Complete Economy Notes by Anish Mohan (Updated)

Revise entire
Indian Economy
(Notes with video explanation)
for UPSC EPFO & UPSC CSE 2021

Revise entire Indian Economy
(Notes with video explanation)
Objective behind these notes is to provide you short and efficient revision tool
for Indian Economy. These notes would be beneficial for various examinations
like Civil Services (Prelims), UPSC EPFO exam, UPSC CAPF (Assistant
Commandant), State PSC, SSC CGL etc.
Make the most out of these notes by reading them along with our Indian
Economy lectures at the links given below.
Session 1: https://youtu.be/kAxNPHzJCJ4
Session 2: https://youtu.be/xYhyiWIxseI
“We wish our notes and lectures would make the subject easier to understand.”
Measure of Growth
Economics The word is driven from the Greek word ‘Oikonomikos’- Oikos = Home and
Nomos = Management i.e. Home management.
While needs of humans are unlimited, resources are limited. That is there is scarcity of
resources. Economy is the study of choosing limited resources to satisfy human wants.
Adam Smith, the Father of Economics, defines Economics as, ‘‘The science relating to
the laws of production, distribution and exchange.’’
The two branches of economics are:

1. Macro economics
2. Microeconomics
Microeconomics: It examine the behaviour of individual agents in the economy like

households and firms, buyers and sellers, and market and their interaction.
Macro Economics: It deals with the study of economy as a whole. In this branch issues
like national income, unemployment, poverty, balance of payments and inflation etc.
are studied.
Economy
It provides information about the production, distribution, trade and consumption of
goods and services in a given geographical area by different agents like individuals,
businesses, organization or governments.
Types of Economy
Open Economy: It refers to a market-economy, Free from trade barriers, Exports and
imports form a large percentage of the GDP.
Closed Economy: No activity is conducted with outside world i.e. there is no import or
export. The degree of openness of an economy is decided by their respective
governments by using policy controls like tariffs, import and export quotas, and
exchange rate limits.
Free market economy: Very little government control; Economic decisions based on
market principles of demand and supply. There is unrestricted entry of suppliers and
buyers and as a result competition and choice increase. Resources for production are
under private ownership which takes decision to maximize profits.
Capitalist economy: Factors of production are controlled by private enterprise.

Government interference is minimal, and laws of supply and demand dictate economic
WATCH FREE LECTURE OF INDIAN ECONOMY

decisions. It is similar to free-market economy.
Command economy: Factors of production are under government control.
Planning is centralised. Due to lack of competition, resource allocation is inefficient and

consumers have very little choices
Socialist economy: Government or the state controls economic planning, production

and distribution of goods. Communism advocates class struggle and revolution to
establish a society of cooperation with strong government control
Mixed economy:
Both- public and private sector- exist.
India presents a model of mixed economy where private and public sector both exist.
After independence India adopted a model of central planning (inspired by Soviet
Union). With little presence of private sector in early years of independence, experience
of being enslaved by a trading company, experience of Great Economic Depression in
the 1930s etc directed India’s decision regarding its economic model. Economy was
relatively closed with little trade from outside world. The objective of India’s
development strategy has been to establish a socialistic pattern of society through
economic growth with self-reliance, social justice and poverty alleviation.
In 1991, India adopted reforms like Liberalisation, Privatisation and Globalisation. India’s
economic history would be discussed in later chapters.
Sectors of Indian Economy

Primary Sector It includes production of raw material and includes agriculture, forestry
and fishing.
Secondary Sector: It is also known as manufacturing sector. The raw material is

converted into products and goods e.g. mining manufacturing, electricity, gas and water
supply, construction.
Tertiary Sector: It is also known as service sector. This sector is concerned with providing
a service e.g. business, transport, telecommunication, banking, insurance, real estate,
community and personnel services. (also called service sector)
National Income
In an economy, goods are produced and services are rendered. These are measured in
monetary value.

Thus, output implies aggregation of monetary value of all the goods and services
produced in an economy in a given time period.
Only final goods are measured in the calculation for output. Intermediate goods are
not included in the definition of output. Otherwise it would lead to counting the same
thing twice- first as intermediate good and second in final product.
Old, Secondhand products are not included in the measurement but commission
earned by commission agents are included in the measurement.
National income measures the net value of goods and services produced in a country
during a year and it also includes net earned foreign income.
In other words, a total of national income measures the flow of goods and services in
an economy. National income is a flow not a stock.
As contrasted with national wealth which measures the stock of commodities held by
the nationals of a country at a point of time, national income measures the productive
power of an economy in a given period to turn out goods and services for final
consumption.
Concepts of National Income

National Income (NI) is the net value of all the final goods and services produced by its
nationals during a financial year.
Per Capita Income: It is a measure of the amount of money that is being earned per
person in a certain area.
PCI = National Income / Population
Output implies aggregation of monetary value of all the goods and services produced in
an economy in a given time period. There are four concepts in the output of an
economy—GNP, GDP, NNP and NDP
Gross National Product (GNP)

Gross National Product refers to the money value of total output or production of final
goods and services produced by the nationals of a country during a given period of time,
generally a year.
In the calculation of GNP, we include the money value of goods and services produced
by nationals outside the country.
Hence, income produced and received by nationals of a country within the boundaries
of foreign countries should be added.
Similarly, income received by foreign nationals within the boundary of the country
should be excluded.

Net Factor Income from Abroad: Include the income of Indian nationals outside the
country and deduct the income of foreign nationals residing in our country.
Domestic Product + Income of Indians Abroad - Income of Foreigners in India =

National Product
or
Domestic Product (+/-) NFIAD = National Product
Net factor income from abroad can be positive or negative.
Q: how would increase in foreign currency denominated debt of a country affect

domestic product?
Gross Domestic Product

The monetary value of all the final goods and services produced within the geographic
boundary of a country, irrespective of who the producer of the goods and services
are, is called ‘domestic output’ of the economy.
DEPRECIATION
The output of an economy also consists of production of machines/machineries which
are consumed every year. Capital goods gradually undergo wear and tear and so
producer has to invest in repair or replacing of worn-down parts to keep the value of
capital constant.
This replacement investment is same as depreciation of capital. In other words, it is
same as using up of capital. This does not signify additions to machine or capital stock
in the economy.
GNP - Depreciation = Net National Product (NNP)
GDP — Depreciation = Net Domestic Product (NDP)
NNP at factor cost is called National Income
Sale of assets to foreign entities and increasing external debts reduce GNP/NNP. Thus,
it is losing significance. Remittances also affect GNP/NNP.

GDP
The monetary value can be viewed from two perspectives— factor cost (It is also the
income for the factors of production) and market price.
Factor Cost + Indirect Taxes - Subsidies = Market Price or
Factor Cost + Net Taxes (as subsidies can never be equal or more than
taxes in an economy) = Market Price.
i.e. Market price- factor cost = tax burden on the economy.

Can output at market price and factor cost be the same?
Nominal GDP and Real GDP: The output calculated would be affected because of
increase in prices i.e. inflation. Suppose if a country produces only 100 shoes at Re. 1
per pair. The GDP would be = Rs. 100.
Now if prices of raw material increase and the same pair of shoes is produced at Rs.1.5,
then the GDP would become 150. Here, the number of products has not changed. GDP
seems to have improved only because of increased prices. Thus, the real picture of
economy is not known.
It means that the output has not increased, but their prices have increased. Without
adjusting for inflation, the increase in output could be misleading.
This adjustment for inflation is also known as ‘real’ or otherwise it is ‘nominal’. Real
growth is adjusted for inflation while nominal growth ignores adjustment for inflation.
Growth by definition has to be ‘real’.
Thus, growth= increase in GDP at factor cost at constant prices.

In India, the growth figures are provided by the Central Statistical Organization (CSO),
Government of India on quarterly basis.
Computation of National Income

There are three methods: -
1. output method/value addition method
2. income method and
3. expenditure method
Method of Measurement of Nl: At a Glance
GDP/NATIONAL ACCOUNTS REVISED SERIES WITH 2017-18 AS BASE YEAR

The recent introduction of new series of National Accounts by Central Statistics Office
(CSO) revised the base year for National Accounts Statistics to 2017-18 from 2011-12
The new series provides for comprehensive coverage of corporate sector and
government activities and incorporation of recent data generated through National
Sample Surveys.
GDP at factor cost in constant prices was used as “GDP”.
In the revised series, as is the practice internationally, industry-wise estimates are
presented as Gross Value Added (GVA) at basic prices, while “GDP at market prices”
will be referred to as “GDP”. Estimates of GVA at factor cost (earlier called GDP at
factor cost) can be compiled by using the estimates of GVA at basic prices and

production taxes less subsidies.
GDP at market prices, henceforth, be referred as GDP, can be computed by adding net
of product tax and product subsidies in GVA at basic prices.
• Gross Value Added (GVA) at basic prices = Compensation of Employees +

Operating Surplus + Mixed Income + Consumption of Fixed Capital (CFC) +
Production taxes - Production subsidies
• Gross Domestic Product (GDP) = GVA at basic prices + Product taxes - Product
subsidies
• GVA at factor cost (earlier referred to as GDP at factor cost) = GVA at

basic prices - (Production taxes - Production subsidies)
The production tax has been distinguished from product tax. For example: production
taxes like land revenues, stamps and registration fees and tax on profession etc. and
excise tax, sales tax, service tax and import and export duties etc. are included in
product tax.
A similar distinction is also made between production and product subsidies, for
instance, former includes subsidies to railways, input subsidies to farmers, subsidies to
village and small industries, administrative subsidies to corporations or cooperatives
etc. and latter includes food, petroleum and fertilizer subsidies, interest subsidies
given to farmers, households etc. through banks and subsidies for providing
insurance to households at lower rates etc.
GROSS HAPPINESS INDEX (GHI)

The term was first coined by the 4th King of Bhutan, King Jigme Singye Wangchuck, in
1972. The concept implies that sustainable development should take a holistic
approach towards notions of progress and give equal importance to non-economic
aspects of wellbeing.
The GNH Index includes areas of socio-economic concern such as living standards,
health, education and less traditional aspects of culture and psychological wellbeing.
It is a comprehensive reflection of the general wellbeing of the population.

Quality of Life Index (QLI):
The Index of Quality of life depends upon mainly three factors, i.e. life expected, Basic
Literacy ad Infant Mortality Rate.
Most of the countries with low per capita GNP tends to have low QLI and vice-a-versa.
Human Development Index (HDI):

It is one of the most recent and significant indicator of economic development of a
country.
It is a composite of three indicators, i.e.
• Life Expectancy Index (LEI)→ life expectancy at birth
• Education Attainment Index (EAI)→ Expected years of schooling and mean years
of schooling and
• Standard of Living Index → Gross National Income Percapita.
(HDI) ranks countries in relations to each other.
Estimates of National Income in India

In 1868, the first attempt was made by Dada Bhai Naoroji. He, in his book ‘Poverty and
UnBritish Rule in India’ estimated Indian per capita annual income at a level of Rs. 20.
Some other economists followed it and gave various estimates of Indian national
income, some of these estimates are as follows :
• Findlay Shirras ( 1911) - Rs. 49
• Wadia & Joshi ( 1913-14) – Rs. 44.30
• Dr. V.K.R.V. Rao (1925-29) – Rs. 76
After Independence, the Government of India appointed the National Income
Committee in August 1949 under the chairmanship of Prof. P.C. Mahalanobis, to
compile authoritative estimates of national income.
Present Status of Indian Economy :

Indian economy is world’s 6th largest economy on nominal GDP basis and the 3rd
largest by Purchasing Power Party (PPP). India had overtaken the UK in 2019 to
become the fifth largest economy in the world but has been relegated to 6th spot in
2020.
From 1951 until 2013, India GDP Annual Growth rate averaged 5.8% reaching an all
time high of 10.2% in December of 1988 and a record low of 5.2% in December of 1979.

Purchasing Power Parity (PPP) is a theory, which states that exchanges rates between
currencies are balanced, when their purchasing power is the same in each of the two
countries.

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INFLATION
Inflation is the persistent increase in the general price level of goods and services in an
economy over a given period of time. It leads to reduction in purchasing power of
money and fewer goods and services are bought. The inflation rate is the percentage
change in a price index. In India CPI (combined) is declared as the new standard for
measuring inflation. CPI numbers are typically measured monthly, and with a significant
lag . Inflation is caused by:
• The increase in the money supply faster than the economic growth can sustain;
or
• The injection of large amounts of money into the economy.
Remember: Inflation hurts lenders and benefits borrowers.
Inflation has its advantages and limitations.

Advantages
• Reduction in the amount of real private and public debt; and
• Increased employment because of nominal wage rigidity.
Limitations
• Increased opportunity cost of holding money;
• Discourages savings and investments; and
• Consumers begin amassing goods in fear of future prices rising.
Hyperinflation
Hyperinflation is an extreme case of inflation where the inflation rate increases above
100%. During hyperinflationary periods, the price level increase by about 500% to
1000% per year. Prices cannot be controlled.
Hyperinflation happens when there exists a significant rise in money supply not
supported by economic growth. As a result, the supply and demand for money are at a
disequilibrium.
Causes of Hyperinflation
• An imbalance between money demand and supply;
• Excess printing of currency by the central bank; and
• When people lose confidence in their country’s currency.

Effects of Hyperinflation
• Borrowers gain at the expense of lenders; and
• The public transfers wealth to the government.
Deflation
Deflation is a decrease in the price level due to a reduced supply of money in an
economy. Although it raises consumer’s purchasing power, deflation may have
negative outcomes on economic stability and growth. During a period of deflation, the
inflation rate falls below 0%.
Causes of Deflation
• Reduced money supply; or
• Increased economic productivity, which results in having more goods produced
than there is demand for.
Effects of Deflation
• It discourages expenditure and investments; and
• It decreases aggregate demand.
Disinflation
Whereas deflation is negative economic growth, such a -5%, disinflation is simply a
reduction in the rate of inflation, such as the inflation rate going from 9% one year to
7% the next year. It occurs when the rate at which the prices are raising is diminishing.
It is important to note that it does not signal the slowing down of the growth of the
economy; it signals a slow in the growth rate of inflation.
Stagflation When you have a slow economy with high inflation rates and
unemployment, stagflation is usually resultant. When the economy does not grow and
prices continue to rise have a stagflation cycle in the economy.
Hyper or runaway inflation (averaging 100 per cent in three years).

Galloping inflation (inflation increasing in arithmetic or geometric progression).
Creeping inflation (gradual increase in price are seen as good for economies).
core inflation refers to price increase excluding that of volatile fluctuation in

prices of food and energy. This measure can also be known as ‘structural
inflation*. The other is ‘food inflation’ which is increase in food prices.

Yet another measure is ‘imported inflation wherein prices of imports contribute to
inflation like increase in crude petroleum prices leading to increased fuel prices and it
results in overall increase in prices.
Measures to Control Inflation
• Increasing the bank interest rates.

• Regulating fixed exchange rates of the domestic currency.
• Controlling prices and wages.
• Providing cost of living allowances to citizens.
• Regulating black and speculative market.
• Supply side inflation can be controlled by increasing production of economy,
specially foodgrains and by improving infrastructure.
WPI
Wholesale Price Index (WPI) is measured on weekly basis. The first index of wholesale
prices commenced in India for the week January 10, 1942.
The base year of All- India WPI has been revised from 2004-05 to 2011-12 by the Office
of Economic Advisor (OEA), Department of Industrial Policy and Promotion , Ministry
of Commerce and Industry to align it with the base year of other macroeconomic
indicators like the Gross Domestic Product ( GDP) and Index of Industrial Production
(IIP). For determining WPI, commodities are divided into three categories –
1. Primary Articles (102 items),
2. Fuel & Power (19 items), and
3. Manufactured Products (555 items)→ 82% weightage.
Since services cannot be bought on wholesale basis, WPI does not include Services.
CPI
It measures changes over time in general level of prices of goods and services that
households acquire for the purpose of consumption. CPI is widely used as a
macroeconomic indicator of inflation, as a tool by governments and central banks for
inflation targeting and for monitoring price stability, and as deflators in the national

accounts. CPI is also used for indexing dearness allowance to employees for increase in
prices.
The Central Statistics Office (CSO), Ministry of Statistics and Programme

Implementation has revised the Base Year of the Consumer Price Index (CPI) from
2010=100 to 2012=100.
Unlike WPI, there is not a single measure of CPI. In India, four CPI indices are used to
determine inflation at the consumer level. These are:
1. CPI-IW (Industrial Worker)
2. CPI- UNME (Urban Non-Manual Employees)
3. CPI-AL (Agricultural Labourers)
4. CP1-RL (Rural Labourers).
IIP
The Index shows the growth rates in different industry groups of the economy in a
stipulated period of time. The IIP index is computed and published by the Central
Statistical Organisation (CSO) on a monthly basis.
Description: IIP is a composite indicator that measures the growth rate of industry
groups classified under,
1. Broad sectors, namely, Mining, Manufacturing and Electricity
2. Use-based sectors, namely Basic Goods, Capital Goods and Intermediate Goods.
Index of Eight Core Industries (Base: 2011-12 = 100)

The Eight Core Industries comprise 40.27 per cent of the weight of items included in
the Index of Industrial Production (IIP). The eight core industries are :-
• Coal Coal production (weight: 10.33 %)
• Crude Oil Crude Oil production (weight: 8.98 %)
• Natural Gas The Natural Gas production (weight: 6.88 %)
• Refinery Products Petroleum Refinery production (weight: 28.04%)
• Fertilizers Fertilizer production (weight: 2.63 %)
• Steel Steel production (weight: 17.92 %)
• Cement Cement production (weight: 5.37%)
• Electricity Electricity generation (weight: 19.85%)
WPI Food Index

Food Articles and Index is being compiled combining the

1. “Food Articles” under Primary,
2. “Food Products” under “Manufactured Products”.
Together with the Consumer Food Price Index released by Central Statistics Office, this
would help monitor the price situation of food items better.
Demand-pull Inflation This inflation occurs when aggregate demand increases at

a faster rate than aggregate supply. This type of inflation will typically occur when the
economy is growing faster than the long run trend rate of growth. If demand exceeds
supply, the prices of commodities rise.
Cost-push Inflation. This inflation occurs when there is an increase in the cost of
production for firms. Cost-push inflation could be caused by rising energy and
commodity prices.
Other important concepts:-
Fall Out of Inflation

A mild price rise is good for an economy like creeping inflation as it provides incentive
to producers in an economy to produce more, thereby more output and income in
an economy. The increased income enables the people to bear the modest increase in
prices.
But higher inflation makes essential goods out of reach of consumers. To maintain the
same standards, living people have to spend more in inflationary period, very often they
have to dip into their savings.
Why Prices Increase?

Causes of inflation could be
➢ demand-driven as demand-pull inflation or
➢ driven from the supply side as cost push inflation.
However, in inflationary period both reinforce each other.
Demand-pull inflation can occur because of the following reasons:

(1) Increasing population and a natural increase in demands of goods in an economy.
(2) Increase in income levels leads to increasing purchasing power of people to
purchase more goods.

(3) Consumerism in the economy when people believe in spending money rather
than saving.
(4) Increase in money supply and liquidity in the economy.
A demand in the economy is said to be good provided there are no supply constraints.
Some of the major aspects on the supply side in India are as follows:
(1) Food grains production has virtually become stagnant creating a severe demand
supply mismatch and similarly for other agricultural products. It may not be out of place
to say that rising food prices is essentially a supply issue. In the past the problem of
inflation was on account of shortage of food grains, but in recent times it is essentially
on account daily consumables of fruits, vegetables etc.
(2) Excessive monsoon dependence of the agricultural sector and the weather has a
large role in augmenting supply.
(3) India also has problems in the supply chain and involvement of too many
middlemen disrupting supply and creating an artificial shortage in the agricultural
sector.
(4) Supply of key industrial goods such as electricity, steel, cement hampers
adjustment of supply to the increased demand.
(5) Despite the policy of liberalization and the freedom given to the private sector it
is not relatively easy to make the supply flexible enough in the short-term which would
potentially become inflationary.
(6) Increased prices of raw materials, labour, etc., increase the cost of production
giving rise to cost-push inflation.
(7) There are structural problems like rising income of the poor through the NREGA
and other such income , generation activities for the poor which is bound to increase
demand for food items and given the near stagnancy in agricultural production build
inflationary
Measures of controlling inflation are:

➢ Controlling liquidity.
➢ Reducing expenditure and taxes.
➢ Tackling supply-side bottleneck including checking hoarding and speculation.
Inflation is also about the perception which people in general hold in the ability of the
government to maintain price stability. As if one is unsure of the prices tomorrow, one

will stock up today.
FISCAL POLICY IN INDIA

The government is not a profitmaking entity. Therefor to spend, the government has
to raise the money from the economy, mostly through taxes. Fiscal policy is the use of
government spending and taxation to influence economic condition- employment,
inflation, growth etc.
If the government receives more revenue than it spends, it runs a surplus, while if it
spends more than the tax and non-tax receipts, it runs a deficit.
To meet additional expenditures, the government needs to borrow domestically or
from overseas.
The objectives of any fiscal policy of a country' are as follows:
1) To ensure that the expenditure → welfare of the people.
2) Maintain optimal level of inflation.
3) Expenditure should not be wasteful. Efficiency and effectiveness in utilization of
resources should be the focus.
4) Taxes should not lead to undue burden on people and reduce inequalities.
5) Maintain economic stability.
➢ In a country like India, fiscal policy plays a key role in elevating the rate of capital
formation both in the public and private sectors.
➢ Fiscal policy also helps in providing stimulus to elevate the savings rate.
➢ The fiscal policy gives adequate incentives to the private sector to expand its
activities.
➢ Fiscal policy aims to minimise the imbalance in the dispersal of income and
wealth i.e. reduce inequality.
The main instrument of fiscal policy is budget. Hence it is also referred to as Budgetary
policy. The budget is more than a balance sheet of government receipts and
expenditures presented to the parliament.
Union Budget is classified into Revenue Budget and Capital Budget.
Revenue budget includes the government's revenue receipts and expenditure. There
are two kinds of revenue receipts - tax and non-tax revenue. Revenue expenditure is
the expenditure incurred on day to day functioning of the government and on various
services offered to citizens. If revenue expenditure exceeds revenue receipts, the
government incurs a revenue deficit.
Capital Budget includes capital receipts and payments of the government. Loans from
public, foreign governments and RBI form a major part of the government's capital
receipts. Capital expenditure is the expenditure on development of machinery,

equipment, building, health facilities, education etc.
Public expenditure / where does money go
Till 2016-17, Government expenditure used to be defined under—

1. Plan expenditure
2. Non-plan expenditure
Plan expenditure is expenditure ear marked for investment mentioned in the five -year
plans. Whereas non-plan expenditure is expenditure for items not mentioned in the
Five year plans.
Capital expenditure → creation of assets in an economy → desirable for growth. For

example, money spent for setting up power plant is a capital expenditure.
Revenue expenditure is recurring in nature, for maintenance, etc.
In India, non-plan expenditure used to be around 70 per cent of the total expenditure
whereas plan expenditure is only 30 per cent.
1. The plan and non-plan classification was removed from 2017-18.

2. Henceforth the expenditures of the Government will be reclassified as Capital
and Revenue spending.
Receipts by the government/where does money come from

Expenditure is met through receipts, which could be of two types:-
1. Revenue receipts- recurring in nature; do not create interest liability or loss of
asset.
2. Capital receipts- non recurring; creates liability (debt creating) or loss of asset
(non-debt creating).
The primary source of revenue receipts is tax revenue. Taxes could be either direct or
indirect.
Direct tax: incidence and burden on the same person i.e. the tax burden cannot be
shifted eg income tax, corporate taxes, wealth tax, etc.
Indirect tax: incidence and burden are on different people i.e. tax burden can be
shifted. In case if the subject is not identifiable then also tax is known as indirect tax
eg excise duty, customs duty, service tax etc.

Taxes levied by the central income tax, customs duty,
government and collected by excise duty and service tax
central government
Taxes levied by the central central sales tax levied on
government and collected by inter-state movement of goods
state government
Taxes levied by the state sales rax, octroi, municipal
government and collected by taxes, road tax, entertainment
state government tax and agriculture tax
The basis of sharing the rax revenue between the centres and the states are decided
by the finance commission.
Chairman of 13th finance commission= vijay Kelkar.
Chairman of 14th finance commission= Y. V. Reddy
Chairman of 15th finance commission= N. K. Singh
Surcharge= Tax on tax.

Cess= Similar in application as the surcharge except that the amount
collected is meant solely for specific funding/cause like education cess for funding of
education.
Non-tax revenue receipts are dividends received by the government from public
sector, payment of interest by the state governments etc.
WAYS AND MEANS ADVANCES

While tax revenue is received with delay, expenditure is incurred immediately. This
causes temporary mismatch between receipts and expenditure. This mismatch is met
through a temporary overdraft facility provided by RBI. This is knowns as Ways and
Means Advances
This overdraft facility is for a time period of 90 days.
NATURE OF GOVERNMENT BUDGET

A government budget by its very structure is deficit-oriented.
▪ Balanced Budget – A government Budget is assumed to be balanced if the
expected expenditure is equal to the anticipated receipts for a fiscal year.
▪ Surplus Budget – A Budget is said to be surplus when the expected revenues
surpass the estimated expenditure for a particular business year. Here, the Budget
becomes surplus, when taxes imposed, are higher than the expenses.
▪ Deficit Budget- A Budget is in deficit if the expenditure surpasses the revenue
for a designated year.
NATURE OF DEFICITS
1. Revenue deficit = Total revenue expenditure – Total revenue receipts.
2. Fiscal deficit = Total expenditure – Total receipts excluding borrowings.
3. Primary deficit = Fiscal deficit-Interest payments.
Revenue deficit is the most dangerous. I t implies borrowing money for meeting the
consumption of the government and not to create assets.
Borrowings should be used to create assets.
The primary deficit shows how far the interest payments are responsible for the fiscal
deficit.
A high primary deficit would mean that fiscal deficit is on account of factors other than
the interest payments and structural in nature. A low primary deficit indicates that the
high fiscal deficit is on account of interest payments, which is the case in India.
Too much fiscal deficit results into

➢ higher inflation,
➢ crowding out of private sector,
➢ downgrade in credit rating etc.
because of these reasons, government framed, Fiscal Responsibility and Budget
Management Act (FRBMA) for gradual reduction of revenue deficit by 0.5 per cent
every year to be brought down to zero by 2007-2008. In respect of fiscal deficit the
aim was to reduce it by 0.3 per cent every year beginning from 2004 to 2005.
The global crisis initiated during 2007 required a fiscal stimulus package to ensure that
the Indian economy does not slip into a recession and a conscious decision taken to
relax the FRBMA provisions until the situation is improved.
If the expenditure needs are inflexible and deficits have to be checked the only way
is to augment the receipts and this is where the government has focused through tax
reforms with the taxes being a major source of receipts for the government as it offered
great potential. There is a need to increase the tax to GDP ratio which is presently
around 10 per cent especially given the growth of the economy there should be
proportionately larger increase in tax revenue.

If the deficit is financed through printing of money it is known as monetization of
deficit or monetized deficit. Any monetized deficit will leads to inflation. Realizing
the dangers of monetization, governments have switched to market borrowings for
meeting the deficit to prevent build-up of inflationary pressures for the past several
decades.
Market borrowing for meeting the deficit is performed by the RBI, on behalf of the
government being a banker to the government. This is performed through issuance of
central government securities by RBI and could either treasury bills (borrowings of
less than a year) or dated securities (more than a year).
All carry a fixed interest rate (also known as coupon) directly in case of dated securities
and can be derived in case of treasury bills. There is always a market for government
securities as they are risk-free (gilt edged) as the government can never be a defaulter
and in the most exceptional circumstances it can always resort to printing of currency
in discharge of its debt obligations.
A major role is played by banks as they subscribe to these borrowing programs of the
RBI.
However, large government borrowings to meet the deficit have three issues. One, it
crowds out private investment which otherwise would have arrived in the economy.
Secondly, large borrowings would add pressures on interest rates as large borrowing
would necessitate higher interest rates. If the interest on government securities is high
it would add pressures on the general interest rate which could create inflationary
pressures. Thirdly, interest payment is the number one expenditure head accounting
for over 25 per cent of the total expenditure in the economy. This has happened as
over the past several decades deficits are being financed through market borrowings.
Types of Taxes
Progressive tax
A progressive tax is a tax in which the tax rate increases as the taxable base amount
increases. Progressive taxes are imposed in an attempt to reduce the tax incidence of
people with a lower ability-to-pay, as such taxes shift the incidence increasingly to those
with a higher ability-to-pay. The opposite of a progressive tax is a regressive tax, where
the relative tax rate or burden increases as an individual’s ability to pay it decreases.
Progressive taxation: Graph demonstrates a progressive tax distribution on income

that becomes regressive for top earners.
Regressive tax
A regressive tax is a tax imposed in such a manner that the average tax rate decreases
as the amount subject to taxation increases. A regressive tax imposes a greater burden
(relative to resources) on the poor than on the rich — there is an inverse relationship
between the tax rate and the taxpayer’s ability to pay as measured by assets,
consumption, or income.

Proportional tax
Proportional tax is the taxing mechanism in which the taxing authority charges the
same rate of tax from each taxpayer, irrespective of income. This means that lower
class, or middle class, or upper class people pay the same amount of tax. Since the tax
is charged at a flat rate for everyone, whether earning higher income or lower income,
it is also called flat tax.
Description: Proportional tax is based on the theory that since everybody is equal,
taxes should also be charged the same way.
It is unfair to charge more from anybody having a higher income. The government
charges a flat rate of 30% on the income earned by the companies in India, exclusive of
surcharge and educational cess. A surcharge of 10% and a cess of (2%+ SHEC 1%) are
collected on the tax amount collected.
Some concepts:
Tax buoyancy: explains this relationship between the changes in government’s tax
revenue growth and the changes in GDP. It refers to the responsiveness of tax revenue
growth to changes in GDP. When a tax is buoyant, its revenue increases without
increasing the tax rate.
Tax elasticity: It refers to changes in tax revenue in response to changes in tax rate.
For example, how tax revenue changes if the government reduces corporate income
tax from 30 per cent to 25 per cent indicate tax elasticity.
TAX REFORMS—INDIRECT TAXES

Issues which should be taken care of:
• Burden should be lower
• Avoid multiple taxation rates.
• Avoid cascading effect.
The government has tried to address the issue by reducing the slabs of excise duty only
and lower excise duty on essentials or mass goods to minimize the regressive
character. With regard to the cascading effect, the best way to prevent it is by
introducing value added tax VAT) which is a tax on the value additions at each stage of
production rather than on the finished goods. Provided the federal structure both
centre and state government VAT would have to be at both levels.
Central level: MODVAT → CENVAT

State governments replaced sales tax with→ VAT

An initiation was made with the government by first introducing the modified value
added tax (MODVAT) scheme which allowed partial adjustment of duties on capital
goods purchased, however, it was restrictive in nature. The government replaced
MODVAT with a wider scheme of input credit for the excise duties inputs (raw
materials, capital goods and services) purchased for direct use in production known as
central value added tax (CENVAT) at the central level during 2004.
A major reform has been at the state level with the replacement of sales tax with state
VAT. The credit for this goes to Shri. Asim Das Gupta the then Finance Minister, West
Bengal and can be hailed as a landmark in tax reforms.
The sales tax regime was very complicated with different sales tax rates for same
products in different states. A state VAT required one product one tax rate’ across all
states and to drive a consensus for this was herculean effort as some states would
stand to gain and others would tend to lose.
State VAT made effective from 1 April 2005 has the following salient features:
(1) State VAT is not a new tax but only a change in the way of collecting tax from the
final stage to the value addition stage.
(2) This allows for set-off of duties from the tax payable but against original
invoices/ challans of the tax paid on the inputs purchased.
(3) There would be a uniform 4 per cent state VAT on 270 mass-consumed goods
across all states, a uniform VAT of 12.5 per cent on 280 goods and 1 per cent on gold
and silver ornaments across all states.
(4) Those with a turnover of ₹ 5 lakh and less would not be liable for any VAT, from
₹ 5 to 50 lakh a composite tax but with no set-off. VAT is payable for turnover
exceeding ₹ 50 lakhs
The state VAT has helped in checking tax evasion by introducing a ‘bill culture,
transparency in tax administration and collection, increased revenue for the state
government.
The government proposed integrating goods and services tax.
TAX REFORMS—DIRECT TAXES

Progressive in nature.
Fiscal Drag: During inflation, pay packets increases to keep pace with the increasing
prices. This increase in pay packet does not lead to increase in quality of life. It is utilized
in maintaining the same quality of life as before.
but increased pay packets pushes them to higher tax bracket and they would ave to pay
more taxes.
The coffers of the government fills up because of people moving up the tax bracket and
on the other there is a reduced spending. This phenomenon is known as ‘Fiscal drag’.
To improve tax collection:-

1. Increase in the direct tax rates.
2. Increase in the tax base.
3. Enforce tax compliance.
Increase in Tax Rate

Laffer curve:
The Laffer Curve describes the relationship between tax rates and total tax revenue,
with an optimal tax rate that maximizes total government tax revenue.
If taxes are too high along the Laffer Curve, then they will discourage the taxed
activities, such as work and investment, enough to actually reduce total tax revenue.
In this case, cutting tax rates will both stimulate economic incentives and increase tax
revenue.
The Laffer Curve was used as a basis for tax cuts in the 1980's with apparent success,
but criticized on practical grounds on the basis of its simplistic assumptions, and on
economic grounds that increasing government revenue might not always be optimal.
Increase in Tax Base

1. Reducing exemption level or
2. Taxing untaxed sector.
Tax base refers to that threshold level of income on which taxes become applicable.
So one way could be to lower the exemption level so that more people are drawn in
the tax net and thereby an increase in tax payers and tax revenue.
Lowering the exemption would further burden the middle class and more so by this
way it may be possible to increase the ‘number of tax payers’ but ‘not necessarily tax
revenue’ as many would be marginal tax payers.
The other way to increase the tax base is to bring in untaxed sectors under the tax net.
All sectors with the possible exception of the agricultural sector are already under the
tax net. Agriculture being a state subject can be taxed only by the state government
and not by the central government.
Ensuring Tax Compliance

The people who are not paying should be paying taxes. Compliance could be increased
by making process simpler eg Saral- for filing ITR.

The problem in India is that of tax compliance with lot of leakages, large-scale tax
evasion and black money.
BLACK MONEY
It is an unaccounted income, earned through illegal channels and put to unproductive
anti-national use and conspicuous consumption.
Demonetisation
On November 8, 2016, the two largest denomination notes, Rs 500 and Rs 1000, were
“ demonetized ”.
OBJECTIVE: to curb corruption; counterfeiting; the use of high denomination notes for
terrorist activities; and especially the accumulation of “black money”, generated by
income that has not been declared to the tax authorities.
In the wake of the demonetisation, the government has taken a number of steps to
facilitate and incentivize the move to a digital economy. These include:
Launch of the BHIM (Bharat Interface For Money) app for smartphones. This is based
on the new Unified Payments Interface (UPI) which has created inter-operability of
digital transactions. To make simple and quick payments.
Launch of Aadhaar Merchant Pay, aimed at the 350 million who do not have phones.
This enables anyone with just an Aadhaar number and a bank account to make a
merchant payment using his biometric identification. Aadhar Merchant Pay will soon
be integrated into BHIM and the necessary POS devices will soon be rolled out.
Reductions in fees (Merchant Discount Rate) paid on digital transactions and
transactions that use the UPI.
VIEWS ON TAX COMPLIANCE
Why people do not want to pay taxes?
(1) Doubts about the intentions of the government in using it productively for the
masses.
(2) The perception of the income tax officials has got to change from treating
everyone as a tax evader to that of trust, a friend guiding and supporting the people.
(3) Our policies for tax evasion can be said to be ‘soft’. What is required is strong
punishment for tax evaders, those generating black money uniform for all irrespective
of whether political leader, bureaucrat, private organization, etc., to serve as a lesson
and a source of discouragement.
Other issues which can help augment revenue to the government like completely
simplified tax regime based on income at low rates with no exemptions easily
enforceable and minimizing leakages.
Characteristics of efficient taxation system:
• buoyancy (raise tax revenue with increased growth of an economy rather
than by changing the tax rates).

• effectiveness (promoting tax compliance).
• cost-effective (lower cost of collection with increased tax revenue).
• neutral to economic decisions (not influencing location of businesses).
Typical Budget in India

The budgets are focused on ‘outlays’ or spending under different heads but no
provision is made to know the outcome’ of such spending. The other aspect is the
outlays are not linked to the actual need.
Changes made in Budget and Budgetary Practices

• Merger of Rail Budget with Union Budget
• Advancement of Financial Year
• To advance its presentation by 27 days i.e. on 1st feb.
• To dispense with Plan-non-Plan dichotomy in expenditure.
• The classifications for Centrally-sponsored schemes have already been changed
to “core of the core”, “core” and “optimal”.
Budget Presentation Date Advancement

The objective behind this move is to have the Budget constitutionally approved by
Parliament and assented to by the President, and all allocations at different tiers
disseminated to budget-holders, before the financial year begins on April 1.
To dispense with Plan-non-Plan dichotomy in expenditure from 2017-18
In line with the government’s decision to dismantle the Planning Commission.
Plan/Non-Plan will help in resolving the following issues

• This distinction of expenditure had led to a fragmented view of resource
allocation to various schemes.
• It had made it difficult to ascertain cost of delivering a service and also to link
outlays to outcomes.
• It had led to bias in favour of Plan expenditure by Centre as well as the State
Governments and had neglected essential expenditures on maintenance of assets and
other establishment related expenditures to provide essential social services.
Railway budget: From now onwards all the proposals regarding Railway Budget will be
part of general budget, which will have a separate discussion on railway expenditure,
but the functional autonomy of the Railways will be maintained. Now the railway
revenue deficit and capital expenditure will be transferred to the Finance Ministry.
The Railways will also not have to pay a special dividend to the government for getting
gross budgetary support. The Railways pays about Rs. 10,000 crore as dividend a year
after getting about Rs. 40,000 crore.
NITI Aayog member, Bibek Debroy, led committee recommended restructuring of the

Ministry of Railways and merging of budgets.
This step will help raise capital expenditure in Railways which will enhance connectivity
in the country and boost economic growth.
Functional autonomy, distinct identity of Railways will remain as it is.
The merger would also facilitate an integrated and seamless approach towards
transportation strategy in the country.
SOME OTHER FORMS OF BUDGETING
Zero-Based Budgeting - ZBB

This is a method of budgeting in which all expenses must be justified for each financial
year. The process of this budgeting starts from a “zero base,” on every financial year.
Every function within the ministry or department is analyzed for its needs and costs.
Budget allocations are then made according to the need of ensuing financial year.
Outcome Budget
Outcome based budgeting is a practice of suggesting and listing of estimated outcomes
of each programmes or schemes designed.
Gender Budget
A Gender Budget or Gender-Responsive Budget is a budget allocation that considers
the gender patterns in the society and allocates the resources to implement policies
and programs to help moving society towards a more gender equal society.
Gender Budget disaggregates the mainstream budget according to its impacts on
women and men. It visualizes the process of conceiving, planning, approving,
executing, monitoring, analyzing and auditing budgets in a gender-sensitive way.
Performance Budgeting
Performance Budgeting also known as Planning-Programming-Budgeting System
(PPBS) is an attempt to integrate budgeting with overall planning of the country as
a whole. It tries to make the planning, execution, and evaluation of government
policies in a more systematic manner. The centre for PPBS is the budget; the methods
used are planning and decision-making. The purpose of this budget is for ensuring a
more viable economy and improved coordination among various sectors.

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Monetary Policy Committee (MPC):
RBI Act, 1934 was amended in 2016 to provide a statutory and institutionalised
framework for the creation of MPC
Monetary Policy Committee (MPC) has the responsibility to take decisions on
monetary policy matters to meet inflation target as decided between the Central
government and RBI.
MPC replaced the earlier system where the RBI governor had complete control over
monetary policy decisions.
As per Monetary Policy Framework Agreement, RBI is responsible to contain inflation

at 4% (+ or – 2%)
When the RBI fails to meet the inflation target, it will send a report to the central
government stating reasons and the remedial actions that will be taken. A breach of
the tolerance level for three consecutive quarters will constitute a failure of monetary
policy.
Composition:
6-member committee
1. RBI Governor (Chairperson)
2. RBI Deputy Governor in charge of monetary policy
3. One official nominated by the RBI Board
4. 3 members representing the Government of India
These 3 members of the MPC are experts in the field of economics or banking or
finance or monetary policy and are appointed for a period of 4 years and shall not be
eligible for re- appointment.
Decision Making:
The committee meets 4 times a year. MPC decisions are taken on a majority basis and
the chairman of the committee will have casting vote (and not veto power)
RBI publishes Monetary Policy Report after every 6 months to explain the sources and
forecasts of inflation for the coming period of 6-8 months.
Transmission of rates
From 1st April 2016, RBI has introduced a new methodology for calculation of the
Base Rates based on marginal cost of funds based lending rate rather than average
cost of funds.
Calculation is based on 4 factors:
• Marginal cost of deposits/funds
• Cost of maintaining CRR and SLR
• Operational Costs of Banks
• Tenor Premium (based on the time period for which loan is given)

As per the new methodology of MCLR, when RBI reduces the repo rate, banks reduce
their deposit rate and since the lending rate is linked to the new deposit rate, they
reduce the lending rate also. It will lead to fast transmission of repo rate and bring
transparency.
Every bank calculates its own MCLR rate based on the cost of deposits, operational
costs, reserve requirements, and tenor premium. So MCLR is an internal benchmark.
RBI has made it mandatory for banks to link all new floating rate personal or retail
loans, and floating rate loans to MSMEs to an external benchmark from October 1,
2019.
Banks can choose one of the four external benchmarks–
1. repo,
2. 3-month treasury bill,
3. 6- month treasury bill yield or
4. any other interest rate published by Financial Benchmarks India Private limited
Organised Banking System:

Banking in India started in 1770 with the establishment of Bank of Hindustan.
The organized banking system is classified into three categories: the central bank
known as the Reserve bank of India which is the monetary authority or the apex bank,
commercial and cooperative banks.
1806: Bank of Calcutta founded; it was later renamed to Bank of Bengal.

1840: Bank of Bombay
1843: Bank of Madras
These three banks were known as the presidency banks. And were integrated into a
single bank—Imperial Bank of India which became State Bank of India in 1955.
The first bank which was exclusively set up by Indians was Allahabad Bank, followed by
Punjab national Bank Ltd. set up in 1895 with headquarters at Lahore.
In 1922, Royal Commission on Indian Currency and Finance headed by Hilton Young
was established. Based on the recommendations of this commission, RBI Act was
passed in 1934.
Later, in the year 1935 India’s central bank — Reserve Bank of India — was established
under the Reserve Bank of India act.
Commercial banks:
According to the RBI Act of 1934, commercial banks are classified into scheduled and
non- scheduled banks
Scheduled Banks:
The scheduled banks are those which are entered in the Second Schedule of RBI Act

1934.
Scheduled banks are regulated under the provisions of Banking Regulation Act, 1949.
Benefits of Scheduled Banks : They can approach RBI for financial assistance at bank
rate, repo rate, MSF etc.
The banks included in this category should fulfil two conditions
1. Scheduled Banks should have paid-up capital and reserves not less than 5 lakhs
2. Any activity of the bank will not adversely affect the interests of the depositors
Scheduled Banks in India are categorised in 5 different groups according to their
ownership / nature of operation.
1. State Bank of India
2. Nationalised Banks
3. Regional Rural Banks
4. Foreign Banks
5. Private Banks
Nationalisation of Commercial Banks in India (Historical Dimension):
Govt of India, with the enactment of the SBI Act, 1955 partially nationalised the 3
Imperial Banks (mainly operating in the three past Presidencies with their 466
branches) and named them the State Bank of India—the first public sector bank
emerged in India.
On 19th July 1969, 14 major banks were nationalized by the government of India
In 1980, the government of India took over another 6 commercial banks
New Bank of India was merged with Punjab National Bank in 1993
The nationalized banks are banks in which the central government is a major share
holder
Lead Bank Scheme which came into existence in the year 1969 also contributed to the
banking development and branch expansion effort
Reasons to nationalize 14 big commercial banks in July 1969:
• Commercial banks in India were not functioning according to the development
requirements of the people of India
• The banks were controlled by a group of industrialists and business men who
had used bank funds to build their private industries
• Small industrial and business units were ignored in spite of the government of
India’s policy to help the small sector
• Agricultural credit was non-existent
Regional Rural Banks:

The Working Group on rural banks under the chairmanship of Mr. M Narasimham

recommended the setting up of regional rural banks as part of a multi-agency
approach to rural credit
It was found that the commercial banks and credit co-operative societies were not
adequately catering to the credit requirements of the small and marginal farmers,
agricultural labourers and artisans in the rural areas
The small income groups required low cost credit
Accordingly, in the year 1975, five RRBs were set up
First set up on 2 October, 1975 with the formation of a Prathama Grameen Bank
Legislative backing of Regional Rural Banks Act 1976
RRBs are joint venture between
1. central government (50%),
2. State government (15%) and
3. a Commercial Bank (35%)
Every RRB was to be sponsored by a “Public Sector Bank”
RRB are expected to lend only to the weaker sections of rural society, charging lower
interest rates, opening branches in remote and rural areas and keep a low cost profile.
But the commercial motivation was absent. RRBs have played a significant role in
mobilizing rural savings
In 1991, the Narasimham Committee had recommended that RRB may be given a
choice to maintain a separate identity or to get merged with the sponsor banks as
rural subsidiaries
In the Post Reforms period:

By 1995, the liberalization policy of the government allowed private sector
participation in banking industry. This was followed by foreign direct investment (FDI)
in banks.
Deregulation of interest rates, increased competition and greater accountability has
improved the profitability of commercial banks in spite of the fall in interest rates and
resultant fall in interest spreads.
Core Banking Solutions
Core Banking Solutions (CBS) can be defined as a solution that enables banks to offer a
multitude of customer-centric services on a 24x7 basis from a single location,
supporting retail as well as corporate banking activities.
The centralisation thus makes a “one-stop” shop for financial services a reality. Using
CBS, customers can access their accounts from any branch, anywhere, irrespective of
where they have physically opened their accounts. The customer is no more the
customer of a Branch. He becomes the Bank’s Customer.
In 2019, the Finance Minister has announced the biggest consolidation plan of Public

sector Banks (PSBs)- merging 10 of them into just 4.
S.
Amalgamated Banks Anchor Banks
No.
Punjab National Bank (PNB), Oriental Bank
1 of Commerce (OBC), and United Bank of PNB
India
2 Canara Bank and Syndicate Bank Canara Bank
Union Bank of India, Andhra Bank, and
3 Union Bank of India
Corporation Bank
4 Indian Bank and Allahabad Bank Indian Bank
Now, the total number of PSBs after consolidation has come down to 12 from 27 in
2017. The earlier mergers were:
Vijaya Bank and Dena Bank with Bank of Baroda (BoB) – effective from April 01, 2019.
State Bank of India absorbed five of its associates and the Bharatiya Mahila Bank in
2017.
Co-Operative Banks
Co-operative banks in India are registered under the States Cooperative Societies Act.
Co-operative banks are also regulated by the Reserve Bank of India (RBI) and
governed by Banking Regulations Act 1949 and Banking Laws (Co-operative Societies)
Act, 1955.
They work under the "No Profit No Loss" model.
They function with the rule of “One Member One Vote”.
Co-operative banks mainly focus on agricultural and rural sector lending.
Co-operative banks are the first government sponsored, government supported and
government. subsidised financial agency in India.
SHORT TERM CREDIT: Co-operative banks have a 3 tier structure —
1. Primary (agriculture or urban) credit societies
2. District central co-operative banks and at the apex level
3. State co-operative banks
LONG TERM CREDIT:
1. Land Development Banks
2. Cooperative and Rural Development Banks
Development Banks in India:
NABARD-National Bank for Agriculture and Rural Development:
Established on the recommendations of B. Sivaramman Committee on July 12, 1982

to implement the National Bank for Agriculture and Rural Development Act 1981.
Replaced the Agricultural Credit Department (ACD) and Rural Planning and Credit Cell
(RPCC) of Reserve Bank of India, and Agricultural Refinance and Development
Corporation (ARDC).
NABARD is India's specialised bank for Agriculture and Rural Development in India.
Initial Corpus – 100 cr
Headquarters : Mumbai
NABARD is also known for its 'SHG Bank Linkage Programme' which encourages
India's banks to lend to self-help groups (SHGs).
Largely because SHGs are composed mainly of poor women, this has evolved into an
important Indian tool for microfinance.
In 2019, RBI sold its stake in NABARD to government. of India. Now NABARD is fully
owned by government of India.
Small Industries Development of India (SIDBI):
It was established on April 2, 1990 as an independent financial institution.

SIDBI was designated as apex organisation in the field of Small Scale Finance.
Aim: To aid the growth and development of micro, small and medium scale enterprises
(MSMEs) in India.
Headquarters: Lucknow, Uttar Pradesh
Though it was a wholly owned subsidiary of Industrial Development Bank of India,
presently the ownership is held by Government of India owned / controlled
institutions.
In order to promote and develop MSME sector, SIDBI adopted “Credit Approach”
Industrial Finance Corporation of India (IFCI):
IFCI was established on 1st July, 1948 under the Industrial Finance Corporation Act of
1948.
IFCI became a Public Limited Company in 1993.
IFCI was the first specialized financial institution set up in India to provide term finance
to large industries in India.
It is also a Systematically Important Non- Deposit Taking Non Banking Financial
Company.
Key functions of IFCI:

Granting long-term loans(25 years and above)
Guaranteeing rupee loans floated in open markets by industries
Underwriting of shares and debentures Providing guarantees for industries
Export-Import Bank (EXIM Bank):

Export-Import Bank of India is a wholly owned government. of India entity established
in 1982.
Its main aim is financing, facilitating and promoting foreign trade of India.
EXIM Bank extends Line of Credit (LoC) to overseas financial institutions, regional
development banks, sovereign governments and other entities abroad.
It is regulated by the Reserve Bank of India.
HQ : New Delhi
Key functions of EXIM Bank:
Provides direct financial assistance to exporters of plant, machinery and related

services in the form of medium term credit.
It rediscounts the export bills for a period not exceeding 90 days against short-term
export bills discounted by Commercial Banks.
It facilitates in developing and financing export- oriented industries.
National Housing Bank:

It was setup as a statutory organization in 1988 under National Housing Bank Act,
1987
It is an apex financial institution for housing
Objective: To operate as a principal agency to promote housing finance institutions
both at local and regional levels
HQ: New Delhi
It registers, regulates and supervises Housing Finance Companies (HFCs)
NHB is regulated by RBI
RBI sold its stake in NHB in 2019 – NHB is now 100% owned by government. of India
[On recommendations of Narasimham Panel]
Mudra Bank
MUDRA stands for Micro Units Development and Refinance Agency
It was setup in 2015 by government. of India to provide loans at low rates to Micro-
Finance In- stitutions and Non-Banking Financial Institutions which then provide
credit to MSMEs
It also provides refinance support to RRBs for enhancing their liquidity
Eligible Borrowers : Small Manufacturing Units, Shopkeepers, Artisans, Fruit and
Vegeta- ble Vendors
Non-Banking Financial Companies (NBFCs)

It is a company which is engaged in the business of loans and advances, acquisition
and selling of shares, bonds, debentures etc.
2016: government allowed 100% FDI on ‘other financial services’ carried out by NBFCs
As per the changed FDI policy 2017, under section 47 of the Foreign Exchange
Management Act, 100 percent FDI through automatic route is permitted for NBFCs.

NBFCs financial assets should constitute more than 50% of the total assets and
income from financial assets should constitute more than 50% of the gross income.
NBFCs cannot accept demand deposits from public.
Liquid Debt Mutual Funds is a primary source of short-term funds to NBFC sector.
[Liquid Funds: Liquid funds belong to the debt category of mutual funds. They invest in
very short- term market instruments like treasury bills, government securities and call
money. They are getting popular with retail investors due to their higher than savings
bank account returns and easy liquidity]
Classification of NBFCs based on liability structure:
1. Deposit-taking NBFCs (NBFC-D)
2. Non-deposit taking NBFCs (NBFC-ND)
NBFCs exempted from the regulatory control of the RBI:
Differences between Banks and NBFC:
Banks are govt. authorized fi

NBFC does not hold a bank
nancial intermediary providi
Definition license but yet can provide
ng all sorts of banking servic
financial service to people.
es to the people.
Demand D
Accepeted Does not accept
eposit
Foreign Inv Allowed up to 74% for privat

up to 100% is allowed
estment e sector banks
Maintenan
ce of Reser Mandatory Not Required
ve Ratios
Credit crea
Banks create credit NBFC do not create credit
tion
Differentiated Banks
There are two kinds of banking licences that are granted by the Reserve Bank of India
– Universal Bank Licence and Differentiated Bank Licence.
The concept of differentiated banking was introduced by RBI, based on the
recommendations of Nachiket Mor Committee in 2013.
Differentiated Banks (niche banks) are banks that serve the needs of a certain

demographic segment of the population.
Small Finance Banks and Payment Banks are examples of differentiated banks in India.
Small Finance Banks:
The objectives of setting up of small finance banks will be to further financial inclusion
by
(1) provision of savings vehicles
(2) supply of credit to small business units; small and marginal farmers; micro and
small industries; and other unorganised sector entities, through high technology-low
cost operations.
SFBs are private financial institutions established as a Public Limited Company under
Companies Act, 2019.
SFBs are licensed under Banking Regulation Act, 1949 and are governed by RBI Act,
1934
In 2019, RBI started “On Tap Facility” under which RBI can accept applications and
grant license for SFBs throughout the year.
Capital Small Finance Bank is the first SFB. It started in 2016.
Minimum Paid Up Capital for SFBs shall be 100 cr.
Small finance banks will be required to extend 75 per cent of its Adjusted Net Bank
Credit (ANBC) to the sectors eligible for classification as priority sector lending (PSL)
by the Reserve Bank.
Individuals/professions with 10 years of experience in finance, Non-Banking Financial
Companies (NBFCs), micro finance companies, local area banks are eligible to set up
SFBs.
SFBs can accept all types of deposits like a commercial bank (Current A/c, Savings A/c,
Fixed Deposit etc.)
Conditions: 25% branches in rural areas and 50% of the loans to be given to MSME
sector( 25 lakh rupees).
Have to maintain CRR and SLR as per RBI norms.
Payments Banks:
Paid up capital = 100crore.
FDI limit is as per FDI policy for private sector banks.
The objectives of setting up of payments banks will be to further financial inclusion by
providing
(1) small savings accounts
(2) payments/remittance services to migrant labour workforce, low-income
households, small businesses, other unorganised sector entities and other users.
They will not lend to customers and will have to deploy their funds in government
papers and bank deposits.
Acceptance of demand deposits-Payments bank will initially be restricted to holding a

maximum balance of Rs. 1,00,000 per individual customer.
Issuance of ATM/debit cards-Payments banks, however, cannot issue credit cards.
Payments bank cannot undertake lending activities.
Payments Bank can invest depositor’s money in government securities (G-Secs) only.
75% is required to be invested in SLR. And can hold maximum of 25% with other
scheduled commercial banks for operational purposes and liquidity management.
Maintain CRR
FRBM Act
▪ It was enacted in August 2003.
▪ Obj: Bringing fiscal responsibility for ensuring inter-generational equity in fiscal
management and long-term macro-economic stability.
▪ The Act envisages the setting of limits on the Central government’s debt and
deficits.
It was mandated by the act that the following must be placed along with the Budget
documents annually in the Parliament:
1. Macroeconomic Framework Statement
2. Medium Term Fiscal Policy Statement and
3. Fiscal Policy Strategy Statement
▪ It limited the fiscal deficit to 3% of the GDP.
▪ Similar laws were enacted for states.
o The States have enacted their own respective Financial Responsibility
Legislation, which sets the same 3% of Gross State Domestic Product (GSDP) cap on
their annual budget deficits.
▪ The rules were amended in 2018, and most recently to the setting of a target of
3.1% for March 2023.
The NK Singh committee (set up in 2016) recommended:
• government should target a fiscal deficit of 3% of the GDP in years up to March

31, 2020 cut it to 2.8% in 2020-21 and to 2.5% by 2023.
• Using debt to GDP ratio as the primary target for fiscal policy. This ratio was 70%
in 2017.
These are the targets set by NK Singh:
1. Debt to GDP ratio: The review committee advocated for a Debt to GDP ratio of

60% to be targeted with a 40% limit for the centre and 20% limit for the states.
2. Revenue Deficit Target – revenue deficit should be reduced to 0.8% of GDP by
March 31, 2023. The minimum annual reduction target was 0.5% of GDP.
3. Fiscal Deficit Target – fiscal deficit should be reduced to 2.5% of GDP by March
31, 2023. The minimum annual reduction target was 0.3% of GDP.
After the recommendations of the committee, the FRBM Act was amended by the
government in 2018. The amendment added a new road map and timeline to reduce
the fiscal deficit to 3% of GDP by 31st March 2021. It also inserted the escape clause
that allows the government to go above the fiscal deficit target set for the year during
some extraordinary circumstances.
Escape Clause
The clause allows the govt to relax the fiscal deficit target for up to 50 basis points
or 0.5 per cent.
The Escape Clauses can be invoked:
• by the Government after formal consultations and advice of the Fiscal Council.
• with a clear commitment to return to the original fiscal target in the coming
fiscal year.
Grounds for the use of the escape clause
The subsection 4 (2) of the Act says about various grounds on which the FRBM’s fiscal
deficit target may be exempted during a year.
• national security, act of war,

• national calamity,
• collapse of agriculture severely affecting farm output and incomes,
• structural reforms in the economy with unanticipated fiscal implications,
• decline in real output growth of a quarter by at least three per cent points
below its average of the previous four quarters,
Budget 2021-22
In 2021-22, the government has not provided a target for the next three years and will
amend the FRBM Act to accommodate the higher fiscal deficit. The fiscal deficit is
targeted at 6.8% of GDP in 2021-22, down from the revised estimate of 9.5% in 2020-
21 (4.6% in 2019-20). In the Union Budget 2021 speech, the Finance Minister has
announced the government’s aim to steadily reduce fiscal deficit to 4.5% of GDP by
2025-26.

• Revenue deficit is targeted at 5.1% of GDP, and
• fiscal deficit is targeted at 6.8% of GDP in 2021-22.
• primary deficit (which is fiscal deficit excluding interest payments) is 3.1% of
GDP.
In 2020-21, as per the revised estimate, revenue deficit is 7.5% of GDP, and fiscal
deficit is 9.5% of GDP.
15th FC Report 2021-26:
(1) The President shall, within two years from the commencement of this Constitution
and thereafter at the expiration of every fifth year or at such earlier time as the
President considers necessary, by order constitute a Finance Commission which shall
consist of a Chairman and four other members to be appointed by the President.
(2) Parliament may by law determine the qualifications which shall be requisite for
appointment as members of the Commission and the manner in which they shall be
selected.
(3) It shall be the duty of the Commission to make recommendations to the President
as to —
(a) the distribution between the Union and the States of the net proceeds of taxes
which are to be, or may be, divided between them under this Chapter and the
allocation between the States of the respective shares of such proceeds;
(b) the principles which should govern the grantsin-aid of the revenues of the States
out of the Consolidated Fund of India;
(bb) the measures needed to augment the Consolidated Fund of a State to

supplement the resources of the Panchayats in the State on the basis of the
recommendations made by the Finance Commission of the State;
(c) the measures needed to augment the Consolidated Fund of a State to supplement
the resources of the Municipalities in the State on the basis of the recommendations
made by the Finance Commission of the State;
(d) any other matter referred to the Commission by the President in the interests of
sound finance.

(4) The Commission shall determine their procedure and shall have such powers in the
performance of their functions as Parliament may by law confer on them.
1. Maintaining vertical devolution at 41 per cent:

• Same as in the report 2020-21.
On GST:
• GST accounts for 35 per cent of the gross tax revenue of the Union.
• GST accounts for around 44 per cent of own tax revenue of the States.
On Gross Tax Revenue:
• There is a drop of 1.7 percentage points in the gross tax revenue after
excluding GST cess collection in comparison to 2016-17 figures. The impact of this drop
could be seen in the tax devolution to states.
• Gross Tax Revenue Assessment 2021-26: It is expected to be 135.2 lakh
crore, out of which the divisible pool is estimated to be 103 lakh crore.
On Horizontal Devolution: The criteria and the weights assigned for horizontal
devolution are:
• Population – 15%
• Area – 15%
• Forest & Ecology – 10%
• Income Distance – 45%
• Tax and Fiscal Efforts – 2.5%

• Demographic Performance – 12.5%
The commission has assigned a 12.5 per cent weight to the demographic performance
criterion in the horizontal devolution. The commission has also re-introduced tax
effort criterion to reward fiscal performance.
On Revenue Deficit Grants (RDG) of around Rs 2.94 crore over the award period for
seventeen States.
On Local Governments: Rs. 4,36,361 crore is the total grant given to the local
governments for the period of 2021-26. Out of the total grant; Rs.450 crore is
dedicated to the shared municipal services.
• Grants to Rural Local Bodies – Total sum of Rs. 2,36,805 crore is a grant
for the rural local bodies.
• Grants to Urban Local Bodies – Rs.1,21,055 crore is the total grant for the
urban local bodies.
• Grants for Health to be Channelised through Local Governments – Rs.
70,051 crore stands for the Health grant to the local governments.
On Health:
• The commission has suggested increasing the state expenditure on health
by 8 percent by 2022.
• The commission suggested prioritizing the creation of All India Health
Services/All India Medical Services on the pattern of the UPSC Civil Services.
• National Medical Council is suggested to develop small courses on
wellness clinic, basic surgical procedures, anaesthesia, obstetrics and gynaecology,
eye, ENT etc. for MBBS doctors.
• AYUSH to be encouraged as an elective subject for medicine
undergraduates.
• The Allied and Healthcare Professions Bill should be passed at the earliest.
On Higher Education:
• The XV finance commission has recommended two subtypes of higher
education grants:
• Promotion of online education – Rs. 5,078 crore is a total sum of
grant for the promotion of online education.
• Development of professional courses in regional languages: in line
with the New Education Policy 2020. Rs. 1,065 crore has been allocated for the
development of these courses from 2021-26.
• Two colleges in each state should convert their learning

material and pedagogy into the recognized regional language.
On Defence:
• Recommendation to create a non-lapsable pool for the defence and
internal security sector under the Public Accounts of India.
On Disaster Risk Management:
• The fifteenth finance commission recommended maintaining the
contribution of states to the State Disaster Risk Fund (SDRF) to be 25 percent except
by the NE States (10 percent.) It has seen no changes since 13th Finance Commission
recommended the same arrangement.
Creation of Mitigation Funds both at central and state levels.

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Planning
Making major economic decisions like what and how much is to be produced, how, when and
where it is to be produced, and to whom it is to be allocated by the comprehensive survey of
the economic system as whole. (H.D. Dickinson)
Planning was adopted for the first time in the world by Soviet Union
1934: M. Visvesvaryya, in his book ‘Planned Economy of India’, advocates the necessity of
planning in the country much before Independence.
1944: Bombay Plan, published in January 1944, prepared by eight leading industrialist of
Bombay.
1944: Gandhian Plan put forward by S.N. Agrawal.
1944: Planning Development Council was set up under the chairmanship of A. Dalal.
1995: Peoples Plan drafted by M.N. Roy.
1950: Planning Commission was set up.
2015: Formation of Niti Aayog.
Visvesvarayya Plan
• Democratic capitalism with emphasis on industrialisation and shift of labour from agri
sector to industrial sector targeting double national income in a decade
Congress Plan
• National Planning Committee @ 1938 – initiative of Subash C. Bose

• NPC under the chairmanship of J.L. Nehru
Bombay Plan
• Popular title of “A Plan of Economic Development for India”

• Prepared by Capitalists
Gandhian Plan
• Sriman Narayan Agarwal formulated this plan in 1944

• More emphasis on agriculture
• Promote cottage and village level industries
• Articulated a “Decentralised Economic Structure” for India with self-contained villages
People’s Plan
• M N Roy formulated this plan in 1945

• Plan was based on Marxist Socialism
• Focused on the need for providing “basic necessities of life”
• Agricultural and industrial sectors were equally highlighted
• “Economic reforms with the human face” – slogan of 1990s economic reforms has the
resonance of People’s plan
Sarvodaya Plan
• Jayprakash Narayan formulated this plan in 1950

• Inspired from the Gandhian techniques of constructive works and Sarvodaya concept
of Acharya Vinoba Bave
• Major ideas of the plan were similar to Gandhian Plan
• By 1960s there was Increasing centralising nature and dilution of people’s
participation in planning process.
• Jayprakash Narayan Committee was established in 1961 which focused on planning
and execution of plans with Panchayati Raj Institutions.
Planning Commission
• The Planning Commission was established in 1950, in accordance with Article 39 of

the Directive Principles of the Constitution of India headed by Prime Minister.
• A staff drafts plans under the guidance of the Commission; the draft plans are
presented for approval to the National Development Council, which consists of
members of the Planning Commission, the Chief Ministers of the States and
Administrators of UTs and All Union Ministers.
The Council can make changes in the draft plan.
➢ After Council approval, the draft is presented to the Cabinet and subsequently to
Parliament, whose approval makes the plan an operating document for Central and
State governments.
➢ Jawaharlal Nehru was the first chairman of the Planning Commission by virtue of his
being the Prime Minister of India.
Functions
1. Assessment of the material, capital and human resources of the country, including
technical personnel and formulation of proposals for the augmentation of such
resources;
2. Formulation of plans for effective and balanced utilization of resources;
3. Defining stages in which the plan should be carried out;
4. Determination of the resources necessary for implementation of the plans;
5. Appraisal from time to time of the progress achieved;
6. Public co-operation in national development;
7. Perspective planning;
National Planning Council was established in 1965 as an advisory body attached to Planning
commission. It included experts.
Niti Aayog
• The government of India has replaced Planning Commission with a new institution
named Niti Aayog (National Institution for Transforming India).
• The institution will serve as ‘Think Tank’ of the Government - a directional and policy
dynamo.
• Niti Aayog will provide Governments at the Central and State Levels with relevant
strategic and technical advice across the spectrum of key elements of policy, this
includes matters of national and international importance on the economic front,
dissemination of best practices from within the country as well as from other nations,
the infusion of new policy ideas and specific issue-based support.
Niti Aayog consists of:
• Prime Minister as its chairman

• 1 Vice-Chairman cum chief-executive officer
• 5 fulltime members
• 2 part time members
• 4 central government ministers
Five Year Plans
First Plan (1951-56)
• As the economy was facing the problem of large scale food grains import (1951) and
the pressure of price-rise, the modest overall target of 2.1% was fixed
Major Objective
• Agriculture, Price Stability, Power & Transport.

• It was based on Harrod Domar Model.
• Its highest priority on agriculture, irrigation and power projects.
• Modest overall growth target of 2.1%
Achievements
• National income grew by 18% and per capita income by 11%.

• Actual Growth Rate – 3.6%
• Food production increased by 20%.
Negative Aspect
• Development of public sector industries was neglected.

Positive Aspect
• The plan saw 3.6% annual growth rate, multipurpose irrigation projects were
conceived, and rural development initiative was taken up.
Second Plan (1956-61)- based on Mahalnobis model
Objective
• Rapid Industrialisation
• The emphasis of Mahalanobis model was on achieving self-reliance and also to meet
the needs of our domestic economy
Achievements
• Growth – 4.21%
• Per capita income rose by 8%.
• Large industries including steel plants (Durgapur, Bhilai and Rourkela) were set up.
Negative Aspect
• Closed economy→ shortage of Forex. Shortages of food and capital were felt during
this plan.
• This plan is known for a top-down industrialisation of the big industries creating a base
for the growth of medium and small scale industries and going down to village and
cottage industries.
Third Plan (1961-66)
At its conception, it was felt that Indian economy has entered a “takeoff stage”
• Based on John Sandy and S Chakravarthy model

Goals
• Make India a 'self-reliant' and 'self-generating' economy

• Growth target of 5.6%
• Integrated growth of industry balanced with agriculture
Achievements
• Growth rate of only 2.2% achieved as against a target of 5% per annum

Negative aspects
• Emphasis on basic industries continued but agriculture and allied sectors (irrigation
and power) were allocated 35% of the outlay
Challenges during the plan implementation: A series of crises - China war (1962), Nehru’s
death (1964), Pakistan war (1965) and Shastri’s death (1966), major drought (1965-66) -
marred the smooth implementation of the plan
As a result, rupee was devalued in 1966.
Positive Aspects
• During the later phase focus was shifted from development to defence & development
• Engineering industries like automobiles, cotton textile machinery, diesel engines,
electric transformers and machine tools, advanced according to set- targets.
• FCI was established to store grains imported under USPL-480 programme and PDS was
started for rationing
Outcome
• Only 2% growth rate in food grain production

• Increase in inequality in income and wealth
• Challenging balance of payment situation
• Growth rate of per capita income was almost negligible
Failure of Third Plan that of the devaluation of rupee (to boost exports) along with inflationary
recession led to postponement of Fourth FYP, a plan holiday was declared for three years
(1966- 69).
Positive aspects
• Resources were mobilised for building a buffer stock and for stepping up food
production learning from the experience of near-famine years (1965-66). Green
Revolution eased inflationary pressure→ Production of food grains reached 95 million
tons in the year 1967-68.
• Nationalisation of banks.
• Devaluation of currency in 1966
Fourth Plan (1969-74)
• Growth with stability and progress towards self-reliance [Based on Gadgil Strategy]
• Emphasis on growth with distributive justice.
Goals
• Twin objectives of poverty eradication and attainment of self-reliance

• self-sufficiency in agriculture and industrial production.
• increased focus on family planning
• The plan witnessed nationalisation of 14 banks in 1969
Achievements
• Growth rate of only 3.3% achieved as against a target of 5.7% per annum
• Agricultural production by 2.8%
• Industrial production by 3.9%
Early years of 1970s were full of challenges like
• Indo-Pak war of 1971-72 and subsequent problem related to refugees.

• Oil crisis in 1972-73 hiked oil prices.
Major objective
• A National Programme for Minimum Needs including elementary education, safe

drinking water, health care, and shelter for landless was launched.
• Stress on Export Promotion and Import Sub- stitution
Achievements
• Govt. Launched the Twenty-point programme

• The plan period was badly disturbed by 1975 emergency and a change of government
in the centre in 1977
• Increased inflation led the government to hand over a new function to RBI - stabilise
inflation
1977: Janta party came to power and the plan was terminated in 1978.
Rolling Plan (1978-80)
• Janata Party government ended the 5th plan.

Positive Aspect
• Janata government emphasised employment in contrast to Nehru model which the

government criticised for concentration of power, widening inequality and for
mounting poverty
Negative Aspect
• Due to political instability and change in the government in the terminal year of the
5th plan, 6th plan could not be started on April 1, 1979 and was postponed for one
year and 6th plan started from 1980.
Sixth Plan (1980-85)
aim- attacking poverty. Poverty Alleviation [Garibi Hatao] → it marked the transformation
from allocating scarce resources in the economy to welfare orientation
Positive aspects
• Poverty alleviation given top priority

• Qualitative improvement in the living standards of people by means of Minimum Need
Pro- gramme (MNP)
• Schemes for transferring skills (TRYSEM) and assets (IRDP) and providing slack season
employment (NREP) → these were not new schemes, all different schemes were
combined as one scheme and known as Integrated Rural Development Programmes
(IRDP)
• First plan to focus on gender issues, women empowerment and the growing
inequalities amongst the states and also intra-regional im- balances
Negative aspects
• Industrial growth rate was less than the targeted rate

Achievements
• Poverty declined from 48.3% in 1977-78 to 37.4% in 1983-84

Seventh Plan (1985-90)
Reason
“This plan had two very important areas, one that of larger agricultural sector orientation of
increasing production and productivity and the second pertains to a steady decline in the
public sector investment implying a larger contribution of private sector ”
Major objective: Growth, Modernisation, Self- reliance and Social justice
Goals
• Establishment of a self-sufficient economy

• Progress towards a social system based on equality and justice
• To prepare firm base for technological development in agriculture and industrial
sector
• Faster growth in energy sector with focus on domestic resources
• Ecological and environment protection
• Stress on increasing the production of food grains, oilseeds, sugar, textiles, domestic
fuel and housing.
Negative Aspects
• By the end of the plan, India had a highly unfavourable balance of payment situation.
India faced the problem of imports outstripping exports resulting in balance of
payment crisis requiring India to seek loan from IMF.
Positive Aspects
• The Plan had a 15-year perspective (1985- 2000) for removal of poverty, providing for
basic needs, achieving universal elementary education and total access to health
facilities.
• Promotion to sunrise industries especially food processing and electronics
• Jawahar Rojgar Yojana (JRY) was launched in 1989 with the motive to create wage-
employment for the rural poor
Outcome
The plan was very successful as the economy recorded 6% growth rate against the targeted
5% with the decade of 80’s struggling out of the ’Hindu Rate of Growth’.
Two Annual Plans (1990-92)
• Due to economic crisis and political instability at the centre, 8th plan could not be
started in 1990
• Outcome
• “New Industrial Policy” was announced and it is considered the beginning of large
scale liberalisation in the Indian Economy
• The basic thrust on maximisation of employment and social transformation
• “Each successive plan after 7th plan has seen a phased reduction in public sector
outlay and large levels of private sector, changing planning from ‘directed to
indirected’, which is indicating which sectors require investments in terms of priorities
and private sector is accordingly expected to make investment in those sectors.”
Eighth Plan (1992-97) : Manmohan-Rao (F.M- P.M.) Era
• Worsening balance of payment situation

• Rising debt burden
• Widening budget deficit
• Major objective: Human resource development
Goals
• Creation of sufficient employment opportunities and achieve full employment by the

end of the century
• To control population explosion by people’s participation
• Modernisation and diversification of industries to make them more competitive
• Universalisation of primary education and 100% literacy in the age group 15-35 yrs
• Diversification in agriculture sector with the objective of self sufficieny and surplus for
export
Achievements
• Annual growth rate achieved in the Plan period is 6.8% against the target of 5.6 %.
• Agriculture sector growth rate was 3.6% higher than the target of 3.5%
• Industrial sector growth rate 8.5% higher than the the target of 8.1%
Outcome
The Eighth Plan was to walk on ‘two legs’ - one leg of alleviating poverty and removing un-
employment; and the other ‘leg’ providing a ‘safety net’ for those who will be affected by the
structural adjustment programme. The plan had thus built in the ‘human face’ element of
adjustment.
Ninth Plan (1997-2002) Reason
• A series of political crises in the country delayed the formulation and approval of the
plan by two years.
• The NDC finally approved the plan in February 1999, envisaging a GDP growth rate of
6.5 percent per annum. Though delayed by two years in approval, the plan was to
run its period through to 2002
Major objective: Equitable distribution and growth with equality
Focus
• To provide the basic minimum services like clean drinking water, primary health care
facility, universal primary education, housing etc.
• To encourage mass participation through institutions like Panchayati Raj institutions,
cooperatives and voluntary organisations
Positive Aspects:
• The development strategy emphasised the role of markets and the need for
government to intervene to promote a degree of competition through suitable
legislation. Licence Raj was to be ended. The Plan emphasised cooperative federalism.
It also stressed the importance of infrastructural development.
• The Plan was indicative in nature, focusing on policies. It also provided a 15-year
perspective.
• It aimed to achieve a growth rate of 8% per annum in the medium term and a rate of
6.5% during the plan period (1997-2002).
Negative aspects:
• The GDP grew only by 5.35% per annum during the plan period against the target of
6.5%.
• 9th plan was launched when there was an all round ‘slowdown’ in the economy by the
South East Asian Financial Crisis (1996-97). Some other development during the ninth
plan, such as cyclone in Orissa, earthquake in Gujarat, Kargil war etc. also resulted in
diversion of resources from investment and consequent decline in the growth rates.
Tenth Plan (2002-07)

Objective: Growth with emphasis on human development
Goals:
The Tenth Plan laid down an ambitious target of 8% annual growth rate for the economy,
against the prevailing rate of 5.5%.
Positive Aspects:
• ‘Governance’ was considered a factor of the development

• Agriculture sector declared as the priming moving force (PMF) of the economy
• However, against the ambitious target of 8%, the economy grew at the rate of 7.7%
on an average during the 10th Plan period.
→Foreign exchange reserves have gone up from about $50 billion to more than $200 billion
Eleventh Plan (2007-12)
• Faster and more Inclusive Growth

• The Plan document, sub-titled Inclusive Growth, outlines a strategy for making growth
both faster and more inclusive.
• The target of 9% growth required the average rate of investment to rise from 32%
(during 10th Plan) to 37% in the current plan, reaching 39% at the end of the plan
period.
• Planning Commission has framed a plan for achieving faster growth with greater
inclusive- ness which involves the following interrelated components:
• The broad targets fixed by the 11th Plan include a 4% per cent growth in Agriculture
sector, 10% growth in Industries and Minerals, and investment in infrastructure to
grow from 5.43% of GDP in 06-07 to 9.43% by the end of the 11th Plan.
Achievements:
• It has brought out the need for neo-liberal policies given the changing political
dynamics and a changed face of the economy
• It gave thrust to Public Private Partnership (PPP) model for infrastructural
development in the economy
• Growth rate of 8% achieved as against a target of 9% per annum
• The shortfall in achievement of (various growth targets) can be attributed both to
internal and external factors viz. global slowdown, fluctua- tions in international
prices, strong inflationary pressures and negative growth in agriculture due to drought
like situation
Outcome:
• India emerged as one of the fastest growing economy by the end of the Tenth Plan
• The savings and investment rates had increased, industrial sector had responded well
to face competition in the global economy and foreign investors were keen to invest
in India
• But the growth was not perceived as sufficiently inclusive for many groups, specially
SCs, STs & minorities as borne out by data on several dimensions like poverty,
malnutrition, mortality, current daily employment etc
• Since the period saw two global crises - one in 2008 and another in 2011 – the 8%
growth may be termed as satisfactory.
• Based on the latest estimates of poverty released by the Planning Commission,
poverty in the country has declined by 1.5 percentage points per year between 2004-
05 and 2009-10.
Twelfth Five Year Plan (2012-2017)- Faster, Sustainable and More Indusive Growth
• Sovereign Debt problem led to second financial crisis at the global level.
• India’s growth slowed down to 6.2% in 2011-12.
• 13th Finance Commission increased the devolution to the states from 30.5 %to 32 %
of divisible pool and it covers the period up to 2014-15, which includes the first three
years of the twelfth Plan.
• Recently 14th Finance Commission increased the devolution to the states from 32 %to
42 % of divisible pool and it covers the period up to 2015-16
• It is clear that there was a sharp acceleration in the rate of growth since 1980. It went
almost unnoticed. It came into limelight in the early 2000s. A majority of scholars
opined that the structural break in the economic performance of independent India
occured around 1980. The growth was impressive, not only in comparison with the
part in India but also in comparison with the performance of most developed countries
in the world.
Achievements of Planning:
• There is a considerable rise in Net Domestic Product, savings and investment

• Per capita incomes have increased
• India has achieved self-sufficiency in almost all basic and capital goods industries and
consumer goods industries
• Self-sufficiency in food grains production is achieved and food security is assured
• There is a good deal of diversification in industrial structure
• The plans have created significant infrastructure particularly in the fields of transport,
irrigation and telecommunications
• There has been tremendous development of educational sector and there has been a
significant growth in trained scientific and technical manpower. India is one of the
leading nations in IT and space exploration
Failures of Planning:
• Incidence of poverty is relatively high in rural areas

• Unemployment has risen. This is the basic reason for poverty in both urban and rural
areas
• Inequalities of income have not been reduced. They have been widening in the post
reform era
• There is unequal land ownership as land reforms are inadequately implemented
• Regional disparities still persist
FROM PLANNING TO NITI AAYOG
• National Institution for Transforming India

• Replaced Planning Commission
• The new institution will be a catalyst to the developmental process; creating enabling
environment, through a holistic approach to development going beyond the limited
sphere of the Public Sector and Government of India
At the core of Niti Aayog’s creation are two hubs –
1. Team India Hub: leads the engagement of states with the Central government
2. The Knowledge and Innovation Hub: builds NITI’s think-tank capabilities.
Functions and Mandates of NITI Ayog:
• Think tank for Government policy formulation.
• Find best practices from other countries, partner with other national and international
bodies to help their adoption in India.
• Cooperative Federalism: Involve state governments and even villages in planning
process.
• Sustainable development
• Urban Development: to ensure cities can remain habitable and provide economic
venues to everyone.
• Participatory Development: with help of private sector and citizens.
• Inclusive Development or Antyodaya: Ensure SC, ST and Women too enjoy the fruits
of Development.
• Poverty elimination to ensure dignity and self- respect.
• Focus on 5 crore Small enterprises– to generate more employment for weaker
sections.
• Monitoring and feedback. Midway course cor- rection, if needed.
• Make policies to reap demographic dividend and social capital.
• Regional Councils will address specific “issues” for a group of states. Example: Regional
Council for drought, Left-wing extremism, Tribal welfare and so on.
• Extract maximum benefit from NRI’s geo- economic and Geo-political strength for
India’s Development.
• Use Social media and ICT tools to ensure transparency, accountability and good
governance.
• Help sorting inter-departmental conflicts.
Structure of NITI:
1. Chairperson: Prime Minister of India
2. Governing Council: comprising the Chief Ministers of all States and Lt. Governors of
Union Territories
3. Regional Councils: will be formed to address specific issues and contingencies
impacting more than one state or region. Strategy and Planning in the Niti Aayog will
be anchored from State-level; with Regional Councils convened by the Prime Minister
for identified priority domains, put under the joint leadership of related sub-groups of
States (grouped around commonalities which could be geographic, economic, social
or otherwise) and Central Ministries.
Regional Councils will
• Have specified tenures, with the mandate to evolve strategy and oversee
implementation
• Be jointly headed by one of the group Chief Ministers (on a rotational basis or
otherwise) and a corresponding Central Minister.
• Include the sectoral Central Ministers and Secretaries concerned, as well as State
Ministers and Secretaries.
• Be linked to domain experts and academic institutions.
• Have a dedicated support cell in the Niti Aayog Secretariat
• Special Invitees: experts, specialists and practitioners with relevant domain
knowledge as special invitees nominated by the Prime Minister.
Niti Aayog’s Vision for New India:
• The five year plan will be replaced by a three year action plan which will be a part of a
seven year strategy that will in turn help to realise 15 year long term vision.
• The target set for next 15 years include 3 fold rise in GDP, Rs. 2 lakh increase in per
capita GDP and facilities such as housing with toilets, electricity and digital
connectivity for all, a fully literate population with unhindered access to health care
and a clean India with clean air and water etc.
The positive impact of Niti Aayog can be seen as
• Cooperative Federalism : The centre and states have been brought on a single
platform with state Chief ministers heading certain committees.
• It has been able identify best practices of certain states and replicate them in others
abandoning the previous top down approach eg. UP’s seed DBT replication,
Yantradoot-Farm Machine rent scheme being replicated
• Various indices such Agri marketing index, Health index have created competitive
environment among states to foster reforms
• The extra constitutional role of Planning commission which usurped the domain of
finance commission has been done away with
Certain issues are
• Its recommendations are advisory

• Centre’s domination and bias in the institution is still persistent.
Niti Aayog ‘s vision, action and strategy reflects the new aspirational India as
• It has fostered the SETU and Atal Innovation Mission to boost startup ecosystem in
India
• Its 3 year and 15-year plans are in line with tangible short term and long term goals
for the nation
• It is overseeing authority for SDG which seek to make India at par with developed
nations
• Transformation of Aspirational Districts.
Industrial Development 1947-1990

After Independence, the Industrial Policy resolution was issued in 1948 followed by the
passing of the Industrial (Development and regulation) Act of 1951. The 1948 resolution
emphasized the responsibility of Government in promoting, assisting, and regulating the
development of industries in the national interest and it envisaged an increase in production
and its equitable distribution and laid down a certain demarcation of fields for the public and
private sectors in the industrial sphere.
Industrial Policy Resolution 1948 (IPR 1948)
IPR 1948 provided for the setting up of a mixed economy. IPR 1948 divided industries into 4
broad categories.
1) The first category - Exclusive Monopoly of the Central government →

manufacturing of arms and ammunitions, the production and control of atomic
energy and the ownership & management of rail transport
2) The second category - the mixed sector. It included 6 industries viz. coal, mineral
oils, iron and steel, manufacture of aircraft, ship building and manufacture of
telephone, telegraph and wireless apparatus. The state was to have exclusive right
to set up new undertakings in this category. All the existing private sector
enterprises in this category were permitted to develop for a period of 10 years, after
which the government would review the situation and take further decisions.
3) The third category - industries of basic importance and the central government
would regulate them if found necessary to do so. It covered 18 industries such as
salt, automobiles, heavy chemicals, fertilizers, power, cotton and woolen textile,
cement, sugar, paper, newsprint, minerals etc.
4) The fourth category included remaining industries, was left open to private
enterprise, industrial as well as co-operative
Other aspects: Cottage and Small Scale Industries were given importance.
Industrial Policy Resolution 1956 (IPR 1956)
• The 1948 Resolution was further reviewed with the experience gained during the First
Plan (1951-56) and a new Industrial Policy Resolution was issued in 1956.
• While the State would play a dominant role in industrialization, the resolution
recognized the importance of the private sector.
• It also laid stress on promoting small-scale and cottage industries and on ensuring
balanced development of all regions.
• Government accepted "The Socialist Pattern of Society" as the objectives of socio
economic policy.
In the 1956 IPR, Industries were classified into 3 categories:
Schedule A: The first category included industries of 'basic' and 'strategic' importance. There
were 17 such industries. These industries can be grouped into following 5 classes
• Defense industries
• Heavy industries
• Minerals
• Transport and Communication
• These four industries - arms and communication, atomic energy, railways and air
transport were to be government monopolies.
• In the remaining 13 industries, all new units were to be established by the state.
However, existing units in the private sector were allowed to subsist and expand. The
state could also elicit the co-operation of private sector in establishing new units in these
industries 'when the national interest so required'
Schedule B: The second group of 12 industries was listed in Schedule B.
a) All other minerals (except minor f) Antibiotics and other essential drugs
minerals)
g) Fertilizers
b) Road transport, Sea Transport
h) Synthetic rubber
c) Machine tools, ferro alloys and tool
i) Chemical pulp
steels
j) Carbonization of coal
d) Basic and Intermediate products
required by chemical industries such k) Aluminum
as manufacture of drugs
l) Other non-ferrous metals not
e) Dyestuffs & plastics included in the first category
• In these industries, state would increasingly establish new units and increase its
participation but would not deny the private sector opportunities to set up units or
expand existing units
Schedule C: It included all the remaining industries, and their future development was left to
the initiative and enterprise of the private. Government could also start any industry in which
it was interested.
Industrial Policy Statement, 1977
• When the Janata Government came to power, it issued an Industrial Policy Statement
in 1977 which emphasized the development of the small-scale sector which had
potential for creating employment opportunities on a large scale.
• It also sought to encourage medium size enterprises even in capital-intensive sectors
with a view to ensure that there would be no concentration of economic power in the
hands of large, dominant business houses.
Industrial Policy, 1980
• This policy, framed by the newly elected Congress government, was primarily based on
the 1956 Resolution with suitable modifications to suit the changed circumstances.
With the introduction of Industrial Policy Resolution 1956, the public sector became
dominant sector and driver of economic growth.
However, in the course of time it was realized that excessive controls & restrictions led to red-
tapism, corruption and inefficiency in the public sector.
Economic Reforms (LPG)

The balance of payments position was precarious and international confidence in our
economy had eroded considerably.
There was sharp reduction in foreign exchange reserves (barely enough to meet the needs
of two weeks of imports.) and there were strong inflationary pressure.
The government under Rajiv Gandhi (1984- 89) initiated several reform measures. These
included reducing state control and regulation of the private sector, greater freedom to
import even capital goods, liberalization in the application of FERA, and the operation of
companies under MRTP Act.
• The fiscal deficit of the Central Government was over 8 % of the GDP in 1990-91 as
compared with 6 % at the beginning of 1980s and 4 % in mid-1970s.
• Steep increase in oil prices and disruptions caused by the Iraqi invasion of Kuwait in
August 1990.
• With the disintegration of Soviet Union in December 1991, India lost a major trading
partner.
• Besides all these, there was political instability at home-there were two changes in
the Government at the Centre between December 1989 and June 1991.
The Reforms of 1991
• A newly elected Government headed by P.V. Narasimha Rao took over in June 1991 and
appointed Manmohan Singh as the Finance Minister.
• A decision taken earlier to use part of the gold held by the Reserve Bank of India to
mobilize temporary liquidity abroad was implemented, but as planned the gold was
redeemed as soon as the foreign exchange position stabilized.
• The situation called for progressively reduction in the fiscal and revenue deficits of the
Central Government and reduction of current account deficit in the balance of
payments.
• Devaluation of the Rupee by about 18 % was effected in two steps on July 1 and 3, 1991.
India’s strategy to tackle BOP crisis:
✓ India approached the International Bank for Reconstruction and Development (IBRD)—
World Bank and the International Monetary Fund (IMF) and received $7 billion as loan
to manage the crisis
International agencies expected India to liberalize and open up the economy and placed
certain conditions. India agreed to the conditionality’s of World Bank and IMF —announced
the New Economic Policy (NEP) which consisted of wide-ranging economic reforms, such as:
✓ Creating a more competitive environment by removing the barriers to entry and growth
of firms
✓ Introduced liberalization to integrate the Indian economy with the world economy
✓ To remove restrictions on direct foreign investment as also to free the domestic

entrepreneur from the restrictions of Monopolies and Restrictive Trade Practices
(MRTP) Act
✓ Remove unnecessary bureaucratic controls
✓ To shed the load of public sector enterprises which have shown a very low rate of return
or which were incurring losses over the years
New Trade Policy

• A new Trade Policy was drawn up in 1991.
• It marked a radical shift from the Import Substitution policy.
• The time had come to open up the economy and expose Indian industry to competition
from abroad in a phased manner. With this in view, the Government introduced changes
in Import-Export policy, liberalized import licensing, optimally reduced imports, and
aimed at vigorous export promotion.
• The two-step devaluation of the Rupee effected in July 1991.
Measures to Promote Exports
• The trade policy was further revamped in 1992.
• A system of partial convertibility of the Rupee on the Current Account was introduced.
• Under this system, all foreign exchange earned through exports of goods or services, or
remittances, could be converted into rupees.
• 40 % of the foreign exchange could be converted at the official exchange rate while the
remaining 60 % was to be converted at a market- determined rate.
• The foreign exchange surrendered at official exchange rate could be used to meet the
foreign exchange requirements of essential imports like petroleum, oil products,
fertilizers, defense, and life-saving drugs.
• Imports of raw materials and capital goods were made freely importable on Open
General Licence (OGL) but the foreign exchange required for these had to be obtained
from the market.
• The Government, finding that the balance of payments could be reasonably managed
with a unified exchange rate, the dual rate arrangement was dispended with.
• All exporters as well as foreign exchange earners like Indian workers abroad were al-
lowed to convert 100 % of their earnings at the market rate.
Removal of Import Controls

• Import licences were eliminated on most items of capital goods, raw materials, and
components.
• These items became freely importable against foreign exchange purchased in the
market.
• All imports were also liable to be paid for the market rate.
Other Important Measures
• Reserve bank of India took steps to ensure availability of adequate credit for export.
• In order to promote new investment in industry, the customs duty levied on capital
goods and import items for projects such as general machinery was progressively
reduced from 1993-94.
The New Industrial Policy 1991

• Another major structural reform was opening up the industrial sector.
• Restrictive policies like barriers to entry and limits on the size of firms had shackled
industry and led to a degree of monopoly in the sector by facilitating foreign investment
and infusing foreign technology to increase productivity.
Delicensing
• Industrial licensing was abolished for all industries except for a short list of 18 industries
involving security and strategic factors, social considerations, hazardous and
environmental aspects and those producing items of elitist consumption.
• Later, more industries were delicensed and presently compulsory licensing applies
only to 6 industries.
• Industries reserved for the small scale sector continued to be so reserved.
Promotion of foreign investment
• Direct foreign investment up to 51 % foreign equity in high priority industries was
allowed.
• Also, foreign equity up to 51% was allowed for trading companies primarily engaged
in export activities.
• Foreign investment would facilitate technology transfer, help to enhance productivity,
nurture better management practices, and provide greater access to world markets.
• High priority industries could get automatic approval for entering into technology
agreements.
MRTP Act
• The Monopolies and restrictive Trade Practices Act (MRTP Act) which came into force
in 1970 had over the years hampered industrial growth and expansion.
• The MRTP Act was later repealed and replaced by the Competition Act, 2002.
Reforming the Public Sector
• The Industrial Policy Resolution of 1956 had given the public sector a strategic role in
the economy. The public sector came to occupy a commanding role in the economy.
• Many of them were also considered sick units which called for some drastic measures.
The government considered the need to reinvigorate them and hence took certain steps
under the Industrial Policy of 1991.
• Specified sectors of the economy were reserved for the public sector:
1) Essential infrastructure goods and services;
2) Exploration and exploitation of oil and mineral resources;
3) Technology development and building of manufacturing capabilities in areas crucial

for the long-term development of the economy and where private sector
investment is inadequate; and,
4) Manufacture of products where strategic considerations predominate such as

defence equipment.
• Government would strengthen those public enterprises which fall in the reserved or high
priority areas that have successfully expanded production, built up technical
competence, or are generating profits.
• Such enterprises would be given much greater degree of autonomy. Competition will
also be induced in these areas by allowing private sector to participate.
Disinvestment: In case of enterprises which were chronically sick and incurring heavy
losses, part of Government holding in their equity share capital would be disinvested in order
to provide market discipline to their performance.
Liberalisation of Foreign Policy: The limit of foreign equity was raised to 100% in many
activities i.e. NRI and foreign investors were permitted to invest in Indian Companies
Foreign Investment Promotion Board: This board was setup to promote and bring foreign
investment in India
Economic reforms can be categorised in 3 major components → Liberalisation, Privatisation

and Globalisation
LIBERALISATION: Liberalisation refers to end of license, quota and many more restrictions
and controls which were put on industries before 1991.
• Liberalisation was introduced to put an end to these restrictions and open up various
sectors of the economy. The main purpose of the process to economic liberalization is
to set business free and to run on commercial lines.
• The liberalization intended to liberalize commerce and business and trade from the
clutches of controls and obstacles.
• Lessened Government control and freelance to private Enterprises.
• Simplification of Licensing policy
Removal of Industrial Licensing:
• All industrial licensing was abolished except a shortlist of 18 industries related to

security and strategic concerns, social reasons, hazardous chemicals and over-riding
environmental reasons and items of elitist consumption industries reserved for the small
scale sector which were to continue under the reservation list.
• Subsequently, all industries except for a small group of 5 industries [alcohol, cigarettes,
hazardous chemicals industrial explosives, electronics, aerospace and drugs and
pharmaceuticals], industrial licensing requirements have been done away with.
• Reservations for Public sector: defence equipment, atomic energy generation and
railway transport.
• Deregulation of goods produced in small scale industries.
• Market mechanism to determine the prices.

Financial Sector Reforms:
• One of the major aims of financial sector reforms is to reduce the role of RBI from
regulator to facilitator of financial sector i.e., the financial sector was allowed to take
decisions on many matters without consulting the RBI.
• For instance, the reform policies led to the establishment of private sector banks, Indian
as well as foreign.
Liberalization of Foreign Investment:
• Automatic approvals were given for Foreign Direct Investment (FDI) to flow into the
country.
• A list of high-priority and investment- intensive industries were de-licensed and could
invite up to 100% FDI including sectors such as hotel and tourism, infrastructure, soft-
ware development etc.
Public Sector Reforms:
• Greater autonomy was given to the PSUs (Public Sector Units) through the MOUs
(Memorandum of Understanding) restricting interference of the government officials
and allowing their managements greater freedom in decision-making
MRTP Act→ Competition Commission
PRIVATISATION is the transfer of control of ownership of economic resources from the
public sector to the private sector. It means a decline in the role of the public sector.
✓ Another term for privatization is Disinvestment.
✓ The objectives of disinvestment were to raise resources through sale of PSUs to be

directed towards social welfare expenditures, raising efficiency of PSUs through
increased competition, increasing consumer satisfaction with better quality goods and
services, upgrading technology and most importantly removing political interference.
• It recommends a change in the role of the government from that of the “owner
manager” to that of a mere “controller” or “regular”.
Autonomy to Public sector: Greater autonomy was granted to nine PSUs referred to as
‘navaratnas’ (ONGC, HPCL, BPCL, VSNL, BHEL).
De-reservation of Public Sector
• The numbers of industries reserved for the public sector were reduced in a phased
manner from 17 to 8 and then to only 3 including Railways, Atomic energy, specified
minerals.
Setting up of board of Industrial and Financial Reconstruction (BIFR)→ This board was setup
to revive sick units in public sector enterprises suffering loss
GLOBALISATION:
• Integration of the national economy with the world economy- free flow of information,
ideas, technology, goods and services, capital, culture and even people across different
countries and societies.
• India reduced customs duties on imports. The general customs duty on most goods was
reduced to only 10% and import licensing has been almost abolished.
• Tariff barriers have also been slashed significantly to encourage trade volume to rise in
keeping with the World trade Organization (WTO) order under (GATT) General
Agreement on Tariff and Trade.
• Foreign Exchange Regulation Act (FERA) was liberalized in 1993 and later Foreign
Exchange Management Act (FEMA) 1999 was passed to enable foreign currency
transactions
• India signed many agreements with the WTO affirming its commitment to liberalize
trade such as TRIPs (Trade Related Intellectual Property Rights), TRIMs (Trade Related
Investment Measures) and AOA (Agreement on Agriculture)
Limitations of reform
• Low Growth of Agriculture Sector: In 1991, agriculture provided employment to 72%

of the population and contributed 29.02 % of the gross domestic product. However,
in 2014 the share of agriculture in the GDP went down drastically to17.9 per cent.
• Threat from foreign competition as more MNC’s are came to India and competes
with local businesses and companies
• Adverse Impact on Environment
• Increase in Income disparity
• Growth and Employment: scholars point out that the reformed growth has not
generated sufficient employment opportunities in the country
• Between 1980-81 and 1990-91 (pre-reform period), share of primary sector declined
from 38.1 %to 34.0 per cent, that of secondary declined marginally from 25.9 %to
24.9 per cent, while the tertiary sector showed perceptible increase.
Achievements:
• India’s GDP growth rate increased.

• Foreign Direct Investment (FDI)
o It had touched a record high of $611.89 bn
• Per capita income

o In 1991 India’s Per capita Income was Rs. 11,235 but in 2014-15 Per Capita
Income is reached to Rs. 85,533.
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Poverty
Poverty can be defined as a social phenomenon in which a section of the society is unable to
fulfill even its basic necessities of life.
The UN Human Rights Council has defined poverty as “A human condition characterized by the
sustained or chronic deprivation of the resources, capabilities, choices, security and power
necessary for the enjoyment of an adequate standard of living and other civil, cultural, economic,
political and social rights”.
Types of Poverty:
Absolute Poverty:
The population whose level of income or expenditure is below the figure is considered to be the
absolute poverty of a person whose income or consumption expenditure is so meagre that he
lives below the minimum subsistence level is called absolute poverty.
As per ICMR, these physical quantities should lead to the provision of 2,400 calories per capita
for the rural areas and 2,100 calories per capita in urban areas on daily basis.
Relative Poverty:
According to the relative standard, a comparison of the levels of living is made between people
of different income group. The people with lower income groups are relatively poor compared
with higher incomes, even though they may be living above the minimum level of subsistence and
hence it is known as relative poverty.
It is the absolute poverty with which we are concerned when we talk of the problem of poverty
in India
 Engel's Law is a 19th century observation that as household income increases, the
percentage of that income spent on food declines on a relative basis. This is because the
amount and quality of food a family can consume in a week or month is fairly limited in price
and quantity. As food consumption declines, luxury consumption and savings increase in
turn.
Always poor: These people are never having income above poverty line in their lifetime
Usually poor: Those people who are generally poor but who may sometimes have a little more
money. ex: casual workers
Chronic poor: Always poor and usually poor together are categorised under chronic poor.
Churning poor: Those people who regularly move in and out of poverty. ex: small farmers and
seasonal workers
Occasionally poor: Those who are rich most of the time but may sometimes have a patch of bad
luck.
Transient poor: Churning poor and occasionally poor are categorised under this.
Non – Poor: Those who are never poor in their lifetime.
How to measure Poverty?

 Head count ratio (HCR) is the proportion of a population that exists, or lives,
below the poverty line. In India, it was last reported at 21.9% in 2011-12
 Definition:- When the number of poor is estimated as the proportion of people below
the poverty line, it is known as 'head count ratio'.
 It ignores the depth of poverty.
Poverty gap index:

Poverty gap is the difference between the poor’s expenditure or income and the pre-
determined poverty line. It measures the intensity of poverty
Poverty gap index is an improvement over the poverty measure headcount ratio which simply
counts all the people below a poverty line, in a given population, and considers them equally poor
Poverty gap index estimates the depth of poverty by considering how far, on the average, the
poor are from that poverty line.
The most common method of measuring and reporting poverty is the headcount ratio, given
as the percentage of population that is below the poverty line.
Squared Poverty Gap Index: This method squares the poverty gap for each
individual/household, and thus puts more emphasis on observations that fall far short of the
poverty line rather than those that are closer. Squared Poverty Gap Index is very similar to the
Poverty Gap Index because it also weights the poor based on how poor they are.
Weighted PGI is squared poverty gap index. Here, more weight is given to the poorest among
the poor.
Squared Poverty Gap Index determines the degree of poverty for a given area.
The difference between them is that the short- falls of people below the poverty line are squared
giving the very poor much more weight than those falling only a few cents short of the poverty line
Estimation of Poverty Line in India

• The earliest effort to estimate poverty was Dadabhai Naoroji’s “Poverty and Un-British Rule
in India”- from Rs. 16 to Rs. 35 per capita per year in various regions of India.
• In 1938, the National Planning Committee (NPC) estimated a poverty line ranging from
Rs 15 to Rs 20 per capita per month.
• In 1944, the authors of the ‘Bombay Plan’ (Thakurdas 1944) suggested a poverty line of Rs
75 per capita per year.
• After independence the Planning Commission has been estimating the number of people
below the poverty line (BPL) at both the state and national level based on consumer
expenditure information collected as part of the National Sample Survey Organization
(NSSO) since the Sixth Five Year Plan.
• In 1962, the Planning Commission constituted a working group to estimate poverty nationally,
and it formulated separate poverty lines for rural and urban areas – of Rs 20 and Rs 25
per capita per year respectively.
• The Ministry of Rural development conducts the Below Poverty Line (BPL) Census with the
objective of identifying the BPL households in rural areas, who could be assisted under various
programmes of the ministry.
• Niti Aayog (earlier planning commission) estimates poverty using NSSO data:
• NSSO conducts surveys to collect household consumption expenditure: Monthly per
capita consumption expenditure is used to determine poverty line
Post-Independence Estimation of Poverty in India

1. VM Dandekar and N Rath
While the previous estimations had stressed on subsistence living or basic minimum needs as a
criterion for the poverty line, VM Dandekar and N Rath suggested that the poverty line’s criteria
must be based on the expenditure that would provide 2250 calories per day both in rural
and urban areas.
2. Alagh Committee (1979)
constituted by the Planning Commission under the direction of YK Alagh, constructed a poverty
line for rural and urban areas on the basis of nutritional requirements and related consumption
expenditure.
3. Lakdawala Committee (1993)
The Lakdawala committee based their findings on the assumption that the basket used to
calculate Consumer Price Index-Industrial Workers (CPI-IW) and Consumer Price Index-
Agricultural Labourers (CPI-AL) reflected the consumption pattern of the poor
• Poverty Line approach can be continued based on calorie consumption (fixed
consumption basket)
• State-specific poverty lines should be constructed and these should be updated using the
CPI-IW in urban areas and CPI-AL in rural areas
The Indian Government accepted the Lakdawala Committee recommendations with minor
modifications in 1997.
4. Tendulkar Committee (2009)
This committee chaired by Suresh Tendulkar gave the following recommendations
1. A shift away from calorie consumption-based poverty estimation
2. A uniform poverty line basket (PLB) across rural and urban India
3. Incorporation of private expenditure on health and education while estimating poverty
The committee used the Mixed Reference Period as opposed to Universal Reference Period
used by earlier committees.
Using this method the committee arrived at a conclusion that the poverty line was at Rs. 446.68
per capita per month in rural areas and Rs. 578.80 per capita per month in urban areas from
2004-2005. In 2009-2010 it was Rs. 859.6 in urban areas while it was Rs.672.8 in rural areas. In
2010-2011 it was Rs. 1000 for urban and Rs. 816 for rural areas.
4. C Rangarajan Committee (2012)
The Planning commission created a new panel on poverty estimation that would
1. Provide an alternate method to identify poverty levels
2. Examine divergences between the consumption data provided by the NSSO and the
National Accounts aggregates
3. Review of international poverty estimation methods
4. Recommend how these methods can be linked to eligibility for various poverty elimination
schemes created by the government of India
The committee submitted its final report on 2014. The report dismissed the Tendulkar
Committees estimation of the poverty level in India. The report said that poverty was much
higher in 2011-2012 at 29.5% of the population, which means that three out of 10 people in India
were poor
 Uniform Resource Period (URP): Up until 1993-94, the poverty line was based on URP data,
which involved asking people about their consumption expenditure across a 30-day recall
period that is the information was based on the recall of consumption expenditure in the
previous 30 days.
 Mixed Reference Period (MRP): From 1999-2000 onwards, the NSSO switched to an MRP
method which measures consumption of five low-frequency items (clothing, footwear,
durables, education and institutional health expenditure) over the previous year, and all other
items over the previous 30 days.
o That is to say, for the five items, survey respondents are asked about consumption in
the previous one year. For the remaining items, they are asked about consumption in
the previous 30 days.
Causes of Poverty
Colonial Exploitation:
• Colonial rule in India is the main reason of poverty and backwardness in India.
• In 1830, India accounted for 17.6 % of global industrial production against Britain's
9.5%, but, by 1900, India's share was down to 1.7 % against Britain's 18.5 %.
• This view claims that British policies in India, led to mass famines, roughly 30 to 60
million deaths from starvation in the Indian colonies.
Lack of Investment for the Poor:
 Over the past 60 years, India decided to focus on creating world class educational
institutions for the elite, whilst neglecting basic literacy for the majority.
 This has denied the illiterate population - 33 % of India - of even the possibility of
escaping poverty.
 Given India's greater reliance on private healthcare spending, healthcare costs are a
significant contributor to poverty in India.
Social System in India:
• A disproportionally large number of poor people are lower caste Hindus.
• According to S. M. Michael, Dalits constitute the bulk of poor and unemployed.
• In many parts of India, land is largely held by high ranking property owners of the
dominant castes that economically exploit low ranking landless labourers and poor
artisans, all the while degrading them with ritual emphasis on their so-called, God-given
inferior status.
Over-reliance on Agriculture:
• primitive methods of agriculture i.e little to no mechanisation.
• surplus of labour in agriculture.
• Farmers are a large vote bank and use their votes to resist reallocation of land for higher-
income industrial projects.
• While services and industry have grown at double digit figures, the agriculture growth
rate has dropped to single digit.
Heavy Population Pressures:
• Mahmood Mamdani aptly remarked "people are not poor because they have large
families. Quite contrary, they have large families because they are poor".
High Unemployment:
• India is marching with jobless economic growth.
• Disguised unemployment and seasonal unemployment is very high in the agricultural
sector of India. It is the main cause of rural poverty in India.
Human Development
Infant mortality rate: Probability of dying between birth and exactly age 1, expressed per 1,000 live births
Under-five mortality rate: Probability of dying between birth and exactly age 5, expressed per 1,000 live births.
Human development is the process of enlarging people’s freedoms and opportunities and improving their
wellbeing. Human development is about the real freedom ordinary people have to decide who to be, what to
do, and how to live i.e expanding the richness of human life.
 It is focused on creating fair opportunities and choices for all people.
Human development is, fundamentally, about more choice. It is about providing people with opportunities, not
insisting that they make use of them. The process of development – human development - should atleast create
an environment for people, individually and collectively, to develop to their full potential and to have a
reasonable chance of leading productive and creative lives that they value.
Concept of Human Development
Dr Mahbub-ul-Haq and Prof Amartya Sen worked together under the leadership of Dr Haq to bring out the
initial Human Development Reports.
Dr Mahbub-ul-Haq created the Human Development Index in 1990. The United Nations Development
Programme has used his concept of human development to publish the Human Development Report annually
since 1990.
Nobel Laureate Prof Amartya Sen saw an increase in freedom (or decrease in unfreedom) as the main
objective of development. Therefore, access to resources, health and education are the key areas in human
development
Human Development Index
The Human Development Index (HDI) is a summary measure of average achievement in key dimensions of
human development: a long and healthy life, being knowledgeable and have a decent standard of living.
The HDI is the geometric mean of normalized indices for each of the three dimensions:
 The health dimension is assessed by life expectancy at birth,

 The education dimension is measured by
• mean of years of schooling for adults aged 25 years and more and
• expected years of schooling for children of school entering age.
 The standard of living dimension is measured by gross national income per capita.
HDI does not reflect on inequalities, poverty, human security, empowerment, etc.
o The HDI assigns equal weight to all three dimension indices; the two education sub-indices are also
weighted equally.
Inequality-adjusted HDI (IHDI)
The Inequality-adjusted Human Development Index (IHDI) adjusts the Human Development Index (HDI) for
inequality in distribution of each dimension across the population.
If there is no inequality across people, HDI is equal to IHDI. However, in case of inequalities, the value of IHDI is
always less than HDI. This implies that the IHDI is the actual level of human development (accounting for this
inequality), while the HDI can be viewed as an index of “potential” human development (or the maximum level
of HDI) that could be achieved if there was no inequality.
 The “loss” in potential human development due to inequality is given by the difference between the HDI
and the IHDI and can be expressed as a percentage.
Gender related Development Index (GDI)
The Gender related Development Index (GDI) measures gender inequalities in achievement in three basic
dimensions of human development as follows:
 Health, which is measured by female and male life expectancy at birth
 Education, which is measured by female and male expected years of schooling for children and female and
male mean years of schooling for adults ages 25 and older
 Command over economic resources, measured by female and male estimated earned income
 The index shows the loss in human development due to inequality between female and male
achievements in these dimensions. It ranges from 0, which indicates that women and men fare equally, to
1, which indicates that women fare as poorly in comparison to their male counterparts as possible in all
measured dimensions.
 In order to address shortcomings of the GDI, a new index Gender Inequality Index (GII) was proposed. This
index measures three dimensions viz. Reproductive Health, Empowerment, and Labor Market
Participation.
Gender Inequality Index
 Gender inequality remains a major barrier to human development.
 Girls and women have made major strides since 1990, but they have not yet gained gender equity.
 The disadvantages facing women and girls are a major source of inequality.
 Women and girls are discriminated against in health, education, political representation, labour market,
etc.—with negative consequences for development of their capabilities and their freedom of choice.
The GII is an inequality index. It measures gender inequalities in three important aspects of human
development
1) Reproductive health, measured by mater- nal mortality ratio
2) Adolescent birth rates; empowerment, measured by proportion of parliamentary seats occupied by

females and proportion of adult females and males aged 25 years and older with at least some
secondary education;
3) Economic status, expressed as labour market participation and measured by labour force
participation rate of female and male populations aged 15 years and older.
The GII is built on the same framework as the IHDI—to better expose differences in the distribution of
achievements between women and men. It measures the human development costs of gender inequality. Thus,
the higher the GII value the more disparities between females and males and the more loss to human
development.
The GII sheds new light on the position of women in 159 countries; it yields insights in gender gaps in major
areas of human development. The component indicators highlight areas in need of critical policy intervention
and it stimulates proactive thinking and public policy to overcome systematic disadvantages of women.
Multidimensional Poverty Index (MPI)
Multidimensional Poverty Index (MPI) identifies multiple deprivations at the individual level in health,
education and standard of living.
It uses micro data from household surveys, as basis of deprivation of Cooking fuel, Toilet, Water, Electricity,
Floor, Assets.
Each person in a given household is classified as poor or non-poor depending on the number of deprivations his
or her household experiences.
These data are then aggregated into the national measure of poverty.
The indicator thresholds for households to be considered deprived are as follows:
Education
 School attainment: no household member has completed at least six years of schooling.
 School attendance: a school-age child (up to grade 8) is not attending school.
Health
 Nutrition: a household member is malnourished, as measured by the body mass index for adults (women
ages 15–49 in most of the surveys) and by the height-for-age z score calculated using World Health
Organization standards for children under age 5.
 Child mortality: a child has died in the household within the five years prior to the survey.
Standard of living
 Electricity: not having access to electricity.
 Drinking water: not having access to clean drinking water or if the source of clean drinking water is located
more than 30 minutes away by walking.
 Sanitation: not having access to improved sanitation or if improved, it is shared.
 Cooking fuel: using ‘dirty’ cooking fuel (dung, wood or charcoal).
 Having a home with a dirt, sand or dung floor.
 Assets: not having at least one asset related to access to information (radio, TV, telephone) and not having
at least one asset related to mobility (bike, motorbike, car, truck, animal cart, motor- boat) or at least one
asset related to livelihood (refrigerator, arable land, livestock).
Computation of the Multi-Dimensional Poverty Index (MDPI) reveals that, despite recent progress in poverty
reduction, more than 2.2 billion people are either near or living in multidimensional poverty.

Complete Economy Notes by Anish Mohan (Updated)

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Complete Economy Notes by Anish Mohan (Updated)

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Revise entire

for UPSC EPFO & UPSC CSE 2021

The two branches of economics are:

Microeconomics: It examine the behaviour of individual agents in the economy like

Capitalist economy: Factors of production are controlled by private enterprise.

WATCH FREE LECTURE OF INDIAN ECONOMY

Command economy: Factors of production are under government control.

Planning is centralised. Due to lack of competition, resource allocation is inefficient and

Socialist economy: Government or the state controls economic planning, production

Sectors of Indian Economy

Secondary Sector: It is also known as manufacturing sector. The raw material is

WATCH FREE LECTURE OF INDIAN ECONOMY

Concepts of National Income

Gross National Product (GNP)

WATCH FREE LECTURE OF INDIAN ECONOMY

Domestic Product + Income of Indians Abroad - Income of Foreigners in India =

Net factor income from abroad can be positive or negative.

Q: how would increase in foreign currency denominated debt of a country affect

Gross Domestic Product

GNP - Depreciation = Net National Product (NNP)

GDP — Depreciation = Net Domestic Product (NDP)

NNP at factor cost is called National Income

WATCH FREE LECTURE OF INDIAN ECONOMY

Factor Cost + Indirect Taxes - Subsidies = Market Price or

taxes in an economy) = Market Price.

i.e. Market price- factor cost = tax burden on the economy.

WATCH FREE LECTURE OF INDIAN ECONOMY

Computation of National Income

Method of Measurement of Nl: At a Glance

GDP/NATIONAL ACCOUNTS REVISED SERIES WITH 2017-18 AS BASE YEAR

WATCH FREE LECTURE OF INDIAN ECONOMY

• Gross Value Added (GVA) at basic prices = Compensation of Employees +

• GVA at factor cost (earlier referred to as GDP at factor cost) = GVA at

GROSS HAPPINESS INDEX (GHI)

WATCH FREE LECTURE OF INDIAN ECONOMY

Human Development Index (HDI):

Estimates of National Income in India

Present Status of Indian Economy :

WATCH FREE LECTURE OF INDIAN ECONOMY

WATCH FREE LECTURE OF INDIAN ECONOMY

GDP can be calculated at:

aNP = abP t Net Zn come hom Aho ad

# Net Zncome kom Akaoad Tnte eaned

ltek ndependene 9nd'a

Lada moved vwaxd

Lberakahon As vo'sahon Globattakon

Bus sh, he obeckves of 40ual ermory

Indias Nohornad Sncome

Ngrnina GDP =GsP evaluates at pre

aDP Delarr alko Rnron as he inpbict

used maAuase nflohtn

Co vers ALL Goods

e aVA mmeasuLd and ro0?

VA uwe caltulate GbP

ortA Value o valve

Sumit purchae Seefor

ina value 150.

ale tan 4ay h s a addA value

finas Corta u ptm

aVA a acr Enchude pvduchom a

Remember: Inflation hurts lenders and benefits borrowers.

Inflation has its advantages and limitations.