Introduction to Economics

What Is Economics?

Did you know?

 One of the earliest recorded economists was the 8th-century B.C. Greek farmer and poet Hesiod who wrote that labour,
materials, and time needed to be allocated efficiently to overcome scarcity.

 The publication of Adam Smith’s 1776 book, An Inquiry into the Nature and Causes of the Wealth of Nations sparked the
beginning of the current Western contemporary economic theories

What Are Economic Indicators?

 Economic indicators detail a country’s economic performance, and are published periodically by governmental agencies or
private organizations.

 The commonly used Economic Indicators are as follows:

o Gross domestic product (GDP)

 It is the total market value of all finished goods and services produced in a country in a given year.

o Industrial production

 The reports published by Government entities, changes as according to the production of factories, mines,
and utilities in the country.

 This data is an indicator of price increases or supply shortages in the near term, Slack/Tightening of the
Economy, etc.
 o Employment Data

 Sharp increases in employment indicate prosperous economic growth and potential contractions may be
imminent if significant decreases occur.

o Consumer Price Index (CPI)

 This measures the level of retail price changes, and the costs that consumers pay, and is the benchmark for
measuring inflation.

 This report is an important economic indicator and its release can increase volatility in equity, fixed income,
and forex markets.

Economic Systems

 The following five economic systems illustrate historical practices used to allocate resources to meet the needs of the
individual and society.

1. Primitivism

 In primitive agrarian societies, individuals produced necessities from building dwellings, growing crops, and
hunting game at the household or tribal level.

2. Feudalism

 This was defined by the lords who held land and leased it to peasants for production, who received a
promise of safety and security from the lord.

3. Capitalism

 With the advent of the industrial revolution, capitalism emerged and is defined as a system of production
where business owners organize resources including tools, workers, and raw materials to produce goods
for market consumption and earn profits.

 Supply and demand set prices in markets in a way that can serve the best interests of society.

4. Socialism

 Socialism is a form of a cooperative production economy.

 Economic socialism is a system of production where there is limited or hybrid private ownership of the
means of production.

 In this system, prices, profits, and losses are not the determining factors used to establish who engages in
the production, what to produce and how to produce it.

5. Communism

 Communism holds that all economic activity is centralized through the coordination of state sponsored
central planners with common ownership of production and distribution.
Terms Details/Significance

Appreciation A rise in the value of an asset

Arbitrage Buying an asset in one market and simultaneously selling an identical asset in another market at a higher price.

Assets Things that have earning power or some other value to their owner.

Balance of The total of all the money coming into a country from abroad less all of the money going out of the country during the
payments same period.

Bankruptcy When a court judges that a debtor is unable to make the payments owed to a creditor.

Barter Paying for goods or services with other goods or services, instead of with money.

A bond is an interest-bearing security issued by governments, companies and some other organizations. Bonds are an
Bonds
alternative way for the issuer to raise capital to selling shares or taking out a bank loan.

When the price of an asset rises far higher than can be explained by fundamentals, such as the income likely to derive
Bubble
from holding the asset.

An annual procedure to decide how much public spending there should be in the year ahead and what mix of taxation
Budget
, charging for services and borrowing should finance it.

Business cycle The long-run pattern of economic growth and recession.

Buyer’s market A market in which supply seems plentiful and prices seem low; the opposite of a seller’s market.

Capital Money or assets put to economic use, the life-blood of Capitalism.

Capital controls Government-imposed restrictions on the ability of CAPITAL to move in or out of a country.

Capital Markets in securities such as Bonds and Shares. Governments and companies use them to raise longer-term Capital
markets from investors.

An agreement among two or more firms in the same industry to co-operate in fixing prices and/or carving up the
Cartel
market and restricting the amount of output they produce.

A guardian of the monetary system. A central bank sets short-term Interest Rates and oversees the health of the
Central bank
Financial System, including by acting as Lender of Last Resort to commercial banks that get into financial difficulties.

Closed An economy that does not take part in international trade; the opposite of an Open Economy.
economy

An asset pledged by a borrower that may be seized by a lender to recover the value of a loan if the borrower fails to
Collateral
meet the required Interest charges or repayments.

Command
When a Government controls all aspects of economic activity (see, for example, Communism).
economy
 A comparatively homogeneous product that can typically be bought in bulk. It usually refers to a raw material – oil,
Commodity
cotton, cocoa, silver – but can also describe a manufactured product used to make other things, for example,

microchips used in personal computers.

Concentration The tendency of a market to be dominated by a few big Firms.

Crony
An approach to business based on looking after yourself by looking out for your own.
capitalism

Crowding out When the state does something it may discourage, or crowd out, private-sector attempts to do the same thing

Currency peg When a Government announces that the Exchange Rate of its currency is fixed against another currency or currencies.

Default Failure to fulfil the terms of a loan agreement.

Deflation It is a persistent fall in the general price level of goods and Services.

Depreciation A fall in the value of an asset or a currency; the opposite of appreciation.

The textbook definition of a recession is two consecutive quarters of declining Output. A slump is where output falls
Depression
by at least 10%; a depression is an even deeper and more prolonged slump.

Cutting red tape. The process of removing legal or quasi-legal restrictions on the amount of Competition, the sorts of
Deregulation
business done, or the prices charged within a particular industry.

Derivatives Financial assets that ‘derive’ their value from other assets.

Devaluation A sudden fall in the value of a currency against other currencies.

Disinflation A fall in the rate of Inflation. This means a slower increase in prices but not a fall in prices, which is known as Deflation.

Dividend The part of a company’s profit distributed to shareholders.

Dollarization When a country’s own money is replaced as its citizens’ preferred currency by the US dollar.

Selling something for less than the cost of producing it. This may be used by a Dominant Firm to attack rivals, a
Dumping
strategy known as Predatory Pricing.

Economies of Bigger is better. In many industries, as output increases, the average cost of each unit produced falls. One reason is

scale that overheads and other Fixed Costs can be spread over more units of Output.

A measure of the responsiveness of one variable to changes in another.

Elasticity
Price Elasticity measures how much the quantity of supply of a good, or Demand for it, changes if its price changes.

Income elasticity of demand measures how the quantity demanded changes when income increases.
 When supply and demand are in balance. At the equilibrium price, the quantity that buyers are willing to buy exactly
Equilibrium
matches the quantity that sellers are willing to sell. So everybody is satisfied

Exchange Limits on the amount of foreign currency that can be taken into a country, or of domestic currency that can be taken
controls abroad

Exchange rate The price at which one currency can be converted into another.

A measure of output reflecting the costs of the factors of production used, rather than market prices, which may
Factor cost
differ because of indirect tax and subsidy.

Factors of
The ingredients of economic activity: land, labour, capital and enterprise.
production

Financial
Certificate of ownership of a financial asset, such as a bond or a share
instrument

Fiscal drag Fiscal drag is the tendency of revenue from taxation to rise as a share of GDP in a growing economy

Fiscal
When the net effect of taxation and public spending is neutral, neither stimulating nor dampening demand.
neutrality

Getting the benefit of a good or service without paying for it, not necessarily illegally. This may be possible because
Free riding
certain types of goods and services are actually hard to charge for–a firework display, for instance.

Another way to look at this may be that the good or service has a positive externality. However, there can sometimes

be a free-rider problem, if the number of people willing to pay for the good or service is not enough to cover the cost o

The ability of people to undertake economic transactions with people in other countries free from any restraints
Free trade
imposed by governments or other regulators.

Frictional That part of the jobless total caused by people simply changing jobs and taking their time about it, because they are
unemployment spending time on job search or are taking a break before starting with a new employer.

Giffen good A good for which demand increases as its price rises. But such goods may not exist in the real world.

The Gini coefficient measures the inequality of income distribution within a country. It varies from zero, which

Gini coefficient indicates perfect equality, with every household earning exactly the same, to one, which implies absolute inequality,

with a single household earning a country’s entire income.

Gold standard A monetary system in which a country backs its currency with a reserve of gold, and allows currency holders to exchang

Reducing your risks. Hedging involves deliberately taking on a new RISK that offsets an existing one, such as your
Hedge
exposure to an adverse change in an Exchange Rate, Interest Rate or Commodity Price.
Horizontal One way to keep taxation fair. Horizontal equity means that people with a similar ability to pay taxes should pay the

equity same amount.

It is the money that is held in one currency but is liable to switch to another currency at a moment’s notice in search
Hot money
of the highest available returns, thereby causing the first currency’s Exchange Rate to plummet. It is often used to

describe the money invested in currency markets by speculators.

The stuff that enables people to earn a living. Human capital can be increased by investing in education, training and
Human capital
health care.

Initially, higher tax rates would increase revenue, but at some point further increases in tax rates would cause

Laffer curve revenue to fall, for instance by discouraging people from working. The curve became an icon of supply-side

Economics.

Laissez-faire It is the belief that an economy functions best when there is no interference by Government.

How easily an ASSET can be spent, if so desired. Cash is wholly liquid. The liquidity of other assets is usually less;
Liquidity
how much less may be measured by the ease with which they can be exchanged for cash (that is, liquidated).

Shorthand for the pressures from buyers and sellers in a market, rather than those coming from a Government
Market forces
planner or from Regulation.

Mixed
A market economy in which both private-sector firms and firms owned by Government take part in economic activity.
economy

When the production of a good or service with no close substitutes is carried out by a single firm with the Market
Monopoly
Power to decide the price of its output.

Shorthand for the way in which a change in spending produces an even larger change in income. For instance,

Multiplier suppose a Government loosens Fiscal Policy, increasing net Public Spending by pumping an extra INR 10 Lakhs into

education. This has an immediate effect by increasing the income of teachers and of people who sell educational

supplies or build or maintain schools.

Where the usual rules of a person or firm’s home country do not apply. It can be literally offshore, as in the case of
Offshore
investors moving their money to a Caribbean island Tax Haven.

When a few firms dominate a market. Often they can together behave as if they were a single Monopoly, perhaps by
Oligopoly
forming a cartel.

Open economy An economy that allows the unrestricted flow of people, capital, goods and services across its borders; the opposite
 of a closed economy.

In 1958, an economist from New Zealand, A.W.H. Phillips (1914-75), proposed that there was a trade-off between
Phillips curve
inflation and unemployment: the lower the unemployment rate, the higher was the rate of inflation.

A sort of Wealth effect resulting from Deflation. A fall in the price level increases the real value of people’s savings,
Pigou effect
making them feel wealthier and thus causing them to spend more. This increase in demand can lead to higher

employment.

Price elasticity A measure of the responsiveness of demand to a change in price. If demand changes by more than the price has

changed, the good is price-elastic. If demand changes by less than the price, it is price-inelastic. Economists also

measure the elasticity of demand to changes in the income of consumers.

Things that can be consumed by everybody in a society, or nobody at all. They have three characteristics. They are:
Public goods
· non-rival – one person consuming them does not stop another person consuming them;

· non-excludable – if one person can consume them, it is impossible to stop another person consuming them;

· non-rejectable – people cannot choose not to consume them even if they want to.

Purchasing A method for calculating the correct value of a currency, which may differ from its current market value. It is helpful

when comparing living standards in different countries, as it indicates the appropriate Exchange Rate to use when

power parity expressing incomes and prices in different countries in a common currency.

Recession A measure of the value of money that removes the effect of inflation.

Reflation Policies to pump up demand and thus boost the level of economic activity.

Money in the hand, available to be used to meet planned future payments or if some other need arises. Firms may

Reserves put their reserves in a Bank, as a deposit. For a bank, reserves are those deposits it retains rather than lending them

out.

Financial contracts, such as bonds, shares or derivatives, that grant the owner a stake in an asset. Such securities
Securities
account for most of what is traded in the Financial Markets.

Traditionally, the profit rulers made from allowing metals to be turned into coins. Now it refers in a loosely defined
Seignories
way to the power of a country whose notes and coins are held by another country as a reserve currency.

The amount of community spirit or trust that an economy has gluing it together. The more social capital there is,
Social capital
the more productive the economy will be.

Stagflation Term coined in the 1970s for the twin economic problems of stagnation and rising inflation.
Structural The hardest sort of unemployment to cure because it is caused by the structure of an economy rather than by
unemployment changes in the economic cycle.

Tangible assets Assets you can touch: buildings, machinery, GOLD, works of art, and so on.

Often used to describe a tax on goods produced abroad imposed by the government of the country to which they are
Tariff
exported. Many countries have reduced such tariffs as part of the process of freeing up world trade.

A country or designated zone that has low or no taxes, or highly secretive banks, and often a warm climate and sandy
Tax haven
beaches, which make it attractive to foreigners bent on tax avoidance or even Tax evasion.

The prices assumed, for the purposes of calculating tax liability, to have been charged by one unit of a multinational
Transfer pricing
company when selling to another (foreign) unit of the same firm.

A form of short-term Government Debt. They are used for managing fluctuations in the government’s short-run cash
Treasury bills
needs.

Unemployment When unemployed people who receive benefits, either from the government or from private charity, are deterred
trap from taking a new job because the reduction or removal of benefit if they do will make them worse off.

Private Equity to help new companies grow. A valuable alternative source of finance for Entrepreneurs, who might
Venture capital
otherwise have to rely on a loan from a probably risk averse bank manager.

One way to keep taxation fair. Vertical equity is the principle that people with a greater ability to pay should hand
Vertical equity
over more tax to the Government than those with a lesser ability to pay.

The most widely accepted measure of risk in financial markets is the amount by which the price of a security swings
Volatility
up and down. The more volatile the price, the riskier is the security.

The annual income from a security, expressed as a percentage of the current market price of the security. The yield
Yield
on a share is its dividend divided by its price. A bond yield is also known as its interest rate: the annual coupon divided b
 Branches of economics

Economics is a broad subject concerned with the optimal distribution of resources in society. Within the subject, there are several
different branches which focus on different aspects. Also, there are different schools of thought which generally have different
views on aspects of economics.

The Major classification

1. Microeconomics

o Microeconomics studies how individual consumers and firms make decisions to allocate resources.

o Whether a single person, a household, or a business, economists may analyse how these entities respond to
changes in price and why they demand what they do at particular price levels.

o Further, within the dynamics of supply and demand, the costs of producing goods and services, and how labour is
divided and allocated, microeconomics studies how businesses are organized and how individuals approach
uncertainty and risk in their decision-making.

2. Macroeconomics

o Macroeconomics is the branch of economics that studies the behaviour and performance of an economy as a
whole.

o Its primary focus is the recurrent economic cycles and broad economic growth and development.

o Also, it focuses on foreign trade, government fiscal and monetary policy, unemployment rates, the level of
inflation, interest rates, the growth of total production output, and business cycles that result in expansions,
booms, recessions, and depressions.
Other Classification

1. Classical economics

o Classical economics is often considered the foundation of modern economics. It was developed by Adam Smith,
David Ricardo, Jean-Baptiste Say.

o It is based on:

 Operation of free markets. How the invisible hand and market mechanism can enable an efficient
allocation of resources.

 Classical economics suggests that generally, economies work most efficiently when government
intervention is minimal and concerned with the protection of private property, promotion of free trade and
limited government spending.

 Classical economics does recognise that a government is needed for providing public goods, such as
defence, law and order and education.

2. Neo-classical economics

o Neo-classical economics built on the foundations of free-market based classical economics. It included new ideas
such as:

 Utility maximisation.

 Rational choice theory

 Marginal analysis. How individuals will make decisions at the margin – choosing the best option given
marginal cost and benefit.

3. Keynesian economics

o Keynesian economics was developed in the 1930s against a backdrop of the Great Depression.

o The existing economic orthodoxy was at a loss to explain the persistent economic depression and mass
unemployment. Keynes suggested that markets failed to clear for many reasons (e.g. paradox of thrift, negative
multiplier, low confidence).

o Therefore, Keynes advocated government intervention to kick-start the economy.

o Keynes argued that the aggregate economy may operate in very different ways to individual markets and different
rules and policies were needed.

4. Monetarist economics

o Monetarism was partly a reaction to the dominance of Keynesian economics in the post-war period.

o Monetarists, led by Milton Friedman argued that Keynesian fiscal policy was much less effective than Keynesians
suggested.

o Monetarists promoted previous classical ideals, such as belief in the efficiency of markets. They also placed
emphasis on the control of the money supply as a way to control inflation.

5. Austrian economics
 o This is another school of economics that was critical of state intervention, price controls.

o It is broadly free-market.

6. Marxist economics

o Emphasises unequal and unstable nature of capitalism.

o Seeks a radically different approach to basic economic questions.

o Rather than relying on free-market advocate state intervention in ownership, planning and distribution of
resources.

7. Neo-liberalism/Neo-classical

o A modern interpretation of classical economics.

o Considerable overlap with monetarism. Essentially concerned with the promotion of free-markets, competition,
free trade, privatisation, lower government involvement, but some minimal state intervention in public services like
health and education.

New Branches of economics

1. Environmental economics/welfare economics

o This places greater emphasis on the environment. This can include:

 Neo-classical analysis of external costs and external benefits. From this perspective, it is rational for man to
reduce pollution

 Market failures – tragedy of the commons, Public goods, external costs, external benefits.

 Environmental economics can take a more radical approach – questioning whether economic growth is
actually desirable.

2. Behavioural economics

o It examines the psychology behind economic decision making and economic activity. Behavioural economics
examines the limitation of the assumption individuals are perfectly rational. It includes:

 Bounded rationality – people make choices by rules of thumb

 Irrational exuberance – People get carried away by asset bubbles.

 Nudges/Choice architecture – how the framing of decisions affects the outcome

3. Development economics

o Concerned with issues of poverty and under-development in poorer countries of the world. Development
economics is concerned with both micro and macro aspects of economic development. Issues include

 Trade vs aid

 Increasing capital investment.

 Best ways to promote economic development

  Third World debt

4. Econometrics

o Use of data to find simple relationships.

o Econometrics uses statistical methods, regression models and data to predict the outcome of economic policies.

5. Labour economics

o Concentration on wages, labour employment and labour markets.

o Labour economics starts from the neo-classical premise of labour supply and marginal revenue product of labour.

o Recent developments in labour economics have placed greater emphasis on non-monetary factors, such as
motivation, enjoyment and labour market imperfections.

A sector is one of a few general segments in the economy within which a large group of companies can be categorized. An
economy can be broken down into about a dozen sectors, which can describe nearly all of the business activity in that economy.

Sectors of Economic Activities

Broadly, the four main sectors in an Economy are:

1. Primary sector

o This sector deals with the extraction and harvesting of natural resources.

o These can be renewable resources, such as fish, wool and wind power. Or it can be the use of non-renewable
resources, such as oil extraction, and mining for coal.

o In developing economies, the primary sectors tends to take a big share with many employed in agriculture and
mining.

o However, improved technology and the growth of nation, results in decline of share in this sector.

2. Secondary sector

o This sector makes and distributes finished goods, and can include:

 Manufacturing – e.g. producing cars from aluminium.

 Construction – building homes, factories

 Utilities – providing goods like electricity, gas and telephones to households

o Basically, this sector comprises industries that relate to the production of finished goods from raw materials.

3. Tertiary Sector

o This is the service sector, which is concerned with the intangible aspect of offering services to consumers and
business.
 o Retailers, entertainment, and financial companies make up this sector.

4. Quaternary/knowledge sector

o This sector deals with knowledge or intellectual pursuits including research and development (R&D), business,
consulting services, and education.

o It is the process which enables entrepreneurs to innovate better manufacturing processes and improve the quality
of services offered in the economy.

o Without this growth of technology and information, economic development would be slow or non-existent.

5. Quinary sector

o This sector is the part of the economy where the top-level decisions are made.

o This includes the government which passes legislation.

o It also comprises the top decision-makers in industry, commerce and also the education sector.

Historical Change in Sectors

 Generally, it has been noted from the histories of many, now developed, countries that at initial stages of
development, primary sector was the most important sector of economic activity.

 Over a long time (more than hundred years), and especially because new methods of manufacturing were introduced,
factories came up and started expanding. Those people who had earlier worked on farms now began to work in factories in
large numbers.

o As a result, Secondary sector gradually became the most important in total production and employment.
 In the past 100 years, there has been a further shift from secondary to tertiary sector in developed countries. The service
sector has become the most important in terms of total production. This is the general pattern observed in developed
countries.
Sector wise contribution in India

 In India, the share of primary, secondary and tertiary sectors have been estimated as 21.82 percent, 24.29 percent, and
53.89 percent respectively.

 The services sector is the largest sector of India.

o It accounts for 53.89% of total India’s GVA.

 It is to be noted that, the Agriculture sector’s contribution to the Indian economy is much higher than the world’s average
(6.4%).

 Further, the industry and services sector’s contribution is lower than the world’s average – 30% for the Industry sector and
63% for the Services sector.

Sectors in terms of Ownership

1. Public Sector

o In this, the government owns most of the assets and provides all the services.

o Railways or post office is an example of the public sector.

 o The purpose of the public sector is not just to earn profits. Governments raise money through taxes and other ways
to meet expenses on the services rendered by it.

2. Private Sector

o In this, ownership of assets and delivery of services is in the hands of private individuals or companies.

o Example: companies like Tata Iron and Steel Company Limited (TISCO) or Reliance Industries Limited (RIL) are
privately owned.

o Activities in the private sector are guided by the motive to earn profits.

Sectors on basis of Work Condition

1. Organised Sector

o In this sector, employment terms are fixed and regular, and the employees get assured work and social security.

o It is a sector, which is registered with government and certain acts apply to the enterprises.

o This sector provides security of employment.

2. Unorganised Sector

o This sector refers to a home-based worker or a self-employed worker or a wage worker in the unorganized sector.

o Further, it includes a worker in the organized sector who is not covered by any of the Acts pertaining to welfare
Schemes as mentioned in Schedule-II of Unorganized Workers Social Security Act, 2008.

o This sector is marked by low incomes, unstable and irregular employment, and lack of protection either from
legislation or trade unions.

What Is an Economic System?

 Economic systems are the methods societies and governments use to organize, allocate and distribute goods, services and
resources across locations.

 It serves as a regulatory system for controlling different aspects of production and distribution, including capital, labour,
land and other physical resources.

Types of Economic Systems

 Each type of economic system has its own distinguishing characteristics, although they all share some basic features.
  Each economy functions based on a unique set of conditions and assumptions.

The main categories are as follows:

1. Traditional economic system

o This is based on goods, services, and work, all of which follow certain established trends.

o It relies a lot on people, and there is very little division of labour or specialization.

o In essence, the traditional economy is very basic and the most ancient of the four types.

o It is commonly found in rural settings in second and third world nations, where economic activities are
predominantly farming or other traditional income-generating activities.

o Advantages

 Rarely any surplus in goods or resources

 Community members are generally more satisfied in social roles

 Absence of total economic hierarchy results in a lack of economic competition

o Drawbacks

 Antiquated methods of distribution

 Lack of growth and technology development

 Reliance on localized resources and services inhibits globalization

 Less focus on industrialized production and more focus on agricultural processes

2. Command economic system

o In command economic systems, governments and centralized powers control much of the economic processes,
including allocating and distributing resources, goods and services.
 o Many command economies consist of governments that have total control over the distribution and use of valuable
resources, like oil and gas.

o Additionally, these types of systems may operate under governing entities that have ownership of essential
industries like transportation, utilities and energy, and technology.

o Advantages

 Creates potential for mass mobilization of necessary resources due to government control

 Creates additional jobs for community members and citizens due to increased mobility of resources

 Focuses on benefits to society over individual interests

 Encourages more efficient use of valuable resources

o Disadvantages

 Creates scarcity due to an inability to plan for individual needs

 Forces government rationing due to inability to calculate demand on set prices

 Eliminates market competition, resulting in a lack of innovation and advancement

 Inhibits employees’ freedom to pursue creative jobs and careers

3. Centrally planned economic system

o In this, the society creates and dictates economic plans to drive the production, investments and allocation of
goods, services and resources.

o The government only intervenes in production processes to regulate fair trade agreements and ensure compliance
with international policy.

o Additionally, governments in a centrally planned economy take part in coordination efforts to provide public
services.

o Advantages

 Better able to meet national and social objectives by addressing issues like environmentalism and anti-
corruption

 Gives governing powers the ability to make decisions regarding the production and distribution of goods
and resources when private industries cannot raise enough investment capital

 Allows input from community members on government plans for setting product prices, determining
production quantity and opening up job sectors

o Disadvantages

 Can create a lack of government resources to respond efficiently to shortages and surpluses

 Potential for corrupt actions within governing bodies and established powers
  Creates a potential loss of freedom for citizens wanting to start their own enterprises

 Institutes governing powers that sometimes develop into repressive political systems

4. Market economic system

o In a market economic system, or a “free-market system”, communities, firms and proprietors act in self-interest to
decide how to allocate and distribute resources, what to produce and who to sell to.

o Governments in market systems typically have little intervention in how businesses operate and generate income,
however, can regulate factors like fair trade, policy development and honest business operations.

o Advantages

 Provides incentive for innovative entrepreneurship

 Gives consumers a choice in goods, services and purchase prices

 Creates market competition for resources, resulting in quality offerings and efficient use of resources to
produce goods

 Inspires research, development and advances in goods and production of goods

o Disadvantages

 Highly competitive markets can cause a scarcity in resources for disadvantaged individuals

 Potential for monopolizing of industries and niches, such as technology, health care and pharmaceuticals

 Can increase income disparity by placing focus on economic needs over societal, community and human
needs

5. Mixed economic system

o Mixed economic systems combine two or more economic practices to form one central system.

o Traditionally, a mixed economy consists of a market and command economy combined to form an economic
system where the market is generally free from government or national ownership.

o However, the government can still have control over essential industries and sectors like transportation and
defence

o Further, the governing entities in mixed economic systems usually have a predominant oversight over the
regulation of private corporations and businesses.

o Advantages

 Allows for private companies to operate more efficiently and reduce operational costs because of less
government oversight

 Creates an outlet for market failures through allowing certain government intervention
  Enables governments to create net programs like social security, health care and food and nutrition
programs

 Gives governments power to redistribute income through tax policies, reducing income disparities

o Disadvantages

 Government intervention can be too frequent or not frequent enough, creating an imbalance

 Creates potential for government subsidiaries within state-run industries

 Can cause subsidized government industries to go into debt with a lack of competition in state-run
industries

Difference between economic growth vs economic development

Economic Growth

What Is Economic Growth?

 Economic growth is an increase in the production of economic goods and services, compared from one period of time to
another.

 It can be measured in nominal or real (adjusted for inflation) terms.

 Traditionally, aggregate economic growth is measured in terms of gross national product (GNP) or gross domestic product
(GDP), although alternative metrics are sometimes used.

Ways to generate economic growth

 The first is an increase in the amount of physical capital goods in the economy.

o Newer, better, and more tools mean that workers can produce more output per time period.

 The second method of producing economic growth is technological improvement.

o Improved technology allows workers to produce more output with the same stock of capital goods, by combining
them in novel ways that are more productive.

o Example: The invention and use of Petroleum became a better and more productive method of transporting goods
in process and distributing final goods more efficiently.

 The third way to generate economic growth is to grow the labour force.

o All else equal, more workers generate more economic goods and services.
  The last method is increases in human capital.

o This means laborers become more skilled at their crafts, raising their productivity through skills training, trial and
error, or simply more practice. Savings, investment, and specialization are the most consistent and easily controlled
methods.

Economic Development

 Economic development is defined as a sustained improvement in material wellbeing of society.

 Economic development is a wider concept than economic growth.

o Apart from growth of national income, it includes changes – social, cultural, political as well as economic which
contribute to material progress.

o It contains changes in resource supplies, in the rate of capital formation, in size and composition of population, in
technology, skills and efficiency, in institutional and organizational set-up. These changes fulfil the wider objectives
of ensuring more equitable income distribution, greater employment and poverty alleviation.

 In short, economic development is a process consisting of a long chain of interrelated changes in fundamental factors of
supply and in the structure of demand, leading to a rise in the net national product of a country in the long run.

 On the whole, the economic growth is a narrow term.

o It involves increase in output in quantitative terms but economic development includes changes in qualitative
terms such as social attitudes and customs along with quantitative growth of output or national income.
 o But, Economic development without growth is almost inconceivable.

Differences between Economic Growth and Economic Development

Parameter Economic Growth Economic Development

It is the quantitative and qualitative change in an

Concept It is the positive change in the indicators of economy.
Economy.

Growth relates to a gradual increase in one of the Development relates to growth of human capital, decrease in
components of Gross Domestic Product: consumption,
Factors government spending, investment, net inequality figures, and structural changes that improve the

Exports. quality of life of the population.

It refers to the reduction and elimination of poverty,

It refers to the increment in amount of goods and
Impact unemployment and inequality with the context of growing
services produced by an economy.
economy.

Focus This focuses on production of goods and services. This focuses on distribution of resources.

The qualitative measures such as HDI (Human Development

Economic Growth is measured by quantitative factors Index), gender- related index, Human poverty index (HPI),
Measurement
such as increase in real GDP or per capita income. infant mortality, literacy rate etc. are used to measure

economic development.

Relevance It reflects the growth of national or per capita income It reflects progress in the quality of life in a country.

It is for short term/short period. It is measured in It is a continuous and long-term process. Economic
Time Frame
certain time frame/period. development does not have specific time period to measure.

Economic development requires intervention from the

Economic growth is an automatic process that may or
Interaction government as all the developmental policies are formed by
may not require intervention from the government
the government

Expectations It is not concerned with happiness of public life It is concerned with happiness of public life.

Economic growth is more relevant metric for assessing More relevant to measure progress and quality of life in
Application
progress in developed countries. developing countries.
 The concept of demand and supply in an economy

What Is the Law of Supply and Demand?

 The law of supply and demand is a theory that explains the interaction between the sellers of a resource and the buyers for
that resource.

 The theory defines the relationship between the price of a given good or product and the willingness of people to either
buy or sell it. Generally, as price increases, people are willing to supply more.

 The theory is based on two separate “laws”, as follows:

1. Law of demand

1. The law of demand states that if all other factors remain equal, the higher the price of a good, the fewer
people will demand that good.

2. The amount of a good that buyers purchase at a higher price is less because as the price of a good goes up,
so does the opportunity cost of buying that good.

3. As a result, people will naturally avoid buying a product that will force them to forgo the consumption of
something else they value more.

2. Law of supply

1. The law of supply demonstrates the quantities sold at a specific price.

2. This means that the higher the price, the higher the quantity supplied.
 3. Producers supply more at a higher price because the higher selling price justifies the higher opportunity
cost of each additional unit sold.

 Supply and Demand Curves

o At any given point in time, the supply of a good brought to market is fixed.

o In other words, the supply curve, in this case, is a vertical line, while the demand curve is always downward sloping
due to the law of diminishing marginal utility.

o Sellers can charge no more than the market will bear based on consumer demand at that point in time.

o Over longer intervals of time, however, suppliers can increase or decrease the quantity they supply to the market
based on the price they expect to charge.

o So over time, the supply curve slopes upward; the more suppliers expect to charge, the more they will be willing to
produce and bring to market.

Equilibrium Price

 Also called a market-clearing price, the equilibrium price is the price at which the producer can sell all the units he wants
to produce, and the buyer can buy all the units he wants.

 With an upward-sloping supply curve and a downward-sloping demand curve, it is easy to visualize that the two will
intersect at some point.

 At this point, the market price is sufficient to induce suppliers to bring to market the same quantity of goods that
consumers will be willing to pay for at that price. Here, Supply and demand are balanced or in equilibrium.

 The exact price and amount where this occurs depend on the shape and position of the respective supply and demand
curves, each of which can be influenced by several factors.
Factors Affecting Supply

Supply is largely a function of production costs, including:

 Labor and materials

 The physical technology available to combine inputs

 The number of sellers and their total productive capacity over the given time frame

 Taxes, regulations, or additional institutional costs of production.

 Competitors and Supply chains

Factors Affecting Demand

These include:

 Consumer preferences among different goods

 The existence and prices of other consumer goods

 Changes in conditions that influence consumer preferences

 Changes in incomes can also be important in either increasing or decreasing the quantity demanded

Importance of concept of Supply and Demand

 The Law of Supply and Demand is essential because it helps investors, entrepreneurs, and economists understand and
predict market conditions.

 For example, a company launching a new product might deliberately try to raise the price of its product by increasing
consumer demand through advertising.

 At the same time, they might try to further increase their price by deliberately restricting the number of units they sell to
decrease supply
 Factors of production

What Are Factors of Production?

 Factors of production are the inputs needed for creating a good or service.

 Those who control the factors of production often enjoy the greatest wealth in a society.

 In capitalism, the factors of production are most often controlled by business owners and investors. In socialist systems, the
government (or community) often exerts greater control over the factors of production.

 In factors of production, the word “production” refers to a process of transforming inputs into outputs, which are finished
products that can be sold as a good or service.

The 4 Factors of Production

 There are four factors of production—land, labour, capital, and entrepreneurship.

1. Land as a Factor of Production

 Land is a broad term that includes all the natural resources that can be found on land, such as oil, gold, wood, water, and
vegetation.

 Natural resources can be divided into renewable and non-renewable

 The income that comes from using land and its natural resources is referred to as rent.

 Land differs from the other factors of production because some natural resources are limited in quantity, so its supply
cannot be increased with demand.

2. Labour as a Factor of Production

 This refers to the effort that individuals exert when they produce a good or service.

 For example, an artist producing a painting or an author writing a book.

 The value of Labour depends on human capital, which is determined by the individual’s skills, training, education, and
productivity.

 The income that comes from labour is referred to as wages

 Characteristics of labour in terms of being a factor of production:

o Labour is considered to be heterogeneous, which refers to the idea of how the efficiency and quality of work are
different for each person. It differs because it depends on an individual’s unique skills, knowledge, motivation, work
environment, and work satisfaction.

o Labour is also perishable in nature, which means that labour cannot be stored or saved up.

o It is strongly associated with human efforts. It means that there are factors that play an important role in labour,
such as the flexibility of work schedules, fair treatment of employees, and safe working conditions.

3. Capital as a Factor of Production

 This refers to the money that is used to purchase items that are used to produce goods and services.

 Examples of capital goods include computers, machines, properties, equipment, and commercial buildings.

 They are all considered to be capital goods because they are used in a production process and contribute to the
productivity of work.

 The income that comes from capital is referred to as interest.

4. Entrepreneurship as a Factor of Production

 Entrepreneurship as a factor of production is a combination of the other three factors.

 Entrepreneurs use land, labour, and capital in order to produce a good or service for consumers.

 Entrepreneurship is involved with establishing innovative ideas and putting that into action by planning and organizing
production.

 The income that entrepreneurs earn is called profit.

Who Owns the Factors of Production?

 Ownership of the factors of production depends on the type of economic system and society.

Why are the factors of production important?

 The factors of production make up the total productivity potential of a given economy.

 Understanding their relative availability and accessibility helps economists and policymakers assess an
economy’s potential, make predictions, and craft policies to boost productivity.

How do the four factors of production interrelate?

 All four factors are necessary for production, and each has an impact on the others.

 For instance, more available capital can inspire more entrepreneurship, which necessitates more land and labour for
production. Abundance or constraints on any of the factors will inevitably affect the other
 National Income

National income of a country means the sum total of incomes earned by the citizens of that country during a given period, over a
year.

National income accounting refers to the set of methods and principles that are used by the government for measuring production
and income, or in other words economic activity of a country in a given time period.

The various measures of determining national income are GDP (Gross Domestic Product), GNP (Gross National Product), and NNP
(Net National Product) along with other measures such as personal income and disposable income.

It should be noted that national income is not the sum of all incomes earned by all citizens, but only those incomes which accrue
due to participation in the production process.

Individuals participate in the production process by supplying factors of production which they possess.

According to Marshall: “The labour and capital of a country acting on its natural resources produce annually a certain net aggregate
of commodities, material and immaterial including services of all kinds. This is the true net annual income or revenue of the country
or national dividend.” In this definition, the word ‘net’ refers to deductions from the gross national income in respect of
depreciation and wearing out of machines. And to this, must be added income from abroad.

National income accounting equation is an equation that shows the relationship between income and expense of an economy and
other categories. It is represented by the following equation:

Y = C + I + G + (X – M)

Where

Y = National income

C = Personal consumption expenditure

I = Private investment

G = Government spending

X = Net exports

M = Imports

The most important metrics that are determined by national income accounting are GDP, GNP, NNP, disposable income, and
personal income. Let us know more about these concepts briefly in the following lines.

Importance of quantifying economic growth

 Economic indicators portray the “big-picture” of a country or region in regards to the economy. A single indicator or a small
set of indicators attempts to give you an idea of the overall economic health of a particular geography.
  It can help investors assess whether financial markets are in line with economic fundamentals or if there’s a mismatch. This
indicates either a run-up in financial markets ahead of fundamentals or markets that are lagging behind. This information
can be useful for investors when they’re making investment and asset allocation decisions.

 Economic growth can be considered among the most crucial indicators that are released. The reason why it’s so important
is that it indicates the growth in economic output, whether measured by GDP (gross domestic product), GVA (gross value
added), or any other measure.

 The stage of development of an economy is crucial for comparing two economies. Developed economies have a much
slower growth pace YoY (year-over-year) than emerging or developing economies. As a result, comparing the US and
China’s economic growth rates won’t be accurate. Instead, comparing the economic growth of countries in the same stage
of development—preferably the same geographic region—provides a more comparable picture.

 Assessing economic output also helps investors understand what drives an economy. For instance, over two-thirds of the
US economy depends on consumer spending.

National income data have the following importance:

 For the Economy:

National income data are of great importance for the economy of a country. These days the national income data are regarded as
accounts of the economy, which are known as social accounts. These refer to net national income and net national expenditure,
which ultimately equal each other.
Social accounts tell us how the aggregates of a nation’s income, output and product result from the income of different individuals,
products of industries and transactions of international trade. Their main constituents are inter-related and each particular account
can be used to verify the correctness of any other account.

 National Policies:

National income data form the basis of national policies such as employment policy, because these figures enable us to know the
direction in which the industrial output, investment and savings, etc. change, and proper measures can be adopted to bring the
economy to the right path.

 Economic Planning:

In the present age of planning, the national data are of great importance. For economic planning, it is essential that the data
pertaining to a country’s gross income, output, saving and consumption from different sources should be available. Without these,
planning is not possible.

 Economic Models:

The economists propound short-run as well as long-run economic models or long-run investment models in which the national
income data are very widely used.

 Research:

The national income data are also made use of by the research scholars of economics. They make use of the various data of the
country’s input, output, income, saving, consumption, investment, employment, etc., which are obtained from social accounts.

 Per Capita Income:

National income data are significant for a country’s per capita income which reflects the economic welfare of the country. The
higher the per capita income, the higher the economic welfare of the country.

 Distribution of Income:

National income statistics enable us to know about the distribution of income in the country. From the data pertaining to wages,
rent, interest and profits, we learn of the disparities in the incomes of different sections of the society. Similarly, the regional
distribution of income is revealed.

It is only on the basis of these that the government can adopt measures to remove the inequalities in income distribution and to
restore regional equilibrium. With a view to removing these personal and regional disequibria, the decisions to levy more taxes and
increase public expenditure also rest on national income statistics.
Various types of economic indicators or concepts related to measuring economic growth

Gross Domestic Product (GDP)

Gross domestic product is the value of all final goods and services produced within the boundary of a nation during one year. In
India one year means from 1st April to 31st March of the next year.
GDP calculation includes income of foreigners in a Country but excludes income of those people who are living outside of that
country.

Net Domestic Product (NDP)

NDP is calculated by deducting the depreciation of plant and Machinery from GDP.

NDP = Gross Domestic Product – Depreciation

Gross National Product (GNP)

GNP is the value of all final goods and services produced by the residents of a country in a financial year

While Calculating GNP, income of foreigners in a country is excluded but income of people who are living outside of that country is
included. The value of GNP is calculated on the basis of GDP.

GNP = GDP + X – M

Where,

X = income of the people of a country who are living outside of the Country
M = income of the foreigners in a country

Net National Product (NNP)

Net National Product (NNP) in an economy is the GNP after deducting the loss due to depreciation.

NNP = GNP – Depreciation

NNP at Factor Cost:

It is the value of NNP when the value of goods and services is taken at the production cost.

NNP at Market Price:

It is the value of NNP at consumer cost.

NNP at market cost = NNP at factor cost + Indirect taxes – Subsidies

Domestic Income:

Income generated (or earned) by factors of production within the country from its own resources is called domestic income or
domestic product.

Domestic income includes:

(i) Wages and salaries, (ii) rents, including imputed house rents, (iii) interest, (iv) dividends, (v) undistributed corporate profits,
including surpluses of public undertakings, (vi) mixed incomes consisting of profits of unincorporated firms, self- employed persons,
partnerships, etc., and (vii) direct taxes.

Since domestic income does not include income earned from abroad, it can also be shown as: Domestic Income = National Income-
Net income earned from abroad. Thus the difference between domestic income f and national income is the net income earned
from abroad. If we add net income from abroad to domestic income, we get national income, i.e., National Income = Domestic
Income + Net income earned from abroad.

But the net national income earned from abroad may be positive or negative. If exports exceed import, net income earned from
abroad is positive. In this case, national income is greater than domestic income. On the other hand, when imports exceed exports,
net income earned from abroad is negative and domestic income is greater than national income.
Private Income:

Private income is income obtained by private individuals from any source, productive or otherwise, and the retained income of
corporations. It can be arrived at from NNP at Factor Cost by making certain additions and deductions.

The additions include transfer payments such as pensions, unemployment allowances, sickness and other social security benefits,
gifts and remittances from abroad, windfall gains from lotteries or from horse racing, and interest on public debt. The deductions
include income from government departments as well as surpluses from public undertakings, and employees’ contribution to social
security schemes like provident funds, life insurance, etc.

Thus Private Income = National Income (or NNP at Factor Cost) + Transfer Payments + Interest on Public Debt — Social Security —
Profits and Surpluses of Public Undertakings.

Personal Income:

Personal income is the total income received by the individuals of a country from all sources before payment of direct taxes in one
year. Personal income is never equal to the national income, because the former includes the transfer payments whereas they are
not included in national income.

Personal income is derived from national income by deducting undistributed corporate profits, profit taxes, and employees’
contributions to social security schemes. These three components are excluded from national income because they do reach
individuals.

But business and government transfer payments, and transfer payments from abroad in the form of gifts and remittances, windfall
gains, and interest on public debt which are a source of income for individuals are added to national income. Thus Personal Income
= National Income – Undistributed Corporate Profits – Profit Taxes – Social Security Contribution + Transfer Payments + Interest on
Public Debt.

Personal income differs from private income in that it is less than the latter because it excludes undistributed corporate profits.

Thus Personal Income = Private Income – Undistributed Corporate Profits – Profit Taxes.

Disposable Income:

Disposable income or personal disposable income means the actual income which can be spent on consumption by individuals and
families. The whole of the personal income cannot be spent on consumption, because it is the income that accrues before direct
taxes have actually been paid. Therefore, in order to obtain disposable income, direct taxes are deducted from personal income.
Thus Disposable Income=Personal Income – Direct Taxes.

But the whole of disposable income is not spent on consumption and a part of it is saved. Therefore, disposable income is divided
into consumption expenditure and savings. Thus Disposable Income = Consumption Expenditure + Savings.

If disposable income is to be deduced from national income, we deduct indirect taxes plus subsidies, direct taxes on personal and
on business, social security payments, undistributed corporate profits or business savings from it and add transfer payments and
net income from abroad to it.

Thus Disposable Income = National Income – Business Savings – Indirect Taxes + Subsidies – Direct Taxes on Persons – Direct Taxes
on Business – Social Security Payments + Transfer Payments + Net Income from abroad.

Real Income:

Real income is national income expressed in terms of a general level of prices of a particular year taken as base. National income is
the value of goods and services produced as expressed in terms of money at current prices. But it does not indicate the real state of
the economy.
It is possible that the net national product of goods and services this year might have been less than that of the last year, but owing
to an increase in prices, NNP might be higher this year. On the contrary, it is also possible that NNP might have increased but the
price level might have fallen, as a result national income would appear to be less than that of the last year. In both the situations,
the national income does not depict the real state of the country. To rectify such a mistake, the concept of real income has been
evolved.

In order to find out the real income of a country, a particular year is taken as the base year when the general price level is neither
too high nor too low and the price level for that year is assumed to be 100. Now the general level of prices of the given year for
which the national income (real) is to be determined is assessed in accordance with the prices of the base year. For this purpose the
following formula is employed.

Real NNP = NNP for the Current Year x Base Year Index (=100) / Current Year Index

Suppose 1990-91 is the base year and the national income for 1999-2000 is Rs. 20,000 crores and the index number for this year is
250. Hence, Real National Income for 1999-2000 will be = 20000 x 100/250 = Rs. 8000 crores. This is also known as national income
at constant prices.

Per Capita Income:

The average income of the people of a country in a particular year is called Per Capita Income for that year. This concept also refers
to the measurement of income at current prices and at constant prices. For instance, in order to find out the per capita income for
2001, at current prices, the national income of a country is divided by the population of the country in that year.

Similarly, for the purpose of arriving at the Real Per Capita Income, this very
formula is used.

This concept enables us to know the average income and the standard
of living of the people. But it is not very reliable, because in every country due to unequal distribution of national income, a major
portion of it goes to the richer sections of the society and thus income received by the common man is lower than the per capita
income.

Nominal and Real GDP:

When GDP is measured on the basis of current price, it is called GDP at current prices or nominal GDP. On the other hand, when
GDP is calculated on the basis of fixed prices in some year, it is called GDP at constant prices or real GDP.

Nominal GDP is the value of goods and services produced in a year and measured in terms of rupees (money) at current (market)
prices. In comparing one year with another, we are faced with the problem that the rupee is not a stable measure of purchasing
power. GDP may rise a great deal in a year, not because the economy has been growing rapidly but because of rise in prices (or
inflation).

On the contrary, GDP may increase as a result of fall in prices in a year but actually it may be less as compared to the last year. In
both 5 cases, GDP does not show the real state of the economy. To rectify the underestimation and overestimation of GDP, we
need a measure that adjusts for rising and falling prices.

This can be done by measuring GDP at constant prices which is called real GDP. To find out the real GDP, a base year is chosen
when the general price level is normal, i.e., it is neither too high nor too low. The prices are set to 100 (or 1) in the base yea
 Methods of estimating National Income

There are three methods of measuring national income. They are as follows:

Output Method

In this method, a country’s national income can be calculated by adding the output of all the firms in the economy to determine the
nation’s output.

Product method is also known as output method or value added method. In this method, we calculate the national income in terms
of final goods and services produced in an economy during a particular period of time. The final goods are those which are either
available to the consumers for consumption or become a part of national wealth in the form of investment.

Product method is that which estimates the national income by measuring the contribution of final output and services by each
producing enterprise in the domestic territory of a country during a given accounting period.

Classification of Productive Enterprises

The first step in this method of measuring national income is the classification of enterprises. All the productive enterprises in the
economy are classified into three main categories, viz. (i) Primary Sector, (ii) Secondary Sector and (iii) Tertiary Sector. Let us briefly
explain these sectors.

 Primary Sector – Primary sector refers to that sector of the economy which exploits natural resources to produce goods.
Agriculture and allied activities like mining, quarrying, fishing, forestry etc. are included in this sector.

 Secondary Sector – The manufacturing sector of the economy which transforms one physical good into another is included
in the secondary sector.

 Tertiary Sector – The tertiary sector of the economy, generally known as the service sector consists of the provision
of services instead of end products
Classification of Output

National output is classified into the following types:

 Consumer Goods – Consumer goods are those goods which help in the further production of consumer gods. These are also
called are also called capital goods.

 Producer Goods– Producer goods are those goods which help in the further production of consumer goods. These are also
called capital goods.

 Govt. Produced Goods– These include defence, police, education, health care, roads, railways, ports, dams etc.

 Net Exports– Net exports refer to the value of goods and services exported to the rest of the world minus the value of
goods & services imported during an accounting year.

Measurement of Value of Output

There are two methods of measuring the value of output. They are (i) Final output method, (ii) Value added method. Below we
discuss these two approaches of product method of measuring national income.

(i) Final Output Method

In final method, we have to estimate the following element involved to arrive at the correct figure of the final output.

(a) Value of output

Here output means final goods as well as intermediate goods. The value of all these goods can be estimated by multiplying the
quantity of output of each producing unit with the market price. This is equal to the value of sales and the change in stock.

(b) Value of intermediate consumption

The goods and services used by the firms as inputs are known as intermediate consumption. To calculate the value of intermediate
consumption, we have to multiply the intermediate goods with the prices paid by the enterprises to purchase these goods.

(c) Consumption of fixed capital

Consumption of fixed capital means depreciation. When goods are produced, there is wear and tear of machines leading to the loss
of value of the capital assets. To calculate this loss of value in an accounting period, we have to deduct the value of capital asset at
the end of the period from the value of the asset at the beginning of the period.

According to final output method, the value of intermediate goods is deducted from the value of output. The quantity produced by
each producing enterprise is multiplied by the market price. This gives us the value of output. From this, we deduct the value of
intermediate consumption to arrive at the value of the output.

Value of final output= Value of output- Value of intermediate goods

When we add the market value of final output in the primary sector, secondary sector and that of tertiary sector, we arrive at gross
domestic product at market price.

GDP at Market Price = Market value of final output of primary sector + Market value of final output of tertiary sector

By deducting depreciation from GDP at market price we can get net domestic product at market price. When we add net factor
income from abroad, we get GNP and NNP at market price.

Expenditure Method

Expenditure method: In this method, the national income is calculated by adding all the expenditures that are done for purchasing
the national output.

 The expenditure method is a system for calculating gross domestic product (GDP) that combines consumption, investment,
government spending, and net exports. It is the most common way to estimate GDP. It says everything that the private
sector, including consumers and private firms, and government spend within the borders of a particular country, must add
up to the total value of all finished goods and services produced over a certain period of time. This method
produces nominal GDP, which must then be adjusted for inflation to result in the real GDP.

 Expenditure is a reference to spending. In economics, another term for consumer spending is demand. The total spending,
or demand, in the economy is known as aggregate demand. This is why the GDP formula is actually the same as the formula
for calculating aggregate demand; because of this, aggregate demand and expenditure GDP must fall or rise in tandem

 However, this similarity isn’t technically always present in the real world—especially when looking at GDP over the long
run. Short-run aggregate demand only measures total output for a single nominal price level, or the average of current
prices across the entire spectrum of goods and services produced in the economy. Aggregate demand only equals GDP in
the long run after adjusting for price level.

 The expenditure method is the most widely used approach for estimating GDP, which is a measure of the economy’s output
produced within a country’s borders irrespective of who owns the means to production. The GDP under this method is
calculated by summing up all of the expenditures made on final goods and services. There are four main aggregate
expenditures that go into calculating GDP: consumption by households, investment by businesses, government spending on
goods and services, and net exports, which are equal to exports minus imports of goods and services.

 There are four factors of production: natural resources or land; human resources or labour; produced means of production
or capital; and entrepreneurs or organisation.
  The payment for the use of land is called rent. Payment for the use of labour is known as wages and payment for the use of
capital is known as interest. The factors of production — land, labour and capital are primary factors of production and
their contractual payments are called factor incomes. The surplus—what is left after the payment of these primary factors
— is called the profit. This residual income is paid to the organiser of production as profit.

 Thus, income for the participation in the production process may take four forms: rent, wages, interest and profit. By
national income we mean the sum-total of all rent, wages, interest and profit earned in the production process during a
given period by all the citizens, which is known as the factor payments total.

Income method

The Income Method measures national income from the side of payments made to the primary factors of production in the form of
rent, wages, interest and profit for their productive services in an accounting year. Thus, national income is calculated by adding up
factor incomes generated by all the producing units located within the domestic economy during a period of account.

The resulting total is called Domestic Income or Net Domestic Product at FC (NDPFC)- By adding net factor income from abroad to
domestic income, we get National Income (NNPFC)- Mind, in income method national income is measured at the stage when factor
incomes are paid out by enterprises to owners of factors of production—land, labour, capital and enterprise.

Since net value added by an enterprise is the result of services of factors of production, therefore, the same is distributed in the
form of money income (rent, wages, interest, etc.) among factors of production. Hence, value of national income method should be
the same as the one calculated by value added method.

Following are the main steps involved in estimating national income by income method:

 Identify enterprises which employ factors of production (land, labour, capital and enterprise).

 Classify factor payments into various categories like rent, wages, interest, profit and mixed income (or classify factor
payments into compensation of employees, mixed income and operating surplus).

 Estimate amount of factor payments made by each enterprise.

 Sum up all factor payments made within domestic territory to get Domestic Income (NDP at FC).

 Estimate net factor income from abroad which is added to Domestic Income to derive National Income.

 Only factor incomes which are earned by rendering productive services are included. All types of transfer income like old-
age pension, unemployment allowance, etc. are excluded.

 Sale and purchase of second-hand goods are excluded since they are not part of production of current year but commission
paid on sale of second-hand goods is included as it is reward for rendering productive services. Likewise, sale proceeds of
shares and bonds are not included.

 Imputed rent of owner occupied dwellings and value of production for self-consumption is included but value of self-
consumed services like those of housewife is not Included.

 Income from illegal activities like smuggling, black-marketing, etc. as well as windfall gains (e.g., from lotteries) are
excluded.

 Direct taxes such as income tax which are paid by the employees from their salaries and corporate tax, which is paid by the
joint stock company from its profit, are included. But wealth tax and gift tax are excluded since they are deemed to be paid
 from past savings and wealth. Similarly, indirect taxes like sales tax, excise duties, which tend to increase market prices, are
not included.

Basic characteristics of the Indian economy in present times

Market size

 India’s real gross domestic product (GDP) at current prices stood at Rs. 135.13 lakh crore (US$ 1.82 trillion) in FY21, as per
the provisional estimates of annual national income for 2020-21.

 India is the fourth-largest unicorn base in the world with over 21 unicorns collectively valued at US$ 73.2 billion, as per the
Hurun Global Unicorn List. By 2025, India is expected to have ~100 unicorns by 2025 and will create ~1.1 million direct jobs
according to the Nasscom-Zinnov report ‘Indian Tech Start-up’.

 India needs to increase its rate of employment growth and create 90 million non-farm jobs between 2023 and 2030’s, for
productivity and economic growth according to McKinsey Global Institute. Net employment rate needs to grow by 1.5% per
year from 2023 to 2030 to achieve 8-8.5% GDP growth between 2023 and 2030.

 According to data from the RBI, as of the week ended on June 04, 2021, the foreign exchange reserves in India increased by
US$ 6.842 billion to reach US$ 605 billion.

Recent Developments

 With an improvement in the economic scenario, there have been investments across various sectors of the economy.
Private Equity – Venture Capital (PE-VC) sector recorded investments worth US$ 20 billion in the first five months of 2021,
registering a 2x growth in value compared with the same period in 2020. Some of the important recent developments in
Indian economy are as follows:

 Merchandise exports stood at US$ 62.89 billion between April 2021 and May 2021, while imports touched US$ 84.27
billion. The estimated value of service exports and imports Cumulative FDI equity inflows in India stood at US$ 763.58
billion between April 2000 and March 2021. Foreign Direct Investment (FDI) inflows in India stood at US$ 6.24 billion in
April 2021, registering an increase of 38% YoY.

 India’s Index of Industrial Production (IIP) for April 2021 stood at 126.6 against 143.4 for March 2021.

 Consumer Food Price Index (CFPI) – Combined inflation was 5.01 in May 2021 against 1.96 in April 2021.

 Consumer Price Index (CPI) – Combined inflation was 6.30 in May 2021 against 4.23 in April 2021.

 In June 2021, foreign portfolio investors (FPIs) turned net buyers by investing Rs. 12,714 crore (US$ 1.71 billion) into the
Indian markets. According to depositories data, between June 1, 2021 and June 25, 2021, FPIs invested Rs. 15,282 crore
(US$ 2.06 billion) in equities.

 between April 2021 and May 2021 stood at US$ 35.39 billion and US$ 19.86 billion, respectively.

 In May 2021, the Manufacturing Purchasing Managers’ Index (PMI) in India stood at 50.8.

 Gross GST collections stood at Rs. 141,384 crore (US$ 19.41 billion) in April 2021.
Government Initiatives

 The first Union Budget of the third decade of 21st century was presented by Minister for Finance & Corporate Affairs, Ms.
Nirmala Sitharaman in the Parliament on February 1, 2020. The budget aimed at energising the Indian economy through a
combination of short-term, medium-term and long-term measures.

 In the Union Budget 2021-22, capital expenditure for FY22 is likely to increase to increase by 34.5% at Rs. 5.5 lakh crore
(US$ 75.81 billion) over FY21 (BE) to boost the economy.

 Increased government expenditure is expected to attract private investments, with production-linked incentive scheme
providing excellent opportunities. Consistently proactive, graded and measured policy support is anticipated to boost the
Indian economy.

 In May 2021, the government approved the production linked incentive (PLI) scheme for manufacturing advanced
chemistry cell (ACC) batteries at an estimated outlay of Rs. 18,100 crore (US$ 2.44 billion); this move is expected to attract
domestic and foreign investments worth Rs. 45,000 crore (US$ 6.07 billion).

 The Union Cabinet approved the production linked incentive (PLI) scheme for white goods (air conditioners and LED lights)
with a budgetary outlay of Rs. 6,238 crore (US$ 848.96 million) and the ‘National Programme on High Efficiency Solar PV
(Photo Voltic) Modules’ with an outlay of Rs. 4,500 crore US$ 612.43 million).

 In June 2021, the RBI (Reserve Bank of India) announced that the investment limit for FPI (foreign portfolio investors) in the
State Development Loans (SDLs) and government securities (G-secs) would persist unaffected at 2% and 6%, respectively, in
FY22.

 To boost the overall audit quality, transparency and add value to businesses, in April 2021, the RBI issued a notice on new
norms to appoint statutory and central auditors for commercial banks, large urban co-operatives and large non-banks and
housing finance firms.

 In May 2021, the Government of India has allocated Rs. 2,250 crore (US$ 306.80 million) for development of the
horticulture sector in 2021-22.

 In November 2020, the Government of India announced Rs. 2.65 lakh crore (US$ 36 billion) stimulus package to generate
job opportunities and provide liquidity support to various sectors such as tourism, aviation, construction and housing. Also,
India’s cabinet approved the production-linked incentives (PLI) scheme to provide ~Rs. 2 trillion (US$ 27 billion) over five
years to create jobs and boost production in the country.

 Numerous foreign companies are setting up their facilities in India on account of various Government initiatives like Make
in India and Digital India. Mr. Narendra Modi, Prime Minister of India, launched Make in India initiative with an aim to boost
country’s manufacturing sector and increase purchasing power of an average Indian consumer, which would further drive
demand and spur development, thus benefiting investors. The Government of India, under its Make in India initiative, is
trying to boost the contribution made by the manufacturing sector with an aim to take it to 25% of the GDP from the
current 17%. Besides, the Government has also come up with Digital India initiative, which focuses on three core
components: creation of digital infrastructure, delivering services digitally and to increase the digital literacy.

Some of the recent initiatives and developments undertaken by the Government are listed below:

 In June 2021, RBI Governor, Mr. Shaktikanta Das announced the policy repo rate unchanged at 4%. He also announced
various measures including Rs. 15,000 crore (US$ 2.05 billion) liquidity support to contact-intensive sectors such as tourism
and hospitality.
  In June 2021, Finance Ministers of G-7 countries, including the US, the UK, Japan, Italy, Germany, France and Canada,
attained a historic contract on taxing multinational firms as per which the minimum global tax rate would be at least 15%.
The move is expected to benefit India to increase foreign direct investments in the country.

 In June 2021, the Indian government signed a US$ 32 million loan with World Bank for improving healthcare services in
Mizoram.

 In May 2021, the Government of India (GoI) and European Investment Bank (EIB) signed the finance contract for second
tranche of EUR 150 million (US$ 182.30 million) for Pune Metro Rail project.

 According to an official source, as of June 2021, 29 companies including global electronics manufacturing organisations,
such as companies Foxconn, Sanmina SCI, Flex, Jabil Circuit, have registered under the Rs. 12,195 crore (US$ 1.64 billion)
production linked incentive scheme for the telecom sector.

 In May 2021, Union Cabinet has approved the signing of memorandum of understanding (MoU) on migration and mobility
partnership between the Government of India, the United Kingdom of Great Britain and Northern Ireland.

 In April 2021, Minister for Railways and Commerce & Industry and Consumer Affairs, Food & Public Distribution, Mr. Piyush
Goyal, launched ‘DGFT Trade Facilitation’ app to provide instant access to exporters/importers anytime and anywhere.

 In April 2021, Dr. Ahmed Abdul Rahman AlBanna, Ambassador of the UAE to India and Founding Patron of IFIICC, stated
that trilateral trade between India, the UAE and Israel is expected to reach US$ 110 billion by 2030.

 India is expected to attract investment of around US$ 100 billion in developing the oil and gas infrastructure during 2019-
23.

 The Government of India is going to increase public health spending to 2.5% of the GDP by 2025.

 For implementation of Agriculture Export Policy, Government approved an outlay Rs. 2.068 billion (US$ 29.59 million) for
2019, aimed at doubling farmers income by 2022.

Road Ahead

 As indicated by provisional estimates released by the National Statistical Office (NSO), India posted a V-shaped recovery in
the second half of FY21. As per these estimates, India registered an increase of 1.1% in the second half of FY21; this was
driven by the gradual and phased unlocking of industrial activities, increased investments and growth in government
expenditure.

 As per the Reserve Bank of India’s (RBI) estimates, India’s real GDP growth is projected at 9.5% in FY22; this includes 18.5%
increase in the first quarter of FY22; 7.9% growth in the second quarter of FY22; 7.2% rise in the third quarter of FY22 and
6.6% growth in the fourth quarter of FY22.

 India is focusing on renewable sources to generate energy. It is planning to achieve 40% of its energy from non-fossil
sources by 2030, which is currently 30% and have plans to increase its renewable energy capacity from to 175 gigawatt
(GW) by 2022. In line with this, in May 2021, India, along with the UK, jointly launched a ‘Roadmap 2030’ to collaborate and
combat climate change by 2030.

 India is expected to be the third largest consumer economy as its consumption may triple to US$ 4 trillion by 2025, owing
to shift in consumer behaviour and expenditure pattern, according to a Boston Consulting Group (BCG) report. It is
estimated to surpass USA to become the second largest economy in terms of purchasing power parity (PPP) by 2040 as per
a report by PricewaterhouseCoopers.
 Features of Indian Economy

(i) Low per capita income

(ii) Heavy population pressure

(iii) Dependence of population on agriculture

(iv) Poverty and Inequality income distribution

(v) Higher level of capital formation which is a positive feature

(vi) Planned economy

(i) Low per capita income

 India is known in the world as a country with low per capita income. Per capita income is defined as the ratio of national
income over population. It gives the idea about the average earning of an Indian citizen in a year, even though this may not
reflect the actual earning of each individual. India’s per capita income for the year 2012-2013 is estimated at 39,168.

 This comes to about 3,264 per month. If we compare India’s per capita income with other countries of the world then it can
be seen that India is well behind many of them. For example, the per capita income of USA is 15 times more that of India
while China’s per capita income is more than three times of India.

(ii) Heavy population pressure

 India is world’s second largest populated country after China. As per 2011 census India’s population stands at more than
121 crores. It increased at a rate of 1.03 percent during 1990-2001. The main cause of fast rise in India’s population is the
sharp decline in death rate while the birth rate has not decreased as fast. Death rate is defined as the number of people
died per thousand of population while birth rate is defined as the number of people taking birth per thousand of
population.

 In 2010, the birth rate was 22.1 persons per one thousand population while the death rate was only 7.2 persons per one
thousand population. In fact it is a sign of development. Low death rate reflects better public health system. But high birth
rate is a problem because it directly pushes the growth of population.

 After 1921, India’s population increased very fast because birth rate declined very slowly while death rate declined very
fast. From 49 in 1921 the birth rate declined to 22.1 in 2010 while during the same time period, death rate declined from
49 to 7.2. Hence the population growth was very rapid in India.

 Heavy population pressure has become a major source of worry for India. It has put burden on the public exchequer to
mobilize enough resources to provide public education, health care, infrastructure etc

(iii) Dependence on Agriculture

 Majority of India’s working population depend on agricultural activities to pursue their livelihood. In 2011 about 58 percent
of India’s working population was engaged in agriculture. In spite of this, the contribution of agriculture to India’s gross
domestic product is a little over 17 percent.

 A major concern of agriculture in India is that productivity in this sector is very less.
  There is heavy population pressure on land to sustain huge number. Due to population pressure on land the per capita
availability of land area is very low and not viable for extracting higher output. Two, since per capita land availability is less,
a majority of people are forced to become agricultural labour working at low wages.

 Three, Indian agriculture suffers from lack of better technology and irrigation facilities.

 Four, mostly people, who are not educated or not trained properly, are engaged in agriculture. So it adds to low
productivity in agriculture.

(iv) Poverty and inequality

 As per reports of government of India, in 2011-12 about 269.3 million people in India were poor. This was about 22 percent
of India’s population. A person is termed poor if he/she is not able to consume the required amount of food to get a
minimum calorie value of 2400 in rural area and 2100 in urban area. For this the person must earn the required amount of
money as well to buy the food items.

 The government has also estimated that the required amount of money is 816 in rural area and ` 1000 in urban area per
head per month. This comes to about ` 28 in rural area and ` 33 in urban area per head per day. This is called poverty line.
This implies that 269.9 million people of India were not able to earn such little amount in 2011-12. In 2018, almost 8% of
the world’s workers and their families lived on less than US$1.90 per person per day (international poverty line).

 Poverty goes with inequality in income and wealth distribution. Very few in India posses materials and wealth while
majority have control over no or very little wealth in terms of land holding, house, fixed deposits, shares of companies,
savings etc.

 Only top 5 percent of households control about 38 percent of total wealth in India while the bottom 60 percent of
household has control over only 13 percent of the wealth. This indicates concentration of economic power in a very few
hand.

 Another issue linked to poverty is the problem of unemployment. One of the most important reasons of poverty in India is
that there is lack of job opportunities for all the persons who are in the labour force of the country.

 Labour force comprises of the adult persons who are willing to work. If adequate number of jobs are not created every
year, the problem of unemployment will grow.

 In India every year large number of people are added to the labour force due to increase in population, increase in number
of educated people, lack of expansion of industrial and service sector at the required speed etc.

(v) Higher rate of capital formation or investment

 At the time of independence, one of the major problem of Indian economy was deficiency in capital stock in the form of
land and building, machinery and equipment, saving etc.

 In order to continue the cycle of economic activities such as production and consumption, a certain ratio of production
must go towards saving and investment.

 However, the required ratio was never generated in the first four to five decades after independence. The simple reason
being higher consumption of necessary items by the population of whom most happened to be poor and lower middle
income class.
  Collective household saving was very less due to this. Consumption of durable items was also very less. But in recent years
things have charged. Economists have calculated that in order to support the growing population,

 India requires 14 percent of its GDP to be invested. It is encouraging to note that the saving rate of India for the year 2011
stands at 31.7 percent. The ratio of gross capital formation was 36.6 percent. This is possible because people are now able
to save in banks, consume durable goods and there has been large scale investment taking place on public utilities and
infrastructure.

(vi) Planned economy

 India is a planned economy. Its development process has been continuing through five year plan since the first plan period
during 1951-56. The advantage of planning is very well known. Through planning the country sets its priorities first and
provides the financial estimates to achieve the same.

 Accordingly efforts are made to mobilise resources from various sources at least cost. India has already completed eleven
five year plan periods and the twelfth plan is in progress. After every plan a review is made analysing the achievements and
short falls.

 Accordingly, things are rectified in the next plan. Today India is a growing economy and recognised every where as a future
economic power. The per capita income of India is growing at a higher rate than before. India is seen as a big market for
various products. All these are possible due to planning in India.

Role of Agriculture in India

 Agriculture is one of the most important sectors of Indian economy. It is the supplier of food and raw materials in the
country. At the time of independence more than 70 per cent of India’s population depended on agriculture to earn
livelihood. Accordingly the share of agriculture in the national product/income was as high as 56.6 per cent in 1950-51.

 However with development of industries and service sector during the plan periods, the percentage of population
depending on agriculture as well as the share of agriculture in the national product has come down. In 1960, the
percentage of labour force engaged in agricultural activities was 74 which gradually came down over the years to 51 per
cent in 2012.

 In 1960 the share of labour force in industry and service sectors stood at 11 and 15 percent respectively. But in 2012 these
shares increased to 22.4 and 26.5 percent respectively. It has been observed in most of the economies that along with
economic development shift in labour force from agriculture to industry and service sector takes place.

 Agriculture is the source of food supply. The production of food grains has increased from nearly 55 million tonnes in 1950-
51 to 259 million tones in 2012- 13. Because of the growth in food grain production,

 India’s dependence on import of food grains has declined and almost become nil. Keeping in view the rapid growth in
India’s population, increase in food grain was a necessity which the country achieved significantly. Except for pulses,
increase in food grains has been mode possible by increase in cereals and various cash crops.
  Agriculture is also a major source of foreign exchange earning through export. The share of agriculture in India’s export in
the year 2011-12 was 12.3 percent. The major items of export include tea, sugar, tobacco, spices, cotton, rice, fruits and
vegetables etc.

In Current Scenario,

 Agriculture is the primary source of livelihood for about 58% of India’s population. Gross Value Added by agriculture,
forestry, and fishing was estimated at Rs. 19.48 lakh crore (US$ 276.37 billion) in FY20. Share of agriculture and allied
sectors in gross value added (GVA) of India at current prices stood at 17.8 % in FY20. Consumer spending in India will return
to growth in 2021 post the pandemic-led contraction, expanding by as much as 6.6%.

 The Indian food industry is poised for huge growth, increasing its contribution to world food trade every year due to its
immense potential for value addition, particularly within the food processing industry. Indian food and grocery market is
the world’s sixth largest, with retail contributing 70% of the sales. The Indian food processing industry accounts for 32% of
the country’s total food market, one of the largest industries in India and is ranked fifth in terms of production,
consumption, export and expected growth.

 Principal agricultural commodities export for April 2020 – January 2021 was US$ 32.12 billion.

Market Size

 The Economic Survey of India 2020-21 report stated that in FY20, the total food grain production in the country was
recorded at 296.65 million tonnes—up by 11.44 million tonnes compared with 285.21 million tonnes in FY19. The
government has set a target to buy 42.74 million tonnes from the central pool in FY21;

 This is 10% more than the quantity purchased in FY20. For FY22, the government has set a record target for farmers to raise
food grain production by 2% with 307.31 million tonnes of food grains. In FY21, production was recorded at 303.34 million
tonnes against a target of 301 million tonnes.

 Production of horticulture crops in India was estimated at a record 326.6 million metric tonnes (MMT) in FY20 as per third
advance estimates, an increase of 5.81 million metric tonnes over FY20. India has the largest livestock population of around
535.78 million, which translates to around 31% of the world population. Milk production in the country is expected to
increase to 208 MT in FY21 from 198 MT in FY20, registering a growth of 10% y-o-y. Area under horticulture is projected to
rise by 2.7% in FY21.

 Sugar production in India reached 26.46 MT between October 2019 and May 2020 sugar season according to Indian Sugar
Mills Association (ISMA).

 India is among the 15 leading exporters of agricultural products in the world. Agricultural export from India reached US$
38.54 billion in FY19 and US$ 35.09 billion in FY20.

 The organic food segment in India is expected to grow at a CAGR of 10% during 2015-25 and is estimated to reach Rs.
75,000 crore (US$ 10.73 billion) by 2025 from Rs. 2,700 crore (US$ 386.32 million) in 2015.

 The processed food market in India is expected to grow to Rs. 3,451,352.5 crore (US$ 470 billion) by 2025, from Rs.
1,931,288.7 crore (US$ 263 billion) in FY20 on the back of government initiatives such as planned infrastructure worth US$
1 trillion and Pradhan Mantri Kisan Sampada Yojna. The food processing industry employs about 1.77 million people. The
sector allows 100% FDI under the automatic route.
Investments

 According to the Department for Promotion of Industry and Internal Trade (DPIIT), the Indian food processing industry has
cumulatively attracted Foreign Direct Investment (FDI) equity inflow of about US$ 10.24 billion between April 2000 and
December 2020.

 In March 2020, Fact, the oldest fertiliser manufacturer in the country, crossed one million production and sales mark.

 Nestle India will invest Rs. 700 crore (US$ 100.16 million) in construction of its ninth factory in Gujarat.

 In November 2019 Haldiram entered into an agreement for Amazon’s global selling program to E-tail its delicacies in the
United States.

 In November 2019, Coca-Cola launched ‘Rani Float’ fruit juices to step out of its trademark fizzy drinks.

 Two diagnostic kits developed by Indian Council of Agricultural Research (ICAR) – Indian Veterinary Research Institute (IVRI)
and the Japanese Encephalitis lgM ELISA were launched in October 2019.

 Investment worth Rs. 8,500 crore (US$ 1.19 billion) have been announced in India for ethanol production.

Government Initiatives

Some of the recent major Government initiatives in the sector are as follows:

 As per Union Budget 2021-22, Rs. 4,000 crore (US$ 551.08 million) was allocated towards implementing Pradhan Mantri
Krishi Sinchayee Yojana (PMKSY-PDMC).

 The Ministry of Food Processing has been allocated Rs. 1,308.66 crore (US$ 180.26 million) in the Union Budget 2021-22.

 In April 2021, the Government of India approved a PLI scheme for the food processing sector with an incentive outlay of Rs
10,900 crore (US$ 1,484 million) over a period of six years starting from FY22.

 In November 2020, the government inaugurated a mega food park in Punjab worth Rs. 107.83 crores (US$ 14.6 million) that
will be spread across over 55 acres of land.

 In October 2020, the Tribal Cooperative Marketing Development Federation of India (TRIFED) included 100 new Forest
Fresh Organic Products sourced from tribes across India on its e-marketplace (tribesindia.com).

 In October 2020, Agri-lender Nabard (National Bank for Agriculture and Rural Development) proposed plans to set up a
subsidiary to provide guarantee for loans under agriculture and rural development.

 In October 2020, the government announced that it is putting up a common data infrastructure for farmers in the
country. PMFBY (Pradhan Mantri Fasal Bima Yojana), PM-Kisan and the Soil Health Card will be integrated through a
common database, along with land record details.

 In September 2020, the government launched the PM Matsya Sampada Yojana, e-Gopala App and several initiatives in
fisheries production, dairy, animal husbandry and agriculture. Under this scheme, an investment of Rs. 20,000 crore (US$
2.7 billion) will be made in the next 4-5 years in 21 states.

 In May 2020, Government announced the launch of animal husbandry infrastructure development fund of Rs. 15,000 crore
(US$ 2.13 billion).
  In September 2019, Prime Minister, Mr Narendra Modi launched National Animal Disease Control Programme (NADCP),
expected to eradicate foot and mouth disease (FMD) and brucellosis in livestock. In May 2020, Rs. 13,343 crore (US$ 1.89
billion) was allocated to the scheme.

 The Government of India came out with Transport and Marketing Assistance (TMA) scheme to provide financial assistance
for transport and marketing of agriculture products in order to boost agriculture exports.

 The Agriculture Export Policy, 2018 was approved by the Government of India in December 2018. The new policy aimed to
increase India’s agricultural export to US$ 60 billion by 2022 and US$ 100 billion in the next few years with a stable trade
policy regime.

 The Government of India is going to provide Rs. 2,000 crore (US$ 306.29 million) for computerization of Primary
Agricultural Credit Society (PACS) to ensure cooperatives are benefitted through digital technology.

 The Government of India launched the Pradhan Mantri Krishi Sinchai Yojana (PMKSY) with an investment of Rs. 50,000
crore (US$ 7.7 billion) aimed at development of irrigation sources for providing a permanent solution from drought.

 Government plans to triple the capacity of food processing sector in India from the current 10% of agriculture produce and
has also committed Rs. 6,000 crore (US$ 936.38 billion) as investments for mega food parks in the country, as a part of the
Scheme for Agro-Marine Processing and Development of Agro-Processing Clusters (SAMPADA).

 The Government of India has allowed 100% FDI in marketing of food products and in food product E-commerce under the
automatic route.

Achievements in the sector

 Paddy procurement in Kharif Marketing Season (KMS) 2020-21 until January 10, 2020, reached over 534.44 lakh metric
tonnes (LMT), an increase of 26.24% against the last year corresponding purchase of 423.35 LMT.

 In November 2020, the planting of winter crops exceeded by 10% compared with the last year and witnessed 28% increase
in area under pulses. The total area acreage under pulses increased to 8.25 million hectares from 6.45 million hectares last
year.

 Out of the total 37 mega food parks that were sanctioned, 22 mega food parks are operational, as of January 2021.

 In November 2020, Minister of Consumer Affairs, Food and Public Distribution, Mr. Piyush Goyal announced that the Food
Cooperation of India and state agencies are set to procure a record quantity of 742 LMT (lakh metric tonnes) paddy during
the ongoing Kharif crop season as against 627 LMT paddy last year.

 The Electronic National Agriculture Market (e-NAM) was launched in April 2016 to create a unified national market for
agricultural commodities by networking existing APMCs. It had 16.9 million farmers and 157,778 traders registered on its
platform until February 2021. Over 1,000 mandis in India are already linked to e-NAM and 22,000 additional mandis are
expected to be linked by 2021-22.

 Sale of tractors in the country stood at 880,048 units in 2020 with the export of 77,378 units.

 The total agricultural exports stood at US$ 37.31 billion between April 2020 and February 2021.

 The principal commodities that posted significant positive growth in exports between FY20 and FY21 were the following:

 Wheat and Other Cereals: 727% from Rs. 3,708 crore (US$ 505 million) to Rs. 5,860 crore (US$ 799 million)

 Non-Basmati Rice: 132% from Rs. 13,130 crore (US$ 1,789) to Rs. 30,277 crore (US$ 4,126 million)
  Soya Meal: 132% from Rs. 3,087 crore (US$ 421 million) to Rs. 7,224 crore (US$ 984 million)

 Raw Cotton: 68% from Rs. 6,771 crore (US$ 923 million) to Rs. 11,373 crore (US$ 1,550 million)

 Sugar: 39.6% from Rs. 12,226 crore (US$ 1,666 million) to Rs. 17,072 crore (US$ 2,327 million)

 Spices: 11.5% from Rs. 23,562 crore (US$ 3,211 million) to Rs. 26,257 crore (US$ 3,578 million)

 During FY20 (till February 2020), tea export stood at US$ 709.28 million.

 Coffee export stood at US$ 742.05 million in FY20.

Road Ahead

 India is expected to achieve the ambitious goal of doubling farm income by 2022. The agriculture sector in India is expected
to generate better momentum in the next few years due to increased investment in agricultural infrastructure such as
irrigation facilities, warehousing and cold storage. Furthermore, the growing use of genetically modified crops will likely
improve the yield for Indian farmers. India is expected to be self-sufficient in pulses in the coming few years due to
concerted effort of scientists to get early maturing varieties of pulses and the increase in minimum support price.

 In the next five years, the central government will aim US$ 9 billion in investments in the fisheries sector under PM Matsya
Sampada Yojana. The government is targeting to raise fish production to 220 lakh tonnes by 2024-25.

 Going forward, the adoption of food safety and quality assurance mechanisms such as Total Quality Management (TQM)
including ISO 9000, ISO 22000, Hazard Analysis and Critical Control Points (HACCP), Good Manufacturing Practices (GMP)
and Good Hygienic Practices (GHP) by the food processing industry will offer several benefits. The agri export from India is
likely to reach the target of US$ 60 billion by the year 2022.

(References: Agricultural and Processed Food Products Export Development Authority (APEDA), Department of Commerce and
Industry, Union Budget 2021-22, Press Information Bureau, Ministry of Statistics and Programme Implementation, Press Releases,
Media Reports, Ministry of Agriculture and Farmers Welfare, Crisil)
 Growth of Industry in India

 Industry or the secondary sector of the economy is another important area of economic activity. After independence,
the government of India emphasized the role of industrialization in the country’s economic development in the long
run. Accordingly, the blue print for industrial development was made through the Industrial Policy Resolution (IPR) in
1956.

 The 1956 policy emphasized on establishment of heavy industries with public sector taking the lead in this area.
Adoption of heavy or basic industries strategy was justified on the ground that it will reduce the burden on agriculture,
enable growth in the production of consumer goods industries as well as small industries that are helpful for
employment generation and achieving self reliance.

 After the adoption of the IPR, 1956 there was tremendous growth in industrialization during the second and third plan
periods i.e. 1956-61 and 1961-66. Public sector contributed maximum to this growth.

 But towards the end of 1960s, investment in industries was reduced which adversely affected its growth rate.

 In the 1980s, this trend was reversed and investment in industries was increased by making the infrastructure base
such as power, coal, rail much stronger.

 In early 1990s it was found that the public sector undertakings were not performing upto expectation. There has been
reports of mismanagement in these under takings resulting in loss. So in 1991 the government of Indian decided to
encourage the role of private sector in industrial development, remove the rigid licence system which is known as
liberalization and allow international players to compete in the domestic country as well as domestic players to explore
foreign territories.

 The aim of taking all these steps was to strengthen the process of industrialization in the country. Such a model of
industrial development is called Liberalization, Privatization and Globalization (LPG) model. After the adoption of this
new policy in 1991, there has been phases of growth followed by slowdown in the industrial development process.

 In the early years of 1990s there was significant growth in industrialization due to increase in investment in
infrastructure, reduction in excise duty, availability of finance etc.

 But towards the end of 1990s the growth rate slowed down due to stiff competition from international companies,
inadequate infrastructure support etc. However, in the beginning of the new millennium, between 2002-08 there was
again some recovery due to increase in saving rate from 23.5 percent in 2001-2 to 37.4 percent in 2007- 08.

 Even the competition from the foreign companies helped during this phase as the domestic companies could create
enough internal strength in term of quality control, finance and customer care etc. to withstand the competition.
However after 2008-09 there was some slow down in industrial growth due to rise in petroleum price, interest rate and
borrowings from abroad which has created lot of liabilities for the domestic companies.

Market Size

 The sector’s gross value added (GVA) at current prices was estimated at US$ 348.53 billion as per the second advanced
estimates of FY21. The IHS Markit India Manufacturing Purchasing Managers Index (PMI) reached 55.5 in April 2021 from
55.4 in March 2021. The manufacturing GVA accounts for 19% of the country’s real gross value added.

 As per the latest survey, capacity utilisation in India’s manufacturing sector stood at 66.6% in the third quarter of FY21.
  The manufacturing component of the IIP stood at 116.9 between April 2020 and March 2021.

 According to the Ministry of Statistics & Programme Implementation, India’s industrial output measured by the Index of
Industrial Production (IIP) stood at 143.4 in March 2021.

Investments

 With the help of Make in India drive, India is on a path of becoming the hub for hi-tech manufacturing as global giants such
as GE, Siemens, HTC, Toshiba, and Boeing have either set up or are in process of setting up manufacturing plants in India,
attracted by India’s market of more than a billion consumers and an increasing purchasing power.

 In May 2020, the Government of India increased FDI in defence manufacturing under the automatic route from 49% to
74%.

 India has become one of the most attractive destinations for investment in the manufacturing sector. Some of the major
investments and developments in this sector in the recent past are:

 In FY21, India received a total foreign direct investment (FDI) inflow of US$ 81.72 billion, a 10% increase YoY.

 On February 16, 2021, Amazon India announced to start manufacturing electronic products in India, starting first with
Amazon Fire TV stick manufacturing. The company plans to start manufacturing with contract manufacturer Cloud Network
Technology, a subsidiary of Foxconn in Chennai by end-2021.

 In April 2021, Samsung started manufacturing mobile display panels at its Noida plant and plans to ramp up manufacturing
IT display panels soon.

 Samsung Display Noida, which has invested Rs. 4,825 crore (US$ 650.42 million) to move its mobile and IT display
manufacturing plant from China to Uttar Pradesh, has received special incentives from the state government.

 In April 2021, Bharti Enterprises Ltd. and Dixon Technologies (India) Ltd., formed a joint venture to take advantage of the
government’s PLI scheme for the manufacturing of telecom and networking products.

 In April 2021, Godrej Appliances launched a range of Made-in-India air conditioners (AC). The company plans to invest Rs.
100 crore (US$ 13.48 million) in its manufacturing units (located in Shirwal and Mohali) to increase its AC production
capacity to 8 lakh units by 2025.

Government Initiatives

 The Government of India has taken several initiatives to promote a healthy environment for the growth of manufacturing
sector in the country. Some of the notable initiatives and developments are:

 The government approved a PLI scheme for 16 plants for key starting materials (KSMs)/drug intermediates and active
pharmaceutical ingredients (APIs). The establishment of these 16 plants would result in a total investment of Rs. 348.70
crore (US$ 47.01 million) and generation of ~3,042 jobs. The commercial development of these plants is expected to begin
by April 2023.

 As part of efforts to expand its smartphone assembly industry and improve its electronics supply chain, the government, in
March 2021, announced funds worth US$ 1 billion in cash to each semiconductor company that establishes manufacturing
units in the country.
  The Union Budget 2021-22 is expected to enhance India’s domestic growth in manufacturing, trade and other sectors.
Development of a robust infrastructure, logistics and utility environment for the manufacturing sector is a primary focus
field.

Some of these initiatives are as follows:

 In May 2021, the government approved a PLI scheme worth Rs. 18,000 crore (US$ 2.47 billion) for production of advanced
chemical cell (ACC) batteries; this is expected to attract investments worth Rs. 45,000 crore (US$ 6.18 billion) in the
country, and further boost capacity in core component technology and make India a clean energy global hub.

 In India, the market for grain-oriented electrical steel sheet manufacturing is witnessing high demand from power
transformer producers, due to the rising demand for electric power and increasing adoption of renewable energy in the
country.

 In line with this, in May 2021, JFE Steel Corporation in collaboration with JSW Steel Limited (JSW) signed a MoU to evaluate
a study to establish a grain-oriented electrical steel sheet manufacturing & sales joint-venture company in India.

 To facilitate manufacturing and investment in sectors such as ICT and telecom, in May 2021, TEMA (Telecom Equipment
Manufacturers Association of India) signed a collaboration deal with ICCC (Indo-Canada Chamber of Commerce) to promote
‘Make in India’ and ‘Self-reliant India’ initiatives.

 India’s display panel market is estimated to grow from ~US$ 7 billion in 2021 to US$ 15 billion in 2025.

 The Mega Investment Textiles Parks (MITRA) scheme to build world-class infrastructure will enable global industry
champions to be created, benefiting from economies of scale and agglomeration. Seven Textile Parks will be established
over three years.

 The government proposed to make significant investments in the construction of modern fishing harbours and fish landing
centres, covering five major fishing harbours in Kochi, Chennai, Visakhapatnam, Paradip, and Petuaghat, along with a
multipurpose Seaweed Park in Tamil Nadu. These initiatives are expected to improve exports from the textiles and marine
sectors.

 The ‘Operation Green’ scheme of the Ministry of the Food Processing Industry, which was limited to onions, potatoes and
tomatoes, has been expanded to 22 perishable products to encourage exports from the agricultural sector. This will
facilitate infrastructure projects for horticulture products.

 The Union Budget 2021-22 allocated funds of Rs. 1,000 crore (US$ 137.16 million) for the welfare of tea workers, especially
women and their children. About 10.75 lakh tea workers will benefit from this, including 6.23 lakh women workers involved
in the large tea estates of Assam and West Bengal.

Road Ahead

 India is an attractive hub for foreign investments in the manufacturing sector. Several mobile phone, luxury and automobile
brands, among others, have set up or are looking to establish their manufacturing bases in the country.
 The manufacturing sector of India has the potential to reach US$ 1 trillion by 2025. The implementation of the Goods and
Services Tax (GST) will make India a common market with a GDP of US$ 2.5 trillion along with a population of 1.32 billion
people, which will be a big draw for investors. The Indian Cellular and Electronics Association (ICEA) predicts that India has
the potential to scale up its cumulative laptop and tablet manufacturing capacity to US$ 100 billion by 2025 through policy
interventions.
  With impetus on developing industrial corridors and smart cities, the Government aims to ensure holistic development of
the nation. The corridors would further assist in integrating, monitoring and developing a conducive environment for the
industrial development and will promote advance practices in manufacturing.

 References: Central Statistics Office, FICCI, Economic Survey of India, DPIIT, Media sources, Ministry of Skill Development
and Entrepreneurship

Growth of Services sector in India

The services sector is not only the dominant sector in India’s GDP, but has also attracted significant foreign investment, has
contributed significantly to export and has provided large-scale employment. India’s services sector covers a wide variety of
activities such as trade, hotel and restaurants, transport, storage and communication, financing, insurance, real estate, business
services, community, social and personal services, and services associated with construction.

Market Size

 The services sector is a key driver of India’s economic growth. The sector contributed 55.39% to India’s Gross Value Added
at current price in FY20#. GVA at basic prices at current prices in the second quarter of 2020-21 is estimated at Rs. 42.80
lakh crore (US$ 580.80 billion), against Rs. 44.66 lakh crore (US$ 633.57 billion) in the second quarter of 2019-20, showing a
contraction of 4.2%. According to RBI, in February 2021, service exports stood at US$ 21.17 billion, while imports stood at
US$ 10.61 billion.

 The India Services Business Activity Index/Nikkei/IHS Markit Services Purchasing Managers’ Index fell to 54 in April 2021,
from 54.6 in March 2021, due to pandemic-induced constraints in business activities and weakened sentiments towards
growth prospects.

Industry developments

Some of the developments in the services sector in the recent past are as follows:

 The services category in India attracted cumulative foreign direct investment (FDI) worth US$ 85.86 billion between April
2000 and December 2020. The services category ranked 1st in FDI inflow as per data released by the Department for
Promotion of Industry and Internal Trade (DPIIT).

 In April 2021, the Ministry of Education (MoE) and University Grants Commission (UGC) started a series of online
interactions with stakeholders to streamline forms and processes to reduce compliance burden in the higher education
sector, as a follow-up to the government’s focus on ease of doing business to enable ease of living for stakeholders.

 On March 17, 2021, the Health Ministry’s eSanjeevani telemedicine services crossed 3 million (30 lakh) teleconsultations
since its launch, enabling patient-to-doctor consultations from the confines of their home and doctor-to-doctor
consultations.

 In April 2021, Elon Musk’s SpaceX has started accepting pre-orders for the beta version of its Starlink satellite internet
service in India for a fully refundable deposit of US$ 99. Currently, the Department of Telecommunications (DoT) is
screening the move and more developments will be unveiled soon.
  In December 2020, a cohort of six health-tech start-ups—AarogyaAI, BrainSightAI, Fluid AI, InMed Prognostics, Wellthy
Therapeutics, and Onward Assist—have been selected by the India Edison Accelerator, fuelled by GE Healthcare. India
Edison Accelerator, the company’s first start-up partnership programme focused on Indian mentors, creates strategic
partners to co-develop healthcare solutions.

 The Indian healthcare industry is expected to shift digitally enabled remote consultations via teleconsultation. The
telemedicine market in India is expected to increase at a CAGR of 31% from 2020 to 2025.

 In December 2020, Gamma Skills Automation Training introduced a unique robotics & automation career launch
programme for engineers, an ‘Industry 4.0 Hands-on Skill Learning Centre’ located at IMT Manesar, Gurgaon in Haryana.

 In December 2020, the ‘IGnITE’ programme was initiated by Siemens, BMZ and MSDE to encourage high-quality training
and technical education. ‘IGnITE’ aims to develop highly trained technicians, with an emphasis on getting them ready for
the industry and future, based on the German Dual Vocational Educational Training (DVET) model. By 2024, this
programme aims to upskill ~40,000 employees.

 In October 2020, Bharti Airtel entered cloud communications market with the launch of business-centric ‘Airtel IQ’.

Government Initiatives

The Government of India recognises the importance of promoting growth in services sector and provides several incentives across a
wide variety of sectors like health care, tourism, education, engineering, communications, transportation, information technology,
banking, finance and management among others.

The Government of India has adopted few initiatives in the recent past, some of these are as follows:

 Under Union Budget 2021-22, the government allocated Rs. 7,000 crore (US$ 963.97 million) to the BharatNet programme
to boost digital connectivity across India.

 FDI limit for insurance companies has been raised from 49% to 74% and 100% for insurance intermediates.

 In May 2021, the Ministry of Commerce and Industry announced that India received an FDI inflow of US$ 81.72 billion, the
highest FDI during FY 2020-21.

 In March 2021, the central government infused Rs. 14,500 crore (US$ 1.99 billion) capital in Central Bank of India, Indian
Overseas Bank, Bank of India and UCO Bank through non-interest-bearing bonds.

 On January 15, 2021, the third phase of Pradhan Mantri Kaushal Vikas Yojana (PMKVY) was launched in 600 districts with
300+ skill courses. Spearheaded by the Ministry of Skill Development and Entrepreneurship, the third phase will focus on
new-age and COVID-related skills. PMKVY 3.0 aims to train eight lakh candidates.

 In January 2021, the Department of Telecom, Government of India, signed an MoU with the Ministry of Communications,
Government of Japan, to strengthen cooperation in the areas of 5G technologies, telecom security and submarine optical
fibre cable system.

 On November 4, 2020, the Union Cabinet, chaired by the Prime Minister, Mr. Narendra Modi, approved to sign a
memorandum of understanding (MoU) between the Ministry of Communication and Information Technology and the
Department of Digital, Culture, Media and Sports (DCMS) of United Kingdom Government to cooperate in the field of
telecommunications/information and communication technologies (ICTs).

 In October 2020, the government selected Hughes Communications India to connect 5,000 village panchayats in border and
naxal-affected states and island territories with satellite broadband under BharatNet project by March 2021.
  In September 2020, the government announced that it may infuse Rs. 200 billion (US$ 2.72 billion) in public sector banks
through recapitalisation of bonds

 In the next five years, the Ministry of Electronics and Information Technology is working to increase the contribution of the
digital economy to 20% of GDP. The government is working to build cloud-based infrastructure for collaborative networks
that can be used for the creation of innovative solutions by AI entrepreneurs and startups.

 On Independence Day 2020, Prime Minister Mr. Narendra Modi announced the National Digital Health Mission (NDHM) to
provide a unique health ID to every Indian and revolutionise the healthcare industry by making it easily accessible to
everyone in the country. The policy draft is under ‘public consultation’ until September 21, 2020.

 In September 2020, the Government of Tamil Nadu announced a new electronics & hardware manufacturing policy aligned
with the old policy to increase the state’s electronics output to US$ 100 billion by 2025. Under the policy, it aims to meet
the requirement for incremental human resource by upskilling and training >100,000 people by 2024.

 Government of India has launched the National Broadband Mission with an aim to provide Broadband access to all villages
by 2022.

Road Ahead

 By 2023, healthcare industry is expected to reach US$ 132 billion. India’s digital economy is estimated to reach US$ 1
trillion by 2025. By end of 2023, India’s IT and business services sector is expected to reach US$ 14.3 billion with 8% growth.

 The implementation of the Goods and Services Tax (GST) has created a common national market and reduced the overall
tax burden on goods. It is expected to reduce costs in the long run-on account of availability of GST input credit, which will
result in the reduction in prices of services.
 Status of Human Resource in India

 India has 62.5% of its population in the age group of 15-59 yearswhich is ever increasing and will be at the peak around
2036 when it will reach approximately 65%.

 These population parameters indicate an availability of demographic dividend in India, which started in 2005-06 and will
last till 2055-56.
  According to Economic Survey 2018-19,India’s Demographic Dividend will peak around 2041, when the share of working-
age,i.e. 20-59 years, population is expected to hit 59%.

 India has one of the youngest populationsin an aging world. By 2020, the median age in India will be just 28, compared to
37 in China and the US, 45 in Western Europe, and 49 in Japan.

 Since 2018, India’s working-age population (people between 15 and 64 years of age) has grown larger than the dependant
population — children aged 14 or below as well as people above 65 years of age. This bulge in the working-age populationis
going to last till 2055, or 37 years from its beginning.

 This transition happens largely because of a decrease in the total fertility rate(TFR, which is the number of births per
woman) after the increase in life expectancy gets stabilised.

 A study on demographic dividend in India by United Nations Population Fund (UNFPA) throws up two interesting facts.

o Thewindow of demographic dividend opportunity in India is available for five decades from 2005-06 to 2055-56,
longer than any other country in the world.

o This demographic dividend window is available at different times in different statesbecause of differential
behaviour of the population parameters.

Advantages Associated with Demographic Dividend

Better economic growth brought about by increased economic activities due to higher working age population and lower
dependent population. It will be channelised in following ways:

 Increased Labour Force that enhances the productivity of the economy.

 Increased fiscal space created by the demographic dividend to divert resources from spending on children to investing in
physical and human infrastructure.

 Rise in women’s workforce that naturally accompanies a decline in fertility, and which can be a new source of growth.

 Increase in savings rate, as the working age also happens to be the prime period for saving.

 A massive shift towards a middle-class society, that is, the rise of aspirational class.

 Demographic dividend has historically contributed up to 15 % of the overall growth in advanced economies.

 Japan was among the first major economies to experience rapid growth because of changing population structure.

 The country’s demographic-dividend phase lasted from 1964 to 2004.

 Rapid industrialization and urbanisation because of higher number of employment seeking population that would force
higher economic activities.

 Rise in workforce: With more than 65% of working age population, India will rise as an economic superpower, supplying
more than half of Asia’s potential workforce over the coming decades.

 Effective policy making: Fine-tuning the planning and implementation of schemes and programmes by factoring in
population dynamics is likely to yield greater socio-economic impact and larger benefits for people.

Challenges Associated with Demographic Dividend

  Asymmetric demography:The growth in the working-age ratio is likely to be concentrated in some of India’s poorest states
and the demographic dividend will be fully realized only if India is able to create gainful employment opportunities for this
working-age population.

 Lack of skills:Most of the new jobs that will be created in the future will be highly skilled and lack of skill in Indian workforce
is a major challenge. India may not be able to take advantage of the opportunities, due to a low human capital base and
lack of skills.

 Low human development parameters:India ranks 130 out of 189 countries in UNDP’s Human Development Index, which is
alarming.Therefore, health and education parameters need to be improved substantially to make the Indian workforce
efficient and skilled.

 Informal nature of economy in Indiais another hurdle in reaping the benefits of demographic transition in India.

 Jobless growth-There is mounting concern that future growth could turn out to be jobless due to de-industrialization, de-
globalization, the fourth industrial revolution and technological progress. As per the NSSO Periodic Labour Force Survey
2017-18, India’s labour force participation rate for the age-group 15-59 years is around 53%, that is, around half of the
working age population is jobless.

Suggestions for Improving Human Resources and Building Human Capital

 Building human capital: Investing in people through healthcare, quality education, jobs and skills helps build human capital,
which is key to supporting economic growth, ending extreme poverty, and creating a more inclusive society.

 Skill development to increase employability of young population. India’s labour force needs to be empowered with the
right skills for the modern economy. Government has established the National Skill Development Corporation (NSDC) with
the overall target of skilling/ up skilling 500 million people in India by 2022..

 Education: Enhancing educational levels by properly investing in primary, secondary and higher education. India, which has
almost 41% of population below the age of 20 years, can reap the demographic dividend only if with a better education
system. Also, academic-industry collaboration is necessary to synchronise modern industry demands and learning levels in
academics.

o Establishment of Higher Education Finance Agency (HEFA)is a welcome step in this direction.

 Health: Improvement in healthcare infrastructure would ensure higher number of productive days for young labourforce,
thus increasing the productivity of the economy.

o Success of schemes like Ayushman Bharatand National Health Protection scheme (NHPS) is necessary. Also
nutrition level in women and children needs special care with effective implementation of Integrated Child
Development (ICDS) programme.

 Job Creation: The nation needs to create ten million jobs per year to absorb the addition of young people into the
workforce. Promoting businesses’ interests and entrepreneurship would help in job creation to provide employment to the
large labourforce.

o India’s improved ranking in the World Bank’s Ease of Doing Business Index is a good sign.

o Schemes like Start-up India and Make in India , if implemented properly, would bring the desired result in the near
future.
  Urbanisation: The large young and working population in the years to come will migrate to urban areas within their own
and other States, leading to rapid and large-scale increase in urban population. How these migrating people can have
access to basic amenities, health and social services in urban areas need to be the focus of urban policy planning.

o Schemes such as Smart City Mission and AMRUT needs to be effectively and carefully implemented.

Way Forward

 India is on the right side of demographic transition that provides golden opportunity for its rapid socio-economic
development, if policymakers align the developmental policies with this demographic shift.

 To reap the demographic dividend, proper investment in human capital is needed by focussing on education, skill
development and healthcare facilities.

 This demographic transition also brings complex challenges with it. If the increased workforce is not sufficiently skilled,
educated and provided gainful employment, we would be facing demographic disaster instead.

 By learning from global approaches from countries such as Japan and Korea and designing solutions considering the
domestic complexities, we would be able to reap the benefits of demographic dividend.

Status of Natural Resource in India

 India is gifted with various types of natural Resources such as fertile soil, forests, minerals and water. These resources are
unevenly distributed. The Indian continent covers a multitude of biotic and abiotic resource.

 As India has rapid population growth therefore there is overconsumption of resources, such as uncontrolled logging or
overfishing and many valuable natural resources are rapidly being exhausted.

 India has huge watered fertile lands. In the sedimentary soil of the Northern Great Plains of the Sutlej-Ganga plains and
Brahmaputra Valley wheat, rice, maize, sugarcane, jute, cotton, rapeseed, mustard, sesame, linseed, are grown in plentiful.
India’s land area includes regions with high rainfall to dry deserts, Coast line to Alpine regions.

 India also has a variety of natural vegetation since the country has a varied relief and climate. These forests are narrowed
to the plateaus and hilly mountainous areas. India has a great variety of wildlife.

 There are many national parks and hundreds of wild life sanctuaries. Around 24.5 percent of the total geographical area
include Forests(IFSR 2019), Because India’s whether conditions are changing frequently and differences in altitude,
different types of Forest are present in India including Tropical, Swamps, Mangrove and Alpine.

 Variety of forest vegetation is large. Forests are the main source of Fire woods, Paper, Spices, Drugs, Herbs, Gums and
more. Forests has great contribution to nation’s GDP.

 India has more marine and inland water resources. Reports signify that India has an 8129 km long coastline. Inland fishery is
performed in Rivers, Reservoirs and Lakes. Reports of EIA estimate indicated that in Indian rivers more than 400 species of
fish are found and many species are economically important.

Indian Oil reserves

 India holds 4,728,790,000 barrelsof proven oil reserves as of 2016, ranking 24th in the world and accounting for about 0.3%
of the world’s total oil reserves of 1,650,585,140,000 barrels. India has proven reserves equivalent to 2.9 times its annual
consumption.

 The oil and gas industry in India dates back to 1889 when the first oil deposits in the country were discovered near the
town of Digboi in the state of Assam. The natural gas industry in India began in the 1960s with the discovery of gas
fields in Assam and Maharashtra (Bombay high). As on 31 March 2018, India had estimated crude oil reserves of 594.49
million tonnes (MT) and natural gas reserves of 1339.57 billion cubic meters (BCM).

 India imports 82% of its oil needs and aims to bring that down to 67% by 2022 by replacing it with local exploration,
renewable energy and indigenous ethanol fuel.India was the second top net crude oil (including crude oil products)
importer of 205.3 Mt in 2019.

 By March 2021, India’s domestic crude oil production output fell by 5.2% and natural gas production by 8.1% in the FY21 as
producers extracted 30,491.Thousand Metric Tonnes (TMT) of crude oil and 28670.6 Million Metric Standard Cubic Metres
(MMSCM) of natural gas.

 An enormous mass of India’s natural gas production comes from the western offshore regions, particularly the Mumbai
High complex. The onshore fields in Assam, Andhra Pradesh, and Gujarat states are also main producers of natural gas

 Mineral Resource in India are also in large amount such as iron, coal, mineral oil, manganese, bauxite, chromite, copper,
tungsten, gypsum, limestone, mica. When evaluating the Livestock Resource, it is found that Hills, mountains and less
fertile lands are put under pasture.

 Scientific methods are followed in rearing cattle. India maintains rich domestic animal diversity. India has large number of
animals like goat, sheep, poultry, cattle, and buffalo. Indian livestock has imperative role in improving the socio-economic
status of the rural masses.

 In the area of Horticulture, India has various agro-climatic conditions which facilitates cultivation of a large number of
horticulture crops such as vegetables, fruits, flower, medicinal and aromatic plant, mushroom, etc. and plantation corps like
tea, coffee and rubber.

 Non-renewable resources are also plentiful in different parts of India: Coal is the mainly used energy in India and occupies
the leading position.

 In India, coal is obtained mostly from Andra Pradesh, Chhattisgarh, Orissa, Madhya Pradesh, West Bengal, Tamil Nadu, and
Meghalaya, Jammu and Kashmir.

 Natural gas in India is available in Tripura State, Krishna Godavari field and gas associates in petroleum products. Petroleum
product has become a vital source of energy in India.

 In India, Petroleum products can be obtained from Digbol, Assam, around the Gulf of Khambat in Gujarat, off shore in
Arabian Sea, spread out from Mumbai up to 100miles.

 India has fourth rank in producing iron ore in the world. On an average, India produces about 7 per cent of the world
production. It has about 2.6 per cent iron ore reserves of the world.
 Challenges with Indian Economy

 Low per capita income

o Usually, developing economies have a low per-capita income. The per capita income in India in 2014 was $1,560. In
the same year, the per-capita Gross National Income(GNI) of USA was 35 times that of India and that of China was 5
times higher than India.

o Further, apart from the low per-capita income, India also has a problem of unequal distribution of income. This
makes the problem of poverty a critical one and a big obstacle in the economic progress of the country. Therefore,
low per-capita income is one of the primary economic issues in India,

 Huge dependence of population on agriculture

o Another aspect that reflects the backwardness of the Indian economyis the distribution of occupations in the
country. The Indian agriculture sector has managed to live up to the demands of the fast-increasing population of
the country.

o According to the World Bank, in 2014, nearly 47 percent of the working population in India was engaged
in agriculture. Unfortunately, it contributed merely 17 percent to the national income implying a low productivity
per person in the sector. The expansion of industries failed to attract enough manpower either.

 Heavy population pressure

o Another factor which contributes to the economic issues in India is population. Today, India is the second most-
populated country in the world, the first being China.

o We have a high-level of birth rates and a falling level of death rates. In order to maintain a growing population, the
administration needs to take care of the basic requirements of food, clothing, shelter, medicine, schooling, etc.
Hence, there is an increased economic burden on the country.

 The existence of chronic unemployment and under-employment

o The huge unemployed working population is another aspect which contributes to the economic issues in India.
There is an abundance of labor in our country which makes it difficult to provide gainful employment to the entire
population.

o Also, the deficiency of capital has led to the inadequate growth of the secondary and tertiary occupations. This has
further contributed to chronic unemployment and under-employment in India.

o With nearly half of the working population engaged in agriculture, the marginal product of an agricultural laborer
has become negligible. The problem of the increasing number of educated-unemployed has added to the woes of
the country too.

 Slow improvement in Rate of Capital Formation

 o India always had a deficiency of capital. However, in recent years, India has experienced a slow but steady
improvement in capital formation. We experienced a population growth of 1.6 percent during 2000-05 and needed
to invest around 6.4 percent to offset the additional burden due to the increased population.

o Therefore, India requires a gross capital formation of around 14 percent to offset depreciation and maintain the
same level of living. The only way to improve the standard of living is to increase the rate of gross capital formation.

 Inequality in wealth distribution

o According to Oxfam’s ‘An economy for the 99 percent’ report, 2017, the gap between the rich and the poor in the
world is huge. In the world, eight men own the same wealth as the 3.6 billion people who form the poorest half of
humanity.

o In India, merely 1 percent of the population has 58 percent of the total Indian wealth. Also, 57 billionaires have the
same amount of wealth as the bottom 70 percent of India. Inequal distribution of wealth is certainly one of the
major economic issues in India.

 Poor Quality of Human Capital

o In the broader sense of the term, capital formation includes the use of any resource that enhances the capacity of
production.

o Therefore, the knowledge and training of the population is a form of capital. Hence, the expenditure on education,
skill-training, research, and improvement in health are a part of human capital.

o To give you a perspective, the United Nations Development Program (UNDP), ranks countries based on the Human
Development Index (HDI). This is based on the life expectancy, education, and per-capita income. In this index,
India ranked 130 out of 188 countries in 2014.

 Low level of technology

o New technologies are being developed every day. However, they are expensive and require people with a
considerable amount of skill to apply them in production.

o Any new technology requires capital and trained and skilled personnel. Therefore, the deficiency of human capital
and the absence of skilled labor are major hurdles in spreading technology in the economy.

o Another aspect that adds to the economic issues in India is that poor farmers cannot even buy essential things like
improved seeds, fertilizers, and machines like tractors, investors, etc. Further, most enterprises in India are micro
or small. Hence, they cannot afford modern and more productive technologies.

 Lack of access to basic amenities

o In 2011, according to the Censusof India, nearly 7 percent of India’s population lives in rural and slum areas. Also,
only 46.6 percent of households in India have access to drinking water within their premises. Also, only 46.9
percent of households have toilet facilities within the household premises.
 o This leads to the low efficiency of Indian workers. Also, dedicated and skilled healthcare personnel are required for
the efficient and effective delivery of health services. However, ensuring that such professionals are available in a
country like India is a huge challenge.

 Demographic characteristics

o According to the 2011 Census, India had a population density of 382 per square kilometer as against the world
population density of 41 per square kilometer.

o Further, 29.5 percent was in the age group of 0-14 years, 62.5 percent in the working age group of 15-59 years, and
around 8 percent in the age group of 60 years and above. This proves that the dependency burden of our
population is very high.

 Under-utilisation of natural resources

o India is rich in natural resources like land, water, minerals, and power resources. However, due to problems like
inaccessible regions, primitive technologies, and a shortage of capital, these resources are largely under-utilized.
This contributes to the economic issues in India.

 Lack of infrastructure

o The lack of infrastructural facilities is a serious problem affecting the Indian economy. These include
transportation, communication, electricity generation, and distribution, banking and credit facilities, health and
educational institutions, etc. Therefore, the potential of different regions of the country remains under-utilized.

The main challenges for fiscal health are as follows:

 Populism in Pre-Election year:For instance, a Central Government sponsored loan waiver.

 Rising Oil Prices: $10 Increase in Crude Oil Barrel Price can lead to 0.2-0.3% increase in FD

 MSP Hikes for Kharif Crops:Government’s decision to hike Minimum Support Price (MSP) for kharif crops can impact GDP
by 0.1-0.2% besides adding to inflationary pressures

 Less than expected GST Revenues:While the ideal GST monthly revenues to meet the targets of the government is around
1.1 lakh crores, the average collection in FY19 was only around 0.97 lakh crores.

 Resignation of RBI Governor: Many economists agree that the resignation was mainly due to the difference of opinion
between the RBI and the Union Government on various key issues like the Resolution of Non-Performing Assets, Banking
Frauds, RBI Surplus Transfer, undermining of the independence of RBI.

 Winds against Multilateralism:Economic Survey 20172018 points out that exports and imports together amount to 42% of
India’s Gross Domestic Product (GDP) showing Indian economy’s interdependence on the rest of the world economies. In
this light, the much talked about tariff war initiated by the US threatens to impact our exports significantly.
  Non-Performing Assets (NPA):The Standing Committee on Finance in its recent report had questioned the Reserve Bank of
India (RBI) for failing to take pre-emptive action in checking bad loans in the banking system prior to the Asset Quality
Review (AQR) undertaken in December 2015.

 Agrarian Crisis:Agriculture which employs nearly 52% of those who are employed in India continues to be in deep crisis as
reflected in the Farmer’s Long March from Nashik to Mumbai and in their agitations in New Delhi in November.

 Higher Bond Yield and Greater Risk:The yield of India’s benchmark long-term government bond at 7.6%-7.8% remains
higher than peers in developing economies and is on an increasing trend showing challenging days ahead.

 Twin Balance Sheet Problem :While few Indian companies like Airtel and Tata have turned into global giants, companies like
Jaypee Infra and Lanco Power are facing existential crisis due to the Twin Balance Sheet problem (stressed balance sheets
of banks and over leveraged corporates).

 Effective implementation of Organization for Economic Cooperation and Development’s (OECD) Guidelines to control Base
Erosion and Profit Shifting (BEPS).

 Changes to the Double Taxation Avoidance Agreements of India with other countries to reduce Tax Avoidance.

PLANNING IN INDIA

Meaning of Economic Planning

Economic planning is a process which involves the following steps:

 Preparing a list of the problems facing the economy.

 Rearranging the list on the basis of priority. The top priority issue which needs to be addressed immediately should be
placed at number one and so on.

 The next step is to identify the problems which are to be solved in the immediate short-run and the other problems which
are to be addressed over the long period.

 Fixing a target to achieve the desired goal. The target could be a specified time period within which the problem must be
solved. If the problem is to be addressed over long run, then it must be made clear that how much of the problem be
solved in the first period (say a year or six months) and so on. Secondly, the target could be a certain quantity to be
achieved. Say in case of production, the government can fix some target in terms of quantity.

 Estimating the amount of resources needed for achieving the target. Resources include financial resource, human resource,
physical resource etc.

 Mobilizing the resources is another important task. This means that the planners must know the sources of arranging the
required resources. For example, in case of financing the plan, the planners must make the budget and spell out the
different sources of finding. When the government makes plan, one of its major source of getting funds in the tax revenue.
For a business person, one of the sources of finance is the loan from bank. When various sources of funds are available
then the planner must also decide as to how much fund to be collected from each of these sources. Use of the human
resource is another important task to execute the plan proposal. The planner must estimate the type of man power and the
number of persons required to carry out the task. A proper estimate on this requirement should be given at the outset.
 Similarly proper estimate of physical resources should also be provided. Physical resources include office buildings, vehicles,
furniture, stationeries etc.

 Once the resources are arranged, implementation and execution process starts in an organize manner to achieve the
desired goal. To make sure that everything is running smoothly and to rectify mistakes if any or to modify the style of
working to accommodate any change, periodic review must be done till the final achievement is realised.

Historical evolution of planning in India

In India, the significance of planning was recognized even before independence. Various ideological perspectives were brought to
influence on the efforts made at plan formulation by a few individuals and institutions. Socio economic Planning has been one of
the most noteworthy inventions of the twentieth century. Even before independence the nation was conscious about the
significance of planned development. Prominent public men like Dadabhai Naoroji (1825 – 1917), M. C. Ranade, (1842-1901), R. G.
Dutt (1848 – 1909) wrote extensively on the social and economic problems of the Indians. During the long period of India’s struggle
for freedom, the concern for the problems of mass poverty, protection of the farmer and the artisan, the need for industrialization
and, the reconstruction of the entire fabric of social and economic life. Almost all the national leaders looked upon political
freedom primary as the means to solve these fundamental problems. To Mahatma Gandhi freedom was not merely a political goal
but a pre requisite for relieving the masses from poverty and stagnation. The social and economic aims of the struggle for freedom
came to be precisely defined during nineteen thirties.

Starting from the Soviet experiment in 1928, planning slowly swept over almost two third of the entire world. During 1930s the
whole world was affected by great depression, only USSR was exempted from effects of this great depression. It was because of
their planning after that whole world was attracted towards USSR because of its planning. Later on the resolutions of the Indian
National Congress from 1929 onwards stressed the need for the revolutionary changes in the present economic structure of society
and removal of great inequalities in order to remove poverty and improve the economic and social conditions of the masses. First
systematic work came into existence e in the year 1934 when the renowned engineer and statesman M. Visvesvaraya formulated a
ten year plan for economic development of the country in his book “Planned Economy for India.” On the other hand the
Government of India Act – 1935, introduced provincial autonomy which led to the formation of Congress Government in eight
provinces. In August 1937 the Congress Working Committee passed a resolution suggesting the committee of inter provincial
experts to consider urgent and vital problems, the solution of which is necessary to any scheme of national reconstruction and
social planning.

National Planning Committee(1938)

Planning, was first initiated in India in 1938 by Congress President and Indian National Army supreme leader Netaji Subhash
Chandra Bose ,later on Jawaharlal Nehru was made head of the National Planning Committee. This was followed by the formulation
of National Planning Committee consisting of fifteen members, in a memorandum, the Committee emphasized that the national
independence is an indispensable primary condition for taking all the steps that might be found necessary for carrying out the plan
in all its various aspects. The setting up by the Indian National Congress of a National Planning Committee towards the end of 1938
– nine years before independence – highlighted both the importance of social and economic objectives as also need to profit from
the experience of planned development through national plans elsewhere. The National Planning Committee appointed several sub
committees to study different aspects of the national economy. It was the first attempt on the part of the people of India to
examine the fundamental economic problems and draw up co – ordinate plan for upliftment of the people.
The Bombay Plan (1944)

In the early 1944, several eminent industrialists and economists of Bombay Sir Purshottamdas Thakurdas, Mr. J.R.D. Tata and six
others made another attempt and published a development plan, which was called Bombay plan. Its main purpose was to stimulate
the thinking of the people and to lay down the principles on the basis of which a national plan could be formulated and executed.
The planners observed that the plan set out in it is neither in any sense a complete scheme nor as comprehensive as that of the
National Planning committee. The central aim of the plan was to raise the national income to such a level that after meeting the
minimum requirements of every individual we would be left with enough resources for the enjoyment of life and for cultural
activities.” Thus its objective was at doubling the per capita income in the country over a period of 15 years. It proposed the
increase of about 130 per cent and 500 percent, in agriculture and industry respectively. The total outlay of Rs. 10,000 crores was
recommended. The planners believed that this could be achieved only by reducing the overwhelming predominance of agriculture
and by establishing a balanced economy. This plan was the systematic scheme of economic planning which made the country plan-
minded. Its major shortcoming was of maintenance of a capitalist order and giving step-motherly treatment to agriculture sector.

People’s Plan (1945)

Another plan was prepared by the late M.N. Roy (a ten year plan) called the ‘People Plan.’ It was different from the Bombay plan in
methodology and priorities. Its chief emphasis was on agricultural and consumer goods industries through collectivization and
setting up of sate owned industrialization. The total outlay was of Rs. 15000 crores. It also advocated the nationalization of land.
The plan was ambitious as it could not properly mobilize the resources. Therefore, it was totally impracticable.

Gandhian Plan

This plan was drafted by Sriman Nayaran, principal of Wardha Commercial College. It emphasized the economic decentralization
with primacy to rural development by developing the cottage industries.

Sarvodaya Plan

Sarvodaya Plan (1950) was drafted by Jaiprakash Narayan. This plan itself was inspired by Gandhian Plan and Sarvodaya Idea of
Vinoba Bhave. This plan emphasized on agriculture and small & cottage industries. It also suggested the freedom from foreign
technology and stressed upon land reforms and decentralized participatory planning.

Post War Construction (1941- 1946)

The government of India seriously considered the plans for the post war reconstruction during June, 1941and appointed a
reconstruction committee of the cabinet with Viceroy as Chairman and the members of the Executive Council as Members. In June,
1944 Planning and Development Department was created under a separate member of the Executive Council for organizing the
planning work in the country. To assist the department, there was a Planning and Development Board consisting of Secretaries of
economic department. It suggested to State Governments that special priority should be given to schemes for training technical
personnel. In 1946 the work of planning had practically been completed and the department of planning and development was
abolished.
Advisory Planning Board (1946)

The interim Government was installed on 24th August, 1946 and the Advisory Planning Board. The Board submitted its report in
January, 1947. Its major recommendations were: a) The increase in production that is essential could be secured only through a
well considered plan. b) There must be control on the use of energy sources, control over distribution and price and as well leases
and sub leases. c) Mineral rights in the permanently settled areas in Bengal and Bihar should be acquired by the state.

Before The establishment of Planning Commission :

At the down of the 15th August, 1947, India was free from the British Imperial Rule. The Constitution of India came into force on
26th January 1950. The Constitution contained certain ‘Directive Principles of State Policy’, which, though not enforceable through
the court of law but were regarded but were regarded as fundamental to the governance of the country. The working Committee
of the Congress Party passed a comprehensive resolution on planned economy for the country and the appointment of the
Planning Commission. The resolution states “ The need for a comprehensive plan has become a matter of compelling urgency in
India now owing to the ravages of Second World War and the economic and political consequences of the partition of the country
which followed in the wake of achievement of freedom and steady worsening of the economic situation in India and the World. ”
Thus the National Planning Commission was established on 15th March, 1950.

Genesis of Planning Commission and its objectives

India has adopted a path of development, which is known as Socialist Path and Mixed Economy, On the one hand, India has
encouraged private business and industry and on the other it has almost full control, at least in principle, over all the major
entrepreneurial and business activities. The Planning Commission was set up by a Resolution of the Government of India in March
1950 in pursuance of declared objectives of the Government to promote a rapid rise in the standard of living of the people by
efficient exploitation of the resources of the country, increasing production and offering opportunities to all for employment in the
service of the community. The Planning Commission was charged with the responsibility of making assessment of all resources of
the country, augmenting deficient resources, formulating plans for the most effective 7 and balanced utilization of resources and
determining priorities. It was entrusted with the work of economic and social development as envisaged in the preamble, the
fundamental rights as well as Directive Principles of State Policy of the Constitution.

Functions of Planning Commission

The 1950 resolution setting up the Planning Commission outlined its functions as the following:

 Make an evaluation of the capital, material and the human resources of the nation, including technical personnel, and
study the possibilities of enhancing these resources for building up the nation;

 Draft a Plan for the most balanced and effective usage of the country’s resources;

 Define the stages in which the Plan should be implemented and put forward the allocation of resources for the completion
of every stage;

 Specify the factors that hamper economic development, and ascertain the conditions which, in view of the prevailing social
and political situation, should be set up for the triumphant implementation of the Plan
  Determine the kind of machinery required for obtaining the successful execution of each stage of the Plan in all its aspects;

 Regularly appraise the progress achieved in the implementation of all stages of the Plan and propose the rectifications or
recommendations of policy and measures that such appraisal may deem necessary;

 Make such interim or ancillary recommendations either for enabling the discharge of the duties assigned to it or on a
consideration of the existing economic conditions, current policies, measures and development programme or on a study
of such specific problems which the Central or State Governments can refer to it.

Framework of planning under the commission

Framework of Planning Commission

 The Prime Minister was the Chairman of the Planning Commission, which used to work under the overall guidance of
the National Development Council. The Deputy Chairman and the full-time members of the Commission, as a composite
body, provided advice and guidance to the subject Divisions for the formulation of Five Year Plans, Annual Plans, State
Plans, Monitoring Plan Programmes, Projects and Schemes.

Members of the Planning Commission

 Chairman – Prime Minister; presided over the meetings of the Commission

 Deputy Chairman – de facto executive head (full-time functional head);

 Was responsible for the formulation and submission of the draft Five-Year Plan to the Central cabinet.

 Was appointed by the Central cabinet for a fixed tenure and enjoyed the rank of a cabinet minister.

 Could attend cabinet meetings without the right to vote.

 Part-time members – Some central ministers

 Ex-officio members – Finance Minister and Planning Minister

The National Development Council (1952)

It is the apex body for decision making and deliberations on development matters in India, presided over by the Prime Minister. It
was set up on 6 August 1952 to strengthen and mobilize the effort and resources of the nation in support of the Plan, to promote
common economic policies in all vital spheres, and to ensure the balanced and rapid development of all parts of the country. The
Council comprises the Prime Minister, the Union Cabinet Ministers, Chief Ministers of all States or their substitutes, representatives
of the Union Territories and the members of the Planning Commission. It is an extra-constitutional and non-statutory body.

Growth of Indian economy under the various-five year plans of the Planning commission

First Five Year Plan:

 It was launched for the duration of 1951 to 1956,under the leadership ofJawaharlal Nehru.

 It was based on the Harrod-Domar model with a few modifications.

  Its main focus was on the agricultural development of the country.

 This plan was successful and achieveda growth rate of 3.6% (more than its target of 2.1%).

 At the end of this plan, five IITs were set up in the country

Second Five Year plan

 It was made for the duration of 1956 to 1961,under the leadership of Jawaharlal Nehru.

 It was based on the P.C. Mahalanobis Model made in the year 1953.

 Its main focus was on the industrial development of the country.

 This plan lags behind its target growth rate of 4.5% and achieved a growth rate of 4.27%.

 However, this plan was criticized by many experts and as a result, India faced a payment crisis in the year 1957.

Third Five Year Plan:

 It was made for the duration of 1961 to 1966, under the leadership of Jawaharlal Nehru.

 This plan is also called ‘Gadgil Yojna’, after the Deputy Chairman of Planning Commission D.R. Gadgil.

 The main target of this plan was to make the economy independent. The stress was laid on agriculture and the
improvement in the production of wheat.

 During the execution of this plan, India was engaged in two wars: (1) the Sino-India war of 1962 and (2) the Indo-Pakistani
war of 1965. These wars exposed the weakness in our economy and shifted the focus to the defence industry, the Indian
Army, and the stabilization of the price (India witnessed inflation).

 The plan was a flop due to wars and drought. The target growth was 5.6% while the achieved growth was 2.4%.

Plan Holidays:

 Due to the failure of the previous plan, the government announced three annual plans called Plan Holidays from 1966 to
1969.

 The main reason behind the plan holidays was the Indo-Pakistani war and the Sino-India war, leading to the failure of the
third Five Year Plan.

 During this plan, annual plans were made and equal priority was given to agriculture its allied sectors and the industry
sector.

 In a bid to increase the exports in the country, the government declared devaluation of the rupee.

Fourth Five Year Plan:

 Its duration was from 1969 to 1974, under the leadership of Indira Gandhi.

 There were two main objectives of this plan i.e. growth with stability and progressive achievement of self-reliance.

 During this time, 14 major Indian banks were nationalized and the Green Revolution was started. Indo-Pakistani War of
1971 and the Bangladesh Liberation War took place.

 Implementation of Family Planning Programmes was amongst major targets of the Plan

 his plan failed and could achieve a growth rate of 3.3% only against the target of 5.7%.
Fifth Five Year Plan:

 Its duration was 1974 to 1978.

 This plan focussed on Garibi Hatao, employment, justice, agricultural production and defence.

 The Electricity Supply Act was amended in 1975, a Twenty-point program was launched in 1975, the Minimum Needs
Programme (MNP) and the Indian National Highway System was introduced.

 Overall this plan was successful which achieved a growth of 4.8% against the target of 4.4%.

 This plan was terminated in 1978 by the newly elected Moraji Desai government.

Rolling Plan:

 After the termination of the fifth Five Year Plan, the Rolling Plan came into effect from 1978 to 1990.

 In 1980, Congress rejected the Rolling Plan and a new sixth Five Year Plan was introduced.

 Three plans were introduced under the Rolling plan: (1) For the budget of the present year (2) this plan was for a fixed
number of years– 3,4 or 5 (3) Perspective plan for long terms– 10, 15 or 20 years.

 The plan has several advantages as the targets could be mended and projects, allocations, etc. were variable to the
country’s economy. This means that if the targets can be amended each year, it would be difficult to achieve the targets
and will result in destabilization in the Indian economy.

Sixth Five Year Plan:

 Its duration was from 1980 to 1985, under the leadership of Indira Gandhi.

 The basic objective of this plan was economic liberalization by eradicating poverty and achieving technological self-reliance.

 It was based on investment Yojna, infrastructural changing, and trend to the growth model.

 Its growth target was 5.2% but it achieved a 5.7% growth.

Seventh Five Year Plan:

 Its duration was from 1985 to 1990, under the leadership ofRajiv Gandhi.

 The objectives of this plan include the establishment of a self-sufficient economy, opportunities for productive
employment, and up-gradation of technology.

 The Plan aimed at accelerating food grain production, increasing employment opportunities & raising productivity with a
focus on ‘food, work & productivity

 For the first time, the private sector got priority over the public sector.

 Its growth target was 5.0% but it achieved 6.01%.

Annual Plans:

 Eighth Five Year Plan could not take place due to the volatile political situation at the centre.

 Two annual programmes were formed for the year 1990-91& 1991-92.

Eighth Five Year Plan:

  Its duration was from 1992 to 1997, under the leadership ofV. Narasimha Rao.

 In this plan, the top priority was given to the development of human resources i.e. employment, education, and public
health.

 During this plan, Narasimha Rao Govt. launched the New Economic Policy of India.

 Some of the main economic outcomes during the eighth plan period were rapid economic growth (highest annual growth
rate so far – 6.8 %), high growth of agriculture and allied sector, and manufacturing sector, growth in exports and imports,
improvement in trade and current account deficit. A high growth rate was achieved even though the share of the public
sector in total investment had declined considerably to about 34 %

 This plan was successful and got an annual growth rate of 6.8% against the target of 5.6%.

Ninth Five Year Plan:

 Its duration was from 1997 to 2002, under the leadership of Atal Bihari Vajpayee.

 The main focus of this plan was “Growth with Social Justice and Equality”.

 It was launched in the 50th year of independence of India.

 This plan failed to achieve the growth target of 6.5% and achieved a growth rate of 5.6%.

Tenth Five Year Plan:

 Its duration was from2002 to 2007, under the leadership of Atal Bihari Vajpayee and Manmohan Singh.

 This plan aimed to double the Per Capita Income of India in the next 10 years.

 It also aimed to reduce the poverty ratio to 15% by 2012.

 Its growth target was 8.0% but it achieved only 7.6%.

Eleventh Five Year Plan:

 Its duration was from 2007 to 2012, under the leadership of Manmohan Singh.

 It was prepared by the C. Rangarajan.

 Its main theme was “rapid and more inclusive growth”.

 It achieved a growth rate of 8% against a target of 9% growth.

Twelfth Five Year Plan:

 Its duration is from 2012 to 2017, under the leadership of Manmohan Singh.

 Its main theme is “Faster, More Inclusive and Sustainable Growth”.

 Its growth rate target was 8%.

 For a long time, there had been a feeling that for a country as diverse and big as India, centralised planning could not work
beyond a point due to its one-size-fits-all approach. Therefore, the NDA government has dissolved the Planning
Commission which was replaced by the NITI Aayog. Thus, there was no thirteen Five Year Plan, however, the five-year
defense plan was made. It is important to note that the documents of the NITI Aayog have no financial role. They are only
policy guide maps for the government.
The three-year action plan only provides a broad roadmap to the government and does not outline any schemes or allocations as it
has no financial powers. Since it doesn’t require approval by the Union Cabinet, its recommendations are not binding on the
government.

Analysis of the working of Planning commission

Advantages of Planning Commission

 Planning Commission laid emphasis on infrastructure developments and capacity building. As a result, huge investments
were made in education, energy, industry, railways and irrigation.

 India became self-sufficient in agriculture and made great progress in capital sector goods and consumer sector goods.

 Planning Commission introduced many remarkable concepts like nationalisation, green revolution etc and transformed
itself to align with new concepts like liberalisation, privatisation and inclusion.

 Planning commission made great emphasis on social justice, governance, employment generation, poverty alleviation,
health and skill development.

 The transformation of India from a poor to an emerging economic power is credited to the orderly and phased manner in
which planning was implemented.

Challenges of Planning Commission

 No structural mechanism for regular engagement with states.

 Ineffective forum for the resolution of centre-state and inter-ministerial issues.

 Inadequate capacity expertise and domain knowledge; weak networks with think tanks and lack of access to expertise
outside government.

 Failed to implement land reforms.

 It was a toothless body, was not able to make union/states/UTs answerable for not achieving the targets.

 Designed plans with ‘one size fit for all’ approach. Hence, many plans failed to show tangible results.

 Weak implementation, monitoring and evaluation.

Genesis of NITI AYOG and its objectives

Planning Commission was replaced by a new institution – NITI AAYYOG on January 1, 2015 with emphasis on ‘Bottom –Up’
approach to envisage the vision of Maximum Governance, Minimum Government, echoing the spirit of ‘Cooperative Federalism’.

Reasons for Creation of NITI Aayog

 The 65 year-old Planning Commission had become a redundant organization. It was relevant in a command economy
structure, but not any longer.
  India is a diversified country and its states are in various phases of economic development along with their own strengths
and weaknesses.

 In this context, a ‘one size fits all’ approach to economic planning is obsolete. It cannot make India competitive in today’s
global economy.

Objectives of NITI Aayog :

 To foster cooperative federalism through structured support initiatives and mechanisms with the States on a continuous
basis, recognizing that strong States make a strong nation.

 To develop mechanisms to formulate credible plans at the village level and aggregate these progressively at higher levels of
government.

 To ensure, on areas that are specifically referred to it, that the interests of national security are incorporated in economic
strategy and policy.

 To pay special attention to the sections of our society that may be at risk of not benefitting adequately from economic
progress.

 To provide advice and encourage partnerships between key stakeholders and national and international like-minded Think
Tanks, as well as educational and policy research institutions.

 To create a knowledge, innovation and entrepreneurial support system through a collaborative community of national and
international experts, practitioners and other partners.

 To offer a platform for resolution of inter-sectoral and inter-departmental issues in order to accelerate the implementation
of the development agenda.

 To maintain a state-of-the-art Resource Centre, be a repository of research on good governance and best practices in
sustainable and equitable development as well as help their dissemination to stake-holders.

Framework of planning under the AYOG

 Chairperson:Prime Minister of India

 Governing Council:Comprising the Chief Ministers of all States and Lt. Governors of Union Territories.

 Regional Councils:Will be formed to address specific issues and contingencies impacting more than one state or region.

 Strategy and Planning in the NITI Aayog will be anchored from State-level. Regional Councils will be convened by the Prime
Minister for identified priority domains, put under the joint leadership of related sub-groups of States (grouped around
commonalities which could be geographic, economic, social or otherwise) and Central Ministries.

Regional Councils

 Have specified tenures, with the mandate to evolve a strategy and oversee implementation.

 Be jointly headed by one of the groups Chief Ministers (on a rotational basis or otherwise) and a corresponding Central
Minister.

 Include the sectoral Central Ministers and Secretaries concerned, as well as State Ministers and Secretaries. It will be linked
to corresponding domain experts and academic institutions.
  Have a dedicated support cell in the NITI Aayog Secretariat.

 States would thus be empowered to drive the national agenda. As a consequence, deliberation would be more grass-roots
informed, and recommendations would have more ownership, given their joint formulation.

 Special Invitees: experts, specialists and practitioners with relevant domain knowledge as special invitees nominated by the
Prime Minister.

Full-time Organisational Framework:

 Will comprise of, in addition to the Prime Minister as the Chairperson:

 Vice-Chairperson: to be appointed by the Prime Minister.

 Members: full-time: specialists with international exposure.

 Part-time Members: maximum of 2, from leading universities, research organizations and other relevant institutions in an
ex-officio capacity. Part-time members will be on a rotational basis.

 Ex-Officio Members: maximum of 4 members of the Union Council of Ministers to be nominated by the Prime Minister.

 Chief Executive Officer: to be appointed by the Prime Minister for a fixed tenure, in the rank of Secretary to the
Government of India.

 Secretariat: as deemed necessary.

NITI Aayog specialized Wings

 Research Wing – that will develop in-house sectoral expertise as a dedicated think tank of top domain experts, specialists
and scholars.

 Consultancy Wing – that will provide a marketplace of whetted panels of expertise and funding for Central and State
Governments to tap into; matching their requirements with solution providers, public and private, national and
international. By playing matchmaker instead of providing the entire service itself, NITI Aayog will be able to focus its
resources on priority matters, providing guidance and an overall quality check to the rest.

 Team India Wing – comprising representatives from every State and Ministry, will serve as a permanent platform for
national collaboration.

Performance of the AYOG since its inception

Digital Payments Movement

 The Government has prepared an action plan on advocacy, awareness and co-ordination of their handholding efforts
among general public, micro-enterprises and other stakeholders for which NITI Aayog had organised presentations or
interactions for training and capacity building of various Ministries/Departments of Government of India, representatives of
State/UTs, Trade and Industry Bodies as well as all other concerned stakeholders.

 A committee of Chief Ministers was constituted by NITI Aayog on Digital Payment on 30th November 2016, Chandrababu
Naidu, the Chief Minister of Andhra Pradesh as the convener to promote transparency, financial inclusion and a healthy
financial ecosystem nationwide which submitted its interim report to Prime Minister in January 2017.
  The state/UTs will be incentivised with Rs. 50 crore as a Central assistance for the promotion of digital transactions which is
to be used in districts for undertaking Information, Education and Communication activities to bring 5 crore Jan Dhan
accounts to a digital platform.

 To promote the use of digital payments through BHIM App, the Government has started the Cashback and referral bonus
schemes which were launched by the Prime Minister on 14th April 2017.

 The incentive schemes such as Lucky Grahak Yojana and the Digi Dhan Vyapar Yojana were also launched by NITI Aayog to
promote digital payments across all sections of society in which over 16 lakh consumers and merchants have won Rs. 256
crore under these two schemes.

 From December 25, 2016, till April 14, 2017, the Digi Dhan Melas were also been organised for 100 days in 100 cities.

Atal Innovation Mission

 In a view to strengthening the country’s innovation and entrepreneurship ecosystem, the Government has set up Atal
Innovation Mission (AIM) under NITI Aayog that spur innovation in schools, colleges, and entrepreneurs in general.
Following major schemes were rolled out in 2016-17 under Atal Innovation Scheme (AIM):

 Atal Tinkering Labs (ATLs): The Atal Innovation Scheme (AIM) is working to establish 500 ATLs in schools across India, where
students can design and make small prototypes based on the rapid prototyping technologies to solve challenges they see
around them.

 Atal Incubation Centres (AICs): The AICs will help start-ups to expand quicker and enable innovation-entrepreneurship, in
core sectors of the economy such as manufacturing, energy, transport, education, agriculture, water and sanitation, etc for
which Atal Innovation Mission (AIM) will provide financial support of Rs.10 crore and capacity building for setting up of
such AICs.

 Indices Measuring States’ Performance in Health, Education and Water Management

Social Development

 In a view to the Prime Minister’s focus on outcomes, NITI Aayog has developed indices measuring State’s performance in
Health, Education and Water Management.

 The indices will measure incremental annual performances in critical social sectors like health, education and water with a
view to nudge the states into challenging with each other for better outcomes.

 The indices will also help states to share the best practices and innovation in order to achieve gain from each other which is
an example of competitive and cooperative federalism.

Sub-Group of Chief Ministers on Rationalisation of Centrally Sponsored Schemes

 The sub-group has provided its recommend on the rationalization of centrally sponsored schemes and a Cabinet note was
prepared by NITI Aayog which also has been approved by the Cabinet.

 The sub-group has recommended several decisions which led to the rationalisation of the existing CSSs into 28 umbrella
schemes.
Sub-Group of Chief Ministers on Swachh Bharat Abhiyan
  This sub-group on Swachh Bharat Abhiyan was constituted on 9th March 2015 which has submitted its report to the Prime
Minister in October 2015.

 The most of the recommendations suggested by this sub-group have been accepted.

Sub-Group of Chief Ministers on Skill Development

 The sub-group on Skill Development was constituted on 9th March 2015, the report of which was submitted to the Prime
Minister on 31st December 2015.

 The key recommendations of the sub-group have been approved by the Prime Minister and already are in practice by the
Ministry of Skill Development.

 Task Force on Elimination of Poverty in India

 The Task Force on Elimination of Poverty in India was constituted on 16th March, 2015 under the Chairmanship of Dr
Arvind Panagariya, Vice Chairman, NITI Aayog, the report which was submitted to the Prime Minister on 11th July 2016.

 The primary focus of the task force was to find out the issues involved in the measurement of poverty and the list of
strategies to combat the poverty.

 The task force was unable to develop its consensus in favour of either the Tendulkar or a higher poverty line did not
emerge.

 The task force concluded and suggested that there is a requirement of another high-level committee of country’s top
experts which can analyse issues and suggest the best measure of poverty.

 The task force also suggested strategies combat poverty and it faster reduction through employment-intensive sustained
rapid growth and effective implementation of anti-poverty programs.

Task Force on Agriculture Development

 Agricultural development was set up on 16th March 2015 under the Chairmanship of Dr Arvind Panagariya, Vice Chairman,
NITI Aayog.

 The Task Force has prepared an occasional paper entitled “Raising Agricultural Productivity and Making Farming
Remunerative for Farmers” which is based on their work focusing on 5 critical areas of Indian Agriculture are:

o Raising Productivity

o Remunerative Prices to Farmers

o Land Leasing, Land Records & Land Titles

o Second Green Revolution-Focus on the Eastern States

o Responding to Farmers’ Distress

 The task force after getting all the required inputs from the states/UTs submitted its report on 31st May 2016.

 The task force has recommended significant policy measures to bring in reforms in the agriculture sector for the welfare of
the farmers as well as enhancing their income.
Transforming India Lecture Series

 NITI Aayog as the premier think-tank of the Government views knowledge building & transfer as the enabler of real
transformation in States and UTs.

 In a view to building knowledge systems for States and the Centre, NITI Aayog has launched the ‘NITI Lectures such as
Transforming India’ series, with full assistance from the Prime Minister on 26th August 2016.

 NITI Aayog’s lecture series has the aim of addressing the top policy-making team of the Centre including the members of
the Cabinet and several top bureaucrats of the country.

 The key aim of the lecture is to bring cutting edge ideas in development policy to policy makers and public, so as to
promote the basis of the transformation of India into a prosperous modern economy in the world.

The latest report 2019-20 mentions the achievements of Niti Aayog:

 Monitoring and Analysing Food and Agricultural Policies (MAFAP) programme in India – It is a collaborative research project
between Niti Aayog and the United Nations’ Food and Agriculture Organization (FAO).

 It aims to monitor, analyse and reform food and agricultural policies.

 The first phase of the MAFAP programme ran between 23rd September and 31 December 2019.

 National Agriculture Price Policy and National Food Security Policy for selected agricultural product marketing committees
and districts respectively were reported.

 The second phase of the MAFAP programme is scheduled between 1st January 2020 and 31st December 2021.

 The Niti Aayog governing council promoted Zero Budget Natural Farming.

 Additionally, natural farming is being promoted as ‘Bhartiya Prakritik Krishi Paddhati’ programme under Paramparagat
Krishi Vikas Yojana (PKVY).

Village Storage Scheme has been conceptualised. Similarly, Union Budget 2021 has proposed Dhaanya Lakshmi Village Storage
Scheme, yet to be implemented.

Issues plaguing the AYOG and measures to resolve these issues

 Like planning commission, it’s also a non-constitutional body which is not responsible to parliament.

 Dismantled planning commission without consulting the states.

 UTs are represented by Lieutenant Governors, not by chief ministers. This is against the principles of federalism.

 Fund allocation to welfare schemes may get affected. For example, there is a 20 % reduction in gender budgeting.

 To prove its mettle in policy formulation, the NITI Aayog needs to prioritize from the long list of 13 objectives with clear
understanding of the difference in policy, planning and strategy.
  To build the trust, faith and confidence more than the planning commission, NITI Aayog needs freedom of various kinds
with budgetary provisions not in terms of plan and non-plan expenditures but revenue and capital expenditure as the
higher rate of increase in capital expenditure can remove infrastructural deficits at all levels of operation in the economy.

 It does not possess mandate to impose policies.

 It does not have powers to allocate funds, which are vested in Finance Minister

 A deeply unequal society cannot be transformed into a modern economy by the NITI Aayog, that ensures the welfare of all
the citizens, irrespective of their social identity.

 NITI Aayog has no role in influencing private or public investment.

 NITI Aayog does not seem to influence policy-making with long-term consequences. For example, demonetization and
Goods and Services Tax.

 If NITI Aayog is a think-tank, it should be maintaining a respectable intellectual distance from the government. Instead,
what we see is uncritical praise of the Government-sponsored schemes and programs.

 NITI Aayog has not been able to answer some specific questions, like why 90% of the workers are still working in an
unorganized sector? and more informalisation is taking place in an organized sector.

 Women’s labor force participation rate is also decreasing when our neighbors like Bangladesh are registering an increase in
women’s labor participation.

 Though things are working in the NITI Aayog, but not with the pace that is required, which should not be the case.

 To make it relevant, Niti Aayog has been bestowed with too many powers but bestowing too many powers in a single body
is not a good idea for governance.

 The work of NITI Aayog includes to keep listening to the demands of the states and fulfill their needs which NITI Aayog has
not been able to do till now.

 The intention behind setting up NITI Aayog was to encourage participation in the economic policy and public involvement,
it has done neither.

 The prime minister himself is of the view that the NITI Aayog has not been able to do enough in promoting initiatives like
Swachh Bharat Mission, Make in India, and smart city projects in the states.

 It does not have the power to analyze the performance of various government schemes.

Changes required in NITI Aayog

 The need of the hour is that NITI Aayog has to evolve into a much stronger organization as compared to what it is now. NITI
Aayog should be engaged with the allocation of “transformational” capital in a formulaic manner, complete with incentive-
compatible conditionalities. As now when the Planning Commission has been dissolved, there is a vacuum especially as the
NITI Aayog is primarily a think tank with no resources to dispense, which renders it toothless to undertake a
“transformational” intervention.

 The implications that should be enforced in a complex country like India which has become an industrial economy late is
that the planning must continue as a central function of the state to bring the economy to long-run equilibrium.
  However, it can be contended that the Planning Commission was not able to fulfill its function adequately. The reason why
NITI Aayog came into force by replacing the Planning Commission, there was a necessity to grow into a much stronger
organization.

 The NITI Aayog should come up with new reforms, learn from the neighboring countries, for example learn from the
experience of the now industrialized Chinese state. It ensured after its market-oriented economic reforms began at the
State apparatus (China created special economic zones to push manufacturing and export-oriented industries. The general
rules of business were eased in these zones, marked out in areas with better infrastructure and access to cheap labor for
investors. Indian special economic zones that came up decades later lacked such push and better incentives to attract
foreign investors in numbers and size to give China a competition. China made a shift by promoting green energy like solar
power and reducing its dependence on coal massively. China has emerged as the second-largest solar energy producer.
India may emulate Chinese example to reduce its dependence on coal and oil, most of which it imports).

 The State Planning Commission should become more powerful by focussing on growth and poverty reduction. China with
its proper implementation of strategies became the “factory of the world” that was backed by an industrial policy that is
driven by the Reforms Commission and the National Development.

 Similarly, in all Southeast Asian and East Asian countries, industrial policy has always been planned and has been executed
as part of the five-year or longer-term plans.

 While Southeast Asian and East Asian countries still have and had five-year plans, the thing that was also integral to their
planning was the productive use of labor, the most abundant factor of these countries, through an export-oriented
manufacturing strategy. Such strategies have been lacking in India’s planning.

Conclusion

NITI Aayog should focus on the implementation rather than only focusing upon the recommendations of the policies. It should also
be focussing upon the reforms and informing the government as to where it will have to face the consequences for non-
implementation of its policies and where it is falling short. The establishment of NITI Aayog gave positive results but there is a need
to change and focus on areas that have been discussed in this article.
 UNIT -02 MAJOR PROBLEMS OF INDIAN ECONOMY

Poverty

Definition of Poverty

 Poverty is the state of one who lacks a usual or socially acceptable amount of money or material possessions.

 Poverty is said to exist when people lack the means to satisfy their basic needs

o In this context, the identification of poor people first requires a determination of what constitutes basic needs

o These may be defined as narrowly as “those necessary for survival” or as broadly as “those reflecting the prevailing
standard of living in the community.”

Classification of Poverty

 On the basis of social, economic and Political aspects, Poverty can be classified as follows:

Absolute poverty

o Also known as extreme poverty or abject poverty, it involves the scarcity of basic food, clean water, health, shelter,
education and information.

 Those who belong to absolute poverty tend to struggle to live and experience a lot of child deaths
from preventable diseases

o Absolute Poverty is usually uncommon in developed countries.

o It was first introduced in 1990, the “dollar a day” poverty line measured absolute poverty by the standards of the
world’s poorest countries; which in 2015, was changed to $1.90 a day, by the World Bank.

 This number is controversial; therefore each nation has its own threshold for absolute poverty line.

Relative Poverty

o It is defined from the social perspective, that is living standard compared to the economic standards of population
living in surroundings. Hence it is a measure of income inequality

o Usually, relative poverty is measured as the percentage of the population with income less than some fixed
proportion of median income

o It is a widely used measure to ascertain poverty rates in wealthy developed nations.

Situational Poverty
 

o It is a temporary type of poverty based on occurrence of an adverse event like environmental disaster, job loss and
severe health problem

o People can help themselves even with a small assistance, as the poverty comes because of unfortunate event

Generational Poverty

o It is handed over to individual and families from one generation to the one.

o This is more complicated, as there is no escape because the people are trapped in its cause and are unable to
access the tools required to get out of it

Rural Poverty

o This occurs in rural areas, where there are less job opportunities, less access to services, less support for disabilities
and quality education opportunities

o People here tend to live mostly on farming and other menial work available in the surroundings.

Urban Poverty

o The major challenges faced by the Urban people, because of Poverty include:

o Limited access to health and education

o Inadequate housing and services

o Violent and unhealthy environment because of overcrowding

o Little or no social protection mechanism.

Poverty in India at the eve of Independence

 The National Planning Committee of 1936 noted the appalling poverty of undivided India

o There was lack of food, of clothing, of housing and of every other essential requirement of human existence.

 At the time of Independence the incidence of poverty in India was about 80% or about 250 million

 After Independence, the reports published estimated poverty rates in 1950s as cyclical and a strong function of each year’s
harvest

o In 1956-57, India’s poverty rates was computed to be 65%(215 million people)

Various Methodologies Proposed by Various Committees for Calculation of Poverty

Various expert groups constituted by the Planning Commission have estimated the number of people living in poverty in India

Working Group (1962)

o The poverty line in India was quantified for the first time in 1962, by this Group in terms of a minimum requirement
(food and non-food) of individuals for healthy living

o The Group formulated separate poverty lines for rural and urban areas (₹20 and ₹25 per capita per month
respectively in terms of 1960-61 prices) without any regional variation

o The poverty line excluded expenditure on health and education, both of which, were to be provided by the State

Study by VM Dandekar and N Rath (1971)

o Although this was not a study commissioned by the Planning Commission, the origins of India’s poverty line lie in
the seminal work of these two economists

o They first established the consumption levels required to meet a minimum calorie norm, of 2,250 calories per
capita per day

o Unlike previous scholars who had considered subsistence living or basic minimum needs criteria as the measure of
poverty line, they derived poverty line from the expenditure adequate to provide 2250 calories per day in both
rural and urban areas

o They found poverty lines to be Rs. 15 per capita per month for rural households and Rs. 22.5 per capita per month
for urban households at 1960-61 prices

Task Force on “Projections of Minimum Needs and Effective Consumption Demand” headed by Dr. Y. K. Alagh (1979)

o Official poverty counts began for the first time in India based on the approach of this Task Force

o Poverty line was defined as the per capita consumption expenditure level to meet average per capita daily calorie
requirement of 2400 kcal per capita per day in rural areas and 2100 kcal per capita per day in urban areas

o Based on 1973-74 prices, the Task Force set the rural and urban poverty lines at 49.09 and Rs.56.64 per capita per
month at 1973-74 prices.

Lakdawala Expert Group (1993)

o It did not redefine the poverty line and retained the separate rural and urban poverty lines recommended by the
Alagh Committee at the national level based on minimum nutritional requirements.
 o However, it disaggregated them into state-specific poverty lines in order to reflect the inter-state price differentials

o Over the years, this method lost credibility. The price data were flawed and successive poverty lines failed to
preserve the original calorie norms

Tendulkar Expert Group (2009)

o The Tendulkar Committee suggested several changes to the way poverty was measured

 It recommended a shift away from basing the poverty lines from calorie norms used in all poverty
estimations since 1979 and towards target nutritional outcomes instead

 Instead of two separate poverty line baskets (PLBs) for rural and urban poverty lines, it recommended a
uniform all-India urban PLB across rural and urban India.

 It recommended using Mixed Reference Period (MRP) based estimates, as opposed to Uniform Reference
Period (URP) based estimates used in earlier methods for estimating poverty.

 It recommended incorporation of private expenditure on health and education while estimating poverty.

 It validated the poverty lines by checking the adequacy of actual private consumption expenditure per
capita near the poverty line on food, education and health by comparing them with normative
expenditures consistent with nutritional, educational and health outcomes respectively.

 Instead of monthly household consumption, consumption expenditure was broken up into per person per
day consumption, resulting in the figure of Rs 32 and Rs 26 a day for urban and rural areas.

 As a result, the national poverty line for 2011-12 was estimated at Rs. 816 per capita per month for rural
areas and Rs. 1,000 per capita per month for urban areas

Rangrajan Committee (2014)

o Due to widespread criticism of Tendulkar Committee approach as well as due to changing times and aspirations of
people of India, Rangarajan Committee was set up in 2012

o It reverted to the practice of having separate all-India rural and urban poverty line baskets and deriving state-level
rural and urban estimates from these.

o It recommended separate consumption baskets for rural and urban areas which include food items that ensure
recommended calorie, protein & fat intake and non-food items like clothing, education, health, housing and
transport.

o This committee raised the daily per capita expenditure to Rs 47 for urban and Rs 32 for rural from Rs 32 and Rs 26
respectively at 2011-12 prices

o Monthly per capita consumption expenditure of Rs. 972 in rural areas and Rs. 1407 in urban areas is recommended
as the poverty line at the all India level

o However, The government did not take a call on the report of the Rangarajan Committee
Poverty Alleviation Programmes since Independence

 Since the early 1950s, the government of India has initiated, sustained, and refined various planning schemes to help the
poor attain self-sufficiency in acquisition of food and overcome hunger and poverty

 All the Five year plans introduced in India, had elements in them to reduce Poverty; of which the following Five year
plans(FYP) had explicit provisions in them aimed at Poverty alleviation:

Fifth Plan (1974–1978)

 It laid stress on employment, poverty alleviation (Garibi Hatao), and justice

 It also assured a minimum income of Rs. 40 per person per month calculated at 1972-73 prices

Seventh Plan (1985–1990)

 The thrust areas of the Seventh Five-Year Plan were: social justice, removal of oppression of the weak,
using modern technology, agricultural development, anti-poverty programmes, full supply of food,
clothing, and shelter, increasing productivity of small- and large-scale farmers, and making India an
independent economy

 From perspective of Poverty, it aimed at improving the living standards of the poor with a significant
reduction in the incidence of poverty.

Eighth Plan (1992–1997)

 The major objectives included, controlling population growth, poverty reduction, employment generation,
etc.

Ninth Plan (1997–2002)

 It offered strong support to the social spheres of the country in an effort to achieve the complete
elimination of poverty

Tenth Plan (2002–2007)

 One of the main objectives of the plan, was Reduction of poverty rate by 5% by 2007

Eleventh Plan (2007–2012)

 It aimed at Rapid and Inclusive growth(Poverty reduction)

Twelfth Plan (2012–2017)

 The government intended to reduce poverty by 10% during the tenure of the plan
The major Poverty Alleviation Programmes in India since Independence are as follows:

Scheme/Programme Year Objective/Provisions

 This scheme was first started in 1945, during the Second World
War, and was launched in the current form after 1947

Public Distribution Pre-

System Independence
After the increase in Agricultural production after Green Revolution, the
outreach of PDS has been extended to tribal blocks, and areas of high
poverty incidence in the 1970s and 1980s

 It was among the world’s most ambitious programs to alleviate

rural poverty by providing income-generating assets to the
Integrated Rural poorest of the poor
Development 1978
Programme (IRDP)  Major objective of the scheme was to raise families of identified
target group below the poverty line, by creating sustainable
opportunities for self-employment in the rural sector

Rural Landless
 This was launched to generate additional employment
Employment Guarantee 1983
opportunities for the landless people in the villages.
Programme

 The scheme aimed at creating 20 lakh housing units, by giving

out loans to people at subsidised rates to make houses
Pradhan Mantri Gramin  It improved the standard of living of rural areas: health, primary
1985
Awaas Yojana education, drinking water, housing, and roads; thereby
alleviating some aspects of poverty and addressing the issue of
development in the rural areas

 This was launched with the objective of providing 90-100 Days

Jawahar Rozgar Yojna 1989 Employment per person particularly in backward districts

 People below Poverty Line were main targets

 The Revamped PDS was launched in 1992, with a view to

Revamped Public strengthen and streamline the PDS as well as to improve its
1992
Distribution System reach in far-flung, hilly, remote and inaccessible areas where
substantial section of poor live

 In 1997 RPDS became TPDS (Targeted PDS) which

Targeted Public established Fair Price Shops for the distribution of food grains at
Dsitribution 1997 subsidized rates
System(TPDS)
 The primary goal was to distribute essential food commodities
like rice, wheat and kerosene at highly subsidized rates to the
 people living below the poverty line. This poverty alleviation
scheme has helped in addressing the issue of food insecurity in
rural areas of India.

 It is for families below the poverty line

 This scheme provides a sum of ₹6000 to a pregnant mother in

National Maternity
1999-2000 three instalments
Benefit Scheme
 The scheme was updated in 2005-06 into Janani Suraksha
Yojana

 The main aim of this program was the development of

Jawahar Gram Samridhi infrastructure rural areas like roads, schools and hospitals
1999
Yojana (JGSY)  Its secondary objective was to give out sustained wage
employment

 This scheme was started to provide food to senior citizens who

cannot take care of themselves and are not under the National
Old Age Pension Scheme (NOAPS), and who have no one to take
Annapurna scheme 1999-2000 care of them in their village

 The scheme mostly targeted groups of ‘poorest of the poor and

‘indigent senior citizens’

 This scheme provides foodgrains at a highly subsidized rate of

Antyodaya Anna Yojana
2000 Rs.2.00 per kg for wheat and Rs.3.00 per kg for rice to the poor
(AAY)
families under the Targeted Public Distribution System (TPDS)

 This was a scheme launched by the Government of India to gain

the objective of providing gainful employment for the rural poor

 It was launched by merging the provisions of Employment

Sampoorna Gramin Assurance Scheme (EAS) and Jawahar Gram Samridhi Yojana
2001
Rozgar Yojana (SGRY) (JGSY)

 The programme is self-targeting in nature and aims to provide

employment and food to people in rural areas who lived below
the poverty line

 It aims to enhance livelihood security in rural areas by providing

at least 100 days of wage employment in a financial year to every
Mahatma Gandhi household whose adult members volunteer to do unskilled
National Rural manual work
2005
Employment Guarantee  Another aim of MGNREGA is to create durable assets (such as
Act (MGNREGA) roads, canals, ponds and wells)

 Through the process of providing employment on works that

address causes of chronic poverty such as drought, deforestation
 and soil erosion, the Act seeks to strengthen the natural resource
base of rural livelihood and create durable assets in rural areas.
Effectively implemented, MGNREGA has the potential
to transform the geography of poverty

 Launched with the objective, “To reduce poverty by enabling the

poor households to access gainful self- employment and skilled
National Rural Livelihood wage employment opportunities resulting in appreciable
2011
Mission improvement in their livelihoods on a sustainable basis, through
building strong and sustainable grassroots institutions of the
poor.”

 It focuses on organizing urban poor into Self Help Groups,

National Urban creating opportunities for skill development leading to market-
2013
Livelihood Mission based employment and helping them to set up self-employment
ventures by ensuring easy access to credit

Pradhan Mantri Ujjwala It was launched to distribute 50 million LPG connections to women of
2016
Yojana (PMUY) Below Poverty Line (BPL) families.

Impact of LPG reform on reducing poverty in India

India embarked on economic reforms 1991 – the positive impacts of which, on poverty are as follows:

o A World Bank study reveals that poverty declined by 1.36 percentage points per annum after 1991, compared to
that of 0.44 percentage points per annum prior to 1991

 Their study shows that among other things, urban growth is the most important contributor to the rapid
reduction in poverty even though rural areas showed growth in the post-reform period

o The second conclusion is that in the post-reform period, poverty declined faster in the 2000s than in the 1990s

 The official estimates based on Tendulkar committee’s poverty lines shows that poverty declined only 0.74
percentage points per annum during 1993-94 to 2004-05

 But poverty declined by 2.2 percentage points per annum during 2004-05 to 2011-12. Around 138 million
people were lifted above the poverty line during this period

 This indicates the success of reforms in reducing poverty

o The poverty of Scheduled Castes and Scheduled Tribes also declined faster in the 2000s.

 The Rangarajan committee report also showed faster reduction in poverty during 2009-10 to 2011-12

o Consequentially, Higher economic growth, agriculture growth, rural non-farm employment, increase in real wages
for rural labourers, employment in construction and programmes like the Mahatma Gandhi National Rural
 Employment Guarantee Act (MGNREGA) contributed to higher poverty reduction in the 2000s compared to the
1990s.

Other negative impacts of LPG relating to poverty, that need to be accounted for, are as follows:

o Poverty declined faster but inequality increased in the post-reform period

o India still has 300 million people below the poverty line

o The Gini coefficient measured in terms of consumption for rural India increased marginally from 0.29 in 1993-94 to
0.31 in 2011-12

 There was a significant rise in the Gini coefficient for urban areas from 0.34 to 0.39 during the same period

Reasons why poverty still exists in India

Heavy pressure of population

o India’s population was 84.63 crores in 1991 and became 102.87 crores in 2001

o Rapid population growth causes excessive sub-division and fragmentation of holdings. As a result, per capita
availability of land has greatly declined and households do not have access to sufficient land to produce enough
output and income for them.

o Rapid growth in population in India since 1951 has caused lower growth in per capita income causing lower living
standards of the people

Unemployment and under employment

o Due to continuous rise in population, there is chronic unemployment and under employment in India.

o There is educated unemployment and disguised unemployment, and Poverty is just a reflection of this aspect

Lack of Inclusive Economic Growth

o The first important reason for mass poverty prevailing in India is lack of adequate economic growth in India

o Despite increase in National Income and Savings rate since independence, poverty in India did not reduce
sufficiently as:

 industrial growth did not generate much employment opportunities

 Growth strategy mainly benefitted the rich, than aiding the poor

 Capital intensive and labour-displacing technology was adopted in the growing industries. As a result,
unemployment and underemployment increased

 Besides, due to the increase in income inequalities during this period, rise in average per capita income
could not bring about significant rise in per capita income of the weaker sections of the society
  Further, trickledown effect of overall economic growth was operating only to a small extent

Sluggish Agricultural Performance and Poverty

 The experience of Punjab and Haryana shows that, the agricultural growth through use of new high yielding
technology (during Green revolution), poverty ratio can be significantly reduced

 However, in various states of the country such as Orissa, Bihar, Madhya Pradesh, Assam, East Uttar
Pradesh, where poverty ratio is still very high; new high-yielding technology has not been adopted on a
significant scale and as a result agricultural performance has not been good. As a result, poverty prevails to
a larger extent in them.

 Further, Indian policy makers have neglected public sector investment in agriculture, particularly irrigation

 As a result, irrigation facilities whose availability ensures adoption of new high-yielding technology
and leads to higher productivity, income and employment, are available in not more than 33 per cent
of cultivable land

 As a result, many parts of the country remain semi-arid and rain-fed areas, where agricultural
productivity, income and employment are not sufficient to ensure significant reduction in poverty

Non-implementation of Land Reforms

 Equitable access to land is an important measure of poverty reduction

 Access to adequate land, a productive asset, is necessary for fuller employment of

members of an agricultural household

 Most of the rural poor are agricultural labourers (who are generally landless) and self-employed
small farmers owning less than 2 acres of land

 They also are unable to find employment throughout the year. As a result, they remain
unemployed and under-employed for a large number of days in a year

Inflation and Food Prices

 Inflation, especially rise in food prices, raises the cost of minimum consumption
expenditure required to meet the basic needs. Thus, inflation pushes down many
households below the poverty line

As assessment of Poverty Alleviation programmes, state three major areas of concern which prevent their successful
implementation

 Due to unequal distribution of land and other assets, the benefits from direct poverty
alleviation programmes have been appropriated by the non-poor

 Compared to the magnitude of poverty, the amount of resources allocated for these
programmes is not sufficient

 The programmes depend mainly on government and bank officials for their
implementation. Since such officials are ill motivated, inadequately
trained, corruption prone and vulnerable to pressure from a variety of local elites, the
resources are inefficiently used and wasted

 There is also non-participation of local level institutions in programme implementation

  Overlapping of similar government schemes is a major cause of ineffectiveness as it leads to
confusion among poor people and authorities and the benefits of the scheme do not reach the
poor.

 The poverty alleviation program may not properly identify and target the exact number of poor
families in rural areas. As a result, some of the families who are not registered under these
programs are benefited by the facilities rather than the eligible ones

Shortage of Capital and Able Entrepreneurship

 Capital and able entrepreneurship have important role in accelerating the growth. But
these are in short supply making it difficult to increase production significantly, when
compared to other developing countries

Social Factors

 The social set up is still backward and is not conducive to faster development.

 Laws of inheritance, caste system, traditions and customs are putting hindrances in the
way of faster development and have aggravated the problem of poverty

Actions required to address the above issues

More Citizen participation

o Without the active participation of the poor, successful implementation of any programme is not possible

o Poverty can effectively be eradicated only when the poor start contributing to growth by their active
involvement in the growth process.

 This is possible through a process of social mobilisation, encouraging poor people to participate to get
them empowered

Accelerating Economic Growth

 While efforts should be made to accelerate economic growth, the use of capital-intensive technologies
imported from the Western Countries should be avoided

 Instead, we should pursue labour-intensive path of economic growth.

 Such monetary and fiscal policies should be adopted that provide incentives for using labour-
intensive techniques

Agricultural Growth and Poverty Alleviation

o The higher agricultural growth leads to lower poverty ratio. The experience of Punjab and Haryana has confirmed
this inverse relation between agriculture growth and poverty.

 It is also true that, all India level employment generated by new green revolution technology has
been cancelled out by increasing mechanisation of agricultural operations in various parts of a country

 Thus, in the light of the finding of zero employment elasticity of agricultural output, positive impact of
agricultural growth on the incomes of small farmers and, more particularly on the wage income of
agricultural labourers, cannot be denied
  Hence, the need to balance between the two aspects

o Also, there is need to increase public investment in infrastructure and ensure adequate access to credit to the small
farmers

Accelerating Human Resource Development

o Focus on Education, Health and Skill development, not only generates a good deal of employment opportunities
but also raises productivity and income of the poor

o Hence, the need of efficient implementation of schemes like Pradhan Mantri Kaushal Vikas Yojana, Sarva Shiksha
Abhiyan (SSA) etc, going forward

Growth of Non-Farm Employment

o For reduction of poverty, growth of non-farm employment in the rural areas is of special importance.

o Non-farm employment can be created in marketing (i.e., petty trade), transportation, handicrafts, dairying, and
forestry, processing of food and other agricultural products, repair workshops, etc.

Providing access to more Assets to vulnerable section

o Rapid growth of population after independence has led to greater sub- division and fragmentation of agricultural
holdings, and this has resulted in lack of employment opportunities for agricultural labourers

o Redistribution of land through effective measures, such as implementation of tenancy reforms so as to ensure
security of tenure and fixation of fair rent could be an important measure of reducing rural poverty

Poverty alleviation has always been accepted as one of India’s main challenges by the policy makers

 There is improvement in terms of per capita income and average standard of living; even though some progress towards
meeting the basic needs has been made; But when compared to the progress made by many other countries, our
performance has not been impressive

 Hence, the need of actions to enable the fruits of development to reach all sections of the population

Unemployment

Definition of Unemployment

 Unemployment, according to the OECD (Organisation for Economic Co-operation and Development), is people above a
specified age not being in paid employment or self-employment but currently available for work during the reference
period

 Unemployment is measured by the unemployment rate, which is the number of people who are unemployed as a
percentage of the labour force (the total number of people employed added to those unemployed).

 The National Sample Survey Organization (NSSO),since its inception in 1950, does the measurement of employment /
unemployment in India

o In order to find out whether an individual is employed or unemployed it needs to be first determined whether
h/she belongs to the ‘Labour Force’ or not, which in turn depends on the Activity Status of the individual during the
chosen reference period
 o Activity Status refers to the activity situation in which the individual is found during the reference period with
respect to his participation in economic or non-economic activities

o The NSSO defines following three broad Activity Status

1. Working (engaged in an economic activity) i.e. ‘Employed’

2. Seeking or available for work i.e. ‘Unemployed’

 Neither seeking nor available for work

 All those individuals having a broad activity status as i) or ii) above are classified as being in the Labour Force and those
having activity status iii) are classified as outside the Labour Force. Thus labour force constitutes of both employed and
unemployed

Unemployment rate = (Unemployed Workers / Total labor force) X 100

 Further, Estimations of labour force, labour participation rate, unemployment rate, greater labour force, greater labour
participation rate and greater unemployment rate – are all computed using the employment / unemployment status of
persons of 15 years of age or more

Types of unemployment

 Cyclical unemployment

o Cyclical unemployment exists when individuals lose their jobs as a result of a downturn in aggregate demand (AD)

 If the decline in aggregate demand is persistent, it is either called demand deficient, general, or Keynesian
unemployment

o When companies experience a reduction in the demand for their products or services, they respond by cutting back
on their production, making it necessary to reduce their workforce within the organization. In effect, workers are
laid off.

 Example: Unemployment caused by the recession of 2008-2010

o Cyclical unemployment is normally a shot-run phenomenon; and are subject to trade cycles

 Structural unemployment

o Structural unemployment occurs when certain industries decline because of long term changes in market
conditions

o Drastic changes in the economic structure, affect either the supply of a factor or demand for a factor of production

o Structural employment is a natural outcome of economic development, technological advancement and innovation
that are taking place rapidly all over the world in every sphere

o For example, as old industries have declined, new industries have emerged, such as higher tech manufacture, IT,
computing, insurance, and internet based companies. However, these new industries may require a different skill
set to previous manufacturing jobs, and it is this that can cause structural unemployment

 Classical unemployment

o Classical unemployment is caused when wages are ‘too’ high.

 o This explanation of unemployment dominated economic theory before the 1930s, when workers themselves were
blamed for not accepting lower wages, or for asking for too high a wage

o Classical unemployment is also called real wage unemployment

 Seasonal unemployment

o Seasonal unemployment exists because certain industries only produce or distribute their products at certain times
of the year.

o Industries where seasonal unemployment is common include farming, tourism, and construction

o Ex: Workers in a ski resort will become unemployed after winter ends, while tourist guides in a hill station in India
are likely to lose work after summer when the influx of tourists is low

o Other example could be in the agricultural sector where the demand for workers is more during harvesting than is
required in other months in a year

 Frictional unemployment

o Frictional unemployment, also called search unemployment, occurs when workers lose their current job and are in
the process of finding another one.

o There may be little that can be done to reduce this type of unemployment, other than provide better information
to reduce the search time.

o This suggests that zero unemployment is impossible at any one time because some workers will always be in the
process of changing jobs.

 Voluntary unemployment

o Voluntary unemployment is defined as a situation when workers choose not to work at the current equilibrium
wage rate.

o For one reason or another, workers may elect not to participate in the labour market

 There are several reasons for the existence of voluntary unemployment including excessively generous
welfare benefits and high rates of income tax

 Disguised Unemployment

o It is a situation in which more people are doing work than actually required

o Even if some are withdrawn, production does not suffer. In other words it refers to a situation of employment with
surplus manpower in which some workers have zero marginal productivity

o Overcrowding in agriculture due to rapid growth of population and lack of alternative job opportunities may be
cited as the main reasons for disguised unemployment in India

 Educated Unemployment

o Among the educated people, apart from open unemployment, many are underemployed because their
qualification does not match the job

o Shortfalls in education system, mass output, preference for white collar jobs, lack of employable skills and
dwindling formal salaried jobs are mainly responsible for unemployment among educated youths in India
  Technological Unemployment

o It is the result of certain changes in the techniques of production which may not warrant much labour

o Modern technology being capital intensive requires fewer labourers and contributes to this kind of unemployment

 Casual Unemployment

o When a person is employed on a day-to-day basis, casual unemployment may occur due to short-term contracts,
shortage of raw materials, fall in demand, change of ownership etc.

 Chronic Unemployment

o If unemployment continues to be a long term feature of a country, it is called chronic unemployment.

o Rapid growth of population and inadequate level of economic development on account of vicious circle of poverty
are the main causes for chronic unemployment

Measurement of Unemployment in India

 There are three measures or estimates of unemployment. These are developed by National Sample Survey Organisation
(NSSO). They are:

o Usual Status Unemployment

 This measure estimates the number of persons who remained unemployed for a major part of the year.

 This measure gives the lowest estimates of unemployment

o Weekly Status Unemployment

 The estimate measures unemployment with respect to one week.

 A person is said to be unemployed if he is not able to work even for an hour during the survey period.

 In other words according to this estimate, a person is said to be employed for the week, even if he/she is
employed only for a day during that week

o Current Daily Status Unemployment

 It considers the activity status of a person for each day of the preceding seven days. The reference period
here is a day.

 If a person did not find work on a day or some days during the survey week, he/she is regarded as
unemployed

 Normally if a person works for four hours or more during a day, he or she is considered as employed for the
whole day.

 The daily status unemployment is considered to be a comprehensive measure of unemployment

Unemployment Trends in India

 Post-independence, the issue of employment has had different resonance during different Plan periods.

o In the initial years of development planning, unemployment was not expected to emerge as a major problem. It
was assumed that reasonable growth rate and labour intensive sectors would prevent any increase in
unemployment and this expectation continued from one Five Year Plan to another during the 1950’s and 1960’s

o However, the economy grew at a slower pace (around 3.5% as against the planned rate of 5% per annum) and
the labour force grew more rapidly than the increase in employment , doubling the unemployment figures during
1956-1972, from around 5 to 10 million and increasing the unemployment rate from 2.6 to 3.8 per cent

 1980s to 2015

o According to the Indian government’s official statistics between the 1980s and mid-2010s, relying in part on the
NSSO data, the unemployment rate in India has been about 2.8 percent

o In absolute terms, according to the various Indian governments between 1983 and 2005, the number of
unemployed persons in India steadily increased from around 7.8 million in 1983 to 12.3 million in 2004–05

o Using the current daily status definition, the unemployment rate in India had increased from “7.3 percent in 1999–
2000 to 8.3 percent in 2004–5”, states the World Bank report

 2018-2019

o According to the Pew Research Centre, a significant majority of Indians consider the lack of employment
opportunities as a “very big problem”

 About 18.6 million Indians were jobless and another 393.7 million work in poor-quality jobs vulnerable to
displacement

o According to the International Labour Organization (ILO) – a United Nations agency, unemployment is rising in
India and the unemployment rate in the country stood at 3.5 percent in 2018 and 2019
 Present status

o Unemployment rate in India rose to 10.3% in 2020, according to a periodic labour force survey by the National
Statistical Office (NSO)

o The rise in the unemployment rate comes in the backdrop of the Covid-19 pandemic, which suspended commercial
activities for a long time, leading to people losing jobs countrywide

o Data from the periodic labour force survey shows the female unemployment rate in urban India at 13.1% for
October-December quarter of 2020, which is higher than the national average of 10.3%, while women labour force
participation rate stood at 20.6% compared to national average of 47.3%.

o Further, While 67 per cent of all men of working age are employed, only 9 per cent of all women of working age are
employed

o Overall, Women face a much higher unemployment rate of 17 per cent compared to 6 per cent for men
Causes of unemployment in India

 The Caste System

o The caste system, a structure of social stratification that can potentially pervade virtually every aspect of life in
India is a major factor in generating unemployment

o In some locations, certain kinds of work are prohibited for members of particular castes. This also leads to the
result that work is often given to members of a certain community, rather than to those who truly deserve the job
those who have the right skills

o The result is higher levels of unemployment

 Inadequate Economic Growth

o Indian economy is underdeveloped and role of economic growth is inadequate

o This slow growth fails to provide enough unemployment opportunities to the increasing population

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

 Increase in Population

o India’s population is predicted to exceed China’s by the year 2024; it will, furthermore, probably be the most
populous country for the entirety of the 21st century.
 o As the country’s economic growth cannot keep up with population growth, this leads to a larger share of the
society being unemployed

 Agriculture is a Seasonal Occupation

o Agriculture offers unemployment for a large segment of the population, but only for several months out of the
year.

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

 Loss of Small-Scale/Cottage Industries

o Industrial development has made cottage and small-scale industries considerably less economically attractive, as
they do not offer the economies of scale generated by large-scale mass production of goods.

o Oftentimes the demand for cheap, mass-produced goods outweighs the desire for goods that are handcrafted by
those with very specific skill and expertise.

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

 Low Rates of Saving and Investment

o India lacks sufficient capital across the board. Likewise, savings are low and the result is that investment—which
depends on savings—is also low.

o Were there higher rates of investment, new jobs would be created and the economy would have kickstarted

o Also, there is lack of investment in rural areas and tier 2 and tier 3 cities as well, as a result of which there is exists
large untapped employment potential

 Ineffective (or absent) Economic Planning

o Problematically, there have been no nationwide plans to account for the significant gap between labor supply
(which is abundant) and labor demand (which is notably lower)

o It is crucial that the supply and demand of labor are in balance, to ensure that those who need jobs are able to get
them; otherwise, many individuals will compete for one job.

 Labor Immobility

o Culturally, attachment and maintenance of proximity to family is a major priority for many Indian citizens. The
result is that people avoid traveling long distances from their families in pursuit of employment.

o Additionally, language, religion, and climate can also contribute to low mobility of labor

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

 Job Specialization

o Jobs in the capitalist world have become highly specialised, but India’s education system does not provide the
right training and specialisation needed for these jobs. Thus many people who are willing to work become
unemployable due to lack of skills.
 Lack of essential skilling

o A study reveals that 33% of educated youth in India are unemployed due to a lack of future skills

o Millions of students in our country even after finishing schooling, remain devoid of hands-on learning and robust
practical knowledge.

Programmes, policies and measures taken to address Unemployment in India since Independence

Programme/Policy Year Objectives/Measures

This scheme was started in 1979 with objective to help

Training of Rural Youth for Self-
1979 unemployed rural youth between the age of 18 and 35 years to
Employment (TRYSEM)
acquire skills for self-employment

The aim of the program is to provide employment opportunities to

Integrated Rural Development
1980 the poor as well as opportunities to develop their skill sets so as to
Programme (IRDP)
improve their living conditions.

This was a restructured version of the Food For Work Programme

National Rural Employment
1980 · It aimed at the implementation of additional employment to
Programme
under employed persons

Launched with the aim of mitigating the unemployment problem

among the youth, jointly by Sri Dharmasthala Manjunatheshwara
Educational Trust, Syndicate Bank and Canara Bank in 1982, which
was the setting up of the “RURAL DEVELOPMENT AND SELF
RSETI/RUDSETI 1982 EMPLOYMENT TRAINING INSTITUTE” with its acronym RUDSETI
near Dharmasthala in Karnataka

· Presently, these are now managed by Banks with active co-

operation from the Government of India and State Government.

This was launched by merging National Rural Employment

Programme and Rural Landless Employment Guarantee
Programme

· This was a consolidation of the previous employment

Jawahar Rozgar Yojana (JRY) 1989
programs and it was largest National Employment Program of India
at that time with a general objective of providing 90-100 Days
Employment per person particularly in backward districts

· People below Poverty Line were main targets

This was launched by merging the provisions of Employment

Assurance Scheme (EAS) and Jawahar Gram Samridhi Yojana (JGSY)
Sampoorna Grameen Rozgar
2001 · The programme is self-targeting in nature and aims to
Yojana
provide employment and food to people in rural areas who lived
below the poverty line.
 It is an employment scheme that was launched in 2005 to provide
Mahatma Gandhi National social security, by guaranteeing a minimum of 100 days paid work
Rural Employment Guarantee 2005 per year to all the families whose adult members opt for unskilled
Act labour-intensive work.

· The act provides Right to Work to people

The mission of the scheme is

“To reduce poverty by enabling the poor households to access

Deen Dayal Antyodaya Yojana – gainful self-employment and skilled wage employment
National Livelihoods Mission 2013 opportunities, resulting in appreciable improvement in their
(NRLM) livelihoods on a sustainable basis, through building strong
grassroots institutions of the poor.”

This was launched to drive the ‘Skill India’ agenda in a ‘Mission

National Skill Development
2014 Mode’ in order to converge the existing skill training initiatives and
Mission
combine scale and quality of skilling efforts, with speed

To enable a large number of Indian youth to take up industry-

Pradhan Mantri Kaushal Vikas
2015 relevant skill training that will help them in securing a better
Yojana (PMKVY)
livelihood

National Career Service (NCS) project is a Mission Mode Project

launched by the Ministry of Labour and Employment
(India)Government of India for establishing quick and efficient
career related services across the country by revamping the
existing nation-wide set-up of Employment Exchanges into IT-
enabled Career Centers
National Career Service (India) 2015
· It was launched as part of the government’s focus on
providing right skills and generating employment

· The Career Centres are a modified version of Employment

Exchanges which serve as a platform for addressing all career-
related needs of the youth and students.

The scheme aims to enable Micro Finance Institutions (MFIs), Non-

Banking financial institutions/Companies (NBFCs), Small Finance
Banks, RBRs, Commercial Banks, Cooperative Banks, etc. to provide
Pradhan Mantri Mudra Scheme 2015 Low Rate Loans to eligible entities

· One of the objectives of this scheme is to help generate

sources of employment and increase the overall GDP by providing
micro-enterprises with credit facilities

Start Up India Scheme 2016 The primary objective of Startup India is the promotion of
startups, generation of employment, and wealth creation. The
 Startup India has initiated several programs for building a robust
startup ecosystem and transforming India into a country of job
creators instead of job seekers

The scheme is aimed at incentivising employers to generate

employment, where the Government pays the employers’
Employee Pension Scheme share of 8.33 percent, for new
Pradhan Mantri Rojgar employees for the first three years of their job
2016-17
Protsahan Yojana · The scheme targets workers who earn wages of less than INR
15000 on a monthly basis. It encourages employers of Small and
Medium Enterprises and Micro Businesses to avail the benefits of
this project

Objective Analysis of Unemployment schemes in India

 Despite the Government devolving power and funds to implement projects, most of the schemes contribute to follow
a top-down model

o This is the Irony with Jawahar Rozgar Yojana (JRY)

 The government sets financial and physical limits for schemes to be executed by panchayats and
determines priorities for funding

 This, observers say, has led to the creation of mostly non-productive assets such as school boundary walls
and panchayat halls.

 Corruption continues to flourish, though it has shifted from a bureaucrat-contractor nexus to one linking
the sarpanch and contractor

 The government introduced Pradhan Mantri Rojgar Protsahan Yojana(PMRPY) to generate new employment by
incentivising employers

o Under the scheme, the central government provides the entirety of the employers’ contribution towards the
Employers Provident Fund, or EPF, scheme—12 percent—for a period of three years for new employees who earn
less than Rs 15,000 a month

o But, at least 40 percent of the eligible employees in the country are still outside this scheme

o A case study based on a sectoral analysis of the power loom industry in Solapur district of Maharashtra showed
that lax implementation of the scheme is one of the major reasons behind its inefficacy

 The Mudra scheme was launched to provide loans to target Enterprises

o However, data from public-sector banks shows that loans given under the scheme since 2015—over three crore
loans, worth Rs 1.5 lakh crore, were disbursed in 2018 alone—have added to the Non Performing Assets, or NPA
crisis

 The Government in 2015, announced that 40 crore people would be imparted skill training by 2022 under the aegis of Skill
India

o In regards to this, there have been reports of bogus enrolments by private partners who are entitled to 75 percent
of government subsidy on the sanctioned cost of Rs 10,000 per candidate
 o Also, the data from Skill India is hardly credible because all these figures are self-reported and there is no
authentication process for enrolment and certification.

o There is no monitoring of the skill centres to see whether the courses are even conducted

 Pradhan Mantri Kaushal Vikas Yojana (PMKVY) has been criticised for training lakhs of women in conventional sectors
such as weaving, bakery, apparel, and retail, instead of imparting skills that help them enter new job sectors such as
construction, electronics, IT services and financial services

o There is also the lack of support to the handicrafts sector, which could enhance existing skills in an ecological
manner in India’s rural areas

 The following new schemes were to boost employment in India. However, these schemes have not so far yielded the
expected results:

o The main aim of the Make in India programme was to generate employment in the manufacturing sector

 Stringent land acquisition laws and inflexible labour regulations make it difficult for India to attract
investors in the manufacturing sector.

 Local apparel, footwear, textiles and leather industries did not receive any support from the government in
the form of funding.

o The government aimed to stress on automation through the introduction of Digital India

 Combined with Demonetisation, the switch to online transactions resulted in the closing down of many
local kirana stores that accepted only cash payments

o Under Startup India, the Government encouraged banks to provide finance to young entrepreneurs to start their
own business ventures

 However, lack of innovation and lack of skilled labour resulted in the shutdown of many new startups

 It could be suggested that not only did Startup India fail to create more jobs, it may have actually resulted
in a lot of individuals losing their jobs

Measures required to reduce the current unemployment rate in India

 Use of Labour-intensive Technology

o Both the organised and un-organised sectors must adopt labour-intensive technology if sufficient employment
opportunities are to be generated in both the rural and urban sectors of the economy.

o Increasing mechanization of agriculture in various states has lowered the employment elasticity of growth of
agricultural output.

o Of course, the use of labour-intensive techniques with lower productivity of workers in the industry and agriculture
may lower the growth of output.

 Thus, there might be same trade-off between employment and growth of output. In our view due to the
seriousness of unemployment problem some output growth should be sacrificed for the sake of more
employment.

 Accelerating Investment in Agriculture

 o An important reason for slow growth of employment in agriculture and rural sector has also been a shortfall in
investment or capital formation in agriculture

o It is worth noting that investment not only generates employment directly but also has a multiplier effect which
operates through backward and forward linkages

 Diversification of Agriculture

o There is an urgent need for a relative shift from growing of crops to horticulture, vegetable production, floriculture,
animal husbandry, fisheries etc. which are more labour absorbing and higher income-yielding.

o In addition to this, promotion of agro-processing industries for export purposes has a large employment potential

 Education, Health and Employment Generation

o The expansion of education and health care not only promotes accumulation of human capital and thereby
contributes to growth of output, it will also generate a good deal of employment opportunities

 Development of the rural areas

o This will help mitigate the migration of the rural people to the urban areas thus decreasing the pressure on the
urban area jobs

 Overhaul of Education system

o Government needs to keep a strict watch on the education system and should try to implement new ways to
generate skilled labour force.

o Industry collaboration, Vocational training, Upgrading the standards of Education could be the way forward in this
perspective

 Need for National Employment Policy (NEP)

o This would encompass a set of multidimensional interventions covering a whole range of social and economic
issues affecting many policy spheres and not just the areas of labour and employment.

o The policy would be a critical tool to contribute significantly to achieve the goals of the 2030 Agenda for
Sustainable Development

 Decentralised Development

o It has been observed that unemployment is especially concentrated in certain regions.

o In order to overcome this geographical disparity, the government could incentivize firms to set up operations in
these areas by giving tax breaks.

 Urban MGNREGA needed

o India needs to formulate an urban national job guarantee scheme on the lines of the Mahatma Gandhi National
Rural Employment Guarantee Scheme (MGNREGS) to help people recover from massive job and income loss
following the coronavirus outbreak, a parliamentary standing committee has recommended to the Union
government
 Economic Inequality Definition

Economic inequality is the unequal distribution of income, wealth, and opportunity across and within groups in society. This
concept can also apply to the unequal distribution of income and wealth across countries.

Economic inequality is the representation of how some households earn below the poverty line while some others earn above it.
Basically, the differences in income and wealth.

Economists group households into quintiles, and each quintile contains a fifth or 20% of the entire population. The quintiles are
presented in order of poverty. Therefore, the first 20% or the first quintile represents those who are poorer than 80% of the
population. The 20% above that, or the second quintile, represents those who are poorer than 60% of the population. This goes up
three more times till we have those who are richer than 80% of the population.

Economic Inequality or Economic Disparity

So, you have heard economic inequality and economic disparity, and you were wondering what they were. Well, if you guessed
that they were the same thing, you were right! Economic disparity is just a different way of saying economic inequality, which is the
unequal distribution of income, wealth, and opportunities across different groups in society.

Economic disparity is just a different way of saying economic inequality, which is the unequal distribution of income, wealth, and
opportunities across different groups in society.

Types of Economic Inequality

There are two types of economic inequality. These are income inequality and wealth inequality.

Income inequality is the unequal distribution of earnings throughout a population.

This is different from wealth inequality, which is primarily concerned about ownership. Wealth inequality focuses on ownership of
assets like cars, houses, businesses, and even shares, among others.

Wealth inequality is the unequal distribution of wealth throughout a population.

From this, we realize that people who earn the same level of income can have different levels of wealth. For example, some people
may own more houses than other people who receive the same salary.

Note the difference - income inequality looks at earnings, and wealth inequality looks at ownership.

Economic Inequality Index

The inequality index will be explained here, but let's first look at the visualization of economic inequality. Income inequality is
visualized using the Lorenz curve. What the Lorenz curve does is that it basically shows the real distribution of income on a graph. It
shows the cumulative percentage of the population on the x-axis against the cumulative percentage of income on the y-axis.
Figure 3 shows the Lorenz curve for the USA.

The Lorenz curve is the graphical representation of income inequality in a population.

This can be quite confusing to understand, so let's make it easier for you.

For instance, if the poorest 20% of the economy received exactly 20% of the income, this would mean that there is equality since
each percentage of the population receives exactly the same percentage of income. However, this is not the case in reality, and the
Lorenz curve would fall below the equality line, as shown in Figure 3.

If the Lorenz curve was the same as the equality line, there would be equality.

Economists usually want to summarize the level of inequality in a country, and they do this with the Gini coefficient. The Gini
coefficient is also known as the Gini index or the economic inequality index. The easiest description of the Gini coefficient is in
Figure 3 above. If the area between the Lorenz curve and the inequality line is larger, the Gini coefficient is larger. It basically
measures the distribution of income.

The Gini coefficient is a summary number of how uneven the income distribution is for a given population. The higher the number,
the more unequal is the income distribution.

As you can see, both the Lorenz curve and the Gini coefficient are used to represent inequality in a given population. They can also
be used to compare the levels of inequality across different populations.

Causes of Economic Inequality

Let's explain the why and how of economic inequality. There are a number of causes of economic inequality; some of these are
explained here.

1. Each factor of production gets paid the value of its marginal product - To explain this simply, if capital has a higher marginal
product in industries than labor, the households that supply the capital will earn more than the households that supply the
labor. In other words, capital owners will earn more than workers in these industries.

2. Differences in tax structures - Here, a regressive tax structure creates a situation where lower-income earners pay higher
percentages of tax on their income compared to higher-income earners.

3. Human capital - Here, two workers may have the same qualifications, but the worker with more experience can earn more
than the other with less experience.

4. Social capital - People with powerful social connections are in a better position to exploit economic opportunities.

5. Inheritance - People are born automatically richer if they are born into wealthy families.

6. Discrimination - This refers to several types of discrimination, racial, gender-based, or any other type of discrimination that
affects how workers are valued.

7. Access to financial markets - Here, the richer you are, the more likely you are to be granted a loan or given credit. This
widens the inequality gap between the rich and the poor since the poor do not have as much access to loans, insurance,
credit, and other financial services.

8. Bargaining power within economic and social units (firms, families, and so on) - For example, the labor union is a way for
workers to increase their bargaining power within a firm. Labor unions are able to bargain for higher wages since they
control the supply of labor to an extent. Therefore, a stronger labor union for drivers may bargain for higher wages,
whereas a weaker union for a different profession may receive lower wages.

Economic inequality may be fair or unfair in some of these situations, but remember not to only focus on the unfair ones. The point
is that income and wealth are distributed unequally, and these are the causes.