads to lack of quality human
capital, thereby increasing their probability of being unemployed.
 Ineffective planning and information catering system has further made it difficult
to disseminate information regarding various employment generation schemes and
plans and consequently people lack awareness.

2
 Economic Consequences of Unemployment
 Underutilisation of Human Capital- Country fails to utilise its human resources
optimally due to high unemployment rates.
 The rate of capital formation declines due to the inability of rising unemployed
population to save and invest.
 Due to high unemployment rate the aggregate output for the economy will also be
low.
 Reduces Productivity- Per capita productivity remains low due to widespread
unemployment, poverty and inferior quality of human capital.

 Steps to Solve the Problem of Unemployment

 Steps to increase productivity levels lead to higher profits that in turn results in
higher investment and generates higher demand for labour.
 Providing assistance to self employed persons- Government should provide
facilities like credit, better seeds and irrigation to small and marginal farmers.
 Controlling population- People should be made aware of various birth control
measures and also the benefits associated with family planning and nuclear-family.
 Development of infrastructure such as dams, bridges, canal, roads, etc.
 Increase in investments in developing human capital- technical education,
imparting skills, on-the-job training, quality medical facilities, etc.
 Policy re-formulation and special plans focusing on the development of the small
scale and cottage industries such as easy and cheap credit facility.
 Encouraging private investments in industrial sector via financial concessions
such tax holidays, etc.
 Increasing production in the agricultural and industrial sectors in order to increase
employment opportunities.
 Use of labour intensive technique rather than an undue reliance on capital intensive
techniques of production.

3
 CHAPTER 9

ENVIRONMENT AND SUSTAINABLE DEVELOPMENT

 Environment refers to all the surroundings and their effects which have an impact on
human lives. It is the sum total of the surroundings and resources that affect our existence
and quality of life. It includes all the biotic and abiotic factors.

 Biotic factors include all the living creatures such as, plants, animals, forests, etc.

 Abiotic factors include non living creatures such as, air, water, land, sun, etc.

 Dynamic Functions of Environment

 Offers production resources such as, minerals, water, soil, etc.
 Sustains life by providing vital ingredients such as sun, soil, water and air that are
necessary for the survival of life.
 Assimilates wastes
 Enhances quality of life by providing scenic beauty that everybody admires and that
adds to the quality of human life.

 Carrying capacity of environment refers to the situation

 when the exploitation of resources < the regeneration of resources and
 when the generation of wastes < the absorption capacity of the environment

 The two basic problems related to environment are pollution and excessive exploitation
(degradation) of natural resources.

 The excessive exploitation of natural resources to achieve higher rate of growth is referred
to overuse of resources.

 A situation of diversion of resources to the wrong use is called misuse (or misallocation) of
resources.

 Environment crises occur when the carrying capacity of the environment is challenged
through excessive exploitation and through excessive generation of wastes.

 Renewable resources are those resources that cannot get exhausted on use and can be
replenished easily. For example, solar energy, water, wind, etc.
 Non-renewable resources are those resources that are likely to be exhausted or depleted on
excessive use. These are not easily regenerated. For example, petroleum, coal, iron–ore, etc.

 Global warming refers to a situation of rising global temperatures due to environmental

pollution and deforestation. It is caused by the emission of the Green House Gases that
particularly include carbon dioxide.

 The radiations that penetrate to the earth’s surface due to the depletion of the ozone layer are
termed as ultraviolet radiations.
 CPCB (Central Pollution Control Board) was set up in 1974, aimed at spreading
awareness among the people regarding the extent of possible dangers of environmental
pollution.

 The gradual but consistent loss of fertility of land is termed as degradation of land.

 The removal of the upper layer of soil that is caused either by the strong winds or floods is
termed as soil erosion.

 Causes of Environmental Degradation

 Growing population lead to exhaustion of the vital resources via intensive and
extensive extraction of both renewable and non-renewable resources.
 Abject poverty forces people to cut trees (deforestation) and rear cattle
(overgrazing) to earn their livelihood. That leads to degradation of environment.
 Widespread urbanisation and preference towards nuclear family system is leading
to large scale deforestation.
 Rapid industrialisation causes deforestation and depletes the natural resources.

 Steps to Save Environment

 Creating social and general awareness
 Controlling population and levying taxes on industries polluting environment.
 Enforcement of Environment Conservation Act
 Opening up of new sanctuaries, wildlife and national parks to conserve ecological
balance.
 Launching Afforestation Campaign and need of more movement such as, Chipko
Movement.
 Recycling wastes
 Controlling population
 Use of input efficient technology

 Sustainable development is the process of economic development that aims at meeting the
needs of the present generation without compromising with the needs of the future
generations. It maximises the welfare of both present and future generations.

 The concept of sustainable development is aligned with the view of the Brundtland
Commission. This commission highlighted the need for handing over the earth (in good
condition) to the future generation in such a manner that it does not affect the productive
capacity of the future generation.

 Features of Sustainable Development

 Efficient and judicious use of the natural resources.
 Controlling pollution levels.
 Sustained rise in the real per capita income and economic welfare, i.e. growth with
equity.
 Achieving high economic growth rate without compromising with the needs of the
future generations. In other words, it implies that in a blind rage of achieving high
economic growth rates for the present generation, the productive capacity of the
future generations should not be impaired.

2
 Strategies for Sustainable Development
 Use of environment supportive fuel that are cleaner and smokeless such as, CNG, etc.
 Use of renewable resources that are non-exhaustible and pollution free.
 Promotion of use of gobar gas and solar energy in the rural areas.
 Encouragement and incentives to organic farming.
 Limited use of chemical fertilisers, pesticides, etc.
 Recycling wastes by accumulating and classifying the wastes into biodegradable and
non-biodegradable wastes.
 Strategic and judicious use of renewable resources.
 Employing input efficient technology leading to increased productivity and
continuous efforts should be made for regular technological innovations and
appreciation via R & D

3
 CHAPTER 10

COMPARATIVE DEVELOPMENT
EXPERIENCES OF INDIA AND ITS NEIGHBOURS
 Regional and Economic Groupings
The general consensus among all the nations to understand various development strategies
and to strengthen their respective economies, motivated different nations of the world to form
regional and global economic groups such as, SAARC, European Union, ASEAN, etc.

 Liberty Indicator
 It is defined as the measure of the extent of demographic participation in social and
political decision making.
 It measures the participation of people in taking decisions.
 For example- Measures of the extent of the Constitutional Protection Rights given to
the citizens and the extent of the Constitutional Protection of the independence of the
Judiciary and Rule of Law.

 India and Pakistan became independent nations in 1947 while People’s Republic of China
was established in 1949.

 China, Pakistan and India initiated its reforms in the year 1978, 1988, and 1991 respectively.

 Features of The Great Leap Forward (GLF)- China

 China initiated a campaign named The Great Leap Forward (GLF) in 1958.
 It aimed at large scale industrialisation both in rural as well as in the urban areas.
 The people in the urban areas were motivated to set up industries in their backyards.
 In the rural areas, Commune System (collective farming) was implemented.

 Features of Commune System

 The system of collective farming known as Commune System was implemented.
 Under this system, small plots of land were allocated to the individual households.
 These households were allowed to keep the remaining income from land after paying
taxes to the government.

 Great Proletarian Cultural Revolution- China

 Due to the failure of GLF together with the conflict between China and Russia, Mao
introduced the Great Proletarian Cultural Revolution in 1966-76.
 This revolution aimed at enforcing socialism and eradicating capitalism and cultural
elements in China.
 Students and professionals were forced to work with and learn from the countryside.

 Stages of China’s Industrialisation

The rapid industrial growth in China is the outcome of the introduction of the reforms in
phases.
 In the initial phase, reforms were introduced in the agricultural sector, foreign trade
and investment sectors.
 In the later phase, industrial sector reforms- the private firms , village and
township enterprises were allowed to produce goods and services
  Implementation of Dual Pricing Policy led farmers and the industrial units to buy and
sell a fixed quantity of inputs and outputs at the fixed price (by government) and the
remaining quantities were traded at the market price.
 Later, Special Economic Zones (SEZs) were set up to attract foreign investors and
to encourage exports.

 Development Strategies of Pakistan

Pakistan adopted the path of the mixed economy with the existence of both private and
public sector.
 Introduced a variety of regulated policy framework during 1950s and 1960s
 Restricted trade policy was followed- high tariff barriers and direct import controls
 Green Revolution infused mechanisation of agriculture, thereby increasing the
production of food grains.
 Enforced nationalisation of capital goods industries in 1970s
 In the late 1970s and early 1980s, resorted to denationalisation and encouraged
private sector participation in the economic development.
 Finally, in 1988, economic reforms were initiated in Pakistan.

 Similar Developmental Strategies of India and Pakistan

 Started their planned developmental programmes after independence in 1947.
 Relied on the public sector for initiating the process of growth and development.
 Followed the path of mixed economy involving the participation of both the state and
the private sector.
 Both introduced economic reforms at the same time to strengthen their economies.
 Unlike China (that brought all critical areas of production under state ownership),
India and Pakistan initiated mixed economy.

 Comparative Study of Sectoral Share in GDP

Sectors Contribution to GDP (in %) (2003)

India China Pakistan
Primary (Agriculture) 23 15 23
Secondary (Industry) 26 53 23
Tertiary (Service) 51 32 54
Source: NCERT Page- 188

 Comparative Study of Occupation Structure

Sectors Distribution of Workforce (in %)

India China Pakistan
(2000) (1997) (2000)
Primary (Agriculture) 60 54 49
Secondary (Industry) 16 27 18
Tertiary (Service) 24 19 37
Source: NCERT Page- 188
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 Demographic Parameters

 China has the lowest density of population due to the large geographical area.
 The fertility rate is also very low which acts as a check on the growth rate of
population in China, as compared to India and Pakistan.
 China having a marginally higher sex ratio than India and Pakistan.
 China is comparatively more urbanised than India and Pakistan.
 The annual growth rate of China’s population is just 1% p.a.

Demographic Indicators, 2000-01

Country Estimated Annual Growth Density Sex Fertility Urbanisation

Population Rate of Population (per sq. Ratio Rate
(in millions) (1990-2003) km)
India 1103.6 1.7 358 933 3.0 27.8
China 1303.7 1.0 138 937 (*) 1.8 36.1
Pakistan 162.4 2.5 193 922 5.1 33.4
Note: (*) data excludes population of Hong Kong, Macao and Taiwan Provinces.
Source: NCERT Page- 185

 Comparative Study of Human Development Indicators

Indicators of Human Development, 2003

Indicators India China Pakistan

HDI (value) 0.602 0.755 0.527
Rank 127 85 135
Life Expectancy at Birth (years) 63.3 71.6 63
Adult Literacy Rate (% aged 15 and above) 61 90.9 48.7
Per Capita GDP (PPP US$) 2,892 5,003 2,097
Percentage of Population below Poverty Line (in %) 34.7 16.6 13.4
Infant Mortality Rate (Per 1000 live births) 63 30 81
Source: Human Development Report, 2005

 Life expectancy, Adult literacy rate, Infant mortality rate, Percentage of the
population below poverty line, GDP per capita, Percentage of the population having
access to improved sanitation, Percentage of the population having access to
improved water sources are the various indicators of human development.
 China ranks higher in HDI, followed by India and then by Pakistan.
 China has the highest literacy rate among the three.
 Also, the per capita GDP is higher in China than in India and Pakistan.
 Infant Mortality Rate is lower in China.