1 .

1 FEATURES OF INDIAN ECONOMY

India is described as a developing economy. It possesses plenty of
natural and human resources. But they are not properly and fully
utilized.

The main characteristics of Indian economy are:

1. Predominance of agriculture

India is mainly an agricultural economy. More than 60 percent of the

population in India depends on agriculture. Though agriculture is the
backbone of Indian economy, it contributes only 18 percent of national
income.

But the condition is different in developed economies. Only 4 percent

of the population in America, 1 percent in England, 5 percent in
Canada, 8 percent in France and 5 percent in Japan depend upon
agriculture. Still, they have achieved self-sufficiency in food production.
Though, agriculture is the biggest production sector in Indian economy,
it remains under-developed.

2. Low per capita income

Per capita income of the people in India is very low compared to that of
the other nations in the world. As per Economic Survey, India's per
capita income was Rs.29,642 in 2006-07. According to the 2009 World
Development Report India's per capita income in 2007 was just $ 950 as
compared to $ 46,040 in America, $42,740 in England, $38,860 in
Germany, $39,420 in Canada, $76,450 in Norway (highest) and $ 37,670
in Japan. The per capita income of these countries cannot be compared
with that of India. Only Bangladesh, Nepal, Jambia, Ethiopia, Jaire and
other most backward countries have less per capita income than India.

3. Low standard of living

Not only the per capita income of the people in India is low but their
standard of living is also very low. So much of economic progress has
been achieved after independence, but the reward of this development
is not equally distributed. Income and wealth are concentrated in a few
hands and about 21.8 percent of the people of India are living below
the poverty line. Most of the people are not getting the basic
necessities of life, such as food, clothing and shelter.

4. Rapid growth of population

Population in India is growing at a rapid rate. As per the 1991 census it

was 84.6 crore. According to 2001 census, it was 102.86 crore. As per
the latest figures it is more than 130 crore. India's population is the
second largest in the world next only to China. The population of India
is not only very large but also growing at a very high rate. The total land
area of the country is only 2.4 percent of the total land area of the
world, but its population is about 16.98 percent of the total world's
population. This huge population is eating away all the fruits of
economic development.

5. Chronic poverty

Another important feature of the Indian economy is the existence of

chronic poverty. More than 21.8 percent of the people in India are
living below the poverty line and they are struggling hard to get even a
plate meal a day. The income and wealth of the country are not equally
distributed.
6. Unemployment and under-employment

Unemployment and under employment are the other main problems of

India. During 1950-51, 3.3 million people were unemployed. This rose
to 24.34 million in 1983 and to 34.74 million in 2004-2005. In India we
find three types of unemployment, chronic unemployment, under-
employment and disguised unemployment. There is too much
dependence on agriculture in the country. Rapid growth of population,
lack of proper planning, defective education system, etc. contribute to
the mounting unemployment problem.

7. Gross inequalities

Gross inequalities in the distribution of income and wealth among the

people is another striking feature of the Indian economy. The resource
base of 50 percent of the households is so weak and it can hardly
provide them any sufficient income. As per the Human Development
Report 2008 the richest 30 percent of Indians had a share of 76.4
percent share in income and the poorest 30 percent only 11.7 percent
in 2004-05. Recent estimates show that about 28 percent of the people
in India are poor.

8. Improving rate of capital formation

Capital is the essential fountain of economic development. In India,

there is a grave scarcity of capital. The per capita income of the people,
savings and capital formation in India were extremely low. But figures
reveal that there is a steady improvement in the rate of capital
formation.
The savings ratio in India in 2006-07 has reached a high level of 34.8
percent and Gross capital formation was high at 35.9 percent. This is a
welcome development.

9. Technological backwardness

Technological backwardness is another feature of the country. There is

a clear lack of technical knowledge. The techniques of production are
mostly old and obsolete. This is due to low level of scientific inventions
and innovations. Use of defective and primitive methods of production
are the causes of increasing costs and lowering production.

10. Lack of talented entrepreneurs

The economic development of any country would depend upon

efficient, talented and courageous entrepreneurs. Formulation of plans
and their effective implementation is the main task of entrepreneurs.
America, England, Germany, Japan and such other countries have
achieved rapid economic development mainly due to the efforts of
these entrepreneurs. But, such entrepreneurs are not found in India in
good numbers.

11. Underutilization of natural resources

India is rich in natural resources. It has an immense wealth of minerals,

forests, land, fisheries and a number of perennial rivers. But the natural
resources of the country remain unutilized or underutilized due to the
shortage of capital, low level of technology and inefficient
administration.
12. Inadequate transport and communication facilities

The transport and communication systems in the country are not

adequately developed. India is basically a country of villages, with more
than 6 lakh villages. All round development of the country depends
mainly upon the development of transport and communication
facilities. But, even today, many of our villages are not provided with
well-developed roads.

13. Poor quality of human capital

The quality of the human capital in India is very poor. The Indian public
expenditure on education, skill formation, research and improvements
in health care is miserably low. As a result, the quality of human capital
remained very low.

14. A dual economy

India is a dualistic economy. That is, both ancient and modern sectors
exist side by side. For instance, in agriculture, we find ancient wooden
ploughs as well as modern implements. Similarly, in industries we find
old, obsolete machines and methods, as well as modern sophisticated
machines and methods.

15. A mixed economy

India has a mixed economic system. Mixed economy is a combination

of capitalism and socialism. In India public and private sectors exist side
by side. Some industries are owned and managed by private individuals
and some industries are owned jointly by private and public sector.

16. Inefficiency of labour

Indian labour is less efficient when compared to the labour in other
countries. Lack of proper education, training and research facilities,
health and sanitation facilities, etc. have made Indian labour inefficient
and less productive. In addition, tropical climate of India, caste system,
poverty, ill-health, ignorance, immobility etc. have contributed a lot to
the inefficiency of labour in India.

17. Inefficient administration

India lacks efficient, clean and honest administration. Favouritism

nepotism and corruption are rampant all over the country.
Consequently the natural and human resources are not properly used,
economic plans are not effectively implemented and poverty,
unemployment and inequality of income are not removed.

18. Environmental Problems

Forest destruction, unscientific industrialization, lack of clear cut

government policy, etc. have created a lot of environmental problems.
Air pollution, water pollution, noise pollution etc. have become
common. Floods, droughts and other natural calamities are a recurring
feature in India.

19. Lack of certain economic institutions

In India, certain economic institutions like banks, insurance companies,

co-operative institutions, financial institutions, capital market, etc. are
not properly developed. On account of the under development of these
economic institutions, savings and capital formation is low and the
capital supplied to different productive sectors is far below the normal.

20. Economic and social backwardness

India is economically and socially backward. Agriculture in India is
backward. Transport, communication and financial institutions are not
yet developed. Caste system, ignorance, superstitious beliefs and
tradition bound outlook of the people are deep rooted. Joint family
system, law of inheritance, untouchability, etc. still continue and India
is backward in all walks of life.

21. Vicious circle of poverty

India is caught in the vicious circle of poverty. Shortage of capital, low

per capita income, low standard of living, low level of savings, low
investment, low level of production, lack of demand, etc. have become
common features of Indian economy. This vicious circle is so complex
that India cannot hope to come out of it.
 1 . 2 DEMOGRAPHIC FEATURES OF INDIAN
ECONOMY
POPULATION EXPLOSION IN INDIA

The fastest rise in the population of India was during the period of 1951
to 1981, in which the population was from 36 crores in 1951 had
reached around to 70 crores in 1981. During this period of 30 years,
population increased around 34 crores, which is the fastest rise in the
history of population statistics. Death rate has reduced due to modern
healthcare and medical facilities. Whereas birth rate has not got any
significant reduction. That is why this period from 1951 to 1981 is
known in India as the period of Population Explosion.

CAUSES OF POPULATION EXPLOSION IN INDIA

1. Hot Climate

One of the reasons of fast rising population in India is its hot climate.
Due to hot climate, maturity comes at early age in boys and girls, due to
which they give birth to their children at their early age. This is one of
the main reasons for population explosion.

2. Child Marriage and Multi Marriage System

Marriage of around 80% girls of the country takes place at their young
age between 15 to 20 years. Thus, the result of long married life comes
in the form of excessive childbirth. Tradition of multi-marriage system
increases the rate of childbirth. Apart from it, the increasing tendency
of widow re-marriage due to the social reforms is also increasing
childbirth up to some extent.
3. Religious Superstitions

Our religious Gurus say that if a Hindu person does not have a son, then
who will perform the religious ritual in its absence. Due to this, person
remains engage in the continuous process of giving birth, one by one, in
search of male baby. In the same manner, in Muslims both male and
female child is a boon (gift) sent by Allah, prevention of their birth by
using any means of family planning is a sin. Due to these reasons,
population is continuously increasing.

4. Illiteracy and Unawareness

In India around 36% males and 61% females are illiterate. Neither they
have full knowledge of family planning nor do they know about the
consequences of excessive childbirth. This is one of the reasons of rising
population.

5. Poverty

Due to poverty, population increases in poor families of our country.

People live in slum, use their children as a tool to earn money, hence
they always try to increase the number of children in their families.

6. Birth Rate

In India the average age for marriage is very low, compared to other
nations of the world. This is also a reason for population explosion.

7. Death Rate

In India the death rate from the year 1900 to 1910 was around 35 to 50
persons per thousand people, which is now reduced to only 7 to 8
persons per thousand people. This becomes possible in the country by
good and hygienic food, pure drinking water, hospital facilities,
cleanliness, medical facilities at affordable rates and control over
Malnutrition, Cholera, Epidemic diseases, etc. Along with this, child
death rate has reduced to 69 per thousand kids, compared to 218 per
thousand in 1916 to 1920. Due to this the population increases.

8. Indifferent towards Family Planning

Illiterate persons and people living in rural areas are indifferent towards
family planning. They feel fear even by the name of ‘Operation’. They
are not interested even in the use of simplest and cheapest means of
family planning.

9. Lack of Social Security

Due to lack of social security system in India, every parent seeks shelter
at the time of crisis and for their old age. In the fear of death of their
child at childhood, they give birth to too many children, so that any of
them would be of support them in their old age.

10. Arrival of Refugees

At the time of division of India and Pakistan in 1947, more than 1 crore
refugees came to India. In 1962 at the time of attack of China, a huge
number of Tibetan refugees came to India. Similarly, in 1971, more
than 1 crore Bangladeshi refugees came to India and even today this
problem is still continued. More than 5 lakhs Tamil refugees had come
to India due to Sri Lankan Tamil problem. All these are responsible for
population explosion.
11. Other Causes

Apart from the above, following are other causes of population

explosion:-

Social compulsion of Marriage

Lack of means of entertainment

Bhagyawati (fateful) view

Ambition of big family

Betterment in economic position

Joint family system, etc.

EFFECTS OF POPULATION EXPLOSION IN INDIA

Persons are means as well as ends of economic development. They are

an asset if in adequate strength and prove to be a liability if excess in
strength.

Population has crossed the optimum limit in India and has become a
liability.

So problem of population explosion in India has proved to be a big

hindrance to the success of economic planning and development.

Following are the main effects of population explosion:

1. Problem of Investment Requirement

Indian population is growing at a rate of 1.8 percent per annum. In

order to achieve a given rate of increase in per capita income, larger
investment is needed. This adversely affects the growth rate of the
economy.

2. Problem of Capital Formation

Composition of population in India hampers the increase in capital

formation. In India 35 percent of population is composed of persons
less than 14 years of age. Most of these people depend on others for
living. They are unproductive consumers. So the rate of capital
formation falls.

3. Effect on per Capita Income

Large size of population in India and its rapid rate of growth results in
low per capita income. From 1950-51 to 1980-81, India’s national
income grew at an average annual rate of 3.6 percent per annum. But
per capita income had raised around one percent. It is due the fact that
population growth had increased by 2.5 percent.

4. Effect on Food Problem

Rapid rate of growth of population has been the root cause of food
problem.

Shortage of food grains hampers economic development in two ways:

People do not get sufficient quantity of food due low availability of food
which affects their health and productivity. Low productivity causes low
per capita income and thus poverty.

Shortage of food-grains obliges the under-developed countries to

import food grains from abroad. So a large part of foreign exchange is
spent on it. So development work suffers. So rise in population causes
food problem.

5. Problem of Unemployment

Large size of population results in large army of labour force. But due to
shortage of capital resources it becomes difficult to provide
employment to the entire working population. Disguised
unemployment in rural areas and open unemployment in urban areas
are the normal features of developing country like India.

6. Low Standard of Living

Rapid growth of population accounts for low standard of living in India.

Even the basic necessities of life are not available adequately.
According to Dr. Chandra Shekhar population in India increases by 1.60
crores. It requires 121 lakh tonnes of food grains, 1.9 lakh metres of
cloth, 2.6 lakh houses and 52 lakh additional jobs.

7. Poverty

Rising population increases poverty in India. People need to spend

more resources in raising their kids. It results in less saving and low rate
of capital formation. Hence improvement in production becomes
impossible. It results in low productivity of labour.

8. Burden of Unproductive Consumers

In India, a large number of children are dependent. Old persons above

the age of 60 and many more in the age group of 15-59 do not find
employment. In 2001, working population was 39.2 percent while 60.8
percent are unproductive workers. This high degree of dependency is
due to high rate of dependent children. This dependency adversely
affects effective saving.

9. Population and Social Problems

Population explosion leads to migration of people from rural areas to

the urban areas causing the growth of slum areas.

Unemployment and poverty lead to frustration and anger among the

educated youth. This leads to robbery, beggary, prostitution and
murder etc. The terrorist activities that we find today in various parts of
the country are the reflection of frustration among educated
unemployed youth. Overcrowding, traffic congestions, frequent
accidents and pollution in big cities are the direct result of over-
population.

10. More Pressure on Land

Rising rate of population growth exerts pressure on land. On one hand,

per capita availability of land goes on diminishing and on the other, the
problem of sub-division and fragmentation of holdings goes on
increasing. It adversely affects the economic development of the
country.

11. Impact on Maternity Welfare

In India, population explosion is the result of high birth rate. High birth
rate reduces health and welfare of women. Frequent pregnancy
without having a gap is hazardous to the health of the mother and the
child. This leads to high death rate among women in the reproductive
age due to early marriage. Hence to improve the welfare and status of
women in our society, we have to reduce the birth rate.
12. Pressure on Environment

Population explosion leads to environmental degradation. Higher birth

rate brings more pollution, more toxic wastes and damage to
biosphere. Briefly speaking, population explosion hinders the economic
development. It should be controlled effectively.
 DENSITY OF POPULATION IN INDIA

Population refers to the total number of organisms inhabiting in a

particular area. The rapid growth of population in certain parts of our
planet has become a cause of concern. Population is commonly
referred to the total number of people living in an area. However, it
also defines the number of organisms who can interbreed. Human
population is growing at a rapid pace in certain countries. These
countries are being advised to control human control measures.

‘Density of Population’ is defined as the number of persons per square

kilometer.

In the beginning of the twentieth century i.e. in 1901 the population

density of India was as low as 77 persons per sq. km. It steadily
increased in each decade to reach 382 persons per sq. km. in 2011.

The rate of increase in population density of India has exhibited a sharp

decline during 2001-2011 (17.5 per cent) compared to 1991-2001 (21.7
per cent).

With a population density of 382/km2, India ranks 31st among the most
densely populated countries in the world.

Even though India accounts for only 2.4% of surface area of the earth, it
contributes 17.5% to the world population, which is extremely large.
Whereas USA, accounting for 7.2% of the earth’s surface area,
contributes only 4.5% to the world population.

The following is a list of the Top Ten Most Densely Populated States of
India. Bihar tops the list followed by West Bengal & Kerala.
1 Bihar - 1,102.4

2 West Bengal - 1,029.2

3 Kerala - 859.1

4 Uttar Pradesh - 689

5 Haryana - 573.4

6 Tamil Nadu - 554.7

7 Punjab - 550.1

8 Jharkhand - 441.5

9 Assam - 396.8

10 Goa - 393.8

Bihar has the maximum density of population among the Indian states
and the Union Territory with the highest population density is Delhi.

Arunachal Pradesh and Andaman & Nicobar Islands have the lowest
population densities among the Indian states and union territories
respectively.
 RURAL-URBAN COMPOSITION OF POPULATION IN INDIA

As per the Census 2011, there are 7935 towns in the country. The
number of towns has increased by 2774 since last census. The total
urban population in the country as per Census 2011 is more than 377
million constituting 31.16 percent of the total population.

At per the Census 2011, there are 468 Class I towns. 264.9 million
Persons, constituting 70.1 of the total urban population live Class I
towns. Among the million – plus cities, there are three very large cities
with more than 10 million persons in the country. These are Greater
Mumbai UA (18.4 million) Delhi UA (16.3 million) and Kolkata UA (14.1
million).

The vast majority of the population of India has always lived in the rural
areas and that continues to be true, the 2001 Census found that 72% of
our population still lives in villages, while 28% is living in cities and
towns. However the urban population has been increasing its share
steadily from about 11% at the beginning of the twentieth century to
about 28% at the beginning of 21st century.

Process of modern development ensures that the economic and social

significance of the agrarian rural way of life denies relation to the
significance of the industrial-urban way of life. This has been broadly
true all over the world and true in India as well. While the majority of
our people lives in the rural areas and makes their living out of
agriculture, the relative economic value of what they produces has
fallen drastically.

Moreover more and more people who live in villages may no longer
work in agriculture or even in villages, Rural people are increasingly,
engaged in non-farm rural occupation like transport services, business
enterprises or craft manufacturing.

If they are close enough, then they may travel daily to the nearest
urban Centre to work while continuing to live in village. Mass media
and communication channels are now bringing images of urban-life
styles and patterns of consumption into the rural areas. Consequently
urban norms and standards are becoming well-known even in the
remote villages, creating new desires and aspirations for consumption.

Considered from an urban point of view, the rapid growth is

combination shows that the town or city has been acting as a magnet
for the rural population. Those who cannot work in the rural areas go to
the city in search of work.

This flow of rural-to-urban migration has also been accelerated by the

continuous decline of common property resource like ponds, forests
and grazing lands. If people no longer have access to these resources,
but on the other hand have to buy many things in the market that they
used to get free, and then their hardship increases. This hardship is
worsened by the fact that opportunities for earning cash income are
limited in the villages.

Sometimes the city may also be preferred for social reasons, especially
the relative anonymity it offers. The fact that urban life involves
interaction with strangers can be an advantage for different reasons.

For the socially oppressed groups like the SC & STs, this may offer some
partial protection from the daily humiliation they may suffer in the
village where everyone knows lower caste identity. The anonymity of
the city also allows the poorer sections of the socially dominant rural
groups to engage in low status work that they would not be able to do
in the village. All these reasons make the city an attractive destination
for the villages.

A high proportion of rural population implies that the economy is still

heavily dependent on agriculture and the traditional social order is still
intact. The states of Bihar, M.P., Orissa and Rajasthan are largely under-
developed and industrialization has not resulted in urbanization on any
significant scale. Among the major states, Tamil Nadu is the most
urbanized with 44% of its population living in urban areas, followed by
Maharashtra, Gujarat, Karnataka and West Bengal.

In all these states the proportion of urban population to total

population is higher than the national average of 27.8%. Goa with 49.8
per cent of the population lives in urban areas has the first rank of
urbanization followed by Mizoram (49.6%), and Himachal Pradesh has
the lowest rank of urbanization with 9.8%. According to Census 2001,
the urban centres have been categorized into the following six
population size classes of town.

It is clear from above that there is an increase in population nearly in all

classes of town except class VI. While urbanization has been occurring
at a rapid pace, it is the biggest cities – the metropolises – that have
been growing the fastest.

These metros attract migrants from the rural areas as well as from
small towns. These are now 5,161 towns and cities are India where 286
million people live. What is striking; however is that more than two-
thirds of the urban population lives in 27 big cities with million-plus
populations? Clearly the largest cities in India are growing at such a
rapid rate that the urban infrastructure can hardly keep pace.
 AGE AND SEX COMPOSITION OF POPULATION IN INDIA

Age and sex structure are an important biological attributes of any

population. These factors affect demographic structure, social,
economic and political status of any society. In society, status and roles
are culturally determined and varies with culture. In traditional
societies, age demands respect. But the modern societies are more
youth-oriented. As far as the sex structure is concerned, it is the
reflection of the social reality.

The age-sex structure of any population is influenced and determined

by the following factors:

Birth and death rates

Internal and international migration

Marital status composition

Manpower

Gross National Product

Age composition in India

With high birth rate and decrease in death rate, there is an increase in
the proportion of young persons in India. But in developed countries,
low birth rate coupled with low death rate has resulted in aging
population trend. So, generally, the age of morality determines the
structure of population in India.

Presence of younger population in India is a burden to family and

ultimately to the government. This is because the young population
does not contribute to the economy of a country. Instead, the
government has to satisfy the basic needs such as education, medical
facilities, shelter, Clothing etc.

Sex composition in India

Sex ratio is the parameter used to study the age structure of a

population. Sex ratio in India is computed as the number of females per
1,000 males. In India, as per Census 2011, the sex ratio stands at 940. In
certain countries like France, this figure is more than 1000, that is, in
these countries there are more than 1000 females per 1,000 males.

The following are the important factors that determine the sex ratio of
any population:

Sex ratio at birth

Sex ratio of the deceased persons

Sex ratio of the net migrants

Of the three factors above, in Indian context, high mortality of females

is the main reason for lower sex ratio. Over the centuries, females in
India are in a socially and culturally disadvantaged position and hence
have been accorded an inferior status.

Sex Ratio in India

Census 2011

Sex ratio of India stands at 940 (2011), which is a marginal

improvement from 933 registered in 2001 census.

Kerala with 1,084 and Puducherry with 1,038 have registered high sex
ratio in the country. Haryana with a sex ratio of 877 is the state with the
lowest sex ratio in the country. Apart from Haryana, the states such as
Jammu & Kashmir, Sikkim, Punjab, are the other states with worst sex
ratio in the country.

The major reason for the sex ratio contrasts between Kerala and
Haryana is the status of women in the two states. While the position of
women is better in Kerala, it is relatively worst in Haryana. Another
reason is while Kerala experiences male-selective out migration in
search of employment, Haryana experiences male-selective in-
migration in locations near the National Capital Territory of Delhi. In
addition, in case of Haryana, strong preference for male child has
encouraged female foeticide in the state resulting in low sex ratio.

1 . 3 POVERTY AND UNEMPLOYMENT IN INDIA

 POVERTY

Meaning

Poverty is the scarcity or the lack of a certain (variant) amount of

material possessions or money. Poverty is a multifaceted concept,
which may include social, economic, and political elements. Absolute
poverty, extreme poverty, or destitution refers to the complete lack of
the means necessary to meet basic personal needs such as food,
clothing and shelter

Definition

According to Indian planning commission, "poverty line on the basis of

nutritional requirement of 2400 calories per person per day in rural
areas and 2100 calories per person per day in urban areas".

According to Malthas, "poverty refers the inability to secure the

minimum consumption requirement for life, health and efficiency.

Main Causes of Poverty in India

(i) Heavy pressure of population

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

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

(ii) Unemployment and under employment

Due to continuous rise in population, there is chronic unemployment
and under employment in India. There is educated unemployment and
disguised unemployment. Poverty is just the reflection of
unemployment.

(iii) Capital Deficiency

Capital is needed for setting up industry, transport and other projects.

Shortage of capital creates hurdles in development.

(iv) Under-developed economy

The Indian economy is under developed due to low rate of growth. It is

the main cause of poverty.

(v) Increase in Price

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

(vi) Net National Income

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

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

(vii) Rural Economy

Indian economy is rural economy. Indian agriculture is backward. It has

great pressure of population. Income in agriculture is low and disguised
unemployment is more in agriculture.
(viii) Lack of Skilled Labour

In India, unskilled labour is in abundant supply but skilled labour is less

due to insufficient industrial education and training.

(ix) Deficiency of efficient Entrepreneurs

For industrial development, able and efficient entrepreneurs are

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

(x) Lack of proper Industrialization

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

engaged in industry. So industrial backwardness is major cause of
poverty.

(xi) Low rate of growth

The growth rate of the economy has been 3.7% and growth rate of
population has been 1.8%. So compared to population, per capita
growth rate of economy has been very low. It is the main cause of
poverty

(xii) Outdated Social institutions

The social structure of our country is full of outdated traditions and

customs like caste system, laws of inheritance and succession. These
hamper the growth of economy.

(xiii) Improper use of Natural Resources

India has large natural resources like iron, coal, manganese, mica etc. It
has perennial flowing rivers that can generate hydroelectricity. Man
power is abundant. But these sources are not put in proper use.
(xiv) Lack of Infrastructure

The means of transport and communication have not been properly

developed. The road transport is inadequate and railway is quite less.
Due to lack of proper development of road and rail transport,
agricultural marketing is defective. Industries do not get power supply
and raw materials in time and finished goods are not properly
marketed.

UNEMPLOYMENT

Meaning

The situation where a person is able, qualified and willing to work, but
do not get job opportunities is called unemployment.

Definition

A man willing to work, and unable to find work, is perhaps the saddest
sight that fortune's inequality exhibits under this sun - Thomas Carlyle

Main Causes of Unemployment in India

(i) 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.
(ii) Slow Economic Growth

Indian economy is underdeveloped and role of economic growth is very

slow. This slow growth fails to provide enough unemployment
opportunities to the increasing population.

(iii) Increase in Population

Constant increase in population has been a big problem in India. It is

one of the main causes of unemployment. The rate of unemployment is
11.1% in 10th Plan.

(iv) Agriculture is a Seasonal Occupation

Agriculture is underdeveloped in India. It provides seasonal

employment. Large part of population is dependent on agriculture. But
agriculture being seasonal provides work for a few months. So this
gives rise to unemployment.

(v) Joint Family System

In big families having big business, many such persons will be available
who do not do any work and depend on the joint income of the family.

Many of them seem to be working but they do not add anything to

production. So they encourage disguised unemployment.

(vi) Fall of Cottage and Small industries

The industrial development had adverse effect on cottage and small

industries. The production of cottage industries began to fall and many
artisans became unemployed.
(vii) Slow Growth of Industrialization

The rate of industrial growth is slow. Though emphasis is laid on

industrialization yet the avenues of employment created by
industrialization are very few.

(viii) Less Savings and Investment

There is inadequate capital in India. Above all, this capital has been
judiciously invested. Investment depends on savings. Savings are
inadequate. Due to shortage of savings and investment, opportunities
of employment have not been created.

(ix) Causes of Under Employment

Inadequate availability of means of production is the main cause of

under employment. People do not get employment for the whole year
due to shortage of electricity, coal and raw materials.

(x) Defective Planning

Defective planning is the one of the cause of unemployment. There is

wide gap between supply and demand for labour. No Plan had
formulated any long term scheme for removal of unemployment.

(xi) Expansion of Universities

The number of universities has increased manifold. There are 385

universities. As a result of this educated unemployment or white collar
unemployment has increased.

(xii) Inadequate Irrigation Facilities

Even after the completion of 9th five plans, 39% of total cultivable area
could get irrigation facilities.
Due to lack of irrigation, large area of land can grow only one crop in a
year. Farmers remain unemployed for most time of the year.

(xiii) 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.

Poverty alleviation and employment generation programmes in India

1. Integrated Rural Development Programme (IRDP)

The Integrated Rural Development Programme (IRDP), which was

introduced in 1978-79 and universalized from 2nd October, 1980,
aimed at providing assistance to the rural poor in the form of subsidy
and bank credit for productive employment opportunities through
successive plan periods. On 1st April, 1999, the IRDP and allied
programmes were merged into a single programme known as
Swarnajayanti Gram Swarozgar Yojana (SGSY). The SGSY emphasizes on
organizing the rural poor into self-help groups, capacity-building,
planning of activity clusters, infrastructure support, technology, credit
and marketing linkages.

2. Jawahar Rozgar Yojana/Jawahar Gram Samriddhi Yojana

Under the Wage Employment Programmes, the National Rural

Employment Programme (NREP) and Rural Landless Employment
Guarantee Programme (RLEGP) were started in Sixth and Seventh
Plans. The NREP and RLEGP were merged in April 1989 under Jawahar
Rozgar Yojana (JRY). The JRY was meant to generate meaningful
employment opportunities for the unemployed and underemployed in
rural areas through the creation of economic infrastructure and
community and social assets. The JRY was revamped from 1st April,
1999, as Jawahar Gram Samriddhi Yojana (JGSY). It now became a
programme for the creation of rural economic infrastructure with
employment generation as the secondary objective.

3. Rural Housing – Indira Awaas Yojana

The Indira Awaas Yojana (LAY) programme aims at providing free

housing to Below Poverty Line (BPL) families in rural areas and main
targets would be the households of SC/STs. It was first merged with the
Jawahar Rozgar Yojana (JRY) in 1989 and in 1996 it broke away from JRY
into a separate housing scheme for the rural poor.

4. Food for Work Programme

The Food for Work Programme was started in 2000-01. It was first
launched in eight drought-affected states of Chhattisgarh, Gujarat,
Himachal Pradesh, Madhya Pradesh, Orissa, Rajasthan, Maharashtra
and Uttaranchal. It aims at enhancing food security through wage
employment. Food grains are supplied to states free of cost, however,
the supply of food grains from the Food Corporation of India (FCI)
godowns has been slow.

5. Sampoorna Gramin Rozgar Yojana (SGRY)

The JGSY, EAS and Food for Work Programme were revamped and
merged under the new Sampoorna Gramin Rozgar Yojana (SGRY)
Scheme from 1st September, 2001. The main objective of the scheme
continues to be the generation of wage employment, creation of
durable economic infrastructure in rural areas and provision of food
and nutrition security for the poor.

6. Mahatma Gandhi National Rural Employment Guarantee Act

(MGNREGA) 2005

It was launched on February 2, 2005. The Act provides 100 days

assured employment every year to every rural household. One-third of
the proposed jobs would be reserved for women. The central
government will also establish National Employment Guarantee Funds.
Similarly, state governments will establish State Employment
Guarantee Funds for implementation of the scheme. Under the
programme, if an applicant is not provided employment within 15 days
s/he will be entitled to a daily unemployment allowance.

7. National Food for Work Programme

It was launched on November 14, 2004 in 150 most backward districts

of the country. The objective of the programme was to provide
additional resources available under Sampoorna Grameen Rojgar Yojna.
This was 100% centrally funded programme. Now this programme has
been subsumed in the MGNREGA from Feb....... 2, 2006.

8. National Rural Livelihood Mission: Ajeevika (2011)

It is the skill and placement initiative of Ministry of Rural development.

It is a part of National Rural Livelihood Mission (NRLM) –the mission for
poverty reduction is called Ajeevika (2011). It evolves out the need to
diversify the needs of the rural poor and provide them jobs with regular
income on monthly basis. Self Help groups are formed at the village
level to help the needy.
9. Pradhan Mantri Kaushal Vikas Yojna

The cabinet on March 21, 2015 cleared the scheme to provide skill
training to 1.4 million youth with an overall outlay of Rs. 1120 crore.
This plan is implemented with the help of Ministry of Skill Development
and Entrepreneurship through the National Skill Development
Corporation. It will focus on fresh entrant to the labour market,
especially labour market and class X and XII dropouts.

10. National Heritage Development and Augmentation Yojna

(HRIDAY)

HRIDAY scheme was launched (21 Jan. 2015) to preserve and

rejuvenate the rich cultural heritage of the country. This Rs. 500 crore
programme was launched by Urban Development Ministry in New
Delhi. Initially it is launched in 12 cities: Amritsar, Varanasi, Gaya, Puri,
Ajmer, Mathura, Dwarka, Badami, Velankanni, Kanchipuram, Warangal
and Amarvati.

These programmes played/are playing a very crucial role in the

development of the all sections of the society so that the concept of
holistic development can be ensured in the real sense.
 1 . 4 OBJECTIVES OF PLANNING IN INDIA
1. Economic Development

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 causes behind this increase.

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 investment 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.

ACHIEVEMENTS OF PLANNING IN INDIA

1. Increase in National Income and Per Capita Income

During planning period national income has increased manifold. The

average annual increase in national income was registered to be 1.2 per
cent from 1901 to 1947. This increase was recorded to be 3 per cent
from 1950 to 2000-01.

The per capita income which was 254.7 at current prices in 1950-51
increased to Rs. 1741.3 in 1980-81 to Rs. 5365.3 in 1990-91 and further
to Rs. 16563.5 in 2000-01.

2. Development in Agriculture

Agricultural productivity has also marked an upward trend during the

plan period. The production of food-grains which was 510 lakh tones in
1950-51 increased to 176.4 million tones in 1990-91 and further to
211.9 million tones in 2001-02.
Similarly, the production of cotton was 21 lakh bales in 1950-51 and it
was expected to be 908 million bales in 1990-91 and further 10.0
million tones in 2001- 02. In the same, the production of sugarcane was
expected to be 241.0 million tones in 1990-91 against the 69 lakh tones
in 1950-51. It rose to 298.4 million tones in 2001-02.

3. Development of Industry

In the first five year plan much of the capital was invested to develop
the industry and defence. About fifty per cent of the total outlay of the
plans was invested for their development. As a result, industrial
production has increased to a great extent. For instance, the production
of cotton cloth which was 4215 million sq. metres in 1950-51.

4. Development of Transport and Communication

During the planning period, much attention has been paid towards the
development of transport and communication. In the first two plans,
more than one-fourth of the total outlay was invested on the
development of transport and communication.

In 1990-91, the total length of roads increased to 19.92 lakh kms which
increased to 252.2 lakh kms in 1998-99. Similarly route of railway was
63.1 thousand kms in 2001-02 against 53.6 thousand km in 1950-51.

5. Self-Reliance

During the last five decades, considerable progress seems to have been
made towards the achievement of self-reliance. We are no longer
dependent on other countries for the supply of food-grains and a
number of agricultural crops. In the same fashion, we have made
substantial investment in basic and heavy industries. We are in a
position to produce all varieties of basic consumer goods.

6. Employment Generation

In India, the problem of unemployment is most crucial. During the first

Nine plans, much emphasis was laid on the creation of larger
employment opportunities, such as, emphasis on the establishment of
small and cottage industries, spread of technical education,
development of self-employment schemes, creation of larger
industries, improvement of agriculture and service sectors etc.

During the first two plans employment opportunities were generated

for about 16 million people.

7. Power

Total installed capacity, which was only 2,301 MW in 1950, increased to

97,899 MW by the end of March, 2000. The cumulative capacity in the
public utilities as on March, 2000 in the country has reached 97,837
MW comprising 23,816 MW as hydro, 70,186 MW as thermal, 2,680
MW as nuclear and 1,155 MW as wind energy.

8. Price Stability

Attaining economic stability has been considered as one of the major

objective of economic planning throughout the entire plan period.

The average of inflation in terms of the Wholesale Price Index (WPI)

increased significantly from 3.3% in 1999-2000 to 7.1% in 2000-2001
due to substantial rise in administered prices of petroleum products.

9. Capital Formation
In India due to the development of agriculture, industry and defence,
the rate of capital formation has also increased. In 1950-51, the rate of
capital formation was 11.0 per cent which in 2000-01 remarkably
increased to 21.3 per cent.

10. Development of Science and Technology

In the era of planning, India has made much progress in the field of
science and technology. In reality, the development is so fast that India
stands third in the world in the sphere of science and technology.
Indian engineers and scientists are in a position that they can
independently establish any industrial venture.

11. Social and Miscellaneous Services

Development of social and miscellaneous services is also another

important sector of our five year plans. It consists such vital services as
education, health and family planning, housing, labour welfare and
welfare of backward classes etc. and a considerable amount has been
allotted in our five year plans for the provision of these services.

12. Social Justice

The planning in India has an objective of sustained growth with social

justice. It has also been emphasizing the achievement of this objective.
As a result, these plans have been ensuring the improvement of living
standards of the people, removal of poverty, creation of additional
jobs, and reduction in inequalities of income and wealth.

FAILURES OF PLANNING IN INDIA

1. Rise in Prices
Price stability has been one of the objectives of every five year plan in
India. But almost all the plans witnessed considerable rise in price-level.
In first plan, price level came down. In all other plans, the prices
recorded a steep rise. Price level rose on average by 63 percent in
second plan, 5.8% in third plan, 9% in fourth plan, 6.3% in fifth plan, 3.6
percent in Ninth plan and 4% in 2004-05.

2. Increase in unemployment

During the period of five year plans, unemployment went on rising. At

the end of first five year plan 53 lakh persons were unemployed. Their
number rise to 349 in 2004-05. In the last 22 years employment
opportunities have increase by 2.3 percent while the supply of labour
has increased by 2.5% resulting in an increase in unemployment.

3. Slow Growth in Production Sector

In the five year plan, growth rate of production was slow in many
sectors. Priority should have been given to the development of
agriculture in all the plans, but it was not done. Capital intensive
industries in urban areas were given precedence over small scale
industries in the rural areas. In agriculture green revolution continues
to be confined largely to wheat and rice crop.

4. Inequality in Distribution of Income and Wealth

One of the main objectives of five year plans has been to minimize
inequality in distribution of income and wealth. But the plan witnessed
only increase in inequality. Rich Class becomes richer and poor class
poorer. This inequality is found not only in industrial sector but in
agriculture sector also. According to one estimate, 3 percent of
household own roughly 50 percent of cultivable land.
5. Inefficient Administration

An expert team of U.N.O. observed that one of the main short comings
of Indian plans has been with reference to its implementation. Plans
are formulated after good deal of discussion and deliberation but their
targets are not achieved due to inefficient administration, dishonesty,
vested interest and redtapism etc.

6. Lack of Strong Foundation

In spite of the fact that nine five year plans have rolled by still the
economic base is far from being strong. We are still dependent on
weather God for good harvest. In 1965-66, 1966-67, 1979-80, 1982-83
and 2002-03, the economy received a big jolt due to failure of
monsoons. Large scale import of food grains was resorted to Gulf war
in 1991 also caused disruption to Indian Economy. In 1998, due to
shortage in the production of onions, the prices increased to Rs. 60 per
kg.

7. Extra Ambitious

Indian plans are criticized on the ground that their targets are very
ambitious. Two factors may account for its first shortage of resources
and second faulty implementation of the plans. These has been a wide
gap between the targets of growth rate and their achievements during
the period of planning average growth rate of Indian economy has been
4.4 percent as against the target of 5%. The gap between the targets
and achievements underlines the failures of the plans.

8. Paradox of Saving and Investment

Although during the planning period there has been appreciable
increase in saving and investment, yet the growth rate of economy has
been very slow.

9. No increase in the Standard of Living

All the five year plans of India aimed at raising the standard of living of
the people. In fact what to say of improving the living standard, even
the basic necessaries have not yet been provided to the people. On an
average, a normal healthy person needs 2508 calories of food per day
but in India per capita availability of food is 2400 calories.

An individual gets 16 metres of cloth per annum. Regarding housing,

the condition is deplorable. In 1950-51, per capita income at 1993-94
prices was Rs. 3687. In 2004-05, it increased to Rs. 12416 at 1993-94
prices. In India 26% of population still lives much below the poverty
line.

Even after 55 years of planning, poverty alleviation programme has not

met with much success. In the end we can conclude that plans are
sound but the problem is of proper implementation. Political
interference and attitude of bureaucracy is greatly responsible for
failure of plans.

2 . 1 CAUSES OF LOW AGRICULTURAL PRODUCTIVITY

The causes of low productivity in Indian agriculture can be divided into
the following three categories:

General
Institutional

Technical

GENERAL CAUSES

1. Social environment

The social environment of villages is often stated to be an obstacle in

agricultural development. It is said that the Indian farmer is illiterate,
superstitious, conservative, and unresponsive to new agricultural
techniques. On the face of it, this seems to be correct. However, the
fact is that given the limitation of present production relations, the
unassuming and ignorant looking farmer uses his resources efficiently.

2. Pressure of population on land

There is heavy pressure of population on land. In fact, since the non-

agricultural sectors of the economy have not been able to expand at a
sufficiently rapid pace over the period of last five-and-a-half decades,
this pressure has continuously increased. In 2001, about 228 million
workers, or nearly three-quarters of the rural working population
(which was310.7 million) was employed in the agricultural sector.
Increasing pressure of population on land is partly responsible for the
subdivision and fragmentation of holdings. Productivity on small
uneconomic holdings is low.

3. Land degradation

Government of India has recently estimated that nearly half of the

country's 329 million hectares of soil could be categorized as degraded.
Almost 43 percent of the land suffers from high degradation resulting in
33-67 percent yield loss while 5 per cent is so damaged that it has
become unusable.

INSTITUTIONAL CAUSES

1. Land tenure system

Perhaps the most important reason of low agricultural productivity has

been the zamindari system. Highly exploitative in character, this system
drained out the very capacity, willingness and enthusiasm of the
cultivators to increase production and productivity. Legislations passed
for abolition of intermediaries in the post-Independence period did not
break the stranglehold of the zamindars on the rural economy. They
only changed their garb and became large landowners.

2. Lack of credit and marketing facilities

It is often assumed that the decisions of Indian farmers are not affected
or modified in response to price incentives. In other words, the Indian
farmer continues to produce the same agricultural output even on
more attractive prices. However, the facts are different.

3. Uneconomic holdings

According to the National Sample Survey, 52 per cent holdings in 1961-

62 had a size less than 2 hectares. In 2005-06, 83 per cent of total
holdings fell under this category. Most of these holdings are not only
extremely Small they are also fragmented into a number of tiny plots so
that Cultivation on them can he carried out only by labour intensive
techniques. This results in low productivity.

TECHNICAL CAUSES
1. Outmoded agricultural techniques

Most of the Indian farmers continue to use outmoded agricultural

techniques. Wooden ploughs and bullocks are still used by a majority of
farmers. Use of fertilizers and new high-yielding varieties of seeds is
also extremely limited. In summary, Indian agriculture is traditional.
Therefore productivity is low.

2. Inadequate irrigation facilities

Gross cropped area in India in 2007-08 was 195.83 million hectares of

which 87.26 million hectares had irrigation facilities. Thus, 44.6 per cent
of gross cropped area had irrigation facilities in 2007-08.This shows that
even now more than 55 percent of the gross cropped area continues to
depend on rains. Rainfall is often insufficient, uncertain and irregular.
Accordingly, productivity is bound to be low in all those areas which
lack irrigation facilities, and are totally dependent on rains. Even in
areas having irrigation facilities, potential is not wholly utilized because
of defective management.

MEASURES TO INCREASE PRODUCTION AND PRODUCTIVITY

1. Implementation of land reforms

Special attempts will have to be made by the State governments to

implement the land reforms legislation forcefully so that the slogan
'land to the tiller' is translated into practice. Unless this is done, the
tiller will have no incentive to invest in land and adopt new agricultural
techniques. Therefore, land reforms are the first and foremost
necessity.

2. Integrated management of land and water resources

The Committee on 25 Years Perspective Plan for the Development of
Rainfed Areas constituted by the Planning Commission for the Tenth
Plan has suggested treating/development of 75 million hectares arable
land and non-arable land by the end of the Thirteenth Plan with a total
cost of 20.850 crore. The Working Group on Watershed Development,
Rainfed Farming and Natural Resources Management for the Tenth
Plan has suggested treating 88.5 million hectares of rainfed/degraded
land by the end of the Thirteenth Plan with a total 72,750 crore.

3. Improved seeds

Improved seeds can play an important role in increasing productivity.

This has been amply proved by the experience of many countries and
by the demonstration of high-yielding varieties of wheat in Punjab,
Haryana and Uttar Pradesh in our own country. Therefore, more and
more farmers in more and more areas should be encouraged to use
improved seeds. After examining the soil conditions and availability of
irrigation facilities in different areas, farmers should be advised about
what seeds are best in the area. They should also be educated in the
methods of sowing, manuring and irrigating the new high-yielding
varieties of seeds.

4. Fertilizers

Improved varieties of seeds require heavy doses of fertilizers. It has

been estimated by agricultural scientists that Indian farmers use only
one-tenth the amount of manure that is necessary to maintain the
productivity of soil. There are wide inter-State differences in fertilizer
use as well. While it was as high as 237.1 kgs per hectare in Punjab in
2009-10, it was just 48.3 kgs per hectare in Rajasthan. Similarly,
fertiliser use was only 81.4 kg. per hectare in Madhya Pradesh and 57.6
kgs in Orissa.

5. Irrigation

The coverage of irrigation in various States varies from 14 to 97

percent. There is a large gap between the current level and the ultimate
irrigation potential except in the case of Punjab, Haryana and Rajasthan
which have already exceeded the potential irrigation level. According to
Ramesh Chand, S.S.Raju and L.M.Pandey, "Bihar has water resources to
extend irrigation to entire gross cropped area, with a further scope to
provide irrigation to expansion in gross cropped area through an
increased cropping intensity.

6. Consumption of power

Consumption of electric power per hectare was just 9 kwh in Assam, 30

kwh in Orissa and only 34 kwh in Himachal Pradesh during 2001-02 and
2003-04. Electric power used in agriculture varied between 80 and 300
kwh in Kerala, Jammu and Kashmir, Bihar, Madhya Pradesh, West
Bengal, Uttar Pradesh and Rajasthan, whereas it exceeded 1,000kwh in
Andhra Pradesh, Gujarat, Haryana, Punjab and Tamil Nadu. As noted by
Ramesh Chand, S.S.Raju and L.M.Pandey, increase in electric supply to
agriculture is important for promoting irrigation and thus raising
output.

7. Cropping intensity

Although irrigation facilities have expanded in recent decades, the level

of crop intensity continues to be very low in most of the States. In
Andhra Pradesh, Karnataka, Tamil Nadu, Madhya Pradesh,
Maharashtra, Gujarat and Rajasthan more than one crop is taken on
less than 30 per cent of area under cultivation. This shows that there is
considerable scope to raise output through an expansion of area under
double cropping.

8. Technology

Improved technology is most important for the growth of agricultural

output. Available evidence shows that there is a big gap between the
level of yield with improved farm practices on farmers’ fields and the
yield with practices followed by the farmers. Therefore, there is a need
to transfer improved technology to farmers. For this purpose, extension
services need to be strengthened.

9. Plant protection

Around 10-30 per cent of the farm production in India is lost every
year due to pests, weeds and diseases. The Crop Care Foundation of
India (CCFI) has placed the loss in agricultural production due to
damage from weeds and plant diseases at almost 1.5 lakh crore each
year. “Most of the farmers in the countryside are unaware of the
medicines and insecticides developed in recent years to face the
challenge posed by diseases and insects. Some farmers have started
using them to some extent but their efforts cannot be successful unless
and until their neighboring farmers also adopt them. Therefore, it is
necessary to manage this programme at the government level. The
government should maintain its own technical staff to carry out the
spraying of pesticides and insecticides at nominal rates.

10. Provision of credit and marketing facilities

Use of improved varieties of seeds, fertilizers, pesticides, insecticides,
agricultural machinery and irrigation facilities all require substantial
money resources which small farmers do not usually possess.
Therefore, it is necessary to strengthen the credit cooperative sector
and free it from the clutches of large landowners so that it can meet
the credit requirements of small farmers.

11. Incentives to the producer

Incentives to the agriculturists can go a long way in encouraging them

to increase productivity. Incentives can be in the following forms:

(a) Implementing land reforms rigorously and vigorously

(b) Ensuring timely availability of agricultural inputs

(c) Guaranteeing remunerative prices of produce to the farmer

(d) Implementing crop insurance scheme to cover the risk of damage to

crops and other risks in agriculture

(e) Social recognition and conferment of awards, merit certificates, etc.

12. Better management

Just as industry needs skilled management for increased productivity,

agriculture also requires better management for raising the level of
productivity. For this purpose farmers have to be educated in more
efficient use of their resources particularly land, irrigation facilities and
agricultural implements.

13. Agricultural research

Agricultural research is presently being conducted by the Indian Council
of Agricultural Research, various Agricultural Universities and other
institutions for evolving high-yielding varieties of seeds for different
crops. Considerable success has been achieved in the case of wheat.
However, intensive efforts are required for achieving similar success in
other crops. Research should also be conducted on a substantial scale
at different regional centres for testing the quality of soil, suggesting
measures for soil conservation and reclamation, examining the diseases
affecting different crops, improving the quality of agricultural
implements, avoiding wastage in agriculture especially damage to crops
resulting from pests, insects, rodents, etc.

2 . 2 LAND REFORMS IN INDIA

At the time of Independence, there were three types of land reform
systems prevailing in the country – the Zamindari system, the
Mahalwari system, and the Ryotwari system. The basic difference in
these systems was regarding the mode of payment of land revenue. In
the zamindari system, the land revenue was collected from the farmers
by the zamindars. In the mahalwari system by the village headman on
behalf of the whole village. While in the ryotwari system the land
revenue was paid to the State directly by the farmers. In all the three
systems the usual practice adopted was to get the land cultivated by
tenants.

Tenants, themselves, were of the following three types:

Occupancy tenants

Tenants-at-will

Sub-tenants.

Occupancy tenants enjoyed permanent and heritable rights on land.

They had security of tenure and could claim compensation from the
landlord for any improvement effected on the land. As against this,
tenants-at-will did not have security of tenure and could be evicted
from land whenever the landlord so desired. The position of sub-
tenants was also similar. The only difference between them and
tenants-at-will was that, whereas the latter were appointed by the
landlords themselves, sub tenants were appointed by the occupancy
tenants.

In addition to these classes of people, a big class of agricultural

labourers existed side-by-side. These people had no land whatsoever
and worked on the land of others on wages.
Zamindari System

This system was created by the East India Company when in 1793, Lord
Cornwallis entered into permanent settlement with landlords with a
view to increasing the revenue of the company. Under the settlement,
the landlords (known as zamindars) were declared full proprietors of
large areas of land. In return, the task of collecting rent from the
farmers was entrusted to them. Thus, the zamindars were to function
as intermediaries between the cultivators and the State. The share of
the government in total rent collected by the zamindars was kept at
10/11th, the balance going to the zamindars as remuneration. At the
time of Independence, this system was prevalent in West Bengal, Bihar,
Orissa, Uttar Pradesh, Andhra Pradesh and Madhya Pradesh.

The zamindari system suffered from a number of defects. It created a

unique agrarian structure in the countryside which conferred the right
of sharing the produce of land without participating personally in the
productive process. The system itself was based on exploitation as it
conferred unlimited rights on the zamindars to extract as much rent as
they wished. According to Bhawani Sen, approximately 25 per cent of
the produce was taken away by the intermediaries in the form of rent.
This would mean that out of the income of 4,800 crore from agriculture
in 1949-50, the share of intermediaries was as high as 1,200 crore. The
grabbing of such a high proportion of income by a parasitic class was
not only socially unjust but also highly detrimental to capital formation
and economic development.

The actual cultivator was left with no surplus to invest in better

implements, improved seeds or fertilizers and neither was there any
incentive for him to increase agricultural production and productivity.
Thus, according to Thorner, a built-in 'depressor' continued to operate
in the countryside characterized by low capital intensity and antiquated
methods. The tillers showed no interest in modernization of agriculture
or in prevention of such recognized evils as fragmentation.
Consequently, agricultural production was held down and from the
1880s to the 1940s it rose so slowly as to amount to virtual stagnation.
Not only this. The records of rights in land were not systematically
maintained in most areas governed by zamindari. This made it difficult
to mortgage and/or sell land. As a result, credit institutions were slow
to develop in zamindari areas, Public investments in agriculture were
generally less in these areas. Communal rights in pastures, forests, etc.
were encroached upon and the cultivator was made to pay to gain
access to these. In addition to excessive rents and illegal exactions, the
zamindars forced peasants to do begar and offer various gifts/nazrana,
etc.

Mahalwari System
This system was introduced by William Bentinck in Agra and Oudh. It
was later extended to Madhya Pradesh and Punjab. In this system, the
whole village was treated as a unit as far as payment of land revenue is
concerned. The responsibility for collecting the land revenue and
depositing it in the treasury was of the village headman (or a co-sharer
appointed for the purpose). According to the Congress Land Reforms
Committee the ownership of land under this system was collective.
Period of ‘settlement', fixation of land revenue, etc. were different in
different mahalwari areas.

Ryotwari System

This system was initially introduced in Tamil Nadu and was later
extended to Maharashtra, Barar, East Punjab, Assam and Coorg. Under
this system the responsibility of paying land revenue to the government
was of the cultivator (or individual ryot) himself and there was no
intermediary between him and the State. The ryot had full rights
regarding sale, transfer and leasing of land and could not be evicted
from the land as long as he paid the land revenue. These rights were
not available to cultivators under the zamindari system.

The settlement of land revenue under the ryotwari system was done on
a temporary basis. In Madhya Pradesh, such temporary settlement was
done after every 20 years, in Bombay (Maharashtra) after every 30
years and in Madras (Tamil Nadu) and United Provinces (Uttar Pradesh)
after every 40 years.

Though the ryotwari system appears satisfactory on the face of it, yet it
also developed various snags. In these areas, moneylenders and
mahajans granted loans to cultivators by mortgaging their lands. Soon
substantial portions of land slipped out of cultivators hold and became
the property of moneylenders and mahajans. The latter started giving
land for cultivation on lease and soon a new zamindar class (with all its
exploitative practices) started developing. At the beginning of the era of
Independence at least one-fifth of the total area under cultivation even
in ryotwari tracts had passed under open tenancy while an unknown,
though substantial, proportion of area was worked under forms of
crops sharing, in essence no different from tenancy.

OBJECTIVES OF LAND REFORMS

As stated above, the zamindari system was based on exploitation. It

created a parasitic class of zamindars which did not do any work on
land but snatched away whatever surplus above the minimum
subsistence the cultivators produced. The latter were forced to lead a
wretched life of slavery and deprivation. Under the ryotwari and
mahalwari systems also, the practice of cultivation by tenants became
widely prevalent. These tenants were also exploited in a number of
ways. Particularly miserable was the condition of tenants-at-will and
sub-tenants.

It was basically to stop the exploitation of the actual tillers of the soil
and pass on the ownership of land to them that land reforms were
introduced in the post-Independence period in India. The government
defined the objectives of land reforms as follows:

To remove such impediments to increase in agricultural production as

arise from the agrarian structure inherited from the past.

To eliminate all forms of exploitation and social injustice within the

agrarian system, to provide security for the tiller of soil and assure
equality of status and opportunity to all sections of the rural
population.

Measures contemplated to achieve these objectives were as given

below:

Abolition of Intermediaries

Tenancy Reforms

Reorganization of Agriculture.

Tenancy Reforms included the following set or measures:

Regulation of Rent

Security of Tenure
Ownership Rights for Tenants

Reorganization of Agriculture included the following policies:

Redistribution of Land

Consolidation of Holdings

Cooperative Farming

2 . 3 GREEN REVOLUTION
Green revolution is also known as “seed-water-fertilizers-pesticides-
technology”. Norman Borlaug, an American scientist introduced the
concept of green revolution in Mexico in the 1940s.
In 1965, the government of Indira Gandhi implemented green
revolution during 1967-1968, basically in parts of Punjab and Haryana.
At this stage, the green revolution was concerned only with the
production of wheat and rice and did not give much emphasis to other
food crops.

Dr.M.S.Swaminathan from India led the green revolution to success.

DEFINITION

J.G.Harrar says “green revolution is the phrase generally used to

describe the spectacular increase that took place during 1967-1968 and
is continuing in the production of food grains in India”.

METHODS USED IN GREEN REVOLUTION

1 Double cropping or multiple cropping

Producing more than one crop in a single land is known as double or

multiple cropping system.

2 High yielding variety of seeds

This was the scientific aspect of green revolution to use HYV seeds in
agriculture.

3 Proper irrigation system

To provide water facilities for cultivating crops through canals, dams,

wells, etc.

4 Use of pesticides and fertilizers

To improve the quality of agricultural production

5 Use of modern machinery

Like tractor, harvester, thresher, etc. to increase the speed of

agricultural production.

6 Expansion of farming areas

To increase the quantity of agricultural production.

CAUSES OF GREEN REVOLUTION

1 Population growth

Due to population growth the national income, per capita income and
availability of food had reduced. The food production hardly increased
while the population reached its peak.

2 Agricultural development

With limited land, fast growing labour force, slow rate of labour
utilization and lack of serious policies, food crisis rose in some
underdeveloped countries. Moreover natural calamities like droughts
often created larger trouble to the farmers.

3 Social revolution

Because of green revolution, the socio-economic life of the villages will

change. The education will spread, the lifestyle of the people will
change. The death rates in rural areas will reduce. The distances
between rural and urban centres will come down. Agro based
industries will be setup.

EFFECTS OF GREEN REVOLUTION

1 Increase in agricultural production

The introduction of green revolution has resulted in phenomenal

increase in the production of agricultural crops especially in food grains.
Wheat crop drew maximum benefit from green revolution. The
production of wheat increased by more than 3 times. Hence, green
revolution in India is also known as ‘Wheat revolution’.

2 Reduction of import of food grains

The increased production of food grains resulted in drastic reduction in

their imports. We are now self-sufficient in food grains.

The per capita net availability of food grains has also increased from
395 grams per day in early 1950s to the level of 436 grams in 2003.

3 Capitalistic farming

Farmers having more than 10 hectares of land tend to get maximum

benefit from green revolution technology by investing amount of
money in various inputs like HYV seeds, fertilizers, machines, etc.

4 Ploughing back of profit

Green revolution helped the farmers in raising their level of income.

Wiser farmers ploughed back their surplus income for improving
agricultural productivity.
5 Industrial growth

Green revolution created demand for machines like tractors,

harvesters, threshers, combines, diesel engines, electric motors, etc.
Demand for chemical fertilizers, pesticides, insecticides, weedicides,
etc. also increased.

6 Rural employment

Green revolution benefitted more than 15 lakh poor people from the
northern regions of India.

7 Change in attitude of farmers

The farmers were using traditional methods of farming before green

revolution. But the farmers adopted to the latest technologies
introduced by green revolution.

LIMITATIONS OF GREEN REVOLUTION

The green revolution, howsoever impressive but not 100% success.

Only Punjab and Haryana states showed best results of green

revolution.

The new farming techniques has given birth to the serious pollution of
drinking water causing cancer and other diseases.

A recent Punjabi University study found a high rate of genetic damage

among farmers which was attributed to pesticide use.

The new organic fertilizers, pesticides and chemicals are ruining the
soil.

It led to unemployment and rural-urban immigration.

 2 . 4 AGRICULTURAL MARKETING IN INDIA
For a long period of time Indian agriculture was mostly in the nature of
‘subsistence farming'. The farmer sold only a small part of his produce
to pay-off rents, debts and meet his other requirements. Such sale was
usually done immediately after harvesting of crops since there were no
storing facilities. A considerable part of the total produce was sold by
the farmers to the village traders and moneylenders often at prices
considerably lower than the market prices. The farmers who took their
produce to the mandies (wholesale markets) also faced a number of
problems as they were confronted with powerful and organized
traders. In mandies, business was carried out by arhatiyas with the help
of brokers, who were the agents of arhatiyas.

GOVERNMENT MEASURES TO IMPROVE THE SYSTEM OF

AGRICULTURAL MARKETING

After Independence, the Government of India adopted a number of

measures to improve the system of agricultural marketing, the
important ones being establishment of regulated markets, construction
of warehouses, provision for grading and standardization of produce,
standardization of weights and measures, daily broadcasting of market
prices of agricultural crops on All India Radio, improvement of transport
facilities, etc.

Organization of Regulated Markets

Regulated markets have been organized with a view to protect the

farmers from the malpractices of sellers and brokers. The management
of such markets is done by a Market Committee which has nominees of
the State Government, local bodies, arhatiyas, brokers and farmers.
Thus, all interests are represented on the committee. These
committees are appointed by the government for a specified period of
time. Important functions performed by the committees can be
summarized as follows:
(i) Fixation of charges for weighing, brokerage, etc

(ii) Prevention of unauthorized deductions, underhand dealings and

wrong practices by the arhatiyas

(iii) Enforcing the use of standardized weights

(iv) Providing up to date and reliable market information to the farmers

and

(v) Settling of disputes among the parties arising out of market

operations.

Grading and Standardization

Improvements in agricultural marketing system cannot be expected

unless specific attempts at grading and standardization of the
agricultural produce are made. The government recognized this quite
early and the Agricultural Produce (Grading and Marketing) Act was
passed in 1937. Initially grading was introduced for saun, hemp and
tobacco. The net was later enlarged. To facilitate grading, standards for
182 agricultural commodities have so far been laid down. The
government set up Central Quality Control Laboratory at Nagpur and a
number of regional subsidiary quality control laboratories. Samples of
important products are obtained from the market and their physical
and chemical properties are analyzed in these laboratories. On these
bases, grades are drawn up and authorized packers are issuedAGMARK
seals (AGMARK is simply an abbreviation for Agricultural Marketing).
Important commodities graded under AGMARK for internal
consumption include cotton vegetable oils, ghee, cream, butter, eggs,
rice, wheat, atta, jaggery, pulses, honey and ground spices.
Use of Standard Weights

One of the main defects of unregulated markets was that non-standard

and arbitrary weights were used by the arhatiyas and brokers to cheat
the farmers. To stop this practice, the government undertook a number
of steps. It passed the Standard Weights Act as far back as in 1939.This
Act passed by the Central government served as a model for the State
governments to pass their own legislations. The Central government
adopted the Metric System of Measures in 1958 when an Act to this
effect was passed by the Parliament. The metric system replaced all old
systems of weights and measures and has introduced uniformity in this
respect all over the country though one does find old measures still
existing in some markets of the country (especially in the village
markets).

Godown and Storage Facilities

It is necessary to provide a network of godown facilities all over the

country so that the farmers are not compelled to sell their produce
immediately after the harvesting of crops. This will enhance the
bargaining power of farmers and save them from distress sales (which
have to be resorted to when the produce gets damaged or rotten lying
in open fields). On the basis of godown receipts issued against the
produce stored in the godowns, the farmers can also obtain credit from
commercial banks and cooperative credit societies. This increases their
staying power and enables them to wait till fair prices are promised for
their produce.

Dissemination of Market Information

To inform the farmers about the prices prevailing indifferent markets,
the government has initiated a number of steps. For example, prices in
important markets are broadcasted daily by the All India Radio. Trends
on market prices are reviewed weekly in special programmes and talks
organized by the A.I.R. and Doordarshan. Market intelligence reports
are displayed in a number of markets all over the country. These
intelligence reports collect vital information on stocks, market arrivals,
sales, prices, etc. and are published periodically. The newspapers also
publish agricultural prices either daily or weekly accompanied by a
short review of trends. For speedy collection and dissemination of price
and market related information to farmers, electronic connectivity is
being provided to all important agricultural markets in the country
under a Central scheme, Market Research and Information Network.
Presently, wholesale prices of 300 commodities and about 2,000
varieties are being reported on the Agricultural Marketing Information
Network (AGMARKNET) portal from more than 1,800 markets covering
all major agricultural and horticultural produce.

Directorate of Marketing and Inspection

This Directorate was set up by the Government of India to coordinate

the agricultural marketing activities of various agencies and to advise
the Central and State governments on the problems of agricultural
marketing. Activities of this Directorate include:

Statutory regulation of markets and market practices

Training of personnel

Market extension

Market research, survey, and planning and

Administration of Meat Food Products Order, 1973

Government Purchases and Fixation of Support Prices

In addition to the measures mentioned above, the government also

announces minimum support prices and procurement prices for various
agricultural commodities from time to time in a bid to ensure fair
returns to the farmers. These prices are fixed in accordance with the
recommendations of the Commission for Agricultural Costs and Prices
(CACP). Government agencies, like the Food Corporation of India,
purchase agricultural commodities from the farmers at these fairly
remunerative prices and these purchases, in turn, are sold off by the
government at reasonable prices through the public distribution
system.

Ch. Charan Singh National Institute of Agricultural Marketing

Ch. Charan Singh National Institute of Agricultural Marketing (NIAM)

earlier known as the Centre for Agricultural Marketing (CAM) was
established in 1988. The main aims and objectives of the Institute are:

To augment the agricultural marketing infrastructure of the country

through programmes of teaching, research and consultancy services.

To design and conduct training courses appropriate to the specific

identified needs of the personnel and enterprises and institutions that
they serve.

To undertake research to demonstrate and replicate better

management techniques in the field of agricultural marketing.

To provide consultancy services for formulating investment projects

and for problem solving advice.
To offer educational programmes in agricultural marketing for
supplementing the existing facilities.

WEAKNESSES IN AGRICULTURAL MARKETING

According to the Eleventh Five Year Plan, the regulated markets lack
even basic infrastructure at many places. When the Agriculture Produce
Marketing (Regulation) Acts were first initiated, there were significant
gains in market infrastructure development. However, this
infrastructure is now out of date, especially given the needs of a
diversified agriculture. At present, only one-fourth of the markets have
common drying yards, trader modules, viz, shop, godown and platforms
in front of shop exist in only 63 percent of the markets. Cold storage
units are needed in the markets where perishable commodities are
brought for sale. However, they exist only in 9 per cent of the markets
at present and grading facilities exist in less than one-third of the
markets. The basic facilities, viz, internal roads, boundary walls, electric
lights, loading and unloading facilities, and weighing equipment are
available in more than 80 per cent of the markets. Farmer’s rest houses
exist in more than half of the regulated markets. Covered or open
auction platforms exist in only two-thirds of regulated markets. It is
evident from the above that there is considerable gap in the facilities
available in the market yards. Also, the farmers have to deal with non-
transparent methods of price discovery and there is often lack of
auction of graded items. Some modern markets with electronic
auctioning have been introduced, but they are the exception. All this
shows that major modernization of market infrastructure is required.

COOPERATIVE MARKETING
Though the above measures have improved the system of agricultural
marketing to some extent, a major part of the benefits has been
derived by large farmers who have adequate ‘marketable surplus’.
However, the small and marginal farmers continue to sell a major part
of their produce to moneylenders to meet their credit needs and these
moneylenders offer them very low prices. Therefore, it is essential to
form cooperatives of the small and marginal farmers to enable them to
obtain fair price for their produce. The advantages that cooperative
marketing can confer on the farmer are multifarious, some of which are
listed below:

1. Increases bargaining strength of the farmers

Many of the defects of the present agricultural marketing system arise

because often one ignorant and illiterate farmer (as an individual) has
to face well-organized mass of clever intermediaries. If the farmers join
hands and form a Cooperative, naturally they will be less prone to
exploitation and malpractices. Instead of marketing their produce
separately, they will market it together through one agency. This will
increase their bargaining strength vis-a-vis merchants and
intermediaries.

2. Direct dealings with final buyers

In certain cases, the cooperatives can altogether skip the intermediaries

and enter into direct relations with the final buyers. This practice will
eliminate exploiters and ensure fair prices to both the producers and
the consumers.

3. Provision of credit
The marketing cooperative societies provide credit to the farmers to
save them from the necessity of selling their produce immediately after
harvesting. This ensures better returns to the farmers.

4. Easier and cheaper transport

Bulk transport of agricultural produce by the societies is often easier

and cheaper. Sometimes the societies have their own means of
transport. This further reduces cost and botheration of transporting
produce to the market.

5. Storage facilities

The cooperative marketing societies generally have storage facilities.

Thus, the farmers can wait for better prices, also there is no danger to
their crop from rains, rodents and thefts.

6. Grading and standardization

This task can be done more easily for a cooperative agency than for an
individual farmer. For this purpose they can seek assistance from the
government or can even evolve their own grading arrangements.

7. Market intelligence

The cooperatives can arrange to obtain data on market prices, demand

and supply and other related information from the markets on a regular
basis and can plan their activities accordingly.

8. Influencing market prices

While previously the market prices were determined by the

intermediaries and merchants and the helpless farmers were mere
spectators forced to accept whatever was offered to them, the
cooperative societies have changed the entire complexion of the game.
Wherever strong marketing cooperatives are operative they have
bargained for, and have achieved, better prices for agricultural
produce.

9. Provision of inputs and consumer goods

The Cooperative marketing societies can easily arrange for bulk

purchase of agricultural inputs like seeds, manures, fertilizers,
pesticides, etc. and consumer goods at relatively lower prices and can
then distribute them to the members.

10. Processing of agricultural produce

The Cooperative societies can undertake processing activities like

crushing oilseeds, ginning and pressing of cotton, etc. In addition to all
these advantages, the cooperative marketing system can arouse the
spirit of self-confidence and collective action in the farmers without
which no programme of agricultural development, howsoever well-
conceived and implemented, holds much promise of success. They can
help in enlarging the marketable surplus of agricultural produce and
can even influence the crop-pattern through proper planning.

SUGGESTIONS FOR IMPROVEMENT

It has been observed that as in other fields of cooperation the gains of

cooperative marketing societies have also, by and large, accrued to the
large farmers. This is on account of the hold exercised by these farmers
on the rural economy. Therefore, it is imperative to make such changes
in the cooperative marketing structure that small and marginal farmers
are given more representation in these societies so that the benefits of
cooperation can percolate to the sections for which they were originally
intended, i.e. small and marginal farmers.

The activities of the marketing cooperative societies should be further

diversified. They should not only arrange for marketing of agricultural
produce but should also arrange for adequate storage capacity, means
of transport, grading of goods, etc. For this purpose necessary financial
and technical assistance should be provided to them by the State
governments.

The marketing societies should be linked up with credit and other

societies. In fact, the development of agriculture is a gigantic task
encompassing activities right from the planting of seeds to the final
marketing of produce, and much beyond. Accordingly, there is a need
for multipurpose societies which can look upon all requirements of the
farmers in an integrated way. Particular emphasis needs to be laid on
the integration of agricultural processing, credit and marketing
activities. Unless the farmer is freed from the clutches of the village
moneylender by developing alternative sources of credit, the
dependence of the farmer on the moneylender will remain as usual and
he will be compelled to sell off his produce to the moneylender (often
at very low prices) to pay off his debts.

2 . 5 IRRIGATION
Water is indispensable to agricultural production. In areas where
rainfall is plentiful and well-distributed over the year, there is no
problem of water. But rainfall in certain areas is very scanty as well as
uncertain. This is so in Deccan and Central India, Punjab and Rajasthan.
In these areas, artificial irrigation is absolutely essential, for without it
cultivation is almost impossible. In certain regions, rainfall may be
abundant but it may be concentrated in a short period of the year, the
rest of the year being dry. As a result cultivation may not be possible for
the whole year. In these regions, provision of irrigation will facilitate
growing of more than one crop in the year. Finally, there are certain
food and cash crops such as rice and sugarcane which require
abundant, regular and continuous supply of water. In short, water is a
vital input to increase agricultural output to keep pace with the food
requirements of the ever-increasing population.

During the 50 years since independence, the Government had spent

about 231,400 crore (at 1996-97 prices) on major, medium and minor
irrigation works. As a result, the country's irrigation potential has
increased from 23 million hectares in the pre-plan period (i.e. 1950 51)
to 89 million hectares at the end of 1996-1997. With this, India has the
largest irrigated area among all the countries in the world. This has
greatly contributed to the increase in food grains production from 51
million tonnes in 1950-1951 to 203 million tonnes in 2001-2002.

SOURCES OF IRRIGATION IN INDIA

Since 1950-51, considerable importance was attached to the provision

of canal irrigation. Canal-irrigated area had increased from 8.3 million
hectares to 18 million hectares during 1950-1951 and 2000-01. Even
then, it relative importance has come down from 40 percent to 29.5
percent.

Well irrigated area has increased from 6 million hectares to 33.3 million
hectares during the last 50 years - well irrigation in 2000-01 accounted
for nearly 61 per cent of the total irrigated area as compared to only 29
percent in 1950-51.The growth of well irrigation has been at the
expense of irrigation from tanks and other sources. During this period,
it is well irrigation, particularly tube well irrigation, which has made the
most spectacular progress, In 1960-61, only 0.1 million hectares were
irrigated by tube wells, but by 2000-01, over 16 million hectares were
served by tube well irrigation, Tube wells account for 28 percent of
total irrigated area.

In India, irrigation works are classified into major and minor irrigation
works. Since 1978-79, the Planning Commission has adopted the
following classification of irrigation schemes:-

(a) Major Irrigation Scheme - Those with culturable command areas

(CCA) more than 10,000hectares.

(b) Medium Schemes - Those with culturable command areas (CCA)

between 2,000 and 10,000 hectares.

(c) Minor Schemes - Those with culturable command areas (CCA) up to

2,000 hectares,

BENEFITS OF IRRIGATION

Net irrigated area has increased from 21 million hectares in 1950-51 to

61 million hectares in 2006-07-an increase by over 290 per cent in 56
years.

Gross irrigated area (which includes land cultivated more than once in a
year with the help of irrigation) has gone up from 23 million hectares to
85million hectares during this period-an increase by more than 269 per
cent in 56 years.

This means that the area cultivated more than once in a year has risen
sharply from about 2 million hectares in 1950-51 (which was 8 per cent
of net irrigated area) to nearly 24 million hectares in 2006-07 (which
was 39 per cent of net irrigated area). This has great significance in the
Indian context. Area irrigated more than once is a kind of increase of
land and, therefore, is very crucial in raising agricultural productivity
and agricultural production.

Finally, the benefit of irrigation is available for more land now than in
1950-51. In 1950-51, total cropped area was 133 million hectares but
by the end of the century, the total cropped area had increased to 193
million hectares. Moreover, only 17 per cent of cropped land got the
benefit of irrigation in 1950-51. But in 2006-07, as much as 44 per cent
of all cropped area gets the benefit of irrigation.

2 . 6 AGRICULTURAL FINANCE
Agriculture is an unorganized profession. Its success and failure
depends, to a large extent, on climatic factors. Further, it is not always
possible to distinguish between productive and unproductive loans of
the farmers. Because of these factors, banks did not show much
interest in advancing loans to agriculture and allied activities for a
longtime and farmers were forced to depend on moneylenders and
Mahajan’s.

NEED FOR AGRICULTURAL FINANCE

Credit needs of the farmers can be examined from two different angles:

On the basis of time

On the basis of purpose

On the basis of time

Agricultural credit needs of the farmers can be classified into three

categories on the basis of time:

Short-term

Medium-term

Long-term

Short-term loans are required for the purchase of seeds, fertilizers,

pesticides, feeds and fodder of livestock, marketing of agricultural
produce, payment of wages of hired labour, litigation, and a variety of
consumption and unproductive purposes. The period of such loans is
less than 15 months. Main agencies for granting of short-term loans are
the moneylenders and cooperative societies. Medium-term loans are
generally obtained for the purchase of cattle, small agricultural
implements, repair and construction of wells, etc. The period of such
loans extends from 15 months to 5 years. These loans are generally
provided by moneylenders, relatives of farmers, cooperative societies
and commercial banks. Long-term loans are required for effecting
permanent improvements on land, digging tube wells, purchase of
larger agricultural implements and machinery like tractors, harvesters,
etc., and repayment of old debts. The period of such loans extends
beyond 5 years. Such loans are normally taken from Primary
Cooperative Agricultural and Rural Development Banks (PCARDBs).

On the basis of purpose

Agricultural credit needs of the farmers can be classified on the basis of

purpose into the following categories:

Productive

Consumption needs

Unproductive

Under productive needs, we can include all credit requirements which

directly affect agricultural productivity. Farmers need loans for the
purchase of seeds, fertilizers, manures, agricultural implements,
livestock, digging and repair of wells and tube wells, payment of wages,
effecting permanent improvements on land, marketing of agricultural
produce, etc. Repayment of these loans is generally not difficult
because the very process of production generally creates the
wherewithals for repayment. Farmers often require loans for
consumption as well. Between the moment of marketing of agricultural
produce and harvesting of the next crop there is a long interval of time
and most of the farmers do not have sufficient income to sustain them
through this period. Therefore, they have to take loans for meeting
their consumption needs. In the time of droughts or floods, the crop is
considerably damaged and farmers who otherwise avoid taking loans
for consumption, have also to incur such loans. Institutional credit
agencies do not provide loans for consumption purposes.
 SOURCES OF AGRICULTURAL FINANCE AND THEIR RELATIVE
IMPORTANCE

NON-INSTITUTIONAL AND INSTITUTIONAL SOURCES

Sources of agricultural finance can be divided into two categories:

Non-institutional sources

Institutional sources.

The non-institutional sources are the following:

Moneylenders

Relatives

Traders

Commission agents

Landlords

The institutional sources comprise the cooperatives, Scheduled

Commercial Banks and Regional Rural Banks (RRBs). As far as
cooperatives are concerned, the Primary Agricultural Credit Societies
(PACSs) provide mainly short and medium-term loans and PCARDBs
long-term loans to agriculture. The commercial banks, including RRBs,
provide both short and medium-term loans for agriculture and allied
activities. The National Bank for Agriculture and Rural Development
(NABARD) is the apex institution at the national level for agricultural
credit and provides refinance assistance to the agencies mentioned
above. The Reserve Bank of India as the central bank of the country
plays a crucial role in this sphere by giving overall direction to rural
credit and financial support to NABARD for its operations.
At the time of Independence, the most important source of
agricultural credit was the moneylenders.

In 1951 (the year when planning was initiated in the country)

moneylenders accounted for as much as 71.6 per cent of rural credit.
The predominant position of the moneylenders was due to the reason
that there was no other source worth the name and the farmers were
forced to borrow from them. This almost total dependence of the
farmers on the moneylenders enabled the latter to dictate terms and
exploit the former in a number of ways. For instance, moneylenders
charged exorbitant rates of interest ranging from 18 percent to 50
percent or even more. They often manipulated accounts to their
advantage by not entering the money returned and interest paid into
the account. They also forced farmers to sell the agricultural produce to
them at low prices. Long-term loans were often advanced against the
security of land and moneylenders often manipulated things in such a
way as to seize the land. On account of this reason, they can be termed
anti-social elements. The government has, therefore, undertaken
various steps to regulate the activities of the moneylenders. For this
purpose, various legislations were enacted. The basic objectives of
these legislations were as follows:

To bring about an improvement in the terms on which private credit

was made available to the agriculturists and place legal restrictions on
the unreasonable exactions of the moneylenders.

To enable the civil courts to do greater justice to both the lenders and
the borrowers than was possible, under the ordinary Code of Civil
Procedure.

To the first category belong such provisions as:

Licensing and/or registration of moneylenders

Fixation of maximum rates of interest

Maintenance of accounts by moneylenders, grant of regular receipts,

etc.

To the second category belong such provisions as:

The empowering of the court to reopen the closed transactions and go

behind the written contract

Protection of certain forms of assets from attachment in execution of

decrees

The empowering of the court to direct payment of decretal amount by

instalments.

As far as institutional sources are concerned, the first institution

established and promoted was the institution of cooperative credit
societies. The Cooperative movement in this country was started as far
back as 1904. However, its development was very slow. Even in 1951,
cooperatives provided only 3.1 per cent of total rural credit. Hence, the
dominance of moneylenders in agricultural credit continued. It was only
with the nationalization of 14 major banks in 1969 followed by
nationalization of 6 more banks in 1980 that the grip of moneylenders
on agricultural credit could be reduced. In 1975, the government set up
the third institution - the institution of RRBs (Regional Rural Banks).
Thus, by the end of 1976, there emerged three separate institutions for
providing rural credit, which is often described as the multi-agency
approach. In 1982, NABARD was set up. India now has a wide network
of rural finance institutions (RFIs). There are more than 30,000
commercial bank branches, 14,000 regional rural banks, and about
1,00,000 rural credit Cooperatives. This translates to about 4,700
people served by each RFI outlet.

As a result of the efforts undertaken by the government to develop the

institutional sources of credit, the role of non-institutional sources like
moneylenders in agricultural credit declined considerably The share of
non-institutional sources in rural credit which was as high as 92.7
percent in 1951 fell consistently to 68.3 per cent in 1971 and further to
30.6 percent in 1991 (in 2002, it rose to 38.9 per cent).More
significantly, the share of moneylenders fell from 71.6 per cent in 1951
to merely 17.5 per cent in 1991 (though it rose to 26.8 per cent in
2002). The share of institutional sources in rural credit rose
correspondingly from only 7.3 per cent in 1951 to 31.7 per cent in 1971
and further to 66.3 per cent in 1991 (in 2002, it fell to 61.1 percent)

3 . 1 NEED FOR INDUSTRIALIZATION IN INDIA

Industrialization may be defined as a process in which change of series
of strategical and systematic production take place. It means creation
and growth of manufacturing units. For a developing country like India
industrialization plays a key role for the economic development. Thus,
from the Second Five Year Plan the Planning Commission has given
huge emphasis on industrialization in India.

The reasons behind the need of industrialization are listed below:

(i) Increase in Per Capita Income

The development of various industries leads to direct increase in

production and productivity within the country. Industries create an
environment where more manpower’s are utilized. Hence, the surplus
labour from agriculture can easily absorb within the industries bring
more income opportunities in the country.

(ii) Rise in Capital Formation

Industrial development is positively correlated with increase in capital

formation. High level of investment is required for the establishment of
industries. According to ‘Big Push’ theory, high level investment-
injection within a country causes a suitable atmosphere for industrial
growth which eventually rise to the economic growth of the country.

(iii) Optimal Use of Economic Resources

Industries can efficiently utilize various economic resources inside the

country compared to agriculture. All the locally available mineral and
natural resources, human resources water and forest resources are
successfully utilized by the industries moreover, industries can utilize
other resources which cannot be utilized by the other sectors of the
economy.

(iv) Creating More Employment

India is an overpopulated country, a large section of working force

remains unemployed. Moreover, due to the effect of Green Revolution,
i.e. use of modern scientific technologies in agriculture, huge amount of
surplus labourers create in the primary sector.

(v) Solving BOP Problem

Indian economy is suffering with the problem of deficit Balance of

Payment (BOP). The export earnings in India are quite low compared to
import expenditures. Thus, to solve the problem, ‘export promotion
and import substitution’ are required.

(vi) Agricultural Improvement

India is an agro-based economy. About 67% of total working force are

engaged in agriculture. However, Indian agriculture is still following the
primitive method of cultivation, therefore, the productivity is very low.
After the introduction of New Agricultural Policy, use of scientific tools
and equipment’s like tractors, pump sets, chemical fertilizers,
insecticides and harvesters have increased a lot in the agricultural land.
All these products are the outcome of industries. Hence there is urgent
need to develop industrial sector in India.

(vi) Stable Economic Growth

In India growth is unbalanced and biased in nature. After 1966,

agricultural sector has improved decently compared to industries.
However, the stability of an economy depends on the industrial growth.
Hence, to achieve a stable balanced growth, the country requires a
healthy industrial development in both consumer and capital goods
areas.
 3 . 2 INDUSTRIAL POLICY
Meaning of Industrial Policy

Any government action aimed at affecting industry may be considered

to be part of industrial policy, which makes it a limitless field.

It usually means government action to influence the ownership and

structure of industry and its performance and it takes the form of pay-
ing subsidies or providing finance in other ways, or of regulation.

It excludes macroeconomic policies affecting industry, but it may be

viewed as supporting macroeconomic policy by improving the
performance of an important part of the supply side of the economy as
a whole. The concept is, thus, a comprehensive one. It includes
procedures, principles (i.e., the philosophy of a given economy),
policies, rules and regulations, incentives and punishments, the tariff
policy, the labour policy, government’s attitude towards foreign capital,
etc.

A country must formulate industrial policy as an instrument of

industrialization. The public sector may be invited to implement
industrial policy. In a country like India, where private sector is allowed
to coexist in business, its control and regulation is necessary. Industrial
policy is a necessary step in this direction.

1956 INDUSTRIAL POLICY

Since the adoption of 1948 Resolution, significant development took

place in India. Economic planning had proceeded on an organized basis
and the First Five-Year Plan had been completed. Parliament had
accepted the socialist pattern of society as the basic aim of social and
economic policy. These important developments necessitated a fresh
statement of industrial policy. A second Industrial Policy Resolution was
adopted in April, 1956, replacing the Resolution of 1948.Important
provisions of the 1956 Resolution were:-

(i) New classification of industries

The resolution laid down three categories which bear a close

resemblance to the earlier classification, but were more sharply defined
and were broader in coverage as to the role of the State. These
categories were:-

(a) Schedule A: those which were to be an exclusive responsibility of

the state
(b) Schedule B: those which were to be progressively state-owned and
in which the state would generally set up new enterprises, but in which
private enterprise would be expected only to supplement the effort of
the state.

(c) Schedule C: all the remaining industries and their future

development would, in general be left to the initiative and enterprise of
the private sector.

Under Schedule A were listed seventeen industries: arms and

ammunition, atomic energy, iron and steel, heavy castings and forgings
of iron and steel, heavy machinery required for iron and steel
production, for mining, for machine tool manufactures, etc. Heavy
electrical industries, coal, mineral oils, mining, iron ore and other
important minerals like copper, lead and zinc, aircraft, air transport,
railway transport, shipbuilding, telephone, telegraph and wireless
equipment, generation and distribution of electricity.

Under Schedule B, twelve industries were: other mining industries,

aluminium and other non-ferrous metals not included in Schedule A,
machine tools, ferro-alloys and tool steels, the chemical industry,
antibiotics and other essential drugs, fertilizers, synthetic rubber,
carbonization of coal, chemical pulp, road transport and sea transport.

The Schedule 'C' category industries which consisted of the rest had to
fit into the framework of social and economic policy of the state and be
subject to control in terms of the Industries (Development and
Regulation) Act and other relevant legislations.

(ii) Fair and non-discriminatory treatment for the private sector

In order that the private sector may feel confident and function
efficiently, the State was to facilitate and encourage the development
of industries in the private sector by ensuring the development of
transport, power and other services, and by appropriate fiscal and
other measures. The State would continue to foster institutions to
provide financial aid to these industries, and special assistance would
be given to enterprises organized on co-operative lines for industrial
and agricultural purposes. When there exist in the same industry both
private and publicly owned units, it would continue to be the policy of
the state to give full and non-discriminatory treatment to both of them.

(iii) Encouragement to village and small-scale enterprises

The State would support cottage and village and small-scale enterprises
by restricting volume of production in the large-scale sector, by
differential taxation, or by direct subsidies. The state would
concentrate on measures designed to improve the competitive strength
of the small scale producer by constantly improving and modernizing
the technique of production.

(iv) Removing regional disparities

The Resolution stressed the necessity of reducing the regional

disparities in levels of development in order that industrialization may
benefit the country as a whole. The resolution fully supported the idea
that only by securing a balanced and coordinated development of the
industrial and the agricultural economy in each region, can the entire
country attain higher standards of living.

(v) Attitude towards foreign capital

The government recognized the need for securing the participation of
foreign capital and enterprise particularly as regards industrial
technique and knowledge so as to foster the pace of industrialization of
the Indian economy.

1991 INDUSTRIAL POLICY

In order to accelerate Industrial Development in India, and in

accordance with the changing circumstances, various industrial policies
were declared in the years 1948, 1956, 1977, 1980 and 1985, but in
spite of all efforts, the pace and as well as the level of Industrial
Development in India, could not reached according to its need.
Therefore, in order to lift unnecessary restrictions on Industries, under
the licensing policy, and to increase their efficiency, development and
technological level, in order to make Indian goods usable in the
competitive global market, on 24th July, 1991, in Lok-Sabha the
Minister of States for industries, Mr. P. J. Kurian declared the Industrial
Policy, 1991.

OBJECTIVES OF NEW INDUSTRIAL POLICY, 1991

To liberalize the economy

To increase employment opportunities

To encourage foreign assistance and co-partnership

To make the Public Sector more competitive

To increase the production and productivity, give encouragement to

industries

To liberate the economy from various government restrictions

Industrial development of backward areas

To give liberty to private sector to work independently

To make development for modem competitive economy

To give encouragement for expansion of production capacity

To increase exports and liberalize (facilitate) imports.

SALIENT FEATURES OF NEW INDUSTRIAL POLICY, 1991

Liberalized Industrial Licensing Policy

Under this policy, with the exception of 18 industries, licensing system

has been removed for all other industries. Some of those 18 industries,
where the licensing system is still mandatory are; Army and Defence,
Forest Conservation, Industries engaged in manufacturing goods which
are harmful to the Environment and industries, which are
manufacturing luxury goods, for the affluent (very rich) class, etc.

Localization Policy

Those industries which are situated in cities, where the population is

less than 1 million, industrial permission from the government, to start
any industry is not required. In cities having population of more than 1
million, with the exception of electronics and other pollution free
industries, all industrial units may be 25 kilo meters away from the
city’s boundary.

Foreign Investment

Provision has been made to invest up to 51 percent by foreign investors

in the equity shares of Indian Companies. Earlier, this limit was limited
up to 40% only. This will increase the flow of foreign capital into India
and make possible technical exchange from developed countries.

Workers Participation in Management

Under this industrial policy, emphasis has been laid on safeguarding the
workers’ interest. Provision has been made for workers ’ participation in
management, in order to manage sick units, provision has been made
to form co-operative societies of workers, to run them.

Role of Public Sector

Those public sector undertakings which are not doing well at present,
but in which there are enough chances of improvement, shall be re-
constituted. Public sector undertakings, which are facing constant
financial crisis, shall be kept under observation by ‘Board of Industrial
and Financial Reconstruction’ or by any other institution, which is fixed
by the government.

Change in the MRTP Act

In the industrial policy 1991, major changes have been made in the
Monopolistic and Restrictive Trade Practice Act. Companies having
investment of Rs.100 crores, will not be required to take prior
Government permission, for opening new subdivisions, or to expand
the present industry or for amalgamation of companies. This industrial
policy has also eliminated the investment limit, which was fixed by
MRTP Act.

Creation of Productive Capacity

In order to increase the productive capacity of new industries, all

administrative controls have been removed. Industrialists will only have
to inform the government of opening of new units or increasing their
production capacity.

Promotion of Industries in Rural Areas

In order to remove the regional imbalances, under this industrial policy,

various provisions have been made to encourage industries in rural
areas.

Foreign Technology

No prior permission from government will be required in importing

foreign technology, up to the limit of One Crore rupees. Indian
companies, will be free to negotiate their terms and conditions, with
their foreign collaborators, in matters of technology transfers.

Reservation of Small Scale Industries

This policy has stated that the government shall keep giving assistance
to small scale industries. The limit for small scale industries has been
reduced from Rs.3 Crores to Rs.1 Crore, since 24 December, 1999.

EVALUATION OF INDUSTRIAL POLICY, 1991

“Industrial Policy 1991” is also known as “Open Industrial Policy”,

because it contains several revolutionary schemes and plans. If, we
make an analytical study of the special features of Industrial Policy
1991, it becomes clear that several fundamental changes have been,
made, in this policy.

Liberalization of industrial licensing system

Welcoming of foreign capital

Facility of Import of Technical Know-how

Exemption to industrial structure from several unnecessary
government controls

Aiming to make Indian industries more competitive at national and

international level

Safeguarding the interest of workers, etc.

3 . 3 SMALL SCALE AND COTTAGE INDUSTRIES

Small Scale Industry

In the small scale industry the male members of the family along with
hired labour work together. In small industries, electric power and
improved machines are mostly used in subcontinental the firm
employing less than 10 person are classified as small. In subcontinental
Carpet industry, poultry farming, bee keeping, tailoring and furniture
making is included in the cottage and small industry.

Cottage Industry

It means the industry is run in the home usually with the help of family
members. Simple implements are used and workers are not paid
wages.

IMPORTANCE
There is a shortage of capital and technical skill in subcontinental. It is
not possible to establish the heavy industries. While it is very easy to
increase the number of small scale industries. The examples of Japan,
Hong Kong and Taiwan are before us.

Following are the main advantages of small scale industry in

subcontinental:

1. Increase in Industrial Product

There is a shortage of manufactured goods in our area. We spend a lot

of foreign exchange on the import of these goods every year. So we
should increase the small scale and cottage industry to remove the
shortage of these goods.

2. Increase in Employment

The rate of unemployment is increasing day by day. To control

unemployment it is necessary that we should increase the small scale
industries because these are labour intensive. Our farmer can also
easily work in small scale industry. It is not possible to provide Govt.
jobs to all the unemployed people. It may also increase the self-
employment.

3. Increase in Foreign Exchange Earnings

The various kinds of goods like carpets and sports sold in the
international market. We earn a lot of foreign exchange by exporting
these goods.

4. Use of Industrial waste

The waste of large scale industries like cotton and steel can be used by
the small scale industry. In this way we can save a lot of capital.

5. Provides Employment to Women

Our women is engaged in the cottage and small scale industry and
increasing the production. Because in our society women cannot work
with other men in the factories. We should increase the number of
cottage industries to make the female sector a real asset of the nation.

6. Increase in the Income

Increase in the production of goods on small scale increase the income

of the people. The rise in income improves the standard of living. In
rural areas there is great need of small scale industry.

7. Cheaper Production

The small scale industry is labour intensive while labour is cheap in

subcontinental, so the production of small scale industry is cheaper.
Due to low prices people purchase more goods and market expands.

8. Proper Distribution of Wealth

The small scale industry increases the income of the people and
reduces the gap between rich and poor. We can reduce the poverty by
expanding the small scale industry.

9. Establishment with Small Capital

We can establish these industries with small capital. In subcontinental

most of the people are poor, so they can start the production with
small capital.
10. Development of Backward Areas

We can develop backward areas by establishing the small scale industry

in these areas. It will remove poverty from backward areas.

11. Reduction of Population Pressure

The development of small scale industry reduces the pressure of

population on land and increases the income of the people.

12. Reduction in Migration

The unemployed labour force is migrating to the other countries. If we

expand the small scale industry, it can serve the nation instead of
serving the other countries.

PROBLEMS OF SMALL SCALE AND COTTAGE INDUSTRIES

Small scale and cottage industries play a vital role in the economic
development of our country.

This sector can stimulate economic activity and is entrusted with the
responsibility of realizing various objectives generation of more
employment opportunities with less investment, reducing regional
imbalances etc. Small scale and cottage industries are not in a position
to play their role effectively due to various constraints. The various
constraints, the various problems faced by small scale and cottage
industries are as under:

(1) Finance
Finance is one of the most important problem confronting small scale
and cottage industries. Finance is the life blood of an organization and
no organization can function properly in the absence of adequate
funds. The scarcity of capital and inadequate availability of credit
facilities are the major causes of this problem.

(2) Raw Material

Small scale and cottage industries normally tap local sources for
meeting raw material requirements. These units have to face numerous
problems like availability of inadequate quantity, poor quality and even
supply of raw material is not on regular basis. All these factors
adversely affect the functioning of these units.

(3) Idle Capacity

There is underutilization of installed capacity to the extent of 40 to 50

percent in case of small scale industries. Various causes of this
underutilization are shortage of raw material problem associated with
funds and even availability of power. Small scale units are not fully
equipped to overcome all these problems as is the case with the rivals
in the large scale sector.

(4) Technology

Small scale entrepreneurs are not fully exposed to the latest

technology. Moreover, they lack requisite resources to update or
modernize their plant and machinery. Due to obsolete methods of
production, they are confronted with the problems of less production
in inferior quality and that too at higher cost. They are in no position to
compete with their better equipped rivals operating modem large scale
units.
(5) Marketing

These small scale units are also exposed to marketing problems. They
are not in a position to get firsthand information about the market i.e.
about the competition, taste, liking, disliking of the consumers and
prevalent fashion.

(6) Infrastructure

Infrastructure aspects adversely affect the functioning of small scale

units. There is inadequate availability of transportation,
communication, power and other facilities in the backward areas.
Entrepreneurs are faced with the problem of getting power
connections and even when they are lucky enough to get these they are
exposed to unscheduled long power cuts.

(7) Under Utilization of Capacity

Most of the small-scale units are working below full potentials or there
is gross underutilization of capacities. Large scale units are working for
24 hours a day i.e. in three shifts of 8 hours each and are thus making
best possible use of their machinery and equipment.

(8) Project Planning

Another important problem faced by small scale entrepreneurs is poor

project planning. These entrepreneurs do not attach much significance
to viability studies i.e. both technical and economical and plunge into
entrepreneurial activity out of mere enthusiasm and excitement.

(9) Skilled Manpower

A small scale unit located in a remote backward area may not have
problem with respect to unskilled workers, but skilled workers are not
available there. The reason is Firstly, skilled workers may be reluctant
to work in these areas and secondly, the enterprise may not afford to
pay the wages and other facilities demanded by these workers.

(10) Managerial

Managerial inadequacies pose another serious problem for small scale

units. Modern business demands vision, knowledge, skill, aptitude and
whole hearted devotion. Competence of the entrepreneur is vital for
the success of any venture. An entrepreneur is a pivot around whom
the entire enterprise revolves.

MEASURES OF SMALL SCALE AND COTTAGE INDUSTRIES

Government Policies for Development and Promotion of Small-Scale

Industries in India

1. Industrial Policy Resolution (IPR) 1948

The IPR, 1948 for the first time, accepted the importance of small-scale
industries in the overall industrial development of the country. It was
well realized that small-scale industries are particularly suited for the
utilization of local resources and for creation of employment
opportunities. However, they have to face acute problems of raw
materials, capital, skilled labour, marketing, etc. since a long period of
time. Therefore, emphasis was laid in the IPR, 1948 that these problems
of small-scale enterprises should be solved by the Central Government
with the cooperation of the State Governments. In nutshell, the main
thrust of IPR 1948, as far as small-scale enterprises were concerned,
was ‘protection.’

2. Industrial Policy Resolution (IPR) 1956

The main contribution of the IPR 1948 was that it set in the nature and
pattern of industrial development in the country. The post-IPR 1948
period was marked by significant developments taken place in the
country. For example, planning has proceeded on an organised manner
and the First Five Year Plan 1951-56 had been completed. Industries
(Development and Regulation) Act, 1951 was also introduced to
regulate and control industries in the country.

3. Industrial Policy Resolution (IPR) 1977

(i) Reservation of 504 items for exclusive production in small-scale

sector.

(ii) Proposal to set up in each district an agency called ‘District Industry

Centre’ (DIC) to serve as a focal point of development for small-scale
and cottage industries. The scheme of DIC was introduced in May 1978.
The main objective of setting up DICs was to promote under a single
roof all the services and support required by small and village
entrepreneurs.

4. Industrial Policy Resolution (IPR) 1980

The Government of India adopted a new Industrial Policy Resolution

(IPR) on July 23, 1980. The main objective of IPR 1980 was defined as
facilitating an increase in industrial production through optimum
utilization of installed capacity and expansion of industries.

5. Industrial Policy Resolution (IPR) 1990

(i) The investment ceiling in plant and machinery for small-scale

industries (fixed in 1985) was raised from Rs. 35 lakhs to Rs. 60 lakhs
and correspondingly, for ancillary units from Rs. 45 lakhs to Rs. 75
lakhs.

(ii) Investment ceiling for tiny units had been increased from Rs. 2 lakhs
to Rs. 5 lakhs provided the unit is located in an area having a population
of 50,000 as per 1981 Census.

(iii) As many as 836 items were reserved for exclusive manufacture in

small- scale sector.

(iv) A new scheme of Central Investment Subsidy exclusively for small-

scale sector in rural and backward areas capable of generating more
employment at lower cost of capital had been mooted and
implemented.

(iv) With a view, to improve the competitiveness of the products

manufactured in the small-scale sector; programmes of technology up
gradation will be implemented under the umbrella of an apex
Technology Development Centre in Small Industries Development
Organization (SIDO).

(v) To ensure both adequate and timely flow of credit facilities for the
small- scale industries, a new apex bank known as ‘Small Industries
Development Bank of India (SIDBI)’ was established in 1990.
(vi) Greater emphasis on training of women and youth under
Entrepreneurship Development Programme (EDP) and to establish a
special cell in SIDO for this purpose.

(vii) Implementation of delicensing of all new units with investment of

Rs. 25 crores in fixed assets in non-backward areas and Rs. 75 crores in
centrally notified backward areas. Similarly, delicensing shall be
implemented in the case of 100% Export Oriented Units (EOU) set up in
Export Processing Zones (EPZ) up to an investment ceiling of Rs. 75
lakhs.

3 . 4 ROLE OF MNCs IN INDIAN ECONOMY

Prior to 1991 Multinational companies did not play much role in the
Indian economy. In the pre-reform period the Indian economy was
dominated by public enterprises.

To prevent concentration of economic power industrial policy 1956 did

not allow the private firms to grow in size beyond a point. By definition
multinational companies were quite big and operate in several
countries.

Some of world’s largest multinational corporations are given below

Honda motor co.

BMW AG
Sony Corporation

Hewlett Packard

1. Promotion Foreign Investment

In the recent years, external assistance to developing countries has

been declining. This is because the donor developed countries have not
been willing to part with a larger proportion of their GDP as assistance
to developing countries. MNCs can bridge the gap between the
requirements of foreign capital for increasing foreign investment in
India.

The liberalized foreign investment pursued since 1991, allows MNCs to

make investment in India subject to different ceilings fixed for different
industries or projects. However, in some industries 100 per cent export-
oriented units (EOUs) can be set up. It may be noted, like domestic
investment, foreign investment has also a multiplier effect on income
and employment in a country.

2. Non-Debt Creating Capital inflows

In pre-reform period in India when foreign direct investment by MNCs

was discouraged, we relied heavily on external commercial borrowing
(ECB) which was of debt-creating capital inflows. This raised the burden
of external debt and debt service payments reached the alarming figure
of 35 per cent of our current account receipts. This created doubts
about our ability to fulfill our debt obligations and there was a flight of
capital from India and this resulted in balance of payments crisis in
1991.

3. Technology Transfer
Another important role of multinational corporations is that they
transfer high sophisticated technology to developing countries which
are essential for raising productivity of working class and enable us to
start new productive ventures requiring high technology. Whenever,
multinational firms set up their subsidiary production units or joint-
venture units, they not only import new equipment and machinery
embodying new technology but also skills and technical know-how to
use the new equipment and machinery.

4. Promotion of Exports

With extensive links all over the world and producing products
efficiently and therefore with lower costs multinationals can play a
significant role in promoting exports of a country in which they invest.
For example, the rapid expansion in China’s exports in recent years is
due to the large investment made by multinationals in various fields of
Chinese industry.

5. Investment in Infrastructure

With a large command over financial resources and their superior

ability to raise resources both globally and inside India it is said that
multinational corporations could invest in infrastructure such as power
projects, modernization of airports and posts, telecommunication.

The investment in infrastructure will give a boost to industrial growth

and help in creating income and employment in the India economy. The
external economies generated by investment in infrastructure by MNCs
will therefore crowd in investment by the indigenous private sector and
will therefore stimulate economic growth.

PROBLEMS OF MNCs IN INDIA

The operations of MNCs in India have been opposed on the following
grounds:

(i) They are interested more on mergers and acquisitions and not on
fresh projects.

(ii) They have raised very large part of their financial resources from
within the country.

(iii) They supply second hand plant and machinery declared obsolete in
their country.

(iv) They are mainly profit oriented and have short term focus on quick
profits. National interests and problems are generally ignored.

(v) They use expatriate management and personnel rather than

competitive Indian Management.

(vi) Though they collect most of the capital from within the country,
they have repatriated huge profits to their mother country.

(vii) They make no effort to adopt an appropriate technology suitable

to the needs. Moreover, transfer of technology proves very costly.

(viii) Once an MNC gains foothold in a venture, it tries to increase its

holding in order to become a majority shareholder.

(ix) Further, once financial liberalizations are in place and free

movement is allowed, MNCs can stabilize the economy.

(x) They prefer to participate in the production of mass consumption

and non-essential items.
 3 . 5 TRADE UNION MOVEMENT
"A trade union is a voluntary organization of workers formed for the
purpose of promoting and protecting the interest of workers through
collective action". It is a long term association of employees, formed
and maintained for the specific purpose of protecting their interests.
Trade unions increase the bargaining power of workers and help
maintain better working conditions.

Growth of trade union movement in India

Modern industrial sector in India has a history of just 150 years. The
first trade union of textile workers of Bombay came into existence in
1890. Since then several trade unions were formed. The real beginning
of the trade union movement in India was made towards the end of
First World War. The Russian Revolution which took place in 1917 gave
birth to the movement. With the formation of Madras Trade Union in
1918, the trade union movement saw its real beginning in the country.
All India Trade Union Congress was formed in 1920. Again in 1922 All
India Railway Men Federation and All India Post and Telegraph Unions
were formed.

The Trade Union Act, 1926

The First Trade Union Act was passed in 1926. It was a landmark in the
history of growth of the trade union movement in the country. This act
gave legal status to trade unions and there by contributed for their
rapid growth. This act was amended in 1948, 1960 and in 1964. The
growth of trade unions after independence has been phenomenal. The
number of registered unions increased from less than 4000 in 1951 to
25,000 in 1999-2000 with a membership of 124 lakh workers.

National level labour organizations

There are at present 10 central all India trade union organizations in the
country. The details of some of these central unions are given below:

1. The Indian National Trade Union Congress (INTUC)

INTUC was set up in the year 1947 and this is the second largest trade
union in the country. It has 4,428 unions affiliated to it with a
membership of about 26.9 lakh workers. This union is controlled by the
Indian National Congress.

2. The All India Trade Union Congress (AITUC)

It was formed in the year 1920.This union is the oldest union in the
Country. It has 4,300 unions affiliated to it with a membership of 9.24
lakh workers. This union is dominated by the Communist Party of India
(CPI).

3. The Centre of Indian Trade Unions (CITU)

It came into existence in 1970. It has 3,011 unions affiliated to it with a
membership of 18 lakh workers. It is controlled by the Communist Party
of India (Marxist group).

4. The Hind Mazdoor Sabha (HMS)

It was established in 1948. HMS is controlled by Praja Social Party. It

has 1,248 unions affiliated to it with a membership of 14.8 lakh
workers.

5. The Bharatiya Mazdoor Sangh (BMS)

BMS was set up in 1954. It has 2,871 affiliated unions with membership
of 31 lakh workers. It is controlled by Bharatiya Janata Party (BJP) and it
is the largest trade union in the country.

6. The United Trade Union Congress (UTUC)

It was established in 1949. UTUC has 1989 affiliated unions with a

membership of 13.43 lakh workers. It is controlled by the Revolutionary
Socialist Party (RSP).

In addition to the above all India level central labour organisations

there are some small unions like National Labour Organisation, National
Front of Indian Trade Unions, United Trade Union Congress Committee,
etc.

Defects or weaknesses of trade unions in India

The trade union movement in India has several defects or weaknesses

which are as follows:
1. Limited membership

The trade unions in India have limited membership. Majority of the

workers have not taken the membership of the unions. Only 40 to 50
percent of workers get membership. This tendency has made the
unions weak.

2. Lack of unity

There is no unity among the members of trade union. They are divided
and sub-divided on the basis of caste, language, religion, region, etc.
This has led to the weakening of the trade union movement.

3. Multiplicity of trade unions

In India there is the existence of too many trade unions. Many unions
are formed within one factory or industry. This is an unhealthy trend.
Existence of too many unions leads to inter-union rivalry.

4. Weak finances

An important factor restraining the functioning of trade unions in our

country has been their weak financial position. Consequently, trade
unions cannot undertake labour welfare and benefit schemes.

5. Illiteracy

Majority of the industrial workers in India are illiterate. They are unable
to understand the importance of unity and unionism. They do not come
forward to launch united struggle. They easily become victims of
employers.

6. Outside leadership
Most of the trade unions in India are controlled by outsiders. They do
not take interest in the development of trade unions or protection of
labour interest.

7. Migratory character

The factory workers in India are migratory in character. They come

from villages and return to villages as soon as the work is completed.
They are used to move from one job to another without any reason.

8. Political influence

The trade unions in India are controlled by politicians and political

parties. Most of the times, politicians victimize the workers to protect
their self-interest.

9. Lack of constructive work

The trade unions in India do not pay much attention to constructive

activities such as providing education and training, medical and health
facilities and other benefit schemes. Consequently, they are unable to
get whole hearted support of the workers.

10. Defective administration

The administration of trade unions is not efficient. With no proper

conduct of the affairs of the unions, the functioning or the workers
body cannot be healthy and efficient.

11. Lack of government interest

The government also does not take much interest in the formation and
growth of trade unions. This indifferent attitude of the government is
partly responsible for the slow growth of trade union movement in the
country.

12. Inter-union rivalry

Inter-union and Intra-union rivalries are most common in India.

Existence of too many unions and political influence are the main
reasons for this trend. This unhealthy trend has weakened the trade
union movement.

13. Opposition from employers

The employers of industrial concerns are always against the formation

of trade unions. As a result, the trade union movement is not that much
strong.

Suggestions to strengthen the movement

It is of utmost importance that trade unionism is placed on a strong and

sound footing. For this purpose the defects or weaknesses of the trade
unions have to be removed. Following suggestions are made to
strengthen the trade union movement.

Expansion of education facilities.

Encouraging internal leadership.

Provision of constructive work.

Implementation of one industry, one union principle.

Control of political interference.

Strengthening their financial position.

Providing proper training.

Co-operation of employers.

Eliminating inter-union rivalry.

10. Reforming the structure of unions etc.

3 . 6 INDUSTRIAL DISPUTES
Industrial disputes refer to the differences between the employers and
workers in an industry. These disputes take various forms of protest.
From the workers side the forms of protest are strikes, demonstration,
etc. From the employer’s side the forms of protest are retrenchment,
dismissal, lockouts etc.

The two most important forms of protest lead to loss in industrial

production and decline in the national income. Hence, it is essential to
know the nature and magnitude of industrial disputes, factors
responsible for their occurrence and measures used to resolve them.

There has been a growing trend in terms of workers involved and man
days lost in industrial disputes in India.

Causes of Industrial Disputes

The main causes of industrial disputes are:

(i) Wages

Low wages of industrial workers constitute a major cause of industrial

disputes in the country. Wages have not been rising in proportion to
the rise in prices. This has forced the labourers to demand higher
wages, consequently leading to disputes.

(ii) Bonus

The demand for bonus or increase in bonus has been the second major
cause of industrial disputes. The workers feel that they should have a
greater share in the profits of the industrial concern. Non-acceptance of
this fact by the employers has been a source of friction among the
employers and the workers.

(iii) Working Conditions

The demand for improvement in working conditions such as lesser

working hours, security of job, better safety measures in the factory,
leave, canteen, gratuity facilities, etc., are also responsible for many
industrial disputes.

(iv) Other Causes

Among other causes that lead to disputes are failure of employers to

recognize trade unions, conflict between rival unions for
representation, insult to trade union leadership by the employer,
introduction of rationalization in the factory, the fear of retrenchment
of workers, sympathetic strikes with fellow employees in other
establishments, general discontent and sense of frustration among
labourers, political issues etc.

Measures for Industrial Peace

Some of the measures undertaken by the Government for improving
industrial relations and for establishing industrial peace are as follows:

(i) Enactment of the Factories Act, 1948 and other labour laws for
regulating conditions of work in factories.

(ii) Introduction of schemes like profit sharing, workers participation in

management, subsidized industrial housing etc.

(iii) Framing of Industrial Employment, (Standing Orders) Act, 1948 for

defining conditions of employment and for framing model service rules.

(iv) Introduction of bonus scheme making it compulsory for all

establishment to pay a minimum of 8.33 per cent bonus to all
employees under the Payments of Bonus Act, 1965.

(v) Enactment of an Equal Remuneration Act 1976, which provides for

payment of equal remuneration to men and women workers for the
same work, or work of similar nature and for prevention of
discrimination against women in matters of employment.

(vi) Arrangement for settlement of industrial disputes under the

Industrial Disputes Act, 1947.

(vii) Adoption of ‘Code of Discipline’ (1958) by both employers and

workers for settlement of disputes and avoiding direct action.

(viii) Provision of social security benefits for industrial workers under

various laws like the Employees Provident Fund and Family Pension Act,
1952; Employees State Insurance Act, 1948, Payment of Gratuity Act,
1972 etc.
(ix) Fixation of minimum wages under the Minimum Wages Act, 1948
and the government’s efforts to get fair wages for workers, etc.

(x) Introduction of a scheme for workers participation in management.

Industrial Relations Machinery

The Government of India has devised certain statutory and voluntary

arrangements for the prevention and settlement of industrial disputes.
These are discussed below:

Statutory Arrangement

It is covered by the Industrial Disputes Act, 1947. The Act provides for
the settlement of industrial disputes through conciliation, arbitration,
adjudication or working committees. It also has provision for payment
of compensation for lay-off and retrenchment.

Conciliation, Arbitration and Adjudication

The Act empowers the government to appoint Conciliation Officers (a

third party) to bring about settlement of disputes through conciliation.
If conciliation officers fail to settle the dispute, parties can by
agreement refer it (dispute) for voluntary arbitration to resolve the
dispute.

Lay-off and Retrenchments

The Act provides that no worker who has put in at least one year of
continuous service would be entrenched unless given one month’s
notice in writing, or one month’s wages in lieu thereof. In addition he is
also to be compensated at the rate of 15 days average pay for every
completed year of continuous service.

However, only workers employed in those factories, mines and

plantations are eligible for compensation which have an average daily
employment of 50 or more workers and where work is not of a
personal character. However, the new Act called the Industrial Disputes
(Amendment) Act, 1976, puts reasonable restrictions on an employer ’s
right to layoff retrenchment arid closure.

Works Committees

The Industrial Disputes Act, 1947 provides for setting up of a works

committee consisting of representatives of management and
employees in every undertaking employing 100 or more workmen. The
duty of works committee is to promote measures for securing and
preserving amity and good relations between employers and workman.

Voluntary Arrangements

The code of discipline and the Truce Resolution, both voluntary

instruments, emphasize settlement of dispute through voluntary
arbitration.

Code of Discipline

A code of discipline was evolved by the Indian Labour Conference in

1958. It has been accepted by all central organizations of employers
and workers and is aimed at preventing and settling industrial disputes
on a voluntary basis. According to the code of discipline:
(i) No strikes and lockouts without prior notice.

(ii) The parties should not take any action without consulting each
other.

(iii) No deliberate damage should be done to machinery.

(iv) Should not resort to acts of violence, intimidation, coercion etc.

(v) There should be no go-slow tactics.

(vi) In case of dispute the existing machinery should be utilized with

utmost expedition.

(vii) Employers should recognize the majority union in the

establishment and frame a grievance procedure.

(viii) Management should take prompt action for settlement of

grievances and should implement the awards and agreements speedily,
etc.

4 . 1 NATIONALISATION OF COMMERCIAL BANKS

Prior to 1949, commercial banks in India were exclusively owned,
controlled and managed by private entrepreneurs and shareholders.
The process of nationalization of banks began when the Reserve Bank
of India was nationalized on 1 January, 1949 with the passing of the
Reserve Bank (Transfer of Public Ownership) Act, 1948.

It was essential to nationalize the RBI as the central bank of the country
in order to ensure greater coordination of monetary, economic and
fiscal policies in independent India which was to embark itself on the
path to planned economic development.

But the first step towards the nationalization of commercial banks was
taken with the nationalization of the Imperial Bank of India as the State
Bank of India on 1 July, 1955. The second step was taken when 7 State-
associated banks were nationalized as subsidiaries of the State Bank of
India in 1959.

These seven associate banks are – the State Bank of Hyderabad, the
State Bank of Jaipur and Bikaner, the State Bank of Travancore, the
State Bank of Mysore, the State Bank of Patiala, the State Bank of
Indore, and the State Bank of Saurashtra.

The third major step was the nationalization of 14 major commercial

banks with deposits exceeding Rs.50 crores each on 19 July 1969. They
are: Allahabad Bank, Bank of Baroda, Bank of India, Bank of
Maharashtra, Canara Bank, Central Bank of India, Dena Bank, Indian
Bank, Indian Overseas Bank, Punjab National Bank, Syndicate Bank,
Union Bank of India, United Bank of India, and United Commercial
Bank.

The last step was the nationalization of 6 more commercial banks on 15

April 1980. They were: Andhra Bank, Corporation Bank, New Bank of
India, Oriental Bank of Commerce, Punjab and Sind Bank, and Vijaya
Bank. At the time of nationalization, each one of these had crossed the
deposit mark of Rs.200 crores, though at the time of nationalization of
14 banks their individual deposits were below Rs.50 crores.
In June 1996, there were 19 nationalized banks, New Bank of India was
merged with Punjab National Bank in 1993. We discuss below the
justification, objectives, achievements and failures of nationalization of
commercial banks in India. As nationalization of major commercial
banks is an established fact now, the case against nationalization is
uncalled for and hence of purely academic interest.

Objectives

Bank have been nationalized for fulfilling various socio-economic

objectives.

Six major objectives of bank nationalization are:

1. To mobilize savings of the people to the maximum possible extent

and utilize them for productive purposes;

2. To ensure prompt operations of the banking system for a larger

social purpose and subject it to close public regulation;

3. To meet the legitimate credit needs of private sector industry and

trade (big or small);

4. To ensure that the needs of the productive sectors of the economy

and, in particular, those of farmers, small scale industrialists and self-
employed professional groups are met in an increasing manner.

5. To instruct the banks to provide banking facilities to the hitherto

neglected and backward areas in different parts of the country; and

6. To check (stop) the use of the bank credit for speculative and other
unproductive purposes.

Performance
The philosophy of bank nationalization was that those financial
institutions which mobilized saving of the public should broadly
function as an instrument for promoting economic and social
development in more purposive manner. In the post-nationalization pe-
riod, there has been a rapid growth of India’s banking system.

The following points may be highlighted in this context:

1. Deposit Mobilization

There has occurred a significant increase in deposits of scheduled com-

mercial banks in the post-nationalization period. At the end of June
1969, deposits of these banks were Rs.4,564 crores. By March 2001,
total deposits increased to Rs.983,268 crores.

2. Branch Expansion

As against 8,262 branches at the end of June 1969, the total number of
commercial bank branches at the end of March 2001 was 63,380. As a
result of this, banking coverage in the country as a whole has been
improved from one office for 65,000 persons to 15,000 persons during
the same period.

3. Coverage of Rural Areas

In the post-nationalization period, the thrust of the branch expansion

policy of commercial banks has been on improving the availability of
banking facilities in rural areas. The number of rural branches increased
from 1,860 in 1969 to 32,890 in 1997.

4. Credit Deployment
Advances in whatever form constitute the end objective or purpose of
banking. From a modest Rs.3,599 crores in June 1969, total advances ’
by public sector banks increased to Rs.265,554 crores in March 1999.

5. Sectoral Allocation

More significant than the increase in bank credit are the changes in
sectoral development. In the pre-nationalization period, large and
medium industries as also wholesale trade accounted for more than
79% of total commercial bank credit.

6. Advances to Priority Sectors

The expansion of credit to small borrowers in the hitherto neglected

sectors of the economy has been one of the major tasks of public sector
banks in the post- nationalization period. To achieve this objective,
banks have drawn up schemes to extend credit to small borrower in
sectors like agriculture, small scale industry, road and water transport
operators, retail trade and small business, which traditionally had very
little share in credit extended by banks.

7. Credit to Weaker Sections of Society

To increase the flow of bank credit to poorer sections comprising small

and marginal farmers, landless labourers, tenant farmers and share-
croppers, artisans, village and cottage industries and small transport
operators, several new credit schemes have been evolved. This section
received very little bank credit before nationalization. In March 1999
the out-standings to small businesses were Rs.4,231 crores,
professional and self-employed person 2,630 crores, housing Rs.5,366
crores, and consumers and others Rs.1,108 crores.

8. Direct Finance to Agriculture

Public sector banks were initially given a target of extending 15% of

total advances as direct finance to agriculture, to be achieved by March
1985. As against this, advances by public sector banks to priority
sectors rose to 16.8% of their total advances by March 1988. Direct
finance to agriculture (outstanding) increased from Rs.310 crores in
June 1969 to Rs.31,167 crores in March 1999. Indirect finance
(outstanding) stood at Rs.6,464 crores.

4 . 2 MONETARY POLICY OF RBI

Monetary Policy of India is formulated and executed by Reserve Bank of
India to achieve specific objectives. It refers to that policy by which
central bank of the country controls:

(i) The supply of money

(ii) Cost of money or the rate of interest, with a view to achieve
particular objectives.

Thus, monetary policy of India refers to that policy which is concerned

with the measures taken to regulate the volume of credit created by
the banks. The main objectives of monetary policy are to achieve price
stability, financial stability and adequate availability of credit for
growth.

Following are the main elements of the monetary policy of India:

i. It regulates the stocks and the growth rate of money supply.

ii. It regulates the entire banking system of the economy.

iii. It determines the allocation of loans among different sectors.

iv. It provides incentives to promote savings and to raise the savings-

income ratio.

v. It ensures adequate availability of credit for growth and tries to

achieve price stability.

Objectives of Monetary Policy

i. To Regulate Money Supply in the Economy

Money supply includes both money in circulation and credit creation by

banks. Monetary policy is farmed to regulate the money supply in the
economy by credit expansion or credit contraction. By credit expansion
(giving more loans), the money supply can be expanded. By credit
contraction (giving less loans) money supply can be decreased.

ii. To Attain Price Stability

Another major objective of monetary policy in India is to maintain price
stability in the country. It implies Control over inflation. Price level, is
affected by money supply. Monetary policy regulates money supply to
maintain price stability.

iii. To promote Economic Growth

An important objective of monetary policy is to make available

necessary supply of money and credit for the economic growth of the
country. Those sectors which are quite significant for the economic
growth are provided with adequate availability of credit.

iv. To Promote saving and Investment

By regulating the rate of interest and checking inflation, monetary

policy promotes saving and investment. Higher rates of interest
promote saving and investment.

v. To Control Business Cycles

Boom and depression are the main phases of business cycle. Monetary
policy puts a check on boom and depression. In period of boom, credit
is contracted, so as to reduce money supply and thus check inflation. In
period of depression, credit is expanded, so as to increase money
supply and thus promote aggregate demand in the economy.

vi. To Promote Exports and Substitute Imports

By providing concessional loans to export oriented and import

substitution units, monetary policy encourages such industries and thus
help to improve the position of balance of payments.
vii. To Manage Aggregate Demand

Monetary authority tries to keep the aggregate demand in balance with

aggregate supply of goods and services. If aggregate demand is to be
increased than credit is expanded and the interest rate is lowered
down. Because of low interest rate, more people take loan to buy
goods and services and hence aggregate demand increases and vice-
verse.

viii. To Ensure more Credit for Priority Sector

Monetary policy aims at providing more funds to priority sector by

lowering interest rates for these sectors. Priority sector includes
agriculture, small- scale industry, weaker sections of society, etc.

ix. To Promote Employment

By providing concessional loans to productive sectors, small and

medium entrepreneurs, special loan schemes for unemployed youth,
monetary policy promotes employment.

x. To Develop Infrastructure

Monetary policy aims at developing infrastructure. It provides

concessional funds for developing infrastructure.

xi. To Regulate and Expand Banking

RBI regulates the banking system of the economy. RBI has expanded
banking to all parts of the country. Through monetary policy, RBI issues
directives to different banks for setting up rural branches for promoting
agricultural credit. Besides it, government has also set up cooperative
banks and regional rural banks. All this has expanded banking in all
parts of the country.

4 . 3 REFORMS IN BANKING SECTOR

The banking sector reforms in India are a part of comprehensive
economic reforms package introduced in 1991. The two reports
submitted by M.Narasimham committee of 1991 and 1998 have
influenced greatly the banking sector reforms during the past few
years.There was a growing erosion in the efficiency and profitability of
the banking sector. This has compelled the government to go for
comprehensive restructuring of the banking sector in order to infuse
greater competition and efficiency in their working and to increase their
profitability. Accordingly, the government appointed a nine member
committee on the financial system under the chairmanship of
M.Narasimham in August 14, 1991. The committee submitted its final
report to the Government in November 1991. Again, the Government
appointed one more committee on banking sector reforms under the
chairmanship of M.Narasimham in 1998. It submitted its report in April
1998. These two reports are landmark documents and have played a
significant role in the banking sector reforms.

Goals of banking sector reforms

The major goals of banking sector reforms are as follows:

i) To correct and improve the macro-economic policy setting within

which banks can operate.

ii) To improve the financial health and condition of banks.

iii) To build financial institutions and infrastructure relating to

supervision, audit, technology and legal framework.

iv) To improve the managerial competence and the quality of human

resources by reviewing the policies relating to recruitment, training,
placement, etc.
v) To improve access to financial savings.

vi) To reduce intermediation costs and distortions in the banking

system.

vii) To promote competition through a level playing field and free entry
and exit in the financial sectors.

viii) To develop transparent and efficient capital and money markets.

Recommendations of the Narasimham Committee, 1991

Narasimham Committee recommendations were based on the

fundamental assumption that the resources of the banks come from
the general public and they should be deployed in a most rational
manner so that it can provide maximum benefit to its depositors. The
main aims of Narasimham Committee recommendations were:

a) Ensuring higher degree of operational flexibility.

b) Internal autonomy in decision making.

c) To infuse competitiveness and higher degree of professionalism in

banking operations.

The important recommendations of the Narasimham Committee, 1991

were in the following areas:-

1. Statutory liquidity requirements (SLR)

The committee recommended that the government should reduce the

SLR from 38.5 per cent of the net demand and time liabilities of banks
to 25 percent over the next five years. The committee said that the SLR
instrument should be deployed in conformity with original intention of
regarding it as a prudential requirement and not to be viewed as a
major instrument for financing the public sector.

2. Cash reserve ratio (CRR)

The committee recommended that CRR should be progressively

reduced from the present high level of 15 percent to 3 to 5 percent and
RBI should rely more on open market operations.

3. Directed credit programmes

The Narasimham Committee, 1991 recommended that the system of

directed credit programmes should be gradually phased out. The
committee proposed that the concept of priority sector should be
redefined to include only marginal farmers, rural artisans, village and
cottage industries, etc. and credit to this sector should be fixed at 10%
of the aggregate bank credit, even this is to be reviewed after a period
of three years.

4. Structure of interest rates

On the level and structure of interest rates the committee

recommended that they should be determined by market forces and all
controls and regulations on interest rates should be removed.
Concessional rates of interest for priority sector loans and subsidy on
IRDP loans should be withdrawn.

5. Structural reorganization of the banking sector

To bring about greater efficiency in banking operations, the

Narasimham Committee proposed a substantial reduction in the
number of public sector banks through mergers and acquisitions. For
this purpose the Committee suggested establishment of a four-tier
hierarchy for the banking structure consisting of 3 or 4 large banks
including the SBl at the top which could become international
character, 8 to 10 national banks with a network of country wide
branches, local banks for regional operations and rural banks at the
bottom mainly to finance agriculture and related activities.

6. Nationalization of banks

On the nationalization of banks, the committee wanted the

government to make a positive declaration that there would be no
more nationalization of banks.

7. Setting up of new banks

The committee said that RBI should permit the setting up of new banks
in the private sector, provided they conform to the minimum start-up
capital and other requirements. There should be no difference in the
treatment between public sector banks and private sector banks.

8. Foreign banks

The Narasimham Committee recommended that the Government

should allow foreign banks to open offices in India either as branches or
as subsidiaries. They should be permitted to set up joint ventures in
respect of merchant and investment banking.

9. Bad and doubtful debts

Narasimham Committee recommended the setting up of the Assets

Reconstruction Fund (ARF) to take over from the nationalized banks
and financial institutions, a portion of their bad and doubtful debts
(Non-performing assets) at a discount.

10. Removal of dual control

The Narasimham Committee recommended that the present system of

dual control over the banking system between RBI and the Banking
Division of the Ministry of Finance should be done away with.

11. Autonomy to banks

The Narasimham Committee recommended granting of full autonomy

to public sector banks. They should be free to introduce a radical
change in work technology and culture.

12. Disinvestment

The Committee also recommended that a percentage of shares of the

public sector banks should be disinvested like other PSUs

13. Rural banking subsidiaries

Every public sector bank should set up one or more rural banking
subsidiaries to take over all its rural branches and these should be at
par with regional rural banks.

14. Recruitment of staff

The committee said common staff recruitment system for bank officers
be done away with as part of the banking sector reforms.
Appointments to the key posts should be kept out of political favor and
the Chief Executive of a bank should be made by an independent panel
of experts.

15. Computerization
The Committee recommended speedy computerization of banking
services to improve their efficiency and to infuse competition.

4 . 4 FOREIGN TRADE
The features of Volume, Composition and Direction of India’s Foreign
Trade are as follows
1) Increasing Share of Gross National Income

India’s foreign trade plays an important role in the Gross National

Income.

In 1990-91, share of India’s foreign trade (import export) in net national

income was 17 per cent which in 2006-07 rose to 25 per cent. In 2006-
07 exports and imports as percentage of GDP were 14.0 per cent and
21 per cent respectively.

2) Less Percentage of World Trade

Share of India’s foreign trade in world trade has been declining. In

1950-51, India’s share in total import trade of the world was 1.8 per
cent and in export trade it was 2 per cent. According to World Trade
Statistics, India’s share in world trade has gone-up from 1.4 per cent in
2004 to 1.5 per cent in 2006 and estimated to be 2 per cent in 2009.

3) Oceanic Trade

Most of India’s trade is by sea, India has very little trade relations with
its neighing countries like Nepal, Afghanistan, Myanmar, Sri Lanka, etc.
Thus, 68 per cent of India’s trade is oceanic trade: Share of these
neighing countries in our export trade was 21.8 per cent and in import
trade 19.1 per cent.

4) Dependence on a Few Ports

For its foreign trade, India depends mostly on Mumbai, Kolkata, and
Chennai ports. These ports are therefore, over-crowded. Recently, India
has developed Kandla, Cochin, and Visakhapatnam ports to lessen the
burden on former ports.

5) Increase in Volume and Value of Trade

Since 1990-91, volume and value of India’s foreign trade has gone up.
India now exports and imports goods which are several times more in
value and volume. In 1990-91, total value of India’s foreign trade was Rs
75,751 and in 2008-09, it rose to Rs 22, 15,191 crore. Of it, value of
exports was Rs 8, 40,755 crore and that of imports was Rs 13, 74,436
crore.

6) Change in the Composition of Exports

Since independence, composition of export trade of India has

undergone a change. Prior to independence, India used to export
agricultural products and raw materials, like jute, cotton, tea, oil seeds,
leather, food grains, cashew nuts, and mineral products. It also
exported manufactured goods. But now in its export kitty are included
mostly manufactured items like, machines, ready-made garments,
gems and jewellery, tea, jute manufactures, Cashew Kernels, electronic
goods, especially hardware’s and software’s which occupy prime place
in exports.

7) Change in the Composition of Imports

Since Independence, composition of India’s import trade has also

witnessed a sea change. Prior to Independence, India used to import
mostly consumption goods like medicines, cloth, motor vehicles,
electrical goods, iron, steel, etc. Now it has been importing mostly
petrol and petroleum products, machines, chemicals-, fertilizers, oil
seeds, raw materials, steel, edible oils, etc.
8) Direction of Foreign Trade

It refers to the countries with whom a country trades. Main changes in

the direction of foreign trade are as under:

In the year 1990, in exports the maximum share, i.e., 17.9 per cent was
that of Eastern Europe, i.e., Romania, East Germany, and U.S.S.R., etc.
In import trade, maximum share, i.e., 16.5 per cent was that of OPEC,
i.e., Iran, Iraq, Saudi Arabia, Kuwait, etc. In 2008-09, the largest share in
India’s foreign trade (both imports and exports) was that of European
Union (EU), i.e., Germany, Belgium, France, U.K., etc., and developing
countries. Now, U.A.E., China and U.S.A. have occupied important place
in India’s foreign trade. The importance of England, Russia, etc., has
declined.

9) Mounting Deficit in Balance of Trade

Since 1950-51, India’s balance of trade has been continuously adverse

except for two years, viz., 1972-73 and 1976-77, besides it has been
mounting year after year. In 1950-51 balance of trade was adverse to
the tune of Rs 2 crore and by 1990-1991 it rose to Rs 16,933 crore.
After the policy of liberalization, the country has witnessed a rapid
increase in it. In 1999- 2000 it rose to Rs 77,359crorc and in 2008-09 it
amounted to 5, 33,680 crore. Fast rise in the value of imports and slow
rise in the value of exports accounted for this tremendous rise in
balance of trade deficit.

10) Trend towards Globalization

Globalization and diversification mark the latest trend of India ’s foreign

trade. India’s foreign trade is no longer confined or a few goods or a
few countries. Presently, India exports 7,500 items to about 190
countries and in its import- kitty there are 6,000 items from 140
countries. It unveiled the changing pattern of India’s foreign trade.

11) Changing Role of Public Sector

Since 1991 the role of public sector in India’s foreign trade has
undergone a change. Prior to it, State Trading Corporation (STC),
Minerals and Metals Trading Corporation (MMTC), Handicraft and
Handloom Corporation, Steel Authority of India Ltd. (SAIL), Hindustan
Machine Tools (HMT), Bharat Heavy Electrical Limited (BHEL), etc., used
to play significant role in India’s foreign trade. As a result of
implementation of the policy of liberalization, the importance of all
these public sector enterprises has diminished.

4 . 5 DISEQUILIBRIUM IN BALANCE OF PAYMENT

Though the credit and debit are written balanced in the balance of
payment account, it may not remain balanced always. Very often, debit
exceeds credit or the credit exceeds debit causing an imbalance in the
balance of payment account. Such an imbalance is called the
disequilibrium. Disequilibrium may take place either in the form of
deficit or in the form of surplus.

Disequilibrium of Deficit arises when our receipts from the foreigners

fall below our payment to foreigners. It arises when the effective
demand for foreign exchange of the country exceeds its supply at a
given rate of exchange. This is called an 'unfavorable balance'.

Disequilibrium of Surplus arises when the receipts of the country

exceed its payments. Such a situation arises when the effective demand
for foreign exchange is less than its supply. Such a surplus
disequilibrium is termed as 'favorable balance'.

Causes of Disequilibrium in Balance of Payment

1. Population Growth

Most countries experience an increase in the population and in some

like India and China the population is not only large but increases at a
faster rate. To meet their needs, imports become essential and the
quantity of imports may increase as population increases.

2. Development Programmes

Developing countries which have embarked upon planned

development programmes require to import capital goods, some raw
materials which are not available at home and highly skilled and
specialized manpower. Since development is a continuous process,
imports of these items continue for the long time landing these
countries in a balance of payment deficit.

3. Demonstration Effect
When the people in the less developed countries imitate the
consumption pattern of the people in the developed countries, their
import will increase. Their export may remain constant or decline
causing disequilibrium in the balance of payments.

4. Natural Factors

Natural calamities such as the failure of rains or the coming floods may
easily cause disequilibrium in the balance of payments by adversely
affecting agriculture and industrial production in the country. The
exports may decline while the imports may go up causing a discrepancy
in the country's balance of payments.

5. Cyclical Fluctuations

Business fluctuations introduced by the operations of the trade cycles

may also cause disequilibrium in the country's balance of payments. For
example, if there occurs a business recession in foreign countries, it
may easily cause a fall in the exports and exchange earning of the
country concerned, resulting in a disequilibrium in the balance of
payments.

6. Inflation

An increase in income and price level owing to rapid economic

development in developing countries, will increase imports and reduce
exports causing a deficit in balance of payments.

7. Poor Marketing Strategies

The superior marketing of the developed countries have increased their

surplus. The poor marketing facilities of the developing countries have
pushed them into huge deficits.
8. Flight of Capital

Due to speculative reasons, countries may lose foreign exchange or

gold stocks People in developing countries may also shift their capital to
developed countries to safeguard against political uncertainties. These
capital movements adversely affect the balance of payments position.

9. Globalization

Due to globalization there has been more liberal and open atmosphere
for international movement of goods, services and capital. Competition
has been increased due to the globalization of international economic
relations. The emerging new global economic order has brought in
certain problems for some countries which have resulted in the balance
of payments disequilibrium.

Measures to correct disequilibrium in BOP

Sustained or prolonged deficit has to be settled by short term loans or

depletion of capital reserve of foreign exchange and gold.

Following remedial measures are recommended:

(i) Export promotion

Exports should be encouraged by granting various bounties to

manufacturers and exporters. At the same time, imports should be
discouraged by undertaking import substitution and imposing
reasonable tariffs.

(ii) Import

Restrictions and Import Substitution are other measures of correcting

disequilibrium.
(iii) Reducing inflation

Inflation (continuous rise in prices) discourages exports and encourages

imports. Therefore, government should check inflation and lower the
prices in the country.

(iv) Exchange control

Government should control foreign exchange by ordering all exporters

to surrender their foreign exchange to the central bank and then ration
out among licensed importers.

(v) Devaluation of domestic currency

It means fall in the external (exchange) value of domestic currency in

terms of a unit of foreign exchange which makes domestic goods
cheaper for the foreigners. Devaluation is done by a government order
when a country has adopted a fixed exchange rate system. Care should
be taken that devaluation should not cause rise in internal price level.

(vi) Depreciation

Like devaluation, depreciation leads to fall in external purchasing power

of home currency. Depreciation occurs in a free market system wherein
demand for foreign exchange far exceeds the supply of foreign
exchange in foreign exchange market of a country (Mind, devaluation is
done in fixed exchange rate system).
 4 . 6 EXIM POLICY
The Export-Import Policy (EXIM Policy), announced under the Foreign
Trade (Development and Regulation Act), 1992, would reflect the
extent of regulations or liberalization of foreign trade and indicate the
measures for export promotion. Although the EXIM Policy is announced
for a five- year period, announcing a Policy on March 31st of every year,
within the broad frame of the Five Year Policy, for the ensuring year.
A very important feature of the EXIM policy since 1992 is freedom.
Licensing, quantitative restrictions and other regulatory and
discretionary controls have been substantially eliminated.

The Union Commerce Ministry, Government of India announces the

integrated Foreign Trade Policy FTP in every five year. This is also called
EXIM policy. This policy is updated every year with some modifications
and new schemes. New schemes come into effect on the first day of
financial year, i.e., April 1, every year. The Foreign Trade Policy which
was announced on August 28, 2009 is an integrated policy for the
period 2009-14.

Export-Import (EXIM) Policy frames rules and regulations for exports

and imports of a country. This policy is also known as Foreign Trade
Policy. It provides policy and strategy of the government to be followed
for promoting exports and regulating imports. This policy is periodically
reviewed to incorporate necessary changes as per changing domestic
and international environment. In this policy, approach of government
towards various types of exports and imports is conveyed to different
exporters and importers.

Export refers to selling goods and services to other countries, while

import means buying goods and services from other countries. Now in
the era of globalization, no economy in the world can remain cut-off
from rest of the world. Export and import play a significant role in the
economic development of all the developed and developing
economies. With the growth of international organizations like WTO,
UNCTAD, ASEAN, etc., world trade is growing at a very fast rate.

Objectives of EXIM Policy

1) To facilitate sustained growth in exports to attain a share of at least 1
% of global merchandise trade.

2) To stimulate sustained economic growth by providing access to

essential raw materials, intermediates, components, consumables and
capital goods required for augmenting production and providing
services.

3) To enhance the technological strength and efficiency of Indian

agriculture, industry and services, thereby improving their competitive
strength while generating new employment opportunities, and to
encourage the attainment of internationally accepted standards of
quality.

4) To provide consumers with good quality goods and services at

internationally competitive prices while at the same time creating a
level playing field for the domestic produce.

5 .1 PUBLIC REVENUE
India has a quasi-federal form of government. It has a strong Central
Government and several State Governments. The Union Government of
India has retained many powers and it will take major decisions
concerning financial matters. As most of the powers are concentrated
in the hands of the central government, naturally its annual revenue
and expenditures are more than the State Governments.

Sources of public revenue

At present the Central Government gets its revenue from three main
sources. They are: 1. Tax revenues, 2. Non-tax revenues and 3. Capital
receipts. These sources of revenue of central government can be
presented in a tree diagram as given below.

1. Tax revenues

Taxes are the main sources of revenue to the government. Tax revenue
refers to the revenues collected from taxes. "Tax is a compulsory
payment made by the people to the government without expecting any
quid pro quo relations”. The central government mobilizes its tax
revenues from two main sources. They are: a) Direct taxes and b)
Indirect taxes. Tax revenues account for the largest part i.e. 70 percent
of the total revenues of the central government. It mobilized
Rs.4,34,387 crore net tax revenue from these sources in 2006-07.
During 2007-08 and 2008-09 net tax revenues are expected to be
around Rs.5,25,098 and Rs.6,02,935 crore respectively. Different
sources of tax revenues of the central government are as follows:-

a. Direct taxes

Taxes levied on the income and wealth of the people are called direct
taxes. They include personal income tax, corporation tax, wealth tax,
gift tax, estate duty, interest tax, expenditure tax, etc. Direct taxes bring
about 48.8 percent of tax revenue to the central government (2007-08).
Total revenue mobilized from direct taxes during 2000-01 was
Rs.68,306 crore. The expected revenue yield from this source during
2007-08 was Rs.2,67,490 crore.

i. Income tax

Income tax which is known as personal income tax is a tax levied by the
central government on the incomes of individuals, Hindu undivided
families and unregistered firms and associations. The government
raised income tax limit from Rs.1,00,000 to Rs.1,50,000 during 2008-09
budget. Income tax is levied on the slab system and the government
mobilized Rs.85,561 crore during 2006-07 and Rs.98,774 in 2007-08.
The expected share of income tax in the total revenues of the central
government is 15 percent in 2008-09.

Ii. Corporation tax

Corporation tax is levied on the incomes of registered companies and

corporations. It is levied at a flat rate and at present the rate is 30
percent of the net profit. This brings largest tax revenue to Central
Government. The central government mobilises about 24 percent
revenues from this sources and it was Rs.1,44,306 crore during 2006-07
and Rs.1,68,401 crore in 2007-08.

iii. Wealth tax

Wealth tax is levied on the excess of net wealth over exemption of

individuals, Hindu undivided families and companies. It was first
introduced in 1957 on the recommendations of Prof. Kaldor. It is not a
very important source of revenue for the central government and the
yield from this tax in 2006-07 was just Rs.243 crore.

iv. Gift tax

Gift tax is levied on all donations and gifts except the ones given by the
charitable institutions, government companies and private companies.
It was first introduced in 1958. Gift tax is progressive in nature. The
revenue mobilized from this source in 2006-07 was Rs.4.45 Crore.
v. Death duty or Estate duty

Death Duty or Estate Duty was levied by the central government on the
property of a person passed on to his heirs after his death. It was first
introduced in India in 1953. Now it is not in force.

vi. Interest tax

It is the tax levied on the gross interest earned by commercial banks

and individuals. It was first introduced in 1974. The income from this
source is negligible and it was just Rs.5.02 crore in 2006-07.

vii. Expenditure tax

This is another tax levied by the central government. The yield from this
tax was Rs.49 crore in 2003-04.

viii. Fringe benefit tax

It is a tax levied on the value of benefits provided by the employer for

the collective enjoyment of the employees. The tax at 30 percent on
the value of such fringe benefits like entertainment, conveyance, tour
and travel, use of hotel, gifts, boarding and loading facilities is payable
by the employer. Revenue mobilized from this source in 2006-07 was
Rs.243 crore.

ix. Banking cash transaction tax (BCTT)

This tax at O.1 per cent is introduced on withdrawal of cash from bank
on a single day of Rs.25,000 or more by individuals or HUF and Rs.1 lakh
by persons other than individuals and HUF. Cash withdrawals from
savings account and purchase of DD for cash is exempt from BCTT.
Rs.502 crore mobilized from BCTT in 2006-07.

x. Securities transaction tax (STT)

STT is levied on the securities and stocks transacted in the share

market. The revenue mobilized from this source in 2006-07 was
Rs.4,648 crore.

b. Indirect taxes

The taxes levied on the goods and services are called indirect taxes.
Revenue from indirect taxation is the most important source of income
for the central government. The principal indirect taxes levied by the
union government are customs duties and excise duties. Indirect taxes
bring largest amount of revenue to the central government. The
revenues from these sources was Rs.1,18,681 crore in 2000-01 and
Rs.2,79,190 in 2007-08 (BE) i.e. 50.9 percent of gross tax revenue.

i. Central excise duties

Central excise duties are the taxes levied on commodities which are
produced within the country. But commodities on which state
governments impose excise duties such as liquor, drugs, etc. are
exempted from central excise duties. Sugar, cotton, match Box,
kerosene, paper, petrol, tea, coffee, tobacco, cigarettes, motor spirit,
cement, tyres, fan, electric bulb, etc. are the goods which yield the
most by way of excise duties. Central excise duties are the 2nd largest
source of revenue to the central government and its share in total tax
revenue is 23.8 percent (2005-06) and their share in total revenue is 15
percent (2008-09). The revenue mobilized from central excise duties
was Rs.1,18,121 crore in 2006-07 and Rs.1,30,220 crore in2007-08 (BE).

ii. Custom duties

Customs duties are the taxes levied on commodities imported into

India (Import duties) or those exported from India (Export duties).
Import duties are more important than export duties, as export duties
almost have been removed. Customs duties constitute the fourth most
important source of revenue to the central government. Their share in
the total tax revenue is 11 percent (2007-08) and 13 percent (2008-09)
in the total revenue of the central government. The revenue from
customs duties in 2006-07 was Rs.86,304 crore.

iii. Service tax

Various services are brought under the tax net by the central
government and it was introduced in 1994-95. They include banking,
insurance, telecom, transport, real estate, etc. The revenue mobilized
from this source during 2006-07 was Rs.37,482 crore.

iv. Other taxes and duties

The central government is getting about 1 percent revenue from other

taxes and duties. In 1950-51 the government mobilized Rs.3 crore from
this source and it went up to Rs.1,410 crore in 2001-02.

v. Taxes of the union territories

The taxes levied and collected from union territories is another source
of revenue to the central government. But this revenue has to be spent
in the respective union territories. In 2001-02 about Rs.496 crore was
mobilized from this source.
2. Non-tax revenue

The union government gets revenue from other sources as well. They
are collectively called as non-tax revenues. Thus, revenues mobilized
from sources other than taxes are called non-tax revenue. Central
government mobilized Rs.83,205 crore from this source during 2006-07
(BE). The sources of non-tax revenue are as follows:-

i. Public enterprises

The central government owns a large number of commercial and

industrial establishments. When they earn profits, it will become the
revenue of the central government. In 1950-51 it accounted for
Rs.23crore and it went up to Rs.18,292 crore in 2001-02.

ii. Interest receipts

The major source of non-tax revenue (i.e. 70 percent) is interest

receipts. These are receipts from central loans to state governments,
union territories, railways, tele-communication departments, etc. In
2001-02 it accounted for Rs.37,800 crore and it was expected to rise to
Rs.39,160crore by 2003-04.

iii. Administrative revenue

The central government from its day-to-day administration and various

economic, social, general and fiscal services gets sizable revenue by
way of fees, license fees, fines and penalties, special assessments, etc.
During 1997-98 it mobilized Rs.9,650 crore from this source.

iv. Railways, post and telegraphs

Railways, post and telegraphs are owned by the central government.
The profits earned by these undertakings constitute the sources of
revenue to the central government.

v. Reserve Bank of India

The profits earned by the Reserve Bank of India from its operations
becomes one of the important sources of revenue to the central
government.

vi. Incomes from currency and mint

The union government of India earns revenue from currency and mint.

Non-tax revenue has been steadily increasing. For instance, in 1950-51,

it accounted for Rs.49 crore and in 1990-91 it was Rs.12,650 crore. It
has further increased to Rs.83,205 crore by 2006-07 and it was
expected to go up to Rs.82,550 crore by 2007-08. The share of non-tax
revenue in the total revenue of the central government is 10 percent
(2008-09). The revenue mobilized from tax and non-tax sources is
called Revenue Receipts and it constitutes the most important part of
Central Budget.

3. Capital receipts

When revenue mobilized through tax and non-tax sources is insufficient

to meet its expenditures, the central government will try to mobilize
income through capital receipts. The examples of such capital receipts
are: - i. Internal and external borrowings ii. Small savings ili. Provident
fund iv. Loan recovery v. Public deposits, etc. In 1950-51, the total
capital receipts was Rs.105 crore. It went up to Rs.1,84,275 crore in
2007-08 and it is expected to be around Rs.1,47,949 crore by 2008-09.
 PUBLIC EXPENDITURE

India has a quasi-federal form of government in which a strong union

government is functioning. Most of the economic powers are
concentrated in the hands of central government and therefore, its
revenue and expenditures are more. The central government has the
responsibility of implementing various developmental programmes and
bring about economic and social change in the country. As a result, the
expenditure of the central government has increased over years.

Classification of public expenditure

The expenditure made by the central government can be broadly

classified into two categories: -i) plan expenditure and non-plan
expenditure ii) revenue expenditure and capital expenditure. The
Central Government receives revenue from two sources, namely,
revenue receipts and capital receipts. The expenditure made out of
current revenues on various services like administrative, social,
economic and civil expenditure is called revenue expenditure. Whereas,
the expenditure made out of capital receipts is called capital
expenditure. The revenue and capital expenditure of central
government was Rs.5,14,608 crore and Rs.68,778 crore respectively in
2006-07(RE).They are expected to be Rs.5,57,899 crore and Rs.1,22,622
crore respectively in 2007-08 (BE). The present classification of
expenditure into plan expenditure and non-plan expenditure are more
relevant. These expenditures are presented in a tree diagram as given
below.

1. Plan expenditure

The expenditure made on various economic and social services, nation

building activities and such other developmental activities is called plan
expenditure. The plan outlay consists of agriculture and allied activities,
rural development, irrigation and flood control, energy, industry and
minerals, transport, education, science, technology and environment,
etc. This expenditure is met out of both revenue and capital receipts.
The plan expenditure was Rs.2,07,524 (RE) crore in 2007-08 and is
expected to go up to Rs.2,43,386 crore in 2008-09 (BE). Various items of
plan expenditure of central government are as follows:

A. Central plan schemes

In the central plan schemes there are economic, social and general
services. The central plan expenditure in 2000-01 was Rs.51.274 crore.
The important items of central plan schemes are as follows:-
i. Economic services

Expenditure on economic services include such projects as agriculture

and allied activities, rural development, industry and minerals, energy,
transport, science, technology, environment, etc. This type of
expenditure contributes to the economic development of the country.
Rs.31,284 crore was spent on economic services in 2000-01.

ii. Social services

Expenditure on social services include such activities as education, art

and culture, health and family welfare, social welfare, nutrition,
sanitation, housing, etc. A sum of Rs.28,461 crore was spent on social
services in 2002-03.

iii. General services

The expenditure on general services include maintenance of law and

order, internal and external security, etc. The expenditure made in this
account in 1990-91 was Rs.4,380 crore and Rs.397 crore in 2002-03.

B. Central assistance to state plans

India has a quasi-federal form of constitution in which there is a strong

central government and several state governments. The central
government is giving plan assistance to state governments and this
assistance is included in the central plan expenditure. Central plan
assistance to states in 2000-01 was Rs.29,283 crore.

C. Central assistance for union territory plans

Some territories in the country are under the direct control of the
Central Government. It gives plan assistance to these territories which
are also included in the central plan expenditure. Central plan
assistance for union territories stood at Rs.1,082 crore in 2000-01.

2. Non-plan expenditure

Non-plan expenditure is a term used to cover all expenditures of the

government not included in the plan. It includes both developmental
and non-developmental expenditures. The important items of non-plan
expenditures are: defence and internal security, interest payments,
grants-in-aid, subsidies, pensions, etc. Various items of non-plan
expenditures of the Central Government are explained below:-

i. Civil expenditure

Civil Expenditure refers to the administrative expenditure of the

government. It includes maintenance of law and order, civil
administration, tax collection, public and internal security, judiciary,
pensions, etc. Civil expenditure was just Rs.21 crore in 1950-51 and it
shot-up to Rs.29,327 crore in 2000-01.

ii. Defence expenditure

Defence Expenditure is the most important item of expenditure of the

Central Government. Production of arms and ammunitions, purchase of
costly defence equipment, salary, pension and training to defence
personnel, etc. are included in defence expenditure. The share of
defence expenditure in the total expenditure of the Central
Government is 11 percent and it ranks second next only to interest
payments. Defence expenditure was Rs.96,000 crore in 2007-08 and a
provision of Rs.1,05,600 crore is made for 2008-09.

iii. Interest payments

The biggest item in the Central Government expenditure is the interest
payments made on the internal and external borrowings. Interest
payments constitute 21 percent of the total Central Government
expenditure. Interest payments were Rs.1,32,630 crore in 2005-06 and
it was estimated to reach Rs.1,58,995 crore in 2007-08.

iv. Subsidies

Another important item of the Central Government non-plan

expenditure is subsidies for food, fertilizers and export promotion.
Subsidies accounted for Rs.45,015 crore in 2004-05 and it is estimated
to reach Rs.50,987 crore i.e. 7 percent in 2007-08.

v. Grant-in-aid

The Central Government gives grant-in-aid to the state governments

and union territories. The total grant-in-aid given during 2000-01 was
Rs.17676 crore.

vi. Loans and advances

The Central government also gives loans and advances to state and
union territories. The loans and advances given in 1999-2000 was
Rs.3,110 crore.

vii. Miscellaneous expenditure

Reliefs given at the time of floods, droughts, earthquakes and such

other natural calamities, rehabilitation expenditure, aid to backward
regions, etc. are other items of non-plan expenditure.
The total non-plan expenditure of the Central Government in 2007-08
was Rs.5,01,849 crore and it is estimated to reach Rs.5,07,498 crore by
2008-09. The non-plan expenditure as percent of GDP was 11.7 and
10.5 per cent in 2004-05 and 2005-06 respectively. During the same
period the plan expenditure was 4.2 and 4.1 percent respectively.

Causes for enormous growth of public expenditure

There has been a spectacular rise in the public expenditure during the
last four and a half decades. The total expenditure of the central
Government which stood at Rs.900 crore in 1950-51 shot up to
Rs.7,09,373 crores in 2007-08. The ratio of public expenditure to the
GDP has risen to 14.6 percent. Main causes of this enormous growth of
public expenditure in India are:-

Rapid growth of population

Effect of urbanization

Increase in national income

Increase in defence expenditure

Burden of debt and interest payments

Increasing subsidies

Expansion of administrative machinery.

Development projects

Inflation

10. Burden of democracy and democratic institutions

11. Natural calamities.

 12. Poverty, unemployment, etc.

5 . 2 PUBLIC DEBT
Public debt refers to all types of borrowings by the government from
among the institutions, organizations and the public. When the
revenues of the government fall short of its expenditure, it tries to
meet it through public borrowing. Expenditure of the governments has
increased rapidly during recent years due to expanded role of the state
in economic activities. However, there are limits to which revenues
from taxes can be raised to meet these continuously increasing
expenditure. Consequently the governments are forced to borrow from
the public. In India, both the Central and State Governments have
borrowed in the past and continue do so even now.

Importance of public debt

Public debt plays an important role in a capital deficient country like

India. The benefits of public debt are as follows:-
Mobilisation of resources.

Financing economic plans.

Control of inflation.

Implementation of development projects.n2o5.Development of money

and capital markets.

Effective implementation of monetary policy.

Promotion of production, income and employment.

Providing social services, etc.

Classification of public debt

The public debt of the Government of India has now been reclassified
into three major groups: i) Internal debt ii) External debt and iii) Other
outstanding liabilities.

Internal debt

Internal debt comprises of all borrowings and market loans which were
formerly called permanent or funded debt. Lt consists of all internal
borrowings and market loans. It includes treasury bills issued by the
Government of India to the Reserve Bank, State Governments,
Commercial Banks and other parties.

External debt
External debt includes loans taken by the Government of India against
the non-negotiable, non-interest bearing securities issued to
international financial institutions like the IMF, IBRD, IDA, ADB, etc.
Besides these, the loans taken by the Government of India from
friendly countries are also included. External debt also includes loans
taken from the IMF Trust Fund.

Other outstanding liabilities

This includes all outstanding liabilities against the various small savings
schemes, public provident fund and state provident fund contributions,
income tax annuity deposit schemes, interest bearing reserve funds of
the departments of Railways, Post and Telegraphs, etc.

Extent of public debt

The public debt of India is increasing phenomenally from the time of

the commencement of planning. The aggregate liabilities (Which
includes internal debt, external debt and other liabilities) of the Central
Government as on 2006-07 (BE) was Rs.25,36,464 crore. Of which
Rs.24,34,329 crore formed internal liabilities, Rs.1,02,135 crore external
debt (At historical exchange rate). As on March 31,2007, the external
debt of the Government of India was $1,69,600 mn i.e. Rs.7,40,099
crore. The total outstanding liabilities as per cent of GDP was 61.2
percent and external debt as percent of GDP was 17.9 percent in 2006-
07. As a result of the enormous increase in public debt the burden of
interest payments has increased over the years. Interest payments in
2005-06 was Rs.1,32,630 crore and was expected to go up to
Rs.1,58,995 crore by 2007-08.

Causes for the growth of public debt

As stated above, both internal and external debts of India have

increased considerably during the last five and a-half decades of
planning. India is the 2nd largest debtor country in Asia and the fifth
largest in the world (1st is China). The burden of interest payments is
eating away 21 percent of the central budget resources. There are
various reasons for this trend. They are:

1. Development plans

After independence, India implemented economic plans to accelerate

the growth rate of economy. The government is required to invest huge
amount of capital to implement development plans. But, the financial
resources mobilized through tax sources is insufficient. Therefore, the
government is forced to borrow heavily.

2. Removal of temporary deficit

When the expenditure of the government exceeds its revenue,

temporary deficit may arise. To remove this temporary deficit the
government is forced to borrow. As a result, public debt mounts up.

3. Limits of taxation

Taxes are an important source of revenue to the government. But taxes

are to be levied in such a way as to avoid any burden on the people.
The taxable capacity of the people in India is very low. The funds
required for meeting the growing public expenditure cannot be raised
only through taxation. So, the government is forced to resort to public
borrowing.

4. Control of inflation

In India, public debt is used as a tool to control inflationary trends in the

economy. Due to larger investment and money supply the prices are
increasing. Transfer of funds from private to government hands
through public debt, and aggregate money supply can bring inflation
under control.

5. Low taxable capacity

As stated above, the taxable capacity of the people in India is very low.
The government cannot mobilize required funds through taxation.
Consequently, the government is forced to borrow from the public.

6. Higher government interference

In a socialistic pattern of society the government is expected to

promote social welfare and work for the well-being of the people. Due
to the increased government interference in economic matters, the
expenditure has increased. But, the funds mobilized through taxation is
insufficient. So, the dependence of the government on public debt is on
the rise.

7. Mounting defence expenditure

The defence expenditure of the country has increased over the years.
At present, it is more than Rs.1,05,600 crore. The growing defence
expenditure could not be met out of normal revenues. The Central
government, as a result, is forced to resort to heavy public borrowing.
8. Rise in non-development expenditure

The non-development expenditure of both the central and state

governments has been increasing. The sources to meet this expenditure
is insufficient and therefore the government is borrowing heavily trom
the public.

9. Burden of interest payments

The burden of interest payments on debt is ever increasing. It has gone

up from Rs.600 crore in 1970-71 to Rs.1,32,630 crore in 2005-06 and it
was expected to be around Rs.1,58,995 crore in 2007-08. Interest
payments are likely to accelerate further in the near future. We have
reached a stage where the government has to borrow even to service
debts.

10. Meeting emergencies

To meet some emergencies like floods, droughts, cyclones,

earthquakes, war, etc. large sums of money is required. When the
funds available with the government falls short, it is forced to borrow
from the public.

11. Populist schemes

The governments with an eye on elections implement various populist

schemes. These schemes are highly unproductive and lead to wastage
of public funds. The government due to its faulty policies is sometimes
forced to borrow heavily from the public.

Apart from the above, burden of subsidies, extravagance of the

government, burden of democracy, unemployment, poverty,
backwardness of the economy, shortage of capital, foreign trade
orientation, lack of infrastructural facilities, etc. are other reasons for
the enormous growth of public debt in the country.

5 . 3 NEW ECONOMIC POLICY OF 1991

The year 1991 is an important landmark in the economic history of
post-Independent India. The country went through a severe economic
crisis triggered by a serious Balance of Payments situation. The crisis
was converted into an opportunity to introduce some fundamental
changes in the content and approach to economic policy.

The response to the crisis was to put in place a set of policies aimed at
stabilization and structural reform. While the stabilization policies were
aimed at correcting the weaknesses that had developed on the fiscal
and the Balance of Payments fronts, the structural reforms sought to
remove the rigidities that had entered into the various segments of the
Indian economy. Former Prime Minister Manmohan Singh is considered
to be the father of New Economic Policy of India.

Main Objectives of New Economic Policy – 1991, July 24

The main objectives behind the launching of the New Economic policy
(NEP) in 1991 by the union Finance Minister Dr. Manmohan Singh are
as follows:

1. The main objective was to plunge Indian economy in to the arena of

‘Globalization and to give it a new thrust on market orientation.

2. The NEP intended to bring down the rate of inflation and to remove
imbalances in payment.

3. It intended to move towards higher economic growth rate and to

build sufficient foreign exchange reserves.

4. It wanted to achieve economic stabilization and to convert the

economic in to a market economy by removing all kinds of unnecessary
restrictions.

5. It wanted to permit the international flow of goods, services, capital,

human resources and technology, without many restrictions.

6. It wanted to increase the participation of private players in the all

sectors of the economy. That is why the reserved numbers of sectors
for government were reduced to 3 as of now.

Beginning with mid-1991, the govt. has made some radical changes in
its policies bearing on trade, foreign investment exchange rate,
industry, fiscal discipline etc. The various elements, when put together,
constitute an economic policy which marks a big departure from what
has gone before.

The thrust of the New Economic Policy has been towards creating a
more competitive environment in the economy as a means to
improving the productivity and efficiency of the system. This was to be
achieved by removing the barriers to entry and the restrictions on the
growth of firms.

Main Measures Adopted in the New Economic Policy

Due to various controls, the economy became defective. The

entrepreneurs were unwilling to establish new industries (because laws
like MRTP Act 1969 de-motivated entrepreneurs). Corruption, undue
delays and inefficiency risen due to these controls. Rate of economic
growth of the economy came down. So in such a scenario economic
reforms were introduced to reduce the restrictions imposed on the
economy.

Following steps were taken under the Liberalization measure:-

(i) Free determination of interest rate by the commercial Banks

Under the policy of liberalization interest rate of the banking system

will not be determined by RBI rather all commercial Banks are
independent to determine the rate of interest.

(ii) Increase in the investment limit for the Small Scale Industries (SSIs)

Investment limit of the small scale industries has been raised to Rs.1
crore. So these companies can upgrade their machinery and improve
their efficiency.
(iii) Freedom to import capital goods

Indian industries will be free to buy machines and raw materials from
foreign countries to do their holistic development.

(v) Freedom for expansion and production to Industries

In this new liberalized era now the Industries are free to diversify their
production capacities and reduce the cost of production. Earlier
government used to fix the maximum limit of production capacity. No
industry could produce beyond that limit. Now the industries are free
to decide their production by their own on the basis of the requirement
of the markets.

(vi) Abolition of Restrictive Trade Practices

According to Monopolies and Restrictive Trade Practices (MRTP) Act

1969, all those companies having assets worth Rs. 100 crore or more
were called MRTP firms and were subjected to several restrictions. Now
these firms have not to obtain prior approval of the Govt. for taking
investment decision.

1. Liberalisation

Removal of Industrial Licensing and Registration

Previously private sector had to obtain license from Govt. for starting a
new venture. In this policy private sector has been freed from licensing
and other restrictions.

Industries licensing is necessary for following industries

(i) Liquor

(ii) Cigarette
(iii) Defence equipment

(iv) Industrial explosives

(v) Drugs

(vi) Hazardous chemicals.

2. Privatization

Simply speaking, privatization means permitting the private sector to

set up industries which were previously reserved for the public sector.
Under this policy many PSU’s were sold to private sector. Literally
speaking, privatization is the process of involving the private sector-in
the ownership of Public Sector Units (PSU’s).

The main reason for privatization was in currency of PSU’s are running
in losses due to political interference. The managers cannot work
independently. Production capacity remained under-utilized. To
increase competition and efficiency privatization of PSUs was
inevitable.

Step taken for Privatization

1. Sale of shares of PSUs

Indian Govt. started selling shares of PSU’s to public and financial

institution e.g. Govt. sold shares of Maruti Udyog Ltd. Now the private
sector will acquire ownership of these PSU’s. The share of private sector
has increased from 45% to 55%.

2. Disinvestment in PSU’s
The Govt. has started the process of disinvestment in those PSU ’s which
had been running into loss. It means that Govt. has been selling out
these industries to private sector. Govt. has sold enterprises worth Rs.
30,000 crores to the private sector.

3. Minimization of Public Sector

Previously Public sector was given the importance with a view to help in
industrialization and removal of poverty. But these PSU’s could not able
to achieve this objective and policy of contraction of PSU’s was
followed under new economic reforms. Number of industries reserved
for public sector was reduces from 17 to 3.

(a) Transport and railway

(b) Mining of atomic minerals

(c) Atomic energy

4. Globalization

Literally speaking Globalization means to make Global or worldwide,

otherwise taking into consideration the whole world. Broadly speaking,
Globalization means the interaction of the domestic economy with the
rest of the world with regard to foreign investment, trade, production
and financial matters.

Steps taken for Globalization

Following steps are taken for Globalization:

(i) Reduction in tariffs

Custom duties and tariffs imposed on imports and exports are reduced
gradually just to make India economy attractive to the global investors.
(ii) Long term Trade Policy

Forcing trade policy was enforced for longer duration.

Main features of the policy are

(a) Liberal policy

(b) All controls on foreign trade have been removed

(c) Open competition has been encouraged

(iii) Partial Convertibility of Indian currency:

Partial convertibility can be defined as to convert Indian currency (up to

specific extent) in the currency of other countries. So that the flow of
foreign investment in terms of Foreign Institutional Investment (FII) and
foreign Direct Investment (FDI).

This convertibility stood valid for following transaction:

(a) Remittances to meet family expenses

(b) Payment of interest

(c) Import and export of goods and services

(iv) Increase in Equity Limit of Foreign Investment

Equity limit of foreign capital investment has been raised from 40% to
100% percent. In 47 high priority industries foreign direct investment
(FDI) to the extent of 100% will be allowed without any restriction. In
this regard Foreign Exchange Management Act (FEMA) will be enforced.
If the Indian economy is shining at the world map currently, its sole
attribution goes to the implementation of the new economic policy in
1991.