Class 9 To 12 Ncert Economy Notes

NCERT Class 9 Economics notes – ORACLE IAS
Chapter 1
The Story of Village Palampur
As per the previous 3 years’ examinations, special emphasis has been laid upon the
following topics from this chapter.
 Organisation of Production
 Change in the Traditional Activities
 Fanning in Palampur
Village Palampur
 Palampur is a small village. About 450 families live here. It is 3 km away from
Raiganj — a big village.
 Shahpur is the nearest town to the village.
Main Production Activities
 Farming is the main production activity in the village Palampur.

 Most of the people are dependent on farming for their livelihood.
 Non-farming activities such as dairy, small-scale manufacturing (e.g., activities of
weavers and potters, etc.), transport, etc., are carried out on a limited scale.
Factors of Production (or Requirements for Production of Goods and Services)
 Land, labour and capital are the basic requirements for the production of goods and
services which are popularly known as factors of production.
 Land includes all free gifts of nature, e.g., soil, water, forests, minerals, etc.
 Labour means human effort which of course includes physical as well as mental
labour.
 Physical capital is the third requirement for production.
 Physical capital includes fixed capital (e.g. tools, machines, building, etc.) and raw
materials such as seeds for the farmer, yarn for the weaver.
Important Changes in Farm Activities
Land area under cultivation is virtually fixed. However, some wastelands in India had
been converted into cultivable land after 1960.
Over the years, there have been important changes in the way of farming, which have
allowed the farmers to produce more crops from the same amount of land. These changes
include:
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 Multiple cropping farming
 Use of modern farming methods.
Due to these changes (in the late 1960s) productivity of land has increased substantially
which is known as Green Revolution. Farmers of Punjab, Haryana and Western Uttar
Pradesh were the first to try out the modern farming methods in India.
Labour: After land, labour is the basic factor of production. Small farmers provide their
own labour, whereas medium and large farmers make use of hired labour to work on their
fields.
Capital: After land and labour, capital is another basic factor of production. All
categories of farmers (e.g., small, medium and large) require capital. Small farmers
borrow from big farmers or the village moneylenders or the traders who supply them
various inputs for cultivation.
Modern farming requires a great deal of capital.
Sale of Surplus Farm Products

Farmers produce crops on their lands by using the three factors of production, viz. land,
labour and capital. They retain a part of produce for self-consumption and sell the surplus
in the nearby market. That part of farm produce which is sold in the market is called
marketable surplus. Small farmers have little surplus output. It is the medium and big
farmers only who have substantial surplus produce for selling in the market.
Non-farming activities
Out of every 100 workers in the rural areas in India, only 24 are engaged in non-farming
activities. There is a variety of non-farming activities in the villages. Dairy, small scale
manufacturing, transport, etc., fall under this category.

Chapter 2
People as Resource
According to the previous 3 years examinations, the following concepts are most
important from this chapter and should be focussed upon.
 Various Aspects of Human Resource Development

 The Role of Education
 Unemployment and Forms of Unemployment in India.
Human beings perform many activities which can be grouped into economic and non-
economic.
Economic Activities: Economic activities refer to those activities of human which are
undertaken for a monetary gain or to satisfy his/her wants. The activities of workers,
farmers, shopkeepers, manufacturers, doctors, lawyers, taxi drivers, etc. fall under this
category.
Non-Economic Activities: Non-economic activities are ones that are not undertaken for
any monetary gain. These are also called unpaid activities, e.g., Puja-paath, housekeeping,
helping the poor or disabled, etc.
Classification of Economic Activities: Various economic activities can be classified into

three main sectors, that is, primary sector, secondary sector and tertiary sector. The
primary sector includes activities like agriculture, forestry, animal husbandry, fishing,
poultry, farming and mining. In this sector, goods are produced by exploiting nature. In
the secondary sector, manufacturing (small and large) and construction activities are
included. The tertiary sector (also called service sector) provides various types of services
like transport, education, banking, insurance, health, tourism, etc.
Market Activities and Non-Market Activities: Economic activities, i.e., production of

goods and services can be classified into market activities and non-market activities.
Market activities are’performed for remuneration. Non-market activities are the activities
carried out for self¬consumption.
Activities of Women: Women generally look after domestic affairs like cooking of food,
washing of clothes, cleaning of utensils, housekeeping and looking after children.
Human Capital: Human capital is the stock of skill and productive knowledge embodied
in human beings. Population (human beings) become human capital when it is provided
with better education, training and health care facilities.

People as a Resource: People as a resource is a way of referring to a country’s workforce
in terms of their existing skills and abilities.
Human Capital Formation: When the existing human resource is further developed by
spending on making the workforce more educated and healthy, it is called Human Capital
Formation.
Quality of Population: The quality of population depends upon the literacy rate, life
expectancy and skills formation acquired by the people of the country.
Role of Education: Education is the most important component of Human Resource

Development. In view of its contribution towards the growth of the society, government
expenditure on education as a percentage of GDP rose from 0.64% in 1951-52 to 3.98%
in 2002-03. However, our national goal is 6% of GDP
Health: Health is another very important component of Human Resource Development.

The efficiency of workers largely depends on their health.
There has been a considerable improvement in the country’s health standard. For
instance, the life expectancy at the time of birth in India rose from 37.2 years in 1951 to
63.9 years in 2001. Similarly, the infant mortality rate has come down from 147 to 70
during the same time period.
Unemployment: Unemployment is said to exist when people who are willing to work at
the prevailing wage rates cannot find jobs. When we talk of unemployed people, we refer
to those in the age group of 15-59 years. Children below 15 years of age and the old
people above 60 are not considered while counting the number of unemployed.
Nature of Unemployment in India: Seasonal unemployment occurs when people fail to

get work during some months of the year (that is, during off-season). Farm labourers
usually face this kind of problem, i Disguised unemployment is another kind of
unemployment found in rural areas. Such kind of problem arises due to excessive
pressure of population on agriculture. Disguised unemployment refers to a situation
wherein the number of workers in a job is more than actually required to do the job. The
extra number of workers are disguisedly unemployed.
Consequences of Unemployment:
 Unemployment leads to wastage of manpower resource.

 Unemployment tends to increase the economic overload that is the dependence of
the unemployed on the working population.
 Unemployment may lead to an increase in social unrest and tension.

Chapter 3
Poverty as a Challenge
Poverty is the most difficult challenge faced by independent India. Poverty is a condition
in which a person lacks the financial resources and essentials things to enjoy minimum
standards of life. Poor people can be landless labourers in villages, jhuggi and slum
dwellers in cities and towns, daily wage workers at construction sites, child , workers in
dhabas or even beggars. India has the largest single concentration of the poor in the
world, where every fourth person is poor.
Two Typical Cases Of Poverty

The following two cases show the many dimensions of poverty, including lack of proper
food, shelter, healthcare, education as well as clean water and sanitation. They also show
lack of a regular means of livelihood.
(i) Urban Case

Ram Saran is a daily wage labourer in a flour mill near Ranchi in Jharkhand. He earns
around Rs. 1500 per month when employed. He supports his family of 6 persons, besides
sending some money to his elderly parents. His wife and son also work, but none of his 4
children can attend school. The family lives in a one-room rented house on the outer areas
of the city; The children are undernourished, have very few clothes or footwear and no
access to healthcare.
(ii) Rural Case

Lakha Singh is a landless labourer in a small village near Meerut in Uttar Pradesh. By
doing odd jobs for farmers, he earns Rs. 50 per day. Sometimes, he gets some foodgrain
or other items instead of cash. He is not literate and his family of 8 people lives in a
kuchha hut near the edge of the village. They have no access to healthcare, cannot afford
new clothes or even soap or oil.
Poverty Analysis by Social Scientists

Social scientists, analyze poverty from many aspects besides levels of income and
consumption.
These aspects are
 Poor level of literacy

 Malnutrition leading to poor resistance to disease
 Lack of access to healthcare
 Lack of job opportunities
 Lack of access to sanitation and safe drinking water and so on.

Indicators for Poverty
The most commonly used indicators for poverty analysis are social exclusion and
vulnerability.
Social Exclusion
A social exclusion means living in a poor surrounding with poor people, excluded from
enjoying Social equality of better off people in the better surrounding. Social exclusion
can be a cause as well as a result of poverty which leads to exclusion of individuals or
groups from facilities, benefits and opportunities that others enjoy.
In India, the caste system is based on social exclusion. People belonging to certain caste
were prevented from enjoying equal facilities, benefits and opportunities. This caused
more poverty than the lower income.
Vulnerability
Vulnerability to poverty is a measure, which describes the greater probability of certain
communities e.g. members of a backward caste or individuals e.g. widow, physically
handicapped person of becoming or remaining poor in the coming time.
Vulnerability is determined by various options available to different communities in
terms of assets, education, job, health, etc and analyse their ability to face various risks
like natural disasters. The group which face greater risk at the time of natural calamity are
called vulnerable groups.
Poverty Line
Poverty line is an imaginary line used by any country to determine its poverty. It is
considered appropriate by a country according to its existing social norms. It varies from
time to time, place to place and country to country.
The most common method of determining poverty is income or consumption levels i.e.
people will be considered poor if their income or consumption level falls below a given
‘minimum level’ (poverty line) necessary to fulfil the basic needs.
Poverty Line Estimation in India

In India, a subsistence level or minimum level of food requirement (as determined by its
calorific value), clothing, footwear, fuel, lighting,-educational and medical requirements,
etc are determined for estimating the poverty line. Since ih rural and urban areas, the
nature of work and the prices of goods are different, the calorific requirement and
expenditure per capita are also different.
Poverty line defined by the government as follows

The money value required for buying these calorie requirements (given in the last
column) in terms of foodgrains and other items is revised periodically based on rise in
prices of these goods. In urban areas, the prices of essential items is higher when
compared to the rural areas and so, the poverty line is higher despite having low calorific
requirement per day.
Organisations Involved in Estimating Poverty Line

Surveys for determining poverty line are carried out by the National Sample Survey
Organisation (NSSO). It is an organisation under the Ministry of Statistics and
Programme Implementation of the Government of India. It conducts surveys at the
interval of 5 years. It is the largest organisation in India conducting regular socio-
economic surveys. It was established in 1950.
For determining the poverty line in various countries and for their comparison,
international organisations like the World Bank use a uniform standard method. As per
this method, the poverty line is level of minimum availability of the equivalent of $1 per
person per day.
Poverty Trends In India

There is a decline in poverty ratios in India from about 45% in 1994 to 21.9% in 2012. If
the trend of declining poverty ratios in India continues at this rate, then the poverty line
may reduce 20% in the next few years.
Group Vulnerable to Poverty

Poverty among social groups and economic categories varies widely in India. Social
vulnerable groups are the households of the Scheduled Castes (SCs) and Scheduled
Tribes (STs). Economically vulnerable groups comprise rural landless labour households
and urban casual labour households.
However, during the last few years, all these groups except the Scheduled Tribes group,
have witnessed a decline in poverty.
In the year 2011-12, the proportions (as determined by NSSO) were as given below

Source Reports of Employment and Unemployment among Social Groups in India
NSSO. Ministry of Statistics and Programme Implementation, Government of India.
There is a great difference within poor families. It is observed that female infants, women
and elderly members are not given equal access to resources available to the family. So,
they are also called poorest of the poor.
Story of Sivaraman
The family of Sivaraman, a rural landless labourer has been cited as an example of such a
family. There are 8 members in the family and both he and the wife work. His children do
not attend school due to poverty. Only his son gets milk sometimes and they find
difficulty in managing even two meals in a day.
The story portays the sufferings of Sivaraman who works as an agricultural labourer, that
too for just 5-6 months in a year. The sufferings and inequality within the family for
women and children »are even more. Girls are not sent to school and not even given milk
to drink, while the youngest child, who is a son gets milk to drink sometimes and his
parents also plan for his education.
Inter-State Disparities
The proportion of poor people is not the same in every state. Recent estimates show while
the all India HCR was 21.9% in 2011-12, states like Madhya Pradesh, Assam, Uttar
Pradesh, Bihar and Orissa had all India poverty level.
Bihar and Odisha continue to be the two poorest states with poverty ratios of 33.7% and
37.6% respectively. Alongwith rural poverty, urban poverty is also high in Odisha,
Madhya Pradesh, Bihar and Uttar Pradesh.
In states like Kerala, Jammu and Kashmir, Andhra Pradesh, Tamil Nadu, Gujarat, West
Bengal, there is a significant decline in poverty. The states successful in reducing poverty
have adopted different methods for doing so.
Some examples are
 Punjab and Haryana had high agricultural growth rates due to the effects of the
Green Revolution.
 Kerala has developed its human resources by investing more in education.
 West Bengal has reduced poverty by implementing land reforms.
 Public distribution of foodgrains at subsidised prices in Andhra Pradesh and Tamil
Nadu has helped in poverty reduction.
 Jammu and Kashmir have generated wide-ranging economic activities all across the
state and converted potential in various sectors into employment opportunities.
Global Poverty Scenario

Although extreme economic poverty has reduced in the world from 43% in 1990 to 22%
in 2008 (as per the World Bank), still there are vast regional differences. These are stated
below

The proportion of people living under poverty in different countries is defined by the
international poverty line (means population below $1 a day).
In South-East Asia and China, there is a decline in poverty due to rapid economic growth
and massive investment in human resource development.
In Latin America and the Caribbean, the poverty ratio has not changed significantly since
1981.
In Sub-Saharan Africa, poverty has increased since 1981 due to successive droughts and
other reasons. However, it declined from 51% in 1981 to 47% in 2008.
Economic Growth It is a term which defines an increase in real output of a country.
The Millennium Development Goals of the United Nations (formulated in the year 2000)
call for reducing the proportion of people living on less than $1 a day to half the 1990
level by 2015.
Causes of Poverty
Poverty continues in India for a variety of reasons.
These are
 Historically, there was a low level of economic development under the British
colonial administration prior to 1947. They discouraged traditional handicrafts and
also industrial development, reducing job opportunities and income growth.
 The low level of economic development persisted for many years after
independence and due to population increase, per capita income growth was low,
increasing poverty.
 The Green Revolution improved opportunities in agriculture, only in certain areas
of the country.

 The growth in the population increased the number of job seekers, who had to be
content with low paying jobs in urban areas, leading to poverty spreading to towns
and cities.
 Sociocultural (i.e. traditions) and economic factors lead to extra expenditure, which
ultimately increases poverty.
 There is an unequal distribution of land and other resources, that is why there are
large income inequalities also.
 Land reforms have not been properly implemented and lack of adequate land
resources is also a reason for many people to be poor.
 Small farmers borrow money for seeds, fertilisers and pesticides, etc and later on
fail to pay landing in debt trap. This high level of indebtedness is both the cause
and effect of poverty.
Anti-Poverty Measures
Removal of poverty has been one of the major objectives of Indian developmental
strategy.
The current anti-poverty strategy of the government is based on the following two
objectives
(i) Promotion of Economic Growth

The government has promoted economic growth during the last few years. Economic
growth was low till the 1980s but has increased significantly since then, causing
significant poverty reduction. The high economic growth helps in a significant reduction
of poverty. There is strong linkage between economic growth and poverty reduction.
Economic growth widens opportunities and provides the resources needed to invest in
human development.
High economic growth encourages people to send their children (including the girl child)
to school with hope of better economic returns from investing in education.
The poof may not take direct advantage of economic growth. Due to lack of growth in the
agricultural sector, the large number of people remain poor in rural areas.
(ii) Targeted Anti-Poverty Programmes

The government introduced targeted anti-poverty programmes starting from 1990. The
results of these programmes have been mixed due to lack of proper implementation and
improper targeting. Also, some schemes overlap others. Thus, the benefits of these
schemes are not fully reaching the deserving poor.
So, now the government is emphasising more on proper monitoring of all these
programmes.
Millennium Development Goals These are eight international development goals that
were officially established following the Millennium Summit of the United Nations in
2000, following the adoption of the United Nations Millennium Declaration. One of these
was to reduce by 50% the proportion of people living on less than US $1 a day by the
year 2015.

The Challenges to Poverty Reduction

Poverty reduction is still a major challenge in India, due to the wide differences between
regions as well as rural and urban areas. Further, poverty should include not only the
matter of the adequate amount of food but other factors like education, healthcare, shelter,
job security, gender, equality, dignity and so on.
These give us the concept of human poverty. Poverty reduction is expected to be lower in
the next 10-15 years.
In addition to anti-poverty measures, the government should focus on the following to
reduce poverty.
 Higher economic growth.

 Universal free elementary education.
 The decrease in population growth.
 Empowerment of women and weaker sections.
Summary
The most difficult challenge faced by independent India is poverty.

India has the largest single concentration of the poor in the world, where every fourth
person is poor.
Social scientists analysis poverty from many aspect besides level of income and
consumption.
These aspects include poor level of literacy, lack of job opportunities etc.
Social exclusion aneb* vulnerability are the most commonly used indicators for poverty
analysis.
The poverty line is an imaginary line used by any country to determine is poverty. It
varies time to time, place to place and country to country.
The most common method of determining poverty is income or consumption levels.
The calorific requirement and expenditure per capita are different for urban and rural
areas.
Surveys for determining poverty lines are carried out by the National Sample Survey
Organisation (NSSO).
The organisation is under the Ministry of statistics and programme implementation of the
Government of India.
Poverty among social groups and economic categories varies widely in India.
Female infants, women and elderly member are not given equal access to resources
available to the family.
Bihar and Odisha continue to be the two poorest states with poverty ratios of 33.7% and
37.6% respectively.
In states like Kerala, Andhra Pradesh, Gujarat, there is significant decline in poverty.
The proportion of people living under poverty in different countries is defined by the
international poverty line i.e. population below $ 1 a day.
There is decline in poverty in South-East Asia and China due to rapid economic growth
and massive investment in human resource development.

The Millenium Development Goals of the United Nations formulated in 2000, call for
reducing the proportion of people living on less than $ 1 a day to half the 1990 level by
2015.
There are many causes for the prevalence of poverty in India like unemployment, low
economic development and income inequalities.
Removal of poverty has been one of the major objectives of Indian developmental
strategy.
There is a strong linkage between economic growth and poverty reduction.
The Government of India introduced targeted anti-poverty programmes starting from

1990.
Poverty reduction is still a major challenge in India, due to the wide differences between
regions as well as rural and urban areas.

Chapter 4
Food Security in India
Food security refers to availability, accessibility and affordability of food to all people at
all times. Food security depends, on the Public Distribution System (PDS) and
government vigilance and time to time action, when this security is threatened.
Meaning Of Food Security

Food security means availability of adequate supply of basic foodstuffs at all times.
The 1995 World Food Summit declared, “Food security at the individual, household,
regional, national and global levels exists when all people, at all times, have physical and
economic access to sufficient, safe and nutritious food to meet their dietary needs and
food preferences for an active and healthy life”. The declaration further recognises that
“poverty eradication is essential to improve access to food”.
Food security has the following dimensions
 Availability of Food It means food production within the country, food imports and
the previous years stock stored in government granaries.
 Accessibility of Food It means food is within reach of every person.
 Affordability of Food It implies that an individual has enough money to buy
sufficient, safe and nutritious food to meet one’s dietary needs.
The above dimensions conclude that food security is ensured in a country only if *
Enough food is available for all the persons.
 All persons have the capacity to buy food of acceptable quality.

 There is no barrier on access to food.
Necessity Of Food Security

Food security is needed in a country to ensure food at all times. It is needed to ensure that
no person in a country dies of hunger.
Effect of Natural Calamity on Food Security

Most of the time, the poorest section of society might be food insecure. But persons
above the poverty line might also be food insecure when the country faces a national
disaster/calamity like earthquake, drought, flood, tsunami, widespread failure of crops
causing famine, etc.-
The total production of foodgrains decreases due to a natural calamity. It creates a

shortage of food in the affected areas. The price of the food products goes up due to this
shortage. At high prices, some people cannot afford to buy food. If such calamity happens
in a very wide area or is stretched over a longer time period, it may cause a situation of

starvation. Massive starvation might take a turn of famine. Thus, natural calamity affects
food security adversely.
Famine and Starvation

A famine is characterised by widespread deaths due to starvation and epidemics caused
by forced use of impure water or decaying food and loss of body resistance due to
weakening from starvation.
The most devastating famine in India was the famine of Bengal in 1943. Thirty lakh
people died in it. The price of rice, the staple diet of the people in the region, increased
sharply.
People Affected by Famine

No famine has occurred in India since independence. But today also, there are places like
Kalahandi and Kashipur in Odisha where famine-like condition still prevails. Starvation
deaths are also reported in Baran district of Rajasthan, Palamau in Jharkhand and man^
other remote areas.
Food Insecure People

Food and nutrition insecurity has affected the large section in India. But the most affected
people in the rural areas are landless agricultural labourers, traditional artisans and petty
self-employed workers. In urban areas the most affected are beggars and homeles people,
casual labourers people employed in ill-paid occupations and construction migrant and
other seasonal workers.
Further, many pregnant and nursing mothers and also children under the age of 5 years
are food insecure people. The second National Health and Family Survey (NHFS)
conducted during 1998-99. estimated that approximately 11 crore women and children in
India are food insecure.
Food Insecure Regions

Economically backward states with high level of poverty, tribal and remote areas, regions
more prone to natural disasters (like Eastern and South-eastern parts of Uttar Pradesh,
Bihar, Odisha, Jharkhand, West Bengal, Chhattisgarh, Maharashtra and parts of Madhya
Pradesh) consist the largest number of food insecure people.
Hunger
Food insecurity also has an important aspect of hunger. To create food security, current
hunger should be removed and the risk of future hunger should be reduced. Hunger has
two dimensions i.e. chronic and seasonal.
National Health and Family Survey (NHFS) 1998-95 A large-scale, multi-round survey
conducted in a representative sample of households throughout India. Three rounds of the
survey have been conducted since the first survey in 1992-93 and this was the second.
The survey provided .essential data on health and family welfare needed by the Ministry

of Health and Family Welfare and other agencies for policy and programme purposes as
well as information on important emerging health and family welfare issues.
There are two types of hunger. These are as follows

(i) Chronic Hunger
It is a consequence of a diet regularly deficient in quantity and quality this is caused due
to lack of income to buy food for survival. Chronic hunger has reduced in rural areas
from 2.3% of households in 1983 to 0.7% in 1999 – 2000. In urban areas, it has reduced
from 0.8% to 0.3% during the same period.
(ii) Seasonal Hunger

It is related to seasonal cycles of food growing and harvesting. It affects landless*
agricultural labourers in rural areas the most. In urban areas, casual construction workers
suffer from this during the time when they do not get work. The proportion of households
experiencing seasonal hunger in rural areas has reduced significantly from 16.2% in 1983
to 2.6% in 1999-2000. In urban areas, it has reduced from 5.6% to only 0.6% during the
reference period.
Note Malnutrition is a condition that results from eating a diet in which certain nutrients
are lacking or in wrong proportions.
Measures for Self-Sufficiency in Foodgrains.
India is aiming at self-sufficiency in foodgrains since independence. India has adopted all
measures to achieve self-sufficiency in foodgrains. The’ Green Revolution during the late
1960s and early 1970s helped significantly to achieve this, although the success varied
from region to region.
During this period, High Yielding Varieties (HYVs) of wheat and rice were introduced in
many states. The highest rate of growth was achieved in Punjab and Uttar Pradesh, where
foodgrain production jumped from 7.23 million tonnes in 1964-65 to reach an all-time
high of 78.9 million tonnes in 2012-13.
Production of foodgrains in Uttarakhand, Jharkhand, Assam, Tamil Nadu has dropped.

West Bengal and Uttar Pradesh, on the other hand, recorded significant increases in rice
yield in 2012-13. Indira Gandhi, the then Prime Minister of India, officially recorded the
impressive progress of the Green Revolution in agriculture by releasing a special stamp
entitled ‘Wheat Revolution’ in Julyl968.
Food Corporation of India (FCI) This was set-up under the Food Corporation’s Act 1964,
in order to support operations for safeguarding the farmers, distribution of foodgrains
throughout the country Tor PDS and maintaining satisfactory level of operational and
buffer stocks.

Minimum Support Price (MSP) This is the price at which the government (through the
Food Corporation of India) purchases crops from the farmers. Presently, there are 27
crops being purchased with such prices including varieties of cereals, pulses, oilseeds,
fibre crops and others.
Food Security In India

The Green Revolution was started in early 70s. Since then, our country has avoided
famine even during adverse weather conditions. India has become self-sufficient in
foodgrains during the last 30 years due to the variety of crops grown. Foodgrains
availability even in adverse conditions has been ensured by the government through a
food security system consisting of maintaining a buffer stock of foodgrains, alongwith a
Public Distribution System (PDS) for foodgrains and other essential items.
Buffer Stock
It is the stock of foodgrains (wheat and rice) procured by the government. Government
purchases wheat and rice from farmers through the Food Corporation of India (FCI) states
having surplus production. The farmers are paid a Minimum Support Price (MSP) for
their crops. The MSP is announced at the beginning of the sowing season to give an
incentive to the farmers to grow more. These purchased foodgrains are stored in granaries
as a buffer stock. This stock is maintained to distribute foodgrains through the PDS in the
areas of the country where production is less. It is provided, to the poorer sections of
society at subsidised prices, i.e. lower than the market price which is known as the issue
price. The buffer stock also helps to resolve the problem of food shortage due to a
calamity or in adverse weather conditions.
Programmes For Food Security In India

In mid-1970s, National Sample Survey Organisation (NSSO) reported the high incidence
of poverty level. Due to this, three important food intervention programmes were
introduced.
They are
 Public Distribution System (PDS) for foodgrains

 Integrated Child Development Services (ICDS)
 Food-For Work (FfW) programme.
Public Distribution System (PDS) Through government regulated ration shops, the food
procured by the FCI is distributed among the poorer sections of the society. This is called
the Public Distribution System (PDS). Ration shops are now present in most localities,
villages, towns and cities. There are about 5.5 lakh ration shops all over the country.
Ration shops are also known as fair price shops. They keep stock of foodgrains, sugar,
kerosene oil for cooking. These items are sold to people at a price lower than the market
price. Any family with a ration card can buy .a stipulated amount of these items (e.g. 35
kg of grains, 5 litres of kerosene, 5 kg of sugar, etc) every month from the nearby ration
shop. The ration cards are of three kinds, colour-coded for easy recognition

 Antyodaya card for the poorest of the poor.
 BPL card for families below the poverty line.
 APL card for all others.
Rationing
It is a term given to government controlled distribution of resources and scarce goods or
services. It restricts how much people are allowed to buy or consume at a particular time
within a particular period. Rationing in India was introduced in 1940s against the
backdrop of the Bengal famine. Later, it was revived in the wake of an acute food
shortage during 1960s prior to the Green Revolution.
Current Status of Public Distribution System

In the beginning, the PDS coverage was universal with no discrimination between the
poor and non-poor. In 1992, a Revamped Public Distribution System (RPDS) was started
in 1,700 blocks of the country to provide the benefits of PDS in remote and backward
areas. In 1997, a Targeted Public Distribution System (TPDS) was introduced to target
the ‘poor in all areas’, with a lower issue price for foodgrains for them compared to the
price paid by non-poor people. Further in year 2000, two special schemes Antyodaya
Anna Yojana (AAY) and Annapura Scheme (APS) were launched.
(i) Antyodaya Anna Yojana (AAY) for the ‘poorest of poor’. AAY was launched in
December 2000. Under the scheme, 1 crore of the poorest among the BPL families
covered under the Targeted Public Distribution System (TPDS) were identified.
Poor families were identified by the respective state rural development departments
through a Below Poverty, Line (BPL) survey. 25 kg of foodgrains were made available to
each eligible family at a highly subsidised+ rate of Rs. 2 per kg for wheat and ? 3 per kg
for rice. This quantity was increased from 25 kg to 35 kg from April 2002.
(ii) Annapurna Scheme (APS) for the ‘indigent senior citizen’. It provides 10 kg of
foodgrains free of cost per month to senior citizens who are not receiving any pension or
have any other source of income or having a family to support them, i.e. they are
destitute.
Following are some remarkable achievements of PDS
 PDS has helped government to stabilise foodgrain prices, so that it is available to

consumers at affordable rates.
 It has helped in avoiding widespread hunger and famine by supplying food from
surplus regions to deficit ones.
 It also helped in increasing foodgrain production, besides providing income
security to farmers in some areas.
Criticisms of PDS
The implementation of the PDS still needs to be improved, because of the following
reasons

 Buffer stocks are much higher than the rules.
 In some FCI godowns, grains are getting damaged or eaten by rats and still
instances of hunger are prevalent.
 High level of buffer stock of 65.3 million tonnes of wheat and rice in 2014 was
much more than the minimum level of buffer norms. The excess stock of
foodgrains bought from farmers at high , prices leads to high carrying costs for the
government, besides leading to deterioration and wastage.
 The pressure exerted by leading foodgrain producing states to increase the buying
cost has increased MSP. The rising’ MSP has increased the maintenance cost of
procured foodgrains, storage cost and transportation cost.
 The buying of foodgrains is concentrated in a few prosperous states like Punjab,
Haryana Western Uttar Pradesh, Andhra Pradesh and to a lesser extent in West
Bengal.
 The high MSPs have made farmers to cultivate wheat and rice more resulting in
depletion of the water table, as they require more water to grow. This has also led
to soil degradation, endangering future sustainability of agricultural development in
the regions where these are grown.
Malpractices in PDS
PDS has also become ineffective in many regions of the country because dealers running
the ration shops are indulged in malpractices
The malpractices indulged into by the dealers include
 Diverting the grains to open market to get a better margin.

 Selling poor quality grains at ration shops.
 Irregular opening of the shops and so on.
The malpractices have resulted in consumers of Bihar, Uttar Pradesh, Madhya Pradesh
and Odisha buying much less foodgrains than the national average from the ration shops.
In the Southern states, where the shops are run by cooperatives, the consumers purchase
much more than the national average.
Since the introduction of Targeted Distribution System (TPDS), with three levels of
prices for three different income level families, the Above Poverty Line (APL) families
do not have much incentive to buy foodgrains from the ration shops. The prices for these
families are not significantly lower than market prices.
Subsidy
It is a payment that a government makes to a producer to supplement the market price of
a commodity. Subsidy helps in keeping consumer prices low while maintaining a higher
income for domestic producers.
Integrated Child Development Services (ICDS)

In 1975, it was introduced on an experimental basis. Its aim is to provide children upto 6
years of age supplementary nutrition, immunisation, health, check-up, referral services,

pre-school non-formal education as well as nutrition and health education for their
mothers.
Food-For-Work (FFW) Programme

The main objective of the Food for Work Programme is generation of supplementary
wage employment. It is open to all rural people who are in need of unskilled work wage
employment.
National Food For Work Programme

National Food for Work Programme was launched on 14th November, 2004 in 150 most
backward districts of the country with the objective of intensifying the generation of
supplementary wage employment. The programme is open to all rural poor who are in
need of wage employment and desire to do manual unskilled work. It is implemented as a
100% centrally sponsored scheme and the foodgrains are provided to the states free of
cost. The Collector is the nodal officer at the district level and has the overall
responsibility of planning, implementation, coordination, monitoring and supervision.
The programme from 2005 has since been subsumed in NREGA.
Poverty Alleviation Programmes (PAPs)

Over the last few years, several other Poverty Alleviation Programmes (PAPs), were
launched mostly in rural areas. Some of – them have also been restructured.
Some of these programmes have explicit food components. Others are employment
programmes, which improve food security by increasing the income of the poor. For
example, Rural Wage Employment Programme, Employment Guarantee Scheme,
Sampurna Grameen Rozgar Yojana and Mid-day-Meal.
Role Of Cooperatives In Food Security

The role played by cooperatives in food security of India is important especially in the
Southern and Western parts of the country. The cooperative societies set-up shops to sell
low priced goods to poor people. For example, out of all fair price shops running in Tamil
Nadu, around 94% are being run by the cooperatives.
The examples shown below are success stories of cooperatives in order to contribute in
food security of India
In Delhi, Mother Dairy is making progress in the provision of milk and vegetables to the
consumers at a controlled rate decided by the Government of Delhi.
Amul is another success story of cooperatives in milk and milk products from Gujarat. It
has brought about the White Revolution in the country.
In Maharashtra, Academy of Development Science (ADS) has facilitated a network of

NGOs for setting up grain banks in different regions. ADS organises training and capacity

building programmes on food security for NGOs. The ADS Grain Bank programme is
acknowledged as a successful and innovative food security intervention.
Summary
The availability, accessibility and affordability of food to all people at all times is called
food security.
When there is problems in food production or distribution, poor household has to suffer
the most.
The food, security in India depends on the Public Distribution System (PDS) and vigilant
and timely action of the government.
Food is an essential item for the survival of human being.
Food security of a nation is ensured if all of its citizens have enough nutritious food
available (availability), all person having the capacity to buy food (affortat>iJit^) and
there is no barrier on access to food (accessibility).
The poorest strata of society are mostly food insecure and the better off might face food
insecurity during national disaster and calamity.
During natural calamity there is decrease in foodgrain production, which causes shortage
of foodgrain. The increased price ultimately leads to starvation and famine.
Epidemics during famine is caused by forced use of contaminated water or decaying food
and loss of body resistance due to weakening from starvation.
Landless people, traditional artisans, petty self employed workers and destitutes Including
beggars are worst affected groups from food and nutrition insecurity.
Workers of ill-paid occupations and casual labourer are the most food insecure people in
urban areas.
Agriculture is seasonal and low paying activity.
Besides the inability to buy food, the social composition (like SCs, STc, OBCs etc) also
has role in food insecurity.
Economically backward states, with high incidence of poverty, tribal and rural areas,
regions prone to natural disaster has largest number of food insecure people.

For example, Bihar, Jharkhand, Eastern UP, West Bengal, Madhya Pradesh, Maharashtra
etc.
Poverty and hunger are two dimensions of food insecurity.
Hunger can be chronic or seasonal.
The chronic hunger is the consequence of a diet regularly deficient in quantity and quality
due to lack of income.
The seasonal hunger is the consequence of seasonal nature of food production and
harvesting which affects landless agricultural labourers the most.
Through Green Revolution, India attained self sufficiency in foodgrain production.
The food security system of government consist of component of buffer stock and public
distribution system.
Buffer stock is the stock of foodgrains (wheat and Rice) procured by government
(through FCI) from surplus producing state for distribution (through PDS) to deficit states
and the poorest section of society.
The pre-announced price, paid by government to farmers is called Minimum Support

Price (MSP).
The price at which foodgrains is distributed to poorer section of people is called issue
price. It is lower than market price.
The system of distribution of food procured by the FCI among the poorer section of
society is called the Public Distribution System (PDS).
Ration shops (also known as fair price shops), keep stocks of foodgrains, sugar, kerosene
etc to be sold to people at a price lower than market price.
In addition to PDS, the other poverty alleviation programme comprising component of

food security are : Integrated Child Development Service (ICDS); Food For Work (FFW),
mid day meals, Antyodaya Anna Yojana (AAY) etc.
Various cooperatives, NGOs are also working intensively along with government to
ensure food security of India.

Mother Dairy, Amul, Grain banks are regarded as successful and innovation food security
intervention.

Development – Chapter 1
Different notions of development:
Different people have different notions of development because life situations of
persons are different and therefore their aspirations and desires and goals.
Importance of averages:
Since countries have different populations comparing total income does not tell us what
an average person is likely to earn, hence we compare the average income which is the
total income of the country divided by its total population. It is also called per capita
income.
Criterion used by the World Bank as per World Development Report 2006, in classifying
the countries. World Bank says that countries with the per capita income of Rs 4,53,000
per annum and above in 2004 are called rich countries and those with the per capita
income of Rs 37,000 or less are called low-income countries. India comes in the category
of low income countries because its per capita income in 2004 was just Rs 28000 per
annum. Rich countries excluding the countries of Middle-East and certain other small
countries are generally called developed countries.
Key terms:
 Development. Growth of economy along with the improvement in the quality of

life of the people like health, education etc.
 Per capita income. Is the average income obtained as the ratio between National
Income and Population of a country.
 National income. Is the money value of final goods and services produced by a
country during an accounting year.
Human development Index:

It is a composite Index prepared by United Nations Development Programme (UNDP)
through its Annual Human Development Report published every year. Major parameters
such as longevity of life, levels of literacy and Per capita income are used to measure the
development of countries. World countries are ranked accordingly in to Very High
Developed countries, High Developed countries, Medium Developed countries and Low
Developed countries.
 Infant Mortality Rate. The number of children that die before the age of one year
as a proportion of 1,000 live birth in that particular year.
 Literacy Rate. It measures the proportion of literate population in the 7 and above
age group.

 Net Attendance Ratio. It is the total number of children of age group 6-10
attending school as a percentage of total number of children in the same age
group.
 Body Mass Index. (BMI) one way to find out if adults are undernourished is to
calculate Body Mass Index. Divide the weight of a person (in kg) by the square of
the height (in metres). If this figure is less than 18.5 then the person would be
considered undernourished. If this BMI is more than 25, then a person is
overweight.
Sustainable Development:
It means development without hampering the Environment. It is the process of
development that satisfies the present needs without compromising the needs of the
future generation.
Sectors of Indian Economy- Chapter 2

Primary sector:
When we produce goods by exploiting natural resources, it is an activity of the primary
sector.
Secondary sector:
Covers activities in which natural products are changed into other forms through ways
of manufacturing, it is also called as industrial sector.
Tertiary sector:
These are the activities that help in the development of the primary & secondary sector.
These activities by themselves do not produce good but they are an aid and support to
the production process. Example: Transportation-Goods that are produced in the
primary sector need to be transported by trucks or trains and than sold in the wholesale
and retail shops; Storage—at times it is necessary to store these products in godowns,
which is also a service made available. Communication -talking to others on telephone);
Banking-borrowing money from the banks. Since these activities are generate services
rather than goods it is also called Service sector.
Gross Domestic Product (GDP):

The value of final goods and services produced in each sector during a particular year
provides the total production of the sector for that year. And sum of production in three
sectors give Gross Domestic Product—GDP of the country. It is the value of all final
goods and services produced within the country during a particular year.
Underemployment:
This is the situation of where people are apparently working but all of them are made to

work less than their potential. This kind of underemployment is hidden in contrast to
someone who does not have a job. Hence, it is also called disguised unemployment.
Mahatma Gandhi National Rural Employment Guarantee Act 2005, (MNREGA 2005):
Under NREGA 2005, all those who are able to, and are in need of, work have been
guaranteed 100 days of employment in a year by the government. If the government
fails in its duty to provide employment, it will give unemployment allowances to the
people.
Organised sector:
It covers those enterprises or places of work where the terms of employment are
regular and therefore, people have assured work.
Unorganized sector:
It is characterized by small and scattered units which are largely outside the control of
the government. There are rules and regulations but these are not followed.
Public sector:
In this sector government owns most of the assets and provides all the services.
Growing importance of Tertiary sector:
 In any country several services such as hospitals , educational institutions, post

and telegraph services, police stations, courts, village administrative offices,
municipal corporations, defense, transport, banks, insurance companies etc. are
required.
 The development of the agriculture and industrial leads to the development of
services such as transport, trade, storage and the like. Greater the development of
primary and secondary sectors more will be demand of such services.
 As the income level rise, certain sections of people start demanding many more
services like
eating out, tourism, shopping , private hospitals, professional training etc. This is
found especially in the big cities.
 Over the past decade or so certain new services such as those based on the
information and communication technology have become important & essential.
Money and Credit - Chapter 3

 Money:
Money acts as an intermediate in the exchange process & it is called medium of

exchange. In many of our day to day transactions, goods are being bought & sold
with the use of money.
 The reason as to why transactions are made in money is that, a person holding
money can easily exchange it for any commodity or service that he or she wants.
 Double coincidence of wants:
When in the exchange, both parties agree to sell and buy each others
commodities it is called double coincidence of wants. In the barter system double
coincidence of wants is an essential feature.
 Demand Deposits in Bank:
Deposits in the bank account that can be withdrawn on demand. People need
only some currency for their day to day needs. For instance workers who receive
their salaries at the end of each month, have some extra cash. They deposit it
with the banks by opening a bank account in their name. Bank accept the
deposits and also pay an interest rate on the deposits.
 Cheque:
Paper instructing the bank to pay a specific amount from a person’s account to
the person in whose name the cheque is drawn.
 Reserve Bank of India:
It is the central bank of India which controls the monetary policy of the country.
Reserve Bank of India supervises the activities of formal sector and keep the track
of their activities but there is no one supervise the functioning of informal sector.
Periodically banks have to submit information to the RBI on how much they are
lending and to whom, at what interest rate, etc.
 Credit:
The activity of borrowing and lending money between two parties.
 Collateral:
Collateral is an asset that the borrower owns (such as land, building, vehicle,
livestock, deposits with banks) and uses this as a guarantee to a lender until the
loan is repaid. Property such as land titles, deposits with banks, livestock are
some common examples of collateral used for borrowing.
 Terms of Credit:
Interest rate, collateral and documentation requirement, and the mode of
repayment together comprise what is called the terms of credit. The terms of
credit vary substantially from one credit arrangement to another. They may vary
depending on the nature of the lender and the borrower.
 Formal sector:
Includes banks & cooperatives; RBI supervises the functioning of formal sources
of loans. To see that the bank maintains a minimum cash balance and monitors
that these banks give loans not just to profit-making business and traders but
also to small cultivators , small scale industries , to small borrowers etc.
periodically banks have to submit information to RBI of their activities.
 Informal sector:
Includes money lenders, traders, employers, relatives & friends etc. There is no
one to supervise their credit activities. They can charge whatever rate of interest.
There is no one to stop them from using unfair means to get their money back.

 Self Help Groups (SHG):
A typical SHG has 15-20 members usually belonging to a neighborhood, who
meet and save regularly. Saving per month varies from 25-100 rupees or more
depending upon the ability of the people. Members take small loans from group
itself to meet their needs.
Globalisation and the Indian Economy -Chapter

4
Globalisation refers to the integration of the domestic economy with the economies of
the world.
An MNC is a company that owns and controls production in more than one nation.
Foreign Investment is investment made by MNCs.
Advantages of Foreign Trade—
1. ‘Foreign Trade’ has facilitated the travel of goods from one market to another.
2. It provides a choice of goods to the buyers.
3. Producers of different countries have to compete in different markets.
4. Prices of similar goods in two markets in two different countries become almost
equal.
SEZs or Special Economic Zones are industrial zones being set up by the Central and
State Governments in different parts of the country. SEZs are to have world class
facilities such as electricity, water, roads, transport, storage, recreational and
educational facilities. Companies who set up production units in SEZs are exempted
from taxes for an initial period of five years. SEZs thus help to attract foreign companies
to invest in India.
Reasons to put barriers to foreign trade:
1. The Indian government after independence had put barriers to foreign trade and
investment. This was done to protect the producers within the country from
foreign competition. Industries were just coming up in the 1950s and 1960s and
competition from imports at that stage would not have allowed these industries
to develop and grow. Imports of only essential items such as machinery, fertilizers,
petroleum etc. was allowed.
2. To protect the Indian economy from foreign infiltration in industries affecting the
economic growth of the country as planned. India wanted to move faster to catch

up with the main industries in the world market and therefore had to keep an
extra watch on its progress in international trade and give incentives to the more
rapidly growing industries through fiscal tariff and other means.
Around 1991, some changes were made in policy by the Indian government as it was
decided that the time had come for the Indian producers to compete with foreign
producers. This would not only help the Indian producers to improve their performance
but also improve their quality.
Liberalization means the removal of barriers and restrictions set by the government on
foreign trade. Governments use trade barriers to increase or decrease (regulate) foreign
trade to protect the domestic industries from foreign competition. Example, Tax on
imports. Around 1991, government India adopted the policy of liberalization.
World Trade Organization (WTO) was started at the initiative of the developed
countries. Its main objective is to liberalize international trade.
Privatization means transfer of ownership of property from public sector to private

sector.
Business Process Outsourcing (BPO) is the contracting of non primary business activities
and functions to a third party service provider.
Economic Reforms or New Economic Policy is policy adopted by the Government of

India since July 1991. Its key features are Liberalization, Privatisation and Globalisation
(LPG).
MNCs set up production in various countries based on the following factors:
 MNCs set up offices and factories for production in regions where they can get
cheap labour and other resources; e.g., in countries like China, Bangladesh and
India.
 At times, MNCs set up production jointly with some of the local companies of
countries around the world. The benefit of such joint production to the local
company is two-fold. First, the MNCs can provide money for additional
investments for faster production. Secondly, the MNCs bring with them the latest
technology for enhancing and improving production.
 Some MNCs are so big that their wealth exceeds the entire budgets of some
developing countries. This is the reason why they buy up local companies to
expand production. Example, Cargill Foods, An American MNC has bought over
small Indian company such as Parakh Foods.

 MNCs control production by placing orders for production with small producers in
developing nations; e.g., garments, footwear, sports items etc. The products are
supplied to these MNCs which then sell these under their own brand name to
customers.
Factors which have helped in globalization:
 Technology. Rapid improvement in technology has contributed greatly towards

globalization.
 Development in information and communication technology has also helped a
great deal. Telecommunication facilities — telegraph, telephone (including mobile
phones), fax are now used to contact one another quickly around the world.
Teleconferences help in saving frequent long trips across the globe.
 Information technology has also played an important role in spreading out
production of services across countries. Orders are placed through internet,
designing is done on computers, even payment for designing and printing can be
arranged through internet.
Consumer Rights - Chapter 5

Consumer is a person who buys and uses a good or service from the market after
making a payment.
Some common ways by which consumers may be exploited by manufacturers and

traders:
 Underweight and under-measurement: Goods sold in the market are sometimes

not measured or weighed correctly.
 High prices: Very often the traders charge a price higher than the prescribed retail
price.
 Sub-standard quality: The goods sold are sometimes of sub-standard quality, e.g.
selling medicines beyond their date of expiry, selling deficient or defective home
appliances.
 Duplicate articles: In the name of genuine parts or goods, fake or duplicate items
are sold.
 Adulteration and impurity: In costly edible items like oil, ghee and spices,
adulteration is common in order to earn more profit. This causes heavy loss to the
consumers.
 Lack of safety devices: Fake or inferior electronic goods, electrical devices or other
appliances, produced locally lack the required in-built safety measures. This may
cause accidents.

 Artificial scarcity: Some unscrupulous businessmen create artificial scarcity by
hoarding. They sell their goods for a higher price by creating panic among
consumers.
 False and incomplete information is provided by sellers which can easily mislead
consumers.
 Unsatisfactory after-sale service: The suppliers do not provide the satisfactory
after-sale service despite the necessary payments on items such as electronics,
automobiles, etc.
Consumer International:
An international umbrella organization to over 240 member organizations from over 220
countries.
COPRA: This Act (COPRA) 1986 tries to ensure:
 information, safety, redressal, representation and consumer education.

 Under COPRA, a’ three tier quasi-judicial machinery at the district, state and
national level helps in solving consumer disputes.
 Consumer Movement with its different organisations helps in exerting pressure on
business firms as well as the government to correct their conduct which may be
against the interests of the consumers at large.
Right to Information Act, 2005:

This act gives rights to the citizen to have information about the government
departments, their policies practices and procedures.
ISI Mark:
A certification mark for industrial products in India developed by the Bureau of Indian
Standards.
AGMARK:
A certification mark employed on agricultural products in India by the directorate of
Marketing and Inspection.
Hallmark:
An official mark struck on items made of precious metals like gold silver platinum etc.
Duties of consumers while shopping are

A consumer must check for a certification of quality such as ISI mark, Agmark or
Hallmark; Consumers must ensure that they receive a valid bill or cash memo and
warranty on purchase of items especially electronic goods such as TV, laptop, mobile
phones etc.; The consumer should not allow a salesman to force him/her to buy a

particular brand; and a consumer should inform concerned authorities if a shopkeeper is
selling defective goods.
Consumer Forum:
The consumer movement in India has led to the formation of various organizations
locally known as consumer forums or consumer protection councils. They guide
consumers on how to file cases in the consumer court. They represent consumers in the
consumer courts. These voluntary organizations receive financial support from the
government for creating awareness among the consumers.

NCERT Class 11 Indian Economic Development notes –
ORACLE IAS
(PS: We have used the old data as given in the book)

Indian Economy on the Eve of Independence Chapter 1
Agricultural Sector on the Eve of Independence
India’s agricultural sector (on the eve of independence) exhibited three principal characteristics,
these characteristics pointed to backwardness of India’s agriculture as well as its stagnation
 Low level of productivity
 High degree of vulnerability
 A wedge between owners of the soil and tillers of the soil.
Factors causing backwardness and stagnation of Indian agriculture during the British rule
 Land revenue settlement under the British Raj
 Forced commercialisation of agriculture
Industrial Sector
“Systematic de-industrialisation” is the term that describes the status of industrial sector during the
British rule. It implied two things
 Decay of world famous traditional handicraft industry owing to discriminatory policies of the
British Government.
 Bleak growth of modern industry now to lack of investment opportunities.
Two-fold motive behind the systematic .(industrialisation during the British Rule in India.
 To exploit India’s wealth of raw material and primary products. It was required to fulfill the
emerging needs of industrial inputs in the wake of industrial revolution in Britain.
 To exploit India as a potential market for the industrial products of Britain.
Foreign Trade India had occupied a place of eminence in the area of Foreign trade, since ancient
times. But the British rule in India ended this eminence.
Drain of India’s Wealth

Huge administrative expenses were incurred by the British Government to manage their colonial i
ale in India. Also huge expenses were incurred by the British Government to fight wars in pursuit of
their policy of imperialism.
Demographic Condition
Demographic conditions during the British rule exhibited all features of a stagnant and backward
economy. Both birth rate and death rate were very high nearly 48 and 40 per thousand respectively.
Occupational Structure
Greater dependence on agriculture as suggested by occupational structure on the eve of
independence implied lesser availability of land per head for the farming population. Accordingly
agriculture was taken largely as a means of subsistence and less as an occupation for profit.

ORACLE IAS
Infrastructure
Infrastructure refer to the elements of economic change as well as elements of social change which
serve as a foundation for growth and development of a country. Development of infrastructure is a
precondition to the economic and social development of a country.
Economy of a country includes all production, distribution or economic activities that relates with
people an determines the standard of living. On the eve of independence Indian economy was in a
very bad shape due to the presence of British colonial rule.
The Britishers generally framed policies that favoured England. The only purpose of Britishers was to
unjustly enrich themselves at the cost of India’s economic development. Thus, in 1947, when British
transferred power back to India, we inherited a crippled economy.
India’s National and Per Capital Income

Under Colonial Rule There were no efforts from the part of the colonial government to measure the
national and per capital income of India. Some individual attempts were made to measure such
incomes but produced conflicting and inconsistent results. The contribution of VKRV Rao and
Dadabhai Naoroji are considered very significant in this context.
Low Economic Growth Under Colonial Rule

India had an independent economy before the arrival of British rule. But the Britishers, dominated it
for over a period of 200 years. Britishers framed policies that protected and promoted the economic
interests of their own country. They transformed India into supplier of raw materials and consumer
of finished goods from the factories of Britain. Such policies affected Indian economy very adversely.
In this context, we will discuss the conditions of certain sectors that were badly affected by the
presence of colonial rule, i.e. on the eve of independence.
State of Agriculture Sector

Agriculture was the main source of livelihood for most of the people of India, and about 85% of the
country’s population lived mostly in villages and derived livelihood directly or indirectly from
agriculture.
Inspite of such a large segment of the population being dependent of agriculture, either directly or
indirectly, this sector was facing stagnation and constant deterioration, as is brought forward
through the following points.
 Low Level of Productivity Productivity, i.e. output per hectare of land was very low. This led
to a low level of output, inspite of a large area under cultivation.
 High degree of Vulnerability Agriculture was vulnerable to climatic factors and mostly
affected by erratic rainfall. Poor rainfall generally led to a low level of output and also to
crop failures. No effort was made by British Government to provide permanent source of
irrigation facilities for the farmers.
The reasons for stagnation of agricultural sector were

(i) Land Revenue System
The Britishers introduced the zamindari system. The zamindars were recognised as permanent
owners of the soil. Zamindars were to pay a fixed sum to the government as land revenue and they
were absolutely free to extract as much from the tillers of the soil as they could.
Their main interest was in rent collection regardless of the economic conditions of cultivators and
this caused misery and social tension among the latter.

ORACLE IAS
Apart from this there are two more systems namely, the Ryotwari and the Mahalwari were
prevalent.
(ii) Lacking of Resources

Because the tillers had to pay huge amount of rent, referred to as ‘Lagaan’, they were not left with
any surplus to be able to provide for resources needed in agriculture in the form of fertilisers or
providing for irrigation facilities. This further lowered the agricultural productivity.
(iii) Commercialisation of Agriculture

Commercialisation of agriculture refers to shift from cultivation for self-consumption to cultivation
for sale in the market. It also refers to cultivation of cash-crops like cotton, indigo, etc.
Due to commercialisation of agriculture, there was some evidences of a relatively higher yield of
cash crops in certain areas of the country. But this could not help in improving the conditions of
Indian farmers.
Instead of producing food crops, farmers were producing cash crops, which were ultimately to be
used by British industries.
State of Industrial Sector

In the pre-british period, India was particularly well-known for its handicraft industries, in the fields
of cotton and silk textiles, metal and precious stone works, etc. These products enjoyed a worldwide
market based on the reputation of the fine quality of material used and the high standards of
craftsmanship.
But the Britishers followed a policy of systematic de-industrialisation by creating circumstances

conducive to the decay of handicraft industry and not taking any steps to promote modern industry
and reduced India to a mere exporter of raw material and importer of finished goods.
The following points bring farword the state of the industrial sector at the eve of independence
1. Decay of Handicraft Industry
The traditional handicraft industry in India enjoyed worldwide reputation, but the British misrule in
India led to the decline of Indian handicraft industry. The Britishers adopted the following policies to
systematically destroy the handicraft industry.
 Discriminatory Tariff Policy of the State The Britishers followed a discriminatory tariff policy
by allowing tariff free exports of raw material from India (to provide for the requirements of
their industries in Britain) and tariff free import of British Industrial products (to promote
British goods in India), but placed a heavy duty on the export of handicraft products. So,
Indian handicraft products started loosing their domestic as well as foreign markets.
 Competition from Machine-made Products Machine-made products from Britain were cheap
and better in quality than the handicraft products. This competition forced many a
handicrafts to shut down their business.
 Introduction of Railways in India The Britishers introduced Railways in India, to expand the
market of its low priced industrial products. Consequently, the demand of high-priced
handicraft products started to fall, thus leading to the downfall of handicraft industry.
2. Slow Growth of Modem Industry

Under second half of 19th. century, modern industry showed slow growth. This development was
confined to the setting up of cotton and jute textile mills.

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Subsequently, the iron and steel industries began coming up in the beginning of the 20th century.
In this context, the Tata Iron and Steel Company (TISCO) was incorporated in August, 1907 in India. It
established its first plant in Jamshedpur [Bihar, at present Jharkhand].
But, these industries were the result of private endeavour. The state participation in the process of
modem industrialisation was very limited, as is evident from the following points
 Limited Growth of Public Sector Enterprises The public sector enterprises such as railways,
power, post and telegraph were confined to areas which would enlarge the size of market
for British products in India.
 Lopsided Industrial Structure The industrial growth was lopsided, in the sense that consumer
goods industry was not adequately supported by the capital goods industry.
 Lack of Basic and Heavy Industries No priority was given for the development of basic and
heavy industries. Tata Iron and Steel Mills was the only basic industry in India.
Textile Industry in Bengal

Muslin is a type of cotton textile which had its origin in Bengal,particularly, places in and around
Dhaka (now the capital city of Bangladesh). Daccai Muslin had gained worldwide fame as an
exquisite type of cotton textile.
The finest variety of muslin was called malmal. Foreign travellers also used to refer to it as malmal
shahi or malmal khas meaning that it was worn by or fit for, the royalty.
State of Foreign Trade

India has been an important trading nation since ancient times.
But when the restrictive policies of commodity production, trade and tariff were imposed by the
colonial government, it adversely affected the structure, composition and volume of India’s foreign
trade.
Following were the reasons behind the poor growth of foreign trade
1. Exporter of Primary Products and Importer of Finished Goods
Under the colonial rule, India became an exporter of primary products such as raw silk, cotton, wool,
sugar, indigo, jute, etc and an importer of finished consumer goods like cotton, silk and woollen
clothes and capital goods like light machinery produced in the factories of Britain.
2. Britain’s Monopoly Control

Britain maintained a monopoly control over India’s exports and imports. Due to this, more than half
of India’s foreign trade was restricted to Britain while the rest was allowed with a few other
countries like; China, Ceylon (Sri Lanka) and Persia (Iran). The opening of Suez Canal in 1869 further
intensified British control over India’s foreign trade.
3. Drain of India’s Wealth

An important characteristic of foreign trade throughout the colonial period was the generation of a
large export surplus. But this surplus came at a huge cost to the country’s econo Several essential
commodities like food grains, kerosene, were scarcely available in the domestic market.
Also, this surplus was not used in any developmental activity of India. Rather, it was used to
maintain the administrative set-up of the Britishers or bear the expenses of war taught by Britain.
All of this, led to the drain of Indian wealth.
State of Occupational Structure

During the colonial period, the occupational structure of India exhibited its backwardness. The

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agricultural sector accounted for the largest share of the work force which remained at a high of 70-
75% of the work force and the manufacturing and services sectors accounted for only 10 and 15-20%
respectively.
There existed a growing regional disparity with few states such as Orissa, Rajasthan and Punjab
witnessing an increase in agricultural workforce while the states which were the parts of Madras
presidency. Bombay and Bengal witnessed a decline in the percentage of work force dependent on
agriculture.
State of Infrastructure
Infrastructure comprises of such industries which help in the growth of other industries. Under the
colonial period, basic infrastructure such as railways, port per transport, posts and telegraphs
developed.
However, the real motive behind this development was not to provide basic amenities to the people
but to sub serve various colonial interests.
The state of infrastructure under the colonial rule can be understood with the help of following
points
1. Roads
Roads constructed before independence were not fit for modern transport. It was very difficult to
reach rural areas during rainy season.
The roads were built only to serve the purpose of mobilising the army within India and transporting
raw materials from the countryside to the nearest railway station or the port for exporting it.
2. Railways
British rulers introduced railways in India in 1850 and it began its operation in 1853. It is considered
as one of the important contribution of Britishers.
The railways affected the structure of the Indian economy in the following two ways
 It enabled people to undertake long distance travel and thereby break geographical and
cultural barriers.
 It fostered commercialisation of Indian agriculture which adversely affected the self-

sufficiency of the village economies in India.
So, the social .benefits provided by the Railways was outweighed by the country’s huge economic
loss.
3. Water and Air Transport

The colonial rulers took measures for the development of water transport. The inland waterways, at
times, also proved uneconomical as in the case of the coast canal on the Orissa coast. The main
purpose behind their development was to serve Britain’s colonial interest.
The colonial government also showed way to the air transport in 1932 by establishing Tata Airlines.
Thus, in this way it inaugurated the aviation sector in India.
4. Communication
Modern postal system started in India in 1837. The first telegraphy line was opened in 1857. The
introduction of the expensive system of electric telegraph in India served the purpose of maintaining
law and order.
Demographic Condition
Various details about the population of British India were first collected through a census in 1881.
Before 1921, India was in the first stage of demographic transition. The second stage began after

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1921. However neither the total population of India nor the rate of population growth at this stage
was very high. Though suffering from certain limitations, it revealed the Unevenness in India’s
population growth. The population grew at a rate of 1.2% up to the year 1951.
On the eve of independence the demographic condition was as follows
 The overall literacy level was less than 16%.
 The female literacy level was at a negligible low rate of about 7%.
 Public health facilities were either unavailable to large chunks of population or when
available, were highly inadequate. Infant mortality rate was 218 per thousand in contrast to
present infant mortality rate of 63 per thousand.
 Life expectancy was very low 44 years in contrast to the present 66 years.
 Both birth rate and death rate were very high at 48 and 40 per thousand of persons
respectively.
Indian Economy 1950 – 1990 -Chapter 2

Economic Planning
It is a process under which a central authority defines a set of targets to be achieved within a
specified period of time.
Capitalism It is an economic system in which major economic decisions like
 What goods and services are to be produced.
 How goods and services are to be distributed are left to the free play of the market forces or
the forces of supply and demand.
Socialism
It is an economic system in which major economic decisions are taken by the government, keeping
in view the collective interest of the society as a whole.
Mixed Economy
It is an economic system in which major economic decisions are taken by the Central Government
authority as well as are left to the free play of the market forces.
Goals of Five Year Plans

A plan should have some clearly specified goals. The goals of five year plans are
 Growth Economic growth implies a consistent increase in GDP or a consistent increase in the
level of output or a consistent increase in the flow of goods and services in the economy
over a long period of time.
 Modernisation To increase the production of goods and services to producers with the
adoption of new technology.
 Self-reliance It means avoiding imports of those goods which could be produced in India
itself. This policy was considered a necessity in order to reduce our dependence on Foreign
countries, especially for food.

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 Equity It implies equitable distribution of income so that the ^benefits of growth are shared
by all sections of the society.
Agriculture
It refers to all those activities which are related to the cultivation of land for the production of crops;
food crops and non-food crops.
(i) Importance of Agriculture in the Indian Economy
 Contribution to GDP
 Supply of wage goods
 Employment
 Industrial raw material
 Contribution to international trade
 Contribution to domestic trade
 Wealth of the nation
(ii) Problems of Indian Agriculture
 Lack of permanent means of irrigation
 Deficiency of finance
 Conventional outlook
 Small and scattered holding
 Lack of organised marketing system
Reforms in Indian Agriculture

(i) Technical Reforms
 Use of HYV seeds
 Use of chemical fertilisers
 Scientific farm management practices
 Mechanised means of cultivation
(ii) Land Reforms
 Abolition of intermediaries
 Regulation of rent
 Consolidation of holding
 Ceiling on land holding
 Co-operative farming

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(iii) General Reforms
 Expansion of irrigation facilities
 Provision of credit
 Regulated market
 Price support policy
Marketable Surplus
It refers to surplus of farmer’s output over and above his own farm consumption.
Thus, Marketable surplus of wheat = Output of wheat – On farm consumption of wheat
Green Revolution
It started in India in year 1967-68. In the year, 1967-68 itself, foodgrain production increased by
nearly 25%. So, much increase in foodgrain production in a country which earlier used to import
foodgrains.
Industry
Industry provides employment in agriculture; it promotes modernisation and overall prosperity.
Importance of industry are as follows
 Structural transformation
 Source of employment
 Source of mechanised means of farming
 Imparts dynamism to growth process
 Growth of civilisation
 Infrastructural growth
Industrial Policy Resolution 1956 (IPR-1956)
 Three-fold classification of industries
 Industrial licensing
 Industrial soaps
Private Sector
It was assigned only a secondary role in the process of industrialisation. Industries in the private
sector could be established only through a license from the government.
Small Scale Industries (SSI)

These were accorded a high priority with a view to promoting the goals of ‘employment and equity’.
Import Substitution
Inward looking trade strategy is called import substitution.
On 15 th August, 1947, India attained its freedom. After independence, Nehru and many other
leaders decided the type of economic system that will prove beneficial for India. In order to achieve

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the objectives of ‘growth with equity’, mixed economy was introduced as the economic system of
India.
Topic 1 Economic System and Planning

Economic System
Economic system is defined as an arrangement by which the central problems of an economy are
solved.
The three basic central problems of an economic system are
 Choice of Production What goods and services should be produced in the country?
 Choice of Technology How should the goods and services be produced? Should producers
use more human labour or more capital for producing things,
 Distribution of Goods and Services How should goods and services be distributed among
people?
On the basis of government intervention, economic system can be classified as
Socialist Economy
It is an economic system in which all economic decisions are taken by the government. In this
system, the government decides what goods are to be produced in accordance with the needs of
society, how goods are to be produced and how they should be distributed.
Socialist economy promotes equitable distribution of income. However, it also suffers from the
drawbacks of a bureaucratic set up in the form of red-tapism and corruption.
In Cuba and China, most of the economic activities are governed by the socialistic principles.
Capitalist Economy
Capitalist economies depend upon the market forces of demand and supply. In this type of
economy, only those consumer goods will be produced that have good demand in the market and
yield profit to the producers.
For example, cars will be produced if they are in demand and also if they can earn profits for the
producer.
In this economy, the goods and services produced are distributed among people not on the basis of
what people need but on the basis of purchasing power.
 Capitalist economy generally manifests unequal distribution of income, but it also generates
fastest growth in output and national income
 Capitalist economy is also called laissez faire or free market economy, it exists in North
America, Japan, Australia, Western Europe, etc.
Mixed Economy
It is an economic system in which public sector and private sector exist side by side.
In this economy, the market will provide whatever goods and services it can produce well and the
government will provide essential goods and services which the market fails to provide.
Merits of Mixed Economy
 Mixed economy gives proper scope to private individuals to co-exist and contribute towards
economic development.
 In this, planned economic development ensures stability . and balanced development.

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 In this, competition between the private sector and public sector industries is there. It leads
to enhanced productivity.
Demerits of Mixed Economy
 Mixed economy cannot effectively control the private sector industries which are outside
the government purview.
 It is characterised by red-tapism and high degree of corruption.
 In it, there is concentration of economic power in the hands of private sector, politicians and
bureaucrats.
Economic Planning
Economic planning is a process in which a central authority of a country defines a set of goals to be
achieved within a specified period, sets out a plan to achieve those goals, keeping in view the
country’s resources.
Planning commission defines economic planning as, ‘Economic planning means utilisation of
country’s resources in different development activities in accordance with national priorities’. Now,
let us understand what a ‘plan’ is?
 A plan spells out how the resources of nation should be efficiendy utilised.
 It should have some general goals which are achieved through specific objectives within a
specified period of time.
To formulate plans, Planning Commission was set up in 1950 under the chairmanship of Jawaharlal
Nehru, the first Prime Minister of independent India.
Its aim was to promote rapid rise in standard of living of the people, increase production and offer
employment opportunities in India. To facilitate economic planning Five Year Plans were forniulated.
The first Five Year Plan was introduced in April 1951.
All the Five Year Plans are formulated keeping the below objectives in mind
Growth
It refers to increase in the country’s capacity to produce the output of goods and services within the
country. It implies either a larger stock of productive capital or a large size of supporting services like
transport and banking.
Increase is GDP is a good indicator of economic growth. Gross Domestic Product (GDP) is the market
value of all final goods and services produced in the different sectors of an economy, viz the primary
sector, the secondary sector and the tertiary sector during an year within the domestic teritory of a
country.
Modernisation
Adoption of new technology is called modernisation. It is done with an aim to increase the
production of goods and services. For example, a farmer can increase the output on the farm by
using new seed varieties instead of using old ones.
Modernisation refers to not only change in production methods, but also change in the social
outlook of a society by granting equal status to women and making use of their talent in the
productive process.

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Self-Reliance
A nation can promote economic growth and modernisation by using its own resources or by using
resources imported from other nations. The first seven Five Year Plans gave importance to self-
reliance by avoiding imports. This policy was considered a necessity in order to reduce our
dependence on foreign countries especially for food.
Equity
It refers to reduction in disparity of income or wealth, by uplifting weaker sections of the society. It
also refers to distribution of economic power equally or in such way that every Indian should be able
to meet his or her basic needs such as food, a decent house, education, healthcare, etc.
Mahalanobis
The Architect of Indian Planning
Prasanta Chandra Mahalanobis was born in 1893 in Calcutta. He was educated at the Presidency
College in Calcutta and at Cambridge University in England. His contributions to the subject of
statistics brought him international fame. In 1946, he was made a Fellow (member) of Britain’s Royal
Society, one of the most prestigious organisations of scientists.
Mahalanobis established the Indian Statistical Institute (ISi) in Calcutta and started a journal,
Sankhya. Mahalanobis had contributed a lot in the formulation of our Five Year Plans. The Second
Plan, became the landmark of his contribution.
During the Second Plan period, Mahalanobis invited many distinguished economists from India and
abroad to advise him on India’s economic development. Some of these economists became Nobel
Prize winners later, which shows that he could identify individuals with talent.
Many economists today reject the approach to planning formulated by Mahalanobis but he will
always be remembered for playing a vital role in putting India on the road to economic progress and
statisticians continue to profit from his contribution to statistical theory.
Liberalisation, Privatisation and Globalisation –Chapter 3

Economic Reforms
These were based on the assumption that market forces would steer the economy into the path of
growth and development. Economic reforms started in 1991 in India.
Need for Economic Reforms
 Mounting fiscal deficit
 Adverse balance of payment
 Gulf crisis
 Fall in foreign exchange reserves
 Rise in prices
Liberalisation
Liberalisation of the economy means its freedom from direct or physical controls imposed by the
government.

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Economic Reforms Under Liberalisation
(i) Industrial Sector Reforms
 Abolition of industrial licensing.
 De-reservation of production areas.
 Expansion of production capacity.
 Freedom to import goods.
(ii) Financial Sector Reforms

Liberalisation implied a substantial shift in the role of the RBI from a regulator to a facilitator of the
financial sector.
(iii) Fiscal Reforms Fiscal reforms relate to revenue and expenditure of the government. Tax reforms
are the principal component of fiscal reforms. Broadly taxes are classified
 Direct Taxes and
 Indirect Taxes
(iv) External Sector Reforms It include Foreign exchange reforms and Foreign trade policy reforms.
Privatisation
Privatisation is the general process of involving the private sector in the ownership or operation of a
state owned enterprise.
Disinvestment
It refers to a situation when goverment sell off a part of its share capital of PSUs to the private
investors.
Globalisation
It may be defined as a process associated with increasing openness, growing economic
interdependence and deepening economic integration in the world economy.
Policy Strategies Promoting Globalisation of the Indian Economy
 Increase in equity limit of foreign investment
 Partial convertibility
 Long term trade policy
 Reduction in tariffs
 Withdrawal of quantitative restriction
World Trade Organisation (WTO)

The WTO was founded in 1995 as the successor organisation to the general agreement on Trade and
Tariff (GATT). GATT was established in 1948 with 23 countries as the global trade organisation.
Positive Impact of the LPG (Liberalisation, Privatisation and Globalisation) Policies
 A vibrant economy

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 A stimulant to industrial production
 A cheek on fiscal deficit
 A cheek on inflation
 Consumer’s sovereignty
 Flow of private foreign investment
Negative Impact of LPG (Liberalisation, Privatisation and Globalisation) Policies
 Neglection of agriculture
 Urban concentration of growth process
 Economic colonialism
 Spread of consumerism
 Lopsided growth process
 Cultural erosion
During the tenure of Narasimha Rao Government (1991), India met with an economic crisis relating
to its external debt. The government was unable to make repayments on its borrowings from
abroad; foreign exchange reserves were not sufficient to repay the debts. The prices of essential
goods were rising and the imports were growing at a very high rate.
As a result, the government initiated a new set of policy measures to reform the conditions of an
economy and several economic reform programme were also introduced in this respect to promote
privatisation, liberalisation and globalisation.
Economic Crisis of 1991 and Indian Economy Reforms

Crisis in India is figured out because of the inefficient management of Indian Economy in 1980s.
The revenues generated by the government were not adequate to meet the growing expenses. So,
the government resorted to borrowing to pay for its debts and was caught is a debt-trap.
Deficit it refers to the excess of government expenditure over its revenue.
Causes of Economic Crisis
Different causes of economic crisis are given as under
 The continued spending on development programmes of the government did not generate
additional revenue.
 The government was not able to generate sufficient funds from internal sources such as
taxation.
 Expenditure on areas like social sector and defence do not provide immediate returns, so
there was a need to utilise the rest of its revenue in a highly effective manner, which the
government failed to do.
 The income from public sector undertakings was also not very high to meet the growing
expenditures.

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 Foreign exchange borrowed from other countries and international financial institutions was
spent on meeting consumption needs and to make repayments on other loans.
 No effort was made to reduce such increased spending and sufficient attention was not
given to boost exports to pay for die growing needs.
Due to above stated reasons, in the late 1980s, government expenditure began to exceed its
revenue by such large margins that meeting the expenditure through borrowings became
unsustainable.
Need for Economic Reforms

The economic policy followed by the government upto 1990 failed in many aspects and landed the
country in an unprecedented economic crisis. The situation was so alarming that India’s reserves of
foreign exchange were basely enough to pay for two weeks of imports. New loans were not available
and NRIs were withdrawing large amounts. There was an erosion of confidence of international
investors in the Indian economy.
The following points highlight the need for economic reforms in the country
 Increasing fiscal deficit
 Adverse Balance of Payments
 Gulf crisis
 Rise in prices
 Poor performance of Public Sector Units (PSUs).
 High rate of deficit financing.
 Collapse of soviet block.
Emergence of New Economic Policy (NEP)

Finally, India approached International Bank for Reconstitution and Development, popularly known
as World Bank and International Monetary Fund (IMF) and received $ 7 million as loan to manage
the crisis. International agencies expected India to liberalise and open up economy by removhfg
restrictions on private sector and remove trade restrictions between India and other countries.
India agreed to conditions of World Bank and IMF and had announced New Economic Polity (NEP)
which consist of wide range of economic reforms.
The measures adopted in the New Economic Policy can be broadly classified into two groups i.e.,
 Stablisation Measures They are short-term measures which were intended to correct some
weakness that have developed in the Balance of Payments and to bring Inflation under
control.
 Structural Reforms They are longterm measures, aimed at improving the efficiency of the
economy and increasing its international competiveness by removing the rigidities in various
segments of the Indian economy.
The various structural reforms are categorised as
 Liberalisation

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 Privatisation
 Globalisation
Balance of Payment It is a system of recording country’s economic transactions with the rest of the
world over a period of one year. Inflation It is a situation in which general price level of goods and
services increases in an economy over a period of time.
Liberalist off, Privatisation and Globalisation

By introducing concept of liberalisation, privatisation and globalisation, government have revived
the condition of Indian Economy.
Liberalisation
Libralisation was introduced with an aim to put an end to those restrictions which became major
hindrances in growth and development of various sectors. It is generally defined as the lossening of
government regulations in a country to allow for private sector companies to operate business
transactions with fewer ristrictions. In relation to developing countries, this term refers to opening
of economic border for multinationals and foreign investment.
Objectives of Liberalisation
The main objectives of liberalisation policy are
 To increase competition among domestic industries.
 To increase foreign capital formation and technology.
 To decrease the debt burden of the country.
 To encourage export and import of goods and services.
 To expand the size of the market.
Economic Reforms Under Liberalisation

Reforms under liberalisation were introduced in many areas. Let us discuss these now
Industrial Sector Reforms
The following steps were taken to deregulate the industrial sector
(i) Abolition of Industrial Licensing Government abolished the licensing requirement of all industries,
except for the five industries, which are
 Liquor
 Cigarettes
 Defence equipment
 Industrial explosives
 Dangerous chemicals, chugs and pharmaceuticals.
(ii) Contraction of Public Sector The number of industries reserved for the public sector was reduced
from 17 to 8.. Presendy, only three industries are ’ reserved for public sector. They are
 Railways
 Atomic energy

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 Defence
(iii) De-reservation of Production Areas The production areas which were earlier reserved for SSI
were de-reserved.
(iv) Expansion of Production Capacity The producer’s were allowed to expand their production
capacity according to market demand. The need for licensing was abolished.
(v) Freedom to Import Capital Goods The business and production units were given freedom to
import capital goods to upgrade their technology.
Financial Sector Reforms

Financial sector includes financial institutions such as commercial banks, investment banks, stock
exchange operations and foreign exchange market.
The following reforms were initiated in this sector
 Reducing Various Ratio Statutory Liquidity Ratio (SLR) was lowered from 38.5% to 25%.
Cash Reserve Ratio (CRR) was lowered from 15% to 4.1%.
 Competition from New Private Sector Banks The banking sector was opened for the private
sector. This led to an increase in competition and expansion of services for consumers.
 Change in the Role of RBI RBI’s role underwent a change from a ‘regulator’ to a ‘facilitator’.
 De-regulation of Interest Rates Except for savings accounts, banks were able to decide their
own interest rates
Tax Reforms/Fiscal Reforms

Tax reforms are concerned with the reforms in government’s taxation and public expenditure
policies which are collectively known as its fiscal policy.
Moderate and Simplified Tax Structure Prior to 1991, the tax rates in the country were quite high,
which led to tax evasion. The fiscal reforms simplified the tax structure and lowered the rates of
taxation. This reduced tax-evasion and increased government’s revenues.
Foreign Exchange Reforms/External Sector Reforms

External sector reforms include reforms relating to foreign exchange and foreign trade. The
following reforms were initiated in this sector
(i) Devaluation of Rupee Devaluation implies a fall in the value of rupee against some foreign
currency. In 1991, the rupee was devalued to increase our country’s exports and to discourage
imports.
(ii) Other Measures
 Import quotas were abolished.
 Policy of import licensing was almost scrapped.
 Import duty was reduced.
 Export duty was completely withdrawn.
World Trade Organisation (WTO)

The WTO was founded in 1995 as the successor organisation to the General Agreement on Trade
and Tariff (GATT). GATT was established in 1948 with 23 countries as the global trade organisation to

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administer all multinational trade agreements by providing equal opportunities to all countries in
international market for trading purpose. However this had certain problems hence.
WTO was expected to establish a rule based trading regime in which nations cannot place arbitrary
restrictions on trade. Its purpose was mainly to expand production and trade in order to have
optimum utilisation of world resources.
The WTO agreements cover {rade in goods as well as services to facilitate international trade
through removal of tariff as well as non-tariff barriers and provide better market access to all
countries. Being an important member of WTO. India has been in front to frame rule and regulations
and safeguards interest of developing world.
India has kept commitments towards liberalisation of trade in WTO by removing quantitative
restrictions on imports and reducing tariff rates.
Functions of WTO
 It facilitates the implementation, administration and operation of the objectives of

multilateral trade agreements.
 It administers the ‘trade review mechanism’.
 It administers the ‘understanding rules and procedures , governing the settlement disputes’.
 It is a watchdog of international trade, it examines the trade regimes of individual members.
 Trade disputes that cannot be solved through bilateral talks are forwarded to the WTO
dispute settlement ‘court’.
 It is a management consultant for world trade. Its economist keep a close watch on the
activities of the global economy and provide studies on the main issues of the day.
Privatisation
It refers to giving greater role to private sector thereby reducing the role of public sector. In other
words, it means shedding of the ownership or management of a government owned enterprise.
It may also mean de-reservation of industries previously reserved for public sector.
Government companies (public companies) are converted into private companies in two ways
 By withdrawal of the government from ownership and management of the public sector
companies.
 By the method of disinvestment.
Forms of Privatisation
Different forms of privatisation are
 Denationalisation When 100% govermffdht ownership of productive assets is transferred to

the private sector, it is called denationalisation. It is also known as strategic sale.
 Partial Privatisation When less than 100% or more than 50% ownership is transferred, it is a
case of partial privatisation with private sector owning majority of shares. In this situation,
the private sector can claim to possess substantial autonomy in its functioning. It is also
known as partial sale.

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 Deficit Privatikation/Token Privatisation When the government disinvests its shares to the
extent of 5 to 10% to meet the deficit in the budget, this is termed as deficit privatisation or
token privatisation.
Objectives of Privatisation
The most common and important objectives of privatisation are
 Improving the financial condition of the government.
 Raising funds through disinvestment.
 Reducing the workload of public sector.
 Increasing the efficiency of the government undertakings.
 Providing better goods and services to consumers.
 Bringing healthy competition within an economy.
 Making way for Foreign Direct Investment (FDI).
Navratnas and Public Enterprise Policies

In order to improve efficiency, infuse professionalism and enable them to compete more effectively
in the liberalised global environment, the government identifies PSUs and declare them as
maharatnas, navratnas and mininavratnas. They were given greater managerial and operational
autonomy, in taking various decisions to run the company efficiently and thus increase their profits.
Greater operational, financial and managerial autonomy has also been granted to profit-making
enterprises referred to as mininavratnas.
In 2011, about 90 public enterprises were designated with different status.
A few examples of public enterprises with their status are as follows
 Maharatnas
 Indian Oil Corporation Limited
 Steel Authority of India Limited
 Navratnas
 Bharat Heavy Electricals Limited
 Mahanagar Telephone Nigam Limited
 Mininavratnas
 Bharat Sanchar Nigam Limited
 Airport Authority of India
Globalisation
It means integration of the economy of the'”country with the world economy. Globalisation
encourages foreign trade and private and institutional foreign investment.
Globalisation is a complex phenomenon and an outcome of the set of various policies that are aimed
at transforming the world towards greater interdependence and integration. Globalisation attempts

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to establish links in such a way that the happenings in India can be in need by events happening
miles away. It is turning the into one whole or creating a borderless world.
Outsourcing
An Outcome of Globalisation
This is one of the important outcome of the globalisauon process. In outsourcing, a company hires
regular service from external sources, mosdy from other countries, which were previously provided
internally or from within the country like legal advice, computer service, advertisement, etc. In other
words outsourcing means getting a work done on contract from Someone outside.
As a form of economic activity, outsourcing has intensified, in recent times, because of the growth of
fast modes of communication particularly the growth of Information Technology (IT).
Many of the services such as voice-based business processes (popularly known as BPO or call
centres), record keeping, accountancy, banking services, music recording, film editing, book
transcription, clinical advice or even teaching are being outsourced by companies in developed
countries to India.
Most multinational corporations and even small companies, are outsourcing their services to India
where they can be availed at a cheaper cost with reasonable degree of skill and accuracy. The low
wage rates and availability of skilled manpower in India have made it a destination for global
outsourcing in the post reform period.
Economic Growth During Reforms

Growth of an economy is measured by the Gross Domestic Product (GDP). The growth of GDP
increased from 5.6% during 1980-91 to 8.2% during 2007-2012.
Main highlights of economic growth during reforms are given below
 During the reform period, the growth of agriculture has declined. While the industrial sector
reported fluctuation, the growth of service sector has gone up. This indicates that the
growth is mainly driven by the growth in the service sector.
 The opening up of the economy has led to rapid increase in foreign direct investment and
foreign exchange reserves.
The foreign investment, whiclyincludes Foreign – Direct Investment (FDI) and Foreign
Institutional Investment(FII), has increased from about US $ 100 million in 1990-91 to US $
400 billion in 2010-11.
 There has been an increase in the foreign exchange Reserves from about US $ 6 billion in
1990-91 to US $ 300 billion in 2011-12. In 2011, India is the seventh largest foreign exchange
reserve holder in the world.
 India is seen as a successful exporter of auto parts, engineering goods, IT software and
textiles in the reform period. Rising prices have also been kept under control.
Failures of Economic Reforms

I- Neglect of Agriculture
There has been deterioration in agricultural growth rate. This deterioration is the root cause of the
problem of rural distress that reached crisis in some parts of the country. Economic reforms have
not been able to benefit the agricultural sector because

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 Public investment in agriculture sector especially in infrastructure which includes irrigation,
power, roads, market linkages and research and extension has been reduced in the reform
period.
 The removal of fertiliser subsidy has led to increase in the cost of production which has
severely affected the small and marginal formers.
 Various policy changes like reduction in import duties on agricultural products, removal of
minimum support price and lifting of quantitative restrictions have increased the threat of*
international competition to the Indian formers.
 Export-oriented policy strategies in agriculture has been a shift from production for the
domestic market towards production for the export market focusing on cash crops in lieu of
production of food grains.
II- Uneven Growth in Industrial Sector

Industrial sector registered uneven growth during this period.
This is because of decreasing demand of industrial products due to various reasons
 Cheaper imports have decreased the demand for domestic industrial goods.
 Globalisation created conditions for the free movement of goods and services from foreign
countries that adversely affected the local industries and employment opportunities in
developing countries.
 There was inadequate investment in infrastructural facilities such as power supply.
 A developing country like India still does not have the access to developed countries markets
because of high non-tariff barriers.
Sirdlla Tragedy
Privatisation of power supply in Andhra Pradesh resulted in substantial increase in power-rates,
causing many powerlooms to shut down in a small town, Sirdlla.
50 workers committed suicide because of loss in means of livelihood.
II- Other Failures
In addition to the above mentioned failures, the other drawbacks of LPG policy were:
 It led to urban concentration of growth process.
 It encouraged economic colonialism.
 It resulted in the spread of consumerism.
 It led to cultural erosion.
Poverty -Chapter 4
Poverty
It is inability to fulfill the minimum requirements of life.
 Relative Poverty It refers to poverty in relation to different classes, regions or countries.

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 Absolute Poverty In India, concept of poverty line is used as a measure of absolute poverty.
Poverty Line
It is that line which expresses per capita average monthly expenditure by which people can satisfy
their minimum needs.
Relative poverty and absolute poverty are the two variants of poverty.
Poverty line is fixed in India
 in the estimation of consumption cut off.
 in private consumption expenditure.
 frequencies are recorded against each class-interval. Each frequency counts the number of
heads belonging to a particular consumption class.
Categorising Poverty
 Category 1 Chronic poor Those who are always poor and those who are usually poor e.g.,
Landless workers.
 Category 2 Transient Poor Those who are moving in and out of poverty and occasionally
poor.
 Category 3 Never Poor These are categorised as non-poor people.
Rural Poor
These include landless agricultural work marginal holders and tenants-at-will.
Urban Poor
These include migrants from the rural areas in search of employment, casual factory workers and
self employed serving largely as street vendors.
Urban poor are largely the spillover of the rural poor who are forded to migrate in search of jobs.
Causes of Poverty
 Low level of national product
 Low rate of growth
 Heavy pressure of population
 Inflationary pressures
 Chronic unemployment and under employment
 Capital deficiency
 Outdated social institutions
 Lack of infrastructure
Measures to Remove Poverty
 Combating poverty by accelerating the place of economic growth.

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 Combating inequality of income through fiscal and legislative measures.
 Combating poverty through population control.
 Other measures enhancing quality of life of the poor.
Poverty Alleviation Programmes

Some of the principle measures adopted by the government to remove poverty are given below
 Samaranjayanti Gram Swarozgar Yojana (SGSY)
 Sampoorna Gramin Rozgar Yojana (SGRY)
 Pradanmantri Gramoday Yojana (PGY)
 Jai Prakash Rozgar Guarantee Yojana (JPRGY)
 The Swaran Jayanti Shahri Rozgar Yojana (SJSRY)
 Prime Minister’s Rozgar Yojana
 Development of Small and Cottage Industries (viii) Minimum Needs Programme
 Twenty Point Programme
 Mahatma Gandhi National Rural Employment Guarantee
Rural Development Chapter 5

Rural Development
Rural development means an action- plan for the social and economic upliftment of the rural areas.
The key issues of action plan for rural development are
 Development of infrastructure
 Human capital formation
 Development of productive resources
 Poverty alleviation
 Land reforms
Rural Credit
Rural credit means credit for the farming families. Credit is the life line of farming activity credit
needs of the typical Indian farmer may broadly be classified as under
 Short Term Credit It needs relates basically to the purchase of inputs like seeds fertilisers etc
short term borrowings generally stretches over a period of 6 to 12 months.
 Medium Term Credit Medium term loans are required for purchasing machinery
constructing fences and digging wells. Such loans are generally stretch over a period of 12
months to 5 years.

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 Long Term Credit Long term credit is meant for the purchase of additional land. The period
of such loan ranges between 5 to 20 years.
Sources of Rural Credit
 Non-institutional sources
 Institutional sources
 Co-operative credit societies
 State Bank of India
 Regional Rural Bank
 National Bank for Agriculture and Rural Development (NABARD)
Agriculture Marketing
It includes all those activities or processes which help a former getting maximum price for his
produce among others, these processes include grading packaging and storage.
Measures Initiated by the Government to Improve Market System
 Regulated markets
 Co-operative agricultural marketing societies
 Provision of warehousing facilities
 Subsidised transport
 Dissemination of information
 MSP policy
Diversification Diversification is an emerging challenge in the context of rural development. It has

two aspects.
 Diversification of Crop Production It implies production of diverse variety of crops rather

than one specialised crop. It means a shift form single-cropping system to multi-cropping
system.
 Diversification of Production Activity/Employment It implies a shift from crop farming to

other areas of production activity employment.
Non-Farm Areas of Production Activity/Employment for the Rural Population
 Animal Husbandry It is the most important area of employment in India different from crop
farming. It is also called live stock farming, poultry, cattle etc.
 Fisheries The fishing community in India depends almost equally on inland sources and
marine sources of fishing. Inland sources include rivers, lakes, ponds and streams etc.
 Horticulture Horticultural crops include fruits, vegetables and flowers besides several other.
Over time, there has been a substantial increase in area under horticulture.

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 Cottage and Household Industry This industry has been dominated by such activities as
spinning, weaving, dyeing and bleaching.
Organic Farming and Substainable Development

Organic farming is a system of farming that relies upon the use of organic inputs for cultivation.
Organic inputs basically include animal manures and composts.
Benefits of organic farming are as follows
 Discards the use of non-renewable resources
 Environment friendly
 Sustains soil fertility
 Healthier and tastier food
 In expensive technology for the small and marginal farmers
Golden Revolution
The rapid growth in the production of diverse horticultural crops such as fruits, vegetables, tuper
crops and plantation crops is known as Golden Revolution.
Agriculture is the major source of livelihood in the rural sector. Mahatma Gandhi once said that “real
progress of India did not mean only the industrial growth but also the development of villages
because two-third of India’s population depends on agriculture”. One-third of rural Indians still live
in poverty. This is the reason, why there is need to develop rural India.
Rural Development and Rural credit

Rural development is a comprehensive term which essentially focuses on action for the
development of areas that are lagging behind in the overall development of the village economy. It
is a process whereby the standard of living of rural people, especially poor people, rises
continuously.
The basic objectives of rural development are
 Increasing the productivity of the agricultural sector, so that the income of the formers
increase.
 Generating alternative means of livelihood in the rural areas, so that dependency on

agriculture sector is reduced.
 Promoting education and health facilities in the rural areas, so that human development is
also achieved.
Key Areas in Rural Development

Some of the areas which are challenging and need fresh initiatives for development in rural India are
as follows
 Development of the productive resources of each locality.
 Development of human resources including literacy (more specifically female literacy)

education and skill development.
 Development of human resources like health, addressing both sanitation and public health.

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 Honest implementation of land reforms.
 Infrastructure development like electricity, irrigation, credit, marketing, transport facilities

including construction of village roads and feeder roads to nearby highways, facilities for
agriculture research and extension and information dissemination.
 Special measures for alleviation of poverty and bringing about significant improvement in
the living conditions of the weaker sections of the populations emphasising access to
productive employment opportunities.
The share of agriculture sector’s contribution to GDP was on a decline, the population dependent on
this sector did not show any significant change. Further, after the initiation of reforms, the growth
rate of agriculture sector decelerated to 2.3% per annum during the 1990s, which was lower than
the earlier years.
Rural Credit
Credit is the life line of the farming activity. Rural credit means providing credit for the forming
community. Farmers need credit because
 Most formers in India are small and marginal land holders who practice subsistence farming.
They have no surplus for further production.
 The gestation period between sowing and harvesting is quite high. So, farmers have to
borrow to fulfill their various needs during this period.
Borrowings of afarmer can befor thefollowingpurpose
 Productive Borrowings These borrowings include loans to buy seeds, fertilisers and
agricultural equipments and imptements.
 Un-productive Borrowings These borrowings include loans for social purposes such as
marriage and festive occassions.
Types of Rural Credit

Credit needs of farmers may be classified as
 Long-term Credit These loans are required to acquire permanent assets like tractors, land,
costly equipments, tube-wells, etc. These loans are for a period of 5 to 20 years.
 Medium-term Credit These loans are required for purchasing machinery, constructing fences
and digging wells. Such loans are generally stretch over a period of 12 months to 5 years.
 Short-term Credit These loans are required for buying seeds, tools, manure and fertilisers,
etc. This credit is given to the needy borrowers by cooperatives, moneylenders and banks.
These loans are for a period of 6 to 12 months.
Sources of Rural Credit

Credit in the rural sector is available from two sources
1. Non-institutional Sources of Rural Credit The major non-institutional sources of rural credit are
moneylenders, friends, relatives, landlords, shopkeepers and commission agents. Moneylenders
provided about 93.6% of total financial requirement rural areas in 1951-52 and presently it is 30%.
The short-term credit needs of the formers are met from commission agents, friends and relatives

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which supply roughly 50% of total rural borrowings, Non-institutional sources of credit are not
encouraged by government because of the following reasons
 They charge high rate of interest.
 They acquire land on failure to pay interest and loan.
 They manipulate accounts.
The Poor Women’s Bank Kudumbashree is women-oriented community based poverty i reduction
programme being implemented in Kerala. In 1995, a thrift and credit society was started as a small
savings for poor women with an objective to encourage savings. The thrift and credit society
mobilised Rs. 1 crore as thrift savings. These societies have been acclaimed as largest informal banks
in Asia in terms of participation and savings mobilised.
2. Institutional Sources of Rural Credit In regard to rural credit, major change occurred after 1969,
when India adopted social banking and multi agency approach to adequately meet the needs of rural
credit. Different institutions were formed to provide the rural credit.
The major institutional sources of rural credit are as follows
(i) National Bank for Agriculture and Rural Development (NABARD) It was set up in 1982 as an apex
body to coordinate the activities of all institutions involved in the rural financing system. It has an
authorised share capital of Rs. 500 crore. The RBI has contributed half of the share capital while the
other half has been contributed by Government of India.
The main functions of NABARD are
 To grant long-term loans to the State Government for subscribing to the share capital of
cooperative societies.
 To take the responsibility of inspecting cooperative banks, Regional Rural Banks (RRBs) and
primary cooperative societies.
 To promote research in agriculture and rural development.
 To serve as a refinancing agency for the institutions providing finance to rural and
agricultural development.
 To help tenant farmers and small farmers to consolidate their land holdings.
The national agricultural credit fundjias been transferred from RBI to NABARD to form a part of its
national rural credit fund.
(ii) Self Help Groups (SHGs) Formal credit system has proven inadequate. It has also not been fully
integrated into the overall rural, social and community development.
Due to the demand of some kind of collateral, vast proportion of poor rural households were
automatically out of the credit networks. Self Help Groups emerged to fill this gap, created by formal
credit system.
Self Help Groups (SHGs) promote thrift in small proportions by a minimum contribution from each
member. By March end 2003, more than Rs. 7 lakh SHGs had reportedly been credit linked. Such
credit provisions are generally referred to as micro-credit programmes. SHGs have helped in the
empowerment of women. However, borrowings from SHGs are mainly confined to consumption
purposes.

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(iii) Regional Rural Banks (RRBs) As a supplement to commercial banks, the regional rural banks have
also been opened. These have been set up under the Regional Rural Banks Act-of 1976. Their
banking services are meant for small and marginal formers and artisans, etc. They cater exclusively
to the needs of weaker section. Nearly 90% of the loan of RRBs were provided to the weaker section.
Kisan Credit Card Scheme

Kisan Credit Card scheme (KCCs) was introduced by the government in 1998-99. It facilitates access
to credit from commercial banks and regional rural banks. Under the scheme, the eligible farmers
are provided with a kisan card and pass book from the relevent bank. The farmers can make
withdrawls and repayments of cash within the credit limit as – specified in the Kisan Credit Card
(KCC).
(iv) Commercial Banks They were inducted into the field of agricultural credit under the Banking
Reforms Act, 1972. The share of commercial banks in the supply of agricultural credit has
considerably improved. It was 46.9% during the year 2006-07.
Commercial banks disburse agricultural credit for the purchase of inputs, cattle, tractors, dairy
farming, installation of tube-wells, etc.
(v) Cooperative Credit Societies The cooperative credit societies are actively engaged in addressing
credit needs of the farmers, besides offering a host of related services. Notably these societies
provide guidance in diverse agricultural operations with a view to raise crop productivity. Currendy,
cooperatives account for 16-17% of rural credit flow. The main fimcdon of cooperative credit society
is to provide timely and increased flow of credit to the farmers.
Latest Status of Agricultural Credit

The following points reveal the latest status of agricultural credit
 The credit flow in this sector in 2011-12 is placed at Rs. 475000 crore.
 The agricultural debt waiver and debt relief scheme was announced in the union budget
2008-09.
 Farmers have been receiving crop loans upto a principal amount of Rs.3 lakh at an effective
rate of 4% per annum.
 To provide adequate and timely credit support to the formers, the Kisan Credit Card (KCC)
scheme was
introduced in February, 1999. About 10.78 crore KCCs had been issued upto October 2011.
 Government is implementing a revival package for short-term rural cooperative credit

structure involving financial outlay of Rs. 13596 crore.
Rural Banking : A Critical Appraisal

After the nationalisation of commercial banks in 1969, the rapid expansion of the banking system in
rural areas has been witnessed. Rural banking has raised the level of rural farm and non-farm
output, income and employment especially after the green revolution.
Advantages of Rural Banking
 Raising farm and non-farm output by providing services and credit facilities to farmers.
 Generating credit for self employment schemes in rural areas.
 Achieving food security which is clear from the abundant buffer stocks of grains.

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Limitations of Rural Banking
 Small and marginal formers receive only a very small portion of the institutional credit.
 Rural banking is suffering from the problems of large amount of over dues and default rate.
 The sources of institutional finance are inadequate to meet the requirements of agricultural
credit.
 There exist regional inequalities in the distribution of institutional credit.
It is suggestible that more and more regional rural banks should be set up to need the credit need of
the rural and backward areas of India.
Agricultural Marketing, Diversification of Agricultural Activities and Organic Fanning

Agricultural Marketing Agricultural marketing is the process that involves functions of assembling,
storage, processing, packaging, transportation, grading and distribution of agricultural commodities
throughout the country.
In other words, agricultural marketing covers the services involved in moving an agricultural product
from the farm to the consumer.
Need of Agriculture Marketing
Need of agriculture marketing originates due to the problems faced by farmers.
Different types of problems faced by the farmers are
 Farmers while selling their produce to traders suffered from faulty weighing and
manipulation of accounts.
 Due to lack of knowledge about the prices prevailing in the markets, farmers are often
forced to sell their produce at low prices.
 Farmers did not have proper storage facilities to keep back their produce for selling later at
better price.
Approximately 10% of goods produced in farms is wasted due to lack of storage.
Distress Sale Lack of agricultural marketing infrastructure often forces the farmers to sell their
produce at low prices for fear of spoilage or to pay off an imminent debt. This is termed as distress
sale. Farmers tend to suffer highly on account of these sales, because they not only get a low price
for their produce, but are also cheated by use of false weights and are charged a high commission.
Measures by Government to Improve Agriculture Marketing
Four measures which were initiated to improve the agriculture marketing aspect are discussed
below
1. Regulation of Markets The first measure to improve agriculture marketing aspect is regulation of
markets to create orderly and transparent marketing conditions. Regulated markets have been
established where sale and purchase of the produce is monitored by the Market Committee
consisting of representatives of government, farmers and the traders.
Market committee ensure that the formers get appropriate price of their produce. By and large, this
policy benefited farmers as well as consumers. However there is still need to develop about 27000
rural periodic markets as regulated market places to realize the full potential of rural markets.
2. Improvement in Physical Infrastructure It is the second measure to improve the agriculture

marketing aspect. The current infrastructure facilities like; roads, railways, warehouses, godowns,

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cold storages and processing units etc are inadequate to meet the growing demand. Through this
measure government ensures the improvement in physical infrastructure.
3. Cooperative Marketing It is the third measure taken by government in realising the fair prices for
farmers products. As members of these societies, formers find themselves better bargainers in the
market and get better prices of their produce through collective sale. The success of milk
cooperatives in Gujarat and some other parts of the country are the brilliant examples of
cooperative marketing.
Different problems faced by cooperative during the recent past are
 Inadequate coverage of former members.
 Lack of appropriate link between marketing and processing cooperatives.
 Inefficient financial management.
Supporting Policies
It is the fourth measure taken by government to improve agriculture marketing system. Different
supportive policies applied in this regard are
 Minimum Support Price (MSP) It is an important step to improve agriculture market system.
MSP is an assurance to the farmers that a minimum price will be fixed by the government to
formers’ produce, no purchasing can be done below this price, however farmers can sell
their produce in open market above MSP. This policy assured a minimum income to the
farmers.
 Maintenance of Buffer Stocks of Wheat and Rice Purchases from the farmers are kept by
Food Corporation of India as buffer stocks.
 Distribution of Foodgrains and Sugars Through Stocks purchased by government at MSP are
used primarily for Public Distribution System (PDS). Distribution of foodgrains and other
necessary items like kerosene oil at subsidised price to the poor takes place through fair
price shops.
 Emerging Alternative Marketing Channels In India, alternative marketing channels are

emerging. Through these channels, farmers directly sell their products to the consumers.
This system increases farmers’ share in the prices paid by the consumers.
Important examples of such channels are
 Apni mandi (Punjab, Haryana and Rajasthan).
 Hadaspar mandi (Pune); Rythu Bazars (Vegetables and fruit market in Andhra Pradesh).
 Uzhavar sandies (Farmers’ Markets in Tamil Nadu).
 Several national and international fast food chains and hotels are also entering into
contracts with the farmers to supply them farm products (fresh vegetables and fruits) of the
desired quality.
Diversification into Productive Activities

Diversification means a major proportion of the increasing labour force in the agricultural sector

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needs to find alternate employment opportunities in other non-farm sectors. Diversification is an
emerging challenge in the context of rural development. It has two aspects
 Diversification of crop production
 Diversification of productive activity
Diversification of Crops
This implies a shift from single cropping system to multi-cropping system. In India, where
subsistence farming is still dominant, it may also mean a shift from subsistence farming to
commercial farming.
Significance of Diversification of Crops Diversification of crops is improtant because it will
 Minimise the risk occuring. due to failure of monsoon.
 Minimise the market risk arising due to price fluctuations.
Need of Diversification into Productive Activities

Agriculture sector is a seasonal based activity, most of agriculture employment activities are
concentrated in Kharif season. But during Rabi season, in the areas where irrigation facilities are
inadequate, it becomes difficult to find gainful employment.
So, there is a need to focus on allied activities, non farm employment and other emerging
alternatives of livelihood. Also agriculture sector is already overcrowded, a major proportion of the
increasing labour force needs to find alternate employment opportunities in other non-farm sectors.
Some non-farm activities are discussed below

1. Animal Husbandry
In India, the forming community uses the mixed crop-live stock forming system. Cattle, goats, fowl
are the widely domesticated species. Livestock production provides increased stability in income,
food security, transport, fuel and nutrition for the family without disrupting other food producing
activities.
Today, livestock sector alone provides alternate livelihood options to over 70 million small and
marginal farmers including landless labourers.
Poultry accounts for the largest share with 55% followed by others. India has about 304 million
cattle, including 105 million buffaloes.
A significant number of women also find employment in the livestock sector.

Milk production in the country has increased by more thlkn five times between 1960-2009. This can
be attributed mainly to the successful implementation of ‘operation flood’.
Meat, eggs, wool and other by-products are also emerging as important productive sectors for
diversification.
In numbers, our livestock population is quite impressive but its productivity is quite low as compared
to other countries. It requires improved technology and promotion of good breeds of animals to
enhance productivity. Improved veterinary care and credit facilities to small and marginal formers
and landless labourers would enhance sustainable livelihood options through livestock production.
Operation Flood
It is a system whereby all the farmers can pool their milk produced according to different grading
(based on quality) and the same Is processed and marketed to urban centres through cooperatives.
In this system farmers are assured of fair price and Income from the supply of the milk to urban

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markets. Gujarat state is held as a success story in the efficient implementation of milk cooperatives
which has been emulated by many states.
Fisheries
The socio-economic status of fishermen is comparatively lower because of
 rampant underemployment
 low per capital earnings
 absence of mobility of labour to other sectors
 high rate of illiteracy
 indebtedness
Horticulture
Due to varying climate and soil conditions, India has adopted growing of diverse horticultural crops
such as fruits, vegetables, tuber crops, flowers, medicinal and aromatic plants, spices and plantation
crops. These crops play an important role in providing food, nutrition and employment.
The period between 1991-2003 is called ‘golden revolution’ because during this period, the planned
investment in horticulture became highly productive and the sector emerged as a sustainable
livelihood option.
India has emerged as a world leader in producing a variety of fruits, like mangoes, bananas,
coconuts, cashew, nuts and a number of species and is the second largest producer of fruits and
vegetables.
Economic conditions of many formers engaged in horticulture has improved and has become a
means of improving livelihood for many unprivileged classes.
Flower harvesting, nursery maintance, hybrid seed production and tissue culture, propagation of
fruits and flowers and food processing are highly profitable employment opportunities for rural
women. It has been estimated that this sector provides employment to around 19% of the total
labour force.
Other Alternate Livelihood Options

The Information Technology (IT) has revolutionised many sectors in the Indian economy.
It plays a very significant role in achieving sustainable development and food security in the
following ways
 It can act as a tool for releasing the creative potential and knowledge embedded in our
people.
 Issues like weather forecast, crop treatment, fertilisers, pestisides storage conditions, etc
can be well administered, if expert opinion is made available to the farmers.
 The quality and quantity of crops can be increased manifold, if the farmers are made aware
of the latest equipments, technologies and resources.
 It has ushered in a knowledge economy.
 It has potential of employment generation in rural areas.

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Every Village A Knowledge Centre
MS Swaminathan Research Foundation, an institution located in Chennai, Tamil Nadu, with support
from Sir Ratan Tata Trust, Mumbai, has established the Jamshedji Tata National Virtual Academy for
Rural Prosperity. The academy envisaged to identify a million grass root knowledge workers who will
b% enlisted as fellows of the academy.
The programme provides an info-kiosk (PC with internet and video conferencing facility, scanner,
photocopier, etc) at a low cost and trains kiosk owner; the owner then provides different services
and tries to earn a reasonable income. The Government of India has decided to join the alliance by
providing financial support of Rs. 100 crore.
Sustainable Development and Organic Farming

Conventional agriculture uses chemical fertilisers and toxic pesticides, etc which enter the food
supply, penetrate the water resources, harm the livestock, deplete the soil and devastate natural
eco-system. Due to these problems, an eco-friendly technology is required.
Organic farming is such technology which restores, maintains and enhances the ecological balance.
There is an increasing demand for organically grown food to enhance food safety throughout the
world.
Benefits of Organic Farming
 Organic forming substitutes costlier agriculture inputs like HYV seeds, chemical fertlisers,
pesticides, etc with locally produced organic inputs that are cheaper and thereby generate
good returns on investment.
 Organic forming also generates income through exports.
 Organically grown food has more nutritional value than chemical forming, thus providing us
with healthy foods. Produce pesticide free and produced in an environmendy sustainable
way.
 Due to more labour requirement in organic farming, it is an attractive proposition for India.
Limitations of Organic Farming
 Yields from organic forming are less than modern agricultural forming in the initial years.
Therefore, small and marginal formers may find it difficult to adapt to large scale production.
 Organic produce have shorter shelf life than sprayed produce.
 Choice in production of off-season crops in quite limited in organic forming.
Human Capital Formation in India Chapter 6

 Human Capital It refers to the stock of ‘skill and expertise’ of a nation at a point of time. It is
the sum total of skill and expertise.
 Human Capital Formation It is the process of adding to the stock of human capital over time.
 Physical Capital It refers to the stock of produced means of production. It consists of

machines, production plants etc.

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 Financial Capital It refers to the stocks/shares of the companies or these are simple financial
claims against assets of the companies.
Sources of Human Capital Formation
 Expenditure on Education
 Expenditure on Health
 On-the-Job Training
 Study Programmes for Adults
 Migration
 Expenditure on Information
Human Capital Formation and Economic Growth
 Higher Productivity of Physical Capital Human capital formation increases productivity of

physical capital specialised engineers and skilled workers can certainly handle machines
better than the other.
 Innovative Skills It facilitates the use and growth of innovative skills. Innovation is the life
line of growth.
 Higher Rate of Participation and Equality By enhancing productive capacities of the labour
force, human capital formation induces greater employment.
Thus, there is a cause and effect relationship between human capital formation and economic
growth.
Problems Facing by Human Capital Formation in India
 Rising population
 Brain drain
 Desicient man power planning
 Law academic standards
Human Capital and Human Development

Human capital and human development are related concepts, but certainly not identical. Human
capital is a means to an end. Human development is an end itself.
Education as an Essential Element of Human Resource Development

It implies the process of teaching training and learning especially in schools or colleges, to improve
knowledge and develop skills.
Growth of Education Sector in India

Following observations highlight the growth of education sector in India
 Expansion of general education

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 Primary education
 Secondary education
 Higher education
 Vocationalisation of secondary education
 Technical, medical and agricultural education
 Rural education
 Adult and female education
 Total literacy campaign
Education Still a Challenging Proposition

Education system of the country which along with the following facts makes education still
challenging proposition in India.
Large Number of Illiterates
 Inadequate vocationalisation
 Gender bias
 Low rural access level
 Privatisation
 Low government expenditure on education
Right to Education (RTE)

In the year 2012, the Government of India has brought about an Act, called RTE. It promises
education to all. It makes education a matter of right to all children in the age group of 6-14 years.
The concept of human capital formation, source of human capital and its growth is revealed in the
chapter. It also deals with the relationship among human capital, economic growth and human
development.
Concepts and Sources of Human Capital Formation

Just as a country can turn physical resources like land into physical capital like factories, similarly it
can also turn human resources like students into engineers and doctors. There by increasing their
productivity and efficiency. So, human capital formation aims at converting human resources into
human assets.
Human Capital and Physical Capital
 Human Capital It refers to the stock of skill, ability, expertise, education and knowledge in a
nation at a point of time.
 Physical Capital All inputs which are required for further production such as machine, tools
and implements, factory buildings, etc are called physical capital.

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Human Capital Formation

It is the process of acquiring and increasing the number of people who* have the skills, education
and experience which are critical for the economic and political development of a country.
In other words, human capital formation is the process of adding to the stock of human capital over
time.
G.M. Meier defines human capital formation as, “human capital formation is the process of acquiring
and increasing the number of persons who have the skiff education and experience which are
essential for the economic and political development of a country”.
Sources of Human Capital Formation

Investment in education is considered as one of the most important sources of human capital
formation. There are several other sources as well. Investment in health, on-the-job training,
migration and information are the other sources of human capital formation.
These sources are discussed below
1. Expenditure on Education
The education expenditure is an important source of human capital formation as it is the most
effective way on enhancing and enlarging a productive workforce in the country.
Nations and individuals invest in education with the objective
 increasing their future income.
 generating technical skills and creating manpower, well suited for improving labour
productivity and thus, sustaining rapid economic development.
 tending to bring down birth rate which in turn, brings decline in population growth rate. It
makes more resources available per person.
 education also results in social benefits since, it also spreads to others.

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2. Expenditure on Health
Health is another important source of human capital formation. A sick labourer without access to
medical facilities is compelled to abstain from work and there in a loss of productivity. The various
forms of health expenditure are preventive medicine, curative medicine, social medicine, provision
of clean drinking water, etc.
3. On-the-job Training
Expenditure regarding on-the-job training is a source of human capital formation as the return of
such expenditure in the form of enhanced labour productivity is more than the cost of it.
Firms spend huge amounts on giving on-the-job training to their workers. It may be in different
forms like a worker may be trained in the firm itself or under the supervision of a skilled worker or
can be sent for off campus training.
The firms then insist that workers should work for atleast some time in die company so that they can
recover the benefits of the enhanced productivity owing to the training.
4. Migration
People sometimes migrate from one place to the other in search of better jobs that fetch them
higher salaries than what they may get in their native places. It includes migration of people from
rural areas to urban areas in India. Unemployment is the reason for the rural urban migration in
India and technically qualified people migrate from one country to another in order to get high
salaries.
5. Expenditure on Information
People spent to acquire information relating to the labour market and other markets like education,
health, etc.
For example, people seek information regarding salaries and other facilities available in different
labour markets, so that they can choose the right job. Expenditure incurred for acquiring information
regarding labour markets and other markets like education and health have also becomes an
important source of human capital formation.
Economic Growth and State of Human Capita! Formation in Intiter

Human Capital and Economic Growth
India recognised the importance of human capital in economic growth long ago. The Seventh Five
Year Plan says, ‘Human resources development has necessarily to be assigned a key role in any
development strategy, particularly in a country with a large population’.
The following points show clearly the interdependence among the two
 Higher Productivity of Physical Capital Human capital increases productivity of physical

capital as specialised and skilled workers can handle machines or techniques better than the
unskilled works. This increased productivity and hence production in leads to economic
growth.
 Innovative Skills Human capital facilitates innovation of new methods of production and this
increase the rate of economic growth in the form of increase in GDP.
 Higher Rate of Participation and Equality Human capital formation leads to a higher
employment rate. With increase in employment, the productivity rises. Also, increase in
employment opportunities also increases the level of income and this helps in reducing
inequalities of wealth.
Both, increase in employment rate and decrease in income inequalities are pointers of
economic development.

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 Brings Positive Outlook The process of human capital formation bring in a positive outlook to
the society which is different from orthodox and traditional ways of thinking, and hence
increases the rate of participation in the workforce causes increase in level of production.
India as a Knowledge Economy

The Indian software industry has been showing an Impressive record over the past decade.
Entrepreneurs, bureaucrats and politicians are now advancing views about how India can transform
itself into a knowledge-based economy by using Information Technology (IT).
There have been some instances of villagers using e-mail which are cited as examples of such
transformation. Likewise, e-governance is being projected as the way of the future.
The value of IT depends greatly on the existing level of economic development.
Human Capital and Human Development

Human development is the broader term than human capital.
Human capital considers education and health as a means to increase labour productivity. Human
development is based on the idea that education and health are integral to human well-being
because when people have the ability to read and write and the ability to lead a long and healthy
life, they will be able to make other choices they value.
In human capital view, any investment in education and health is unproductive, if it-does not
enhance output of goods and services. In the human development perspective, human beings are
ends in themselves. Therefore, basic education and basic health are important in themselves,
irrespective of their contribution to labour productivity. Deutsche Bank and World Bank Report on
Indian Economy.
 According to two independent reports one from Deutsche and other from World Bank have
identified that India would grow faster due to Its strength in human capital formation.
 According to Deutsche Bank (a German Bank)’s report on Global Growth Centres, it has been
identified tha India will emerge as one among four major growth Centres in the world by
2020. This report also says that between 2005 to 2020, we expect a 40% rise in the average
years of education in India, to just above 7 years.
 World’s Bank report India and the Knowledge Economy-Leveraging Strengths and
Opportunities
states that India should make a transition to the knowledge economy and if it uses its
knowledge as much as Ireland does, then the per capita income of India will increase from a
little over US $1000 in 2002 to US $3000 in 2020.
 It further states that the Indian economy has all the key ingredients for making this
transition such as a critical mass of skilled workers, a well functioning democracy and a
diversified science and technology infrastructure. Thus two reports point out the fact that
further human capital formation in India will move its economy to a higher growth.
Problems of Human Capital Formation in India

The main problems of human capital formation in India are
 Rising Population Rapidly rising population adversely affects the quality of human capital in
under developed and developing countries like India. It reduces per head availability of
existing facilities like sanitation, employment, drainage, water system, housing, hospitals,
education, food supply, nutrition, roads, electricity, etc.

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 Brain Drain Migration of highly skilled labour termed as ‘brain drain. This slow down the
process of human capital formation in the domestic economy.
 Inefficient of Manpower Planning There is inefficient manpower planning in less developed

countries where no efforts have been made either to raise the standard of education at
different stages pr to maintain the demand and supply of technical labour force. It is a sad
reflection on the wastage of human power and human skill.
 Long-term Process The process of human development is a long-term policy because skill
formation takes time. The process which produces skilled manpower is thus, slow. This also
lowers our competitiveness in the international market of human capital.
 High Poverty Levels A large proportion of the population lives below poverty line and do not
have access to basic health and educational facilities. A large section of society cannot afford
to get higher education or expensive medical treatment for major disease.
Human Developent Index

The Human Developent Index (HDI) is a composite statistic of life expectance education, and income
indices rank countries into four tiers of human development.
It was created by economist Mahbub Ul Haq, followed by economist Amartya Sen in 1990, and
published by the United Nations Development Programme. India has 136th position in the World
Human Development Index.
Education Sector in India

Education implies the process of teaching, training and learning especially in schools or colleges, to
improve knowledge and develop skills.
Following points explain the important or objective of education
 It produces good citizens.
 It develops science and technology.
 It facilities use of natural and human resources of all regions of the country.
 It expands mental horizon of the people.
Growth in Government Expenditure on Education

Government expenditure on education can be expressed in two ways
 As a percentage of‘total government expenditure.
 As a percentage of Gross Domestic Product (GDP).
The percentage of ‘education expenditure of total government expenditure’ indicates the

importance of education in the scheme of expenses before the government. Expenditure on
education out of our GDP shows how much we are committed towards the development of
education in our country.
During 1952-2010, education expenditure as percentage of total government expenditure increased

from. 7.92% to 11.1% and as percentage of GDP increased from 0.64% to 3.25%. During this period
expenditure on education was not constant. There was irregular rise and fell.

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Expenditure on Elementary Education in India
Elementary education takes a major share of total education expenditure and the share of the
higher/tertiary education is the least. But expenditure per student on tertiary education is higher
than that of elementary.
As we expand school education, we need more teachers who are trained in the higher educational
institutions, therefore, expenditure on all levels of education should be increased. The per capita
education expenditure is as high as Rs. 2005 in Himachal Pradesh to as low as Rs. 515 in Bihar.
This leads to differences in educational opportunities across states.
Free and Compulsory Education

The Education Commission (1964-66) had recommended that atleast 6% of GDP to be spent on
education so as to make a noticeable rate of growth in education.
In December 2002, the Government of India, through the 86th Amendment of the Constitution of
India, made free and compulsory education a fundamental right of all children in the age group of 6-
14 years. Government of India in year 1998 appointed. The Tapas Majumdar Committee, which
estimated an expenditure of around 1.37 lakh crore over 10 years (1998-99 to 2006-07) to bring all
Indian children in the age group of 6-14 years, under the purview of school education. Desired level
of expenditure an education is 6% of GDP but the current level is little over 4% which is not
inadequate. It is necessary to reach the level of 6% which is considered as must for coming years.
Recently, Government of India has started levying a 2% ‘education cess’ on all Union taxes. The
revenues from education cess has been earmarked for spending on elementary education.
Educational Achievements in India Generally, educational achievements in a country are indicated in
terms of
 Adult literacy level
 Primary education completion rate
 Youth literacy rate These statistics for the years 1990 to 2010 are given in the following table
Future Prospects
India government considers education a key sector where considerable growth and.development is
required. Thus, it has set some future prospects for framing its policies.
These prospects are discussed below
Education for All : Still a Distant Dream
Although the education level in India has risen for both adults as well as for youth. Still the number
of illiterates in India are as much as the population was at the time of Independence.

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In 1950, when the Constitution of India was passed by the constituent assembly, it was noted in the
directive principles of the constitution that the government should provide free and compulsory
education for all children up to the age of 14 years within 10 years from the commencement of the
constitution.
The following factors makes education still a distant dream
 Large number of illiterates
 Inadequate vocationalisation
 Gender bias
 Low rural access level
 Privatisation
 Low government expenditure on education
Gender Equity : Better than Before

The differences in literacy rates between males and females are narrowing, signifying a positive
development in gender equity; still the need to promote education for women in India is imminent
for various reasons, such as
 Improving economic independence.
 Social status of women.
 Healthcare of women and children.
Therefore, we cannot show the satisfaction about the upward movement in literacy rates as we have
miles to go in achieving cent percent adult literacy.
In India, Mizoram, Kerala, Goa and Delhi are the states having high literacy rate, while Bihar, Uttar
Pradesh, Rajasthan and Arunachal Pradesh are the educationally backward states. The educational
backwardness is due to social and economic poverty of the people.
Higher Education : A Few Takers
The Indian education pyramid is steep, indicating lesser and lesser number of people reaching the
higher education level.
As per NSSG (National Sample Survey Organisation) data, in the year 2007-08, the rate of
unemployment for youth with education up to secondary level and above was 18.1% whereas, the
rate of unemployment for youth with education up to primary level was only 11.6%.
Therefore, the government should increase allocation for higher education and also improve the
standard of higher education institutes, so that students are imparted employable skills in such
institutions
Employment-Growth, Informalisation and Related Issues Chapter 7

 Worker A worker is an individual who is in some employment to earn a living. He is engaged
in some production activity.

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 Production Activity It refers to the process of producing goods and services. Employed are
those who are engaged in some production activity or the other.
 Self-employed and Hired Worker Self-employed workers are those who are engaged in their
own business or own profession.
Hired workers are those who work for others they renders their services to other, as a
reward, get wages/salaries or may be they are paid in kind.
 Casual and Regular Worker Casual workers are the daily wagers. They are not hired by their
employers on regular basis.
Regular workers are permanent pay-roll of their employers. A regular worker is usually a
skilled worker.
 Labour Supply It refers to supply of labour corresponding to different wage rates. Supply of
labour is measured in terms of man-days of work and always studied with reference to wage
rate.
 Labour Force It refers to the number of persons actually working or willing to work. It is not
related to wage rate.
 Work Force It refers to the number of persons actually working and does not account for
those who are willing to work.
 Employment in Firms, Factories and Offices In the course of economic development of a

country, labour force from agriculture and other related activities to industry and services. In
this process workers migrate from rural to urban areas.
 Informalisation of Workforce It refers to a situation where percentage of work force in the

formal sector tends to decline and that in the informal sector tends to rise.
Market economy and informalisation of workers, perhaps are strongly correlated to each
other.
Unemployment
According to Prof Pigou, “A man is unemployed only when he is both without a job a or not
employed and also desires to be employed”.
 Rural Unemployment In Indian villages nearly 58.7% of labourers are engaged in primary
sector. Most of the rural labourers engaged in non-farm sector work in cottage industries.
 Urban Unemployment In urban areas, unemployed people are often registered with
employment exchanges. Therefore, urban unemployment is more like open unemployment.
Unemployment in urban sector is placed in two board categories
 Industrial Unemployment
 Educated Unemployment
Common Types of Unemployment in Rural and urban Areas

In India, following types of unemployment are found both in urban and rural areas
 Open unemployment
 Structural unemployment

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 Under employment
 Frictional unemployment
 Cyclical unemployment
Suggestions to Solve the Problem of Unemployment in India
 Increase in production
 Increase in productivity
 High rate capital formation
 Help to self employed persons
 Technique of production
 Co-operative industries
Government Policy and Programmes

Government seeks to solve the problem of unemployment through its poverty eradication
programmes generating employment opportunities for poorer sections of the society. Rural
employment Guarantee scheme is a significant recent attempt of the government, offering
guaranteed employment to those in the rural areas who are below poverty line.
Some of the basic issues related to unemployment in India are emphasised in this chapter. It also
addresses the growth rate of Indian economy and various employment generation, schemes. It also
specifies the need of transformation of workers from in formal sector to formal sector.
Employment and Informalisation of Indian workforce

Work plays an important role in our lives as an individual or a group of members can earn their living
after doing work. Being employed gives us a sense of self-worth and enables us to relate ourselves
meaningfully with others. In this way, every working person can actively contribute towards national
income.
Thus, there is need to know who is a worker and what is an employment.
A person is classed as a worker if
 he has contract or agreement to do work.
 he gets reward or other benefits from doing a work.
 he works for himself or is self-employed.
So, it can be concluded that all those who are engaged in production activities, in whatever capacity
high or low, are workers.”
Types of Workers
Broadly, workers can be categorised into self-employed and hired workers. They are discussed below
 Self-Employed The workers who own and operate an enterprise to earn their livelihood are
known as self-employed.
For example, a farmer working on his own farm. This category accounts for more than 50%
of the workforce.

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 Hired Workers Those people who are hired by others and are paid wages or salaries as a
reward for their services are called hired workers.
Hired workers can be of two types
 Casual Workers Those people, who are not hired by their employers on a regular/permanent
basis and do not get social security benefits are said to be casual workers.
For example, construction workers.
 Regular Salaried Workers When a worker is engaged by someone or by an enterprise and

paid his or her wages on a regular basis, they are known as regular salaried employees or
regular workers.
For example, teachers, chartered accountants, etc.
Self-Employed and Hired Workers in India

1. According to Region (Rural and Urban)
 41% of workers are self-employed and 59% of workers are hired in urban areas.
 54% of workers are self-employed and 46% of workers are hired in rural areas.
The above chart shows that the self-employed and casual wage labourers are found more in rural
areas than in urban areas. It is -because in urban areas, people are skilled and work for jobs in offices
and factories. But in rural areas, people work on their own farms.
2. According to Gender
 50% of male workers are self-employed and 50% of male workers are hired.
 53% of female workers are self-employed and 47% of female workers are hired.

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Distribution of Employment by Gender The above chart shows that self-employment and hired
employment are equally important for male workers. But female workers give preference to self-
employment than to hired employment. It is because women, both in rural and urban areas are less
mobile and thus, prefer to engage themselves in self employment.
So, it can be concluded that self-employment is a very important source of livelihood for people in
India. Size of Workforce in India. India has a workforce of nearly 40 crore of people.
The data on the size of workforce In India are as follows
 About 70% of the workforce comprises of male workers, only 30% are female workers,
 Nearly, 70% of workforce is found in rural areas i and only 30% is in urban areas.
 Percentage of female workforce In rural areas is nearly 26% while it is only 14% in urban
areas.
Employment
It is a relationship between two parties i.e. employer and the employee who are binded in a contract
of doing something valuable or it is an act of employing or state of being employed.
The nature of employment in India is multifaceted. Some get employment throughout the year or
some others get employed for only a few months in a year. Many workers do not get fair wages for
their work but still while estimating the numbers of workers, all those who are engaged in
productive activities are included as employed.
Terms associated with workers and employment are accumulated below
 Productive Activities Those activities which contribute to the gross national product are
called productive activities.
 Workforce Persons who are engaged in productive activities are termed as workers and they
constitute the workforce.
Workforce is the total number of persons actually working.
 Workforce Participation Rate (Ratio) It is measured as the ratio between workforce and total
population of a country.

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 Labour Supply It refers to the amount of labour that the workers are willing to work,
corresponding to a particular wage rate.
 Labour Force It refers to he number of workers actually working or who are able to work. It
is not related to wage rate.
 Rate of Unemployment
Participation of People in Employment

It refers to participation of people induction activity. It is measured as a ratio of or force to total
population of the country.
The data on rate of participation of people in employment are as follows
 Rate of participation for the urban areas is about 35%.
 Rate of participation for the rural areas is about 41%.
 In urban areas, rate of participation is about 54.3% for men and 13.8% for women.
 In rural areas, rate of participation is about 54.7% for men and 26.1 % for women.
 Overall rate of participation in the country is about 39.2%.
Worker-Population Ratio in India, 2009-2010 Worker-Population Ratio
The above data reveals the following
 Overall rate of participation in the country is not very high, implying not many people are
engaged in production activity.
 Participation rate in rural areas is higher than in urban areas.
 Participation rate for women is higher in rural areas compared with urban areas.

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Employment in Firms, Factories and Offices
In the course of economic development of a country, labour flows from agriculture and other related
activities to industry and services. In this process, workers migrate from rural to urban areas.
Generally, we divide all productive activities into different industrial divisions, they are as follows
 Primary Sector It includes agriculture, forestry and logging, Ashing, mining and quarrying.
 Secondary Sector It includes manufacturing, construction, electricity, gas and water supply.
 Tertiary Sector It includes trade, transport, storage and services.
Growth and Changing Structure of Employment

During the period 1960-2000, Gross Domestic Product (GDP) of India grew positively and was higher
than the employment growth. However, there was always fluctuation in the growth of GDP. During
this period, employment grew at a stable rate of about 2%.
In 1972-73, about 74% of workforce was engaged in primary sector and in 2009-10, this proportion
has declined to 53%. Secondary and service sectors are showing promising future for the Indian
workforce.The distribution of workforce in different status indicates that over the last four decades

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(1972-2010), people have moved from self employment and regular salaried employment to casual
wage work. Yet self-employment continues to be the major employment provider.
The movement of labour from regular workers to casual wage workers is known as The Process of
casualization.
The chart given above points that in the late 1990s, employment growth started declining and
reached the level of growth that India had in the early stages of planning. During these years, there
is a widening gap between the growth of GDP and employment. This means that in the Indian
economy, without generating employment, we have been able to produce more goods and services.
This phenomenon is referred as Jobless Growth.
Distribution of workforce by industrial sectors shows substantial shift from farm work to non-farm
work.
Informalisation of Indian Workforce

Development planning in India is always focused to provide decent livelihood to its people. It was
thought that the industrialisation strategy would bring surplus workers from agriculture to industry
with better standard of living as in developed countries. Over the years, the quality of employment
has been deteriorating. A small section of Indian workforce is getting regular income. The
government through its labour laws, enable them to protect rights in various ways. This section of
workforce forms trade unions, bargains with employers for better wages and other social security
measures.
Workforce can be classified into two categories
Formal Sectors All the public sector establishments and those private sector establishments which
employ 10 hired workers or more are called formal sector establishments and those who work in
such establishments are formal sector workers.
Informal Sectors All other enterprises and workers working in those enterprises form the informal
sector. Informal sector includes millions of farmers, agricultural labourers, owners of small

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enterprises and people working in those enterprises as also the self employed who do not have any
hired workers.
Those who are working in the formal sector enjoy social security benefits. They earn more than
those in the informal sector. Workers and enterprises in the informal sector do not get regular
income; they do not have any protection or regulation from the government. Workers are dismissed
without any compensation.
As the economy will grow, more and more workers would become formal sector workers. Owing to
the efforts of the International Labour Organisation (ILO), the Indian government has initiated the
modernisation of informal sector.
Informalisation in Ahmedabad Ahmedabad is a prosperous city with its wealth based on the produce
of more than 60 textile mills with a labour force of 150000 workers employed in them. These
workers had, over the course of the century, acquired a certain degree of income security.
They had secure jobs with a living wage, they were covered by social security schemes protecting
their health and old age. They had a strong trade union which not only represented them in disputes
but also ran activities for the welfare of workers and their families. In the early 1980s, textile mills all
over the country began to close down. In some places, such as Mumbai, the mills closed rapidly.
In Ahmedabad, the process of closure was long drawn out and spread over 10 years. Over this
period, approximately over 80000 permanent workers and over 50000 non-permanent workers lost
their jobs and were driven to the informal sector.
The city experienced an economic recession and public disturbances, especially communal riots. A
whole class of workers was thrown back from the middle class into the infor mal sector, into
poverty. There was widespread alcoholism.
Unemployment
In every section of society there will be a large number of unemployed persons. It is a situation, in
which all those who, owing to lack of work are not working but either seek work through
employment exchanges, intermediaries, friends or relatives or by making applications to prospective
employers or express their willingness or availability for work under the prevailing condition of work
and remunerations.
There are a variety of ways by which an unemployed person is identified. As per the view 4)f some
economists, unemployed person is one who is not able to get employment of even one hour in half a
day.
One can get the data of unemployed persons through below stated sources
 Reports of Census of India
 NSSO’s (National Sample Survey Organisations) reports of employment and unemployment

situation
 Directorate General of Employment and Training Data of Registration with Employment

Exchanges.

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Types of Unemployment in India
1. Rural Unemployment
Around 70% of India’s population lives in village. Agriculture is the single largest source of their
livelihood. Agriculture suffers from a number of problems like dependence upon rainfall, financial
constraints, obsolete techniques, etc.
Rural unemployment can be of following three types
 Open Unemployment It refers to that situation wherein the worker is willing to work and has
the necessary ability to work yet he does not get work and remains unemployed for full
time. ”
 Seasonal Unemployment It refers to a situation where a number of a persons are not able to
find a job in a particular season. It occurs in case of agriculture, ice-cream factories, woollens
factories, etc.
 Disguised Unemployment It exists when marginal physical productivity of labour is zero or

sometimes it becomes negative. Important features of disguised unemployment are as
under
 Marginal physical productivity of labour is zero.
 There is disguised unemployment among wage earners.
 Disguised unemployment is invisible.
 It is different from industrial unemployment.
2. Urban Unemployment
In urban areas, unemployed people are often registered with employment exchanges. Between
1961 and 2008, the number of unemployed registered in employment exchanges has increased
more than eight-fold.
Urban unemployment is of three types
 Industrial Unemployment It includes those illiterate persons who are willing to work in
industries, mining, transport, trade and construction activities, etc.

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Problem of unemployment in industrial sector has become acute because of increasing
migration of rural people to urban industrial areas in search of employment.
 Educated Unemployment In India the problem of unemployment among the educated

people is also quite grave. It is a problem spread across all parts of the country, because the
massive expansion of the education facilities have contributed to the growth of educated
persons who are on the look out for white collar jobs.
 Technological Unemployment Technological upgradation is taking place in all spheres of

activity.
People who have not updated their skills in the latest technology become technologically
unemployed.
Causes of Unemployment in India

1. Slow Economic Growth In Indian economy, the rate of economic growth is very slow. This slow
growth rate fails to provide enough employment opportunities to the rising population. Supply of
labour is much more than the available employment opportunities.
2. Rapid Growth of Population Constant increase in population has been a grave problem of India. It
is one of the main causes of unemployment. The number of unemployed has actually increased
instead of decreasing during the plan period.
3. Faulty Employment Planning The Five Year Plans in India have not been designed for employment
generation. A frontal attack to solve the problem of unemployment is missing. It was thought that
economic growth will take care of unemployment problem.
4. Excessive Use of Foreign Technology Lack of scientific and technical cosearch at home, due to its
high cost has resulted in excessive use of foreign technology which has led to technical
unemployment in our country.
5 Lack of Financial Resources The expansion and diversification programme of agriculture and small
scale industries have suffered because of lack of financial resources. This has been accompained by
increasing government control of economic activities.
6. Increase in Labour Force The population explosion stage of Indian economy has added young
people to the labour force who are seeking employment.
Government and Employment Generation

In 2005, the government had passed an act in parliament known as the National Rural Employment
Guarantee Act, 2005. It promises 100 days of guaranteed wage employment to all rural households
who volunteer to do unskilled manual work. This scheme is one of the important measure adopted
by government to generate employment for those who are in need of jobs in rural areas.
Since independence, the Union and State Government have played an important role in generating
employment or creating opportunities for employment generation. Their efforts can be broadly
categorised into two i.e., direct and indirect.
 Direct Employment, In this government employs people in various departments for

administrative purposes. It also runs industries, hotels and transport companies and hence
provides employment directly to workers.
 Indirect Employment It can be understood as when output of goods and services from
government enterprises increases, then private enterprises which receive now materials
from government enterprises will also raise their output and hence increase the number of
employment opportunities in the economy. This is the indirect generation of employment
opportunities by the government initiatives in the economy.

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Employment Generation Programmes
Many programmes that governments implement with the aim of alleviating poverty through
employment generation are called employment generation programmes.
These programmes aim at providing not only employment but also services in areas such as primary
health, primary education, rural drinking water, nutrition, assistance for people to buy income and
employment generating assets, development of community assets by generating wage employment,
construction of houses and sanitation, assistance for constructing houses, laying of rural roads,
development of waste lands/degraded lands.
Infrastructure -Chapter 8
Concept of Infrastructure
Infrastructure refers to such core elements of economic and social change which serves as a support
system to production activity in the economy.
Economic Infrastructure
It refers to all such elements of economic change which serve as a support system to the process of
economic growth.
Social Infrastructure
It refers to the core elements of social change which serve as a support system for the process of
social development of a country.
Infrastructure and Development

Following observations show how exactly infrastructure contributes to the process of growth and
development.
 Infrastructure impacts productivity
 Infrastructure induces investment
 Infrastructure generates linkages in production
 Infrastructure enhances size of the market
 Enhance ability to work
 Induces Foreign Direct Invesment (FDI)
The State of Infrastructure in India

(i) Energy Energy is the most important component of economic infrastructure. Industrial production
is not possible if energy is not available.
Energy is broadly classified as commercial and non-commercial energy.
 Components of Commercial Energy Coal, petroleum products natural gas, electricity.
 Components of Non-Commercial Energy Fire wood, animal waste, agricultural waste.
(ii) Conventional Sources
 Coal

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 Natural gas
(iii) Non-Conventional Sources
 Solar energy
 Wind energy
 Biomass energy including energy in the form of gobar gas
 Geo thermal energy
 Energy through tides and waves as well as temperatue gradient over sea
(iv) Power/Electricity The most visible form of energy, which is often identified with progress in
moderation civilization is power, commonly called electricity.
(v) Some Challenges in the Power Sector
 Inadequate generation of electricity
 Less capacity utilisation
 Losses of electricity boards
(vi) Health Health is a state of complete physical, mental and social well-being. It does not simply
mean absence of disease; rather it means a sound physical and mental state of the individual.
Development of Health Services After Independence

There has been a large scale improvement in health facilities. Following are the highlights
 Decline in death rate
 Reduction in infant mortality
 Rise in expectancy of life
 Control over deadly diseases
 Reduction in child mortality rate
Women’s Health
Women in India suffer from a serious neglect not only in the area of education, but in the area of
health care as well. More than 50% of women in India in the age group of 15-49 years suffer from
nutritional deficiency.
Health as an Emerging Challenge

Points given below highlight the deficiencies of our social infrastructure in terms of health facilities.
 Unequal distribution of healthcare services
 Communicable diseases
 Poor management
 Privatisation

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 Poor upkeep and maintenance
 Poor sanitation level
Infrastructure facilitates support system in an economy. It contributes to economic development of

a country both by rising the productivity of factors of production and by improving the quality of life
of its people.
This chapter focuses on analysing the economic and social components of infrastructure. The
significance of infrastructure in the context of growth and development of an economy is also
discussed in it.
Concept, Types and Importance of Infrastructure

Infrastructure is basic physical and organisational structure needed for the operation of a society or
enterprise. It provides supporting services in the main areas of industrial and agricultural production,
domestic and foreign trade and commerce. Infrastructural installations do not direcdy produce
goods but help in promoting production activities in an economy. e.g. transport, communication,
banking, power, etc.
These services include roads, railways, ports, airports, dams, power stations, oil and gas pipelines,
telecommunication facilities, etc. They also include country’s educational system including schools
and colleges, health system including hospitals, sanitary system including clean drinking water
facilities and the monetary system including banks, insurance and other financial institutions.
Types of Infrastructure
Infrastructure is broadly categorised as social and economic infrastructure. They are discussed below
Social Infrastructure It refers to the core elements of social change which serve as a foundation for
the process of social development of a country. It contributes to economic processes indirectly and
from outside the system of production and distribution, e.g. educational institutions, hospitals,
sanitary conditions and housing facilities, etc.
Economic infrastructure It refers to all such elements of economic change which serve as a
foundation for the process of economic growth. These helps in the process of production directly.
e.g. transportation, communication, energy/power, etc.
Difference between Social and Economic Infrastructure
Relevance of Infrastructure

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Infrastructure is the support system which provides support to the efficient working of a modem
industrial economy. Modem agriculture also largely depends on it
 for speedy and large scale transportation of seeds, pesticides, fertilisers, etc.
We use modern roadways, railways and shipping i facilities. In recent times, agriculture also depends
on insurance and banking system.
Inadequate infrastructure can have multiple adverse effects on health. Improvements in water
supply and – sanitation have a large impact by reducing morbidity (state of being unhealthy or
diseased) from major
 waterborne diseases and reducing the severity of disease, when it occurs. Air pollution and
safety hazards connected to transportation also effect morbidity particularly in densely
populated areas.
Importance of Infrastructure in Development

Folloiving points highlights how exactly infrastructure contributes to the process of growth and
development
 Impact on Productivity Infrastructure plays an major role in the raising productivity, with
improved roadways, warehouses etc farmers can easily sell their products in different
markets. Also irrigation facilities has reduced dependence on monsoon for water needs,
which not only increases productivity but also production level.
 Induces Investment Infrastructure induces investment. Low investment points to low level of
production and backwardness of an economy. A well developed infrastructure attracts
foreign investors. Which gives investment avenues and profitable ventures.
 Generates Linkages in Production Better means of transport and communication, robust

system of banking and finance generates better inter-industrial linkages. It is a situation
when expansion of one industry facilitates the expansion of the other.
 Enhances Size of the Market Infrastructure enhances the size of the market as large scale of
production can capture more market.
 Enhances Ability to Work Social infrastructure increases the quality of life of workers,
thereby increasing their efficiency. Health care centres, educational institutions and other
such facilities inherit skills which increases ability and efficiency to work.
 Facilities Outsourcing India is emerging to be a global destination for all kinds of outsourcing.
For example, call centres, study centres, medical
 transcription and such other services, owing largely – to its sound system of social and
economic infrastructure.
The State of Infrastructure in India
Traditionally, the government has been solely responsible for developing the country’s
infrastructure. But it was found that the government’s investment in infrastructure was inadequate.
Today, the private sector by itself and also in joint partnership with the public sector has started
playing a very important role in infrastructure development. India invests only 5% of its GDP on
infrastructure, which is for below than that of China and Indonesia.

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Infrastructure State in Rural Area

Majority of India’s population still lives in rural area.
Infrastructure state in rural India can be understood from the following points
 Despite of so much technological progress, women of rural India are still using bio fuels to
meet their daily energy requirement.
 Women go long distances to fetch water and other basic needs.
 The Census 2001 shows that in rural India, only 56% households have an electricity
connection and 43% still use kerosene.
 About 90% of the rural households use bio fuels for cooking.
 Tap water availability is limited to only 24% rural households.
 About 76% of the population drinks water from open resources such as wells, ponds, etc.
 Access to improved sanitation in rural areas was only 20%.
Future Prospects in India

Some economists have projected that India will become the third biggest economy in the world, a
few decades from now. For that to happen, India will have to boost its infrastructure investment.
In an economy as the income rises, requirement of infrastructure will change. For low income
countries, basic infrastructure services like irrigation, transport and power are more important. On
the contrary the developed economies require more service related to infrastructure. That is why,
share of power and telecommunication infrastructure is greater in high income countries.
Thus, development of infrastructure and economic development go hand in hand. Obviously, if

proper attention is not paid to infrastructure development, economic development will be severely
affected.
In this chapter, we will focus only two kinds of infrastructure, those associated with energy and
health. Other types of infrastructure are not included in our syllabus.
Energy
Energy is a critical aspect of development process of a nation. It is essential for industries, agriculture
and related areas like production and transportation of fertilisers, pesticides and farm equipment. It
is also required in house for cooking, household lighting and heating etc.
Sources of Energy

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1. Conventional Sources of Energy
There are two types of conventional sources of energy
 Commercial Sources Coal, petroleum and electricity are commercial sources of energy as
they bought and sold in the market. They account for over 40% of total energy sources
consumed in India. Commercial sources of energy are generally exhaustible in nature.
 Non-commercial Sources Fire wood, agricultural waste and dried dung non-commercial
sources of energy. They are found in nature free of cost. Non-commercial sources are
generally renewable in nature.
More then 60% of Indian households depend on the traditional sources of energy. In meeting their
regular cooking and heating needs.
2. Non-conventional Sources of Energy

Solar energy, wind energy and tidal power are non-conventional sources. India has almost unlimited
potential for producing all three types of energy if some appropriate cost effective technologies
(that are already available) are used.
Note India is fifth largest producer of wind energy.
Difference between Conventional and Non-conventional Sources of Energy

Conventional Sources of Energy
These are the traditional sources of energy which are generally bought and sold in the market.
In India, conventional sources are being used in total disregard to the environment, i.e. These
sources creates pollution.
Primary and Final Sources of Energy

Primary Sources They are those sources which are the gift of nature to the Earth. They do not
require any transformation before their use. They are directly used as the inputs of production. e.g.,
coal, lignite, petroleum, gas, etc.
Final Sources They sources are used as a final product.

This involves transformation process, transforming inputs into final outputs like transformation of
coal energy into electricity.
Consumption Pattern of Commercial Energy in India

At present, commercial energy consumption makes up about 74% of the total energy consumed in
India. This includes coal with the largest share of 54%, followed by oil at 33%, natural gas at 9% and
hydro energy at 3%. Non-commercial energy sources account for over 26% ofthe total energy
consumption.

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The critical feature of India’s energy sector and its linkages to the economy, is the import
dependence on crude and petroleum products, which is likely to grow rapidly to more than 100% of
the need in the near future.
Sectoral Pattern of Energy Consumption in India

Earlier till 1953-54, transport sector was the largest consumer of commercial energy but it declined
thereafter and industrial sector has been increasing. The share of oil and gas is highest among all
commercial energy consumption.
Power/Electricity
The most visible form of energy, which is often identified with progress in modern civilisation, is
power, commonly called electricity. It is a critical component of infrastructure that determines the
economic development of a country. The growth rate of demand for power is generally higher than
the GDP growth rate. Studies point that in order to have 8% per annum, power supply needs to grow
around 1. annually.
In 2010-11, thermal sources accounted for almost 65% generation capacity in India. Hydel and wind
power accounted for 32.5% while nuclear power accounted only 2.5%. India’s energy policy
encourages two energy sources; hydel and wind, as they do not rely on fossil fuel and hence, avoid
carbon emissions and are renewable in nature. It has resulted in faster growth of electricity
produced from there two sources.
Atomic energy is an important source of electric power. At present, nuclear energy accounts for only
2.5% of total energy consumption, against a global average of 13% which is too low. Hence, some
scholars suggest to generate more electricity through atomic sources.
Use of Solar Energy in Thane

There is a use of solar energy on large scale in Thane city. The use of solar energy, which was
considered a somewhat far fetched concept, has bought in real benefits and results in cost and
energy saving, In this city, solar energy is being applied to heat water, power traffic signals and
advertising hoardings, The experiment is lead by Thane Municipal Corporation. It has made
compulsory for all new buildings in the city to install solar water heating system.
Some Challenges in the Power Sector

Energy, in a developing country like India, is a basic put required to sustain economic growth and to
provide basic amenities of life to the entire population of a country.

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Energy generated at various power stations is not totally used by the consumers, some of it is
consumed by the power station itself and some of it is wasted in transmission.
Some of the challenges that India’s power sector faces today are
 India’s installed capacity to generate electricity is , not sufficient to feed an annual economic
growth of 9%. At present, India is able to and only 20,000 MW a year. Even the installed
capacity is under utilised.
 State Electricity Boards (SEBs) which distribute electricity, incur losses which exceed ? 500
billion due to transmission and loss in distribution, wrong pricing of electricity and other
inefficiences.
 Private sector power generators are yet to play their role in a major way, same is the case
with foreign investors.
 There is general public unrest due to high power tariffs and prolonged power cuts in
different parts of the country.
 Thermal power plants which are the mainstay of India’s power sector, are facing shortage of
raw material and coal supplies.
Continued economic development and raising population is driving the demand for more energy
than what India is currendy producing. Instead of investing in already installed power sector,
government has shifted interest into the private sector particularly for the distribution of electricity
at much higher prices.
Power Distribution : The Case of Delhi

Since, independence power management in the capital has changed hands four times. The Delhi
State Electricity Board (DSEB) was set up in 1951. This was succeeded by the Delhi Electric Supply
Undertaking (DESU) in 1958. The Delhi Vidyut Board (DVB) came into existence as SEB in February
1997.
Now the distirbutioq of electricity vests with two leading private sector companies—Reliance Energy
Limited (BSES Rajdhani Power Limited and BSES Yamuna Power Limited) and Tata—Power Limited
(TPDDL). They supply electricity to approximately 28 lakh customers in Delhi.
The tariff structure and other regulatory issues are monitored by the Delhi Electricity Regulatory
Commission (DERC). Though it was expected that there will be greater improvement in power
distribution and the consumers will benefit in a major way, experience shows unsatisfactory results.
Health
A person’s ability to work depends largely on his health. Good health enhances the quality of life.
Health is not only absence of disease but also the ability to realise one’s potential. It is a yardstick of
one’s well being.
Health is an important component of social infrastructure. It is the holistic process related to the
overall growth and development of the nation. Scholars assess people’s health by taking into
account indicators like infant mortality and maternal mortality rate, life expectancy and nutrition
levels, alongwith incidence of communicable and non-communicable diseases.
Development of health infrastructure ensures a country about healthy manpower for production of
goods and services.

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Health infrastructure includes hospitals, doctors, nurses and other para-medical professionals, beds,
equipment required in hospitals and a well developed pharmaceutical industry. Only the presence of
infrastructure is not enough to have healthy people but it should be accessable to all the people
easily.
State of Health Infrastructure in India

The government has the constitutional obligation to guide and regulate all health related issues such
as medical education, adulteration of food, drugs and poisons, medical profession, vital statistics,
mental, deficiency and lunacy. Central Council of Health and Family Welfare collects information and
renders financial and technical assistance to State Governments, union territories and other bodies
for implementation of important health programmes in the country.
State of health infrastructure in India can be understood from the following points
 At the village level, a variety of hospitals known as Primary Health Centres (PHCs) have been
set.
 There are large number of hospitals run by voluntary agencies and the private sector,
equipped with professionals and para medicaf professionals trained in medical, pharmacy
and nursing colleges.
 Since independence, there has been a significant expansion in the physical provision of
health services. Public Health Infrastructure in India, 1951-2000
Private Sector Health Infrastructure

In recent time, private health infrastructure has grown largely. Private sector health, infrastructure is
explained below
About 70% of the hospitals running in India belong to private sector. Nearly 60% of dispensaries are
run by the same private sector.
Private sector has also been contributing significantly in medical education and training, medical
technologies and diagnostics, manufacture and sale of pharmaceuticals, hospital construction and
medical services.
Health System in India

India’s health infrastructure and healthcare is made up of a three tier system
1. Primary Healthcare
Primary healthcare system in India includes

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 Education concerning prevailing health problems and methods of identifying, preventing and
controlling them.
 Promotion of food supply and proper nutrition and adequate supply of water and basic
sanitation.
 Maternal and child health care.
 Immunisation against major infectious diseases and injuries.
 Promotion of health and provision of essential drugs.
Auxiliary Nursing Midwife (ANM) is the first person who provides primary healthcare. Primary Health
Centres (PHCs), Community Health Centres (CHCs) and sub centres.
2. Secondary Healthcare
When condition of a patient is not managed by PHCs, they are referred to secondary or tertiary
hospitals. Health care institutes having better facilities for surgery, X-ray, ECG (Electro Cardio Graph)
are called secondary healthcare institutes. They function both as primary health care provider and
also provide better health care facilities. They are mostly located in district and headquarters in big
towns.
3. Tertiary Healthcare
In tertiary sector, there are the hospitals which have advanced level equipment and medicines and
undertake all the complicated health problems, which could not be managed by primary and
secondary hospitals.
This sector also includes many premier institutes which not only impart quality medical education
and conduct research but also provide specialised health care.
For example, All India Institute of Medical Sciences (AIIMSs), Post Graduate Institute (PGI),
Chandigarh, Jawaharlal Institute of Postgraduate Medical Education and Research (JIPMER),
Pondicherry, National Institute of Mental Health and Neuro Sciences (NIMHNSs), Banglore and All
India Institute of Hygiene and Public Health, Kolkata.
Indian Systems of Medicine ASM

It includes six systems, Ayurveda, Yoga, Unani, Siddha, Naturopathy and Homeopathy (AYUSNH). At
present there are 3529 ISM hospitals 24943 dispensaries and as 6.5 lakhs registered practitioners in
India.
Medical Tourism – A Great Opportunity

Now-a-days foreigners visit India for surgeries,liver transplants, dental and even cosmetic care etc,
the reason is, our health gervices combine latest medical technologies with qualified professionals
and is cheaper for foreigners as compared to costs of similar health careaervices in their own
countries. In 2004-05, as many as 150000 foreigners visited India for medical treatment, this figure is
likely to increase by 15% each year. Health infrastructure can be upgraded to attract more foreigners
to India.
ISM has huge potential and can solve a large part of our health care problems because they are
effective, safe, and inexpensive.
Indicators of Health an Health Infrastructure :critical Appraisal

(i) Health status of the country can be assessed through indicators such as infant mortality and
maternal mortality rates, life expectancy and nutrition levels, alongwith the incidence of

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communicable diseases.
Scholars argue that there is greater scope for the role of government in the health sector.
Source World Health Statistics 2011. www.worldbank.org

From the given table, following facts can be concluded
 India’s expenditure on health sector is only 4.2% of total GDP. This is very low as compared
to other countries, both developing and developed.
 India has about 17% of the world’s population but it bears a frightening 20% of the global
burden of diseases.
 Global Burden of Diseases (GBD) is an indicator used by experts to gauge the number of
people dying prematurely due to a particular disease as well as the number of years spent by
them in state of‘disability’ Owing to the disease.
 Every year around five lakh children die due to water borne diseases. The danger of AIDS is
also looming large.
 Malnutrition and inadequate supply of vaccines lead to the death of 2.2 million children
every year.
 At present, less than 20% c the population utilises public health facilities.
 Only 38% of PHC’s, have quired number of doctors and only 30% of PHC’s have sutTK stock
of medicines.
Urban-rural and Poor-rich Divide

Differences in medical healthcare between urban – rural and poor-rich can be understood from the
points given below
 Only one-fifth of total hospitals are located in rural areas. Rural India has about half the
number of dispensaries. People in rural areas do not have sufficient medical infrasctructure.
This lead to difference in the health status of people. Out of 7 lakhs beds, roughly 11% are
available in rural areas.
 There are only 0.36% hospital for every one lakh people in rural areas while urban areas
have 3.6% hospitals for the same number of people.

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 The PHCs located in rural areas do not offer even X-ray or blood testing facilities which, for a
city dweller, constitutes basic healthcare. Even though 315 recognised medical colleges
produce 30,000 medical graduates every year. Still there is shortage of doctors in rural
areas. One-fifth of these doctors migrate from one coutry to -another for better job
opportunities.
 The poorest 20% of Indians living in both urban and rural areas spend 12% of their income
on healthcare while the rich spend only 2%.
 Percentage of people who have no access to proper care has risen from 15 in 1986 to 24 in
2003.
Women’s Health
Women constitute about half the total population in India. They suffer many disadvantages as
compared to men in the areas of education, participation in economic activities and health care. The
child sex ratio has been detonated from 927 in 2001 to 914 in 2011.
There is growing incidence of female foeticide in the country. Close to 300000 girls under the age of
15 are not only married but have already borne children, at least once.
More than 50% of married women between the age group of 15 and 49 years suffer from anaemia
caused by iron deficiency. It has contributed to 19% of maternal deaths. Abortions are major cause
of maternal morbidity and mortality in India.
Health : A Vital Public Good and a Basic Human Right All citizens can get better health facilities if
public health services are decentralised. Success against diseases depends on education and efficient
health infrastructure. So it is necessary to create awareness on health and provide efficient system.
The role of telecom and IT in this regard is very important. The ultimate goal should be to help
people move towards a better quality of life.
Environment - Sustainable Development Chapter 9

Concept of Environment
Environment may be defined as all those conditions and their effects which influence human life. It is
the sum total of surrounding and the totality of the resources.
According to the Environment Act 1986, “Environment includes, water, air and land and the inter
relationship which exists among and between water air land and human beings and other creatures,
plants, micro-organisms and property”.
Functions of Environment
 It assimilates waste.
 It sustains life by providing genetic and bio diversity.
 It also provides aesthetic services like scenery etc.
Significance of Environment
 Environment offers resources for production.

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 Environment sustains life.
 Environment Enhance quality of life.
Two Basic Problems Related to Environment
 Problem of pollution.
 Problem of excessive exploitation of natural resources.
Pollution It refers to those activities of production and consumption which challenge purity of air
and water and serenity of the environment.
Pollution unfolds itself in three ways
 Air Pollution Pollution of air impliespollution of an essential elements of life.
 Water Pollution Water is an equally important element of life and its pollution is equally
serious. Polluted water is the principal cause of diseases like diarrhoea and hepatities.
 Noise Pollution Excessive noise causes irritation and unnecessarily fatigues the body and the
mind.
Causes of Environmental Degradation
 Population explosion
 Widespread poverty
 Increasing urbanisation
 Increasing use of insecticides, pesticides and chemical fertilisers
 Rapid industrialisation
 Multiplicity of transport vehicles
 Disregard to the civic norms
How to Save Environment?

Following measures need to be taken to protect environment
 Social awareness
 Population control
 Enforcement of Environment Conservation Act
 Afforestation campaign
 Control over industrial and agricultural pollution
 Water management
 Management of solid waste

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 Improvement in housing
Sustainable Development
It is that process of economic development which aims at raising the quality of life of both and
future generation.
Features of Sustainable Development
 Sustained rise in real per capita income and economic welfare
 Rational use of natural resources
 No reduction in the ability of future generations to meet their own needs
 No increase in pollution
Strategies for Sustainable Development
 Input-efficient technology.
 Use of environment-friendly sources of energy.
 Integrated Rural Development.
 Shift to organic farming.
 Manage the westes.
 Stringent laws on the disposal of chimical effluents.
 Awarness to conserve natural assets for inter-generational equity.
 Public means of transport.
Factors Contributing to Deforestation
 Growing industrial demand for wood and other forest products.
 Growing demand for wood owing to explosive rise in population.
 River valley projects.
The economic development we have achieved so far is on the cost of environmental degradation.
The era of globlisation promises higher economic growth, but on the same side it had adverse
consequences that had impacted environment.
In order to understand the sustainable path of development, the significance and contribution of
environment to economic development should be understood. With this in mind, we would be able
to achieve sustainable development in India.
Environment is defined as the total planetary inheritance and the totality of all resources. It includes
all the biotic (e.g. birds, animals, plants, forests, etc) and abiotic (e.g., water, Sun, land, mountains,
etc) factors that influence each other.

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According to the Environment Act-1986, ‘Environment includes, water, air and land and the inter
relationship which exists among and between water, air, land and human beings and other
creatures, plants, micro organisms and property’.
Functions of Environment
Environment performs four vital junctions, which are as follows
 Supply Resources Resources include both renewable and non-renewable sources of energy.
Resources which can be used without any fear of getting depleted are renewable sources of
energy, e.g. trees, fishes, etc. Non-renewable sources are those which are getting depleted
or exhausted. e.g. fossil fuel, etc.
 Assimilates Waste Production and consumption activity generates wastes. It is generally in

form of garbage which is absorbed by the environment.
 Sustains Life Sun, soil, air, water are the essential ingredients of environment for the human
life. Absence of these will lead to an end of life on the Earth.
 Aesthetic Services Environment provides aesthetic services like scenery, which includes
rivers, ocean, mountains and deserts. Enjoying these surroundings adds to the quality of life.
Environmental Crisis
The environment is performing its functions without any interruption as long as the demand of these
functions is within its carrying capacity. This means that if the rate of extraction of resources will be
above the rate of their regeneration, the environment will fail to perform its functions.
Resources are becoming extinct and wastes are generated beyond the absorptive capacity of the
environment. All this has lead to the environmental crisis, it refers to ecological crisis that occurs
when the environment of a species or a population changes and destabalises its survival.
Consequence of Environmental Crisis
The points given below describe the consequences of environmental crisis
 Development has polluted and dried up rivers and other aquifers, which was deteriorated
the quality of water.
 Intensive and extensive excavation of both renewable and non-renewable resources has
exhausted some of the vital resources, compelling to spend a huge amount of money on
technology and research to explore new resources.
 Decline in air and water quality have resulted in increased number of respiratory and water
borne diseases i.e., expenditure of health care is also rising according to a data 70% of water
of . India is polluted which cannot be used for drinking purpose.
Global Environmental Issues

The environmental issues which affect the whole world are called global environmental issues such
as global warming and ozone depletion. These issues also contribute to increased financial
commitments for the government.
These issues are discussed below
1. Global Warming
The gradual increase in the average temperature of Earth’s lower atmosphere is called global
warming.

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Causes/Effects
It occurs due to greenhouse gases (carbon dioxide, methane and other gases which have the
capacity to absorb heat) through burning of fossil fuels (coal and petroleum) and deforestation
(increases the carbon dioxide level in atmosphere). Much of the recent observed and projected
global warming is human induced.
The atmospheric concentrations of carbon dioxide and methane have increased by 31% and 149%
respectively above pre-industrial level since 1750.
Different effects of global warming are described below
 During the past century, the atmospheric temperature has risen by 1.10° F (0.60° C).
 Melting of polar ice resulting in increase in sea level (during the past century, sea level has
risen by several inches) and the risk of coastal flooding has increased.
 Disruption of drinking water supplies dependent of snow melts.
 Extinction of species.
 More frequent tropical storms.
 Increased incidence of tropical diseases.
Action Taken
A United Nations Conference on Climate Change, held in Tokyo, Japan, in 1997, resulted in an
international agreement to fight global warming which called for reductions in emissions of
greenhouse gases by industrialised nations.
2. Ozone Depletion
It refers to the phenomenon of reductions in the amount of ozone layer in the stratosphere.
Causes/Effects
It is caused by high levels of chlorine and bromine compounds in the stratosphere. Origin of these
compounds are Chloro flurocarbons (CFCs), used as cooling substances in air conditioners and
refrigerators or as aerosol propellants and bromofluro-carbons.(halons) used in fire extinguishers.
Different effects of ozone depletion are described below
 More ultraviolet radiation comes to Earth causing damage to living organisms, skin cancer in
humans, low production of phytopjankton affecting acquatic organisms.
 Influences the growth of terrestrial plants.
Action Taken
Between 1979 to 1990, a reduction of 5% in ozone layer was detected. Since ozone layer prevents
most harmful ultraviolet radiation from passing through the Earth’s atmosphere, so reduction in
ozone layer generated worldwide concern, leading to adoption of the montreal protocol banning the
use of Chloroflurocarbon JCFC) compounds as well as other ozone depleting chemicals such as
carbon tetrachloride, tricholoroethane (also known as methyl chloroform) and bromine compounds
known as halons.
State of India’s Environment

India has rich quality of natural resources in plenty of amount.
It is clear from the following points

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 India has rich quality of soil, hundreds of rivers and tributaries, lush green forests, plenty of
mineral deposits beneath the land surface, vast stretch of the Indian Ocean, ranges of
mountains, etc.
 The black soil of the Deccan Plateau is particularly suitable for cultivation of cotton. It has
lead to concentration of textile industries in this region.
 The Indo Gangetic plains spread from Arabian Sea to the Bay of Bengal are one of the most-
fertile, intensively cultivated and densely populated regions in the world.
 India’s forests though unevenly distributed, provide green cover for majority of its
population and natural cover for its wildlife.
 Large deposits of iron-ore, coal and natural gas are found in the country. India alone
accounts for nearly 20% of the world’s total iron-ore reserves.
 Bauxite, copper, chromate, diamonds, gold, lead, lignite, manganese, zinc, uranium, etc are
also available in different parts of the country.
Threat to India’s Environment

Threat to India’s environment is poverty, pollution, rapidly growing industrial sector. Air pollution,
water contamination, soil erosion, deforestation and wildlife extinction are some of the most
pressing environmental concerns of India. The developmental activities in India have resulted in
pressure on its finite natural resources, besides creating impacts on human health and well-being.
Out of them the priority issues are
 Land degradation and solid waste management
 Biodiversity loss
 Air pollution with special reference to vehicular pollution in urban cities
 Management of fresh water Some of these issues are discussed below
Land Degradation in India

Land in India suffers from varying degrees and types of degradation stemming mainly from unstable
use and inappropriate management practices.
The factors responsible for land degradation in India are
 Loss of vegetation occuring due to deforestation.
 Unsustainable fuel wood and fodder extraction.
 Shifting cultivation.
 Reduction into forest lands.
 Forest fifes and overgrazing.
 Non-adoption of adequate soil conservation measures.
 Improper crop rotation.
 Indiscriminate use of agro chemicals such as fertilisers and pesticides.

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 Improper planning and management of irrigation system.
 Extraction of ground water in excess of the regain capacity.
 Open access resource.
 Poverty of the agriculture-dependent people.
Biodiversity Loss
India is the owner of 2.5% of world’s geographical area. India holds 17% of human and 20% of
livestock population on its land. In order to hold livestock and human in country, country needs 0.47
hectare of land to meet the basic needs but it has only 0.08 hectare of land which causes felling of
forests and soil erosion. 5.3 billion tonnes of soil is eroded every year. As a result quantity of
nutrients lost due to erosion each year ranges from 5.8 to 8.4 million tonnes.
Chipko or Appiko : What’s in a Name?

Chipko Movement aimed at protecting forests in the Himalayas. In Karnataka, a similar movement
took a different name, ‘Chpiko’, which means to hug.
On 8th September 1983, when the felling of trees was.started in Salkani forest in Sirsi district, 160
men, women and children hug|ed the trees and forced the woodcutters to leave. They kept vigil in
the forest over the next six weeks. Only after the forest officials assured the volunteers of the trees
will be cut scientifically and in accordance with the working plan of the district, did they leave the
trees, When commercial felling by contractors damaged a large number of natural forests, the idea
of hugging the trees gave the people hope and confidence that they can protect the forests. On that
particular incident, with the felling discontinued, the people saved 12000 trees. Within months, this
movement spread to many adjoining districts.
Air Pollution
In India, air pollution is widespread in urban areas where vehicles are the major contributors and in a
few other areas which have a high concentration of industries and thermal power plants.
Pollution from vehicles and industries are the major sources of air pollution.
 Vehicle Pollution Vehicle emissions are of particular concern since these are ground level
sources and thus, have the maximum impact on the general pollution. The number of
vehicles has increased from 3 lakh in 1957 to 67 crores in 2003.
In 2003, personal transport vehicles (two wheeled and cars only) contributed about 80% of
the total number of registered vehicles thus, contributing significantly to air pollution load.
 Industrial Pollution India is one of the ten most industrialised nations of the world. This
status has brought with it unwanted and unanticipated consequences like unplanned
urbanisation, pollution and the risk of accidents.
The CPCB (Central Pollution Control Board) has identified seventeen categories of industries
(large and medium scale) as significantly polluting.
Management of Fresh Water

Water is an equally important element of life and its pollution is equally serious. Water becomes
polluted when chemicals and other waste materials are dumped into it. Polluted water is the
principal cause of diseases like diarrhoea and hepatitis. Thus, the management of fresh water is
essential to sustain life.

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Pollution Control Boards
To address two major environmental concerns in India; water, air and land pollution, the
government set up the Central Pollution Control Board (CPCB) in 1974. This was followed by states
establishing their own state level boards to address all the environmental concerns.
Different functions of pollution control boards are
 To investigate, collect and disseminate information relating to water, air and land pollution.
 To lay down standards for sewage/trade effluent and emissions.
 To provide technical assistance to governments in promoting cleanliness of streams and

wells by prevention, control and abatement of water pollution.
 To improve the quality of air and to prevent, control or abate air pollution in the country.
 To carryout and sponsor investigation and research relating to problems of water and air
pollution and for their prevention, control and abatement.
 To organise mass awareness programme for pollution control.
 To prepare manual, codes and guidelines relating to treatment and disposal of sewage and
trade effluents.
 To assess the air quality through regulation of industries.
 State boards through their district officials, periodically inspect every industry under their
jurisdiction to assess the adequacy of treatment measures provided to treat the effluent and
gaseous emissions.
 State pollution boards also provide background air quality data needed for industrial siting
and town planning.
In nutshell, it can be said that pollution control boards collect, collate and disseminate
technical and statistical data relating to water pollution. They monitor the quality of water in
125 rivers (including the tribunaries), wells, lakes, ponds, tanks, drains and canals.
How to Save Environment?

The various measures adopted by Ministry of Environment and the central and state pollution
control boards may not yield reward unless, we make ourself concious.
Following are required measures which should be taken to save the environment
 Social Awareness There should be awareness among the people regarding the threats of the
increasing pollution and how can each of us contribute to the check this menace.
 Population Control Biggest issue which should be controlled is increasing population to

protect the environment.
 Enforcement of Environment Conservation Act The Environment act was passed in year
1986. It was passed to check the detoriated quality of the environment.
 Afforestation Campaign Extensive afforestation campaign should be launched to protect

environment.

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 Water Management There should be means which can harvest the rain water in order to use
it in the areas where there is scarcity of water, so that clean drinking water can be provided
to the rural people.
 Management of Solid Waste Management of solid waste is very essential. It should be

treated chemically. Rural garbage should be converted into compost.
Meaning, Features, Needs and Strategies for Sustainable Development

According to the United Nations Conference on Environment and Development (UNCED),
sustainable development can be defined as “development strategy that meets the need of present
generation without compromising the ability of future generation to meet their own needs.”
Edward Barbier, a renowned personality had also given the definition of sustainable development
Sustainable development is one which is directly concerned with increasing the material standards
of living of the poor at grass root level.
In specific term, sustainable development aims at decreasing the absolute poverty of the poor by
providing lasting and securing livelihoods that minimise resource depletion, environmental
degradation, cultural disruption and social instability.
The Brudtland Commission emphasises on protecting the future generation. A moral obligation to
hand over the planet Earth in good order to the future generation, i. e., the present generation
should bequeath a better environment to the future generation.
The present generation can promote development that enhances the natural and built environment
in the way, that are compatible with
 conservation of natural as us.
 preservation of the regenerative capacity of the worlds natural ecological system.
 avoiding the imposition of added costs or risks on future generation.
Features of Sustainable Development
 Sustained rise in real per capital income and economic welfare.
 Rational use of natural resources.
 No reduction in the ability of future generations to meet their own needs.
 Check on pollution.
A Way to Sustainable Development

According to Herman Dalay, a leading environmental economist, the main needs of sustainable
development are
 Limiting the human population to a level within the carrying capacity of the environment.
 Technological progress should be input efficient and not input consuming.
 Renewable resources should be extracted on a sustainable basis, i.e., rate of extraction

should not exceed rate of regeneration.

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 For non-renewable resources, rate of depletion should not exceed the rate of creation of
renewable substitutes.
 Inefficiencies arising from pollution should be corrected.
Strategies for Sustainable Development

1. Use of Non-conventional Sources of Energy India heavily depends on thermal and hydro power
plants to meet its power needs. Both of these have adverse environmental impacts. Thermal power
plants emit large quantities of carbon dioxide, which is a greenhouse gas. If it is not used properly, it
may cause land and water pollution.
2. LPG, Gobar Gas in Rural Areas Rural households in India generally use wood, dungcake (upla) or
other biomass as fuel. This practice has several adverse implications like deforestation, reduction in
green cover and air pollution.
To rectify the situation, subsidised LPG is being provided. Besides it, gobar gas plants are being
encouraged through easy loans and subsidy. LPG is the clean fuel. It does not create any household
pollution and also wastage is minimised. For gobar gas plants, cattle dung is fed in the plant to
function which produces gas and slurry is used as organic soil fertiliser.
3. CNG in Urban Areas In Delhi, the use of Compressed Natural Gas (CNG) as fuel in public transport
system has significantly lowered air pollution and the air has become cleaner in the last few years.
4. Wind Power In areas, where speed of wind is usually high, wind mills can provide electricity
without any adverse impact on the environment. The turbines moves with wind and electricity gets
generated. Its initial cost’ remain high but it can be recovered easily.
5. Solar Power Through Photovoltaic Cells In India, solar energy is used in different forms for
agriculture products, daily use products and even to warm ourselves in winters. Through
photovoltaic cells, solar energy can be converted into electricity. This technology is extremely useful
for remote areas and for places where supply of power lines is either not possible or proves very
costly. This technique is also totally free from pollution.
6. Bio Composting In order to increase production, we have started using chemical fertilisers which
are adversely affecting the waterbodies, ground water system, etc. But again farmers in large
numbers have started using organic fertilisers for production.
In some parts, cattles are maintained only because their waste prouction is very useful in form of
fertiliser. Earthworm can convert organic matter into compost faster than the normal composting
process.
7. Mini-Hydel Plants Mountainous regions have streams every where. Most of such streams are
perennial. Mini-hydel plants use the energy of such streams to move small turbines which generate
electricity. Such power plants are more or less environment friendly.
8. Traditional Knowledge and Practices Traditionally, Indian people have been close to their
environment. If we look back at our agriculture system, healthcare system, housing, transport, etc
we find that all practices have been environment friendly. But in recent years, we have been moving
away from these practices. This has caused large scale damage to our environment.
During older times, we used Ayurveda, Unani, Tibetan and Folk systems for the treatments but now
we are ignoring the traditional system and we are moving towards the western system. Not only
these products were environment friendly but they are free from side effects too.

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9. Biopest Control With the advent of Green Revolution, the country entered into the use of
chemical pesticides to produce more which laid the adverse impacts on soil, water bodies, milk,
meat and fishes. To meet this challenge, better methods of pest control should be brought. One step
is pesticides based on plants like neem. Even many animals also help in controlling pests like snakes,
peacocks, etc.
Comparative Development Experience of India with its Neighbours

Chapter 10
Introduction
With the unfolding of the globalisation process, developing countries are keen to understand the
developmental processes pursued by their neighbours as they face competition from developed
nations as also amongst themselves.
Foreign Direct
Investment It is much larger compared to India and Pakistan, and a much stronger driver of growth.
SEZs (Special Economic Zones) policy of China is of central significance inducing FDI. SEZs are offering
robust infrastructural facilities for FDI.
Demographic Profile
Both for India and China, large size of population is a hindrance in the process of growth, as it
requires a huge amount of ‘maintenance investment’.
Human Development Some important parameters of human development are as these
 Life expectancy-higher the better.
 Adult literacy rate-higher the better.
 Infant mortality rate-lower the better.
 Maternal mortality rate-lower the better.
 Percentage of population having access to improved water sources-higher the better.
 Percentage of undernourished population-lower the better.
With a view to accelerating the pace of growth, different countries are forming regional and global
economic grouping based on common agreements of bilateral relations. e.g., SAARC, EU, ASEAN, G-
8, G-20.
Common Success Story of India and Pakistan
 A substantial rise in GDP per capita.
 Self-sufficiency in food production.
 Dualistic nature of the economy is gradually declining.
 Considerable reduction in the incidence of poverty.
Common Failures of India and Pakistan

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 Relatively slow pace of GDP growth, compared with China.
 Poor perfomance in HDI ranking.
 Dismal Fiscal management.
 Political survival of a dominating issue rather than good governance.
Sex Ratio Sex ratio is found to be low in all three countries pointing to social backwardness, where
people hold high preference for a son in the family.
This chapter will not be examined. Open Text Based Assessment (OTBA) will be based on this
chapter.
Nations are also eager to know and understand about the developmental process pursued by their
neighbouring nations. It allows them to comprehend their strengths and weaknesses. In the process
of globalisation, it is essential for every nation to compete with developed countries.
In this chapter, we are comparing the developmental strategies pursued by India with its
neighbouring economies-Pakistan and China. This will help in understanding where do we stand
today in comparison to others.
Development Strategies of India, China and Pakistan

India, China, Pakistan have many similarities in their development strategies which are as follows
 India, Pakistan and China have started towards their developmental path at the same time.
India and Pakistan became independent nations in 1947. While Peoples Republic of China
was established in 1949.
 All the three countries had started planning their development strategies in similar ways.
India announced its Five Year Plan in 1951-56, while ’ Pakistan announced its first Five Year
Plan in 1956, which is called Medium Term plan. China announced its First Five Year Plan in
1953.
 India and Pakistan adopted similar strategies such as creating a large public sector and
raising public expenditure on social development.
 Till the 1980s, all the three countries had similar growth rates and per capita incomes.
 Economic reforms took place in all the three countries. Reforms started in India in 1991, in
China in 1978 and in Pakistan in 1988.
Development Strategies of India

Some of the prominent strategies of India are discussed below
1. Sound Trade System India was a country which had the history of closed trade. Because of this
historical background; there is a critical challenge for India in order to make a new policy which can
support the new open trade system. This new reform in economies of India has been introduced and
accelerates the economic growth of India.
2. Reduction in Poverty India has adopted several poverty alleviation programmes to reduce poverty
in India. -This would help in increasing per capita income, rise in nutrition level of poors and there is
a subsequent fall in percentage of absolute poor in some states.

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3. Rural Development Under this strategy, India adopted various measures for the development of
areas that are lagging behind in the overall development of village economy.
4. Employment Generation Several economic reforms were initiated to generate employment in the
country and their aim is to provide gainful self-employment and skilled wage employment
opportunities.
Development Strategies of China

After the establishment of People’s Republic of China under one party rule, all the critical sectors of
the economy, enterprises and lands owned and operated by individuals were brought under
government control.
Certain development strategies of China are discussed below
 Great Leap Forward (GLF) This campaign initiated in 1958 aimed at industrialising the
country on a massive scale. People were encouraged to set up industries in their backyards.
In rural areas, communes were started. Under the commune system, people collectively
cultivated lands.
 Great Proletarian Cultural Revolution (1966-76) In 1965, Mao Tse Tung started a cultural
revolution on a large scale. In this revolution, students and professionals were sent to work
and learn from the country side. Unlike GLF, the cultural revolution did not have an explicit
economic rationale.
 1978 Reforms Since 1978, China began to introduce many reforms in phases. The reforms
were initiated in agriculture, foreign trade and investment sector. In agriculture, lands were
divided into small plots which were allocated to individual households. They were allowed to
keep all income from the land after paying taxes.
In later phase, reforms were initiated in industrial sector. All enterprises which were owned
and operated by local collectives in particular, were allowed to produce goods.
At this stage, enterprises owned by government (known as State Board Enterprises – SOEs), in India
we call them public sector enterprises were made to face competition. In reform, prices were fixed
in two ways, i.e., farmers and industrial units were required to buy and sell fixed quantities of inputs
and outputs on the basis of prices fixed by the government and the rest were purchased and sold at
market prices.
Over the years, as production increased, the proportion of goods or inputs transacted in the market
also increased. The goal of Chinese economic reforms was to generate sufficient surplus to finance
the modernisation of the mainland Chinese economy. In order to attract foreign investors, Special
Economic Zones (SEZs) were set up.
Development Strategies of Pakistan

The development strategies of Pakistan are summarised below
 Mixed Economy Pakistan follows a mixed economy system where both public and private
sectors co-existed.
 Import Substitution Pakistan adopted a regulatory policy framework in the late 1950s and
1960s for import industrialisation. The -policy combined tariff protection for manufacturing
of consumer goods together with direct import controls on competing imports.

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 Green Revolution This was introduced to increase the productivity and self sufficiency in
food. This increased the output of foodgrains. This had changed the agrarian structure
dramatically. In 1970’s nationalisation of capital goods took place. Pakistan shifted its policy
orientation in 1970’s and 1980’s when private sector got encouragement.
During this period, Pakistan received financial support from Western. This helped the country in
stimulating economic growth. Government also offered incentives to private sector. This had a
created climate for new investments. And in 1988 certain reforms were also initiated in the country.
Success and Failure of Strategies

The development strategies brought structural reforms in China, India and Pakistan. Follow the
description of their success and failure one by one.
Success of Structural Reforms in China
The success of structural reforms in China are
 There was existence of infrastructure in the areas of education and health and land reforms.
 There was decentralised planning and existence of small enterprise.
 Through the commune system, there was more equitable distribution of foodgrains.
 There was extension of basic health services in rural areas.
Failures of Structural Reforms in China

The failures of structural reforms in China are
 There was slow pace of growth and lack of modernisation in the Chinese economy under the
Maoist rule.
 Maoist vision of economic development based on decentralisation, self sufficiency and

shunning of foreign technology had failed.
 Despite of extensive land reforms, collectivisation, the great leap forward and other
initiatives, the per capita gain output in 1978 was the same as it was in the mid-1950s.
China has an Edge Over India

The Chinese reform process began more comprehensively during the 80s, when India was in the
mid-stream of slow growth process.
Rural poverty in China declined by 85% during the period 1978 to 1989. In India, it declined only by
50% during this period, Global exposure of the economy has been far more wider in China than in
India. China’s export-driven manufacturing has recorded on exponential growth, while India
continues to be only a marginal player in the international markets.
Common Success of Structural Reforms in India and Pakistan

The common success of structural reforms in India and Pakistan are
 Both India and Pakistan have succeeded in more than doubling their per capita incomes
inspite of high growth rate of population.
 The incidence of poverty has also been reduced significantly. However, the level of poverty
is lower in Pakistan.

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 Both the countries have achieved self-sufficiency in the production of food.
 Both the countries have succeeded in developing their service and industry sectors at a fast
rate.
 The use of modern technology is improving in both the countries.
Common Failures of Structural Reforms in India and Pakistan

The common failures of structural reforms in India and Pakistan are
 Growth rate of GDP and its sectoral constituents have fallen in 1990’s.
 Poverty and unemployment are still areas of major concerns in both the countries.
Areas Where Pakistan has an Edge Over India

Starting from almost the same level as India, Pakistan has achieved better results with regards to
 Migration of workforce from agriculture to industry,
 Migration of people from rural to urban areas.
 Access to improved water sources.
 Reduction in below poverty line population.
Areas where India has an Edge Over Pakistan

There is little doubt that, in the area of skilled manpower and research and development
institutions. India is better placed than Pakistan. Indian scientists excel in the areas of defence
technology, space research, electronics and avionics, genetics, telecommunications, etc. The number
of Ph.Ds produced by India in science and engineering every year (about 5000) is higher than the
entire stock of Ph.Ds in Pakistan. Issues of health facilities in general and infant mortality in
particular are better addressed in India.
Comparative Study
With Respect to Demographic Indicators, GDP and HDI .
I. Demographic Indicators
We shall compare some demographic indicators of India, China and Pakistan
 The population of Pakistan is very small and accounts for roughly about one-tenth of China
or India. Though China is the largest nation and geographically occupies the largest area
among the three nations, its density is the lowest.
 One child norm was introduced in China in late 1970’s to check the problem of population
growth. This measure led to decline in the sex ratio. Although sex ratio is biased against
females in all three countries, in recent times, all three countries are trying to adopt various
measures to improve the situation.
After few decades there will be more elderly people in proportion to young people due to
one child norm.
 The fertility rate is low in China and very high in Pakistan.
 Urbanisation is high in both Pakistan and China.

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II. Gross Domestic Product and Sectors

According to the latest data available, we find
(i) China has the second largest GDP (PPP) of US$ 10.1 trillion whereas, India’s GDP (PPP) is US $ 4.2
trillion and Pakistan’s GDP (PPP) is 0.47 trillion US$; roughly about 10% of India’s GDP.
(ii) In 1980’s, Pakistan was ahead of India, China was having double digit growth and India was at the
bottom.
Source Key indicators for Asia and Pacific 2011, Asian Development Bank, Phillipines
(iii) In 2000-10 there is a marginal decline in India and Chinas growth rates whereas Pakistan met
with drastic decline in 4.7%. The reform processes introduced in 1988 in Pakistan and political
instability are reasons behind this trend.
(iv) China and Pakistan have more proportion of urban people than India.
(v) In China, due to topographic and climatic conditions, the area suitable for cultivation is relatively
small-only about 10% of its total land area. The total cultivable area in China accounts for 40% of the
cultivable area in India.
(vi) Until the 1980s, more than 80% of the people in China were dependent on farming as their sole
source of livelihood.
(vii) The government encouraged people to leave their fields and pursue other activities such as
handicrafts, commerce and transport.
(viii) In 2008, with 40% of its workforce engaged in agriculture, its contribution to GDP in China is
10%.
(ix) In both India and Pakistan, the contribution of agriculture to GDP was at 19 and 21%
respectively. But the proportion of workforce that works in this sector is more in India. In Pakistan,
about 45% of people work in agriculture whereas in India it is 56%.
(x) The sectoral share of output and employment also shows that in all the three economies, the

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industry and service sectors have less proportion to workforce but contribute more in terms of
output.
(xi) In China, manufacturing contributes the highest to GDP at 47% whereas in India and Pakistan, it
is the service sector which contributes the highest. In both these countries, service sector accounts
for more than 50% of GDP. In the normal course of development, countries first shift their
employment and output from agriculture to manufacturing and then to services. This is what, is
happening in China.
The proportion of workforce engaged in manufacturing in India and Pakistan were low at 49 and
20% respectively.
(xii) The contribution of industries to GDP is also just equal to or marginally higher than the output
from agriculture.
In India and Pakistan, the shift is taking place directly to the service sector.
(xiii) Thus, in both India and Pakistan, the service sector is emerging as a major player of
development. It contributes more to GDP and, at the same time, emerges as a prospective
employer.
(xiv) In the 1980s India, China and Pakistan employed 17, 12 and 27% of its workforce in the service
sector respectively. In 2008-10 it has reached the level of 25, 33 and 35% respectively.
III. Human Development Indicator

India, China and Pakistan have performed in some of the selected indicators of human development.
Some Selected Indicators of Human Development, 2009-10
Source Human Development Report 2011 and World Development Indicators (www.worldbank.org)
From the data we would be able to conclude
 China is moving ahead of both India and Pakistan in terms of indicators of human
development.
 Pakistan is ahead of India in reducing proportion of people below the poverty line and also
its performance in education, sanitation and access to water is better than that of India.
 In China, for one lakh births, only 38 women die whereas, in India 230 women die and in
Pakistan 260 women die.

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 India is in the worst scenario as compared to the other two countries with respect to access
to improved sanitation and clean water.
Human Development Index (HPI)

HDI includes quantitative aspects of per capital, GDP and the quality aspects of performance in.
health and education. It is an average of life expectancy index, education index and GDP index.

NCERT Class 12 Indian Macro Economics Part 1/3 –
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This PDF contains summary of chapter 1-4

Macro-economics class 12
Introduction to Macroeconomics and its Concepts – Chapter 1

Introduction And Structure Of MacroEconomics:
1. Macroeconomics is the part of economic theory that studies the economy as a whole, such as
national income, aggregate employment, general price level, aggregate consumption, aggregate
investment, etc. Its main instruments are aggregate demand and aggregate supply. It is also called
the ‘Income Theory’ or ‘Employment Theory’.
2. Structure of macro economy: As we know, Macroeconomics is concerned with economic

problems at the level of an economy as a whole. Structure of Macroeconomics implies study of
different sectors of the economy.
An economy may be divided into different sectors depending on the nature of study.
(a) Producer sector engaged in the production of goods and services.
(b) Household sector engaged in the consumption of goods and services.
Note: Households are taken as the owners of factors of production.
(c) The government sector engaged in activities like taxation and subsidies
(d) Rest of the world sector engaged in exports and imports.
(e) Financial sector (or financial system) engaged in the activity of borrowing and lending.
3. Circular flow of income.

It refers to flow of money, income or the flow of goods and services across different sectors of the
economy in a circular form.
There are two types of Circular flow:
(a) Real/Product/Physical Flow
(b) Money/Monetary/Nominal Flow
(a) Real flow
(i) Real flow of income implies the flow of factor services from the household sector to the producing
sector and corresponding flow of goods and services from the producing sector to the household
sector.
(ii) Let us consider a simple economy consisting only of 2 sectors:
• Producer Sector.
• Household Sector.

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(iii) These two sectors are dependent on each other in the following ways:
• Producers supply goods and services to the households.

• Household (as the owners of factors of production) supplies factors of production (or factor
services) to the producers.
This interdependence can be explained with the help of the diagram given here.
(b) Money Flow

(i) Money flow refers to the flow of factor income, as rent, interest, profit and wages from the
producing sector to the household sector as monetary rewards for their factor services as shown in
the flowchart.
(ii) The households spend their incomes on the goods and services produced by the producing
sector. Accordingly, money flows back to the producing sector as household expenditure as shown in
the flowchart.
Circular Flow Of Income In Two Sector Model:

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The following assumptions with regard to a simple economy with only two sector of economics
activity are:
(i) There are only two sectors in the economy; that is, household and firms.
(ii) Household supply factor services to firms.
(iii) Firms hire factor services from Households.
(iv) Households spend their entire income on consumption.

(v) Firms sell all that is produced to the households.
(vi) There is no government or foreign trade.
Such an economy described above has two types of markets.
(i) Market for goods and services that is product market.
(ii) Market for factors of production, factor market.
As a result we can derive the following, in the case of our simple economy:
(i) Total production of goods and services by firms = Total consumption of goods and services by
Household Sector.
(ii) Factor Payments by Firms = Factor Incomes of Household Sector.
(iii) Consumption expenditure of Household sector = Income of Firm.
(iv) Hence, Real flows of production and consumption of Firms and households = Money flows of
income and expenditure of Firms and Households.
Phases of Circular Flow:
There are three types of phases of Circular flow.

(i) Production Phase:
• It deals with the production of goods and services by the producer sector.
• If we study it in term of the quantity of goods and services produced, it is a Real Flow. But, it is a
Money flow, if we study it in terms of the market value of the goods produced.
(ii) Distribution Phase: It means the flow of income in the form of rent, interest, profit and wages,
paid by producer sector to the household sector. It is a Money Flow.
(iii) Disposition Phase:
• Disposition means expenditure made. This phase deals with expenditure on the purchase of goods
and services by households and other sectors.
• This is a Money Flow from other sectors to the producer sector. These phases are illustrated in the

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figure given here.
Some Basic Concepts Of MacroEconomics
1. Factor Income
(a) Income earned by factor of production by rendering their productive services in the production
process is known as Factor Income.
(b) It is a bilateral [Two-Sided] Concept.
(c) It is included in National Income as it contribute something in the flow of goods and services.
Examples: Rent, interest, wages and profit.
2. Transfer Income
(a) Income received without rendering any productive services is known as transfer income.
(b) It is a unilateral [one-sided] concept.
(c) It is not included in National Income as it does not contribute anything in the flow of goods and
services.
Examples: Old Age Pension, Scholarship, Unemployment allowance.
There are two types of transfers:
(i) Current transfers (ii) Capital transfers
(i) Current Transfers
• Transfers made from the income of the payer and added to the income of the recipient (who
receive) for consumption expenditure are called current transfers.
• It is recurring or regular in nature.
For example, scholarships, gifts, old age pension, etc.
(ii) Capital Transfers
• Capital transfers are defined as transfers in cash and in kind for the purpose of investment to
recipients, made out of the wealth or saving of the donor.
• It is non-recurring or irregular in nature.
For example, investment grant, capital gains tax, war damages, etc.

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3. Stock
(a) Any economic variable which is calculated at a particular point of time is known as stock.
(b) It is static in nature, i.e., it do not change.
(c) There is no time dimension in stock variables.
For example, Distance, Amount of Money, Money Supply, Water in Tank, etc.
4. Flow
(a) Any economic variable which is calculated during a period of time is known as flow.
(b) It is dynamic in nature, i.e., it can be changed.
(c) There is time dimension in flow variables.
For example, Speed, Spending of Money, Water in River, Exports, Imports, etc.
5. Economic territory or Domestic Territory:

(a) According to the United Nations, economic territory is the geographical territory administered by
a government within which persons, goods and capital circulate freely.
(b) The above definition is based on the criterion “freedom of circulation of persons, goods and
capital”. Clearly, those parts of the political frontiers (or boundaries) of a country where the
government of that country does not enjoy the above “freedom” are not to be included in economic
territory of that country.
(i) One example is embassies. Government of India does not enjoy the above freedom in the foreign
embassies located within India. So, these are not treated as a part of economic territory of India.
They are treated as part of the economic territories of their respective countries. For example the
U.S. embassy in India is a part of economic territory of the U.S.A. Similarly, the Indian embassy in
Washington is a part of economic territory of India.
(ii) International organizations like UNO, WHO, etc. located within the geographical boundaries of a
country.
(iii) In layman terms, the domestic territory of a nation is understood to be the territory lying within
the political frontiers (or boundaries) of a country. But in national income accounting, the term
domestic territory is used in a wider sense. Based on ‘freedom’ criterion, the scope of economic
territory is defined to cover:
• Ships and aircrafts owned and operated by normal residents between two or more countries. For
example, Indian Ships moving between china and India
i regularly are part of domestic territory of India. Similarly, planes operated by Air India between
Russia and Japan are part of the domestic territory of India. Similarly, planes operated by Malaysian
Airlines between India and Japan are a part of the domestic territory of Malaysia.
• Fishing vessels, oil and natural gas rigs and floating platforms operated by the residents of a
country in the international waters where they have exclusive
rights of operation. For example, fishing boats operated by Indian fishermen in international waters
of Indian Ocean will be considered a part of domestic territory of India.
• Embassies, consulates and military establishments of a country located abroad. For example,
Indian Embassy in Russia is a part of the domestic territory of India. ‘Consulate’ is an office or
building used by consul (an officer commissioned by the government to reside in a foreign country

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to promote the interest of the country to which he belongs).
6. Citizenship
(a) Citizenship is basically a legal concept based on the place of birth of the person or some legal
provisions allowing a person to become a citizen.
(b) It means, Indian citizenship can arise in two ways:
(i) When a person is born in India, he acquires automatic citizenship of India.
(ii) A person born outside India applies for citizenship and Indian Law allows him to become Indian
Citizen.
7. Normal Resident/Resident
(a) A Normal resident, whether a person or an institution, is one whose centre of economic interest
lies in the economic territory of the country in which he lives.
(b) The centre of economic interest implies in two things:

(i) The resident lives or is located within the economic territory for more than one year and
(ii) The resident carries out the basic economic activities of earnings, spending and accumulation
from that location
(c) There is a difference between the terms normal resident (resident) and citizen (or national).
(i) A person becomes a national of a country because he was born in the country or on the basis of
some other legal criterion.
(ii) A person is treated resident of a country on the basis of economic criterion.
(iii) It is not necessary that a resident must also be the national of that country. Even foreigners can
be the residents if they pass the above stated economic criterion.
For example, a large number of Indian nationals have settled in U.S.A., England,
Australia, etc. as residents (and not as nationals) of these countries. For India, they
are Non-resident Indians (NRI) but continue to remain Indian nationals.
Following are not included under the category of Normal residents:

(i) Foreign visitors in the country for such purposes as recreation, holidays, medical treatment, study
tours, conferences, sports events, business etc. (they are supposed to stay in the host country for
less than one year. In case they continue to stay for one year or more in the host country, they will
be treated as normal residents of the host country).
(ii) Crew members of foreign vessels, commercial travelers and seasonal workers in, the country
(Foreign workers who work part of the year in the country in response to the varying seasonal
demand for labour and return to their households and border workers who regularly cross the
frontier each day or somewhat less regularly, (i.e. each week) to work in the neighboring country are
the normal residents of their own countries. Example: Nepal.
(iii) Officials, diplomats and members of the armed forces of a foreign country.
(iv) International bodies like World Bank, World Health Organization or International Monetary Fund
are not considered residents of the country in which these organizations operate but are treated as
residents of international territory. However, the staffs of these bodies are treated as normal
residents of the country in which the international body operates. For example, international body

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like World Health Organization located in India is not normal resident of India but Americans
working in its office for more than a year will be treated as normal residents of India.
(v) Foreigners who are the employees of non-resident enterprises and who have come to the
country for purposes of installing machinery or equipment purchased from their employers. (They
are supposed to stay for less than one year. In case they continue to stay for one year or more, they
will be treated as normal residents of the host country).
8. Final Goods
(a) These are the goods that are used for:
(i) Personal Consumption (like bread purchased by consumer household), or (if) Investment Or
Capital Formation (like building, machinery purchased by a firm)
(b) In other words, final goods are those, which require no further processing and are available in an
economy for consumption purpose or investment. These give direct satisfaction to a consumer.
(c) According to production boundary, if a good crosses the imaginary line around the production
unit and reaches to final consumer or investment made by a producer within the imaginary line of
production unit is known as the final good.
9. Intermediate Goods
(a) These are the goods that are used for:
(i) Further processing (like sugar used for making sweets); or
(ii) Resale in the same year (If car purchased by car dealer for resale).
(b) In other words, intermediate goods are the ones, which require further processing and are not
available in an economy for the purpose of consumption. These goods give indirect satisfaction to a
consumer.
(c) According to the production boundary, if a good does not cross the imaginary line around the
production unit and reaches to other firm within the production boundary, is known as intermediate
good.
10. Point to Remember for Final Goods and Intermediate Goods

(a) Basis of Classification: If a good is used for:
(i) Personal consumption; or (ii) Investment
Then it is a final good, whereas, if a good is used for:
(i) Further processing; or
(ii) Resale in the same year, then it is known as intermediate good.
Thus, the basis of classification between these two goods is not the commodity itself, but the use
made of it.
For example, bread used by a consumer household is a final goods, but the same used by a bakery
for making a sandwich is a intermediate goods.
(b) Production Boundary
(i) Production boundary plays a vital role to differentiate between intermediate and final goods. The
production boundary is the imaginary line around the production unit.
(ii) According to the production boundary, if a good crosses the imaginary line around the
production unit and reaches to final consumer or investment made by a producer within the
imaginary line of production unit, it is known as final good.

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As against it, if a good does not cross the imaginary line around the production unit and reaches to
other firm within the production boundary, it is known as intermediate good.
In the given diagram, there are 3 production units. The thick border drawn around these three units
is the Production Boundary.
Within this limit, wheat and flour are intermediate goods.
Bread is final good as it lies outside the purview of production boundary.
11. Important Points about

Intermediate Goods: As far as intermediate consumption of general government is concerned, it’s
purchased goods ranges from ordinary writing paper, pencils and pens to sophisticated fighter
aircrafts. The goods and services purchased include both durable goods and non-durable goods and
services. The intermediate consumption of the general government includes the following items:
(a) Value of all Non-durable Goods and Services such as petrol, electricity, lubricants, stationery,
soaps, towels etc. including repair and maintenance of capital stock: Non-durable goods and services
are those which have an expected life time of use of less than one year. Repair and maintenance of
capital stock mean expenditure incurred for maintaining fixed assets and keep them in good working
order. This includes the expenditure on new parts of the fixed assets. The life of the new parts may
be around one year or slightly more and the value should be relatively small. For example,
replacement of the tyres of a truck is an intermediate consumption, but not the replacement of its
engine.
(b) Expenditure on Military Equipment missiles, rockets, bombs, warships, submarines, military
aircrafts, tanks, missile carriers and rocket-launchers etc. whose function is to release weapons.
Military vehicles and light weapons.
(c) Value of goods received from foreign governments in form of gifts or as transfers. Examples of
these transfers in kind are food, clothing, medicines, vegetable oils, butter, toys sent by the
government of one country to the other in times of natural calamities or as a token of goodwill and

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friendship between two countries.
However, the goods received for distribution to consumer households without renovation or
alternation should not be included in intermediate consumption as these goods go into the final
consumption of consumer households.
(d) As we know, intermediate goods are purchased by one production unit from another production
unit within the production boundary.
However, it’s not necessary that all purchases by one production unit from other production units
are intermediate purchases. For example, purchases of building, machinery, etc. are not
intermediate purchases (if they are not meant for resale in the same year). Rather, these purchases
are meant for investment and are termed as final product.
(e) Research and development

• Commodities consumed. In research and exploratory activities (like oil exploration in different
parts of India by the Oil and Natural Gas Commission) or improving the technology of a particular
production process.
• Commodities used in basic scientific research.
• Advertisements, market research and public relationship meant for improving the goodwill of the
business enterprises.
• Business expenses of the employees on tours and entertainment.
12. Final goods can be classified into two groups: Consumption Goods and Capital Goods.
(a) Consumption Goods:
(i) Meaning: Consumption goods are those which satisfy the wants of the consumers directly. For
example, cars, television sets, bread, furniture, air-conditioners, etc.
Categories of Consumption Goods:

• Durable goods: These goods have an expected life time of several years and of relatively high
value. They are motor cars, refrigerators, television sets, washing machines, air-conditioners, kitchen
equipments, computers, communication equipments etc.
• Semi-durable goods: These goods have an expected life time of use of one year or slightly more.
They are not of relatively great value. Examples are clothing, furniture, electrical appliances like fans,
electric irons, hot plates and crockery.
• Non-durable goods: Goods which can not be used again and again, i.e., they lose their identity in a
single act of consumption are known as non-durable goods. These are foodgrains, milk and milk
products, edible oils, beverages, vegetables, tobacco and other food articles.
• Services: Services are non-material goods which satisfy the human wants directly. They cannot be
seen or touched, i.e., they are intangible in nature. These are medical care, transport and
communications, education, domestic services rendered by hired servants, etc.
(b) Capital Goods:
(i) Capital goods are defined as all goods produced for use in future productive processes.
For example, all the durable goods like cars, trucks, refrigerators, buildings, aircrafts,
air-fields and submarines used to produce goods and are ready for sale in the market
are a part of capital goods.
(ii) Stocks of raw materials, semi-finished and finished goods lying with the producers at the end of

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an accounting year are also a part of capital goods.
(iii) Some more examples of capital goods are machinery, equipment, roads and bridges.
(iv) These goods require repair or replacement over time as their value depreciate over a period of
time.
13. Differentiate between final goods and intermediate goods on the basis of end used
Classification of goods and services with example.
Words that Matter
1. Circular flow of income: It refers to flow of money income or the flow of goods and services
across different sectors of the economy in a circular form.
2. Money flow (nominal flow): Money flow refers to the flow of factor income, as rent, interest,
profit and wages from the producing sector to the household sector as monetary rewards for their
factor services.
3. Real flow or physical flow: Real flow of income implies the flow of factor services from the
household sector to the producing sector and corresponding flow of goods and services from the
producing sector to the household sector.
4. Factor income: Income earned by factor of production by rendering their productive services in
the production process is known as Factor Income.
5. Transfer income: Income received without rendering any productive services is known as Transfer
Income.
6. Current transfers: Transfers made from the current income of the payer and added to the current
income of the recipient (who receive) for consumption expenditure are called current transfers.
7. Capital transfers: Capital transfers are defined as transfers in cash and in kind for the purpose of
investment to recipient made out of the wealth or saving of a donor.

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8. Final goods: These are those which are used for:
(a) Personal consumption (like bread purchased by consumer household), or
(b) Investment or capital formation (like building, machinery purchased by a firm)
9. Intermediate goods: These are those, which are used for:
(a) Further processing (like sugar used for making sweets), or
(b) Resale in the same year (If car purchased by a car dealer for resale).
10. Consumption goods: Consumption goods are those goods which satisfy the wants of consumers
directly.
11. Capital goods: Capital goods are defined as all goods produced for use in future
productive processes.
National Income and Related Aggregates – Chapter 2

Introduction:
This is a numerical based chapter to calculate national income by different methods (Income,
expenditure and value added method, their steps and precautions). Numerically to determine
private income, personal income, personal disposable income, National disposable income (net and
gross) and their differences.
Gross And Net:
1. Gross means the value of product including depreciation. Net means the value of product
excluding depreciation.
2. The difference between these two terms is depreciation.
3. Where depreciation is the expected decrease in the value of fixed capital assets due to its general
use.
4. It is the result of production process.
Gross = Net + Depreciation Net = Gross – Depreciation
Note: Other names of depreciation are:
(a) Consumption of fixed capital (b) Capital consumption allowance
(c) Current replacement cost.
National Income and Domestic Income:
1. National Income refers to net money value of all the final goods and services produced by the
normal residents of a country during an accounting year.
2. Domestic Income refers to a total factor incomes earned by the factor of production within the
domestic territory of a country during an accounting year.
3. The difference between these two incomes is Net Factor Income from abroad (NFIA), which is
included in National Income (NY) and excluded from Domestic Income (DY).
4. Where NFIA is the difference between income earned by normal residents from rest of the world
and similar payments made to Non residents within the domestic territory. NFIA = Income earned by
Residents from rest of the world (ROW) – Payments to
Non-Residents within Domestic territory.
NY = DY + NFIA DY = NY – NFIA
Note:
Case I: Income paid to abroad is given, then to make NFIA inverse the sign. For this put income from

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abroad 0.
Example, Income paid to abroad =100
NFIA = Income from Abroad – Income paid to abroad
= 0 – 100 = -100 and vice versa.
Case II: Income from abroad is given, then NFIA = Income from abroad. For this put income paid to
abroad 0.
Example, Income from abroad =100
NFIA = Income from Abroad- Income paid to abroad = 100 – 0 = 100 and vice versa Case III: If income
from abroad and income paid to abroad both are given, then NFIA is the difference between them,
Example, Income from abroad =100 Income paid to abroad =120
NFIA = Income from Abroad- Income paid to abroad = 100 – 120 = (-) 20 and vice versa Case IV: Net
factor income to abroad be given, then to make NFIA inverse the sign.
Net factor income paid to abroad (NFPA) = income to abroad – income from abroad.
Example,
(i) Net Factor Income to abroad (NFPA = 100). In this NFPA is positive, which means that income to
abroad is greater than income from abroad, which makes,
NFIA = (-)100
(ii) Net Factor Income to abroad [NFPA = (-)100]. In this NFPA is negative, which
means that income to abroad is less than income from abroad, which makes,
NFIA = (+) 100
Factor Cost and Market Price:
1. Factor Cost (FC): It refers to amount paid to factors of production for their contribution in the
production process.
2. Market Price (MP): It refers to the price at which product is actually sold in the market. The
difference between these two is Net Indirect Taxes (NIT) which is included in MP and excluded from
FC. Where NIT is the difference between indirect taxes and subsidies.
NIT = IT – Subsidies
Where, Indirect Taxes are the taxes which are levied by the government on production and sale of
commodity. Sales tax, excise duty, custom duty, etc. are some of the indirect taxes, and subsidies are
the cash grants given by the government to the enterprises to encourage production of certain
commodities, to promote exports or to sell goods at prices lower than the free market Price. In India,
LPG cylinder is sold at subsidized rates.
MP = FC + NIT (Indirect Taxes – Subsidies)
FC = MP – NIT (Indirect Taxes – Subsidies)
Note:
Case I: Subsidy is given, then to make NIT inverse the sign. For this put Indirect tax = 0.
Example, Subsidy = 100
NIT = Indirect Tax – subsidies = 0-100 = (-) 100 and vice versa
Case II: IT is given, then NIT = IT (For this put subsidy 0)
Example, IT = 100
NIT = Indirect Tax – subsidies = 100-0 = 100 and vice versa
Case III: If IT and subsidy both are given, then NIT is the difference.
Example, IT = 100
Subsidy = 80
NIT = Indirect Tax – subsidies = 100-80 = 20

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Case IV: If sales tax and excise duty are given, then by adding both, we get indirect taxes.
Example, Sales tax = Rs. 1000
Excise duty = Rs.1000 Subsidy = Rs.500
NIT = Indirect Tax(sales tax + excise duty)-subsidies = (1000 + 1000) – 500 = 1500
Case V: If Net subsidy is given, then to convert it into Net Indirect tax, we have to inverse the sign,
Net Subsidy = Subsidy – Indirect Tax
Example,
(a) Net Subsidy = 100. In this, Net subsidy is positive, which means that indirect tax is less than
subsidy which makes,
NIT = (-) 100
(b) Net Subsidy = (-) 100. In this Net subsidy is negative which means that Indirect tax is greater than
subsidy which makes,
NIT = 100
Case VI: If Net subsidy and Indirect tax both are given, then we have to ignore Indirect Tax and
inverse the sign of Net subsidy.
Example, Net Subsidy = 100
Indirect Tax = 20 Net Indirect Tax = (-) 100 Numeribals Illustration on Basic Concept
Aggregate Of National Income
1. Gross Domestic Product at Market Price (GDP MP ): GDPMP is defined as the gross market value of
the final goods and services produced within the domestic territory of a country during an
accounting year by all production units.
(a) ‘Gross’ in GDPMP signifies that depreciation is included, i.e., no provision has been made for
depreciation.
(b) ‘Domestic’ in GDPMP signifies that it includes all the final goods and services produced by all the
production units located within the economic territory (irrespective of the fact whether produced by
residents or non-residents).
(c) ‘Market Price’ in GDPMP signifies that indirect taxes are included and subsidies are excluded, i.e.,
it shows that Net Indirect Taxes (NIT) have been included.
(d) ‘Product’ in GDPMP signifies that only final goods and services have to be included and
intermediate goods should not be included to avoid the double counting.
2. Gross Domestic Product at Factor Cost ( GDPFC): GDPFC is defined as the gross factor value of the
final goods and services produced within the domestic territory of a country during an accounting
year by all production units excluding Net Indirect Tax.
GDPFC = GDPMP – Net Indirect Taxes
3. Net Domestic Product at Market Price (NDPMP ).

NDPMP is defined as the net market value of all the final goods and services produced within the
domestic territory of a country by its normal residents and non-residents during an accounting year.
NDPMP =GDPMP – Depreciation
4. Net Domestic Product at Factor Cost (NDPFC ).

NDPFC refers to a total factor income earned by the factor of production within the domestic
territory of a country during an accounting year.

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NDPFC = GDPMP – Depreciation – Net Indirect Taxes NDPFC is also known as Domestic Income or
Domestic factor income.
5. Gross National Product at Market Price (GNPMP).

GNPMP refers to market value of all the final goods and services produced by the normal residents of
a country during an accounting year.
GNPMP = GDPMP + Net factor income from abroad It must be noted that GNPMP can be less than
GDPMP when NFIA is negative. However, GNPMP will be more than GDPMP when NFIA is positive.
6. Gross National Product at Factor Cost (GDP FC ) or Gross National Income GNPFC refers to gross
factor value of all the final goods and services produced by the normal residents of a country during
an accounting year.
GDPFC = GNPMP – Net Indirect Taxes
7. Net National Product at Market Price (NNPMP ).

NNPMP refers to net market value of all the final goods and services produced by the normal
residents of a country during an accounting year.
NNPMP = GNPMP – Depreciation
8. Net National Product at Factor Cost (NNPFC ).

NNPFC refers to net money value of all the final goods and services produced by the normal residents
of a country during an accounting year.
NNPFC = GNPMP – Depreciation – Net Indirect Taxes It must be noted that NNPFC is also known as
National Income.
Real, Nominal Aggregates, Activities Excluded From GDP And Does GDP Measures Social Welfare:
1. National Income at Constant Price:

(a) If national income is calculated on the basis of base year price index, then it is known as National
income at constant price.
(b) It is also called Real National Income as it fluctuates due to the fluctuation in the flow of goods
and services and price remains constant.
2. National Income at Current Price:

(a) If National Income is calculated on the basis of current year price index, then it is known as
national income at current price.
(b) It is also called Monetary National Income as it fluctuates due to the fluctuation in the flow of
goods and services along with the price of the commodity.
3. GNP at current MP: When final goods and services included in GNP are valued at current MP, i.e.,
prices prevailing in the year for which GNP is being measured, it is called GNP at current MP or
Nominal GNP.

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4. GNP at constant MP: When final goods and services included in GNP are valued at constant
prices, i.e. prices of the base year, it is called GNP at constant MP or Real GNP.
5. GNP Deflator: GNP Deflator measures the average level of the prices of all the final goods and
services that are produced within the domestic territory of an economy including NFIA. GNP deflator
is measured as the ratio of nominal GNP to real GNP, multiplied by 100.
6. Green GNP: Green GNP refers to GNP adjusted for loss of value due to,
(a) Environmental degradation; and
(b) Depletion of natural resources on account of overall production activity in the
economy.
7. Activities excluded from GDPMP: The activities are as follows:

(a) Purely financial transactions: It may be of three types:
(i) Buying and selling of securities
(ii) Government Transfer payments
(iii) Private Transfer Payments
(i) Buying and selling of securities:

• In financial markets potential savers and investors buy and sell financial assets such as shares and
bonds.
• While someone buys a share, there is only a transfer of ownership right. It is a claim to ownership
of assets.
• Trading in financial instruments does not imply production of final goods and services. As such
these are not included in the GNP.
(ii) Government Transfer Payments:

• Transfer Payments are payments for which no goods and services are provided in exchange.
• • Pension payments employees social security measures, etc. are examples for
Government Transfer Payment as there is no production of final goods and services in response to
transfer Payment, transfer payments are not included in GNP.
(iii) Private Transfer Payments:

• Items such as pocket money given by parents to their children, elders gifting money to the young
ones are private transfer payments.
This is merely a transfer of money from one individual to another. Hence, this is not included in GNP.
(b) Transfer of used goods:
(i) GNP refers to the value of the final goods and services produced in a given year.
(ii) Hence, goods produced in the previous time period cannot be included in the GNP. For example,
Mr A sells his old bike to Mr B for rs. 30,000 on 25th April 2011 which was purchased by Mr A on 1st
March 2010 for Rs. 45,000. This transaction should not be included as it has already been included in
the 2010 GNP and if we again include it, then it will create the problem of double counting.

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(c) Non-market goods and services:
(i) Many final goods and services are not acquired through regular market transaction. Vegetables
can be grown in the backyard instead of buying them from the super market or an electrical fault can
be repaired by the house owner himself instead of hiring an electrician.
(ii) These are examples of Non-marketed goods and services that have been consumed with using
organized markets as GNP includes only those transactions that occur through market activities.
(d) Illegal Activities: Activities like gambling, black-marketing etc., should be excluded because all
unlawful activities are beyond the scope of NY and also because there is statistical problem of their
estimation.
(e) Leisure Time Activities: Activities like painting, growing of flowers in kitchen garden, etc. is not
included as their aim is not to earn money but to pass away free time in one’s hobby or
entertainment, again there is statistical problem of measuring their satisfaction derived in painting
or any other leisure activities.
8. Limitations of using GDP as an index of welfare of a country: There are many

reasons behind this. These are:
(a) Many goods and services contributing economic welfare are not included in GDP or Non-
Monetary exchanges:
(i) There are many goods and services which are left out of estimation of national income on account
of practical estimation difficulties e.g., services of housewives and other members, own account
production, etc.
(ii) These are left on account of non-availability of data and problem in valuation.
(iii) It is generally agreed that these items contribute to economic welfare.
(iv) So, if we depend only on GDP, we would be underestimating economic welfare.
(b) Externality:
(i) When the activities of somebody result in benefits or harms to others with no payment received
for the benefit and na payment made for the harm done, such benefits and harms are called
externalities.
(ii) Activities resulting in benefits to others are positive externalities and increase welfare; and those
resulting in harm to others are called negative externalities, and thus decrease welfare.
(iii) GDP does not take into account these externalities.
For example, construction of a flyover or a highway reduces transport cost and journey time of its
users who have not contributed anything towards its cost. Expenditure on construction is included in
GDP but not the positive externalities flowing from it. GDP and positive externalities both increase
welfare. Therefore, taking only GDP as an index of welfare understates welfare. It means that
welfare is much more than it is indicated by GDP.
(iv) Similarly, GDP also does not take into account negative externalities. For examples, factories
produce goods but at the same time create pollution of water and air. River Yamuna, now a drain, is
a living example. The pollution harms people. The factories are not required to pay anything for
harming people. Producing goods increases welfare but creating pollution reduces welfare.
Therefore, taking only GDP as an index of welfare overstates welfare. In this case, welfare is much
less than indicated by GDP.
(c) Change in the distribution of income (GDP) may affect welfare:
(i) All people do not earn the same amount of income. Some earn more and some earn less. In other
words, there is unequal distribution of income.
(ii) At the same time, it is also true that in the event of rise in ‘per capita real income’ all are not
better off equally. ‘Per capita’ is only an average. Income of some may rise by less and of some by

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more than the national average. In case of some it may even fall.
(iii) It means that the inequality in the distribution of income may increase or decrease.
(iv) If it increase it implies that rich become more rich and the poor become more poor.
(v) Utility of a rupee of income to the poor is more than to the rich. Suppose, the income of the poor
declines by one rupee and that of the rich increases by one rupee. In such a case, the decline in
welfare of the poor will be more than the increase in welfare of the rich.
(vi) Therefore, if the rise in per capita real income inequality increases, it may lead to a decline in
welfare (in the macro sense).
(d) All products may not contribute equally to economic welfare:
(i) GDP includes different types of products, like food articles, houses, clothes, police services,
military services, etc.
(ii) Some of these products contribute more to the welfare of the people, like food, clothes, houses,
etc. Other products like police services, military services etc. may comparatively contribute less and
may not directly affect the standard of living of the people.
(iii) Therefore, how much is the economic welfare would depend more on the types of goods and
services produced, and not simply how much is produced.
(iv) It means that if GDP rises, the increase in welfare may not be in the same proportion.
(e) Contribution of some products may be negative:
(i) GDP includes all final products whether it is milk or liquor.
(ii) Milk may provide both immediate and ultimate satisfaction to consumers. On the other hand,
liquor may provide some immediate satisfaction, but because of its harmful effects on health it may
lead to decline in welfare.
(iii) GDP include only the monetary values of the products and not their contribution to welfare.
(iv) Therefore, economic welfare depends not only on the volume of consumption but also on the
type or goods and services consumed.
Methods Of National Income And How To Determine National Income By Income Method And Its
Numericals, Steps And Precaution:
There are three methods of calculating national income.

These are:
(a) Income Method
(b) Expenditure Method
(c) Value Added Method/Product Method/Output Method
National Income determination under income method:
(a) “Production creates income”. If we want to calculate National Income by Income method, then
we have to add different factor incomes from the economy.
(b) The addition of all these factor incomes gives us the calculation near by the
National Income, i.e., Net Domestic Product at FC (NDPfc).
(c) Components of Income Method
1. Compensation Of Employees (COE)/Emoluments of employees: The amount

earned by employees from their employers, whether in cash or in kind or through any
other social security scheme is known as compensation of employees.
This is broadly divided into the following three components:
(a) Wages and Salaries payable in Cash:
(i) Wages and salaries receivable by the employees in respect of their work.
(ii) Special allowances for working overtime.

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(iiij Cost of travel to and from work, and car parking.
(iv) Bonuses
(v) Commissions, gratuities, tips, cost of living (i.e., dearness allowance paid in our country)
honorarium, vacation, sick leave allowance etc.
(vi) Pensions at the time of retirement (Deferred Wage): Pensions at the time of retirement are
related to factor services rendered by recipient prior to their retirement. It is also known as deferred
wage.
Any expenses incurred by the employees and thereafter reimbursed by the business enterprise
should be excluded from Compensation Of Employees (COE) as such expenses are part of
intermediate consumption of business enterprise.
(b) Wages and Salaries in Kind: Remuneration in kind consists of goods and services that are not
necessary for work and can be used by employees at their own discretion, for the satisfaction of
their needs or wants or those of other members of their households. It includes:
(i) Meals and drinks including those consumed when travelling for business.
(ii) Accommodation.
(iii) The services of vehicles or other durables provided for the personal use of the employees.
(iv) Goods and services produced as outputs from the employer’s own process of production such as
free travel for the employees of railways or airlines, or free coal for miners.
(v) Sports, recreation or holiday facilities for employees and their families.
(vi) Creches for children of employees.
(vii) Value of the interest foregone by employers when they provide loans to employees at reduced,
or even zero rates of interest for the purposes of buying houses, furniture or other goods and
services.
It should be kept in mind that it does not include any facilities which are necessary for work and in
which employees do not have any discretion.
For example, uniforms or other forms of special clothing to be used for work only. Examples are
uniforms for police, uniforms of drivers, uniforms for nurses in the hospital. It’s so because such
payments are intermediate consumption of business enterprises.
(c) Employers’ Contribution to Social Security Schemes: Employers’ make payments to social security
schemes like life insurance, causality insurance, pension schemes etc. For example, there is a
Contributory provident Fund Scheme for employees of educational institutions and public sector
undertakings. The contribution made by the employers for such schemes is a part of compensation
of employees.
The thing which has to be remembered is that, employers’ contribution towards social security
scheme should be included whereas employees’ contribution towards Social Security Scheme should
not be included as COE is that what the employer pays to employee and if anything borne by
employee himself should not be included under COE.
2. Operating Surplus: The CSO (Central Statistical Organization) has defined operating surplus as
“value of gross output less the sum of intermediate consumption, compensation of employees,
mixed income, depreciation and NIT.”
Operating Surplus = GVOMP – Intermediate consumption – COE – Mixed Income – Depreciation –
NIT
In other words, it is the sum of income from property and income from entrepreneurship. Operating
surplus have the following two components:
(a) Income from property: It is the income which has been arisen from rent, interest and royalty.
It is divided into three components:

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(i) Rent: The income arising from ownership of land and building is known as rent. It also includes
imputed rent. If a person living in his own house, then it is assumed in an economy that he is paying
rent to himself. This concept is known as imputed rent.
(ii) Royalty: Royalties are the payments made for the use of mineral deposits such as coal, oil, etc. or
for the use of patents, copyrights, trademarks, etc.
(iii) Interest: It is the amount earned for lending funds to the production units. It also includes
imputed interest of funds provided by entrepreneur. But interest income includes interest on loan
taken for productive services only.
The following categories of interest should not be included :
• Interest on national debt or interest paid by government on nation debt should not be included as
it is assumed that such interest is paid on loan taken for consumption purpose.
• Interest paid by one firm to another firm as it is already included in the profit of the firm which
pays it.
(b) Income from entrepreneurship: It is a return of entrepreneur after paying all the other factors of
production. It is of the following three types:
(i) Distributed Profit (Dividend): It is that part of total profit which is given to shareholders.
The thing to be noted here is that profit earned by one firm to another should not be included under
this head because it is already included in the profit of the firm which pays it.
(ii) Undistributed Profit (Saving of private corporate sector or Retained £arnings):
It is that part of total profit which is not given to shareholders and kept as a reserve for future
uncertainties.
(iii) Corporation Tax (Profit Tax): It is that part of total profit which is given by a firm to the
government as Tax.
The concept of operating surplus is applicable to all producing enterprises, whether they belong to
the private sector or to the government. The government enterprises also are expected to earn
reasonable rate of profit on the funds invested.
But, operating surplus does not arise in the general government sector as they produce goods and
services for the social welfare of the country and not for profit motive i.e., why rent, interest and
profit are zero in general government sector.
3. Mixed Income: Income of own account workers (like farmers, doctors, barbers, etc.) and
unincorporated enterprises (like small shopkeepers, repair shops) is known as mixed income. They
do not maintain proper accounts. They do not generally hire factor services from the market rather
use their own resources like land, labour, funds, etc. As the result of, it becomes difficult to classify
their income distinctly among rent, wages, interest and profit.
NDPFC Compensation of employees (COE) + Operating surplus (OS) + Mixed Income (MY)
Method for Calculating National Income By Income Method:
If we want to calculate National Income by Income method, we have to add different factor incomes
from the economy.
The addition of all these factor incomes gives us the calculation near by the National Income, i.e. Net
Domestic Product at FC (NDPFC).

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Important Note:
1. Profit earned by one firm to another should not be included because it is a part of intermediate
consumption.
2. If Profit after tax is given and corporate tax is given, then by adding them we get profit. Profit after
tax = 1000
Corporate tax =100 Profit =1100
3. If Profit before tax and corporate tax are given, then ignore corporate tax.
Profit before tax = 1000
Corporate tax =100 Profit = 1000
Steps for calculating national income by income method:

Step 1: To identify enterprises which employ primary factors (Land, Labour, Capital, enterprise).
Step 2: To classify various types of factor income like:
(a) Compensation of employees: The amount earned by employees from their employer, whether in
cash or in kind or through any other social security scheme is known as compensation of employees.
(b) Operating Surplus: It is the sum of income from property and income from entrepreneurship.
(c) Mixed Income: Income of own account workers (like farmers, doctors, barbers, etc.) and
unincorporated enterprises (like small shopkeepers, repair shops) is known as mixed income.
Step 3: To estimate amount of factor payments made by each producing unit.
Step 4: To add all factor incomes / payments within domestic territory to get domestic income, i.e.,
NDPFC .
NDPFC = Compensation of employees + Operating Surplus + Mixed Income Step 5: Addition of NFIA to
NDPFC to get NY, i.e., NNPFC .
Precautions of income method.

(a) Avoid transfers: National income includes only factor payments, i.e., payment for the services
rendered to the production units by the owners of factors. Any payment for which no service is
rendered is called a transfer, not a production activity. Gifts, donations etc. are main examples. Since

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transfers are not a production activity it must not be included in national income.
(b) Avoid capital gain: Capital gain refers to the income from the sale of second hand goods and
financial assets. Income from the sale of old cars, old house, bonds, debentures, etc. are some
examples. These transactions are not production transactions. So, any income arising to the owners
of such things is not a factor income.
(c) Include income from self-consumed output: When a house owner lives in his house, he does not
pay any rent. But infact he pays rent to himself. Since, rent is a payment for services rendered, even
though rendered to the owner itself, it must be counted as a factor payment.
(d) Include free services provided by the owners of the production units: Owners work in their own
unit but do not charge salary. Owners provide finance but do not charge any interest. Owners do
production in their own buildings but do not charge rent. Although they do not charge, yet the
services have been performed. The imputed value of these must be included in national income.
How To Determine National Income By Expenditure Method And Its Numericals, Steps And
Precautions:
National income determination by Expenditure method:

(a) “Production creates income, income creates expenditure”. If we want to calculate National
Income by this method, we have to add different final expenditures from an economy.
(b) The addition of all those final expenditure gives us the calculation near by the National Income,
i.e. GDPMP .
Components of Expenditure Method:

1. Government Final Consumption Expenditure (GFCE): The expenditure made by a general
government on current expenditure on goods and services like public health, defence, law and
order, education, etc. These goods and services generate no income because it is produce by a
general government without any profit motive.
These goods and services are valued at their cost to the government as they are not sold to the
citizen and have been produced for the social welfare of the citizens. So, GFCE = Intermediate
consumption of government + Compensation of employees (wages and salaries in cash and in kind)
by government + Direct purchases made abroad by government (purchases made by embassies and
consulates located in foreign countries) + Consumption of fixed capital (depreciation) – Sale of goods
and services by government.
2. Private Final Consumption Expenditure (PFCE): Private final consumption expenditure is defined
as consumption expenditure by consumer households (household final consumption expenditure)
and private NPISH (Non-profit Institution serving households) on all types of consumer goods.
PFCE = Household final consumption expenditure + Private non-profit Institution serving households
final consumption expenditure.
The value of following items is measured for getting private final Consumption Expenditure.
(a) Purchases of currently produced goods and services in the domestic market by consumer
households and NPISH.
(b) Direct purchases made abroad by resident households are added but direct purchases in
domestic market by non-resident households and extra territorial bodies are deducted.

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PFCE = Purchases of currently produced goods and services in the domestic Market by consumer
households and NPISH households + direct purchases made abroad by resident households – direct
purchases in domestic market by non¬resident households.
Note: If in the examination problem household final consumption expenditure is not given, it can be
calculated as under
Household Final Consumption Expenditure = Personal disposable income – Personal (Household)
Saving
3. Gross Domestic Capital Formation or Gross Investment or Investment Expenditure:

It refers to additions to the physical stock of capital during a period of time. It includes building
machinery, Housing construction, construction of factories, etc. It has been classified into the
following categories.
(a) Gross Domestic Fixed Capital Formation (GDFCF): It is the expenditure incurred on purchase of
fixed assets. It is of three types:
(i) Gross Business Fixed Investment: It is the amount that the business units spend on purchase of
newly produced capital goods like plant and equipments. Gross business fixed investment is the
gross amount spent on newly produced fixed capital goods. When depreciation is deducted from it,
we obtain Net Business fixed Investment.
Gross Business Fixed Investment = Net Business fixed Investment + Depreciation
(ii) Gross Residential Construction Investment: This is the amount spent on construction of flats and
residential houses. The investment is said to be gross when depreciation is not deducted and Net
when depreciation is deducted.
(iii) Gross Public Investment: This includes capital formation by government in the form of building
of roads, bridges, schools, hospitals, etc. This investment is called Gross when depreciation is not
deducted and Net when depreciation is subtracted.
(b) Change In Stock (Closing Stock – Opening Stock) Or Inventory Investment: It is the net change in
inventories of final goods, finished goods, semi-finished goods and raw material. These are included
as they represent currently produced goods, which are not included in the current sale of final
output. It is a difference between closing stock and the opening stock of the year.
(c) Net Acquisition Of Valuables: These are those high value durable goods like gold, silver, amtiques,
etc. which are taken at market price.
GDCF = Gross domestic fixed capital formation (GDFCF) + Change in Stock (Closing Stock – Opening
Stock) + Net acquisition of valuables
Or
GDCF = Gross Business Fixed Investment + Gross Residential Construction +
Gross Public Investment + Inventory Investment + Net Acquisition of Valuables
4. Net Export (Export – Import): It shows the difference between Domestic spending
on foreign goods (i.e., imports) and foreign spending on domestic goods (i.e., exports).
Thus, the difference between exports and imports of a country is called Net Exports.
Net Exports = Export – Import
GDPMP = Government final consumption expenditure + Private final consumption expenditure +
Gross domestic capital formation + Net export

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Numerical Problems on Expenditure Method
Money – Chapter 3
Introduction:
This chapter is a detailed version of barter system and its difficulties, how money has overcome its
drawbacks, money supply and its measures.
Barter System And Its Difficulties, Money And Functions Of Money:
1. Barter system of exchange is a system in which goods are exchanged for goods.
2. For example, wheat may be exchanged for cloth; house for horses, etc., or a teacher may be paid
wheat or rice as a payment for his/her services.
3. Such exchange exists in the C-C Economy (commodity to commodity exchange economy).
Note: In C-C Economy C stands for commodity. C-C economy is the one in which commodities are
exchanged for commodities. C-C exchange refers to barter system of exchange. Hence, C-C Economy
is an economy dominated by barter system of exchange.
4. Difficulties of barter system are:-Barter system as a system of exchange is faced with the
following difficulties:

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(a) Lack of double coincidence of wants:
(i) Barter is possible only if goods produced by two persons are needed by each other. It is double
coincidence of wants.
(ii) Double coincidence of wants means that goods in possession of two different persons must be
useful and needed by each other. It is the main basis of barter system of exchange. But it is rare.
(iii) It is difficult to find such a person every time. In barter system, exchange becomes quite limited.
(b) Lack of divisibility:
(i) In commodity exchange, difficulty of dividing the commodity arises.
(ii) For example, if a car is to be exchanged for a scooter, then car can not be divided. Similarly,
animals can not be divided into smaller units.
(c) Difficulty in storing wealth:
(i) It is very difficult to store wealth for future use.
(ii) Most of the goods like wheat, rice, cattle etc. are likely to deteriorate with the passage of time or
involve heavy cost of storage.
(iii) Further, the transfer of goods from one place to another place involves huge transport cost.
(iv) Transfer of immovable commodities (such as house, farm, land, etc.) becomes almost
impossible.
(d) Absence of common measure of value:
(i) Different commodities are of different values. The value of a good or service means the amount of
other goods and services it can be exchanged for in the market. There is no common measure of
value under barter system.
(ii) In this situation, it is difficult to decide in what proportions are the two goods to be exchanged.
(e) Lack of standard of deferred payment: In a barter economy future payments would have to be
stated in terms of specific goods or services. This leads to following problems:
(i) There could be disagreement regarding the quality of the goods or services to be repaid.
(ii) There would be disagreement regarding which specific commodities would be used for
repayment.
5. Money: Money is something which is generally acceptable as a medium of exchange

and can be converted into other assets without losing its time and value.
6. Functions of money: Functions of money can be summed up as follow:

“Money is a matter of the following four functions:
A medium, a measure, a standard, a store”
We can conclude these four functions under the following two functions:
(a) Primary function
(b) Secondary function

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(a)Primary function or Main function: Primary function includes the most important functions of
money, which it must perform in an economic system irrespective of time and place. The following
two functions are included under this category.
(i) Medium of exchange
• Money when used as a medium of exchange helps to eliminate the basic limitation of barter trade,
that is, the lack of double coincidence of wants.
• Individuals can exchange their goods and services for money and then can use this money to buy
other goods and services according to their needs and convenience.
• Thus, the process of exchange shall have two parts: a sale and a purchase.
• The ease at which money is converted into other goods and services is called “liquidity of money”.
(ii) Measure of value /unit of account
• Another important function of money is that it serves as a common measure of value or a unit of
account.
• Under barter economy there was no common measure of value in which the values of different
goods could be measured and compared with each other. Money has also solved this difficulty.
• As Geoffrey Crowther puts it, “Money acts as a standard measure of value to which all other things
can be compared.” Money measures the value of economic goods.
• Money works as a common denominator into which the values of all goods and services are
expressed.
• When we express the values of a commodity in terms of money, it is called price and by knowing
prices of the various commodities, it is easy to calculate exchange ratios between them.
(b) Secondary Functions

(i) Standard of deferred payments
• Credit has become the life and blood of a modern capitalist economy.
• In millions of transactions, instant payments are not made.
• The debtors make a promise that they will make payments on some future date. In those
situations money acts as a standard of deferred payments.
• It has become possible because money has general acceptability, its value is stable, it is durable
and homogeneous.
(ii) Store of vaiue
• Wealth can be conveniently stored in the form of money. Money can be stored without loss in
value.
• Savings are secured and can be used whenever there is a need.

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• In this way, money acts as a bridge between the present and the future.
• Money means goods and services. Thus, money serves as a store of value.
• It is also known as asset function of money.
7. Characteristics or features of money:

(a) Durability: Money must be durable and not likely to deteriorate rapidly with
frequent handling. Currency notes and coins are being used repeatedly and shall
continue to do so for many years.
(b) Medium of exchange: Money is the thing that acts as a medium of exchange for the sale and
purchase of goods and services.
(c) Weight: Money must be light in weight. Paper money is better than metal coins because it is light
in weight.
(d) Measure of value: It not only serves as medium of exchange but also acts as a measure of value.
The value of all the goods and services is expressed in terms of money.
8. Money has overcome the drawbacks of barter system: Barter system makes
the exchange process very difficult and highly inefficient. Money has overcome the
drawbacks of barter system in the following manners:
(a) Medium of exchange
(i) Under barter system, there is lack of double coincidence of wants.
(ii) With money as a medium exchange individuals can exchange their goods and services for money
and then use this money to buy other goods and services according to their needs and conveniences.
(iii) A buyer can buy goods through money and a seller can sell goods for money.
(b) Measure of value
(i) Under barter system, there was no common measure of value. Money has also solved this
difficulty.
(ii) As Geoffrey Crowther puts it, “Money acts as a standard measure of value to which all other
things can be compared.” Money measures the value of economic goods.
(iii) Money works as a common denominator into which the values of all goods and services are
expressed.
(iv) When we express the values of a commodity in terms of money, it is called price and by knowing
prices of the various commodities, it is easy to calculate exchange ratios between them.
(c) Store of value
(i) Under barter system it is very difficult to store wealth for future use.
(ii) Most of the goods are perishable and their storage requires huge space and transportation cost.
(iii) Wealth can be conveniently stored in the form of money.
(iv) Money can be stored without loss in value.
(v) Money can easily be stored for future use.
(d) Standard of deferred payments
(i) Under barter system, transactions on deferred payments are not possible.
(ii) With money, the debtors make a promise that they will make payments on some future dates. In
these situations money acts as a standard of deferred payments.
(iii) It has become possible because money has general acceptability, its value is stable, it is durable
and homogeneous.
9. Legal definition of money:

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(a) Legally, money is anything proclaimed by law as a medium of exchange.
(b) Paper notes and coins (together called currency) is money as a matter of law.
(c) Nobody can refuse its acceptance as medium of exchange.
(d) In other words, it is legal tender. It means people have to accept it legally for different payments.
Currency is also called FIAT money because it commands ‘FIAT’ (order/authority) of the government.
10. Functional definition of money: Functional definition of money refers to money as anything that
performs four basic functions,
(a) It serves as a medium of exchange.
(b) It serves as a standard unit of value.
(c) It serves as a means for future / contractual payments or standard of deferred payments.
(d) It serves as a store of value.
According to this, definition of money includes both notes and coins as well as chequeable deposits
with the banks.
11. Narrow definition of money: Functional definition of money is a narrow definition of money. It
includes only notes, coins and demand deposits as money. In other words, in its narrow definition,
money includes only those things that function as money in terms of:
(a) Medium of exchange.
(b) Measure of value.
(c) Standard of future/Deferred payments.
(d) Store of value.
12. Broad definition of money:

(a) A broad definition of money also includes time deposits/term deposits with the banks or post
offices as a component of money.
(b) These deposits can be converted into demand deposits on a short notice, and are “Near money
assets”. Money assets and near money assets together make up a definition of money.
Money Supply and Measures of Money Supply
1. Money supply: The volume of money held by the public at a point of time, in an economy, is
referred to as the money supply. Money supply is a stock concept.
2. Measures of money supply: On the recommendation of the second working group on money
supply, the RBI presented four measures of money supply in its 1977 issues of RBI Bulletin, namely
M1, M2, M3 and M4.
Measures of M1 include:
(a) Currency notes and coins with the public (excluding cash in hand of all commercial banks) [C]
(b) Demand deposits of all commercial and co-operative banks excluding inter-bank deposits. (DD),
Where demand deposits are those deposits which can be withdrawn by the depositor at any time by
means of cheque. No interest is paid on such deposits.
(c) Other deposits with RBI [O.D]
M1 = C + DD + OD
Where, Other deposits are the deposits held by the RBI of all economic units except the government
and banks. OD includes demand deposits of semi¬government public financial institutions (like IDBI,

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IFCI, etc.), foreign central banks and governments, the International Monetary Fund, the World
Bank, etc.
Measures of M2:
(i) M1 [C + DD + OD]
(ii) Post office saving deposits
Measures of M3:
(i) M1
(ii) Time deposits of all commercial and co-operative banks.
Where, Time deposits are the deposits that cannot be withdrawn before the expiry of the stipulated
time for which deposits are made. Fixed deposit is an example of time deposit.
Measures of M4:
(i) M3
(ii) Total deposits with the post office saving organization (excluding national savings certificates).
3. High-powered money: High-powered money is money produced by the RBI and the government.
It consists of two things: (a) currency held by the public and (b) Cash reserves with the banks.
Words that Matter
1. Barter system: Barter system of exchange is a system in which goods are exchanged for goods.
2. Double coincidence of wants: It means that goods in possession of two different persons must be
useful and needed by each other.
3. Money: Money is something which is generally acceptable as a medium of exchange and can be
converted into other assets without loosing its time and value.
4. Legal definition of money: Legally, money is anything proclaimed by law as a medium of
exchange. Paper notes and coins (together called currency) is money as a matter of law.
5. FIAT Money: It is defined as a money which is under the ‘FIAT’ (order/authority) of the
government to act as a money.
6. Functional definition of money: Functional definition of money refers to money as anything that
performs four basic functions. (Medium of exchange, standard unit of value, standard of deferred
payments, store of value)
7. Narrow definition of money: Functional definition of money is a narrow definition of money. It
includes only notes, coins and demand deposits as money.
8. Broad definition of money: A broad definition of money also includes time deposits/ term
deposits with the banks or post offices as a component of money.
9. Money Supply: The stock of money held by the public at a point of time, in an economy, is
referred to as the money supply. Money supply is a stock concept.
10. High-powered money: It is money produced by the RBI and the government. It consists of two
things: (i) currency held by the public and (ii) Cash reserves with the banks.
11. Demand deposits: These are the deposits that can be withdrawn by the depositor at any time by
means of cheque. No interest is paid on such deposits.
12. Time deposits: These are the deposits that cannot be withdrawn before the expiry of the
stipulated time for which deposits are made. Fixed deposit is an example of time deposit.
13. Other deposit measures of M1: Other deposits are the deposits held by the RBI of all economic

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units except the government and banks. OD includes demand deposits of semi-government public
financial institutions (like IDBI, IFCI, etc.), foreign central banks and governments, the International
Monetary Fund, the World Bank, etc.
Banking – Chapter 4
Introduction:
This is a textual description of commercial bank, credit creation by commercial bank, central bank
and its functions.
Commercial Bank And Credit Creation By Commercial Bank
1. Commercial bank is a financial institution which performs the functions of accepting deposits
from the public and making loans and investments, with the motive of earning profit.
2. Process of money creation/deposit creation/credit creation by the commercial banking system.

(a) Let us assume that the entire commercial banking system is one unit. Let us call this one unit
simply “banks’. Let us also assume that all receipts and payments in the economy are routed through
the banks. One who makes payment does it by writing cheque. The one who receives payment
deposits the same in his deposit account.
(b) Suppose initially people deposit Rs.1000. The banks use this money for giving loans. But the
banks cannot use the whole of deposit for this purpose. It is legally compulsory for the banks to keep
a certain minimum fraction of these deposits as cash. The fraction is called the Legal Reserve Ratio
(LRR). The LRR is fixed by the Central Bank. It has two components. A part of the LRR is to be kept
with the Central bank and this part ratio is called the Cash Reserve Ratio. The other part is kept by
the banks with themselves and is called the Statutory Liquidity Ratio.
(c) Let us now explain the process, suppose the initial deposits in banks is Rs.1000 and the LRR is 10
percent. Further, suppose that banks keep only the minimum required, i.e., Rs.100 as cash reserve,
banks are now free to lend the remainder Rs.900. Suppose they lend Rs.900. What banks do to open
deposit accounts in the names of the borrowers who are free to withdraw the amount whenever
they like.
• Suppose they withdraw the whole of amount for making payments.
(d) Now, since all the transactions are routed through the banks, the money spent by the borrowers
comes back into the banks into the deposit accounts of those who have received this payment. This
increases demand deposit in banks by ?900. It is 90 per cent of the initial deposit. These deposits of
Rs.900 have resulted on account
of loans given by the banks. In this sense the banks are responsible for money creation. With this
round, increased in total deposits are now Rs.1900 (=1000 + 900).

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(e) When banks receive new deposit of ?900, they keep 10 per cent of it as cash reserves and use the
remaining Rs. 810 for giving loans. The borrowers use these loans for making payments. The money
comes back into the accounts of those who have received the payments. Bank deposits again rise,
but by a smaller amount of Rs.810. It is 90 per cent of the last deposit creation. The total deposits
now increase to Rs.2710 (=1000 + 900 + 810). The process does not end here.
(f) The deposit creation continues in the above manner. The deposits go on increasing round after
round but Deposit Creation By Commercial Banks each time only 90 per cent of the last round
deposits. At the same time cash reserves go on increasing, each time 90 per cent of the last cash
reserve. The deposit creation comes to end when the total cash reserves become equal to the initial
deposit. The total deposit creation comes to Rs.10000, ten times the initial deposit as shown in the
table.
It can also be explained with the help of the following formula:
3. Banks required to keep only a fraction of deposits as cash reserves Banks are required to keep
only a fraction of deposits as cash reserves because of the following two reasons:
(a) First, the banking experience has revealed that not all depositors approach the banks for
withdrawal of money at the same time and also that normally they withdraw a fraction of deposits.
(b) Secondly, there is a constant flow of new deposits into the banks. Therefore to meet the daily
demand for withdrawal of cash, it is sufficient for banks to keep only a fraction of deposits as a cash
reserve.

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4. When the primary cash deposit in the banking system leads to multiple expansion in the total
deposits, it is known as money multiplier or credit multiplier.
Central Bank and Their Functions
1. The central bank is the apex institution of a country’s monetary system. The design and the
control of the country’s monetary policy is its main responsibility. India’s central bank is the Reserve
Bank of India.
2. Functions of Central Bank.

(a) Currency Authority:
(i) The central bank has the sole monopoly to issue currency notes. Commercial banks cannot issue
currency notes. Currency notes issued by the central bank are the legal tender money.
(ii) Legal tender money is one, which every individual is bound to accept by law in exchange for
goods and services and in the discharge of debts.
(iii) Central bank has an issue department, which is solely responsible for the issue of notes.
(iv) However, the monopoly of central bank to issue the currency notes may be partial in certain
countries.
(v) For example, in India, one rupee notes and all types of coins are issued by the government and all
other notes are issued by the Reserve Bank of India.
(b) Banker, Agent and Advisor to the Government: Central bank everywhere in the world acts as
banker, fiscal agent and adviser to their respective government.
(i) As Banker: As a banker to the government, the central bank performs same functions as
performed by the commercial banks to their customers.
• It receives deposits from the government and collects cheques and drafts deposited in the
government account.
• It provides cash to the government as resumed for payment of salaries and wages to their staff and
other cash disbursements.
• It makes payments on behalf of the government.
• It also advances short term loans to the government.
• It supplies foreign exchange to the government for repaying external debt or making other
payments.
(ii) As Fiscal Agent: As a fiscal agent, it performs the following functions :
• It manages the public debt.
• It collects taxes and other payments on behalf of the government.
• It represents the government in the international financial institutions (such as World Bank,
International Monetary Fund, etc.) and conferences.
(iii) As Adviser
• The central bank also acts as the financial adviser to the government.
• It gives advice to the government on all financial and economic matters such as deficit financing,
devaluation of currency, trade policy, foreign exchange policy, etc.
3. Banker’s Bank and Supervisor:

(a) Banker’s Bank: Central bank acts as the banker to the banks in three ways: (i) custodian of the
cash reserves of the commercial banks; (ii) as the lender of the last resort; and (iii) as clearing agent.

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(i) As a custodian of the cash reserves of the commercial banks, the central bank maintains the cash
reserves of the commercial banks. Every commercial bank has to keep a certain percent of its cash
reserves with the central bank by law.
(ii) As Lender of the Last Resort.
• As banker to the banks, the central bank acts as the lender of the last resort.
• In other words, in case the commercial banks fail to meet their financial requirements from other
sources, they can, as a last resort, approach to the central bank for loans and advances.
• The central bank assists such banks through discounting of approved securities and bills of
exchange.
(ii) As Clearing Agent
• Since it is the custodian of the cash reserves of the commercial banks, the central bank can act as
the clearinghouse for these banks.
• Since all banks have their accounts with the central bank, the central bank can easily settle the
claims of various banks against each other simply by book entries of transfers from and to their
accounts.
• This method of settling accounts is called Clearing House Function of the central bank.
(b) Supervisor
(i) The Central Bank supervises, regulate and control the commercial banks.
(ii) The regulation of banks may be related to their licensing, branch expansion, liquidity of assets,
management, amalgamation (merging of banks) and liquidation (the winding of banks).
(iii) The control is exercised by periodic inspection of banks and the returns filed by them.
4. Controller of Money Supply and Credit: Principal instruments of Monetary Policy or credit control
of the Central Bank of a country are broadly classified as:
(a) Quantitative Instruments or General Tools; and
(b) Qualitative Instruments or Selective Tools.
(a) Quantitative Instruments or General Tools of Monetary Policy: These are the instruments of
monetary policy that affect overall supply of money/credit in the economy. These instruments do
not direct or restrict the flow of credit to some specific sectors of the economy. They are as under:
(i) Bank Rate (Discount Rate)

• Bank rate is the rate of interest at which central bank lends to commercial banks without any
collateral (security for purpose of loan). The thing, which has to be remembered, is that central bank
lends to commercial banks and not to general public.
• In a situation of excess demand leading to inflation,
-> Central bank raises bank rate that discourages commercial banks in borrowing from central bank
as it will increase the cost of borrowing of commercial bank.
-> It forces the commercial banks to increase their lending rates, which discourages borrowers from
taking loans, which discourages investment.
-> Again high rate of interest induces households to increase their savings by restricting expenditure
on consumption.
-> Thus, expenditure on investment and consumption is reduced, which will control the excess
demand.
• In a situation of deficient demand leading to deflation,
-> Central bank decreases bank rate that encourages commercial banks in borrowing from central

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bank as it will decrease the cost of borrowing of commercial bank.
-> Decrease in bank rate makes commercial bank to decrease their lending rates, which encourages
borrowers from taking loans, which encourages investment.
-> Again low rate of interest induces households to decrease their savings by increasing expenditure
on consumption.
-> Thus, expenditure on investment and consumption increase, which will control the deficient
demand.
(ii) Repo Rate

• Repo rate is the rate at which commercial bank borrow money from the central
bank for short period by selling their financial securities to the central bank.
• These securities are pledged as a security for the loans.
• It is called Repurchase rate as this involves commercial bank selling securities
to RBI to borrow the money with an agreement to repurchase them at a later
date and at a predetermined price.
• So, keeping securities and borrowing is repo rate.
• In a situation of excess demand leading to inflation,
-> Central bank raises repo rate that discourages commercial banks in borrowing from central bank
-> It forces the commercial banks to increase their lending rates, which discourages borrowers from
-> Again high rate of interest induces households to increase their savings by restricting expenditure
on consumption.
-> Thus, expenditure on investment and consumption is reduced, which will control the excess
demand.
• In a situation of deficient demand leading to deflation,
-> Central bank decreases Repo rate that encourages commercial banks in borrowing from central
-> Decrease in Repo rate makes commercial bank to decrease their lending rates, which encourages
-> Again low rate of interest induces households to decrease their savings by increasing expenditure
on consumption.
-> Thus, expenditure on investment and consumption increase, which will control the deficient
demand.
(iii) Reverse Repo Rate

• It is the rate at which the Central Bank (RBI) borrows money from commercial bank.
• In a situation of excess demand leading to inflation, Reverse repo rate is increased, it encourages
the commercial bank to park their funds with the central bank to earn higher return on idle cash. It
decreases the lending capability of commercial banks, which controls excess demand.
• In a situation of deficient demand leading to deflation, Reverse repo rate is decreased, it
discourages the commercial bank to park their funds with the central bank. It increases the lending
capability of commercial banks, which controls deficient demand.
(iv) Open Market Operations (OMO)

• It consists of buying and selling of government securities and bonds in the open market by Central

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Bank.
• In a situation of excess demand leading to inflation, central bank sells government securities and
bonds to commercial bank. With the sale of these securities, the power of commercial bank of giving
loans decreases, which will control excess demand.
• In a situation of deficient demand leading to deflation, central bank purchases
government securities and bonds from commercial bank. With the purchase of these securities, the
power of commercial bank of giving loans increases, which will control deficient demand.
(v) Varying Reserve Requirements

• Banks are obliged to maintain reserves with the central bank, which is known as legal reserve ratio.
It has two components. One is the Cash Reserve Ratio or CRR and the other is the SLR or Statutory
Liquidity Ratio.
• Cash Reserve Ratio:
-> It refers to the minimum percentage of a bank’s total deposits, which it is required to keep with
the central bank. Commercial banks have to keep with the central bank a certain percentage of their
deposits in the form of cash reserves as a matter of law.
-> For example, if the minimum reserve ratio is 10% and total deposits of a certain bank is Rs. 100
crore, it will have to keep Rs. 10 crore with the Central Bank.
-> In a situation of excess demand leading to inflation, Cash Reserve Ratio (CRR) is raised to 20 per
cent, the bank will have to keep Rs.20 crore with the Central Bank, which will reduce the cash
resources of commercial bank and reducing credit availability in the economy, which will control
excess demand.
-> In a situation of deficient demand leading to deflation, cash reserve ratio (CRR) falls to 5 per cent,
the bank will have to keep Rs. 5 crore with the central bank, which will increase the cash resources
of commercial bank and increasing credit availability in the economy, which will control deficient
demand.
(vi) The Statutory Liquidity Ratio (SLR)

• It refers to minimum percentage of net total demand and time liabilities, which commercial banks
are required to maintain with themselves.
• In a situation of excess demand leading to inflation, the central bank increases statutory liquidity
ratio (SLR), which will reduce the cash resources of commercial bank and reducing credit availability
in the economy.
• In a situation of deficient demand leading to deflation, the central bank decreases statutory
liquidity ratio (SLR), which will increase the cash resources of commercial bank and increases credit
availability in the economy.
• It may consist of:
-> Excess reserves
-> Unencumbered (are not acting as security for loans from the Central Bank) government and other
approved securities (securities whose repayment is guaranteed by the government); and
-> Current account balances with other banks.
(b) Qualitative Instruments or Selective Tools of Monetary Policy: These instruments are used to
regulate the direction of credit. They are as under:

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(i) Imposing margin requirement on secured loans
• Business and traders get credit from commercial bank against the security of their goods. Bank
never gives credit equal to the full value of the security. It always pays less value than the security.
• So, the difference between the value of security and value of loan is called marginal requirement.
• In a situation of excess demand leading to inflation, central bank raises marginal requirements.
This discourages borrowing because it makes people gets less credit against their securities.
• In a situation of deficient demand leading to deflation, central bank decreases marginal
requirements. This encourages borrowing because it makes people get more credit against their
securities.
(ii) Moral Suasion

• Moral suasion implies persuasion, request, informal suggestion, advice and appeal by the central
banks to commercial banks to cooperate with general monetary policy of the central bank.
• In a situation of excess demand leading to inflation, it appeals for credit contraction.
• In a situation of deficient demand leading to deflation, it appeals for credit expansion.
(iii) Selective Credit Controls (SCCs)

• In this method the central bank can give directions to the commercial banks not to give credit for
certain purposes or to give more credit for particular purposes or to the priority sectors.
• In a situation of excess demand leading to inflation, the central bank introduces rationing of credit
in order to prevent excessive flow of credit, particularly for speculative activities. It helps to wipe off
the excess demand.
• In a situation of deficient demand leading to deflation, the central bank withdraws rationing of
credit and make efforts to encourage credit.
Words that Matter
1. Commercial Bank: Commercial bank is a financial institution which performs the functions of
accepting deposits from the public and making loans and investments, with the motive of earning
profit.
2. Legal Reserve Ratio: It is the minimum ratio of deposits legally required to be kept by the
commercial banks with themselves (Statutory Liquidity Ratio) and with the central bank (Cash
reserve Ratio).
3. Money Multiplier or Credit Multiplier: When the primary cash deposit in the banking system
leads to multiple expansion in the total deposits, it is known as money multiplier or credit multiplier.
4. Central Bank: The central bank is the apex institution of a country’s monetary system. The design
and the control of the country’s monetary policy is its main responsibility.
5. Quantitative Instruments or General Tools of Monetary Policy: These are the instruments of
monetary policy that affect overall supply of money/credit in the economy.
6. Qualitative Instruments or Selective Tools of Monetary Policy: The instruments which are used
to regulate the direction of credit is known as Qualitative Instruments.
7. Bank rate: It is the rate of interest at which central bank lends to commercial banks without any
collateral (security for purpose of loan).
8. Repo rate: It is the rate at which commercial bank borrow money from the central bank for short
period by selling their financial securities to the central bank.

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9. Reverse Repo rate: It is the rate at which the central bank (RBI) borrows money from commercial
bank.
10. Open Market Operation: It consists of buying and selling of government securities and bonds in
the open market by central bank.
11. Cash Reserve Ratio: It refers to the minimum percentage of a bank’s total deposits, which it is
required to keep with the central bank.
12. Statutory Liquidity Ratio: It refers to minimum percentage of net total demand and time
liabilities, which commercial banks are required to maintain with themselves.
13. Marginal requirement: Business and traders get credit from commercial bank against the
security of their goods. Bank never gives credit equal to the full value of the security. It always pays
less value than the security. So, the difference between the value of security and value of loan is
called marginal requirement.
14. Moral suasion: It implies persuasion, request, informal suggestion, advice and appeal by the
central banks to commercial banks to cooperate with general monetary policy of the central bank.
15. Selective Credit Controls (SCCs): In this method the central bank can give directions to the
commercial banks not to give credit for certain purposes or to give more credit for particular
purposes or to the priority sectors.

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Aggregate Demand and Its Related Concepts – Chapter 5
Introduction
This chapter gives an insight into the constructive key role of J.M. Keynes (John Maynard Keynes)
during the period of 1929-1933 towards the rectification of great depression in America,
emphasizing mainly on aggregate demand, aggregate supply, propensity to consume and save and
its types; including related Numericals.
Aggregate Demand, Aggregate Supply and Three Components
1. Aggregate Demand:
(a) Aggregate demand refers to the total demand for final goods and services in an economy during
an accounting year.
(b) Aggregate demand is aggregate expenditure on ex-ante (planned) consumption and ex-ante
(planned) investment that all sectors of the economy are willing to incur at each income level.
Note: In terms of Keynes, aggregate demand refers to the total amount of money, which the buyers
are ready to spend on purchase of goods and services, produced in an economy during a given
period. It should be kept in mind that Keynes measured aggregate demand not in terms of physical
goods and services but as a part of total income that society is ready to spend.
(c) Components of aggregate demand: The components of aggregate demand are:
(i) Private (or Household) consumption demand
• The total expenditure incurred by all the households of the country on their personal consumption
is known as private consumption expenditure.
• Consumption demand depends mainly on disposable income and propensity to consume.
(ii) Private investment demand
• Private investment demand refers to the demand for capital goods by private investors.
• It is addition to the existing stock of real capital assets such as machines, tools, factory – building
etc.
• Investments demand depends upon marginal efficiency of capital (Marginal efficiency of
investment) and interest rate.
• Investment is of two types, Autonomous Investment and Induced investment, but in Keynes theory
investment is assumed to be Autonomous.
• The basic difference between Induced Investment and Autonomous Investment

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(iii) Government demand for goods and services Its curve is upward sloping rises up to Right.
• In a modern economy, the government is an important buyer of goods and services.
It is income inelastic, i.e., it is not affected by change in income level. The volume of autonomous
investment is the same at all levels of income.
Its curve is a straight line parallel to horizontal axis.
• The government demand may be on account of public needs for roads, schools, hospitals, power,
irrigation etc, for the maintenance of law and order and for defence.
(iv) Demand for net export (X – M)
• Net export represents foreign demand for goods and services produced by an economy.
• When exports exceed imports, net exports is positive and when imports exceed, net exports is
negative.
• Exports and imports of a country are influenced by a number of factors such as foreign trade
policy, exchange- rate, prices and quality of goods etc.
Thus, aggregate demand consists of these four types of demand.
However, for the sake of simplicity Keynes included only two types of demand,
-> Consumption demand (C)
-> Investment demand (I)
Aggregate demand can be explained with the help of AD schedule and AD curve.

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2. Aggregate Supply:
(a) The concept of aggregate supply (ΔS) is related with the total supply of goods and services by all
the producers in an economy. Four factor of production like land,
labour, capital and enterprise are required for the production of goods and services. Producers pay
rent to land, wages and salaries to labour, interest to capital and Profits to the entrepreneur for their
services in production. This payment is factor- cost from producer’s point of view and factor-income
from factor-owner angle.
(b) Thus, aggregate supply is the total amount of money value of goods and services, (which is paid
to the factor of production against their factor services) that all the producers are willing to supply in
an economy. In other words, it is the total cost of production of goods and services produced in a
country or it is the value of net national product at factor cost (NNPFC). Thus, the main components
of aggregate supply are:
(c) Keynes assumed his economy to be a closed capitalist economy and whenever any economy is
closed capitalist, then Net Factor Income from Abroad (NFIA) is 0. National Income (NNP FC) =
Domestic Income (NDPFC) + Net Factor Income from Abroad (NFIA)
National Income (NNPFC) = Domestic Income (NDPFC) + 0
In short,
Aggregate Supply = NNPFC = NDPFC = Factor Income = Rent + Interest + Wages + Profit
(d) As we know income is either consumed or saved, hence for the sake of simplicity Keynes has
regarded only two main constituents of aggregate supply:
Consumption Function (Propensity To Consume) And its types, Saving Function (Propensity To
Save) And Its Types

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1. Consumption function expresses functional relationship between aggregate consumption and
national income.
Thus, consumption (C) is a function of income (Y). C = F (Y)
Where, C = Consumption; F = Function; Y = Disposable income Consumption at a point of time can be
measured with the equation:
2. According to Keynes, as income increases consumption expenditure also increases but increase in
consumption is smaller than the increase in income. In other words, consumption lags behind
income. This is called Keynes’ Psychological law of Consumption. According to Keynes, propensity to
consume of the people remains stable in the short period.
3. Break-even point refers to that point in the level of income at which consumption is just equal to
income. In other words, whole of income is spent on consumption and there is no saving. Below this
level of income, consumption is greater than income but above this level, income is greater than
consumption.
In the given imaginary household schedule of consumption and saving, at annual

income level of Rs.60,000, consumption is Rs.60,000 and in consequence there is no
saving. This is break-even point.
It is evident from the table and diagram that:
(i) As the income increases, consumption also increases, but the increase in consumption remains
less than the increase in income.
(ii) Income can be zero but consumption can never be zero in the economy.
(iii) When C > Y, saving are negative.
(iv) When C = Y, savings are zero. This is known as break-even point. This is shown by point E in the
diagram. Thus break-even point indicates a point where consumption becomes equal to income or
consumption curve cuts the income curve.
4. There are two types of propensity to consume:

(a) Average propensity to consume (APC)

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(i) The ratio of aggregate consumption expenditure to aggregate income is known , as average
propensity to consume. It indicates the percentage (or ratio) of income which is being spent on
consumption. It is worked out by dividing total consumption expenditure (C) by total income (Y).
A Consumption (C)
(ii) It can be explained with the help of following schedule and diagram:
(iii) Important Points for APC:

• When APC is more than 1: When APC is more than 1, consumption is more than national income,
i.e. before the break-even point.
• APC = 1: When APC is equal to 1, consumption is equal to national income, which is known as to be
break-even point.
• When APC is less than 1: When consumption is less than national income, i.e. beyond the break-
even point.
(b) Marginal Propensity to consume (MPC):
(i) The ratio of change in consumption (C) to change in income (Y) is known as marginal propensity to
consume. It indicates the proportion of additional income that is being spent on consumption.
(ii) It can be explained with the help of following schedule and diagram:

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(iii) Important points for MPC:

• Value of MPC varies between 0 and 1: As we know that increase in income is either spent on
consumption or saved for future use.
• MPC falls with the successive increase in income: It happens because as an economy becomes
richer, it has the tendency to consume smaller percentage of each increment to its income.
5. (a) Propensity to save (or saving function) shows the functional relationship between aggregate
savings and income.

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It is evident from the saving-function schedule and diagram that as income increases saving also
increases. Saving can be both negative and positive. Prior to break-even point saving is negative, at
break-even point saving is zero and after the break-even point saving is positive.
(c) Important points for Saving function:
(i) Starting Point of Saving Curve:
• Saving curve (SS) starts from point _c on the Y-axis, indicating that there is negative saving (equal
to amount of autonomous consumption) when national income is zero. Note: The saving curve will
have a negative intercept on Y-axis of the same magnitude as the consumption curve has positive
intercept on the Y-axis. It happens because if consumption is positive at zero level of income, then
there would be dis-savings of the same magnitude.
• Break-even point (S = 0).
Saving curve crosses the X-axis at point R which is known as break-even point as at this point saving
is zero (or consumption is equal to income).
• Positive Saving: After the break-even point saving is positive.
6. Types of propensity to save

(a) Average propensity to save (APS):
(i) The ratio of aggregate saving to aggregate income is known as average propensity to save (APS).
By dividing aggregate saving by aggregate income, we get APS. Symbolically,

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(ii) Important Points for APS:

• APS can never be 1 or more than one.
As saving can never be equal to or more than national income.
• APS can be 0: APS is 0 when income is equal to consumption i.e., saving = 0. This point is known as
break-even point.
• APS can be negative or less than 1.
At income levels which are lower than the break-even point APS can be negative as there will be dis-
savings in the economy.
• APS rises with increase in income.
• APS rises with the increase in income because the proportion of income saved keeps on increasing.
(b) Marginal Propensity to Save:
(i) The ratio of change in saving (ΔS) to change in income (ΔY) is called MPS. It is proportion of
income saved out of additional (incremental) income. Symbolically,
Words that Matter

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1. Aggregate demand: It is aggregate expenditure on ex-ante (planned) consumption and ex-ante
(planned)investment that all sectors of the economy are willing to incur at each income level.
2. Induced Investment: It refers to the investment which is made with the motive of earning profit.
3. Autonomous Investment: It refers to the investment, which is made irrespective of level of
income.
4. Aggregate Supply: Aggregate supply is the total amount of money value of goods and services,
(which is paid to the factor of production against their factor services) that all the producers are
willing to supply in an economy.
5. Consumption Function: Consumption function(Propensity to consume) expresses functional
relationship between aggregate consumption and national income. Thus, consumption (C) is a
function of income (Y).
C = F (Y) and C = C + b Y
6. Autonomous Consumption: It refers to minimum level of consumption i.e. (c), which is needed for
survival, i.e., consumption at zero level of national income.
7. Keynes’ Psychological law of Consumption: According to Keynes, as income increases
consumption expenditure also increases but increase in consumption is smaller than the increase in
income. In other words, consumption lags behind income.
8. Break even Point: Break-even point refers to that point in the level of income at which
consumption is just equal to income. In other words, whole of income is spent on consumption and
there is no saving.
9. Average Propensity to Consume: The ratio of aggregate consumption expenditure to aggregate
income is known as average propensity to consume.
APC=C/Y
10. Marginal Propensity to consume: The ratio of change in consumption (C) to change in income
(Y) is known as marginal propensity to consume. It indicates the proportion of additional income
that is being spent on consumption.
MPC=ΔC/ΔY
11. Saving Function: Saving function (Propensity to save) shows the functional relationship between
aggregate savings and income.
S = f (Y) and S = — C + (1 — b) Y
12. Average Propensity to Save: The ratio of aggregate saving to aggregate income is known as
average propensity to save (APS).
APS=S/Y
13. Marginal Propensity to Save: The ratio of change in saving (ΔS) to change in income (ΔY) is called
MPS. It is proportion of income saved out of additional (incremental) income. Symbolically,
MPC= ΔS/ΔY
National Income Determination and Multiplier – Chapter 6

Introduction
This chapter is a numerical determination of national income under Aggregate demand— Aggregate
supply and Saving—Investment approach. Concept of Multiplier, based numerical on it and its
working is also highlighted.
National Income Determination Under Aggregate Demand And Supply Approach And Saving,
Investment Approach, Effective Demand

ORACLE IAS
1. Determination of equilibrium level of national income
Or
Keynesian theory of income and employment
(a) It refers to that point which has come to be established under the given condition of aggregate
demand and aggregate supply, and has tendency to stick to that level under this given condition:
Condition to get equilibrium level of NY
• AD = AS
• Investment = Saving
How is Investment = Saving?
Here,
AD = AS
C+I=C+S
I=C+S–C
I=S
(b) If due to some disturbance, we divert from that position, then the economic forces will work in
such a manner so as to drive us back to the original position,
i. e., aggregate demand is equal to aggregate supply.
(c) Any movement from that point would be unstable. In short, it is a position of rest.
(d) It can be explained with the help of following schedule and diagram:
(e) Figure B is derived from figure A. In figure A at point P, income is equal to consumption, which is
known as to be breakeven point. Corresponding to point P, we derive point P 1; in figure B, where
saving is equal to zero. In figure A, the equilibrium level of national income is attained at point E,
where aggregate supply = aggregate demand. Corresponding to point E, we derive the point E1,
where saving = investment.

ORACLE IAS
2. Determination of equilibrium level of national income through Aggregate demand-Aggregate

Supply Approach
(a) It refers to the point that has come to be established under the given condition of aggregate
demand and aggregate supply, and has tendency to stick to that level under this given condition
where Aggregate Demand = Aggregate Supply.
(b) If due to some disturbance, we divert from that position, the economic forces will work in such a
manner so as to drive us back to the original position, i.e., aggregate demand is equal to aggregate
supply.
(c) In the above mentioned figure, at point P, income = consumption, which is known as to be a
break-even point. The equilibrium level of national income is attained at point E, where aggregate
demand = aggregate supply.
(d) If due to some disturbance we divert from our position, like when AD > AS [at Y2], then,

ORACLE IAS
production will have to be increased to meet the excess demand. Consequently, national income will
increase. As we know positive relationship exists between national income and consumption, so
consumption will increase, which will thereby increase the aggregate demand till we reach the
equilibrium.
(e) As against it, when AD < AS [at Y1], then there would be stockpiling and producers will produce
less. National income will fall and as a result consumption will start falling, which will thereby fall the
aggregate demand till we reach the equilibrium.
3. (a) Ex-ante saving and ex-ante investment:

(i) In an economy what we plan (or intend or desire) to save during a particular period is called ex-
ante saving.
(ii) Against it, what we plan (or intend or desire) to invest during a particular period is called ex-ante
investment.
(b) Ex-post saving and ex-post investment.
(i) In an economy what we actually save or what is left after deducting consumption expenditure
from income is called ex-post (or realized) saving.
(ii) As against it what we actually invest or what we actually add to the physical assets of an
economy is called ex-post (or realized) investment.
4. Determination of equilibrium level of national income through Saving-Investment

Approach
(a) It refers to the point that has come to be established under the given condition of aggregate
demand and aggregate supply, and has tendency to stick to that level under this given condition
where Aggregate Demand (AD)= Aggregate Supply (AS). AD = AS
Consumption (C) + Investment (I) = Consumption (C) + Saving (S)
I=S
(b) If due to some disturbance, we divert from that position, the economic forces will work in such a
manner so as to drive us back to the original position, i.e., Saving is equal to Investment.
(c) In the above figure, the equilibrium level of national income is attained at point E, where saving =
investment which is derived from a point where AD = AS.
(d) If due to some disturbance we divert from our position like when investment > saving [at Y2],
then production will have to be increased to meet the excess demand. Consequently, national
income will increase leading to rise in saving until saving becomes equal to investment. It is here that
equilibrium level of income is established because what the savers intend to save becomes equal to
what the investors intend to invest.

ORACLE IAS
(e) As against it, when saving > investment [at Y1], then there would be stockpiling and producers
will produce less. .National income will fall and as a result saving will start falling until it becomes
equal to investment. It is here the equilibrium level of income is derived.
5. Effective Demand: The level at which the economy is in equilibrium, i.e., where
aggregate demand = aggregate supply, is called effective demand. It can also be
explained with the help of the following table:
Paradox Of Thrift, It’s Reasons With Numirical Example
1. The term thrift means savings and the paradox of thrift shows how an attempt by the economy as
a whole to save more out of its current income will ultimately results in lower savings for the
economy.
2. If all the people in the economy make an effort to save more, then the total savings of the
community will not increase, on the contrary they will decrease. This is called the
paradox of thrift.
3. Reasons for “Paradox of thrift” to operate

(a) As we know that one person’s expenditure is another person’s income.
(b) If individual ‘A’ decides to save more by reducing his consumption expenditure, the income of
individual ‘B’ will be less and individual ‘B’ in turn will spend less.
(c) Thus, if all individuals in the economy decide to save more, the income received by each
individual will be less and overall income will fall and also lower will be the total savings.
4. Diagram Representation: The concept of paradox of thrift with the help of diagrams and
mathematical illustration is as under:

ORACLE IAS
When Investment is Autonomous When Investment is Induced
(a) Paradox of thrift fails in keyne’s theory (when Investment is autonomous):
In figure A, society, households plan to save more at each income level. So, saving curve shifts up
and left from S to . Equilibrium national income falls from Y to Yr The thing which has to be
remembered is that savings is equal to autonomous investment, that is, remains unchanged.
(b) Paradox of thrift is possible when investment is induced: In figure B, we have induced investment
function which makes the investment curve upward positively sloping. With the increase in savings,
not only the equilibrium income falls, but also savings decline.
5. Numerical Illustration: Suppose the original savings function is given as,

S = -50 + 0.5Y and investment (I) = 25 + 0.25Y.
Equilibrium level of income will be attained at the level where
Saving = Investment ! -50 + 0.5Y = 25 + 0.25Y
0. 25Y = 75 Y = 300
Therefore, savings at Y=300 will be S = -50 + 0.5 (300) = 100
Suppose, eveiy individual in the economy decides to save 25 more at each level of income. The new
savings function will be
S2 = -50 + 25 + 0.5Y – -25 + 0.5Y.
The new equilibrium income will be attained at the level where
s2 = i
-25 + 0.5Y = 25 + 0.25Y 0.25Y = 50 Y = 200
Therefore, savings at Y = 200 will be S = -25 + 0.5 (200) = -25 + 100 = 75
Thus, when everybody in the economy decides to save more, the equilibrium level of income falls
and the total savings also fall. This is called the paradox of thrift.
Elements In Understanding Investment (Marginal Efficiency Of Investment And Market Rate Of

Interest), Investment Demand Function
1. Elements In Understanding Investment: A private investor’s demand for investment depends on

two things:
(a) The rate of return on investment or M.E.I: The expected rate of return from’an additional unit of
investment is called marginal efficiency of investment (M.E.I). It is defined as the expected rate of
return of an additional unit of capital goods. M.E.I is very important factor in determining the
investment demand. M.E.I. is determined by two factors.
(i) Supply Price: The cost of replacing the machine under consideration with a brand new machine is
known its supply price. For example, if a machine of Rs.1 lakh is replaced in place of old machine,
then Rs. 1 lakh is the supply price.
(ii) Prospective Yields: It refers to expected net returns(of all costs) from the capital asset over its
lifetime. For example, if the given machine is expected to yield revenue of Rs. 10,000 and running
expenditure is Rs.2000, the prospective yield will be, 10000 – 2000 = 8000.
(iii) Formula of Marginal efficiency of investment: In the given examples, marginal efficiency of
investment will be,

ORACLE IAS
(b) The Market Rate of Interest: It refers to cost of funds borrowed for financing the investment.
There exists inverse relationship between rate of interest and investment demand. Higher interest
implies lower level of investment demand.
(c) Decision whether to invest or not

(i) The investor goes on making additional investments until M.E.I becomes equal to the rate of
interest. If M.E.I is greater than the rate of interest, the investors has to increase the investment and
if the rate is higher than the M.E.I, no investment is to be made.
(ii) For example, if an entrepreneur has to pay 15% market rate of interest on the loan taken by him
and he expected rate of profit i.e., M.E.I. is 30%, then he will surely go for the investment and will
continue making investment till M.E.I. = Rate of Interest (ROI).
2. Investment demand function: Investment demand function is the relationship between rate of
interest and investment demand. There exists inverse relationship between rate of interest and
investment demand. Higher interest implies lower level of investment demand.
Concepts Of Investment Multiplier
1. Investment Multiplier
Meaning: The ratio of change in national income (ΔY) due to a change in investment (ΔI) is known as
multiplier (K).

ORACLE IAS

ORACLE IAS
Words that Matter
1. Ex-ante saving: In an economy what we plan (or intend or desire) to save during a particular
period is called ex-ante saving.
2. Ex-ante Investment: In an economy, what we plan (or intend or desire) to invest during a
particular period is called ex-ante investment.
3. Expost Saving: In an economy what we actually save or what is left after deducting consumption
expenditure from income is called ex-post (or realized) saving.
4. Expost Investment: In an economy, what we actually invest or what we actually add to the
physical assets of an economy is called ex-post (or realized) investment.
5. Effective Demand: The level at which the economy is in equilibrium, i.e., where aggregate
demand = aggregate supply, is called effective demand.
6. Paradox of Thrift: The term thrift means savings and the paradox of thrift shows how an attempt
by the economy as a whole to save more out of its current income will ultimately results in lower
savings for the economy.
7. Marginal efficiency of Investment: The expected rate of return from an additional unit of
investment is called marginal efficiency of investment (M.E.I). In other words, it is the expected rate

ORACLE IAS
of return of an additional unit of capital goods.
8. Supply Price: The cost of replacing the machine under consideration with a brand
new machine is known its supply price. .
9. Prospective Yields: It refers to expected net returns (of all costs) from the capital asset over its
lifetime.
10. Market Rate of Interest: It refers to cost of funds borrowed for financing the investment. There
exists inverse relationship between rate of interest and investment demand. Higher interest implies
lower level of investment demand.
11. Multiplier: The ratio of change in national income (ΔY) due to change in investment (ΔI) is known
as multiplier (K).
Excess Demand and Deficient Demand – Chapter 7
Introduction
An illustration of meaning, diagram, reasons, impacts and measures to control excess demand
(inflationary gap) and deficient demand (deflationary gap); basic definitions of full employment, over
full employment, involuntary unemployment, voluntary unemployment is also dealt with in this
chapter.
Excess Demand And Its Related Concepts
1. Excess Demand and Inflationary Gap:

(a) When in an economy, aggregate demand exceeds “aggregate supply at full employment level”,
the demand is said to be an excess demand.
(b) Inflationary gap is the gap showing excess of current aggregate demand over ‘aggregate supply at
the level of full employment’. It is called inflationary because it leads to inflation (continuous rise in
prices).
(c) A simple example will further -clarify it. Let us suppose that an imaginary economy by employing
all its available resources can produce 10,000 quintals of rice. If aggregate demand of rice is say
12,000 quintals, this demand will be called an excess demand, because aggregate supply at level of

ORACLE IAS
full employment of resources is only 10,000 quintals and the result of the gap of 2000 quintals will
be called as inflationary gap. In the above diagram Inflationary gap is AB because at Full employment
Y*, Aggregate demand (BY*) is greater than Aggregate Supply(AY*).
2. Reasons or causes for excess demand: The main reasons for excess demand are
apparently the increase in the following components of aggregate demand:
(a) Increase in household consumption demand due to rise in propensity to consume.
(b) Increase in private investment demand because of rise in credit facilities.
(c) Increase in public (government) expenditure.
(d) Increase in export demand.
(e) Increase in money supply or increase in disposable income.
3. Impacts or effects of excess demand on price, output, employment:

(a) Effect on General Price Level: Excess demand gives a rise to general price level because it arises
when aggregate demand is more than aggregate supply at a full employment level. There is inflation
in economy showing inflationary gap.
(b) Effect on Output: Excess demand has no effect on the level of output. Economy is at full
employment level and there is no idle capacity in the economy. Hence output can’t increase.
(c) Effect on Employment: There will be no change in thq. level of employment also.
The economy is already operating at full employment equilibrium, and hence, there is no
unemployment.
4. Measures to control the excess demand: We can control the excess demand with the help of the
following policy:
(a) Monetary Policy (b) Fiscal Policy
Let us discuss it in detail:
(a) Monetary Policy: Monetary policy is the policy of the central bank of a countiy to control money
supply and availability of credit in the economy. The central bank can take the following steps:
(i) Quantitative Instruments or General Tools of Monetary Policy: These are the instruments of
not direct or restrict the flow of credit to some specific sectors of the economy. They are as under
• Bank Rate or Discount Rate (Increase in Bank Rate)
-> Bank rate is the rate of interest at which central bank lends to commercial banks without any
-> In a situation of excess demand leading to inflation
-> Central bank raises bank rate that discourages commercial banks in borrowing from central bank
❖ It forces the commercial banks to increase their lending rates, which discourages borrowers from
❖ Again high rate of interest induces households to increase their savings by restricting expenditure
on consumption.
❖ Thus, expenditure on investment and consumption is reduced, which will control the excess
demand.

ORACLE IAS
• Repo Rate (Increase in Repo Rate):
-> Repo rate is the rate at which commercial banks borrow money from the central bank for short
-> These securities are pledged as a security for the loans.
-> It is called Repurchase rate as this involves commercial bank selling securities to RBI to borrow the
money with an agreement to repurchase them at a later date and at a predetermined price.
-> So, keeping securities and borrowing is repo rate.
-> In a situation of excess demand leading to inflation
❖ Central bank raises repo rate that discourages commercial banks in borrowing from central bank
❖ It forces the commercial banks to increase their lending rates, which discourages borrowers from
❖ Again high rate of interest induces households to increase their savings by restricting expenditure
on consumption.
❖ Thus, expenditure on investment and consumption is reduced, which will control the excess
demand.
• Reverse Repo Rate (Increase in Reverse Repo Rate):
-> It is the rate at which the central bank (RBI) borrows money from commercial bank.
-> In a situation of excess demand leading to inflation, Reverse repo rate is increased, it encourages
the commercial bank to park their funds with the central bank to earn higher return on idle cash. It
decreases the lending capability of commercial banks, which controls excess demand.
• Open Market Operations (OMO) (Sale of securities):
-> It consists of buying and selling of government securities and bonds in the open market by central
bank.
-> In a situation of excess demand leading to inflation, central bank sells government securities and
bonds to commercial bank. With the sale of these securities, the power of commercial bank of giving
loans decreases, which will control excess demand.
• Increase in Varying Reserve Requirements or Legal Reserve Ratio:
-> Banks are obliged to maintain reserves with the central bank, which is known as legal reserve
ratio. It has two components. One is the Cash Reserve Ratio or CRR and the other is the SLR or
Statutory Liquidity Ratio.
-> Cash Reserve Ratio (Increase in CRR):
❖ It refers to the minimum percentage of a bank’s total deposits, which
it is required to keep with the central bank. Commercial banks have to keep with the central bank a
certain percentage of their deposits in the form of cash reserves as a matter of law.
❖ For example, if the minimum reserve ratio is 10% and total deposits of a certain bank is Rs.100
crore, it will have to keep Rs.10 crore with the central bank.
❖ In a situation of excess demand leading to inflation, cash reserve ratio (CRR) is raised to 20 per
cent, the bank will have to keep Rs.20 crore with the central bank, which will reduce the cash
resources of commercial bank and reducing credit availability in the economy, which will control
excess demand.
-> Statutory Liquidity Ratio (Increase SLR):
❖ It refers to minimum percentage of net total demand and time liabilities, which commercial banks
❖ In a situation of excess demand leading to inflation, the central bank increases statutory liquidity
ratio (SLR), which will reduce the cash resources of commercial bank and reducing credit availability
in the economy.

ORACLE IAS
(ii) Qualitative Instruments or Selective Tools of Monetary Policy: These instruments are used to
regulate the direction of credit. They are as under:
(i) Imposing margin requirement on secured loans (Increase):
• Business and traders get credit from commercial bank against the security of their goods. Bank
• So, the difference between the value of security and value of loan is called marginal requirement.
• In a situation of excess demand leading to inflation, central bank raises marginal requirements.
This discourages borrowing because it makes people get less credit against their securities.
(ii) Moral Suasion:
• Moral suasion implies persuasion, request, informal suggestion, advice and appeal by the central
• In a situation of excess demand leading to inflation, it appeals for credit contraction.
(iii) Selective Credit Control (SCC) [Introduce Credit Rationing]:
• In this method the central bank can give directions to the commercial banks not to give credit for
• In a situation of excess demand leading to inflation, the central bank introduces rationing of credit
in order to prevent excessive flow of credit, particularly for speculative activities. It helps to wipe off
the excess demand.
(b) Fiscal Policy: The expenditure and revenue policy taken by the general government to
accomplish the desired goals is known as fiscal policy. A general government can take the following
steps:
(a) Revenue Policy (Increase Taxes):
(i) Revenue policy is expressed in terms of taxes.
(ii) During inflation the government impose higher amount of taxes causing the decrease in
purchasing power of the people.
(iii) It is so because to control excess demand we have to reduce the amount of liquidity from the
economy.
(b) Expenditure Policy (Reduces Expenditure):
(i) Government has to invest huge amount on public works like roads, buildings, irrigation works, etc.
(ii) During inflation, government should curtail (reduce) its expenditure on public works like roads,
buildings, irrigation works thereby reducing the money income of the people and their demand for
goods and services.
(c) Increase in Public Borrowing/Public Debt:
(i) This measure means that government should raise loans from public and hence borrowing
decreases the purchasing power of people by leaving them with lesser amount of money.
(ii) So, government should resort to more public borrowing during excessive demand.
(iii) Government should make long term debts more attractive so that public may use their excess
liquidity amount of money in purchasing these bonds, which will reduce the liquidity amount of
money in the economy and thereby inflation could be controlled
Deficient Demand And Its Related Concepts
1. Deficient Demand or Deflationary Gap:

(a) When in an economy, aggregate demand falls short of aggregate supply at full employment level,
the demand is said to be a deficient demand.

ORACLE IAS
(b) Deflationary gap is the gap showing Demand

deficient of current aggregate demand over ‘aggregate supply at the level of full employment’. It is
called deflationary because it leads to deflation (continuous fall in prices).
(c) Let us suppose that an imaginary economy by employing all its available resources can produce
10,000 quintals of rice. If aggregate demand of rice is, say 8,000 quin tals, this demand will be called
a deficient demand and the gap of 2000 quintals will be called as deflationary gap. Clearly here
equilibrium between AD and AS is at a point less than level of full employment. Keynes called it an
under employment equilibrium.
2. Reasons or causes for deficient demand: The main reasons for deficient demand are apparently
the decrease in four components of aggregate demand:
(a) Decrease in household consumption demand due to fall in propensity to consume.
(b) Decrease in private investment demand because of fall in credit facilities.
(c) Decrease in public (government) expenditure.
(d) Decrease in export demand.
(e) Decrease in money supply or decrease in disposable income.
3. Impacts or effects of deficient demand:

(a) Effect on General Price Level: Deficient demand causes the general price level to fall because it
arises when aggregate demand is less than aggregate supply at full employment level. There is
deflation in an economy showing deflationary gap.
(b) Effect on Employment: Due to deficient demand, investment level is reduced, which causes
involuntary unemployment in the economy due to fall in the planned output.
(c) Effect on Output: Low level of investment and employment implies low level of output.
4. Measures to Control the deficient demand: We can control the deficient demand with the help
of the following policies:
(a) Monetary policy (b) Fiscal policy
Let us discuss it in detail:
(a) Monetary Policy: Monetary policy is the policy of the central bank of a country of controlling
money supply and availability of credit in the economy. The central bank takes the following steps:
(i) Quantitative Instruments or General Tools of Monetary Policy: These are the instruments of
not direct or restrict the flow of credit to some specific sectors of the economy. They are as under:

ORACLE IAS
• Bank Rate or Discount Rate (Decrease in Bank Rate):
-> Bank rate is the rate of interest at which central bank lends to commercial banks without any
-> In a situation of deficient demand leading to deflation,
❖ Central bank decreases bank rate that encourages commercial banks in borrowing from central
❖ Decrease in bank rate makes commercial bank to decrease their lending rates, which encourages
❖ Again low rate of interest induces households to decrease their savings by increasing expenditure
on consumption.
❖ Thus, expenditure on investment and consumption increase, which will control the deficient
demand.
• Repo Rate (Decrease Repo Rate):
-> Repo rate is the rate at which commercial banks borrow money from the central bank for short
-> These securities are pledged as a security for the loans.
-> It is called Repurchase rate as this involves commercial bank selling securities to RBI to borrow the
money with an agreement to repurchase them at a later date and at a predetermined price.
-> So, keeping securities and borrowing is repo rate.
In a situation of deficient demand leading to deflation,
❖ Central bank decreases Repo rate that encourages commercial banks in borrowing from central
❖ Decrease in Repo rate makes commercial banks to decrease their lending rates, which
encourages borrowers from taking loans, which encourages investment.
❖ Again low rate of interest induces households to decrease their savings by increasing expenditure
on consumption.
❖ Thus, expenditure on investment and consumption increase, which will control the deficient
demand.
• Reverse Repo Rate (Decrease Reverse Repo Rate):
-> It is the rate at which the central bank (RBI) borrows money from commercial bank.
-> In a situation of deficient demand leading to deflation, Reverse repo rate is decreased, it
discourages the commercial bank to park their funds with the central bank. It increases the lending
capability of commercial banks, which controls deficient demand.
• Open Market Operation (Purchase of Securities):
-> It consists of buying and selling of government securities and bonds in the open market by central
bank.
-> In a situation of deficient demand leading to deflation, central bank purchases government
securities and bonds from commercial bank. With the purchase of these securities, the power of
commercial bank of giving loans increases, which will control deficient demand.
• Decrease in Varying Reserve Requirements:
-> Banks are obliged to maintain reserves with the central bank, which is known as legal reserve
ratio. It has two components. One is the Cash Reserve Ratio or CRR and the other is the SLR or
Statutory Liquidity Ratio.
-> Cash Reserve Ratio (Decrease):
❖ It refers to the minimum percentage of a bank’s total deposits, which is required to keep with the
central bank. Commercial banks have to keep with the central bank a certain percentage of their
deposits in the form of cash reserves as a matter of law.

ORACLE IAS
❖ For example, if the minimum reserve ratio is 10% and total deposits of a certain bank is Rs. 100
crore, it will have to keep Rs.10 crore with the central bank.
❖ In a situation of deficient demand leading to deflation, cash reserve ratio (CRR) falls to 5 per cent,
the bank will have to keep Rs. 5 crore with the central bank, which will increase the cash resources
of commercial bank and increasing credit availability in the economy, which will control deficient
demand.
-> The Statutory Liquidity Ratio (SLR) (Increase):
❖ It refers to minimum percentage of net total demand and time liabilities, which commercial banks
❖ In a situation of deficient demand leading to deflation, the central bank decreases statutory
liquidity ratio (SLR), which will increase the cash resources of commercial bank and increases credit
availability in the economy.
(ii) Qualitative Instruments or Selective Tools of Monetary Policy: These

instruments are used to regulate the direction of credit. They are as under:
• Imposing margin requirement on secured loans( Decrease):
-> Business and traders get credit from commercial bank against the security of their goods. Bank
-> So, the difference between the value of security and value of loan is called marginal requirement.
-> In a situation of deficient demand leading to deflation, central bank decreases marginal
requirements. This encourages borrowing because it makes people get more credit against their
securities.
• Moral Suasion:
-> Moral suasion implies persuasion, request, informal suggestion, advice and appeal by the central
> In a situation of deficient demand leading to deflation, it appeals for credit expansion.
• Selective Credit Controls (SCCs):
-> In this method the central bank can give directions to the commercial banks not to give credit for
-> In a situation of deficient demand leading to deflation, the central bank withdraws rationing of
credit and make efforts to encourage credit.
2. Fiscal Policy: The expenditure and revenue policy taken by the general government to accomplish
the desired goals is known as fiscal policy. A general government has to take the following steps:
(a) Revenue Policy (Decrease in Taxes):
(i) Revenue policy is expressed in terms of taxes.
(ii) During deflation the government will impose lower amount of taxes so that purchasing power of
the people be increased.
(iii) It is so because to control deficient demand we have to increase the amount of liquidity in the
economy.
(b) Expenditure Policy (Increase in Expenditure):
(i) Government has to invest huge amount on public works like roads, buildings, irrigation works, etc.
(ii) During deflation government should increase its expenditure on public works like roads,
buildings, irrigation works thereby increasing the money income of the people and their demand for
goods and services.
(c) Decrease in Public Borrowing / Public Debt:

ORACLE IAS
(i) At the time of deficient demand public borrowing should be reduced.
(ii) People will have more money and more purchasing power.
(iii) In brief, during period of deficient demand government should adopt the pricing of deficit
budget.
(iv) Old taken debts from public should be finished and paid back to increase money in the market.
Full Employment, Voluntary Unemployment And Involuntary Unemployment
1. Full employment:
(i) Full employment equilibrium refers to the situation where aggregate demand is equal to
aggregate supply, and all those who are able to work and willing to work (at the existing wage rate)
are getting work.
(ii) Full employment doesn’t means that there is no unemployment in an economy. Unemployment
also exists at full employment level because of voluntary unemployment.
2. Voluntary unemployment:
(i) Voluntary unemployment refers to the situation when a person is unemployed because he is not
willing to work at the existing wage rate, even when work is available.
(ii) Suppose, if the market wage rate for MBA in the industries is Rs.8,000 a month, but
some of the qualified MBA’s refuse to accept job at Rs.8,000 a month, they will be considered as
voluntarily unemployed.
3. Involuntary unemployment:
(i) Involuntary unemployment refers to a situation in which all able and willing persons to work at
existing wage-rate do not find work.
Words that Matter
1. Excess Demand: When in an economy, aggregate demand exceeds “aggregate supply at full
employment level”, the demand is said to be an excess demand.
2. Inflationary gap: It is the gap showing excess of current aggregate demand over ‘aggregate supply
at the level of full employment’. It is called inflationary because it leads to inflation (continuous rise
in prices).
3. Deficient demand: When in an economy, aggregate demand falls short of aggregate supply at full
employment level, the demand is said to be a deficient demand.
4. Deflationary gap: It is the gap showing deficient of current aggregate demand over ‘aggregate
supply at the level of full employment’. It is called deflationary because it leads to deflation
(continuous fall in prices).
5. Monetary policy: It is the policy of the central bank of a country to control money supply and
availability of credit in the economy.
6. Quantitative Instruments or General Tools of Monetary Policy: These are the instruments of
monetary policy that affect overall supply of money/credit in the economy.
7. Qualitative Instruments or Selective Tools of Monetary Policy: These instruments are used to
regulate the direction of credit.
8. Bank rate: It is the rate of interest at which central bank lends to commercial banks without any
collateral (security for purpose of loan).
9. Repo rate: It is the rate at which commercial bank borrow money from the central bank for short
10. Reverse repo rate: It is the rate at which the central bank (RBI) borrows moneyfrom commercial
bank.
11. Open Market Operation: It consists of buying and selling of government securities and bonds in

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the open market by central bank.
12. Cash Reserve Ratio: It refers to the minimum percentage of a bank’s total deposits, which it is
required to keep with the central bank.
13. Statutory Liquidity Ratio: It refers to minimum percentage of net total demand and time
liabilities, which commercial banks are required to maintain with themselves.
14. Marginal requirement: Business and traders get credit from commercial bank against the
security of their goods. Bank never gives credit equal to the full value of the security. It always pays
less value than the security. So, the difference between the value of security and value of loan is
called marginal requirement.
15. Moral suasion: It implies persuasion, request, informal suggestion, advice and appeal by the
central banks to commercial banks to cooperate with general monetary policy of the central bank
16. Selective credit control: In this method the central bank can give directions to the commercial
banks not to give credit for certain purposes or to give more credit for particular purposes or to the
priority sectors.
17. Fiscal policy: The expenditure and revenue policy taken by the general government to
accomplish the desired goals is known as fiscal policy.
18. Full employment equilibrium: It refers to the situation where aggregate demand is equal to
aggregate supply, and all those who are able to work and willing to work (at the existing wage rate)
are getting work.
19. Voluntary unemployment: It refers to the situation when a person is unemployed because he is
not willing to work at the existing wage rate, even when work is available.
20. Involuntary unemployment: It refers to a situation in which all able and willing persons to work
at existing wage-rate do not find work.

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Government Budget and the Economy – Chapter 8
Introduction
This is a descriptive chapter on government budget of Indian economy, wherein its objectives,
importance, types, components, budget deficits and its types (Revenue, Fiscal, Primary Deficit) and
their implications are studied.
Chapter at a Glance
Government Budget and Its Related Concepts
1. A government budget is an annual financial statement showing item wise estimates of

expected revenue and anticipated expenditure during a fiscal year.
2. Budget has two parts:

(a) Receipts; and (b) Expenditure.
3. Objectives of budget:
(a) Activities to secure a reallocation of resources:
(i) Private enterprises always desire to allocate resources to those areas of production where profits
are high.
(ii) However, it is possible that such areas of production (like production of alcohol) may not
promote social welfare.
(iii) Through its budgetary policy the government of a country directs the allocation of resources in a
manner such that there is a balance between the goals of profit maximisation and social welfare.
(iv) Production of goods which are injurious to health (like cigarettes and whisky) is discouraged
through heavy taxation.
(v) On the other hand, production of “socially useful goods” (like electricity, ‘Khadi’) is encouraged
through subsidies.
(vi) So, finally government has to reallocate resources in accordance to social and economic
considerations in case the free market fails to do or does so inefficiently.
(b) Redistributive activities:
(i) Budget of a government shows its comprehensive exercise on the taxation and subsidies.
(ii) A government uses fiscal instruments of taxation and subsidies with a view of improving the
distribution of income and wealth in the economy.
(iii) A government reduces the inequality in the distribution of income and wealth by imposing taxes
on the rich and giving subsidies to the poor, or spending more on welfare of the poor.
(iv) It reduces income of the rich and raises the living standard of the poor, thus, leads to equitable
distribution of income.
(v) Expenditure on special anti poverty and employment schemes will be increased to bring more
people above poverty line.
(vi) Public distribution system should be inferred so that only the poor could get foodgrains and

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other essential items at subsidised prices.
(vii) So finally, Equitable distribution of income and wealth is a sign of social justice which is the
principal objective of any welfare state in India.
(c) Stabilising activities:
(i) Free play of market forces (or the forces of supply and demand) are bound to generate trade
cycles, also called business cycles.
(ii) These refer to the phases of recession, depression, recovery and boom in the economy. (Hi) The
government of a country is always committed to save the economy from
business cycles. Budget is used as an important policy instrument to combat(solve) the situations of
deflation and inflation.
(iv) By doing it the government tries to achieve the state of economic stability.
(v) Economic stability leads to more investment and increases the rate of growth and development.
(d) Management of public enterprises:
(i) A government undertakes commercial activities that are of the nature of natural monopolies; and
which are established and managed for social welfare of the public.
(ii) A natural monopoly is a situation where there are economies of scale over a large range of
output.
(iii) Industries which are potential natural monopolies are railways etc.
4. Importance of a budget:
(a) Today every country aims at its economic growth to improve living standard of its people.
Besides, there are many other problems such as poverty, unemployment, inequalities in incomes
and wealth etc. Government strives hard to solve these problems through budgetary measures.
(b) The budget shows the fiscal policy. Itemwise estimates of expenditure discloses how much and
on what items, the government is going to spend. Similarly, itemwise details of government receipts
indicate the sources from where the government intends to get money to finance the expenditure.
In this way budget is the most important instrument in hands of governments to achieve their
objectives and there lies the importance of the government budget. Note: Fiscal year is the year in
which country’s budgets are prepared. Its duration is from 1st April to 31st March.
5. Types of budget: It may be of two types:

(a) Balanced Budget (b) Unbalanced Budget
Let us discuss them in detail:
(a) Balanced Budget: If the government revenue is just equal to the government expenditure made
by the general government, then it is known as balanced budget.
(b) Unbalanced Budget: If the government expenditure is either more or less than a government
receipts, the budget is known as Unbalanced budget.
It may be of two types:
(i) Surplus budget (ii) Deficit budget
Let us discuss them in detail:
(i) Surplus Budget: If the revenue received by the general government is more in comparison to
expenditure, it is known as surplus budget.
In other words, surplus budget implies a situation where government income is in excess of

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government expenditure.
(ii) Deficit Budget: If the expenditure made by the general government is more than the revenue
received, then it is known as deficit budget.
In other words, in deficit budget, government expenditure is in excess of government income.
Components Of Government Budget, Budget Receipts Its Types
1. Components of a government budget: Government budget, comprises of two parts—

(a) Revenue Budget and (b) Capital Budget.
(a) Revenue Budget: Revenue Budget contains both types of the revenue receipts of the
government, i.e., Tax revenue and Non tax revenue ; and the Revenue expenditure.
(i) Revenue Receipts: These are the receipts that neither create any liability nor reduction in assets
of the government. It includes tax revenues like income tax, corporation tax and non-tax revenue
like fines and penalties, special assessment, escheat etc.
(ii) Revenue Expenditure: An expenditure that neither creates any assets nor cause reduction of
liability is called revenue expenditure.
(b) Capital Budget: Capital budget contains capital receipts and capital expenditure of the
government.
(i) Capital Receipts: Government receipts that either creates liabilities (of payment of loan) or reduce
assets (on disinvestment) are called capital receipts. Capital receipts include items, which are non-
repetitive and non-routine in nature.
(ii) Capital Expenditure: This expenditure of the government either creates physical or financial
assets or reduction of its liability. Acquisition of assets like land, machinery, equipment, its loans and
advances to state governments etc. are its examples.
2. Budget receipts (government receipt): Budget receipt refers to the estimated receipts of the
government from various sources during a fiscal year. It shows the sources from where the
government intends to get money to finance the expenditure. Budget receipts are of two types:

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(a) Revenue receipts

(i) Meaning:
• Government receipts, which
-> Neither create any liabilities for the government; and
-> Nor cause any reduction in assets of the government, are called revenue receipts.
In revenue receipts both the conditions should be satisfied.
• Revenue receipts include items which are Repetitive and routine in nature.
(ii) Revenue receipts are further classified into:

• Tax Revenue:
-> Tax revenue refers to receipts from all kinds of taxes such as income tax, corporate tax, excise
duty etc.
-> A tax is a legally compulsory payment imposed by the government on income and profit of
persons and companies without reference to any benefit. Taxes are of two types: Direct taxes and
Indirect taxes.
• Non-Tax Revenue:
-> Non-tax revenue refers to government revenue from all sources other than taxes.
-> These are incomes, which the government gets by way of sale of goods and services rendered by
different government departments.
-> Components of Non-Tax Revenue:
♦ Commercial Revenue (Profit and interest):
♦ It is the revenue received by the government by selling the goods and services produced by the
government agencies.
♦ For example, profit of public sector undertakings like Railways, BHEL, LIC etc.
♦ Government gives loan to State Government, union territories, private enterprises and to general
public and earns interest receipts from these loans.
♦ It also includes interest and dividends on investments made by the government.
♦ Administrative Revenue: The revenue that arises on account of the administrative function of the
government. This includes:
♦ Fee: Fee refers to a payment made to the government for the services that it renders to the
citizens. Such services are generally in public interest and fees are paid by those, who receive such
services. For example, passport fees, court fees, school fees in government schools.
♦ License Fee: License fee is a payment to grant a permission by a government authority. For
example, registration fee for an automobile.

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♦ Fines and penalties for an infringement of a law, i.e., they are imposed on law breakers.
♦ Special Assessment: Sometimes government undertakes developmental activities by which value
of nearby property appreciates, which leads to increase in wealth. So, it is the payment made by
owners of those properties whose value has appreciated. For example, if value of a property near a
metro station has increased, then a part of developmental expenditure made by government is
recovered from owners of such property. This is the value of special assessment.
♦ Forfeitures are in the form of penalties imposed by courts that a person needs to pay in the court
of law for failing to comply with court orders.
♦ Escheat refers to the claim of the government on the property of a person who dies without
having any legal heir or without leaving a will.
♦ External grants: Government receives financial help in the form of grants, gifts from foreign
governments and international organisations (IMF, World Bank). Such grants and gifts are received
during national crisis such as earthquakes, flood, war etc.
(b) Capital receipts:

(i) Meaning:
• Government receipts, that either creates liabilities (of payment of loan) or reduce assets (on
disinvestment) are called capital receipts.
In capital receipts any one of the conditions must be satisfied.
• Capital receipts include items which are non-repetitive and non-routine in nature,
(ii) Components:
• Borrowing (Domestic and External): Borrowings are made to meet the financial requirement of the
country. A government may borrow money:
-> Domestically: General Public (By issuing government bonds in the open market). Reserve Bank of
India.
-> Externally: Rest of the world (foreign government and international institutions)
• Recovery of Loans and Advances: Loans offered to others are assets of the government. It includes
recovery of loans granted by the central government to state and union territory governments. It is a
capital receipt because it reduces financial assets of the government. For example, The Government
of India may give Rs. 1000 crore as a loan to The Government of Delhi. Here the value of asset is Rs.
1000 crore. When The Government of Delhi repaid Rs. 100 crore, the value of The Government of
India assets reduces to Rs. 900 crore. Since, recovery of loan reduces the value of assets, it is termed
as a capital receipts.
• Disinvestment: A government raises funds from disinvestment also. Disinvestment means selling
whole or a part of the shares (i.e., equity) of selected public sector enterprises held by government.
As a result, government assets are reduced.
Foreign Exchange Rate – Chapter 9
Introduction
This chapter defines the meaning of foreign exchange and related terms, how foreign exchange rate
is determined, study of foreign exchange rate regimes (fixed and flexible exchange rate) and their
differences; thereafter hybrid systems of exchange rate and operation of foreign exchange market.
Foreign Exchange and Its Related Concepts

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1. Foreign exchange refers to all the currencies of the rest of the world other than the domestic
currency of the country. For example, in India, US dollar is the foreign exchange.
2. The rate at which one currency is exchanged for another is called Foreign Exchange Rate.
In other words, the foreign exchange rate is the price of one currency stated in terms of another
currency. For example, if one U.S dollar exchanges for 60 Indian rupees, then the rate of exchange is
1$ = Rs. 60 or 1 Rs = 1/60 or 0.0166 U.S. dollar.
3. Foreign exchange market is the market where the national currencies are converted, exchanged
or traded for one another.
4. Functions of a foreign exchange market

(a) Transfer Function: Transfer function refers to transferring of purchasing power
among countries.
(b) Credit Function: It implies provision of credit in terms of foreign exchange for the export and
import of goods and services across different countries of the world.
(c) Hedging Function: Hedging function pertains to protecting against foreign exchange risks. Where
Hedging is an activity which is designed to minimize the risk of loss.
5. Sources of demand of foreign exchange:

The demand (or outflow) of foreign exchange comes from the people who need it to make payments
in foreign currencies. It is demanded by the domestic residents for the following reasons:
(a) Imports of Goods and Services: When India imports goods and services, foreign exchange is
demanded to make the payment for imports of goods and services.
(b) Tourism: Foreign exchange is demanded to meet expenditure incurred in foreign tours.
(c) Unilateral Transfers Sent Abroad: Foreign exchange is required for making unilateral transfers like
sending gifts to other countries.
(d) Purchase of Assets in Foreign Countries: It is demanded to make payment for purchase of assets,
like land, shares, bonds, etc. in foreign countries.
(e) Repayment of loans to Foreigners: As and when we have to pay interest and repay the loans to
foreign lenders, we require foreign exchange.
(d) Speculation: Demand for foreign exchange arises when people want to make gains from
appreciation of currency.
6. Reasons for ‘Rise in Demand’ for Foreign Currency:

The demand for foreign currency rises in the following situations:
(a) When price of a foreign currency falls, imports from that foreign country become cheaper. So,
imports increase and hence, the demand for foreign currency rises. For example, if price of 1 US
dollar falls from Rs. 60 to Rs. 55, then imports from the USA will increase as American goods will
become relatively cheaper. It will raise the demand for US dollar.
(b) When a foreign currency becomes cheaper in terms of the domestic currency, it promotes
tourism to that country. As a result, demand for foreign currency rises.
(c) When price of a foreign currency falls, its demand rises as more people want to make gains from
speculative activities.

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7. Demand curve of foreign exchange is downward sloping:
(a) Demand curve of foreign exchange slopes downwards due to inverse relationship between
demand for foreign exchange and foreign exchange rate.
(b) In figure, demand for foreign exchange (US dollar) and rate of foreign exchange are shown on the
horizontal axis and vertical axis respectively.
(c) The demand curve [US$] is downward sloping. It means that less foreign exchange is demanded
as the exchange rate increase
(d) This is due to the fact that rise in the price of foreign exchange increases the rupee cost of
foreign goods, which make them more expensive. As a result, imports decline. Thus, the demand for
foreign exchange also decreases.
8. Sources of supply of foreign exchange: The supply (inflow) of foreign exchange comes from the
people who receive it due to the following reasons.
(a) Exports of Goods and Services: Supply of foreign exchange comes through exports of goods and
services.
(b) Tourism: The amount, which foreigners spend in the home country, increases the supply of
foreign exchange.
(c) Remittances (unilateral transfers) from Abroad: Supply of foreign exchange increases in the form
of gifts and other remittances from abroad.
(d) Loan from Rest of the world: It refers to borrowing from abroad. A loan from U.S. means flow of
U.S. $ from U.S. to India, which will increase supply of Foreign exchange.
(e) Foreign Investment: The amount, which foreigners invest in our home country, increases the
supply of foreign exchange.
(f) Speculation: Supply of foreign exchange comes from those who want to speculate on the value of
foreign exchange.
9. Reasons of‘rise in supply’ of foreign currency: The supply of foreign currency rises in the
following situations:
(a) When price of a foreign currency rises, domestic goods become relatively cheaper. It induces the
foreign country to increase their imports from the domestic country. As a result, supply of foreign
currency rises. For example, if price of 1 US dollar rises from Rs. 60 to Rs. 65, then exports to USA will

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increase as Indian goods will become relatively cheaper. It will raise the supply of US dollars.
(b) When price of a foreign currency rises, foreign direct investment (FDI). from rest of the world
increases, which will increase the supply for foreign exchange.
(c) When price of a foreign currency rises, supply of foreign currency also rises as people want to
make gains from speculative activities.
10. Supply curve of foreign exchange is upward sloping:
(a) Supply curve of foreign exchange slopes upwards due to positive relationship between supply for
foreign exchange and foreign exchange rate, which means that supply of foreign exchange increases
as the exchange rate increases.
(b) This makes home country’s goods become cheaper to foreigners since rupee is depreciating in
value. The demand for our exports should therefore increase as the exchange rate increases.
(c) The increased demand for our exports will translate into greater supply of foreign exchange.
Thus, the supply of foreign exchange increases as the exchange rate increases.
How Foreign Exchange Is Determine, Disequilibrium Conditions Under Exchange Rate
1. Determination of foreign exchange rate:

(a) Exchange rate in a free exchange market is determined at a point, where demand for foreign
exchange is equal to the supply of foreign exchange.
(b) Let us assume that there are two countries – India and U.S.A – and the exchange rate of their
currencies i.e., rupee and dollar is to be determined. Presently, there is floating or flexible exchange
regime in both India and U.S.A. Therefore, the value of currency of each country in terms of the
other currency depends upon the demand for and supply of their currencies.
(c) In the above diagram, the price on the vertical axis is stated in terms of domestic currency (that
is, how many rupees for one US dollar). The horizontal axis measures the quantity demanded or
supplied.
(d) In the above diagram, the demand curve [D$] is downward sloping. This means that less foreign
exchange is demanded as the exchange rate increases. This is due to the fact that the rise in price of
foreign exchange increases the rupee cost of foreign goods, which make them more expensive. As a
result, imports decline. Thus, the demand for foreign exchange also decreases.
(e) The supply curve [S$] is upward sloping which means that supply of foreign exchange increases as
the exchange rate increases.

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This makes home country’s goods become cheaper to foreigners since rupee is depreciating in value.
The demand for our exports should therefore increase as the exchange rate increases.
The increased demand for our exports translates into greater supply of foreign exchange. Thus, the
supply of foreign exchange increases as the exchange rate increases.
2. Disequilibrium conditions under equilibrium exchange rate:

(a)Change in demand:
(i) Increase in demand for dollar: An increase in the demand for US dollar in India will cause the
demand curve to shift to D1$ and the exchange rate rises to P1$. Note that increase in the exchange
rate means that more rupees are required to buy one US dollar. When this occurs, Indian rupee is
said to be depreciating.
(b) Change in Supply

(i) Increase in supply for dollar: An increase in the supply of US dollar causes the supply curve to shift
to S1$ and exchange rate falls to P1$. In this case, rupee cost of US dollar is decreasing and the Indian
rupee is said to be appreciating.

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(ii) Decrease in demand for dollar: A decrease in the demand for US dollar in India will cause the
demand curve to shift to D1$ and the exchange rate falls to P1$. Note that decrease in the exchange
rate means that less rupees are required to buy one US dollar. When this occurs, Indian rupee is said
to be appreciating.
(ii) Decrease in supply of dollar: A decrease in the supply of US dollar causes the supply curve to shift
to S1$ and exchange rate rises to P1$. In this case, rupee cost of US dollar is increasing and the Indian

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rupee is said to be depreciating.
Exchange Rate Regimes (Fixed, Flexible And Managed Floating Exchange Rate And Their Merits
And Demerits)
Types of exchange rate regimes:

1. Fixed exchange rate system (Pegged exchange rate system):
(a) Meaning:
(i) The system of exchange rate in which exchange rate is officially declared and fixed by the
government is called fixed exchange rate system.
(ii) When domestic currency is tied to the value of foreign currency, it is known as
pegging.
(iii) To maintain stability in fixed exchange rate system, government buy foreign currency when
exchange rate appreciates and sell foreign currency when exchange rate depreciate. This process is
called Pegging operation, i.e., all efforts made by the central bank to keep the rate of exchange
stable.
Note:
(i) Fixed exchange rate is not determined by the forces of demand and supply in the market. Such a
rate of exchange has been associated with Gold Standard System during 1880-1914.
(ii) According to this system, value of every currency is determined in terms of gold. Accordingly,
ratio between gold value of the two countries was fixed as exchange rate between those currencies.
(iii) For example, Value of one dollar = 100 gms of gold.
Value of a rupee = 5 gms of gold
Then, 1 dollar = 100/5 = Rs. 20
(b) Merits of fixed exchange rate system:
(i) Stability: It ensures stability, in the international money market/exchange market. Day to day
fluctuations are avoided. It helps formulation of long term economic policies, particularly relating to
exports and imports.
(ii) Encourages international trade: Fixed exchange rate system implies low risk and low uncertainty
of future payments. It encourages international trade.
(iii) Co-ordination of macro policies: Fixed exchange rate helps co-ordination of macro policies across

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different countries of the world. Long term economic policies can be drawn in the area of
international trade and bilateral trade agreements.
(c) Demerits of fixed exchange rate system:
(i) Huge international reserves: Fixed exchange rate system is often supported with huge
international reserves of gold. This is because different currencies are directly or indirectly
convertible into gold.
(ii) Restricted movement of capital: Fixed exchange rate restricts the movement
of capital across different parts of the world. Accordingly, international growth process suffers. .v
(iii) Discourages venture capital: Venture capital in the international money market refers to
investments in the purchase of foreign exchange in the international money market with a view to
earn profits. Fixed exchange rate system discourages such investments. Fixed exchange rate
discourages venture capital in the international money market.
(d) Devaluation of currency: Devaluation refers to decrease in the value of domestic
currency in terms of foreign currency by the government. It is a part of fixed
exchange rate.
(e) Revaluation of currency: Revaluation refers to increase in the value of domestic
currency by the central government. It is a part of fixed exchange rate.
2. Flexible exchange rate (floating exchange rate system):

(a) Meaning:
(i) The system of exchange rate in which value of a currency is allowed to float freely as determined
by demand for and supply of foreign exchange is called flexible exchange rate system.
(ii) Under this system, the central banks, without intervention, allow the exchange rate to adjust to
equate the supply and demand for foreign currency.
(iii) The foreign exchange market is busy at all times by changes in the exchange rates.
(b) Merits of flexible exchange rate system:

(i) No need for international reserves: Flexible exchange rate system is not to be supported with
international reserves.
(ii) International capital movements: Flexible exchange rate system enhances movement of capital
across different countries of the world. This is due to the fact that member countries are no longer
required to keep huge international reserves.
(iii) Venture capital: Flexible exchange rate promotes venture capital in foreign exchange market.
Trading in international currencies itself becomes an important economic activity.
(c) Demerits of flexible exchange rate system:

(i) Instability: It causes instability in the international money market. Exchange rate tends to
fluctuate like price of goods in the commodity market.
(ii) International trade: Instability in foreign exchange market causes instability in the area of
international trade. It becomes difficult to draw long period policies of exports and imports.
(iii) Macro policies: While fixed exchange rate helps coordination of macro policies, flexible exchange
rate makes it a difficult proposition. Day to day fluctuations in exchange rate makes bilateral trade
agreements a difficult exercise.

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(d) Currency depreciation:
(i) Currency depreciation refers to decrease in the value of domestic currency in terms of foreign
currency. It makes the domestic currency less valuable and more of it is required to buy a foreign
currency. It is a part of flexible exchange rate.
(ii) For example, rupee is said to be depreciating if price of $1 rises from ? 60 to Rs. 65.
(iii) Effect of depreciation of domestic currency on exports: Depreciation of domestic currency
means a fall in the price of domestic currency (say, rupee) in terms of a foreign currency (say, $). It
means, with the same amount of dollars, more goods can be purchased from India, i.e., exports to
USA will increase as they will become relatively cheaper.
(e) Currency appreciation:

(i) Currency appreciation refers to increase in the value of domestic currency in terms of foreign
currency. The domestic currency becomes more valuable and less of it is required to buy a-foreign
(ii) For example, Indian rupee appreciates when price of $1 falls from Rs. 60 to Rs. 55.
(iii) Effect of appreciation of domestic currency on imports: Appreciation of domestic currency
means a rise in the price of domestic currency (say, rupee) in terms of a foreign currency (say, $).
Now, one rupee can be exchanged for more $, i.e., with the same amount of money, more goods can
be purchased from the USA. It leads to increase in imports from the USA as American goods will
become relatively cheaper.
3. Managed floating rate system:

(a) Managed floating exchange rate is a mixture of a flexible exchange rate (the float part) and a
fixed exchange rate (the Managed part).
(b) In other words, it refers to a system in which foreign exchange is determined by free market
forces (demand and supply forces), which can be influenced by the intervention of the central bank
in foreign exchange market.
(c) Under this system, also called Dirty floating, central banks intervene to buy or sell foreign
currencies in an attempt to stabilize exchange rate movements in case of extreme appreciation or
depreciation.
Kinds Of Foreign Exchange Rate (Spot And Forward Market)
1. Spot market for foreign exchange:

(a) If the operation is of daily nature, it is called spot market or current market.
(b) The exchange rate that prevails in the spots market for foreign exchange is called spot rate.
(c) In other words, spot rate of exchange refers to the rate at which foreign currency is available on
the spot.
2. Forward market for foreign exchange:
(a) A market for foreign exchange for future delivery is known as forward market.
(b) Exchange rate that prevails in a forward contract for purchase or sale of foreign exchange is
called forward rate.
(c) Thus, forward rate is the rate at which a future contract for foreign currency is bought and sold.
Other Types Of Exchange Rate System
1. Wider band System:

(a) It is a system that allows wider adjustment in the fixed exchange rate system.

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(b) It allows adjustment upto 10% around the “parity” between any two currencies in the
internationahmoney market.
(c) For example, if one US dollar is fixed as equal to fifty Indian rupees, 10% revision (upward or
downward) is to be allowed in this exchange rate of 1: 50. Exchange rate may be revised as,
1: 60 + 10% = 1: 66 or as 1: 60 – 10% = 1 : 54
2. Crawling peg system:
(a) It allows “small” but regular adjustments in the exchange rate for different currencies.
(b) Not more than (+) 1% adjustment is allowed at a time. Indeed, it is a small adjustment.
(c) But it can crawl, i.e., it can be repeated at regular intervals.
Some Important Terms
1. Nominal exchange rate (NER): The number of units of domestic currency required to purchase a
unit of foreign currency is called nominal exchange rate. Thus, $1 = Rs. 60. It may move to $1 = Rs.
65, and so on.
2. Nominal effective exchange rate (NEER):
(a) The concept is useful for an aggregative analysis. A nation has to deal with a number of countries,
and hence a number of currencies.
(b) For example, during a period Indian rupee may be losing value against the American dollar, but it
may be gaining value against Euro.
(c) Therefore, we would be interested in knowing what is happening in aggregate to our rupee i.e., is
it gaining or losing.
(d) For this purpose, we prepare a basket of all the currencies which we are interested in, and find
out the average of the changes in these currencies in a given period. This gives us the nominal
effective exchange rate (NEER).
(e) So, finally NEER is the measure of average relative strength of a given currency with respect to
other currencies without eliminating the effect of change in price.
3. Real exchange rate (RER): RER is the exchange rate which is calculated after eliminating the
effects of price change. Therefore, RER is based on constant prices.
4. Real effective exchange rate (REER): REER is the measure of average relative strength of a given
currency with respect to other currencies after eliminating the effects of price change.
5. Parity value: In the context of exchange rate in foreign exchange market, parity value refers to the
value of one currency in terms of the other for a given basket of goods and services. If a U.S. dollar
buys 50 times the goods and services in India, compared to a rupee, the parity value of a US dollar
should be 50 : 1. Accordingly, the exchange rate between rupee and a US dollar ought to be Rs. 50 :
1$. Any change in the parity value would imply a corresponding change in exchange rate.
Words that Matter
1. Foreign exchange: It refers to all the currencies of the rest of the world other than the domestic
currency of the country. For example, in India, US dollar is the foreign exchange.
2. Foreign Exchange Rate: The rate at which one currency is exchanged for another is called Foreign
Exchange Rate.
3. Foreign exchange market: It is the market where the national currencies are converted,
exchanged or traded for one another.
4. Hedging function: Hedging function pertains to protecting against foreign exchange risks, where
Hedging is an activity which is designed to minimize the risk of loss.
5. Fixed exchange rate system: The system of exchange rate in which exchange rate is officially
declared and fixed by the government is called fixed exchange rate system.

ORACLE IAS
6. Pegging: When domestic currency is tied to the value of foreign currency, it is known as pegging.
7. Pegging operations: It refers to all efforts made by the central government to keep the rate of
exchange stable.
8. Venture capital: Venture capital in the international money market refers to investments in the
purchase of foreign exchange in the international money market with a view to earn profits.
9. Devaluation: It refers to decrease in the value of domestic currency in terms of foreign currency
by the government. It is a part of fixed exchange rate.
10. Revaluation: It refers to increase in the value of domestic currency by the central government. It
is a part of fixed exchange rate.
11. Flexible Exchange Rate: The system of exchange rate in which value of a currency is allowed to
float freely as determined by demand for and supply of foreign exchange is called flexible exchange
rate system.
12. Currency depreciation: It refers to decrease in the value of domestic currency in terms of foreign
currency. It makes the domestic currency less valuable and more of it is required to buy a foreign
13. Currency appreciation: It refers to increase in the value of domestic currency in terms of foreign
currency. The domestic currency becomes more valuable and less of it is required to buy a foreign
14. Managed floating exchange rate: It is a mixture of a flexible exchange rate (the float part) and a
fixed exchange rate) the Managed part).
15.Spot Rate: If the operation is of daily nature, it is called spot market or current market.
16. Forward Rate: A market for foreign exchange for future delivery is known as forward market.
17. Nominal Exchange Rate (NER): The number of units of domestic currency required to purchase a
unit of foreign currency is called nominal exchange rate.
18. Nominal Effective Exchange Rate (NEER): It is the measure of average relative strength of a
given currency with respect to other currencies without eliminating the effect of change in price.
19. Real Exchange Rate (RER): It is the exchange rate which is calculated after eliminating the effects
of price change. Therefore, RER is based on constant prices.
20. Real Effective Exchange Rate (REER): It is the measure of average relative strength of a given
currency with respect to other currencies after eliminating the effects of price changes.
21. Parity value: It refers to the value of one currency in terms of the other for a given basket of
goods and services.
Balance of Payment – Chapter 10

Introduction
This chapter gives a detailed account of balance of payment of an economy, it structure and
categorisation into current and capital account. Thereafter explaining balance of trade and its
differences with the balance of payment, autonomous items, accommodating items and their
differences, disequilibrium in balance of payment.
Balance Of Payment, Its Structure And Components
1. The balance of payments of a country is a systematic record of all economic transactions between
its residents and residents of the foreign countries during a given period of time.
Note: Economic transactions are the transactions which cause transfer of value. In the context of

ORACLE IAS
foreign transactions value is transferred by the residents of one country to the residents of other
country. Example: when exports of goods or services are made by country A to country B, value (=
export receipts) is transferred by country B to country A. Between the countries, value is transferred
in terms of foreign exchange (i.e. payments are received and made in terms of foreign exchange).
2. Structure of balance payment accounting

(a) Transactions are recorded in the balance of payments accounts in double-entry book keeping.
(b) Each international transaction undertaken by country will results in a credit entry and debit entry
of equal size.
(c) As international transactions are recorded in double entry accounting, the BOP accounting must
always balance i.e., total amount of debits must be equal to total amount of credits.
(d) The balancing item Errors and omissions must be added to “balance” the BOP accounts.
(e) By convension, debit items and credit items are entered with a minus sign and plus sign
respectively.
(f) Transactions in BOP are classified into the following five major categories:
(i) Goods and services account (ii) Unilateral transfer account
(iii) Long-term capital account (iv) Short-term private capital account
(v) Short-term official capital account
For each of these given categories, specific types of transactions are shown as debits or credits. This
is shown in below table:

ORACLE IAS
The above five categories are also divided into the following two major categories of accounts in the
BOP account statement:
3. Current Account (Category-I, Category-II):

(a) Meaning: Current account records imports and exports of goods and services and unilateral
transfers.
(b) Components of Current Account: The main components of Current Account are:
(i) Export and Import of Goods (Merchandise Transactions or Visible Trade):
A major part of transactions in foreign trade is in the form of export and import of goods (visible
items). Payment for import of goods is written on the negative side (debit items) and receipt from
exports is shown on the positive side (credit items). Balance of these visible exports and imports is
known as balance of trade (or trade balance).
(ii) Export and Import of Services (Invisible Trade): It includes a large variety of non-factor services
(known as invisible items) sold and purchased by the residents of a country, to and from the rest of
the world. Payments are either received or made to the other countries for use of these services.
Services are generally of three kinds: (a) Shipping, (b) Banking, and (c) Insurance. Payments for these
services are recorded on the negative side and receipts on the positive side.
(iii) Unilateral or Unrequisted Transfers to and from abroad (One sided Trans¬actions): Unilateral
transfers include gifts, donations, personal remittances and other ‘oneway’ transactions. These refer
to those receipts and payments, which take place without any service in return. Receipt of unilateral
transfers from rest of the world is shown on the credit side and unilateral transfers to rest of the
world on the debit side.
(iv) Income receipts and payments to and from abroad: It includes investment income in the form of
interest, rent and profits.
4. Capital Account (Category-Ill, Category-IV, Category-V):
(a) Meaning: Capital account is that account which records all such transactions between residents
of a country and rest of the world which cause a change in the asset or liability status of the
residents of a country or its government.
(b) Components of Capital Account: The main components of capital account are:
(i) Loans: Borrowing and lending of funds are divided into two transactions:
• Private Transactions
-> These are transactions that are affecting assets or liabilities by individuals, businesses, etc. and
other non-government entities. The bulk of foreign investment is private.
-> For example, all transactions relating to borrowings from abroad by private sector and similarly
repayment of loans by foreigners are recorded on the positive (credit) side.
-> All transactions of lending to abroad by private sector and similarly repayment of loans to abroad
by private sector is recorded as negative or debit item.
• Official Transactions
-> Transactions affecting assets and liabilities by the government and its agencies.
-> For example, all transactions relating to borrowings from abroad by government sector and
similarly repayment of loans by foreign government are recorded on the positive (credit) side.
-> All transactions of lending to abroad by government sector and similarly repayment of loans to

ORACLE IAS
abroad by government sector is recorded as negative or debit item.
Private and official transactions borrowing are of two components:
(i) Commercial borrowings, referring to borrowing by a country (including government and private
sector) from international money market. This involves market rate of interest without
considerations of any concession, (ii) Borrowings as External Assistance, referring to borrowing by a
country with considerations of assistance. It involves lower rate of interest compared to that
prevailing in open market.
(ii) Foreign Investment (Investments to and from abroad): It includes:

• Investments by rest of the world in shares of Indian companies, real estate in India, etc. Such
investments from abroad are recorded on the positive (credit) side as they bring in foreign exchange.
• Investments by Indian residents in shares of foreign companies, real estate abroad, etc. Such
investments to abroad are recorded on the negative (debit) side as they lead to outflow of foreign
exchange.
‘Investments to and from abroad’ includes two types of investments:
-> Foreign Direct Investment (FDI)
It refers to purchase of an asset in rest of the world, such that it gives direct control to the purchaser
over the asset.
For example, (i) acquisition of a firm in the domestic country by a foreign country’s firm (ii) transfer
of funds from the parent company abroad to the subsidiary company in the domestic country.
-> Portfolio Investment
Portfolio Investment refers to the purchase of financial asset by the foreigners that does not give the
purchaser control over the asset. A foreign Institutional Investment (FII) is also a part of portfolio
investment.
For instance, purchase of shares of a foreign company, purchase of foreign government’s bonds, etc.
are treated as portfolio investments.
(iii) Change in Foreign Exchange Reserves

• The foreign exchange reserves are the financial assets of the government held in
• central bank. A change in reserves serves as the financing item in India’s BOP.
• So, any withdrawal from the reserves is recorded on the positive (credit) side and any addition to
these reserves is recorded on the negative (debit) side.
• It must be noted that ‘change in reserves’ is recorded in the BOP account and not ‘reserves’.
Balance Of Payments And Its Types
1. Balance: It means difference between the sum of credits and sum of debits. The BOP account
records three balances:
(a) Balance of trade
(b) Balance on current account
(c) Balance on capital account
2. Balance of trade: The term “balance of trade” denotes the difference between the exports and
imports of goods in a country. Balance of trade refers to the visible items only. It is the difference
between the value of merchandise (goods) exports and imports.
Balance of Trade = Export of visible goods – Import of visible goods.
3. Balance on current account: It is the difference between sum of credits and sum of debits on
current account.

ORACLE IAS
Balance on Current Account = Sum of credits on current account – Sum of debits on current account
4. Balance on capital account: It is the difference between sum of credits and sum of debits on
capital account.
Balance on capital account = Sum of credits on capital account – Sum of debits
on capital account
Autonomous And Accommodating Items, Deficit In Balance Of Payment And Disequilibrium In

Balance Of Payment
1. Autonomous items
(a) Autonomous items refer to those international economic transactions in the
current account and capital account which take place due to some economic motive such as profit
maximisation.
(b) These transactions are independent of the state of BOP account.
(c) These items are also known as ‘above the line items’.
(d) For example, if a foreign company is making investments in India with the aim of earning profit,
then such a transaction is independent of the country’s BOP situation.
2. Accommodating items
(a) Accommodating items refer to the transactions that are undertaken to cover deficit or surplus in
autonomous transactions, i.e., such transactions are determined by net consequences of
autonomous transactions.
(h) These items are also known as ‘below the line items’.
(c) For example, if there is a current account deficit in BOP, then this deficit is settled by capital
inflow from abroad. The sources used to meet a deficit in BOP, are: (i) Foreign exchange reserves; (ii)
Borrowings from IMF or foreign monetary authorities.
3. Deficit in BOP
(a) The balance of payments of a country is a systematic record of all economic transactions
between the residents of foreign countries during a given period of time.
(b) The transaction in the balance of payment account can be categorized as autonomous
transactions and accommodating transactions.
(c) Autonomous transactions are transactions done for some economic consideration such as profit.
(d) When the total inflows on account of autonomous transactions are less than total outflows on
account of such transactions, there is a deficit in the balance of payments account.
(e) Suppose, the autonomous inflow of foreign exchange during the year is $500, while the total
outflow is $600. It means that there is a deficit of $100.
4. Disequilibrium in Balance of Payments: There are a number of factors that cause disequilibrium
in the balance of payments showing either a surplus or deficit. These causes are:
(a) Economic Factors
(i) Large scale development expenditure that may cause large imports.
(ii) Cyclical fluctuations in general business activity such as recession or depression.
(iii) High domestic prices may result in imports.
(b) Political Factors: Political factors instability may cause large capital outflows and hamper the
inflows of foreign capital.

ORACLE IAS
(c) Social Factors: Changes in tastes, preference and fashions of the people bring disequilibrium in
BOP by inflowing imports and exports.
Words that Matter
1. Balance of payment: The balance of payments of a country is a systematic record of all economic
transactions between its residents and residents of the foreign countries during a given period of
time.
2. Current account: It records imports and exports of goods and services and unilateral transfers.
3. Capital account: Capital account is that account which records all such transactions between
residents of a country and rest of the world which cause a change in the asset or liability status of
the residents of a country or its government.
4. Foreign Direct Investment: It refers to purchase of an asset in rest of the world, such that it gives
direct control to the purchaser over the asset.
5. Portfolio Investment: It refers to the purchase of financial asset by the foreigners that does not
give the purchaser control over the asset.
6. Balance: It means difference between the sum of credits and sum of debits.
7. Balance of trade: The term “balance of trade” denotes the difference between the exports and
imports of goods in a country. Balance of trade refers to the visible items only.
8. Balance on Current Account: It is the difference between sum of credits and sum of debits on
current account.
Balance on Current Account = Sum of credits on current account – Sum of debits on current account
9. Balance on Capital Account: It is the difference between sum of credits and sum of debits on
capital account.
Balance on capital account = Sum of credits on capital account – Sum of debits
on capital account
10. Autonomous items: It refer to those international economic transactions in the current account
and capital account which take place due to some economic motive such as profit maximisation.
11. Accommodating items: It refer to the transactions that are undertaken to cover deficit or surplus
in autonomous transactions, i.e., such transactions are determined by net consequences of
autonomous transactions.

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NCERT Class 9 Economics notes – ORACLE IAS

Main Production Activities

 Farming is the main production activity in the village Palampur.

Factors of Production (or Requirements for Production of Goods and Services)

Important Changes in Farm Activities

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Modern farming requires a great deal of capital.

Sale of Surplus Farm Products

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 Various Aspects of Human Resource Development

Classification of Economic Activities: Various economic activities can be classified into

Market Activities and Non-Market Activities: Economic activities, i.e., production of

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Role of Education: Education is the most important component of Human Resource

Health: Health is another very important component of Human Resource Development.

Nature of Unemployment in India: Seasonal unemployment occurs when people fail to

 Unemployment leads to wastage of manpower resource.

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Two Typical Cases Of Poverty

(i) Urban Case

(ii) Rural Case

Poverty Analysis by Social Scientists

 Poor level of literacy

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Poverty Line Estimation in India

Poverty line defined by the government as follows

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Organisations Involved in Estimating Poverty Line

Poverty Trends In India

Group Vulnerable to Poverty

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Global Poverty Scenario

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(i) Promotion of Economic Growth

(ii) Targeted Anti-Poverty Programmes

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The Challenges to Poverty Reduction

 Higher economic growth.

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The most common method of determining poverty is income or consumption levels.

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There is a strong linkage between economic growth and poverty reduction.

The Government of India introduced targeted anti-poverty programmes starting from

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Meaning Of Food Security

Food security has the following dimensions

 All persons have the capacity to buy food of acceptable quality.

Necessity Of Food Security

Effect of Natural Calamity on Food Security

The total production of foodgrains decreases due to a natural calamity. It creates a

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Famine and Starvation

People Affected by Famine

Food Insecure People

Food Insecure Regions

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There are two types of hunger. These are as follows

(ii) Seasonal Hunger

Production of foodgrains in Uttarakhand, Jharkhand, Assam, Tamil Nadu has dropped.

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Food Security In India

Programmes For Food Security In India