B.Com 3rd Year Course Code- BC 3.8

Indian Economy

Lesson 1- 21

International Centre for Distance Education & Open Learning Himachal Pradesh University, Summer Hill, Shimla – 171005

Table of Contents

Chapter-1: Economic Growth, Development and Underdevelopment Chapter-2: Economic and Human Development Chapter-3: National income: Measurement, Growth and Industrial Origin Chapter-4: Economic Planning: Rational Features and Objectives Chapter-5: India’s Fiscal Policy Chapter-6: Monetary Policy Chapter-7: Poverty in India Chapter- 8: Some Demographic Issues Chapter- 9: Basic Issues in Agriculture Chapter- 10: Green Revolution Chapter- 11: Food Problem and Public Distribution System Chapter-12: Industrial Growth: Performance and Problems Chapter: 13: Public Sectors in India: Role, Growth and Problems Chapter- 14: Services Sector: Chapter-15: Financial Sector Chapter- 16: WTO and India Chapter- 17: India’s Foreign Trade Chapter- 18: India’s Balance of Payments Chapter- 19: Trade Policy of the Government of India Chapter- 20: Inflation Chapter- 21: Unemployment and Labour Force

Chapter-1

Economic Growth, Development and Underdevelopment

1.1 Introduction 1.2 Concept of Economic Development 1.3 Underdevelopment: Meaning and Characteristics 1.4 Indicators of Development 1.5 Exercise

1.1 Introduction Today, economic growth is everybody‘s concern and in such a milieu, growth theory has received particular attention of economists. Yet surprisingly, there is no consensus on the definition of the term. Different economists have used the term ‗economic growth‘ to convey different meanings. In some cases the concepts differ in essence whereas in others only in emphasis. Some other economists are of the view that the term ‗economic growth‘ is very much obvious and there is no need to frame a precise definition of it. Thus, quite often no distinction is made between ‗economic growth‘ and ‗economic development‘ and the two terms are used interchangeable. In this chapter, we propose to address the following issues:  Concept of Concept of Economic Development  Underdevelopment Meaning and Indicators  Common Characteristics of Underdevelopment/developing Countries 1.2 Concept of Economic Development Till the 1960s the term ‗economic development‘ was often used as a synonym of ‗economic growth‘ in economic literature. Now, economic development is no longer considered identical with economic growth as economic development is a broader concept than economic growth. Development reflects social and economic progress and requires economic growth. Growth is a vital and necessary condition for development, but it is not a sufficient condition as it cannot guarantee development.

Concept of Economic Development  Till the 1960s, economic development was often used as a synonym of economic growth  Once economic development was not conceptualized as economic growth, two different approaches developed;  The Traditional Approach i. Sustained annual increase in GDP at the rate of 5to7 percent or more ii. Structural transformation of an agrarian economy into an industrialized economy  The New Economic View of Development i. It has been defined to include improvements in material welfare, specially for persons with the lowest incomes, the eradication of mass poverty with its correlates of illiteracy, disease and early death and finally alleviation of unemployment and income inequality. ii. Protection of Environment is now considered to be a part of the new concept of development.

1.3 Underdevelopment: Meaning and Indicators In understanding the phenomenon of underdevelopment, it is useful first to know as to what constitutes its essence. It is also necessary to know its various dimensions and extent of the same. This will help us in identifying the underdeveloped countries and in recognizing the gravity of the problem these countries face. The term underdevelopment refers to that state of an economy where levels of living of masses are extremely low due to very low levels of per capita income resulting from low levels of productivity and high growth rates of population. Underdeveloped countries are now known as ‗developing countries‘ signifying that such nations are capable of and are indeed making serious efforts to overcome their problems of poverty and low income. Characteristics of Underdeveloped Economy 1. Low Level of Income: Underdeveloped countries are maintaining a very low level of income in comparison to that of developed countries. The per capita incomes of these groups of countries are extremely low if we compare it with that of developed countries. Moreover, inequality in the distribution of income along with this low level of income worsens the situation in these economies to a disastrous level. 2. Mass Poverty:

Existence of chronic mass poverty is another characteristic of underdeveloped economies. This problem of poverty arises not due to any temporary economic maladjustment but arises mainly due to existence of orthodox methods of production and social institutions. The degree of poverty in these economies gradually increases due to increase in its size of population, growing inequality in income and increasing price level. 3. Lack of Capital Formation: Developing or underdeveloped countries of the world are suffering from poor rate of capital formation. As the level of per capita income in these countries is very low thus their volume and rate of savings are also very poor. This has resulted lack of capital formation and which is again responsible for low rate of investment in these countries. 4. Heavy Population Pressure

The underdeveloped countries are also characterized by heavy population pressure. The natural growth rate of population in these countries is very high due to its prevailing high birth rate and falling death rate. This excessive population pressure has been creating the problem of low standard of living and reduction in the average size of holding. The population in these countries is increasing by 2 to 3 per cent per annum which has created various problems like scarcity of agricultural land, small size of holding, problem of unemployment, food crisis, poverty etc.

5. Unemployment Problem: Excessive population pressure and lack of alternative occupations have resulted in huge unemployment and underemployment problem in these underdeveloped countries. In the absence of growth of alternative occupations both in the secondary and tertiary sector of these countries, this increasing number of population is being thrown on land to eke out their living from agricultural sector. This sort of increasing dependence on agricultural sector leads to disguised unemployment or under-employment in these economies to a large scale. Moreover, problem of educated unemployment in these economies is also increasing gradually day by day due to lack of industrial development. 6. Mass Illiteracy: Underdeveloped countries are mostly characterized by the existence of mass illiteracy. Due to illiteracy the people in these countries are very much superstitious and conservative which is again responsible for lack of initiative and enterprise on the part of people of these countries.

7. Poor Socio-Economic Condition: Underdeveloped countries are also suffering from totally poor socio-economic conditions. The path of economic development in these countries is being obstructed by various socio-economic factors like-joint family system, universal marriage, costly social customs and the law of inheritance.

1.4 Indicators of Development The extent to which a country has developed may be assessed by considering a range of narrow and broad indicators, including per capita income, life expectancy, education, and the extent of poverty.

1. Per Capita Income The most important indicator of economic underdevelopment is low per capita income. Usually, an LDC is defined as one in which per capita real income is low when compared with that of USA, Canada, Australia and Western Europe. Statistical studies show low-in- come countries are much poorer than advanced countries like the USA. In fact, their measured per capita incomes are above 20% of those in high-in- come countries. However, Prof. Samuelson states that standard comparisons are distorted by the use of official exchange rates to compare living standards.

2. Life expectancy A variety of factors may contribute to differences in life expectancy, including:  The stability of food supplies  War  The incidence of disease and natural disasters According to World Bank figures, life expectancy at birth in developing countries over the past 40 years has increased by 20 years. However, these increases were not evenly distributed. Indeed, in many countries in sub-Saharan Africa, life expectancy is falling due to the AIDS epidemic 3. Poverty The next important indicator of economic underdevelopment is poverty. Not only per capita income is low, there is inequality in the distribution of income. Many people in LDCs do not get the minimum level of income necessary for a minimum caloric intake are said to be living below the poverty line. In India it is 25% at present, however it is not easy to define and whatever be the approach, there is bound to be an element of arbitrariness in it.

4. Operational Pattern Another important indicator of economic back•wardness is occupational pattern. It is widely believed that the countries in which most of national output or national income is derived from the primary sector (i.e., agriculture, forestry, animal husbandry, mining etc.) are underdeveloped. In other words, the greater the contribution of agricul•ture, the more economically backward a country is supposed to be. Most people in LDCs live in rural areas and work on farms. In India, for example, 70% of the total population depends on agriculture directly or indirectly. In advanced countries most people work on factories or are engaged in trade and professions. Similarly, the contribution of agriculture and allied activi•ties to net national product is quite high. In India, it is around 40% at present. In advanced countries the percentage is in between 8 to 10 1.5 Exercise: 1. Short answer type Questions A. Multiple Choice Questions 1. Which of the following explains the term economic growth? a. Increase in per capita production b. Increase in per capita real income c. structural change in the economy d. all the above are right 2. Economic development is characterized by a. Structural change in the economy b. Change in the occupational structure c. Both a and b d. None of the above

3. Which of the following explains the term economic development? a. Improvement in the technology involved b. Improvement in production c. Improvement in distribution system d. All the above

4. An underdeveloped economy is characterized by a. High per capita real income b. Large proportion of labor force in the tertiary sector c. State of deprivation of large proportion of population d. All the above

5. Scarcity of capital , technological backwardness and unemployment are generally found in a. Developed countries b. Underdeveloped countries c. Both d. None of the above Which of the following denotes an underdeveloped economy? a. High level of inequalities b. Low level of capital productivity c. A relatively closed economy d. All the above 7. Capital formation in underdeveloped countries is a major bottleneck. The reason can be: a. Small size of market with no incentive for investment b. Low level of income c. Demonstration effect d. All the above 8. Consider the following statements and identify the right ones. i. Higher level of capital-output ratio indicates efficient use of capital. ii. It reflects the productivity of capital in the economy a. I only b. ii only c. both d. none 9. Consider the following statements and identify the right ones. i. COR is relatively low in labour intensive sectors. ii. COR will be high in capital intensive sectors iii. Both iv. None 10. Which of the following about strategy of balanced growth is right? a. Simultaneous investment in all sectors b. All sectors are independent. c. Both d. None ANSWER:1- d, 2-c, 03-d, 04-c, 05-b, 06-d, 07-d, 08-b, 09-iii, 10-a

2. Concept based Questions 1. Describe development and its major features in a developing economy. 2. ―Capital formation in underdeveloped countries is a major bottleneck‖. Explain. 3. Explain the important indicator of economic underdevelopment. 4. ―The underdevelopment refers to that state of an economy where levels of living of masses are extremely low due to very low levels of per capita income.‖ Comment.

Chapter-2

Economic and Human Development

2.1 Introduction 2.2 Concept of Human Development 2.3 Objectives of Human Development 2.4 Essential Components of Human Development 2.5 The Human Development Index (HDI)

2.1 Introduction

Economic development is a complex process. It is influenced by natural resources and both economic and non-economic factors. Role of natural resources has always been recognized in economic development. As a matter of fact, natural resources often decide the limits of development. Among the economic factors which determine the development process in any county, the most prominent once are the available capital-output ratio and the rate of its accumulation, agriculture surplus, conditions in foreign trade and economic system. In addition, some non-economic factors such as size and quality of human resources, political freedom, absence of corruption, etc play an important role in determining the pace and direction of development. It is also important to note at this juncture that the ultimate objective of all efforts is human development.

2.2 Concept of Human Development

In recent years, the search for an alternative to GNP as a measure of economic development has led to computation of the Human Development Index (HDI). The United Nations Development programme (UNDP) introduced the HDI in its first Human Development Report prepared under the able stewardship of Mahbub ul Haq and published in 1990. The measure has been enlarged and refined over the years and many related indices of human development like Gender-related Development Index (GDI), Human Poverty Index (HPI) have been developed in subsequent Human Development Reports published annually by the UNDP.

What is Human Development? The term ‗human development‘ may be defined as an expansion of human capabilities, a widening of choices, ‗an enhancement of freedom, and a fulfillment of human rights. At the beginning, the notion of human development incorporates the need for income expansion. However, income growth should consider expansion of human capabilities. Hence development cannot be equated solely to income expansion. In other words Human Development is thus a process of widening people‘s choice as well as raising the level of well-being achieved.

2.3 Objectives of Human Development

In the traditional development economics, development meant growth of per capita real income. Later on, a wider definition of develop•ment came to be assigned that focused on distributional objectives. Economic development, in other words, came to be redefined in terms of reduction or elimination of poverty and inequality.

These are, after all, ‗a goods-oriented‘ view of development. True development has to be ‗people- centred‘. When development is defined in terms of human welfare it means that people are put first. This ‗people-oriented‘ view of development is to be called human development. According to Amartya Sen, the basic objective of development is ‗the expansion of human capabilities‘. The capability of a person reflects the various combinations of ‗doings and beings‘ that one can achieve. It then reflects that the people are capable of doing or being. Capability thus describes a person‘s freedom to choose between different ways of living.

2.4 Essential Components of Human Development According to Mahbub Ul Haq, there are four essential components in the human development paradigm:

Equity

If development is viewed in terms of enhancing people‘s basic capabilities, people must enjoy equitable access to opportunities. Such may be called equality-related capabilities. To ensure equality-related capabilities or access to opportunities what is essential is that the societal institutional structure needs to be more favorable or progressive. In other words, the unfavorable initial asset distribution, like land, can be made more farmer-friendly through land reform and other redistributive measures. In addition, uneven income distribution may be addressed through various tax-expenditure policies. Economic or legislative- measures that interferes with market exchange may enable people to enlarge their capabilities and, hence, well-being. Further, to ensure basic equality, political opportunities need to be more equal. In the absence of effective political organization, disadvantaged groups are exploited by the ‗rich‘ to further their own interests rather than social goals. However, participatory politics gets a beating by the inequality in opportunities in having basic education. It is to be added here that basic education serves as a catalyst of social change. Once the access to such opportunity is opened up in an equitable way, women or religious minorities or ethnic minorities would be able to remove socio•economic obstacles of development. This then surely brings about a change in power relations and makes society more equitable.

Sustainability

The next generation‘s right to enjoy the same-well being that we now enjoy makes sustainability an essential component of the human development paradigm. The concept of sustainable development focuses on the need to maintain the long term protective capacity of the biosphere. This then suggests that growth cannot go on indefinitely; there are, of course, ‗limits to growth.‘ At times, the concept of sustainability is confused with the renewal of natural resources, which is just one aspect of sustainable development. As emphasized by Mahbub ul Haq, ― It is the sustainability of human opportunities that must lie at the centre of our concerns‖. This in turn, requires sustaining all forms of capital-physical, human, financial and environmental. Here we assume that environment is an essential factor of production. In 1987, the Bruntland Commission Report (named after the then Prime Minister Go Harlem Bruntland of Norway) defined sustainable development as ‗development that meets the needs of the present without compromising the ability of future generations to meet their basic needs.‘ This means that the term sustainability focuses on the desired balance between future economic growth and environ- mental quality. To attain the goal of sustainable development, what is of great impor•tance is the attainment of the goal of both intra- generation and inter-generation equality. This kind of inequality includes the term ‗social well-being‘ not only for the present generation but also for the people who will be on the earth in the future. Any kind of environmental decline is tantamount to violation of distributive justice of the disadvan•taged peoples. Social well-being thus, then, depends on environ-mental equality.

Productivity

Another component of human development is productivity which requires investment in people. This is commonly called investment in human capital. Investment in human capital in addition to physical capital can add more productivity. The improvement in the quality of human resources raises the productivity of existing resources. Theodore W. Schultz, the Nobel Prize-winning economist articulated its importance, ―The decisive factors of production in improving the welfare of poor people are not space, energy, and crop land; the decisive factor is the improvement in population quality.‖ Empirical evidence from many East Asian countries corroborate this view

Empowerment

Human development paradigm envisages full empowerment of the people. The empowerment of people particularly women is an important component of human development. In other words, genuine human development requires empower•ment in all aspects of life. Empowerment implies a political democracy in which people themselves make the decisions about their lives. Under it, people enjoy greater political and civil liberties and remain free from excessive controls and regu•lations. Empowerment refers to decentralization of power so that the benefits of governance are reaped by all peoples. It focuses on grassroots participation which promotes democracy by enfranchising the disadvantaged groups. Unfortu•nately, benefits are cornered by the elites because of lack of empowerment of people. Participation as a goal is a feature of ‗bottom-up‘ development strategy rather than ‗top-down‘. Hence, the empowerment of people requires actions on various issues:

i. It requires investing in the education and health of the people so that they can take advantage of market opportunities. ii. It requires ensuring an enabling environment that gives everyone access to credit and productive assets. iii. It implies empowering both women and men so that they can compete on equal footing.

2.5 The Human Development Index (HDI)

The search for a comprehensive measure that could capture the various dimensions of human development led to the definition and formulation of Human Development Index. It is a composition of three indicators: a. Longevity or life expectancy b. Educational attainment c. Standard of living or per capital income

The first two indicators are the social indicators. Life expectancy, a much-desired objective of human beings, reflects the progress made in such a field as health, infant and child mortality and nutrition. The educational attainment is comprised of adult literacy and a combined primary, secondary and tertiary enrolment ratio. The per capita income, an economic indicator, is used as a proxy measure for satisfaction derived from a bundle of basic goods and services. It also reflects employment levels of people. The HDI, unlike other indices which measures absolute levels, ranks countries in relation to each other. For this the current minimum value and the maximum desirable value in respect of each of the three elements of the index are taken note of. Another novel feature of the HDI is the weight assigned to income which tapes off sharply beyond the threshold income regarded as sufficient for human survival. This means that as the income goes beyond the cut-off point, it becomes increasingly less important, on the valid assumption that the rise in income beyond a certain point is subject to diminishing returns. As a consequence, the other two indicators become more influential in determining index.

2.6 Exercise:

1. Which three indicators are used in the Human Development Index (HDI)?

I. Standard of living

II. Education

III. Life expectancy IV. Condition of environment

(a) Only I,II & IV

(b) Only I, II, & III

(c) Only I & II

(d) All of the above

2. Who releases the Human Development Report?

(a) World bank

(b) World economic forum

(c) United Nations

(d) UNCTAD

3. Who invented the Human development Index?

(a) Paul krugman

(b) Mahbub –ul Haq

(c) Jean dreze

(d) Alfred marshal

4. Which of the following index is not released by the UNDP? (a) Human Development Index (b) Multidimensional Poverty Index (c) Gender Inequality Index (d) Environmental Quality Index

5. Which statement depicts the best definition of sustainable development? (a) It means optimal utilization of natural resources. (b) Sustainable use of natural resources without considering the need of the future generation. (c) Present generation fulfills its needs while considers the needs of the future generation as well. (d) None of these Answers: 01-b, 02-c, 03-b, 04-d, 05-c

2. Concept Based Questions 1. How Human development paradigm envisages full empowerment of the people? Explain with the help of suitable example. 2. Explain the four essential components in the human development paradigm given by Mahbub Ul Haq. 3. ―Empowerment implies a political democracy in which people themselves make the decisions about their lives.‖ Comment 4. Why does the HDI not include dimensions of participation, gender and equality? 5. What does the Human Development Index tell us?

Chapter-3 National income: Measurement, Growth and Industrial Origin

3.1 Introduction 3.2 Meaning and Concept 3.3 Measurement and Difficulties 3.4 Methods of National Income Calculation 3.5 Difficulties in Measuring National Income 3.6 Exercise

3.1 Introduction How well an economy performs is a matter of great concern to all those who are directly associated with it. But, how to judge its performance? .This is a question we have attempted to answer in this chapter. Here, it would suffice to say that national income trends, particularly the changes in gross or net national product, per capita gross or net national product and sectoral distribution of gross or net domestic product adequately reflect the progress of the economy. In this chapter, we shall confine our analysis only to such national income measures which indicate the growth trends and structural changes.

3.2 Meaning and Concept National income of a country means the sum total of incomes earned by the citizens of that country during a given period, say a year. 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. There are four factors of production: natural resources or land; human resources or labour; produced means of production or capital; and entrepreneurs or organization. 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 are 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 organizer 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.

3.3 Measurement and Difficulties National income is a money value of final goods and services produced in an economy over some period of time, usually a year. Final goods and services are those purchased for their own sake; they are what the economy finally wanted and obtained. We discuss in this section, the subject of estimating India‘s national income. Important Aggregates Around the concept of national income, there are various concepts with different contents. Their values are also calculated in India. Gross Domestic Product Gross domestic product (GDP) is the total value of output in an economy and is used to measure change in economic activity. GDP includes the output of foreign owned businesses that are located in a country following foreign direct investment. For example, the output produced at the Nissan car plant on Tyne and Wear and by foreign owned restaurants and banks all contribute to the UK‘s GDP. There are 3 ways of calculating GDP all of which should sum to the same amount: National Output = National Expenditure (Aggregate Demand) = National Income The full equation for GDP using this approach is GDP = C + I + G + (X-M) where C: Household spending I: Capital Investment spending G: Government spending X: Exports of Goods and Services M: Imports of Goods and Services The Income Method: adding factor incomes Here GDP is the sum of the incomes earned through the production of goods and services. This is: Income from people in jobs and in self-employment + Profits of private sector businesses + Rent income from the ownership of land = Gross Domestic product (by factor incomes) Only those incomes that come from the production of goods and services are included in the calculation of GDP by the income approach. We exclude: Transfer payments e.g. the state pension; income support for families on low incomes, Allowance for the unemployed and welfare assistance, such housing benefit. Income not registered with the Inland Revenue or Customs and Excise. Every year, billions of pounds worth of activity is not declared to the tax authorities. This is known as the shadow economy or black economy. Net National Product (NNP): NNP = GNP – Depreciation • It is calculated by subtracting Depreciation from Gross National Product. • Depreciation – Wear and Tear of goods produced. • This deduction is done because a part of current produce goes to replace the depreciated parts of the products already produced. This part does not add value to current year‘s total produce. It is used to keep the products already produced intact and hence it is deducted.

Net Domestic Product (NDP): NDP = GDP – Depreciation It is the calculated GDP after adjusting the value of depreciation. This is basically, Net form of GDP, i.e. GDP – total value of wear and tear. NDP of an economy is always lower than its GDP, since their depreciation can never be reduced to zero. The concept of NDP and NNP are not used to compare different economies because the method of calculating depreciation varies from country to country. National Income at Factor Cost (NIFC): It is the sum of all factors of income earned by the residents of a country (Indian) both from within the country as well as abroad. National Income at Factor Cost = NNP at Market Price – Indirect Taxes + Subsidies In India, and many developing countries across the world, National Income is measured at factor cost instead of market prices. Some of the reasons for the same are lack of uniformity in taxes, goods not being printed with their prices, etc.

3.4 Methods of National Income Calculation There are three approaches and methods of measuring National Income: Income Method By this National Income is calculated compiling income of factors of production viz., land, labour, capital and entrepreneur. National Income = Total Wage + Total Rent + Total Interest + Total Profit In Indian context, since 1993 as per the System of National Accounts (SNA), National Income is total of the following: GDP = Compensation of Employees + Consumption of Fixed Capital + (Other Taxes on Production – Subsidies of Production) + Gross Operating Surplus Compensation of employees: (Wage) salaries paid in cash and kind and other benefits provided to employees. Consumption of Fixed Capital: wear and tear of machinery which are replaced by new parts. Other Taxes on Production minus Subsidies: Net tax on production. There is a difference between tax on products and tax on production. Tax on products includes taxes like sales tax and excise duty. Tax on production is tax imposed irrespective of production like license fees and land tax. Gross Operating Surplus: balance of value added after deducting the above three components. It goes to pay rent of land and interest of capital. Product Method (or Value Added Method, Output Method) It is used by economists to calculate GDP at market prices, which are the total values of outputs produced at different stages of production. Some of the goods and services included in production are: Goods and services actually sold in the market. Goods and services not sold but supplied free of cost. (No Charge/Complementary) Some of the goods and services not included in production are: Second hand items and purchase and sale of the same. Sale and purchase of second cars, for example, are not a part of GDP calculation as no new production takes place in the economy. Production due to unwarranted/ illegal activities. Non-economic goods or natural goods such as air and water. Transfer Payments such as scholarships, pensions etc. are excluded as there is income received, but no good or service is produced in return. Imputed rental for owner-occupied housing is also excluded. Here the Gross Value of final goods and services produced in a country in certain year is calculated. GDP is a concept of value added; it is the sum of gross value added of all resident producer units (institutional sectors, or industries) plus that part of taxes (total) less subsidies, on products which is not included in the valuation of output. Gross Value Added = Output of Final Goods and Services – Intermediate Consumption National Income = Gross Value Added + Indirect Taxes – Subsidies Expenditure Method It measures all spending on currently-produced final goods and services only in an economy. In an economy, there are three main agencies which buy goods and services: Households, Firms and the Government. This final expenditure is made up of the sum of 4 expenditure items, namely; Consumption (C): Personal Consumption made by households, the payment of which is paid by households directly to the firms which produced the goods and services desired by the households. Investment Expenditure (I): Investment is an addition to capital stock of an economy in a given time period. This includes investments by firms as well as governments sectors. Government Expenditure (G): This category includes the value of goods and service purchased by Government. Government expenditure on pension schemes, scholarships, unemployment allowances etc. are not included in this as all of them come under transfer payments. Net Exports (X-IM): Expenditures on foreign made products (Imports) are expenditure that escapes the system, and must be subtracted from total expenditures. In turn, goods produced by domestic firms which are demanded by foreign economies involve expenditure by other economies on our production (Exports), and are included in total expenditure. The combination of the two gives us Net Exports. National Income = Consumption (C) + Investment Expenditure (I) + Government Expenditure (G) + Net Exports (X-IM)

3.5 Difficulties: Problems arise in aggregation largely because of the difficulty of finding an appropriate unit of measurement. In adding up the total output of a country, there is no single physical unit of measurement that can be used: the millions of different types of goods and services are all measured in different units, for example, steel is measured in tones and cloth is measured in meters and it is, of course, impossible to add tones to meters. The problem is partially overcome by using money as the unit of measurement this greatly simplifies the adding up, but it gives rise to the problem of distinguishing between real and nominal values. In addition, there are many problems of measuring national income of an economy. These problems may be stated as follows: Firstly, there is the problem of which goods and services should be included. We know that gross domestic product (GDP) is the money value of all goods and services currently produced within an economy involving economic activity which means trans•forming scarce resources to satisfy human wants. We normally include those activities which generate goods and services to be sold in the market for money. Thus, we exclude from national income accounting all personal and household services which do not pass through the market. This way of measuring is not correct because this excludes all goods that are not sold in the market. In a developing economy a substantial part of the national income (or output) is not marketed and, hence, these products are not included in the national income account. The second problem is to exclude transfer payments and capital gains from national income accounts. Receipts from illegal activities should also be excluded from the national income calculation. The third problem is associated with the valuation of inventories. The general rule is that when a firm increases its inventory of goods, this investment in inventory is counted both as past expenditure and as part of income. Thus, production of inventory increases GDP just as production for final sale does.

3.6 Exercise 1. Very Short Answer Type Questions A. Multiple Choice Questions 1. Consider the following statements and identify the right ones. i. National income is the monetary value of all final goods and services produced. ii. Depreciation is deducted from gross value to get the net value a. I only b. ii only c. both d. none

2. Consider the following statements and identify the right ones. i. While calculating GDP, income generated by foreigners in a country is taken into consideration ii. While calculating GDP, income generated by nationals of a country outside the country is taken into account a. I only b. ii only c. both d. none

3. The net value of GDP after deducting depreciation from GDP is a. Net national product b. Net domestic product c. Gross national product d. Disposable income

4. Consider the following statements and identify the right ones. i. While calculating GNP, income generated by foreigners in a country is taken into consideration ii. While calculating GNP, income generated by nationals of a country outside the country is taken into account a. I only b. ii only c. both d. none

5. When depreciation is deducted from GNP, the net value is a. Net national product b. Net domestic product c. Gross national product d. Disposable income

6. The value of NNP at consumer point is a. NNP at factor cost b. NNP at market price c. GNP at market price d. GNP at factor cost

7. The value of NNP at production point is called a. NNP at factor cost b. NNP at market price c. GNP at market price d. GNP at factor cost

8. The value of national income adjusted for inflation is called a. Per capita income b. Disposable income c. Inflation rate d. Real national income

09. The average income of the country is a. Per capita income b. Disposable income c. Inflation rate d. Real national income

10. Which of the following method/s is/are used to calculate national income in India? a. Production method b. Expenditure method c. Income method d. All the above

11. The national income estimation is the responsibility of a. NSSO b. CSO c. Finance Ministry d. National Income Committee

Answers: 01-c, 02-a, 03-b, 04-b, 05-a, 06-b,07-b,08-d,09-a, 10-d, 11-d

B. Concept Based Questions 1. Define national Income. What is its significance in understanding and growth of an economy? 2. What is Nominal Gross Domestic Product? 3. Explain in detail the various methods of measuring National Income. 4. ―National income is a money value of final goods and services produced in an economy over some period of time‖. Comment

Chapter-4

Economic Planning: Rational Features and Objectives 4.1 Characteristics of Indian Plans 4.2 Objectives of Economic Planning 4.3 Economic Reforms in India since 1991

4.1 Characteristics of Indian Plans: There is a long history of the evolution of economic thinking and approach to planning in India and, therefore, its features are changing with the change of the economy. Structure and objectives of each and every country never remain uniform as well as linear. One can also see a wide difference in the political viewpoint as well as political approaches. Such differences lead to different approaches to plan•ning varying from country to country. In other words, every country has its own peculiarities of economic planning, and India is no exception to this. Further, such characteristics of Indian planning are not uniform. Now let us discuss some of the essential features of Indian planning so as to understand the mechanics of planning both in a controlled and planned economy, and planning in a market- friendly economy.

(i) Five Year Planning: Though India‘s plans are of a 5-year period, such planning is linked with a long term view. Sino- India War (1962), Indo-Pak War (1965), and the unprecedented drought in the mid-60s forced to adopt the approach of ‗plan holiday‘ from the Fourth Five Year Plan. Instead of a regular Five Year Plan, planning was discontinued through three ad hoc Annual Plans during the period 1966- 69. Again, with the assumption of power by the Janata Government in 1977, rolling plan on a year to year basis or the Sixth Plan had been formulated for the period 1978-83. In 1980, this rolling plan concept was discontin•ued by the Congress (I) Government much ahead of the scheduled time and the Sixth Plan came into operation from 1980 and continued till 1985. Because of unprecedented political crisis in New Delhi and frequent changes of power, the Eighth Five Year Plan scheduled for the period 1990-95 could not be launched.

The Eighth Five Year Plan was delayed by two years, though the years 1990-91 and 1991-92 had not been projected as ‗plan holiday‘. The Eighth Five Year Plan came into operation in 1992. Since then there has been no break from the five year planning system.

(ii) Developmental Planning: Indian plan•ning is of the developmental variety. To build up a self-reliant economy, overall economic development of the country received top pri•ority. However, short term problems like refu•gee rehabilitation, food crises, foreign ex•change shortage also got due attention from the planners.

(iii) Comprehensive Planning: Indian plan•ning is comprehensive in character in the sense that it not only undertakes economic pro•grammes but also puts emphasis on changes in institutional structures and cultures. It emphasizes both on the development of agri•culture, industry, transport and commu•nications and physical infrastructures and so•cial infrastructures such as literacy, health, population control, environment, etc. Plan•ning programmes are also initiated for the development of lower castes and backward classes so that these people are involved in the development processes.

(iv) Indicative Planning: Indian planning before 1991 was of the nature of directive plan•ning and averse to the role of market mecha•nism. As far as resource allocation in the gov•ernmental sector was concerned, the govern•ment did not rely on the market but gave directions so that resources could be utilized by all the states efficiently. Private initiative and freedom was allowed but not in an unhindered way. Private industrialists were en•couraged for making investments but, at the same time, they came under strong control and regulation. Thus, planning in India during 1951-91 was not strictly ‗planning by direction‘ like the socialist plan and not strictly ‗planning by inducement‘ like capitalist planning. Thus, the Indian planning became indicative in nature with the launching of the Eighth Five Year Plan in 1992.

(v) Democratic Planning: Indian planning is democratic planning. The chief building block of laying down the national plan is the Planning Commission. It is a decision-making body that formulates five year plans and implements them in a democratic spirit and frame. Discussions are held periodically between the people‘s representatives, industrialists, chambers of commerce, educationists, and many other bodies as well as the members of the Planning Commission. The National Development Council is there to make decisions relating to planning in con•sultation with the Union and State Governments. In fact, the NDC is the apex body for coordination of policies and plans of the Central and the State Governments.

(vi) Decentralized Planning: Being democratic planning, In•dian planning is essentially a decentralized type of plan. Until the Fourth Plan, planning at the national level was essentially macro planning. In other words, there was very little or no provision for planning from below. While ‗macro plan‘ provides a broad framework, a ‗micro plan‘ chalks out all the details in and fixes priorities for dif•ferent regions depending on their specific needs. A macro plan cannot deal with the problems of the remotest regions of the country. A macro plan does not involve people straightforward. However, for an all round growth of every region small or big planning has to be decentralized in which local people, local institutions and local governance are asked to participate. This is called ‗participatory development‘. Participation of the community is needed to deal with the local problems, local resources, local priorities, etc. In this way, the concept of planning from bottom to top rather than top to down is more popular in India.

(vii) Present Role of the Planning Commission: The nature and content of the Eighth Plan (1992-97) was different from earlier plans since this plan had been greatly influenced by the liberalized economic policies of the government and the changing world situation. From a rather centralized planning system, the country moved gradually towards indicative planning. However, as market forces gathered strength as contrasted to planning, India‘s Planning Commission became somehow redundant. Earlier, the Planning Commission behaved something like a ‗super cabinet‘ in propagating and implementing plan policies and programmes.

Against the backdrop of embracing market philosophies, the Planning Commission could no longer act as a policy•making body as it did earlier. The role of the Planning Commission indeed needs to be diluted in the light of changes in the Indian scenario. In other words, Planning Commission needs to be married to the market economy. Most importantly, the present UPA government has been facing challenges from different quarters because of coalition politics. And the Planning Commission has been reorienting itself to accommodate the compulsions of the coalition Government. Since no neutral standpoint could be maintained by the respective ministries, the Planning Commission would then play a bigger role in the realm of perspective or long term planning. Secondly, market, in case of long term of planning, has very little say. Herein lays the importance of the Planning Commission. Thus, the planning methodology must change so as to reflect the new economic realities and the emerging requirements. It is, thus, obvious that the features of Indian planning are not static. The role of the Planning Commission has changed to a dif•ferent form. Above all, the above features of Indian plans are just the reflection of the country‘s socio eco-politic philosophies and view•points.

4.2 Objectives of Economic Planning The main objective of Indian planning is to achieve the goal of economic development economic development is necessary for under developed countries because they can solve the problems of general poverty, unemployment and backwardness through it. Economic development is concerned with the increase in per capita income and in order to calculate the economic development of a country, we should take into consideration not only increase in its total production capacity and consumption but also increase in its population. Economic development refers to the raising of the people from inhuman elements like poverty unemployment and ill heath etc.

2. Increase Employment: Another objective of the plans is better utilization of man power resource and increasing employment opportunities. Measures have been taken to provide employment to millions of people during plans. It is estimated that by the end of Tenth Plan (2007) 39 crore people will be employed.

3. Self-Sufficient: It has been the objective of the plans that the country becomes self-sufficient regarding food grains and industrial raw material like iron and steel etc. Also, growth is to be self sustained for which rates of saving and investments are to be raised. With the completion of Third Plan, Indian economy has reached the take off stage of development. The main objective of the Tenth Plan is to get rid of dependence on foreign aid by increasing export trade and developing internal resources.

4. Economic Stability: Stability is as important as growth. It implies absence of frequent end excessive occurrence of inflation and deflation. If the price level rises very high or falls very low, many types of structural imbalances are created in the economy. Economic stability has been one of the objectives of every Five year plan in India. Some rise in prices is inevitable as a result of economic development, but it should not be out of proportions. However, since the beginning of second plan, the prices have been rising rather considerably.

5. Social Welfare and Services: The objective of the five year plans has been to promote labour welfare, economic development of backward classes and social welfare of the poor people. Development of social services like education, health, technical education, scientific advancement etc. has also been the objective of the Plans.

6. Regional Development: Different regions of India are not economically equally developed. Punjab, Haryana, Gujarat, Maharashtra, Tamil Nadu, Andhra Pradesh etc. are relatively more developed. But U.P., Bihar, Orissa, Nagaland, Meghalaya and H.P. are economically backward. Rapid economic development of backward regions is one of the priorities of five year plans to achieve regional equality.

7. Comprehensive Development: All round development of the economy is another objective of the five year plans. Development of all economic activities viz. agriculture, industry, transport, power etc. is sought to be simultaneously achieved. First Plan laid emphasis on the development of agriculture. Second plan gave priority to the development of heavy industries. In the Eighth Plan maximum stress was on the development of human resources.

8. To Reduce Economic Inequalities: Every Plan has aimed at reducing economic inequalities. Economic inequalities are indicative of exploitation and injustice in the country. It results in making the rich richer and the poor poorer. Several measures have been taken in the plans to achieve the objectives of economic equality especially by way of progressive taxation and reservation of jobs for the economically backward classes. The goal of socialistic pattern of society was set in the second plan mainly to achieve this objective.

9. Social Justice: Another objective of every plan has been to promote social justice. It is possible in two ways, one is to reduce the poverty of the poorest section of the society and the other is to reduce the inequalities of wealth and income. According to Eighth Plan, a person is poor if the spends on consumption less than Rs. 328 per month in rural area and Rs. 454 per month in urban area at 1999-2000 prices. About 26 percent of Indian population lives below poverty line. The tenth plan aims to reduce this to 21%.

10. Increase in Standard of Living: The other objective of the plan is to increase the standard of living of the people. Standard of living depends on many factors such as per capita increase in income, price stability, equal distribution of income etc. During the period of Plans, the per capita income at current prices has reached only up to Rs. 20988. 4.3 Economic Reforms in India

The process of economic reforms was started by the government of India in 1991 for taking the country out of economic difficulty and speeding up the development of the country. The centre of economic reforms has been liberalization, privatization and globalization these three terms are explained as follows:

(A) Liberalization: Liberalization means to unshackle the economy from bureaucratic cobweb to make it more competitive. Following are its chief features:  To do away with the necessity of having a license for most of the industries  Freedom in determining the scale of business activities  Removing restrictions for the movement of goods and services from one place to another  Freedom to fix the prices of goods and services  Reduction in the rate of taxes  Freedom from unnecessary control over economy  Simplifying import-export procedure  Simplifying the process of attracting foreign capital and technology.

(B) Privatization: In brief, privatization means such an economic process through which some public sector undertaking is brought either partially or completely under private ownership. Broadly speaking, establishing a new enterprise in private sector instead of public sector is also privatization. Not only this, depriving public sector of the job of production which was earlier reserved for it or transferring its production, without depriving it, to the private sector also amounts to privatization. Its chief features are given below:

 Reducing the role of public sector and increasing the role of private sector  Reducing fiscal burden of the government  Reducing the size of the government machinery  Speeding up economic development  Improving management of enterprises  Increase in government treasury  Increasing competition by opening industries reserved for the public sector to the private sector.

(C) Globalization: Globalization means integrating the economy with the rest of the world. Following are its chief features:  Free flow of goods and services in all the countries  Free flow of capital in all the countries  Free flow of information and technology in all the countries  Free movement of people in all the countries  The same conflict-solving technique in all the countries.

4.4 Exercise Multiple Choice Questions A. Which of the following plan is also known as rolling plan?

A. First five year plan

B. Second five year plan

C. Sixth five year plan

D. Tenth five year plan

B. Rapid industrialization is the basic objective of

A. Second five year plan

B. Third five year plan

C. Fourth five year plan D. Fifth five year plan

C. Which of the following period is known as plan holiday?

A. 1969 to 1974

B. 1966 to 1969

C. 1965 to 1968

D. 1961 to 1966

D. Which of the following plan is based on P.C.Mahalnobis?

A. First five year plan

B. Second five year plan

C. Fourth five year plan

D. Fifth five year plan

E. Which type of planning is a blueprint of development over a longer period of time?

A. Centralized planning

B. Decentralized planning

C. Annual planning

D. Perspective planning

F. Which of the following type of planning is also known as soft planning due to minimum rigidity in its structure?

A. Indicative planning

B. Perspective planning C. Physical planning

D. Financial planning

G. Which of the following planning process used persuasion methods for manipulating the markets in the economy?

A. Planning by inducement

B. Planning by direction

C. Fixed planning

D. Perspective planning

H. Which of the following method is /are used for solving the central problems in mixed economy?

A. Market

B. Planning

C. None of these

D. Both (a) & (b)

I. Planning commission was established as ------on ------.

A. Non-constitutional body, 15th march 1950

B. Constitutional body, 15th march 1950

C. Non statutory body, 15th march 1951

D. Statutory body, 15th march 1951

Answers -:

1-B, 2-A, 3-B, 4-B, 5- D 6-A, 7- A 8, D, 9-A 2. Concept Based Questions 1. Why was planned course of development started in India in 1951? What have been its major objectives in India? 2. Discuss the major strategies of planning in the Indian economy. 3. How far five year plan strategy has been successful in its objectives?

Chapter-5 India’s Fiscal Policy

Fiscal policy is playing an important role on the economic and social front of a country. Traditionally, fiscal policy in concerned with the determination of state income and expenditure policy. But with the passage of time, the importance of fiscal policy has been increasing continuously for attaining rapid economic growth. This chapter while discussing India‘s Fiscal Policy will address the following issues: 5.1 Introduction 5.2 Objectives of Fiscal Policy in India 5.3 Techniques of Fiscal Policy 5.4 Achievements of Fiscal Policy in India 5.5 Short Comings of Fiscal Policy in India 5.6 Suggestions for Necessary Reforms in Fiscal Policy 5.7 Exercise

5.1 Introduction Fiscal Policy's first word Fiscal is taken from French word Fisc which means treasure of Govt. Fiscal policy concerns itself with the aggregate effect of government expenditure and taxation on income, employment and production. It refers to the instruments by which a government tries to regulate or modify the economic affairs of the economy keeping in view certain objectives. Thus, fiscal policy is a package of economic measures of government regarding its public expenditure, public revenue and public debt .Fiscal Policy is the most important part of Economic Policy .So ,we can define fiscal policy as the revenue and expenditure policy of Govt. of India .It becomes the prime duty of Government to frame fiscal policy . By making this policy, Govt. collects money from his different resources and utilizes it in different expenditure. Thus fiscal policy is related to development policy. Harvey and Joanson, M., defined fiscal policy as ―changes in government expenditure and taxation designed to influence the pattern and level of activity.‖ According to G.K. Shaw, ―We define fiscal policy to include any design to change the price level, composition or timing of government expenditure or to vary the burden, structure or frequency of the tax payment.‖ Otto Eckstein defined fiscal policy as ―changes in taxes and expenditure which aim at short run goals of full employment price level and stability.‖

5.2 Objectives of Fiscal Policy in India Fiscal Policy in India always had major objectives, namely, improving the growth performance of the economy and ensuring social justice to the people. Following are some of the important objectives of fiscal policy adopted by the Government of India: 1. To mobilize adequate resources for financing various programmes and projects adopted for economic development. 2. To raise the rate of savings and investment for increasing the rate of capital formation; 3. To promote necessary development in the private sector through fiscal incentive; 4. To arrange an optimum utilization of resources; 5. To control the inflationary pressures in economy in order to attain economic stability; 6. To remove poverty and unemployment; 7. To attain the growth of public sector for attaining the objective of socialistic pattern of society; 8. To reduce regional disparities; and 9. To reduce the degree of inequality in the distribution of income and wealth. In order to attain all these aforesaid objectives, the Government of India has been formulating its fiscal policy incorporating the revenue, expenditure and public debt components in a comprehensive manner

5.3 Techniques of Fiscal Policy Following are the four important techniques of fiscal policy of India:

1. Taxation Policy It is one of the powerful instruments of fiscal policy in the hands of public authorities which greatly affects changes in disposable income, consumption and investment. Taxation policy is relates to new amendments in direct tax and indirect tax. Every year Govt. of India passes the finance bill. In this policy govt. determines the rate of taxes. Govt. can increase or decrease these tax rates and amend previous rules of taxation .Govt.'s earning's main source is taxation. But more tax on public will adverse effect on the development of economy. ‗If Govt. will increase taxes, more burdens will be on the public and it will reduce production and purchasing power of public and If Govt. will decrease taxes, then public's purchasing power will increase and it will increase the inflation. Govt. analyzes both the situation and will make his taxation policy more progressive. 2. Govt. Expenditure Policy There are large number of public expenditure like opening of govt schools, colleges and universities, making of bridges, roads and new railway tracks. For the above projects govt has paid large amount for purchasing and paying wages and salaries, however, all these expenditures are paid after making govt. expenditure policy. Govt. can increase or decrease the amount of public expenditure by changing govt. budget. So, govt. expenditure is technique of fiscal policy by using this, govt. use his fund first on very necessary sector and other will be done after this. Following are some of the important features of the policy of public expenditure formulated by the Government of India: (a) Development of infrastructure: Development of infrastructural facilities which include development of power projects, railways, road, transportation system, bridges, dams, irrigation projects, hospitals, educational institutions etc. involves huge expenditure by the Government as private investors are very much reluctant to invest in these areas considering the low rate of profitability and high risk involved in it. (b) Development of public enterprises: Development of heavy and basic industries is very important for the development of underdeveloped country. But the establishment of these industries involves huge investment and a considerable proportion of risk. Naturally private sector cannot take the responsibility to develop these industries. Development of these industries has become a responsibility of the Government of India particularly since the introduction of Industrial Policy, 1956. A significant portion of public expenditure has been utilised for the establishment and improvement of these public enterprises. (c) Support to Private Sector: Providing necessary support to the private sector for the establishment of industry and other projects is another important objective of public expenditure policy formulated by the Government of India. (d) Social Welfare and Employment Programmes: Another important feature of public expenditure policy pursued by the Government of India is its growing involvement in attaining various social welfare programmes and also on employment generation programmes.

3. Deficit Financing Policy If Govt.'s expenditures are more than his revenue, then govt. should have to collect this amount. This amount is deficit and it can be fulfilled by issuing new currency by central bank of country. But, it will reduce the purchasing power of currency. More new currency will increase inflation and after inflation value of currency will decrease. So, deficit financing is very serious issue in the front of govt. Govt. should use it, if there is no other source of govt. earning.

4. Public Debt Policy If Govt. thinks that deficit financing is not sufficient for fulfilling the public expenditure or if govt. does not resort to deficit financing , then govt. can take loan from world bank , or take loan from public by the way of issuing govt. securities and bonds . But it will also increase the cost of debt in the form of interest which govt. has to pay on the amount of loan. So, govt. has to necessarily make solid budget for this and after taking into consideration the amount which is taken as debt. This policy can also use as the technique of fiscal policy for increase the treasure of govt. Internal sources of debt include market loans, compensation bonds,15 year's annuity certificates ,small private savings through various saving schemes. External sources includes in borrowing from the external market, from international institutions such as the World Bank, IMF IDA etc and the governments of other countries. Total public debt of the Central Government includes internal debt and external debt. Internal Debt: Internal debt indicates the amount of loan raised, by the Government from within the country. The Government raises internal public debt from the open market by issuing bonds and cash certificates and 15 years annuity certificates. The Government also borrows for a temporary period from RBI (treasury bills issued by RBI) and also from commercial banks. External Debt: As the internal debt is insufficient thus the Government is also collecting loan from external sources, i.e., from abroad, in the form of foreign capital, technical knowhow and capital goods. Accordingly, the Central Government is also borrowing from international financing agencies for financing various developmental projects. These agencies include World Bank, IMF, IDA, IFC etc. Moreover, the Government is also collecting inter-governmental loans from various developed countries of the world for financing its various infrastructural projects.

5.4 Achievements of Fiscal Policy in India Following are some of the important achievements of Fiscal Policy of India:

1. Mobilization of resources To finance the development need of India, the government has extensively used the fiscal policy. The policy of public borrowing and deficit financing has enabled the government to raise huge amounts of resources for development. Increasing tax GDP ratio is a good indication of the increasing mobilization of resources. The tax GDP ratio was only 6.7 percent in 1950-51 but it has reached to 17.3 % in 2006-07.

2. Increase in savings The fiscal policy has been successful in raising the rate of savings in the household sector, corporate sector and public sector. To encourage savings, prize based schemes to encourage savings, expansion of the network of savings bank, post office schemes.

3. Increase in capital formation Capital formation involves three stages-incentive to save, mobilization of savings and investment of savings .The fiscal policy has tried to influence all the three stages .A well spread network of postal banks ,savings bank, commercial banks, financial institutions and money market is there to collect people's savings .The government has also been successful in using the savings of the public of the public sector for development.

4. Incentives to investment The government has exclusively used it to influence the government decisions of the private sector. Various tax concessions, tax rebates, subsidies and fiscal incentives are given to investors. Cottage and small scale industries have survived due to the support of the fiscal policy. The government is mobilizing increased amounts of resources through public borrowings and deficit financing to push up the level of investment in infrastructure, social sectors, exploration and development of natural resources.

5. Reduction in Income and wealth Inequalities To create equitable conditions in the society ,a progressive tax system has been adopted in the realm of direct taxes. The rate of taxes on income goes on increasing with the increase in income .Direct and indirect taxes are used to mop up more resources from the richer sections of the society. Luxuries are heavily taxed. The government has also launched several poverty eradication programmes to directly benefit the poor people. The poor sections of the society are provided with subsidized grains and other essential items of consumption.

6. Reduction in inter regional variations The states like Bihar, U.P., Rajasthan, Madhya Pradesh, Orissa etc. are given preference while transferring resources from the center to the states .Both statutory and non statutory channels of resource transfer are being used for the purpose. The government of India also gives discretionary grants to economically poor states. In addition to these special incentives, subsidies and concessions are given for locating industrial units in backward regions.

5.5 Short Comings of Fiscal Policy in India

The fiscal policy has achieved a mixed success in mobilization of resources. The defective tax system, limited base of direct taxes, exemption of agriculture from direct taxation, evasion of taxes, inefficient and corrupt tax collection machinery are some of the causes of poor tax collection in the country. Another cause of poor resource mobilization is the low share of non-tax revenue in the total revenue receipts. Following are the major shortcomings of the fiscal policy of the country: 1. Instability: Fiscal policy of the country has failed to attain stability on various fronts. Growing volume of deficit financing has created the problem of inflationary rise in price level. Disequilibrium in its balance of payments has also affected the external stability of the country. 2. Defective Tax Structure: Fiscal policy has also failed to provide a suitable tax structure for the country. Tax structure has failed to raise the productivity of direct taxes and the country has been relying much on indirect taxes. Therefore, the tax structure has become burdensome to the poor. 3. Inflation Inflation of India is increasing rapidly after issuing new notes for payment of govt. of expenses and in this inflation; prices of necessary goods are increasing very fastly. Living of poor people has become difficult due to this. So, these signs show the failure of Indian fiscal policy. Further, increasing volume of public expenditure on non-developmental heads and deficit financing has resulted in demand-pull inflation. Higher rate of indirect taxation has also resulted in cost-push inflation. Moreover, the direct tax has failed to check the growth of black money which is again aggravating the inflationary spiral in the level of prices. 4. Growing Inequality: Fiscal policy of the country has failed to contain the growing inequality in the distribution of income and wealth throughout the country. Growing trend of tax evasion has made the tax machinery ineffective for the purpose. Growing reliance on indirect taxes has made the tax structure regressive 5. Fiscal policy and inflation The direct taxes are the main instruments of the fiscal policy. The rise in the rates of direct taxes result in the reduction of the disposable income of the people .The indirect taxes contribute more than four-fifths of the tax revenue .Taxes on commodities, sales taxes, excise duties, customs etc .add to the prices of commodities. Increase in the rates of sales taxes and excise duties immediately cause a rise in the price level.

5.6 Suggestions for Necessary Reforms in Fiscal Policy: Following are some of the important measures suggested for necessary reforms of the fiscal policy of the country:

1. Progressive Taxes: The tax structure of the country should try to infuse more progressive elements so that it can put heavy burden on the rich and less burden on the poor. Necessary amendments should be made in respect of irrigation tax, sales tax, excise duty, land revenue, property taxes etc.

2. Agricultural Taxation: The tax net of the country should be extended to the agricultural sector for rapping a huge amount of revenue from the rich agriculturists.

3. Broad-based Tax Net: Tax net of the country should be broad-based so that it can cover increasing number of population having the taxable capacity.

4. Checking Tax Evasion: Adequate measures be taken to check the problem of tax evasion in the country. Tax laws should be made stricter for prosecuting the tax evaders. Tax machinery should be made more efficient and honest to gear up its operations. Tax rate should be reduced to encourage the growing trend of tax compliance.

5. Increasing Reliance on Direct Taxes: Tax machinery of the country should attach much more reliance on direct taxes instead of indirect taxes. Accordingly, the tax machinery should try to introduce wealth tax, estate duty, gift tax, expenditure tax etc.

6. Simplified Tax Structure: Tax structure and rules of the country should be simplified so that it can encourage tax compliance among the people and it can remove the unnecessary harassment of the tax payers.

7. Reduction of Non-Development Expenditure: The fiscal policy of the country should try to reduce the non-developmental expenditure of the country. This would reduce the volume of unproductive expenditure and can reduce the inflationary impact of such expenditure.

8. Checking Black Money: The fiscal policy of the country should try to check the problem of black money. In this direction schemes like VDIS should be repeated. Tax rates should be reduced. Corruption and political interference should be abolished. Smuggling and other nefarious activities should be checked.

9. Raising the Profitability of PSUs: The Government should try to restructure its policy on public sector enterprises so that its efficiency and rate of return on capital invested can be raised effectively. PSUs should be managed in rational manner with least government interference and on commercial lines. Accordingly, the policy of budgetary provisions for maintaining the PSUs should gradually be eliminated.

5.7 Exercise Concept Based Questions 1. Explain the various measures suggested for necessary reforms of the fiscal policy of the country. 2. Fiscal policy of the country has failed to attain stability on various fronts. What are those fronts explain each one in detail. 3. To finance the development need of India, the government has extensively used the fiscal policy, based on following kindly through light on the achievements of fiscal policy of India. 4. What are the various important techniques of fiscal policy of India? Explain each one in detail.

Chapter-6 Monetary Policy 6.1 Introduction 6.2 Objectives of Monetary Policy 6.3 Instruments of Monetary Policy 6.4 Exercise

6.1 Introduction Monetary policy is the macroeconomic policy laid down by the central bank. It involves management of money supply and interest rate and is the demand side economic policy used by the government of a country to achieve macroeconomic objectives like inflation, consumption, growth and liquidity. Monetary policy implies those measures designed to ensure an efficient operation of the economic system or set of specific objectives through its influence on the supply, cost and availability of money. The concept of monetary policy has been defined in a different manner according to different economists; 1. ―The management of the expansion and contraction of the volume of money in circulation for the explicit purpose of attaining a specific objective such as full employment.‖ R.P. Kent 2. ―The monetary policy is defined as discretionary action undertaken by the authorities designed to influence:

(a) The supply of money,

(b) Cost of Money or rate of interest and

(c) The availability of money.‖ D.C. Rowan 3. ―Monetary Policy consists of the steps taken or efforts made to reduce to a minimum the disadvantages that flow from the existence and operation of the monetary system. It is a policy to regulate the flow of monetary resources in the economy to attain certain specific objectives.‖

Prof. Crowther

6.2 Objectives of Monetary Policy

The monetary policy in developed economies has to serve the function of stabilization and maintaining proper equilibrium in the economic system. But in case of underdeveloped countries, the monetary policy has to be more dynamic so as to meet the requirements of an expanding economy by creating suitable conditions for economic progress. It is now widely recognized that monetary policy can be a powerful tool of economic transformation. Anyhow following are the main objectives of the monetary policy.

1. Exchange Stability: Exchange stability was the traditional objective of monetary authority. This was the main objective under Gold Standard among different countries. When there was disequilibrium in the balance of payments of the country, it was automatically corrected by movements. It was popularly known, ―Expand Currency and Credit when gold is coming in; contract currency and credit when gold is going out.‖ This system will correct the disequilibrium in the balance of payments and exchange stability will be maintained. 2. Price Stability: The objective of price stability has been highlighted during the twenties and thirties of the present centuries. In fact, economists like Crustar Cassels and Keynes suggested price stabilization as a main objective of monetary policy. Price stability is considered the most genuine objective of monetary policy. Stable prices repose public confidence because cyclical fluctuations are totally eliminated. It promotes business activity and ensures equitable distribution of income and wealth. As a consequence, there is general wave of prosperity and welfare in the community. Price stability also impedes economic progress as there is no incentive left with the business community to increase production of qualitative goods.

3. Full Employment: During world depression, the problem of unemployment had increased rapidly. It was regarded as socially dangerous, economically wasteful and morally deplorable. Thus, full employment assumed as the main goal of monetary policy. In recent times, it is argued that the achievement of full employment automatically includes prices and exchange stability. However, with the publication of Keynes‘ General Theory of Employment, Interest and Money in 1936, the objective of full employment gained full support as the chief objective of monetary policy. Prof. Halm has also favoured Keynes‘ view. Prof. Gardner Ackley regards that the concept of full employment is ‗slippery‘. Classical economists believed in the existence of full employment which is the normal feature of an economy. Full employment, thus, exists when all those who are ready to work at the existing wage rate get work. Voluntary, frictional and seasonal unemployed are also called employed. According to their version, full employment means absence of involuntary unemployment. Therefore, it implies not only employment of all types of labourers but also includes the employment of all economic resources. It is not an end in itself rather a pre- condition for maximum social and economic welfare.

Keynes equation of income,

Y = C + I

Throws light as to how full employment can be secured with monetary policy.

4. Economic Growth:

In recent years, economic growth is the basic issue to be discussed among economists and statesmen throughout the world. Prof. Meier defined ―Economic growth as the process whereby the real per capita income of a country increases over a long period of time.‖ It implies an increase in the total physical or real output, production of goods for the satisfaction of human wants. In other words, it means utilization of all the productive natural, human and capital resources in such a manner as to ensure a sustained increase in national and per capita income over time. Therefore, monetary policy promotes sustained and continuous economic growth by maintaining equilibrium between the total demand for money and total production capacity and further creating favorable conditions for saving and investment. For bringing equality between demand and supply, flexible monetary policy is the best course.

5. Equal Distribution of Credit:

Monetary policy should also ensure that distribution of credit should be equitable and purposeful. The credit priority should be given to backward areas.

6. Improvement in Standard of Living:

It is also the major objective of the monetary policy that it should improve the quality of life in the country.

7. Balance of Payments (BOP) Equilibrium :

Many developing countries like India suffers from the Disequilibrium in the BOP. The Reserve Bank of India through its monetary policy tries to maintain equilibrium in the balance of payments. The BOP has two aspects i.e. the 'BOP Surplus' and the 'BOP Deficit'. The former reflects an excess money supply in the domestic economy, while the later stands for stringency of money. If the monetary policy succeeds in maintaining monetary equilibrium, then the BOP equilibrium can be achieved.

6.3 Instruments of Monetary Policy:

The instruments of monetary policy are of two types: first, quantitative, general or indirect; and second, qualitative, selective or direct. They affect the level of aggregate demand through the supply of money, cost of money and availability of credit. Of the two types of instruments, the first category includes bank rate variations, open market operations and changing reserve requirements. They are meant to regulate the overall level of credit in the economy through commercial banks. The selective credit controls aim at controlling specific types of credit. They include changing margin requirements and regulation of consumer credit. Let us discuss each one in detail:

Quantitative Instruments or General Tools:

The Quantitative Instruments are also known as the General Tools of monetary policy. These tools are related to the Quantity or Volume of the money. The Quantitative Tools of credit control are also called as General Tools for credit control. They are designed to regulate or control the total volume of bank credit in the economy. These tools are indirect in nature and are employed for influencing the quantity of credit in the country. The general tool of credit control comprises of following instruments.

1. Bank Rate Policy:

The bank rate is the minimum lending rate of the central bank at which it rediscounts first class bills of exchange and government securities held by the commercial banks. When the central bank finds that inflationary pressures have started emerging within the economy, it raises the bank rate. Borrowing from the central bank becomes costly and commercial banks borrow less from it. The commercial banks, in turn, raise their lending rates to the business community and borrowers borrow less from the commercial banks. There is contraction of credit and prices are checked from rising further. On the contrary, when prices are depressed, the central bank lowers the bank rate. It is cheap to borrow from the central bank on the part of commercial banks. The latter also lower their lending rates. Businessmen are encouraged to borrow more. Investment is encouraged. Output, employment, income and demand start rising and the downward movement of prices is checked.

2. Open Market Operations:

Open market operations refer to sale and purchase of securities in the money market by the central bank. When prices are rising and there is need to control them, the central bank sells securities. The reserves of commercial banks are reduced and they are not in a position to lend more to the business community. Further investment is discouraged and the rise in prices is checked. Contrariwise, when recessionary forces start in the economy, the central bank buys securities. The reserves of commercial banks are raised. They lend more. Investment, output, employment, income and demand rise and fall in price is checked.

3. Changes in Reserve Ratios:

This weapon was suggested by Keynes in his Treatise on Money and the USA was the first to adopt it as a monetary device. Every bank is required by law to keep a certain percentage of its total deposits in the form of a reserve fund in its vaults and also a certain percentage with the central bank. When prices are rising, the central bank raises the reserve ratio. Banks are required to keep more with the central bank. Their reserves are reduced and they lend less. The volume of investment, output and employment are adversely affected. In the opposite case, when the reserve ratio is lowered, the reserves of commercial banks are raised. They lend more and the economic activity is favorably affected.

Selective Credit Controls:

Selective credit controls are used to influence specific types of credit for particular purposes. They usually take the form of changing margin requirements to control speculative activities within the economy. When there is brisk speculative activity in the economy or in particular sectors in certain commodities and prices start rising, the central bank raises the margin requirement on them.

1. Fixing Margin Requirements

The margin refers to the "proportion of the loan amount which is not financed by the bank". Or in other words, it is that part of a loan which a borrower has to raise in order to get finance for his purpose. A change in a margin implies a change in the loan size. This method is used to encourage credit supply for the needy sector and discourage it for other non-necessary sectors. This can be done by increasing margin for the non-necessary sectors and by reducing it for other needy sectors. Example:- If the RBI feels that more credit supply should be allocated to agriculture sector, then it will reduce the margin and even 85-90 percent loan can be given.

2. Consumer Credit Regulation Under this method, consumer credit supply is regulated through hire-purchase and installment sale of consumer goods. Under this method the down payment, installment amount, loan duration, etc is fixed in advance. This can help in checking the credit use and then inflation in a country.

3. Publicity

This is yet another method of selective credit control. Through it Central Bank (RBI) publishes various reports stating what is good and what is bad in the system. This published information can help commercial banks to direct credit supply in the desired sectors. Through its weekly and monthly bulletins, the information is made public and banks can use it for attaining goals of monetary policy.

4. Credit Rationing

Central Bank fixes credit amount to be granted. Credit is rationed by limiting the amount available for each commercial bank. This method controls even bill rediscounting. For certain purpose, upper limit of credit can be fixed and banks are told to stick to this limit.

5. Moral Suasion

It implies to pressure exerted by the RBI on the Indian banking system without any strict action for compliance of the rules. It is a suggestion to banks. It helps in restraining credit during inflationary periods. Commercial banks are informed about the expectations of the central bank through a monetary policy. Under moral suasion central banks can issue directives, guidelines and suggestions for commercial banks regarding reducing credit supply for speculative purposes.

6. Control through Directives

Under this method the central bank issue frequent directives to commercial banks. These directives guide commercial banks in framing their lending policy. Through a directive the central bank can influence credit structures, supply of credit to certain limit for a specific purpose. The RBI issues directives to commercial banks for not lending loans to speculative sector such as securities, etc beyond a certain limit. 7. Direct Action

Under this method the RBI can impose an action against a bank. If certain banks are not adhering to the RBI's directives, the RBI may refuse to rediscount their bills and securities. Secondly, RBI may refuse credit supply to those banks whose borrowings are in excess to their capital. Central bank can penalize a bank by changing some rates. At last it can even put a ban on a particular bank if it does not follow its directives and work against the objectives of the monetary policy.

6.4 Exercise Concept Based Questions 1. Under what conditions is monetary policy likely to be unsuccessful? Explain with suitable example 2. State with the help of an example the difference between monetary and fiscal policy. 3. Selective credit controls are used to influence specific types of credit for particular purposes. Explain How? 4. Explain Keynes Equation of Income with reference to monetary policy.

Chapter-7 Poverty in India In almost all underdeveloped countries where per capita income is very low, income inequality has resulted in a number of evils, of which poverty is certainly the most serious one. In this chapter an attempt has been made to focus on following issues:

7.1 Introduction 7.2 Poverty in Urban India 7.3 Poverty in Rural India 7.4 Causes of Poverty 7.5 Effects of Poverty 7.6 Multidimensional Poverty Index 7.7 Exercise

7.1 Introduction In India, even now in spite of all the development during the period of planning, a large number of people live below the poverty line and most of the time these people also suffer from extreme destitution. Poverty refers to a situation when people are deprived of basic necessities of life. It is often characterized by inadequacy of food, shelter and clothes. In other words, poverty refers to a state of privation where there is a lack of essential needs for subsistence. India is one of the poorest countries in the world. Many Indian people do not get two meals a day. They do not have good houses to live in. Their children do not get proper schooling. Poor people are the depressed and deprived class. They do not get proper nutrition and diet. Their conditions have not sufficiently improved even long after over 65 years of our Independence.

7.2 Poverty in Urban India: Just like most of the growing and developing countries, there has been continuous increase in Urban population. Poor people migrate from rural areas to cities and towns in search of employment/financial activity. The income of more than 8 crore urban people is estimated to fall below poverty line (BPL). In addition to this, there are around 4.5 crore urban people whose income level is on borderline of poverty level. A income of urban poor‘s is highly unstable. A large number of them are either casual workers or self-employed. Banks and Financial institutions are reluctant to provide them loan because of the unstable income. Five states that constitutes around 40% of all urban poor people of India are Uttar Pradesh, Bihar, Rajasthan, Odisha, and Madhya Pradesh. Around 35% of the total population of the four metro cities (Delhi, Kolkata, Chennai and Mumbai) consists of slum population. A large portion of people living in slums are illiterate. The initiatives taken to deal with the problem of urban poverty has not yielded the desired results. 7.3 Poverty in Rural India: It is said that rural India is the heart of India. In reality, the life of people living in rural areas is marked with severe poverty. Inspite of all the efforts, the condition of poor villagers is far from satisfactory. The report on Socio-economic and Caste Census (2011) reveal the following facts: SCST: Of all the rural households, around 18.46 percent belongs to scheduled castes, and around 10.97 belongs to scheduled Tribes. Major source of income: Manual causal labour jobs and cultivation are the major sources of income for rural people. Nearly 51 percent of all households are economically engaged in manual casual labour and nearly 30 percent of them are engaged in cultivation. Deprived: Around 48.5 percent of rural households are deprived according to the census. Assets: Only 11.04 percent of families own a refrigerator while there is a vehicle (including two-wheeler, boat, etc. ) in around 29.69 percent of the rural houses. Income Tax: Only 4.58 percent of rural households pay income tax. Land ownership: Around 56 percent of village households doesn‘t own a land. Size of rural houses: The houses of around 54 percent rural families consists of either one or two-rooms. Out of them, around 13 percent lives in a one-room house.

7.4 Causes of Poverty The growing population inflates the problem of poor techniques used in Agriculture. Further, there is unequal distribution of wealth. As a result, the poor people are often exploited by the wealthy community. The most important causes of Poverty in India are poor agriculture, growing Population, gap between rich and poor, corruption and black money.

Poor agriculture: India is mainly an agricultural country. About 80% people of our country depend on agriculture. But our agriculture is in a bad way. Farmers are poor and uneducated. They do not know the modern methods of farming. They have no good facilities of irrigation. They do not get seeds and fertilizers in time. Thus, the yield is poor. Agriculture is not profitable today. We face the shortage of food. We have to import it. So, poor agriculture is one of the causes of India‘s poverty.

Growing population: Our population is growing rapidly. But our resources are limited. The growth in population creates problems for us. Today, our population is 1.20 billion; tomorrow we will be 1.21 billion and so on. We need more food, more houses, and more hospitals for them. So we have no money to spend on development projects. The ever-growing rate of population must be checked. If not, we may not be able to remove India‘s poverty.

Gap between the rich and the poor: The widening gap between the rich and the poor is also responsible for India‘s poverty. The rich are growing richer. The poor are growing poorer. This economic gap between the two must be reduced. Our social system should be changed. The poor people must get all help to reap the fruits of Independence.

Corruption and black-money: There are corruptions in every walk of life. There is inefficiency in offices. People have become selfish. They neglect the national interests. Black money causes the problem of rising prices. Some people have all the privileges. But many others are suffering. Black money affects our economy. It causes poverty.

7.5 Effects of Poverty

Illiteracy: Poor people constitutes greater share of illiterate population. Education becomes extremely difficult when people are deprived of basic necessities of life. Child Labor: In India, a large number of young boys and girls are engaged in child labour. Also read, article on Poverty and Child labour in India. Nutrition and Diet: Poverty is the leading cause of insufficient diet and inadequate nutrition. The resources of poor people are very limited, and its effect can be seen in their diet. Poor Living Condition and Housing Problems: They don‘t get proper living conditions. They have to fight the hardship of poverty to secure food, clothes and shelter. A large number of poor families live in houses with one room only. Unemployment: Poor people move from villages to towns and form one town to another in search of employment/work. Since, they are mostly illiterate and un-skilled, there are very few employment opportunities open for them. Due to unemployment, many poor people are forced to live an unfulfilled life. Hygiene and Sanitation: These people have little knowledge about hygiene and proper sanitation system. They are not aware of the harmful consequences of not maintaining proper hygiene. The government is taking initiatives to make available clean and safe water, and proper sanitation system to them. Feminization of Poverty: Women are the worst victims of poverty. Poverty effects greater number of women than men. The total of poor women outnumbers the total population of poor men. The causes include low income, gender-inequality, etc. They are deprived of proper-diet, medicines and health treatment. Social Tensions: Poverty is often characterized with income disparity and unequal distribution of national wealth between the rich and the poor. Concentration of wealth in the hands of few rich people leads to social disturbances and revolts. Fair or even distribution of wealth leads an overall improvement in general standard of living of people.

7.6 Multidimensional Poverty Index Like development, poverty is multidimensional but this is traditionally ignored by headline money metric measures of poverty. The Multidimensional Poverty Index (MPI), published for the first time in the 2010 Report, complements monetary measures of poverty by considering overlapping deprivations suffered by individuals at the same time. The index identifies deprivations across the same three dimensions as the HDI and shows the number of people who are multi dimensionally poor (suffering deprivations in 33% or more of the weighted indicators) and the number of weighted deprivations with which poor households typically contend with. It can be deconstructed by region, ethnicity and other groupings as well as by dimension and indicator, making it a useful tool for policymakers. For more technical details see Technical notes. The MPI can help the effective allocation of resources by making possible the targeting of those with the greatest intensity of poverty; it can help address some SDGs strategically and monitor impacts of policy intervention. The MPI can be adapted to the national level using indicators and weights that make sense for the region or the country, it can also be adopted for national poverty eradication programs, and it can be used to study changes over time. About 1.5 billion people in the 102 developing countries currently covered by the MPI about 29 percent of their population live in multidimensional poverty that is, with at least 33 percent of the indicators reflecting acute deprivation in health, education and standard of living. And close to 900 million people are at risk (vulnerable) to fall into poverty if setbacks occur – financial, natural or otherwise. This year we present online trends in multidimensional poverty for 65 countries for which data were available. For many of these countries, multidimensional poverty is on decline – although it still remains affecting many people.

7.8 Exercise 1. Explain any five important causes of Poverty in India 2. How the poverty line is is estimated in India? Explain 3. Why the results of the poverty alleviation programmes have been mixed up? 4. How can poverty be reduced in future in India? Suggest any four points. 5. Mention the two planks on which the current anti – poverty strategy of the govern•ment is based. Why the poverty alleviation was programmes not successful in most parts of India?

Chapter- 8 Some Demographic Issues

The present chapter focuses on following issues: 8.1 Relationship between Population Growth and Development 8.2 Theories of Population Growth 8.3 Relationship between Population Growth and Economic Development 8.4 Exercise

8.1 Relationship between Population Growth and Development

The relationship between population growth and economic development has been a topic under debate for a long time. Different economists have brought up their views as to the definitions of population growth, economic development, the relationship between them and how they impact or affect the varying economies (i.e. less developed economies, developed economies and transition economies). The popular Malthus theory postulates that as population increased in a geometric mode, food supply only increased in an arithmetic mode. This is also the view of Todaro et. al. (2009) when he says that Malthus' postulation of population growth of a country was growing at a geometric rate and can be repressed with a decline in food supply. The food supply he said, will grow at an arithmetic rate as diminishing returns are likely to affect agricultural land produce over time and an increase in population also resulting in competition over the use of land with the opportunity cost of either agricultural use or other needs such as housing, hospitals etc. Population growth can be defined as a numerical increase in people who occupy a certain area measured within a period of time. Population increases when people are either born in a country or immigrate to a different country from their country of birth. The population equally decreases as people die out or emigrate out of their country of birth. According to the World Development Indicator (ed. September 2009), total population is defined as 'based on the de facto definition of population, which counts all residents regardless of legal status or citizenship-except for refugees not permanently settled in the country of asylum, who are generally considered part of the population of their country of origin'.

8.2 Theories of Population Growth There are theories that show forth the characteristics of population growth and means by which such population sizes can be controlled - the Malthusian Theory and the Theory of Demographic Transition.

Malthusian theory Malthusian theory is based on two assumptions - that food is a necessity if man will have to exist and that procreation will remain in almost the same state. Malthus' (1993) theory proposes that if the population is left unimpeded for any reason it will lead to a rise in geometric proportion with subsistence left or constrained to increase in arithmetic proportion. Malthus further explains that an increase in population within a limited land resource is likely to lead to a set-in of diminishing returns. The theory proposes two possible ways to control the increase in population growth - either a means to curb the population growth by way of 'positive' methods such as famines, pestilence, wars etc or the 'preventive' method which uses sexual abstinence, delayed marriages etc (Bizien, 1979). According to Malthus, a nation which has an unchecked population growth is likely to experience an unfavorable economic growth, due mainly to the presence of limited resources with which economies are endowed. His opinion was that diminishing returns will most likely affect food and resources as an increase in the population of a country is expected to decrease available natural resources and in the long-run lower the production of goods. Population growth and size also tend to determine the standard of living in an economy that is characterized by low capital accumulation, low technological change as well as being closed or isolated to interactions with the international community.

Demographic Transition Theory Demographic Transition Theory according to Hicks (1957 p.302 cited in Katzen. 1998, p.231) describes the historic 'unprecedented rise in population' as being liable for the Industrial Revolution. Rapid population growth was, to Ashton (1966), the major characteristic of the industrial revolution. However, Habakkuk (1971, p.39) also notes that his contemporaries did not only believe that industrialization could be solely responsible for population growth but that an increase in economic activity also plays a role in population growth.

8.3 Relationship between Population Growth and Economic Development

The relationship between population growth and economic development can be measured by looking at the impact of population growth on economic development and vice-versa. The phases of Demographic Transition theory can be considered looking at three different time frames i.e. before the transition, during the transition and post-transition to better have an understanding of the population growth pattern. 'World population growth is entirely the result of natural increase- the excess of births over deaths. For any subdivision of the world, net migration- the difference between out- and in-migration is also a factor' (National Academy of Sciences.1972). From Bizien (1979), Habakkuk (1971) and Ghatak (1995) the pre-industrial era was mainly agriculturally inclined and so when there was poor harvest, it had a negative effect on the economy e.g. there was increase in epidemics. Therefore, the need for families to want to have more children was high as they provided the labour required to work in the farms and in the long-run they provided support for their parents when the aged. The higher the mortality rate, the higher the fertility rate producing a net population phase. The second transitional stage was the beginning of the industrial era. This period was characterized by a declining death rate though birth rate remained high. This decline in the death rate was mainly attributed to improved health care, more regular food supplies and improved law and order. Population growth was at its peak at this stage as the birth rate was way ahead of the death rate. The third stage of the demographic transition was the era of previously low death rate mixed with a waning and stumpy birth rate. The decreasing birth rate was attributed to an increase in the age of marriage, celibacy, increased awareness on reproductive health and family planning practices etc. This mix stabilized population growth as the decreasing birth rates as well as a stumpy death rate were the present occurrences in the economy. According to Coale et al.(1958) economic development was responsible for the decline in the death rate that was seen in the demographic transition theory. The changing roles played by women, especially activities they carried out outside the household and the falling importance placed on the family, were some of the changes attributed to economic development. Another feature of economic development was economic mobility as members of families were from time to time moved around as a result of the kind of jobs they did. Also, rising urbanization discouraged the birth of so many children as women later began to view them (children) as burdens rather than assets in helping out with the home front, especially with regards to the care of the aged. Old-age economists like Malthus and Adam Smith also supported this view as population growth was determined by the demand on labor (Habakkuk, 1971). The impact of economic development on population growth has been considered and it will be proper to also consider the impact of population growth on economic development as a part of this study. The negative impact of a fast growing population on economic development especially with regards to Less Developed Countries will come to bare when not properly managed. These negativities are commonly being referred to as the Cost of Population Growth (Katzen. 1998, p.233). An increasing population has the tendency of slowing down the per capita income growth in Less Developed Countries leading to income distribution inequalities. It also stifles savings and capital investment thereby limiting the growth rate of the nation's Gross National Product (National Academy of Sciences.1972, p.2). Therefore, assuming increasing per capita income (or output) is used as an indicator of measuring the improvement in the average standard of living, it then implies an economy with a stagnant total income and a rising population is likely to have its average standard of living worsen over the specified time frame under consideration (Katzen. 1998, p.231-232). Migration - is the movement of people from one geographical location to another one. A high increase in rural-urban migration tends to lead to a situation in which the rural area is left under-developed as most people move to the urban areas in search of jobs, education or even what they perceive as a 'better life'. The resultant on one hand is the choking up of the urban areas, whilst on the other hand, the populations in the rural settlements are left decimated. This is also a reflection of what is obtainable in the case of international migration. Todaro et al (2003, p.291) cite many highly educated and skilled workers who move from the Less Developed Countries to developed countries as legal migrants resulting in what is termed as Brain Drain, thereby contributing to stifling the economic development of their parent countries. Population growth competes with capital formation. A growing population could result in a continuously increasing dependency ratio (i.e. the ratio of the non-working population to the working population) and as such more is spent on the dependent ratio at the expense of other investments (Habakkuk.1971, p.46). The combination of an increase in birth rate and a decrease in death rate is likely to increase the dependency ratio of the population. The assumption that this dependency ratio is made up of a high number of children between the ages of 15-16 years might aggravate the problem of food supply and employment creation Katzen (1998, p.233). An increase in population with a fixed amount in land tends to lower man-land and man-resource proportions. This means that a static backward economy without any form of technical progress might lead to an increase in poverty, especially with a growing pressure on available resources (Katzen. 1998, p.232). Rapid population growth places a lot of strain on the available social infrastructure; this is especially a huge challenge in Less Developed Countries. For instance a large family surviving on a low income reduces the chances of the children being properly educated by their parents. Also, due to the fierce competition for scarce resources, there are more constraints on the government to spend thinly on the educational sector thereby trading or diluting quality for the sake of quantity (Todaro et al. 2003, p.290-291). A rapid population growth can also put excessive demands on the environment leading to different forms of environmental degradation and pollution. Products of this scenario include but are not limited to increase in number of shanty towns, air pollution, juvenile delinquency, deforestation, soil erosion, squalor, fuel-wood depletion, congestion, declining fish and animal stocks, inadequate and unsafe water supply (Todaro et al. 2003, p.291; Katzen. 1998, p.233). A rapid population growth that exists in a poor and fairly static economy can increase the problems of inequalities in income distribution. As the poor (who are usually the worst hit as they are the ones who are rendered landless) bear the consequences of environmental hazards, reduced government healthcare, educational programs and massive job losses - they are the main victims of the imbalance. Again on the average, poor families tend to be larger in number than rich families with usually only one bread winner in both kinds of financial classes. Therefore, real consumption, real and per capita income will definitely be lower in the poor family when compared with the rich family (Todaro et al. 2003, p.290; Katzen. 1998, p.233). The relationship between population and economic growth can also be looked at from the demand and supply perspective. For the demand side, population growth leads to an increase in the demand for food, services and other scarce resources. On the supply side, the consideration is on the availability of more labor to produce more goods and services (Katzen. 1998, p.231). There are, however, benefits to be derived from population growth as suggested by Katzen (1998, p.231), Habakkuk (1971, p.47). These include: An increase in the market size with a resultant increase in aggregate demand that comes from population growth. It provides the labor required for employment to produce the required goods and services. If labor supply is constrained to grow, then an increase in labor force will inadvertently increase output and growth. Population growth might directly increase the acquisition of technical knowledge. Population growth might be of benefit to economic progress as the presence of deficient demand means that the rate of investment is less than available resources. This situation then moves demand to more capital intensive goods like houses. Also, by promoting urbanization and expansion of cultivated areas, investment is stimulated as a result of population growth increases demand and quickens output growth. Population growth might encourage individuals to work harder and be better prepared to undertake land clearance, enclosure and reclamation i.e. a higher rate of investment is likely to lead to an extra effort put in on the part of the cultivator. It is also important to distinguish between developed and less developed countries or communities as the effects on each differ significantly. For less developed countries, the main economic effects of rapid growth are on supply, productive capabilities and capacities, where as for the developed countries the effects are mostly seen on the level of demand. Katzen (1998, p.231), states that in developed countries, the long-run growth of the economy could be constrained by the supply of labour and here an increase in population growth rate might raise the rate of economic growth.

8.4 Exercise Q1. How a rapidly increasing population like in India cans affects the developing adversely? Q2. Do you believe that population growth is always harmful? Provide the two sides of the story. Q3. Discuss the measures to control population growth in India. Q4. Examine the population policy and government measures to control population growth in India.

Chapter- 9 Basic Issues in Agriculture 9.1 Introduction 9.2 Role of Agriculture in Indian Economy 9.3 Nature of India‘s Agriculture 9.4 Cropping Pattern in India 9.5 Factors Determining Crop-Pattern 9.6 Major Rural Development Policy of India 9.7 India: Issues and Priorities for Agriculture 9.8 Challenges 9.9 World Bank Support 9.10 Exercise

9.1 Introduction Indian agriculture had reached the stage of development and maturity much before the now advanced countries of the world embarked on the path of progress. At that time, there was a proper balance between agriculture and industry and both flourished hand-in-hand. This situation continued till the middle of the eighteenth century. The interference from the alien British government and its deliberate policy of throttling the village handicrafts and cottage industries destroyed the fiber of balance and the economy of the country was badly shattered. Britishers persuade a typical colonial policy in India and did nothing to develop agriculture. Instead, they created a class of intermediaries known as Zamindars who sucked the very blood out of the poor people. Therefore, Indian agriculture in the pre-Independence period can be correctly described as a ‗subsistence‘ occupation. It was only after the advent of planning that some farmers started adopting agriculture on a commercial basis. Let us know discuss the role of agriculture I Indian economy.

9.2 Role of Agriculture in Indian Economy: Agricultural sector plays a strategic role in the process of economic development of a country. It has already made a significant contribution to the economic prosperity of advanced countries and its role in the economic development of less developed countries is of vital importance. According to Prof. Kinderberger, Todaro, Lewis and Nurkse etc., agriculture makes its contribution to economic development in several ways, viz. 1. By providing food and raw material to non-agricultural sectors of the economy; 2. By creating demand for goods produced in non-agricultural sectors, by the rural people on the strength of the purchasing power, earned by them on selling the marketable surplus; 3. By providing investable surplus in the form of savings and taxes to be invested in non- agricultural sector; 4. By earning valuable foreign exchange through the export of agricultural products; 5. Providing employment to a vast army of uneducated, backward and unskilled labour. As a matter of fact, if the process of economic development is to be initiated and made self- sustaining, it must begin for agricultural sector. The role of agriculture for the development of an economy may be stated as below: 1. Share in National Income: The lessons drawn from the economic history of many advanced countries tell us that agricultural prosperity contributed considerably in fostering economic advancement. It is correctly observed that, ―The leading industrialized countries of today were once predominantly agricultural while the developing economies still have the dominance of agriculture and it largely contributes to the national income. In India, still 28% of national income comes from this sector.

2. Source of Food Supply: Agriculture is the basic source of food supply of all the countries of the world—whether underdeveloped, developing or even developed. Due to heavy pressure of population in underdeveloped and developing countries and its rapid increase, the demand for food is increasing at a fast rate. If agriculture fails to meet the rising demand of food products, it is found to affect adversely the growth rate of the economy. Raising supply of food by agricultural sector has, therefore, great importance for economic growth of a country. Increase in demand for food in an economy is determined by the following equation: D = P + 2g Here, D stands for Annual Rate of Growth in demand for food. P stands for Population Growth Rate. g stands for Rate of Increase in per Capita Income. 2 stand for Income Elasticity of Demand for Agricultural Products.

3. Pre-Requisite for Raw Material: Agricultural advancement is necessary for improving the supply of raw materials for the agro-based industries especially in developing countries. The shortage of agricultural goods has its impact upon on industrial production and a consequent increase in the general price level. It will impede the growth of the country‘s economy. The flour mills, rice shellers, oil & dal mills, bread, meat, milk products sugar factories, wineries, jute mills, textile mills and numerous other industries are based on agricultural products.

4. Provision of Surplus: The progress in agricultural sector provides surplus for increasing the exports of agricultural products. In the earlier stages of development, an increase in the exports earning is more desirable because of the greater strains on the foreign exchange situation needed for the financing of imports of basic and essential capital goods. Johnson and Mellor are of the opinion, ―In view of the urgent need for enlarged foreign exchange earnings and the lack of alternative opportunities, substantial expansion of agricultural export production is frequently a rational policy even though the world supply—demand situation for a commodity is unfavorable.‖

5. Shift of Manpower: Initially, agriculture absorbs a large quantity of labour force. In India still about 62% labour is absorbed in this sector. Agricultural progress permits the shift of manpower from agricultural to non-agricultural sector. In the initial stages, the diversion of labour from agricultural to non-agricultural sector is more important from the point of view of economic development as it eases the burden of surplus labour force over the limited land. Thus, the release of surplus manpower from the agricultural sector is necessary for the progress of agricultural sector and for expanding the non-agricultural sector.

6. Creation of Infrastructure: The development of agriculture requires roads, market yards, storage, transportation railways, postal services and many others for an infrastructure creating demand for industrial products and the development of commercial sector.

7. Relief from Shortage of Capital: The development of agricultural sector has minimized the burden of several developed countries who were facing the shortage of foreign capital. If foreign capital is available with the ‗strings‘ attached to it, it will create another significant problem. Agriculture sector requires less capital for its development thus it minimizes growth problem of foreign capital.

8. Helpful to Reduce Inequality: In a country which is predominantly agricultural and overpopulated, there is greater inequality of income between the rural and urban areas of the country. To reduce this inequality of income, it is necessary to accord higher priority to agriculture. The prosperity of agriculture would raise the income of the majority of the rural population and thus the disparity in income may be reduced to a certain extent.

9. Based on Democratic Notions: If the agricultural sector does not grow at a faster rate, it may result in the growing discontentment amongst the masses which is never healthy for the smooth running of democratic governments. For economic development, it is necessary to minimize political as well as social tensions. In case the majority of the people have to be kindled with the hopes of prosperity, this can be attained with the help of agricultural progress. Thus development of agriculture sector is also relevant on political and social grounds.

10. Create Effective Demand: The development of agricultural sector would tend to increase the purchasing power of agriculturists which will help the growth of the non-agricultural sector of the country. It will provide a market for increased production. In underdeveloped countries, it is well known that the majority of people depend upon agriculture and it is they who must be able to afford to consume the goods produced. Therefore, it will be helpful in stimulating the growth of the non- agricultural sector. Similarly improvement in the productivity of cash crops may pave the way for the promotion of exchange economy which may help the growth of non- agricultural sector. Purchase of industrial products such as pesticides, farm machinery etc. also provide boost to industrial dead out.

11. Helpful in Phasing out Economic Depression: During depression, industrial production can be stopped or reduced but agricultural production continues as it produces basic necessities of life. Thus it continues to create effective demand even during adverse conditions of the economy.

12. Source of Foreign Exchange for the Country: Most of the developing countries of the world are exporters of primary products. These products contribute 60 to 70 per cent of their total export earnings. Thus, the capacity to import capital goods and machinery for industrial development depends crucially on the export earning of the agriculture sector. If exports of agricultural goods fail to increase at a sufficiently high rate, these countries are forced to incur heavy deficit in the balance of payments resulting in a serious foreign exchange problem. However, primary goods face declining prices in international market and the prospects of increasing export earnings through them are limited. Due to this, large developing countries like India (having potentialities of industrial development) are trying to diversify their production structure and promote the exports of manufactured goods even though this requires the adoption of protective measures in the initial period of planning.

13. Contribution to Capital Formation: Underdeveloped and developing countries need huge amount of capital for its economic development. In the initial stages of economic development, it is agriculture that constitutes a significant source of capital formation. Agriculture sector provides funds for capital formation in many ways as: (i) agricultural taxation, (ii) export of agricultural products, (iii) collection of agricultural products at low prices by the government and selling it at higher prices. This method is adopted by Russia and China, (iv) labour in disguised unemployment, largely confined to agriculture, is viewed as a source of investible surplus,

14. Employment Opportunities for Rural People: Agriculture provides employment opportunities for rural people on a large scale in underdeveloped and developing countries. It is an important source of livelihood. Generally, landless workers and marginal farmers are engaged in non-agricultural jobs like handicrafts, furniture, textiles, leather, metal work, processing industries, and in other service sectors. These rural units fulfill merely local demands. In India about 70.6% of total labour force depends upon agriculture.

15. Improving Rural Welfare: It is time that rural economy depends on agriculture and allied occupations in an underdeveloped country. The rising agricultural surplus caused by increasing agricultural production and productivity tends to improve social welfare, particularly in rural areas. The living standard of rural masses rises and they start consuming nutritious diet including eggs, milk, ghee and fruits. They lead a comfortable life having all modern amenities like a better house, motor-cycle, radio, television and use of better clothes.

9.3 Nature of India’s Agriculture At the time of Independence, India‘s agriculture was in a state of backwardness. Productivity per hectare and per worker was extremely low. The techniques employed were age-old and traditional. Because of low productivity, agriculture merely provided ‗subsistence‘ to the farmers and had not become ‗commercialized‘. Approximately 45 percent of the total consumption of farmers came from their own production in 1951-52. This highlights the low importance of money in the village economy. Some of the important features of India‘s agriculture are discussed as below: 1. Source of livelihood: Agriculture is the main occupation. It provides employment to nearly 61% persons of total population. It contributes 25% to national income. 2. Dependence on monsoon: Agriculture in India mainly depends on monsoon. If monsoon is good, the production will be more and if monsoon is less than average then the crops fail. Sometimes floods play havoc with our crops. As irrigation facilities are quite inadequate, the agriculture depends on monsoon.

3. Labour intensive cultivation: Due is increase in population the pressure on land holding increased. Land holdings get fragmentized and subdivided and become uneconomical. Machinery and equipment cannot be used on such farms.

4. Under employment: Due to inadequate irrigation facilities and uncertain rainfall, the production of agriculture is less, farmers find work a few months in the year. Their capacity of work cannot be properly utilized. In agriculture there is under employment as well as disguised unemployment.

5. Small size of holdings: Due to large scale sub-division and fragmentation of holdings, land holding size is quite small. Average size of land holding was 2.3 hectares in India while in Australia it was 1993 hectares and in USA it was 158 hectares.

6. Traditional methods of production: In India methods of production of agriculture along with equipment are traditional. It is due is poverty and illiteracy of people. Traditional technology is the main cause of low production.

7. Low Agricultural production: Agricultural production is low in India. India produces 27 Qtls. wheat per hectare. France produces 71.2 Qtls per hectare and Britain 80 Qtls per hectare. Average annual productivity of an agricultural labourer is 162 dollars in India, 973 dollars in Norway and 2408 dollars in USA.

8. Dominance of food crops: 75% of the cultivated area is under food crops like Wheat, Rice and Bajra, while 25% of cultivated area is under commercial crops. This pattern is cause of backward agriculture.

9.4 Cropping Pattern in India Cropping Pattern mean the proportion of area under different crops at a point of time, changes in this distribution overtime and factors determining these changes. Cropping pattern in India is determined mainly by rainfall, climate, and temperature and soil type. Technology also plays a pivotal role in determining crop pattern. Example, the adoption of High Yield Varieties Seeds along with fertilizers in the mid 1960‘s in the regions of Punjab, Haryana and Western Uttar Pradesh increased wheat production significantly. The multiplicity of cropping systems has been one of the main features of Indian agriculture. This may be attributed to following two major factors:  Rain fed agriculture still accounts for over 92.8 million hectares or 65 percent of the cropped area. A large diversity of cropping systems exists under rain fed and dry land areas with an overriding practice of intercropping, due to greater risks involved in cultivating larger area under a particular crop.  Due to prevailing socio-economic situations (such as; dependency of large population on agriculture, small land-holding size, very high population pressure on land resource etc.), improving household food security has been an issue of supreme importance to many million farmers of India, who constitute 56.15 million marginal (<1.0 hectare), 17.92 million small (1.0-2.0 hectare) and 13.25 million semi-medium (2.0-4.0 hectare) farm holdings, making together 90 percent of 97.15 million operational holdings.  An important consequence of this has been that crop production in India remained to be considered, by and large, a subsistence rather than commercial activity.

9.5 Factors Determining Crop-Pattern The crop-pattern of any country is due to a number of factors which can be classified into the broad categories of natural, social, historical and economic. In addition, the pattern through its agricultural policy. 1. Physical Factors: Cropping pattern of any particular region of the country is depending on its soil content, weather, climate, rainfall etc. As for example, in a wet area having chances of heavy rainfall and water- logging, people will like to cultivate rice whereas in a dry area, farmer can manage to cultivate coarse cereals like bajra, jowar etc.

2. Technical Factors: The cropping pattern also depend upon the technical factors such as nature and capacity of irrigation facilities available in a region, availability of improved seeds, chemical fertiliser etc. With the development of irrigation facilities, the entire method of cultivation being followed from the traditional period is bound to change. With this, new and better crop rotation system can be followed and new and superior crops also can be grown. In India, due to the extension of irrigation facilities, the cultivation of sugarcane, tobacco, oilseeds etc. have increased substantially. Moreover, with the availability of irrigation water, even double or triple cropping is also successfully done. Again, in the absence of irrigation facilities in some other parts of the country, the concept of ―dry land farming‖ is also gaining its importance in recent years. 3. Economic Factors: Economic factors are playing the major role in determining the cropping pattern in a country like India. The following are some of the economic factors influencing the cropping pattern of our country: (a) Price and income aspect: Movement of price of agricultural products is having some correlation with the changes in cropping pattern. A remunerative and steady price of a particular crop will provide a better incentive to the producer to produce that crop and un-remunerative price will induce the farmer to change the cropping pattern. In India, fixed procurement price of wheat and rice and other controls imposed by the Government induced the farmers to shift to cash crops like sugarcane. Again, the un-remunerative prices of jute prevailing in Assam and other adjoining states also led to shift in the production of food crops. Moreover, income maximisation aspect is also playing an important role in influencing the cropping pattern in the country. Relative profitability per acre is also having considerable influence on the cropping pattern of the country.

(b) Farm Size: A good relationship also exists between farm size and cropping pattern. In a small farm, farmers are very much interested to produce food grains for household consumption. After meeting their own food requirements small farmers may go for cash crops in order to maximise their money income. On the other hand, in a big farm farmers like to follow that cropping pattern which maximise their income. (c) Tenure: Land tenure system prevailing in the country also influences the cropping pattern. In a system of crop sharing, it is the landlord who finalizes the cropping pattern guided by profit maximising principle.

(d) Availability of firm inputs: Cropping pattern is also depending upon the farm inputs available viz., seeds, fertiliser, controlled and assured water supply through irrigation etc. and among these irrigation is the most important. Accordingly, the NCAER observed, ―if additional irrigation facilities were provided in Punjab, the cropping pattern on as much as 3.4 million acre could be changed, of which nearly 1.6 million acre now under gram could be put to more paying crops.‖

9.6 Major Rural Development Policy of India

1. Land Policy: Land policy is a crucial element in a rural development strategy. It is well-known that distribution of land and other assets is very skewed in India, as the large majorities have small land holdings. This has a direct impact on the ability to earn incomes in rural areas. Land reforms including the protection of the rights of tenants are one of the primary means of transforming rural societies. It has also been contended that productivity levels of small farms are often greater than those of large farms. This is attributed to the fact that the small peasant puts in more intensive labour on the small plot that belongs to him. Thus land reforms and a land policy that seeks to provide distributive justice may also result in greater agricultural productivity.

2. Technology Policy: Improvements in technologies available lo rural societies can have a big impact on them. On the one hand, it is essential that newer technologies are adapted to rural societies and on the other, it is necessary that existing technologies are extended lo rural areas. Technological planning, research and development are very vital ingredients of rural development. In India, the agricultural sector is particularly vulnerable to the ravage of the weather. Technological improvements can play a vital role in insulating agriculture from the effects of weather. Rural societies are also characterized by large scale unemployment on the one hand and low productivity on the other. Therefore care has to be taken when new technologies are introduced in rural areas. Technologies appropriate to rural societies have to be chosen so that there is no large-scale displacement of labour. A judicious balance between achieving higher productivity and increasing employment opportunities to rural communities has to be struck. Rural development strategies have to take this into account in formulating their programmes.

3. Agricultural Policy: Agriculture remains the main avenue for providing incomes and employment in rural areas. Needless to say, agricultural planning is vital for rural development strategies. The balanced growth of the agricultural sector can play an important role in creating better conditions for those depending on this sector.

4. Employment Policy: Given the extent of unemployment problem in rural India, the need for well-formulated employment programmes can hardly be over stated. Such programmes can insulate fluctuations in rural incomes on account of poor weather conditions IKS is the case when the monsoon fails. Agricultural employment is often seasonal. Under these conditions, rural employment programmes can ensure better spread of employment through the year. The growth of non- agricultural activity within the village economy can also relieve the pressure of population on the land.

5. Education, Research and Extension Policy: In India the problem of illiteracy is particularly acute in rural areas. The lack of education can act as a constraint in furthering rural development. Rural societies, are also characterised by wide spread inequalities in the distribution of incomes and assets. The lack of education creates a situation in which this problem is perpetuated. The spread of education on the one hand, can enable the rural poor to ensure distributive justice and, on the other, help them inactively participating in rural development programmes. Research and extension is a very important ingredient of rural development strategies. Research enables furthering knowledge which is appropriate to rural cultures and extension ensures that the gains are actually delivered to the target groups. Trained staff are very important for any rural development programme since they actually interact with the community for whom the programmes are meant.

6. Rural Institutions Policy: Rural institutions need to be reformed and utilised for successfully carrying out rural development. The institutional aspects of rural societies are often ignored when strategies are formulated. The institutional structures such as panchayats need to be nurtured so that there is popular participation in rural development. These structures can act as powerful agents in actually implementing the development strategies. Since rural settlements are spread out and are often isolated, they cannot be monitored successfully from outside. Contrarily, local monitoring by institutions such as panchayats can actually ensure that programmes are successfully implemented and that the target group actually benefits from such programmes. Rural institutions such as banks and co-operatives can also play a vital role in rural development.

7. Price Policy: The use of a price is also a crucial element in a rural development policy: Agricultural produce has to be priced in such a manner that the farmers enjoy adequate returns. The price policy through the use of subsidies can act as a means of providing essential items of mass consumption to people residing in rural areas. This is particularly essential for those below the poverty line. The spread of the public distribution system through its network of ration shops in rural areas can be used to solve this problem. This is particularly important during periods of poor rainfall when rural Incomes are adversely affected, which in turn has a negative effect on consumption. Subsidies may have other forms like the form of input subsidies to the agricultural sector for example. This is particularly important in the case of fertilizers, pesticides and seeds. Thus, the price policy can act as a useful means of achieving rural development objectives. The recent thinking along the neo-liberal lines has led to significant changes in the various aspects of the price policy, and it is quite clear that rural India has been subjected to tremendous stress during the liberalization era: some of it is on account of changes in some aspects of the price policy.

9.7 India: Issues and Priorities for Agriculture While agriculture‘s share in India‘s economy has progressively declined to less than 15% due to the high growth rates of the industrial and services sectors, the sector‘s importance in India‘s economic and social fabric goes well beyond this indicator. First, nearly three-quarters of India‘s families depend on rural incomes. Second, the majority of India‘s poor (some 770 million people or about 70 percent) are found in rural areas. And third, India‘s food security depends on producing cereal crops, as well as increasing its production of fruits, vegetables and milk to meet the demands of a growing population with rising incomes. To do so, a productive, competitive, diversified and sustainable agricultural sector will need to emerge at an accelerated pace. India is a global agricultural powerhouse. It is the world‘s largest producer of milk, pulses, and spices, and has the world‘s largest cattle herd (buffaloes), as well as the largest area under wheat, rice and cotton. It is the second largest producer of rice, wheat, cotton, sugarcane, farmed fish, sheep & goat meat, fruit, vegetables and tea. The country has some 195 m ha under cultivation of which some 63 percent are rain fed (roughly 125m ha) while 37 percent are irrigated (70m ha). In addition, forests cover some 65m of India‘s land.

9.8 Challenges

Three agriculture sector challenges will be important to India‘s overall development and the improved welfare of its rural poor: 1. Raising agricultural productivity per unit of land: Raising productivity per unit of land will need to be the main engine of agricultural growth as virtually all cultivable land is farmed. Water resources are also limited and water for irrigation must contend with increasing industrial and urban needs. All measures to increase productivity will need exploiting, amongst them: increasing yields, diversification to higher value crops, and developing value chains to reduce marketing costs. 2. Reducing rural poverty through a socially inclusive strategy that comprises both agriculture as well as non-farm employment: Rural development must also benefit the poor, landless, women, scheduled castes and tribes. Moreover, there are strong regional disparities: the majority of India‘s poor are in rain-fed areas or in the Eastern Indo-Gangetic plains. Reaching such groups has not been easy. While progress has been made - the rural population classified as poor fell from nearly 40% in the early 1990s to below 30% by the mid-2000s (about a 1% fall per year) – there is a clear need for a faster reduction. Hence, poverty alleviation is a central pillar of the rural development efforts of the Government and the World Bank. 3. Ensuring that agricultural growth responds to food security needs: The sharp rise in food-grain production during India‘s Green Revolution of the 1970s enabled the country to achieve self- sufficiency in food-grains and stave off the threat of famine. Agricultural intensification in the 1970s to 1980s saw an increased demand for rural labor that raised rural wages and, together with declining food prices, reduced rural poverty. However agricultural growth in the 1990s and 2000s slowed down, averaging about 3.5% per annum, and cereal yields have increased by only 1.4% per annum in the 2000s. The slow-down in agricultural growth has become a major cause for concern. India‘s rice yields are one-third of China‘s and about half of those in Vietnam and Indonesia. The same is true for most other agricultural commodities. Policy makers will thus need to initiate and/or conclude policy actions and public programs to shift the sector away from the existing policy and institutional regime that appears to be no longer viable and build a solid foundation for a much more productive, internationally competitive, and diversified agricultural sector.

Priority Areas for Support

1. Enhancing agricultural productivity, competitiveness, and rural growth: Promoting new technologies and reforming agricultural research and extension: Major reform and strengthening of India‘s agricultural research and extension systems is one of the most important needs for agricultural growth. These services have declined over time due to chronic underfunding of infrastructure and operations, no replacement of aging researchers or broad access to state-of-the-art technologies. Research now has little to provide beyond the time-worn packages of the past. Public extension services are struggling and offer little new knowledge to farmers. There is too little connection between research and extension, or between these services and the private sector. 2. Improving Water Resources and Irrigation/Drainage Management: Agriculture is India‘s largest user of water. However, increasing competition for water between industry, domestic use and agriculture has highlighted the need to plan and manage water on a river basin and multi-sectoral basis. As urban and other demands multiply, less water is likely to be available for irrigation. Ways to radically enhance the productivity of irrigation (―more crop per drop‖) need to be found. Piped conveyance, better on-farm management of water, and use of more efficient delivery mechanisms such as drip irrigation are among the actions that could be taken. There is also a need to manage as opposed to exploit the use of groundwater. Incentives to pump less water such as levying electricity charges or community monitoring of use have not yet succeeded beyond sporadic initiatives. Other key priorities include: (i) modernizing Irrigation and Drainage Departments to integrate the participation of farmers and other agencies in managing irrigation water; (ii) improving cost recovery; (iii) rationalizing public expenditures, with priority to completing schemes with the highest returns; and (iv) allocating sufficient resources for operations and maintenance for the sustainability of investments. 3. Facilitating agricultural diversification to higher-value commodities: Encouraging farmers to diversify to higher value commodities will be a significant factor for higher agricultural growth, particularly in rain-fed areas where poverty is high. Moreover, considerable potential exists for expanding agro-processing and building competitive value chains from producers to urban centers and export markets. While diversification initiatives should be left to farmers and entrepreneurs, the Government can, first and foremost, liberalize constraints to marketing, transport, export and processing. It can also play a small regulatory role, taking due care that this does not become an impediment. 4. Promoting high growth commodities: Some agricultural sub-sectors have particularly high potential for expansion, notably dairy. The livestock sector, primarily due to dairy, contributes over a quarter of agricultural GDP and is a source of income for 70% of India‘s rural families, mostly those who are poor and headed by women. Growth in milk production, at about 4% per annum, has been brisk, but future domestic demand is expected to grow by at least 5% per annum. Milk production is constrained, however, by the poor genetic quality of cows, inadequate nutrients, inaccessible veterinary care, and other factors. A targeted program to tackle these constraints could boost production and have good impact on poverty. 5. Developing markets, agricultural credit and public expenditures: India‘s legacy of extensive government involvement in agricultural marketing has created restrictions in internal and external trade, resulting in cumbersome and high-cost marketing and transport options for agricultural commodities. Even so, private sector investment in marketing, value chains and agro-processing is growing, but much slower than potential. While some restrictions are being lifted, considerably more needs to be done to enable diversification and minimize consumer prices. Improving access to rural finance for farmers is another need as it remains difficult for farmers to get credit. Moreover, subsidies on power, fertilizers and irrigation have progressively come to dominate Government expenditures on the sector, and are now four times larger than investment expenditures, crowding out top priorities such as agricultural research and extension. 6. Poverty alleviation and community actions: While agricultural growth will, in itself, provide the base for increasing incomes, for the 170 million or so rural persons that are below the poverty line, additional measures are required to make this growth inclusive. For instance, a rural livelihoods program that empowers communities to become self-reliant has been found to be particularly effective and well-suited for scaling-up. This program promotes the formation of self-help groups, increases community savings, and promotes local initiatives to increase incomes and employment. By federating to become larger entities, these institutions of the poor gain the strength to negotiate better prices and market access for their products, and also gain the political power over local governments to provide them with better technical and social services. These self-help groups are particularly effective at reaching women and impoverished families. 7. Sustaining the environment and future agricultural productivity: In parts of India, the over-pumping of water for agricultural use is leading to falling groundwater levels. Conversely, water-logging is leading to the build-up of salts in the soils of some irrigated areas. In rain-fed areas on the other hand, where the majority of the rural population live, agricultural practices need adapting to reduce soil erosion and increase the absorption of rainfall. Overexploited and degrading forest land need mitigation measures. There are proven solutions to nearly all of these problems. The most comprehensive is through watershed management programs, where communities engage in land planning and adopt agricultural practices that protect soils, increase water absorption and raise productivity through higher yields and crop diversification. At issue, however, is how to scale up such initiatives to cover larger areas of the country. Climate change must also be considered. More extreme events – droughts, floods, erratic rains – are expected and would have greatest impact in rain-fed areas. The watershed program, allied with initiatives from agricultural research and extension, may be the most suited agricultural program for promoting new varieties of crops and improved farm practices. But other thrusts, such as the livelihoods program and development of off-farm employment may also be key.

9.9 World Bank Support With some $5.5 billion in net commitments from both IDA and IBRD, and 24 ongoing projects, the World Bank‘s agriculture and rural development program in India is by far the Bank‘s largest such program worldwide in absolute dollar terms. This figure is even higher when investments in rural development such as rural roads, rural finance and human development are included. Nonetheless, this amount is relatively small when compared with the Government‘s - both central and state - funding of public programs in support of agriculture. Most of the Bank‘s agriculture and rural development assistance is geared towards state-level support, but some also takes place at the national level. The Bank‘s Agricultural and Rural Development portfolio is clustered across three broad themes with each project, generally, showing a significant integration of these themes:  Agriculture, watershed and natural resources management  Water & irrigated agriculture  Rural livelihood development Over the past five to ten years, the Bank has been supporting: 1. R&D in Agricultural Technology through two national level projects with pan-India implementation (the National Agriculture Technology Project and the National Agriculture Innovation Project) coordinated by the Government of India‘s Indian Council for Agricultural Research (ICAR). 2. Dissemination of Agricultural Technology: New approaches towards the dissemination of agricultural technology such as the Agriculture Technology Management Agency (ATMA) model have contributed to diversification of agricultural production in Assam and Uttar Pradesh. This extension approach is now being scaled-up across India. 3. Better delivery of irrigation water: World Bank support for the better delivery of irrigation water ranges from projects covering large irrigation infrastructure to local tanks and ponds. Projects also support the strengthening of water institutions in several states (Andhra Pradesh, Karnataka, Maharashtra, Rajasthan, Tamil Nadu, Uttar Pradesh) improved groundwater management practices (for instance, in the upcoming Rajasthan Agriculture Competitiveness Project).

9.10 Exercise Q1. Discuss the significance of agriculture in a developing economy like India. Q2. Do you think that there has been satisfactory growth of output in the Indian agriculture? Q3. Discuss the pattern of agricultural productivity in India. Is cash crop productivity also showing an upward trend?

Chapter- 10 Green Revolution 10.1 Introduction 10.2 Components of Green Revolution 10.3 Impact of Green Revolution 10.4 Problems with Green Revolution 10.5 Role of Technology in Indian Agriculture 10.6 Exercise

10.1 Introduction The dramatic transformation in agriculture practices that involves the use of new methods of cultivation and inputs refers to as Green Revolution in India. The green revolution consists of technological improvements which were mainly adopted to increase agriculture productivity. The green revolution occurs as a result of adoption of new agriculture strategy during mid 60‘s by Government of India to achieve self-sufficiency in the food grains production. These changes bring about a substantial increase in agriculture production in a short span of time. Food is the most basic requirement for sustaining every kind of living creatures on this earth. It is the source of energy which is utilized by living organism for their growth, development and doing work. Man obtains their food from cultivated plants and domesticated animals. Around 95% of the human population‘s protein demand are met from agricultural crops, animal husbandry and fishing. India is self sufficient in food production this is only because of modern pattern of agriculture. Then Green revolution in 1960‘s is one of the important eras in India history.

The main features of Green Revolution in India are: 1. Introduction of new and high yielding variety of seeds. 2. Increased use of fertilizers and pesticides in order to reduce agricultural loses. 3. Increased application of fertilizers in order to enhance agricultural productivity. 4. Use of latest agricultural machinery like tractor, seed drills, threshers and harvester. 5. Use of high disease resistance varieties so that production will enhance.

10.2 Components of Green Revolution The core components of new agriculture strategy are :  Use of High-Yeilding Variety (HYV) seeds that matures in short span of time.  Application of fertilizers, manures and chemicals in the agriculture production.  Multiple Cropping Patterns that allows farmers to grow two or more crops on the same land as HYV seeds matures quickly. This helped the increase of total production.  Mechanization of farming with the use of machines like tractors, harvesters pump sets etc in the agriculture occur in a big way.  Better Infrastructure facilities in terms of better transportation, irrigation, warehousing, marketing facilities, rural electrification were developed during the period of green revolution.  Price Incentives involving provision of the minimum support prices for various crops so as to allow reasonable price to farmers for their produce. This offers inventive to the farmers to adopt new practices.  (vii) Better financial assistance through spread of credit facilities with the development of wide network of commercial banks, cooperative banks and establishment of National Bank for Agriculture and Rural Development (NABARD) as an apex bank to coordinate the rural finance in India.

10.3 Impact of Green Revolution The green revolution resulted quantitative and qualitative development in the agriculture in India. The quantitative improvement occurs as a result of steep increase in the production of agriculture output. The qualitative improvement resulted into adoption of modernized technology in the agriculture. The impact of green revolution can be discussed as follows: Spectacular increase in agriculture production: The dependence on food imports is eliminated with the increase in agriculture production. The country becomes self-sufficient in food grains. In fact India was the second largest importer in 1966 and it imported no food grain in subsequent decades except during late 80‘s and early 90‘s mainly due to failure of monsoons or untimely rains or floods in different regions. However, it may be noted that in recent years annual growth in the food grain production is losing its momentum.

Improvement in productivity: The tremendous increase in agriculture production occurred as a result of improvements in productivity. The productivity was quite low in the pre-green revolution period. The substantial increase in the productivity occurred in wheat and rice in the earlier periods but later on it spread to other crops also.

Increase in Employment: Green revolution generated employment opportunities into diverse activities which were created as a result of multiple cropping and mechanization of farming. It helped to stimulate non-farm economy that generated newer employment in various services such as milling, marketing, warehousing etc.

Food grain Price Stability: The adoption of new agricultural technology has led to the increased production and marketable surplus of crops especially food grains that have resulted into price stability of food items.

Strengthening of forward and backward linkages with industry: The increase in agriculture production has strengthened the forward linkage of agriculture sector with industry in the sense of supplying inputs to the industry. The backward linkage with the industry has also received a boost as agricultural modernization created larger demand for inputs produced by industry.

10.4 Problems with Green Revolution The new agriculture strategy has resulted into increased productivity and returns for farmers. This has resulted in decline in rural poverty to an extent. However, the revolution resulted into increased income, wide interpersonal and regional inequality and inequitable asset distribution. The major problems associated with green revolution are as follows: (1) Increase in personal inequalities in rural areas The income inequality between rich and poor increases due to: (i) The owners of large farms were the main adopters‘ of new technology because of their better access to irrigation water, fertilizers, seeds and credit. In other words, given the need for complex agricultural techniques and inputs, the green revolution benefits the large farmers. The small farmers lagged behind the larger farmer as small farmers had to depend upon traditional production method. Since the rich farmers were already better equipped, the green revolution accentuate the income inequalities between rich and poor. (ii) Green revolution resulted into lower product price and higher input prices which also encouraged landlords to increase rents or force tenants to evict the land.

(iii) The mechanization pushed down the wages of and employment opportunities for unskilled labor in the rural areas thereby further widening the income disparities.

(2) Increased Regional disparities Green revolution spread only in irrigated and high-potential rain fed areas. The villages or regions without the access of sufficient water were left out that widened the regional disparities between adopters and non-adopters. Since, the HYV seeds technically can be applied only in land with assured water supply and availability of other inputs like chemicals, fertilizers etc. The application of the new technology in the dry-land areas is simply ruled out. The states like Punjab, Haryana, Western UP etc. having good irrigation and other infrastructure facilities were able to derive the benefits of green revolution and achieve faster economic development while other states have recorded slow growth in agriculture production.

(3) Environmental Damage Excessive and inappropriate use of fertilizers and pesticides has polluted waterway, killed beneficial insects and wild life. It has caused over-use of soil and rapidly depleted its nutrients. The rampant irrigation practices have led to eventually soil degradation. Groundwater practices have fallen dramatically. Further, heavy dependence on few major crops has led to loss of biodiversity of farmers. These problems were aggravated due to absence of training to use modern technology and vast illiteracy leading to excessive use of chemicals.

(4) Restrictive Crop Coverage The new agriculture strategy involving use of HYV seeds was initially limited to wheat, maize and bajra. The other major crop i.e. rice responded much later. The progress of developing and application of HYV seeds in other crops especially commercial crops like oilseeds, jute etc has been very slow. In fact, in certain period a decline in the output of commercial crops is witnessed because of diversion of area under commercial crop to food crop production. The basic factor for non-spread of green revolution to many crops was that in the early 1960‘s the severe shortage in food grains existed and imports were resorted to overcame the shortage. Government initiated green revolution to increase food grain productivity and non-food grain crops were not covered. The substantial rise in one or two food grain crop cannot make big difference in the total agricultural production. Thus new technology contributed insignificantly in raising the overall agricultural production due to limited crop coverage. So it is important that the revolutionary efforts should be made in all major crops. It can be concluded that green revolution is a major achievement for India which has given it a food-security. It has involved the adaptation of scientific practices in the agriculture to improve its production and productivity. It has provided benefits to poor in the form of lower food prices, increased migration opportunities and greater employment in the rural non-farm economy. However, the inequalities between region and individuals that adopted green revolution and those who failed to adopt has worsened. Further, green revolution has led to many negative environmental impacts. The policy makers and scientists are urged to develop and encourage the new technologies that are environmentally and socially sustainable.

10.5 Role of Technology in Indian Agriculture The important reason of low agricultural productivity in India is the unsatisfactory spread of new technological practices, including cultivation of HYV seeds. The adoption of new technology mainly the cultivation of HYV seeds requires intensive use of fertilizers and pesticides under adequate and often assured water supply. The use of HYV seeds involves higher yield risk as compared to the traditional seeds in the absence of proper irrigation facilities. The inadequate irrigation facilities in most part of the country explain the limited regional spread of modern technology. Nearly 64 percent of total cultivated area is rain fed. Further, the irrigated area is generally used for growing rice and wheat while other crops are grown mostly in the rain fed and un irrigated area. In this scenario the technological development in terms of adoption of HYV seeds with chemical and fertilizers is only limited to few regions having irrigation coverage and that too for wheat and rice. Thus the adoption of new technology requires the development of irrigation facilities at first place so as to increase its regional and crop spread. Another, factor that inhibits the dissemination of modern technology is the small and marginal land holdings and slow progress of tenancy reforms. The lack of ownership rights on land provide no incentive to adopt improved technology as the production is shared with the land owners and cost of adoption of new technology will be borne by the tenant cultivators. Thus institutional reforms in terms of land reforms have to be strengthened to improve adoption of modern technology. The use of new technology improves the agriculture productivity. However, it also adds to the instability in the output growth. The application of new technology raises the response of output to water. Thus if applied under the rain fed conditions then the instability in output will be greater. However, the increase in output would be stable if applied under assured irrigated conditions. This requires effective public distribution system to stabilize prices during uncertain conditions. Thus both institutional and technological changes have played important role in agriculture growth in India. The technological changes by themselves could not bring revolutionary productivity growth in the agriculture without the institutional and infrastructural changes. The new technology cannot be used if the agrarian system suffers from gross inequalities of land ownership and cultivation is in the hands of landless cultivators. Thus land reforms are required to abolish intermediaries and to undertake the reorganization of land holding. Further, modern technique also requires higher amount of investments. Thus organizational reform in terms of better availability of agri-credit is also important. In nutshell, it can be concluded that though technical reforms provide modern inputs to increase agriculture production but organizational and institutional reforms would provide suitable conditions to apply these modern inputs.

10.7 Exercise 1. Examine the trends in the agricultural production and productivity during the Green Revolution period? 2. ―Green Revolution has increased he production level substantially. At the same time it has led to substantial increase in the inter-regional and inter-personal inequalities‖. Discuss. 3. ―Technological progress is a necessary but not sufficient condition for agriculture growth in India.‖ Comment on the statement.

Chapter- 11 Food Problem and Public Distribution System

11.1 Introduction 11.2 Food Problem and Food Policy in India Since Independence 11.3 Food Problem in India has the following three Different Aspects 11.4 Factors Responsible for Food Problem in India 11.5 Exercise

11.1 Introduction Many people in the country find it difficult to meet their requirements of food grains. Their diet is also deficient in respect of nutritious foods. This problem of food inadequacy is a very serious one for the poor. We, therefore, discuss in detail the solution of food problem and will also examine the public distribution system which supplies through fair-price shops some items of food articles to the people at subsidized prices. India has been facing food problems since long period. During Second World War India experienced a severe food crisis leading to a phenomenal increase in the prices of food grains. Again in 1943, Bengal faced a serious Agriculture and its Development in India famine where nearly 3.5 million people died out of starvation. In order to meet the situations, the rationing system was introduced and about 45 million people were covered by this rationing system. But due to corrupt and inefficient administrative structure, the entire system failed leading to a widespread hoarding and speculation of foodgrains causing huge suffering of millions of people of the country. The partition of India in 1947 again aggravated the food crisis as after partition the country received about 82 per cent of the population but had to manage with nearly 45 per cent of the total cultivated area under cereals and with 69 per cent of the irrigated area. The country had to forego the surplus area of West Punjab and Sind. Thus, while the separation of Burma aggravated the situation and forced the country to import rice but the partition of the country again forced the country to import wheat from foreign countries.

11.2 Food Problem and Food Policy in India Since Independence: India had to face a serious food crisis at the time of independence. To meet the deficiency in the supply of food grains in the short run, the Government made the following provisions: (a) Extension of the rationing system to cover both urban and rural areas; (b) Import of food grains to make easy the situation and the amount of import reached the level of 2.7 million tones in 1947; (c) Introduction of subsidy for the distribution of imported food grains as it was expensive as compared to indigenously produced food grains. But the public distribution system which was mostly maintained in the urban areas primarily had been suffering from huge degree of inefficiency and corruption. To meet the situation, the First Five Year Plan accorded highest priority to agriculture. During the First Plan period, the country experienced a series of good harvests leading to an improvement in the food supply situation, curtailment of imports and a consequent fall in the prices of food grains by 23 per cent. Considering the situation the planners became very much optimistic and an impression was created that the food problem was finally solved. But the situation was short-lived because whatever improvement in food situation was achieved that was mainly due to better climatic conditions and timely arrival of monsoons. Soon after, the Second Plan again experienced a serious food crisis especially in 1958-59, in various parts of the country due to drought, floods and cyclone. To meet the crisis the Government of India entered into an agreement in 1956 with U.S.A. to import 3.1 million tonnes of wheat and 0.19 million tonnes of rice for the next three years. This agreement was known as Public Law- 480 (PL- 480) Agreement, 1956 which the government utilized to reduce and stabilise the prices of food grains in the country. That marked the beginning of the present public distribution system (PDS) which was introduced to distribute cheap imported food grains through network of ―fair price shops‖ at a price which was far below the prevailing market price. Again the Third Plan set a target to raise the production of food grains by 100 million tones but the plan failed to achieve the target. Under such a situation the government had no other alternative but to import food grains heavily.

11.3 Food Problem in India has the following three Different Aspects:

(i) Quantitative Aspect: Supply of foodgrains in India is totally inadequate as the per capita calorie intake in India is very low in comparison to other developing countries. The report of the Food Advisory Committee (1958) states that in India a normal working adult person requires 2300 calories and 62 grams of protein daily. But unfortunately only 35 per cent of the Indian population is provided with this minimum consumption standard.

(ii) Qualitative Aspects: There is a deficiency in the nutrient content of the diet of average Indian and this deficiency is mostly marked in respect of sugar, fish and milk.

(iii) High Prices of Food grains: In India, the prices of food grains have been increasing rapidly and prices were double in 1970- 71 as compared to that of 1960-61. The index of food grains prices (1970-71 = 100) has increased from 108 in 1971-72 to 390 in 1988-89. Again the new index of prices of food grains (1981-82 = 100) again increased from 118 to 179 in 1990-91. This continuous rise in the prices of food grains has eroded the purchasing capacity of the Indian people and thus aggravated the food problem severely.

11.4 Factors Responsible for Food Problem in India: Food problem in India was very much acute during 1950s and 1960s. With the adoption of new agricultural strategy, the intensity of food problem in India has declined. But as Indian agriculture is continuing its dependence upon weather conditions thus the production of food grains is fluctuating abruptly with the variation of weather conditions, as experienced recently in 1991-92. Thus, even in recent years, the country had to import food grains from foreign countries although at a lesser quantity. Thus, India has not yet reached the level of self-sufficiency in food grains.

The following are some of the important factors which are responsible for this persisting food problem in the country: (i) High Rate of Population Growth: The population of India is increasing at a very high rate. The annual average growth rate of population in India has declined slightly from -2.5 per cent during the decade 1961-71 and 1971- 81 to 2.1 percent in 1981-91 and then to 1.9 per cent in 1991-2001. The size of population has become more than double during the post-independence period which has raised the aggregate demand for food grains significantly. Thus, this ever increasing size of population is responsible for the persisting food problem in the country.

(ii) High Marginal Propensity to Consume: Due to acute poverty the marginal propensity to consume of the people of India is very high. This is mainly due to high income elasticity of demand for food articles. With the increase in money income, the demand for food articles of average Indian is increasing rapidly leading to a huge pressure in the food market.

(iii) Inadequate Increase in the Production of Food grains: In the pre-green revolution period, the production of food grains in India was totally inadequate. It is only due to adoption of new agricultural strategy the production of food grains has reached the level of 233.9 million tones in 2008-09. But considering the high rate of growth of population to (2.5 per cent per annum) this rate of increase in food grains production is totally inadequate. Thus, the per capita net availability of food grains has failed to increase substantially as it has increased marginally from 494.4 grams per day in 1965 to 509.9 grams per day in 1991.

(iv) Hoarding of Food grains: There is a continuous tendency on the part of traders in India to hoard foodgrains and to accentuate the shortage of food grains in order to push up the prices for reaping extra•ordinary profit. Thus, this speculation and hoarding has created artificial crisis of foodgrains in the country.

(v) Increase in Farm Consumption: In India the farm consumption of food grains is increasing with the increase in agricultural output. Thus, due to this increasing home consumption the marketable surplus of food grains could not increase substantially.

(vi) Corrupt Administrative Practices: To improve the food situation in the country, the Government has imposed various measures like price controls, rationing, zoning, surprise checks etc. But as the administrative machinery in India is totally corrupt, these measures failed to provide any benefit to the general masses of the country.

Policy Measures Adopted by the Government to Solve the Food Problem: During the planning period, the Government of India adopted various measures to tackle the food situation of the country at different times. Neither the free market mechanism nor the full control was adopted by the Government rather a compromise solution consisting of partial control, food procurement, public distribution system, import of food grains etc. has been followed to tackle the food problem of the country.

11.6 Exercise Q1. Discuss the nature of problem in India and how does it affect poverty in the country? Q2. What is the significance of public distribution system in the Indian economy? Also elaborate upon its short comings. Q3. Provide an account of food problem and its solution through the public distribution system in India for the poor.

Chapter-12 Industrial Growth: Performance and Problems 12.1 Introduction 12.2 Role of Industrialization 12.3 Industrial Policy before 1991 12.4 Critical Analysis of New Industrial Policy

12.1 Introduction Industrialization plays a vital role in the economic development of underdeveloped countries. As the historical record shows, the developed countries of the world broke the vicious cycle of poverty by industrializing, rather than focusing on agricultural or the production of national resources. For a predominately agricultural country like India, development of industries is a must. And some industrial development in the country has, in fact, taken place. A look at its progress made and an assessment of the same is taken up in this chapter.

Importance and Present Position It is now an established fact that material riches industries go together. This is amply demonstrated by the industrially advanced countries. Negatively it is proved by the less developed countries which lack industries, and whose people live in poverty.

12.2 Role of Industrialization

Industrialization refers to a process of change in the technology used to produce goods and service. According to Wilbert Emoore and G. R. Madan, it is a much broader process of economic development which has in view the integrated development of all other sectors, i.e. agriculture, power, transport and other services. Industrialization has a major role to play in the economic development of the under developed countries. The role of industrialization in the development of country can be analyzed as follows:

1. Raising Income: Industrialization allows countries to make optimal use of their scarce resources. It increases the quantity and quality of goods manufactured in that company, which makes a larger contribution to gross national product (GNP). 2. Higher Standard of Living: In an industrialized society, workers' labor is worth more. In addition, because of higher productivity, individual income increases. This rise in income raises the standard of living for ordinary people. 3. Economic Stability: A nation that depends on the production and export of raw material alone cannot achieve a rapid rate of economic growth. The restricted and fluctuating demand for agricultural products and raw materials—along with the uncertainties of nature itself hampers economic progress and leads to an unstable economy. Industrialization is the best way of providing economic stability. 4. Improvement in Balance of Payments: Industrialization changes the pattern of foreign trade in the country. It increases the export of manufactured goods, which are more profitable in foreign exchange. But at the same time, processing the raw material at home curtails the import of goods, thereby helping to conserve foreign exchange. The export- orientation and import-substitution effects of industrialization help to improve the balance of payments. In Pakistan in particular, the exports of semi-manufactured and manufactured goods resulted in favorable trends. 5. Stimulated Progress in Other Sectors: Industrialization stimulates progress in other sectors of the economy. A development in one industry leads to the development and expansion of related industries. For instance, the construction of a transistor radio plant will develop the small-battery industry. (This is an example of backward linkage.) In another case, the construction of milk processing plants adds to the production of ice cream as well. (This is forward linkage.) 6. Increased Employment Opportunities: Industrialization provides increased employment opportunities in small- and large-scale industries. In an industrial economy, industry absorbs underemployed and unemployed workers from the agricultural sector, thereby increasing the income of the community.

12.3 Industrial Policy before 1991: India started her quest for industrial development after independence. The industrial policy resolution of 1948 marked the beginning of the evolution of Industrial policy.

Features of industrial policy 1948: i. The industrial policy resolution of 1948 contemplated a mixed economy reserving a sphere for both public and private sector. ii. The industries were divided into four broad categories viz: a. Defence industries and control of atomic energy. The ownership and management of these industries was the exclusive monopoly of the Central Government. b. Coal, Iron and steel, ship building, telephone and telegraphs were to be owned by the state. c. Basic industries—Fertilizers electron chemicals, non- ferrous metals woollentextiles, minerals etc. were subject to the regulation of Central Government. d. Remaining industries other than the above mentioned were open to the private sector.

Industrial Policy 1956: After 1948 significant developments took place in India. Parliament accepted the socialist pattern of economy. It facilitated the fresh statement of industrial policy.

Provisions of 1956 Policy: i. New classification of industries: Schedule A industries: Exclusive responsibility of the state. Schedule B: State owned industries, but the private enterprises could supplement the effort of the state. Schedule C: All the remaining industries which could be owned by private sector. ii. Fair and non-discriminatory treatment of Private sector. iii. Encouragement to village and small scale industries. iv. Removing regional disparities. v. Provision of amenities for labour.

Industrial Policy 1977: In 1977 the Congress Party was thrown out and Janata Party assumed power, new Industrial Policy was introduced to make radical changes in the existing policy. Provisions of 1977 Industrial Policy: i. Development of small scale sector. Small scale sector was classified into three categories Viz: a. Cottage and household industries. b. Tiny sector with less than 1 lakh investment. c. Small scale sectors with investment upto 10 lakhs. ii. District industrial centres were to setup in each district to support small scale and cottage industries. iii. Programmes to enlarge the areas of operation of Khadi and village industries. iv. Special arrangements for the application of technology to improve the productivity of small and village industries. v. Large scale sectors should devise programme for small scale and village industries. vi. Approach towards sick units should be selective and public funds should be pumped into sick units. vii. Framing policies encouraging worker‘s participation in management.

Industrial policy 1980: It was announced by Congress (I). The objective of this policy was to strengthen the economic infrastructure Features: i. Socio-economic objectives: a. Optimum utilisation of installed capacity. b. Maximising production c. Higher productivity d. Higher employment generation e. Correction of regional imbalance f. Preferential treatment to agro-based industries. g. Promoting economic federalism. ii. Revival of the economy iii. Effective operational management of the Public sector. iv. Integrating industrial development in the private sector by promoting the concept of economic federalism. v. Promotion of industries in rural areas. vi. Removal of regional imbalances. vii. Industrial sickness and state policy. The Industrial policy stated that industrial units found guilty of mismanagement leading to sickness would be dealt firmly. All the above industrial policies recognised the need for securing participation of foreign capital and enterprise. But there was no encouragement for foreign ownership and control. These policies could not meet the requirements of liberalised economy and foreign investments. Hence the new policy was framed in 1991.

Features of 1991 Industrial Policy: 1. Structural reforms: With the introduction of new industrial policy a substantial programme of deregulation has been undertaken. Industrial licensing has been abolished for all items except for a short list of six industries, viz.: i. Distillation of alcoholic drink ii. Cigars and Cigarette. iii. Aerospace and defence equipments. iv. Industrial explosives. v. Hazardous chemicals. vi. Drugs and Pharmaceuticals.

2. Foreign Direct investment: The government has been committed to promoting accelerated growth the industrial sector. The role of foreign direct investment as a means to support domestic investment for achieving a higher level of economic development. FDI benefits domestic industry as well as the Indian consumer by providing opportunities for technological up gradation access to global managerial skills and practices etc. To reduce delays, a simplified approval mechanism for FDI proposals has been put in place via: i. Automatic approval by RBI to specified industries. ii. Other proposals which do not conform to the guide lines for automatic approval are considered by foreign investment promotion Board (FIPBJ. The FIPB makes recommendations to the government.

3. Major initiatives: The following initiatives have been taken: (a) Delicensing of some industries Viz: i. Coal and lignite ii. Petroleum and its distillation iii. Sugar industry iv. Bulk drugs. (b) Foreign equity upto 100% in i. Power sector ii. Electric generation (c) Requirement of prior approval by RBI for bringing FDI/ NRI/OCB investment. (d) The RBI has delegated powers to regional office. (e) Scope for private sector: The number of industries reserved for private sector has been reduced and entry level barriers have been removed. (f) Foreign exchange rate policy has been changed. Restriction on current account transaction has been removed. (g) Integration with global economy. Industrial policy has brought reforms in related areas such as export, import etc. Tariffs have been reduced on imports.

12.4 Critical Analysis of New Industrial Policy: 1991 policy has a greater impact on Indian economy and society. It has positive as well as negative impact which may be summed up as follows: i. Research and Development: Creativity and innovation has become the order the day. Knowledge is updated by constant research and development. Industries are concentrating on research and development to bring out creativity in product design. ii. Quality: Quality aspect has gained a lot of significance. The concept of quality has undergone a significant change. Quality is not something which is determined by the quality control department. Rather it is to be judged by the customer. The focus is on total quality which is to be maintained at all levels rights from the manufacture of goods till it reaches the customer. iii. Infra structure: On account of new industrial policy, there is extensive growth of infra structure such as Transport, banking, communication etc. iv. Free flow of foreign capital on account of FDI. v. Employment opportunities in MNCs vi. Increase in the standard of living. vii. Implementation of better technology.

Negative impact of new industrial policy: i. Tough competition for Domestic industries. ii. Opposition from trade unions. iii. Unemployment iv. Indiscriminate use of natural resources of domestic country by MNCs.

Chapter 13

Public Sectors in India: Role, Growth and Problems

The Present Indian Economic structure s often characterized as ‗mixed economy‘. There are two fields of production in the structure i.e. the private sector and the public sector. In the Indian economy, both the private and public sector have an important placing. Both operate in almost all the sectors of the economy, although their relative positions differ widely in different sectors.

13.1 Role of Public Sector in India 13.2 Public Sector Enterprises (PSEs) 13.3 Rationale of PSEs in India 13.4 Role and Contribution of PSE in India: Recent Evidences 13.5 Problems Facing PSEs in India 13.6 Public Sector Reforms 13.7 Exercise

13.1 Role of Public Sector in India: After the attainment of independence and the advent of Planning, there has been a progressive expansion in the scope of the Public Sector. The passage of Industrial Policy Resolution of 1956 and the adoption of the Socialist Pattern of Society as our national goal, further led to deliberate enlargement of the role of public sector. To understand the role of the Public Sector, we must have an idea about its size in the context of the Indian economy. Secondly, it would not be appropriate to use any single measure to estimate the size of the public sector; rather it would be desirable to use quite a few indicators, e.g., employment, investment, value of output, national income generated, savings, capital formation and capital stock. Role of public sectors in the development of the country is explained below: 1. Public Sector and Capital Formation: The role of public sector in collecting saving and investing them during the planning ear has been very important. During the first and second five year plan it was 54% of the total investment, which declined to 24.6 % in the 2010-11. 2. Employment Generation: Public sector has created millions of jobs to tackle the unemployment problem in the country. The number of persons employed in the as on march 2011 was 150 lakh. Public sector has also contributed a lot towards the improvement of working and living conditions of workers by serving as a model employer. 3. Balanced Regional Development: Public sector undertakings have located their plants in backward parts of the county. These areas lacked basic industrial and civic facilities like electricity, water supply, township and manpower. Public enterprises have developed these facilities thereby bringing about complete transformation in the socio-economic life of the people in these regions. Steel plants of Bhilai, Rourkela and Durgapur; fertilizer factory at Sindri, are few examples of the development of backward regions by the public sector. 4. Contribution to Public Exchequer: Apart from generation of internal resources and payment of dividend, public enterprises have been making substantial contribution to the Government exchequer through payment of corporate taxes, excise duty, custom duty etc. gross internal resource generation in 1990- 2000 was 36000 cr which rose to 1, 11,000 cr in 2008-09, while net profit was 92,077 cr in 2010-11. 5. Export Promotion and Foreign Exchange Earnings: Some public enterprises have done much to promote India‘s export. The State Trading Corporation (STC), the Minerals and Metals Trading Corporation (MMTC), Hindustan Steel Ltd., the Bharat Electronics Ltd., the Hindustan Machine Tools, etc., have done very well in export promotion. 6. Import Substitution: Some public sector enterprises were started specifically to produce goods which were formerly imported and thus to save foreign exchange. The Hindustan Antibiotics Ltd., the Indian Drugs and Pharmaceuticals Ltd. (IDPL), the Oil and Natural Gas Commission (ONGC), the Indian Oil Corporation Ltd., the Bharat Electronics Ltd., etc., have saved foreign exchange by way of import substitution. 7. Promotion of Research and Development: As most of the public enterprises are engaged in high technology and heavy industries, they have undertaken research and development programmes in a big way. Public sector has laid strong and wide base for self-reliance in the field of technical know-how, maintenance and operation of sophisticated industrial plants, machinery and equipment in the country. Expenditure on research and development reduces the cost of production.

In India, a public sector company is that company in which the Union Government or State Government or any Territorial Government owns a share of 51 % or more. Currently there are just three sectors left reserved only for the government i.e. Railways, Atomic energy and explosive material. Private sectors/players are not allowed to operate in these sectors. Before the independence of India, there were only a few public sector companies in the country this includes, Indian Railways, the Port Trusts, the Posts and Telegraphs, All India Radio and the Ordinance Factory are some of the major examples of the country‘s public sector enterprises. However, post Indian independence, some policies for the development of the socio-economic status of the country were planned out by the then visionary leaders, where the public sector were used as a tool for the self-reliant growth of the nation‘s economy. This was the reason that the second five year plan of India was solely based on the development of the different industries. Till 1990s major sectors of the economy were reserved only for the government, this caused the great loss of our precious natural resources and the whole country trapped into the great economic problem. From the very first five year plan till 1980s our country grows with the average rate of 3.5% per year (which is called Hindu rate of growth by Prof. Rajkrishna). But later on the in 1991, july our new economic policy was launched under the leadership of Mr. Manmohan Singh and P.V. Narsimha Rao. The main objectives of this new economic policy were: 1. To maintain a sustained growth in productivity 2. To enhance gainful employment 3. To achieve optimum utilization of human resources 4. To transform India into a major partner and player in the global arena. 5. To take out Indian economy from the vicious circle of poverty. 6. Open the Indian economy to interact openly with the rest of the world. The main result of this new policy was that reserved sectors were opened for the private players. Public sectors were not able to operate at its optimum pace.

13.2 Public Sector Enterprises (PSEs) It is also known as State owned and managed units have played a strategic role in the Indian economy. The key factors contributing to stronghold of these enterprises are the need of rapid industrialization with equitable distribution of economic wealth and inadequacies of free market. India witnessed a greater degree of state ownership and increased regulation since second plan that envisaged industrialization as a development strategy. By 1980s the poor performance of state-owned companies was acknowledged and various efforts were made to improve performance. In an era of economic reform process initiated since1991, privatization has become a key component of public sector policy of the government. The survival of PSEs now depends upon performance efficiency and profitability. Public Sector Enterprises often referred to as government owned undertakings/enterprises or state-owned enterprises are wholly or partly owned and controlled by the government and produce marketable goods and services i.e. PSEs includes industrial and commercial enterprises which are managed and controlled by government. Public sector and PSEs are different from each other. The word public sector is wider and includes all kinds of organization commercial (i.e. PSEs) and non-commercial that are owned partly or fully and effectively managed by Government. Thus Government funded universities, colleges, hospitals, schools are part of public sector but are not PSEs because these organizations lack commercial orientation.

13.3 Rationale of PSEs in India The policy rationale for public ownership and government provision of certain goods and services has been based on the presence of some form of market failure, which are addressed through public ownership. In India, PSEs are assigned the responsibility of fulfilling specific social goals like correcting regional and economic imbalances, providing employment and reducing the concentration of monopoly power in the economy. Further, as a pre-requisite for balanced growth, the state controls the key sectors of the economy which is popularly known as the 'commanding heights' rationale of PSEs. The rationale of PSEs in India is discussed as follows: 1. Rapid Economic Development The prerequisite of faster economic development is the creation of infrastructure and the growth of basic industries like power, steel transportation; communication, banking etc. These industries require huge capital investment and involve long-gestation period and so private sector may not be interested to undertake the development of such industries. Further, the private sector lack financial and technical skills to develop such industries. In other words, reluctance on the part of private entrepreneurs to develop key industries due to high risk and low returns necessitated the establishment of PSEs. Government with its capacity to mobilize huge economic resources can develop the industries that are significant for growth prospects of the country. Thus in the earlier phase of development heavy state spending on investment in basic infrastructural sectors and service facilities(for example financial institutions, telecommunication banking etc.) is essential for providing a congenial atmosphere to the private sector to facilitate the process of accelerated development of the economy. 2. Reduction of Concentration of Economic Powers: PSEs reduce inequalities of income through welfare programmes, favorable pricing policy towards small industries and supply of cheaper goods to the consumer. Private sector may manipulate the price of essential goods and indulge into quick profit-making by controlling the volume and price of such goods. PSEs prevent such concentration of economic power.

3. Balanced Regional Growth: Private sector generally neglects backward regions that lack infrastructure and other basic facilities such as power, roads, telecommunication, skilled labor etc. PSEs set up large projects in these areas and spend huge cost to develop such areas. In this manner PSEs help to achieve balanced regional growth.

4. Employment Generation: The adequate generation of employment opportunities is a major objective of the public sector enterprises. This sector has provided direct employment to more than 80 percent of organized labor.

5. Import-Substitution and Export-Promotion: In the initial period of development foreign exchange constraints exist due to huge imports of capital goods and low exportable surplus. PSEs produce importable goods domestically which tend to save precious foreign exchange and facilitate exports.

6. Resource Mobilization: PSEs mobilize savings through large network of banking and financial institutions. The profits of PSEs are ploughed back into developmental activities of the country. Further, PSEs contribute to the Government‘s exchequer through payment of tax and divideds.

13.4 ROLE AND CONTRIBUTION OF PSE IN INDIA: RECENT EVIDENCES The role of PSEs in the provision of social and economic infrastructure has been impressive. It has significant contribution to the country‘s economy by filling the gaps in the industrial sector, generating employment and balanced regional development. The major contributions of PSEs are explained as under:

Contribution towards Industrial Development and GDP Growth The role of Indian PSEs in the process of industrialization is widely acclaimed. The PSEs has helped to build sound and diversified industrial base. The capacity creation by PSEs in basic industries such as generation and distribution of electricity, telecommunication public transportation stood at around 50 percent. In case of basic metals fuel and fertilizers it stood at 80 percent to 100 percent. These industries are central to economic development process of industrialization. PSEs contribute around 27percent of total industrial production of the economy. On the eve of the First Five Year Plan there were 5 central public sector enterprises (CPSEs) with a total (financial) investment of Rs. 29 crore. Both the number of enterprises and the investment in CPSEs recorded an overwhelming increase over the years, especially so after the Second Five Year Plan. As on 31st March, 2007, there were a total of 247 CPSEs with a total of Rs. 421089 crores. (Table1).The contribution of PSEs in the real gross capital formation as depicted in table2 clearly indicate that PSEs occupy a significant position in the process of country‘s capital formation and holds commanding heights of the economy.

13.5 Problems Facing PSEs In India

1. Defective Pricing Policy The prices of goods and services produced by the PSE in India for long have been determined by Govt. under administered price regimes (APR). In post-91 era with intense market competition Government has dismantled the APR in most cases and PSEs have been given independence to fix their own price competitively. In the recent years various price regulatory commission for regulating prices in best interest of both consumers and producers have been established whose recommendations are applicable both for private and PSEs. Government on its part continues to be sensitive to the needs of the poor and price level in the economy. Any rise in price generally warranted by market conditions is avoided. Pricing of petroleum is an example in this respect. The rise in the international price of crude oil is hardly passed on to the consumers. The social approach set prices in PSE causes a lower returns and financial losses. 2. Excessive Political Interference There exists considerable political interference in the operational aspects of PSEs in terms of appointment in the management, pricing of products, location of projects. The decisions are guided by political considerations and not by economic factors.

3. Delays in Decision-Making The red-tapism and bureaucratic management causes delay in decision-making of these organizations. PSEs thus fail to take advantage of opportunities thrown open by the market.

4. Over-Manning The public sector enterprises are overstaffed. It increases cost of production and inefficiency in the organization.

5. Lack of Accountability The appraisal system lack performance-based remuneration system. The system lacks incentives to improve and penalties for delays and failures. The security of service makes them lethargic and reduces creativity. This lack of accountability causes inefficiency and losses in the public enterprises.

6. Under-Utilization of Capacity The public enterprises operate at less than their full capacity and produce lower than potential output. This increase the cost of production as the fixed cost is distributed over small output.

13.6 Public Sector Reforms The Industrial policy resolution of 1956 has been the guiding factor which gave PSEs a strategic role in the economy. Massive investments have been made over the past five decades to build public sector. These enterprises have successfully expanded production, opened up new areas of technology and built up a reserve of technical competence in various areas. Initially, public sector investments were in the key infrastructure areas, but later on it begun to spread in all areas of he economy including non-infrastructure and non-core areas. Since 1980‘s, the performance of state owned enterprises has been undergoing a close scrutiny in India. The existence of huge fiscal deficit made it difficult to raise funds at home and abroad. It was felt that the PSEs were absorbing a large chunk of government funds in the form of subsidies, which has resulted in the misallocation of resources brought about by diversion of savings. In order to overcome these problems government allows relaxation in the controls over PSEs and the emphasis was put on efficiency and internal resource generation of these enterprises. The public sector reforms in India since 1991 involves structural changes that aim at increasing efficiency, decentralization, accountability and market orientation of these enterprises. The important reform measures introduced in the recent years are discussed as follows:

1. Allowing Managerial Autonomy: Government has adopted empowerment of PSEs as a continuous process. The management of PSEs has been given operational autonomy in respect of human resource development decisions like recruitment, promotion and other service related decisions. The profit-making enterprises which don‘t depend on the budgetary support of the government identified as Navratnas and miniratnas are given enhanced powers to take investment and project -related decisions such as decisions relating to capital expenditure, raising capital from the market, mergers and acquisitions etc. Board of Directors of PSEs exercises the delegated powers subject to the broad guidelines issued by Government. This would help PSEs to mitigate problems relating to delay in decision- making and help to improve the competitive strength of these enterprises.

2. Performance-based Accountability through Memorandum of understanding (MOU) System: MOU is an instrument that specifies mutual responsibilities of two parties who sign it. It is signed between government and management of PSEs. MOU clarifies objectives and targets expected form the management and performance evaluation takes place with reference to these objectives. Thus it allows management by results and objectives rather than management by controls. Further an attempt is made to evaluate performance of PSEs on the basis of financial and operational performance indicators such as sales, growth in sales and return on assets, dividend pay-out ratio and earnings per share.

3. Manpower Rationalization: PSEs for long have been suffering from over manning. Voluntary Retirement Scheme (VRS) has been introduced in a number of PSEs to shed the surplus manpower. In order to provide security net to those who opt for VRS, Counseling, Retraining and Redeployment (CRR) scheme has been launched. CRR aims at retraining employees who have opted for VRS so that the employees can adapt to new vocation after their separation from PSEs.

4. Professionalism in Management: In order to improve efficiency, Board of Directors (BOD) of PSEs has been strengthened with the induction of professional managers. The number of Government nominated directors has been reduced. Management personnel are allowed greater operational autonomy in implementing the policies of the board. Efforts are being made to reduce political and bureaucratic interference in the working of public sector enterprises.

5. Dereservation: The portfolio of the public sector investments has been thoroughly reviewed to focus the public sector on strategic, high-tech and essential infrastructure. The new industrial policy 1991 adopted the policy of dereservation that allowed the entry of private sector in the activities exclusively reserved for public sector. The list of industries reserved solely for the public sector -- which used to cover 18 industries, including iron and steel, heavy plant and machinery, telecommunications etc. has been drastically reduced to two: atomic energy generation, and railway transport. These reform mainly aim at providing competition to the public sector.

6. Transparency in Operations of PSEs: Corporate Governance Code has been formulated to bring greater amount of public accountability and transparency amongst PSEs in an era of competitive environment in 2005. Corporate governance refers to ethical business and transparent conduct of management of organization so as to protect the interest of stakeholders (i.e. shareholders, employees, suppliers etc.).These are the guidelines that management is required to follow in their decision-making process. The code meet the regulatory framework, builds harmonious relations with the stakeholders, provide high degree of accountability to the parliament and the public and ensures transparency in decisions. Further, PSEs are also subject to Right to Infromation Act (RTI).

7. Revival and Restructuring of Sick PSEs: Efforts are made to modernize and restructure PSEs and revive sick industries. The chronically sick industries have been sold off or closed. Companies having potential for revival have been allowed to be turned around by private sector. In 2004, Board for Reconstruction of PSE (BRPSE) has been created to take up restructuring and revival of PSEs. BRPSE is an advisory body which provides measures to strengthen, modernize PSEs. It advises government on disinvestment or closure or sale of chronically sick or loss making units that cannot be revived. It also monitors incipient sickness in PSEs so as to detect their problems at the initial stage that can result into sickness at the later stage. As on 15-7-07, 57 PSEs have been referred to BRPSE.

8. Allowing PSEs to Enter Capital Market: In an era of reduced budgetary support PSEs have been allowed to raise equity finance from the capital market. This has provided a market pressure on PSEs to improve their performance. As investors keep on monitoring the shares listed on stock exchange and market price movements reflect the performance of the company so management remain alert of their operational efficiency. Further, the listing of PSEs share in the market has offered new opportunities to the investors that have also improved the trading activity of the stock exchanges in India. In the year 2007, 44 central PSEs were listed on the stock exchange. Some of PSE shares are enlisted on the international stock exchange (for example MTNL share is listed on New York stock exchange).

9. Modernization: The new policy provided for modernization of plants, rationalization of productive capacity and changes in the product mix of PSEs. Further PSEs have been allowed to enter into technology joint ventures and have alliance to obtain technology and know-how. National Investment Fund has been established in 2005 to provide funds for revival and capital investment requirements of PSEs. The disinvestment proceeds will be channelized to this fund. This would help them to develop competitive strategy based on market needs.

13.7 Exercise

1. ―PSEs hold commanding heights in the economy but financial performance of these enterprises are far from satisfactory‖. Comment on this statement and explain the role and contribution of PSEs in India. 2. Critically examine the performance of PSEs in India. Would you recommend disinvestment of public sector units? 3. Discuss the merits and demerits of the private sector and public sector in India. What have been major of inefficient functioning of the public sector enterprises? 4. What do you mean by disinvestment? What has been the progress of privatization of the public sector enterprises in the country?

Chapter- 14 Services Sector:

14.1 Introduction 14.2 Role of Service Sector in Economic Development 14.3 Growth of Services Sector in India 14.4 Exercise

14.1 Introduction: India left the stage of under-development far behind. It has embarked upon the path of rapid economic development since the 1980‘s. Thus, India has been showing high growth pattern for last several decades or it has moved on high growth trajectory after the initial slow growth decades from 1950-80. Such growth pattern in the Indian economy must be accompanied by rapid economic and structural transformation. It is also inequitable that sources of economic growth are also shifting. It means that new sources of economic growth become stronger. Broadly, there are three sectors in an economy: Primary sector, Secondary sector and Tertiary sector. Under Primary sector agriculture and allied activities are the major activities. In the initial stages of economic development agriculture is the main occupation and majority of the population depends upon it. As economic development proceeds industrialization takes place and industrial growth becomes higher to give momentum to the overall economy. Due to this, share of the secondary sector in the economy increases and that of the primary sector goes down. The tertiary sector also starts showing higher growth rate and therefore its share in the economy keeps on increasing.

14.2 Role of Service Sector in Economic Development In any country economic development depends on the growth and evolution of the three sectors of the economy. However in recent years the service sector growing at a very faster rate in the developing countries and is contributing a major share in terms of output, income and employment. Even the productivity per worker is becoming higher in service sector when compared to agriculture and industrial sectors. Already the service sector is dominant in the developed countries. If agriculture sector is stagnant, new service activities are emerging and adding to the service sector making the economy to grow. Hence service sector is playing a major role in economic development of any country. The importance of the services sector can be gauged by its contributions to different aspects of the economy. Business includes both domestic trade as well as foreign trade. Trade as service sector activities facilitates the exchange of the goods and services between producers and consumers. Domestic trade refers to the exchange of goods and services within the country. Which provides income and employment to the people who have engaged in these activities? Foreign trade plays a major role in the development of the country. Imports of machinery and equipment which cannot be produced in the initial stages at home are essential. Such imports which either help to create new capacity in some lines of production or enlarge capacity in the other lines of production are called developmental imports. The imports which are made in order to make a full use of the productive capacity are called maintenance imports. Finance as a service sector activity plays an important role in undertaking any economic activities. Finance refers to funds of monetary resources required by individual, business houses and the government. People need funds to meeting their current requirement or day to day of expenses for buying capital goods. A business house requires funds for paying wages and salaries, for buying raw materials, for purchasing new machinery or replacing an old one etc. Government needs funds to provide various services to its subject. Finance institutions provide funds to various groups of people for variety of activities. In this process the service sector activities provides income and employment to the people of a country. In the previous days this sector is responsible for distributing the output of the primary and secondary sectors for the intermediate and final consumption and also for the providing a variety of services to producers as well as consumers. Trade, transport and storage activities ensure distribution of goods and services where and when needed by consumers. Business and financial services facilitate mobilization of resources and their development in the activities of different sector of the economy. Service sector activities generally require relatively less capital investment than activities in other sectors. But a majority of these activities also require relatively less space for operations service sector is a knowledge intensive sector and substantial HRD inputs are the necessary for developing most of the services sector activities.

14.3 Growth of Services Sector in India Service sector also recognized as tertiary or residual sector is indispensable for economic development in any economy including India. It has developed as the main and fastest- growing sector in the global economy in the last three decades. The services sector is not only the dominant sector in India‘s GDP, but has also attracted significant foreign investment flows, contributed significantly to exports as well as 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 the key driver of India‘s economic growth. The sector is estimated to contribute around 54.0 per cent of India‘s Gross Value Added in 2017-18 and employed 28.6 per cent of the total population. India‘s net services exports during reached US$ 57.60 billion April- December 2017. Nikkei India Services Purchasing Managers Index grew from 47.80 in February 2018 to 50.30 in March 2018, supported by growth in the growth in Information & Communications and Finance & Insurance. As per Ministry of Statistics and Programme Implementation‘s second advance estimates of National Income 2017-18, services sector GVA is expected to grow to US$ 1,266.10 million in FY18. According to a report called ‗The India Opportunity‘ by leading research firm Market Research Store, the Indian mobile services market is expected to reach $37 billion in 2017 and grow by 10.3 per cent year-on-year to reach US$ 103.9 billion by 2020. Out of overall services sector, the sub-sector comprising financial services, real estate and professional services contributed US$ 305.8 billion or 20.5 per cent to the GDP. The sub-sector of community, social and personal services contributed US$ 188.2 billion or 12.6 per cent to the GDP.

Investments The Indian services sector which includes financial, banking, insurance, non-financial/business, outsourcing, research and development, courier and technical test analysis, has attracted FDI equity inflows in the period April 2000-December 2017, amounting to about US$ 64.10 billion according to the Department of Industrial Policy and Promotion (DIPP). Some of the developments and major investments by companies in the services sector in the recent past are as follows:  Private Equity (PE) investments in the hospitality industry rose nearly three-fold to US$ 119 million in 2017 from US$ 43.58 million in 2016.  Hotel deals, including mergers and acquisitions, are expected to pick up further in 2018 as many premium hotel properties are up for sale.  American fast food chain McDonalds is reopening 84 of its closed restaurants, increasing the total number of operational restaurants across north and east India to 169.  National Skill Development Corporation has signed a tripartite Memorandum of Understanding (MoU) with Tourism and Hospitality Sector Skill Council (THSC) and Airbnb to impart hospitality skills training to hospitality micro-entrepreneurs in India.  The domestic and foreign logistic companies are optimistic about prospects in the logistics sector in India, and are actively making investments plans to improve earnings and streamline operations.

Government Initiatives The Government of India recognizes the importance of promoting growth in services sectors and provides several incentives in wide variety of sectors such as health care, tourism, education, engineering, communications, transportation, information technology, banking, finance, management, among others. Prime Minister Narendra Modi has stated that India's priority will be to work towards trade facilitation agreement (TFA) for services, which is expected to help in the smooth movement of professionals. The Government of India has adopted a few initiatives in the recent past. Some of these are as follows:  Under the Mid-Term Review of Foreign Trade Policy (2015-20), the Central Government increased incentives provided under Services Exports from India Scheme (SEIS) by two per cent.  Ministry of Communications, Government of India, has launched DARPAN - ―Digital Advancement of Rural Post Office for A New India‖ which is aimed at improving the quality of services, adding value to services and achieving ―financial inclusion‖ of un- banked rural population.  Ministry of Civil Aviation, Government of India, launched 'DigiYatra', a digital platform for air travellers that aims to develop a digital ecosystem providing consistent service and a delightful experience at every touch point of the journey.  The Ministry of Electronics and Information Technology has launched a services portal, which aims to provide seamless access to government services related to education, health, electricity, water and local services, justice and law, pensions and benefits, through a single window. Road Ahead Services sector growth is governed by both domestic and global factors. The Indian facilities management market is expected to grow at 17 per cent CAGR between 2015 and 2020 and surpass the US$19 billion mark supported by booming real estate, retail, and hospitality sectors. The performance of trade, hotels and restaurants, and transport, storage and communication sectors are expected to improve in FY17. The financing, insurance, real estate, and business services sectors are also expected to continue their good run in FY17. The implementation of the Goods and Services Tax (GST) has created a common national market and reduced the overall tax burden on goods. It is expected to reduce costs in the long run on account of availability of GST input credit, which will result in the reduction in prices of services. Exchange Rate Used: INR 1 = US$ 0.015 as on March 01, 2018.

14. 4 Exercise

1. What do you mean by the services sector in an economy? Discuss its growth in the Indian economy. 2. Throw light on role of the service sector in the Indian economy. 3. How far it is correct to suggest that the service sector in the Indian economy is acting like the engine of growth? 4. Examine the structure of the services in India and also discuss the changing structure of service sector?

Chapter-15 Financial Sector

Financial Sector: Structure, Performance and Reforms. Foreign Trade and balance of Payments: Structural Changes and Performance of India‘s Foreign Trade and Balance of Payments; Trade Policy Debate; Export policies and performance; Macro Economic Stabilization and Structural Adjustment; India and the WTO, Role of FDI, Capital account convertibility. In this chapter we will discuss the following issues: 11.7Introduction 11.8Economic Reforms in India 11.9Macroeconomic Stabilization 11.10 Exercise

15.1 Introduction In early 1991, a major economic crisis surfaced in India. Most economists are now convinced that this crisis in the economy was the worst that this country had experienced since independence. To tackle the problems emanating from this crisis, the government introduced a programme of macroeconomic stabilization and structural reforms. In this chapter, we shall discuss:

 Economic Reforms in India  Macroeconomic stabilization measures introduced in the post-reform period;  Measures introduced for structural reforms in this economy.

15.2 Economic Reforms in India New economic reforms in India refer to the neo-liberal polices introduced by the government in 1991 and in the later years. The central point of the reforms was liberalization of the economy, simplifying regulations, giving more roles to the private sector and opening up of the economy to competition. New industrial policy of 1991 is the heart of the new economic reforms. The philosophy of the new economic policy was enhancing competition based upon more market orientation. During the last twenty-five years, the economic reform has produced significant impact on the economy- mostly positive. Following are the main features of New Economic Reforms. The economic reforms were started in 1991, and they are still continuing. A major feature of economic reforms was that it was implemented in a gradual manner. The reforms were comprehensive and extensive as it covered all sectors- trade, investment, industrial sector, financial sector, public sector, fiscal sector etc. The new industrial policy introduced in 1991 is the central point of the economic reforms. In the following years, the government has introduced further policy changes for trade liberalization, financial sector liberalization and foreign investment policy changes to sustain the momentum initiated in 1991. Over the last twenty-five years, as a result of the launch of the new economic policy and its continuation, the Indian economy has undergone significant improvement and now is one of the fastest growing economies in the world. The famous BRIC report predicts that India will grow as the second largest economy by 2050. At present, India is categorized as an Emerging Market Economy (EME) along with China, Brazil, and Russia etc. Even in the current crisis phase of the global economy, India‘s macroeconomic performance is comparatively better.

1. Dereservation of the Industrial Sector–: The industrial sector of the economy has been opened up to the private sector after the New Industrial Policy of 1991. Previously, the public sector has given reservation especially in the capital goods and key industries. Other operators private sector and foreign investors were not allowed in these critical industries. Deregulation of the industrial sector allowed private sector operation in most of these sectors except in eight selected areas including atomic energy, mining and railways.

2. Industrial de licensing Policy: The most important part of the new industrial policy of 1991 was the end of the industrial licensing or the license raj or red tapism. Under the previous industrial licensing policies, private sector firms have to secure licenses to start an industry. This has created long delays in the startup of industries. The industrial policy of 1991 has almost abandoned the industrial licensing system. It has reduced industrial licensing to fifteen sectors.

3. Opening up of the Economy to Foreign Competition: Another major feature of the economic reform measure was that it has given welcome to foreign investment and foreign technology. Opening up of the economy to foreign competition started a new era in India‘s economic policy with permission to FDI up to 51 per cent in selected sectors.

4. Liberalization of Trade and Investment: The economic reforms introduced extensive liberalization of foreign trade and foreign investment. The import substitution and import restriction policies were abandoned and instead import liberalization and export promotion policies were introduced. On the investment front, the economic reforms mark the era of capital mobility in the country. Foreign capital in the form of FDI (Foreign Direct Investment) and FPI (Foreign Portfolio Investment) were entered into our country.

5. Financial Sector Reforms: on the financial sector the government is introducing numerous measures for the deregulation as well as liberalisation of the sector. Different banking sector reforms including removal of control on interest rate and branch licensing policy liberalization were launched. Capital market reforms and money market reforms were extensive after 1994.

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

15.3 Macroeconomic Stabilization Macroeconomic stabilization involves returning to low and stable inflation and a sustainable fiscal and balance of payments position. Stabilization is necessary to overcome a crisis but it assumes a special importance if structural reforms are also introduced together with stabilization. This is because structural reforms often add to macroeconomic pressure. For example, in the short run, trade liberalization may increase deficits in the balance of payments and financial sector reforms may worsen fiscal position by raising the cost of public borrowing. Therefore, stabilization must accompany structural reforms and stabilization policies have to be bold and effective, otherwise extra macroeconomic strains generated in the reforms process can disrupt the latter completely. The macroeconomic stabilization programme adopted by the government consisted of the following measures: 1. Control of Inflation 2. Fiscal Correction 3. Improving the balance of payments positions

11.11 Exercise Q1. What do you mean by economic reforms? How it is different from the mixed economy approach? Q2. Examine the pattern of economic reforms in the Indian economy since 1991. Q3. How is economic reform harmful in a developing economy? How can it be corrected?

Chapter- 16 WTO and India 16.1 Introduction 16.2 Functions and Organization of WTO 16.3 WTO Agreements 16.4 India’s Commitments to WTO 16.5 Exercise

16.1 Introduction On April 15, 1994, basis for a new world institution, World Trade Organization (WTO) was laid. It has started functioning from early 1995. It has replaced GATT (General Agreement on Tariffs and Trade). It also incorporates Dunkel Proposals, better described as Dunkel Dr4aft, in respect of international trade and trade related matters, which were made by Arthur Dunkel, Director General of GATT in December, 1991. The GATT and, in particular the Dunkel Draft, have been a subject of intense debate.

16.2 Functions and Organization of WTO The signing of the Final Act of the Uruguay Round by member nations of GATT in April 1994 paved the way for the setting up of the World Trade Organization. An agreement to this effect was signed by 104 members. The WTO agreement came into force from January 1, 1995 and India becomes a founder member of the World Trade Organization, by ratifying the WTO Agreement on December 30, 1994. The former GATT was not really an organization: it was merely a legal arrangement. On the other hand, the WTO is a new international organization set up as a permanent body and is designed to lay the role of a watchdog in the spheres of trade in goods, trade in services, foreign investment, intellectual property rights, etc. It ahs following five functions as set out in Article III: i. WTO shall facilitate the implementation, administration and operation of the WTO trade agreements, such as multilateral trade agreements, plurilateral trade agreements. ii. WTO shall provide forum for negotiations among its members concerning their multilateral trade relations. iii. WTO shall administer the ‗Understanding on Rules and Procedures‘ so as to handle trade disputes. iv. WTO shall monitor national trade policies. v. WTO shall provide technical assistance and training for members of the developing countries. vi. WTO shall cooperate with various international organizations like the IMF and the WB with the aim of achieving greater coherence in global economic policy-making.

16.3 WTO Agreements: The main WTO agreements can be divided into the following categories: 1. Agreement on Agriculture The Agreement on Agriculture was concluded creating substantial, binding commitments in three areas: market access (tariffication), domestic supports (reduction in subsidies), and export competition. These commitments are to be implemented over a period of six years from 1995 to 2000. This was accomplished despite the following difficulties: (1) the United States had used price support policies to boost its grain production and exports making itself into "the world's breadbasket;" (2) the European Union's Common Agricultural Policy (CAP) had used price supports, import levies, and export subsidies, and consequently, transformed the European Union from one of the world's largest importers of agricultural products to one of its largest exporters; and (3) competition for grain exports has been intensified as the shortages that existed through the mid-seventies turned to surpluses because of changes in the international supply-and-demand balance. 2. Agreement on trade in textiles and clothing This provides for phasing out the import quotas on textiles and clothing in force under the Multi- Fiber Agreements since 1974, over a span of 10 years. As a result, quotas on textiles and clothing have now been abolished. 3. Agreement on Market Access The member nations are required to cut tariffs on industrial and farm goods in a bid to promote foreign trade and provide better access to foreign competitors in their domestic markets. 4. Agreement on Services For the first time, trade in services like banking, insurance, travel, maritime transportation, mobility of labour etc. was brought within ambit of negotiations in the Uruguay Round. The GATTs provides a multilateral framework of principles and services which should govern trade in services under conditions of transparency and progressive liberalization. In addition to the above, the Uruguay Round also reached agreements on the understanding and implications of certain articles of GATT 1947, viz, pre-shipment inspection, rules of origin, import licensing, anti-dumping measures, safeguards, subsidies, etc.

16.4 India’s Commitments to WTO The government of India has made a number of commitments to WTO. The main commitments are in the following fields: 1. GATS: Multilaterally agreed and legally enforceable rules and disciplines relating to trade in services are covered by General Agreement on Trade in Services. It envisages free trade in services, like banking, insurance, hotels, construction, etc., so as to promote growth in the developed countries by providing larger markets and in the developing countries through transfer of technologies from the developed countries. As a result of this agreement, access of service personnel into markets of member countries will henceforth be possible on a non-discriminatory basis under transparent and rule-based system. Under the agreement, service sector would be placed under most favoured nation (MFN) obligations that prevents countries from discriminating among different nations in respect of services 2. TRIPs

TRIPS Agreement covers seven specific areas, viz. copyrights, trademarks, industrial designs, integrated circuits, geographical indications, trade records and patent. Of these seven areas, the most important as well as debatable aspect is the patents right. The basic principle of the patent system is that an inventor, who makes a full disclosure of what he has invented, is granted a statutory monopoly to exploit his invention. Patents should be available for any invention, whether products or processes, in all fields of technology provided they are new, involve an inventive step and capable of industrial application. Patents should be available and patent rights enjoyable without discrimination. TRIPS also say that members must provide for the protection of plant varieties either by patents or by an effective sui generis system. The sui generis system commonly refers to the system of Plant Breeders‘ Rights (PBRs)—the exclusive right to produce seed of the protected variety for the seed trade and control of its marketing. In addition, WTO members have set procedures for settling disputes arising out of the violation of trade rules. Thus, there exists a multilateral system of settlement of disputes. The WTO agreement also allows governments to take appropriate action against dumping.

3. TRIMs Under the TRIMs agreement, developing countries had a transition period of 5 years up to December 31, 1999 during which they could continue to maintain measures inconsistent with the Agreement provided these were duly notified. The government of India notified two TRIMs.

4. Quantitative Restrictions Article XI of the GATT generally prohibits quantitative restrictions on the importation or the exportation of any product, by stating "[n]o prohibitions or restrictions other than duties, taxes or other charges shall be instituted or maintained by any Member..." One reason for this prohibition is that quantitative restrictions are considered to have a greater protective effect than tariff measures and are more likely to distort free trade. When a trading partner uses tariffs to restrict imports, it is still possible to increase exports as long as foreign products become price competitive enough to overcome the barriers created by the tariff. When a trading partner uses quantitative restrictions, however, it is impossible to export in excess of the quota no matter how price competitive foreign products may be. Thus, quantitative restrictions are considered to have such a greater distortional effect on trade. However, the GATT provides exceptions to this fundamental principle. These exceptional rules permit the imposition of quantitative measures under limited conditions and only if they are taken on policy grounds justifiable under the GATT such as critical shortages of foodstuffs (Article XI:2) and balance of payment (Article XVIII:B).

1. 5 Exercise Q1. What do you understand about the WTO and its emergence to streamline trade at global level? Q2. What have been the major changes in global trade due to the emergence of the WTO? Q3. Describe the major features of the different rounds of WTO norms? Q4. How far is it correct to measure that WTO has been helpful in promoting trade in goods and services in the world economy?

Chapter- 17 India’s Foreign Trade

The present chapter is devoted to a discussion of trends in the foreign trade of India. The discussion is divided into the following sections:

17.1 Introduction 17.2 Features of Foreign Trade of India 17.3 Need and Importance of Foreign Trade 17.4Exercise

17.1 Introduction India‘s foreign trade was largely determined by the strategic needs of the British colonial powers prior to its independence in 1947 Like other colonies, India too was a supplier of raw materials and agricultural commodities to Britain and other industrial countries and it used to import the manufactured goods from Britain. The dependence of colonial India on Britain for manufactured goods hindered the process of industrialization and obliterated the indigenous handicraft and cottage industries. As a part of the British strategy, India had to export more than its imports prior to World War II, so as to meet the unilateral transfer of payments to Britain by way of the salaries and pensions of the British officers, both military and civil, dividends on British capital invested in India, and interest on sterling loans. This helped India to achieve a favourable trade balance. In April 1946, India was able to build a huge sterling balance of Rs. 17.33 billion, even after paying of the sterling debt. However, the share of raw materials in India‘s exports declined from 45 per cent in 1938-39 to 31 per cent in 1947-48 whereas the share of manufactured goods increased from 30 per cent in 1938-39 to 49 per cent in 1947-48. It was only after independence that India‘s trade patterns began to change in view of its developmental needs. India, as a newly independent country, had to import equipment and machinery that could not be manufactured domestically, in order to create new production capacity and build infrastructure, known as developmental imports. Foreign Trade is the important factor in economic development in any nation. Foreign trade in India comprises of all imports and exports to and from India. The Ministry of Commerce and Industry at the level of Central Government has responsibility to manage such operations. The domestic production reveals on exports and imports of the country. The production consecutively depends on endowment of factor availability. This leads to relative advantage of the financial system. Currently, International trade is a crucial part of development strategy and it can be an effective mechanism of financial growth, job opportunities and poverty reduction in an economy. According to Traditional Pattern of development, resources are transferred from the agricultural to the manufacturing sector and then into services.

17.2 Features of Foreign Trade of India are: 1. Negative or Unfavorable Trade 2. Diversity in Exports 3. Worldwide Trade 4. Change in Imports 5. Maritime Trade 6. Trade through a few Selected Ports Only 7. Insignificant Place of India in the World Overseas Trade 8. State Trading! 1. Negative or Unfavorable Trade: India had to import various items like heavy machinery, agricultural implements, mineral oil and metals on a large scale after Independence for economic growth. But our exports could not keep pace with our imports which left us with negative or unfavorable trade.

2. Diversity in Exports: Previously, India used to export its traditional commodities only which included tea, jute, cotton textile, leather, etc. But great diversity has been observed in India‘s export commodities during the last few years. India now exports over 7,500 commodities. Since 1991, India has emerged as a major exporter of computer software and that too to some of the advanced countries like the USA and Japan.

3. Worldwide Trade: India had trade links with Britain and a few selected countries only before Independence. But now India has trade links with almost all the regions of the world. India exports its goods to as many as 190 countries and imports from 140 countries.

4. Change in Imports: Earlier we used to import food-grains and manufactured goods only. But now oil is the largest single commodity imported by India. Both the imports as well as exports of pearls and precious stones have increased considerably during the last few years. Our other important commodities of import are iron and steel, fertilizers, edible oils and paper.

5. Maritime Trade: About 95 per cent of our foreign trade is done through sea routes. Trade through land routes is possible with neighboring countries only. But unfortunately, all our neighboring countries including China, Nepal, and Myanmar are cut off from India by lofty mountain ranges which makes trade by land routes rather difficult. We can have easy access through land routes with Pakistan only but the trade suffered heavily due to political differences between the two countries.

6. Trade through a few Selected Ports Only: We have only 12 major ports along the coast of India which handle about 90 per cent overseas trade of India. Very small amount of foreign trade is handled by the remaining medium and small ports.

7. State Trading: Most of India‘s overseas trade is done in public sector by state agencies and very little trade is done by individuals

17.3 Need and Importance of Foreign Trade

Following points explain the need and importance of foreign trade to a nation. 1. Division of labour and specialization Foreign trade leads to division of labour and specialization at the world level. Some countries have abundant natural resources. They should export raw materials and import finished goods from countries which are advanced in skilled manpower. This gives benefits to all the countries and thereby leading to division of labour and specialization.

2. Optimum allocation and utilization of resources Due to specialization, unproductive lines can be eliminated and wastage of resources avoided. In other words, resources are channelized for the production of only those goods which would give highest returns. Thus there is rational allocation and utilization of resources at the international level due to foreign trade.

3. Equality of prices Prices can be stabilized by foreign trade. It helps to keep the demand and supply position stable, which in turn stabilizes the prices, making allowances for transport and other marketing expenses.

4. Availability of multiple choices Foreign trade helps in providing a better choice to the consumers. It helps in making available new varieties to consumers all over the world.

5. Ensures quality and standard goods Foreign trade is highly competitive. To maintain and increase the demand for goods, the exporting countries have to keep up the quality of goods. Thus quality and standardised goods are produced.

6. Raises standard of living of the people Imports can facilitate standard of living of the people. This is because people can have a choice of new and better varieties of goods and services. By consuming new and better varieties of goods, people can improve their standard of living.

7. Generate employment opportunities Foreign trade helps in generating employment opportunities, by increasing the mobility of labour and resources. It generates direct employment in import sector and indirect employment in other sector of the economy. Such as Industry, Service Sector (insurance, banking, transport, communication), etc.

8. Facilitate economic development Imports facilitate economic development of a nation. This is because with the import of capital goods and technology, a country can generate growth in all sectors of the economy, i.e. agriculture, industry and service sector.

9. Assistance during natural calamities During natural calamities such as earthquakes, floods, famines, etc., the affected countries face the problem of shortage of essential goods. Foreign trade enables a country to import food grains and medicines from other countries to help the affected people.

10. Maintains balance of payment position Every country has to maintain its balance of payment position. Since, every country has to import, which results in outflow of foreign exchange, it also deals in export for the inflow of foreign exchange.

11. Brings reputation and helps earn goodwill A country which is involved in exports earns goodwill in the international market. For e.g. Japan has earned a lot of goodwill in foreign markets due to its exports of quality electronic goods.

12. Promotes World Peace Foreign trade brings countries closer. It facilitates transfer of technology and other assistance from developed countries to developing countries. It brings different countries closer due to economic relations arising out of trade agreements. Thus, foreign trade creates a friendly atmosphere for avoiding wars and conflicts. It promotes world peace as such countries try to maintain friendly relations among themselves. 17.5 Exercise Q1. Differentiate between balance of trade and balance of payments. Also discuss growth of India‘s foreign trade over a period of time. Q2. What is the progress of balance of trade in India? Discuss the reasons for adverse balance of trade and its implications in the Indian Economy. Q3. Examine the pattern of trade in services in India. Q4. Discuss the structure of foreign trade on India. How does it portray nature of the Indian economy?

Chapter- 18 India’s Balance of Payments 18.1 Meaning of Balance of Payments 18.2 Components of BOP 18.3 India’s Balance of Payments: the Pre-1991 Period 18.4 What is BOP and how does it lead to crisis 18.5 Exercise

18.1 Meaning of Balance of Payments

The Balance of Payments is a statement that contains the transactions made by residents of a particular country with the rest of the world for a specific time period. It is also known as the balance of international payments and if often abbreviated as BOP. It summarizes all payments and receipts by firms, individuals, and the government. The transactions can be both factor payments and transfer payments. There are two accounts in the BOP statement: Current Account and Capital Account. Current account records all transactions involving goods, services, investment income and current transfer payment. Capital account shows the net change in ownership of foreign assets and transactions in financial instruments. The balance of payments account follows a double entry system. All receipts are entered on the credit whereas all payments are entered on the debit side. Theoretically, a balance of payments accounts is always zero with the total on the debit side equaling the total on the credit side. Practically, however, there might be an error of some degree due to the different sources of data and fluctuation of currency exchange rates.

18.2 Components of BOP The BOP comprises of two accounts: 1. Current 2. Capital. Current Account The four major components of current account are as follows: 1. Visible trade – This is the net of export and imports of goods (visible items). The balance of this visible trade is known as the trade balance. There is a trade deficit when imports are higher than exports and a trade surplus when exports are higher than imports. 2. Invisible trade – This is the net of exports and imports of services (invisible items). Transactions mainly constitute of shipping, IT, banking and insurance services. 3. Unilateral transfers to and from abroad – These refer to payments that are not factor payments. These are ‗one-way‘ transactions. For examples, gifts or donations sent to the resident of a country by a non-resident relative. 4. Income receipts and payments – These include factor payments and receipts. These are generally rent on the property, interest on capital and profits on investments.

Capital Account The capital account is used to finance the deficit in the current account or absorb the surplus in the current account. The three major components of capital account: 1. Loans to and borrowings from abroad – These consist of all loans and borrowings given to or received from abroad. It includes both private sector loans as well as the public sector loans. 2. Investments to/from abroad – These are investments made by nonresidents in shares in the home country or investment in real estate in any other country. 3. Changes in foreign exchange reserves – Foreign exchange reserves are maintained by the central bank to control the exchange rate and ultimately balance the BOP if it is not. Current account deficit is financed by a surplus in the capital account and vice versa. This can be done by borrowing more money from abroad or lending more money to non-residents.

18.3 India’s Balance of Payments: the Pre-1991 Period The economic reform of 1991 brought the global transition in India. This transition is towards a newer India and a change in perspective of government towards the role of private players and markets in the economy. The Balance of Payment crisis followed by pledging of Gold reserves, taking loan from IMF and other structural adjustment programme (sponsored by IMF and World Bank) were the initial steps towards the economic reforms that were launched. The BOP crisis was the result of decades of imprudent economic policies that India followed. The institutional arrangements of the economy, pre 1991, were adequate then but were eventually deteriorating the fiscal situation of the country. The role of fiscal policy in India‘s history is significant. In 1991, India ran into an unsustainable deficit in balance of payments. The country ran into large deficits for long time and as a result faced the balance of payment crisis. To combat the crisis, the government took various fiscal, monetary, trade, finance and industrial measures. Since mid-1991, the Indian economy took a departure from the past policies prevailed post-independence. Liberalization, Privatisation and Globalization are the words that strike the most listening to the reforms that took place post crisis. India‘s economy paved itself into a new regime through new economic policy (NEP). It is necessary to know about the economic compulsion that leads to such crisis which leads to these reforms.

18.4 What is BOP and how does it lead to crisis? Government runs into deficit when it spends more than it receives. Alternatively, it runs into surplus when receives more than it spends. To meet the additional expenditure, when in deficit, it can resort to 3 options. Printing money, drawing money from foreign exchange reserves, or borrows from domestic or foreign source. But it is not that easy as it appears. It influences other economic variables while resorting to these measures. Excessive printing of money can lead to inflation. It can lead to debt crisis if the government borrows a lot from foreign source. Excessive borrowing from domestic sources can result in higher interest rates and further the situation of ―crowding out‖. Fiscal Situation before Crisis: In 1950, planning commission was formed and since then India commenced on the path of planned development. The major portion of planning process was inclined towards strengthening of public sector as a means to achieve economic growth and development. Administrative controls were set up over industries by the introduction of quota-license-inspector raj. Since 1950, India ran into continuous trade deficit because of license raj system. The private savings were a mode of catering the public sector investment and consumption. The redistribution of income and wealth through tax and transfers was another goal during the time to reduce inequalities and poverty. There were 11 income tax brackets. The Government raised the income tax rates to high levels during the 1970s. The marginal rate of taxation along with the wealth tax reached up to 100% during 70s. In 1974–75 the personal income tax rate was brought down to 77 percent but the wealth tax rate was increased. The central revenue deficit reached to 2.44% of GDP by 1989–90 from 1.4% of GDP in 1980–81. The centre‘s gross fiscal deficit increased from 5.71% to 7.31% of GDP. Even after the fall in external liabilities, the overall liabilities were huge. Around 34% of the expenditure was on defense during 1970–71, interest payment had 19% share while the subsidies were at 3%. Furthermore, by 1990–91, the interest payment had the largest share of 29%, subsidies having 17% and defense had 15% of the expenditure share. The burden of public debt and the subsidy burden were quite great at that time. The phase of 1980–90 saw the self-perpetuating process of deficit induced inflation and inflation induced deficit. The deficit leads to increase in money supply, which eventually raises the price levels. The rise in price increases the government expenditure faster than the receipts, hence increasing the deficit. Since 1950, India ran into continuous trade deficit because of quota license inspector raj. The fiscal imbalances affected the foreign sector resulting in the BOP crisis of 1991. This was the worst BOP crisis, India faced since independence. During 1980s, inflow of foreign borrowings increased at burgeoning rates. There was an excessive domestic expenditure on incomes, due to which the fiscal deficit of centre and state reached to 11% in 1991. Total public debt as a ratio of GNP got doubled and foreign currency reserves faced a rapid depletion. In 1990–91, India faced double digit inflation.

18.5 Exercise Q1. What do you mean by balance of payments? Describe the pattern of the balance of payments in India during the five year plans. Q2. Make distinction between the balance of trade and balance of payments. Throw light on trade pattern of the Indian economy over a period of time. Q3. Review the nature and magnitude of external debt of India since 1991. Q4.How can India raise its foreign trade and benefits from this? In this regard discuss about the government policy.

Chapter- 19 Trade Policy of the Government of India

19.1 Introduction 19.2 Features 19.3 Foreign Trade Policy of India 19.4 Foreign Trade Policy 19.5 The issue of Capital Account Convertibility 19.6 Critical Factors in Adopting Capital Account Convertibility

19.1 Introduction Having taken up the balance of payments comprising all the external transactions of the country in the preceding chapter, we now take up its most vital part, namely trade in merchandise/goods in detail. Here we describe the trends in trade in respect of its three dimensions, namely its value, its composition and its direction. Besides we discuss imports and exports in relation to the growth of the country.

19.2 Features India‘s trade policy used Import restriction through a judicious use of import licensing, import quotas, import duties and in extreme cases, even banning import of specific goods. This was essential to protect domestic industries and promote industrial development. Mahalanobis strategy of economic development through heavy industries, which India adopted since second five year plan seems to have been guided the trade policy through the following: a. Banning or keeping to minimum the import of non essential consumer goods. b. Comprehensive control of various items of imports. c. Liberal import of machinery, equipment and other development goods to support heavy industry based economic growth. d. Prosperous climate for the policy. e. Vigorous export promotion was emphasized after the second five year plan to earn foreign exchange to overcome the penetrating foreign exchange crisis. f. During 1970‘s importance of export promotion was again emphasized because of mounting debt service obligations and the goal of self reliance (with zero net aid)

19.3 Foreign Trade Policy of India The integration of the domestic economy through the twin channels of trade and capital flows has accelerated in the past two decades which in turn led to the Indian economy growing from Rs 32 trillion (US$ 474.37 billion) in 2004 to about Rs 153 trillion (US$ 2.3 trillion) by 2016. Simultaneously, the per capita income also nearly trebled during these years. India‘s trade and external sector had a significant impact on the GDP growth as well as expansion in per capita income. Total merchandise exports from India grew by 4.48 per cent year-on-year to US$ 25.83 billion in February 2018, while merchandise trade deficit increased 25.81 per cent year-on-year from US $ 11.979 billion during April-February 2017-18 to US $ 9.521 billion during April- February 2017-18, according to data from the Ministry of Commerce & Industry. Capital Inflows According to data released by the Reserve Bank of India (RBI), India's foreign exchange reserves were US$ 421.335 billion as on March 16, 2018.

Foreign Direct Investments (FDI) During April 2000–December 2017, India received total foreign investment (including equity inflows, re-invested earnings and other capital) worth US$ 532.6 billion. The country was one of the top destinations for FDI inflows from Asian countries, with Mauritius contributing 34 per cent, Singapore 17 per cent and Japan and UK contributing 7 per cent each of the total foreign inflows. Foreign Institutional Investors (FIIs) FIIs net investments in Indian equities, debt and hybrid stood at Rs 145,068 crores (US$ 22.34 billion) in 2017-18.

External Sector India‘s external sector has a bright future as global trade is expected to grow at 4 per cent in 2018 from 2.4 per cent in 2016. Bilateral trade between India and Ghana is rising exponentially and is expected to grow from US$ 3 billion to US$ 5 billion over the coming three years, stated Mr Aaron Mike Oquaye Junior, Ghana's Ambassador to India. India has revised its proposal on trade facilitation for services (TFS) at the World Trade Organisation (WTO) and has issued a new draft, with the contents being more meaningful and acceptable to other member countries. Indian exports of merchandise shipments is expected to reach US$ 325 billion in 2017-18, compared to US$ 275 billion in 2016-17, as per Mr Ganesh Kumar Gupta, President, Federation of Indian Export Organisations (FIEO). The Union Cabinet, Government of India, has approved the proposed Memorandum of Understanding (MoU) between Export-Import Bank of India (EXIM Bank) and Export-Import Bank of Korea (KEXIM). The Goods and Services Network (GSTN) has signed a memorandum of understanding (MoU) with Mr Ajay K Bhalla, Director General of Foreign Trade (DGFT), to share realised foreign exchange and import-export code data, process export transactions of taxpayers under goods and services tax (GST) more efficiently, increase transparency and reduce human interface. In March 2017, the Union Cabinet approved the signing of the customs convention on the international transport of goods, Transports Internationaux Routiers (TIR) making India the 71st signatory to the treaty, which will enable the movement of goods throughout these countries in Asia and Europe and will allow the country to take full benefit of the International North South Transportation Corridor (INSTC). Mr Richard Verma, the United States Ambassador to India, has verified that India-US relations across trade, defence and social ties will be among the top priorities of the newly elected US President Mr Donald Trump's administration.

19.4 Foreign Trade Policy In the Mid-Term Review of the Foreign Trade Policy (FTP) 2015-20 the Ministry of Commerce and Industry has enhanced the scope of Merchandise Exports from India Scheme (MEIS) and Service Exports from India Scheme (SEIS), increased MEIS incentive raised for ready-made garments and made- ups by 2 per cent, raised SEIS incentive by 2 per cent and increased the validity of Duty Credit Scrips from 18 months to 24 months. All export and import-related activities are governed by the Foreign Trade Policy (FTP), which is aimed at enhancing the country's exports and use trade expansion as an effective instrument of economic growth and employment generation. The Department of Commerce has announced increased support for export of various products and included some additional items under the Merchandise Exports from India Scheme (MEIS) in order to help exporters to overcome the challenges faced by them. The Central Board of Excise and Customs (CBEC) has developed an 'integrated declaration' process leading to the creation of a single window which will provide the importers and exporters a single point interface for customs clearance of import and export goods. As part of the FTP strategy of market expansion, India has signed a Comprehensive Economic Partnership Agreement with South Korea which will provide enhanced market access to Indian exports. These trade agreements are in line with India‘s Look East Policy. To upgrade export sector infrastructure, ‗Towns of Export Excellence‘ and units located therein will be granted additional focused support and incentives. RBI has simplified the rules for credit to exporters, through which they can now get long-term advance from banks for up to 10 years to service their contracts. This measure will help exporters get into long-term contracts while aiding the overall export performance. The Government of India is expected to announce an interest subsidy scheme for exporters in order to boost exports and explore new markets.

Road Ahead India is presently known as one of the most important players in the global economic landscape. Its trade policies, government reforms and inherent economic strengths have attributed to its standing as one of the most sought after destinations for foreign investments in the world. Also, technological and infrastructural developments being carried out throughout the country augur well for the trade and economic sector in the years to come. Boosted by the forthcoming FTP, India's exports are expected reach US$ 750 billion by 2018-2019 according to Federation of India Export Organisation (FIEO). Also, with the Government of India striking important deals with the governments of Japan, Australia and China, the external sector is increasing its contribution to the economic development of the country and growth in the global markets. Moreover, by implementing the FTP 2014-19, by 2020, India's share in world trade is expected to double from the present level of three per cent.

Exchange Rate Used: INR 1 = US$ 0.0154 as on March 28, 2018

19.5 The issue of Capital Account Convertibility Currency convertibility refers to the freedom to convert the domestic currency into other internationally accepted currencies and vice versa. Current account convertibility means freedom to convert domestic currency into foreign currency and vice versa to execute trade in goods and invisibles. On the other hand, capital account convertibility implies freedom of currency conversion related to capital inflows and outflows. Compared to current account convertibility, capital account convertibility is a complex issue because of the peculiar feature of capital account transactions. An important one is the high frequency and volume of international capital movements across borders which may produce many macroeconomic effects in host countries like India.

Meaning of Capital Account Convertibility (CAC) Capital Account Convertibility is not just the currency convertibility freedom, but more than that, it involves the freedom to invest in financial assets of other countries. The Committee on Capital Account Convertibility (1997, Chairman Dr S S Tarapore) in its report has given a working definition for the CAC which is as following. ―CAC refers to the freedom to convert local financial assets into foreign financial assets and vice versa at market determined rates of exchange. It is associated with changes of ownership in foreign/domestic financial assets and liabilities and embodies the creation and liquidation of claims on, or by, the rest of the world.‖ Capital account convertibility is thus the freedom of foreign investors to purchase Indian financial assets (shares, bonds etc.) and that of the domestic citizens to purchase foreign financial assets. It provides rights for firms and residents to freely buy into overseas assets such as equity, bonds, property and acquire ownership of overseas firms besides free repatriation of proceeds by foreign investors.

19.6 Critical Factors in Adopting Capital Account Convertibility (CAC) There are number of issues which are of concern for adopting CAC in India. Some of which are as follows: Short-Term External Borrowings The impact of allowing unlimited access to short-term external commercial borrowing for meeting working capital and other domestic requirements. In respect of short-term external commercial borrowings, there is already a strong international consensus that emerging markets should keep such borrowings relatively small in relation to their total external debt or reserves. Many of the financial crises in the 1990s occurred because the short-term debt was excessive. When times were good, such debt was easily accessible. The position, however, changed dramatically in times of external pressure. All creditors who could redeem the debt did so within a very short period, causing extreme domestic financial vulnerability. The occurrence of such a possibility has to be avoided, and the Indian Reserve would do well to continue with its policy of keeping access to short-term debt limited as a conscious policy at all times whether good or bad.

Free Convertibility of Domestic Assets The Indian Monetary System provided unrestricted freedom to domestic residents to convert their domestic bank deposits and idle assets (such as, real estate), in response to market developments or exchange rate expectations. The daily movement in exchange rates is determined by "flows" of funds, that is, by demand and supply of spot or forward transactions in the market. If supposedly, the exchange rate is depreciating disproportionately and is expected to continue to do so in the near future, the domestic residents would be likely to convert a part or whole of their stock of domestic assets from domestic currency to foreign currency. This was thought to be financially desirable as the domestic value of their converted assets was expected to increase because of anticipated depreciation. It is furthermore thought that if a large number of residents so decide simultaneously within a short period of time, as they may, this expectation would become self-fulfilling. A severe external crisis is then unavoidable.

External Events External events such as the Kargil war or Pokhran Test Although at present our reserves are high and exchange rate movements are, by and large, orderly. However, there can be events like Kargil war or Pokhran Test, which creates external uncertainty. Domestic stock of bank deposits in rupees in India is presently close to US $ 290 billion, nearly three and a half times our total reserves. At the time of Kargil or Pokhran or the oil crises, the multiple of domestic deposits over reserves was in fact several times higher than now. One can imagine what would have had happened to our external situation, if within a very short period, domestic residents decided to rush to their neighbourhood banks and convert a significant part of these deposits into sterling, euro or dollar. No emerging market exchange rate system can cope with this kind of contingency. This may be an unlikely possibility today, but it must be factored in while deciding on a long term policy of free convertibility of "stock" of domestic assets. Incidentally, this kind of eventuality is less likely to occur in respect of industrial countries with international currencies such as Euro or Dollar, which are held by banks, corporates, and other entities as part of their long-term global asset portfolio (as distinguished from emerging market currencies in which banks and other intermediaries normally take a daily long or short position for purposes of currency trade).

Impact of Capital Account Convertibility The first impact of CAC adopted by India is the acceptance of Indian Rupee currency all over the world. In case of two convertible currencies, Forward Exchange Rates reflect interest rate differentials between these two currencies. Thus, we can say that the Forward Exchange Rate for the higher interest rate currency would depreciate so as to neutralize the interest rate difference. However, sometimes there can be opportunities when forward rates do not fully neutralize interest rate differentials. In such situations, arbitrageurs get into the act and forward exchange rates quickly adjust to eliminate the possibility of risk-less profits. Capital account convertibility is likely to bring depth and large volumes in long-term Indian Rupee (INR) currency swap markets. Thus, for a better market determination of INR exchange rates, the INR should be convertible. If capital account is made fully convertible it will imply the following: Market forces will regulate all current and capital account transactions and there will be no restriction on the inflow or the outflow of capital either by non-resident Indians or by foreigners. There will be no restriction on foreign exchange transactions and the RBI and the government will not intervene even where the cost or the quantity of the transaction is concerned.

Purely market forces will determine the exchange rate of rupee in relation to any foreign currency. RBI can intervene in relation to foreign currency only by buying and selling of the rupee in the market. Indian companies will be free to go aboard and raise money. They will also be free to invest in GDR's and maintain offshore funds. Similarly foreign companies will be free to invest in India without any intervention of the RBI or the government Indian's will be free to maintain foreign bank accounts and deposit withdraw and maintain foreign currency in any bank without any restriction. There will be no restriction on the repatriation of capital by foreigners.

Dangers from Capital Account Convertibility in India At present very few countries permit absolute free market in foreign exchange. Among developing countries only a handful at present has, what may be called, full convertibility in both current and capital accounts. Even many industrial countries still do not allow free flows of capital account transactions. Some of the Latin American countries notably Uruguay, Argentina and Chile which had prematurely liberalised capital account in the early eighties have subsequently imposed a very tight control on capital mobility in the subsequent periods. It has been estimated that eventual capital flights out of these countries have been much more that initial capital inflows after capital account liberalisation. Some countries have however, notably, The U.K. and New Zealand, implemented capital account convertibility successfully. An examination of case study of successful and unsuccessful capital account liberalisation suggest that capital account liberalisation be best introduced as one of the last steps of economic reforms. Whenever it was introduced prematurely it had been disastrous. In general it has been observed that capital account liberalisation and full convertibility of exchange rate succeeds when it follows (and definitely not precedes) Fiscal reform, price stability, domestic financial reform, balance of payments stability and acceleration in growth of domestic output, particularly industrial output. In India very few of these objectives are fulfilled by now. Fiscal deficit of the Centre after falling from 8.3% of GDP in 1990-91 to 6.0% of GDP in 1991-92, has remained around that level since then. What is worst is that while real public investment has fallen sharply, unwarranted subsidies and bureaucratic expenditure have remained virtually at their pre-reform levels. In fact in some states, subsides, instead of falling have actually increased after the reform. Inflation continued at 10% per annum for many years after the reform in spite of many favourable conditions, including good monsoon and low oil price. It has now come down to around 6% after a very tight squeeze on money and credit since 1995-96. But the credit squeeze increased both nominal and real interest rates, and currently the interest rates in India are well above the international levels. The credit squeeze also hampered the growth of industry and overall growth. Balance of payments situation is far from satisfactory. The improvement in foreign exchange reserve is more due to special factors like NRI remittances and deposits and portfolio capital inflow. There is no notable improvement in either trade balance or balance of payments. There is a dangerous illusion about capital account liberalisation. It is generally assumed that it can encourage only inflow of capital, ignoring the possibility that once deregulation is introduced it may also lead to outflow of capital. Experiences suggest that initially inflow is more than outflow because foreigners take advantage of initial low prices of shares and properties. Besides domestic residents may also bring back illegal capital held abroad. But if the real sector of the economy does not improve, especially lags behind more dynamic economy elsewhere in the world, then capital later goes out. The outflow can be more than inflow because not only foreigners can take back capital but even domestic residents can take advantage of the deregulated environment and invest abroad. It would therefore be prudent to wait for the real improvement of the economy, particular in current account balance, industrial growth rate, fiscal deficit and financial reform, before entering into an adventurous path of capital account liberalisation and full convertibility of rupee. Thus India will have to gradually move towards capital account convertibility, step by step, one reform after the other and then finally introduce full convertibility of rupee as the last step of economic reforms when all of the above listed objectives are fulfilled and as Dr. Y.V.Reddy, Deputy Governor RBI, put it as," In India, it is recognised that the pace of liberalisation of the capital account would depend on both domestic factors, especially progress in the financial sector reform and the evolving international financial architecture."

Pros (for) of Capital Account Convertibility for India It allows domestic residents to invest abroad and have a globally diversified investment portfolio; this reduces risk and stabilizes the economy. A globally diversified equity portfolio has roughly half the risk of an Indian equity portfolio. So, even when conditions are bad in India, globally diversified households will be buoyed by offshore assets; will be able to spend more, thus propping up the Indian economy. Our NRI Diaspora will benefit tremendously if and when Capital Account Convertibility becomes a reality. The reason is on account of current restrictions imposed on movement of their funds. As the remittances made by NRI's are subject to numerous restrictions which will be eased considerably once Capital Account Convertibility is incorporated. It also opens the gate for international savings to be invested in India. It is good for India if foreigners invest in Indian assets - this makes more capital available for India's development. That is, it reduces the cost of capital. When steel imports are made easier, steel becomes cheaper in India. Similarly, when inflows of capital into India are made easier, capital becomes cheaper in India. Controls on the capital account are rather easy to evade through unscrupulous means. Huge amounts of capital are moving across the border anyway. It is better for India if these transactions happen in white money. Convertibility would reduce the size of the black economy, and improve law and order, tax compliance and corporate governance. Most importantly convertibility induces competition against Indian finance. Currently, finance is a monopoly in mobilizing the savings of Indian households for the investment plans of Indian firms. No matter how inefficient Indian finance is, households and firms do not have an alternative, thanks to capital controls. Exactly as we saw with trade liberalization, which consequently led to lower prices and superior quality of goods produced in India, capital account liberalization will improve the quality and drop the price of financial intermediation in India. This will have repercussions for GDP growth, since finance is the 'brain' of the economy.

Cons (against) of Capital Account Convertibility for India During the good years of the economy, it might experience huge inflows of foreign capital, but during the bad times there will be an enormous outflow of capital under "herd behavior" (refers to a phenomenon where investors acts as "herds", i.e. if one moves out, others follow immediately). For example, the South East Asian countries received US$ 94 billion in 1996 and another US$ 70 billion in the first half of 1997. However, under the threat of the crisis, US$ 102 billion flowed out from the region in the second half of 1997, thereby accentuating the crisis. This has serious impact on the economy as a whole, and can even lead to an economic crisis as in South-East Asia. There arises the possibility of misallocation of capital inflows. Such capital inflows may fund low-quality domestic investments, like investments in the stock markets or real estates, and desist from investing in building up industries and factories, which leads to more capacity creation and utilisation, and increased level of employment. This also reduces the potential of the country to increase exports and thus creates external imbalances. An open capital account can lead to "the export of domestic savings" (the rich can convert their savings into dollars or pounds in foreign banks or even assets in foreign countries), which for capital scarce developing countries would curb domestic investment. Moreover, under the threat of a crisis, the domestic savings too might leave the country along with the foreign 'investments', thereby rendering the government helpless to counter the threat. Entry of foreign banks can create an unequal playing field, whereby foreign banks "cherry-pick" the most creditworthy borrowers and depositors. This aggravates the problem of the farmers and the small-scale industrialists, who are not considered to be credit-worthy by these banks. In order to remain competitive, the domestic banks too refuse to lend to these sectors, or demand to raise interest rates to more "competitive" levels from the 'subsidised' rates usually followed. International finance capital today is "highly volatile", i.e. it shifts from country to country in search of higher speculative returns. In this process, it has led to economic crisis in numerous developing countries. Such finance capital is referred to as "hot money" in today's context. Full capital account convertibility exposes an economy to extreme volatility on account of "hot money" flows. It does seem that the Indian economy has the competence of bearing the strains of free capital mobility given its fantastic growth rate and investor confidence. Most of the pre-conditions stated by the Tarapore Committee have been well complied to through robust year on year performance in the last five years especially. The forex reserves provide enough buffer to bear the immediate flight of capital which although seems unlikely given the macroeconomic variables of the economy alongside the confidence that international investors have leveraged on India. However it must not be forgotten that Capital Account Convertibility is a big step and integrates the economy with the global economy completely thereby subjecting it to international fluctuations and business cycles. Thus due caution must be incorporated while taking this decision in order to avoid any situation that was faced by Argentina in the early 80's or by the Asian economies in 1997-98.

Chapter- 20 Inflation 20.1 Meaning of Inflation 20.2 Types of Inflation 20.3 Causes of Inflation 20.4 Phillip Curve in Economics: The Relation between Unemployment and Inflation 20.5 Exercise

20.1 Meaning Inflation means there is a sustained increase in the price level. The main causes of inflation are either excess aggregate demand (economic growth too fast) or cost push factors (supply-side factors). To put it simply, inflation is the long term rise in the prices of goods and services caused by the devaluation of currency. Inflationary problems arise when we experience unexpected inflation which is not adequately matched by a rise in people‘s incomes. If incomes do not increase along with the prices of goods, everyone‘s purchasing power has been effectively reduced, which can in turn lead to a slowing or stagnant economy. Moreover, excessive inflation can also wreak havoc on retirement savings as it reduces the purchasing power of the money that savers and investors have squirreled away. Inflation is a highly controversial term which has undergone modification since it was first defined by the neo-classical economists. They meant by it a galloping rise in prices as a result of the excessive increase in the quantity of money. They regarded it ―as a destroying disease born out of lack of mon­etary control whose results undermined the rules of business, creating havoc in markets and financial ruin of even the prudent.‖ However, it is essential to understand that a sustained rise in prices may be of various magni•tudes. Accordingly, different names have been given to inflation depending upon the rate of rise in prices.

20.2 Types of Inflation 1. Creeping Inflation: When the rise in prices is very slow like that of a snail or creeper, it is called creeping inflation. In terms of speed, a sustained rise in prices of annual increase of less than 3 per cent per annum is characterized as creeping inflation. Such an increase in prices is regarded safe and essential for economic growth. 2. Walking or Trotting Inflation: When prices rise moderately and the annual inflation rate is a single digit. In other words, the rate of rise in prices is in the intermediate range of 3 to 6 per cent per annum or less than 10 per cent. Inflation at this rate is a warning signal for the government to control it before it turns into running inflation. 3. Running Inflation: When prices rise rapidly like the running of a horse at a rate or speed of 10 to 20 per cent per annum, it is called running inflation. Such an inflation affects the poor and middle classes adversely. Its control requires strong monetary and fiscal measures, otherwise it leads to hyperinflation. 4. Hyperinflation: When prices rise very fast at double or triple digit rates from more than 20 to 100 per cent per annum or more, it is usually called runaway ox galloping inflation. It is also characterised as hyperinflation by certain economists. In reality, hyperinflation is a situation when the rate of inflation be•comes immeasurable and absolutely uncon•trollable. Prices rise many times every day. Such a situation brings a total collapse of mon•etary system because of the continuous fall in the purchasing power of money. 5. Semi-Inflation: According to Keynes, so long as there are unemployed resources, the general price level will not rise as output increases. But a large increase in aggregate expenditure will face shortages of supplies of some factors which may not be substitutable. This may lead to increase in costs, and prices start rising. This is known as semi-inflation or bottleneck inflation because of the bottlenecks in supplies of some factors. 6. True Inflation: According to Keynes, when the economy reaches the level of full employment, any increase in aggregate expenditure will raise the price level in the same proportion. This is because it is not possible to increase the supply of factors of production and hence of output after the level of full employment. This is called true inflation. 7. Mark-up Inflation: The concept of mark-up inflation is closely related to the price-push problem. Modem labour organizations possess substantial monopoly power. They, therefore, set prices and wages on the basis of mark-up over costs and relative incomes. Firms possessing monopoly power have control over the prices charged by them. So they have administered prices which increase their profit margin. This sets off an inflationary rise in prices. Similarly, when strong trade unions are suc•cessful in raising the wages of workers, this contributes to inflation. 8. Ratchet Inflation: A ratchet is a toothed wheel provided with a catch that prevents the ratchet wheel from moving backward. The same is the case under ratchet inflation when despite downward pressures in the economy, prices do not fall. In an economy having price, wage and cost inflations, aggregate demand falls below full employment level due to the deficiency of demand in some sectors of the economy. But wage, cost and price structures are inflexible downward because large business firms and labour organisations possess monopoly power. Consequently, the fall in demand may not lower prices significantly. In such a situation, prices will have an upward ratchet effect, and this is known as ―ratchet inflation.‖ 9. Sectoral Inflation: Sectoral inflation arises initially out of excess demand in particular indus•tries. But it leads to a general price rise because prices do not fall in the deficient demand sectors. 10. Reflation: Is a situation when prices are raised deliberately in order to encourage economic activity. When there is depression and prices fall abnormally low, the monetary authority adopts meas•ures to put more money in circulation so that prices rise. This is called re flation.

20.3 Causes of Inflation So what exactly causes inflation in an economy? There is not a single, agreed-upon answer, but there are a variety of theories, all of which play some role in inflation: 1. The Money Supply Inflation is primarily caused by an increase in the money supply that outpaces economic growth. Ever since industrialized nations moved away from the gold standard during the past century, the value of money is determined by the amount of currency that is in circulation and the public‘s perception of the value of that money. When the Federal Reserve decides to put more money into circulation at a rate higher than the economy‘s growth rate, the value of money can fall because of the changing public perception of the value of the underlying currency. As a result, this devaluation will force prices to rise due to the fact that each unit of currency is now worth less.

One way of looking at the money supply effect on inflation is the same way collectors value items. The rarer a specific item is, the more valuable it must be. The same logic works for currency; the less currency there is in the money supply, the more valuable that currency will be. When a government decides to print new currency, they essentially water down the value of the money already in circulation. A more macroeconomic way of looking at the negative effects of an increased money supply is that there will be more dollars chasing the same amount of goods in an economy, which will inevitably lead to increased demand and therefore higher prices.

2. The National Debt: We all know that high national debt in the U.S. is a bad thing, but did you know that it can actually drive inflation to higher levels over time? The reason for this is that as a country‘s debt increases, the government has two options: they can either raise taxes or print more money to pay off the debt. A rise in taxes will cause businesses to react by raising their prices to offset the increased corporate tax rate. Alternatively, should the government choose the latter option, printing more money will lead directly to an increase in the money supply, which will in turn lead to the devaluation of the currency and increased prices (as discussed above).

3. Demand-Pull Effect: The demand-pull effect states that as wages increase within an economic system (often the case in a growing economy with low unemployment), people will have more money to spend on consumer goods. This increase in liquidity and demand for consumer goods results in an increase in demand for products. As a result of the increased demand, companies will raise prices to the level the consumer will bear in order to balance supply and demand. An example would be a huge increase in consumer demand for a product or service that the public determines to be cheap. For instance, when hourly wages increase, many people may determine to undertake home improvement projects. This increased demand for home improvement goods and services will result in price increases by house-painters, electricians, and other general contractors in order to offset the increased demand. This will in turn drive up prices across the board.

4. Cost-Push Effect: Another factor in driving up prices of consumer goods and services is explained by an economic theory known as the cost-push effect. Essentially, this theory states that when companies are faced with increased input costs like raw goods and materials or wages, they will preserve their profitability by passing this increased cost of production onto the consumer in the form of higher prices. A simple example would be an increase in milk prices, which would undoubtedly drive up the price of a cappuccino at your local Starbucks since each cup of coffee is now more expensive for Starbucks to make.

5. Exchange Rates: Inflation can be made worse by our increasing exposure to foreign marketplaces. In America, we function on a basis of the value of the dollar. On a day-to-day basis, we as consumers may not care what the exchange rates between our foreign trade partners are, but in an increasingly global economy, exchange rates are one of the most important factors in determining our rate of inflation. When the exchange rate suffers such that the U.S. currency has become less valuable relative to foreign currency, this makes foreign commodities and goods more expensive to American consumers while simultaneously making U.S. goods, services, and exports cheaper to consumers overseas. This exchange rate differential between our economy and that of our trade partners can stimulate the sales and profitability of American corporations by increasing their profitability and competitiveness in overseas markets. But it also has the simultaneous effect of making imported goods (which make up the majority of consumer products in America), more expensive to consumers in the United States.

20.4 Phillip Curve in Economics: The Relation between Unemployment and Inflation The Phillips curve examines the relationship between the rate of unemployment and the rate of money wage changes. Known after the British economist A. W. Phillips who first identified it, it expresses an inverse relationship between the rate of unemployment and the rate of increase in money wages. Basing his analysis on data for the United Kingdom, Phillips derived the empirical relationship that when unemployment is high, the rate of increase in money wage rates is low.

This is because ―workers are reluctant to offer their services at less than the prevailing rates when the demand for labour is low and unemployment is high so that wage rates fall very slowly.‖ On the other hand, when unemployment is low, the rate of increase in money wage rates is high. This is because, ―when the demand for labour is high and there are very few unemployed we should expect employer to bid wage rates up quite rapidly.‖

The second factor which influences this inverse relationship between money wage rate and unemployment is the nature of business activity. In a period of rising business activity when unemploy•ment falls with increasing demand for labour, the employers will bid up wages. Conversely, in a period of falling business activity when demand for labour is decreasing and unemployment is rising, employers will be reluctant to grant wage increases. Rather, they will reduce wages. But workers and unions will be reluctant to accept wage cuts during such periods. Consequently, employers are forced to dismiss workers, thereby leading to high rates of unemployment. Thus when the labour market is depressed, a small reduction in wages would lead to large increase in unemployment. Phillips concluded on the basis of the above arguments that the relation between rates of unemployment and a change of money wages would be highly non-linear when shown on a diagram. Such a curve is called the Phillips curve. The PC curve in Figure is the Phillips curve which relates percentage change in money wage rate (W) on the vertical axis with the rate of unemployment (U).on the horizontal axis. The curve is convex to the origin which shows that the percentage change in money wages rises with decrease in the employment rate.

W S C

M B

PC

O X

In the figure, when the money wage rate is 2 per cent, the un•employment rate is 3 per cent. But when the wage rate is high at 4 per cent, the unemployment rate is low at 2 per cent. Thus there is a trade-off be•tween the rate of change in money wage and the rate of unemployment. This means that when the wage rate is high the unemployment rate is low and vice versa. The original Phillips curve was an observed statistical relation which was explained theoretically by Lipsey as resulting from the behaviour of labour market in disequilibrium through excess demand. Several economists have extended the Phillips analysis to the trade-off between the rate of unem•ployment and the rate of change in the level of prices or inflation rate by assuming that prices would change whenever wages rose more rapidly than labour productivity. If the rate of increase in money wage rates is higher than the growth rate of labour productivity, prices will rise and vice versa. But prices do not rise if labour productivity increases at the same rate as money wage rates rise. This trade-off between the inflation rate and unemployment rate is explained in Figure 6 where the inflation rate (p) is taken along with the rate of change in money wages (W). Suppose labour productivity rises by 2 per cent per year and if money wages also increase by 2 per cent, the price level would remain constant. Thus point В on the PC curve corresponding to percentage change in money wages (M) and unemployment rate of 3 per cent (N) equals zero (O) per cent inflation rate (p) on the vertical axis. Now assume that the economy is operating at point B. If now, aggregate demand is increased, this lowers the unemployment rate to OT (2%) and raises the wage rate to OS (4%) per year. If labour productivity continues to grow at 2 per cent per annum, the price level will also rise at the rate of 2 per cent per annum at OS in the figure. The economy operates at point C. With the movement of the economy from В to C, unemployment falls to T (2%). If points В and С are connected, they trace out a Phillips curve PC. Thus money wages rate increase which is in excess of labour productivity leads to inflation. To keep wage increase to the level of labour productivity (OM) in order to avoid inflation, ON rate of unemployment will have to be tolerated. The shape of the PC curve further suggests that when the unemployment rate is less than 5 ½ per cent (that is, to the left of point A), the demand for labour is more than the supply and this tends to increase money wage rates. On the other hand, when the unemployment rate is more than 5 ½ per cent (to the right of point A), the supply of labour is more than the demand which tends to lower wage rates. The implication is that the wage rates will be stable at the unemployment rate ОA which is equal to 5 ½ per cent per annum. It is to be noted that PC is the ―conventional‖ or original downward sloping Phillips curve which shows a stable and inverse relation between the rate of unemployment and the rate of change in wages.

Friedman’s View: The Long-Run Phillips Curve:

Economists have criticised and in certain cases modified the Phillips curve. They argue that the Phillips curve relates to the short run and it does not remain stable. It shifts with changes in expectations of inflation. In the long run, there is no trade-off between inflation and employment. These views have been expounded by Friedman and Phelps‘ in what has come to be known as the ―accelerationist‖ or the ―adaptive expectations‖ hypothesis. According to Friedman, there is no need to assume a stable downward sloping Phillips curve to explain the trade-off between inflation and unemployment. In fact, this relation is a short-run phenom•enon. But there are certain variables which cause the Phillips curve to shift over time and the most important of them is the expected rate of inflation. So long as there is discrepancy between the expected rate and the actual rate of inflation, the downward sloping Phillips curve will be found. But when this discrepancy is removed over the long run, the Phillips curve becomes vertical. In order to explain this, Friedman introduces the concept of the natural rate of unemployment. In represents the rate of unemployment at which the economy normally settles because of its structural imperfections. It is the unemployment rate below which the inflation rate increases, and above which the inflation rate decreases. At this rate, there is neither a tendency for the inflation rate to increase or decrease. Thus the natural rate of unemployment is defined as the rate of unemployment at which the actual rate of inflation equals the expected rate of inflation. It is thus an equilibrium rate of unemployment towards which the economy moves in the long run. In the long run, the Phillips curve is a vertical line at the natural rate of unemployment. This natural or equilibrium unemployment rate is not fixed for all times. Rather, it is determined by a number of structural characteristics of the labour and commodity markets within the economy. These may be minimum wage laws, inadequate employment information, deficiencies in manpower training, costs of labour mobility, and other market imperfections. But what causes the Phillips curve to shift over time is the expected rate of inflation. This refers to the extent the labour correctly forecasts inflation and can adjust wages to the forecast.

20.5 Exercise

Q1. Is inflation caused by increasing the money supply?

Q2. How much do governments influence inflation? Explain the concept in detail.

Q3. Out of the various ways of the financing government‘s investment expenditure, which one is the best method of inflation control? Explain with the help of example.

Q4. ―The natural rate of unemployment is defined as the rate of unemployment at which the actual rate of inflation equals the expected rate of inflation‖. Comment

Chapter- 21

Unemployment and Labour Force

21.1 Introduction 21.2 Types of Unemployment in India 21.3 Causes / Reasons 21.4 Measurement of Unemployment 21.5 Labour Force: Growth and Occupation Pattern 21.6 Factors Responsible for Failure of Occupational Structure 21.7 Exercise

21.1 Introduction

Unemployment means lack of employment. In simple way, unemployment means the state of being unemployed. The employment in the country is marred by a number of ugly marks large many are underemployed, Many are without work. Quite a number, though educated, find no or little work to use their talent or skill. The rate of unemployment varies over a wide range among the different states of India. When a person does not get a full time work, it is called under- employment. When the productivity and income of a person increase by changing his occupation, he is also known as under employed.

21.2 Types of Unemployment in India:

1. Open Unemployment:

Open unemployment is a situation where in a large section of the labour force does not get a job that may yield them regular income. This type of unemployment can be seen and counted in terms of the number of unemployed persons. The labour force expands at a faster rate than the growth rate of economy. Therefore all people do not get jobs. 2. Disguised Unemployment:

It is a situation in which more people are doing work than actually required. 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. So their removal will not affect the volume of total production. 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.

3. Seasonal Unemployment:

It is unemployment that occurs during certain seasons of the year. In some industries and occupations like agriculture, holiday resorts, ice factories etc., production activities take place only in some seasons. So they offer employment for only a certain period of time in a year. People engaged in such type of activities may remain unemployed during the off-season.

4. Cyclical Unemployment:

It is caused by trade cycles at regular intervals. Generally capitalist economies are subject to trade cycles. The down swing in business activities results in unemployment. Cyclical unemployment is normally a shot-run phenomenon.

5. Educated Unemployment:

Among the educated people, apart from open unemployment, many are underemployed because their qualification does not match the job. Faulty education system, mass output, preference for white collar jobs, lack of employable skills and dwindling formal salaried jobs are mainly responsible for unemployment among educated youths in India. Educated unemployment may be either open or underemployment.

6. Technological Unemployment:

It is the result of certain changes in the techniques of production which may not warrant much labour. Modern technology being capital intensive requires less labourers and contributes to this kind of unemployment. 7. Structural Unemployment:

This type of unemployment arises due to drastic changes in the economic structure of a country. These changes may affect either the supply of a factor or demand for a factor of production. Structural employment is a natural outcome of economic development and technological advancement and innovation that are taking place rapidly all over the world in every sphere.

8. Underemployment:

It is a situation in which people employed contribute less than their capacity to production. In this type of unemployment people are not gainfully employed. They may be employed either on part-time basis, or undertake a job for which lesser qualification is required. For example a Post Graduate may work as a clerk for which only S.S.L.C. is enough.

9. Casual Unemployment:

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.

10. Chronic Unemployment:

If unemployment continues to be a long term feature of a country, it is called chronic unemployment. Rapid growth of population and inadequate level of economic development on account of vicious circle of poverty are the main causes for chronic unemployment.

11. Frictional Unemployment:

Frictional unemployment is caused due to improper adjustment between supply of labour and demand for labour. This type of unemployment is due to immobility of labour, lack of correct and timely information, seasonal nature of work. etc.

21.3 Causes / Reasons:

1. Theoretical Education: This chronic unemployment is in some quarters attributed to the system of education prevailing in our country. Our education is too theoretical. It turns too many arts graduates and too few engineers. To make up for this deficiency Government has opened several technological institutes in different parts of India. However, this attempt, good as it is, will not solve the problem of unemployment. Already there are more technically trained men than there is employment for them.

2. Lack of Full Employment in Industries: In the industrial segment, there is the same lack of full employment. There are not many mills and factories and the number of men employed in them is not large. Even the mills and factories that we have do not work to their maximum capacity either for lack of requisite machinery or for lack of adequate supply of materials.

3. Lack of Alternative Opportunities for Agricultural Workers: In the rural India, the picture is equally discouraging. Agriculture is the principal occupation of the majority of rural population. However, agriculture keeps the cultivators engaged for a limited part of the year. For many months every year the agriculturist remain idle and lives miserably.

4. Poor Condition of Cottage Industries: In villages, unemployment is due to lack of cottage industries. The cottage industries are in a winding state. They give whole-time occupation to only a fraction of the people who depend on them.

5. Caste System: In India caste system is prevalent. The work is prohibited for specific castes in some areas. In many cases, the work is not given to the deserving candidates but given to the person belonging to a particular community. So this gives rise to unemployment.

6. Immobility of Labour: Mobility of labour in India is low. Due to attachment to the family, people do not go too far off areas for jobs. Factors like language, religion, and climate are also responsible for low mobility. Immobility of labour adds to unemployment

7. Other Factors: The other factors that are responsible for unemployment in India are:

 Excessive burden of population on cultivation;  Rapidly increasing population;  Low productivity in agriculture sector;  Defective economic planning, and  Large-scale production and mechanization.

21.4 Measurement of Unemployment: There are three measures or estimates of unemployment. These are developed by National Sample Survey Organization (NSSO). They are:

1. Usual Status Unemployment:

Also known as open unemployment or chronic 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. This concept used to determine the usual activity status of a person as employed or unemployed or outside the labour force. The persons covered may be classified into those working or available for work in their principal activity sector and subsidiary sector.

2. 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.

3. 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.

21.5 Labour Force: Growth and Occupation Pattern

Labour force is defined as those able-bodied workers in the age group of 15 to 59. The proportion of working population to total population is called work participation rate. In Underdeveloped Countries (UDC‘s) the work participation rate of labour force is low. According to 1981 census, the work participation rate in India was 36.7 percent. In 1991, it increases to 37.7%. According to 2001 census, the work participation rate increased to 39.2 percent. It means out of our total population of 102.7 crore, about 40 crore people constitute the work force. Similarly in 1991, out of total population of 84.6 crore, about 32 crore people constituted the labour force. We will observe how many of our labour force were employed in agriculture and how many engaged in industrial and service sector. In the course of development certain changes in the structure of the labour force by industry and occupation are usually entailed. In a developing country, past changes in this respect may provide some indication of the likely changes which are desirable, or are likely to take place, for the fulfillment or during the process of development. Short-term policies may be guided by past short-term trends, but for perspective planning and long-term policy making it is essential to foresee the emerging patterns over long periods of time and to base the forecasts on a long-term analysis of past trends.

Economic Development of Occupational Structure:

Economic development creates various types of occupations in an economy. All these various occupations can be broadly classified into three categories, viz. primary, secondary and tertiary. The primary occupations include all those essential activities such as agriculture and allied activities like animal husbandry, forestry, fishery, poultry farming etc. Secondary activities include manufacturing industries composed of both large and small scale and mining. Tertiary activities include all other activities like transport, communication, banking, insurance, trade etc. The occupational structure indicated the distribution as well as absorption of population into these various types of occupations. In underdeveloped countries, majority of the population are still engaged in agriculture and other primary activities. Even in some developed countries like Japan, England, Norway fishing continues to be an important occupation, providing employment to a substantial number of populations. Development experience shows that with the gradual development of a backward economy, the importance of primary occupations gradually declines with the growth of industries and tertiary activities. In the secondary sector, large scale industries, being more capital-intensive cannot provide much employment opportunities. But it is the development of small scale and cottage industries, mining activities etc., being largely labour-intensive, can provide huge number of employment opportunities. Again the tertiary occupations are also considered very important as these have a huge employment potential. In developed countries, the absorption capacity of this sector is very high. According to World Development Report, 1983, whereas about 45 to 66 per cent of the work force of developed countries was employed in the tertiary sector but India could absorb only 18 per cent of total force in this sector.

Occupational Distribution of Population in India:

Occupational distribution of population reflects on the degree of development and the diversification achieved in an economy. Let us now turn our discussion on the occupational structure of India. The occupational structure of India clearly reflects a high degree of backwardness prevailing in Indian economy. Since the turn of the present century the occupational structure in India was tilted towards the primary sector. Over the last 80 years (1901-1981), the proportion of working force engaged in primary occupations remained very steady, i.e., around 70 per cent and that in secondary and tertiary sector was ranging between 28 to 30 per cent only.

21.6 Factors Responsible for Failure of Occupational Structure:

1. Indian planners failed to make any serious attempt for the development of rural economy for utilizing the vast idle labour force and also to raise the productivity of labourers. Due to poor organization, the programmes of reducing unemployment and under-employment problem in the rural areas failed miserably. Moreover, planners did not make any serious attempt to enlarge the scope of non-agricultural rural employment.

2. Land reforms in India failed miserably to realise its goal and to create small owner holding. These reforms could not diffuse the ownership of land among a large number of marginal cultivators.

3. Various other facilities provided by the Government such as cheaper credit, marketing, subsidy on fertilizer price etc. only benefitted rich farmers and poor and marginal farmers could not reap any benefit from these facilities leading to a failure in raising their agricultural productivity.

4. Efforts of the planners to develop industries helped the large scale capital goods sector and the plans could not create much response to the development of small scale and cottage industries. This development of large scale highly capital-intensive industries could not create much employment potential and thus created no impact on the occupational structure of the country. 5. The high rate of growth of labour force is also an important factor which has been creating serious drags on the path of changing the occupational structure in India. This fast growing labour force without getting any subsidiary occupation open to them in the rural areas stated to eke out their living from agricultural sector alone. This led to a huge dependence as well as a high degree of disguised unemployment in the agricultural sectors.

Thus under this present situation occupational structure in India can be amended suitable only when the country will start to develop its labour-intensive sectors that include small scale and cottage industries, allied activities in the primary sector such as animal husbandry, fishing, poultry farming etc. and the service sectors as well as so to foster the growth of non-agricultural employment side by side with modern large scale industrial sector. Development of this huge labour-intensive sector will raise the level of employment and income both in the rural and urban areas leading to an enlargement of aggregate demand for various goods and services produced by large scale industries. Thus the development of this labour intensive sector will be able to bring changes in the occupational distribution of population from agricultural to non-agricultural occupations and will also be able to support the large scale manufacturing sector by enlarging the demand for their products and while doing so they can save these large scale industries from recession.

21.7 Exercise

Q1. Analyze the pattern of employment in the Indian economy and its sectoral distribution.

Q2. Discuss the various types of unemployment and analyze the pattern of unemployment in India.

Q3. What are the major causes of employment growth and persistence of unemployment in India?

Q4. Elucidate upon the nature and extent of unemployment in India and measure to contain its effectively.