NCERT Economy - POWERPLAY #2

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NCERT Economy – Back to Basics

Class 9 : Chapter 1 – THE STORY OF VILLAGE PALAMPUR
Primary Sector:
 The primary sector is directly concerned with natural resources of the country.
 Economic description: It is concerned with the extraction of raw materials.
 It includes agriculture, forestry, fishing and mining.
 Amongst the primary sector, agriculture is the predominant occupation.
 The primary sector utilizes the natural resources and produces raw materials and basic
goods which may be used by the industries or by the end-users.
 It can be said that the primary sector serves as a basic sector assisting the growth of the
secondary and tertiary sectors.

Secondary Sector:
 Secondary sector consists of the industrial sector, engaged in construction activities and
manufacturing of finished goods and tangible products.
 The secondary sector performs the vital role of catering to the needs of potential consumers
of the nation.
Tertiary Sector:
 Tertiary sector is intangible in nature, concentrating on the services sector.

 This sector consists of provision of services such as education, medical, hotel and finance
needed by the consumers.

Quaternary Activities:
 Involves the research and development needed to produce products from natural
resources.
 These are specialized tertiary activities in the ‘Knowledge Sector’ which demands a separate
classification
 The quaternary sector is the intellectual aspect of the economy.
 It is the process which enables entrepreneurs to innovate and improve the quality of
services offered in the economy.
 Elementary schools and university classrooms, hospitals and doctors’ offices, theatres,
accounting and brokerage firms all belong to this category of services
Quinary Activities:
 The quinary sector is the part of the economy where the top-level decisions are made.
 This includes the government which passes legislation.
 It also comprises the top decision-makers in industry, commerce and also the education
sector.

Organisation of Production:
 Aim of Production  To produce the goods and services that we want
The first requirement is land, and other natural resources such as water, forests, minerals
The second requirement is labour, i.e. people who will do the work  Highly educated +
Manual workers [Most abundant factor of production]
The third requirement is physical capital, i.e. the variety of inputs required at every stage
during production
[PHYSICAL CAPITAL: Tools, machines, buildings, raw materials and money in hand]
Fourth requirement is human capital
[HUMAN CAPITAL: It denotes the monetary value of the knowledge, skills, and competencies
of a person]
Differences between Organised Sector and Unorganised Sector:

Multiple Cropping:
 To grow more than one crop on a piece of land during the year is known as multiple
cropping.
 It is the most common way of increasing production on a given piece of land
Yield:
 Yield is measured as crop produced on a given piece of land during a single season
High yielding varieties (HYVs):
 Green Revolution in the late 1960s introduced the Indian farmer to cultivation of wheat and
rice using high yielding varieties (HYVs) of seeds.
 Compared to the traditional seeds, the HYV seeds promised to produce much greater
amounts of grain on a single plant.
 As a result, the same piece of land would now produce far larger quantities of foodgrains
than was possible earlier.
 HYV seeds needed plenty of water and also chemical fertilizers and pesticides to produce
best results.
 Higher yields were possible only from a combination of HYV seeds, irrigation, chemical
fertilisers, pesticides etc.
Modern farming method:
 Farmers of Punjab, Haryana and Western Uttar Pradesh were the first to try out the
modern farming method in India.
 The farmers in these regions set up tubewells for irrigation, and made use of HYV seeds,
chemical fertilizers and pesticides in farming.
 They were rewarded with high yields of wheat.
 Scientific reports indicate that the modern farming methods have overused the natural
resource base.
 Green Revolution is associated with the loss of soil fertility due to increased use of chemical
fertilizers.
 Continuous use of groundwater for tubewell irrigation has reduced the water-table below
the ground.
Chemical fertilizers:
 Chemical fertilizers provide minerals which dissolve in water and are immediately available
to plants.
 Chemical fertilizers can also kill bacteria and other microorganisms in the soil. This means
some time after their use, the soil will be less fertile than ever before.
 The continuous use of chemical fertilizers has led to degradation of soil health.
 Farmers are now forced to use more and more chemical fertilizers and other inputs to
achieve the same production level. This means cost of cultivation is rising very fast.

Lack of Surplus:
 Lack of surplus means that farmers are unable to obtain capital from their own savings, and
have to borrow
Class 9 : Chapter 2 – PEOPLE AS A RESOURCE
Population  Asset for the economy rather than a liability
Human Capital:
 Human capital is the stock of skill and productive knowledge embodied in them.
 Population becomes human capital when there is investment made in the form of
education, training and medical care.
'People as Resource':
 It is a way of referring to a country’s working people in terms of their existing productive

skills and abilities.
Human Capital Formation:
 When the existing 'human resource' is further developed by becoming more educated and
healthy, we call it 'human capital formation' that adds to the productive power of the
country
IT revolution:
 India’s IT revolution is a striking instance of how the importance of human capital has come
to acquire a higher position than that of material plant and machinery.
Productive asset by investment in human capital:
 Several years of your education added to the quality of labour. This enhanced your total
productivity.
 Total productivity adds to the growth of the economy. This in turn pays you through salary
or in some other form of his choice.
Economic Activities:
Economic activities have two parts: market activities and non-market activities
Market activities: Market activities involve remuneration to anyone who performs i.e., activity
performed for pay or profit. These include production of goods or services including govt service.
Non-market activities: Non-market activities are the production for self-consumption.

Major determinants of the earning of any individual:
 Education and skill are the major determinants of the earning of any individual in the
market.
 A majority of the women have meagre education and low skill formation.
 Women are paid low compared to men.
Quality of Population:
 The quality of population depends upon the literacy rate, health of a person indicated by
life expectancy and skill formation acquired by the people of the country.
 The quality of the population ultimately decides the growth rate of the country.
 Illiterate and unhealthy population are a liability for the economy.
 Literate and healthy population are an asset.
Mid-day meal scheme:
 Mid-day meal scheme has been implemented to encourage attendance and retention of
children and improve their nutritional status.
Sarva Siksha Abhiyan:
 Sarva Siksha Abhiyan is a significant step towards providing elementary education to all
children in the age group of 6 to 14 years.
Infant Mortality Rate (IMR):
 Infant Mortality Rate is the death of a child under one year of age.
Birth Rate:
 Birth rates is the number of babies born there for every 1,000 people during a particular
period of time.
Death Rate:
 Death Rate is the number of people per 1,000 who die during a particular period of time.
Unemployment:
 Unemployment is said to exist when people who are willing to work at the going wages
cannot find jobs.
 Unemployment leads to wastage of manpower resource. People who are an asset for the
economy turn into a liability.
 Unemployment tends to increase economic overload. The dependence of the unemployed
on the working population increases.
 Increase in unemployment is an indicator of a depressed economy.
 Rural Areas: seasonal and disguised unemployment
 Urban Areas: educated unemployment

Seasonal Unemployment:
 Seasonal unemployment happens when people are not able to find jobs during some
months of the year.
 People dependant upon agriculture usually face such kind of problem.
Disguised Unemployment:
 In case of disguised unemployment people appear to be employed.

 They have agricultural plot where they find work.
 This usually happens among family members engaged in agricultural activity.
Workforce Population:
 Workforce population includes people from 15 years to 59 years.
Class 9 : Chapter 3 – POVERTY AS A CHALLENGE
Poverty Line:
 Poverty trends in India and the world are illustrated through the concept of the poverty
line.
 A common method used to measure poverty is based on the income or consumption levels.
 A person is considered poor if his or her income or consumption level falls below a given
“minimum level” necessary to fulfill basic needs.
 While determining the poverty line in India, a minimum level of food requirement, clothing,
footwear, fuel and light, educational and medical requirement etc. are determined for
subsistence. These physical quantities are multiplied by their prices in rupees.
 The present formula for food requirement while estimating the poverty line is based on the
desired calorie requirement.
 The accepted average calorie requirement in India is 2400 calories per person per day in
rural areas and 2100 calories per person per day in urban areas.
 Since people living in rural areas engage themselves in more physical work, calorie
requirements in rural areas are considered to be higher than urban areas.
 The poverty line is estimated periodically (normally every five years) by conducting sample
surveys. These surveys are carried out by the National Sample Survey Organisation (NSSO).
Poverty – The Biggest Challenge:
 One of the biggest challenges of independent India has been to bring millions of its people
out of abject poverty.
 Mahatma Gandhi always insisted that India would be truly independent only when the
poorest of its people become free of human suffering.

Indicators:
 Usually the indicators used relate to the levels of income and consumption.
 But now poverty is looked through other social indicators like illiteracy level, lack of general
resistance due to malnutrition, lack of access to healthcare, lack of job opportunities, lack of
access to safe drinking water, sanitation etc.
Social Exclusion:
 It is a process through which individuals or groups are excluded from facilities, benefits and
opportunities that others (their “betters”) enjoy
 A typical example is the working of the caste system in India in which people belonging to
certain castes are excluded from equal opportunities.
Vulnerability:
 Vulnerability to poverty is a measure, which describes the greater probability of certain

communities (say, members of a backward caste) or individuals (such as a widow or a
physically handicapped person) of becoming, or remaining, poor in the coming years.
Vulnerable Groups:
 Social groups which are most vulnerable to poverty are scheduled caste and scheduled
tribe households.
 Among the economic groups, the most vulnerable groups are the rural agricultural labour
households and the urban casual labour households.
 The double disadvantage, of being a landless casual wage labour household in the socially
disadvantaged social groups of the scheduled caste or the scheduled tribe population
highlights the seriousness of the problem.
International Poverty Line:
 The international poverty line is a monetary threshold under which an individual is

considered to be living in poverty.
 It is calculated by taking the poverty threshold from each country—given the value of the
goods needed to sustain one adult—and converting it into dollars.
 Current international poverty line is $1.90 per day.
Causes of Poverty
Low level of economic development under the British colonial administration:
 Policies of the colonial government ruined traditional handicrafts and discouraged

development of industries like textiles.

Low Rate of Growth until 1980s:
 This resulted in less job opportunities and low growth rate of incomes.
 This was accompanied by a high growth rate of population.
 The two combined to make the growth rate of per capita income very low.
 The failure at both the fronts: promotion of economic growth and population control
perpetuated the cycle of poverty.
Irrigation and Green Revolution:
 With the spread of irrigation and the Green revolution, many job opportunities were created
in the agriculture sector.
 But the effects were limited to some parts of India.
Industries:
 The industries, both in the public and the private sector, did provide some jobs. But these
were not enough to absorb all the job seekers.
 Unable to find proper jobs in cities, many people started working as rickshaw pullers,
vendors, construction workers, domestic servants etc.
 With irregular small incomes, these people could not afford expensive housing.
 They started living in slums on the outskirts of the cities and the problems of poverty, largely
a rural phenomenon also became the feature of the urban sector.
Income inequalities:
 Another feature of high poverty rates has been the huge income inequalities.
 One of the major reasons for this is the unequal distribution of land and other resources.
 Since lack of land resources has been one of the major causes of poverty in India, proper
implementation of policy could have improved the life of millions of rural poor.
Class 9 : Chapter 4 – Food Security in India
Food Security:
 Food security means availability, accessibility and affordability of food to all people at all
times.
 The poor households are more vulnerable to food insecurity whenever there is a problem
of production or distribution of food crops.
 Food security depends on the Public Distribution System (PDS), Government vigilance and
action at times when this security is threatened.
Dimensions:
(a) Availability of food means food production within the country, food imports and the previous
years stock stored in government granaries.

(b) Accessibility means food is within reach of every person.
(c) Affordability implies that an individual has enough money to buy sufficient, safe and nutritious
food to meet one's dietary needs
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
How is food security affected during a calamity?
 Due to a natural calamity, say drought, total production of foodgrains decreases. It creates a
shortage of food in the affected areas.
 Due to shortage of food, the prices go up.
 At the high prices, some people cannot afford to buy food.
 If such calamity happens in a very wide spread area or is stretched over a longer time period,
it may cause a situation of starvation.
 A massive starvation might take a turn of famine.
Famine:
 A Famine is characterised by wide spread deaths due to starvation and epidemics caused
by forced use of contaminated water or decaying food and loss of body resistance due to
weakening from starvation
 The most devastating famine that occurred in India was the FAMINE OF BENGAL in 1943.
This famine killed 30 lakh people in the province of Bengal.
Most food insecure people:
 The social composition along with the inability to buy food also plays a role in food
insecurity.
 The SCs, STs and some sections of the OBCs (lower castes among them) who have either
poor land-base or very low land productivity are prone to food insecurity.
 The people affected by natural disasters, who have to migrate to other areas in search of
work, are also among the most food insecure people.
Hunger:
 Hunger is another aspect indicating food insecurity.

 Hunger is not just an expression of poverty, it brings about poverty.
 The attainment of food security therefore involves eliminating current hunger and reducing
the risks of future hunger.
 Hunger has chronic and seasonal dimensions.

Chronic Hunger
 Chronic hunger is a consequence of diets persistently inadequate in terms of quantity and/or

quality.
 Poor people suffer from chronic hunger because of their very low income and in turn
inability to buy food even for survival.
Seasonal Hunger:
 Seasonal hunger is related to cycles of food growing and harvesting.

 This is prevalent in rural areas because of the seasonal nature of agricultural activities and in
urban areas because of the casual labour, e.g., there is less work for casual construction
labour during the rainy season.
 This type of hunger exists when a person is unable to get work for the entire year.
Self-sufficiency in foodgrains:
 After independence, Indian policy makers adopted all measures to achieve self-sufficiency in
food grains.
 India adopted a new strategy in agriculture, which resulted in the ‘Green Revolution’
especially in the production of wheat and rice.
 Indira Gandhi, the then Prime Minister of India, officially recorded the impressive strides of
the Green revolution in agriculture by releasing a special stamp entitled ‘Wheat Revolution’
in July 1968. The success of wheat was later replicated in rice.
Buffer Stock:
 Buffer Stock is the stock of foodgrains, namely wheat and rice procured by the government
through Food Corporation of India (FCI).
 The FCI purchases wheat and rice from the farmers in states where there is surplus
production.
 The farmers are paid a pre-announced price for their crops. This price is called Minimum
Support Price.
 The MSP is declared by the government every year before the sowing season to provide
incentives to the farmers for raising the production of these crops.
Why this buffer stock is created by the government?
 This is done to distribute foodgrains in the deficit areas and among the poorer strata of
society at a price lower than the market price also known as Issue Price.
 This also helps resolve the problem of shortage of food during adverse weather conditions
or during the periods of calamity.
Public Distribution System:
 The food procured by the FCI is distributed through government regulated ration shops
among the poorer section of the society. This is called the public distribution system (PDS).

Fair Price Shops:
 Ration shops also known as Fair Price Shops keep stock of foodgrains, sugar, kerosene oil for
cooking.
 These items are sold to people at a price lower than the market price.
Rationing:
 The introduction of Rationing in India dates back to the 1940s against the backdrop of the
Bengal famine.
 The rationing system was revived in the wake of an acute food shortage during the 1960s,
prior to the Green Revolution.
 In the wake of the high incidence of poverty levels, as reported by the NSSO in the mid-
1970s, three important food intervention programmes were introduced:
1) Public Distribution System (PDS) for food grains (in existence earlier but
strengthened thereafter)
2) Integrated Child Development Services (ICDS) (introduced in 1975 on an
experimental basis)
3) Food-for -Work(FFW) (introduced in 1977–78)
Subsidy:
 Subsidy is a payment that a government makes to a producer to supplement the market

price of a commodity.
 Subsidies can keep consumer prices low while maintaining a higher income for domestic
producers.
Maintenance cost of procuring foodgrains:
 The rising Minimum Support Prices (MSP) have raised the maintenance cost of procuring
foodgrains by the government.
 Rising transportation and storage costs of the FCI are other contributing factors in this
increase.
Role of cooperatives in food security:
 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 per cent are being
run by the cooperatives.

Class 10 : Chapter 1 – Development
Average Income or Per Capita Income:
 It is the total income of the country divided by its total population.

 The average income is also called per capita income.
 Per Capita Income is calculated in dollars for all countries so that it can be compared.
 It is also done in a way so that every dollar would buy the same amount of goods and
services in any country.
Infant Mortality Rate:
 Infant Mortality Rate (or IMR) indicates the number of children that die before the age of
one year as a proportion of 1000 live children born in that particular year.
Literacy Rate:
 Literacy Rate measures the proportion of literate population in the 7 and above age group.
Net Attendance Ratio:
 Net Attendance Ratio 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.
Human Development Report:
 Human Development Report published by UNDP compares countries based on the

educational levels of the people, their health status and per capita income.
Life Expectancy at Birth:
 Life expectancy at birth denotes, as the name suggests, average expected length of life of a
person at the time of birth.
Gross Enrolment Ratio:
 Gross Enrolment Ratio for three levels means enrolment ratio for primary school,
secondary school and higher education beyond secondary school.

Class 10 : Chapter 2 – Sectors of the Indian Economy
Primary Sector:
When we produce a good by exploiting natural resources, it is an

activity of the primary sector.This is because it forms the base for
all other products that we subsequently make.
Secondary Sector:
The secondary sector covers activities in which natural products

are changed into other forms through ways of manufacturing that
we associate with industrial activity. It is the next step after
primary.
Tertiary Sector:
Transport, storage, communication, banking, trade are some

examples of tertiary activities. Since these activities generate
services rather than goods, the tertiary sector is also called the
service sector.

Why are only ‘final goods and services’ counted?
 In contrast to final goods, goods such as wheat and the wheat flour in this example are
intermediate goods.
 Intermediate goods are used up in producing final goods and services.
 The value of final goods already includes the value of all the intermediate goods that are
used in making the final good.
 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.
Gross Domestic Product (GDP):
 The sum of production in the three sectors gives what is called the Gross Domestic Product
(GDP) of a country.
 It is the value of all final goods and services produced within a country during a particular
year.
NREGA 2005:
 Central government made a law implementing the Right to Work.

 It is called National Rural Employment Guarantee Act 2005 (NREGA 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.
Public Sector:
 In the public sector, the government owns most of the assets and provides all the services.
 Railways or post office is an example of the public sector
 The purpose of the public sector is not just to earn profits.
 Governments raise money through taxes and other ways to meet expenses on the services
rendered by it.
Private Sector:
 In the private sector, ownership of assets and delivery of services is in the hands of private
individuals or companies.
 Companies like Tata Iron and Steel Company Limited (TISCO) or Reliance Industries Limited
(RIL) are privately owned
 Activities in the private sector are guided by the motive to earn profits.

Class 10 : Chapter 3 – Money and Credit
Double Coincidence of wants:
Shoe manufacturer  He wants to sell shoes in the market

and buy wheat.
If the shoe manufacturer had to directly exchange shoes for

wheat without the use of money  VERY DIFFICULT
He would have to look for a wheat growing farmer who not

only wants to sell wheat but also wants to buy the shoes in
exchange.
That is, both parties have to agree to sell and buy each
others commodities.
This is known as double coincidence of wants.
In a barter system where goods are directly exchanged

without the use of money, double coincidence of wants is an
essential feature.
 In an economy where money is in use, money by providing the crucial intermediate step
eliminates the need for double coincidence of wants.
Medium of Exchange:
 Since money acts as an intermediate in the exchange process, it is called a medium of

exchange.

Currency:
 Modern forms of money include currency — paper notes and coins.

 It is accepted as a medium of exchange because the currency is authorised by the
government of the country.
 In India, the Reserve Bank of India issues currency notes on behalf of the central
government.
Deposits with Banks:
 The other form in which people hold money is as deposits with banks.
 Banks accept the deposits and also pay an interest rate on the deposits.
 In this way people’s money is safe with the banks and it earns an interest.
 Since the deposits in the bank accounts can be withdrawn on demand, these deposits are
called demand deposits.
Loan Activities of Banks:
 Banks keep only a small proportion of their deposits as cash with themselves.
 Banks use the major portion of the deposits to extend loans.
 There is a huge demand for loans for various economic activities.
 Banks make use of the deposits to meet the loan requirements of the people. In this way,
banks mediate between those who have surplus funds (the depositors) and those who are in
need of these funds (the borrowers).
 Banks charge a higher interest rate on loans than what they offer on deposits.
 The difference between what is charged from borrowers and what is paid to depositors is
their main source of income.
Cheque:
 A cheque is a paper instructing the bank to pay a specific amount from the person’s account
to the person in whose name the cheque has been made.

Collateral:
 Collateral is an asset that the borrower owns (such as land, building, vehicle, livestocks,
deposits with banks) and uses this as a guarantee to a lender until the loan is repaid.
 If the borrower fails to repay the loan, the lender has the right to sell the asset or collateral
to obtain payment.
 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.
Loans from Co-operatives:
 Besides banks, the other major source of cheap credit in rural areas are the cooperative
societies (or cooperatives).
 Members of a cooperative pool their resources for cooperation in certain areas.
 There are several types of cooperatives possible such as farmers cooperatives, weavers
cooperatives, industrial workers cooperatives, etc.
Class 10 : Chapter 4 – Globalisation and the Indian Economy
Multinational corporations (MNCs):
 A MNC is a company that owns or controls production in more than one nation.
 MNCs set up offices and factories for production in regions where they can get cheap
labour and other resources.
 This is done so that the cost of production is low and the MNCs can earn greater profits.
 Investment made by MNCs is called foreign investment.
Foreign Trade:
 Foreign trade creates an opportunity for the producers to reach beyond the domestic
markets, i.e., markets of their own countries.
 Producers can sell their produce not only in markets located within the country but can also
compete in markets located in other countries of the world.
 Similarly, for the buyers, import of goods produced in another country is one way of
expanding the choice of goods beyond what is domestically produced.
 Foreign trade thus results in connecting the markets or integration of markets in different
countries.

Globalisation:
 Globalisation is this process of rapid integration or interconnection between countries.

 MNCs are playing a major role in the globalisation process.
 More and more goods and services, investments and technology are moving between
countries.
Factors that have enabled Globalisation:
 Rapid improvement in technology

 Liberalisation of foreign trade and foreign investment policy
Liberalisation:
 Removing barriers or restrictions set by the government is what is known as liberalisation.

 Tax on imports is an example of trade barrier. It is called a barrier because some restriction
has been set up.
World Trade Organisation (WTO):
 World Trade Organisation (WTO) is one such organisation whose aim is to liberalise
international trade.
Class 11 : Chapter 1 – Indian Economy on the eve of Independence
Muslin:
 Muslin is a type of cotton textile which had its origin in Bengal, particularly, places in and
around Dhaka (spelled during the pre-independence period as Dacca), 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.
British Colonial Rule:
 The sole purpose of the British colonial rule in India was to reduce the country to being a
feeder economy for Great Britain’s own rapidly expanding modern industrial base.
 The economic policies pursued by the colonial government in India brought about a
fundamental change in the structure of the Indian economy — transforming the country into
a net supplier of raw materials and consumer of finished industrial products from Britain.
National and Per Capita Income Estimates:
 V.K.R.V. Rao estimates of the national and per capita incomes during the colonial period
were considered very significant

Agricultural Sector:
 India’s economy under the British colonial rule remained fundamentally agrarian — about
85% of the country’s population lived mostly in villages and derived livelihood directly or
indirectly from agriculture.
 Agricultural Sector continued to experience stagnation and, not infrequently, unusual
deterioration.
 This stagnation in the agricultural sector was caused mainly because of the various systems
of land settlement that were introduced by the colonial government.

 Particularly, under the zamindari system which was implemented in the then Bengal
Presidency, the profit accruing out of the agriculture sector went to the zamindars instead of
the cultivators.
 Low levels of technology, lack of irrigation facilities and negligible use of fertilisers, all added
up to aggravate the plight of the farmers and contributed to the dismal level of agricultural
productivity.
 Some evidence of a relatively higher yield of cash crops in certain areas of the country due
to commercialisation of agriculture.
 India’s agricultural production received a further set back due to the country’s partition at
the time of independence.
 A sizeable portion of the undivided country’s highly irrigated and fertile land went to
Pakistan; this had an adverse impact upon India’s output from the agriculture sector.
 Particularly affected was India’s jute industry since almost the whole of the jute producing
area became part of East Pakistan (now Bangladesh).
 India’s jute goods industry (in which the country had enjoyed a world monopoly so far), thus,
suffered heavily for lack of raw material.
Industrial Sector:
 India could not develop a sound industrial base under the colonial rule.
 The primary motive of the colonial government behind this policy of systematically
de-industrialising India was two-fold.
 The intention was, first, to reduce India to the status of a mere exporter of important raw
materials for the upcoming modern industries in Britain and, second, to turn India into a
sprawling market for the finished products of those industries so that their continued
expansion could be ensured to the maximum advantage of their home country — Britain.

 Decline of the indigenous handicraft industries created not only massive unemployment in
India but also a new demand in the Indian consumer market, which was now deprived of the
supply of locally made goods.
 This demand was profitably met by the increasing imports of cheap manufactured goods
from Britain.
 During the second half of the nineteenth century, modern industry began to take root in
India but its progress remained very slow.
 The cotton textile mills, mainly dominated by Indians, were located in the western parts of
the country, namely, Maharashtra and Gujarat, while the jute mills dominated by the
foreigners were mainly concentrated in Bengal.
 Subsequently, the iron and steel industries began coming up in the beginning of the
twentieth century. The Tata Iron and Steel Company (TISCO) was incorporated in 1907.
 The growth rate of the new industrial sector and its contribution to the Gross Domestic
Product (GDP) remained very small.
 Another significant drawback of the new industrial sector was the very limited area of
operation of the public sector.
 This sector remained confined only to the railways, power generation, communications,
ports and some other departmental undertakings.

Foreign Trade:
 Restrictive policies of commodity production, trade and tariff pursued by the colonial
government adversely affected the structure, composition and volume of India’s foreign
trade.
 Consequently, India became 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.
 The opening of the Suez Canal further intensified British control over India’s foreign trade.
 The most important characteristic of India’s 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 economy.
 This export surplus did not result in any flow of gold or silver into India.
 Export surplus was used to make payments for the expenses incurred by an office set up by
the colonial government in Britain, expenses on war, again fought by the British
government, and the import of invisible items, all of which led to the drain of Indian wealth.
Demographic Conditions:
 Various details about the population of British India were first collected through a census in
1881.
 It revealed the unevenness in India’s population growth.

 Before 1921, India was in the first stage of demographic transition. The second stage of
transition began after 1921. However, neither the total population of India nor the rate of
population growth at this stage was very high.
 The overall literacy level was less than 16 %. Out of this, the female literacy level was at a
negligible low of about seven per cent.
 Water and air-borne diseases were rampant and took a huge toll on life.
 Infant mortality rate was quite alarming—about 218 per thousand
 Life expectancy was also very low — 32 years
Occupational Structure:
 Agriculture sector accounted for largest share of workforce

 Another striking aspect was the growing regional variation
 Parts of the then Madras Presidency (comprising areas of the present-day states of Tamil
Nadu, Andhra Pradesh, Kerala and Karnataka), Maharashtra and West Bengal witnessed a
decline in the dependence of the workforce on the agricultural sector with a commensurate
increase in the manufacturing and the services sectors.
 There had been an increase in the share of workforce in agriculture during the same time in
states such as Orissa, Rajasthan and Punjab.
Infrastructure:
 Under the colonial regime, basic infrastructure such as railways, ports, water transport,
posts and telegraphs did develop.

 The real motive behind this development was not to provide basic amenities to the people
but to sub-serve various colonial interests.
Roads:
 The roads that were built primarily served the purposes of mobilising the army within India
and drawing out raw materials from the countryside to the nearest railway station or the
port to send these to far away England or other lucrative foreign destinations.
Railways:
 The British introduced the railways in India in 1850 and it is considered as one of their most
important contributions.
 The railways affected the structure of the Indian economy in two important ways.
 On the one hand it enabled people to undertake long distance travel and thereby break
geographical and cultural barriers
 On the other hand, it fostered commercialisation of Indian agriculture which adversely
affected the comparative self-sufficiency of the village economies in India.
 The volume of India’s export trade undoubtedly expanded but its benefits rarely accrued to
the Indian people.
Waterways:
 The inland waterways, at times, also proved uneconomical as in the case of the Coast Canal
on the Orissa coast.
 Though the canal was built at a huge cost to the government exchequer, yet, it failed to
compete with the railways, which soon traversed the region running parallel to the canal,
and had to be ultimately abandoned.
Telegraph:
 Introduction of the expensive system of telegraph in India served the purpose of

maintaining law and order
Postal Services:
 The postal services, on the other hand, despite serving a useful public purpose, remained all
through inadequate.



Class 11 : Chapter 2 – Indian Economy 1950 - 1990

To get an insight into—
 Development of Five year Plans

 Development policies in different sectors
 Understand merits and limitations of a regulated economy
Types of Economic Systems
What to produce
How to produce
How to distribute
A. Market economy or Capitalism:
 Production of those consumer goods which are in demand i.e., goods that can be sold
profitably either in the domestic or in the foreign markets
 Goods produced are distributed among people not on the basis of what people need but on
the basis of what people can afford and are willing to purchase

B. Socialist society:
 The government decides what goods are to be produced in accordance with the
needs of society—assumed that the government knows what is good for the people of the
country as well as how they should be distributed.
 A socialist society has no private property since everything is owned by the state
C. Mixed Economy:
 Most economies are mixed economies, i.e., the government and the market together
answer the three questions of what to produce, how to produce and how to distribute what
is produced
 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 do
In India…
India would be a ‘socialist’ society with a strong public sector but also with private property and
democracy; the government would ‘plan’ economy with the private sector being encouraged
to be part of the plan effort.

 Reflections: The ‘Industrial Policy Resolution’ of 1948 + Directive Principles of the

Indian Constitution
 1950: The Planning Commission was set up (Prime Minister-its Chairperson)
 Led to: An era of five year plans
 Plan: To spell out as to how the resources should be distributed in the country
 Goals of the five year plans:
1) Growth
2) Modernisation
3) Self-reliance
4) Equity

Growth:
 Refers to increase in the country’s capacity to produce the output of goods and
services within the country
 Good indicator of economic growth is the steady increase in the Gross Domestic
Product (GDP)—the market value of all the goods and services produced in the
country during a year.
 The GDP of a country is derived from the different sectors of the economy—the
contribution made by each of these sectors makes up the structural composition of the
economy.

Modernisation:
 Steps taken by a factory to increase output by using a new type of machine and this
adoption of new technology is called modernisation
 Also, refers to changes in social outlook (the recognition that women should have the
same rights as men)
Self-reliance:
 The first seven five year plans gave more importance to self-reliance which means
avoiding imports of those goods which could be produced in India itself in order to reduce
our dependence on foreign countries, especially for food
 There was a fear that dependence on imported food supplies, foreign technology and
foreign capital may make India’s sovereignty vulnerable to foreign interference in our
policies.

Equity:
Philosophy: To ensure that the benefits of economic prosperity reach the poor sections as well
instead of being enjoyed only by the rich—every Indian should be able to meet his or her basic
needs such as food, a decent house, education and health care; and inequality in the distribution of
wealth should be reduced.
Addressing agricultural needs
Land Reforms:
Intermediaries (variously called zamindars, jagirdars etc.) merely collected rent from the actual
tillers of the soil without contributing towards improvements on the farm
 Equity in agriculture: Land reforms—change in the ownership of landholdings

 Steps were taken to abolish intermediaries and to make the tillers the owners of
land— ownership of land would give incentives to the tillers to invest in making
improvements provided sufficient capital was made available to them.
Land ceiling: Fixing the maximum size of land which could be owned by an individual—to reduce
the concentration of land ownership in a few hands
Around 200 lakh tenants came into direct contact with the government — they were freed from
being exploited by the zamindars incentive to increase output growth in agriculture
But there still were cases wherein
 The zamindars continued to own large areas of land (usage of loopholes in legislation)
 Tenants were evicted and the landowners claimed to be self-cultivators (the actual tillers)
Hurdles faced by the land ceiling legislation
 The big landlords challenged the legislation in the courts delayed its implementation
 Used this delay to register their lands in the name of close relatives to escape from the
legislation
Success of Land reforms witnessed: Kerala and West Bengal had governments committed to the
policy of land to the tiller
Green Revolution
 During independence: About 75% of the country’s population dependent on

agriculture
 Marred with low productivity  use of old technology + absence of required
infrastructure
 India’s agriculture  dependant upon monsoon; and if the monsoon fell short the
farmers were in trouble (if no access to irrigation facilities)

Stagnation in agriculture shifted—Green Revolution
 The large increase in production of food grains resulting from the use of high yielding variety
(HYV) seeds especially for wheat and rice
 This also meant usage of fertiliser and pesticide in the correct quantities as well as regular
supply of water; the need for these inputs in correct proportions is vital
Check-list for farmers: Reliable irrigation facilities as well as the financial resources to
purchase fertiliser and pesticide
1st phase of the green revolution (approximately mid 1960s upto mid 1970s)
 The use of HYV seeds was restricted to the more affluent states such as Punjab,
Andhra Pradesh and Tamil Nadu.
 Use of HYV seeds proved beneficial for the wheat-growing regions only
2nd Phase of the green revolution (mid-1970s to mid-1980s):
 Spread of the HYV technology to a larger number of states and this benefited more
variety of crops thus, enabling India to achieve self-sufficiency in food grains
 To increase growth in agricultural output & contribute to the country’s economy—it is
important to keep a substantial amount of agricultural produce to be sold in the market
(and not consumed by the farmers himself)
The portion of agricultural produce which is sold in the market by the farmers is called marketed
surplus
Observations of C.H. Hanumantha Rao
 A good proportion of the rice and wheat produced during the green revolution
period (available as marketed surplus) was sold by the farmers in the market decline in the
price of food grains
 Low-income groups - Benefited from this decline in relative prices (spend a large
percentage of their income on food)
 Enabled the government to procure sufficient amount of food grains to build a stock which
could be used in times of food shortage
Risks involving technology:

 Possibility of increase in the disparities between small and big farmers—since only
the big farmers could afford the required inputs, thereby reaping most of the
benefits of the green revolution
 HYV crops were more prone to attack by pests

Fears remained ‘fears’— because of the steps taken by the government
 Provided loans at a low interest rate to small farmers

 Subsidised fertilisers so that small farmers could also have access to the needed
inputs; since the small farmers could obtain the required inputs, the output on small farms
equalled the output on large farms in the course of time benefited the small as well as rich
farmers
 Risks due to pest attack were minimised with the services rendered by research
institutes established by the government
Subsidies
Why: necessary to use subsidies to provide an incentive for adoption of the new HYV
technology by small farmers in particular—to encourage farmers to test the new technology
Case against continuing subsidies—
 Once the technology is found profitable and is widely adopted, subsidies should be phased
out since their purpose has been served— meant to benefit the farmers buta substantial
amount of fertiliser subsidy also benefits the fertiliser industry; and among farmers,
the subsidy largely benefits the farmers in the more prosperous regions
 Ends up not providing benefit to the target group and it is a huge burden on the
government’s finances
Need to continue with agricultural subsidies— Farming in India continues to be a risky

business as most of the farmers are very poor and they will not be able to afford the
required inputs without subsidies will increase the inequality between rich and poor farmers
and violate the goal of equity
Correct way forward: Ensure that only the poor farmers enjoy the benefits
Observation: As a nation becomes more prosperous, the proportion of GDP contributed by

agriculture as well as the proportion of population working in the sector declines
considerably
Between 1950 and 1990: The proportion of GDP contributed by agriculture declined
significantly but not the population depending on it (67.5 per cent in 1950 to 64.9 per cent by
1990)—the industrial sector and the service sector did not absorb the people working in the
agricultural sector
Industry & Trade
Poor nations can progress only if they have a good industrial sector as industry provides
employment which is more stable than the employment in agriculture; it promotes
modernisation and overall prosperity  more emphasis on its growth in the FYPs

Post-Independence: Need to expand the industrial base with a variety of industries if the
economy was to grow
Market and State in Indian Industrial Development:
 At the time of independence— lack of capital to undertake investment in industrial ventures

required for the development of our economy; small market being unable to encourage
industrialists to undertake major projects  state had to play an extensive role in
promoting the industrial sector
 Development of the economy on socialist lines: Policy of the state controlling the
commanding heights of the economy—the state would have complete control of
those industries that were vital for the economy
 Policies of the private sector needed to be complimentary to those of the public
sector, with the public sector leading the way.
Industrial Policy Resolution 1956 (IPR 1956):
Formed the basis of the Second Five Year Plan—to build the basis for a socialist pattern of the
society
Classification of Industries—three categories:
1st: Industries which would be exclusively owned by the state

2nd: Industries in which the private sector could supplement the efforts of the state sector, with
the state taking the sole responsibility for starting new units
3rd: The remaining industries which were to be in the private sector; was kept under state control
through a system of licenses.
 Only with the issuance of license could any industry be established—to promote
industry in backward regions  it was easier to obtain a license if the industrial unit
was established in an economically backward area
 Were given certain concessions such as tax benefits and electricity at a lower tariff To
promote regional equality
 Even an existing industry had to obtain a license for expanding output or for
diversifying production (producing a new variety of goods)to ensure that the
quantity of goods produced was not more than what the economy required
 License to expand production was given only if the government was convinced that
the economy required the larger quantity of goods.
Small-scale Industry:

Karve Committee: In 1955 possibility of using small-scale industries for promoting rural
development
A ‘small-scale industry’ is defined with reference to the maximum investment allowed on the assets
of a unit.
 More ‘labour intensive’ i.e., they use more labour than the large-scale industries and,
therefore, generate more employment
 Inability to compete with bigger firms— reservation of a certain number of products
for the small-scale industry; the criterion of reservation being the ability of these
units to manufacture the goods
 Were given concessions- lower excise duty and bank loans at lower interest rates
Trade Policy—Import Substitution
The industrial policy that we adopted was closely related to the trade policy
1st seven FYPs: Trade was characterised by an inward looking trade strategy  Import
substitution; aiming at replacing or substituting imports with domestic production
Protection from imports took two forms: Tariffs and Quotas
Tariffs: Tax on imported goods; they make imported goods more expensive and discourage their
use.
Quotas: Specify the quantity of goods which can be imported
Both restrict imports and, therefore, protect the domestic firms from foreign competition
Policy of protection:

 Based on the notion that industries of developing countries are not in a position to
compete against the goods produced by more developed economies—assumed that if the
domestic industries are protected they will learn to compete in the course of time
 Feared the possibility of foreign exchange being spent on import of luxury goods if no
restrictions were placed on imports
Until the mid-1980s: Hardly any promotion of exports until the mid-1980s
Effect of Policies on Industrial Development:
 Proportion of GDP contributed by the industrial sector increased in the period from
11.8 per cent in 1950-51 to 24.6 per cent in 1990-91
 Rise in the industry’s share of GDP—important indicator of development
 Witnessed six per cent annual growth rate of the industrial sector
 Diversification of the Indian industries was ensured
Mahalanobis: The Architect of Indian Planning
 Mahalanobis established the Indian Statistical Institute (ISI) in Calcutta and started a
journal, Sankhya, which still serves as a respected forum for statisticians to discuss their
ideas.
Marketed Surplus:
 The portion of agricultural produce which is sold in the market by the farmers is called
marketed surplus.

Class 11 : Chapter 3 – LIBERALISATION, PRIVATISATION AND

GLOBALISATION: AN APPRAISAL
 Since independence, India followed the mixed economy framework by combining the
advantages of the market economic system with those of the planned economic system.
 In 1991, India met with an economic crisis relating to its external debt — the government
was not able to make repayments on its borrowings from abroad; foreign exchange
reserves, which we generally maintain to import petrol and other important items, dropped
to levels that were not sufficient for even a fortnight.
[ When we import goods like petroleum, we pay in dollars which we earn from our exports ]
 The crisis was further compounded by rising prices of essential goods.
Expenditure > Income
When expenditure is more than income, the government borrows to finance the deficit from
banks and also from people within the country and from international financial institutions.
Development Policies:
 Development policies required that even though the revenues were very low, the
government had to overshoot its revenue to meet problems like unemployment, poverty
and population explosion.
 The continued spending on development programmes of the government did not generate
additional revenue.
 Govt. was not able to generate sufficiently from internal sources such as taxation.
 The income from public sector undertakings was also not very high to meet the growing
expenditure.
 At times, our foreign exchange, borrowed from other countries and international financial
institutions, was spent on meeting consumption needs.
Govt. Expenditure @ late 1980s:
 Government expenditure began to exceed its revenue by such large margins that it became
unsustainable.
 Prices of any essential goods rose sharply
 Imports grew at a very high rate without matching growth of exports
 As pointed out earlier, foreign exchange reserves declined to a level that was not adequate
to finance imports for more than two weeks
 There was also not sufficient foreign exchange to pay the interest that needs to be paid to
international lenders
Support from IBRD and IMF:
 India approached the International Bank for Reconstruction and Development (IBRD),
popularly known as World Bank and the International Monetary Fund (IMF), and received $7
billion as loan to manage the crisis.
 For availing the loan, these international agencies expected India to liberalise and open up
the economy by removing restrictions on the private sector, reduce the role of the
government in many areas and remove trade restrictions.

 India agreed to the conditionalities of World Bank and IMF and announced the New
Economic Policy (NEP).
New Economic Policy (NEP):
 The thrust of the policies was towards creating a more competitive environment in the
economy and removing the barriers to entry and growth of firms.
 This set of policies can broadly be classified into two groups: the stabilisation measures and
the structural reform measures.
Stabilisation Measures:
 Stabilisation measures are short term measures, intended to correct some of the
weaknesses that have developed in the balance of payments and to bring inflation under
control.
 In simple words, this means that there was a need to maintain sufficient foreign exchange
reserves and keep the rising prices under control.
Structural Reform Measures:
 Structural reform policies are long-term measures, aimed at improving the efficiency of the
economy and increasing its international competitiveness by removing the rigidities in
various segments of the Indian economy.
LPG:
 The government initiated a variety of policies which fall under three heads viz.,
liberalisation, privatisation and globalisation.
 The first two are policy strategies and the last one is the outcome of these strategies.
Liberalisation:
 Liberalisation was introduced to put an end to these restrictions and open up various sectors
of the economy.
 Though a few liberalisation measures were introduced in 1980s in areas of industrial
licensing, export-import policy, technology upgradation, fiscal policy and foreign investment,
reform policies initiated in 1991 were more comprehensive.
Deregulation of Industrial Sector:
In India, regulatory mechanisms were enforced in various ways
(i) Industrial licensing under which every entrepreneur had to get permission from
government officials to start a firm, close a firm or to decide the amount of goods that
could be produced
(ii) Private sector was not allowed in many industries
(iii) Some goods could be produced only in small scale industries
(iv) Controls on price fixation and distribution of selected industrial products

Lifting the restrictions:
 The reform policies introduced in and after 1991 removed many of these restrictions.
 Industrial licensing was abolished for almost all but product categories — alcohol, cigarettes,
hazardous chemicals industrial explosives, electronics, aerospace and drugs and
pharmaceuticals.
 The only industries which are now reserved for the public sector are defence equipments,
atomic energy generation and railway transport.
 Many goods produced by small scale industries have now been deserved.
 In many industries, the market has been allowed to determine the prices.
Financial Sector Reforms:
 Financial sector includes financial institutions such as commercial banks, investment banks,
stock exchange operations and foreign exchange market.
 The financial sector in India is controlled by the Reserve Bank of India (RBI).
 All the banks and other financial institutions in India are controlled through various norms
and regulations of the RBI.
 The RBI decides the amount of money that the banks can keep with themselves, fixes
interest rates, nature of lending to various sectors etc.
 One of the major aims of financial sector reforms is to reduce the role of RBI from regulator
to facilitator of financial sector.
 This means that the financial sector may be allowed to take decisions on many matters
without consulting the RBI.
Establishment of Private Sector Banks:
 The reform policies led to the establishment of private sector banks, Indian as well as
foreign.
 Foreign investment limit in banks was raised to around 50 per cent.
 Those banks which fulfil certain conditions have been given freedom to set up new branches
without the approval of the RBI and rationalise their existing branch networks.
 Though banks have been given permission to generate resources from India and abroad,
certain aspects have been retained with the RBI to safeguard the interests of the account-
holders and the nation.
 Foreign Institutional Investors (FII) such as merchant bankers, mutual funds and pension
funds are now allowed to invest in Indian financial markets
Tax Reforms:
 Tax reforms are concerned with the reforms in government’s taxation and public
expenditure policies which are collectively known as its fiscal policy.
 There are two types of taxes: direct and indirect.
 Direct taxes consist of taxes on incomes of individuals as well as profits of business
enterprises.
 Since 1991, there has been a continuous reduction in the taxes on individual incomes as it
was felt that high rates of income tax were an important reason for tax evasion.

 It is now widely accepted that moderate rates of income tax encourage savings and
voluntary disclosure of income.
 The rate of corporation tax, which was very high earlier, has been gradually reduced.
 Efforts have also been made to reform the indirect taxes, taxes levied on commodities, in
order to facilitate the establishment of a common national market for goods and
commodities.
Foreign Exchange Reforms:
 The first important reform in the external sector was made in the foreign exchange market.
 In 1991, as an immediate measure to resolve the balance of payments crisis, the rupee was
devalued against foreign currencies.
 This led to an increase in the inflow of foreign exchange.
 It also set the tone to free the determination of rupee value in the foreign exchange market
from government control.
 Now, more often than not, markets determine exchange rates based on the demand and
supply of foreign exchange.
Trade and Investment Policy Reforms:
 Liberalisation of trade and investment regime was initiated to increase international

competitiveness of industrial production and also foreign investments and technology into
the economy.
 The aim was also to promote the efficiency of the local industries and the adoption of
modern technologies.
 In order to protect domestic industries, India was following a regime of quantitative
restrictions on imports.
 This was encouraged through tight control over imports and by keeping the tariffs very high.
 These policies reduced efficiency and competitiveness which led to slow growth of the
manufacturing sector.
The trade policy reforms aimed at
Dismantling of quantitative restrictions on imports and exports

Reduction of tariff rates
Removal of licensing procedures for imports
 Import licensing was abolished except in case of hazardous and environmentally sensitive
industries.
 Quantitative restrictions on imports of manufactured consumer goods and agricultural
products were also fully removed from April 2001.
 Export duties have been removed to increase the competitive position of Indian goods in the
international markets.

Privatisation:
 It implies shedding of the ownership or management of a government owned enterprise.

 Government companies can be converted into private companies in two ways
(i) By withdrawal of the government from ownership and management of public sector
(ii) By outright sale of public sector companies.
Disinvestment:
 Privatisation of the public sector undertakings by selling off part of the equity of PSUs to the
public is known as disinvestment.
 The purpose of the sale, according to the government, was mainly to improve financial
discipline and facilitate modernisation.
 Government envisaged that privatisation could provide strong impetus to the inflow of FDI.
Navaratnas:
 In 1996, in order to improve efficiency, infuse professionalism and enable them to compete
more effectively in the liberalised global environment, the government chose nine PSUs and
declared them as navaratnas.
 They were given greater managerial and operational autonomy, in taking various decisions
to run the company efficiently and thus increase their profits.
Miniratnas:
 Greater operational, financial and managerial autonomy had also been granted to 97 other
profit-making enterprises referred to as mini ratnas.
Globalisation:
 Globalisation is the outcome of the policies of liberalisation and privatisation.

 Globalisation attempts to establish links in such a way that the happenings in India can be
influenced by events happening miles away.
Outsourcing:
 This is one of the important outcomes of the globalisation process.

 In outsourcing, a company hires regular service from external sources, mostly from other
countries, which was previously provided internally or from within the country (like legal
advice, computer service, advertisement, security — each provided by respective
departments of the company).
 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).
World Trade Organisation (WTO):
 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
administer all multilateral trade agreements by providing equal opportunities to all countries
in the international market for trading purposes.
 WTO agreements cover trade in goods as well as services to facilitate international trade
(bilateral and multilateral) through removal of tariff as well as non-tariff barriers and
providing greater market access to all member countries
Growth and Employment:
 Though the GDP growth rate has increased in the reform period, scholars point out that the
reform-led growth has not generated sufficient employment opportunities in the country.
Reforms in Agriculture:
 Reforms have not been able to benefit agriculture, where the growth rate has been
decelerating.
 Public investment in agriculture sector especially in infrastructure, which includes irrigation,
power, roads, market linkages and research and extension (which played a crucial role in the
Green Revolution), has been reduced in the reform period.
 Because of export-oriented policy strategies in agriculture, there 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. This puts pressure on prices of food grains.
Reforms in Industry:
 Industrial growth has also recorded a slowdown

 This is because of decreasing demand of industrial products due to various reasons such as
cheaper imports, inadequate investment in infrastructure etc.
 Cheaper imports replaced the demand for domestic goods. Domestic manufacturers are
facing competition from imports.
Disinvestment:
 Every year, the government fixes a target for disinvestment of PSUs. For instance, in
1991-92, it was targeted to mobilise Rs 2,500 crore through disinvestment.
 Critics point out that the assets of PSUs have been undervalued and sold to the private
sector. This means that there has been a substantial loss to the government.
 The proceeds from disinvestment were used to offset the shortage of government revenues
rather than using it for the development of PSUs and building social infrastructure in the
country.
Reforms and Fiscal Policies:
 Economic reforms have placed limits on the growth of public expenditure especially in social
sectors.
 The tax reductions in the reform period, aimed at yielding larger revenue and to curb tax
evasion, have not resulted in increase in tax revenue for the government.

 In order to attract foreign investment, tax incentives were provided to foreign investors
which further reduced the scope for raising tax revenues. This has a negative impact on
developmental and welfare expenditures.

Class 11 : Chapter 4 – Poverty
Pre-Independent India:
 In pre-independent India, Dadabhai Naoroji was the first to discuss the concept of a Poverty
Line.
Post-Independent India:
 In post-independent India, there have been several attempts to work out a mechanism to
identify the number of poor in the country.
 For instance, in 1962, the Planning Commission formed a Study Group.
 In 1979, another body called the ‘Task Force on Projections of Minimum Needs and Effective
Consumption Demand’ was formed.
Categorising Poverty:
 People who are always poor and those who are usually poor but who may sometimes have a
little more money (example: casual workers) are grouped together as the chronic poor.
 Another group are the churning poor who regularly move in and out of poverty (example:
small farmers and seasonal workers) and the occasionally poor who are rich most of the
time but may sometimes have a patch of bad luck. They are called the transient poor.

Aim of Poverty Alleviation Schemes:
 It should be to improve human lives by expanding the range of things that a person could be
and could do, such as to be healthy and well-nourished, to be knowledgeable and participate
in the life of a community.
Sen Index:
 Developed by Amartya Sen (Nobel Laurete)
Head Count Ratio:
 When the number of poor is estimated as the proportion of people below the poverty line, it
is known as ‘Head Count Ratio’
Absolute Poverty:
 The per capita consumption expenditure level which meets the average per capita daily
requirement of 2,400 calories in rural areas and 2,100 calories in urban areas, along with a
minimum of non-food expenditure, is called poverty line or absolute poverty.
Approaches to reduce Poverty:
Over the years, the government has been following three approaches to reduce poverty
1) Growth oriented development

2) Specific poverty alleviation programmes
3) Meeting the minimum needs of the poor

Class 11 : Chapter 5 – Human Capital Formation in India
Human Capital Formation:
 Human capital formation is the process of transforming the people in a country into
workers who are capable of producing goods and services.
 During this process, relatively unskilled individuals are given the tools they need to
contribute to the economy
Sources of Human Capital:
Investment in education
Investment in health
On-the-job training
Migration
Information
Human Capital and Economic Growth:
 Economic growth means the increase in real national income of a country; naturally, the
contribution of the educated person to economic growth is more than that of an illiterate
person.
 Education provides knowledge to understand changes in society and scientific
advancements, thus, facilitate inventions and innovations.
 Similarly, the availability of educated labour force facilitates adaptation to new technologies.
 Higher income causes building of high level of human capital and vice versa, that is, high
level of human capital causes growth of income.
 The Seventh Five Year Plan says, “Human resources development (read human capital) has
necessarily to be assigned a key role in any development strategy, particularly in a country
with a large population. Trained and educated on sound lines, a large population can itself
become an asset in accelerating economic growth and in ensuring social change in desired
directions.
Human Capital and Human Development:
 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 only 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 which they value.
Growth in Government Expenditure on Education:
This expenditure by the government is expressed in two ways

(i) As a percentage of ‘total government expenditure’
(ii) As a percentage of Gross Domestic Product (GDP)
 The percentage of ‘education expenditure of GDP’ expresses how much of our income is
being committed to the development of education in the country.

 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.

Class 11 : Chapter 6 – Rural Develpment
Credit and Marketing in Rural Areas:
 Growth of rural economy depends primarily on infusion of capital, from time to time, to
realise higher productivity in agriculture and non-agriculture sectors.
 National Bank for Agriculture and Rural Development (NABARD) was set up in 1982 as an
apex body to coordinate the activities of all institutions involved in the rural financing
system.
SHGs:
 Self-Help Groups (SHGs) have emerged to fill the gap in the formal credit system
 SHGs promote thrift in small proportions by a minimum contribution from each member
 From the pooled money, credit is given to the needy members to be repayable in small
instalments at reasonable interest rates
 Such credit provisions are generally referred to as micro-credit programmes
 SHGs have helped in the empowerment of women but the borrowings are mainly confined
to consumption purposes and negligible proportion is borrowed for agricultural purposes
Agricultural Marketing:
 Agricultural marketing is a process that involves the assembling, storage, processing,

transportation, packaging, grading and distribution of different agricultural commodities
across the country.
Diversification:
 Diversification includes two aspects: one relates to diversification of crop production and the
other relates to a shift of workforce from agriculture to other allied activities (livestock,
poultry, fisheries etc.) and non-agriculture sector.
Golden Revolution:
 The period between 1991-2003 is also called an effort to heralding a ‘Golden Revolution’
because during this period, the planned investment in horticulture became highly
productive and the sector emerged as a sustainable livelihood option.

Class 11 : Chapter 7 – EMPLOYMENT : GROWTH, INFORMALISATION

AND OTHER ISSUES
Economic Activities:
 Those activities which contribute to the gross national product are called economic
activities.
Worker-population ratio:
 Worker-population ratio is an indicator which is used for analysing the employment

situation in the country.
 This ratio is useful in knowing the proportion of population that is actively contributing to
the production of goods and services of a country.
 If the ratio is higher, it means that the engagement of people is greater; if the ratio for a
country is medium, or low, it means that a very high proportion of its population is not
involved directly in economic activities.
 Primary sector is the main source of employment for majority of workers
Population:
 Population is defined as the total number of people who reside in a particular locality at a
particular point of time.
Industrial Divisions:
We divide all economic activities into eight different industrial divisions.
(i) Agriculture
(ii) Mining and Quarrying
(iii) Manufacturing
(iv) Electricity, Gas and Water Supply
(v) Construction
(vi) Trade
(vii) Transport and Storage
(viii) Services
Jobless Growth:
 Disheartening development 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, we also find 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.
 Scholars refer to this phenomenon as jobless growth.

Formal Sector Employment:
 The information relating to employment in the formal sector is collected by the Union
Ministry of Labour through employment exchanges located in different parts of the country.
Sources of Data on Unemployment:
 There are 3 sources of data on unemployment : Reports of Census of India, National Sample
Survey Organisation’s Reports of Employment and Unemployment Situation and Directorate
General of Employment and Training Data of Registration with Employment Exchanges.

Class 11 : Chapter 7 – Infrastructure
 Infrastructure provides supporting services in the main areas of industrial and agricultural
production, domestic and foreign trade and commerce.
 These services include roads, railways, ports, airports, dams, power stations, oil and gas
pipelines, telecommunication facilities, the 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.
Composition of Infrastructure requirements:
 In any country, as the income rises, the composition of infrastructure requirements changes
significantly.
 For low-income countries, basic infrastructure services like irrigation, transport and power
are more important.
 As economies mature and most of their basic consumption demands are met, the share of
agriculture in the economy shrinks and more service related infrastructure is required.
 This is why the share of power and telecommunication infrastructure is greater in high-
income countries.
Indian Systems of Medicine (ISM):
It includes six systems:
1) Ayurveda
2) Yoga
3) Unani
4) Siddha
5) Naturopathy
6) Homeopathy (AYUSH)

Class 11 : Chapter 9 – Environment and Sustainable Development
 Environment is defined as the total planetary inheritance and the totality of all resources. It
includes all the biotic and abiotic factors that influence each other.
Functions of the Environment:
 It supplies resources: resources here include both renewable and non-renewable resources.
Renewable resources are those which can be used without the possibility of the resource
becoming depleted or exhausted. That is, a continuous supply of the resource remains
available. Examples of renewable resources are the trees in the forests and the fishes in the
ocean. Non-renewable resources, on the other hand, are those which get exhausted with
extraction and use, for example, fossil fuel
 It assimilates waste
 It sustains life by providing genetic and bio diversity
 It also provides aesthetic services like scenery etc.
Absorptive Capacity:
 Absorptive capacity means the ability of the environment to absorb degradation. The result
— we are today at the threshold of environmental crisis.
Global Warming:
 Global warming is a gradual increase in the average temperature of the earth’s lower
atmosphere as a result of the increase in greenhouse gases since the Industrial Revolution.
Ozone Depletion:
 Ozone depletion refers to the phenomenon of reductions in the amount of ozone in the
stratosphere.
 The problem of ozone depletion is caused by high levels of chlorine and bromine
compounds in the stratosphere.
Chipko:
 Aimed at protecting forests in the Himalayas.
Appiko:
 In Karnataka, a similar movement took a different name, ‘Appiko’, which means to hug.
 On 8 September 1983, when the felling of trees was started in Salkani forest in Sirsi district,
160 men, women and children hugged the trees and forced the woodcutters to leave. They
kept vigil in the forest over the next six weeks.
Central Pollution Control Board:
 In order to address two major environmental concerns in India, viz., water and air pollution,
the government set up the Central Pollution Control Board (CPCB) in 1974.

 CPCB has identified 17 categories of industries (large and medium scale) as significantly
polluting.
Threat to India’s Environment:
 The threat to India’s environment is of two dimensions —threat of poverty induced

environmental degradation and the threat of pollution from affluence and a rapidly growing
industrial sector.
Sustainable Development:
 Sustainable development is development that meets the need of the present generation
without compromising the ability of the future generation to meet their own needs.

Class 12 : Chapter 1 – Introductory Macroeconomics
Economic Agents:
 By economic units or economic agents, we mean those individuals or institutions which

take economic decisions.
 They can be consumers who decide what and how much to consume.
 They may be producers of goods and services who decide what and how much to produce.
 They may be entities like the government, corporation, banks which also take different
economic decisions like how much to spend, what interest rate to charge on the credits,
how much to tax, etc.
Adam Smith:
 Founding father of modern economics

 He suggested that if the buyers and sellers in each market take their decisions following only
their own self-interest, economists will not need to think of the wealth and welfare of the
country as a whole separately
 He was a Scotsman and a professor at the University of Glasgow.
 Philosopher by training, his well known work “An Enquiry into the Nature and Cause of the
Wealth of Nations “ (1776) is regarded as the first major comprehensive book on the
subject.
Macroeconomic decision makers:
 Macroeconomic policies are pursued by the State itself or statutory bodies like the Reserve
Bank of India (RBI), Securities and Exchange Board of India (SEBI) and similar institutions.
 Typically, each such body will have one or more public goals to pursue as defined by law or
the Constitution of India itself.
 These goals are not those of individual economic agents maximising their private profit or
welfare.
 Thus the macroeconomic agents are basically different from the individual decision-makers.
John Maynard Keynes:
 John Maynard Keynes, British economist, was born in 1883.

 He prophesied the break down of the peace agreement of the War in the book” The
Economic Consequences of the Peace” (1919).
 His book General Theory of Employment, Interest and Money (1936) is regarded as one of
the most influential economics books of the twentieth century.
1929 Great Depression:
 Great Depression of 1929 and the subsequent years saw the output and employment levels
in the countries of Europe and North America fall by huge amounts.
 In USA, from 1929 to 1933, unemployment rate rose from 3% to 25%

Capitalist Economy:
Capitalist economy can be defined as an economy in which most of the economic activities have the
following characteristics :
(a) There is private ownership of means of production

(b) Production takes place for selling the output in the market
(c) There is sale and purchase of labour services at a price which is called the wage rate (the labour
which is sold and purchased against wages is referred to as wage labour)
External Sector:
1. The domestic country may sell goods to the rest of the world. These are called exports.
2. The economy may also buy goods from the rest of the world. These are called imports. Besides
exports and imports, the rest of the world affects the domestic economy in other ways as well.
3. Capital from foreign countries may flow into the domestic country, or the domestic country may
be exporting capital to foreign countries
Rate of Interest:
 An interest rate is the amount of interest due per period, as a proportion of the amount lent,
deposited or borrowed (called the principal sum).
 The total interest on an amount lent or borrowed depends on the principal sum, the interest
rate, the compounding frequency, and the length of time over which it is lent, deposited or
borrowed.
Four factors of production:
 Land
 Labour
 Capital
 Entrepreneur
Unemployment Rate:
 It may be defined as the number of people who are not working and are looking for jobs
divided by the total number of people who are working or looking for jobs
Capital:
 In finance and accounting, capital generally refers to financial wealth, especially that used
to start or maintain a business
Investment Expenditure:
 Investment expenditure refers to the expenditure incurred either by an individual or a firm

or the government for the creation of new capital assets like machinery, building etc.

Class 12 : Chapter 2 – National Income Accounting
Final Goods:
 An item that is meant for final use and will not pass through any more stages of production
or transformations is called a final good.
Consumption Goods:
 Goods like food and clothing, and services like recreation that are consumed when
purchased by their ultimate consumers are called consumption goods or consumer goods.
Capital Goods:
 Capital goods are man-made, durable items businesses used to produce goods and services.
They include tools, buildings, vehicles, machinery, and equipment.
 In accounting, capital goods are treated as fixed assets.
Consumer Durables:
 Some commodities like television sets, automobiles or home computers, although they are
for ultimate consumption, have one characteristic in common with capital goods – they are
also durable.
 That is, they are not extinguished by immediate or even short period consumption; they
have a relatively long life as compared to articles such as food or even clothing.
 They also undergo wear and tear with gradual use and often need repairs and replacements
of parts, i.e., like machines they also need to be preserved, maintained and renewed.
 That is why we call these goods consumer durables.
Intermediate Goods:
 Of the total production taking place in the economy a large number of products don’t end
up in final consumption and are not capital goods either.
 Such goods may be used by other producers as material inputs.
 Examples are steel sheets used for making automobiles and copper used for making utensils.
 These are intermediate goods, mostly used as raw material or inputs for production of
other commodities. These are not final goods.
Stock:
 It is defined as any quantity measured at a particular point of time e.g. number of machines
in a plant, amount in bank account on a specific date
Flow:
 It is defined as any quantity measured per unit at a particular period of time e.g. income or
expenditure over a time period of 1 month or 1 year

Gross Investment:
 Gross Investment of an economy constitutes that part of our final output that comprises of
capital goods
 These may be machines, tools and implements; buildings, office spaces, storehouses or
infrastructure like roads, bridges, airports or jetties.
Depreciation:
 It is the loss of value of fixed assets in use on account of wear and tear
 It is also called as consumption of fixed capital
New addition to capital stock in an economy is measured by net investment or new capital
formation, which is expressed as
Net Investment = Gross investment – Depreciation
4 kinds of contributions that can be made during the production of goods and services:
(a) Contribution made by human labour, remuneration for which is called wage
(b) Contribution made by capital, remuneration for which is called interest
(c) Contribution made by entrepreneurship, remuneration of which is profit
(d) Contribution made by fixed natural resources (called ‘land’), remuneration for which is called
rent

Circular flow of income:
 The circular flow of Income refers to the flow of money, services, and goods, etc.
 This circulation happens in terms of income in the production process, distribution between
the factors of production, and at the end the circulation of the product from household to a
firm in the form of consumption expenditure on goods and services manufactured by them.
The three different phases in the circular flow of income are-
Generation Phase: In this phase, the firm manufactures the goods and services with the assistance
of factor services.
Distribution Phase: This phase involves the flow of factor income, which comprises of rent, interests,
wages, and profit from firm to the household.
Disposition Phase: Here, the income collected by the factors of production, is used on the goods and
services manufactured by a firm
There are two types of circular flow
Real Flow: The term real flow means the flow of factor services from household to firms. Similarly,
the flow of goods and services from firms to household
Money Flow: The Money flow refers to the flow of factor payments from firm to household for
factor services. Similarly, the flow of consumption expenditure from household to firm for the
purchase of goods and services manufactured by the firm.
Value added:
 The term that is used to denote the net contribution made by a firm is called its value
added.
 The raw materials that a firm buys from another firm which are completely used up in the
process of production are called ‘intermediate goods’.
 Therefore the value added of a firm is, value of production of the firm – value of
intermediate goods used by the firm.
 If we include depreciation in value added then the measure of value added that we obtain is
called Gross Value Added.
 If we deduct the value of depreciation from gross value added we obtain Net Value Added.
 Unlike gross value added, net value added does not include wear and tear that capital has
undergone.
Inventory:
 The stock of unsold finished goods, or semi-finished goods, or raw materials which a firm
carries from one year to the next is called inventory.
 Inventory is a stock variable.
 It may have a value at the beginning of the year; it may have a higher value at the end of the
year.

 In such a case inventories have increased (or accumulated). If the value of inventories is less
at the end of the year compared to the beginning of the year, inventories have decreased
Change of inventories of a firm during a year ≡ production of the firm during the year – sale of
the firm during the year
Factor Cost, Basic Prices and Market Prices:
 The distinction between factor cost, basic prices and market prices is based on the
distinction between net production taxes (production taxes less production subsidies) and
net product taxes (product taxes less product subsidies).
 CSO releases GVA at basic prices. Thus, it includes the net production taxes but not net
product taxes.
In order to arrive at the GDP (at market prices) we need to add net product taxes to GVA at basic
prices.
GVA at factor costs + Net production taxes = GVA at basic prices

GVA at basic prices + Net product taxes = GVA at market prices
Undistributed Profits:
 National Income which is earned by the firms and government enterprises, a part of profit is
not distributed among the factors of production. This is called Undistributed Profits (UP).
National Disposable Income:
 The idea behind National Disposable Income is that it gives an idea of what is the maximum
amount of goods and services the domestic economy has at its disposal.
 Current transfers from the rest of the world include items such as gifts, aids, etc.
National Disposable Income = Net National Product at market prices + Other current transfers
from the rest of the world
Private Income = Factor income from net domestic product accruing to the private sector +
National debt interest + Net factor income from abroad + Current transfers from government +
Other net transfers from the rest of the world
Gross Domestic Product at Market Prices :
 GDP is the market value of all final goods and services produced within a domestic
territory of a country measured in a year
 All production done by the national residents or the non-residents in a country gets
included, regardless of whether that production is owned by a local company or a foreign
entity
 Everything is valued at market prices

GDP at Factor Cost:
 GDP at factor cost is gross domestic product at market prices, less net product taxes.
 Market prices are the prices as paid by the consumers. Market prices also include product
taxes and subsides.
 The term factor cost refers to the prices of products as received by the producers.
 Thus, factor cost is equal to market prices, minus net indirect taxes.
 GDP at factor cost measures money value of output produced by the firms within the
domestic boundaries of a country in a year.
Net Domestic Product at Market Prices:
 This measure allows policy-makers to estimate how much the country has to spend just to
maintain their current GDP.
 If the country is not able to replace the capital stock lost through depreciation, then GDP
will fall
NDP at Factor Cost:
 NDP at factor cost is the income earned by the factors in the form of wages, profits, rent,
interest, etc., within the domestic territory of a country
Gross National Product at Market Prices:
 GNP MP is the value of all the final goods and services that are produced by the normal
residents of India and is measured at the market prices, in a year.
 GNP refers to all the economic output produced by a nation’s normal residents, whether
they are located within the national boundary or abroad
 Everything is valued at the market prices.
GNP at Factor Cost:
 GNP at factor cost measures value of output received by the factors of production belonging
to a country in a year

Net National Product at Market Prices:
 This is a measure of how much a country can consume in a given period of time. NNP
measures output regardless of where that production has taken place (in domestic territory
or abroad)
NNP at Factor Cost (NNP FC) Or National Income (NI):
 NNP at factor cost is the sum of income earned by all factors in the production in the form of
wages, profits, rent and interest, etc., belonging to a country during a year.
 It is the National Product and is not bound by production in the national boundaries. It is
the net domestic factor income added with the net factor income from abroad.
Gross Value Added (GVA):
Base Year:
 The year whose prices are being used to calculate the real GDP to the current year
GDP Deflator:
 In the calculation of real and nominal GDP of the current year, the volume of production is
fixed.
 Therefore, if these measures differ it is only due to change in the price level between the
base year and the current year.
 The ratio of nominal to real GDP is a well known index of prices. This is called GDP Deflator.

Nominal GDP:
 The market value of the final production of goods and services within a country in a given
period using that year’s prices (also called “current prices”)
Real GDP:
 Nominal GDP adjusted for changes in the price level, using prices from a base year (constant
prices) instead of “current prices” used in nominal GDP; real GDP adjusts the level of
output for any price changes that may have occurred over time
Externalities:
 Externalities refer to the benefits (or harms) a firm or an individual causes to another for
which they are not paid (or penalised).
 Externalities do not have any market in which they can be bought and sold.

Class 12 : Chapter 3 – Money and Banking
 Money is the commonly accepted medium of exchange

 Economic exchanges without the mediation of money are referred to as barter exchanges.
Cashless Society:
 A cashless society describes an economic state whereby financial transactions are not
connected with money in the form of physical bank notes or coins but rather through the
transfer of digital information (usually an electronic representation of money) between the
transacting parties.
Demand for Money:
 The demand for money tells us what makes people desire a certain amount of money.
 Since money is required to conduct transactions, the value of transactions will determine
the money people will want to keep: the larger is the quantum of transactions to be made,
the larger is the quantity of money demanded.
 At higher interest rates, money demanded comes down.
Supply of Money:
 In a modern economy, money comprises cash and bank deposits.

 These are created by a system comprising two types of institutions: central bank of the
economy and the commercial banking system.
Central Bank:
 India got its central bank in 1935.

 Its name is the ‘Reserve Bank of India’
 It issues the currency of the country.
 It controls money supply of the country through various methods, like bank rate, open
market operations and variations in reserve ratios.
 It acts as a banker to the government.
 It is the custodian of the foreign exchange reserves of the economy. It also acts as a bank to
the banking system.
 Lender of last resort
 This currency issued by the central bank can be held by the public or by the commercial
banks, and is called the ‘high-powered money’ or ‘reserve money’ or ‘monetary base’ as it
acts as a basis for credit creation.
Commercial Banks:
 They accept deposits from the public and lend out part of these funds to those who want to
borrow.
 The interest rate paid by the banks to depositors is lower than the rate charged from the
borrowers.

 This difference between these two types of interest rates, called the ‘spread’ is the profit
appropriated by the bank
Assets:
 Assets are things a firm owns or what a firm can claim from others. In case of a bank, apart
from buildings, furniture, etc., its assets are loans given to public.
Reserves:
 Reserves are deposits which commercial banks keep with the Central bank, Reserve Bank
of India (RBI) and its cash.
 These reserves are kept partly as cash and partly in the form of financial instruments
(bonds and treasury bills) issued by the RBI.
 Reserves are similar to deposits we keep with banks.
Liabilities:
 Liabilities for any firm are its debts or what it owes to others.
 For a bank, the main liability is the deposits which people keep with it.
Cash Reserve Ratio:
 RBI decides a certain percentage of deposits which every bank must keep as reserves.
 This is done to ensure that no bank is ‘over lending’.
 This is a legal requirement and is binding on the banks.
 This is called the ‘Required Reserve Ratio’ or the ‘Reserve Ratio’ or ‘Cash Reserve Ratio’
(CRR).
Open Market Operations:
 Open Market Operations refers to buying and selling of bonds issued by the Government in
the open market.
 This purchase and sale is entrusted to the Central bank on behalf of the Government.
There are two types of open market operations: outright and repo.
Outright:
 Outright open market operations are permanent in nature: when the central bank buys
these securities (thus injecting money into the system), it is without any promise to sell
them later.
 Similarly, when the central bank sells these securities (thus withdrawing money from the
system), it is without any promise to buy them later.
 As a result, the injection/absorption of the money is of permanent nature.

Repo:
 Another type of operation in which when the central bank buys the security, this agreement
of purchase also has specification about date and price of resale of this security.
 This type of agreement is called a repurchase agreement or repo.
 The interest rate at which the money is lent in this way is called the repo rate.
Reverse repurchase agreement or reverse repo:
 Instead of outright sale of securities the central bank may sell the securities through an
agreement which has a specification about the date and price at which it will be
repurchased.
 This type of agreement is called a reverse repurchase agreement or reverse repo.
 The rate at which the money is withdrawn in this manner is called the reverse repo rate.
 The Reserve Bank of India conducts repo and reverse repo operations at various maturities:
overnight, 7-day, 14- day, etc.
Bank Rate:
 RBI can influence money supply by changing the rate at which it gives loans to the
commercial banks. This rate is called the Bank Rate in India.
 By increasing the bank rate, loans taken by commercial banks become more expensive; this
reduces the reserves held by the commercial bank and hence decreases money supply.
 A fall in the bank rate can increase the money supply
Fiat Money:
 Currency notes and coins are called fiat money.

 They do not have intrinsic value like a gold or silver coin.
 They are also called legal tenders as they cannot be refused by any citizen of the country for
settlement of any kind of transaction.
Narrow and Broad Money:
 RBI publishes figures for four alternative measures of money supply, viz. M1, M2, M3 and
M4.
 M1 and M2 are known as narrow money.
 M3 and M4 are known as broad money.
 These measures are in decreasing order of liquidity.

 M1 is most liquid and easiest for transactions whereas M4 is least liquid of all.
 M3 is the most commonly used measure of money supply. It is also known as aggregate
monetary resources
Demonetisation:
 Demonetisation was a new initiative taken by the Government of India in November 2016 to
tackle the problem of corruption, black money, terrorism and circulation of fake currency in
the economy.
 Old currency notes of Rs 500, and Rs 1000 were no longer legal tender.
 New currency notes in the denomination of Rs 500 and Rs 2000 were launched.
 The public were advised to deposit old currency notes in their bank account till 31 December
2016 without any declaration and upto 31 March 2017 with the RBI with declaration
Barter Exchange:
 Exchange of commodities without the mediation of money is called Barter Exchange.

 It suffers from lack of double coincidence of wants.
 Money facilitates exchanges by acting as a commonly acceptable medium of exchange.
In a modern economy, people hold money broadly for two motives – transaction motive and
speculative motive

Class 12: Chapter 4 – Determination of Income and Employment
Ceteris paribus:
 When we concentrate on the determination of a particular variable, we must hold the

values of all other variables constant.
 This is a stylisation typical of almost any theoretical exercise and is called the assumption of
ceteris paribus, which literally means ‘other things remaining equal.
Ex-ante and Ex-post:
 Ex-ante depicts what has been planned, and ex-post depicts what has actually happened.
Consumption:
 The most important determinant of consumption demand is household income.

 A consumption function describes the relation between consumption and income.
Autonomous consumption:
 The simplest consumption function assumes that consumption changes at a constant rate
as income changes.
 Of course, even if income is zero, some consumption still takes place.
 Since this level of consumption is independent of income, it is called autonomous
consumption.
Investment:
 Investment is defined as addition to the stock of physical capital (such as machines,

buildings, roads etc., i.e. anything that adds to the future productive capacity of the
economy) and changes in the inventory (or the stock of finished goods) of a producer.

 Note that ‘investment goods’ (such as machines) are also part of the final goods – they are
not intermediate goods like raw materials.
 Machines produced in an economy in a given year are not ‘used up’ to produce other goods
but yield their services over a number of years.
Full employment level of income:
 Full employment level of income is that level of income where all the factors of production
are fully employed in the production process.
Deficient demand:
 The equilibrium level of output may be more or less than the full employment level of output.
 If it is less than the full employment of output, it is due to the fact that demand is not
enough to employ all factors of production.
 This situation is called the situation of deficient demand. It leads to decline in prices in the
long run.
Excess demand:
 If the equilibrium level of output is more than the full employment level, it is due to the fact
that the demand is more than the level of output produced at full employment level.
 This situation is called the situation of excess demand.
 It leads to rise in prices in the long run.
When, at a particular price level, aggregate demand for final goods equals aggregate supply
of final goods, the final goods or product market reaches its equilibrium.
Aggregate demand for final goods consists of ex ante consumption, ex ante investment,
government spending etc.
Marginal propensity to consume:
 The rate of increase in ex ante consumption due to a unit increment in income is called
marginal propensity to consume.
Aggregate demand:
 It is the total demand for final goods and services in an economy at a given time.
 This is the demand for the gross domestic product of a country.
Aggregate supply:
 It is the total supply of goods and services that firms in a national economy plan on selling
during a specific time period.
 It is the total amount of goods and services that firms are willing and able to sell at a given
price level in an economy.

Ex-ante consumption:
 Ex-ante consumption refers to the consumption expenditure planned to be incurred during a

peroid.
Ex-ante or planned investment:
 Ex-ante or planned investment is the investment which is desired to be made by the firms
and planners in the economy during a particular period in the beginning of the period.
Parametric Shift:
 Parametric shift is a graph due to change in the value of a parameter.

 A positively sloping straight line swings upwards as its slope is decreases.
 A positively sloping straight line shifts upwards in parallel as its Intercept is increased.
Expenditure Multiplier:
 The expenditures multiplier measures the change in aggregate production triggered by

changes an autonomous expenditure, including consumption expenditures, investment
expenditures, government purchases, or net exports.
 The expenditures multiplier captures the consequences of a shift in the aggregate
expenditures line in a single measure, a measure that is generally greater than one.

Class 12: Chapter 5 - Government Budget and the Economy
Mixed Economy:
 An economy in which there is both the private sector and the Government is known as a
mixed economy.
Main Budget Document:
 There is a constitutional requirement in India (Article 112) to present before the Parliament
a statement of estimated receipts and expenditures of the government.
 This ‘Annual Financial Statement’ constitutes the main budget document of the
government.
Revenue Account:
 Those that relate to the current financial year only are included in the revenue account (also
called revenue budget)
Capital Account:
 Those that concern the assets and liabilities of the government into the capital account (also
called capital budget).
Public provision:
 Public provision means that they are financed through the budget and can be used without
any direct payment.
Public Production:
 When goods are produced directly by the government it is called public production.
Redistribution function:
 The government sector affects the personal disposable income of households by making
transfers and collecting taxes.
 It is through this that the government can change the distribution of income and bring about
a distribution that is considered ‘fair’ by society. This is the redistribution function.
Stabilisation Function:
 The intervention of the government whether to expand demand or reduce it constitutes the
stabilisation function
Revenue Receipts:
 Revenue receipts are those receipts that do not lead to a claim on the government.
 They are therefore termed non-redeemable.

 They are divided into tax and non-tax revenues.
Tax Revenue:
 Tax revenues, an important component of revenue receipts, have for long been divided into
direct taxes (personal income tax) and firms (corporation tax), and indirect taxes like excise
taxes (duties levied on goods produced within the country), customs duties (taxes imposed
on goods imported into and exported out of India) and service tax.
Paper Taxes:
 Other direct taxes like wealth tax, gift tax and estate duty (now abolished) have never
brought in large amount of revenue and thus have been referred to as ‘paper taxes’
Non-Tax Revenue:
 Non-tax revenue of the central government mainly consists of interest receipts on account of
loans by the central government, dividends and profits on investments made by the
government, fees and other receipts for services rendered by the government.
 Cash grants-in-aid from foreign countries and international organisations are also included.
Capital Receipts:
 The government also receives money by way of loans or from the sale of its assets.
 Loans will have to be returned to the agencies from which they have been borrowed.
 Thus they create liability. Sale of government assets, like sale of shares in Public Sector
Undertakings (PSUs) which is referred to as PSU disinvestment, reduce the total amount of
financial assets of the government.
 All those receipts of the government which create liability or reduce financial assets are
termed as capital receipts.
 When government takes fresh loans it will mean that in future these loans will have to be
returned and interest will have to be paid on these loans.
 Similarly, when government sells an asset, then it means that in future its earnings from that
asset, will disappear. Thus, these receipts can be debt creating or non-debt creating.

Revenue Expenditure:
 Revenue Expenditure is expenditure incurred for purposes other than the creation of
physical or financial assets of the central government.
 It relates to those expenses incurred for the normal functioning of the government
departments and various services, interest payments on debt incurred by the government,
and grants given to state governments and other parties (even though some of the grants
may be meant for creation of assets).
Plan Revenue Expenditure:
 Plan revenue expenditure relates to central Plans (the Five-Year Plans) and central
assistance for State and Union Territory plans.
Non-Plan Expenditure:
 Non-plan expenditure, the more important component of revenue expenditure, covers a

vast range of general, economic and social services of the government.
 The main items of non-plan expenditure are interest payments, defence services, subsidies,
salaries and pensions
 Interest payments on market loans, external loans and from various reserve funds constitute
the single largest component of non-plan revenue expenditure.
 Defence expenditure, is committed expenditure in the sense that given the national security
concerns, there exists little scope for drastic reduction.
 Subsidies are an important policy instrument which aim at increasing welfare
 Apart from providing implicit subsidies through under-pricing of public goods and services
like education and health, the government also extends subsidies explicitly on items such as
exports, interest on loans, food and fertilisers.
Capital Expenditure:
 Capital expenditure is also categorised as plan and non-plan in the budget documents.
 Plan capital expenditure, like its revenue counterpart, relates to central plan and central
assistance for state and union territory plans.
 Non-plan capital expenditure covers various general, social and economic services provided
by the government.
Fiscal Responsibility and Budget Management Act:
 Along with the budget, three policy statements are mandated by the Fiscal Responsibility
and Budget Management Act, 2003 (FRBMA)
 The Medium-term Fiscal Policy Statement sets a three year rolling target for specific fiscal
indicators and examines whether revenue expenditure can be financed through revenue
receipts on a sustainable basis and how productively capital receipts including market
borrowings are being utilised.

 The Fiscal Policy Strategy Statement sets the priorities of the government in the fiscal area,
examining current policies and justifying any deviation in important fiscal measures.
 The Macroeconomic Framework Statement assesses the prospects of the economy with
respect to the GDP growth rate, fiscal balance of the central government and external
balance
Balanced , Surplus and Deficit Budget:
 The government may spend an amount equal to the revenue it collects. This is known as a
balanced budget.
 If it needs to incur higher expenditure, it will have to raise the amount through taxes in
order to keep the budget balanced.
 When tax collection exceeds the required expenditure, the budget is said to be in surplus
 The most common feature is the situation when expenditure exceeds revenue. This is when
the government runs a budget deficit.
Revenue Deficit:
 The revenue deficit refers to the excess of government’s revenue expenditure over revenue
receipts
 The revenue deficit includes only such transactions that affect the current income and
expenditure of the government.
 When the government incurs a revenue deficit, it implies that the government is dissaving
and is using up the savings of the other sectors of the economy to finance a part of its
consumption expenditure.
 This situation means that the government will have to borrow not only to finance its
investment but also its consumption requirements.
 This will lead to a build up of stock of debt and interest liabilities and force the government
eventually, to cut expenditure.
 Since a major part of revenue expenditure is committed expenditure, it cannot be reduced.
 Often the government reduces productive capital expenditure or welfare expenditure. This
would mean lower growth and adverse welfare implications.
Fiscal Deficit:
 Fiscal deficit is the difference between the government’s total expenditure and its total
receipts excluding borrowing
Non-debt creating capital receipts are those receipts which are not borrowings and, therefore, do
not give rise to debt. Examples are recovery of loans and the proceeds from the sale of PSUs.

The fiscal deficit will have to be financed through borrowing. Thus, it indicates the total borrowing
requirements of the government from all sources.
Net borrowing at home includes that directly borrowed from the public through debt instruments
(for example, the various small savings schemes) and indirectly from commercial banks through
Statutory Liquidity Ratio (SLR).
 The gross fiscal deficit is a key variable in judging the financial health of the public sector and
the stability of the economy.
 From the way gross fiscal deficit is measured as given above, it can be seen that revenue
deficit is a part of fiscal deficit (Fiscal Deficit = Revenue Deficit + Capital Expenditure - non-
debt creating capital receipts)
 A large share of revenue deficit in fiscal deficit indicated that a large part of borrowing is
being used to meet its consumption expenditure needs rather than investment.
Primary Deficit:
 The borrowing requirement of the government includes interest obligations on

accumulated debt.
 The goal of measuring primary deficit is to focus on present fiscal imbalances.
 To obtain an estimate of borrowing on account of current expenditures exceeding revenues,
we need to calculate what has been called the primary deficit. It is simply the fiscal deficit
minus the interest payments
 Net interest liabilities consist of interest payments minus interest receipts by the
government on net domestic lending.
Government Debt:
 Budgetary deficits must be financed by either taxation, borrowing or printing money.

Governments have mostly relied on borrowing, giving rise to what is called government
debt.
 The concepts of deficits and debt are closely related. Deficits can be thought of as a flow
which add to the stock of debt.
 If the government continues to borrow year after year, it leads to the accumulation of debt
and the government has to pay more and more by way of interest. These interest payments
themselves contribute to the debt.

Ricardian equivalence:
 The consumer will be concerned about future generations because they are the children and
grandchildren of the present generation and the family which is the relevant decision
making unit, continues living.
 They would increase savings now, which will fully offset the increased government
dissaving so that national savings do not change.
 This view is called Ricardian equivalence after one of the greatest nineteenth century
economists, David Ricardo, who first argued that in the face of high deficits, people save
more.
 It is called ‘equivalence’ because it argues that taxation and borrowing are equivalent means
of financing expenditure.
 When the government increases spending by borrowing today, which will be repaid by taxes
in the future, it will have the same impact on the economy as an increase in government
expenditure that is financed by a tax increase today.
Proportional taxes reduce the autonomous expenditure multiplier because taxes reduce
the marginal propensity to consume out of income.
Goods and Service Tax:
 Goods and Service Tax (GST) is the single comprehensive indirect tax, operational from 1
July 2017, on supply of goods and services, right from the manufacturer/ service provider to
the consumer.
 It is a destination based consumption tax with facility of Input Tax Credit in the supply
chain.
 It is applicable throughout the country with one rate for one type of goods/service
 It has amalgamated a large number of Central and State taxes and cesses.
 It has replaced large number of taxes on goods and services levied on production/ sale of
goods or provision of service.
 As there have been a number of intermediate goods/services, which were
manufactured/provided in the economy, the pre GST tax regime imposed taxes not on the
value added at each stage but on the total value of the commodity/service with minimal
facility of utilisation of Input Tax Credit (ITC). The total value included taxes paid on
intermediate goods/services. This amounted to cascading of tax.
 Under GST, the tax is discharged at every stage of supply and the credit of tax paid at the
previous stage is available for set off at the next stage of supply of goods and/or services
 It is thus effectively a tax on value addition at each stage of supply. In view of our large and
fast growing economy, it addresses to establish parity in taxation across the country, and
extend principles of ‘value- added taxation’ to all goods and services.
 It has replaced various types of taxes/cesses, levied by the Central and State/UT
Governments. Some of the major taxes that were levied by Centre were Central Excise Duty,
Service Tax, Central Sales Tax, Cesses like KKC and SBC.

 The major State taxes were VAT/Sales Tax, Entry Tax, Luxury Tax, Octroi, Entertainment Tax,
Taxes on Advertisements, Taxes on Lottery /Betting/ Gambling, State Cesses on goods etc.
These have been subsumed in GST
 GST is the biggest tax reform in the country since independence and was rolled out on the
mid-night of 30 June/1 July, 2017 during a special midnight session of the Parliament.
 The 101th Constitution Amendment Act received assent of the President of India on 8
September, 2016.
 The amendment introduced Article 246A in the Constitution cross empowering Parliament
and Legislatures of States to make laws with reference to Goods and Service Tax imposed by
the Union and the States. Thereafter CGST Act, UTGST Act and SGST Acts were enacted for
GST
 It is aimed at reducing the cost of business operations and cascading effect of various taxes
on consumers.
 It has also reduced the overall cost of production, which will make Indian products/services
more competitive in the domestic and international markets.
 It has expanded the tax base, introduced higher transparency in the taxation system,
reduced human interface between Taxpayer and Government and is furthering ease of doing
business.

Class 12: Chapter 6 - Open Economy Macroeconomics
Open Economy:
 An open economy is one which interacts with other countries through various channels.
Output Market:
 An economy can trade in goods and services with other countries. This widens choice in the
sense that consumers and producers can choose between domestic and foreign goods.
Financial Market:
 Most often an economy can buy financial assets from other countries. This gives investors
the opportunity to choose between domestic and foreign assets.
Labour Market:
 Firms can choose where to locate production and workers to choose where to work. There
are various immigration laws which restrict the movement of labour between countries
International monetary system:
 The purpose of the international monetary system (IMS) is to facilitate international

economic exchange since most countries have national currencies that are not typically
accepted as legal payment beyond their borders.
 The essential element of the IMS is to facilitate the exchange of goods, services, and capital
among countries.
Influence of Foreign Trade on Aggregate Demand:
 First, when Indians buy foreign goods, this spending escapes as a leakage from the circular
flow of income decreasing aggregate demand.
 Second, our exports to foreigners enter as an injection into the circular flow, increasing
aggregate demand for goods produced within the domestic economy.
Foreign Exchange Rate:
 The price of one currency in terms of another currency is known as the foreign exchange
rate or simply the exchange rate.
Balance of Payments:
 The balance of payments (BoP) record the transactions in goods, services and assets
between residents of a country with the rest of the world for a specified time period
typically a year.
 There are two main accounts in the BoP — the current account and the capital account

Current Account:
 Current Account is the record of trade in goods and services and transfer payments.
 Trade in goods includes exports and imports of goods.
 Trade in services includes factor income and non-factor income transactions.
 Transfer payments are the receipts which the residents of a country get for ‘free’, without
having to provide any goods or services in return. They consist of gifts, remittances and
grants. They could be given by the government or by private citizens living abroad.
 Buying foreign goods is expenditure from our country and it becomes the income of that
foreign country. Hence, the purchase of foreign goods or imports decreases the domestic
demand for goods and services in our country.
 Similarly, selling of foreign goods or exports brings income to our country and adds to the
aggregate domestic demand for goods and services in our country.
Balance on Current Account:
 It has 2 components
 Balance of Trade or Trade Balance and Balance on Invisibles
Balance of Trade (BOT):
 It is the difference between the value of exports and value of imports of goods of a country
in a given period of time.
 Export of goods is entered as a credit item in BOT, whereas import of goods is entered as a
debit item in BOT. It is also known as Trade Balance.
 BOT is said to be in balance when exports of goods are equal to the imports of goods.

 Surplus BOT or Trade surplus will arise if country exports more goods than what it imports.
 Deficit BOT or Trade deficit will arise if a country imports more goods than what it exports.
Net Invisibles:
 Net Invisibles is the difference between the value of exports and value of imports of
invisibles of a country in a given period of time.
 Invisibles include services, transfers and flows of income that take place between different
countries.
Services trade:
 Services trade includes both factor and non-factor income.

 Factor income includes net international earnings on factors of production (like labour, land
and capital).
 Non-factor income is net sale of service products like shipping, banking, tourism, software
services, etc.
Capital Account:
 Capital Account records all international transactions of assets.

 An asset is any one of the forms in which wealth can be held, for example: money, stocks,
bonds, Government debt, etc.
 Purchase of assets is a debit item on the capital account.
 If an Indian buys a UK Car Company, it enters capital account transactions as a debit item (as
foreign exchange is flowing out of India).
 On the other hand, sale of assets like sale of share of an Indian company to a Chinese
customer is a credit item on the capital account.

Balance on Capital Account:
 Capital account is in balance when capital inflows (like receipt of loans from abroad, sale of
assets or shares in foreign companies) are equal to capital outflows (like repayment of
loans, purchase of assets or shares in foreign countries).
 Surplus in capital account arises when capital inflows are greater than capital outflows,
whereas deficit in capital account arises when capital inflows are lesser than capital
outflows.
Balance of Payments Surplus and Deficit:
 The essence of international payments is that just like an individual who spends more than
her income must finance the difference by selling assets or by borrowing, a country that has
a deficit in its current account (spending more than it receives from sales to the rest of the
world) must finance it by selling assets or by borrowing abroad.
 Thus, any current account deficit must be financed by a capital account surplus, that is, a
net capital inflow
 In this case, in which a country is said to be in balance of payments equilibrium, the current
account deficit is financed entirely by international lending without any reserve movements.
 The basic premise is that the monetary authorities are the ultimate financiers of any deficit
in the balance of payments (or the recipients of any surplus).
 Official reserve transactions are more relevant under a regime of fixed exchange rates than
when exchange rates are floating.
Autonomous Transactions:
 International economic transactions are called autonomous when transactions are made
due to some reason other than to bridge the gap in the balance of payments, that is, when
they are independent of the state of BoP.
 One reason could be to earn profit. These items are called ‘above the line’ items in the BoP.
 The balance of payments is said to be in surplus (deficit) if autonomous receipts are greater
(less) than autonomous payments.
Accommodating transactions:
 Accommodating transactions (termed ‘below the line’ items), on the other hand, are
determined by the gap in the balance of payments, that is, whether there is a deficit or
surplus in the balance of payments.
 In other words, they are determined by the net consequences of the autonomous
transactions.
 Since the official reserve transactions are made to bridge the gap in the BoP, they are seen
as the accommodating item in the BoP (all others being autonomous).

Balance of Payments Accounts:
 Following the new accounting standards introduced by the International Monetary Fund in
the sixth edition of the Balance of Payments and International Investment Position
Manual (BPM6) the Reserve Bank of India also made changes in the structure of balance of
payments accounts.
 According to the new classification, the transactions are divided into three accounts:
current account, financial account and capital account.
 The most important change is that almost all the transactions arising on account of trade in
financial assets such as bonds and equity shares are now placed in the financial account.
 RBI continues to publish the balance of payments accounts as per the old system also,
therefore the details of the new system are not being given here.
Foreign Exchange Market:
 The market in which national currencies are traded for one another is known as the foreign
exchange market.
 The major participants in the foreign exchange market are commercial banks, foreign
exchange brokers and other authorised dealers and monetary authorities.
Foreign Exchange Rate:
 Foreign Exchange Rate (also called Forex Rate) is the price of one currency in terms of
another.
 It links the currencies of different countries and enables comparison of international costs
and prices.
 For example, if we have to pay Rs 50 for $1 then the exchange rate is Rs 50 per dollar.
Flexible or Floating Exchange Rate:
 This exchange rate is determined by the market forces of demand and supply. It is also
known as Floating Exchange Rate.
Depreciation of domestic currency:
 Increase in exchange rate implies that the price of foreign currency (dollar) in terms of
domestic currency (rupees) has increased.
 This is called Depreciation of domestic currency (rupees) in terms of foreign currency
(dollars).

Appreciation of domestic currency:
 In a flexible exchange rate regime, when the price of domestic currency (rupees) in terms of
foreign currency (dollars) increases, it is called Appreciation of the domestic currency
(rupees) in terms of foreign currency (dollars).
 This means that the value of rupees relative to dollar has risen and we need to pay fewer
rupees in exchange for one dollar.
Purchasing Power (PPP) theory:
 The purchasing Power (PPP) theory is used to make long-run predictions about exchange
rates in a flexible exchange rate system.
Fixed Exchange Rate System:
 In this exchange rate system, the Government fixes the exchange rate at a particular level.
 At this exchange rate, the supply of dollars exceeds the demand for dollars.
 The RBI intervenes to purchase the dollars for rupees in the foreign exchange market in
order to absorb this excess supply
 Thus, through intervention, the Government can maintain any exchange rate in the
economy. But it will be accumulating more and more foreign exchange so long as this
intervention goes on.
Devaluation and Revaluation:
 In a fixed exchange rate system, when some government action increases the exchange rate
(thereby, making domestic currency cheaper) is called Devaluation.
 On the other hand, a Revaluation is said to occur, when the Government decreases the
exchange rate (thereby, making domestic currency costlier) in a fixed exchange rate system.
Managed floating exchange rate system:
 Without any formal international agreement, the world has moved on to what can be best
described as a managed floating exchange rate system.
 It is a mixture of a flexible exchange rate system (the float part) and a fixed rate system
(the managed part).
 Under this system, also called dirty floating, central banks intervene to buy and sell foreign
currencies in an attempt to moderate exchange rate movements whenever they feel that
such actions are appropriate.
 Official reserve transactions are, therefore, not equal to zero.
Gold Standard:
 From around 1870 to the outbreak of the First World War in 1914, the prevailing system
was the gold standard which was the epitome of the fixed exchange rate system.
 Fractional reserve banking helped to economise on gold.
 Paper currency was not entirely backed by gold; typically countries held one-fourth gold
against its paper currency.

Bretton Woods System:
 Bretton Woods Conference held in 1944 set up the International Monetary Fund (IMF) and
the World Bank and re-established a system of fixed exchange rates.
 A two-tier system of convertibility was established at the centre of which was the dollar
 In 1967, gold was displaced by creating the Special Drawing Rights (SDRs), also known as
‘paper gold'
 Originally defined in terms of gold, with 35 SDRs being equal to one ounce of gold (the
dollar-gold rate of the Bretton Woods system), it has been redefined several times since
1974.
 At present, it is calculated daily as the weighted sum of the values in dollars of four
currencies (euro, dollar, Japanese yen, pound sterling) of the five countries (France,
Germany, Japan, the UK and the US).
‘Smithsonian Agreement’:
 The ‘Smithsonian Agreement’ in 1971, which widened the permissible band of movements
of the exchange rates to 2.5 per cent above or below the new ‘central rates’ with the hope
of reducing pressure on deficit countries, lasted only 14 months
Currency Board System:
 Argentina, for example, adopted the currency board system in 1991.

 Under this, the exchange rate between the local currency (the peso) and the dollar was fixed
by law.
 The central bank held enough foreign currency to back all the domestic currency and
reserves it had issued.
 In such an arrangement, the country cannot expand the money supply at will.
 Also, if there is a domestic banking crisis (when banks need to borrow domestic currency)
the central bank can no longer act as a lender of last resort.
 However, following a crisis, Argentina abandoned the currency board and let its currency
float in January 2002
India’s exchange rate policy:
 India’s exchange rate policy has evolved over time in line with the gradual opening up of the
economy as part of the broader strategy of macroeconomic reforms and liberalization since
the early 1990s.
 This change was also warranted by the consensus response of all major countries to
excessive exchange rate fluctuations that accompanied the abolishment of fixed exchange
rate system.
 The major changes in the exchange rate policy started with the implementation of the
recommendations of the High Level Committee on Balance of Payments (Chairman: Dr. C.
Rangarajan, 1993) to make the exchange rate market determined.
 The Expert Group on Foreign Exchange Markets in India (popularly known as Sodhani
Committee, 1995) made several recommendations with respect to participants, trading, risk

management as well as selective market intervention by the Reserve Bank to promote

greater market development in an orderly fashion.
 Consequently, the period starting from January 1996 saw wide-ranging reforms in the Indian
foreign exchange market. In essence, the exchange rate developments changed in side-by-
side with the reform in the external sector of India.
Liberalised Exchange Rate Management System:
 The Finance Minister announced the liberalised exchange rate management system
(LERMS) in the Budget for 1992- 93.
 This system introduced partial convertibility of rupee.
 Under this system, a dual exchange rate was fixed under which 40 per cent of foreign
exchange earnings were to be surrendered at the official exchange rate while the remaining
60 per cent were to be converted at a market-determined rate.
 The dual rates were converged into one from March 1, 1993; this was an important step
towards current account convertibility, which was finally achieved in August 1994 by
accepting Article VIII of the Articles of Agreement of the IMF.
 The exchange rate of the rupee thus became market determined, with the Reserve Bank
ensuring orderly conditions in the foreign exchange market through its sales and purchases.

NCERT Economy - POWERPLAY #2

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NCERT Economy - POWERPLAY #2

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Download High Quality Study Material: www.instamojo.

APPSC Guidance Batch-Testimonials

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NCERT Economy – Back to Basics

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 Tertiary sector is intangible in nature, concentrating on the services sector.

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 Aim of Production  To produce the goods and services that we want

Differences between Organised Sector and Unorganised Sector:

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High yielding varieties (HYVs):

Modern farming method:

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Class 9 : Chapter 2 – PEOPLE AS A RESOURCE

Population  Asset for the economy rather than a liability

 It is a way of referring to a country’s working people in terms of their existing productive

Human Capital Formation:

Productive asset by investment in human capital:

Non-market activities: Non-market activities are the production for self-consumption.

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Major determinants of the earning of any individual:

Mid-day meal scheme:

Sarva Siksha Abhiyan:

Infant Mortality Rate (IMR):

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 In case of disguised unemployment people appear to be employed.

 Workforce population includes people from 15 years to 59 years.

Class 9 : Chapter 3 – POVERTY AS A CHALLENGE

Poverty – The Biggest Challenge:

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 Vulnerability to poverty is a measure, which describes the greater probability of certain

International Poverty Line:

 The international poverty line is a monetary threshold under which an individual is

Low level of economic development under the British colonial administration:

 Policies of the colonial government ruined traditional handicrafts and discouraged

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Low Rate of Growth until 1980s:

Irrigation and Green Revolution:

Class 9 : Chapter 4 – Food Security in India

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(b) Accessibility means food is within reach of every person.

Food security is ensured in a country only if

 Enough food is available for all the persons

How is food security affected during a calamity?

Most food insecure people:

 Hunger is another aspect indicating food insecurity.

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 Chronic hunger is a consequence of diets persistently inadequate in terms of quantity and/or

 Seasonal hunger is related to cycles of food growing and harvesting.

Why this buffer stock is created by the government?

Public Distribution System:

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Fair Price Shops:

 Subsidy is a payment that a government makes to a producer to supplement the market

Maintenance cost of procuring foodgrains:

Role of cooperatives in food security:

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Class 10 : Chapter 1 – Development

Average Income or Per Capita Income:

 It is the total income of the country divided by its total population.

Infant Mortality Rate:

Net Attendance Ratio: